The Law Office of Vincent Trivelli, PLLC 178 Chancery Row Morgantown, West Virginia 26505 Phone (304) 291-5223 Toll Free 1-866-266-5948 November 16,2009 Fax (304) 291-2240 E-mail: [email protected] (Via Hand Delivery)
Ms. Sandra Squire, Executive Secretary Public Service Commission of West Virginia P. 0. Box 812 201 Brooks Street Charleston, WV 25323
RE: Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia, Inc. Case No.09-0871-T-PC Dear Ms. Squire:
Enclosed for filing in the above-styled and numbered case, please find the original and twelve (12) copies of the following:
1. Public (Redacted) Version of the Direct Testimony of Randy Barber on Behalf of the Communications Workers of America, AFL-CIO;
3. Public (Redacted) Version of the Direct Testimony of Susan M. Baldwin on Behalf of the Communications Workers of America, AFL-CIO; and
2. Direct Testimony of John Pusloskie on Behalf of the Communications Workers of America, AFL-CIO.
Copies have been served this date upon the parties of record via U. S. mail as indicated by the Certificates of Service.
Also enclosed is one copy each of the PROPRIETARY VERSIONS of the Direct Testimony of Randy Barber on Behalf of the Communications Workers of America, AFL- CIO and Direct Testimony of Susan M. Baldwin on Behalf of the Communications Workers of America, AFL-CIO which are being filed under seal in this case. Copies of these Proprietary versions will be sent to parties of record who have executed a Protective Agreement in this matter.
If you have any questions, please feel free to contact me at (304) 291 -5223.
Thank you. n
West Virginia Bar #80 15 Enclosures Cc: All parties of record PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON
Case No. 09-0871-T-PC
Citizens TelecommunicationsCompany of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. Joint Petition for consent and approval of the transfer of Verizon’s local exchange and long distance business in West Virginia to companies to be owned and controlled by Frontier Communications
Direct Testimony of Randy Barber on Behalf of the Communications Workers of America, AFL-CIO
November 16,2009
PUBLIC (REDACTED) VERSION Table of Contents Introduction ...... 1 Background ...... 2 Organization of Testimony ...... 5 Summary of Testimony ...... 5 Overview of Application and Document Review ...... 7 Concerns with Frontier and the Proposed Transaction: Unrealistic Savings and Illusory Benefits ...... 12 Frontier Lacks Financial Fitness: Frontier’s Unsustainable, High-Risk Business Model ...... 17 A Frontier Acquisition Would Significantly Weaken VSTO (Verizon’s Operations in West Virginia and 13 Other States)...... 30 Frontier’s Highly Aggressive And Unrealistic Financial Projections Risk Overestimating Future Revenues And Underestimating Future Expenses, Possibly By Significant Amounts 34 Frontier Plans to Reduce Capital Expenditures ...... 49 Putting it Together: Frontier is Not Financially Fit to Own and Operate VSTO ...... 55 Conclusion ...... 60 Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
1 INTRODUCTION
2 Q. Please state your name and business address.
3 A. My name is Randy Barber. My office address is: Suite 204,6935 Laurel Avenue,
4 Takoma Park, Maryland 209 12.
5 Q. By whom are you employed and in what capacity?
6 A. I am employed by the Center for Economic Organizing and serve as its president.
7 Q. On whose behalf are you testifying in this case?
8 A. I am testifj4ng on behalf of the Communications Workers of America.
9 Q. Why is CWA interested in this case?
10 A. CWA represents approximately 1,750 employees of Verizon-WV and a number of
11 employees of Frontier. These employees represented by CWA include operators,
12 consultants, and system technicians who work to provide telecommunications service in
13 West Virginia. CWA is concerned about the financial health of its employer, as well as
14 the employer's ability and commitment to safely and reliably operate and maintain that
15 company's telecommunications network in West Virginia.
16 Q. Have you been engaged to offer expert analysis and testimony on the proposed
17 Frontier-Verizon transaction in other regulatory proceedings?
18 A. Yes. I have been jointly retained by CWA and the International Brotherhood of Electrical
19 Workers ("IBEW") to provide analyses and testimony concerning this proposed
1 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
20 transaction. I expect to participate in the unions’ interventions before commissions in
21 several other states.
22 BACKGROUND
23 Q. When you were engaged by CWA on this case, what were you asked to do?
24 A. I have been asked to provide expert analysis and testimony, focusing on financial issues.
25 Q. Do you have experience in rendering that type of opinion as an expert witness?
26 A. Yes. While I do not specialize in being an expert witness, I have performed that function
27 on several occasions, and I have assisted experts and attorneys in the financial and
28 analytical aspects of judicial, quasi-judicial and regulatory proceedings. Most relevantly,
29 I served as the financial expert for CWA and the IBEW in two recent telecommunications
30 transactions: Fairpoint Communications’ acquisition of Verizon’s Northern New
31 England landline business, and the merger of Embarq and CenturyTel that formed
32 CenturyLink.
33 Q. What in your educational and employment background has qualified you to provide
34 an expert opinion on financial issues such as those presented in this case?
35 A. After attending Dartmouth College, I have worked as a financial consultant for more than
36 25 years. I specialize in complex financial and operational analyses of companies and
37 industries, sometimes in the context of collective bargaining, other times in support of
38 clients’ strategic or policy interests. My clients tend to be labor unions and pension
39 funds. I also regularly analyze a wide range of issues impacting specific employee benefit
2 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
40 plans. Among the companies that I have analyzed are Alcatel, Avaya, AT&T, Boeing,
41 Catholic Healthcare West, Celestica, CenturyTel, Columbia/HCA, Eastern Air Lines,
42 Edison Schools, Embarq, Fairpoint Communications, Idearc, Lucent Technologies, MCI,
43 Oregon Steel, Qwest, RH Donnelley, Sprint, Sylvan Learning Systems, Texas Air
44 Corporation, TIAA-CREF, United Air Lines, the United States Postal Service, Verizon,
45 and Wal-Mart. More broadly, I have provided clients with various analyses of such
46 industries as aerospace manufacturing, air transport, for-profit education, newspaper
47 publishing, off-road vehicle manufacturers, and telecommunications and internet access
48 and content providers.
49 In addition, I have performed a wide range of analyses of private sector pension
50 plans and public employee retirement systems across the country. These include
51 investigations into factors associated with under-funding, integration of two or more
52 benefit plans, efforts to improve the operations of benefit plans, evaluations of proposed
53 investment and funding mechanisms, and proposals to convert defined benefit plans into
54 defined contribution plans. A number of the activities mentioned above have taken the
55 form of joint labor-management initiatives in which I served as the union expert, paired
56 with one or more management experts. Some of these projects included work with
57 AT&T, Lucent Technologies, and the League of Voluntary Hospitals and Nursing Homes
58 (New York City and environs).
3 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
59 Q. Please summarize your experience as an expert financial witness.
60 A. As mentioned above, I was an expert financial witness in the FairPointNerizon
61 transaction before the regulatory commissions in Maine, New Hampshire, and Vermont.
62 In addition, I have testified as an expert witness (either at trial or by deposition) in several
63 judicial proceedings and arbitrations. These have included, for example, a class action
64 law suit involving A.P. Moller-MaersWBTT, a National Mediation Board Single Carrier
65 proceeding, the Big Sky Airlines Bankruptcy, and an Examiner's Investigation into the
66 Bankruptcy of Eastern Air Lines. I have also served as an expert consultant in various
67 proceedings where it was not necessary for me to test@, such as an airline fitness
68 investigation involving ATX, a cross-border airline merger investigation (American
69 Airlines-Canadian Airlines), and a major CWA/AT&T arbitration.
70 Q. What is the scope of your testimony?
71 A. I am advised by counsel that the West Virginia Supreme Court of Appeals has long held
72 that the primary purpose of the PSC is to "serve the interests of the public". In addition,
73 as this Commission noted in its Order of July 23,2009 in this matter, in order to
74 consent to this proposed acquisition the Commission "must find that the terms of and
75 conditions of the transactions are reasonable, that neither party is given an undue
76 advantage over the other, and that the transactions do not adversely affect the public in
77 this state."'
1 Order at page 3. see W.Va. Code section 24-2-12 4 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871 -T-PC
78 79 Generally, I refer to this as the question of Frontier’s financial fitness to own and operate
80 Verizon’s landline business in West Virginia. I also discuss the risk that Frontier will not
81 attain the synergies -- as well as the revenues -- upon which the success of the proposed
82 transaction rest.
83 ORGANIZATION OF TESTIMONY
84 Q. How is your testimony organized?
85 A, The first part of my testimony contains an analysis based on publicly available
86 information. The next section expands on this analysis, based on purportedly
87 Confidential information provided by either Verizon or Frontier. Finally, I set forth
88 recommendations for the Commission’s consideration.
89 SUMMARY OF TESTIMONY
90 Q. Please summarize your major findings and recommendations.
91 A. My findings are summarized as follows:
92 1. Frontier is not fit to assume ownership and control of the Verizon Separate Telephone
93 Operations. Frontier has relied upon quite aggressive revenue and expense assumptions to
94 justifj the transaction internally.
95 2. If Frontier falls significantly short of its revenue and expense goals, it would likely
96 come under severe pressure to reduce service-related spending, cut capital expenditures,
97 and lower its dividend payments, probably a combination of all three.
5 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
98 3. Given the potential for such a failure in Frontier's plans -- and they need not be of the
99 Fairpoint magnitude to have serious negative ramifications -- the risks associated with
100 this proposed transaction are simply too great.
101 4. Based on my analysis, I can unequivocally recommend to the Commission that it not
102 approve this transaction.
103 5. Although I believe that any attempt to cure the flaws in this deal will still leave a
104 weakened Frontier and VSTO (and should thus be denied as well), if the Commission
105 determines that it should indeed give the Applicants the opportunity to cure the flaws in
106 their transaction, I recommend that the Commission establish conditions that would
107 insure Verizon's continued involvement (and interest) in the properties it is trying to sell
1 os to Frontier. Fundamentally, the idea would be to ensure that Verizon retain significant
109 "skin in the game." As I describe in greater detail below, there are two alternatives that I
110 believe could help achieve that goal:
111 a) Require Verizon and Frontier to form a Joint Venture, with meaningful
112 milestones which the Joint Venture would be required to achieve before Verizon would
113 be permitted to complete its sale (and Frontier allowed to consummate its purchase).
114 b) Require Verizon to provide Frontier with a long-term warranty (or guarantee)
115 on all critical elements of the property it seeks to sell, again with meaningfbl milestones
116 which must be reached prior to allowing Verizon to terminate its guarantees.
6 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
117 6. If the Commission declines to reject the transaction and further declines to require the
118 parties to enter into a Joint Venture (or for Verizon to issue a warranty or guarantee), I
119 have listed a set of financial conditions that could help protect West Virginia
120 communities and customers.
121 OVERVIEW OF APPLICATION AND DOCUMENT REVIEW
122 Q. Piease describe your understanding of the proposed transaction.
123 A. On May 13, 2009, Verizon and Frontier entered into a series of agreements that would
124 enable Frontier to become the owner of Verizon’s landline business in 13 states and a
125 portion of a fourteenth state. The first step in the transaction is the creation by Verizon of
126 a new subsidiary that would become the holding company for all of the businesses being
127 transferred to Frontier. The agreements refer to this holding company as Spinco. In
128 subsequent filings with the Securities and Exchange Commission, this holding company
129 is referred to as Verizon Separate Telephone Operations or VSTO. The terms Spinco and
130 VSTO can be used interchangeably, but I will generally refer to the new holding company
131 as VSTO.
132 The next step in the transaction would be for VSTO to merge with and into
133 Frontier, so that VSTO becomes a wholly owned subsidiary of Frontier. The actual steps
134 of the transaction are more complex than this because of income tax rules that Verizon
135 will follow in order to make the transaction tax-free to Verizon and its stockholders.
7 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
136 In exchange for VSTO, Verizon’s stockholders will receive common stock in
137 Frontier and Verizon will receive approximately $3.3 billion in cash and debt relief.
138 Again, there are several steps in this process because of the tax rules, but the effect is that
139 Verizon will receive cash (or reductions in its debt) of $3.3 billion and Verizon’s
140 stockholders will end up owning a majority of Frontier’s common stock (estimated at
141 between 66% and 71% of Frontier’s stock, depending on Frontier’s stock price near
142 closing). The stipulated value of the Frontier equity to be distributed to Verizon
143 shareholders is $5.247 billion, bringing the total transaction value to $8.58 billion.
144 However, the value of the Frontier shares to be distributed to Verizon shareholders could
145 increase by any amounts that Verizon is required to pay or forgo in order to obtain
146 regulatory approvals for the transaction, thus further diluting existing Frontier
147 shareholders’ stake in the firm.2
148 Essentially, Verizon has created -- and Frontier has acceded to -- an insurance
149 policy against the actions of public utility regulators. If various state commissions
150 require, as a condition of approval, Verizon to fund specific projects, guarantee the asset
151 it seeks to sell, directly reduce the price, or otherwise negatively impact the proceeds
152 Verizon realizes, Frontier is required to issue additional shares at the stipulated
153 transaction price in sufficient amounts to make Verizon shareholders whole. It seems to
Frontier Cop. Prospectus, Form 424B3, filed with the Securities and Exchange Commission on Sept. 16,2009 (hereafter “Prospectus”), first page of Mary Agnes Wilderotter cover letter to Frontier Shareholders.
8 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
154 me that Verizon insisted on this provision after regulators in the Northern New England
155 states effectively required it to reduce its price by some $360 million in the Fairpoint
156 transaction.
157 Q. In order to render an opinion about the financial analyses presented by Verizon and
158 Frontier in this case, what information do you need to review?
159 A. Ideally, I should be able review all relevant information that was available to Verizon’s
160 and Frontier’s Boards of Directors, management, and advisors, as well as subsequently
161 developed data regarding either of the companies, the transaction, and refined projections
162 regarding the post-closing “new” Frontier.
163 Q. Have you been able to review all of the information you require?
164 A. For the most part, but as I explain later, there are some significant gaps in our knowledge
165 about the proposed transaction. Based on their replies to the CWA’s interrogatories,
166 however, it appears that neither company created more than rudimentary sensitivity
167 analyses to test how robust the new combined company would be under various
168 scenarios. In addition, as I discuss below, the key assumption in Frontier’s financial
169 model - its projected $500 million in annual savings from so-called “synergies” -- is not
170 based on detailed Verizon data, but, rather, starts with high level Verizon 2008 operating
171 expense information, which is then projected forward to 20 13, based on Frontier’s own
172 financial and operating experience and not on any bottom-up analysis of the actual
173 Verizon operations that Frontier proposes to acquire.
9 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
1 74 Nonetheless, I have been provided with a large amount of public and purportedly
175 confidential information. Based on this data, I am prepared to offer my opinion, although
176 with certain caveats upon which I elaborate below.
177 Q. Please summarize the types of documents that you were able to review in this case.
178 A. I have reviewed documents that fall into a number of categories:
179 Press reports;
180 Frontier and Verizon filings with the Securities and Exchange Commission;
181 0 Documents from various public utility regulatory agencies;
182 0 Documents derived from on-line databases;
183 0 Proprietary analyses produced by a number of investment advisory firms;
184 0 Pre-filed testimony from Frontier and Verizon; and,
185 0 Frontier and Verizon responses to numerous interrogatories and requests for
186 production of documents in this case, including a large volume of purportedly
187 confidential documents and information.
188 Q. Before addressing details of the transaction, please describe your basic impressions
189 about the proposed Frontier-Verizon transaction.
190 A. My overall reaction to the proposed transaction is one of disappointment. This
191 transaction is being driven, in large measure, by the income tax rules. Verizon can make
192 the transaction tax-free to itself and its stockholders only if it finds a buyer that is
193 considerably smaller than the service areas being sold. In effect, a tax-free transaction
10 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
194 can only be used if Verizon’s stockholders end up owning a majority of the combined
195 company. Verizon did this once before - with the sale of its landline operations in
196 Maine, New Hampshire, and Vermont to FairPoint Communications. That deal has been
197 a disaster for Fairpoint, its customers and the communities it serves. On October 26,
198 2009, FairPoint petitioned for protection under Chapter 1 1 of the Federal Bankruptcy
199 Code. Fairpoint has not been able to maintain Verizon’s service quality or uphold many
200 of the commitments and other promises it made to regulators and elected officials in those
201 states. As I describe below, there are now signs that the company will seek the
202 bankruptcy court’s approval to modi@ the terms established by regulators as part of the
203 approval process for the transaction.
204 While I am not suggesting that Frontier is FairPoint (though there are unfortunate
205 similarities, as I discuss below), I would have hoped that Verizon learned its lesson from
206 the Fairpoint debacle and would no longer try to use the tax loophole that makes it
207 essential that Verizon find a much smaller buyer. Unfortunately, Verizon did not do so
208 and we now have Frontier - a company with fewer than 2.3 million access lines -hoping
209 to acquire Verizon business with a total of approximately 4.8 million access lines. Even
210 worse, Verizon’s lines are spread out all over the country - literally from coast to coast -
21 1 and many of them are in states where Frontier does not currently operate, or where its
212 presence is small. For example, in West Virginia, as of December 3 1,2008, Frontier had
11 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
213 about 144,000 access lines today, but wants to acquire Verizon’s business with 617,000
214 lines in the state.
215 As I explain below, my testimony focuses on my analysis of Frontier’s financial
216 condition, including both its historical and current financial conditions and its projections
217 for the fbture, as well as on the risks that I believe this transaction poses to VSTO’s
218 customers, communities and employees.
219 Q. Based on your review and analysis, are you able to render an opinion about the
220 reasonableness of the companies’ financial assumptions and analyses?
221 A. Yes, I am able to render an opinion. While there is some critically important information
222 that is missing, I have enough information to conclude that Frontier’s current financial
223 position is precarious, that it has not made reasonable assumptions about the financial
224 impact of acquiring VSTO, and that Frontier is not financially fit to own and operate
225 Verizon’s business in West Virginia.
226 CONCERNS WITH FRONTIER AND THE PROPOSED TRANSACTION: 227 UNREALISTIC SAVINGS AND ILLUSORY BENEFITS
228 Q. Please provide a broad summary of your analysis.
229 A. Based on my analysis and as I discuss in greater detail below, the proposed transaction
230 raises serious concerns about whether the new Frontier will be able to provide quality
23 1 telecommunications services and deployment of advanced high-speed broadband
232 services. Frontier will find it difficult to meet its debt obligations while simultaneously
12 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
233 investing enough capital to maintain current plant, improve service quality, set up entirely
234 new operational, administrative and billing systems in West Virginia, pay to maintain
235 existing computer systems from Verizon in the other 13 states until it integrates those
236 systems, provide video service for the first time, ensure adequate staffing, and expand
237 broadband availability. The financial and operational risks involved in the transaction
238 overwhelm any supposed benefits.
239 Q. Frontier has promised benefits from the proposed transaction. Do you agree?
240 A. No, I do not agree with Frontier. While I would like to believe the promises of enhanced
24 1 broadband deployment and better customer service, the financial realities will make it
242 difficult for Frontier to deliver these types of benefits to the public. Frontier will be
243 burdened with an additional $3.3 billion in debt, and Verizon’s transferred properties will
244 experience a six-fold increase in the revenue they must generate to service the higher debt
245 load. Equally disturbing, Frontier has not yet obtained any of the debt financing it
246 requires to complete the transaction. Millions of dollars will leave West Virginia and the
247 other VSTO states to service Frontier’s debt and pay its extravagant dividend to
248 stockholders - money that would not be paid out under Verizon’s ownership and that
249 could be invested in the telecommunications network.
250 Further, neither Frontier nor any other company its size has ever taken on a deal of
25 1 this complexity and magnitude - requiring the integration of 4.8 million lines spread over
252 parts of 14 states stretching from coast to coast. The new Frontier will have to manage a
13 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
253 company with triple its current number of access lines and employees. In West Virginia,
254 Frontier will need to integrate all computer systems - including billing, ordering,
255 provisioning, network operations, trouble reporting, dispatch, customer service, among
256 other systems - on the day the deal closes. In the 13 other states, where Frontier will use a
257 copy of Verizon’s systems (and for which Frontier will pay an annual maintenance fee),
258 Frontier will be under pressure to cut-over to its own systems as soon as possible - and
259 likely before they are ready -- in order to stop paying an annual $94 million maintenance
260 fee to Verizon, and to meet Frontier’s projected $500 million annual “synergy” targets.
26 1 Q. Are there benefits that outweigh these risks?
262 A. No, there are not. The transaction poses tremendous financial and operational risks of
263 harm, but it presents few countervailing public interest benefits. Frontier has not made
264 any definite, verifiable, or enforceable commitments in terms of broadband build-out or
265 improvements in service to consumers. Frontier projects a 2 1 percent or $500 million
266 annual cut in operational expense^,^ which would further limit funds available for
267 investment in plant, customer service, and staffing. Even without such draconian so-
268 called “synergy” savings, Frontier - a more highly leveraged company than Verizon -
269 will struggle to find the resources to expand and upgrade broadband services.
14 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
270 Q. What will Frontier do with the profits it hopes to earn from operating VSTO?
271 A. Frontier’s business model has been based on a transfer of wealth to shareholders rather
272 than re-investment in its networks. Frontier has historically paid out more in dividends to
273 shareholders than it earns in annual profits, and as a result, has seen its shareholder equity
2 74 steadily decline. Frontier plans to continue this pattern with VSTO.
275 Q. Frontier says it has plans for increased broadband investment in VSTO. Do you
276 doubt those promises?
277 A. Yes, I do. As Susan M. Baldwin discusses in her testimony, Frontier’s historic and
278 projected capital expenditures are less than the level that Verizon actually has been
2 79 investing in VSTO. And while Frontier claims it has a higher rate of broadband
2 80 deployment in its service areas than Verizon has in VSTO, Frontier fails to mention that it
281 receives higher per-line universal service support for these areas than Verizon. I am
282 advised by counsel that under the Federal Communications Commission’s “parent trap”
283 rule, Frontier’s universal service support would be the same as Verizon’s in the VSTO
284 service area^.^
285 Based on data supplied by Frontier witness, Billy Jack Gregg, in West Virginia,
286 Frontier received USF support of $104.18 per access line in 2008, while Verizon received
287 $45.70. Put another way, USF support represented 5.1% of Verizon’s revenues in 2008
288 while it accounted for 10.7% of Frontier’s revenues. According to Mr. Gregg’s
PROPRIETARY>>>
15 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
289 calculations, the combined companies' USF support would have constituted only 6.2% of
290 total revenues, a much lower level than Frontier has received for its own operations in the
29 1 state.5 In response to another CWA question, Mr. Gregg acknowledged that while "at the
292 current time USF support cannot be used directly for broadband, the higher level of
293 support received by Frontier is obviously helpfbl in upgrading outside plant which can be
294 used to provision both broadband and basic voice service.If6 Finally, while Mr. Gregg
295 speculates that the combined companies could reallocate cash flows, including those
296 derived from universal service support, "from one part of the state to another," he does
297 not explain how that can be legally accomplished under current USF strictures and he
298 acknowledges that he has not analyzed any cash flow-impacting expenses associated with
299 the tran~action.~
300 So Frontier will not be able to rely on enhanced federal support to enhance
301 broadband deployment in the VSTO service areas. I have not seen an actual plan by
302 Frontier that explains how it will invest less than Verizon has been investing in VSTO,
303 but somehow enhance broadband availability and improve the quality of the network.
304 In fact, the proposed Verizon divestiture to Frontier would most likely represent a
305 step backward for high-speed broadband deployment in these states. Verizon has
47 CFR $54.305 Prepared Direct Testimony of Billy Jack Gregg on Behalf of Frontier Communications Corporation, pp. 4,5 and 9; also see Mr. Gregg's corrected pages 8 and 9 of his testimony, provided in response to CWA 2nd Discovery, response 13. Response to CWA Second Discovery, response 19. ' Response to CWA Second Discovery, response 25. 16 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
3 06 deployed its world-class FiOS fiber-to-the-home (“FTTH”) network in parts of four states
307 involved in this deal (Washington, Oregon, Indiana, and South Carolina). Today,
308 Verizon’s FiOS network passes 600,000 homes in these states, and serves 140,000 FiOS
309 Internet and 103,000 FiOS TV subscribers.8(Verizon sells FiOS Internet in all four states,
3 10 but does not sell FiOS TV in South Carolina.) Further, in some areas where Verizon has
311 not yet deployed FTTH, it is offering a high-speed 7 mbps residential DSL service - a
3 12 service that, to the best of my knowledge, Frontier does not offer in West Virginia today.
3 13 In stark contrast to Verizon’s state-of-the-art FTTH network and its progressive
3 14 high-speed DSL service, Frontier’s residential customers in West Virginia are limited to
315 DSL at either 256 kbps, 1 mbps or 3 mbps.’ I am unaware of any plans that Frontier
3 16 might have to improve either its existing network or the VSTO network beyond the 3
3 17 mbps DSL service.”
318 FRONTIER LACKS FINANCIAL FITNESS: FRONTIER’S UNSUSTAINABLE, HIGH- 319 RISK BUSINESS MODEL
320 Q. Do you have enough information to evaluate the impact of the proposed transaction
321 on Frontier’s financial viability and fitness?
322 A. No, not entirely. This is a large and complex acquisition. The $8.4 billion deal will
323 transfer 4.8 million access lines across 14 states, impact millions of customers and
Prospectus, p. 146
Frontier reply to CWA Set 3, Question 10. lo In a reply to an IBEW interrogatory in Illinois (IBEW 2.9), Frontier affirmed that it “has no plans to increase
17 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
324 hundreds of communities in Verizon’s transferred exchanges and in Frontier’s existing
3 25 territories. Many unanswered questions remain. Specifically, at this date, the Applicants
3 26 have not provided sufficient information to answer the following questions:
327 Will Frontier be able to finance the transaction and what will Wall Street demand to 328 provide the financing? Frontier needs to raise $3.3 billion, but it does not have a 329 commitment for the financing. 330 How will Verizon realign its operations in West Virginia and the 12 other former 33 1 GTE states to provide the same functions that are currently provided centrally? 332 How and when will Frontier integrate Verizon’s computer systems and operations in 333 the former GTE states into Frontier’s systems and operations centers? 3 34 How will Frontier achieve its promises to expand the level of broadband availability 335 in Verizon’s service areas while investing less than Verizon has been investing in the 336 same service areas? Frontier has not provided any state-specific plans, budgets, 337 milestones, or even goals; and to the best of my knowledge, it has not even visited 338 central offices or other facilities in West Virginia or many of the other states it wants 339 to acquire. 340 How will Frontier achieve the projected synergy savings of $500 million per year? 341 Frontier is projecting a 2 1 percent reduction in VSTO’s operating costs, but we do not 342 know how this can be achieved without adversely affecting the quality, safety, and 343 reliability of service it provides to the public. 344 Does Frontier have the expertise, capability, and desire to maintain and expand the 345 availability of VSTO’s DSL service? 346 How will the transaction affect Frontier’s existing customers and its ability to expand 347 broadband service to current Frontier areas that are underserved by service that is 348 barely fast enough to meet the FCC‘s outmoded minimal definition of “broadband?” 349 350 In summary, there are many unanswered questions about the proposed transaction.
35 1 The Applicants implicitly ask the Commission to accept their vague, unverifiable claims
352 at face value. “Trust us” is not enough.
speed offerings in its existing Illinois service areas .. .” It gave a similar reply in Ohio. 18 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
353 Q. In your opinion, why is Frontier pursuing such a large transaction?
3 54 A. Frontier is approaching the end of its ability to sustain the high-dividend disinvestment
355 business model it adopted about five years ago. While the company, then known as
356 Citizens Utilities, grew rapidly in the late 1990s and early 2000’s, it actually peaked in
357 2001 (in terms of access lines and shareholder equity) and 2002 (in terms of revenues).”
358 Subsequently, it was forced to write down over a billion dollars in assets while it exited
359 the gas, water and electric utility businesses, as well as its CLEC operations. Schedules
360 1,2 and 3 clearly demonstrate this situation, over the past ten years, as reflected by
361 Frontier‘s revenue, access line and property, plant and equipment trends.
362 Q. What led Citizens to write down its assets?
363 A. In the early part of this decade, Citizens ran into significant financial difficulties,
364 particularly with its CLEC and gas and electric utility operations. In 2002, it booked
365 impairment charges in excess of $1 billion ($657 million on its Electric Lightwave CLEC
366 and $417 million on its gas and electric utility assets). In 2003, Citizens announced that it
367 would explore “strategic alternatives.” During 2004, Citizens reportedly had at least two
368 private equity suitors (Kohlberg Kravis Roberts and the Blackstone Group), but the
369 company’s board rejected that course. It reinstated its common stock dividend (including
3 70 a huge special payment to shareholders in 2004) and it appointed Mary Agnes (Maggie)
~~ Even though Frontier acquired a reasonably large single-state telecommunications company in 2007 (Commonwealth Telephone Enterprises of Pennsylvania), adding over $260 million in revenues and some 434,000 access lines, the company’s revenues and access line levels have not matched those it achieved at the beginning of the decade.
19 PUBLIC (REDACTED)VERSION Direct Testimony of Randy Barber Case No. 09-087 I -T-PC
371 Wilderotter as the company’s a new president and CEO (she was named board chair in
3 72 2006).
373 After undergoing this financial restructuring, Citizens’ board adopted a new high-
3 74 dividend, depreciation-driven model. Since then, Citizens (and Frontier since the name
375 change) has consistently paid out much more to shareholders than it earned in net income.
3 76 During 2008, Frontier paid out dividends equal to 174% of net income. In the first half
3 77 of 2009, the payout has been 240% of its profits ($65 million of net income; more than
378 $156 million paid in dividends). The result is that Frontier’s shareholders’ equity has
3 79 declined steadily - it stood at almost $2 billion in 2001 but is now less than $450 million
3 80 (as of June 30,2009).
381 Q. Is there something wrong with a utility paying out more in dividends than it earns?
3 82 A. Yes, there is. It simply is not sustainable for a public utility to consistently pay out more
3 83 to its shareholders than it earns in net income. Counsel informs me that, in rejecting a
384 proposed acquisition in 2007, the Montana Public Service Commission explained the
385 reasons why a utility’s dividend payments should be less than the utility’s net income. In
386 NorthWestern Corp.,I2the Montana PSC rejected a proposed merger and acquisition,
387 primarily because of the acquiring company’s plan to pay out more in dividends than it
388 would earn. The Montana PSC explained why this was so problematic for a public
’’ 2007 Mont. PUC LEXIS 54 (Mont. PSC July 3 1,2007) The order is also available on the Montana commission’s web site at: < http://www.psc.state.mt.us/eDocs/eDocuments/pdfFiles/D2006-6-82~6754e.pdf>. Citations are to the numbered paragraphs in the order, which are the same in either the Lexis or web site versions of the order.
20 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
3 89 utility: “In normal utility operations, retained earnings provide a vital source of financial
390 strength for capital investment and as reserves that are available during unexpected
391 financial strains. Regularly paying out dividends in excess of net earnings by a utility is
3 92 inappropriate and risky because having insufficient reserves on hand could adversely
393 affect the utility’s ability to provide adequate ~ervice.”’~
3 94 I completely agree with the Montana PSC’s reasoning. Cash recovered through
395 customers’ rates for depreciation is supposed to be reinvested in the business, not paid out
3 96 to shareholders to pump up the stock price. But that is precisely what Frontier has been
397 doing, and, based on its public filings, plans to continue to do if this transaction is
398 approved.
399 Q. How does the proposed acquisition of VSTO relate to Frontier’s business model?
400 A. In order for Frontier to sustain its business model, it needs to acquire more customers and
40 1 continue to invest far less in the business than it earns. Thus, the proposed acquisition of
402 VSTO would allow Frontier to keep following its high-dividend, low-investment scheme
403 for a few more years. At some point, though, Frontier’s model will fail. The company
404 will run out of retained earnings and will not generate enough cash flow from
405 depreciation to keep paying exorbitant dividends. Because of the number of shares of
406 stock Frontier would issue to Verizon stockholders in this deal, Frontier’s next
13 Zbid.,para 149. 21 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
407 acquisition would have to be huge - in the tens of millions of access lines - in order to
408 further pursue its failed business model.
409 Q. Are you saying that Frontier's business model is not sustainable?
410 A. Yes, that is exactly right. Frontier's business model is based on high dividend pay-outs,
41 1 financed by reducing the value of its assets. A company can support this business model
4 12 over the short-term by adding assets through new acquisitions. But such a model is not
413 sustainable over the long-term, particularly if the company takes on large debt to finance
414 the purchase. This is precisely what Frontier proposes to do in this transaction.
415 Frontier has consistently paid out much more to shareholders than it has earned in
416 net income. During 2008, Frontier paid out dividends equal to 173 percent of net income.
417 In the first three quarters of 2009, the payout has been 199 percent of profits ($234
418 million in dividends, $1 18 million in net income). (See Schedule 4) The result is that
419 Frontier's shareholders' equity has declined steadily. It stood at almost $2 billion in 2001,
420 but is now less than $418 million (as of September 30,2009). During the first nine
42 1 months of 2009, Frontier's shareholder equity fell 18.9%, or $100 milli~n.'~
422 If a company pays out more in dividends than it earns in profits, there are basically
423 two other sources from which such dividends can be paid: retained earnings and non-cash
424 charges to the income statement. By far the largest non-cash charge for most companies,
l4 Frontier SEC Form 10K, filed March 12,2002, p. F-3 and Frontier SEC Form lOQ, filed November 4,2009, p. 2 22 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
425 including Frontier, is depreciation and amortization (D&A). As can be seen in Schedule
426 5, Frontier’s D&A has been roughly double its capital expenditures.
427 A fundamental result of Frontier’s practice of using depreciation-based cash flows
428 to fknd dividends is an inevitable decline in its property, plant, and equipment. Even with
429 the 2007 Commonwealth Telephone acquisition of 434,000 access lines, Frontier’s net
430 property, plant, and equipment has declined by more than $1.2 billion dollars since its
43 1 peak in 2001. (See the previously referenced Schedules 3 and 5) Frontier’s business
432 model is based on failing to adequately reinvest in its network - in essence, cannibalizing
433 its network assets - to pay high dividends to shareholders.
434 Q. Do other analysts share your view of Frontier’s future?
435 A. Yes. At the beginning of 2009, Jason Armstrong (a telecommunications analyst from
436 Goldman Sachs) and Simon Flannery (a telecommunications analyst from Morgan
437 Stanley) issued independent projections of Frontier. Both analysts projected that
43 8 Frontier’s shareholder equity would turn negative between 2012 and 2014.15 As can be
439 seen in Schedule 6, by November 2009, while these analysts support the transaction with
440 Verizon, they were also projecting that a standalone Frontier would see its shareholder
44 1 equity turn negative in 2012.
”Goldman Sachs and Morgan Stanley financial models for Frontier Communications, both dated February 25,2009.
23 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
442 The Morgan Stanley and Goldman Sachs analysts also project a continued decline
443 in Frontier’s Net Property, Plant & Equipment, as can be seen in Schedule 7.16
444 Q. But Frontier projects that this deal would improve the Company’s financial
445 condition. Do you disagree?
446 A. Yes, I disagree with Frontier’s assessment. Frontier’s track record for these types of
447 forecasts is not good. The Company had promised Wall Street that the 2007
448 Commonwealth acquisition would only result in a temporary increase in Leverage Ratio
449 (Net Debt to EBITDA) from 3.1~at year-end 2006 to around 3.6~before declining to
450 pre-transaction levels.” In prepared direct testimony before the Pennsylvania Public
45 1 Utility Commission in connection with the 2006 agreement to acquire Commonwealth
452 Telephone, Frontier executive Daniel McCarthy assured the Commission that an increase
453 in leverage caused by that transaction would only be temporary:
454 ”. . . as a result of the acquisition of CTE, Citizens’ leverage ratio (net debt divided 455 by earnings before interest, taxes, depreciation and amortization, or EBITDA) will 456 only slightly increase from 3.2 times to 3.5 times. These figures are based on a 457 June 30,2006 schedule of both companies’ publicly disclosed historical results. 458 As such, they do not reflect the synergies I discuss within this testimony, nor do 459 they reflect any operating cash flow realized after June 30. Both of these items 460 will increase our available cash balance, which will reduce our net debt and 46 1 leverage ratio.rr18
l6 Both analysts produce detailed financial projections which they regularly update. As of this writing, the most recent iterations of these models were dated November 4,2009 and November 11, 2009, respectively, for Goldman Sachs and Morgan Stanley. 1711Management expects to be able to bring net leverage from 3.6~to the 3.2~area while concurrently repurchasing equity under its $250 million stock repurchase plan, . . .I’ Goldman Sachs, Credit Research (Kevin Coyne), May 2, 2007. 18 Prepared Direct Testimony of Daniel McCarthy, Executive Vice President and Chief Operating Officer, on behalf of Citizens Communications, November 10,2006, pp. 12-13.
24 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
462 463 However, by year-end 2008, Frontier’s Leverage Ratio stood at 3.8~and was rising.
464 In early 2009, Frontier negotiated an increase in its maximum leverage ratio with
465 one of its lenders from 4.0~to 4Sx, along with an interest penalty if the leverage ratio
466 rises above 4.0~(which the Goldman Sachs analyst projects Frontier will exceed by year-
467 end).
468 Frontier has maintained a high debt level, which has fluctuated somewhat during
469 this decade, but which currently stands close to its all-time high. The company’s
470 Leverage Ratio (Net Debt to EBITDA) has steadily risen from 3. lx in 2006 to around
47 1 4. lx as measured on September 30,2009. When it acquired Commonwealth Telephone,
472 Frontier projected that this would not occur, but the Company was dead wrong. As can
473 be seen in Schedule 8, the Morgan Stanley and Goldman Sachs analysts have projected
474 that, standing alone, Frontier would breach the 4.5~Leverage Ratio maximum
475 somewhere between 2013 and 2014.
476 As can be seen in Schedule 9, the two analysts also project that Frontier’s current
477 trajectory would lead it to paying out dividends (at its current $1 per share level) that
478 exceed its Free Cash Flow by 2014. These are all signs that Frontier’s business model is
479 not sustainable. The Company is engaged in a high-risk path to financial failure and soon
480 will be forced to drastically reduce its dividend and cut back further on its capital
48 1 expenditures. Its only alternatives are to merge with a larger company (which would be
482 likely to result in Frontier’s management losing their jobs) or buying millions of
25 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
483 additional customers - and the cash flow they provide - to avert failure for a few more
484 years. In my opinion, that is what is motivating Frontier to pursue the proposed deal with
485 Verizon.
486 Q. Are there indications that Verizon understood Frontier’s true motivations for this
487 deal?
488 A. Yes, there are. In an internal email message on April 19,2009, the head of Verizon’s
489 negotiating team, Verizon Vice President of Business Development for the Domestic
490 Telecommunications group, Stephen Smith, wrote to other members of the Verizon team:
49 1 492 493 494 495
496 Q. Have you seen this type of high-dividend, low-reinvestment business model before?
497 A. Yes, I have. FairPoint Communications was engaged in the same type of scheme before
498 its deal with Verizon was announced. Fairpoint’s financial condition was precarious
499 because of the same strategy Frontier is pursuing: use the cash flow to pay out dividends
500 far in excess of profits, under-invest in the networks, don’t retain cash in the business,
50 1 and acquire new customers (and their cash flows) every few years to prop up the business.
