Ralph de la Vega, CEO of AT&T Mobility

AT&T Mobility has news for its customers: “You’ll be hearing something from us in the near future,” says AT&T Mobility CEO Ralph de la Vega.  He was speaking about an end to “unlimited” usage of its wireless network.  Stop the Cap! reader Jeremy learned about it and sent word our way.

Of course, AT&T has always reserved the right to impose overlimit fees or terminate accounts that exceed 5 gigabytes per month, but most of the horror stories about enormous bills come from consumers using AT&T’s wireless broadband service on a computer.  For iPhone users, who are force-fed a mandatory $30 monthly “unlimited” data plan, their wireless usage has not been subjected to an AT&T crackdown for whatever they consider “excessive” that month.

But that is likely to change, and soon.  De la Vega warned listeners on a conference call held this week that AT&T’s considerations of ways to deal with extreme bandwidth users are “all in flux, but we will come up with ways that mitigate the [network] impact we’ve seen by a small number of customers who are driving inordinate usage.”

The company has been holding focus groups about Internet Overcharging schemes, trying to conjure up a public relations message that consumers will be duped into believing is fair.  They’ve tested everything from meal scenarios to toll roadways, comparing “heavy users” with 18 wheelers and ordinary light users with Mini Coopers, asking participants if they felt it was fair “for the truckers to pay more?”  One of our readers clandestinely participated in one of these, and managed to debunk their nonsense over a free lunch, with consumers incensed to discover the tolls they are charging are ludicrously profitable even at current rates.

When facts about Internet Overcharging are revealed, it’s not a question of who should pay more — it’s a demand to know why everyone isn’t paying less -and- why companies like AT&T aren’t investing a greater percentage of their fat profits in expanding their network.

As I’ve written on several previous occasions, it comes as no surprise to me that some companies in the broadband industry have been looking for an excuse to throw all of our “favorite” Internet Overcharging schemes on customers — usage allowances, overlimit fees and penalties, or just throttling your connection to dial-up speeds.  As I predicted, some will try an “either/or” scam on consumers, telling them they are “forced” to impose these kinds of profit grabs because the government is demanding Net Neutrality.  One has absolutely nothing to do with the other of course, but it’s a convenient excuse to help rally consumers against Net Neutrality now, and impose higher pricing on consumers anyway.  It is crucial that consumers do not fall for this ploy.  There is no fairness in being overcharged for Internet access, such plans never truly provide “only paying for what you use” pricing, and no one should be willing to give up one for the other.  In Canada, they ended up with no Net Neutrality -and- Internet Overcharging schemes, precisely what would happen here.

As has always been the case, AT&T blames a “small percentage” of their users for consuming massive amounts of bandwidth.  Earlier this summer it was “three percent of Smartphone users use 40% of AT&T’s wireless network.”  The us vs. them mentality is designed to divide consumers into finger pointing camps blaming their neighbors for “the problem” instead of asking pointed questions of the carrier making the claim.  Some questions are:

1. Exactly how much data do those “heavy Smartphone users” consume?
2. What is AT&T’s cost per megabyte/gigabyte to deliver that data to consumers?
3. Why does AT&T mandate iPhone customers purchase an “unlimited” data plan and then complain when customers utilize what they are paying for?
4. Will AT&T significantly reduce pricing for mandatory data plan customers, or simply throw a usage allowance on existing accounts and expect consumers to pay the same?
5. What percentage of AT&T’s profits are spent on their network and its expansion, and has that amount as a percentage increased or decreased in the last five years?
6. If AT&T is suffering from smartphone congestion, why continue an exclusive deal for the iPhone, which AT&T claims contributes to a significant amount of that congestion?
7. Why does AT&T marketing claim their wireless broadband plans are “unlimited” when, in fact, they are limited to 5 gigabytes of usage per month?

Jack Gold, an analyst at J. Gold Associates, told Computerworld carriers have a legitimate issue in considering an “overage charge,” for users who surpass a certain number of gigabytes of data per month.

“People will complain about an overage charge,” Gold said. “I guarantee complaints, but there’s no other way to deal with it short of building out more networks to give people the bandwidth they crave. There really are bandwidth hogs. You have 5% of the users taking up 90% of the bandwidth sometimes.”

Gold said he agrees with net neutrality rules that allow users to reach any Web site on the Internet, but argued that carriers can’t provide unlimited bandwidth to all users. Doing so “means everybody else is limited … The AT&Ts and Verizons have a legitimate point.”

