Customers unhappy with Sprint’s mobile service need not wait until the end of their contract term to switch providers without incurring an expensive early termination fee.  Sprint has changed its pricing for their monthly regulatory fees from $.20 to $.40 per month.  Although it sounds all-official-sounding, in fact it’s nothing more than pure profit padding.  It’s a “junk fee” thrown on to customer bills ostensibly to pay for the company’s costs of complying with legal regulations.  In fact, a lot of it probably ends up paying for their lobbyists.

No matter, because you can use this pesky fee to your advantage if you were thinking of switching providers.  Your contract with Sprint includes a clause pertaining to a “materially adverse changes” to your contract with Sprint, and paying even more for your Sprint service sounds mighty adverse to me.

This means you get to break your contract, leave, and pay them zero in cancellation fees on the way out the door.  If you are happy with Sprint service and want to stay, you can also use the extra charge to extract free add-ons, like a free texting plan or other calling feature.  Maybe you want a new and better phone now at a substantial discount instead of waiting until the end of your contract.  Or maybe you just want to refuse paying this junk fee.  All things are possible during your 30-day window of opportunity to your favor, depending on the representative you reach and their authority to act on your behalf.

The Consumerist has some great pointers to prepare you for the call or online chat you are about to have with Sprint.  Be prepared for some varying degrees of push back from the company representatives, many who will be under-informed about your right not to pay junk fees and get out of your contract without penalties:

• When you call, they will ask you why you are canceling and try to get you to say you are unhappy with some other aspect of the service. You need to stick fast to your guns and insist, no matter what, that the only reason you are canceling is because you are rejecting this materially adverse change in contract terms and conditions.
• Not looking forward to playing head-games over the phone? Some readers have had better luck using online chat. “They just copy-and-paste a few canned pleas for you to stay, and all you have to do is type no thanks,” says commenter ohenry. “Plus then you can save your chat.”
• Yes, you can keep your phone number and port it to another provider.
• Yes, you may be able to use this to switch to a month to month plan.
• You only have January 31, 2010 to cancel.

The Consumerist site has a comments section with the experiences of those looking for the exit.

Lawrence, Kansas is a unique place to live.  Its local newspaper, the Lawrence Journal-World, was one of the first in America to begin an online edition in 1995.  Its owner, The World Company, just so happens to also own the independent cable system serving the community, which also provides broadband and phone service to the city’s 90,000 residents.  Its biggest competitor is AT&T, which has been upgrading parts of Lawrence with its U-verse system to stay competitive.

Sunflower Broadband, which provides a “triple play” package of Internet, cable TV and telephone service, has remained controversial among service providers because it instituted an Internet Overcharging scheme with usage caps and overlimit fees.  The company has been used by the American Cable Association, a trade and lobbying group serving independent cable operators, as a poster child for effective rationed broadband schemes that reduce demand and increase broadband profits.

Customers generally have loathed usage caps, particularly when they were stuck choosing between Sunflower’s faster, usage capped broadband service or a low speed DSL product from AT&T.  Stop the Cap! receives more complaints about Sunflower Broadband than any other provider, except Time Warner Cable during its own Internet Overcharging experiment in April 2009.  Lawrence residents appreciate the relatively fast speeds Sunflower can provide, but complain they can’t get much use from a service that limits customers to a set allowance and then bills them up to $2 per gigabyte in overlimit penalties when they exceed them.

Last fall, things started to change in Lawrence as AT&T began offering it’s U-verse service in parts of the community.  We began receiving e-mail from Lawrence residents pondering a new service plan Sunflower Broadband introduced — Palladium, an unmetered broadband option priced at $49.95 per month.  It sounded like a good deal, perhaps introduced to protect them from U-verse customer poaching, until they noticed Sunflower was  selling the plan without a fixed downstream or upstream speed.  In fact, no speed was mentioned at all.  Indeed, Sunflower’s Palladium is nothing new to those living abroad under various cap ‘n tier broadband regimes.  It’s comparable to New Zealand Telecom’s Big Time plan, where customers need not fear overlimit fees and penalties, but have to live with a “traffic management” scheme that gives priority to customers on other plans living under a usage cap.