502 In fact, it was in my testimony in the Fairpoint cases that I first referred to this process as
503 “cannibalizing” the business - failing to reinvest enough in the business to offset the
~~ ~ ~
l9 Email message from Stephen E. Smith to John W. Diercksen, Jackson G. Bennett, John P. Fitzgerald, dated April
26 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
504 depreciation of current property, which reduces net plant and continually erodes retained
505 earnings.
506 Fairpoint needed a big acquisition to sustain its scheme for a few more years. It
507 purchased Verizon’s lines in Maine, New Hampshire, and Vermont - roughly increasing
508 the size of Fairpoint six-fold (from 300,000 access lines to approximately 1.8 million
509 lines). To do so, FairPoint took on an extraordinary amount of debt, some of which
5 10 carried very high interest rates. But FairPoint believed that there was sufficient cash flow
511 in the Verizon businesses to allow it to sustain its high-risk business model.
512 Frontier is larger than Fairpoint was - it is a little further along on the curve of
513 buying more customers (and their cash flows) to sustain the scheme -but the strategy is
514 exactly the same. And this deal is needed by Frontier for exactly the same reasons that
515 Fairpoint needed to do its deal with Verizon.
516 Q. What happened to Fairpoint?
517 A. Unfortunately, FairPoint got trapped by its model. Just as the Montana commission
518 warned in the order I cited above, when a utility fails to retain sufficient cash in the
519 business, it cannot weather an economic downturn or other unforeseen circumstances.
520 ARer it acquired Verizon’s lines, Fairpoint experienced a combination of the economic
521 downturn, service quality problems, and the resulting customer dissatisfaction. As I had
522 warned, Fairpoint’s revenue projections were unjustifiably rosy, it had insufficient cash
19,2009 (document 4(c)(42) attached to Verizon’s Hart-Scott-Rodinofiling). 27 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
523 flows and reserves to reliably operate the business, and it was unable to generate the
524 revenues it needed to pay its lenders - let alone pay any dividends to stockholders.
525 At the end of September 2009, FairPoint announced that it was unable to make the
526 required payments on its debt, but that it received a 30-day reprieve from some of its
527 lenders. As I mentioned above, the company entered Chapter 11 bankruptcy on October
528 26,2009. Fairpoint also filed a "Plan Term Sheet" for a reorganization plan that it had
5 29 agreed upon with a "steering committee" of its secured creditors. This plan provides for,
530 among many other things, the conversion of more than half of the company's secured
531 loans into a 98% equity ownership stake in a reorganized FairPoint (assuming, of course,
532 such a plan is ultimately approved by the Bankruptcy court). Beyond turning the
533 company's secured lenders into its new owners, the Term Sheet contains a provision that
534 appears to challenge the enforceability of public utility commission penalties or fines:
535 "The allowance of unsecured claims and the treatment of unsecured claims . . . 536 including any claims held by state public utility commissions relating to the NNE 537 [FairPoint Northern New England] Operating Companies' alleged failure to 538 satisfjr certain service quality indicators, shall be determined at a later date on 539 terms reasonably satisfactory to the Steering Committee Lenders and the 540 Company."20[emphasis added] 541 542 It also appears that Fairpoint may call into question the various broadband
543 expansion commitments it made to regulators in the three Northern New England states
544 in order to obtain approvals for the acquisition of Verizon's landline assets. In a
20 Declaration of Alfred C. Giammarino Pursuant to Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York in Support of First-Day Motions; Exhibit B, "Plan Term Sheet," Section 6(d). 28 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
545 Telephony Online article entitled "Fairpoint aims to renegotiate broadband rollout
546 requirements," reporter Ed Gubbins writes that "Fairpoint's lawyers are currently
547 examining whether or not its Chapter 11 protection from creditors might also allow the
548 company to renegotiate regulatory requirements in Vermont, New Hampshire and Maine,
549 where it acquired 1.7 million access lines from Verizon." As Gubbons reports,
550 "As part of the regulatory approval process for its Verizon deal, Fairpoint had to 551 commit to spending set amounts on broadband expansion in all three of the states 552 involved. In Maine, it was required to spend an average of $47 million on 553 broadband expansion during the first three years following the deal. In Vermont, it 554 was required to spend an average of $40 million per year in the first three years. 555 And in New Hampshire, it was required to spend at least $52 million in each of 556 the first three years and $49 million in each of the two years after that; Verizon 557 contributed $49.2 million to that effort, but this year the state allowed Fairpoint to 558 use Verizon's contribution for general purposes.112* 559 560 Q. Frontier claims that it is not like FairPoint and that this transaction will make it
56 1 stronger and even allow it to approach an investment-grade bond rating. How do
5 62 you respond?
563 A. FairPoint made very similar assertions, trying to assure us that it would be a financially
564 strong company if only it could do this next deal. Despite Frontier's assertions to the
565 contrary, FairPoint also presented the transaction as delevering. On a pro forma basis,
566 Fairpoint projected that its Leverage Ratio would decline from 4.5~to 4. lx at closing.22
567 But a dispassionate view of the numbers did not support Fairpoint's belief and it does not
*' Telephony Online, October 26,2009, http://www.telephonyonline.com/independent/news/fairoint-renegotiate- broadband-1 02609/index.html (accessed October 27,2009) '* FairPoint Communications SEC Form 8-K, January 16,2007, page 12 of the attached investment analyst presentation. In fact, because of actions by regulators which effectively reduced the price Fairpoint paid, and thus
29 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC
568 support Frontier’s belief either. It is possible that the transaction may help Frontier for a
569 little while. As I explained, Frontier is on the path to failure, and this deal may help avoid
5 70 that result for a few years. I am concerned, however, that there is no certainty in that
571 result. This is especially true because Frontier’s debt burden will increase by $3.3 billion,
572 to more than $8 billion overall, if this deal goes through.
573 Frontier argues that the deal will make it finally stronger by reducing its leverage.
5 74 But that calculation is based on unsubstantiated and unrealistic assumptions about
575 revenues and expense savings, none of which are certain (or even likely) to occur. What
5 76 will be certain, however, is that Frontier’s debt burden will nearly double and Wall Street
5 77 lenders will need to be paid out of an ever-shrinking pool of revenues. I am especially
578 cautious about believing Frontier’s rosy projections because it made similar projections
5 79 before the Commonwealth Telephone deal that did not pan out, as I discussed above.
580 A FRONTIER ACQUISITION WOULD SIGNIFICANTLY WEAKEN VSTO 581 (VEFUZON’SOPERATIONS IN WEST VIRGINIA AND 13 OTHER STATES)
582 Q. What effect would the proposed transaction have on the financial condition of
583 VSTO, including current Verizon operations in West Virginia?
584 A. In my opinion, this is the critical question. While the deal may help Frontier somewhat, I
585 believe that the Commission’s primary concern should not be whether the deal would
586 help Frontier, it is whether it will help VSTO - that is, existing Verizon customers and
the debt it was required to incur, its Leverage Ratio, on the same pro forma basis, was actually 3.8~at closing. 30 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
5 87 the communities they serve. In my opinion, the answer to that question is unequivocal:
588 there is no doubt that this transaction would make VSTO significantly weaker financially.
589 Right now, VSTO has only about 34 cents in debt for every dollar of operating
5 90 cash flow. AEter the Frontier deal closes, these same properties (previously owned by
591 Verizon) will be responsible for at least $2.60 in debt for every dollar of operating cash
592 flow, an increase of over 600 percent. (See Schedule 10). The divested Verizon properties
593 will be tied to a company with much lower profits and much higher debt service
594 requirements - a combination that results in a much lower margin for error and much less
595 ability to weather unexpected negative conditions (such as service quality problems,
596 increased competition from cable companies and other carriers, economic downturns in
5 97 portions of the service area, or new technologies that make existing services obsolete).
598 Specifically, during the first quarter of 2009, Frontier reported profit margins of
5 99 6.7 percent compared to a 16.5 percent profit margin for VSTO. For the first half of
600 2009, the difference narrowed somewhat, but VSTO still had a profit margin almost
601 double that of Frontier (1 1.4% versus 6. l%).23 At this writing, VSTO's 3rd quarter
602 results have yet to be made available, but Frontier's profit margin for the first nine months
603 of 2009 were 7.4%.
604 In addition, Frontier has not yet obtained any of the approximately $3.3 billion in
605 debt financing for the proposed transaction. The merger agreement permits Frontier to
23 Prospectus, pp. 16 and 19. 31 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
606 walk away from the deal if it cannot obtain that financing at an annual average interest
607 cost of 9.5 percent or less (including the original issue discount).24 Frontier’s recent debt
608 has high interest rates and it just issued $600 million in securities at an effective rate of
609 about 8.73 percent to pay off near-term notes.25The next most recent debt was issued on
610 April 9,2009, and carries an annual interest cost of 10.375 percent. Around the time of
611 the transaction, Frontier’s bonds traded in the range of 7.5 1 percent to 12.56 percent
612 depending on the term, with most in the 9 to 11 percent range.26More recently, Frontier’s
613 issues traded in the 6% to 11% range, mostly between 8% to 9%. In the current unstable
614 economic environment combined with Frontier’s recent cost of debt, it is not clear that
6 15 the company will be able to finance this transaction on reasonable terms. It is possible
616 that Frontier - and the public it serves - may be saddled with extraordinarily high debt
617 costs or other onerous conditions that lenders may require. Frontier’s Chief Financial
618 Officer has stated that he does not expect even to begin the process of obtaining this
619 financing until January 2010 and that he does not expect to have financing in place until
620 March or April 20 10.27
24 Agreement and Plan of Merger between Verizon and Frontier, dated as of May 13, 2009, 4 7.18(e)(ii)-
25 The $600 million issue, which matures on October 1,2018, carries a coupon of 8.125%. Frontier’s net proceeds were $577.6 million, after discounts and expenses, yielding an effective interest rate of 8.73%, Frontier SEC Form AWP, September 17,2009.
26 Frontier response to Staff data requests 77 and 79 in the Oregon Docket, July 2,2009; additional trading data obtained from http://www.investinginbonds.com. ” Transcript ofFrontier analysts’ conference call, Aug. 4, 2009, p. 12.
JL PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
621 Q. Can you determine the financial impact of this deal on VSTO and Frontier without
622 knowing the terms of that financing?
623 A. No, because of Frontier’s current precarious financial condition, it is not possible for me,
624 or any other independent financial analyst, to know whether Frontier will be financially
625 viable (and for how long) without knowing the interest rate and other terms and
626 conditions of that financing.
627 Q. Frontier has announced that it would reduce its dividend if this deal goes through.
628 Have you taken that into account in your analysis?
629 A. Yes, I have. Frontier has stated that, if the deal goes through, it would reduce its per-
630 share dividend pay-out by one-fourth, from $1 to 75 cents per share annually?8 Even
63 1 with this dividend reduction, it is likely that Frontier would still end up paying far more in
632 dividends than it earns in profits. Depending on the price at which Frontier’s stock is
633 issued to Verizon’s shareholders, Frontier’s new dividend would represent between 125
634 percent and 142 percent of the combined company’s (Frontier + VSTO) 2008 net income.
635 (See Schedule 1 1) And since net income is likely to decline in the future because of the
636 large debt burden being taken on by Frontier, these numbers will get even worse.
28 Frontier SEC Form 425, filed May 13,2009, p. 7.
33 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
637 Q. Do Verizon and VSTO also pay out more in dividends than they earn?
638 A. No. Both Verizon and VSTO have paid dividends that are well below their profit
639 levels?’ (See Schedule 12) VSTO has been doing what a utility is supposed to do:
640 reinvesting earnings in the business, keeping cash available to maintain flexibility, paying
64 1 a reasonable dividend to stockholders, and growing retained earnings.
642 FRONTIER’S HIGHLY AGGRESSIVE AND UNREALISTIC FINANCIAL 643 PROJECTIONS RISK OVERESTIMATING FUTURE REVENUES AND 644 UNDERESTIMATING FUTURE EXPENSES, POSSIBLY BY SIGNIFICANT 645 AMOUNTS
646 Q. Have you reviewed Frontier’s financial projections?
647 A. Yes, I have.
648 Q. Please summarize your conclusions from conducting that review.
649 A. Frontier’s financial projections are quite aggressive and are based on a range of
650 unrealistic assumptions. Its revenue assumptions fly in the face of recent experience at
65 1 both Frontier and VSTO. They are also very risky, in the context of the continued
652 declines in the landline business, heightened broadband competition, and the ongoing
653 uncertainty about the direction of the economy. There is a real risk that Frontier could
654 fall far short of its financial goals and, as a result, be unable to meet many of the
655 commitments it has already made or likely will make during the regulatory process
29 Since VSTO has only recently been created, it obviously did not pay dividends directly to Verizon shareholders. We use VSTO’s reported “parent hnding, allocations, intercompany reimbursement” as the closest measure available for VSTO’s dividend-like “upstream” payments.
34 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
656 attendant to this transaction. As I discuss below, Frontier’s expense assumptions are
657 literally unprecedented. The combination of the very risky revenue and expense
658 projections upon which Frontier has built its plans could prove quite toxic?’ In my
659 opinion, the Commission should not accept these projections as an accurate baseline to
660 evaluate the Applicants’ pro forma financial projections.
661 Q. Why do you conclude that Frontier has over-stated its projected revenues?
662 A. Frontier’s so-called “proforma” projections rely on VSTO’s year-end 2008 results. But
663 Frontier recently acknowledged (in its second quarter conference call with investment
664 analysts) that VSTO lost 136,000 access lines (2.9 percent of all its lines) during just the
665 second quarter of 2009. Since June 30,2008, VSTO has lost more than 11 percent of its
666 access lines, resulting in a significant decline in revenues, cash flow, and net in~orne.~’
667 The difficulties that both Frontier and VSTO have been encountering have been
668 dramatically reflected in their financial results. Below is a table that reflects the
669 comparative results of both companies during the first half of 2009 (“1H09”)compared to
670 those of the same period in 2008 (as noted earlier, VSTO’s 3rd quarter results have not
671 been made available at this writing). Both Frontier and Verizon suffered in excess of 5
672 percent revenue declines, big drops in EBITDA (essentially cash operating profits before
30 In addition, while interest rates have declined somewhat since the transaction was agreed upon in May, the economic environment is still quite unsettled and the high yield bond market notoriously volatile and unpredictable, particularly in connection with large, highly leveraged transactions. As noted above, during 2009, many of Frontier’s issues have traded over IO%, some over 11% or higher.
31 Prospectus, p. 146. 35 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
673 taxes and interest), and approximately one-third lower profits. It is very much worth
674 noting that both not only struggled with declining revenues, they obviously had real
675 difficulties controlling costs in this challenging environment: Frontier barely reduced
676 expenses even though its revenues dropped appreciably, and VSTO’s costs climbed
677 almost as much as its revenues declined. To say the least, these dynamics do not portend
678 well for Frontier’s ability to achieve unprecedented levels of cost savings while 679 attempting to maintain revenues well aboveKl either its or VSTO’s trend lines.32 1H09vs 1H09vs
Revenues -5.4% -5.8% Operating Expenses -1.4% 4.1% EBITDA -10.6% -18.6% 680 Net Income -36.6% -29.3%
681 Recently, Frontier stated in its Prospectus filed with the Securities and Exchange
682 Commission, “The combined company will likely face further reductions in access lines,
683 switched access minutes of use, long distance revenues and federal and state subsidy
684 revenues, which could adversely affect it.’’33 But Frontier has not revised its financial
685 projections to reflect this view of the future.
686 There is another aspect of Frontier’s projections that concerns me: its implicit
687 assumption that it will be able to dramatically increase broadband penetration in the
32 Prospectus, p. 16 and 146.
33 Prospectus, p. 29. 36 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
688 VSTO territories. As I pointed out earlier, Frontier would seem to be able to afford
689 higher levels of capital expenditures on broadband, all other things being equal, due to its
690 much higher USF support and the fact that it can more readily be applied to upgrades of
69 1 its copper-based plant. As I explain below in a confidential section of my testimony,
692 Frontier simply assumes one set of revenue projections for VSTO, which presumably
693 reflect the company's embedded assumptions regarding increased broadband revenues. I
694 am concerned that Frontier is applying its experience in its current properties to the
695 VSTO properties that it seeks to acquire, even though the latter operates in less rural areas
696 and is subject to more vigorous broadband competition. Mr. Gregg, in his testimony, says
697 that "it is possible'' that Verizon faces more cable broadband competition than Frontier.
698 In response to a CWA question, he reiterates "to the extent that Verizon serves more
699 urban areas in West Virginia than Frontier, it may face more competition from cable
700 companies in those urban areas."34 Despite Mr. Gregg's reticence, it seems clear that
701 Frontier's West Virginia operations are significantly more rural, and have significantly
702 less broadband competition, than does Verizon. While I have not seen Frontier's detailed
703 revenue projections for VSTO's West Virginia operations (or for any of the Verizon
704 properties for that matter), I am concerned that Frontier's optimism about its ability to
705 increase broadband penetration to levels that approach its own has distorted its revenue
706 projections.
34 Response40 CWA Second Discovery, response 24. 37 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC
707 Q. Why do you conclude that Frontier has understated its projected expenses?
708 A. It is unprecedented to have expense savings of the magnitude projected by Frontier for a
709 transaction of this size. Frontier projects that it will be able to cut VSTO's annual
710 operating expenses by $500 million (21 percent of total VSTO expenses) by 2013. In
71 1 order to achieve savings of this magnitude, Frontier will need to reduce the VSTO
712 workforce and cut deeply into other costs. By comparison, when Fairpoint purchased
713 Verizon's access lines in Maine, New Hampshire, and Vermont, Fairpoint projected
714 reducing costs by 8 percent to 10 percent (and FairPoint has not been able to achieve even
715 those savings). The most recent major merger involving rural landline operations, the
716 CenturyTel-Embarq transaction, entailed projected synergy savings of 9 percent of
717 Embarq's expenses. (See Table 1). Frontier's so-called synergy savings are either wishfil
718 thinking, or will require such draconian reductions in service, workforce, and
719 maintenance that Frontier will not be able to deliver on its promises to improve service
720 and broadband deployment.
Fairpoint- CenturyTel- Frontier- Verizon Em ba ra Verizon Projected "Synergy" Savings as a % 8-10% 9% 21 % of the Target's Operating Expense
72 1 722 << 123 38 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 724 725 726 727 728 729 730 73 1 732 733 734 735 736 737 738 739 740 74 1 742 39 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 743 744 745 746 747 748 749 750 75 1 752 753 754 755 756 757 75 8 759 760 35 The references for Schedules HC-1,-2, and -3 appear on the documents themselves. Also, there is something of a discrepancy between the publicly announced synergies projection of 2 1 percent and the percentage reflected for the public "guidance" on this transaction. The difference is probably due to slight methodological variations. 40 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC 76 1 762 763 764 765 766 Q. What is the magnitude of the workforce reduction Frontier projects for VSTO? 767 A. At the present time, VSTO has approximately 10,700 employee^.^' Frontier projects that 768 by 20 13 VSTO will have only << 769 38 END 770 CONFIDENTIAL & PROPRIETARY>>> 77 1 Q. Hasn’t Frontier promised that none of the job losses will be in service-affecting 772 positions? 773 A. No, Frontier has not promised that. Frontier has said that it would not lay off any 774 technicians or installers for 18 months after closing, which would be roughly through the 775 end of 201 1. After that point, Frontier has made no commitments whatsoever to keep its 776 workforce appropriately sized so that customer service will be maintained and improved. 777 Moreover, Frontier has yet to respond to multiple queries about its commitment to 36 “WV CWA Set 1-VZlO Attach2 Barclays and PMorgan VZ BODPrese.pdf,” page 14. 37 Prospectus, p. 32. 38 See WV CAD Set4 FROM27 attl Synergy HIGHLY CONFIDENTIAL.pdf and WV CAD Set4 FROM36 attl Synergy HIGHLY CONFIDENTIAL.pdf, which are the same file. Also see various versions of the Synergy 41 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1 -T-PC 778 employees who are not technicians or installers. Given the magnitude of the workforce 779 reduction that is contained in Frontier’s synergies model, it appears likely that service- 780 affecting jobs (such as call center, customer service, dispatch, and field employees) will 781 be affected. 782 Q* Can you show specifically where Frontier has been too optimistic in its expense 783 projections? 784 A. << 785 786 787 788 789 790 79 1 792 793 794 795 796 ~ ~ ~ ~ ~~~ Process Summary document such as WV CWA Set4 FRO12 Synergy Process Summary highly confidential.pdf. 42 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC 797 798 1END CONFIDENTIAL & 799 PROPRIETARY>>> In a summary overview of the company's synergy projection 800 process, Frontier says: 80 1 Frontier was provided summary financial and operational 802 information for the FYs 2006 - 2008, by Verizon, relating to 803 Verizon's Wireline operations in 13 states (SpinCo, or the potential 804 divestiture properties) (financial information for California was 805 provided later, but is not material to the forecasts). Frontier 806 identified the various components of the business (local, long 807 distance, and data services) that would be acquired as part of the 808 transaction and generated a historical and forward looking view of 809 revenues and product units by state for the SpinCo properties. 810 81 1 Using this revenue and unit information, and the underlying 812 metrics of demand activity that were available in the data room and 813 via discussions with Verizon personnel, Frontier compared its 814 stand-alone operating performance metrics to the projected view of 815 SpinCo for the FY 20 13 and had our functional area teams develop 816 a view of incremental headcount, wage expense . . . and non-wage 817 expenses . . . necessary to operate the acquired properties at 818 current Frontier stand-alone performance levels. . . . 819 820 Due to the nature of the data provided, synergy estimates by 82 1 functional area and by state were unable to be created. 822 Additionally, the calculation of synergies used numerous estimates 823 and assumptions which have yet to be validated by supporting 824 documentation from Verizon. No information regarding 825 Verizon's "realignment"plan was provided prior to the 826 determination of the anticipated value of the ~ynergies.3~ 827 [emphasis added] 39Frontiersupplemental reply to Illinois IBEW 5.12(c), "SynergydocsPUBL1C.pdf"which is the public version of "WV CWA Set1 FTR 34 Frontier Synergy Summary HIGHLY PROPRIET.pdf" and a number of other confidential documents produced by Frontier in this case. 43 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1 -T-PC 828 829 << 832 833 834 835 836 837 - 838 839 840 841 842 843 844 845 846 847 848 END CONFIDENTIAL- & PROPRIETARY>>> 44 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 849 Q. You cite Frontier's description of how its synergies projections were determined. 850 Have you had a chance to evaluate any more detailed explanation of Frontier's 85 1 synergies analysis? 852 A. Yes I have. In analyzing the credibility of Frontier's synergies projections, it is important 853 to understand how these projections were created. Frontier received public financial data 854 for 2006-2008 and validated this data through visits to a "data room" and conversations 855 with Verizon personnel. However, in projecting VSTO's synergies under Frontier's 856 management, the company took the 2008 VSTO cash operating expense data, projected it 857 forward to 2010, using that as the starting point for its "final" synergies estimate for 2013. 858 Describing confidential pages of the synergies overview document, Frontier says that 859 [it] did not take any steps to convert the operating expense 860 "summary buckets" into Departmental categories as reflected on 861 the third and fourth pages of this document. Due to the nature of 862 the data provided, synergy estimates by fbnctional area and by state 863 were not created. Rather, pages 3 and 4 were developed based 864 upon Frontier's current organization and cost structure applied to 865 the business to be acquired. The information received from 866 Verizon was used only in total to create a starting point to 867 determine amount of potential ~ynergies.~' 868 869 << 8 70 871 872 40 Frontier response to Oregon IBEW Data Request No. 249, August 25,2009. 45 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 8 73 874 875 876 877 878 879 880 88 1 882 883 884 885 886 887 888 889 890 891 46 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 892 END CONFIDENTIAL & PROPRIETARY>>> 893 Q. You question Frontier’s revenue and expense projections. Are you suggesting that 894 Frontier does not have a good understanding of what it would take to operate the 895 VSTO business? 896 A. Yes, that is exactly what I am saying. This transaction is unprecedented in scope and 897 size. Neither Frontier nor any other company its size has ever taken on a deal of this 898 complexity and magnitude which includes integrating approximately 4.8 million access 899 lines spread over parts of 14 states stretching from coast to coast. As a result of this 900 transaction, the new Frontier will have three times as many access lines (fiom 2.2 million 90 1 access lines now to 7 million after the sale) and employees (from 5,400 employees now to 902 approximately 16,000 after the sale).41 903 This deal is at least four times larger than any other Frontier acquisition. 904 Frontier’s biggest deal prior to this one was the 200 1 acquisition of Global Crossing’s 905 telephone landline assets, including Rochester Telephone. That acquisition totaled 906 approximately one million lines but about 70 percent of those lines were located in one 907 state. 908 It does not appear that Frontier has engaged in rigorous due diligence of the 909 service areas it is acquiring. The period between Frontier’s initial meeting with Verizon 41 Prospectus, pp. 11,32,and 112. 47 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 910 to the signing of the merger agreement was only two monthse4*That is an extremely short 91 1 period of time to evaluate and plan for a transaction of this complexity and magnitude. It 912 is not at all clear that Frontier understands the condition of the networks that it proposes 913 to purchase, the reason broadband deployment lags behind levels in other locations, the 914 quality of Verizon’s equipment and facilities, the availability of spare parts for Verizon’s 915 aging equipment, and numerous other factors that will affect Frontier’s ability to offer 916 quality service and deploy broadband in West Virginia and the remainder of the 14-state 917 territory. 918 In my role as financial expert for the IBEW and CWA during the regulatory 919 process in Maine, New Hampshire and Vermont concerning the FairPointNerizon 920 transaction, I performed a series of in-depth analyses of multiple iterations of Fairpoint’s 92 1 transaction model. While I cannot disclose any details (which are also confidential and 922 proprietary), I can attest that a key difference between Fairpoint’s model and Frontier’s 923 “proforma” model is that the former relied on detailed historic Verizon revenue and 924 operating expense data. 42 See Prospectus, pp. 46-54. It is also instructive to evaluate the context in which the Verizon transaction unfolded. Approximately one month prior to the first meeting between the CEOs of Frontier and Verizon, Frontier received an offer to be acquired by “Company A,” which Frontier appears to have rebuffed. During the period that Frontier and Verizon were negotiating the present transaction, Company A’s CEO periodically contacted Frontier’s CEO, seeking to recommence discussions about a potential acquisition of Frontier by Company A. Three days before the Verizon deal was completed, Company A reasserted its offer to purchase Frontier and did so again on the day the Verizon proprietary>> 48 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 925 While I found many of Fairpoint's assumptions and projections to be unrealistic, 926 they were far more grounded in an understanding of the actual Verizon operations than is 927 the Frontier model. Frontier's model is based on Frontier's experience with its own 928 operations and not on Verizon's hnctions and operations. Fairpoint's model contained 929 bottoms up revenue and expense projections based on historic Verizon experience in the 930 Northern New England states. In contrast, Frontier's model contains revenue and 93 1 expense projections based on Frontier's experience in other parts of the country. 932 FRONTIER PLANS TO REDUCE CAPITAL EXPENDITURES 933 Q. Have you reviewed Frontier's projected levels of capital investment in West Virginia 934 and the other VSTO states? 935 A. I have reviewed capital expenditure projections at a summary level for the 14 VSTO 936 states. Frontier has not provided specific capital expenditure projections for West 937 Virginia. In reply to a CWA data request Frontier indicates that it "has not completed 938 specific timeline for incrementally increasing broadband availability in the acquired 939 properties in West Virginia" and it "has not developed a cost estimate for deploying 940 additional High-speed Internet services in West Virginia."43 94 1 < 942 43 Reply to CWA Set 3 Data Request, Question 25 a. and b. 49 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 944 948 949 950 95 1 END CONFIDENTIAL & 952 PROPRIETARY= 953 Q. Please summarize your understanding of Frontier’s and VSTO’s current practices 954 regarding the use of their cash flows and capital investment. 955 A. As I mentioned earlier, Frontier uses an inordinately high amount of its cash flow to pay 956 dividends to stockholders. Several financial measures capture the amount of cash flows 957 that a company re-invests in capital projects. One measure evaluates the proportion of 958 depreciation and amortization (D&A) cash flows that are reinvested as capital 959 expenditures. Using this measure, VSTO has invested a significantly greater percentage 960 in new capital expenditures than Frontier every year since 2006. In 2008, VSTO invested 44 “WV CAD Set4 FROM27 att5 BoDProjNorS-l[ 13 HIGHLY CONFIDENTIAL.PDF” p. 19; materials prepared by Citigroup and Evercore. 45 “WV CWA Set I-VZIO Attach2 Barclays and JPMorgan VZ BODPrese” 50 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC 96 1 twice as much of its D&A derived cash flows in capital expenses (96.2 percent for VSTO 962 compared to 50 percent for Frontier). In 2007, VSTO capital expenditures were one-third 963 larger than Frontier's (88.3 percent for VSTO's compared to 57.9 percent for Frontier), 964 and in 2006, they were 25 percent greater (VSTO's 77.4 percent compared to Frontier's 965 56.4 percent). (See Schedule 13.) 966 One can also measure a company's level of capital expenditures as a percentage of 967 its revenues. Frontier makes much of the fact that it dedicates about 12 percent of its 968 revenues to new capital expenditures?6 However, an examination of the capital 969 expenditures in VSTO reveals a materially higher ratio of capital expenditures in recent 970 years. For the period 2004 through 2008, Frontier dedicated between 12.8 percent and 971 13.9 percent of its revenues to capital expenditures (It was 12.9 percent in 2008). VSTO, 972 on the other hand, invested 13.5 percent of its revenues in capital expenditures in 2004, 973 increased that proportion to 15 percent or more during 2005 through 2007, and further 974 increased it to 16.8 percent in 2008. (See Schedule 14) 975 Q. Does Frontier plan to maintain VSTO's level of capital investment? 976 A. No, it does not. Despite its promises of enhanced services and network modernization, 977 Frontier actually plans to reduce VSTO's level of capital expenditures. In 2008, VSTO 46 For example, speaking at the May 18, JPMorgan Global Technology, Media and Telecom Conference, Frontier Chairman and CEO Maggie Wilderotter made the point that she and other Frontier executives frequently repeat: "The other thing that I would add is, if you look at our percentage of revenues that we spend on capital today, it's about 12%. So, for our business as usual, it's probably 4% higher than what Verizon looks at as business as usual." Thompson StreetEvents Transcript, p. 8. 51 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 978 had actual capital expenditures of $730 million.47 In fact, from 2005 through 2008, 979 VSTO's capital spending was higher than $700 million in every year, ranging from $702 980 million in 2006 to $733 million in 2005.48 98 1 But Frontier does not plan to maintain this level of capital spending. According to 982 Frontier's financial model, it plans to have capital expenditures of << 983 CONFIDENTIAL & PROPRIETARY 1- 984 985 END 986 CONFIDENTIAL & PROPRIETARY>>>!9 Moreover, these significant reductions in 987 capital expenditures are occurring during the period when Frontier claims that it will be 988 increasing investment to improve the level of broadband deployment in West Virginia 989 and other VSTO service areas. 990 Unfortunately, after 2012, Frontier proposes to make even more drastic cuts in the 991 level of capital investment in West Virginia and the other VSTO service areas. Frontier's 992 financial model shows capital expenditures of << 993 PROPRIETARY 47 Prospectus, p. 19. 48 Id. 49 Frontier proforma financial model. While this spreadsheet is names "WV CWA Set 1 FTR 37 Frontier Synergy Spreadsheet HIGHLY PROP.xls," it is not the Frontier synergies spreadsheet (which was only produced in a highly cumbersome 346 page printout (see "WV CAD Set4 FROM27 attl Synergy HIGHLY CONFIDENTIAL.pdf' and "WV CAD Set4 FROM36 Synergy spreadsheet HIGHLY PROPRIETARY.pdf." JL PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC 994 995 END CONFIDENTIAL & PROPRIETARY=->>. 996 Q. What would happen to Frontier's financial condition if it maintained the same level 997 of capital spending (approximately $700 million per year) that Verizon has 998 consistently invested in the VSTO states? 999 A. If Frontier continued Verizon's historic $700 plus million per year of capital spending 1000 (above and beyond whatever transaction and transition-related costs that it may incur), 1001 something would have to give. Again, assuming that Frontier maintained a robust capital 1002 investment program (which could well require more than the Verizon status quo level), it 1003 would only have one realistic choice: reduce its dividends materially and refrain from 1004 reinstituting its share repurchase program. The amount that dividends would need to be 1005 reduced would depend on the specific circumstances of VSTO (and Frontier) when such a 1006 decision is made. It would be a significant amount, though. 1007 Q. Have you identified other risks associated with this proposed transaction that could 1008 have negative financial consequences? 009 A. Yes. I believe that the requirement for a "flash1'cutover at close in West Virginia carries 010 with it significant execution and operational risks. Even Frontier acknowledges that this 01 1 is probably the single most challenging aspect of the transaction. As Ms. Baldwin 1012 delineates in her testimony, the sheer magnitude of tasks, software programs, databases, 50 Id. 53 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871-T-PC 1013 hardware upgrades, data extracts, training, and personnel implicating every element of 1014 this transaction in West Virginia (and beyond) raises the distinct possibility of unforseen 1015 negative consequences. As I have previously mentioned, I am not suggesting that 1016 Frontier is in the same position as was Fairpoint. However, this aspect of the deal 1017 contains some of the same risks that ultimately brought FairPoint to its knees. While 1018 Frontier and its advocates argue that a major difference is that the West Virginia 1019 properties will be converted to an existing system, rather than a newly-created one, the 1020 fact remains that there are significant risks of failure which could have important 1021 financial consequences. Beyond the mere complexity of the cutover and the other factors 1022 identified by Ms. Baldwin, there are two important factors that I hope the Commission 1023 scrutinizes very closely: 1024 0 This is an enormous, and I believe unprecedentedly large, first-day cutover 1025 attempt. Even Fairpoint had ten months after the close before the cutover 1026 occurred; and, 1027 0 As confirmed by Mr. Gregg, this represents the first attempt to acquire and 1028 integrate a portion of a former Bell Atlantic wireline operating company.” Response to CWA Second Discovery, response 3 1. 54 PUBLIC (REDACTED)VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1029 PUTTING IT TOGETHER: FRONTIER IS NOT FINANCIALLY FIT TO OWN AND 1030 OPERATE VSTO 103 1 Q. Have you reached any conclusions about Frontier's financial fitness to own and 1032 operate Verizon's VSTO operations in West Virginia and 13 other states? 1033 A. Yes, I have. Based on my analysis of Frontier's current business model, Frontier's 1034 unrealistic projections of revenue increases and expense reductions, and Frontier's 1035 dramatic planned reductions in the level of capital spending in VSTO, I conclude that 1036 Frontier is not financially fit to own and operate Verizon's VSTO operations. 1037 Q. How did you reach your conclusions? 1038 A. These conclusions stem from the totality of my analysis, which initially led me to doubt 1039 the credibility of Frontier's public representations, and subsequently spurred me to 1040 explore the company's financial and synergy models very closely. That exploration, 1041 combined with reams of documents, confirmed my suspicion that Frontier would be 1042 taking on enormous potential risks which, if they came to bear, Frontier would in no way 1043 be capable of confronting. 1044 There are a number of ways to test the credibility of a firm's financial projections, 1045 one of which is to subject its model to something of a "forensic" analysis. This entails 1046 what could be described as an inside-out exploration of the entire model, to understand 1047 how it works, to judge whether or not its output is meaningful, and possibly to use it as a 1048 tool to test alternative scenarios (or sensitivities). In this case, Frontier's proforma model 1049 yielded information about the assumptions the company has made, particularly with 55 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1050 respect to the data it determined to insert into the program rather than subject it to further 1051 manipulation (of which there is much). I would describe the model's output as somewhat 1052 useful, but limited for the purposes of testing the credibility of Frontier's plans. It only 1053 permits two basic (very aggressive) scenarios for standalone VSTO and three fairly 1054 narrow scenarios for standalone Frontier. It combines the results of these limited 1055 standalone scenarios, but those results are not particularly usehl in understanding the 1056 likely financial behavior of the firm under financial stress. 1057 Fortunately, the question that I wanted to explore is quite straight forward: what 1058 risks can reasonably be deduced by examining the financial impact of plans gone 1059 seriously awry? From my initial analysis, it was clear to me that Frontier is banking on 1060 projections that have a fairly high risk of not coming to hition. Significant 1061 underperformance on either the revenue or expense side can lead to similar pressures. In 1062 the end, it all gets down to available cash and the competition for access to it within a 1063 firm. While I can't predict with any precision how badly Frontier might undershoot its 1064 projections -- and I certainly don't know with any certainty how the company's leadership 1065 would respond in such a situation -- I can say with a high degree of certainty that it would 1066 do something. Management would obviously react and make changes. The question 1067 would be whether it still had sufficient resources available to it and what the magnitude 1068 of its financial distress might imply about the decisions it might take. 56 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1069 Q. Please describe your analysis. 1070 << 1071 A. 1072 1073 1074 1075 1076 1077 1078 1079 1080 1081 1082 1083 1084 1085 1086 1087 1088 57 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1089 1090 1091 1092 1093 1094 1095 1096 1097 1098 1099 1100 1101 1102 1103 1104 1105 1106 1107 1108 58 PUBLIC (REDACTED)VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1110 1111 - 1112 1113 1114 END CONFIDENTIAL & PROPRIETARY>>> 1115 Q. What were the results of your financial analysis of Frontier under stress? 1116 A. As I describe in more detail in my confidential testimony, I tested what the impact would 1117 be on the combined FrontierNSTO if no synergies are achieved over the mid-2010-year- 1118 end 2014 timeframe. While I obviously can't predict what the company's management 1119 would do under such circumstances, this would clearly be a significant event with large 1120 financial implications. 1121 Q. What do you conclude? 1122 A. It is my conclusion that in such a situation, FrontierNSTO would come under enormous 1123 pressure to reduce outlays anywhere it could (as well as raise revenues if it could). Three 1124 obvious targets for downward adjustment would be service, capital expenditures, and 1125 dividends. While I cannot disclose the precise results of this analysis in the public part of 1126 my testimony, I can say that the lost profits and cash flows represent a large proportion of 1127 the dividends and capital expenditures that Frontier intends to pay over that four and one- 1128 half year period. 59 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC i 129 CONCLUSION 1130 Q. Based on your financial analyses, what do you conclude? 