201 Brooks Street, P.O. Box 812 Phone: (304) 340-0300 Charleston, West Virginia 25323 Fax: (304) 340-0325
October 30,2020
Connie Graley, Executive Secretary Public Service Cornmission PO Box 812 Charleston, West Virginia 25323
Rl5: CASE NO. 20-0400-T-PC FRONTIER WEST VIRGINIA, INC., AND CITIZENS TELECOMMUNICATIONS COMPANY OF WEST VIRGINIA DBA FRONTIER COMMUNICATIONS OF WEST VIRGINIA
Dear Ms.Graley:
Enclosed for filing in the above-referenced case, please find an original and twelve copies of the following documents:
1. Prefiled Direct Testimony of Terri Blake, Telecom and Cable TV Supervisor; and 2. Prefiled Direct and Rebuttal Testimony of Karen Macon, Director, Utilities Division.
A copy has been served upon all parties of record.
Sincerely,
Linda S. Bouvette Staff Attorney West Virginia State Bar I.D. No. 5926 And Chris Howard West Virginia State Bar I.D. No 8688 LSB/vm Enclosures S:\~Staff~Files\LBouvette\CASES\2020\20-0400-T-P\CoverLetter to Prefiled Testimony.doc PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON
CASE NO. 20-0400-T-PC FRONTIER WEST VIRGINIA, INC., AND CITIZENS TELECOMMUNICATIONS COMPANY OF WEST VIRGINIA DBA FRONTIER COMMUNICATIONS OF WEST VIRGINIA
CERTIFICATE OF SERVICE
I, LINDA S. BOUVETTE, Staff Counsel for the Public Service Commission of West
Virginia, hereby certi& that I have served a copy of the foregoing Stafs Pre-Filed
Testimonies upon all parties of record by First Class United States Mail; postage prepaid and by electronic mail this 30th day of October, 2020.
Joseph J. Starsick, Esq. Associate General Counsel - Southeast Region Frontier West Virginia Inc. 1500 MacCorkle Ave., S.E. Charleston, WV 25396 Email: [email protected]
Torn White, Esq. Consumer Advocate Division 300 Capital Street Suite 8 10 Charleston, WV 25301 Email: [email protected]
Chris Callas, Esq. Counsel, Frontier West Virginia, Inc. P.O. Box 553 Charleston, WV 25322 Email: [email protected] Bobby Lipscomb, Esq. Consumer Advocate Division 300 Capital Street Suite 8 10 Charleston, WV 25301 Email: blipscomb@,cad.state.wv.us
Vincent Trivelli, Esq. Counsel, CWA,AFL-CIO Law office of Vincent Trivelli 324 Simpson Street Morgantown, W 2650 1 Email: [email protected]
West Virginia State Bar I.D. No. 5926
Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 1
1 Q- PLEASE STATE YOUR NAME, OCCUPATION AND YOUR BUSINESS
2 ADDRESS.
3 A. My name is Karen Macon and my business address is 201 Brooks Street, P.O. Box
4 8 12, Charleston, West Virginia 25323.
5
6 Q* BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
7 A. I am employed as the Director of the Utilities Division of the Public Service
8 Commission of West Virginia (Commission).
9
10 Q. WHAT IS YOUR EDUCATION BACKGROUND AND WORK
11 EXPERIENCE?
12 A. I attended West Virginia University and received a Bachelor of Science Degree in
13 Accounting. I am a certified public accountant, and first joined the Commission in
14 July, 1982 as a Finance and Special Studies Analyst in the Utilities Division. In
15 February, 1987, I joined Mountaineer Gas Company as a Regulatory Analyst and in
16 1990 I was promoted to Vice President of Marketing and Regulatory Affairs.
17 Following my stint at Mountaineer Gas, I operated my own natural gas and energy
18 management consulting firm. I rejoined the Commission on June I, 2020, as the
19 Director of the Utilities Division.
1 Of 19 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 2
1
2 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION?
3 A. Yes.
4
5 Q* ARE YOU FAMILIAR WITH THE FILINGS MADE IN THIS CASE?
6 A. Yes. I have read the petition and some of the bankruptcy filings that have been filed
7 with the Commission in this case. I have also reviewed Frontier’s responses to the
8 data requests served by Staff and the Consumer Advocate Division (CAD).
9
10 Q. WHY DID FRONTIER FILE BANKRUPTCY?
11 A. In its direct testimony, Frontier listed a number of reasons for its bankruptcy filing,
12 including changes in market trends and competition, high debt service from
13 acquisitions and the fact that part of its operations are regulated as compared to its
14 competitors. Frontier downplays its own role in failing to recognize market trends
15 such as “cutting the cord;” the cost of its acquisition strategies that resulted in the
16 high debt service; and the fact that Frontier deliberately chose to be regulated by the
17 Commission when it purchased the Verizon system in 2010 and became the carrier
18 of last resort (COLR) in West Virginia.
