An administrative law judge reviewing the proposed sale of Verizon landlines to Frontier Communications has formally recommended the Illinois Commerce Commission (ICC) reject the deal.

Allowing Verizon to sell 600,000 Illinois phone lines, mostly in less populated areas of the state, would likely harm the quality of service customers receive from their landline provider according to Judge Lisa Tapia.

Tapia was given the responsibility to review the transaction’s merits before the deal moves before the ICC for final consideration.  Her 46-page report concludes that Frontier’s existing Illinois customers would likely be harmed, along with existing Verizon customers, because of the enormous debt Frontier Communications will take on as part of the deal.  Tapia writes the economic impact of the deal “will diminish Frontier’s ability to perform its duties to provide adequate, reliable, efficient, safe and least-cost public utility service.”

According to Staff witness Mr. McClerren, both Frontier Illinois operating ILECs (local phone companies) and Verizon have, in recent years, had some difficulty meeting the minimum key standards contained in Part 730. The key Part 730 standards are Toll & Assistance Operator Answer Time, Directory Assistance Operator Answer Time, Repair Office Answer Time, Business Office Answer Time, Service Installations, Out of Service for Less Than 24 Hours, and Trouble Reports.

Ms. McClerren characterized the performance of the nine Frontier Illinois operating ILECs as poor relative to the Repair Office Answer Time and Out of Service for Less Than 24 Hours standards and unacceptable relative to the Business Office Answer Time standard. Mr. McClerren concluded that given Frontier’s poorer performance relative to Verizon’s performance on Repair Office Answer Time, Business Office Answer Time, and Out of Service for Less Than 24 Hours , service quality would likely decline in the current Verizon North and Verizon South territories if the proposed reorganization is allowed to occur. Mr. McClerren further stated that because Frontier had continuously failed to satisfy the Business Office Answer Time, Staff expressed to Frontier representatives that it was prepared to initiate a hearing under Section 730.120 of the Act for the purpose of imposing penalties.

The evidence shows there is a significant risk that problems could occur if the transition is made too prematurely so as to create a potential for harm to Illinois customers. When weighed against the many risks of the Transaction, including, among others, the risk of systems integration, the purported benefits of the Transaction do not justify approval.

Of particular concern to Judge Tapia is the impact on Frontier’s finances and operating ability to take on more than 600,000 new customers in Illinois.  Despite company promises to the contrary, Tapia’s report notes we’ve been down this road before, particularly with FairPoint Communications, which went bankrupt late last year.

The evidence shows there is a significant risk that problems could occur if the transition is made too prematurely so as to create a potential for harm to Illinois customers. When weighed against the many risks of the Transaction, including, among others, the risk of systems integration, the purported benefits of the Transaction do not justify approval.

[...]

For instance, Frontier’s total Illinois access lines would be increasing from 97,000 to over 670,000 lines. Frontier would also be almost tripling its size and will be burdened with an enormous amount of approximately $3.3 billion in debt. The financial pressure along with more wirelines to handle leads the Commission to conclude that service quality will certainly be diminished. The ultimate consequences of diminished quality service will be borne by Illinois customers.

What about broadband and Frontier’s promises to expand it into rural communities across Illinois?  Judge Tapia’s report questions whether Frontier will do any better than Verizon did.

The record also does not support a finding that Frontier will be any more effective than Verizon in expanding the scope and quality of broadband services in the Illinois service areas it proposes to acquire from Verizon. To the contrary, the evidence shows that it is very unlikely that a smaller, less experienced operator would be able to support such an investment.

The findings also call attention to Frontier’s practice of paying out more in dividends to shareholders than the company actually earns from customers.  The International Brotherhood of Electrical Workers (IBEW), which has consistently argued against Verizon spinoffs, says no company can expect to succeed by paying out more than they earn just to keep a favorable stock price.  The IBEW has correctly predicted the outcome of other Verizon spinoffs, and warned the Verizon-Frontier deal is simply more of the same.

IBEW pointed to a 2007 Montana Public Service Commission (“PSC”) decision in which the PSC rejected a proposed merger and acquisition because “In normal utility operations, retained earnings provide a vital source of financial strength for capital investment and as reserves that are available during unexpected financial strains.  Regularly paying out dividends in excess of net earnings by a utility is inappropriate and risky because having insufficient reserves on hand could adversely affect the utility’s ability to provide adequate service.”

IBEW stated that the Montana PSC’s findings apply equally to Frontier. The IBEW endorsed the reasoning of the Montana PSC and reached the same conclusion about Frontier.

According to IBEW, Frontier only has two or three more years before it will have paid out all of its retained earnings to stockholders, based on its performance in the first half of 2009. IBEW also stated that two Wall Street financial analysts have independently found that Frontier’s shareholders’ equity is likely to become negative in 2012 or 2013. After that, Frontier’s dividend would have to be reduced to no more than its net income – a likely dividend cut of 60% or more. IBEW argued that without this Transaction, Frontier’s business model will fail within two or three years. IBEW asserted that Frontier does not plan to change its approach to business. Frontier still plans to pay out more to shareholders than it earns in net income and that there is no scenario where Frontier plans to pay out less in dividends than it earns in net income during the 2010 to 2014 period examined.

The report agrees with the IBEW position:

Frontier’s risky business model is a concern. The Commission agrees with IBEW that in normal utility operations, retained earnings provide a vital source of financial strength for capital investment and as reserves that are available during unexpected financial strains. Regularly paying out dividends in excess of net earnings by a utility is inappropriate and risky because having insufficient reserves on hand could adversely affect the utility’s ability to provide adequate service. Based on the record, this has been Frontier’s business practice. However, Frontier testified that it has revised its dividend policy. According to Frontier, it currently pays an annual cash dividend of $1.00 per share of Frontier common stock. Frontier after the closing of the proposed Transaction, intends to change its dividend policy to pay an annual cash dividend of $0.75 per share of Frontier common stock, reducing its dividend by 25% – from $1.00 to $0.75 per share – effective with the close of the Transaction.

