Frontier Communications has quietly begun testing an Internet Overcharging scheme in Minnesota designed to charge confiscatory prices to residents who exceed the company’s usage allowances, demanding customers pay up to $249.99 a month to keep their broadband service running.

Stop the Cap! has learned Frontier has begun measuring customers’ broadband usage, and for those in Minnesota who exceed 100GB of usage during a month, Frontier is dispatching e-mail messages telling them they’ll have to agree to pay more — much more — or their service will be cut off in 15 days.

Two e-mail messages are being sent to customers who break the 100 and 250GB usage barriers.  Both reference Frontier’s 5GB usage allowance that Stop the Cap! has strongly and repeatedly criticized the company for implementing in the first place.  Using that usage allowance as a baseline, Frontier calls out its customers using more demanding they switch to a higher priced service plan if they want to continue service with the company.

• For those achieving 100GB of usage, the new monthly rate is $99.99 per month
• For those achieving 250GB of usage, the new monthly rate is an incredible $249.99 per month

Sources tell Stop the Cap! the Internet Overcharging scheme Frontier is running is an experiment to gauge customer reaction.  If the furious customer e-mail reaching us is any indication, it’s another public relations disaster for Frontier Communications.  One customer didn’t even realize there was a 5GB usage allowance to begin with, much less a vastly higher new monthly price if he wants to stay with Frontier DSL.  He’s not.

"You can earn this much money just from overcharging Minnesotans for their Internet service!"

Ironically, the experimental pricing plan comes at a time when Frontier is still trying to get state regulators to approve its deal with Verizon to assume control of landline and broadband service in several states.  Residents in West Virginia and a dozen other states might be a bit concerned that their unlimited Verizon DSL broadband service, often the only service provider available, could be replaced with a company that is willing to punish its customers with $250 in monthly charges once a customer hits 250GB in usage.  Even worse, Frontier takes the overlimit penalty concept to a whole new level, telling customers that new high price represents their new monthly rate plan, not just a temporary penalty.

To add insult to injury, Frontier continues to mislead its customers about the experimental pricing on its own website.  As of this writing, Frontier’s Acceptable Use Policy still states:

Customers may not resell High Speed Internet Access Service (“Service”) without a legal and written agency agreement with Frontier. Customers may not retransmit the Service or make the Service available to anyone outside the premises (i.e., wi-fi or other methods of networking). Customers may not use the Service to host any type of commercial server. Customers must comply with all Frontier network, bandwidth, data storage and usage limitations. Frontier may suspend, terminate or apply additional charges to the Service if such usage exceeds a reasonable amount of usage. A reasonable amount of usage is defined as 5GB combined upload and download consumption during the course of a 30-day billing period. The Company has made no decision about potential charges for monthly usage in excess of 5GB.

For customers receiving Frontier’s Scare-o-Gram, it sure sounds like they made up their minds… to charge a lot more for the exact same level of service.

For state regulators, watching Frontier charge ludicrous pricing for broadband service that would make most providers blush should be more than enough evidence that approving Frontier’s plans to take over Internet and landline service in their state is not in the best interests of consumers.  For many, it saddles them with a broadband provider that can charge these kinds of prices knowing full well many customers have nowhere else to go.

Copy of E-Mail Sent to Minnesota Customers Exceeding 100 GB of usage a month [emphasis in bold is ours]:

Dear [Customer]:

Frontier is focused on providing the best possible internet experience across our entire customer base.  We bring you a quality service at a fair price, dependent upon an average monthly bandwidth usage of 5GB.  Over the past months, your account is in violation of our Residential Internet Acceptable Use Policy.

Our policy states that Frontier reserves the right to suspend, terminate or apply additional charges to the Service if such usage exceeds a reasonable amount of usage. A reasonable amount of usage is defined as 5GB combined upload and download consumption during the course of a 30-day billing period.

We realize there are times when our customers use the internet for services such as video and music downloads, however your specific usage has consistently exceeded 100GB over a 30 day period.

We would like to provide you with the option of keeping your Frontier internet service at a monthly rate of $99.99 which is reflective of your average monthly usage.  Please call us within 7 days of the date of this email at 1-877-273-0489 Monday – Friday, 8AM – 5PM CST to review your options.  If you do not wish to switch to this new rate plan, you can have your service disconnected.  If we do not hear from you within 15 days, your internet service will be automatically disconnected.

We continue to manage our network to ensure all of our customers have equal access to the internet and the ability to enjoy all of its available content, at our committed level of service quality.

Sincerely,

Frontier Communications

Copy of E-Mail Sent to Minnesota Customers Exceeding 250 GB of usage a month [emphasis in bold is ours]:

Dear [Customer]:

Frontier is focused on providing the best possible internet experience across our entire customer base.  We bring you a quality service at a fair price, dependent upon an average monthly bandwidth usage of 5GB.  Over the past months, your account is in violation of our Residential Internet Acceptable Use Policy.