In other words, Palladium customers get last priority on Sunflower’s network.  If the network is not congested, these customers should enjoy relatively fast connections.  But during primetime, expect speeds to drop… and dramatically so according to customers writing us.

That customers debate just how slow those speeds can get testify to the nature of cable’s “shared infrastructure.”  Groups of subscribers are pooled together in geographic areas and share a set amount of bandwidth.  As usage increases, so does congestion.  Responsible operators measure that congestion and can split particularly busy neighborhoods into two or more distinct “pools,” each sharing their own bandwidth.  Based on the variable reports we’ve read, it’s apparent Palladium works better in some parts of Lawrence, namely those with fewer broadband enthusiasts, than others.

Network management is a major concern of Net Neutrality proponents.  It allows an operator to artificially impede traffic based on its type, who generates it, and potentially how much a customer has paid to prevent that throttling of their speed.  In the case of Palladium, network management is used to give usage-capped customers first priority for available bandwidth, and push Palladium customers further back in line.

Judging the quality of such a service is a classic case of “your results may vary,” because it is entirely dependent on when one uses the Internet, how many others are logged in and trying to use it at the same time, how many customers are saturating their connections with high traffic downloading and uploading, and how many people are sharing your “pool” of bandwidth.  Oh, and the quality of your cable line can create a major impact as well.

Sunflower Broadband representatives claim Palladium is “optimized for video” and should provide at least 2Mbps service during peak usage and up to 21Mbps service at non-peak times.  That’s a tremendous gap, and we wanted to find out whether most customers were getting closer to the low end or the high end of that range.

Back in October, we wrote a request in the comments section of the Journal-World asking customers to e-mail us with answers to several questions about their experiences with Sunflower Broadband:

• 1) whether you ever exceed the cap.
• 2) do you think there should be one.
• 3) would you prefer faster speed with a cap or slightly slower speed with no cap.
• 4) your experience with the new unlimited option.
• 5) whether you would contemplate switching to AT&T U-verse if it meant escaping a usage cap, even if it had slower speeds.
• 6) Would you pay more for faster speed and no cap?
• 7) your overall feelings about Sunflower Broadband.

We heard from just over two dozen readers sharing their thoughts about the company and its service.  The response was mixed.

Generally speaking, customers hate the usage caps Sunflower Broadband maintains on most of their broadband tiers.  All thought it was unfair and unreasonable to limit broadband service under Sunflower’s Bronze tier to just 2GB per month and their Silver tier to just 25GB per month.  Most customers who wrote subscribed to the Silver tier of service with 7Mbps/256kbps speeds at $29.95 per month.  They also paid a $5 monthly modem rental charge.  Those who wrote who fit the “broadband enthusiast” category were internally debating whether the Gold plan, with its assured 50Mbps/1Mbps speeds for $59.95 per month was a better option, even with a 120GB allowance, or whether they should opt for Palladium’s $49.95 option to escape the usage cap.

Among enthusiasts, some felt Sunflower responded to customer demands by offering an unlimited plan in the first place, and thought it was an acceptable trade-off to obtain lower speeds at peak usage times for a correspondingly lower price, and no cap, as long as speeds were reasonable at all times.  Others were offended they had to make the choice in the first place.

“If I lived anywhere else, I wouldn’t have to choose between a throttled service or one that asks for $60 a month for 120GB of service,” writes Steve from Lawrence.  “AT&T DSL for me is 1.5Mbps service because I live close to the edge of the distance limit from AT&T’s exchange.”

But Justin, also from Lawrence, has a more favorable view. “I hate their usage cap with a passion, but when you look at what small cable companies usually offer their customers, it’s slow speed service at terribly high prices,” he writes. “At least Sunflower did DOCSIS 3 upgrades and can offer big city speeds here.  How long will that take other small independent providers?”

Troy adds, “at least they gave us one choice for unlimited service.  Time Warner Cable and Comcast sure didn’t.”

About half of those who wrote did exceed their usage cap by underestimating the amount of usage in their respective households.  Most of those who did were on the Silver plan.

