Strike Up the Broadband

Two weeks ago, more than 80 people squeezed into the Williston office of Vermont Interactive Television - one of 11 VIT sites around the state tuned in to the same drama. As the proceedings began, a chorus of cellphones - being turned off - served as a reminder of the subject under collective scrutiny. The singsong of similar ring tones revealed a predominance of Verizon phones - many belonging to employees of the company.

Their interest in this event was understandable. VIT was hosting the Public Service Board's [1] teleconference on the proposed sale of Verizon's [2] landlines in Vermont, Maine and New Hampshire. The $2.175 billion deal, announced in January, would transfer control of Verizon's entire landline infrastructure in northern New England - telephone poles, switches, routers, trucks - plus its work force of 3000 employees, to FairPoint Communications [3] of Charlotte, North Carolina. Verizon would retain control of its wireless business in the region.

All three states' public utilities boards and the Federal Communications Commission [4] must give the sale their thumbs-up, or the entire deal [5] collapses. But if it gets regulatory approval, FairPoint will become Vermont's largest phone company and its default provider of telephone services.

As PSB Chairman Jim Volz [6] explained at the outset, the point of the hearing was to hear the public's questions, not to answer them. The ultimate goal? To help the PSB better frame its own inquiry into the deal before formal, technical hearings are held in September.

For nearly two hours, Vermonters aired their hopes, expectations and uncertainties about Verizon and its new corporate suitor from the South. Their comments ran the gamut: Will phone and Internet rates increase? Will FairPoint uproot Verizon's workers and/or offer them similar pay and benefits when union contracts expire next year? Does FairPoint plan to upgrade Verizon's fleet of ailing vehicles? Can FairPoint take on a monstrous debt load, which would dwarf the company's current net worth, and still have the financial muscle to build out a high-speed broadband network?

If that network expands, will rural customers in small towns such as Richford, Island Pond and New Halifax be able to download videos, swap music files and watch movies on demand at the same rate of megabits per second as their urban counterparts in Burlington and Montpelier?

It was clear from the testimony that Vermonters understand what's at stake. Whether it's e-commerce, telemedicine or interactive distance learning, universal access to high-speed Internet service is as vital to Vermont's economic and social well-being in this century as the interstate highway system was in the last one.

Opinions differed on FairPoint's ability to move Vermont boldly into the communications age. But there seemed to be a general consensus that something needs to improve soon if Vermonters are to end up on the right side of the digital divide. As DSL Prime, a telecom-industry newsletter based in New York City, remarked in its April 13 issue [7], Verizon's 60 percent broadband coverage in Vermont, Maine and New Hampshire is one of the lowest rates in the developed world. DSL Prime editor Dave Burstein likens Verizon's relationship with consumers in those states "to the early Roman treatment of the Sabine women." That's a fancy way of saying "rape."

The PSB hearing also revealed another, less obvious fact: Much of what Vermont lawmakers, business leaders and the public have heard about this deal comes from two sources whose agendas and interests are diametrically opposed. First, you've got FairPoint's executives, who have an obvious incentive to paint this deal in the rosiest possible terms. Speaking of incentives, the federal tax code would enable FairPoint - because of its small size - to do this deal entirely tax-free. That's gotta sound good to Verizon.

The other source of information has been the unions - specifically, the Communications Workers of America (CWA) [8] and the International Brotherhood of Electrical Workers (IBEW) [9]. Their well-organized, three-state campaign [10] to scuttle the deal began last summer, six months before a potential buyer was named. Why are the unions so adamantly opposed? One analyst suggests it's in part because they would prefer to renegotiate the terms of their expiring contracts with "a corporation with very deep pockets versus one with lint in its pockets."

Which raises some interesting questions. Can Vermonters get an accurate, complete and unbiased picture of this transaction from someone who doesn't have a dog in the fight? If the deal gets the green light, will Vermont's telecom landscape eventually resemble the pretty picture painted by FairPoint executives - or the dismal predictions of union economists? Does the public have enough information to know which questions to ask and which commitments to demand from FairPoint? Finally, will Vermonters be better or worse off if this deal goes sour?

As Tim Volk, board chair of the Vermont Business Roundtable [11], commented in urging the PSB to approve the sale, "Which do we want, a company that is interested in us? Or one that has its sights, and its capital, set elsewhere?"

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If we want to shed light on these questions, we should first consider what is known about FairPoint. This telecom acquisition firm, which is publicly traded on the New York Stock Exchange, has been around since 1991. The company's modus operandi has been to buy up small, independently owned phone companies in rural areas - 31 local exchanges in 18 states - and grow those businesses with the help of lucrative federal subsidies from the Universal Service Fund [12].