19
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 3
1
2
3 Q. AS PART OF THE BANKRUPTCY, IS THE COMMON STOCK OF
4 FRONTIER BEING TRANSFERRED TO ANOTHER ENTITY?
5 A. At this point, the common stock of Frontier is worthless and is no longer being
6 traded on the New York Stock Exchange. As I understand the Restructuring
7 Support Agreement and the Debtor’s Bankruptcy Plan of Reorganization, Frontier
8 negotiated with its largest unsecured creditors to take shares in the newly
9 reorganized parent company in exchange for their debt. In doing so, Frontier will
10 shed approximately $10 billion in unsecured debt and $1 billion in annual interest
11 payments in exchange for ownership of the parent company. This transaction
12 qualifies as a transfer of control under W.Va. Code 824-2-12 and requires
13 Commission approval.
14
15 Q* IS FRONTIER DEDICATING THE INTEREST EXPENSE SAVINGS
16 ESTIMATED AT $1 BILLION PER YEAR TO INVESTMENT IN
17 INFRASTRUCTURE?
18 A. No. Frontier has made no commitment to use the interest expense savings, projected
19 to be $1 billion annually, for infrastructure improvements. The information that
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 4
1 will explain how Frontier management will operate the newly reorganized company,
2 including the interest expense savings will most likely be included in the “Virtual
3 Separation” Report and the “Modernization” Report, neither of which will be
4 available until 202 1.
5
6 Q* HOW WILL FRONTIER’S OPERATIONS CHANGE HERE IN WEST
7 VIRGINIA?
8 A. Frontier included reassurances in its petition that the reorganization will have no
9 effect on individual state operations.
10 The Restructuring will not impact the day-to-day operations of the West 11 Virginia Operating Subsidiaries. These entities will continue to fulfill 12 their existing regulatory obligations in West Virginia. No assignment of 13 licenses, assets, or customers will occur in West Virginia as part of the 14 Plan. Following the Restructuring, the West Virginia Operating 15 Subsidiaries will continue to provide service to their existing customers 16 pursuant to their existing rates, terms, and conditions. For all practical 17 purposes, the Restructuring will be imperceptible to their respective 18 customers. In addition, network functionality and customer service will 19 not be impaired or reduced. 20 21 Petition, p. 11. 22 23
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 5
1 Q* IF NOTHING IS CHANGING AT THE LOCAL LEVEL, HOW CAN THIS
2 TRANSACTION BRING SIGNIFICANT PUBLIC INTEREST BENEFITS
3 TO WEST VIRGINIA?
4 A. That’s a good question. The same managers that created the financial crisis in which
5 Frontier finds itself will continue to manage the newly reorganized parent company,
6 along with the subsidiaries, at least until the new Board of Directors determines
7 otherwise. An additional concern is that the Senior Unsecured Noteholders will
8 hold 100% of the shares of the reorganized Frontier parent (other than the 6%
9 included in the Management Incentive Plan). No information has been provided to
10 date that documents whether the new shareholders will want to invest in and grow
11 the reorganized Frontier or monetize their investment through dividends and sales
12 of individual state operations.
13
14 Q. YOU MENTIONED EARLIER THAT THE VIRTUAL SEPARATION
15 REPORT AND THE MODERNIZATION REPORT WILL DETERMINE,
16 TO SOME EXTENT, HOW REORGANIZED FRONTIER WILL
17 OPERATE. WHAT IS VIRTUAL SEPARATION?
18 A. Terri Blake included in her direct testimony the explanation provided by Frontier
19 on virtual separation describing it as an improved accounting and allocation method
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 6
1 designed to better track state by state cost information. As you may be aware from
2 the Focused Management Audit case, Case No. 18-0291 -T-P, Frontier provided no
3 financial information on a state level basis. All revenues are sent directly to the
4 corporate headquarters and expenses are allocated according to a formula. Virtual
5 separation will provide a tracking mechanism for all revenues and expenses on a
6 state by state basis, making it easier to determine which state operations are
7 profitable, which ones are not and whether a particular service is generating
8 revenue. This information will allow the new Board of Directors to determine how
9 best to operate the state operations to maximize revenue. The information can also
10 be used to market certain state operations for sale. Frontier has already announced
11 in one of its recent SEC Form 8-K filings its intent to complete an asset sale
12 evaluation.