Dave writes, “I knew right off the bat the Bronze tier was ridiculous for anyone to choose, and our family has three teenagers so we knew that was not an option.  We tried the Silver plan when we switched from AT&T DSL service and blew the lid off that 25GB cap probably within two weeks and got a crazy bill.  At least Sunflower forgave the overlimit fees for the first month, but they could afford to because we upgraded to Palladium, paying them $20 more per month.”

Angela, who shares an apartment with two other roommates had their share of fights over who used up all the broadband allowance.

“We have a wireless network and everyone splits the bill, but when we ran up almost 200GB of usage, we freaked.  Nobody would admit to using that much Internet.  Thanks to my boyfriend, we discovered our wireless router was wide open and one of our lovely neighbors probably hopped on to enjoy,” Angela writes.

Sunflower also forgave their overlimit bill for the first month, but they decided to take advantage of an introductory offer from AT&T and switched to U-verse and are much happier.

“At least with AT&T, we know what our broadband bill is going to be and we don’t have fights or worries about getting a huge bill from Sunflower,” she adds.

Among those answering our question about reduced speed in return for no cap, the consensus view was “we would need to know what speed they are providing.”  Broadband speed was important to most who wrote.  While many may not be able to discern a difference between 10 and 20Mbps service for most online activities, obtaining 2Mbps service when expecting closer to 20Mbps is readily apparent, and that was the biggest problem with Palladium users unimpressed with its performance.

“Palladium is god awful, and close to unusable on the weekends and during the early evening when everyone is online,” writes Kelly, also in Lawrence.  “We have college students all over the neighborhood and these people can’t be unconnected for a minute, so I’m not surprised Palladium crawls when everyone is online.”

Kyle, a regular Stop the Cap! reader writes the whole concept of Palladium leaves a bad taste in his mouth.

“Palladium is the equivalent of going into a restaurant and eating leftovers — whatever speed is leftover, it’s yours.  Sometimes it might be a whole meal, other times scraps!  It’s an example of crappy customer service coming from a provider which doesn’t have much competition (although maybe that will change with U-verse),” he says.

Kyle is on the Gold plan, but remains unimpressed with Sunflower:

“Is there another DOCSIS 3 system in the country that limits upload speed to 1Mbps or has a bandwidth cap this low (120 GB) with DOCSIS 3?”

Stop the Cap! also obtained access to the company’s subscriber-only forums and discovered considerable discontent with Sunflower’s broadband service.

“I recently switched over to Palladium to avoid the new Gold price gouging. I bought the new modem set it up and much to my surprise my speeds were HORRIFIC! Consistently 4.5Mbps service over the course of a week at various times. Upload speeds were so terrible it took 15 minutes to send emails with one minute movies,” writes one user.  “So, for $20 more a month Palladium offers much slower speeds BUT unlimited bandwidth (which according to Sunflower’s own statistics almost no one exceeds their limits anyway.)  What a rip-off. All I want is my old Gold back, same speed and price. I am absolutely disgusted with Sunflower. Calling Palladium “variable speed” is a lie. You are throttling customers – period.”

“So I have Palladium and the speeds are decent, usually around 10Mbps down (we won’t talk about up speeds.) But every time I run a torrent my speeds go down to about 500kbps. The second I turn off my torrent client and run a speed test again its right back up to 10. Has anyone else been having similar issues? It seems like Sunflower throttles my entire connection when they detect a torrent,” writes another.

One Lawrence resident claims he was blacklisted by Sunflower Broadband after criticizing them.

“Their blacklisting of me served as a warning to others after I spoke out nationally.  They are quite pissed and I’m not allowed to go to any event sponsored by them.  I even got removed from the local Twitter festival,” a person who I have chosen to keep anonymous writes. “The nutshell is that the bandwidth from DOCSIS 3.0 is extremely throttled for Palladium users. If they have done heavy downloading the throttle drops speed to about 2Mbps.”

For Lawrence residents who have decided they don’t like the choices Sunflower provides for broadband service, the good news is that AT&T is upgrading their network in the city to provide U-verse service, and many who wrote us have switched just because AT&T does not engage in Internet Overcharging caps and limits in Lawrence.