The USF, which customers pay into on their monthly phone bills, is a pool of money used to defray the cost of expanding telecom services into poor, rural and sparsely populated areas. Historically, FairPoint has enjoyed high federal subsidies - $452 per line - compared with Verizon in Vermont, which gets just $31 per line. Industry analysts say that FairPoint would not be able to rely on those high reimbursement rates in Vermont.

FairPoint's purchase of Verizon assets in northern New England would put it in an entirely different class of operations - the telecom equivalent of leaping from college baseball to playing in the majors. For perspective: FairPoint currently reports 311,150 access lines nationwide. If this deal goes through, that figure would become 1.77 million. FairPoint's staff would increase more than fourfold - from 900 employees pre-merger to 3900 post-merger - with six times as many customers. Overnight, the company would morph from the 14th largest telecom company in the nation to the eighth largest.

Walter Leach [13], FairPoint's executive vice president for corporate development, says his company is well positioned to manage that growth. "These three markets [in Vermont, Maine and New Hampshire] will be our most important markets," he says. "They will represent over 80 percent of our business, 80 percent of our customer base and over 80 percent of our revenues. So, they will be getting all of our attention."

Currently, just 19 percent of FairPoint's workforce is unionized. But Leach insists his company will do right by Verizon's workers. FairPoint has agreed in writing to honor all existing contracts, to maintain head counts, and to fully fund all employee pension funds. The company has also promised to add 600 new jobs, in data, administrative and technical services, which would be evenly distributed across all three states. And FairPoint management is prepared to open negotiations on next year's expiring contracts even before the Verizon deal is approved.

"If the union would like to sit down with us today and talk about extending [its contract] under the same general terms and conditions," Leach says, "we'd love to have that conversation." Thus far, however, the two sides have met just once. According to Leach, the unions have expressed no interest in holding peace talks at this time.

Ben Scott [14] is policy director for Free Press [15], a nonpartisan organization based in Washington, D.C., whose goal is to increase public participation in media policy debates. A former congressional telecom expert, Scott notes that FairPoint doesn't have a known track record on labor/management issues - only 119 of its 900 current employees are unionized.

"To me, it's a public-interest issue," Scott says. "If you've got a company [Verizon] that's providing good jobs at living wages, they're doing right by their communities and ultimately growing the economy."

Scott's concern is that, if the debt FairPoint incurs in the deal puts it under serious financial strain, workers could be hurt down the line. "None of FairPoint's workers have those kinds of benefits and wage structures [that Verizon's do]," he says. "If I were the unions, I'd be nervous."

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Although the Verizon/FairPoint deal is ostensibly about telephone lines, the rubber meets the road on universal broadband access. According to Leach, FairPoint is "committed" to beating Verizon's promise of extending DSL coverage to at least 80 percent of Vermont by 2010. (FairPoint will probably need to revise that projection. Last week, the Vermont Legislature passed H.248, which creates the Vermont Telecommunications Authority and requires 100 percent broadband accessibility in Vermont by 2010.)

FairPoint intends to achieve that goal with a technology known as ADSL, which is reportedly faster than DSL and would use Verizon's existing network of copper wires. Leach asserts that ADSL can provide more than 100 channels of video and video-on-demand services to the home.

"We believe it will be a very robust network," Leach says. "It's the quickest and best way to get a good, high-speed product to those people who don't have it now, and it's going to provide very high levels of capacity. We think it makes a lot of sense."

But FairPoint's promises come laden with qualifications and preconditions. Just consider the boilerplate caveats included in the company's January press release: "This press release may contain forward-looking statements that are not based on historical fact . . . Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements."

In other words, your actual mileage may vary.

Not surprisingly, some Vermont lawmakers aren't buying FairPoint's "forward-looking statements." They include Senator Vince Illuzzi [16] (R- Essex/Orleans), who chairs the Economic Development, Housing and General Affairs Committee. Illuzzi is skeptical about FairPoint's plan for DSL in Vermont, which he has variously called "a Band-aid technology" and "a dead-end technology."

"The broadband service FairPoint has promised to offer . . . will be functionally obsolete in five to 10 years," Illuzzi says. "I don't want FairPoint to follow Verizon's business model of investing most of its Vermont net revenues in more lucrative markets, where the return on investment is greater."

Actually, some telecom analysts take Illuzzi's assessment one step further. "DSL is already obsolete on any new build," says Burstein at DSL Prime. "It can't hold its own in a competitive market."

Burstein says he's "outraged" by what FairPoint is offering northern New Englanders. He says state lawmakers should demand the same state-of-the-art fiber network that small towns in Massachusetts are getting - from Verizon, no less, and more speedily than FairPoint has promised to deliver.