The Commission does not find Frontier’s assertion credible. Specifically, that it plans to revise its dividend policy (at the discretion of it Board of Directors) because of this proposed Transaction when this has been Frontier’s approach to business for years.

Hundreds of pages of comments from consumers and other interested parties have been recorded by the ICC, many in opposition to the proposed deal.  The ICC’s next step is to accept comments about the report, which have already been forthcoming.

McCarthy

Dan McCarthy, Chief Operating Officer of Frontier Communications was among the first.

“Today’s proposed order by an administrative law judge in Illinois ignores the numerous public interest benefits outlined in the complete record developed in the Frontier/Verizon transaction. This record fully addresses the issues raised by the ALJ. We are confident that once the full Illinois Commerce Commission reviews the record, they will vote to support the transaction,” McCarthy said in a prepared statement.

“Frontier has formally committed to expand broadband to 85 percent of the households in the Verizon Illinois service areas covered by the transaction and spend in excess of $40 million to accomplish this effort,” the statement says, further noting that the company already provides DSL broadband service to 90 percent of its existing footprint in the state.

The full ICC is expected to rule by the end of April.

Among the Illinois communities impacted by the transaction:

Chatham, Divernon, Elkhart, Illiopolis, Jacksonville, Lincoln, Loami, New Berlin, Pawnee, Pleasant Plains, Sherman, Virden, Waverly and Williamsville.

Oregon's telephone company service areas

Frontier Communications has won approval to assume control of telephone lines serving 310,000 Oregonians.

The Oregon Public Utilities Commission Friday unanimously approved the transfer of service from Verizon to Frontier as part of a 14-state transaction.

“First and foremost we want to ensure that customers are not harmed by this transaction.  That’s why we are requiring more than 50 conditions, all aimed at making sure customers are not harmed by this sale,” Chairman Lee Beyer said. “In addition, we are requiring Frontier Communications to spend $25 million on expanding high-speed internet access to its Oregon customers by July 2013.”

In return for approval, Frontier agreed to PUC demands for customer service protections:

• A commitment that Frontier spend at least $25 million to expand high-speed broadband in Oregon by July 2013;
• No changes in “commission-regulated” retail service plans for at least three years;
• Costs of the transition must not be paid by customers in the form of rate increases;
• 90-day window to change long distance carrier without any fees;
• An independent audit, paid for by Verizon, to ensure Frontier can handle service for those customers affected by the deal;
• An opt-out provision letting Oregon’s FiOS subscribers terminate their contracts without penalty if Frontier reduces Internet speeds or drops any of its television channels.

What is missing from Oregon’s agreement?

• A prohibition of Internet Overcharging schemes like Frontier’s 5 gigabyte “acceptable use” policy that potentially limits customer’s broadband use.  Expanded broadband that customers can only use for basic web browsing and e-mail, without fear of exceeding the limit, indefinitely punishes rural Oregonians with no broadband alternatives;
• A specific definition of what constitutes “broadband” speeds.  Frontier can continue to deliver the 1-3 Mbps it routinely provides to its less urban service areas.  While better than nothing, Oregon regulators could have used the deal as leverage to win 21st century broadband speeds from Frontier, not yesterday’s ‘barely broadband;’
• Fines and penalties that will punish a provider that does not invest appropriately in high service standards to provide quality service, and a trigger to permit automatic cancellation of operating certificates should Frontier go bankrupt.

Too many of these deals offer upsides for Wall Street and little benefit to consumers, especially those dependent on their landline phone company for basic communications services.  By forcing requirements that prove costly for a provider to renege on, investors will understand their gains will only happen when they are assured Frontier is doing right by their customers, as well as their shareholders.

Oregon is the sixth state to approve the sale.

Frontier currently serves only 12,000 customers in the state, mostly in southwest Oregon, including the communities of Azalea, Canyonville, Cave Junction, Days Creek, Glendale, Myrtle Creek, O’Brien, Riddle, Selma, and Wolf Creek.

The company’s new customers will come mostly from Washington County, east Multnomah County, and from several pockets of customers in the northwestern part of the state.  Oregon’s largest telephone provider is Qwest Communications, but the state has numerous smaller independent providers as well.

Verizon Communications has made its intentions clear — would-be broadband customers in its service area who are off the FiOS footprint can pound salt.  The Federal Communications Commission issues regular reports on broadband services and their adoption by consumers across the United States.  In the latest report, published this month, customers in Verizon’s current or former service areas who are not being served by Verizon FiOS are behind the broadband 8-ball, waiting for the arrival of DSL service from a company that has diverted most of its time, money, and attention on deploying its fiber-to-the-home service for the big city folks.

One might think the worst DSL availability in the country would be in rural states like Alaska, or territories like Guam, or income-challenged Mississippi.  No, the bottom of the barrel can be found in northern New England and the mid-Atlantic states — largely the current or former domain of Verizon:

Percentage of Residential End-User Premises with Access to High-Speed Services by State
(Connections over 200 kbps in at least one direction)

Source: FCC High-Speed Services for Internet Access: Table 19

Some might argue that DSL penetration ignores Verizon’s fiber upgrades, but does it?

Providers of High-Speed Connections by Fiber by State as of December 31, 2008
(Connections over 200 kbps in at least one direction)

Source: FCC High-Speed Services for Internet Access: Table 20

A survey of the rest of the country calls out Verizon’s inattentiveness to DSL expansion in its remaining service areas not covered by FiOS.

For example: Alabama, Idaho, Montana, and Oklahoma all enjoy 80 percent DSL availability.  Utah and Nevada achieved 90 percent coverage.  Even mountainous Wyoming, the least populous state in the country, provides 78 percent of its state’s customers with the choice of getting DSL service.  Yet New York manages only one point higher among its telephone companies, largely because of enormous service gaps upstate.