Of course, Gold is in the business of representing business interests, not consumers.  Does Gold have direct evidence of his numbers, or does he simply repeat what he has heard carriers tell him?  Since consumers cannot easily find truly unlimited mobile broadband accounts in the American wireless industry today, de la Vega’s urgent statements about imposing limits on customers must target iPhone and other smartphone users specifically, because those are the only accounts AT&T hasn’t held hard to their 5GB usage cap.

As we approach Halloween, it’s time to share a scary story.

The “Reverse Morris Trust” is something a majority of Americans have never heard of before, but if you are a Verizon customer and happen to live in one of 13 states where Verizon is just itching to abandon you, it’s time to learn more about this twister in the tax laws.  A debt-laden phone company may haunt your future.  Another is already haunting millions of New Englanders.

When Verizon throws telephone customers overboard to companies like FairPoint (and Frontier Communications if that deal is approved by state regulators), the company has found a great way to cash out, saddle the buyer in massive amounts of debt, and walk away without paying one cent in taxes.  How?

The Reverse Morris Trust.

To be fair, Verizon is not the first company to use this tax loophole to structure mergers, acquisitions, and spinoffs.  Before 1997, the use of the original Morris Trust provision was commonplace.  A company would split itself into two pieces, one of which would be swapped for stock in an unrelated company.  Then those shares would be redistributed, effectively transferring ownership.  The tax savings were enormous.  A $3 billion dollar sale would normally net the taxman nearly $1 billion in capital gains taxes.  But when using the magic of the Morris Trust, the taxman got $0.00.

In 1997, Congress realized how much tax money they were losing from this loophole.  They enacted Internal Revenue Code Sec. 355(e), which made these transactions taxable.  Or did they?

With billions in savings now potentially gone, businesses started looking for a way around Sec. 355(e) and found one in the Reverse Morris Trust.

Follow this:

A Reverse Morris Trust - "D"=Verizon, "C"=Spinco, "A"=FairPoint or Frontier

Companies involved in a Reverse Morris Trust deal don’t buy and sell from each other directly.  Instead, the seller sets up a new corporation, usually referred to in company financial reports as “Spinco” and conducts the transaction through that entity.

Spinco issues stock (and why not), which is owned by a majority of the shareholders of the parent company cooking up the sale.

When Verizon cast off its New England customers into the fetid waters of FairPoint, it structured the sale as a Reverse Morris Trust.  Verizon “spun off” Bell Atlantic Communications, NYNEX Long Distance, and Verizon New England assets serving Maine, New Hampshire and Vermont into Northern New England Spinco, a new corporation it created just for the deal.  It needed to find a buyer smaller than itself to take advantage of the tax-free magic of the Reverse Morris Trust.  It found FairPoint Communications, a tiny independent phone company based in North Carolina, dwarfed by the three New England states’ Verizon customers.  Imagine living alone in a one bedroom apartment and then letting The Brady Bunch move in with you.

Spinco, by design, has an addiction to piling on debt.  It’s like giving a shopaholic a wallet full of credit cards all issued by Verizon.  Spinco lards itself with as much debt as it possibly can.  When it’s finally teetering under the weight of  as much as $1.7 billion in debt, Verizon effectively sends a bill saying “we want our money — pay us back our $1.7 billion in full.”  Of course, Verizon doesn’t expect to receive the check.  Instead, it demands Spinco pay a “dividend” in the form of an IOU for the entire amount.

Spinco now has a problem.  Its balance sheet looks terrible.  Would you buy a company that has a $1.7 billion liability on its balance sheet?  FairPoint would, but of course, they knew this was part of the plan all along.

FairPoint now seeks to merge with this Spinco company that has more debt than some third world countries.  State regulators announce they have to examine this deal to make sure a company like FairPoint, now proposing to take on Spinco’s debt, will be able to run the company, make investments in its upkeep and expansion, and still pay back the Bank of Verizon, or whoever else ends up owning the IOU.

Regulators (foolishly) go ahead and approve the deal, and the newly merged Spinco and FairPoint issue stock to Verizon shareholders, the original owners of Spinco.  Verizon also gets cash and securities.  Technically, Verizon shareholders now own 60% of FairPoint.  Of course, nobody says every shareholder gets an equal vote.  In the end, FairPoint runs and manages the entire operation, or tries to, saddled with what is now $2.5 billion in debt and on the brink of bankruptcy.