There is even a blog devoted to comparing Sunflower Broadband service with AT&T U-verse.  The Lawrence Broadband Observer has been reporting on the dueling providers since August.  His verdict: AT&T U-verse wins for broadband for its more stable speeds, and no Internet Overcharging schemes, even if it costs more:

We decided to go with U-verse for our Internet service, canceling our Sunflower Broadband Internet, which we had used for over 13 years. U-verse’ top line internet costs $15 more per month then Sunflower’s; we decided that the advantages of U-Verse for Internet were enough to make this extra $15 per month a reasonable value.

Furthermore, the speed of U-verse has been remarkably consistent, always ranging between 16 and 17Mbps down and about 1.4Mbps up, no matter the time of day.

While Sunflower’s service is very fast at certain times of day, it frequently slows down during evenings or other times of heavy network use, sometimes to less then half of the speed we were paying for.

The other primary reason we went with U-verse was because U-verse does not have bandwidth overage fees or any kind of bandwidth limits. Although we have been careful with Sunflower and managed to avoid any bandwidth overage charges, having “the meter running” all the time was annoying, and we worried that we could always be surprised with an unexpected charge. With U-verse we do not have this worry.  One could almost think of the $15 extra for U-verse as an insurance policy…it buys peace of mind not having to worry about bandwidth overages.

Two Republicans serving on the Federal Communications Commission told attendees at Saturday’s Tech Policy Summit that “usage-based pricing” for wireless broadband could be a solution to congested cell phone data networks.

“Pricing freedom has to be essential, because a small number of users take up the majority of bandwidth. So charging some of the heavy users for that bandwidth makes sense,” Commissioner Robert McDowell said during a panel discussion at the 2010 Consumer Electronics Show.

“I think it’s time to let that happen,” he added. “Net neutrality proponents say it should be an all-you-can-eat price. But that will lead to gridlock.”

The discussion, Inside the FCC’s Communications Agenda, focused on the FCC’s agenda in light of the Obama Administration’s new policy initiatives and the current the impact technology has on regulatory policy.

McDowell was responding to industry reports that Verizon was prepared to abandon all-you-can-eat pricing for wireless data on its forthcoming 4G LTE wireless network, even though it doesn’t actually have such a plan in place at the time the panel discussion was held.

McDowell believes that since private money is constructing the networks capable of delivering LTE service, the company has a right to charge what it pleases for service, reducing demand with a correspondingly higher price for those who use the network more than others.

Consumer advocates argue that current profits in the wireless industry provide ample resources to build and upgrade networks without overcharging consumers with expensive usage based pricing designed to make customers think twice before using the service they pay good money to receive.  Unlimited use pricing is favored by consumers as well.  Most providers abandoned “all you can eat” plans at least a year ago.  Every wireless broadband plan carries some limitations somewhere in the fine print, particularly for plans that are designed for mobile netbooks or laptops.  Virtually all of them either limit usage to 5GB per month or throttle the user who exceeds that amount down to dial-up speeds for the rest of the month.

Meredith Attwell Baker, the newest Republican FCC Commissioner, seemed slightly out of her element in discussing the issue of consumption billing.

As panel moderator Kim Hart reported for The Hill newspaper, Baker has some novel ideas for easing congestion on wireless broadband networks.

“Maybe we move back to a world where people pay for roaming,” she said.

Verizon Wireless is expected to unveil three new data plans on January 18th, including a new smartphone-mandatory “unlimited broadband” 3G plan priced at $29.99 per month, according to documents obtained by Broadband Reports.

The documents, provided by a Verizon Wireless employee, show the company is moving towards mandating all of their customers select some sort of data plan as part of their monthly service.  But unlike some wireless providers that leave options open to customers, Verizon wants to herd customers into data plans based on the types of phones they use:

• Simple Phones: Basic handsets that are designed for making and receiving phone calls and sending quick text messages from a numeric keypad, typically at older network standard speeds;
• 3G Multimedia: 3G-capable phones that may include a simple keyboard, and are designed for simpler text messaging and occasional data access;
• 3G Smartphones: Blackberry, Android, Windows-capable, and eventually the iPhone all qualify for this classification.

Verizon Wireless formerly offered a paltry 25MB package for $9.99 with a 50 cents per megabyte overlimit fee and a stingy 75MB package for $19.99 per month with a 30 cents per megabyte overlimit fee.  These might be suitable for someone trying to navigate a mobile web browser on an older generation phone from a numeric keyboard, but were priced unattractively for those with more advanced phones.