What happened?  By 2002 Verizon began to realize their future depended on moving beyond providing landline service.  The company began to divert most of its resources to a grand plan to deliver fiber connections to residences in larger markets in its service areas.  While great news for those who live there, those that don’t discovered they’ve been left behind by Verizon.  Northern New England got flushed by Verizon altogether — sold to the revenue-challenged FairPoint Communications who assumed control of Verizon’s problems and managed to make them worse.

The argument that rural broadband is “too expensive” doesn’t fly when looking at DSL availability in the expansive mountain west or rural desert regions.  Compact states like Vermont, New Hampshire, and Maryland are far easier to wire than North Dakota, New Mexico or even Texas with its large rural areas (87, 87, and 81 percent coverage, respectively).  Verizon simply doesn’t realize the kind of Return on Investment it seeks from FiOS customers — a dollar amount investors want to see.

Of course, that’s the argument Frontier Communications, and FairPoint behind it, made to regulators in sweeping promises to deliver better broadband service.  FairPoint missed its targets and declared bankruptcy.  Frontier is still in the “promises, promises” stage of its deal to take over millions of rural customers currently served by Verizon.

Frontier's broadband stimulus requests were also shot down when West Virginian cable operators objected

Even companies whose raison d’être these days is to provide better phone and broadband service to rural Americans are being turned down. Frontier Communications, who wants to take control of 617,000 phone lines in West Virginia from Verizon was, in part, promoting rural broadband stimulus funding as a benefit of the deal. After all, a phone company specializing in serving the underserved would stand a better chance of securing broadband stimulus money than a telephone behemoth like Verizon.

Apparently not. The feds turned down their $55 million dollar broadband stimulus application, too.

Frontier applied for two stimulus grants, one to provide fiber optic connections to schools, libraries and health care facilities, the other to fund broadband expansion in West Virginia.

West Virginia’s incumbent cable companies teamed up and just said no.

Opposition piled on from Armstrong Cable Services, Comcast, JetBroadband and Suddenlink urging federal officials to deny Frontier’s applications. They claimed the phone company was trying to secure taxpayer money to provide broadband service in their territories, making the application redundant.

“They had said this was a reason to grant approval, that this would really boost broadband deployment,” Patrick Pearlman, deputy director of the state PSC’s Consumer Advocate Division, which is opposing the Frontier-Verizon sale told the Charleston Gazette. “They went on about how they’re going to get all this money and bring all this, but apparently they couldn’t count on the feds.”

Frontier didn’t blame themselves for the failure, of course. They blamed state officials for holding up their deal with Verizon.

“This is one of the reasons why we have asked this and other commissions to act expeditiously in their review of the proposed transaction,” Daniel McCarthy, Frontier’s chief operating officer told the Gazette.

State regulators should take the rejection as a lesson learned if they believed Frontier’s claims that approving the deal would result in an improved position for broadband stimulus funding. It was not to be. Even small cable companies will pounce on applications that suggest competition might be on the way.

More and more, it appears likely the grand plan for vastly improved broadband will be reduced to funding a handful of showcase rural broadband projects that solve some of the nation’s broadband deficiency woes, but after telecommunications industry and their lobbyist friends are done chewing up the project, plans of expanded broadband providing Americans with better choices at reasonable prices will remain a broadband pipe dream.

TDS Telecom’s grant for broadband expansion is an example of showcasing hit or miss rural broadband projects.  The company secured $8.6 million to expand broadband Internet services to TDS customers in one Chatham Telephone Company exchange in northern Michigan.  Considering TDS serves largely rural customers in 30 states, winning expansive broadband improvement for all Americans is about as likely as winning the Powerball jackpot. TDS CEO Dave Wittwer explains the stimulus funding to customers in this video. (1 minute)

Frontier's headquarters in Rochester, N.Y.

Frontier Communications has dismissed the proposition of Google constructing a 1Gbps fiber-to-the-home network, telling readers of the Rochester Democrat & Chronicle that most users don’t need ultra-fast Internet access.

Ann Burr, chairman and general manager of Frontier Communications of Rochester made the remark in response to news that citizens and business leaders are excited about promoting Monroe County as a potential test location for Google’s fiber network experiment.

Frontier, which serves Rochester and most of the 585 area code, accused Google of having “a poor track record of following through on such proposals and that creating a fiber-optic network from scratch would be enormously expensive.”

Pot to kettle.  Frontier’s illusory promises for fiber optic connectivity in states like West Virginia, where it seeks to take over the majority of the state’s phone customers from Verizon, never seem to include specific assurances such projects will reach customer homes.

“If Google built its own network, we estimate it would cost $5,000 per household,” Burr told the newspaper.

That’s as exaggerated as Frontier’s DSL speed claims.

Verizon Communications, which is in the business of providing fiber connectivity to the home, disclosed the true costs are far lower than that, and continue to decline.  In the summer of 2008, Verizon’s Policy Blog noted:

Capital Costs
– We said our target per home passed was $700 by 2010, and we are ahead of plan to achieve that objective. In fact, we’ve already beaten the target.
– We said our target per home connected was $650 by 2010, and we’re on plan to hit that target.

No wonder Frontier doesn’t contemplate providing fiber service to customers.  It created its own sticker shock.

Still, the local phone company didn’t want to slam the door entirely on Google’s foot, suggesting it would be willing to talk about leasing space on Google’s network if it launched in the Flower City.

Frontier’s claim that customers don’t believe fast broadband service is important is a remarkable admission, particularly for a company that increasingly depends on broadband service to stop revenue loss from customers dropping traditional phone lines.  That philosophy should be carefully considered by state officials and utility commissions reviewing Frontier’s proposal to take over Verizon phone lines in several states.  Do communities want to receive broadband from a company that dismisses faster broadband speed as irrelevant for the majority of its customers?