Our policy states that Frontier reserves the right to suspend, terminate or apply additional charges to the Service if such usage exceeds a reasonable amount of usage. A reasonable amount of usage is defined as 5GB combined upload and download consumption during the course of a 30-day billing period.

We realize there are times when our customers use the internet for services such as video and music downloads, however your specific usage has consistently exceeded 250GB over a 30 day period.

We would like to provide you with the option of keeping your Frontier internet service at a monthly rate of $249.99 which is reflective of your average monthly usage.  Please call us within 7 days of the date of this email at 1-877-273-0489 Monday – Friday, 8AM – 5PM CST to review your options.  If you do not wish to switch to this new rate plan, you can have your service disconnected.  If we do not hear from you within 15 days, your internet service will be automatically disconnected.

We continue to manage our network to ensure all of our customers have equal access to the internet and the ability to enjoy all of its available content, at our committed level of service quality.

Sincerely,

Frontier Communications

“It’s FairPoint Communications all over again,” writes Stop the Cap! reader Jenna who is mad as hell with Verizon Communications who first locked her out of her e-mail account, and then accidentally deleted it, along with all of her e-mail, in preparation for the handover to Frontier Communications.

Jenna is referring to similar debacles which caused billing and service nightmares for residents in northern New England who lost their Internet access for days, along with e-mail accounts, followed by months of inaccurate bills when FairPoint moved away from Verizon’s internal systems.

Her problems started the last weekend of March, when Verizon notified Jenna and other Fort Wayne, Indiana residents who use Verizon Yahoo! e-mail service that they would have to take steps to convert their e-mail accounts.

Verizon Yahoo!: Service No Longer Available in Some Areas

Starting March 27, 2010, Verizon Yahoo! for Broadband will be discontinued in the following areas:

AZ, ID, IL, IN, MI, NV, NC (except Knotts Island), OH, OR, SC, Crows-Hermatite (VA), WA, WI, and the following communities in California that border AZ, NV and OR–Big River, Blythe, Coleville, Crescent City, Desert Center, Eagle Mountain, Earp, Felicity, Fort Dick, Gasquet, Klamath, Kneeland, Markleeville, Merced, Needles, Orick, Parker Dam, Ripley, Smith River, Topaz, Trinidad, Vidal and Winterhaven.

These changes will not impact your Verizon Internet service access plan or pricing, and your Verizon.net email primary and sub-account User names and passwords will stay the same.

“They told us we would have to use this service called Verizon TrueSwitch in order to convert our e-mail box and that all of our contacts and existing e-mail would be transferred from the old Yahoo! webmail account to the new Verizon one,” Jenna writes.

But her experience with Verizon TrueSwitch turned into a TrueNightmare when attempts to use the service resulted in error messages.

“First it popped up with ‘unable to authenticate’ error messages, and then we were locked out of our Yahoo! e-mail account.  The Verizon e-mail account worked, but was empty,” she writes. “I tried to use Verizon’s ‘in-home agent’ online support but it suddenly told me it was ‘only available to Verizon customers.’  Apparently they can’t wait to get rid of us.”

Jenna then did what most customers of a phone company might do — she picked up her phone and called customer service.

“That was the second nightmare — I waited on hold 49 minutes the first time before a representative came on the line, sneezed, and then disconnected me.  The second call was a real marathon — over two hours on hold waiting for someone to help me,” Jenna notes.

When a representative did finally speak to Jenna, she apologized for the delay and candidly admitted their call center was swamped with calls regarding the e-mail conversion.

“When she thought she put me on hold, I was able to overhear her talking with someone else about getting word from a supervisor that the problem was somewhere on their end, and she felt bad because she had spent a good part of the morning blaming TrueSwitch, which I later found out was not even owned by Verizon — it’s a service sold by Esaya, a private third-party company,” Jenna says.

Jenna was transferred to a supervisor when attempts to correct her e-mail account lockout were not working.

“The guy they transferred me to wouldn’t listen to me and kept telling me he knew what the problem was, claiming I had ‘sub-accounts’ and they were messing up their systems,” said Jenna. “But Mr. Expert ended up permanently deleting the account, along with all of my e-mail, contacts, and everything else Verizon claimed I was able to store online.  Years of e-mail and contacts — gone.”

Jenna was right when she noted Verizon’s call centers were jammed with customers experiencing similar problems.

Verizon’s own customer support forum is hot with angry customers who are going through the same thing:

• Verizon/Yahoo! ‘Devilish Switch’
• Verizon Sold Everything to Frontier
• I’m Not Able to Receive E-Mail
• New Set-Up
• Verizon E-Mail Has Been Down for a Week

Verizon spokesman Harry Mitchell acknowledged the significant e-mail conversion issues were partly in preparation for the pending transition some customers face to Frontier Communications.