1 13 1 A. I conclude that the proposed transaction contains fundamental flaws that cannot be 1132 remedied. Frontier is not financially fit to own and operate Verizon’s operations in West 1133 Virginia and the 13 other states Frontier is proposing to acquire. In my opinion, 1134 therefore, the only way for the Commission to project the public is to deny the 1135 Application and reject the proposed transaction. 1136 Q. If the Commission disagrees with you and believes that it is possible to condition the 1137 proposed transaction to protect the public, are there conditions you would 1138 recommend? 1139 A. At the outset, I must reiterate that I do not believe it is possible to adequately protect the 1140 public from the very serious risks that would be posed by having Frontier take over 1141 Verizon’s operations in West Virginia. Frontier simply does not have the financial 1142 capability to safely and reliably operate, maintain, and enhance Verizon’s network. 1143 If the Commission disagrees, however, then I would urge it to approach its 1144 decision in this case deliberately and without haste. In spite of the Applicants’ seeming 1145 impatience to obtain approval of the proposed transaction, it is now clear that even under 1146 the best of circumstances the deal will not close before mid-year. In his rebuttal 1147 testimony in Ohio, Frontier’s Daniel McCarthy indicates that Verizon is required to 1148 demonstrate, by operating them separately over a sixty day period prior to closing, that it 60 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1149 has successhlly "replicated" the former GTE back office systems in the thirteen states 1150 other than West Virginia. These systems will support the operations in those states and , 1151 will only be available in the Fort Wayne, Indiana data center beginning in April 1010. 1152 This means that the transaction would close, at the earliest, in June 2010.52With a 1153 closing at least seven months away, if it determines to approve this transaction in some 1154 form, the Commission has more than enough time to evaluate the cutover and systems 1155 replication processes, institute a third party audit (as I recommend below), verify that 1156 Frontier's financing is complete and affordable, and generally insure that the Applicants 1157 fully meet any conditions the Commission should establish. 1158 Moreover, because the merger agreement (at paragraph 2.2) requires closing to 1159 occur on the last business day of a month, it would appear that the earliest possible 1160 closing date would be June 30,2010. 1161 Again, if the Commission decides to approve this transaction in some form, I 1162 would recommend the conditions outlined below. I do not believe that these conditions 1163 would fully insulate the public from the numerous risks and adversities that I believe are 1164 likely to occur if Frontier were put in charge of Verizon's network in West Virginia. But 1165 these conditions would at least ameliorate some of the most serious risks of the 1166 transaction. '*Before the Public Utilities Commission of Ohio, Rebuttal Testimony of Daniel McCarthy on Behalf of Frontier Communications Corporation, November 4,2009, pp. 47-48. 61 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1167 First, I embrace Ms. Baldwin's recommendations with respect to systems 1168 integration, cutover monitoring, broadband deployment, and service quality. I would 1169 also reiterate that I am very concerned about the risks inherent in the proposed 1170 transaction. Verizon has done this type of transaction twice before (in Hawaii and 1171 Northern New England) and both times have been abject failures, resulting in the 1172 financial failure of the acquiring companies, a significant deterioration in customer 1173 service, and significant expenditures by regulators, labor unions, CLECs, public 1174 advocates, and other interested parties. 1175 Because these risks are so large - and the deal (as proposed) does little if anything 1176 to address them - I do not believe that the Commission should even consider approving 1177 the transaction unless it is substantially restructured to ensure that Verizon retains 1178 responsibility until there is a full and complete transition of operations. Therefore, my 1179 first recommendation would be that the Commission should insist that the applicants 1180 fbndamentally renegotiate the overall transaction. 1181 Q. What do you mean by "fundamentally renegotiate the transaction?" 1182 A. Simply put, the Commission should not agree to let Verizon walk away from its 1183 operations at closing. The last three Verizon asset divestitures resulted in the financial 1184 failure of the new firm (Hawaiian Telcom, Idearc, and Fairpoint). Verizon must remain 1185 responsible until it has been demonstrated that the new Frontier is truly financially viable. 62 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1186 Q. How would you recommend that the Commission insist that Verizon remains 1187 responsible until Frontier and Verizon have demonstrated the viability of the new 1188 combined firm? 1189 A. Broadly, I would suggest two alternative approaches to retaining Verizon's involvement. 1190 While the details of each would obviously require much elaboration, both have the virtue 1191 of ensuring that Verizon continues to have significant "skin in the game," unlike the 1192 Hawaiian Telecom, Idearc and Fairpoint experiences where Verizon fundamentally 1193 walked away after the transactions were consummated. The idea behind each of these 1194 alternatives is to ensure that Verizon's long-term interests are aligned with success of the 1195 proposed transaction. 1196 Verizon Frontier Joint Venture: Create a Joint Venture ("JV'I) between Verizon 1197 and Frontier, with specific milestones that must be met before Verizon can sell its interest 1198 in the venture. (See below for milestones.) Rather than an all-or-nothing solution, a JV 1199 would permit a much more orderly transition from Verizon to Frontier ownership, 1200 retaining Verizon's "skin in the game" while also providing Frontier with appropriate 1201 incentives to manage the transition smoothly. This approach also has the benefit of being 1202 reversible (that is, Verizon can be required to repurchase Frontier's interest in the JV) if 1203 the VerizonFrontier partnership fails to meet the expectations of regulators or the 1204 companies. Finally, the financial burdens imposed by the proposed structure of the deal 1205 on the properties being acquired can be mitigated through an appropriate exit pricing 63 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1206 mechanism that recognizes the actual economic value of the new entity, not the projected 1207 value. 1208 It also is possible that the JV would be beneficial to both companies for the 1209 indefinite future. The Verizon Wireless JV between Verizon and Vodafone has been 1210 quite successful. Both companies have retained their interests, contributed additional 121 1 capital, and worked together to create a successfbl company. 1212 1213 Verizon Warranty or Guarantee: An alternative to the JV would require Verizon 1214 to provide a warranty (or guarantee). The warranty would remain in place for the longer 1215 of five years or the time it takes for Frontier to achieve certain milestones (see below). 1216 Verizon (or its predecessors GTE / Bell Atlantic) has owned these utilities for many 1217 decades. Verizon should be required to stand behind these operations for a reasonable 1218 period while Frontier works to absorb them. The warranty would cover system 1219 operations (all computer systems, network operations center, etc.), condition of plant and 1220 equipment, adequacy of inventory, accuracy of billing and customer data. Verizon would 1221 be required to compensate Frontier for access line losses greater than the industry average 1222 and for increased costs (and revenue losses) Frontier incurs as a result of faulty, incorrect, 1223 or inappropriate data passed by Verizon to Frontier as part of the closing and cutover to 1224 Frontier or standalone former GTE systems. Verizon would also be required, at its 1225 expense, to correct any deficiencies that existed at closing, regardless of when the 64 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1226 deficiencies became apparent to Frontier (or customers or regulators). Needless to say, 1227 the terms of a Verizon guarantee would need to be extensively documented and clear 1228 dispute-resolution procedures created. 1229 Q. You mentioned "milestones." Please explain. 1230 A. The milestones I outline below would be conditions that would have to be met before 1231 either the Joint Venture would be permitted to be dissolved or Verizon would be released 1232 from various warranty or guarantee-related obligations. These would be above and 1233 beyond any other on-going conditions that the Commission might impose on the new 1234 Frontier entity. The milestones would include: Frontier successfblly converts from 1235 Verizon's systems onto the Frontier systems that will be used after the estimated 2-3 year 1236 transition period, and a minimum 2-3 year "proving" period thereafter. (If there are any 1237 systems acquired from Verizon that Frontier will use going forward, then Frontier must 1238 certify when they are operating fully to Frontier's satisfaction and according to 1239 predetermined specifications.) 1240 a. Frontier documents that it has received accurate customer data - billing 1241 information, customer location, etc. Any deficiencies are resolved at 1242 Verizon's expense. 1243 b. Frontier achieves and maintains an investment-grade bond rating from at 1244 least two of the major rating agencies (Moody's, S&P, Fitch). 65 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1245 c. Frontier successklly refinances its corporate debt that matures from 20 11 1246 through 2013 ($1.2 billion).53 1247 d. Joint Applicants should agree to a 3rdparty audit of the systems 1248 integrations process. An outside party, such as an auditing firm, should 1249 perform tests of functionality and reliability of the new systems, and affirm 1250 to the Commission that the systems in question will perform the way they 1251 are intended to perform on the date of transfer, that is, that the systems will 1252 be able to process billing tasks, repair orders, personnel deployment, 1253 wholesale orders, etc. 1254 e. The Joint Applicants should provide broadband availability to 100% of its 1255 territory within three years. Intermediate milestones should be: (1) 3 1256 Mbps to 90% of the broadband eligible access lines within two years of the 1257 Transaction Closing Date; and (2) 7 Mbps to 75% of broadband eligible 1258 access lines within one year of the Transaction Closing Date, 85% of 1259 broadband eligible lines within two years of the Transaction Closing Date, 1260 and 100% of broadband eligible lines within three years of the Transaction 1261 Closing Date; and (3) symmetric 5 mbps to 100 % of broadband eligible 1262 lines within five years of the Transaction Closing Date. 1263 f. Verizon should submit a report to the Commission detailing current 1264 broadband deployment at a very granular level (e.g. on an address-by- 1265 address basis). 1266 g. Verizon should provide comprehensive data about its infrastructure, 1267 broadband locations, broadband speeds, etc., in the format that is required 1268 by the West Virginia “eligible entity” responsible for broadband mapping ~ ~ ~ 53 Frontier Communications, SEC Form 10-Q, November 4,2009, pages 12, 18 and 19. In 2014, Frontier will also need to refinance or otherwise fund the $600 million in debt that it issued in April 2009. 66 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-0871 -T-PC 1269 under the NTIA guidelines so that Frontier does not need to incur that 1270 expense and to facilitate the state’s ability to achieve its broadband goals 1271 in a timely manner. 1272 h. Joint Applicants should commit to allocate sufficient resources in West 1273 Virginia to coincide with the time that systems integration occurs so that 1274 Frontier is able to handle any possible spikes in customer calls and 1275 complaints. Sufficiency of resources should be measured by examining 1276 resources for business as usual and scaling up to accommodate higher 1277 volumes of calls and possible problems at the time of the transfer to 1278 Frontier’s platform. 1279 i. Before systems are shifted from the Verizon platform to the Frontier 1280 platform, Joint Applicants should provide a report to the Commission 1281 outlining its plans. 1282 j. Verizon should pay for an audit to be conducted of its network under the 1283 supervision of the Commission, with proposals submitted to the 1284 Commission, and the auditor selected by the Commission. 1285 Q. As you are aware, Ms. Baldwin also makes a number of recommendations to the 1286 Commission in the event that it determines to approve the transaction without the 1287 restructuring alternatives that you suggest. Do you have any such recommendations 1288 in the financial realm? 1289 A. Yes. Below I set forth a series of financial conditions that I believe -- in combination 1290 with those proposed by Ms. Baldwin -- are the minimum conditions necessary to ensure 1291 that the transaction will not harm the public in West Virginia. 67 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1292 Changes in Responsibility for Verizon (former GTE) Computer Systems 1293 1. Restructure the transaction so that it does not require payment for 1294 maintenance or use of back office systems (e.g., the $94 million annual 1295 maintenance fee for Verizon / former GTE systems). 1296 2. Verizon’s obligations for technical support should continue at no cost until 1297 such time as the Commission determines that the transition from Verizon’s 1298 platform to Frontier’s platform has been successfully completed, based on 1299 a third-party audit. 1300 Financial Conditions (Ring Fencing) 1301 1302 The West Virginia utility will not be permitted to guarantee any debt of Frontier or any 1303 affiliate of Frontier. Frontier will not pledge or otherwise encumber the stock of the West 1304 Virginia utility. Any capital contributions from Frontier, or any affiliate of Frontier, to the 1305 West Virginia utility will be made through a combination of debt and equity that 1306 maintains the capital structure of the West Virginia utility with a minimum of 40% 1307 common equity and a maximum of 60% common equity. 1308 1309 1. Any debt from Frontier, or any affiliate of Frontier, to the West Virginia 1310 utility will carry an interest rate that is no higher than the lowest interest 131 1 rate on Frontier’s public debt of similar maturity. 1312 2. The West Virginia utility shall not pay a dividend to Frontier, or any 1313 affiliate of Frontier, that is more than 90% of the West Virginia utility’s 1314 net income in the year to which the dividend relate^.'^ 1315 3. The West Virginia utility shall not pay a dividend to Frontier if doing so 1316 would result in the West Virginia utility’s capital structure falling below 1317 40% common equity. 1318 4. The West Virginia utility shall not pay a dividend to Frontier if, during the 1319 preceding year, its capital expenditures were less than 90% of its 1320 depreciation and amortization. 1321 1322 Financial Conditions (Debt) 1323 1324 I am very concerned that no information is available about the interest rate, or other terms 1325 and conditions, of the approximately $3 billion in new debt that Frontier will be issuing 1326 for this transaction. The merger agreement (section 7.18(e)) states that Frontier may, but 54 I believe a similar dividend restriction should be imposed on the parent company, but it is unclear if the Commission has the ability to do so. 68 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1 -T-PC 1327 is not required to, walk away from the transaction if the interest rate exceeds 9.5%. 1328 Frontier’s CFO has stated that he does not expect to even begin the process of obtaining 1329 this financing until January 2010 and that he doesn’t expect to have financing in place 1330 until March or April 2010.55Thus, as presently structured, the record in this case would 1331 close before there is any definitive information about the debt issuance. 1332 1333 In my opinion, the Commission should not even consider approving a transaction where 1334 the terms and conditions of the financing are not known. Given this uncertainty, I would 1335 propose the following conditions: 1336 1337 1. Frontier must receive separate Commission approval prior to closing if the 1338 weighted average annual cash interest rate (including annual accretion of 1339 original issue discount) exceeds 8.5% 1340 2. The debt for this transaction should not include a pledge of stock, 1341 guarantee, or other encumbrance on the West Virginia utility. 1342 3. If the debt includes conditions that place Frontier in default or that change 1343 the interest rate based on Frontier’s leverage ratio (net debt / EBITDA), 1344 the trigger for such conditions shall be no less than 4.5~. ’*Transcript of Frontier analysts’ conference call, Aug. 4,2009. 69 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1345 Q. Do you have any other points you would like to make for the consideration of the 1346 Commission? 1347 A. Yes. In my experience, first with FairPoint and now with this deal, there seems to be an 1348 underlying concern that, if this transaction is turned down, Verizon will simply ignore the VSTO 1349 properties and allow them to stagnate. Put another way, there is a palpable worry that Verizon 1350 would leave states like West Virginia on a side-road of the information super-highway. 1351 While I obviously cannot know what Verizon would do in the face of a rejection, I would 1352 point out two things: Verizon executives will still have a fiduciary responsibility to maximize 1353 the financial benefits of the assets under their control and regulators still have tools to enforce 1354 their policies. 1355 Moreover, Verizon today is offering much faster internet service than is Frontier in West 1356 Virginia. It has also not been established how much of the gap between the Frontier and Verizon 1357 broadband penetration is due to competitors offering viable alternatives to DSL (and the 1358 Applicants profess a startling ignorance about the actual level of competition in West Virginia). 1359 Finally, it may be instructive to examine another case where Verizon tried -- and failed -- 1360 to divest itself of "non-core" wireline assets. In 2004, Verizon confirmed to the New York Times 1361 that it was considering selling off its wireline assets in upstate New York, from Orange county to 1362 Buffalo. It is not clear why Verizon abandoned this effort -- there were vocal opponents and 1363 reports that the company failed to obtain the price it was seeking. However, Verizon began 1364 installing FTTH cable throughout the region and in 2006 it began offering high-speed FiOS 70 PUBLIC (REDACTED) VERSION Direct Testimony of Randy Barber Case No. 09-087 1-T-PC 1365 internet in the Buffalo area. Soon thereafter, it began offering FiOS TV and, during 2007 and 1366 2008 alone, it invested $886 million in its upstate New York telecommunications infrastructure. 1367 I firmly believe that it would be a fundamental mistake for the Commission to approve 1368 this proposed transaction simply because of the belief that, in the face of a rejection, Verizon 1369 would simply permit its West Virginia assets to atrophy. It has many incentives to maximize its 1370 profits, even in the face of circumstances that are not completely of its choosing. And the 1371 Commission has to tools to encourage the company to do so. 1372 Q. Does this conclude your direct testimony? 1373 A. Yes, it does, 71 PUBLIC (REDACTED) VERSION $2,700 52,500 ...... -" ..____I_- ...... Schedule 2. Frontier Communications: Access Lines 1999-2008 2,600 2,400 2,200 1,400 1,200 1,000 S 4,51)# $4,000 $3,000 $2,500 lfJET PP&E 5833 Schedule 5. Frontier Csmmu nica tions: Depreciation & Amortization vs Capital Expenditures $Goa 5550 $500 $300 $2 50 $200 Schedule 6. Frontier Communications (Standafane) Total Shareholder Equity: 1999A-2019E Schedule 7. Walt Street Projections far Standalone Frontier: Net Property, Plant & Equipment 2008-2019 3 400 z.zo0 3,000 zsoo 2,600 2,400 2 LO0 2.000 2008A L009E ZOJOE 2OllE 2012~ LOIX 203 4E LOIS€ LOlBE 2017E 2OME 2019E 1 - * ____ _& - ^- .I j 240 3,116 2,951 i785 ' 8 2,L18 2,133 2,073 ,0;4 2,044 Schedule 8. Wall Street Projections for Frontier Leverage Ratios (Standalone): 2008-2019 5.0x 7.0x +Goldinan Sa& --It-Filorg,an Stanle intnnuinit ations Projection.; ate for hontirt OII b stwdalone hasir "" -- Schedule 9. Wall retPrajections for Standa ne Frontier Dividends as a Percent of Free Cas FZOW 2009-2014 2020 201 1 ! 2012 2013 2014 I ,,*...... f- , '"' 89% 86% 86% I 93% 303% t 1,,11,( ...... 1 ...... Schedule 11, fron r's Promised $0.7s/ as % of 2808 Pro Farma Combined Capital Expenditures as Orr6 of Depreciation& Amortization Frontier t 17% 16% 155% 14% 13Y2 12% VSTda froti tier ...... ,-_.I ...... ^- OF WEST VIRGINIA CHARLESTON Case No. 09-087 1-T-PC Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. CERTIFICATE OF SERVICE The undersigned counsel for the Communications Workers of America, AFL- CIO, certifies that service of the foregoing Public (Redacted) Version of Direct Testimony of Randy Barber on Behalf of the Communications Workers of America, AFL-CIO has been made by depositing a true and exact copy thereof in the U.S. Mail, postage pre-paid on the 1gfh day of November, 2009 to the following: Joseph J. Starsick, Jr., Esq. Jeffrey A. Ray, General Counsel Goodwin & Goodwin, LLP Citynet P.O. Box 2107 113 Platinum Drive, Suite B Charleston, WV 25328-2 107 Bridgeport, WV 26330 Patrick W. Pearlman, Esq. Richard L. Gottlieb, Esq. Deputy Consumer Advocate Amanda M. Ream, Esq. Consumer Advocate Division Lewis, Glasser, Casey & Rollins, PLLC 700 Union Building BB&T Square, Suite 700 723 Kanawha Blvd., East 300 Summers Street Charleston, WV 25301 Charleston, WV 25301 Lisa Wansley, Esq. Kevin Saville, Associate General Public Service Commission Counsel P.O. Box 812 Frontier Communications Corporation Charleston, WV 25323 2378 Wilshire Blvd. Mound, MN 55364 James V. Kelsh, Esq. Law Office of James V. Kelsh Lydia Pulley 300 Summers Street, Suite 1230 General Counsel - VA, WV, NC & SC P.O. box 3713 Verizon Corporate Services Corporation Charleston, WV 25337-3713 703 - 713 E. Grace St. Richmond, VA 23219 Steven Hamula, Esq. Director of Regulatory Affairs Stephen S. Melnikoff, General Attorney Fibernet Regulatory Law Office (JALS-RL) 1200 Greenbrier Street U.S. Army Litigation Center Charleston, WV 253 14 901 N. Stuart Street, Suite 700 Arlington, VA 22203-1837 Scott J. Rubin, Esq. 333 Oak Lane Bloomsburg, PA 17815 Robert R. Rodecker, Esq, P.O.Box 3713 Charleston, WV 25337 Stephen G. Hill Hill Associates P.O.Box 587 Hurricane WV 25526 Trevor R. Roycroft Roycroft Consulting 5 1 Sea Meadow Lane Brewster, MA 0263 1 Vincent Trivelli (WV Bar No. 8015) The Law Office of Vincent Trivelli, PLLC 178 Chancery Row Morgantown , WV 26505 Phone: (304) 291-5223 Fax: (304) 291-2240 BEFORE THE PUBLIC SERVICE COMMISSION OF WEST VIRGINIA Joint Application of Frontier ) Communications Corporation and ) Verizon West Virginia Inc. and certain 1 affiliates for approval of the transfer of ) Case No. 09-0871-T-PC Verizon’s local exchange and long distance ) business in West Virginia to companies to ) be owned and controlled by Frontier 1 Communications Corporation ) PREFILED DIRECT TESTIMONY OF SUSAN M. BALDWIN ON BEHALF OF THE COMMUNICATIONS WORKERS OF AMERICA, AFL- CIO Filed: November 16,2009 PUBLIC (REDACTED) VERSION Direct Testimony of Susan M . Baldwin WV Case No.09-0871 -T-PC TABLE OF CONTENTS I . INTRODUCTION ...... 1 Qualifications ...... 1 Purpose of Testimony ...... 5 Organization of Testimony ...... 5 Summary of Testimony ...... 6 I1 . OVERVIEW OF APPLICATION ...... 8 The Proposed Transaction ...... 8 I11 . STANDARD OF REVIEW ...... 21 IV . CUTOVER ...... 22 Overview ...... 22 Cutover agreement...... -23 Outside assistance and employee training ...... 25 Verizon’s role in transferring customer information to Frontier ...... 28 Planned versus actual schedule for cutover tasks ...... 30 Cutover plan description ...... 31 Cutover preparation task description ...... 35 Realignment process...... 38 Joint Applicants’ comparison of proposed cutover with other Verizon transactions...... 42 Frontier’s track record ...... 44 The Fairpoint experience, though not identical, nonetheless sheds light on the potential problems that occur with the cutover...... 45 Prior acquisitions by Frontier ...... 55 Analysis of service quality in two areas previously acquired by Frontier ...... 56 Global Valley Networks ...... 56 Frontier Rochester ...... 58 The cutover of systems to support wholesale operations also presents risks ...... 66 Summary of analysis and recommendations regarding the proposed cutover...... 69 1 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M . Baldwin WV Case No.09-0871 -T-PC V . BROADBAND ...... 74 Joint Applicants’ Discussion of Broadband ...... 74 Broadband in West Virginia ...... 75 Broadband “Lite” ...... 77 Frontier’s broadband lines and investment ...... 80 Verizon West Virginia’s broadband lines and investment ...... 83 Detailed data are essential to support broadband mapping and to achieve the state’s broadband goals . 97 Summary of analysis and recommendations regarding broadband deployment ...... 98 VI . SERVICE QUALITY ...... 100 Impact of the transaction on service quality ...... 100 Financial constraints ...... 101 Impact of cutover and systems integration on service quality ...... 101 Frontier’s due diligence regarding Verizon’s infrastructure in West Virginia ...... 103 Frontier’s service quality in West Virginia ...... 104 ARMIS-based service quality at the Joint Applicants’ Holding Company level ...... 113 Analysis of Verizon’s service quality data submitted to the Commission ...... 122 Verizon’s and Frontier’s capital investment in West Virginia ...... 126 Post-closing economic incentives confronting Frontier ...... 127 Summary of analysis and recommendations regarding service quality ...... 127 VI1. CONCLUSION ...... 129 Conclusion ...... 147 Tables Table 1 Frontier Access Lines Before and After Proposed Transaction Table 2 Density of Verizon’s Operations in Spinco and West Virginia Table 3 Selected Financial and Operational Data as of December 3 1. 2008 Table HC-4 Broadband Speeds of Selected Mid-Sized Rural Carriers Table HC-5 High Speed Internet in SpinCo Footprint .. 11 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC Table 6 State Complaints - Residential, 200 1 - 2008 Table C-7 Verizon West Virginia Average Days to Repair Table HC-8 Incremental and Cumulative Costs of Achieving 100% DSL Availability in SpinCo West Virginia Table HC-9 Verizon Cost Estimates to Expand DSL Deployment in SpinCo Territory Figures Figure 1 Initial Out of Service Trouble Reports per 100 Lines in Rochester: 2000- 2008 Figure 2 Initial Out of Service Interval in Rochester: 2000-2008 Figure 3 Frontier New York Major Service Outages: 2000-2008 Figure 4 Complaint Rate per 1,000 Lines for Frontier New York: May 2006 - December 2008 Figure 5 Percent Commitments Met, 200 1 - 2008 Figure 6 Average Installation Interval, 2001 - 2008 Figure 7 Initial Trouble Reports per 100 Lines, 2001 - 2008 Figure 8 Initial Out of Service Trouble Reports per 100 Lines, 2001 - 2008 Figure 9 Repeat Trouble Reports per 100 Lines, 2001 - 2008 Figure 10 Initial Out of Service Intervals, 2001 - 2008 Figure 11 Average Installation Interval for Verizon and Frontier (Holding Company): 2000-2008 Figure 12 Initial Trouble Reports per 100 Lines for Verizon and Frontier (Holding Company) : 2000-200 8 (annual) Figure 13 Initial Out of Service Interval for Verizon and Frontier (Holding Company): 2000-2008 Figure 14 Repeat Trouble Reports per 100 Lines for Verizon and Frontier (Holding Company): 2000-2008 (annual) Figure 15 Repeat Out of Service Interval for Verizon and Frontier (Holding Company): 2000-2008 Attachments Attachment A Statement of Qualifications of Susan M. Baldwin iii INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC Exhibits Exhibit SMB-1 Joint Applicants’ response to CWA Set 2 Question #20 (household, line, and broadband statistics for West Virginia) Exhibit SMB-2 Response to CWA Set 3 VZ112.pdf (map of the Verizon and Frontier service territory in West Virginia) Exhibit SMB-3 Verizon response to CAD Set 6, Question # T9, “WV CAD Set 6 VZ T9 Attach1 Extract Systems 2009 10 16.pdf” Exhibit SMB HC-4 Verizon response to CAD Set 6, Question #T13 (Cutover Plan Schedule) Exhibit SMB HC-5 NMOC/NNA portion of Verizon’s Cutover Plan (cover page and pages 83-84) Exhibit SMB HC-6 Field Operations portion of Frontier’s Cutover Task Document (cover page and pages 95-1 11) Exhibit SMB HC-7 HSR Attachment 4.c.39 (cover page, page 3 1) Exhibit SMB-8 Frontier’s Web Pages Advertising High Speed Internet Services Exhibit SMB C-9 Frontier response to WV CWA Set3 FR19e Exhibit SMB-HC-10 Verizon response to WV CAD Set 1, Question # E315 Exhibit SMB HC- 1 1 Verizon response to CAD Set 4, Question #B18 Exhibit SMB HC-12 April 16 Board of Directors Materials (cover page and page 20) Exhibit SMB HC-13 HSR Attachment 4.c.52, page 3. Exhibit SMB C-14 Frontier response to WV CAD Set 3 Question #F14 Exhibit SMB- 15 FCC Broadband Workshop “Technology/Fixed Broadband,” August 13, 2009, presentation of David Burstein, Editor, DSL Prime. Available at http://www. broadband.gov/ws-fixed-bb.htm1 . Exhibit SMB- 16 “More Consumers in Seven Ohio Communities Have Access to Fast, Affordable Verizon High Speed Internet Service,” December 22,2008. Exhibit SMB HC-17 Highly Confidential attachment 4.c.45 iv INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 I. INTRODUCTION 2 Qualifications 3 Q: Please state your name, position, and business address. 4 A: My name is Susan M. Baldwin. I am a consultant, and my business address is 17 5 Arlington Street, Newburyport, MA, 01 950. 6 Q: Please summarize your educational background and professional experience. 7 A: I have been specializing in telecommunications economics, regulation, and public policy, 8 for 25 years. I have prepared a Statement of Qualifications, which is included as 9 Attachment A. 10 Q: Have you previously testified before the Public Service Commission of West 11 Virginia (“Commission”)? 12 A: No. 13 Q: Have you testified before other State Commissions? 14 A: Yes. As Attachment A to my testimony shows, I have testified before nineteen state 15 commissions on diverse telecommunications issues encompassing such matters as 16 alternative regulation, revenue requirement, service quality, local competition, mergers, 17 infrastructure deployment, universal service, cost studies, rate design, telephone 18 numbering, and unbundled network elements. 19 Q: Have you analyzed major transactions concerning telecommunications carriers in 20 other regulatory proceedings? 21 A: Yes. During the past eleven years, I have participated in numerous state and federal 22 regulatory proceedings concerning mergers and spin-offs by telecommunications 1 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 companies. Most recently, on behalf of the New Hampshire Office of Consumer 2 Advocate (“OCA”), I analyzed the proposed sale by Verizon New England, Inc. 3 (“Verizon New England”) of its New Hampshire operations to FairPoint 4 Communications, Inc. (“FairPoint”) to assess the impact of the proposed transaction on 5 consumers.’ I also submitted testimony on behalf of the CWA and IBEW in Ohio and on 6 behalf of the IBEW in Illinois regarding the Verizon-Frontier transaction. 7 Q: Have you participated in other proceedings concerning Verizon companies’ 8 operations? 9 A: Yes. I have participated in numerous state and federal proceedings concerning the 10 regulation of many different aspects of Verizon and its predecessor companies (New 11 England Telephone and Telegraph Company (“NET”), NYNEX Corporation 12 (“NYNEX”), and Bell Atlantic), including such issues as its mergers with its potential 13 and actual competitors, deployment and pricing of new services, revenue requirement, 14 retail and wholesale rate design, retail and wholesale cost studies, service quality, 15 regulatory framework, affiliate transactions, and consumer protection. 16 Q: Deployment of advanced services is one of the issues that the proposed transaction 17 raises. Have you addressed this issue previously? 18 A: Yes. Among my recent work in this area is the preparation of comments, submitted in 19 Federal Communications Commission (“FCC”) proceedings, on behalf of consumer 20 advocates regarding numerous aspects of broadband services: the National Broadband ’ / Verizon New England Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Company, Verizon Select Services Inc. and FairPoint Communications, Inc. Joint Petition for Authority to Transfer Assets and Franchise to Fairpoint Communications, Inc., New Hampshire Public Utilities Commission Docket No. DT-07-011, testimony of Susan M. Baldwin, on behalf of the Office of Consumer Advocate, filed August 1,2007. 2 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Plan, deployment, industry practices, competition, consumer protection, and data 2 collection and analysis2 3 4 Also, when I served as the Director of Telecommunications for the Massachusetts 5 Department of Public Utilities (“DPU”) (subsequently the Department of 6 Telecommunications and Energy, and now the Department of Telecommunications and 7 Cable), I frequently dealt with issues concerning the deployment of then-advanced 8 infrastructure in the more sparsely populated parts of Massachusetts. For example, while 9 I was the Director of Telecommunications, the DPU directed NET to accelerate its 10 replacement of electromechanical switches in the Berk~hires,~and in another proceeding, 11 directed NET to set more affordable rates for and accelerate the deployment of its then 12 state-of-the-art Integrated Services Digital Network (“ISDN”) ~ervice.~Although ’ I Some of these FCC proceedings include: In The Matter of A National Broadband Plan for Our Future, GN Docket No. 09-5 1, Notice of Inquiry (“Broadband Plan NoI”), 24 FCC Rcd 4342 (rel. April 8,2009); In the Matter of Broadband Industry Practices, WC Docket No. 07-52, Notice of Inquiry (“Broadband Industry Practices Nor”), FCC 07-3 1 (rel. April 16,2007); In the Matter of Development of Nationwide Broadband Data to Evaluate Reasonable and Timely Deployment of Advanced Services to AN Americans, Improvement of Wireless Broadband Subscribership Data, and Development of Data on Interconnected Voice over Internet Protocol (VoIP) Subscribership, WC Docket No. 07-38, Notice of Proposed Rulemaking, rel. April 16,2007 (“Broadband Data NPRM”); In the Matter of Inquiry Concerning the Deployment of Advanced TelecommunicationsCapability to AN Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the TelecommunicationsAct of1996, GN Docket No. 07-45, Notice of Inquiry, FCC 07-2 1, rel. April 16,2007 (“Broadband Deployment Notice”); In the Matter of Consumer Protection in a Broadband Era, WC Docket No. 05-27 1. I also participated in several merger proceedings, in which the FCC addressed broadband deployment. / State regulators directed NET (now Verizon) to accelerate its replacement of outdated electromechanical central office switches in rural Massachusetts so that some communities would not be left behind, lacking access to touch tone, while NET advertised then-new features, such as call waiting, in urban and suburban communities. State regulators also directed NET to improve service quality in specific regions of the state where aging outside plant yielded inferior service quality. Massachusetts D.P.U. 89-300, New England Telephone Company, June 29, 1990. / The Massachusetts DPU found that ISDN is a “monopoly, basic service that has a potentially far- reaching and significant role in the telecommunications infrastructure of the Commonwealth” and directed NET to deploy ISDN more broadly so that consumers could avail themselves of this then “advanced” technology. ISDN Basic Service, Mass. D.P.U. 91-63-B, February 7, 1992, p. 34. 3 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC technology has evolved greatly since the late 1980s and early 1990s, public policy concerns about consumers’ disparate levels of access to advanced telecommunications services and incumbent carriers’ seemingly unilateral ability to control the deployment and prices of advanced services seem largely unchanged. 5 Q: Service quality is another concern in this proceeding. Have you analyzed service 6 quality in other regulatory proceedings? 7 A: Yes. I have examined service quality data and the regulation of service quality in 8 numerous proceedings. When I was the Director of Telecommunications for the 9 Massachusetts DPU ,the DPU conducted a comprehensive analysis of voluminous service 10 quality data submitted by NET,’ and later, on behalf of the Massachusetts Attorney 11 General, I analyzed service quality indices and productivity offsets as part of my analysis 12 of the proposed price cap plan submitted by NYNEX - Massachusetts.6 I have addressed 13 the service quality elements of various alternative regulation plans in numerous other 14 states; analyzed service quality in the context of a general rate case in Arkansas;’ and 15 prepared a detailed report on service quality and price cap plans on behalf of the Utah 16 Division of Public Utilities.8 17 18 More recently, on behalf of the Communications Workers of America, I testified in 19 proceedings in Connecticut and Maryland regarding service quality. Also, I testified on D.P.U. 89-300 (in the context of a traditional rate of return proceeding). D.P.U. 94-50. ’1 Arkansas Public Service Commission Docket No. 03-04 1-U. 81 “Price Cap Plan for USWC: Establishing Appropriate Price and Service Quality Incentives for Utah” (Patricia D. Kravtin, Scott C. Lundquist, and Susan M. Baldwin). Prepared for the Utah Division of Public Utilities, March 22, 2000. 4 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 behalf of the Massachusetts Office of the Attorney General in an investigation of service 2 quality. 3 Purpose of Testimony 4 Q: On whose behalf is this testimony submitted? 5 A: This testimony is submitted on behalf of the Communications Workers of America, AFL- 6 CIO (“CWA”). 7 Q: What is the purpose of your testimony at this time? 8 A: CWA asked me to analyze the merits of the proposed sale by Verizon Communications 9 Inc. (“Verizon’y)of its assets to Frontier Communications Inc. (“Frontier”) (collectively, 10 “Joint Applicants”), and the implications of the transaction for consumers in West 11 Virginia. 12 Q: What is the scope of your testimony? 13 A: Generally, my testimony: 14 Analyzes the specific risk of the cutover and its potential impact on consumers; 15 0 Analyzes the probable impact of the proposed transaction on network infrastructure 16 and broadband deployment; 17 Analyzes the impact of the proposed transaction on service quality; 18 Assesses the plausibility of the purported benefits that the Joint Applicants describe 19 regarding broadband deployment and service quality; and 20 Relies on the analyses and conclusions in the testimony of Randy Barber regarding 21 Frontier’s ability to finance the transaction, Frontier’s financial fitness, flaws with 22 Frontier’s financial projections, and integration and execution risks. 23 Organization of Testimony 24 Q: Ms. Baldwin, how is your testimony organized? 5 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 A: This section introduces my testimony. Section I1 provides a background of this 2 proceeding. Section I11 provides my understanding of the Commission’s standard of 3 review for the proposed transaction. In Section IV, I analyze the implications of the 4 proposed cutover for consumers. Section V analyzes Frontier’s broadband promises. 5 Section VI analyzes the implications of the proposed transaction for the level of service 6 quality that consumers receive in West Virginia. Section VI1 concludes my testimony. 7 Summary of Testimony 8 Q: Please summarize your major findings and recommendations. 9 A: My testimony demonstrates, among other things, that: 10 0 The success of Frontier’s cutover from Verizon’s systems to Frontier’s systems 11 depends on hundreds of complex tasks and systems, which entail all aspects of the 12 SpinCo operations. Although not identical, the cutover necessary when Verizon 13 sold its operations to Fairpoint sheds light on the general types of risks and 14 problems that could ensue if the proposed transaction occurs. 15 Integrating Verizon West Virginia’s systems with Frontier’s systems likely will be 16 time-consuming and potentially disruptive. 17 o Each of Frontier’s acquisitions of other companies that are discussed in the 18 Joint Applicants’ testimony occurred primarily in a single state and 19 entailed far fewer access lines than are contemplated in the proposed 20 transaction. 21 o In Rochester, systems integration did not occur until seven years after the 22 transaction closed. Even then, the conversion was accompanied by spikes 23 in service quality problems. 24 0 Frontier has not demonstrated that it has conducted comprehensive due diligence 25 regarding the state of Verizon West Virginia’s infrastructure. 26 o Frontier and its customers would have no recourse if, post-closing, 27 Frontier discovers that more funding is necessary than it had anticipated to 28 address aging infrastructure. 29 o Regardless of Frontier’s familiarity with Verizon’s network, it is unlikely 30 that Frontier would possess the fimding necessary to improve and to 31 maintain the network in West Virginia. 6 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 0 Frontier has not demonstrated that it would improve upon Verizon West 2 Virginia’s broadband deployment and pricing. o In contrast with Verizon’s experience throughout its national footprint with FiOS, “ultra 7 mbps” and other DSL services, Frontier’s broadband experience is largely limited to speeds up to 3 mbps download and 384 kbps upload. 7 o Frontier has not demonstrated why it would be able to justify broadband 8 deployment to areas that Verizon West Virginia has not yet served - the 9 locations where Verizon West Virginia has already deployed DSL are the 10 least costly or most profitable. 11 If the transaction goes awry, consumers will bear the consequences. 12 o Albeit not identical to the transaction under investigation, the FairPoint 13 experience is nonetheless instructive. 14 o Verizon West Virginia (and its predecessor companies) has had the 15 century-long opportunity to serve consumers primarily under monopoly 16 conditions and through that opportunity to rely on consumer-generated 17 funds to build an extensive network. Yet, if this deal goes sour, 18 consumers, and not Verizon, would suffer the consequences. 19 Even if the transaction does not go awry, it will adversely affect consumers 20 because Frontier’s financial constraints will prevent it from investing in the West 21 Virginia telecommunications infrastructure. 22 e No set of conditions would offset the risks of the transaction. I recommend, 23 therefore, that the Commission deny the application and reject the proposed 24 transaction. 25 o If, nonetheless, the Commission decides to grant the application, it should 26 impose conditions with specific measurable and enforceable commitments 27 that would at least partially offset the risks to consumers. 7 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 11. OVERVIEW OF APPLICATION 3 The Proposed Transaction 4 Q: Please describe your understanding of the proposed transaction. 5 A: According to the Prospectus Frontier filed with the Securities and Exchange Commission 6 on September 16,2009, Frontier proposes to purchase Verizon’s rural assets in 14 states. 7 As described in the Prospectus, these assets include: 8 [Llocal exchange service, designated intrastate and interstate long distance 9 service, network access service, Internet access service, enhanced voice 10 and data services, digital subscriber line services, referred to as DSL, fiber- 11 to-the-premises voice, broadband and video services, wholesale services, 12 operator services, directory assistance services, customer service to end 13 users, and, in connection with the foregoing, repairs, billing and 14 collections, as well as other specified activities of Verizon in the Spinco 15 territory. The conveyed assets will specifically include designated fiber-to- 16 the-premises network elements and customer premises equipment at fiber- 17 to-the-premises subscriber locations in the states of Indiana, Oregon and 18 Washington and specified related transmission facilities.’ 19 20 The transaction would make Frontier the fifth largest incumbent local exchange carrier 21 (“ILEC”) in the United States.” Table 1 summarizes the number of Frontier lines, per 22 state, pre- and post closing. qt Prospectus, at IO. lo/ Id., at 11. 