Perhaps the remarks came with the understanding Frontier isn’t capable of delivering 21st century broadband speeds over its antique network of copper telephone wire anyway.

That’s the point Time Warner Cable has made repeatedly, especially in the Rochester metro area.  The cable operator routinely promotes its Road Runner cable modem service’s speed advantages over Frontier’s DSL product.  Frontier promises up to 10Mbps, but often manages far less (3.1Mbps was my personal experience with Frontier DSL last April.)  Time Warner Cable promises up to 15Mbps, and often exceeds that with its “PowerBoost” feature.  In rural areas, the phone company tops out at “up to 3Mbps.”  Time Warner Cable notes most of its new broadband customers come at the expense of phone companies like Frontier.  DSL customers switch because they do care about broadband speed.

Judging from the excitement in Rochester over Google’s proposal, Frontier’s dismissal of a fiber optic future seems out of touch, and potentially a drag on the local community’s economic future.

Rochester increasingly will become a broadband backwater because of anemic broadband competition from Frontier Communications.  Its reliance on ADSL technology, more than a decade old, to deliver distance-sensitive broadband service looks out of place compared with the rest of New York State.  Major cities throughout New York are being wired with fiber optic service by Verizon Communications.  Verizon FiOS delivers up to 50Mbps service.  Frontier maxes out at far lower speeds and defines an acceptable amount of broadband usage on its DSL service at just 5GB per month. Using Verizon’s FiOS fiber network, you’d exceed Frontier’s entire month’s ‘allowance’ in less than 15 minutes at Verizon’s speeds.

Rochester is one of many communities challenged by the transition away from a manufacturing economy towards a high technology future.  A world class fiber optic network doesn’t just benefit big business.  It spurs revolutionary growth in medicine, education, software development, telecommunications, and more.  That means good paying jobs.  For consumers with fiber to the home, it opens the door to telecommuting on a whole new level, distance learning opportunities, new ways to access information and entertainment, and allows home-based entrepreneurs to develop new businesses.

With Verizon FiOS unavailable to Rochester indefinitely, and Frontier unwilling to make appropriate investments to keep this city competitive with the rest of upstate New York, those jobs and economic benefits can go to Buffalo, Syracuse, Albany, Westchester County, and metropolitan New York City.  We’ll be held back on the frontier with Frontier and its ideas of rationed broadband service.

WROC-TV in Rochester reports that Ontario County, to the southeast of Rochester, may have a built-in advantage with an already-installed fiber loop covering much of the county.  The county has a team working on a formal application to Google to provide service in communities like Geneva and Canandaigua.  Frontier’s claims that consumers don’t care about fast broadband speed are belied by the excitement of residents of both counties. (2 minutes)

Ohio utility regulators today approved the transfer of telephone service from Verizon North to Frontier Communications with some conditions attached.  The transition will make Frontier Communications the state’s second largest telephone company behind AT&T.

Regulators negotiated conditions with Frontier officials that requires the company to:

• deploy broadband facilities in 85 percent of Verizon’s current Ohio service area by the end of 2013;
• freeze basic local telephone rates in Frontier’s service territory at current levels until broadband deployment reaches 85 percent;
• invest in service upgrades in each of the next three years amounting to $50 million in infrastructure improvements;
• agree to track and report service outages and how Frontier responds to them.

The company has committed to keep on nearly 1,000 Verizon North employees in Ohio.  Opponents expressed concern that pressure to cut costs post-merger would have come at the expense of employees.

Frontier's current service area in Ohio is a tiny portion of Williams County, serving just 480 residents from an office in Michigan (click to see a color map of the service area)

Ohio residents are largely unfamiliar with Frontier Communications.  Prior to the merger, just 480 residents in a tiny portion of Williams County in northwest Ohio had Frontier telephone service, served by Frontier Communications of Michigan’s office in Osseo, Michigan.

Right now, residents of Billingstown, Cooney, Northwest, and Nettle Lake, Ohio might qualify for Frontier High-Speed Internet Max, advertising “breakthrough speeds at an unbeatable price.”  That is “up to 3Mbps” service starting at $49.99 a month.

Those members of Frontier’s family of customers will now be joined by 435,000 Verizon residential customers in 77 of Ohio’s 88 counties.

The largest portion of Frontier’s new service area will include parts of Champaign, Clark, Clinton, Darke, Miami, Montgomery, Preble, Shelby and Warren counties.

Despite early opposition from Ohio Consumers’ Counsel (OCC), who expressed concerns about the financial viability of the deal and the fulfillment of promised broadband expansion, the vote by the Public Utilities Commission (PUC) was unanimous.  After negotiations with company officials and the OCC and PUC, an agreement to attach conditions to the sale of Verizon’s landlines resulted in a change of heart by the Counsel’s office.

Frontier's new service area, representing territory formerly served by Verizon North (click to enlarge)

Many of Ohio’s former Verizon service areas are served by Verizon’’s DSL service, but many rural communities went unserved.  Verizon has made a business decision to direct resources into its fiber to the home service — FiOS, which is only being provided in substantial-sized communities.  With Verizon’s reduction in resources towards rural service areas, Frontier argues the sale will benefit rural residents because they will provide broadband service Verizon never did.  Frontier suggests the viability of its landline business is enhanced by robust broadband deployment as consumers continue to drop traditional phone service.  Broadband gives customers a reason to stay with Frontier, the company believes.

But critics contend Frontier’s broadband is behind-the-times, often providing less than 3Mbps service in many smaller communities.  Frontier also maintains language in its Acceptable Use Policy that expects consumers to limit their broadband use to just 5GB per month, although company officials stress they do not enforce that provision at this time.