The 75MB package appears to be history after January 18th, but the 25MB package will remain with a reduced overlimit fee of 20 cents per megabyte (that’s an incredible $200 per gigabyte) .  Customers who don’t want -any- data plan for their basic wireless phone will be forced onto Verizon’s “pay as you go” plan, which charges $1.99 per megabyte.  It’s this plan that subjects customers to those $1.99 mysterious “data charges” on their bill, caused when a customer invokes the phone’s web browser (intentionally or otherwise, if you believe customers.)

Customers who don’t own smartphones and don’t use their phones to access many data services will find themselves being corralled into one of Verizon’s new data plans, whether they like it or not, once they try and renew their contract or make “certain account changes” under their existing contract.  If you’re a smartphone user, your choice will be the $29.99 unlimited data plan or the $29.99 unlimited data plan.  In other words, smartphone customers don’t get a choice.  Only owners of more basic phones will be able to choose from overpriced “pay as you go” service, a paltry 25MB offering, or what the company will upsell as the “best value” — the $29.99 unlimited plan.

“Even some basic phones such as the LG VX8360 will require data plans starting the 18th,” says Broadband Reports‘ tipster. Some examples of 3G Multimedia phones: LG Chocolate Touch, LG enV3, LG enV Touch, LG VX8360, Motorola Entice, Motorola Rival, Samsung Rogue, Samsung Alias2 and Nokia Twist.

The launch of an unlimited data plan on Verizon Wireless’ 3G network will make Apple happy.  The iPhone manufacturer has reportedly advocated generous data plans for iPhone customers who find themselves required to purchase plans for both voice calling and data with AT&T.  If the iPhone’s arrival on Verizon Wireless’ network is imminent this summer, having an unlimited data plan available to customers would make sense.

Although the fine print isn’t available to us, Karl Bode at Broadband Reports notes the documents he’s seen indicate no hidden usage cap, like AT&T’s formerly advertised “unlimited” plans that were limited to 5GB in the fine print.

Still, for customers pushed into purchasing a data plan they may not want, it’s another case of Internet Overcharging.  That’s particularly true with Verizon, which claims to be a proponent of “paying for what you use,” yet still doesn’t offer all of their customers that option.  Instead, customers who don’t want to pony up $29.99 a month (or don’t have to because they don’t own a smartphone) are stuck paying for overpriced “pay as you go” plans or a paltry 25MB plan priced not to sell.  Even their “unlimited” plan may not last for long.  As Verizon Wireless works towards their 4G network launch, unlimited pricing may never be a part of it.

The Verizon Wireless documents explain what’s really happening here when it instructs employees pushing data plans to up-sell customers: “think of how dissatisfied they would be if they received their bill with excessive Pay As You Go charges!”  That is a powerful tool to motivate customers to choose a more expensive plan they may not need or want, just to protect themselves from the nasty surprise of an enormous bill at the end of the month.

With the evolving wireless phone marketplace now opening up new options for consumers to bypass the wireless company’s own products and services, overcharging consumers for accessing competitors’ products on their network guarantees a nice payday for Verizon Wireless no matter how you use your phone.

It’s why year after year, despite an increasing number of minutes thrown into your plan’s bucket, your cell phone bill never seems to actually decrease.  After all of the additional add-ons, surcharges, and fees attached to the bill, it has become easier than ever to approach $100 a month for cell phone service in the United States.

Hawaii’s landline telephone company, Hawaiian Telcom (HawTel), is awaiting approval from the state’s Public Utility Commission for its $460 million, stand-alone reorganization plan. The company, launched in 2005 from assets acquired from Verizon Hawaii, Inc., by the politically connected global private equity investment firm The Carlyle Group, lasted less than four years before declaring bankruptcy.