13
14 Q. DOES VIRTUAL SEPARATION INVOLVE ANYTHING ELSE?
15 A. Yes. Frontier will use the accounting information to identi@ Frontier’s state
16 operations as either an ImproveCo or an InvestCo company, with the ImproveCo
17 state operations consigned to improving, repairing and maintaining their outdated
18 copper networks for landline and broadband services while InvestCo state
19 operations will receive capital funding to expand service through fiber optic lines.
6 of 19 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 7
1
2 Q* HAS WEST VIRGINIA BEEN IDENTIFIED AS AN IMPROVECO OR AN
3 INVESTCO COMPANY?
4 A. Frontier has not yet identified which state operations are assigned the ImproveCo or
5 InvestCo designations. That information will not be available until sometime in
6 202 1 according to filings made in the bankruptcy and in this case. In the event West
7 Virginia receives the ImproveCo designation, then Frontier should be required to
8 (1) inform the Commission of this designation; and (2) provide evidence that the
9 annual capital budget set for the state is sufficient to improve landline service along
10 with broadband service within Frontier’s service territory.
11
12 Q. WHAT RELIEF IS FRONTIER SEEKING IN THIS CASE?
13 A. Frontier’s petition is seeking approval under W.Va. Code 524-2-12 for a change in
14 control.
15 Unless the consent and approval of the Public Service Commission of 16 West Virginia is first obtained.. .(g) no person or corporation, whether or 17 not organized under the laws of this state, may acquire either directly or 18 indirectly a majority of the common stock of any public utility organized 19 and doing business in this state. 20
21
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 8
1 Q* WHAT IS THE STANDARD OF PROOF REQUIRED UNDER W. VA.
2 CODE §24-2-12?
3 A. The Commission must make three separate findings. First, the Commission must
4 determine whether the terms and conditions of the transaction are reasonable.
5 Second, the Commission must determine that neither party has an undue advantage
6 over the other. Finally, the Commission must determine that the transaction does
7 not adversely affect the public in the state.
8
9 Q* WHAT DOES THE COMMISSION CONSIDER IN DETERMINING
10 WHETHER IT SHOULD APPROVE THE TRANSACTION PROPOSED BY
11 FRONTIER?
12 A. My understanding is that the Commission considers all relevant issues relating to a
13 proposed transaction in applications seeking approval under W.Va. Code 524-2- 12.
14
15 Q. SHOULD THE COMMISSION CONSIDER FRONTIER’S FAILURE TO
16 PROVIDE AND EXPAND BROADBAND SERVICE IN WEST VIRGINIA?
17 A. I believe it is a relevant issue for the Commission to consider because Frontier made
18 representations about expanding broadband service in its West Virginia service area.
19 And while Frontier claims it has met that commitment, the Commission has received
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 9
1 numerous complaints about lack of service and service that does not meet the federal
2 standards of 25/3 bps. Frontier made the following specific commitments in the
3 Verizon sale case, Case No. 09-087 1-T-PC.
4 3. Frontier shall make an additional capital investment of at least $48 5 million beyond the investments set forth in condition 2 above to 6 increase broadband deployment and subscription in the Verizon WV 7 service area. Any federal stimulus funding that Frontier obtains for 8 broadband services in Verizon WV service areas shall not be used to 9 meet or offset this capital investment requirement. 10 11 4. Frontier shall expand broadband availability in Verizon W service 12 areas. Frontier shall develop and implement a West Virginia 13 Broadband Program for the deployment of broadband facilities such 14 that by no later than end of the fourth year following closing, access 15 to broadband service shall be available to no less than 85% of the 16 households within the Verizon WV service areas. 17
18
19 Q. DO YOU BELIEVE THE TERMS AND CONDITIONS OF THE
20 TRANSACTION ARE REASONABLE?
21 A. Yes, If the transaction is as described, Frontier will reduce its debt load by $10
22 billion and its annual interest payment by $1 billion. The $1 billion previously paid
23 out as interest would then be available to invest in Frontier’s infrastructure. My
24 strongest concern is the impact the “virtual separation” may have on subsidiaries
25 like West Virginia where Frontier’s rate of return may not be as high as it is in larger
9of 19 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 10
1 states. If West Virginia is designated an ImproveCo company, then it must receive
2 an increase in its capital budget to make the necessary repairs and maintenance to
3 its copper network and meet all the other requirements imposed by the Commission
4 as part of the Focused Management Audit in Case No. 18-0291-T-P.