How much did taxpayers lose from all of this?  Considering the spending machine in Washington is going to get the money from somewhere (us), they are going to be looking at you and I for the estimated $700 million Verizon never had to pay in capital gains taxes.

Make your check payable to “U.S. Government” and make sure it’s in the mail by Halloween.

Yes, this scary story is true, and has a sequel: Frontier and Verizon plan to structure their magic deal using the same technique.

Boo!  (Now add another zero on the dollar amount of your check.)

If this new deal is approved, Verizon walks away with $3.3 billion in tax-free cash.  Verizon shareholders (lucky them) get to be owners of just under 70% of Frontier Communications, soon to be saddled with its own Spinco debt which will run well into the billions.  Knowing this, they dump their stock in Frontier in droves as soon as the deal completes.  Why hang around for another financial Titanic to sink like a rock around their portfolio?

Verizon customers get to join the Frontier Family, and those of us who are already members get to see whether Frontier can survive the minimum monthly payment on that debt.

Or maybe not.

A large contingent of the New England Congressional delegation has written a letter to Rep. Charlie Rangel (D-NY), who chairs the Ways and Means Committee responsible for overseeing tax policy in Congress, asking that a stake be driven through the heart of the loopholes in the Reverse Morris Trust.

Reps. Michael Michaud, Chellie Pingree, Peter Welch, Paul Hodes, and Carol Shea-Porter all signed the letter asking Rangel to reform the Reverse Morris Trust (they abbreviate it “RMT”) and take it away from companies like Verizon looking for a tax-free windfall:

We projected that the transaction [FairPoint-Verizon] would have disastrous consequences in our states.  Unfortunately, our concerns were well founded with widespread consumer dissatisfaction evident across the region.

Recently, we have learned that other states across the country face similar threats to service and employment as Verizon, once again, seeks to avoid taxes through the use of the RMT in its proposed transaction with Frontier Communications.

[…]

Now is the time to restrict the utility and benefits of the RMT to protect the public interest.

West Virginians, in particular, have expressed increasing concern about their state following a similar path northern New England took. Frontier would assume control over all of Verizon’s operations across the state of West Virginia.

“I hope this vital request, now based on past history, isn’t ignored again,” said Elaine Harris, International Representative with the Communications Workers of America.  “West Virginia is being given the opportunity to avoid some of the pitfalls of the FairPoint disaster and it would be a real shame if we simply follow the same path and our communications operations end up in bankruptcy.”

Expect the usual Washington lobbyists to fight to preserve the loophole.  Remember, in the world of Halloween telecommunications finance, tax free trick or treat candy is for closers.

One day before the Federal Communications Commission in Washington announced draft guidelines to establish an American Net Neutrality policy, the Canadian Radio-television Telecommunications Commission (CRTC) announced its own guidelines to govern what Canadian broadband providers can and cannot do with the Internet traffic they deliver to millions of Canadian consumers.  While Bell (Canada), the nation’s largest telecommunications company praised the CRTC for its provider-friendly ruling, consumer groups varied their responses from “a step in the right direction” to “weak” to “here comes more gouging.”

The CRTC Net Neutrality policy for Canada essentially permits providers to continue to throttle broadband speeds for both retail and wholesale customers, and block traffic altogether should the CRTC grant permission in “exceptional cases,” as long as the provider discloses the practice to consumers up front, and warns them in advance of any policy changes that further slow their connections.

Laurel Russworm, who runs Stop Usage Based Billing, was not pleased.

“The CRTC decision doesn’t have a silver lining I can find; in fact they essentially said that usage based billing and caps are good tools to use to fight congestion. All Bell Canada has to do is warn us first, then they can gouge as they please. They’ve deferred making a decision on usage based billing until after the court challenges are dismissed, but I’m not holding my breath,” Russworm wrote.

On Wednesday the CRTC decided that Internet providers in Canada need measures to manage the traffic on their networks at certain times to deal with what providers claim to be a congestion problem.  At hearings held this past summer, several CRTC commissioners were receptive to the claims providers made that Canadian broadband does not have the capacity their American neighbors have.  Providers like Bell and Rogers claim that peer to peer traffic and increasing consumption of high bandwidth services have created capacity shortages on their networks, requiring traffic management which artificially slows certain traffic on their networks at “peak times.”  Canadian broadband providers almost universally also impose Internet Overcharging schemes on their customers, limiting customer use and charging them overlimit penalties for exceeding usage allowances.

