Public Advocate Announces Recommendations to PUC in Fairpoint’s Proposed Acquisition of Verizon-Maine

October 11, 2007

At the conclusion of formal hearings before the Maine Public Utilities Commission on the proposed Fairpoint acquisition of Verizon’s northern New England landline business, the Public Advocate has proposed a list of 23 conditions on the proposed deal -- all of which are designed to protect ratepayers and the public interest against otherwise likely adverse consequences from this historic telephone utility acquisition. These 23 conditions were developed based on the examination by Public Advocate attorneys and its four expert witnesses of thousands of pages of documents and testimony in the case. During the just-concluded hearings, Public Advocate attorneys cross-examined Verizon and Fairpoint witnesses, including Fairpoint’s top management, and introduced substantial evidence that paints a clear picture of the implications of the proposal from the viewpoint of telephone customers. Under Maine law, the acquisition may be approved by the Commission only if it is proved to be consistent with the interests of ratepayers and investors. “The conditions that we recommend are essential if this proposal is to serve the interests of Maine people” said Public Advocate Dick Davies.

The Public Advocate will recommend that the Commission not approve this acquisition unless it adopts all 23 specific conditions to offset the likely adverse consequences for consumers. The recommended conditions fall into seven general categories. Those include Fairpoint’s financial viability, Fairpoint’s obligation to provide high quality service to customers, prices for telephone and broadband services, Fairpoint’s technical ability to successfully create and implement new operational systems, Fairpoint’s ability and commitment to deliver DSL broadband service throughout Maine, Fairpoint’s continued delivery of all necessary wholesale network services to competitive carriers, and Fairpoint’s obligations to maximize federal support to keep telephone rates as low as possible.

A key element of the Public Advocate’s recommendations requires a restructuring of the agreement between Fairpoint and Verizon so that Verizon, in effect, is paid a lower price. That change would allow Fairpoint to operate with less debt. “Because, under Maine law, Verizon does not have the right to abandon service without the Commission’s approval, the Public Advocate believes that it is appropriate for the Commission to require Verizon to lower its price in order to ensure Fairpoint’s long-term financial viability. Without a significant reduction in the price, this proposal will not work for Maine’s residential and small business customers”, Davies emphasized.

If Fairpoint and Verizon are unable or unwilling to perform on all of these recommended conditions, the Public Advocate will recommend that the transaction be rejected by the PUC. “The risks presented by this case are enormous, and all potential adverse impacts must be addressed now. Otherwise the Commission should reject this deal”, said William Black and Wayne Jortner, the attorneys who represent the Public Advocate in the proceedings before the PUC.

Fairpoint currently serves about 300,000 lines in 18 states and seeks to acquire another 1.6 million lines now served by Verizon in Maine, New Hampshire and Vermont. Fairpoint’s and Verizon’s request for approval is pending before a utilities commission in each of those three states.

A copy of the 23-item list of proposed conditions is attached below.

Press Release Date: October 11, 2007
Contact Information:
Wayne R. Jortner
William C. Black
Richard Davies
Office of Public Advocate, 207-287-2445

NOTICE OF CONDITIONS TO BE PROPOSED BY THE PUBLIC ADVOCATE

Notice is hereby given that, in the event that the Public Advocate recommends approval of Fairpoint’s proposed acquisition of Verizon-Maine, the Public Advocate anticipates recommending the following conditions in the Public Advocate’s brief in this proceeding. The Public Advocate will also recommend that the Public Utilities Commission adopt all conditions suggested in the testimony of our witnesses in this proceeding, whether or not included in following list:

  1. The proposed transaction must be restructured to allow Fairpoint to reduce its bond debt level by $600 million, thereby reducing the associated interest expense and debt leverage levels.
  2. Fairpoint agrees to reduce the dividends it pays to its shareholders by specific percentages in the event of certain specified (to be determined) financial developments
  3. Fairpoint must take steps under a plan provided to the Commission to increase and maintain its credit rating to a minimum investment-grade rating. Further, Fairpoint should agree that, in any future rate case, ratepayers will be held harmless from any extra debt expense that results from less than investment-grade bond ratings
  4. The Commission should review and approve final debt agreements.
  5. Service groups covered by the TSA must be unbundled, along with associated cost-based charges, so that TSA services can be transitioned independently with an associated reduction of TSA charges to FairPoint.
  6. Verizon must ensure that all of Fairpoint’s new back office systems, including billing and customer service systems, are fully functional before Verizon is permitted to abandon service. At four months after closing, all TSA payments will cease and Verizon will continue to provide all necessary services under the TSA until successful cutover of the unbundled function.
  7. For the next ten years, Fairpoint’s rates may not reflect higher capital costs based on Fairpoint’s higher risk level and higher cost of equity. In any future rate case within that ten-year period, ratepayers will be held harmless from capital costs that exceed those of Verizon.
  8. Fairpoint must agree to meet the current and amended service quality performance standards set forth in Public Advocate’s testimony applicable to the Verizon operations, be subject to the proposed revised penalty structure, agree to standards that would make sure that current service quality performance for its Maine “classic” companies will not deteriorate, and submit a combined service-quality performance plan with associated penalties similar to the one currently in effect for Verizon when it combines the operations of the former Verizon and its “classic” companies in the future.
  9. Verizon must pay 50% of capital expenditures necessary to bring plant facilities to levels that remediate service quality problems under the standards for service quality required by the Commission. An escrow fund shall be created for this purpose to be administered by the Commission.
  10. Fairpoint must provide monthly reports to the Commission beginning immediately to provide the staffing status for Fairpoint’s northern New England service area, with particular emphasis on adequacy of technical skills for workers being placed in new positions due to any significant departure of experienced staff in the period six months before, to six months after, close of the transaction. The report shall include training plans and progress associated with bringing workers in new technical positions up to adequate skill levels.
  11. Fairpoint must increase high-speed Internet (DSL) availability to 90% of access lines, under the detailed and enforceable plan recommended by the Public Advocate.
  12. Fairpoint’s DSL prices should be no higher, and its DSL speed should be no lower, than the comparable service provided by Verizon during the previous year. Such pricing and speed comparisons shall include Verizon’s long-term promotional offers, including its online offer of $15 per month for life at 768 Kbs.
  13. Fairpoint should be subject to close financial monitoring by the PUC, including additional special reporting requirements (to be specified).
  14. Fairpoint will not seek any increase in its local rates before 2012. Rates will be immediately reduced to reflect Verizon’s current overearnings to be determined in Docket # 2005-155
  15. In any future rate proceeding, Fairpoint rates will reflect Yellow Pages directory revenues foregone by Fairpoint when it agreed not to compete with Verizon’s former directory business for thirty years
  16. Fairpoint must offer competitive local phone companies all of the wholesale services that Verizon was obligated to provide, including Section 271 obligations and obligations of Bell operating companies.
  17. Fairpoint should offer standalone DSL service at a reasonable price (under $25), to those customers who do not want Fairpoint’s local telephone service
  18. The Commission should retain jurisdiction over Verizon-Maine for the purpose of completing its investigation and applying any remedy, in connection with the Cowie complaint, at such time that the case is remanded to the Commission or the stay of the federal district court is lifted.
  19. Fairpoint shall request, and Verizon will support, a waiver of the “parent trap” rule in order to seek rural high-cost support for Fairpoint’s northern New England operations. If the waiver is approved, rates will be decreased to the extent of any additional USF support.
  20. Fairpoint shall not seek to increase the SLC charge to residential or business customers above the current rates of Verizon, before 2012
  21. Fairpoint shall propose a cost allocation manual, to be approved by the Commission, to ensure that there is no subsidy from its regulated operations to any of its unregulated businesses, including its broadband business and any video business. Fairpoint shall pay the regulated entity the fair share of any joint and common costs attributable to regulated facilities, including the loop.
  22. FairPoint shall provide a detailed budget pro forma of charges to and from affiliates for the three-state operation (and the individual states), for 2008, including the actual cost basis for the charge at its originating location.
  23. Any management fee or other allocations between the Fairpoint parent company, any subsidiary, and the local exchange company, shall be subject to review and approval by the Commission.

The Public Advocate reserves the right to amend or add to these recommendations at any time before our final arguments in the proceeding before the Public Utilities Commission.