8 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Table 1 2 Frontier Access Lines Before and After Proposed Transaction" Before Tranasction After Transaction State Frontier Spinco Combined Company Arizona 145,241 6,297 151,538 California 143,871 24,205 168,076 Idaho 20,035 113,002 133,037 Illinois 97,461 573,321 670,782 Indiana 4,647 71 8,251 722,898 Michigan 19,102 507,462 526,564 Minnesota 210,983 0 210,983 New York 683,880 0 683,880 North Carolina 0 263,479 263,479 Ohio 552 634,153 634,705 Oregon 12,626 309,904 322,530 Pennsylvania 427,489 0 427,489 South Carolina 0 127,718 127,718 Washington 0 578,506 578,506 West Virginia 143,982 617,036 761,018 Wisconsin 62,007 281,350 343,357 Other States (') 282,457 35,989 318,446 Total: 2,254,333 4,790,673 7,045,006 (1) Includes Tennessee, Nevada, Iowa, Nebraska, Alabama, Uta Georgia, New Mexico, Montana, Mississippi and Florida. 3 4 Q: How and when did the proposed transaction come about? 5 A: On February 1 1,2009, Frontier's Chairman, President and CEO, Mary Agnes 6 Wilderotter, contacted Verizon's Chairman and CEO, Ivan Seidenberg, about the 7 possibility of Frontier acquiring portions of Verizon's local exchanges business. In early 8 March, the two spoke again about a preliminary proposal, which Frontier presented to " / Id., at 159. 9 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Verizon on March 1 1,2009. By April 29,2009, the parties had agreed to a working 2 framework for valuing the transaction. On March 3,2009, Frontier presented Verizon 3 with a draft merger agreement. On May 13,2009, Frontier and Verizon finalized and 4 executed the merger agreement and announced the proposed rnerger.l2 5 Q: How many days passed between Ms. Wilderotter’s initial contact with Mr. 6 Seidenberg and the signing of the merger agreement? 7 A: The discussions and negotiations lasted 90 days, but the duration of the substantive 8 discussions was only approximately two months - between mid-March and mid-May. 9 Further discussions resulted in an amendment to the merger clarifLing some terms. This 10 amendment was signed on July 24, 2009.13 11 Q: When did the Joint Applicants submit their application to the Commission? 12 A; The Joint Applicants submitted their application to the Commission on May 29,2009. 13 Daniel McCarthy, Executive Vice President and Chief Operating Officer and J. Michael 14 Swatts, West Virginia Area General Manager, submitted panel testimony on behalf of 15 Frontier and Billy Jack Gregg also submitted testimony on behalf of Frontier. Stephen E. 16 Smith and Kathy L. Buckley submitted panel testimony on behalf of Verizon. 17 Q: What topics do Frontier’s witnesses address? 18 A: Messrs. McCarthy and Swatts provide a general overview of the transaction, discuss 19 broadband deployment and service quality, explain some organizational matters 20 concerning the proposed combined company, and discuss some aspects of the cutover. I Id., at 46-5 1. j3 I Id., at 51. 10 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Mr. Gregg discusses the impact of the transaction on consumers and the likely impact of 2 the transaction on broadband deployment and service q~a1ity.I~ 3 Q: What topics do Verizon’s witnesses address? 4 A: Mr. Smith and Ms. Buckley, on behalf of Verizon, discuss the mechanics of the proposed 5 transaction and systems integrati~n.’~In addition, they discuss the effect of the 6 transaction on the E91 1 system.16 7 Q: What specific plans do Messers McCarthy and Swatt describe for extending 8 broadband deployment in West Virginia? 9 A: Very little. Witnesses McCarthy and Swatt provide only a “plan” in generalities: 10 Frontier is in the process of identifying the areas in West Virginia in which 11 broadband can be reasonably and economically deployed on a timely basis. 12 Frontier, of course, will not be able to immediately deploy broadband- 13 capable infrastructure to all areas. Therefore, as with most network 14 investment plans of this magnitude, we have to make decisions, based on 15 the relevant business case scenarios, on where to deploy such 16 infrastructure first. We are currently in the process of determining where 17 we will augment the broadband network first, but in typical deployment 18 schedules we build out to areas where we can reach the highest number of 19 customers most quickly. Nonetheless, over time, we would expect that 20 Frontier will be able to significantly increase broadband deployment levels 21 in the acquired Verizon territories in West Virginia which are on average 22 more densely populated than the areas Frontier currently serves in West 23 Virginia. *’ 24 25 They also assert that “Frontier will have the financial flexibility and resources to make the l4 / Gregg Direct (Frontier), at 2. l5 / Smith Buckley Direct (Verizon), at 3. l6 / Id, at 19 and E91 1 Testimony Addendum. l7 / McCarthy/Swatts Direct (Frontier), at 28. 11 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 needed investments in the network and to expand broadband deployment over time.”’8 2 Q: What do Messers McCarthy and Swatt say about the importance of broadband 3 deployment grants? 4 A: The witnesses suggest that deployment to some areas of the Verizon West Virginia 5 service territory will only be possible with these grants, and that the realization of the 6 grants is uncertain. 7 The opportunity to seek and receive broadband funding for projects in 8 these areas can be helpful in accelerating broadband deployment and assist 9 in funding projects that would not otherwise be economically justified. 10 While the timing of the applications period for the second and third rounds 11 of funding is not yet definitively known, timely approval of the Frontier 12 acquisition will increase the likelihood of Frontier being in a position to 13 apply for funding in the rural portions of Verizon’s service territory. Until 14 the West Virginia Commission approves the proposed transaction 15 however, it is unlikely that either RUS or NTIA will give serious 16 consideration and priority to any Frontier funding application and request 17 in Verizon’s West Virginia service territory. This is one of the reasons 18 why we have asked this and other Commissions to act expeditiously in 19 their review of the proposed transaction.” 20 21 Q: Do Messrs. McCarthy and Swatt provide a detailed capital budget for the 22 assets it intends to purchase from Verizon? 23 A: No. They state: 24 Based on our review, we have estimated an amount of capital investment 25 to be spent on the current network. This estimate is on a total transaction 26 basis. State specific plans and investment amounts have not yet been 27 developed.20 28 29 Q: How do Messrs. McCarthy and Swatt describe their intentions regarding service 18/ Id., at 26. l9 t Id.,, at 32. 2o / Id., at 48. 12 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 quality? 2 A: They state that “Frontier’s overarching objective will be to maintain and improve the 3 service that is currently provided.”21 They also indicate that they are aware that Verizon 4 has a stipulated Retail Service Quality Plan that the Commission adopted in Case No. 08- 5 076 1-T-GI.22 6 Q: How does Mr. Gregg describe Frontier’s current business? 7 A: Mr. Gregg states that Frontier (then Citizens) first entered the West Virginia market in 8 1993 when it acquired GTE’s west Virginia assets. Citizens subsequently acquired 9 Alltel’s territories, and changed its name to Frontier in 2002.23 Frontier currently serves 10 approximately 143,982 access lines in West Virginia.24 11 Q: How does Mr. Gregg describe the transaction in West Virginia? 12 A: Mr. Gregg state that under the proposed transaction, Frontier will acquire control of 13 Verizon West Virginia, “including its assets, physical infrastructure, liabilities, service 14 contracts, and interconnection obligation^."^^ He adds that most current Verizon West 1s Virginia employees will become Frontier employees and that the combined operations in 16 West Virginia would become the largest telecommunications company in West 17 Virginia.26 In addition, West Virginia would become the state with the greatest number 18 of lines for Fr~ntier.~’Mr. Gregg opines that the transaction should allow the combined 21 I Id., at 38. 22 I Id. ” I Gregg Direct (Frontier), at 5. 24~ M.,at 5. 25 t Id.. at 6-7. 26 t Id., at 7. 27~ 14, at 7. 13 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 company to achieve “adequate scale and scope and sufficient cash flow to cope with any 2 emergency and meet any long term challenge” and that the “combining of scattered 3 service areas into a single company should also produce substantial efficiencies over 4 time.”28 Mr. Gregg also states that “to a large extent, the success of Frontier 5 Communications as a whole will depend on its performance in West Virginia.”29 Mr. 6 Gregg also states that “Frontier is focused on rural markets like West Virginia.”30 7 Q: How much USF support do the Joint Applicants currently receive? 8 A: Mr. Gregg states that in 2008, Verizon West Virginia received $28.2 million in high cost 9 model and interstate access support, and Frontier West Virginia received $15 million in 10 high-cost loop, local switching, and interstate access s~pport.~’Mr. Gregg asserts that 11 after the transaction, Frontier will continue to receive its own support, as well as the 12 support previously received by Veri~on.~~Dividing total USF support by the 2008 access 13 lines for Verizon and Frontier, respectively, yields average support of $3 .SO per line per 14 month for Verizon and $8.78 per line per month for Frontier.33 According to Mr. Gregg, 15 “[allthough at the current time USF support cannot be used directly for broadband, the 16 higher level of support received by Frontier is obviously helpful in upgrading outside 17 plant which can be used to provision both broadband and basic voice services.”34 18 Q: Are these same levels of federal universal service support guaranteed for the future? 28 I Id., at 9 291 Id.,at 10. 30 I Id., at 10. 3’ I Id., at 9. 32/ Id., at9. 33 I Verizon response to CWA-19. 34 1 Id. 14 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 A: No. Although the transaction will not affect the USF support that will be available for the 2 Frontier and SpinCo territories in West Virginia, federal regulatory developments could 3 lead to changes in universal service funding mechanisms in the future. The FCC is 4 examining various proposals to reform the universal service regime including the 5 calculation and disbursement of universal service support; the services eligible for 6 support; and the manner in which contributions to the hnd are ~ollected.~’ 7 Q: Does the transaction require any approvals other than that of the Commission? 8 A: Yes. The merger agreement also requires the approval of regulators in Arizona, 9 California, Illinois, Nevada, Ohio, Oregon, South Carolina, and Wa~hington.~~ 10 Regulators in other states may require that Frontier, Verizon, or both companies obtain 11 approvals or authorizations. In addition, Verizon must obtain regulatory approval in 12 Pennsylvania to transfer a portion of Verizon’s ILEC operations out of Verizon North. 13 Frontier and Verizon must acquire approval to provide video service in 4 1 local franchise 14 authorities in Oregon and Wa~hington.~’Also, the FCC is investigating the transaction in 15 WC Docket No. 09-95.38 16 Q: Please provide a brief overview of the scale of operations that Frontier and Verizon 35 / High-Cost Universal Service Support; Federal-State Joint Board on Universal Service; Lifeline and Link Up; Universal Service Contribution Methodology; Numbering Resource Optimization; Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Developing a Unified Intercarrier Compensation Regime; Intercarrier Compensation for ISP-Bound Traffic; IP-Enabled Services, CC Docket Nos. 96-45,96-98,99- 68,99-200,Ol-92, WC Docket Nos. 03-109,04-36,05-337,06-122, Order on Remand and Report and Order and Further Notice of Proposed Rulemaking, rel. Nov. 5,2008. 36 / Regulators in California, Nevada, and South Carolina recently approved settlements that culminated their review of the transaction. 37 / Prospectus, at 73. 38 / Initial comments and reply comments were filed with the FCC on September 2 1 and October 13, respectively. See FCC Public Notice, Applications Filed by Frontier Communications Corporation and Verizon Communications Inc. for Assignment or Transfer of Control, WC Docket No. 09-95, released: August 1 1,2009. 15 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 West Virginia each control presently in West Virginia. 2 A: Mr. Gregg states that Verizon provides about 617,000 lines in West Virginia:’ and 3 Frontier currently serves 163,638 lines.40 Verizon offers 60% of its West Virginia 4 households with access to broadband technology:* while Frontier offers broadband to 5 94% of its residential customers.42 According to Mr. Gregg, the vast majority of West 6 Virginia households without access to any land-based broadband are located in Verizon 7 West Virginia’s service area:3 Exhibit SMB-1, which reproduces the attachment to the 8 Joint Applicants’ response to CWA Set 2, Question #20, provides data regarding, among 9 other things, households, lines, customers with broadband, and percentage of customers 10 subscribing to broadband separately for Verizon and for Frontier. 11 Q: Please provide some summary statistics regarding the scale of Verizon’s operations 12 in West Virginia. 13 A: Based on the most recent data available from the FCC, as of June 30,2008, Verizon 14 served approximately 596,504 retail access lines in West Virginia, approximately 2,690 15 lines on a resale basis, approximately 49,35 1 unbundled network element loops (“UNE 16 loops”) and approximately 24,061 “Wholesale Advantage” loop platforms.44 Verizon 17 West Virginia’s intrastate revenues were $356 million, and its non-regulated revenues 39 I Gregg Direct (Frontier), at 4. 40 I Id., at 5. 41 / Id., at 14. 421 Id, at 15. 43 I Id., at 14. 44 / FCC, Wireline Competition Bureau, “Selected June 30,2008 Data Filed for the Incumbent Local Exchange Carrier Operations of the Regional Bell Operating Companies,” released July 2009. Available at: http:l/www.fcc.govlwcb/iatd/comp.html.“Wholesale Advantage” is a product that replaces unbundled network element platform (“WE-P”) as a result of the FCC’s order eliminating the requirement that ILECs offer WE-Ps to 16 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 were $33 million in 2007.45 2 Q: Where do the Joint Applicants offer service in West Virginia? 3 A: Verizon West Virginia offers service in 142 wire centers located in 47 West Virginia 4 counties?6 Frontier currently offers service in 76 wire centers located in 38 counties in 5 West Virgi11ia.4~ Exhibit SMB-2 reproduces a map of the Verizon and Frontier service 6 territory in West Virginia.48The density in the entire SpinCo footprint is 35 access lines 7 per square mile and the density within Frontier’s existing territories is 17 access lines per 8 square miles4’ 9 Q: Please describe more about Verizon’s operations in West Virginia. 10 A: Verizon’s West Virginia territory encompasses << 11 CONFIDENTIAL 12 13 14 15 competitors. 45 I FCC, Report 43-01, the ARMIS Annual Summary Report, Table I. Cost and Revenue, row 1090. Verizon was not required to report these figures for 2008. 46 I Joint West Virginia Application, at 6. 4’/ Id. 48 / Exhibit SMB-2 reproduces the Joint Applicants’ response to CWA Set 3 VZ112.pdf. 49 I Response to CWA Set 1, Request #44. 17 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 3 4 5 6 7 8 ~ ~ 9 END HIGHLY 10 CONFIDENTIAL>>> 11 Q: What are the implications, at a very general level, of Frontier acquiring Verizon’s 12 operations in West Virginia? 13 A: The transaction would lead to a huge change in the scale of Frontier’s nationwide and 14 West Virginia operations, which, in turn, has implications for, among other things, 15 systems integration, broadband deployment, and quality of service. Also, simultaneously, 16 Frontier would acquire operations in 13 other states. As Mr. Gregg stated, “to a large 17 extent, the success of Frontier Communications as a whole will depend on its 18 performance in West ~irginia.~~” 50 / HSR Attachment 4.c.8, page 8. The Joint Applicants provided the HSR documents in response to CWA Set 1, Request #5. 51 / Gregg Direct (Frontier), at 10. 18 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Q: Please describe the difference in size between Frontier Communications and 2 “Spinco” (the assets Frontier proposes to purchase from Verizon). 3 A: Table 3 below summarizes some key statistics relating to the relative sizes of the Joint 4 Applicants and the combined company, based on data provided in Frontier’s Prospectus. 5 Tab1e352 6 Selected Financial and Operational Data as of December 31,2008 7 (Dollars in Millions) Frontier Spinco Combined Company Operating Revenues $2,237 $4,352 $6,494 Net Income $183 $552 $572 Capital Expenditures $288 $730 $1,018 Access Lines 2,254,333 4,766,000 7,020,333 ResidentialAccess Lines 1,454,268 NA NA Business Access Lines 800,065 NA NA High Speed Internet Subscriptions 579,943 887,000 1,466,943 FiOS Internet subscriptions 0 110,000 110,000 Video subscriptions 119,919 69,000 188,919 NA: not available 8 9 10 Q: Why are Frontier’s plans in other jurisdictions relevant to this proceeding? 11 A: The complexity of the transaction in general could jeopardize the success of the 12 transaction within West Virginia, with corporate resources being spread over the 14 13 affected states. 14 Q: Ms. Baldwin, you mentioned earlier that you have examined numerous acquisitions, 15 mergers, and spin-offs, dating back to the late 1990s. Is there anything that, in your 16 view, distinguishes this proposed transaction from the other transactions that you 17 have analyzed? 52/ Prospectus, at 16, 17, 128, 148, 152, and 172. 19 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Yes. Of the many mergers, acquisitions, and spin-offs that I have analyzed, this 2 transaction most closely resembles the FairPoint transaction in the risks that it presents. 3 The many mergers among Bell operating companies, between Bell Atlantic and GTE, and 4 between incumbent local exchange carriers (“ILEC”) and the nation’s largest 5 interexchange carriers (the AT&T/SBC and VerizodMCI mergers) raised serious 6 concerns about the loss of competitors in relevant markets and concerns about vague 7 promises of benefits, among other things, but did not raise such sobering questions about 8 the acquiring company’s financial and technical resources to run a telephone company. 9 Q: Frontier asserts that this transaction differs from the FairPoint tran~action.~~ 10 Please comment. 11 A: Every company is different, and of course each transaction raises its own set of issues that 12 merit specific regulatory attention. However, along the spectrum of transactions that I 13 have examined in the past eleven years, for the reasons set forth in my testimony and in 14 the testimony of Mr. Barber, I believe that this transaction is most similar in its structure 15 and risks to the FairPoint transaction. The proposed Verizon-Frontier transaction 16 involves a highly complex process of moving numerous Verizon operations to new 17 locations (including call centers, dispatch centers, data centers, and even the network 18 operations center), replicating and testing hundreds of computer systems, implementing a 19 complex cutover, and fully converting onto Frontier’s systems all of the systems used to 20 operate Verizon. 53 I McCarthy/Swatts Direct (Frontier), at 57. 20 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 2 111. STANDARD OF REVIEW 3 Q: What is your understanding of the standard of review that applies to the proposed 4 transaction? 5 A: I am advised by counsel that the West Virginia Supreme Court of Appeals has long held 6 that the primary purpose of the PSC is to “serve the interests of the public.” In addition, 7 as this Commission noted in its Order of July 23,2009 in this matter, in order to consent 8 to this proposed acquisition the Commission “must find that the terrns of and conditions 9 of the transactions are reasonable, that neither party is given an undue advantage over the 10 other, and that the transactions do not adversely affect the public in this state.”54 11 In the following sections of my testimony, I demonstrate that the proposed transaction 12 does not meet the statutory criteria because the transaction does not promote the public 13 interest and likely would cause customer service and service quality to deteriorate. 54 I Order at page 3; see W.Va. Code section 24-2-12. 21 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 IV. CUTOVER 3 Overview 4 Q: Does the proposed transaction require the cutover of numerous systems from 5 Verizon to Frontier? 6 A: Yes. Presently, Verizon relies on many customer service support systems for activities 7 such as retail ordering and billing, wholesale ordering and billing, and network 8 monitoring and maintenance. Frontier must cutover these systems the day of closing. 9 Q: How are the Joint Applicants preparing for the cutover? 10 A: The Joint Applicants have established a Cutover Planning Committee (“CPC”), which 11 holds weekly meetings and which Verizon’s and Frontier’s subject matter experts 12 attend.55 The Cutover Task Force (which the Applicants refer to in response to Comcast 13 Request No. 1.028) and the CPC described in the testimony of Messrs. Smith and 14 Buckley testimony are the same entities.56 There are no minutes of the CPC. 57 Among 15 the documents relating to the cutover and realignment that the Joint Applicants have 16 provided in this proceeding include: 55 I Frontier response to CAD Set 8, Question # M77. Verizon’s CPC representatives “are senior leaders both of who have expertise in the cutover process through their experiences in prior transactions requiring a cutover.” Verizon response to CAD Set 6, Question # T13. Verizon and Frontier each designate two representatives to the CPC. Response to CWA Set 1, Question # 48. 56 / Frontier response to CAD Set 8, Question # M77. 22 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 0 Cutover Plan Support Agreement, dated May 13, 1009.58 2 Verizon’s Cutover Plan, which the Joint Applicants provided on October 16.59 3 The Cutover Plan Schedule, as of October 21, 2009.60 4 A Deliverables Schedule, as of October 14, 2009.61 5 A list of Verizon systems from which extracts will be takenF2 6 Frontier’s Cutover Plan: West Virginia September 2009, which the Joint Applicants 7 submitted November 6.63 8 Realignment Plan, September 22,2009, which the Joint Applicants submitted 9 October 16, 2009F4 10 Cutover agreement 11 Q: Have you reviewed the cutover agreement, and if so, what is your understanding of 12 some of the major provisions encompassed by the agreement? 13 A: Yes. << 15 16 58 I Provided in response to CWA Set 1 VZ 3a. 59 I Cutover Plan Final 2009 Highly Proprietary.pdf’ was provided by Verizon as a Supplement to CAD’s 4th Requests (Question M 45) on October 16,2009. 6o I WV CAD Set6 VZ T13 CutoverPlnSchedlOl909 HIGHLY CONFIDENTIAL.pdf. 61 / CADSet6T14DeliverSchI 0 1609 HIGHLY CONFIDENTIAL.pdf 62 I CADSet6VZT9Attach 1ExtractSystems 2009 10 16.pdf. 63 I Frontier response to CAD Set 8, Question # M77, and Supplemental Response (Frontier WV Cutover Tasks Final HIGHLY CONFIDENTIAL.pdf). 64 I This was provided by Verizon as a Supplement to CAD’s 4th Requests (Question M 45) on October 16, 2009. Verizon submitted 11 1 of 250 pages, and did not submit those pages that are purportedly specific to states other than West Virginia. 23 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 - 4 5 - 6 7 8 9 10 11 12 13 14 15 16 17 18 19 65 / Cutover Plan Support Agreement, at 1. 66 / Id., at 3. 6’ I Id., at 3. 24 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 3 3 4 5 1 6 7 8 9 1 10 END HIGHLY CONFIDENTIAL>>> 11 Outside assistance and employee training 12 Q: Is Frontier using any outside experts or “third parties” to assist with the cutover? 13 A: This is not clear. Frontier simply states that “[iln executing any IT project of 14 significance, Frontier, like any company, uses a combination of both its expert employees 15 and other specialists, and is executing the same strategy with respect to this 16 transaction.9770 17 Q: Please describe your understanding of the training that the Joint Applicants 18 propose for the new systems. 19 A: I am not aware of any specific detailed plans for training; however, documents provided “ I Id., at 3. 691 Id., at 8. 70 I Frontier response to CAD Set 4, Question # 448. See also Frontier response to CAD Set 4, Question #49, in which Frontier states that it “has not made a final determination on how third-party contractors may be utilized.” 25 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 include various references to training associated with the transaction and cutover. In one 2 data response, Frontier indicates that it anticipates that customer service representatives 3 and retail service support staff who support West Virginia and who are transitioned to 4 Frontier will receive training regarding such aspects of Frontier’s operations as products 5 and services, promotions, and billing and other operational support systems after the 6 closing of the transaction.” While Frontier will be using its existing systems post- 7 cutover, those systems will be new to the Verizon employees who will be using them. 8 Given the large quantity of Frontier systems that existing Verizon employees will need to 9 use, it is surprising that the training would not occur until after the transaction is closed. 10 11 The Cutover Agreement, << 14 END HIGHLY CONFIDENTIAL>>> I am not aware of any 15 specific plans (that is instructors, training manuals, dates scheduled for training, etc.) 16 regarding detailed training plans. 17 18 Frontier’s Cutover Task Document, << 20 71 / Frontier response to CAD Set 1, Question # 20. 72 I Cutover Agreement, at 4. 26 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 END HIGHLY CONFIDENTIAL>>> 73 I See, e.g., Cutover Task Document, at 96. 74 I Id. 75 f Id., at 99. 76 I Id. 27 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Q: For what period of time after the cutover occurs does Verizon intend to make its 2 subject matter experts available to Frontier? 3 A: Pursuant to the Cutover Agreement, << 4 5 6 7 CONFIDENTIAL> 8 Q: Why are training and reliance on Verizon’s subject matter experts important? 9 A: Employees that have been using Verizon’s systems for years for all aspects of the 10 business will suddenly need to use a vast new array of Frontier systems. Given the 11 complexity of the changes contemplated by the proposed transaction, adequate training is 12 essential. 13 Verizon’s role in transferring customer information to Frontier 14 Q: Please describe your understanding of Verizon’s role in transferring customer 15 information to Frontier. 16 A: Verizon describes its role as including: (1) identiQing the Verizon systems from which 17 data should be extracted; (2) explaining the content and format of the extracted data to 18 Frontier so that Frontier can identifj the data that it requires; (3) extracting the data that 19 Frontier requires; and (4) delivering the data to Frontier. Verizon further states that the 20 “parties are cooperating throughout the proce~s.’’~* 77 I Cutover Agreement, at 8. 78 / Verizon response to CAD Set 6, Question # T9. See also file entitled “WV CAD Set 6 VZ T9 Attach1 Extract Systems 2009 10 16.pdf’ (included as Exhibit SMB-3) for a list of the systems from which Verizon will 28 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 Verizon will transfer customer information to the Frontier systems: DPI, Metasolv, CDG 3 CABS and Infinum, which are located (and will remain in) Rochester, New York?’ 4 Verizon will provide at least two test extracts to Verizon and “will maintain data for a 5 period of time after closing to allow Frontier to recover data if it is not transferred 6 properly.”80 Verizon indicates that Frontier is finalizing a plan for verifying the accuracy 7 of the data that Verizon extracts and delivers to Frontier.81 I am not aware whether 8 Frontier has completed this plan or provided this plan in response to data requests in this 9 proceeding. 10 Q: Please describe generally the computer systems that now support Verizon’s 11 operations in West Virginia. 12 A: Verizon uses regional computer systems that support the former Chesapeake and Potomac 13 companies in Maryland, Washington, DC, Virginia and West Virginia as well national 14 systems that support all of Verizon’s local exchange companies.82 The systems support 15 retail ordering and billing, CLEC ordering and billing, network monitoring and 16 maintenance and all customer support functions.83 17 Q: Has Verizon provided a list of the systems from which data extracts will be taken? extract information. 79 / Verizon response to CAD Set 6, Question # T10. / Verizon response to CAD Set 6, Question # TI 1. Verizon does not specify the period of time that it intends to retain the data. Id 81 / Verizon response to CAD Set 6, Question # T1 1 . 82 / SmithBuckley Direct (Verizon), at 11. 83 I Id. 29 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Yes. Verizon included a list of 156 systems from which data extracts will be taken.84 I 2 am not a systems expert, but on its face, extracting data from 156 unique systems, which 3 Verizon has been developing and using over many years, to then be incorporated 4 accurately and seamlessly by Frontier into its own systems seems to be a formidable 5 undertaking, with multiple opportunities for glitches. These systems support a myriad of 6 everyday activities that are essential to operations in West Virginia, such as dispatching 7 technicians, rendering bills to retail and wholesale customers, and monitoring the 8 network, and therefore the success of the cutover has wide-ranging repercussions for 9 West Virginia. 10 Planned versus actual schedule for cutover tasks 11 Q: Have you reviewed the status of the deliverables relating to the cutover? 12 A: Yes. According to Verizon, the first test extract is currently underway, and, as of October 13 6,2009, Verizon has delivered 162 of 191 scheduled extracts.85 Also, I reviewed the 14 Cutover Plan Schedule,86which I have included as Highly Confidential Exhibit SMB- 15 HC-4, and which has a status date of October 21,2009. << 16 CONFIDENTIAL 17 18 19 20 84 I Verizon response to CAD Set 6, Question #T9, Attachment Extract Systems, which I have reproduced as Exhibit SMBJ. 85 i Verizon response to CAD Set 6, Question #T14. 30 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 3 4 HIGHLY CONFIDENTIAL>>> 5 Cutover plan description 6 Q: Have you reviewed the Cutover Plan that Verizon prepared? 7 A: Yes, generally. << 10 11 12 13 14 15 16 17 18 - 19 - I Verizon response to CAD Set 6, Question #T 13. " 1 Cutover Plan, at 2. "1 M.,at 3. 89/ Id. 31 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 90 1 Id. 91 Id. 92 I Id., at 4. 32 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 10 11 12 13 14 15 16 17 18 19 20 93/ Id., at 5. 33 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 END HIGHLY- CONFIDENTIAL>>> 94 I Id., at 5-6. 34 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 Q: What do you conclude based on your review of Verizon’s Cutover Plan? 3 A: The Cutover Plan includes numerous complex elements by which Verizon must prepare 4 its many systems as well as third party vendor systems for cutover to Frontier. The 5 process likely will be challenging and time-consuming because the systems affect all 6 operations of Verizon’s business. 7 Cutover preparation task description 8 9 Q: Have you reviewed Frontier’s Cutover Task Description? 10 A: Yes. This Cutover Task Description << 11 12 13 14 15 16 17 18 19 95/ Id., at 2. 96 I Id., at 4. 35 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 97/ Id., at 5. 98 I Although Frontier refers to the document as a “Cutover Plan,’’ I use the term Cutover Task Document to distinguish Frontier’s document from the separate Cutover Plan that Verizon prepared. 99 / Id., at 6. 100, Id., at 4. 101 Id., at 42. 102 Id., at 46. 36 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 103, Cutover Task Document, at 97 (included in Highly Confidential Exhibit SMB-HC-6). 37 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 CONFIDENTIAL>>> 3 Q: What do you conclude based on your review of the Cutover Task Document? 4 A: The cutover of systems from Verizon to Frontier appears enormously complicated and 5 involves all aspects of numerous operations that now support Verizon’s operations in 6 West Virginia. 7 Q: How is Frontier preparing for the cutover? 8 A: Frontier intends to add or modify hardware if and as necessary to size its existing 9 hardware inventory, and the assessment of such upgrades is ongoing. lo5 Frontier’s 10 software additions and modifications relating to the cutover are set forth in the Cutover 11 Preparation Task Description. 106 12 Realignment pro cess 13 Q: Could Frontier’s systems integration in the other 13 SpinCo states affect consumers 14 in West Virginia? 15 A: Yes. Frontier’s efforts to integrate systems in thirteen states will require significant 16 corporate attention and company resources. Also, Frontier will need to pay Verizon $94 17 million per yearlo7until it transfers a complex collection of systems to Frontier’s own 18 platform. These are monies that then are not available for broadband deployment, 19 infiastructure investment, and improving service quality in any of the states in the newly 104 Id., at 101. 105 Frontier response to CAD Set 6 Question # T27. 106 Id. lo7 I Prospectus, p. 155 38 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 acquired SpinCo footprint. 2 Q: Has Verizon provided the realignment plan that explains how it will create the 3 systems Frontier will need to run the business? 4 A: Yes, in part. Verizon submitted portions of its Realignment Plan, dated September 22, 5 2009. lo* 6 Q: Have you reviewed those portions of the Realignment Plan that Verizon submitted 7 in West Virginia? 8 A: Yes. << 9 10 11 12 13 14 15 16 17 18 19 20 21 108, Verizon supplemental response to Comcast interrogatory 1.045. 39 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 5 END HIGHLY CONFIDENTIAL>>> I recommend that the 6 -Commission require the Joint Applicants to submit regular updates to the Commission 7 regarding progress and any changes to the Realignment Plan during this proceeding. 8 Q: What might be the relationship of those aspects of the realignment process that the 9 Applicants have redacted from the plan to the transaction in West Virginia? 10 A: The Joint Applicants’ efforts to replicate and integrate operations in the 13 other states 11 likely will require significant resources. Frontier’s success in the other thirteen states and 12 the level of resources required to implement the transaction will affect the overall 13 viability of the transaction, which, in turn will affect West Virginia customers. 14 Q: What do you conclude from your review of these various documents? 15 A: I conclude that Frontier’s due diligence process was rushed (approximately three months 16 passed between the initial exploration and the announced transaction); substantial 17 resources will be required to complete the planned integration and cutover; and 18 uncertainties about significant aspects of the transaction, which would affect customer 19 support, remain. 20 Q: Does the prospectus provide any further information about the cutover and the 21 systems integration? 22 A: Yes. Among other things, the prospectus states: 40 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 The acquisition of the Spinco business is the largest and most significant 2 acquisition Frontier has undertaken. Frontier management will be required 3 to devote a significant amount of time and attention to the process of 4 integrating the operations of Frontier’s business and the Spinco business, 5 which may decrease the time they will have to serve existing customers, 6 attract new customers and develop new services or strategies. Frontier 7 expects that the Spinco business will be operating on an independent basis, 8 separate from Verizon’ s other businesses and operations, immediately 9 prior to the closing of the merger (other than with respect to the portion 10 operated in West Virginia, which is expected to be ready for integration 11 into Frontier’s existing business at the closing of the merger) and will not 12 require significant post-closing integration for Frontier to continue the 13 operations of the Spinco business immediately after the merger. However, 14 the size and complexity of the Spinco business and the process of using 15 Frontier’s existing common support hctions and systems to manage the 16 Spinco business after the merger, if not managed successfully by Frontier 17 management, may result in interruptions of the business activities of the 18 combined company that could have a material adverse effect on the 19 combined company’s business, financial condition and results of 20 operations. In addition, Frontier management will be required to devote a 21 significant amount of time and attention before completion of the merger 22 to the process of migrating the systems and process supporting the 23 operations of the Spinco business in West Virginia from systems owned 24 and operated by Verizon to those owned and operated by Frontier. The 25 size, complexity and timing of this migration, if not managed successhlly 26 by Frontier management, may result in interruptions of Frontier’s business 27 activities.lo9 28 29 Furthermore, the prospectus specifically identifies, among the various risks and 30 uncertainties relating to the transaction, “the ability to successfully integrate the Spinco’s 31 business’s operations into Frontier’s existing operations” and also “the ability to migrate 32 the Spinco business’s West Virginia operations from Verizon owned and operated 33 systems and processes to Frontier owned and operated systems and processes 34 35 Q: What is the significance of this excerpt from the Prospectus? 109 Prospectus, at 24-25. 41 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin W Case No.09-0871 -T-PC 1 A: As the Prospectus recognizes in the excerpts quoted above, the cutover represents a risk 2 to the entire transaction, with consumers in West Virginia incurring the greatest risk. 3 Joint Applicants’ comparison of proposed cutover with other Verizon 4 transactions 5 Q: How does Verizon seek to distinguish the cutover in West Virginia from the Hawaii 6 Telecom and FairPoint transactions? 7 A: Verizon states that with the cutover processes in the Hawaiian Telecom and Fairpoint 8 transactions, the transferees did not have existing operating support systems available for 9 use at the transaction signing or at closing. Verizon Mher states that with these two 10 transactions, there was a transition period during which the transferee used Verizon’s 11 systems before cutting over to newly developed systems that had not previously been 12 operational. According to Verizon, the “cutover process that will be utilized with 13 Frontier is different and straightforward” and that cutover “refers specifically to the 14 process by which relevant customer data is extracted from Verizon’s systems and 15 provided to Frontier in the proper format.”’11 Verizon further states that “[u]nlike a 16 complex cutover to newly created systems, Verizon’s extraction and provision of data to 17 Frontier will be basically identical to the process used in other successfully completed 18 telecommunications acquisitions.771l2 19 20 Messrs. McCarthy and Swatts predict: ~~ ~~ 110 1 Id., p. 37. 111, Verizon response to CAD Set 6, Question # T12. 112, Id. Verizon refers to cutover process with CenturyTel (now CenturyLink) and Alltel as well as to approximately 50 other cutovers that had “no or minimal impact on customers.” Id. 42 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Frontier will not have the same or similar cutover problems as those 2 experienced by Fairpoint and Hawaiian Telecom. Frontier already has 3 existing, proven operations, business and customer billing and support 4 systems which are used to serve its more than 2 million customers 5 (including customers in West Virginia today) and Frontier has a successful 6 track record of integrating the operations of various operating companies. 7 Frontier therefore is in a unique position in that it has fully scalable 8 systems to handle additional properties and has had historical experience 9 in acquiring operations, including some from Verizon, and some in West 10 Virginia. ’ l3 11 12 Q: Have other transactions affected the cutover planning process that the Joint 13 Applicants are undertaking in West Virginia? 14 A: Yes. Verizon asserts that it has improved its cutover process as a result of recent 15 transactions, including among other things, improving the form and substance of the 16 Customer Plan Support Agreement, Cutover Planning Committee, Cutover Plan, and the 17 Cutover Preparation Task Description. ’ l4 Verizon also asserts that it has implemented 18 ‘‘numerous IT improvements” including: “additional layout quality control checks, 19 developing standard data extract transmittals, and standardizing on a few extract control 20 totals.” ’l5 According to Verizon a “material difference in the cutover process in this 21 transaction is that, unlike Hawaiian Tel and Fairpoint, the cutover will not involve 22 entirely new untested third party systems, but rather Frontier’s proven systems.9, 116 23 Q: So it sounds as if the cutover to Frontier should be considered more similar to those 24 earlier, more straightforward Frontier cutovers than to Verizon’s cutovers to 25 Fairpoint and Hawaiian Telecorn. Have the Joint Applicants substantiated this ‘I3 / McCarthy/Swatts Direct (Frontier), at 57. 114, Verizon response to CAD Set 6, Question #T16. ‘I5/ Id. 116, Id. 43 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 view? 2A No. The Joint Applicants have not demonstrated that the Commission can simply assume 3 that the cutover will go smoothly. One major difference between the approximate “50” 4 other transactions that Frontier has implemented and the one contemplated in this 5 proceeding is that the cutover to Frontier’s systems must occur on the closing date of the 6 transaction. Also, no portion of the former Bell Atlantic wireline operating company has 7 ever been sold to another company.’ ” 8 Frontier’s track record 9 Q: Doesn’t Verizon assert that Frontier has a track record of integrating other 10 companies that it has acquired? 11 A: Verizon does make such an assertion. Mr. Smith and Ms. Buckley state: “Frontier has a 12 successful track record of acquiring, operating, and investing in telecommunications 13 properties nationally. Frontier has successfully integrated systems, including over 14 750,000 acccess lines it purchased from Verizon and its predecessors between 1993 and 15 2000, and also including former GTE and Alltel properties here in West 16 Q: Have the Joint Applicants provided sufficient evidence to demonstrate that they can 17 implement a smooth transition from Verizon’s customer support operations to 18 Frontier’s? 19 A: No. ’ l7 I Applicant response to CWA Request 3 1. 118 Smith and Buckley Direct (Verizon), at 14. 44 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 The FairPoint experience, though not identical, nonetheless sheds light on 2 the potential problems that occur with the cutover. 3 Q: Ms. Baldwin, earlier you indicated that you had testified on behalf of the New 4 Hampshire Office of Consumer Advocate (“OCA”) regarding the Verizon-FairPoint 5 transaction. Has the “cutover” from Verizon to FairPoint systems in New 6 Hampshire been difficult? 7 A: Yes. The “cutover” from Verizon to FairPoint systems occurred on January 3 1, 2009.120 8 However, the transition has not been smooth and in a March 2009 FairPoint filing the 9 company stated: 10 As we started to utilize our new systems to run the business, we 11 encountered some areas that did not work as well as anticipated. This was 12 primarily in our billing processes, order flow and call center response for 13 both our retail and wholesale business. Since that time, many 14 improvements, system corrections and additional training have been put 15 into place and some areas have shown marked improvement. The end 16 result; however is we are not servicing our customers at an acceptable 17 level, and we are not improving fast enough.121 18 The Stabilization Plan filed by FairPoint in March was intended to provide for 19 “business-as-usual operations” by June 30,2009. 20 Q: Was the Stabilization Plan successful? 119 J Among other things, I stated: “The transaction poses serious risks to consumers, not just financially, but also serious managerial and operational risks (e.g., brain drain, cutover challenges, etc.).” Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and FairPoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Direct Testimony of Susan M. Baldwin on behalf of the New Hampshire Office of Consumer Advocate, August 1,2007, at 10. See also, id., at 156-158 discussing Hawaiian Telecom. 