5
6 Q. DID YOU FIND ANY EVIDENCE THAT ONE PARTY HAS UNDUE
7 INFLUENCE OVER THE OTHER?
8 A. This appears to be a transaction that Frontier has been evaluating for a number of
9 months. The Direct Testimony of Carlin Adrianopolis indicates that Frontier spent
10 months negotiating the terms and conditions of the Restructuring Support
11 Agreement which appears to be the basis for the Chapter 11 bankruptcy filing. I do
12 not believe that any one party has undue influence over the other. There are a vast
13 number of unsecured creditors involved in the negotiations so no one creditor has a
14 greater interest in the resolution than another unsecured creditor.
15
16 Q. DO YOU BELIEVE THE TRANSACTION ADVERSELY AFFECTS THE
17 PUBLIC INTEREST?
18 A. I do not believe the proposed restructuring adversely affects the public interest as
19 presented but I do believe that certain conditions should be imposed as part of the
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 11
1 Commission’s approval in this case. Reducing the interest expense paid by Frontier
2 and its subsidiaries by $1 billion annually will generate additional funds that can be
3 used for capital improvements, including the expansion of fiber and repair and
4 improvement to copper networks. My only concern is that the Company has yet to
5 determine how the reorganized Frontier will operate once it exits bankruptcy since
6 the “Modernization Report” and the “Virtual Separation Report” are not yet
7 complete.
8
9 REBUTTAL TESTIMONY
10
11 Q* H, ‘E 0 REVIEWED THE DIRECT TESTIn 3NY OF A sa
12 ELLIS, CARLIN ADRIANOPOLIS AND MARK NIELSEN?
13 A. Yes, I have reviewed their testimonies filed in the record on October 2 1,2020.
14
15 Q* MS. ELLIS CLAIMS THAT APPROVAL OF THE RESTRUCTURING
16 SHOULD NOT BE CONDITIONED ON ALLOCATIONS OF CAPITAL
17 FOR SERVICE QUALITY IMPROVEMENTS OR FOR FIBER OPTIC
18 DEPLOYMENT. DO YOU AGREE WITH HER? Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 12
1 A. No. I think it is appropriate for the Commission to condition its approval on
2 protecting and ensuring the quality of service that Frontier’s customers in West
3 Virginia will receive post-restructuring. Although Frontier assures the Commission
4 that the status quo will continue for its West Virginia customers, the status quo is
5 no longer acceptable. West Virginia customers deserve landline service that works
6 24 hours per day, 365 days per year. West Virginia customers deserve a landline
7 service that will allow them to call 9 1 1 for emergency service 24 hours per day, 365
8 days per year. The status quo has prevented that from happening for a great number
9 of Frontier’s West Virginia customers over the past several years. The copper
10 network must be repaired, improved and maintained.
11
12 Q. MS. ELLIS CLAIMS THAT NO SERVICE QUALITY CONDITIONS ARE
13 REQUIRED TO MITIGATE ANY SPECIFIC RISKS ARISING FROM THE
14 RESTRUCTURING. IS THIS A TRUE STATEMENT?
15 A. I don’t believe Ms. Ellis can make that claim since the “Modernization Report” and
16 the “Virtual Separation Report” are not yet complete. Unless Frontier management
17 and its attorneys are being less than truthfil, there are a large number of “unknowns”
18 that could adversely affect the quality of service that West Virginia landline and
19 broadband customers receive from Frontier following the Restructuring. Placing
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 13
1 conditions on its approval of the Restructuring allows the Commission to protect
2 West Virginia customers from those potential adverse unknowns.
3
4 Q* MS. ELLIS CLAIMS THAT IF THE COMMISSION PLACES
5 CONDITIONS ON ITS APPROVAL, IT COULD AFFECT THE WEST
6 VIRGINIA OPERATIONS’ ABILITY TO EMERGE FROM
7 BANKRUPTCY.
8 A. None of the conditions proposed by Staff are onerous. Most are requirements to
9 keep the Commission informed as to the progress of the Restructuring, including
10 providing a copy of the final versions of the “Modernization Report”, the “Virtual
11 Separation Report” and dividend policy. There are other conditions that address the
12 financial condition of the West Virginia operations - but with the improved
13 accounting resulting from the Virtual Separation, that information should be easy to
14 provide.
15
16 Q. STAFF HAS ALSO RECOMMENDED CONDITIONING APPROVAL ON
17 MAINTAINING AT LEAST THE 2019 CAPITAL BUDGET INVESTMENT
18 AMOUNT FOR THE YEAR 2021 AND BEYOND. IS THAT
19 UNREASONABLE?
13 of 19 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 14
1 A. Of course not. Like all Frontier operating companies, the West Virginia operations
2 will have a capital budget for 2021 and beyond. Staff contends that the capital
3 budget for 202 1 and subsequent years should not be less than the 20 19 capital budget
4 in light of the work Frontier must do to repair and improve the copper network and
5 meet the requirements imposed by the Commission in the Focused Management
6 Audit case. West Virginia customers deserve 24/7 landline service. That is going
7 to require investment by Frontier for repairs and improvements. To imply that Staff
8 is being unreasonable with such a recommendation - is ludicrous.