Frontier believes broadband deployment will help the company survive the trend away from landline phone service

Frontier relies on traditional, basic ADSL service across its service areas nationwide, but also provides provides some communities with Wi-Fi access for an additional monthly charge.

Similar earlier deals between Verizon and FairPoint Communications, the Carlyle Group, and Verizon’s former telephone directory printing operation (now Idearc Media) have all ended in bankruptcy after months of sub-standard service, billing errors, and broken promises.  Should a similar fate befall Frontier Communications, a trip to Bankruptcy Court could put an end to broadband, pricing, and service commitments made with state officials.

More of the same you can already get elsewhere

If you’re a phone company unwilling to make the investment into delivering a real telco-TV package to customers, why not do online video on the cheap with a new online portal that offers 100,000 videos you can already easily find elsewhere online?

That works for Frontier Communications, who today is patting themselves on the back over the launch of my fitv.com, a new online video site.

“my fitv reflects the disappearing lines between televisions, personal computers and mobile devices and the way time is shifting. Today, consumers don’t have the time or patience to see programs at specific times, or to even sit through an entire program. my fitv gives viewers control, and its unique user experience offers more than 100,000 titles and seamless search and navigation functions. It’s all about search less and watch more,” says Maggie Wilderotter, Chairman and CEO of Frontier.

Unfortunately for Frontier, virtually all of their launch content is readily available and easy to find on sites like Hulu.  The site also contains a handful of news clips from two of the evening newscasts in Minneapolis-St. Paul, Minnesota, with more promised in the future.

Hulu invites anyone to embed their video content, so even you can build your own online video portal.  But giving visitors a compelling reason to visit a site that offers little, if any, original content is a challenge.

The site is available to Frontier customers and those who aren’t, and why not?  Frontier isn’t out anything if outsiders start using the service.

Frontier isn’t the only phone company running an online video portal.  AT&T Entertainment launched last year repackaging Hulu and other content providers’ ‘embeddable videos’ to an underwhelmed audience.

Frontier Communications ran this ad Sunday in Rochester, N.Y., Cincinnati, Ohio, Sacramento, Calif. and Minneapolis/St. Paul, Minn., to launch my fitv.

We’ve heavily covered the proposed sale of Verizon landline service to Frontier Communications since the deal was announced last spring.  This should not come as a big surprise, considering Frontier Communications’ decision to insert a 5GB monthly usage limit in their Acceptable Use Policy in the summer of 2008 was what instigated the launch of Stop the Cap! in the first place.  Frontier’s decision was boneheaded at best in a city like Rochester with a very aggressive cable competitor only too willing to bash Frontier for implementing it if they thought it would win more customers.

But of course Frontier Communications’ Rochester operation is an anomaly for ‘rural America’s phone company.’  For the majority of rural customers, it’s far easier to slap customers around with a usage cap and 1-3Mbps DSL service when those customers have few, if any practical alternatives.  Unfortunately, there is real money to be made from their business plan serving frequently non-competitive communities with incrementally-upgraded “just enough” broadband service with unfriendly terms and conditions attached.

In several of the 14 states impacted by the proposed sale, the relatively small number of customers involved made it easy for regulators to quickly approve the proposal with few conditions attached. The deal flew under the radar and got scant press in most of these states.  Washington, Ohio, and West Virginia are another matter.  Regulators are taking a closer look at the deal in all three states where most of the controversy is taking place.  The deal is most contentious in West Virginia, where Verizon’s exit threatens to turn most of the state’s landline business over to Frontier Communications.

Stop the Cap! has been reviewing the public comments left on more than a dozen news sites, forums, and printed letters to the editor regarding the deal.  We’ve seen comments obviously coming from Frontier employees, union members, politicians, business leaders, and competitors.  But the vast majority come from ordinary consumers who have concerns about what the deal will do to their telephone and broadband service.  Most of the comments from consumers that embrace the sale don’t do so because they are fans of Frontier.  They simply loathe Verizon and want an alternative.  Boiled down, the consensus among those in favor of Frontier taking over is “let them try… they can’t do any worse than Verizon.”

WCHS-TV in Charleston covers West Virginia’s Public Service Commission hearings reviewing the proposed deal.  Frontier employees arrived in Charleston to lobby for the sale. (1 minute)

Desperate for Broadband

There are a lot of West Virginians who still have no broadband options.  Frontier claims Verizon provides only 60 percent of their customers with a broadband option — DSL service that tops out at 7Mpbs, if you live in an urban area.  Those that don’t have often waited years for Verizon to extend DSL service into their communities or neighborhoods.  It’s a problem common in mountainous, often rural states like West Virginia where infrastructure costs can be prohibitive.  Customers believe that Frontier Communications will tolerate a lower return on their investment providing DSL service to those customers Verizon ignored.

Promising to expand broadband service in rural, unserved areas is a common sales point for all of the prior Verizon sell-offs.  Hawaiian Telcom promised improved broadband service and speed.  Fairpoint promised to expand DSL availability to 75 percent of all access lines within 18 months of the sale, 85 percent within two years and 95 percent within five years.  Frontier Communications promises to expand broadband service as well, claiming they already provide 92 percent of their existing West Virginia customers with the option.  Of course, Hawaiian Telcom and FairPoint both reneged on their commitments before going bankrupt.  Frontier Communications hasn’t yet been held to any specific commitment or timeline in West Virginia as part of their proposed takeover of service.

Consumer Reports rated TV, phone, and Internet providers, including Verizon and Frontier, in its February 2010 issue

To those suffering with dial-up or satellite fraudband, -any- broadband option seems like a miracle, even if it turns out to be 1-3Mbps DSL service with a 5GB allowance.  But as those kinds of anemic speeds arrive, cutting edge multimedia-rich broadband applications will become increasingly mainstream and leave these customers behind, again.  With a 5GB usage limit, it wouldn’t matter anyway, because customers will never be able to take advantage of services that will rapidly blow through those limits.  Make no mistake, a user’s broadband experience at 1.5Mbps with a 5GB allowance is going to be considerably different than a customer enjoying online multimedia from a cable provider or the next generation broadband service from Verizon FiOS or AT&T’s U-verse.  Think e-mail and basic web browsing, and that’s about all.