[flv]http://www.phillipdampier.com/video/KITV Honolulu Hawaiian Telcom Takes Over Verizon 5-3-05.flv[/flv]

KITV-TV in Honolulu introduced Hawaii to Hawaiian Telcom in this report from May 3, 2005 (1 minute)

The downfall of Hawaii’s dominant landline provider, despite decades of stable service from its progenitors — GTE/Hawaiian Telephone Company and Mutual Telephone came as no surprise to telecommunications analysts and consumer advocates who saw trouble right from the start.  The Carlyle Group and Verizon structured a deal that loaded $1.2 billion in debt onto Hawaiian Telcom’s balance sheet.  Critics of the deal weren’t impressed by the fact Carlyle had no experience running a telephone company either, and was likely to dump the company after “dressing up the pig” to inflate the company’s value and walk away with big profits from the sale, as one analyst predicted.

Long time Stop the Cap! readers know how this works only too well.  Anyone who followed the exhaustive coverage of the downfall of FairPoint Communications this past year will see plenty of familiar warning signs — piling enormous debt on the buyer, lots of promises made and broken, and plenty of billing and customer service problems that cause customers to flee to other providers.  By 2008, 21 percent of the company’s 700,000 customers did just that.  Remarkably, the only people who suffered from the failing business plan Hawaiian Telcom subjected on the islands were customers, lower-level employees, and company vendors.  The top management that made all of the bad decisions were insulated from the impact with fat bonuses, even as other employees were terminated.

[flv]http://www.phillipdampier.com/video/KITV Honolulu 9,000 Hawaiian Telcom Customers Overbilled 6-9-06.flv[/flv]

Here come the all-too-familiar billing problems.  KITV reported 9,000 HawTel customers were overbilled in this report from June 9, 2006 (2 minutes)

[flv]http://www.phillipdampier.com/video/KITV Honolulu Hawaiian Telcom Problems Continue 3-21-07.flv[/flv]

A year later, still more billing problems from HawTel, this time impacting more than 10,000 customers who can never sure what their monthly bill will look like.  (March 21, 2007 – 2 minutes)

It’s all a word to the wise as Frontier Communications journeys down the same road FairPoint and Hawaiian Telcom have already paved.

On the business side, Hawaiian Telcom’s future foreshadowed its post-mortem if only based on the players who far too often have been rewarded for failure:

The Carlyle Group: Attacked by incumbent competitors in Hawaii when it sought to purchase Verizon’s assets in the state.  Both Time Warner Telecom and Pacific LightNet warned Carlyle had little, if any experience running a telecommunications business, was going to mine the company for profits for its investors from rate increases, slash costs by reducing investment in their network and firing employees, and then try and resell the business at a profit just a few years later.

BearingPoint: Hired by Hawaiian Telcom to manage billing post-Verizon, the troubled firm managed to botch thousands of customer bills, double-charging them, crediting their accounts only to rebill them months later, and other irregularities.  In the end, BearingPoint had to pay $52 million to Hawaiian Telcom and drop an additional $30 million in outstanding invoices.  Like birds of a feather, BearingPoint itself collapsed in bankruptcy in 2009.

Michael Ruley: Hawaiian Telcom’s CEO from October 2004 through February 2008, Ruley oversaw HawTel operations during the post-transition customer service nightmares.  During his last quarter at the company, HawTel lost $29.5 million, and his prescription was a massive cost-cutting program that accelerated company layoffs that began in 2007, resulting in the dismissal of more than 100 employees, 50 of which were cut during his last full month at the company.

Stephen F. Cooper: A so-called “turnaround expert,” Cooper was hired as a ” permanent interim” CEO on February 4, 2008.  His previous “success stories” included succeeding Kenneth Lay at the infamous Enron, and a stint as CEO of Krispy Kreme, which then promptly collapsed as a success story, with store closings and bankruptcies among its franchisees.  His “permanent interim” position as CEO of HawTel ended after three months. “In my view, Hawaiian Telcom is financially stable and has ample liquidity available,” Cooper said less than a year before the company went bankrupt.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/KITV Honolulu Hawaiian Telcom Filing for Bankruptcy 12-01-08.flv[/flv]

KITV has three reports telling viewers HawTel has filed for bankruptcy, the first time in Hawaii’s history a major utility has sought bankruptcy protection.  (12/1 – 12/3 – 2008 – 7 minutes)

Bankruptcy As a Business Tool

The sale of Verizon Hawaii’s assets to Carlyle and its creature HawTel likely doomed the company from the start.  Saddled with massive debt from the $1.6 billion dollar sale in May 2005, HawTel had to manage its 700,000 customers, protect its flank from increasing wireless competition from Verizon Wireless and T-Mobile, and constant customer poaching by Oceanic Cable.  The cable operator offered “digital phone” service at prices lower than HawTel charged and broadband service far faster than the “up to 7Mbps” DSL service the phone company provided.