Burstein points to another rural, mountainous state - Kentucky - as an example of what Vermonters should expect from Verizon's replacement. Since 2004, ConnectKentucky [17], a not-for-profit public/private consortium, has expanded high-speed broadband accessibility to 93 percent of all Kentucky homes, with plans for 100 percent accessibility by the end of 2007.

"Saying that you're going to get Vermont up to the level of Kentucky - three years later - is not promising anything worth a damn," Burstein says. "That's doing what you should do anyway and trying to get political credit for it."

Burstein admits that his plain-spoken opinions may sound controversial, but says he has the data and academic research to back them up. "The islands off Scotland are at 99 percent [broadband] coverage. Northern Ireland - not a rich territory - is at 100 percent," he adds. "What FairPoint is promising is utter bullshit."

Not everyone who's familiar with this deal is so harsh on FairPoint. David Serra is executive director of the Vermont Enhanced 911 Board [18]. The body oversees and manages the state's emergency 911 network, one of the most technologically advanced in the country. Serra admits that FairPoint will have to "ramp up in a big way" to handle 300,000 subscribers. Based on his own experiences with FairPoint - FairPoint Northland Telephone is a small, rural carrier serving northern Vermont with about 6240 access lines - he thinks the company is up to the task.

"FairPoint has been very good about expanding broadband DSL out to the areas where they serve Vermont," says Serra, himself a former businessman. "I'm not really worried about the broadness of FairPoint's shoulders, because I've seen small companies acquire large companies before. It's a totally doable situation."

Serra has a serious interest in seeing universal broadband coverage in Vermont. Wherever it exists, he says, the 911 system can roll out temporary call centers in the event of a major catastrophe. On that front, Serra has been unimpressed with Verizon's investment in broadband accessibility.

Serra, who lives in Newbury, says his town has the technology to provide DSL services to residents. But Verizon won't throw the switch. "To me, that's almost inexcusable," he says. "The executive director of the 911 board, who's presiding over the first IP-based 911 system in the nation, doesn't have broadband to his home."

Another Upper Valley resident who's keenly following developments in the Verizon/FairPoint deal is Brett Bourne. Bourne's interests are twofold. For one, he's the IT manager of a company called groSolar [19] in White River Junction, which is the fifth largest installer of solar heat and energy systems in the United States. Bourne, who's been in the IT business for 15 years, says he's watched the quality of Verizon's service "take a nosedive" recently, which has hurt his business. But, despite his dissatisfaction with Verizon, Bourne worries that things could be even worse under FairPoint.

Bourne is also president of the Upper Valley Computer Industry Association [20], which claims some 1200 members from Burlington to Nashua, New Hampshire. Several months ago, his group invited Peter Nixon [13], FairPoint's chief operating officer, to give a 20-minute presentation on the Verizon/FairPoint deal. For an hour and a half, Nixon faced tough questioning from business professionals, investment managers, tech experts and union reps. "It was quite phenomenal," Bourne recalls. "Pete stood his ground."

Still, Bourne is not convinced that FairPoint is the best fit for Vermont. "If FairPoint had a wild success record and had huge resources . . . I would feel a lot better about it," he says. "If they can do it, great, and I'll be the first to sign up. But no one's seen it yet."

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The person who's probably taken the closest look at this potential transaction is Ken Peres, a Washington, D.C., economist with the Communication Workers of America. Since 1988, Peres has analyzed numerous mergers and acquisitions on behalf of the unions, including deals involving Verizon, NYTEL, Bell Atlantic and GTE. On January 23, he presented a white paper to the Vermont Legislature claiming that this transaction would pose "significant risks" not only to workers' jobs and livelihoods, but also to the economic health of Vermont.

Peres says his bleak assessment is based on FairPoint's business model. FairPoint, he says, is "one of the most leveraged telecom companies out there" and depends on paying very high dividends to its shareholders. If this deal goes through, FairPoint would be saddled with $1.7 billion in debt - four times the company's current debt load - and another $85 million in dividend commitments. Given that it would leave the company limited cash to deal with unforeseen problems, Peres sees this deal as "a recipe for disaster."

"How are they going to fund operations? What are they going to do?" Peres asks. "This is going to be a cash-strapped company that will be beset by a wave of problems."

But FairPoint's Executive VP Leach dismisses those claims, arguing that the deal would be "conservatively capitalized." He points out that many details of Verizon's revenues in Vermont, Maine and New Hampshire are proprietary information that neither the public nor the unions have seen.