120 J The cutover process took place between January 30 and February 9,2009. Fairpoint Press Release, “FairPoint Communications Outlines Timeline Related to Northern New England Systems Cutover,” February 2, 2009. 121, Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and Fairpoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Fairpoint Stabilization Plan, March 3 1,2009. FairPoint submitted a Stabilization Plan Update and 45 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: No. An April 1,2009 Status Report filed with the New Hampshire Public Utilities Commission (“PUC”) by Liberty Consulting Group, the consulting firm engaged by the Maine, New Hampshire and Vermont regulators to monitor the cutover made the following conclusions: 5 “It is well known at this point that both retail and wholesale customers have 6 experienced a number of problems after the cutover”; 7 0 “A complete system replacement and implementation of this magnitude was 8 almost certain to encounter significant problems. Some service degradation for 9 customers was inevitable, no matter how much care was taken . . . ”; and 10 “Nevertheless, the magnitude of the disruptions and the impact on the customers 11 from Fairpoint’s systems transition has been much larger than anticipated, given 12 the steps Fairpoint appears to have taken in preparation for cutover and the 13 oversight of this process by the Regulators.”’22 14 According to the Status Report, while the cutover process went relatively well, the “post- 15 cutover operations” were characterized by significant problems. The exception was 16 disruptions for customers that had used Verizon as an Internet service provider (“ISP”). 17 ISP customers ran into significant difficulties during the cutover and the calls to the 18 technical support center overwhelmed both the call center circuit capacity and staffing.123 Milestones document on April 17,2009 as well. 122 / The Liberty Consulting Group, “Fairpoint Post-Cutover Status Report,” April 1,2009 (“Liberty Status Report”), filed in Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and Fairpoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, at 1-2 (emphasis added). Available online at: htb://www .puc.state.nh.us/Telecom/FairPoint.htm. 123 1 Liberty Status Report, at 5. 46 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 The post-cutover problems include, but are not limited to: 2 Large call volumes at call centers for issues related to late bills, bill formats, and 3 bill errors which overwhelmed capacity and “reduced the number of calls 4 answered in less than 20 seconds to a very small percentage, and increased call 5 abandonment rates to very high levels;”’24 6 An “unprecedented” number of calls to regulators in Vermont, Maine, and New 7 Hampshire; also FairPoint has been “unacceptably slow or non-responsive” to 8 complaints forwarded by Staff; 9 FairPoints’s systems were characterized by timeouts and slow response times; 10 Some customers received their February bills after they received their March bills; 11 Order provisioning has been late for over 50% of orders; and 12 Numerous issues with wholesale provisioning and systems.125 13 The Liberty Status Report also concluded: “Senior leadership has continued to make 14 statements that understate problem severity and overstate success in fixing them”126and 15 “the company has been extremely slow to identify problem breadth and root causes . . 16 ,9127 17 Q: How has the New Hampshire PUC responded? 18 A: The PUC and parties to the proceeding (Dkt. 07-01 1) have been actively involved in 19 resolving these issues, holding several conferences over the past several months. 12* On 124 1 Id., at 5. I Id., at 5-6. 126 1 Id., at 10. 127 1 Id., at 11. 128 1 The New Hampshire PUC held a status conference on April 3,2009 which included public comment about 47 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 May 18,2009, the PUC found that “Fairpoint has provided, in some instances, 2 insufficient information required by the Commission and, according to Staffs compliance 3 review, has not provided certain information required by the Settlement Agreement. 4 Further, in light of recent events including the release of Fairpoint’s 10-Q quarterly 5 report, the payment of executive compensation in the form of bonuses, and the failure by 6 Fairpoint to meet some of the established benchmarks for operational issues, the 7 Commission has determined that further information is required.” 12’ Accordingly, 8 Fairpoint was directed to provide several items by May 26,2009, including: “a date by 9 which the Company will file a full Network Improvement Plan based on root cause 10 analysis required by section 10.2 of the Settlement Agreement.”130Fairpoint responded 11 by noting that it had been “consumed by cutover and stabilization efforts” but that it 12 would submit a Plan of Action for Network Improvements by September 15,2009 for 13 work to be initiated in the fourth quarter of 2009 and a 2010 Plan of Action for Network 14 Improvements by December 10, 2009.13’ 15 Q: Was Fairpoint’s response sufficient? 16 A: No. Fairpoint again filed a Stabilization Plan Status report on July 8,2009 and on July service quality and a review of Fairpoint’s Stabilization Plan; Fairpoint filed a Stabilization Plan update on April 17, 2009; on June 1,2009 the Commission convened a status conference in order for Fairpoint to provide a progress report; and a technical session was held on July 28,2009 to “gather information relevant to the critical goal of normalizing FairPoint’s operations.” Letter from Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to the Service List, Re: DT 07-01 1, FairPoint Communications, Stabilization Plan Status Report Technical Session, July 2 1,2009. 129 / Letter from Debra A. Howland, Executive Director, New Hampshire Public Utilities Commission, to Jeff Allen Executive Vice President External Relations, Fairpoint Communications, May 18,2009, Re: DT 07-0 1 1 Verizon New England, et al Transfer of Assets to FairPoint Communications, Inc. 130 1 Id. 131 1 Letter from Patrick C. McHugh, Devine Millimet Attorneys at Law, on behalf of FairPoint Communications, Inc. to Debra A. Howland, executive Director & Secretary, New Hampshire Public Utilities Commission, Re: DT 07-1 1; Verizon New England, Inc. et al. and FairPoint Communications, Inc. Transfer of 48 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 15,2009 Fairpoint announced organizational changes and stated in a press release: “We 2 must direct our full attention to tackle the integration of our systems serving New 3 England.”13* However, Liberty Consulting Group’s assessment of the report was: “there 4 are a number of areas where the report falls short of explaining the true status and 5 acknowledging all areas of performance Based on that assessment and the 6 recommendation of Staff, on July 2 1,2009, the New Hampshire PUC scheduled a 7 technical session noting: “According to recent filings, it is clear that Fairpoint has not yet 8 achieved business-as-usual operations as it set out to do in its March 3 1,2009 9 Stabilization Plan.”134The Commission also suggested that the technical session would 10 assist in its evaluation of a petition filed by the OCA requesting the initiation of a new 11 proceeding to investigate Fairpoint. 135 12 Q: What was the outcome of the technical session? 13 A: According to Liberty Consulting Group, Fairpoint “continued to assert progress in 14 stabilizing” its operations at the session.136One media report of the session noted that the Assets, May 26,2009, at 3. 13‘ I FairPoint News Release, ‘‘Fairpoint Communications Announces Organizational Changes,” July 15,2009. 133 1 Letter from Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to the Service List, Re: DT 07-0 1 1, Fairpoint Communications, Stabilization Plan Status Report Technical Session, July 2 1,2009. 134 1 Letter from Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to the Service List, Re: DT 07-0 1 1, FairPoint Communications, Stabilization Plan Status Report Technical Session, July 2 1,2009. 135 1 Letter from Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to the Service List, Re: DT 07-01 1, Fairpoint Communications, Stabilization Plan Status Report Technical Session, July 2 1, 2009; Before the New Hampshire Public Utilities Commission, FairPoint Communications Inc., Ofice of Consumer Advocate’s Petition to Establish a New Adjudicative Docket to Investigate FairPoint Communications, Inc., July 17,2009. The OCA is seeking the new proceeding to “evaluate and implement all necessary steps to ensure that FairPoint Communications, Inc. (“FairPoint”) is able to normalize operations as soon as possible and is in compliance will all Commission Orders, and designate certain parties as staff advocates.” Zd,, at 1. 136 1 Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and FairPoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, 49 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 PUC staff indicated that there are “two to four times as many” customer complaints 2 compared to complaints before FairPoint took over operation^.'^^ FairPoint President 3 Peter Nixon indicated at the technical sessions that an “escalation team” had been put in 4 place to resolve billing and other issues.’38The OCA, in comments filed after the 5 session, suggested that “a new approach is needed” and that FairPoint “should not be 6 relied upon to provide objective or complete information to the Commission, to the 7 parties, or to the public.”’39 The OCA also noted that Fairpoint’s filings with the 8 Securities and Exchange Commission indicated that the Company may file for 9 bankruptcy and that the “managerial, technical and financial issues faced by FairPoint are 10 inextricably linked.”’40 11 Q: Are the FairPoint troubles potentially relevant to this proceeding? 12 A: Yes. The Fairpoint transaction serves as a warning about potential post-transaction 13 problems, the resources the Commission may need to utilize to address post-cutover 14 issues, and the risk of relying on applicants’ predictions about their level of preparedness 15 for a cutover. As noted by the New Hampshire OCA in a July 2009 filing: Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Comments on Fairpoint’s Stabilization Status by Liberty Consulting Group, September 2,2009. 137 J Denis Paiste, “FairPoint team assigned to billing,” Manchester Union Leader, July 3 1, 2009, www.unionleader.com. 13’ / Denis Paiste, “FairPoint team assigned to billing,’’ Manchester Union Leader, July 3 1, 2009, www.unionleader.com. 139 / Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and FairPoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-0 1 1, Report of the July 28 and 30,2009 Technical Session and Recommendations of the Office of Consumer Advocate, September 3,2009, at 2. 140 / Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and FairPoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Report of the July 28 and 30,2009 Technical Session and Recommendations of the Office of Consumer 50 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 “micromanaging FairPoint is a strain on state resources.’y141 2 Q: Are customers in the other northern New England states experiencing problems? 3 A: Yes. There have been similar service and billing problems for both retail and wholesale 4 customers in Vermont and Maine. In July, the Maine Public Utilities Commission 5 (“PUC”) ordered Fairpoint to pay service quality penalties for failing to meet wholesale 6 service standard^.'^^ On August 12,2009 FairPoint officials and Maine’s public advocate 7 appeared before the Maine Legislature’s Utilities and Energy Committee to discuss 8 ongoing problems.’43 9 Q: What is the situation in Vermont? 10 A: The Vermont Public Service Board (“PSB”) opened an investigation August 10,2009 11 into “whether to revoke FairPoint Communications’ right to do business in Vermont” and 12 ordered FairPoint to respond to a show cause petition within 30 days.*44The Vermont 13 Department of Public Service had reported an “unprecedented” number of service 14 complaints since the ~ut0ver.l~~At the hearing, the Vermont PSB special counsel stated: 15 “If Fairpoint cannot raise its service quality to an acceptable level it’s our opinion that 16 we’ve got to look at whether they should be operating the incumbent phone company here Advocate, September 3,2009, at 7. 14’ I Chelsea Conaboy, “Fairpoint statistics off base,” Concord Monitor, July 29,2009. In the New Hampshire OCA’S petition for a new proceeding filed July 17,2009 the OCA asked the Commission to “retain a new independent third party to assist the OCA, and other non-settling parties, in this new adjudicatory proceeding.” Before the New Hampshire Public Utilities Commission, Fairpoint Communications Inc., Office of Consumer Advocate’s Petition to Establish a New Adjudicative Docket to Investigate Fairpoint Communications, Inc., July 17, 2009, at 1. ‘42 I Craig Crosby, “FairPoht ordered to pay $400,000 in penalties,” Kennebec Journal, July 29,2009; Denis Paiste, “Fairpoint team assigned to billing,” Manchester Union Leader, July 3 1,2009, www.unionleader.com. 143 I Ashley Smith, “States, fed up with Fairpoint, decide to hold status meeting,” Nashua Telegraph, August 13, 2009. 144 1 John Curran, ‘‘Fairpoint ordered to respond to Vermont complaint,” Associated Press, August 1 1, 2009. ‘45 / John Curran, “Fairpoint ordered to respond to Vermont complaint,” Associated Press, August 1 1 ,2009. 51 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 . . . It’s an enormous amount of problems for an extraordinary amount of people. And we 2 think they’ve had sufficient time to get things pulled together.”146 3 Q: Hasn’t FairPoint filed for bankruptcy protection? 4 A: Yes. The New Hampshire PUC, Maine PUC, and Vermont PSB hosted a joint status 5 conference in New Hampshire on September 9, 200914’ and Fairpoint officials warned 6 regulators that they might file for bankruptcy.148Fairpoint filed for Chapter 11 7 bankruptcy on October 26, 2009.14’ In New Hampshire, the PUC has granted Fairpoint’s 8 petition for a general scheduling order to extend any filing, appearance, or deadline for 2 1 9 days “in order to allow Fairpoint to devote resources to its bankruptcy restructuring 10 efforts.”15oA reorganization plan will be filed with the bankruptcy court by December 11 10, 2009.15‘ 12 Q: Are New England regulators tracking the bankruptcy developments? 13 A: Yes. The Attorney General’s office in New Hampshire had indicated that it is working 14 closely with its counterparts in Maine and New Hampshire. Legislators in New 15 Hampshire met with Fairpoint on November 12,2009 to discuss how to address the 146 / W. David Gardner, “FairPoint Grilled by Regulators,” Information Week, August 11, 2009. 147 Letter ftom Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to Parties, Re: DT 07-01 1, Joint Status Conference, August 12,2009. A transcript of the conference is available at: http://www.puc.state.nh.us/Telecom/FairPoint.htm. 148 / Chelsea Conaboy, “In Hawaii, echoes of Fairpoint,” Concord Monitor, September 20,2009. 149 FairPoint Communications News Release, “FairPoint Reaches Agreement with Bank Lenders - Initiates Voluntary Chapter 11 Proceedings,” October 26,2009, available at: httu://w.fbrestructuring,com/Documents/Final Press Releaseadf. Fairpoint maintains a list of bankruptcy filings at: httu://w~w.bmc~ro~~.com/restructuring/ge.asux?ClientID=225. I50 Letter from Debra A. Howland, Executive Director and Secretary, New Hampshire Public Utilities Commission to Parties, Re:Petition by Fairpoint Communications, Inc., General Scheduling Order, November 10, 2009. 15’ / Chelsea Conaboy, “State mulls leverage in FairPoint bankruptcy,” SentinelSource.com, November 10, 2009. 52 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 bankruptcy filing. *52 Fairpoint’s debt reduction agreement with its lenders reportedly 2 includes a commitment to cut $30 million in wages and benefits across the three northern 3 New England states.’53 In addition, the agreement includes language which treats the 4 commitments made to regulators in northern New England as unsecured commitments.154 5 Q: Did Verizon make any representations as to expectations regarding the cutover 6 process in New Hampshire during the PUC’s review of the proposed sale of 7 Verizon’s operations to FairPoint? a A: Yes. Mr. Smith, in direct testimony on behalf of Verizon in New Hampshire, 9 characterized the planning for the cutover from Verizon to FairPoint systems as ensuring 10 “a smooth and seamless transition . . . 3,155 In rebuttal testimony, in response to concerns 11 by other parties who discussed the problems with the Hawaiian Telecom purchase of 12 Verizon lines, he stated: 13 Those concerns are not well founded. I directed Verizon’s cutover 14 management team in the Hawaii transaction, as I am doing in this case. 15 While the Hawaii project may bear resemblance to this transaction at a 16 certain level (e.g., a large transfer of landlines, a TSA agreement and a 17 third-party consultant developing systems for the new owner), the analogy ia ends there. The transferees are different, the consultants are different, the 152 1 Representatives ftom all three northern New England states were to meet with FairPoint on November 12, 2009 originally, but the tri-state meeting was cancelled until after the judge rules on Fairpoint’s bankruptcy plan. Chelsea Conaboy, “State to meet with FairPoint today,” Concord Monitor, November 12,2009. See, also, Chelsea Conaboy, “State mulls leverage in FairPoint bankruptcy,” SentinelSource.com, November 10,2009; Denis Paiste, “Fairpoint asks unions for $30 million in cuts,” New Hampshire Union Leader, October 30,2009. 153 I See Chelsea Conaboy, “State mulls leverage in FairPoint bankruptcy,” SentinelSource.com,November 10, 2009; Denis Paiste, “Fairpoint asks unions for $30 million in cuts,” New Hampshire Union Leader, October 30, 2009. 154 / Denis Paiste, ‘‘Fairpoint asks unions for $30 million in cuts,” New Hampshire Union Leader, October 30, 2009. See, also, Fairpoint Communications, Inc., Form 8-K filed with the Securities and Exchange Commission, October 25,2009, Exhibit 10.1 Plan Support Agreement. IS5 1 Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and Fairpoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Direct Testimony of Stephen E. Smith on behalf of Verizon NH, March 23,2007, at 27. 53 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 management process in this case is far more open and controlled, the level 2 of engagement by FairPoint and Capgemini is much greater, the term and 3 fee structure of the TSA are different, and the parties here have added 4 formal and informal features to the process to insure that the actual or 5 alleged problems in Hawaii will not arise here.’56 6 7 Mr. Smith argued that “Fairpoint has a much better understanding of, and far greater 8 experience with, the tasks that need to be performed to ensure a smooth transition and 9 how to accomplish them, and it is far less dependent on Verizon or third parties for 10 telecommunications skills and and that “ . . . formalized communications 11 procedures - together with Fairpoint’s experience, Capgemini’s expertise and timeliness 12 and the open communications and tight coordination between the parties - provide further 13 assurance of a successful ~utover.~~~~~ 14 Q: What then do you recommend that the Commission conclude regarding the 15 relevance of the Verizon-FairPoint transaction to the Verizon-Frontier transaction? 16 A: For obvious reasons, the Joint Applicants seek to emphasize the differences between 17 Verizon’s earlier sale to Fairpoint from Verizon’s proposed sale to Frontier. However, in 18 my view, the consequences for consumers, competitors, regulators, employees, and the 19 economy in the northern New England states have been and continue to be sufficiently 20 grave that the Fairpoint experience demonstrates the importance of relying not simply on 21 the Joint Applicants’ prediction of a “smooth” cutover but rather also on an outside, 22 independent assessment. 156 1 Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and Fairpoint Communications, Inc. Petition for Authority to Transfer Assets and Franchise, Order Approving Settlement Agreement with Conditions, New Hampshire Public Utilities Commission Docket No. 07-01 1, Rebuttal Testimony of Stephen E. Smith on behalf of Verizon NH, September 10,2007, at 9-1 0. 157, Id, at 10. 54 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Prior acquisitions by Frontier 2 Q: When did Frontier acquire Commonwealth Telephone Company? 3 A: Frontier (then known as Citizens Communications) acquired Commonwealth Telephone 4 Company (“Commonwealth”) in March, 2007, and in October 2007 it converted 5 Commonwealth from an internally developed billing system to DPI, which involved 6 400,000 accounts. 159 7 Q: When did Frontier acquire Global Valley Networks? 8 A: Frontier acquired Global Valley Networks in November, 20O7,l6O and converted billing to 9 DPI in February 2008. 10 Q: When did Frontier acquire and integrate Rochester Telephone? 11 A: Frontier acquired Rochester Telephone in 200 1 and the Frontier Telephone of Rochester 12 CARS (Customer Accounts Record System) was converted to DPI (Data Products 13 Incorporated) in September 2008, involving more than 400,000 accounts.162 14 Q: Didn’t Frontier acquire dozens of other companies? 15 A: Yes. Frontier has acquired many small operations in many states, beginning in 1993,’63 16 but none of the acquisitions were of the size of the proposed 14-state acquisition. 17 Q: What factors should the Commission consider in assessing Frontier’s previous 158 Id, at 13. 159 Response to CWA Set 1, Request #4 1. 160 In response to CWA Set 1, Request #4 1, Frontier indicates that Global Valley was acquired in February 2007, but the same response also indicates that in February 2008,four months after acquisition, Global Valley was converted to DPI. Also, in the Ohio proceeding, in response to Labor INT-133, the Applicants indicated that the acquisition occurred in November 2007. 161, Response to CWA Set 1, Request #4 1. I Response to CWA Set 1, Request #4 1. 163 See list provided by Frontier in response to CAD Set 4, Question #T22. 55 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 acquisitions? 2 A: Several factors should be considered: 3 0 Frontier’s earlier acquisitions were of a far smaller scale, typically occurring in a 4 single state. 0 The integration of the acquired companies’ operations created service quality problems and customer disruptions, as I discuss in my testimony below. Q: Have any of Frontier’s previous acquisitions used the same computer systems for billing as are used for Verizon West Virginia? 9 A: ~0.l~~ 10 Analysis of service quality in two areas previously acquired by Frontier 11 Global Valley Networks 12 13 Q: Have you examined the service quality in the territories of any operating companies 14 that Frontier acquired in the past? 15 A: Yes. Citizens Communications Corp. d\b\a Frontier Communications acquired Global 16 Valley Networks in February, 2007.’65 Since its acquisition by Frontier, Global Valley 17 Networks has been required to report service quality data through the ARMIS system. 18 Q: What do the ARMIS data show? 19 A: Although there is no record previous to the acquisition for comparison, even a cursory 20 examination of Global Valley’s performance since its acquisition by Frontier indicates 164 Response to CWA Set 1, Request #4 1. 165 1 In response to CWA Set 1, Request #41, Frontier indicates that Global Valley was acquired in February 2007, but the same response also indicates that in February 2008,four months after acquisition, Global Valley was converted to DPI. Also, in the Ohio proceeding, in response to Labor INT-133, the Applicants indicated that the acquisition occurred in November 2007. 56 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 serious service quality problems. For example, in 2008, Global Valley reported an 2 average installation interval of 6.3 days, 2,5 1 1 initial trouble reports, 625 repeat trouble 3 reports, initial out of service intervals of 30.7 hours, and repeat out of service intervals of 4 32.1 hours.'66 5 Q: How do you interpret these data? 6 A: Although one year of data is certainly not enough evidence to pass judgment on Frontier, 7 it is sufficient to give the Commission pause. A total of 3,136 trouble reports in one year 8 for only 13,061 16' access lines is surely not indicative of care-free, high quality service. 9 The fact that potential customers wait on average more than 6 days for service 10 installation is unacceptable. The fact that this average necessarily hides even longer 11 waits for some customers is even worse. The average repair intervals of out of service 12 complaints show that Frontier does not maintain adequate resources to respond quickly to 13 customer needs, or chooses not to make those resources available on weekends and 14 holidays. And again, the averages reported to the FCC hide longer waits for some 15 customers. 16 Q: For how many hours did Global Valley customers lack telephone service in 2008? 17 A: ARMIS data shows that there were 1,754 initial out of service reports in 2008, with an 18 average repair interval of 30.7 hours.'68 There were 464 repeat out of service reports in / ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 134, 140, 144, 146, 145, and 149. 167, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 140. / ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 144 and 145. 57 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2008, with an average repair interval of 32.1 hours.’69 The total out of service time for 2 Global Valley customers in 2008, then, was 68,742 hours. 3 Q: Do ARMIS data show any customer complaints against Global Valley for 2008? 4 A: No. But the lack of customer complaints in ARMIS data is insufficient to cure the 5 demonstrated slow response of Frontier to service troubles. The burden is on the 6 telecommunications provider to provide good service, not on the customer to complain. 7 Q: Should the Commission dismiss the one year of data for Global Valley in its 8 consideration of Frontier’s ability to integrate acquisitions and provide better 9 service quality? 10 A: No. The Commission should find that Frontier obviously has difficulties integrating the 11 13,000 line acquisition of Global Valley. The difficulties of integrating 4.8 million lines 12 in Verizon’s rural areas in 14 states, including rural West Virginia, are likely to be even 13 greater. 14 Frontier Rochester 15 Q: Frontier acquired Rochester Telephone in 2001. Did you seek data from Frontier 16 about its service quality performance in Rochester? 17 A: Yes, but Frontier objected and did not provide the requested data.17’ 18 Q: Did you review other sources of data regarding Frontier’s service quality in 19 Rochester? 20 A: Yes. I examined ARMIS data that Frontier submits to the FCC. After reporting a 169 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 148 and 149. 170 Frontier responses to CWA Set 5, Question #2, stating “Frontier Telephone of Rochester does not provide 58 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 gradually diminishing number of problems from 2002 to 2006, Frontier Rochester 2 customers started reporting increasing numbers of service problems in 2007. Frontier 3 Rochester’s annual trouble reports per 100 lines rose from 24.9 in 2006 to 29.8 in 2007, 4 and then to 33.8 in 2008. FCC’s ARMIS data also show that Frontier Rochester 5 customers have experienced an elevated and increasing number of initial out of service 6 trouble reports. Frontier Rochester’s performance in this respect has deteriorated 7 significantly since the 2006 measure of 17.5 initial out of service reports per 100 lines, 8 rising in 2007 and again in 2008, to 24.1 .I7’ In September 2008, Frontier transferred 9 Rochester’s customer service and billing system to Frontier’s ~1atform.l~~Also during 10 2008, Frontier reported an increase in out of service trouble reports in its Rochester 11 region, as Figure 1 shows. service in West Virginia.” 171 ,, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 140 and 144. Note that ARMIS data are reported as annual figures. 172 ,, Frontier Telephone of Rochester CARS (Customer Accounts Record System) was converted to DPI (Data Products Incorporated) in September 2008. 59 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL lNFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Figure 1*73 2 Initial Out of Service Trouble Reports per 100 Lines in Rochester: 2000-2008 3 (All Customers) a B h 10- I: - i 5- I Ij 07 4 5 Q: How quickly does Frontier Rochester complete out of service repairs? 6 A: As Figure 2 shows, after remaining steady during 2005,2006, and 2007 at about 18.8 7 hours, the average time required to restore service increased by approximately 40% to 8 26.8 hours in 2008. 173 / ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 140 and 144. 60 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 Figure 2174 2 Initial Out of Service Interval in Rochester: 2000-2008 3 (All Customers) ..ll..__.._..l.l.._.,--~ ~ I...... "_" "."l ...... I".....,,... "I"...... "..,.~.._I...... ,...... " " ",..," ...,I...,_..._." I"...... _.l.l... ..,.."...I...... i 35 - x 30 -- 25 - 1 t? g 20- I ,"1 15 - I 5 -- i i 07 4 5 Q: Is it possible that the increasing number of troubles per 100 lines and the recent 6 increase in repair intervals are due to more problems with Internet access? 7 A: Yes. That could be one cause. If that is the cause of more problems, though, Frontier 8 should be adding resources to deal with these particular problems, and the overall repair 9 intervals should not increase. 10 Q: What other service quality data have you examined for Frontier Rochester? 11 A: Frontier is required to report several service quality measures to the New York 12 Department of Public Service. Although the data are aggregated over all of Frontier's 174 f ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 145. 61 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 New York ILECs, Frontier Rochester accounts for nearly 80% of Frontier's ILEC lines in 2 New Y~rk.'~~Figure 3 shows that major service outages increased dramatically in the 3rd 3 quarter of 2008, which corresponds to the time of the customer service and billing system 4 transfer. 5 Figure 3176 6 Frontier New York Major Service Outages: 2000-2008 7 (by quarter) 14 - 12 - i 10 - I i 8- / I I ! 6- 4- 1 i 2- j 04 4th 2008 1st 2007 2nd 2007 3rd 2007 4th 2007 1st 2008 2nd 2008 3rd 2008 4th 2008 8 9 Q: Please describe your analysis of complaints for Frontier ILECs in New York. 10 A: The complaint rate per 1,000 lines increased between May 2006 and December 2008, as 175 1 Frontier Rochester had 3 15,891 access lines as of the 4'h quarter of 2008. The total access lines of all the other Frontier ILECs in New York was 87,504. NY DPS Case 08-C-0405 - In the Matter of Quality of Service provided by Local Exchange Companies in New York State, Frontier Communications, Fourth Quarter 2008 Service Quality Report, January 22,2009, at 2. 176 1 NY DPS Case 08-C-0405 - In the Matter of Quality of Service provided by Local Exchange Companies in New York State, Frontier Communications, Third Quarter 2008 Service Quality Report, November 6,2008, at 6; 62 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 is shown in the trend line in Figure 4. 2 3 Figure 4”’ 4 Complaint Rate per 1,000 Lines for Frontier New York: May 2006 - December 2008 0.3 0.2 Eg 8 4 r a8 .-Q -a I 0.1 0 5 6 Q: 7 A: As stated above, Frontier acquired Rochester in 2001. One would expect that five years 8 later, Frontier would have a good idea of how to maintain high service quality in the 9 region. Figure 4, though, shows a clear increasing trend in the number of complaints per 10 1,000 lines between April 2006 and December 2008. Although I do not know why 11 complaints increased during this period, NY PSC data clearly demonstrate that they did. Fourth Quarter 2008 Service Quality Report, January 22,2009, at 7. 177 1 NY DPS Case 08-(2-0405 - In the Matter of Quality of Service provided by Local Exchange Companies in New York State, Frontier Communications, First Quarter 2008 Service Quality Report, April 23,2008, at 7; Fourth Quarter 2008 Service Quality Report, January 22,2009, at 8. 63 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Q: Is the territory of Frontier Rochester similar to other Frontier territories? 2 A: No. ARMIS data show that about 80% of the access lines in Frontier Rochester’s 3 territory are classified as ccMSA”178rather than n~n-MsA.’~~This indicates an urban and 4 suburban territory. In contrast, only 16% of Frontier’s access lines over all of its 5 territories are located in MSAs. 180 6 Q: Why is the MSA vs. non-MSA classification of Rochester important? 7 A: A high density of customers should make it easier for a company to install and repair 8 service than in sparsely populated areas because, among other things, the travel time per 9 customer-visit and the length of the local loops in an urban or suburban area would be 10 less than in a rural area. The fact that Frontier allowed service quality to decline in the 11 Rochester area does not bode well for the proposed transaction. 12 Q: What do you conclude from your examination of the service quality records of 13 Frontier’s recent acquisitions? 14 A: Whether because of network issues, insufficient resources, billing disputes, integration of 15 customer support systems, or other reasons, service quality in territories acquired by 16 Frontier have deteriorated. For some metrics, there have been spikes that coincide with 17 the transfer from the acquired company’s platform to Frontier’s platform. Furthermore, 18 the two acquisitions that I examined were relatively small, 13,000 access lines in the case 178 1 MSAs, or Metropolitan Statistical Areas, are designated by the Ofice of Management and Budget in a list following each decennial census. An MSA is a Core - Based Statistical Area associated with at least one urbanized area that has a population of at least 50,000. The Metropolitan Statistical Area comprises the central county or counties containing the core, plus adjacent outlying counties having a high degree of social and economic integration with the central county as measured through commuting. See 65 Fed. Reg. 82228 (2000). http://www.fcc,gov/wcb/~is/instructions/2006/definitionsO5.htm#T2C. 179 / FCC ARMIS Report 43-05,Table 11. 180 1 Id 64 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 of Global Valley Network and approximately 500,000 access lines (at the time) in the 2 case of Rochester. In contrast, Verizon’s SpinCo lines would add approximately 4.8 3 million access lines. 4 Commonwealth Telephone of Pennsylvania 5 Q: When did Frontier acquire Commonwealth Telephone of Pennsylvania? 6 A: Frontier (then known as Citizens Communications) acquired Commonwealth Telephone 7 Company (“Commonwealth”) in March, 2007, and in October 2007 it converted 8 Commonwealth from an internally developed billing system to DPI, which involved 9 400,000 accounts. 10 Q: Is Frontier Commonwealth required to report ARMIS data? 11 A: No. It is, however, required to report certain metrics to the Pennsylvania PUC. 12 Q: Did you examine these metrics? 13 A: Yes. The customer complaint rate more than quintupled when Frontier acquired 14 Commonwealth. Specifically, the “justified” residential complaint rate rose from 0.06 15 per 1,000 residential customers in 2006 to 0.32 in 20O7.ls2 Also, Frontier 16 Commonwealth’s response time to residential customer complaints rose from 5.6 days in 17 2006 to 14.9 days in 20O7.Is3 Finally, the PA PUC’s measure of infractions shows that 18 Frontier Commonwealth committed more than twice as many Chapter 63 (quality of 19 service) infractions of Commission policy in 2007 (0.19 per 1,000 residential lines) than 181 / Response to CWA Set 1, Request #41. 182 Pennsylvania Public Utility Commission, Utility Consumer Activities Report and Evaluation 2007 (“PA PUC Report”), at 49. (available at http://www.puc.state.pa.us/General/publications~reports/pdf~CA~~2007.pd~ / PA PUC Report, at 50. 65 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 in 2006 (0.08 per 1,000 residential lines), and nearly twice as many Chapter 64 (billing) 2 infiactions in 2007 (0.19 per 1,000 residential lines) than in 2006 (0.1 1 per 1,000 3 residential lines). lX4 4 Q: What do you conclude from these data? 5 A: Contrary to the assertions of Frontier’s and Verizon’s witnesses, Frontier’s previous 6 acquisitions have not gone smoothly, and have not necessarily brought about a higher 7 level of service quality. 8 The cutover of systems to support wholesale operations also presents 9 risks. 10 11 Q: Why are wholesale operations relevant to retail consumers and to the overall success 12 of the proposed transaction? 13 A: Scaling up Frontier’s wholesale operations will require technical, managerial, and 14 operational resources. These functions will compete for resources and attention with the 15 retail side of the business. 16 Q: In Section I1 of your testimony, you summarized FCC data regarding quantities of 17 Verizon’s wholesale lines in West Virginia. Is there data regarding Frontier’s 18 wholesale operations in West Virginia as compared with those of Verizon? 19 A: Yes. As of August 2009, Frontier was providing << 20 END CONFIDENTIAL resale lines and << 185, Frontier response to FiberNet Set 1, Question # 99. 66 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 in 2008, << 3 END CONFIDENTIAL>>> use Verizon’s oss.186 4 Q: -How does Frontier plan to prepare for taking on these and related wholesale 5 operations? 6 A: Frontier indicates that it intends to participate in and offer “many meetings” with carriers 7 before and after the closing of the transaction, starting in early 2010, and including a 8 “wholesale customer 9 Q: Are there other ways that Frontier must prepare for taking over the wholesale 10 operations for which Verizon is now responsible? 11 A: Yes. Frontier plans to add a new wholesale ordering gateway to support the transferred 12 assets. 188 Also it plans to publish system interface specifications and information in early 13 20 10 to provide CLECs with advance notification for using Frontier’s interface and 14 systems.189 Furthermore, although Frontier intends to implement and use industry 15 standard interfaces and to benchmark against Verizon’s offerings, “[ilt has not 16 determined the exact steps it will take to acquire or develop those interface^.""^ Frontier 17 also plans to establish a front-end gateway for CLEW electronic submission of local 18 service request^.'^^ 186 Verizon response to CAD Set 1, Question # C7. 187 Frontier response to CAD Set 8, Question # M80. 188 Frontier response to FiberNet Set 1, Question #30. 189 Frontier response to FiberNet Set 1, Question #3 1. 190, Frontier response to FiberNet, Set I, Question #34. 191 Frontier response to FiberNet, Set 1, Question #61. 67 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Q: Does Frontier intend to use an independent audit to test its OSS systems? 2 A: No. Frontier states that it “does not believe that a third party audit, test and/or review will 3 be necessary,” and that it “will work with CLECs to validate the interface of their system 4 with Fr~ntier.””~ 5 Q: Will the wholesale cutover require additional Frontier resources? 6 A: Yes. Frontier indicated that it will “dedicate additional staff and resources to ensure that 7 any systems issues that arise or at or after the cutover are immediately and effectively 8 addre~sed.’’’~~Frontier has not yet determined the exact number of employees nor the 9 budgets to staff the centers that will provide the services that Verizon’s Regional 10 Customer Care Center and Regional CLEC Maintenance Center now ~r0vide.l~~ 11 Q: Has Frontier determined where it will locate a center to provide the services now 12 provided by Verizon’s Wholesale Customer Care Center? 13 A: No. Frontier indicates that this matter is still under review.’95 14 Q: What do you conclude about the transition from Verizon’s systems for wholesale 15 services to Frontier’s systems for wholesale services? 16 A: Frontier’s efforts to establish capabilities to handle those wholesale services that Verizon 17 now provides likely will require significant resources, and some aspects of Frontier’s 18 plans are still uncertain. Importantly, Frontier’s description of the wholesale cutover 19 makes it clear that Frontier does not have existing systems to completely handle 192 I Frontier response to FiberNet, Set 1, Question #38. See also Frontier response to FiberNet, Set 1, Question #39. 193 / Frontier response to FiberNet Set 1, Question #40. 194, Frontier response to FiberNet Set 1, Question #64 and #69. 195 Frontier response to FiberNet Set 1, Question #76. 68 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 wholesale operations as extensive as Verizon West Virginia’s wholesale operations. 2 Frontier will be developing new systems, procedures, and work locations (and 3 presumably hiring and training new employees) to enable it to serve Verizon West 4 Virginia’s wholesale customers at closing. The need to cutover wholesale services adds a 5 significant level of complexity to the simultaneous need to cutover retail services. Not 6 only are Frontier’s competitors affected by this cutover, but also the customers of 7 Frontier’s competitors also potentially will be affected by the cutover. 8 Summary of analysis and recommendations regarding the proposed 9 c ut0ver 10 Q: What do you conclude from your review of these various documents? 11 A: I conclude that Frontier’s due diligence process was rushed (approximately three months 12 passed between the initial exploration and the announced transaction); substantial 13 resources will be required to complete the planned integration; and uncertainties about 14 significant aspects of the transaction, which would affect customer support, remain. 15 Q: Based on your review of the information that the Joint Applicants have provided 16 thus far, and your assessment of the FairPoint transaction, what then do you 17 recommend? 18 A: At this point, it is impossible to know how the cutover, as it is presently planned, would 19 actually occur. On one hand, the Joint Applicants would have the Commission believe 20 that the cutover will be seamless for customers, competitors, and employees, and 21 therefore of no great significance. On the other hand, in my view it would be unwise to 22 ignore the recent Fairpoint debacle which I describe above. Ultimately, the West Virginia 69 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 cutover may fall somewhere along the spectrum of the “seamless” cutover that the 2 Applicants predict and the deeply flawed cutover that actually occurred with the recent 3 Fairpoint transaction. Precisely because of the vast uncertainty about the outcome of the 4 cutover and the significant risks to consumers, competitors, employees, and the West 5 Virginia economy that the cutover poses, I believe it is critically important for the 6 Commission to err on the side of caution as it evaluates the Joint Applicants’ plans for 7 transferring operations from Verizon to Frontier. 8 9 The Joint Applicants have delineated numerous tasks, timelines, and milestones involving 10 many employees and many systems that must be completed and met both before and after 11 the cutover. These plans provide a reasonable beginning to the process, but are still in 12 flux. Furthermore, the sheer magnitude of tasks, software programs, databases, hardware 13 upgrades, data extractions, training, and personnel that implicate every element of 14 SpinCo’s operations raises the distinct possibility that either as a result of human error or 15 unforeseen events, problems may well result from the cutover. Although I cannot predict 16 what those problems will be, and whether they will have minor or major consequences, 17 the likelihood of such problems is sufficiently high (and the potential consequences for 18 West Virginia sufficiently great) that Commission oversight of the process is essential. 19 The Commission should require the expertise and independent assessment of an outside 20 entity to examine the systems prior to cutover. As I have indicated earlier, I strongly 21 recommend that the Commission reject the transaction, but if the Commission 22 nonetheless is contemplating approving the transaction, I believe that it is imperative that 70 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 the Applicants’ cutover process be subject to a thorough and objective audit by an entity 2 with demonstrated IT and systems expertise, with the audit being paid for by the Joint 3 Applicants and submitted to the Commission prior to any actual cutover. The cost and 4 burden to Applicants of such a condition are minor when compared to the cost to West 5 Virginia of a failed cutover. If the cutover is as straightforward as the Joint Applicants 6 assert, the cost of the audit should be relatively minor and straightforward. 