The commission accepted the providers’ claims and gave the green light to those practices, but said before a provider literally blocks access to online services, or throttles time sensitive traffic on services like Voice Over IP telephone or two-way video conferencing to the point it becomes “degraded,” it needs to get Commission permission first.

Mirko Bibic, Bell Canada’s senior vice-president of regulatory and government affairs, told The Globe and Mail the ruling gives carriers the right to run their businesses the way they see fit. “We’re the experts, and we get the flexibility to determine how to manage our networks to give the user the best experience,” he said.

Bell already “throttles” its Internet service by slowing peer-to-peer downloading between 4:30 p.m. and 1 a.m. to make sure the network is not overloaded by a relatively small number of people transferring large video and music files.

Independent Internet providers are among the biggest proponents of Net Neutrality, and a ban on Internet Overcharging schemes known in Canada as “usage based billing.”  Many Canadian broadband providers obtain connectivity through wholesale accounts purchased from Bell.  The Canadian phone giant imposed both speed throttles and usage based billing on their wholesale customers.  Those costs, and the speed bumps that go with them, are now increasingly passed on to consumers.  Independent providers fear being put out of business.

For many of them, Wednesday’s decision might as well never have happened.

“This has really not changed anything,” Tom Copeland, chair of the Canadian Association of Internet Providers, told PC World.

Copeland said the “biggest, most glaring omission” from the ruling is the lack of restraints on the time of day or how long suppliers like phone or cable companies can manipulate traffic. “So we could continue to see traffic management every day of the year,” he said.

“We’re still not addressing the cause of the problem,” he added: “Either weak points in the network, or abuse by users.” Most casual users of peer-to-peer applications — the biggest offending programs in the eyes of providers – aren’t the problem, he said.

“We just went backwards at warp speed,” lamented John Lawford, counsel for a coalition of consumer groups that fought for an end to throttling of Internet traffic of consumers, “ while we watch the U.S. rocket ahead.”

“The CRTC has said in this decision that ISPs own your content and own your Internet connection” said Lawford, “You just got owned.”

The Public Interest Advocacy Centre represented the Consumers’ Association of Canada, Canada Without Poverty and Option consommateurs during the hearings on Net Neutrality.  PIAC argued that the Telecommunications Act required ISPs not to interfere with customers’ Internet traffic unless such traffic was clearly harming other users of the network and not otherwise.  “ISPs should act as common carriers and just carry traffic, not as broadcasters deciding what you watch” continued Lawford, “but now they can decide what gets through – and how much they get to charge you for the privilege.”  Lawford also noted the CRTC’s requirement for the ISPs to disclose their “Internet traffic management practices” will not actually stop any of the practices.

The CRTC has repeatedly taken broadband industry-friendly positions in direct opposition to Canadian consumer interests, helping to set the stage for Canada’s rapid decline in broadband leadership.  The country’s standing in broadband rankings has taken a stunning fall from its earlier top-shelf position.  Regulatory policies that permit abusive, anti-competitive practices and reward providers for rationing broadband instead of investing in expanding it are at the heart of the problem.

Since the CRTC has taken positions more worthy of a industry trade group than an independent regulator, an increasing number of Canadians are demanding the CRTC lead or get out of the way.  A large group of Canadian voters upset about any issue is sure to attract politicians, and the New Democratic Party of Canada (NDP) has arrived.

Charlie Angus (NDP)

Charlie Angus, New Democrat Digital Affairs Critic and MP for Timmins-James Bay, who already is on record opposing Internet Overcharging schemes, says the CRTC dropped the ball on Net Neutrality.

“Yesterday’s CRTC decision on Internet traffic-management practices is a blow to the future of digital innovation in Canada,” Angus said in a statement.

“This interference [from traffic management] will be bad news for small third-party competitors and leaves consumers subject to digital snooping and interference from cable giants,” he added.

“Basically the CRTC has left the wolves in charge of the henhouse. ISP giants have been given the green light to shape traffic on the internet in favor of their corporate interests,” he said. “This decision is a huge blow to the future competitiveness of the Internet.”

Angus says that the premise of today’s decision – that notification from the ISP will allow customers to make an informed decision on where to buy Internet service – misses the harsh reality that the market for Internet service in Canada is not nearly competitive enough to work.

