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

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

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

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

[flv]http://www.phillipdampier.com/video/WCHS Charleston PSC Phone Hearing 1-12-2010.flv[/flv]

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

Desperate for Broadband

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

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

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

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

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

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

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

Union Bashing – The enemy of my enemy is my friend

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

Nonsense.

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

[flv]http://www.phillipdampier.com/video/WSAZ Charleston Frontier Defends Deal 1-12-2010.flv[/flv]

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

The Opposition

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

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

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

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

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

What Can Be Done?

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

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

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

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

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

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

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

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

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

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

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

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

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

[flv]http://www.phillipdampier.com/video/CWA 911 Service At Risk Ad.flv[/flv]

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

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

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

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

[flv]http://www.phillipdampier.com/video/WCHS Charleston Union Opposes Sale of Verizon Landlines 1-10-10.flv[/flv]

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

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/CWA Rally Excerpts 1-10-10.flv[/flv]

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

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.