7 Q: Please summarize your recommendations regarding the proposed cutover. 8 A: I recommend that the Commission investigate thoroughly whether the Joint Applicants 9 have adequately prepared for a smooth transition for all retail and wholesale customers. 10 If, despite my recommendations and those of Mr. Barber, the Commission is 11 contemplating approving the transaction, it is essential that conditions be put in place to 12 mitigate the risks of systems integration (or cutover). These conditions should include: 13 0 As Mr. Barber recommends, restructuring the transaction so Verizon cannot leave 14 until Frontier achieves a full conversion to its own operating systems (among 15 other milestones). 16 0 A third-party audit of the cutover before it occurs, and on-going Commission 17 oversight, and independent testing, of that process. 18 Q: What do you mean by independent testing? 19 A: I mean that an outside party, such as an auditing firm, should perform tests of 20 functionality and reliability of the new systems, and affirm to the Commission that the 21 systems in question will perform the way they are intended to perform on the date of 22 cutover, that is, that the systems will be able to process billing tasks, repair orders, 71 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 personnel deployment, wholesale orders, etc. 2 Q: Is there precedent for third-party testing of similar systems? 3 A: Yes. As part of the Section 271 approval process that Bell operating companies (“BOC”) 4 required to be authorized to offer in-region, interLATA service, BOCs were required to 5 provide third-party confirmation that their operating support systems (“OSS”) met the 6 requirements set forth in Section 271 of the Communications Act. 7 Q: Is there any need for the Commission to rush to approval of this transaction? 8 A: No. The Joint Applicants do not expect to close this transaction before the end of June 9 2010, so the Commission is not under any sort of “pressure” to move quickly. 10 Q: Why do you say that the Applicants do not intend to close the deal before the end of 11 June 2010? 12 A: In rebuttal testimony filed in Ohio, Frontier witness McCarthy states that Verizon must 13 operate the replicated systems that it intends to turn over to Frontier for 60 days prior to 14 the transaction c10se.l~~This is to ensure that the systems are fknctioning properly. He 15 also states that under current plans those same replicated systems will be available in the 16 Fort Wayne data center in April 2010.197The merger agreement specifies that the closing 17 can only occur on the last day of a month.’98 Therefore it appears that the earliest that the 18 transaction can close is June 30, 2010.’99 If the Commission intends to approve this 19‘ / In the Matter of Joint Application of Frontier Communications Corporation New Communications Holdings, Inc., and Verizon Communications Inc. for Consent and Approval of a Change in Control, Ohio Public Utilities Commission Case No. 09-454-TP-ACO, Rebuttal Testimony of Daniel McCarthy’s on Behalf of Frontier Communications Corporation, November 4,2009 (“McCarthy Ohio Rebuttal”), at 47. 197 / McCarthy Ohio Rebuttal, at 48. 198, Merger Agreement (para. 2.2) 199, See also my discussion of dates in my discussion of Verizon’s Cutover Plan and Frontier’s Cutover Task 72 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-OS7 1-T-PC 1 transaction, this timeframe leaves more than seven months during which the Commission 2 could audit the systems cutover process. Document. 73 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 V. BROADBAND 3 Joint Applicants’ Discussion of Broadband 4 Q: Please describe your understanding of Frontier’s current broadband deployment. 5 A: Verizon witnesses Smith and Buckley state that Frontier is currently able to provide over 6 90% of the households in its national footprint, and 91% of its current West Virginia 7 service area, with High Speed Internet broadband capacity.2oo 8 Q: Please describe your understanding of Frontier’s broadband plans in West Virginia, 9 if the transaction were to occur. 10 A: Mr. Gregg states that 11 Frontier has made it clear that its future success as a company depends on 12 broadband. Extending broadband service to its customers, especially those 13 in rural areas, makes those customers “sticky;” Le., those customers will 14 be less likely to switch telecommunications providers in the future and 15 will be more likely to produce long-term revenue. As Frontier drives 16 broadband into all areas of West Virginia, Frontier as a company will 17 prosper, the quality of basic service will be improved, and the State of 18 West Virginia will be benefited.*” 19 20 Q: Why are Frontier’s broadband plans for West Virginia relevant to the 21 Commission’s investigation of the proposed transaction? 22 A: In its discussion of the merits of the proposed transaction, Frontier specifically refers to 23 its broadband plans. In light of the extreme importance of broadband availability at 24 reasonable prices and speeds to the economy and welfare of West Virginia, in considering 25 the public interest for consumers, it is critically important to assess Frontier’s broadband 200 / SmiWBuckley Direct (Verizon), at 4. 74 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 promises and capabilities, particularly within the context of the financial constraints that 2 Mr. Barber discusses in his testimony. 3 Q: Please comment on the earlier quote that you excerpt above. 4 A: As the quote above shows, Frontier’s actual plans for broadband deployment are vague at 5 best. As was the case when regulators investigated the merits of Fairpoint’s proposed 6 purchase of Verizon’s Northern New England lines, the lure of broadband is strong, 7 particularly in states with large areas that are unserved and underserved. However, the 8 state’s interest in broadband deployment should not cloud regulators’ judgment about the 9 proposed transaction. 10 Q: What concerns should be foremost in regulators’ minds as they assess the purported 11 benefits flowing from Frontier’s plans to deploy broadband more intensively than 12 Verizon now is doing? 13 A: The financial risks that Mr. Barber discusses should be of great concern to the 14 Commission. The financial constraints that Frontier likely will confront as a result of this 15 transaction will jeopardize its ability to follow through on its pre-transaction broadband 16 plans. In addition, Frontier’s broadband “Lite” (768 kbps download speed) would be a 17 step backward for West Virginia rather than a state-of-the-art product. The Commission 18 should be wary of Frontier promising “broadband” but delivering an outdated product. 19 Broadband in West Virginia 20 Q: Please explain the importance of broadband Internet access to West Virginia 21 consumers. 201, Gregg Direct (Frontier), at 10. 75 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Broadband access is extremely important to West Virginia’s economy, public institutions, 2 and citizens, and is rapidly becoming almost as indispensable as are voice telephone 3 service, electricity, water, and gas. Broadband access enables businesses to maintain 4 relationships with suppliers and customers, and provides consumers an efficient avenue 5 for such daily activities as keeping in touch with friends and family, making purchases, 6 obtaining medical care, paying taxes and fees, finding job opportunities, participating in 7 government and civic activities, and researching school projects. The Internet is quickly 8 becoming the first place to turn for recent or frequently updated information. Because of 9 the increasing importance of the Internet in everyday life, those who lack speedy access to 10 the Internet risk falling behind. Furthermore, a state that lacks an advanced “ramp” to the 11 Internet risks its economic and social infrastructure falling behind other regions of the 12 country. 13 14 Furthermore, as occurs with the public switched telephone network (“PSTN”), broadband 15 deployment yields substantial positive “externalities” - the aggregate societal benefits of 16 broadband interconnectedness increase exponentially as the percentage of consumers 17 served by broadband increases. 18 Q: Please describe generally the regulatory framework for broadband services. 19 A: In 2005, the FCC adopted its Wireline Broadband Order, which determined that wireline 20 broadband Internet access services were “information” services, and which sought to 21 adopt a “consistent regulatory framework across platforms by regulating like services in a 76 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC similar hnctional manner . . .3,202 (i.e.,treating cable modem and DSL services in the same manner). The FCC opted to adopt a “lighter regulatory touch” in order to “promote the availability of competitive broadband Internet access services to consumers, via multiple platforms, while ensuring adequate incentives are in place to encourage the deployment and innovation of broadband platforms consistent with [its] obligations and mandates under the However, broadband deployment is not yet ubiquitous and incentives to encourage deployment to unserved areas are lacking. 8 Broadband “Life” 9 Q: Is there information available in this proceeding about Frontier’s and other 10 comparably sized carriers’ broadband offerings? 11 A: Yes. Highly Confidential Table 4 shows that, << 12 13 2021 Appropriate Frameworkfor Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02-33, et al., Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853 (2005) (“Wireline Broadband Order”), at para. 1. See, also, para. 5. 203 J Wireline Broadband Order, at para. 3. 77 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 3 4 END HIGHLY CONFIDENTIAL>>> 5 Q: Based on this analysis, what specifically do you recommend? 6 A: I recommend that the Commission seek specific detailed data about Frontier’s intentions 7 regarding the specific download and upload broadband speeds it intends to provide to 8 West Virginia consumers.2o5Furthermore, as is becoming increasingly apparent, 9 advertised speeds rarely match the speeds that consumers actually experienceq206 10 Q: Please describe your understanding of Frontier’s high-speed Internet offerings. 11 A: Frontier primarily offers two levels of high speed Internet service: “HSI Lite,” with 12 download speeds up to 768 kbps and an a la carte price of $34.99, and “HSI Max 3M,” 13 which enables up to 3 mbps download speed for an a la carte price of $54.99.207See 14 Exhibit SMB-8 for a reproduction of Frontier’s webpage advertising these products. 204 HSR Attachment 4.c.39, cover page and page 3 1 (reproduced as Highly Confidential Exhibit SMB-HC-7). 205 See, e.g., discussion of broadband speeds in Speed Matters: A Report on Internet Speeds in AlI 50 States, CWA, August 2009, at 1, stating, “too many Americans are locked into slow Internet, foreclosing access to many online applications and services.” 206 FCC Press Release, “Broadband Task Force Delivers Status Report on Feb. 17 National Broadband Plan,” September 29,2009; see also Presentation, September 29,2009 FCC meeting, at 26. 207, http://www.frontier,com/Print/Products/ProductOverview.aspx?type=l &p=5 1 1, visited 1011 312009. See 78 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 However, as Exhibit SMB-8 shows, Frontier also offers a product with speeds up to PO 2 mbps, but it is not clear where Frontier offers these services. Furthermore, Frontier has 3 not committed to offering broadband at any speed higher than 3 mbps in West Virginia. 4 Q: In addition to the information that you include in Table 5 above, are you aware of 5 other evidence supporting industry expectations of speeds higher than 1 mbps or 3 6 mbps? 7 A: Yes. For example, in a letter sent in January to President Obama’s transition team, Qwest 8 states that it “ believes that 7 mbps service will provide access to Internet content at the 9 level of service customers expect, specifically including the ability to quickly download 10 movies and music, and to provide rapid access to the extensive video applications 11 available over the web99 .208 12 Q: But isn’t it better to have slow broadband than no broadband? 13 A: Of course. But it is important for regulators, as they assess the value of Frontier’s 14 broadband promises, to recognize their limitations. It is also important to assess which 15 company, Verizon or Frontier, is better positioned to bring West Virginia’s 170,000209 16 unserved households into the 2 1St century. Broadband at affordable rates and reasonable 17 speeds is critically important to the economy and well-being of consumers. 18 Q: But what if Verizon simply drags its broadband feet? Isn’t it better to have 19 Frontier acquire Verizon’s operations to accelerate broadband deployment? also Frontier response to CAD Set 4, Question #B19 which shows that through a bundled or promotional offer the rate for DSL Lite is $29.99 and the rate for DSL Max is $49.99 208 / “Qwest seeks stimulus dollars for broadband,” New Mexico Business Weekly, January 8,2009, http://www.bizjournals.com/albuquerque/stories/2009/01/05/daily42.html 209 1 Gregg Direct (Frontier), at 14. 79 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC I. A: No. Frontier has not provided specific plans or sufficient evidence to show that it will 2 deploy broadband more aggressively and successfully than would Verizon. Furthermore, 3 as Mr. Barber shows, the financial precariousness of the proposed transaction jeopardizes 4 Frontier’s ability to follow through on its broadband predictions. 5 Frontier’s broadband lines and investment 6 Q: What is Frontier’s current broadband plan for the Spinco territory in West 7 Virginia? 8 A: Frontier witnesses state that Frontier intends to extend the deployment of broadband in 9 West Virginia?” 10 Q: That sounds rather vague. Do Frontier witnesses present any concrete plans for 11 extending the reach of broadband? 12 A: I am unaware of any broadband plan by Frontier that specifies dates, deployment 13 objectives, and predicted broadband capacities and speeds. However, Mr. Gregg did state 14 that Frontier is preparing a grant for Broadband Technology Opportunity Plan (“BTOP”) 15 fhds that would facilitate deployment to approximately 2,350 homes.2* 16 Q: Does Frontier have any projects currently underway that will bring broadband to 17 more West Virginia households? 18 A: According to Frontier , it is <<< BEGIN CONFIDENTIAL 19 - 20 210, McCarthy/Swatts Direct (Frontier), at 27-29. “Frontier’s plan is to focus on and invest over time in network facilities to allow it to significantly increase the levels of broadband availability in these areas.” 211, Gregg Direct (Frontier), at 15. See also Frontier’s response to WV CWA Set3 FR29-1 stimulus Final 80 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 4 5 MEND 6 CONFIDENTIAL>>> 7 Q: Does Frontier provide any information regarding its current broadband deployment 8 at a granular level? 9 A: Yes. Frontier provided the number of households and the number of households with 10 broadband availability at the wire center level in its current West Virginia service 11 territory. Theseadatashow that the “broadband availability ratio” ranges from <<< 12 BEGIN CONFIDENTIAL 13 END CONFIDENTIAL>= 14 Q: What do these data show? 15 A: Although Frontier does deploy broadband to about 9 1% of the households in its service 16 territory, this average statistic masks a wide range in the actual availability of broadband 17 in Frontier’s West Virginia territory within individual communities. 18 Q: You have discussed broadband availability in Frontier’s West Virginia service 19 territory. Have you reviewed subscribership for broadband in this region? 20 A: Yes. Frontier states that as of June 30,2009, it had approximately << CTCWV.pdf, Frontier’s BTOP grant application. 212, WV CWA Set3 FR19g broadband plans CONFIDENTIAL.pdf 213 1 WV CWA Set3 FR19e broadband avail CONFIDENTIAL.PDF, which I have reproduced as Confidential 81 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 HIGHLY CONFIDENTIAL =END HIGHLY CONFIDENTIAL >>> HSI 2 customers in West Virginia.214This amounts to a residential broadband “uptake” rate of 3 about << 4 CONFIDENTIAL >>>*I5 Elsewhere, Frontier witness Gregg states that 43% of 5 Frontier’s residential customers subscribe to broadband.216 6 Q: Did you examine Frontier’s investment in high speed Internet deployment for recent 7 years? 8 A: Yes. I found that, of the years for which Frontier provided data, its high speed Internet 9 investment <<< BEGIN CONFIDENTIAL i< 10 11 END CONFIDENTIAL >>> 12 Q: Has Frontier specified the funding level necessary to achieve its plan for more 13 intensive broadband deployment in West Virginia? 14 A: No. However, based on my review of documents submitted in this proceeding, I have 15 prepared estimates of the specific funding level needed for Frontier to deploy broadband 16 more broadly in the West Virginia territory that Verizon now serves, which I discuss in 17 Section VI1 below. In any event, I am unaware of any specific commitments to particular 18 broadband funding levels by Frontier in West Virginia. Therefore, Frontier’s broadband Exhibit SMB-C-9. 214, Frontier response to WV CAD Set3 T-14. CWA Set3 FR19e. 216, Gregg Direct (Frontier), at 16. 217, Frontier response to WV CAD Set7 FROF28. 82 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 promises should be considered as vague, impossible to measure, let alone enforce, 2 particularly because of the financial constraints under which it would operate. 3 << 4 5 END HIGHLY 6 CONFIDENTIAL>>> 7 8 Also, in another document Frontier << 9 10 11 END HIGHLY CONFIDENTIAL>>> 12 Verizon West Virginia’s broadband lines and investment 13 Q: What are the high-speed Internet options currently available to consumers 14 nationally as well as those residing and working in SpinCo’s territory in West 15 Virginia? 16 A: Within any particular region of the nation, consumers typically have high speed Internet 17 access from either the incumbent local exchange carrier or the incumbent cable television 18 provider, or both. In some instances, where ILECs have not yet deployed DSL and where 19 cable companies either do not yet provide cable television service or have not upgraded 20 their infrastructure to offer cable modem service, consumers may not have any access to 218 1 Project North, Board of Directors Discussion Materials, May 1,2008 (“May 1 Board of Directors Materials”), at 9. 83 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 high speed Internet access - these areas are consider “unserved.” (Consumers may also 2 have access to mobile wireless, but regulators’ and policy makers’ more frequent concern 3 is with promoting broadband deployment to fixed locations - to homes and to 4 businesses?20) 5 6 One of the ongoing efforts resulting from the American Recovery and Reinvestment Act 7 (cLARRA”)221and the Broadband Data Improvement Act222is the National 8 Telecommunications and Information Administration’s (“NTIA”) State Broadband Data 9 and Development Grant Program. As stated by the NTIA: “The program, hnded by the 10 American Recovery and Reinvestment Act, will increase broadband access and adoption 11 through better data collection and broadband planning. The data will be displayed in 12 NTIA’s national broadband map, a tool that will inform policymakers’ efforts and provide 13 consumers with improved information on the broadband Internet services available to 14 them.”223 As part of the ARRA, Congress left it to the NTIA to define underserved areas 219 HSR 4.c.36, “Project North Transaction Overview,” April 2009, at 11. 220/ Mobile broadband is valuable, of course, but can reasonably be considered an “extra” compared to fixed deployment. The FCC is currently examining whether mobile wireless broadband can be considered a substitute or complement to wireline broadband access and whether mobile wireless broadband would be sufficient for unserved and underserved areas in its development of a National Broadband Plan. See, for example, Transcript of Federal Communications Commission National Broadband Plan Workshop, Wireless Broadband Deployment (General), Washington, DC, August 12, 2009, available at: http://www,broadband.pov/ws deulovment wireless.htm1 and Technology/Wireless, August 13,2009, available at: httD://www.broadband.gov/wstech wireless.htm1. 221/ Pub. L. NO. 11 1-5, 8 6001(~). 222 / Pub. L. No. 110-385, 122 Stat. 4096 §103(c) (2008). 223 / http://www.ntia.doc.gov/press/2009/l3TOPMappingAwards 09 1005.html. The NTIA’s description states further: “The State Broadband Data and Development Grant Program is a matching grant program that implements the joint purposes of the American Recovery and Reinvestment Act and the Broadband Data Improvement Act (BDIA). The program will provide grants to assist states or their designees in gathering and verifying state-specific data on the availability, speed, location, and technology type of broadband services. The data they collect and compile will also be used to develop publicly available state-wide broadband maps and to inform the comprehensive, interactive, and searchable national broadband map that NTIA is required by the Recovery Act to create and make publicly available by February 17, 20 1 1 .” 84 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 and broadband service for the purposes of dispersing broadband stimulus funds. In July 2 2009 in its first Notice of Funding Availability, the NTIA outlined the following: 3 “Broadband Service” - the provision of two-way data transmission with 4 advertised speeds of at least 768 kbps downstream and 200 kbps upstream to end 5 users. 6 “Unserved Areas” - a proposed service area (consisting of one or more contiguous 7 census blocks) where at least 90% of households lack access to facilities-based, 8 terrestrial broadband service (either fixed or mobile). 9 “Underserved Areas” - a proposed service area (consisting of one or more 10 contiguous census blocks) where at least one of the following is met: (1) no more 11 than 50% of the households in the proposed funded service area have access to 12 facilities-based, terrestrial broadband service; (2) no fixed or mobile broadband 13 service providers advertises broadband transmission speeds of at least 3 mbps 14 downstream in the area; or (3) the rate of broadband subscribership for the 15 proposed funded service area is 40% of households or less.224 16 Q: Doe Mr. Gregg discuss data regarding broadband deployment and demand in West 17 Virginia? 18 A: Yes. Mr. Gregg states that only 77% of West Virginia households have access to 19 broadband te~hnology,2~~and only 43% of Frontier’s West Virginia residential customer 224/ Federal Register, Vol. 74, No. 130, Thursday, July 9,2009, at 33 108-33 109. Also, available at: http:l/www.broadbandusa.~ov/files/BB%20N0FA~~20F1NAL~~2007092009.udf. 225 I Gregg Direct (Frontier), at 14. 85 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 subscribe to DSL.226He states that the “vast majority” of these unserved households are 2 in Verizon territory, where broadband has been deployed to only 60% of hou~eholds,2~’ 3 and where only 25% of Verizon’s residential customers subscribe to Verizon’s DSL 4 offering.228Of the customers for whom broadband is available, 42% of Verizon’s and 5 42% of Frontier’s customers s~bscribe.2~~ 6 Q: How does Mr. Gregg explain the lack of deployment in some areas of West 7 Virginia? 8 A: Mr. Gregg explain that the topography is unforgiving to broadband providers, as West 9 Virginia is “covered in hills, mountains, and The irregular terrain and heavy 10 vegetation means that mobile and fixed wireless broadband are impossible in much of the 11 state, forcing service providers to rely on wired solutions which are expensive in this 12 terrain.231Mr. Gregg also cites the generally low population density and various demand 13 factors as reasons that broadband deployment has stagnated in West Virginia.232 14 Q: Have you reviewed the FCC’s data regarding broadband deployment and demand 15 in West Virginia? 226 I Id, at 16. 227 / Gregg Direct (Frontier), at 14. 228 I Gregg Direct (Frontier), at 16. See Applicant response to CWA Request 22 clarifying that the references to “broadband’ refer to Frontier and Verizon’s services, and that the analysis encompassed by page 16 of his testimony includes only households that are served by Frontier and by Verizon (and, does not for example, encompass households served by cable companies). 229 / Joint Applicants’ response to CWA Set 2, Question ## 20 (reproduced as Exhibit SMB-I). 230 Gregg Direct (Frontier), at 13. 231 Id. 232 See also Verizon response to CAD Set 4 Question #B20, in which Verizon indicates that it “has not identified impediments in each particular Verizon West Virginia wire center,” and also states that “[glenerally speaking, the impediments to DSL service availability include the condition and make up of outside plant and other facilities, distance and distribution of potential DSL subscribers, insufficient facilities relating to installing and placing outside plant devices, right-of-way, easement, and real estate limitations.” 86 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC ]I A: Yes. As of June 30,2008,69% of households233in West Virginia had the option to 2 subscribe to DSL and 85% of households had the option to subscribe to cable modem 3 service.234Statewide, in West Virginia, there were 167,237 cable modem lines in service 4 and 146,964 DSL lines in service as of June 30, 2008.235Nationally, 46.7% and 34.1% of 5 residential high-speed lines are cable modem and ADSL, respectively followed by 2.7% 6 fiber and 0.1 % SDSL and Traditional Wireline. In addition, approximately 16.4% of 7 residential high-speed lines are served by “other” technologies which include satellite, 8 fixed wireless, mobile wireless, power line and 0ther.2~~ 9 Q: How do these statistics relate to this proceeding? 10 A: One of the issues this proceeding raises (due to Frontier’s prediction that it will deploy 11 broadband more aggressively in the SpinCo footprint than would Verizon) is a 12 comparison of the willingness, financial ability, technical ability, and managerial ability 13 of Verizon West Virginia and Frontier to make the necessary incremental investment to 14 the existing PSTN platform to offer DSL to areas that are not now served, or to deploy 15 fiber to the home. In particular, it is unclear why Frontier would be more able to 16 overcome the obstacles cited by Mr. Gregg than would Verizon. 17 Q: Have you reviewed data regarding Verizon’s broadband deployment in West 18 Virginia? 233 The measurement is defined as the percentage of residential end-user premises with access to high-speed services. FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, High-speed Service for Internet Access: Status us ofJune 30, 2008,” rel. July 2009 (“FCC High-speed Services Report”), at Table 14. 234 FCC High-speed Service Report, at Table 14. 235, FCC High-speed Services Report, at Table 11 and 12. These lines are both business and residential. The data available from the FCC that is technology-specific aggregates residential and business lines at the state level. The FCC does provide the number of total high-speed lines (all technologies) for West Virginia: 3 14,072 residential high-speed lines and 57,688 business high-speed lines as of June 30, 2008. Id., at Table 13. 87 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 A: Yes. Verizon provided data separately by residential and business customers for loop- 2 qualified locations and for penetrati~n,~~’and also provided by wire center, the total 3 estimated residence locations (including those with and without Verizon local service), 4 the quantity of residence locations with high speed Internet availability and the total 5 (residential and business) DSL lines as of December 2008.238 6 Q: Does Mr. Gregg state that Frontier will be better able to extend broadband in West 7 Virginia? 8 A: Yes. Mr. Gregg cites several factors that may explain Frontier’s ability to achieve 90% 9 deployment in other areas, including Frontier’s focus on serving rural markets, Frontier’s 10 explicit policy of deploying broadband, Frontier’s lower “threshold” for deploying 11 broadband, and Frontier’s use of AdrenaLine xDSL technology.239 12 Q: Does Mr. Gregg provide any specific commitments on behalf of Frontier regarding 13 broadband deployment or substantiate Frontier’s broadband predictions? 14 A: No. Mr. Gregg did not provide any specific commitments on behalf of Frontier regarding 15 broadband availability. Furthermore, when the Commission assesses the plausibility of 16 Frontier’s broadband revenue projections, I urge the Commission to consider the data that 17 show that, nationally, of those households that subscribe to broadband, approximately 18 47% subscribe to cable modem and only 34% to DSL (approximately 3% to fiber, and the 236 I FCC High-speed Service Report, at Chart 6 and Table 3. 237 I Verizon response to CAD Set 1, Question # B 15, which I have reproduced as Highly Confidential Exhibit SMB-HC-10. 238 I Verizon response to CAD Set 4, Question #B 18, confidential attachment “WV CAD Set4 VZ B 18 B29 res dsl Dec 2008HIGHLY CONFIDENTIAL.PDF”, reproduced as Highly Confidential Exhibit SMB-C-I 1. (There are two separate questions labeled as “Question B# 1 8.”) 239 Gregg Direct (Frontier), at 15. 88 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 rest to “other”). In other words, Frontier’s DSL offering in the SpinCo territory in West 2 Virginia would be competing with cable modem offerings that the cable industry markets 3 to the same households as well as with the emerging wireless alternatives. Therefore, 4 even if a particular household seeks a high speed Internet connection, the consumer may 5 prefer cable modem to DSL, and in some instances where Frontier may seek to market its 6 DSL offering, customers may already be subscribing to cable modem service, and, 7 therefore, be reluctant to migrate to a new technology and provider. Moreover, I am 8 unaware of any studies that Frontier has conducted of consumers’ high-speed Internet 9 preferences in West Virginia (or elsewhere) nor of the geographic areas of West Virginia 10 to determine in which local markets customers have a cable modem option. 11 Q: Have you reviewed any projections of Frontier DSL penetration in this proceeding? 12 A: Yes. For example << 15 16 17 18 19 20 21 240 / Frontier response to CAD Set 4, Question M-27, Attachment 1, at 12. 89 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 3 4 END HIGHLY CONFIDENTIAL>>> 5 Q: What is the status of DSL deployment in Verizon’s West Virginia region? 6 A: << 9 10 -! END HIGHLY CONFIDENTIAL>>> 11 Q: How does DSL penetration in West Virginia compare with penetration in the other 12 SpinCo states? 13 A: Penetration in West Virginia in Verizon’s territory is << 14 CONFIDENTIAL 15 16 17 18 19 20 241 April 16 Board of Directors Materials, at 20. 242 1 Id. 90 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 3 4 END HIGHLY CONFIDENTIAL>>> 5 ~-Highly Confidential Table 5 below compares West Virginia’s high speed Internet access 6 statistics for Verizon with those of other states in the SpinCo territory. 7 << 8 91 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 4 5 END HIGHLY CONFIDENTIAL>= 6 7 Q: What are the implications of these broadband statistics to this proceeding? 8 A: In assessing a company’s success in achieving broadband adoption, one should examine 9 not simply total penetration (that is, the ratio of DSL lines to the total number of lines), 10 but penetration among those customers for whom broadband is an option (that is, the 11 “take rate.”) By way of example, if 60% of Verizon lines have a DSL option and of those 12 lines, half subscribe to DSL, the penetration is 30% of all lines. If 90% of Frontier’s lines 243, Source: April 16 Board of Directors Materials, at 20. Highly Confidential Exhibit SMB-HC-12 reproduces this page. Data on availability and on penetration are provided in the source document. Percentage of those with 92 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 can subscribe to DSL, and half of those lines do subscribe, then the overall penetration is 2 45%. However, in this illustrative example, based on a comparison of the companies’ 3 relative abilities to achieve adoption, one can conclude that the two companies are 4 equally successful, with each company achieving 50% of those for whom broadband is an 5 option. Furthermore, many factors affect “take rates” including such variables as the 6 presence of a cable modem alternative, consumers’ income, carriers’ marketing, 7 consumers’ willingness to adopt new technology, the price and speed of the service, etc. 8 Each of the three metrics that Table 6 above includes is important, but each should be 9 considered separately in order to assess the implications. 10 Q: What factors do you recornmen%that the Commission consider regarding 11 broadband? 12 A: In assessing the purported benefit of the transaction, specifically the promise of increased 13 broadband deployment and adoption, I urge the Commission to consider the following: 14 << 15 16 17 18 19 20 21 availability that subscribe is calculated based on these data. 93 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 END HIGHLY CONFIDENTIAL=> 16 Q: How much has Verizon invested in the Spinco states in the past two years? 17 A: In 2007, Verizon invested $703 million in capital expenditures in the Spinco states, an 18 average of $132 per access line. In 2008, Verizon invested $730 million in capital 19 expenditures in those states, an average of $1 53 per line.244 20 Q: How much has Frontier invested in its existing service areas during 2007 and 2008? 21 A: In 2007, Frontier invested $3 16 million in capital expenditures in its existing service 244, Prospectus, pp. 19 and 148 (capital expenditures and access lines, respectively). 94 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 areas, an average of $130 per access line. In 2008, its level of investment declined to 2 $288 million, an average of only $128 per access line.245 3 Q: How do these figures compare to Frontier’s projections of how much it will invest in 4 the Spinco states if the transaction is approved? 5 A: Frontier projects that in the SpinCo footprint, it will spend << 6 CONFIDENTIAL 7 ~~ ~~ ~~ ~~ 8 1- END HIGHLY CONFIDENTIAL>>> This represents a 9 significant reduction from the level of investment that Verizon has been making in the 10 Spinco service areas. 11 Q: What do you conclude? 12 A: I conclude that despite Frontier’s promises of greatly increased investment in the Spinco 13 states, Frontier actually is proposing less capital investment than Verizon has actually 14 made in these states during each of the past two years. I find it difficult to believe, 15 therefore, that Frontier will achieve the type of dramatic increases in broadband 16 availability that it projects, given the fairly modest level of investment that it would make 17 in West Virginia and the other Spinco states. 18 Q: What else do you infer from this information? 19 A: Frontier has not made any specific commitments to particular levels of investment in the 20 SpinCo footprint generally nor specifically in West Virginia. The predictions are 245, Prospectus, pp. 16 and 17 (capital expenditures and access lines, respectively). 246 Frontier pro forma financial model, provided in response to CWA Set 1, Question #37. 95 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 unenforceable and ultimately meaningless if Frontier confronts financial constraints. 2 Indeed, the financial constraints that Mr. Barber describes and Frontier’s pursuit of 3 achieving synergies cast serious doubt over Frontier’s ability to invest adequately in the 4 West Virginia telecommunications infrastructure. 5 Q: Have the Joint Applicants explained adequately why broadband deployment would 6 be more financially feasible if carried out by Frontier than it would be if carried out 7 by Verizon? 8 A: No. The Joint Applicants have not adequately demonstrated why deploying broadband to 9 areas in West Virginia that now are unserved or underserved would be more financially 10 attractive to Frontier than it would be for Verizon. Indeed, as I explained above, Verizon 11 has been investing more per line in the Spinco areas than Frontier has spent in its own 12 service areas. It also appears that Frontier will not even match the amount of money that 13 Verizon has been investing in Spinco, let alone provide the type of increased investment 14 that it promises. 15 Q: Have you reviewed any data regarding Frontier’s success in deploying broadband 16 and attracting broadband in other states? 17 A: Yes. Highly Confidential Exhibit SMB-HC- 13 shows Frontier’s penetration by state, as 18 of year-end 2008, expressed as percentage of households and as percentage of primary 19 lines in servi~e.2~~<< 247 I HSR Attachment 4.c.52, cover page and page 3. This attachment also shows penetration in Verizon’s states (these figures include fiber high speed.) 96 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 3 4 END HIGHLY CONFIDENTIAL>>> I recognize that many variables 5 -affect penetration, including factors such as the presence of competing cable modem 6 alternatives. 7 Detailed data are essential to support broadband mapping and to achieve 8 the state’s broadband goals. 9 Q: Do you have any other suggestions regarding broadband-related conditions? 10 A: Yes. If the Commission approves the proposed transaction, which I do not 11 recommend, it should condition such approval on the Joint Applicants’ agreement 12 to provide the Commission with a complete inventory of where their broadband 13 infrastructure is located, and where the service is currently available. 14 Q: Won’t that effort involve seeking some of the same kinds of broadband data 15 that you have examined in this proceeding? 16 A: Yes, except at a much greater level of detail. Furthermore, much of the pertinent 17 information that has been filed in this proceeding has been designated as 18 proprietary and therefore may not be shared beyond this proceeding. The 19 Commission should seek maps from the Joint Applicants indicating on an 20 address-by-address basis where broadband service is available. This information 21 should then be made publicly available. 22 Q: What is the significance of the state’s NTIA-funded broadband mapping 97 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 effort to this proceeding? 2 A: If the Commission is contemplating approving the transaction (which I do not 3 recommend), it is essential that Verizon agree to provide detailed data and to 4 cooperate fully so that this transaction does not jeopardize the state’s ability to 5 fulfill its broadband goals. After the transaction, Frontier’s state and corporate 6 focus likely will be diverted to integrating its newly acquired company. 7 Therefore, before Verizon sells its operations, it should be required to compile and 8 provide all necessary data regarding the location of the households and businesses 9 in Verizon’s West Virginia footprint and the location of Verizon’s high speed 10 Internet access services in West Virginia to enable the state to achieve its 11 broadband goals efficiently. 12 Summary of analysis and recommendations regarding broadband 13 deployment 14 Q: Please summarize your analysis of the broadband-related aspects of the proposed 15 transaction. 16 A: Frontier’s broadband promises do not justify the transaction. Although its promises and 17 stated intentions may at first blush “sound good,” they are in fact vague and impossible to 18 enforce. Further, Frontier’s allegedly aggressive capital expenditure plans are actually far 19 less than Verizon has been spending on capital investments in the Spinco areas. 20 Moreover, I am concerned that financial considerations will cause Frontier to delay or 21 pare back its investment plans. 22 98 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC The lack of a concrete deployment goal and a corresponding action plan make Frontier’s broadband promises little more than wishes, and certainly not business strategy. It is unclear how any of this benefits the public when Frontier would spend far less than Verizon has been spending in West Virginia and the other Spinco states. Furthermore, in 5 the unlikely event that Frontier is able to follow through on its implied promise to deliver 6 broadband to 90% of the households in its service territory within some reasonable time 7 frame, West Virginia customers may be disappointed with the result because the vast 8 majority of Frontier’s broadband offerings are relatively low speed. For all of these 9 reasons, I urge the Commission to afford little weight to Frontier’s speculations about its 10 broadband plans in West Virginia. 11 Q: Are there any broadband conditions that the Commission could impose that would 12 make this transaction in the public interest? 13 A: No. However, if, contrary to my recommendation, the Commission intends to approve 14 the transaction, I urge the Commission to consider the broadband conditions that I 15 describe in detail in Section VII. 99 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 VI. SERVICE QUALITY 3 4 Impact of the transaction on service quality 5 Q: How do you recommend that the Commission assess the impact of the proposed 6 transaction on service quality in West Virginia? 7 A: I recommend that the Commission consider multiple factors as it assesses the potential 8 impact of the transaction on service quality in West Virginia. Specifically, I recommend 9 that the Commission examine: 10 1. The impact of Frontier’s severe financial constraints on its ability to deliver 11 quality service and invest in West Virginia’s telecommunications network 12 (without money it cannot replace aging and defective plant). 13 2. The impact of the proposed cutover and systems integration on state-level and 14 corporate focus. 15 3. The state of Verizon’s infrastructure and Frontier’s familiarity with that 16 infrastructure. 17 4. Frontier’s service quality in West Virginia. 18 5. Frontier’s service quality in other territories that it has acquired. 19 6. Verizon’s service quality in West Virginia, as evidenced by service quality data 20 that it submits to state and federal regulators. 21 7. The post-transaction economic incentives confronting Frontier. 22 I elaborate below on the significance of each of these seven factors as they relate to the 100 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 proposed transaction. 2 Financial constrain ts 3 Q: Mr. Barber has raised concerns about financial risks associated with the proposed 4 transactions. How do his analyses and conclusions affect your view of the quality of 5 service that Frontier would be able to deliver to consumers in West Virginia? 6 A: The serious financial risks that Mr. Barber describes in detail jeopardize the quality of service that Frontier would offer consumers for several reasons. The post-transaction financial constraints on Frontier would limit its ability to follow through on its promise to expend more on capital investment than Verizon has. Instead, in its pursuit of synergies, 10 Frontier would face strong economic incentives to cut costs, particularly where the 11 anticipated cost of such investment is not offset by the anticipated increase in revenue (or 12 decrease in expenses). As a result, for example, consumers may experience long delays 13 for the restoration of out-of-service troubles. 14 Impact of cutover and systems integration on service quality 15 Q: Could the process of the cutover and integrating systems jeopardize service quality? 16 A: Yes. Fairpoint, which acquired Verizon’s operations in only three states, has confronted 17 significant difficulties. The cutover in West Virginia combined with the process of taking 18 over 4.8 million lines in 14 states combined with aging infrastructure could jeopardize 19 service quality. Furthermore, as I discussed above, service quality in Rochester declined 20 in the same time period that Frontier integrated Rochester’s systems. 21 101 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Among the various press reports about the Fairpoint debacle was one that reported: 2 “Maine’s Public Utilities Commission rejected Fairpoint’s request to waive more than 3 $845,000 in penalties that it owes to local phone companies for poor network service 4 from February through April. Fairpoint faces similar scrutiny and issues in the other 5 states. New Hampshire’s Public Utilities Commission is considering a request by the state 6 consumer advocate to open a new investigation into Fairpoint’s poor perf~rmance.”’~~ 7 Q: What predictions did FairPoint make in anticipation of acquiring Verizon’s 8 northern New England operations? 