Regulators Say FairPoint Woes a Factor in Verizon-Frontier Review

At least three FCC commissioners are keeping an eye on FairPoint’s ongoing troubles, said agency officials. FairPoint’s problems are a factor to weigh in the Frontier review, and arguments about that probably will arise “every step of the way,” said one official. However, another said it’s unclear if the same concerns apply to Frontier.

States reviewing the deal are eyeing FairPoint, and have varying views on the extent to which that situation applies to the Frontier case. Washington’s commission is viewing Verizon/Frontier through the lens of FairPoint’s experience, a staffer said. “The staff here has concerns, and the commission will be holding hearings,” he told us. “The staff is developing a position.” Staffers at the Ohio Public Utility Commission were watching the FairPoint drama unfold even before Verizon and Frontier filed for approval of their deal, they said. “We're clearly concerned about the FairPoint phenomenon,” said Allen Francis, chief of the telecom staff. “We're not intimate with the entire FairPoint matter, but we have a good idea of what’s going on there.”

For the Ohio regulator, the main question posed by the Verizon/Frontier transaction is the extent to which it differs from the deal that FairPoint made with Verizon, Francis said. “The companies have provided good testimony to the commission on this,” he said. “The commission opened a proceeding, and we are focusing on particular areas of concern: transactional synergies and financial considerations, coverage in the state, quality of service and competition.”

The Oregon utility commission plans hearings Dec. 3-4 on the Verizon/Frontier transaction. “We are very cognizant of FairPoint in this context,” a staff member said. “Frontier and Verizon have told us they are structuring the transaction differently to avoid the kind of operations problems that FairPoint has had. They say they are taking the Verizon systems, which are the old GTE systems, and replicating them,” the staffer said. “That could be a real asset for them, but you have to ensure that the replicated system works.”

South Carolina’s Public Service Commission has held a public hearing. “The New England situation with FairPoint came up, but beyond that all I can say is that the matter is pending,” said a commission spokesman. That state’s Office of Regulatory Staff, a separate entity, doesn’t look at Frontier through the FairPoint lens, a staff attorney told us. “We see Frontier as a totally different company,” the official said.

Washington’s agency is likely to impose conditions on the transaction, a commission staff member said. “We really are trying to define what to do. The problems in New England seem to have come from FairPoint not being able to get their systems in order,” he said. “With their New England acquisition, FairPoint was going from 300,000 lines to 2 million lines. Frontier is going from about 2 million to 6 million. It’s a hefty increase, but not that hefty.” One advantage for Frontier is that the company engineered a successful conversion after purchasing a broadcaster, he said. “The question is, how well are they going to do with the back-office conversion?” he said. “There are some issues for us in that area, and we're working our way through them. We are in conference on the matter and will be coming up with conditions. Right now they are only at the proposal stage.”

CLECs are “guardedly optimistic” that regulators will pay more heed to history as they review the Frontier deal than they did in considering the FairPoint spinoff, said Thomas Jones, an attorney with Willkie Farr & Gallagher who is representing TW Telecom and three other CLECS. As regulators were mulling the FairPoint deal, CLECs pointed out problems with a Verizon spinoff to the Carlyle Group in Hawaii -- arguments largely ignored, he said. But now two Verizon spinoffs have had “harmful consequences” for retail and wholesale customers, he said. As in those two deals, the Frontier transaction involves Verizon spinning off “non-core ILEC facilities” to a far smaller company inexperienced with the large operational support systems that are needed to serve retail and wholesale customers, he said.

Frontier isn’t FairPoint, and “many differences” separate the two Verizon spinoffs, said Frontier Senior Vice President Steve Crosby. If the Frontier deal had come first, there wouldn’t be the same controversy, he added. Frontier is 70 years old and larger than FairPoint, with 5,500 employees now serving 24 states, he said. And the deal will bring it Verizon’s revenue, about 11,000 employees, and billing and IT systems, he said. Because Frontier is receiving more revenue than debt, the deal actually will lower Frontier’s debt-to-equity ratio, called leverage, to 2.6x from 3.8x, he said. That’s approaching investment grade, he said.