“The systems realignment will facilitate the closing of the transaction with Frontier, which we expect at the end of the second quarter, subject to conditions including regulatory approval,” Mitchell told the Fort Wayne Journal-Gazette.

Mitchell released a statement to the paper regarding the problems:

“In advance of a planned systems conversion over the weekend of March 27-28, Verizon online users who maintain e-mail accounts with Yahoo were notified that a customer-initiated service change would be required following the systems conversion in order to maintain their e-mail service,” he said in an e-mail.

“Customers were given instructions to use a ‘Trueswitch’ service to migrate their existing e-mail and contact information from Verizon Yahoo to Verizon servers in order to maintain e-mail access. Some customers have experienced difficulty when trying to initiate the service change. We’re working to address this as quickly as possible with those customers.”

Mitchell stressed that customers should make sure they validate their passwords in both the Verizon.net e-mail system and the Verizon Yahoo e-mail system. And they should “take extra care to write down those passwords so that, if they want to migrate their old e-mail and contact information, it will go smoothly through the Trueswitch process.”

Unfortunately, that won’t help Jenna.

A supervisor contacted her this week to apologize for the problems and the loss of her e-mail, which may not be gone for good if Verizon and Yahoo! can figure out a way to get the deleted account back, but for Jenna the damage has been done.

“I have read Stop the Cap! since 2008 and followed the misadventures of FairPoint Communications and the endless promises from Frontier they won’t repeat the mistakes the others have made, but it’s a case of ‘here we go again,’ and Frontier isn’t even in the picture yet,” she says.  “Verizon clearly can’t wait to get rid of us and Frontier will probably make us wish we had Verizon back, which should tell you the people of Fort Wayne now live on the corner of Rock Avenue and Hard Place.”

A lobbying campaign to add language to a Senate bill that would retroactively apply a federal ban on a tax loophole could derail plans by Verizon to sell off landlines in 14 states to Frontier Communications.

Verizon has relied on provisions of the “Reverse Morris Trust” (RMT) — which lets companies spin-off subsidiaries that merge into smaller companies do so tax free — to dump landlines across the United States, leading to crushing debt and bankruptcy for the buyers.

The House Small Business and Infrastructure Jobs Tax Act of 2010 includes provisions killing off the tax loophole, and the measure passed the House at the end of March by a vote of 246 to 178.  But the House measure only applies to new deals, not to those already on the table.

Union officials and several public interest groups are asking consumers to contact their senators and request insertion of language in the Senate companion bill that would apply the ban retroactively to the latest Verizon deal with Frontier Communications.

Such a ban would prevent Verizon and Frontier from walking away from a $600 million dollar tax obligation.

Ironically, one of the House leaders strongly supporting the loophole-closing legislation is Rep. Louise Slaughter (D-NY), whose district covers Frontier’s largest service area — Rochester, New York.

“This tax avoidance loophole does nothing to help people in rural communities who rely on traditional landlines for their phone service,” Slaughter said. “If these transactions are allowed to go forward, Verizon may drop landlines in 14 different states, a development that would mean a loss of jobs for workers and poor quality phone service for millions of Americans.”

For Rep. Peter Welch (D-VT), passage of the ban represents some late justice for the disastrous tax-free deal between Verizon and FairPoint Communications, which took over phone service in his state and other parts of northern New England.  FairPoint staggered under the debt load from the deal before collapsing in bankruptcy.

Slaughter

“The RMT was used by Verizon to avoid federal taxes when it sold its northern New England landline operations to FairPoint Communications in 2008,” Welch’s office noted.

“This loophole is bad for taxpayers, bad for consumers and bad for workers. By closing it and investing the savings in job creation, hardworking Americans – not corporations – will benefit,” Welch said.

The ban has special importance for West Virginia, which faces the prospect of turning over most of the state’s phone business to Frontier.

“The House has recognized the Reverse Morris Trust as a greedy grab by corporations to avoid paying their fare share of taxes,” said Elaine Harris, spokeswoman for the Communications Workers of America. “We pay our taxes. Why shouldn’t Verizon have to pay one cent on an $8 billion deal?”

“The Reverse Morris Trust was designed by Wall Street for Wall Street, not West Virginians,” said Ron Collins, a union vice president. “We’re happy Congress shares our view that the Reverse Morris Trust is a tax break for corporations, not a job-creating tool. Without this tax loophole, I don’t believe Verizon would be so eager to sell to Frontier.”

The Charleston Gazette attempted to get the views of Verizon and Frontier over the bill’s passage in the House.  Verizon spokeswoman Christy Reap declined comment. A Frontier spokesman couldn’t be reached for comment.

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.