9 A: Fairpoint Chairman Eugene Johnson stated: 10 The FairPoint senior management team has a lot of experience in the 11 business. Importantly, we’ve been together a long time. This is a team 12 that’s worked together for many, many years versus what (inaudible) 13 worked together since 1994. And that’s a team that understands how to do 14 things. We’ve made, as you know, 36 acquisitions over the years and 34 of 15 the first 35 of those, not counting this one, we exceeded our acquisition 16 projections and we did it quite handsomely in all those cases. So we’re 17 very, very proud of our track record. We’re not perfect. As you know, 18 we’ve stubbed our toe from time to time. But 1’11 tell you one thing, we’re 19 extremely good at getting up, massaging it, moving on, and not having any 20 residual damage from that. And I think that’s something that you can 21 expect us to deliver on the promises we’ve made to you. 22 23 We’ve got a lot of experience with system integration, you can imagine. 24 All these companies that we bought all had separate systems. We had to 25 pull them all together. We did that very effectively. We completed that 26 integration of the 17 different billing platforms onto a single billing 27 platform. We completed that on time and on budget. We’re pleased with 28 that after the initial toe stubbing created by a vendor that basically walked 29 away from the business right in the middle of the conversion. What we did 30 to turn that around and convert it over to another vendor, doing it on time 248 1 “Fairpoint agrees to hire consultant as troubles persist,” Matt Wickenheiser, Portland Press Herald, Maine Sunday Telegram, August 13,2009. The article reports: “Its call center was taking 85,000 customer service calls a week in March and April, early in the transition. It has been down to 35,000 a week for the last two months, Nixon said.”htt~://~ressherald.mainetodav.com/story.php?id=27653O&ac=PHbiz 102 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 and actually under our budget, under the original budget I might add was, I 2 think, very, very satisfying.249 3 4 Q: What do you recommend that the Commission infer from this FairPoint 5 prediction? 6 A: Even with the best of intentions, and despite seemingly similar experiences, each 7 transaction is unique. Frontier has not demonstrated that it is adequately prepared 8 to take over a complex set of systems and to integrate them across a 14-state 9 footprint without causing consumer disruptions and service quality deterioration. 10 Frontier’s due diligence regarding Verizon’s infrastructure in West Virginia 11 Q: Should the Commission be concerned about Frontier’s due diligence regarding 12 Verizon infrastructure in West Virginia? 13 A: Yes. Frontier indicates that it has evaluated the condition of Verizon West Virginia’s 14 outside plant “in a number of ways, including site However, Frontier provides 15 no further detail about its evaluation, or the “number of ways” that it has conducted such 16 an evaluation. Frontier’s response could encompass a wide range of evaluations from 17 driving by some outside plant to a tour of a central office or two. Frontier states that it 18 “has not conducted nor contracted anyone to conduct an audit of Verizon’s property, plant 19 and equipment or the continuing property records in West Virginia,’’ and that it “does not 20 anticipate conducting such an audit prior to the closing date.”25’ Frontier has not 21 demonstrated its familiarity with the condition of the outside plant that it proposes to 249 1 Fairpoint Chairman Eugene Johnson, speaking on a quarterly investment analysts call, Fairpoint SEC Form 8-K, April 18,2007, p. 5 (emphasis added). 250, Frontier response to CAD Set 8, Question # M74. 251, Frontier response to CWA Set 3, Question #5 1. 103 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 acquire in West Virginia. 2 Q: Did Frontier provide other information about its assessment of Verizon’s network? 3 A: Frontier states: 4 Frontier operates in West Virginia and is familiar with network operations 5 in the state. Frontier considered Verizon’s investment, expenditures and 6 service quality data reported to the Commission including the number of 7 customer trouble reports and has engaged in ongoing conversations with 8 Verizon representatives regarding the state of Verizon’s network in West 9 ~irginia.2~~ 10 11 However, this type of general assessment does not demonstrate that Frontier is 12 sufficiently familiar with the status of Verizon’s network. 13 Q: Is there any other information suggesting that Frontier may not be sufficiently 14 familiar with the operations it proposes to acquire? 15 A: Yes. The incredibly short period of time between the first discussion of purchasing 16 SpinCo and the announcement date implies that there was scant time for Frontier to 17 acquaint itself with the infrastructure scattered throughout 14 states. 18 Frontier’s service quality in West Virginia 19 Q: Did you examine other service quality data relating to the Joint Applicants’ 20 performance? 21 A: Yes. I examined several service quality measures that companies report to the FCC 22 through the ARMIS system, including those that reflect the timeliness of the installation 23 and repair of basic local service, the condition of outside plant (troubles reported), and 24 complaints. Specifically, for the years 2001 through 2008, I analyzed average installation 104 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-OS7 1-T-PC 1 time, initial trouble reports per 100 lines, initial out of service interval, repeat trouble 2 reports for 100 lines, and the repeat out of service interval. 3 Q: What companies did you compare? 4 A: I compared data for the West Virginia operating companies of Verizon and Frontier. 5 Frontier reports its West Virginia data to the FCC as three separate entities - two entities 6 acquired from GTE in 1993 and one acquired fiom Alltel in 1995. I use the relevant 7 COSA label to refer to these three Frontier companies - Frontier (CTMW), Frontier 8 (CTCW), and Frontier (CTGW). I also examined service quality performance at the 9 holding company level of Frontier and Verizon. Finally, I looked at ARMIS data for 10 territories acquired by Frontier in previous transactions. 11 Q: HQWoften did Frontier and Verizon meet their service commitments? 12 A: While Verizon West Virginia consistently met 96% or more of its commitments, the 13 Frontier companies consistently metfewer than 96% of their commitments. In some 14 years, Frontier companies met as few as 86% to 87% of its commitments.253Figure 5 15 below shows the percent commitment met for all customers, for Verizon and the three 16 Frontier companies of West Virginia. 17 18 19 252, Frontier response to CAD Set 4, Question #T24. 253, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 132. 105 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC Figure 5254 Percent Commitments Met, 2001 - 2008 All Customers 4 5 Q: How quickly do Frontier and Verizon install dial tone? 6 A: Frontier requires significantly more time than does Verizon to install service. While 7 Verizon's installation interval varied between 0.7 days and 1.1 days from 2001 to 2008, 8 Frontier's installations often required three times as long, and even longer.255Figure 6 9 below shows the average installation intervals for Verizon West Virginia and the Frontier 10 West Virginia companies. 254, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 132. 255 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), 106 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 Average Installation Interval, 2001 - 2008 3 All Customers 14 I - - ‘I--2 -- - ,, -I - - 0 2001 2002 2003 2004 2005 2006 2007 2008 4 /-Frontier (CTMW) +Frontier (CTCW) ’*‘F Frontier (CTGW) -Verizon West Virginia 1 5 Q: What are “trouble reports”? 6 A: Trouble reports include out of service reports, in which the customer is completely 7 without telephone service, and all other trouble reports, which includes problems such as 8 static, interrupted calls, et^.^^' The condition of the outside plant affects whether 9 customers report troubles. Carriers report annual trouble report rates to the FCC (and row 134. 256 ARMIS Report 43-05 Service Quality Report, Table 11 Installation and Repair Intervals (Local Service), row 134. 257 / http://www.fcc.gov/wcb/armis/instructions/2008/definitions05.htm#T2R 107 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 typically report monthly trouble reports to state regulators). 2 Q: Did you examine ARMIS data related to trouble reports? 3 A: Yes. I normalized the data by dividing the number of trouble reports by the number of 4 lines. I multiplied this number by 100 to yield the number of trouble reports per 100 lines 5 for each company. Also, because each Frontier West Virginia company reported the 6 number of trouble report and the number of access lines, I was able to combine them to a 7 form metric for Frontier West Virginia as a whole, rather than as three separate parts. 8 Specifically, I added together all of the trouble reports for the three Frontier companies, 9 multiplied by 100, and divided this by the sum of the total access lines for the three 10 Frontier companies. 11 Q: What does your analysis of initial trouble reports show? 12 A: Frontier consistently receives far more trouble reports than Verizon. Figure 7 below 13 shows the number of initial trouble reports per 100 lines for all customers. 14 15 16 17 18 19 20 21 108 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Figure 7*” 2 Initial Trouble Reports per 100 Lines, 2001 - 2008 3 All Customers 40 35 30 3E 25 0z il g 20 8 2 1 5 15 ce io 5 0 2001 2002 2003 2004 2005 2006 2007 2008 4 aFrontier West Virginia EVerizon Wes! Virginia 5 Q: How do the Joint Applicants’ out of service reports compare? 6 A: Frontier consistently receives significantly more out of service reports than does Verizon 7 (expressed on a per 100 line basis). Figure 8 below shows the number of out of service 8 reports per 100 lines for the two companies. 9 10 11 258, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), 109 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Figure 82s9 2 Initial Out of Service Trouble Reports per 100 Lines, 2001 - 2008 3 All Customers 25 c 0 L 2001 2002 2003 2004 2005 2008 2007 2008 E4Verizon West Virginia 4 El Frontier West Virginia 5 Q: Did you review the Joint Applicants' repeat trouble reports, and, if so, please 6 explain? 7 A: Yes. A repeat trouble report occurs when a customer, who has already reported a trouble, 8 which a company then resolves, reports a subsequent trouble on the same line.260As 9 Figure 9 shows, Frontier West Virginia has more repeat trouble reports per 100 lines, and row 141. 259, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 144. 260, Repeat trouble reports are those concerning service quality that are received within thirty days after the resolution of an initial trouble report on the same line. 110 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC more repeat out of service reports per 100 line than does Verizon West Virginia, in every year except 2003.261 Figure 9262 Repeat Trouble Reports per 100 Lines, 2001 - 2008 All Customers 7 Z6rE c5:I P r eLH3 4l 2t 04- 2001 2002 2003 2004 2005 2006 2007 2008 1 BFrontier West Virginia Bverizon west Virginia I 6 7 8 Q: Did you also examine data regarding the average time to repair out of service 9 troubles? http://www.fcc.gov/wcb/a~is/instructions/2008/definitions05.htm#T2R. 261 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), rows 142 and 148. In 2003, Verizon West Virginia had 5.19 repeat troubles per 100 lines, while Frontier had 5.04. Also in 2003, Verizon had 3.02 repeat out of service reports per 100 lines, while Frontier had 2.74. 262 / ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), 111 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Yes. In contrast to the other metrics I discuss above, Frontier provided much better 2 service than Verizon regarding the speed of remediation of out of service troubles. Figure 3 10 below shows that between 200 1 and 2008, Frontier’s companies repaired out of 4 service troubles in under 30 hours, while Verizon’s repair times have climbed each year 5 since 2005, eventually reaching 67.9 hours in 2008.263 6 Figure 10 7 Initial Out of Service Intervals, 2001 - 2008 8 All Customers 10 Q: Did you examine any other ARMIS data for Verizon and Frontier in West Virginia? ~~~~~ -~ rows 142 and 148. 263, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), row 145. 112 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 A: Yes. I examined the number of complaints filed to state authorities by residential 2 customers. In four of the years under analysis, Frontier had more complaints per 100 3 lines than did Verizon. In the other four years, Verizon had more. Table 6 below shows 4 the number of state complaint for residential customers per 100 lines. 5 Table 6264 6 State Complaints - Residential, 2001 - 2008 7 Per 100 Lines 2001 2002 2003 2004 2005 2006 2007 2008 Frontier 0 000 0170 0002 0000 Verizon 0 042 0 183 0281 0.515 8 9 Q: Based on your analysis of ARMIS data, what do you conclude about the level of 10 service quality provided by Frontier West Virginia and Verizon West Virginia? 11 A: Frontier reports far more troubles per hundred lines than does Verizon, which could be 12 indicative of inferior infrastructure. Frontier also installs basic local service much more 13 ‘slowlythan does Verizon. On the other hand, Frontier appears to address out of service 14 difficulties faster than Verizon. 15 ARMIS-based service quality at the Joint Applicants’ Holding Company 16 level 17 Q: What does your analysis of service quality for Frontier and Verizon at the holding 18 company level show? 19 A: ARMIS reports Verizon’s performance separately between the former Bell Atlantic 20 companies and the former GTE companies, and reports Frontier’s performance separately 113 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 between the former non-Frontier companies of Citizens Communications (which changed 2 its name to Frontier in 2008, and which I refer to as “Frontier (former CTZ)”) and the 3 legacy-Frontier companies of the current Frontier (which I refer to as “Frontier (former 4 FTR)”). 5 Q: Explain further your observations of service quality at the holding company level. 6 A: The ARMIS data show that Frontier takes far longer to install service than does Verizon. 7 Also, the progress that Frontier apparently made from 2000 through 2007 appears to have 8 reversed. In 2008 Frontier required over 4.5 days on average to install service, while 9 Verizon required fewer than two days. See Figure 11 below. 10 264 , ARMIS Report 43-05 Service Quality Report, Table V Service Quality Complaints, rows 330 and 332. 114 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Figure 11265 2 Average Installation Interval for Verizon and Frontier (Holding Company): 2000-2008 04 2000 2001 2002 2003 2004 2005 2006 2007 2008 3 +Frontier (former CTZ) +Frontier (former FTR) 4Verizon Bell Atlantic 4-Veriron GTE 4 5 Q: How do Frontier and Verizon compare in terms of the number of trouble reports? 6 A: Figure 12 shows that Frontier experiences far more trouble reports per 100 lines than does 7 Verizon; most recently, in 2008, on an annual basis, Frontier had more than 28 initial 8 trouble reports per 100 lines, while Verizon reported only 17. 265, ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service). 115 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 Figure 12266 2 Initial Trouble Reports per 100 Lines for Verizon and Frontier (Holding Company): 3 2000-2008 (annual) 2000 2001 2002 2003 2004 2005 2006 2007 2008 +Frontier (former CTZ) --*-Frontier (former FTR) +Verizon Bell Atlantic --+-,Verizon GTE 4 5 6 Q: Does Frontier respond to initial out of service trouble reports as quickly as Verizon? 7 A: Yes. However, as Figure 13 shows, service quality, as measured by this metric, 8 deteriorated for both companies during 2008, meaning that consumers are waiting longer 9 to have their basic dial tone line repaired. Verizon’s and Frontier’s consumers are 10 without basic local service much longer than they were in 2000. The out of service 11 interval for the former GTE companies of Verizon more than doubled fiom 12.3 hours in 12 2000 to 29.0 hours in 2008. The interval for the former Bell Atlantic companies of ~ ~ ~ 266 1 ARMIS Report 43-05 Service Quality Report, Table 11 Installation and Repair Intervals (Local Service). 116 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Verizon increased 50% from 25.8 hours in 2000 to 37.8 hours in 2008. The Frontier 2 companies’ intervals rose from 20.3 hours in 2000 to 23.3 hours in 2008 (former Citizens 3 companies) and from 20.7 hours to 24.6 hours in 2008 (former Frontier companies), 4 increases of 15% and 19%, respectively. 5 Figure 13267 6 Initial Out of Service Interval for Verizon and Frontier (Holding Company): 2000-2008 40 T 2000 2001 2002 2003 2004 2005 2006 2007 2008 7 +Frontier (former CTZ) +Frontier (former FTR) +-Verizon Bell Atlantic 4VerizonGTE 8 9 Q: What else do you conclude from your analyses in Figures 11 and 13? 10 A: The fact that Verizon’s timeliness of repairing out of service troubles and installing basic 11 service268has deteriorated without any apparent repercussion for the company 267 1 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service), Row 145. 268, In the former Bell Atlantic region, Verizon’s average repair time increased from 27.2 hours in 2004 to 37.8 117 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 underscores the need for regulatory oversight of an incumbent carrier’s service quality. 2 The merger between Bell Atlantic and GTE occurred in 2000, and since then, customers 3 have been waiting longer for dial tone repair.269In an affidavit that I co-sponsored in 4 1998 I raised concerns about the implications of the Bell Atlantic/GTE merger on 5 consumers, stating, among other things: 6 “The Applicants, however, have provided negligible information as to how these 7 synergies will be achieved, and as to the impact of the cost-cutting measures and 8 the competitive ventures on staffing and capital investment for home-region, 9 regulated operation^."^'^ 10 “Another way to cut costs would be to allow service quality in less competitive 11 markets to deteriorate. . .. In the absence of widespread competition in the local 12 exchange market, a carrier does not have an economic incentive to install 13 residential lines in a timely manner, to address trouble reports for customers in 14 rural areas, or to maintain service quality generally for customers without an 15 opportunity to change suppliers. The Applicants have provided no compelling 16 evidence of their economic incentive to maintain or to improve service quality for 17 residential customers and/or for customers in regions of the country with the least hours in 2008, an approximate 40% increase in wait times for consumers. Its average installation interval (also in the Bell Atlantic region) increased fiom 1.1 days in 2005 to 1.9 days in 2008, an approximate 70% increase. 269, The FCC approved the merger, with conditions on June 16,2000. Application of GTE Corporation, Transferor, and Bell Atlantic Corporation, Transferee, CC Docket 98-1 84, Memorandum Opinion and Order, 15 FCC Rcd 14032. 270 1 GTE Corporation, Transferor, and Bell Atlantic Corporation, Transferee, For Consent to Transfer Control, Federal Communications Commission CC Docket No. 98-1 84, Affidavit of Susan M. Baldwin and Helen E. Golding, on behalf of a coalition of consumer advocates from Delaware, Hawaii, Maine, Maryland, Missouri, Ohio, Oregon, West Virginia, and Michigan, filed on December 18, 1998 (“BaldwinlGolding Affidavit”), at para. 64, footnote omitted. 118 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 prospect for competitive alternatives.97271 2 “Furthermore, existing service quality standards and penalties are likely 3 inadequate to detect and to prevent the deterioration of service quality to 4 residential 5 “Contrary to their claim, the Applicants have strong economic incentives to 6 reduce service quality, particularly for residential customers, to achieve projected 7 synergies.9,273 8 Q: Are the concerns that you raised in 1998 applicable to the proposed Verizon- 9 Frontier transaction? 10 A: Unfortunately, yes. Whether to achieve projected synergies through cost-cutting 11 measures, because of its focus on new services, the lack of competition, or other reasons, 12 Verizon has indeed allowed service quality to deteriorate. The acquisition of 4.8 million 13 lines in 14 states combined with the pressure to achieve synergies would challenge 14 Frontier significantly and could lead to reduced focus on service quality. 15 Q: Are there other conclusions that you draw from your analysis? 16 A: Yes. Regardless of whether the transaction occurs, adequate economic incentives are 17 critically important to ensure that service quality by incumbent carriers improves and then 18 does not decline. 19 Q: Returning to your analysis of Verizon’s and Frontier’s footprint-wide service 20 quality, what do you observe about repeat trouble reports? 271 1 BaldwidGolding Affidavit, at para. 65. 272 1 Id., at para. 66. 273 I Id., at para. 85. 119 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 A: Figure 14 shows that in. 2008, Frontier had more than 4.4 repeat trouble reports per 100 2 lines while Verizon had fewer than 3. 3 Figure 14274 4 Repeat Trouble Reports per 100 Lines for Verizon and Frontier (Holding Company): 5 2000-2008 (annual) 2000 2001 2002 2003 2004 2005 2006 2007 2008 +Frontier (former CTZ) -+-Frontier (former FTR) -A-Verizon Bell Atlantic -.+.--Verizon GTE 1 6 7 Q: How quickly does Frontier respond to repeat trouble reports? 8 A: Frontier’s repeat out of service interval is shorter than Verizon’s at the holding company 9 level. However, Figure 15 shows that Frontier’s 2008 repair-time slowed (for former 10 CTZ) from 19 hours in 2007 to 27 hours in 2008, and (for former FTR) from 22.6 hours 11 in 2007 to 26 hours in 2008. This means that customers who experience more than one 12 trouble on the same line are waiting longer for final resolution of the problems they 274 1 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service). 120 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 report. Furthermore, as is the case with all of the ARMIS data, the metrics are annual 2 averages, and therefore do not reflect the specific levels of service quality that any 3 particular customer may receive. 4 Figure 15*” 5 Repeat Out of Service Interval for Verizon and Frontier (Holding Company): 6 2000-2008 “I--35 -- 30 -- - - 25 -- - - t e” 20 -- - - lot 5 7 8 Q: What do you conclude from your analysis of these ARMIS service quality metrics as 9 measured across the entire Frontier and Verizon footprints? 10 A: I conclude the following: 11 Frontier has a much higher incidence of trouble reports than does Verizon, which 12 could be evidence of Frontier’s failure to invest in its outside plant. 275 1 ARMIS Report 43-05 Service Quality Report, Table I1 Installation and Repair Intervals (Local Service). 121 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 Frontier’s repair times are lengthening, which means that customers are waiting 2 longer to have their basic local service restored. 3 Frontier has not demonstrated that it can afford or will have the incentive to 4 devote the resources necessary to maintain high service quality as it triples in size 5 through the absorption of Verizon’s rural territories. 6 Analysis of Verizon’s service quality data submitted to the Commission 7 Q: Please describe the Retail Service Quality Plan that governs Verizon West Virginia’s 8 service quality responsibilities. 9 A: On December 19,2008, the Commission approved a Joint Stipulation submitted by 10 Verizon, Commission Staff, and the Consumer Advocate Division (“CAD”) in response 11 to an investigation of Verizon’s service In the Stipulation, Verizon agreed to 12 Clear 75 percent of out of service troubles within 48 hours by July 1,2009,80% 13 within 48 hours by July 1,2010, and 85% within 48 hours by January 1, 201 1; 14 Clear 70% of service affecting troubles within 72 hours by July 1,2009, 75% within 15 72 hours by July 1,2010, and 80% within 72 hours by January 1,201 1; 16 Meet 74% of repair appointments by July 1,2009,76% by July 1,2010, and 78% by 17 January 1,2011; and 18 Achieve a 19% repeat trouble report rate by July 1,2009. 19 Verizon also agreed to provide a $25 customer credit if it misses a repair appointment.277 276 I Public Service Commission of West Virginia, Case No. 08-0761-T-GI,Verizon West Virginia, Inc., a public utility, Investigation into Service Qualify, Commission Order, December 19,2008. This plan extends through July 1, 2011. 277 / Verizon West Virginia, Inc. Retail Service Quality Plan, December 9, 2008, at 2-3. 122 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Q: Has Verizon met its service quality goals as specified in the Retail Service Quality 2 Plan in 2009? 3 A: Not completely. Verizon’s report to the Commission shows that it failed to clear 75% of 4 out of service troubles within 48 hours in August 2009. Also in August 2009, Verizon 5 failed to clear 70% of service affecting troubles within 72 hours. The repeat trouble rate 6 was outside the standard in July, August, and September 2009.278 7 Q: Since the customer credit regime went into effect in March 2009, has Verizon been 8 required to pay any customers credits due to its failure to meet its service quality 9 obligations? 10 A: <-BEGIN CONFIDENTIAL 11 12 13 14 END CONFIDENTIAL >>> 15 Q: -Has Frontier agreed to abide by Verizon’s Retail Service Quality Plan? 16 A: Yes. Witnesses McCarthy and Swatt state that “Frontier will invest in the Verizon West 17 Virginia network and take necessary steps to meet all its regulatory obligations, including 18 the Retail Service Quality Plan.”28o 19 Q: Did you examine Verizon’s average time to repair out of service (“00s”)and 20 service affecting (“SA”) troubles in West Virginia? 278, Verizon response to WV CAD Set 7 VZ Q39a-f (West Virginia Service Quality Results 2009). 279 Verizon response to WV CAD Set2 Question # 44. 280, McCarthyI Swatt Direct (Frontier), at 27. 123 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 A: Yes. Verizon provided these data in a confidential response. From 2006 through 2008 2 Verizon’s performance <-=BEGIN CONFIDENTIAL END 3 CONFIDENTIAL >>> Table 7 below shows yearly average- (and the average through 4 August for 2008) for Verizon’s average days to repair 00s and SA troubles. 5 Table 7281 6 Verizon West Virginia Average Days to Repair 7 (Yearly Averages) 8 << 9 10 END CONFIDENTIAL >>> 11 Q: What is the significance of the data that you summarize in Confidential Table 7? 12 A: First, it appears that, regardless of the outcome of this proceeding, the Commission 13 should monitor service quality in the Spinco territory in West Virginia. Also, Frontier’s 14 promises to provide more local customer focus and to provide basic local service at 15 adequate levels are not sufficient to protect consumers from service quality deterioration 16 that could result from cost-cutting measures. The performance in Confidential Table 7 17 should inform the establishment of a benchmark against which backsliding would not be 281 Verizon Response to WV CAD Set 7 VZ Q39g. 124 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 permitted absent financial consequences, regardless of whether the transaction occurs. 2 Q: Based on these data regarding Verizon’s service quality in West Virginia, it would 3 seem that Frontier’s acquisition of Verizon’s operations could be in the public 4 interest. Please address. 5 A: Verizon’s failure to repair lines in a timely manner may seem like a compelling reason to 6 replace Verizon’ operations with those of Frontier, however, there are several reasons that 7 such a conclusion lacks merit. First, the fact that Verizon apparently is offering 8 substandard service means that Frontier will need to allocate additional resources first to 9 improve service quality and then to maintain service quality. Based on the financial 10 constraints that Mr. Barber describes, this may not be possible. Second, based on my 11 participation in the New Hampshire proceeding in which the New Hampshire Public 12 Utility Commission investigated Verizon’s sale to Fairpoint, I am aware of the regulatory 13 temptation to seek an incumbent local exchange carrier that is seemingly more responsive 14 to consumers’ service quality concerns than Verizon may be. However, ultimately, the 15 more important question is whether Frontier, post-transaction, would possess the requisite 16 resources and economic incentives to deliver on its promise to provide more local focus 17 (and therefore presumably to deliver adequate service quality). 18 Q: What do you conclude from your various service quality analyses? 19 A: My analysis of Frontier’s service quality compared with Verizon, and in territories that it 20 has acquired raises concerns about Frontier’s ability to take on an acquisition of the scale 21 contemplated by the proposed transaction without probable adverse impact on West 22 Virginia’s consumers’ quality of service. Frontier’s claim that its experiences integrating 125 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 other acquisitions were smooth is undermined by the FCC’s ARMIS and New York 2 Department of Public Service data. The proposed transaction risks overextending 3 Frontier and harming West Virginia consumers as Frontier seeks to add 4.8 million access 4 lines to its organization. 5 Verizon’s and Frontier’s capital investment in West Virginia 6 Q: Did you examine Frontier’s record of capital expenditure in West Virginia? 7 A: Yes. Between 2006 and 2008, Frontier’s highest level of capital investment occurred in 8 << 9 10 1-END HIGHLY CONFIDENTIAL>>> 11 Q: Did you examine Verizon’s capital expenditures? 12 A: Yes. Verizon’s recent peak in capital expenditures occurred in << 13 CONFIDENTIAL 14 15 CONFIDENTIAL>>> 16 Q: Why is it important to look at Frontier’s and Verizon’s recent investment? 17 A: It is important because as Frontier takes over Verizon’s service territory, it is likely that 18 Frontier will need to at least match the investment that Verizon would have made. 19 However, absent a comprehensive evaluation of the network, there is no way to know 20 exactly how much Frontier should invest in Verizon’s service territory to meet and to 282 Frontier response to WV CAD Set3 Question # F14 (which I have reproduced as Confidential Exhibit ‘ SMB-C-14). 283 I Verizon response to FiberNet Set 1, Question #93 126 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 maintain Commission-approved levels of service quality. It is also important to 2 understand the additional budgetary requirements that Frontier will face if allowed to 3 acquire Verizon’s West Virginia service territory. 4 Post-closing economic incentives confronting Frontier 5 Q: Ms. Baldwin, you mentioned that you also recommend that the Commission 6 consider the post-transaction economic incentives confronting Frontier. Please 7 elaborate. 8 A: The main objective for Frontier following the transaction will be to stay afloat financially. 9 Regardless of when Frontier decides to integrate the back office systems in the 13 former 10 GTE states, the process of integrating 4.8 million additional access lines, and 11 approximately 10,700 additional employees spread over 14 states could prove 12 overwhelming to Frontier.284In fact, given the $94 million fee Frontier will need to pay 13 Verizon each year to maintain Verizon’s back office systems, there would be significant 14 pressure on Frontier to switch systems and thus achieve immediate cost-savings. Also, 15 << 16 17 END HIGHLY 18 CONFIDENTIAL>>> 19 Summary of analysis and recommendations regarding service quality 20 Q: What then do you conclude? 284 Prospectus, p. 32. 285 1 CWA Set 1 Question # 34, Frontier Communications, Project North - Expense Synergy Analysis 127 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 A: Although Frontier professes a willingness to provide more customer focus than does Verizon, Frontier lacks the financial, technical, and managerial resources that Verizon possesses, and, therefore, the proposed transaction would create serious risks for consumers. Frontier’s unenforceable promise of more customer focus does not justiQ the 5 substantial risks to consumers that I set forth in this testimony and that Mr. Barber 6 describes in his testimony. 7 Q: Ms. Baldwin, if contrary to your recommendation, the Commission contemplates 8 approving the transaction, how might the Commission address some of the concerns 9 that you have raised about service quality? 10 A: First, in light of the difficulty in assessing the status of Verizon’s infrastructure, and the 11 lack of evidence that Frontier has conducted sufficient due diligence regarding Verizon’s 12 infrastructure, I recommend that a third party audit be conducted of Verizon’s plant. I 13 discuss several other service quality recommendations in detail Section VI1 to address 14 ways to make Verizon more accountable for the operations it proposes to walk away from 15 and to establish post-transaction financial incentives for Frontier to provide acceptable 16 service quality to consumers in West Virginia. Overview. 128 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 VII. CONCLUSION 3 Q: Please summarize your major assessments of the probable impact of the transaction 4 on consumers. 5 A: On balance, for the reasons set forth in Mr. Barber's testimony and in this testimony, the 6 proposed transaction is not in the public interest and likely would harm consumers. The 7 Commission should reject the transaction because there is no set of conditions that would 8 protect consumers. If, however, the Commission, despite Mr. Barber's recommendations 9 and my recommendations, is contemplating approving the transaction, it is essential that 10 measures be adopted to protect consumers. If the Joint Applicants will not voluntarily 11 agree to these commitments, the Commission should reject the transaction. As a 12 framework for considering the role of such commitments, I recommend the following: 13 Frontier promises greater broadband deployment, but there are no guarantees. 14 Frontier promises improved customer service, but again there are no guarantees. 15 Frontier has promised a more local, customer-based operation than Verizon provides. 16 If Frontier lacks financial resources, however, those promises of a more local focus 17 are meaningless. Further, if resources are diverted to integration and transition 18 efforts, rather than to local service needs, customers may be further harmed. 19 As regulators, customers, and employees have learned the hard way - pre-transaction 20 promises do not always translate into post-transaction reality. 21 The Commission confronts one company that seeks to abandon the state (but that 22 possesses the financial resources, technical capability, and operational expertise 23 necessary to run a telecommunications company and to offer 21" century services and 24 products) and another company that seeks to expand its existing operations and 25 promises to provide more broadband, more capital expenditures and more local focus 26 (but that lacks the necessary financial resources, and offers 20thcentury services). 27 129 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 Q: Please summarize your major recommendations for trying to mitigate against the 2 numerous risks that the proposed transaction presents for consumers and the 3 economy in West Virginia. 4 A: The Commission should reject the proposed transaction because it is contrary to the 5 public interest: the transaction would create too much risk of harm to consumers, the 6 public and service quality. Furthermore, there is inadequate information on which to base 7 a decision. Among other things, there is insufficient information about Frontier’s systems 8 integration plans, broadband plans and financing, as well as concerning Frontier’s ability 9 to achieve its projected synergies without serious harm to the public. The risks are great 10 and cannot be ameliorated through conditions. However, if the Commission disagrees 11 and believes that conditional approval would be in the public interest, then it should 12 consider the conditions I describe below in combination with those described in Mr. 13 Barber’s testimony. 14 Harm of Cutover and Systems Integration to consumers 15 Q: Please summarize your concerns about the cutover. 16 A: I am concerned that Frontier lacks the track record and resources to cut over from 17 Verizon’s systems in West Virginia and also to integrate systems in thirteen other states 18 without adverse impact on service quality. As I demonstrate in detail above, the cutover 19 entails numerous tasks, systems and employees that affect all aspects of SpinCo’s retail 20 and wholesale operations. 21 Q: What could partly mitigate these consumer harms? 22 A: Precisely because it is impossible to predict whether and what kinds of problems could 130 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 ensue as a result of the cutover and because the risks of the cutover are potentially great, 2 an independent audit of the cutover process before it occurs and subject to the 3 Commission’s review could partly mitigate these harms. 4 Q: How might the Commission measure Verizon’s progress in meeting these 5 milestones? 6 A: The Commission should order a third party audit of the cutover process. An outside 7 party, such as an auditing firm, should perform tests of functionality and reliability of the 8 new systems, and affirm to the Commission that the systems in question will perform the 9 way they are intended to perform on the date of cutover, that is, that the systems will be 10 able to process billing tasks, repair orders, personnel deployment, wholesale orders, etc. 11 If the process is as straightforward as the Joint Applicants assert, the audit will be 12 straightforward and not time-consuming. As a back-stop measure, however, it can help to 13 prevent undue harm to consumers. 14 Q: Are there any ongoing conditions that should apply to Frontier? 15 A: Yes. Frontier should commit to allocate sufficient resources in West Virginia to coincide 16 with the time that cutover occurs so that Frontier is able to handle any possible spikes in 17 customer calls and complaints. Sufficiency of resources should be measured by 18 examining resources for business as usual and scaling up to accommodate higher volumes 19 of calls and possible problems at the time of the transfer to Frontier’s platform. Also, 20 before the cutover occurs, Frontier should provide a report to the Commission outlining 21 its plans, which would be subject to the Commission’s review and approval before the 22 cutover could occur. 131 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Adverse impact of transaction on broadband deployment and speeds in West Virginia. 2 Q: Please summarize your concerns about the impact of the proposed transaction on 3 broadband deployment in West Virginia. 4 A: I am concerned that Frontier will lack the financial resources and incentives to invest in 5 West Virginia’s telecommunications infrastructure, and therefore will be unable to make 6 the capital expenditures necessary to support broadband access at reasonable speeds for 7 consumers. Frontier has not demonstrated that it possesses the financial, technical and 8 managerial resources necessary to deliver state-of-the-art broadband to West Virginia’s 9 consumers, and therefore I am concerned about West Virginia’s economy being left 10 behind during the information-intensive 2 1st century. 11 Q: But Frontier has stated that it intends to expand broadband deployment in West 12 Virginia. Isn’t that sufficient? 13 A: No. Frontier’s broadband promises are vague: They lack specificity, milestones, and 14 evidence to demonstrate that although Verizon has left many areas of its West Virginia 15 footprint without broadband, Frontier somehow will possess the financial, technical and 16 managerial resources to do so. Further, over the past two years, Verizon has been 17 investing more per access line in Spinco than Frontier has been investing in its existing 18 service areas. Moreover, Frontier’s projected annual level of capital expenditures in the 19 Spinco areas is less than Verizon’s actual investment in those areas during each of the 20 past two years. I cannot conclude that the proposed transaction is in the public interest 21 when the new owner would invest so much less in the business than the existing owner 22 has been investing. 132 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 I also am not persuaded that Frontier will be more successful than Verizon at deploying 3 broadband and encouraging adoption. Specifically, I am concerned that the cost of 4 extending broadband to the entire transaction territory will conflict with Frontier’s goal of 5 revenue stability. The Joint Applicants have not demonstrated that Frontier is sufficiently 6 familiar with and financially able to upgrade the network in West Virginia to enable Frontier to offer broadband to underserved and unserved areas in the SpinCo footprint. It is entirely possible that the network Verizon is abandoning is ill-equipped to provide broadband. (Indeed, if it were financially attractive to offer broadband, Verizon would 10 have already done so.) Presumably the locations that are not yet served in Verizon’s 11 footprint are the most costly and least financially attractive areas to serve. 12 Q: What then do you recommend? 13 A: I have several recommendations. First and foremost, I recommend that the Commission 14 deny the application and reject the proposed transaction. 15 16 If the Commission disagrees with my primary recommendation, then I recommend that 17 Verizon establish a Broadband Escrow Fund. I also recommend that the Commission 18 impose specific milestones for achieving ubiquitous broadband availability in the 19 transaction territory, milestones for which the Joint Applicants are both responsible for 20 meeting. Finally, I recommend that the Commission impose conditions on Verizon and 21 Frontier to ensure that West Virginia policymakers have the information they need to 22 continuously monitor the level of broadband deployment and speeds in West Virginia. 133 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Q: What is the cost, per line, to deploy DSL? 2 A: One industry expert at the August 13,2009 FCC Broadband Workshop estimated the cost 3 to deploy broadband infrastructure to remaining unserved areas in general terms: 4 “Cable/DSL should be less than $500, fiber $1500 unless long runs of new fiber 5 required.”286These estimates refer to the average cost of deployment per customer 6 location. 7 Q: Have you reviewed any other cost data for deploying high speed Internet access? 8 A: Yes. Verizon provided data that shows a cost per line for deploying DSL ranging 9 between << 10 per line. 287 In a different jurisdiction, according- to a Verizon press release, Verizon 11 invested more than $13.5 million since 2006 to bring broadband technology to an 12 additional 37,000 which yields a deployment cost of $365 per line. Based on its 13 own deployment in West Virginia, Frontier calculates a cost of DSL deployment of 14 << 16 Q: Is this representative of the per-line DSL deployment cost that Frontier likely would 17 incur? 286 FCC Broadband Workshop “Technology/Fixed Broadband,” August 13,2009, presentation of David Burstein, Editor, DSL Prime. Mr. Burstein’s PowerPoint presentation is available at http://www,broadband.gov/ws-fixed-bb.htm1 and reproduced as Exhibit SMB- 15. 287 Verizon response to CAD Set 4, Question #B18, “WV CAD Set 4 VZ B18 2007-2009 DSL-RT-Jobs CONFIDEN?‘IAL.PDF.” (There are two separate Question #B 18.) 288 “More Consumers in Seven Ohio Communities Have Access to Fast, Affordable Verizon High Speed Internet Service,” December 22,2008. httu://newscenter,verizon.com/press-releases/verizon/2008lmore-consumers- in-seven-ohio.htm1. This press release is reproduced as Exhibit SMB- 16. 289 Frontier response to CAD Set 4, Question # B 18, proprietary attachment . 134 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 A: No. Presumably Verizon has already deployed broadband to the areas where it is most 2 cost-effective, and therefore, deploying broadband to other locations will be more costly. 3 If Verizon disposes of its West Virginia territory, then Frontier, a far smaller company, 4 will be left to cover the more expensive portion of broadband deployment. 5 Q: But aren’t there NTIA funds available to subsidize broadband deployment? 6 A: Yes. However, according to the Fiercewireless newsletter, NTIA received applications 7 summing to $28 billion for the initial round of $4 billion of broadband grants?90 This 8 demonstrates the intense demand for the grants. Furthermore, although I cannot predict 9 how NTIA will award the monies among the states, a back-of-the-envelope estimate of 10 SpinCo West Virginia’s portion of the monies, if the grants from the first round of 11 broadband stimulus funds are divided up according to the proportion of access lines, 12 would be approximately $16 million. 