9
10 Q. MS. ELLIS ALSO CLAIMS THAT THE COMMISSION IS WITHOUT
11 JURISDICTION TO MANDATE FIBER-TO-THE-HOME (FTTH) OR
12 OTHER INVESTMENT FOR INTERNET SERVICE. IS THIS YOUR
13 OPINION AS WELL?
14 A. I agree with Ms. Ellis to the extent that the Commission’s jurisdiction over
15 Frontier’s broadband services is limited and based on the conditions placed on the
16 Verizon sale in Case No. 09-087 1-T-P. Staff questions whether those conditions
17 have been met based on the number of complaints received over the past several
18 years regarding the unavailability of broadband service in Frontier’s service area
19 and the poor quality of broadband service being provided by Frontier. While Ms.
14 of 19 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 15
1 Ellis claims that Frontier is committed to improving its network and broadband
2 services, Staff has seen little evidence of improvement.
3
4 Q+ HAVE YOU REVIEWED MR. NIELSEN’S DIRECT TESTIMONY FILED
5 IN THIS CASE ON OCTOBER 21,2020?
6 A. Yes I have.
7
8 Q* WAS THERE ANYTHING CONCERNING IN THAT TESTIMONY?
9 A. Yes, on page 12 of his testimony, Mr. Nielsen notes that Frontier’s revenues in West
10 Virginia are declining at a fast rate: a 5.1% decline in overall revenues between
11 20 18 and 20 19 and 7.9% decline in voice revenues.
12
13 Q. TO WHAT WOULD YOU ATTRIBUTE THOSE DECLINES?
14 A. I believe it is the poor quality of service in both its landline and broadband service.
15 Frontier’s reputation for poor quality of service leads customers to seek alternatives
16 to its landline and broadband services. Unfortunately, not all West Virginia
17 customers have an alternative to Frontier’s landline and broadband services and are
18 forced to endure long outages and disruptions.
19
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 16
1 Q. MR. NIELSEN NOTES THAT BEING THE “CARRIER OF LAST
2 RESORT” (COLR) IS BURDENSOME.
3 A. What Mr. Nielsen fails to note is that this overly burdensome position is one
4 that Frontier placed itself in when it purchased Verizon’s assets. Case No. 09-087 1-
5 T-PC, Frontier Communications Corporation and Verizon West Virginia, Inc., et.
6 al., Commission order entered May 13,2010.
7 The practical effect of this Transaction will be to vest Frontier with 8 the vast majority of ILEC service in West Virginia. While most wire 9 centers do have some form of competition, Frontier will be a 10 necessary component of most landline telephone service. Therefore, 11 the Commission designates Frontier as a carrier of last resort that 12 provides service to customers in the event that a competing landline 13 ceases to provide local or IXC service. Any such service assumed by 14 Frontier at the request of a customer or the Commission will be 15 provided at the then current Frontier rate for the assumed service. 16 17 Order, page 28. It hrther claimed in its application that it was familiar with and quite
18 capable of providing landline service to rural communities.
19 Frontier already has a proven track record of success in serving rural 20 communities and smaller to moderately sized cities, including its existing 21 service areas in West Virginia. 22 23 Application, page. 2.
24
25
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 17
1 Q* ON PAGE 34 OF HIS TESTIMONY, MR. NIELSEN STATES THAT THE
2 COMPANY WILL ANNUALLY ASSESS HOW TO MODIFY AND
3 IMPROVE ITS CAPITAL AND OPERATING INVESTMENTS. DOES
4 THAT CAUSE YOU CONCERN?
5 A. Yes, in that repairs and improvements to West Virginia’s copper network is a long-
6 term project that will be completed over a number of years. To think that progress
7 on those repairs and improvements may be stalled by inadequate annual assessments
8 of capital investment is of great concern. That’s why Staff feels it is imperative that
9 the Commission impose a condition on investment in West Virginia to ensure that
10 the capital is available to complete these repairs and improvements.