“Canada has fallen to the back of the pack in Internet service provision and pricing after leading the way for years. This is the direct result of a small band of ISP giants blocking out competition,” Angus said. “This decision clears the way for ISPs to squeeze out third-party players who are attempting to provide better price and service options.”

South of the border, the FCC has taken clear steps toward the establishment of Internet neutrality on U.S. networks.

Angus said that principle of Net Neutrality should be at the center of Internet policy in Canada, and that the CRTC has missed a golden opportunity with yesterday’s decision.

“The principle of Net Neutrality must be a cornerstone of the innovation agenda. The CRTC has once again acted as the rubber stamp for large ISP and cable players to dominate the market and decide which traffic goes in the fast lane and which traffic gets stuck in the slow lane. This decision continues a long and dismal tradition of Canada’s communication policy decisions chipping away at the public interest to the benefit of a few corporate giants.”

Dissolve the CRTC, a group collecting signatures to petition for the closure of the Commission, also made several comments about the CRTC decision.

Among their conclusions:

• The new policy leaves the door open to providers deciding their economic interests are better served from traffic management practices like throttles and usage limits than network investments.  Short term limits may serve the interests of stockholders, but could discourage long term investments needed to create new 21st century broadband platforms;
• The Commission’s encouragement that providers make additional investments in their networks is likely to fall on deaf ears.  It was Bell’s lack of investment in their broadband network which led to the traffic management practices, and the recent hearings about them, in the first place.  Without mandates, there is no real pressure on Bell to change their investment strategy.
• The Commission’s policy to regulate this issue through a user complaint process that calls out bad actors has no historical precedent of working.  The CRTC has a long history of ignoring public involvement in telecommunications proceedings, and does not like to involve themselves with individual customer complaints.  Campaigns to flood the CRTC with complaints on specific issues using their language may be the only way to get them to investigate.  Additionally, complaints that call out the disparity in network management policies between wholesale and retail accounts may only lead to additional restrictions on both types of accounts, making a bad situation even worse.

Canadians must contact their elected officials and demand federal legislation to enact true consumer protection and broadband reform policies to restore Canada to a position of leadership in broadband.  The CRTC is ineffective and must not be the final arbiter on these important issues.

The FCC today voted unanimously to begin writing a formal Net Neutrality policy to govern broadband services across the United States.  Three Democratic commissioners voted yes and applauded the concept of Net Neutrality.  The two Republican commissioners also voted to move the process forward, but signaled they would likely oppose the final draft of the rules.

Support for Net Neutrality, which would prohibit providers from slowing down, blocking, or charging higher pricing for favored access to web content, was spearheaded by FCC Chairman Julius Genachowski.

Genachowski said the rules were needed to protect consumers from abusive behavior by telecommunications companies that might seek to block or restrict access to broadband content, including telephone and video services.

“Internet users should always have the final say about their online service, whether it’s the software, applications or services they choose, or the networks and hardware they use to the connect to the Internet,” Genachowski said.

Other Democratic commissioners agreed with Genachowski.  Commissioner Michael Copps stated it was important to hear from everyone about the proposed rules.

“We need to recognize that the gatekeepers of today may not be the gatekeepers of tomorrow,” Copps said.

John McCain

Many Republicans were unconvinced of the need to establish Net Neutrality as formal policy.

“I do not share the majority’s view that the Internet is showing breaks and cracks, nor do I believe that the government is the best tool to fix it,” Republican commissioner Robert McDowell said.

“These new rules should rightly be viewed by consumers suspiciously as another government power grab over a private service provided by private companies in a competitive marketplace,” Sen. John McCain wrote in an opinion piece published by The Washington Times.

McCain compared Net Neutrality with the federal bailout of Wall Street and the American auto industry.

Under the draft proposed rules, subject to reasonable network management, a provider of broadband Internet access service:

1. would not be allowed to prevent any of its users from sending or receiving the lawful content of the user’s choice over the Internet;
2. would not be allowed to prevent any of its users from running the lawful applications or using the lawful services of the user’s choice;
3. would not be allowed to prevent any of its users from connecting to and using on its network the user’s choice of lawful devices that do not harm the network;
4. would not be allowed to deprive any of its users of the user’s entitlement to competition among network providers, application providers, service providers, and content providers;
5. would be required to treat lawful content, applications, and services in a nondiscriminatory manner; and
6. would be required to disclose such information concerning network management and other practices as is reasonably required for users and content, application, and service providers to enjoy the protections specified in this rulemaking.