As customers continues to leave, the company’s bond values lost 65 percent of their value by the start of 2008.

The Wall Street Journal itself began to notice (subscription required) these telecommunications deals had enormous implications for consumers, particularly for those who depend on landline service:

Because major phone companies are reducing their exposure to the shrinking landline phone business, phone services in a growing number of U.S. states are being taken over by private-equity firms like Carlyle or by tiny telecom companies.

Verizon, for instance, has agreed to spin off its landline business in Maine, Vermont and New Hampshire to a small phone company, FairPoint Communications Inc. Alltel Corp., which services the Midwest, was recently taken private by private-equity firms TPG Capital and Goldman Sachs Capital Partners.

Many of these deals are raising concern among local regulators and consumer advocates, who are worried about the telecom savvy of the new buyers. “Why would a company one-10th the size and not nearly as deep of pockets as Verizon be able to make a success where Verizon hasn’t,” asks Rand Wilson, a spokesman for Verizon’s unionized workers, speaking of the Verizon-FairPoint deal, which is expected to close next week. A FairPoint spokeswoman says the company has plenty of experience taking over landlines in less dense regions of the U.S. and plans to offer new technologies and services to New England customers.

By December 2008, it was time to get HawTel’s lawyers in Delaware to walk into Bankruptcy Court.  At the time of the filing, the company said it had about $1 billion in debt, which includes $574.6 million in bank loans as well as about $500 million in bonds.

The company sought bankruptcy to reduce the debt load, and in a remarkable concession, HawTel president and CEO Eric Yeaman spoke prophetic words not heard when the original deal was on the table:

“Our lenders all recognize that this business can’t support its debt load,” Yeaman said. “But they’re still figuring out what the magic number is. Whatever it is, it will affect different parties, especially investors who won’t get their initial investment back. That’s why it’s important that we increase in value going forward.”

In the nine months ending in September 2008, Hawaiian Telcom paid $68.2 million in interest to lenders, on top of a $35.7 million operating loss. The company has lost $425 million since it began operations in 2005.

[flv]http://www.phillipdampier.com/video/KHON Honolulu Hawaiian Telcom Bankruptcy Hearing Begins 11-9-09.flv[/flv]

KHON-TV Honolulu covers the bankruptcy proceedings in this report from November 9, 2009. (1 minute)

BonusGate

Adding insult to injury, Hawaiian Telcom may have been bankrupt, but senior management were assured of being kept whole.  KITV-TV in Honolulu reported that three days before the company filed for bankruptcy, Hawaiian Telcom’s board of directors approved a financial incentive plan for 20 of its top executives for up to $2.3 million in retention bonuses and other benefits.  The executives were eligible for amounts ranging from $57,000 to $2.3 million, if the company met certain earning and revenue targets.

Regular employees were eligible to use a secluded back door to exit the company after being notified they were being laid off to “reduce costs.”

Just three months after declaring bankruptcy, HawTel officials were back asking for approval for even bigger bonuses.

In a filing with the U.S. Bankruptcy Court, Hawaiian Telcom said it was seeking authorization to pay 1,418 employees a total of $6 million, a reduction of 24 percent from their original proposal to pay $7.9 million. Understanding how bad it would look for a president and CEO overseeing a company into financial failure, Yeaman gave up his $609,000 bonus and elected not to participate in the special compensation program.  Six of the company’s senior vice presidents were less generous, agreeing only to defer half of their scheduled bonuses.

Hawaii’s governor was outraged.

“The decision by Hawaiian Telcom to ask the bankruptcy court to approve $6 million in bonuses for its employees is unconscionable, and we will oppose it in court,” Gov. Linda Lingle said on March 19th. “Hawaiian Telcom is the critical communications backbone for our state, and its action to pay millions in bonuses puts the company in a precarious position that jeopardizes its long-term viability, as well as threatens Hawaii’s economic recovery.”