11
12 Q- MR. NIELSEN RAISES THE SAME CONCERN OF MS. ELLIS THAT
13 CONDITIONING APPROVAL OF THE RESTRUCTURING MAY RESULT
14 IN THE REORGANIZATION TO FAIL. DO YOU HAVE A RESPONSE?
15 A. Yes. If requiring Frontier to invest in West Virginia at its 2019 capital budget
16 amount in 2021 and beyond will cause a $10 billion deal to collapse, then it wasn’t
17 much of a deal after all. Frontier will authorize a capital budget for West Virginia
18 for 2021 - Staff wants to ensure that it is at least adequate to maintain the copper
19 network and make some needed repairs. This condition represents less than 2% of
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 18
1 the $1 billion in interest expense savings that Frontier will gain with the
2 Restructuring.
3
4 Q. DO YOU HAVE ANY RECOMMENDATIONS FOR THE COMMISSION?
5 A. Yes, I do. I recommend that the Commission condition its approval of the
6 transaction on the following:
7 a. Frontier is to provide the Commission a copy of the Virtual Separation 8 Report upon completion, indicate which companies are designated InvestCo and 9 whether they have public funds available to them. Further, if West Virginia is 10 assigned to the ImproveCo group, then Frontier should provide evidence that the 11 capital budget provided is sufficient to improve landline service along with 12 broadband service within Frontier’s service territory. 13 14 b. Frontier is to provide complete financial statements for both West Virginia 15 operations, showing both pre- and post-Virtual Separation. 16 17 c. Frontier must commit that it will not use public funds as a substitute for 18 capital investment in West Virginia but that any public funds it receives from any 19 source will be in addition to any capital investment from the parent. 20 21 d. Frontier is to provide an annual capital budget with monthly updates showing 22 capital expenditures. At a minimum, the annual capital budget shall not be less than 23 the amount invested in 2019. 24 25 e. Frontier is to report on when it placed RDOF bids, the dollar amount of its 26 bids, and the specific areas in which it placed bids. 27 28 f. Frontier is to provide a West Virginia specific report on each modernization 29 item contained in the Modernization Report. 30
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DIRECT AND REBUTTAL TESTIMONY OF KAREN MACON PAGE NUMBER 19
1 g. Frontier is to continue meeting all current and Focused Management Audit 2 imposed service quality metria and make a firm commitment that it will provide 3 the capital funds needed to immediately make the necessary repairs, changes and 4 improvements identified in the Focused Management Audit as so ordered by the 5 Commission in Case No. 18-0291 -T-P. 6 7 h. Frontier is to report variances between the amounts shown on the projected 8 spend versus actual achieved results with explanations for any differences. The 9 initial report should be provided upon emergence from bankruptcy and then 10 annually thereafter. 11 12 i. Frontier is to provide a copy of any dividend policy adopted by the board of 13 directors of the reorganized Frontier. 14 15 j. Frontier shall submit documentation that it has complied with conditions 3 16 and 4, including meeting the federal standard of 25/3 bps of the Verizon sale order 17 entered in Case No. 09-078 1-T-PC. 18 19 k. Frontier shall report any change in the number or location of business offices 20 in West Virginia. 21 22 1. Frontier shall report any negative changes in the number of employees or 23 employee positions in West Virginia. 24 25 m. Frontier shall provide notice when the Restructuring is complete. 26 27 n. Frontier will not allocate any of the bankruptcy and Restructuring costs to 28 the West Virginia operations. 29
30 Q. DO YOU HAVE ANYTHING ELSE TO ADD TO YOUR TESTIMONY?
31 A. No.
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Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT TESTIMONY OF TERRI U. BLAKE, PAGE NUMBER 1
PLEASE STATE YOUR NAME, OCCUPATION AND YOUR BUSINESS
2 ADDRESS.
3 A. My name is Terri U. Blake and my business address is 201 Brooks Street, P.O.
4 Box 812, Charleston, West Virginia 25323.
5
6 Q* BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
7 A. I am employed as the Telecom/Cable TV Supervisor in the Utilities Division of
8 the Public Service Commission of West Virginia (Commission).
9
10 Q. WHAT IS YOUR EDUCATION BACKGROUND AND WORK
11 EXPERIENCE?
12 A. I attended West Virginia University and received a Bachelor of Science Degree in
13 Electrical Engineering in 1987. I began employment with C&P Telephone
14 Company in June 1987 as an Engineer. I remained employed there as the
15 company changed to Bell Atlantic, Verizon, and finally Frontier in 2010. I left
16 Frontier in October of 20 18 and started working for the Commission in that same
17 month at my present position. During the 31 years and 4 months I worked for the
18 “telephone company”, I worked in outside plant engineering, switch planning,
19 translations, project management/database conversion, safety coordination, central Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 2
1 office supervising, resource supervising, and for the entire time the company was
2 Frontier, I worked in the dispatch center.
3 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION?