FairPoint’s faced the challenge of building many new systems, but Frontier has the capacity and the time to convert the Verizon systems after the deal closes, Crosby said. Only systems in West Virginia must be converted by the close of the deal, a task Frontier doesn’t expect to be difficult because in the past five years it’s converted seven other systems, he said.

Regulators should view the Frontier deal in isolation, said Independent Telephone & Telecommunications Alliance (ITTA) President Curt Stamp. Frontier is an ITTA member. Focus should be on the merits of the transaction, not on outside factors, he said.

Regulatory approval is by no means assured, said Craig Moffett with Bernstein Research, citing FairPoint’s troubles. It’s hard to convince an individual state that a divestiture is in the state’s best interest when, in FairPoint’s case, Vermont and New Hampshire have seen so little gain and so much pain, he said.

States Mulling Conditions

State regulators likely will condition the deal, said Current Analysis analyst Brian Washburn. One possibility is requiring insurance or bonding to ensure access to financing in case something goes wrong, he said. The goal is to protect existing customers and/or ensure continuous broadband deployment, he said. State regulators will focus on potential integration risks, he said, citing system integration as a major problem with Verizon’s divestiture to FairPoint and at Hawaiian Telcom, which filed for Chapter 11 bankruptcy protection last year.

The South Carolina Office of Regulatory Staff has worked out a settlement on the Verizon-Frontier deal with the U.S. Department of Defense, federal agencies and the South Carolina Telephone Coalition, a staff attorney said. The settlement led to a proposed order that includes conditions to be placed on Frontier, she said. The proposed conditions include a requirement that for two years Frontier report quarterly to the commission and Office of Regulatory Staff on its performance in regard to FCC quality indicators on installation interval, measured in days; percentage of local installation commitments not met; trouble reports per month per 100 lines; complaints to regulatory agencies; repeat out-of-service trouble reports as a percentage of initial out-of-service trouble reports; and out-of-service repair interval measured in hours.

Also during that two-year period, Frontier is to report on its performance in regard to state service standards that already apply to Verizon. The data would be posted on the Office of Regulatory Staff Web site. Frontier also would report its quarterly net income and dividends. If service quality is not satisfactory, the regulatory staff would be empowered to petition the commission for an expedited inquiry, with Frontier agreeing not to oppose that proceeding.

Ohio staffers Francis and Nadia Soliman don’t expect their state to act on the Verizon/Frontier transaction before the end of November, they said. “We have more data coming from the petitioners and from intervenors,” Francis said. “And by the end of this week we will have held six public hearings. The next step will be for the staff to make a recommendation to the Commission. We might recommend an evidentiary hearing, or we might recommend that the commission make a determination.”

The relative stability and familiarity of the Verizon systems -- which that company acquired from GTE - that Frontier will be acquiring offer encouragement, Soliman said. “But we do have questions about how the transaction would affect repair, maintenance and customer transfers,” she said. “We're digging into that, and we can’t speculate on it. There’s definitely high interest.”

The West Virginia utility commission has set an evidentiary hearing on the deal for Jan. 12. “We have not heard what the parties will be presenting,” a spokeswoman said. “We'll have to wait and see.” The Nevada commission is considering the deal. Its staff has until Oct. 28 to file testimony, said a commission spokesman. “It’s too early to say what their opinion is on it,” he told us by email. The California Public Utility Commission received the company’s filing June 4. So far the commission has taken no action, a staffer said. In North Carolina, “the Public Staff is already reviewing this application, and we look forward to the results of their review,” commission chairman Ed Finley told us by e-mail.

The Verizon/Frontier deal lies beyond the reach of some state regulators. Idaho has no jurisdiction because the transaction is occurring at the holding-company level, an official there told us. Neither Wisconsin’s nor Michigan’s commission has a say over telecom mergers or acquisitions, officials of those agencies said. The Indiana Utility Regulatory Commission has limited jurisdiction over such matters, but in the case of Verizon/Frontier it has none, said a spokeswoman. “But the companies have met with us and say they are making every effort to prevent a recurrence of the pattern in New England with FairPoint,” the Indiana official said. “What they do is completely up to them.”