The draft rules make clear that providers would also be permitted to address harmful traffic and traffic unwanted by users, such as spam, and prevent both the transfer of unlawful content, such as child pornography, and the unlawful transfer of content, such as a transfer that would infringe copyright.

Today’s vote marks only a beginning of the process to begin writing the formal policy of Net Neutrality governing Internet use in the United States.  As with the ponderous debate on health care reform, what ends up defining “Net Neutrality” will be open to interpretation, and a barrage of lobbyists and arm twisting from politicians will be part of what comes next.

On the eve of the historic vote, Verizon Communications seemed to join Google in affirming some of the basic principles of Net Neutrality.

However, the devil is in the details, as is always the case in telecommunications policy.

Verizon supports its own interpretation of Net Neutrality, which is wrapped in a concept they call “innovation without permission,” which is code language for a deregulatory open free-market environment.  It broadly accepts the concept that telecommunications companies should not interfere with legal content, but the company doesn’t want a whole barrage of new regulations to specifically define what would constitute “interference.”  Verizon believes onerous rules would stifle investment, and that existing rules already in place at the FCC are sufficient protection.

Things get downright dicey when Verizon spells out its “network management” principles, warning the FCC overly specific rules in this area could have unintended consequences.

Broadband network providers should have the flexibility to manage their networks to deal with issues like traffic congestion, spam, “malware” and denial of service attacks, as well as other threats that may emerge in the future–so long as they do it reasonably, consistent with their customers’ preferences, and don’t unreasonably discriminate in ways that either harm users or are anti-competitive. They should also be free to offer managed network services, such as IP television.

It is in this area where very specific rules are appropriate to write, because what one company defines as appropriate “network management,” could be discriminatory against selected content those providers seek to “manage.”

No broadband user has ever objected to network management that controls spam, “malware,” denial of service attacks, and other like-minded traffic.  In fact, most consumers wish more could be done to control these things.  Nothing in the current framework of telecommunications regulations or in those proposed have ever sought to impede this type of management.

No consumer minds having access to additional content, such as IP television.  But consumers do object when such content is used as an excuse to ram through Internet Overcharging schemes limiting broadband usage or imposing higher fees for using the types of services companies like Verizon now advocate.  “The broadband sky is falling” rhetoric about “exafloods,” overloaded “Internet brownouts,” and other such scaremongering nonsense often comes from the same providers that now want to provide IP television.  What they provide with their left hand, they want to limit with their right.

It’s anti-competitive, because the same companies with an interest in selling these pay television services (FiOS, cable television, fiber-telephone U-verse, etc.) also provide the broadband service that companies like Netflix and Hulu use to indirectly challenge their video business models.

Another concern is “traffic congestion” management, which all too often has meant speed throttles selectively imposed on “offending” applications, particularly peer to peer traffic.  There is good traffic management, such as routing equipment that provides even delivery of services like streaming video and Voice Over IP telephone calls, which rapidly deteriorate on loaded down networks, and then there is bad traffic management which selectively slows down the speed of whatever the provider deems to be of “lower priority.”  Allowing the customer to make the decision about which traffic gets priority is one thing.  Allowing a provider to do it without the consent of the customer is quite another.

Too often, the “unintended consequences” Verizon and Google speak about in the joint statement go to the provider’s favor, not to the consumer.  Overly broad, non-specific language opens loopholes through which providers will eagerly leap through.

Verizon also advocates transparency — “All providers of broadband access, services and applications should provide their customers with clear information about their offerings.”

Disclosure alone doesn’t suffice for consumers, particularly if there are few competitive places to take your business if you disagree with company policies.  Those rules should include realistic speed information (marketing stating “up to 10Mbps” that in reality only delivers 3Mbps would be one example).  It should not simply be an escape clause for providers to abuse their customers with throttled, slow service, and give them the excuse that “we disclosed it.”

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Federal Communications Commission Open Meeting

October 22, 2009

112 minutes

(Warning: Loud audio)

This newspaper ad is running across West Virginia opposing the sale of the state's phone business to Frontier Communications

Opposition to the sale of Verizon’s landline business to Frontier Communications in 13 states continues to increase, particularly in Ohio and West Virginia, where several employee unions have argued the deal represents a win for Wall Street and company executives, but a raw deal for millions of consumers.