4 A. No.
5
6 Q* ARE YOU FAMILIAR WITH THE FILINGS MADE IN THIS CASE?
7 A. Yes. I have read the petition and some of the bankruptcy filings that have been
8 filed with the Commission in this case. I have also reviewed Frontier’s responses
9 to the data requests served by Staff and the Consumer Advocate Division (CAD).
10
11 Q. DID STAFF FILE A FINAL RECOMMENDATION IN THIS CASE?
12 A. Yes it did. Staff recommended that the petition seeking approval under W.Va.
13 Code 924-2-12 be approved subject to the condition that a commitment is made to
14 ensure adequate funds are available to Frontier to immediately implement the
15 recommendations of the Focused Management Audit as may be imposed by the
16 Commission in Case No. 18-029 1-T-P. Further, the Commission’s approval
17 should incorporate Frontier’s Commitment to “meeting applicable service quality
18 metrics [both existing and those imposed pursuant to the Audit] and undertake
19 steps in the ordinary course of its business to address service quality.”
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DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 3
1
2 Q* DID STAFF MAKE AN ADDITIONAL RECOMMENDATION TO THE
3 COMMISSION?
4 A. Yes, it did. Staff noted that social media was raising concerns regarding Frontier’s
5 plans for “virtual separation” and followed up with data requests attempting to
6 ascertain exactly what “virtual separation” was and how it may affect the state of
7 West Virginia and Frontier’s customers, both existing and potential. Staff
8 recommended to the Commission that it refrain from approving the transaction
9 until Frontier provides reassurances that West Virginia will be included as one of
10 the states where fiber will be deployed to homes. Staff further recommended that
11 Frontier be required to provide adequate assurances that sufficient funds are
12 available to immediately implement the recommendations of the Focused
13 Management Audit as may be imposed by the Commission in Case No. 18-0291-
14 T-P. Finally, the Commission’s approval should incorporate Frontier’s
15 commitment to “meeting applicable service quality metrics [both existing and
16 those imposed pursuant to the Audit] and undertake steps in the ordinary course of
17 its business to address service quality.”
18 Case Number: 20-0400-T-PC Frontier West Virginia, Inc. and Frontier Communications of America, Inc. and Citizens Telecommunications Company of West Virginia dba Frontier Communications of West Virginia
DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 4
1 Q. HOW DID FRONTIER RESPOND TO THESE FURTHER
2 RECOMMENDAITONS?
3 A. Frontier stated that the Commission should reject Staff*s recommendation for
4 additional fiber deployment, which is founded on a misunderstanding of the
5 “virtual separation” process, and proceed to expeditiously approve the Company’s
6 Petition.
7
8 Q- DID FRONTIER OFFER AN EXPLANATION OF “VIRTUAL
9 SEPARATION?
10 A. Yes. In its response to the Staff Second Final Joint Memorandum, Frontier stated
11 “Virtual separation is a financial analysis exercise currently being undertaken by
12 the Company to create more accurate operating financial revenue and expense data
13 and to set up reporting mechanisms to better track information across Frontier’s
14 25-state footprint, including West Virginia. It is not a methodology for a physical
15 separation of Frontier’s assets and will not impact the external financial or
16 regulatory reporting completed by Frontier. Rather, it is intended to enable the
17 business to better understand economic and financial data specific to the
18 Company’s operations .”
19
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DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 5
1 Q. DO YOU HAVE ANY REASON TO DOUBT FRONTIER’S
2 EXPLANATION OF “VIRTUAL SEPARATION’?
3 A. Yes, In the Restructuring Support Agreement, “virtual separation” is described as
4 follows:
5 The Debtor [Frontier] will use commercially reasonable best efforts to 6 provide a detailed report by no later than the Plan Effective Date 7 detailing analysis and development of the following: 8 9 0 A virtual separation under the same ownership structure of select 10 state operations where the reorganized Debtors will conduct fiber 11 deployments (“Investco”) from those state operations where the 12 reorganized Debtors will perform broadband upgrades and 13 operational improvements (“ImproveCo”), with such allocation of 14 state operations to be reasonably acceptable to the Company 15 Parties and the Required Consenting Noteholders (the “Virtual 16 Separation”), such that the Reorganized Frontier Board (as 17 defined below) may, at its determination, adopt and implement 18 the Virtual Separation at any time on or after the Plan Effective 19 Date; and 20 21 An internal revenue and cost sharing model based around the 22 Virtual Separation. 23 24 Frontier’s response seems to address the second bullet point from the
25 Restructuring Settlement Agreement but it does not address the actual separation
26 of the Frontier subsidiaries into companies that will invest in fiber (“InvestCo”)
27 and companies that will continue with improvements and repairs to copper
28 networks that provide landline and broadband services (“ImproveCo”).
