As the telecommunications industry continues to face difficult economic times, regulators throughout Europe are looking into the possibilities for incumbent operators to reduce the risks of bad debt. The (provisional) views of the Belgian, Dutch and English regulators confirm that other licensed operators (“OLOs”) cannot be made to shield the incumbent operators from bad economic times in general. Individual cases may however warrant additional securities, but when, what and how much can the incumbent operator ask for?
Prompted by the increasing occurrence of insolvencies and payment problems of their interconnecting partners, incumbent operators have been looking at ways to reduce the risk of bad debt. In doing so, incumbent operators may however find themselves on a collision course with their duty as parties with significant market power to meet all reasonable requests for interconnection (see the EC Interconnection Directive 97/33/EC). Over the last few months regulators in the UK, The Netherlands and Belgium have been considering proposals by the incumbent operators within their jurisdictions, weighing up the risk of such proposals creating new barriers to entry and the right for any company, whether regulated or not, to protect itself against the risks of bad debt.
All three regulators referred to above have concluded that, in principle, incumbent operators too should be allowed to protect their businesses against financial risks. However, as OFTEL in the UK put it: “a certain level of bad debt is to be expected, and this is regarded as a normal cost of doing business”. Note also that the interconnection charges of the incumbent operators will usually already include bad debt expenses within their cost basis (be it that those expenses may not reflect the current levels of debt exposure in general and will not always reflect the particular exposure to individual operators). Accordingly, OFTEL, OPTA and the BIPT are of the view that the incumbent operators should only be allowed to implement additional securities where the particular circumstances so require (and, insofar as Belgium is concerned, only where no provision for bad debt has yet been incorporated in the tariffs for the relevant service).
So when exactly is the risk of bad debt significant enough to warrant protective measures and, secondly, what protective measures are considered proportional?
Identifying the risk
Interconnection arrangements normally include remedies for late or non-payment of charges. Remedies range from interest payments to suspension and, ultimately, termination of the interconnect agreement. All that these remedies do however is to deal with non-payment once it has occurred. Incumbents are now looking to be one step ahead of the game, creating financial buffers as soon as an OLO is likely to pose a credit risk for the incumbent.
All three regulators consider non-payment and credit vetting important elements of the process for establishing whether a credit risk exists. Failure to pay interconnection charges when due may be taken as an objective indication that future payments will also be compromised and can, if material, provide the trigger for additional securities. Note however that neither OFTEL nor OPTA allow the incumbent to request additional securities on the basis of late-payment alone. Both regulators see non-payment as a first step,leading to a credit vetting exercise in which the incumbent has to establish whether the OLO presents an “undue financial risk” (OFTEL) or is likely to exceed its credit limit (OPTA). Only then would the incumbent be allowed to request additional securities from the OLO. The BIPT takes a slightly different approach in that, in the absence of special circumstances, it would not consider additional securities appropriate if an OLO either has a credit rating of Ba2 (Moody’s) or higher or, alternatively, has not defaulted on its payment obligations for twelve months.
Note that OLOs will not be out of trouble if they quickly settle outstanding sums after a request to do so and will have to be on best behaviour for considerable periods of time (up to 12 months in the UK). After all, the process here is not strictly a short term remedy for non-payment, but aimed at establishing whether future payments are at risk. To remedy one instance of non-payment may not mean that the OLO no longer poses a financial risk for the incumbent.
Finally, practice will have to show whether the emphasis that OFTEL places on the mere fact of non-payment (as the trigger for credit control) renders different results compared with the approach of the BIPT and OPTA, both of whom do not look at mere instances of non-payment, but, instead, look at the overall debit position of the OLO (i.e. also taking into account monies owed to the OLO by the incumbent, measured over the interconnection services –and other services).
Determining the level and methods of protection
Once the incumbent has established that a credit risk exists, the issue will turn to the securities that the incumbent can request. The OLOs have drawn the regulators’ attention to the financial burden and the threat to competition if incumbents were allowed to introduce financial securities. However the regulators have (for the reasons set out above) allowed such securities and have resisted being overly prescriptive as to what forms of security could be given. Both OPTA and the BIPT leave the choice of security, in the first instance, with the OLO, with prepayment of interconnection charges being the approved default mechanism in Belgium. Note that the implementation of a reduced due date system (whereby the due date for payment is shortened every time the OLO is late with paying) was found disproportionate by OFTEL, but has been retained as a viable option by OPTA in The Netherlands.
The level of any security that can be asked for by the incumbents has, in all three countries, been set at three months’ interconnection charges and (in the case of the UK) the implementation of a credit limit. OPTA has made it very clear that OLOs which dispute (and subsequently withhold) the incumbents’ charges (which either trigger the credit control procedures or form the basis for the calculation of the security due) will not escape credit control procedures. The incumbent operator may apply credit controls irrespective, taking into account 60% of the value of the disputed charges. OFTEL, on the other hand, refers the parties straight to the dispute resolution procedure in the published interconnection agreement and may –OFTEL is not clear on this point- leave the OLOs with a mechanism for stalling the process of credit vetting.
Finally, only the Belgian regulator has expressly confirmed that any interest or other benefits resulting from the financial securities should be returned to or shared with the OLO providing such securities.
Rather than wait for non-payment and then apply contractual remedies for breach, incumbents may now impose (additional) financial controls on a preventive basis creating the potential for (substantial) financial burdens on OLOs and, in some cases, creating uncertainty as to the financial consequences of established commercial practices such as netting-off arrangements. Regulators may have accepted credit controls in principle, but the real test will be their application in individual circumstances. Each regulator has allowed plenty of room for discussions (or disputes) regarding the actual application, may be even more so now each regulator has derived a slightly different approach from the general principle.
 See Para 2.3 of OFTEL’s Draft Direction relating to BT credit vetting procedures, 21 November 2002, (http://www.oftel.gov.uk/publications/licensing/2002/credit1102.htm) and, for OFTEL’s final directions on this matter, http://www.oftel.gov.uk/publications/licensing/2003/credit0203.htm of 20 February last.
 See OPTA’s preliminary views on financial safeguards, November 2002 (http://www.opta.nl/download/voorlopige_zienswijze_191202.pdf) inviting comments from those concerned by 17 January 2003.
 See BIPT’s advice to the Belgian Minister for Telecommunications of 12 December 2002 regarding Belgacom’s interconnection offer (http://www.bipt.be/bipt_E.htm, under telecommunications> interconnection> communications), p. 42.
 OFTEL defines “material” as a late payment that exceeds 25% of the respective calendar month’s invoice.
 Supra Note 2, Annex 1, p. 6
 See chapter 15 of Belgacom’s reference interconnect offer as approved by the BIPT on 10 January 2003, a copy of which can be found on http://www.belgacom.be/web/car/documents/interconnect/2003brio_en.pdf.