The Communications Workers of America and the International Brotherhood of Electrical Workers, who also warned state regulators in New England about the consequences of approving the sale of Verizon’s operations in Maine, New Hampshire, and Vermont to FairPoint Communications, continue to warn consumers and state officials that a similar deal between Verizon and Frontier Communications could spell major problems for telephone customers.  They call on state officials to reject the deal and force Verizon to invest some of their substantial profits earned in these communities into providing better service instead of dumping customers overboard.

The CWA says the sale would put $3.3 billion dollars into Verizon’s coffers — tax free — and leave Frontier buried in debt, which could impact both new and existing Frontier Communications customers, including hundreds of thousands of those in Rochester, New York, Frontier’s biggest service area.

“Verizon Communications has been divesting assets to smaller, less stable corporations in order to reap large, tax-free, profits,” CWA International Representative Elaine Harris said. “Verizon proposes to repeat that formula, and its disastrous effects, with the sale of all of its wireline operations here in West Virginia to Frontier.”

The CWA considers the transaction based primarily on corporate greed, not the best interests of phone customers.

“The only winner in all of these deals has been Verizon Communications and especially Verizon’s corporate executives,” Harris said. Verizon CEO Ivan Seidenberg is the highest paid executive in the telecom industry, with $24.31 million dollars in annual compensation from Verizon.

“His salary could have funded the entire network of senior services in West Virginia last year and he still would have had $8 million in his pocket,” Harris said.

The deal will leave Frontier Corporation with a total of $8 billion dollars in debt. “The West Virginia consumers will experience the effects of converting more than 617,000 aging access lines to a smaller, debt-ridden company,” Harris said. “The public will be forced to pick up the pieces if Frontier follows Verizon’s other buyers and files for bankruptcy.”

“We’ve closely watched the failures of the companies that purchased Verizon’s assets and we don’t need a crystal ball to figure out what will happen if Verizon tries the same scheme in West Virginia. There’s absolutely no reason to gamble West Virginia’s telecommunication’s future just to increase Verizon’s bottom line,” Harris added.

The CWA is running radio ads across the state of West Virginia opposing the deal.

Audio Clip: Communications Workers of America Radio Ad (1 minute)
You must remain on this page to hear the clip, or you can download the clip and listen later.

Verizon spokesman Harry Mitchell said Verizon wants to sell its access lines so the company can focus on its wireless and broadband business. Mitchell told The Charleston Gazette the union has opposed the deal from day one.

“They’re spending their members’ dues on advertising in an effort to cloud the issue,” he said.

Frontier Communications has protested accusations that their purchase of Verizon assets will result in the same kinds of colossal failures impacting other Verizon sell-offs.  Company officials claim Frontier already has a successful customer support operation in DeLand, Florida, and billing and operating systems in place.

In West Virginia, those existing operations serve 144,000 Frontier customers.  If the deal is approved, Frontier will take on the responsibility of serving 1.3 million landlines across the southeastern U.S. alone.

The International Brotherhood of Electrical Workers, integrally involved in fighting the FairPoint transaction in New England, says the Frontier deal is reminiscent of what happened with FairPoint:

Regulators in the 14 states where Verizon now proposes to sell its landlines to Frontier face an almost identical situation as New England regulators did last year. Frontier Communications is proposing to buy Verizon’s entire wire line operation in West Virginia – as well as Verizon’s scattered landlines across 13 other states – in a similarly structured deal.

In both cases, Verizon chose a much smaller company in order to take advantage of an obscure tax loophole. With the Frontier sale, Verizon will avoid paying any taxes on the $3.3 billion it will receive from Frontier. Frontier will have to cope with three times more employees, three times more access lines and a 75 percent increase in its debt from $4.5 to $8 billion.

Verizon has a very poor track record in these sales. Verizon sold its Hawaii operations to Hawaiian Telcom in 2005 and it filed for bankruptcy. Customers, service and employees have suffered as a result.

Frontier – just like FairPoint – is a making promises that it may not be able to meet. Like FairPoint, state regulators are being asked to approve a deal where a small company will attempt to simultaneously run a much larger operation, pay off billions of dollars more in debt, integrate Verizon’s computer systems and spend more money to expand broadband.

In the end Verizon will profit but consumers, workers and communities are put at real risk.