What kind of broadband experience does Frontier Communications bring?  This month, Consumer Reports rated Frontier dead last among DSL providers that own and operate their own broadband networks (subscription required).  The magazine rated 27 regional fiber, cable, and satellite providers and Frontier’s DSL ended up #19 on the list, the lowest rating of any DSL provider selling service on its own network.  Only Earthlink, which usually buys access on other providers’ networks came in lower among DSL providers.  Verizon actually scored higher than Frontier.

Frontier’s DSL service merited a 67 out of 100 score, rating only fair on value, speed, reliability, and customer support, based on 56,080 Consumer Reports subscribers who have a home Internet account.

Frontier’s phone service rated even lower, second to last in the survey.  Frontier was rated fair on value, reliability and call quality.  Only Mediacom did worse.  Verizon scored much better on reliability.  The magazine’s survey of phone companies was based on 37,484 respondents with phone service and was completed in the spring of 2009.

The consumer magazine did not recommend DSL for broadband access, suggesting consumers would do better with fiber optic broadband first, and cable modem service second.

Union Bashing – The enemy of my enemy is my friend

A significant minority of comments were focused entirely on union bashing, completely ignoring the specifics of the Frontier-Verizon sale.  All these people knew was that if the Communications Workers of America or other union was involved, they were the “real problem,” accusing union bosses of opposing the deal until they were paid off.

Nonsense.

Reality trumps anti-union talking points.  Consumers can review for themselves who correctly predicted the outcome of the last two deals of the recent past.  They were the CWA and the International Brotherhood of Electrical Workers, who accurately identified the service problems, the network transition problems, the debt load that prevented service expansion and upgrades, and the eventual bankruptcies experienced at Hawaiian Telcom and FairPoint Communications.  It turns out that asking front line employees who work in the office and out in the field maintaining the network are well positioned to give an honest assessment of these transactions that others seek to candy coat to get the deal done.

WSAZ-TV in Charleston delivered this decidedly pro-Frontier news report on the company’s efforts to counter opposition to the proposed sale. (3 minutes)

The Opposition

A large number of comments from those who oppose the deal believe they will actually be far worse off with Frontier.  Most relate the experiences of themselves or their friends and family who live in Frontier service areas, and they’re unhappy with Frontier’s poor customer service, reliability, and slow speed DSL.  Many were also unhappy with Frontier’s automatically-renewing contracts committing customers to stay with the company or face a steep early cancellation penalty.  Many more lament the lack of a future with Verizon fiber optics.

David Swanson, who blogs from his home in Golden Valley, Arizona just dumped Frontier for his local cable provider – Golden Valley Cable & Communications.  He says he was overpaying for Frontier’s DSL and phone package.  Together, after fees and taxes, $90 a month went to Frontier and $73 a month went to DirecTV for television service.  With his new cable bundle, he pays $100 a month for everything.  He uses Boost mobile for his phone, and has no need for a landline.

Reviews on DSL Reports aren’t exactly positive about Frontier either.

One Rochester customer isn’t happy with the “spotty service” he’s experienced on Frontier’s aging copper wire infrastructure, noting they don’t seem to be in any hurry to upgrade facilities in western New York.  He’s stuck with unreliable DSL service far slower than what Time Warner Cable’s Road Runner service can provide. Another customer in Lowville, New York admits he has to live with Frontier’s slow speed DSL because there is no other provider available.  In Kingman, Arizona one customer rated the company’s DSL service “slightly better than nothing.”

Even customers who had had good things to say about Frontier in forums often acknowledge their service simply isn’t a good value when considering the high cost charged for the slow speed received.

What Can Be Done?

At this point, it is critical impacted customers contact their state utility commission and state representatives and tell them this deal does not work for you.  It is true Verizon wants out of these service areas, and should they win the right to withdraw someone will have to assume control of landline operations in these communities.  But the terms and conditions for the company seeking to provide service should favor customers and not the Wall Street dealmakers.  Strict financial pre-conditions should be in place to guarantee the buyer is up to the task of providing service and upgrades.  Historically, it’s been far too easy to simply renege on the deal with a quick trip to Bankruptcy Court to shed the debt these deals pile on, and be rid of the service commitments that were part of the approval process.

A company that believes they’ll earn plenty from this deal should be spending plenty to provide quality broadband service starting at 10Mbps, not the 1-3Mbps service Frontier provides most of its rural service areas.  What chance do communities in West Virginia have to stay competitive in a digital economy that requires faster broadband access without the ridiculously low usage limits Frontier includes in their customer agreements?  In fact, usage limits and other Internet Overcharging schemes should be explicitly banned as part of any sales agreement.

Holding Verizon responsible for the outcome of deals that benefit them and their shareholders while sticking customers with a bankrupt provider must be considered.  An important component of past Verizon’s landline-dumping-deals involves the Reverse Morris Trust — delivering a tax-free transaction for Verizon and piles of debt for the buyer. That puts all the risk on ratepayers, lower level employees who are among the first to go when cost-cutting begins, and head-scratching regulators wondering where it all went wrong.  The only ones not doing any hand-wringing are Verizon’s accountants and the executive management of both companies who conjure up such deals.  That’s because they are rarely held accountable, and often win retention bonuses even while a company is mired in bankruptcy.

Regulators should insist Verizon play a fundamental role in insuring that customers are protected even after the deal closes, honoring commitments and financing operations should the buyer fail soon after the sale is complete.  Under these conditions, customers are protected and Verizon might think twice about structuring a deal that loads the buyer down in insurmountable debt.