Bankruptcy can be a profitable business for more than just bonus recipients.

Fees billed by companies working on the bankruptcy reorganization also angered creditors and the U.S. trustee appointed to oversee the company’s restructuring:

• Lazard Freres & Co. was being paid $2,527.38 per hour for its work in Hawaiian Telcom Communications Inc.’s bankruptcy case.  The company billed for 237.4 hours of work between April 1 and June 30 totaling an astonishing $600,000, an amount Acting U.S. Trustee Tiffany Carroll said was way out of line.  “Simply put, the amount of time Lazard is devoting to this case is not commensurate with its interim compensation,” she wrote in papers filed with the Honolulu bankruptcy court.
• The Carlyle Group, despite its losses from piling on debt from the Verizon sale did manage a legislative win when it lobbied for and got passage of a nice deregulation package in the form of SB603, a state bill providing a deregulatory advantage to Hawaiian Telcom, now able to charge higher prices for competitors that connect with HawTel’s network to complete calls to customers.  Better yet, SB603 provides for no oversight or justification for the rates HawTel chooses to charge.  Hawaii’s legislature bowed to the lobbyists to deregulate a company that lost more than $1 billion dollars in bankruptcy.
• Ernst & Young, LLP, a financial advisor hired by Hawaiian Telcom to advise on tax matters, would receive payment for services without as much scrutiny from the bankruptcy court, owing to HawTel’s lawyers seeking to have E&Y’s fees be subject to review only under the “improvident” standard, which would make it much harder to protest unreasonable fees.

The more money paid out to consultants, lawyers, secured creditors, and other advisors, the less money remains available to pay unsecured creditors — mostly suppliers and smaller companies hired as subcontractors to do the work HawTel farmed out.

What The Future Holds for HawTel & Customers

As the company works its way towards an exit to bankruptcy, it’s betting the company’s survival on Next Generation Television (NGTV), an “IPTV” service that delivers Internet, television, and phone service over a broadband network.  HawTel seeks to construct a faster broadband network using a fiber-optic based backbone network and integrate it with the ordinary phone lines that string through neighborhoods across the islands.  Similar to AT&T’s U-verse system, by reducing the length of copper wiring, HawTel can boost broadband speeds to at least 25Mbps, the bare minimum required to deliver a “triple play” package of phone, Internet, and cable-TV service to Hawaiians.  Relying on less than that can seriously degrade parts of the package if customers try to use them all at once (try making a phone call, download a file, and watch two different channels at the same time on a network with reduced bandwidth.)

HawTel realizes without being able to sell all three services to consumers, they have little hope of surviving in a state where consumers are dropping landline phone service in favor of Oceanic Cable’s own “triple play” service, or relying on one of the cell phone providers serving Hawaii.

Of course, such an undertaking will require millions of dollars of investment, something The Carlyle Group may not exactly be enthusiastic to provide.  Company observers suspect HawTel will instead come hat in hand to Washington looking for broadband stimulus funding so the company need not invest as much of its own money.

Why This Is Important To Millions of Potential New Frontier Communications Customers

Detailing the history of broken promises, bad customer service, billing problems, and the impact of more than a billion dollars of crushing debt, all hallmarks of two previous deals with Verizon — one with HawTel, the other with FairPoint Communications — illustrates just how risky the latest Verizon-Frontier deal could be to customers, suppliers, employees, and other creditors.  HawTel’s debt hampered the company’s potential and kept it from providing the kind of enhanced services it speaks of today.  What was once $1.1 billion in debt has been dramatically reduced by a Bankruptcy Court judge to just $300 million.  The better-looking balance sheet frees the company to invest in the services it will be required to provide to protect it from future obsolescence.

Why state utility commissions are willing to risk rolling the dice on another risky deal, and one that is largely tax-free thanks to loopholes in the law, is a question that must be asked.  Consumers, small businesses, and individual employees pay the price for the wrong decisions others make, all while those handful of executives who run the show have built-in insulation from the impact, earning bonuses and benefits that come regardless of their performance or lack thereof.