"We'll be taking on more cash flow relative to the debt that we're taking on," Leach says. "I think the right question to ask is not, 'Is this too much debt?' If we're generating $10 billion in revenue, $1.7 billion in debt wouldn't sound like a very big number."

That's not the opinion of one New England telecom executive (who asked not to be identified because of current and future business dealings with Verizon and, possibly, FairPoint). The executive describes Peres' white paper as "a very smart and objective analysis." In this executive's opinion, Vermonters will neither gain much nor lose much if the deal is approved.

On the one hand, FairPoint might pay more attention to Vermont than Verizon did, because the state would represent a much larger percentage of the company's total business. On the other hand, this executive sees FairPoint as "significantly weaker" than Verizon, both financially and institutionally. And this executive seriously doubts that FairPoint would invest much time or resources in upgrading Vermont's broadband network, despite its lip service to the contrary. "They'll fart around the edges and do a little fiddling here and there," the exec says. But Vermonters shouldn't expect to see "fiber-to-the-home" - i.e., state-of-the-art Internet technology - from FairPoint anytime soon, if ever.

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Vermonters may not know much about the nuances of leveraged financing, or care. What emerges clearly from the May 3 PSB hearing, however, is that Vermonters understand and care a great deal about service quality. And assessing FairPoint's track record in this regard doesn't require tapping the often subjective views of industry analysts.

While most Vermonters probably never heard of FairPoint before this deal was announced, the company has had a small presence here for several years. FairPoint Northland, like other local telephone exchanges, is required to report its performance on standards established by the Department of Public Service (DPS).

Consider, for instance, FairPoint Northland's disconnect rate - that is, how often the company disconnects residential customers for failure to pay their bills. Though not a true "performance" measure per se, the disconnect rate reflects the company's willingness to work with consumers who may be hard-pressed to pay up.

In 2004, FairPoint had a disconnect rate of 77.7 per 1000 residential customers. That same year, Verizon had a disconnect rate of 52.3 per 1000. (The statewide weighted average in 2004 for Vermont's 10 phone companies was 59.8 per 1000 lines.) Though clearly not the highest rate in the state, FairPoint's figure was well above average.

A more meaningful gauge of customer satisfaction is how often people pick up the phone and complain. According to DPS figures, FairPoint's rate of consumer complaints last year was 2.4 per 1000 access lines - significantly higher than Verizon's rate of 0.46 complaints per 1000 lines. In 2003, the company had the highest rate of complaints of Vermont's 10 local exchanges - 0.8 per 1000 lines - while Verizon's rate was 0.56 per 1000. It should be noted that, since FairPoint has considerably fewer customers, even one extra complaint per year can significantly boost its annual average.

But if FairPoint encounters tough questions from state regulators about its service record, they're more likely to come from Maine than Vermont. According to a report in the Bangor Daily News, FairPoint's six Maine subsidiaries had the highest rates of complaints for customer service, disconnection and billing problems in both 2005 and 2006.

A 2006 investigation by the Maine Public Utilities Commission found that "more than 2000 customers were affected by billing errors . . . Call answer times frequently exceeded an average of seven minutes, and delays often exceeded 15 minutes." As a result, FairPoint agreed last year to implement a service-quality monitoring plan to track its performance.

For his part, Leach asserts that FairPoint's phone companies have "impressive" customer service records. He points to FairPoint's three local exchanges in New York State, which, he says, have gotten "very high marks" for broadband accessibility and have all received quality service awards. One exchange, he notes, has been so recognized for at least 10 consecutive years.

But anecdotal evidence suggests there may be problems there, too. In June 2003, FairPoint purchased the Berkshire Telephone Corporation, an independent local exchange that serves five communities in Columbia County, New York, with more than 6700 access lines. IT expert Bourne, who grew up in that region, says he knows the former president of the company.

"He warned me explicitly not to expect much from FairPoint," Bourne says. "It was a business model that worked for them, but he didn't see it offered much for their customer base, infrastructure or its employees."

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What can Vermonters do to address such concerns? Experts who were interviewed for this story suggest that, in the event the deal isn't torpedoed and sunk by regulators, Vermont lawmakers and the public should demand strict guarantees and timetables for building out Vermont's broadband network. Jack Hoffman, executive director of the Vermont Broadband Council [21], suggests asking FairPoint how quickly it intends to offer fiber service in Vermont, if at all, and at what price.

Others suggest that the PSB needs to closely examine the financing of this deal and ask for specific guarantees on FairPoint's capital investments, service-quality improvements, rate caps and limits on the amount of debt it incurs and dividends it pays.

Finally, the burden of proof should be on FairPoint, as the small fish swallowing a much bigger fish, to demonstrate that it's not biting off more than it can chew.