“This deal is driven by greed — and we can learn from Northern New England’s and Hawaii’s experience to make sure it does not come to pass here or in the other 13 states,” said CWA’s District Two Vice-President Ron Collins, who has been leading the campaign in West Virginia.

Some of the crowd at Sunday's rally in Charleston

Verizon employees affiliated with the Communications Workers of America turned out in force Sunday to protest the proposed sale of Verizon’s West Virginia operations to Frontier Communications of Connecticut.

Hundreds of workers and union members rallied at the West Virginia Culture Center in Charleston, the state capital, to protest the deal.

The CWA is concerned the transaction will enrich a handful of corporate executives and Wall Street bankers while saddling the state with sub-standard phone and Internet service for years to come.  Frontier Communications will assume enormous debt to make the deal happen with Verizon, and set itself down the same path that ended in bankruptcy for two similar deals in the recent past involving FairPoint Communications and Hawaiian Telcom.

Union members are, of course, concerned about their future employment prospects at a Frontier-owned operation, but insist they are also concerned with the citizens of West Virginia.

“I work in the community and live in the community. I want to be able to go out to the stores with nobody yelling at me for not being able to provide service for them,” said Jim Radcliff, a Verizon employee.

(from left to right) CWA Pres. Larry Cohen, Local 2003 Pres. Anekia Greiner, and CWA District 2 VP Ron Collins

West Virginia’s governor Joe Manchin made an appearance at the rally, saying he has concerns about the proposed sale, and joined labor and community leaders to say he would do everything in his power to make the proposed deal work for working families in the state, not just Wall Street bankers.

Other rally speakers included Sen. Jack Yost, Del. Mike Caputo, state AFL-CIO President Kenny Perdue, and representatives from the firefighters, nurses and senior citizens.

Firefighters and other public safety officials are concerned about potential disruptions of 911 service, which were an ongoing problem after FairPoint Communications took control of Verizon lines in northern New England.

The Communications Workers of America is concerned the sale of Verizon’s phone lines to Frontier Communications could cause disruptions in 911 service, as happened with FairPoint Communications in northern New England.  The CWA is running this ad in West Virginia.

“We need to bring high speed broadband to West Virginia and communities across the country, to foster economic growth,” CWA President Larry Cohen said.  “Instead, Verizon is using an obscure tax loophole to do a tax free deal that will leave West Virginia without a platform for achieving the speeds that are necessary for economic development.  This deal is only good for Wall Street, not Main Street.”

Cohen was speaking about Verizon’s use of the Reverse Morris Trust provision in corporate tax law, which Stop the Cap! explored last fall in detail.  This transaction could cost taxpayers as much as $600 million in lost tax revenue.

Audio Clip: Communications Workers of America Frontier-Verizon Radio Ad (30 seconds)
You must remain on this page to hear the clip, or you can download the clip and listen later.

WCHS-TV in Charleston covered the weekend rally by CWA opposing the sale of Verizon’s landlines to Frontier Communications. (2 minutes)

http://www.phillipdampier.com/video/CWA Rally Excerpts 1-10-10.flv

Here are some excerpts from Sunday’s rally including speakers protesting the proposed sale and praising union involvement in consumer protection. (courtesy: LairdWilliam) (10 minutes)

Phillip "Doesn't Worship Wall Street" Dampier

Bray Cary, president and CEO of a group of West Virginia television stations enjoying advertising revenue from Frontier Communications, was back on his Decision Makers program to allow an opposing viewpoint to the puff piece interview he held earlier with Frontier’s Ken Arndt, Frontier’s Southeast region chief.  This time, he invited Ron Collins, vice-president of the Communications Workers of America to give the CWA side.  Cary’s Tea-’N-Cookies Breakfast Club With Ken this was not.  Cary decided to play hardball with Collins, leaving no viewer in doubt where Cary stood on the question of Frontier’s proposed purchase of West Virginia’s phone lines from Verizon.

Unfortunately, Collins was not completely prepared to rebut Cary’s pro-Wall Street, pro-deal propaganda and looked ill at ease at times during the interview.  We’re not, and Cary’s “facts” deserve some investigation.  After all, how hard should it be to rebut a guy who believes Wall Street and the banks have all the right answers for West Virginians’ phone service?

• Watch part one of the interview.
• Watch part two of the interview.
• Part three was not available on the website due to a technical fault.
• Watch part four of the interview.

Right from the outset, Cary wants to play “devil’s advocate” with Collins, asking why in the world the CWA is opposed to this deal.  That was a major departure from his cheerleading session with Arndt.

Bray Cary, Host of Decision Makers

“I’ve looked at this [...] their stock has been extremely stable.  Wall Street appears to be signaling their financial viability is okay.  Why is the stock market not reacting negatively?  If it’s good for stockholders, how can it be bad for their financial stability.  Stockholders want financial stability,” Cary said in a series of statements about the deal, including mentioning a Moody’s report on the deal.

The Moody’s report Cary talks about is for shareholders who will reap the rewards or suffer the losses based on the success or failure of the deal.  Moody doesn’t rate the deal’s impact on consumers who have to live with the results.  What’s good for Wall Street is not necessarily what’s best for customers.

“What you don’t have is anyone in the financial community suggesting this is a bad financial deal,” Cary said December 13th.

Wrong.  Almost a week earlier, on December 7th, D.A. Davidson, a respected Wall Street analyst said the opposite.  In a story published in Barron’s: “Frontier Communications’ Shares Not Wired for Success,” the analyst firm argued the regional telecom’s acquisition of Verizon’s rural lines will be… wait for it… bad for the stock.

Cary’s claim that Wall Street is concerned with the long term viability of companies belies the growing reality that much of the investment culture in America has a long term obsession with short term results.  Your company is only as good as your last quarter’s financial earnings statement, and several bad ones in a row are usually enough to bring a recommendation to dump shares.  Frontier has kept its stock value stable largely as a result of their steady dividend payment.  Collins claims Frontier has gone beyond reason, paying 125% of earnings in dividends.  That may make the stock a popular choice for income investors, but is also eerily familiar.