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DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 6
1 Q* WHAT IS YOUR CONCERN WITH “VIRTUAL SEPARATION” AND
2 THE “IMPROVECO” AND “INVESTCO” TERMINOLOGY?
3 A. In the Focused Management Audit case (Case No. 18-0291 -T-P), Frontier
4 disclosed that its broadband services business generates more revenue than its
5 landline services in West Virginia. Frontier indicated that this dichotomy is true
6 throughout the 25 states in which it operates based on its testimonies filed in
7 California and Connecticut PUC proceedings on the Restructuring.
8 Frontier claims that West Virginia’s rural nature and rough terrain makes it
9 difficult to install, maintain and repair its copper network which adversely affects
10 its ability to provide quality landline services. Staff is concerned that Frontier will
11 use the “virtual separation” analysis to minimize investment in West Virginia in
12 favor of other state operations where it can possibly earn a higher rate of return,
13 West Virginia’s landline and broadband services will suffer from a lack of
14 investment for improvement and repairs.
15
16 Q. WHAT IS STAFF RECOMMENDING?
17 A. As stated in its Second Joint Memorandum, Staff wants Frontier to designate West
18 Virginia as an InvestCo company so that it is assured of investment dollars from
19 the parent company. In addition, Staff recommended that the Commission require
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1 a firm commitment from Frontier that it will provide the capital hnds needed to
2 make the necessary repairs, changes and improvements identified in the Focused
3 Management Audit and as so ordered by the Commission. The Commission must
4 take action in this case and in the Audit case to ensure that West Virginia does not
5 fall further behind in providing quality landline service and internet availability
6 throughout the state.
7
8 Q. IS STAFF CONCERNED THAT THE CONDITIONS PLACED ON
9 FRONTIER IN THE AUDIT CASE (18-0291-T-P) WILL BE
10 INSUFFICIENT TO ENSURE THAT FRONTIER’S CUSTOMERS WILL
11 HAVE QUALITY LANDLINE AND INTERNET SERVICE?
12 A. Staff is concerned that Frontier’s parent will not invest sufficient capital in West
13 Virginia to adequately repair and maintain the copper network so that quality
14 landline service is available to its customers. Frontier noted in its filings that the
15 number of landlines has dramatically decreased over the past ten (10) years with
16 no slowing of that decrease. Frontier also noted that it has lost money in West
17 Virginia for the past decade and that its broadband services is providing the
18 majority of its revenues in West Virginia.
19
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DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 8
1 Q. WHY SHOULD THE COMMISSION BE CONCERNED ABOUT 2 “VIRTUAL SEPARATION” SINCE IT DOES NOT REGULATE 3 INTERNET SERVICES? 4 5 A. The Commission noted in its order denying intervention status to the West
6 Virginia Broadband Council in this case that its
7 “jurisdiction over Frontier’s broadband service is very narrow and 8 limited insofar as it stems from Case No. 09-0871-T-PC in which the 9 Commission noted the differences between the Verizon West Virginia 10 Inc. business plan to de-emphasize landline service and the Frontier 11 plan to focus on reducing the losses in landline subscribers.” 12 13 Order entered September 16, 2020. The Commission must exercise the
14 jurisdiction it has to ensure that Frontier’s commitment to West Virginia to install
15 broadband services into areas where Verizon was not willing to make a financial
16 commitment are fulfilled in addition to ensuring that Frontier adequately repairs
17 and maintains its copper network and continues to employ an adequate workforce
18 to repair and maintain this network so our citizens dependent on Frontier’s service
19 have working telephones and broadband internet services.
20
21 Q. DO YOU HAVE ANY RECOMMENDATIONS FOR THE COMMISSION
22 OTHER THAN THOSE INCLUDED IN THE STAFF MEMORANDA YOU
23 REFERENCED IN YOUR TESTIMONY?
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DIRECT TESTIMONY OF TERRI U. BLAKE PAGE NUMBER 9
1 A. Yes, I adopt the recommendations set forth in the Direct and Rebuttal Testimony
2 of Karen Macon. For the past three years we have been working with attorneys
3 for Frontier in an attempt to resolve quality of service issues, who at every turn are
4 attempting to limit Frontier’s commitment to improve landline and broadband
5 services to its West Virginia customers. During the entire time, we have heard
6 virtually nothing from Frontier’s actual management regarding its commitment to
7 provide quality landline and broadband services. It’s time for management to quit
8 hiding behind its attorneys and start addressing the quality of service issues
9 prevalent throughout Frontier’s service area.
10
11 Q. DO YOU HAVE ANYTHING ELSE TO ADD TO YOUR TESTIMONY?
12 A. No.
13
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