Expanding broadband access is an especially critical factor for all rural areas. But Frontier has failed to make any specific commitments, set any timeline or offer a plan for its broadband buildout.

Union leaders believe that states shouldn’t risk their telecommunications’ future just so Verizon can fatten its bottom line. Regulators shouldn’t approve this sale because the risks are too great. Instead, our legislators, regulators and the Governor should require Verizon to meet its service responsibilities. Verizon shouldn’t be allowed to walk away with $3.3 billion tax free, and leave the fate of its customers in the hands of a company with a lot less resources. If Frontier should falter, customers and the public would be required to pick up the pieces – not Verizon!

The track record for Verizon spinoffs has hardly been one of success.

FairPoint Communications, the company to which Verizon sold its Maine, New Hampshire and Vermont operations in 2008, is foundering as it tries to integrate operations and is choking on the debt it incurred to finance the transaction Since the deal was announced, FairPoint’s stock price has declined by about 95%, and the company has been forced to suspend dividend payments.

Hawaiian Telecom, the company to which Verizon sold its Hawaii operations in 2005, filed for bankruptcy. Verizon sold its 715,000 access lines in Hawaii. Since then, Hawaiian Telcom has experienced significant transition issues that resulted in major financial and customer service problems. In three years, the company lost 21% of its customers. In December 2008, Hawaiian Telcom filed for bankruptcy.

The yellow pages company that Verizon spun off also filed for bankruptcy. In November 2006, Verizon spun off its yellow pages directory business to Verizon shareholders, loading the new company, Idearc, with about $9.5 billion in debt and extracting a cool $9 billion in cash and debt reduction. Last year, interest payments alone on Idearc’s debt accounted for almost one-quarter of its total revenues! Representing something of a Verizon failing company “hat trick,” Idearc filed for bankruptcy in March 2009.

[flv]http://www.phillipdampier.com/video/WSAZ Huntington Frontier CWA Fight 10-14-09.flv[/flv]

WSAZ-TV Huntington, West Virginia reported on the growing opposition to the Frontier sale by employee groups on October 14th. (3 minutes)

In Washington State, IBEW Local 89, outside Seattle, says the sale could cripple one of America’s most tech-savvy regions.

“We’ve always been a leader in communications in this part of the country,” said Ray Egelhoff, business manager of IBEW Local 89. “If this happens, we’re afraid businesses won’t move in, and some may even move out.”

Egelhoff, along with more than 1,500 Verizon workers who may become Frontier employees, deluged officials with letters and e-mails expressing their concerns. More than 500 have gone out so far to senators, house members, governors and business leaders. The workers worry Frontier —at about the a third the size of Verizon—won’t be able to absorb the huge Verizon assets, won’t be able to keep customers happy and, eventually, will have to shed staff.

Robert Erickson, International Representative in the IBEW’s Telecommunications Department said, “The deal poses risks to consumers and employees. Frontier is making all kinds of promises about synergy and how they’ll expand broadband. FairPoint Communications made the same grand claims and now they can’t meet their commitments and fulfill the promises they made. It’s clear that Frontier will be in a similar situation and not have the resources to fulfill the commitments they are making.”

Consumer groups are also raising objections to the sale.

The National Association of State Utility Consumer Advocates urged the Federal Communications Commission, which is reviewing the proposed transaction, to reject the deal.

“The merger proposed by Frontier and Verizon is not in the public interest,” said David Springe, president of the consumer advocate group. “The failure of the companies to offer adequate consumer benefits or protections puts customers at risk of being served by a company without enough financial strength to make necessary improvements to local telephone facilities and widen the deployment of broadband access.”

Free Press, a nonpartisan group that works to reform the media, also raised concerns about the sale in a filing with the FCC. Free Press cited Verizon’s sale of lines in New Hampshire, Maine, and Vermont to FairPoint, which subsequently acquired substantial debt, was unable to accommodate the increased service area, and is now on the edge of bankruptcy.

“This trend has the potential to leave rural areas with ill-equipped companies offering inadequate service at high prices,” says the Free Press report. “This is in direct contrast to the stated intent of Congress and the Obama Administration to foster universal broadband to all Americans.”

[flv]http://www.phillipdampier.com/video/WCHS Charleston Verizon Sale Fight 10-14-09.flv[/flv]

WCHS-TV in Charleston, WV talked with the CWA and company officials about the sale of Verizon operations to Frontier Communications. (1 minute)