FairPoint Communications also enjoyed a healthy stock price because of its high dividend payout.  Wall Street only got concerned when they thought that deal might not go through.  Morgan Stanley issued a report in 2007 suggesting the deal between FairPoint and Verizon to take control of landline customers in Vermont, New Hampshire, and Maine, was itself helping to prop up the stock’s value.  We saw how far that got FairPoint when the company declared bankruptcy a few months ago.

Ron Collins, CWA's vice president

Indeed, smaller independent phone companies commonly use high dividends to remain attractive to investors and stay viable in a tough market.  Windstream is another such company and even CNBC’s Jim Cramer gave due diligence to the fact high dividends and stock value by themselves don’t necessarily predict the company’s long term success or failure.

Make no mistake, Frontier has sold this deal to investors based on dividend payouts, claimed cost savings, and a safe bet that any broadband in rural America will earn them increased revenue, especially where consumers have no other place to go for service.

Frontier will take on massive additional debt to finance the deal, but on paper it actually appears to reduce their debt ratio.  That’s because when you add millions of new customers, the debt doesn’t look so big next to the increased revenue those additional customers will bring, assuming they stay with Frontier.  Should Frontier’s performance underwhelm customers, they’ll drop service if they can.  If mobile phone networks do a better job of reaching these rural customers, many will drop landline service anyway.  When wireless broadband service becomes a more realistic option, customers might toss Frontier’s slow speed DSL overboard.

AT&T and Verizon have read the writing on the wall — an ongoing decline in landline service and the eventual death of the kind of service Frontier is providing its customers on its legacy network.  Would you be better off with a company that recognizes the truth about the future of wired basic phone service, or the one that wants to buy up obsolete networks and hang on until the last customer leaves?

Cary’s concern starts and stops with shareholder value, not the individual long term needs of consumers across West Virginia.

“All of the bankers and all of Wall Street are saying financially this is a good deal financially for Frontier,” Cary argued.

“Good for Wall Street, bad for West Virginia,” Collins replied.

“Well, see I disagree… that has been a myth put out there, and the reason we don’t have any jobs in this state is companies don’t want to come here just because of that mentality.  People need to make money.  You look at where companies are flourishing, the workers flourish when they do,” Cary said.

Really.  Then why are several of these telecommunications companies awash in revenue also continuing to reduce their workforce in their relentless effort to obtain “cost savings.”  Someone is making money, just not the average employee.  Every state has pro-business acolytes claiming businesses don’t want to come to their state because of regulation and a hostile business climate, even those with the fewest regulations, lowest taxes, and little protection for employees and consumers.

Cary does make one valid point: Verizon wants out of West Virginia and refuses to invest a dime in the state as it looks for a quick exit.  Instead the company has diverted resources from serving smaller states’ phone service needs into its larger city FiOS fiber to the home system where it believes it can reap more revenue.  Whether that disinvestment should be permitted in the first place is a question that needs to be asked.

Verizon is a regulated utility that is required to meet certain performance standards, and the company’s long history of operations under that framework, under which it profited handsomely, does require consideration.  But the state can also provide additional incentives to make it more attractive for Verizon to commit more resources in the state, ranging from tax credits, public-private investment, rewards for performance and service improvements, etc.  It can also find someone else to provide the service, or let local communities band together into cooperatives to run their own networks, should customers find that could deliver better service.

At the very minimum, Frontier should he held to strict conditions that require a fiscally responsible transaction for ratepayers, not just for shareholders and management.  Verizon’s workforce, already cut to the bone, should not bear the brunt of “cost savings” either, both now and into the future.  If Frontier wants to deliver broadband, they should commit to offering 21st century speed (not the 1-3Mbps service typical for their smaller service areas) without their draconian 5GB usage limit in their Acceptable Use Policy.

Cary doesn’t concern himself with those kinds of details, but consumers and small businesses in his state sure do.

Cary wants more jobs and more earnings for West Virginia.  In the changing digital economy, high speed broadband isn’t an option — it’s a necessity.  Verizon has a proven track record of being able to provide 21st century broadband — Frontier does not (sorry, 1-3Mbps DSL is more 1999, not 2010).

Cary makes an astonishing statement in the third segment of the interview which makes me question his ability to grasp the reality-based community most Americans live in today.

“I have great faith in the banking system in America, in Wall Street, to evaluate these things.”

That stunned Collins, who asked, “even after the 2008 crash?”

Cary seems to think “everything is back to normal.”  Unfortunately, after the bailouts and big lobbying dollars being spent in Washington to preserve the status quo as much as possible, everything is back to normal… for Wall Street and the banks.  The rest of the country, including West Virginia, is another matter.

FairPoint's Stock Price from 2007, when it announced the deal with Verizon, to late 2009 when the company declared bankruptcy. By late 2008/early 2009, what seemed like a great deal for investors was apparently not, as the panicked rushed for the exits.

I’ll put my trust in the wisdom of West Virginians who want good service and reasonable prices.  If Cary wants to read from the Good Book of the “paragons of virtue” like AIG, Bear-Stearns and Goldman Sachs, let him sell his TV stations to help finance the bailouts.  Remember that when we went through this before with Hawaii Telecom and FairPoint Communications, the cheerleading session on Wall Street lasted only as long as the quarterly balance sheets looked good.  At the first sign of trouble, they bailed on the stock and both companies ended up in bankruptcy.

For them, it represented just another roll of the dice in the giant financial casino we call Wall Street.

For the rural residents of states like West Virginia who ultimately have to live with the results, this is their phone and broadband service we are talking about.  Before all bets are placed and the dice are thrown, isn’t it worth considering them?