13 Q: How did you derive this estimate? 14 A: Because SpinCo West Virginia’s access lines total about 61 7,000, and there are 15 approximately 155 million end user access lines the United States,29*SpinCo’s proportion 16 of all access lines is about 0.4%. To reiterate, I computed the $16 million simply to 17 provide an order of magnitude. Actual grants will depend on the pending NTIA 18 deliberations. 19 Q: Has Frontier participated in any broadband stimulus applications? 20 A: Yes. Frontier is involved in two project applications, which were developed based on 290, “NTIA to begin awarding broadband stimulus grants in November,” Fiercewireless, September 23,2009. 291 FCC, Wireline Competition Bureau, Local Telephone Competition: Status as of June 30, 2008, July 2009, at Table 1. 135 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 discussions with the Director of the West Virginia Division of Homeland Security and 2 Emergency Management.292 The applications include one project in Frontier’s existing 3 territory and one project in the SpinCo territ01-y.~~~ 4 Q: Isn’t the FCC considering adding broadband as a supported service with respect to 5 the Universal Service Fund (“USF”)? 6 A: Yes. In its Notice of Inquiry to develop its Congressional mandated National Broadband 7 Plan, the FCC sought comments on the relationship between broadband deployment and 8 the universal service programs and whether it should modify its existing universal service 9 programs by adding broadband to the list of supported ~ervices.2~~Also, Representative 10 Doris Matsui (D, California), a member of the House Energy and Commerce Committee, 11 introduced legislation on September 24,2009 that would expand the Universal Service 12 Fund to cover broadband services for low-income consumers (at a discounted rate). The 13 Broadband Affordability Act of 2009 would charge the FCC with establishing a program 14 which enables Lifeline customers to also qualifL for discounted broadband service. The 15 legislation would require the same eligibility requirements that are currently used for 16 Lifeline services. The proposed legislation would also require the FCC to periodically 17 study the market price and speed for such services. Representative Matsui stated: “To ~ 292 Frontier response to CAD Set 4, Question # B20 (see also, attachments). 293 Frontier response to CAD Set 4, Question # B3 1. 294, In the Matter of A National Broadband Plan for Our Future, FCC GN Docket No. 09-5 1, Notice ofhquiry, at para. 41. See, generally, id., at paras. 39-41. See, also, High-Cost Universal Service Support; Federal-State Joint Board on Universal Service; Lifeline and Link Up; Universal Service Contribution Methodology; Numbering Resource Optimization; Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Developing a Unified Intercarrier Compensation Regime; Intercarrier Compensation for ISP-Bound Traffic; IP-Enabled Services, CC Docket Nos. 96-45,96-98,99-68,99-200,01-92,WC Docket Nos. 03-109,04-36,05-337, 06-122, Order on Remand and Report and Order and Further Notice of Proposed Rulemaking, rel. Nov. 5,2008, at Appendix A, paras. 64-9 1. The FCC sought comment on a plan to adopt a Broadband Lifeline/Link Up Pilot 136 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 fully close the digital divide we must address the affordability of broadband services for 2 lower-income households . . . Although these households may have some options for 3 broadband access, they are underserved if none of these options are affordable.”295 4 Q: Why then are you still concerned about broadband deployment in West Virginia? 5 A: It is difficult to predict if the FCC will actually adopt a plan that includes universal funds 6 for broadband deployment or the timeframe for any action. States should still play an 7 active role in determining the outcome of broadband deployment efforts296and there is no 8 assurance that Frontier will utilize broadband funds to deploy to unserved areas in West 9 Virginia even if those funds are available. Furthermore, as noted by the FCC in its 10 National Broadband Plan NOI, “Although the High-Cost program does not explicitly 11 support the provision of broadband, as do the Schools and Libraries and Rural Health 12 Care programs, a carrier providing broadband services indirectly receives the benefits of 13 high-cost universal service support when its network provides both the supported voice 14 services and broadband services.”297 Program. 295 TR Daily, September 24,2009. 296 On April 24,2009, the National Association of Regulatory Utility Commissioners (“NARUC”) sent a letter to Acting Chairman Copps and the other Commissioners attaching its recently passed resolution that “strongly encourages” the FCC to declare broadband Internet access service as eligible for the USF support. The resolution asks the FCC to immediately create a three-year federal Lifeline and Link-Up Pilot Program for broadband Internet access services and enabling access devices and ensure the Pilot Program is open to all broadband Internet access service providers. NARUC stated: “The Commission’s Lifeline and Link Up programs have made local telephone service widely available at an affordable rate. In an era defined by broadband access to the Internet, those same Commission mechanisms should now be applied to bring broadband services to low-income Americans.” Available at: http://www.naruc.org/Testimony/O8%200424%20NARUC%2OBB%20LL%2OLINKUP%20SUPPORT%2O EX%20PARTE.pdfe NASUCA passed telecommunications-related resolutions at its mid-year meeting in June 2009 including: Resolution 2009-06: Calling for Lifeline and Link-Up program support for broadband Internet access services and devices. Full text of the resolutions is available at http://~~~.nasuca.ord2009%2OBoston.ph~. 297 In the Matter of A National Broadband Plan for Our Future, FCC GN Docket No. 09-5 1, Notice of Inquiry, at para. 39. See, id.,at footnote 49 stating: “The public switched network is not a single-use network, and modern network infrastructure can provide access not only to voice service, but also to data, graphics, video, and other 137 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 Q: What is the present status of DSL deployment in West Virginia? 2 A: The FCC’s High Speed Internet Access report shows that, as of June 2008, of the lines in 3 West Virginia served by an ILEC, the percentage of lines that have DSL availability is 4 69%;298however, this percentage includes all ILECs operating in West Virginia, not only 5 Verizon. According to Mr. Gregg, DSL availability in the Verizon West Virginia service 6 area is about 60%.299 7 Q: Based on Mr. Gregg’s estimate, what do you estimate to be the cost of extending 8 broadband to the remainder of Verizon West Virginia’s service territory? 9 A: Using a per line DSL cost estimate of between $500 and $1000, I estimate that between 10 $123 million and $246 million are required to complete broadband deployment in the 11 transaction’s West Virginia service area?” 12 Q: Did Verizon, during the course of its participation in the proposed transaction, 13 estimate the cost of extending broadband in all of the SpinCo states? 14 A: Yes. In Highly Confidential HSR attachment 4.c.45, Verizon includes cost estimates for 15 expanding the availability of DSL in the SpinCo service territory. 16 Q: Did you prepare a proprietary cost estimate based on the highly confidential 17 deployment and cost data that Verizon provided? services. The Commission’s policies do not impede the deployment of modem plant capable of providing access to advanced service.” 298 I FCC, Wireline Competition Bureau, High-speed Services for Internet Access: Status as of June 30, 2008, July 2009, at Table 14. 299, Gregg Direct (Frontier), at 14. 300 The number of lines without broadband is estimated to be (1 - 60%) * 617,000, or 246,800. Multiplying this number by $500 and $1 000 yields the total cost of the remaining deployment. 138 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Yes. I estimated the cost of completing broadband deployment in SpinCo West Virginia 2 based on this information. << 5 6 7 8 9 10 301, Indeed, the very existence of the NTIA grant program underscores the fact that, without government subsidies, providers likely will not serve many regions of the country. 139 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 2 3 4 5 END HIGHLY CONFIDENTIAL>>> 6 To show Verizon’s cost estimate for expanding DSL availability in the entire Spinco 7 territory, I have reproduced Verizon’s Highly Confidential attachment 4.c.45 as Highly 8 Confidential Exhibit SMB HSC- 17. Highly Confidential Table 10 below summarizes 9 Verizon’s estimates of the costs associated with reaching various deployment milestones 10 throughout its Spinco territory. 11 << 302, HSR Attachment 4.c.45 (reproduced as Highly Confidential Exhibit SMB-HC-I 7). Note that these estimates were produced by Verizon; April 16 Board of Directors Materials, at 20. According to the Frontier witness Gregg, SpinCo serves 617, 036 lines in West Virginia. 140 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 303 HSR Attachment 4.c.45. Note that these estimates were produced by Verizon. 304, May 1 Board of Directors Materials, at 19 (provided in response to CWA Set 1, Request #8). 141 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 8 9 10 11 12 END HIGHLY 13 CONFIDENTIAL>>> 14 Q: Please summarize your Broadband Escrow Fund recommendation. 15 A: Verizon should place funds in an escrow fund in the magnitude I discuss above that will 16 allow 100% broadband availability. The hdsshould only be returned to Verizon upon 17 verifiable attainment of DSL availability milestones in the transaction area. 18 Q: What milestones do you suggest? 19 A: I suggest a sequence of annual milestones aimed at guaranteeing broadband availability to 20 100% of the transaction territory within three years. Intermediate milestones should be: 21 (1) within one year of the Transaction Closing Date, 75% of the lines in the 22 transaction territory should be capable of carrying DSL service at 3 Mbps 23 download speed; 142 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871 -T-PC 1 (2) within two years of the Transaction Closing date, 90% of the lines in the 2 transaction territory should be capable of 3 Mbps DSL service, and 75% of lines 3 should be capable of 5 Mbps service; 4 (3) within three years of the Transaction Closing date, 100% of the lines in the 5 transaction territory should be capable of 5 Mbps DSL service, and 85% of lines 6 should be capable of 7 Mbps DSL service. 7 It is only after each milestone is achieved that Verizon would have a portion of the 8 Escrow funds returned. If the milestones are not met, the funds would be turned over to a 9 public entity charged with completing broadband deployment in West Virginia. 10 Q: Explain why Verizon should deposit money in the Broadband Escrow Fund instead 11 of Frontier, the proposed purchaser of these lines. 12 A: As I stated above, Verizon is disposing of West Virginia assets which may contain 13 seriously impaired infrastructure. The Commission should not allow Verizon to “skip 14 town” without concrete assurances that the infrastructure it leaves behind is capable of 15 serving West Virginia consumers in the digital age. By requiring Verizon to put a large 16 sum at risk, the Commission forces Verizon to maintain some “skin in the game,” and 17 aligns the incentives of Verizon with West Virginia consumers. 18 Q: If the Commission disagrees with your recommendation to reject the transaction, 19 should the Commission qualify its approval of the transaction on any other 20 conditions relating to broadband? 21 A: Yes. The Commission should require Verizon to submit a report to the Commission 22 detailing current West Virginia broadband deployment at a very granular level (e.g. on an 23 address-by-address basis). Verizon should also be required to provide comprehensive 24 data about its infiastructure, broadband locations, broadband speeds, etc., in the format 143 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 that is required by the entity in West Virginia that is responsible for broadband mapping 2 under the NTIA guidelines. This would enable Frontier to avoid incurring this expense, 3 and would facilitate the state’s ability to achieve its broadband goals in a timely 4 manner.305 5 Q: Should the Commission require anything of Frontier? 6 A: Yes. The Commission should require that Frontier provide regularly updated information 7 about its broadband availability, services, speed, and infrastructure to the entity in West 8 Virginia charged with broadband mapping and to the Commission. It should also provide 9 its “Form 477” broadband data to the Commission and to the “eligible entity” at the same 10 time that it submits such data to the FCC to assist the state of West Virginia in 11 monitoring and pursuing its broadband goals.3o6 12 13 Finally, Frontier must produce a feasible plan to ensure that it can meet the broadband 14 deployment milestone described above. 15 16 Harm to Service Quality 17 18 Q: Please summarize your major concerns about the impact of the transition on service 19 quality. 305 / Department Of Commerce, National Telecommunications and Information Administration, State Broadband Data and Development Grant Program, RIN 0660-ZA29, Notice ofFunds Availability, July 8,2009. 306 / In its mid-year meeting, the National Association of Regulatory Utility Commissioners (“NARUC”) adopted a resolution asking the FCC to: (1) provide States that so request with disaggregated data from the relevant current Form 477 submissions by wireline and wireless broadband service providers; (2) require broadband service providers to simultaneously file future Form 477 reports with both the FCC and the requesting States; and (3) condition the aforementioned on a State’s commitment to treat such Form 477 reports as privileged or confidential, as a record not subject to public disclosure except as otherwise mutually agreed to by the broadband service 144 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: I am concerned that Frontier will lack the financial resources and incentives to invest in 2 West Virginia’s telecommunications infrastructure. I am also concerned that Frontier 3 has not provided persuasive evidence that it is familiar with the condition of the network, 4 assets, vehicles, etc. that it proposes to purchase from Verizon in West Virginia. 5 6 I am concerned about the historical trend of service quality deterioration combined with 7 the financial constraints that Frontier would confront if the transaction occurs. These 8 trends underscore the importance of establishing financial incentives to prevent further 9 deterioration. I am also concerned about the competing interest of ensuring financial 10 stability for Frontier and the goal of ensuring that service quality is reasonable. 11 Q: Are there certain measures that would address, at least in part, some of these 12 concerns? 13 A: To address my concern about the lack of detailed information about Verizon’s 14 infrastructure, I recommend that a third party audit be conducted of Verizon’s plant in 15 West Virginia. The audit should be completed before the Commission approves the 16 transaction and Verizon should be required to put into escrow the funds necessary to 17 follow through on the specific recommendations of the audit. The Joint Applicants 18 should submit the names of three firms that have no interest with the Joint Applicants, 19 and based on the proposals of those three firms, the Commission should select one firm to 20 conduct the audit. 21 Q: What specifically should Verizon’s responsibilities entail? provider. See h~://~~~.naluc.org/Resolutions/Resolution%2Oon%2OBroadband%20Mapping%2ODatal.pdf, 145 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-0871-T-PC 1 A: Verizon should pay for an audit to be conducted of its network under the supervision of 2 the Commission, with proposals submitted to the Commission, and the auditor selected 3 by the Commission. Verizon should either complete the recommended maintenance and 4 investment set forth in the Network Audit or should place the funds necessary for such 5 completion in a Network Investment Fund. To address the concern that post-transaction 6 service quality penalties could jeopardize Frontier’s financial stability, Verizon should 7 establish a Service Quality Incentive Escrow Fund that would cover two years’ worth of 8 penalties. 9 Q: How might the Commission address concerns about the adequacy of Frontier’s 10 resources for its West Virginia operations? 11 A: In light of planned headcount and competing demands for resources among 12 the 14 SpinCo states, I recommend that the Commission ensure that Frontier devotes 13 sufficient personnel to maintain and improve the network in West Virginia. 14 Q: What ongoing commitments should Frontier make? 15 A: Frontier should submit service quality data to the Commission on a monthly basis and 16 should post the service quality data on its web site. Frontier should commit to continue 17 filing its ARMIS service quality reports that it now submits to the FCC even if the FCC 18 requirements are discontinued at some point in the future, and should submit the ARMIS 19 report to the Commission when it submits the report to the FCC. 20 Q: How would you remedy the problem that Frontier confronts incentives to cut costs, 21 which could jeopardize service quality? 307 / “Frontier Says Verizon Assets to Be Integrated by 20 12,” Siddhartha Vaidyanathan, November 4,2009, 146 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION Direct Testimony of Susan M. Baldwin WV Case No.09-087 1-T-PC 1 A: Appropriate economic incentives should be established so that Frontier maintains a 2 customer focus. The Joint Applicants should agree to a Service Quality Index with 3 penalties for missing the Commission’s benchmarks. 4 Q: How might such an incentive plan work? 5 A: The penalty structure would include a $7,500 fine per percentage point missed for each 6 benchmark for an overall limit of between $1 5 million per year. Specifically, the 7 percentage deviation from the benchmark should be calculated separately for each metric, 8 and these deviations summed each month. For each month, the sum of percentage 9 deviations would be multiplied by $7,500. For example, if the benchmark for trouble 10 report rate per 100 lines is 1.5, but the actual performance is 1.8, then the percentage 11 deviation is (1.8-1 .5)/1.5 = 20%. If the deviations for all other metrics sum to 0, then the 12 sum over all metrics is 20%, resulting in a penalty of 20*$7,500 = $150,000. 13 14 Conclusion 15 Q: In summary, what do you recommend? 16 A: I recommend that the Commission deny the application because the proposed transaction 17 is not in the public interest, as I described above. 18 Q: Does this conclude your testimony? 19 A: Yes. http://www .bloomberg.comlapps/news?pid=2060 1 103&sid=aDX3mPzTHHZ4# 147 INCLUDES ALLEGED CONFIDENTIAL AND HIGHLY CONFIDENTIAL INFORMATION BEFORE THE PUBLIC SERVICE COMMISSION OF WEST VIRGINIA Joint Application of Frontier ) Communications Corporation and ) Verizon West Virginia Inc. and certain ) affiliates for approval of the transfer of 1 Case No. 09-0871-T-PC Verizon’s local exchange and long distance 1 business in West Virginia to companies to 1 be owned and controlled by Frontier ) Communications Corporation 1 EXHIBITS FOR PREFILED DIRECT TESTIMONY OF SUSAN M. BALDWIN ON BEHALF OF THE COMMUNICATIONS WORKERS OF AMERICA, AFL- CIO Filed: November 16,2009 PUBLIC VERSION VW PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-1 CITIZENS TELECOMMUNICATIONS COMPANY OF WEST VIRGINIA DBA FRONTIER COMMUNICATIONS OF WEST VIRGINIA AND VEFUZON WEST VIRGINIA, INC. WEST VIRGINIA PSC CASE NO. 09-0871-T-PC SECOND REQUEST FOR INFORMATION - CWA Name of Person Preparing Response: Billy Jack Gregg Date of Response: August 12,2009 Request 20 Re: p. 15, footnote 13. Mr. Gregg uses the terms “households,” “residential access lines,” and “residential customers.” Please provide a workpaper showing separately for Verizon West Virginia and Frontier West Virginia, the number of “households,” “residential access lines,” and “residential customers” served by each at year-end 2008, and the number of each that had broadband access available. Response 20 “Households” is a broader category than “residential access lines” and “residential customers.” Many households do not have any type of telephone service and many households receive telephone service only from wireless providers and/or broadband providers. “Residential access lines” is a broader category than “residential customers” since many customers have more than one access line. Attached is a workpaper showing an estimation of “households,” “residential access lines” and “residential customers” for Verizon and Frontier at year-end 2008. WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-1 Data Request 20 Attachment Verizon Frontier 12/31/2008 12/31/2008 Households (HH) 611,375 118,624 Residential Customers (Primary Lines) 421,678 105,273 Non-P rima ry Reside nria I Lines 12,888 4,034 Total Residential Access Lines 434,566 109,307 Residential Customers w/ BB Available 253,007 95,798 Residential Customers Subscribed to 88 105,875 40,460 % of Customers w/ BB Available 60.00% 91.00% % of Customers Subscribed to BB 25.11% 38.43% % of Customers Subscribed w/ BB Available 41.85% 42.23% Wd PSC C~neNo 090871-T-PC Baldwln Olrml Exhibn SMB.2 Territorial Boundaries i Of West Virginia Exchange Carriers 14NltA"Y >I",? PiNNSYl UANIA Lata 240 [A 1 CLARKSBURG LATA Lata 256 I. E G E N D LrlMRLCJ I WIY L44 I I4 WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-3 Arbor VzBB Atlas BAAIS National BAAIS NBC , BDMS - DSL BQT CABS CADENCE Catena CBSS- -- DPVC Gateway eHealth ELCOM eMitta nce ETSIErate eWPTS Exact FirstRa te FleetTracker ~~~ Goldmine W PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-3 I"ed"-I iFinals lnfosource IOFNET I iView LFACS Lotus Notes Testin Potomac, NY, NE, lone Source 1 One View PClA PeoDleSoft I Platinum -Portal I W PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-3 Portal Billin Prernis s Project Tracker RAMP 1-I 1-I RCDA REACT IRedback SEMS (see I RequestNet Rx -RXI I VOL Radius WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-3 VPLAN vRepair Core vRepair DS VSBS VZ450 Gatewa 1-1 1-1 WFA-DO WorkBrain xRM Ad Hoc http://www.frontier.com/Print/Products/ProductOverview.aspx?type=l&p=5 1 I WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-8 I_Home )) Residential Products 1) Internet B Standalone High-speed Internet* Standalone High-speed Internet* Overview Available for NEW Frontier customers only. 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Technical Support provided by real people, 24 hours a day, 365 days a year. 5 GB of web storage per e-mail address to create your home page. I 1 Share with Friends Prices Starting At $54.99 Find out now if Frontier High-speed Internet service is available in your area Frontier High-speed Internet Lite - 768K While not as fast, High-speed Internet Lite still provides downloads up to 8 times faster than dialup. Download files and e-mail attachments in a flash! No more waiting for web pages to load FREE Special Features included with Frontier High-speed Internet Lite - 768K: http://www.frontier.com/Print/Products/ProductOverview.aspx?type=l&p=5 1 1 WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-8 Web-based e-mail + 5 additional e-mail addresses (enough for each family member to have their own!), each with 10 ME4 of storage space. Technical Support provided by real people, 24 hours a day, 365 days a year Available Add-on: Anti-Spam Technology that allows you to manage, control and greatly reduce unwanted e-mail for the low cost of $2,99/month. *-' Share with Friends Prices Startina At I $34.99 Choose a Standalone High-speed Internet option from above and add a phone line with Security Calling. Get a phone line with a dedicated number that allows you to only make Emergency 91 1 and local calls but does not have the ability to receive calls. High-speed Internet Max with Security Calling '" ? Share with Friends Prices Startincr- At $57.98 High-speed Internet Lite with Security Calling ' -'Share with Friends Prices Starting At $37.98 Print Paqe 1 Close Window Frontier.com : Residential Products : Internet : Frontier High-speed Internet http:llwww .frontier.comlproducts/ProductOverview .aspx?type=1 &p=2 __Frontier -.- Mv Yahoo! Fron_t!eF&aj Fcontier Peace of Min Home My Account Contact Us 585-214 (Rochester, NY) Home D Residential Products )) jnternet )) Frontier High-speed Internet 8 Printable View Frontier High-speed Internet b Overview Features Value Packages At up to 10 Mbps, FrontiirFast High-speed Internet is: Telephone Television Breakthrough Speeds at an Unbeatable Price Internet Speed, reliability, and security PC Support & Services A dedicated connection that won't bog down during peak hours. There's no neighborhood sharing My Wi-Fi Always on, always fast, always secure Safe, secure Frontier Mail and a personal online portal powered by Yahoo! The complete suite of CA Security online protection Easy, professional installationwithin a two-hour time window Value Packages Data 8, Internet Live US.-based Technical Suppo rt... 24171365 Voice & Features Managed Services Included at no additional charge, anti-spyware software from CA, Inc. protects your computer from hackers, Television Trojans and Worms as well as spyware, PC Viruses, Pop-Ups and E-mail Spam. PC Support & Services FREE Special Features included with Frontier High-Speed Internet Max: My Wi-Fi Internet Solutions Web-based E-mail account + 8 additional e-mail addresses (enough for each family member to have their Equipment own!), each with 5 GB of storage space esidential Agent Access to ESPN36Qfeaturing Live sporting events and programming, including games you won't see usiness Agent anywhere else Technical Support provided by real people, 24 hours a day, 365 days a year. 5 GB of web storage per e-mail address to create your home page 1 Share with Friends Prices Starting At $44.99 Find out now if Frontier High-speed Internet service is available in your area Frontier High-speed Internet Lite - 768K While not as fast, High-speed Internet Lite still provides downloads up to 8 times faster than dialup. Download files and e-mail attachments in a flash! No more waiting for web pages to load. FREE Special Features included with Frontier High-speed Internet Lite - 768K: Web-based e-mail + 5 additional e-mail addresses (enough for each family member to have their own!), each 3f2 912012009 3:32 PM Frontier.com : Residential Products : Internet : Frontier High-speed Internet http://www .fi.ontier,comiproducts/ProductOverview .aspx?type= 1 &p=2 WV PSC Case No. 09-0871-T-PC with 10 MB of storage space. Baldwin Direct Exhibit SMB-8 Technical Support provided by real people, 24 hours a day, 365 days a year. Available Add-on: Anti-Spam Technology that allows you to manage, control and greatly reduce unwanted e-mail for the low cost of $2.99/mo nth. Share with Friends Prices Starting At $39.99 Helo a SUDDO~~ Proarams Coroorate Leaal8 Reaulatorv Contact Frontier Customer Referral Careers Policies Billing 8 Payment Information Community Connections Investor Relations Terms and Conditions Locate Retail Stores Discount Programs Corporate Communications Carrier Services Technical Support Advertise with Us Tarm 62009 Frontier Communications Corporation. All rights reserved. E-mail This Page 9/2012009 3:32 PM WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-15 DSL VDSL is at 100 meg over short distances, ready to doubl also doubles speed. Improved performance reaches significant repeaters very cheap way to bring “up to 6 meg” longer distanc Cable 30M homes can now get 50 meg down DOCSIS 3.0.6 201 1 85+% in 2013-2 Specification designed to go to a shared gigabit. 95-99% reliabl over 10 megabits. < $100/home, fast to deploy Fiber GPON 200 meg both directions $200-400 gear Verizon passed. Costs dr Other: HD Voice, High cost switches eliminated, HD TV as costs corn W PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-15 all Goal: 201 1 98-99% megabits, 80% 50 meg, happy POTU Bring down backhaul cost by special access or overbuild. $1 1Olmbps to perhaps 2.5 times urban cost of $5-1 0. Reach 40-70?40of "unserved" for under $500/home. That's "unserved" can get cable TV but not data and are cheap u can be reached with new towers or DSL repeaters. Do th Save subsidies for costs companies won't cover. In parti money for "success-based capex," such as any home con switcheshouters. Those are only needed when there are 5 times what s Verizon 1 More Consumers in Seven Ohio Communities Have Access to Fas ... http://newscenter.verizon.com/press-releases/veri~~2008/~re-consume.. WV PSC Case No 09-0871-T-PC Baldwin Direct Exhibit SMB-16 &ignn_in j kBtec_You_Location Need Help? All Verizon Type a quesbon or keyword Residential Busiiness Wireless My Verizon News Center Homepage More Consumers in Seven Ohio Communities Have Access to Fast, Affordable Verizon High Speed Images Video and Audio Internet Service Fact Sheets Expansion Part of Verizon's Three-Year, 513.5 Million Investment in Broadband Across Ohio Speeches, Bios Investor Relations News Release ShareThis Verizon Wireless News Verizon Business News December 22,2008 - TROTWOOD, Ohio - More consumers and businesses in seven Ohio communities now have access to Verizon High Speed Internet, allowing them to quickly download movies, share photos or video with friends and family, and create their own Internet Search News Releases content. Verizon this year installed high-speed Internet equipment, based on digital subscriber line (DSL) technology, at the company's communications facilities in Englewood, Liberty, Oxford, Tipp City, Trotwood, Troy and West Milton. 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(NYSE:VZ), headquartered in New York, is a leader in delivering broadband and other wireline and wireless communication innovations to mass market, business, government and wholesale customers. Verizon Wireless operates America's most reliable wireless network, serving nearly 71 million customers nationwide. Verizon's Wireline operations include Verizon Business, which delivers innovative and seamless business solutions to customers around the world, and Verizon Telecom, which brings customers the benefits of converged communications, information and entertainment services over the nation's most advanced fiber-optic network. A Dow 30 company, Verizon employs a diverse workforce of more than 228,000 and last year generated consolidated operating revenues of $93.5 billion. For mre information, visit w.:_v_er~~~ij..com. If 2 9/25/2009 6:44 PR. Verizon I More Consumers in Seven Ohio Communities Have Access to Fas ... http://newscenter.verizon.com/press-releases/veri~~2OOS/~re-consu~ne... WV PSC Case No. 09-0871-T-PC Baldwin Direct Exhibit SMB-16 #### Media Contact: Lee Gierczyfis_k!, 412-633-5574 of 2 9/25/2009 6:44 PM SUSAN M. BALDWIN 17 Arlington Street Newburyport, MA 01950 978-255-2344 (v) 978-255-2455 (f) smbaldwin~comcast.net Susan M. Baldwin specializes in telecommunications economics, regulation, and public policy. Since 2001, she has been an independent consultant. Ms. Baldwin has been actively involved in public policy for thirty-one years, twenty-five of which have been in telecommunications policy and regulation. Ms. Baldwin received her Master of Economics from Boston University, her Master of Public Policy from Harvard University’s John F. Kennedy School of Government, and her Bachelor of Arts degree in Mathematics and English from Wellesley College. Ms. Baldwin has extensive experience both in government and in the private sector. Ms. Baldwin has testified before the Arkansas Public Service Commission, California Public Utilities Commission, Colorado Public Utilities Commission, Connecticut Department of Public Utility Control, District of Columbia Public Service Commission, Idaho Public Utilities Commission, Illinois Commerce Commission, Indiana Utility Regulatory Commission, Iowa Utilities Board, Maryland Public Service Commission, Massachusetts Department of Telecommunications and Energy, Nevada Public Service Commission, New Hampshire Public Utilities Commission, New Jersey Board of Public Utilities, Public Utilities Commission of Ohio, Rhode Island Public Utilities Commission, Tennessee Public Service Commission, Vermont Public Service Board, and Washington Utilities and Transportation Commission. Ms. Baldwin has also authored numerous comments and declarations submitted in various Federal Communications Commission proceedings. Ms. Baldwin has also participated in projects in Delaware, Hawaii, Illinois, New York, Pennsylvania, and Canada on behalf of consumer advocates, public utility commissions, and competitive local exchange carriers. Ms. Baldwin has served in a direct advisory capacity to public utility commissions in the District of Columbia, Massachusetts, New Mexico, Utah and Vermont. Ms. Baldwin has also testified on behalf of public utility commission staff in Idaho and Rhode Island. Statement of Qualifications of Susan M. Baldwin Page 2 In her capacity as an independent consultant, Ms. Baldwin has consulted to and testified on behalf of consumer advocates on diverse matters including broadband deployment, numbering resources, unbundled network element (UNE) cost studies, incumbent local exchange carriers’ requests for competitive classification of services, mergers and spin-offs, rate cases, universal service, service quality, and state Triennial Review Order (TRO) proceedings. She prepared comprehensive testimony analyzing mass market impairment on behalf of the New Jersey Division of Rate Counsel, the Arkansas Office of the Attorney General, and the Utah Committee of Consumer Services. (Testimony was not filed in Arkansas or Utah because of the DC Circuit Court ruling in USTA v. FCC, which caused these states to postpone their investigations of impairment.) Ms. Baldwin has contributed to numerous comments submitted to the FCC on diverse aspects of broadband in various proceedings on topics such as data collection, mapping, deployment, universal service, affordability, consumer protection, and network management. Also, in state regulatory proceedings that have examined carriers’ proposals for spin-offs and for mergers, she has recommended conditions concerning broadband deployment. Ms. Baldwin served as a direct advisor to the Massachusetts Department of Telecommunications and Energy (DTE) between August 200 1 and July 2003, in Massachusetts DTE Docket 0 1-20, an investigation of Verizon’s total element long run incremental cost (TELRTC) studies for recurring and nonrecurring unbundled network elements (UNEs). She assisted with all aspects of this comprehensive case in Massachusetts. Ms. Baldwin analyzed recurring and nonrecurring cost studies; ran cost models; reviewed parties’ testimony, cross- examined witnesses, trained staff, met with the members of the Commission, assisted with substantial portions of the major orders issued by the DTE; and also assisted with the compliance phase of the proceeding. Ms. Baldwin has also contributed to numerous comments and declarations submitted to the Federal Communications Commission on issues such as broadband; intercarrier compensation reform; price cap regulation; universal service; carriers’ petitions for forbearance; separations reform; special access services, relay services; and numbering optimization. Ms. Baldwin worked with Economics and Technology, Inc. for twelve years, most recently as a Senior Vice President. Among her numerous projects were the responsibility of advising the Vermont Public Service Board in matters relating to a comprehensive investigation of NYNEX’s revenue requirement and proposed alternative regulation plan. She participated in all phases of the docket, encompassing review of testimony, issuance of discovery, cross- examination of witnesses, drafting memoranda and decisions, and reviewing compliance filings. Another year-long project managed by Ms. Baldwin was the in-depth analysis and evaluation of the cost proxy models submitted in the FCC’s universal service proceeding. Also, on behalf of the staff of the Idaho Public Utilities Commission, Ms. Baldwin testified on the proper allocation of US West’s costs between regulated and non-regulated services. On behalf of AT&T Communications of California, Inc. and MCI Telecominunications Corporation, Ms. Baldwin comprehensively analyzed the non-recurring cost studies submitted by California’s incumbent Statement of Qualifications of Susan M. Baldwin Page 3 local exchange carriers. Ms. Baldwin has participated in more than a dozen regulatory investigations of the impact of proposed mergers and spin-offs of telecommunications carriers on consumers. Ms. Baldwin sponsored testimony on behalf of the New Hampshire Office of Consumer Advocate on Verizon’s sale of its operations to Fairpoint. Ms. Baldwin also sponsored testimony and declarations on behalf of the New Jersey Division of Rate Counsel on Verizon’s acquisition of MCI, SBC’s acquisition of AT&T, AT&T’s acquisition of BellSouth, and Sprint’s spin-off of its local operations. During the 1990s’ Ms. Baldwin also sponsored testimony on behalf of the Nevada Bureau of Consumer Protection on the proposed merger of Sprint and WorldCom; sponsored testimony on behalf of the Office of Ratepayer Advocates (ORA) of the California Public Utilities Commission and also on behalf of the Washington Office of Attorney General in their respective investigations of the proposed merger of Bell Atlantic Corporation and GTE Corporation; co-managed assistance to the Hawaii Division of Consumer Advocacy in the analysis of the proposed BA/GTE merger; sponsored testimony on behalf of the Ohio Consumers’ Counsel and the Indiana Office of Utility Consumer Counselor on the SBC/Ameritech merger; co-sponsored testimony on behalf of the Connecticut Office of Consumer Counsel on the impact of SBC’s acquisition of SNET on consumers; co-authored affidavits submitted to the FCC on behalf of consumer coalitions on the SBC/Ameritech and BA/GTE mergers; and co-managed a project to assist the ORA analyze the California Public Utilities Commission’s investigation of the merger of Pacific Telesis Group and SBC Communications. Ms. Baldwin has contributed to the development of state and federal policy on numbering matters. On behalf of the Ad Hoc Telecommunications Users Committee, Ms. Baldwin participated in the Numbering Resource Optimization Working Group (NRO-WG), and in that capacity, served as a co-chair of the Analysis Task Force of the NRO-WG. She has also provided technical assistance to consumer advocates in the District of Columbia, Illinois, Iowa, Massachusetts, and Pennsylvania on area code relief and numbering optimization measures. Ms. Baldwin also co-authored comments on behalf of the National Association of State Utility Consumer Advocates in the FCC’s proceeding on numbering resource optimization. During her first years at ETI, Ms. Baldwin was the Director of Publications and Tariff Research, and, in that capacity, she trained and supervised staff in the analysis of telecommunications rate structures, services, and regulation. Ms. Baldwin served four years as the Director of the Telecommunications Division for the Massachusetts Department of Public Utilities (now the Department of Telecommunications & Cable), where she directed a staff of nine, and acted in a direct advisory capacity to the DPU Commissioners. (The Massachusetts DTC maintains a non-separated staff, which directly interacts with the Commission, rather than taking an advocacy role of its own in proceedings). Ms. Baldwin advised and drafted decisions for the Commission in numerous DPU proceedings including investigations of a comprehensive restructuring of New England Telephone Company’s rates, an audit of NET’S transactions with its NYNEX affiliates, collocation, ISDN, Statement ofQualifications of Susan M. Baldwin Page 4 Caller ID, 900-type services, AT&T’s request for a change in regulatory treatment, pay telephone and alternative operator services, increased accessibility to the network by disabled persons, conduit rates charged by NET to cable companies, and quality of service. Under her supervision, staff analyzed all telecommunications matters relating to the regulation of the then $1.7-billion telecommunications industry in Massachusetts, including the review of all telecommunications tariff filings; petitions; cost, revenue, and quality of service data; and certification applications. As a member of the Telecommunications Staff Committees of the New England Conference of Public Utility Commissioners (NECPUC) and the National Association of Regulatory Utility Commissioners (NARUC), she contributed to the development of telecommunications policy on state, regional, and national levels. Ms. Baldwin has worked with local, state, and federal officials on energy, environmental, budget, welfare, and telecommunications issues. As a policy analyst for the New England Regional Commission (NERCOM), Massachusetts Department of Public Welfare (DPW), and Massachusetts Office of Energy Resources (MOER), she acquired extensive experience working with governors’ offices, state legislatures, congressional offices, and industry and advocacy groups. As an energy analyst for NERCOM, Ms. Baldwin coordinated New England’s first regional seminar on low-level radioactive waste, analyzed federal and state energy policies, and wrote several reports on regional energy issues. As a budget analyst for the DPW, she forecast expenditures, developed low-income policy, negotiated contracts, prepared and defended budget requests, and monitored expenditures of over $1 00 million. While working with the MOER, Ms. Baldwin conducted a statewide survey of the solar industry and analyzed federal solar legislation. Ms. Baldwin received Boston University’s Dean’s Fellowship. While attending the Kennedy School of Government, Ms. Baldwin served as a teaching assistant for a graduate course in microeconomics and as a research assistant for the school’s Energy and Environmental Policy Center, and at Wellesley College was a Rhodes Scholar nominee. She has also studied in Ghent, Belgium. Record of Prior Testimony In the matter of the Application of the New Jersey Bell Telephone Company for Approval of its Plan for an Alternative Form of Regulation, New Jersey Board of Regulatory Commissioners Docket No. T092030358, on behalf of the New Jersey Cable Television Association, filed September 21, 1992, cross- examined October 2, 1992. DPUC review and management audit of construction programs of Connecticut’stelecommunications local exchange carriers, Connecticut Department of Public Utility Control Docket No. 9 1- 10-06, on behalf of the Connecticut Office of the Consumer Counsel, filed October 30, 1992, cross-examined November 4, 1992. Joint petition of New England Telephone and Telegraph Company and Department of Public Service seeking a second extension of the Vermont Telecommunications Agreement, Vermont Public Service Board 5614, Public Contract Advocate, filed December 15, 1992, cross-examined December 2 I, 1992. Statement of’Qualifications of Susan M. Baldwin Page 5 Application of the Southern New England Telephone Company to amend its rates and rate structure, Connecticut Department of Public Utility Control Docket No. 92-09-1 9, on behalf of the Connecticut Office of Consumer Counsel, .fled March 26, 1993 and May 19, 1993, cross-examined May 25, 1993. In the matter of the Application of Cincinnati Bell Telephone Company for Approval of an Alternative Form of Regulation and for a Threshold Increase in Rates, Public Utilities Commission of Ohio Case No. 93-432-TP-ALT, on behalf of Time Warner AxS, filed March 2, 1994. Matters relating to IntraLATA Toll Competition and Access Rate Structure, Rhode Island Public Utilities Commission Docket 1995, on behalf of the Rhode Island Public Utilities Commission Staff, filed March 28, 1994 and June 9, 1994, cross-examined August 1, 1994. In the Matter of the Application of The Ohio Bell Telephone Company for Approval of an Alternative Form of Regulation, Public Utilities Commission of Ohio Case No. 93-487-TP-ALT, on behalf of Time Warner AxS, filed May 5, 1994, cross-examined August 11, 1994. In Re: Universal Service Proceeding: The Cost of Universal Service and Current Sources of Universal Service Support, Tennessee Public Service Commission Docket No. 95-02499, on behalf of Time Warner AxS of Tennessee, L.P., filed October 18, 1995 and October 25, 1995, cross-examined October 27, 1995. In Re: Universal Service Proceeding: Alternative Universal Service Support Mechanisms, Tennessee Public Servicc Commission Docket No. 95-02499. on behalf of Time Warner AxS of Tennessee, L.P., filed October 30, 1995 and November 3, 1995, cross-examined November 7, 1995. In the Matter of the Application of US West Communications, Inc. for Authority to Increase its Rates and Charge for Regulated Title 61 Services, Idaho Public Utilities Commission Case No. USW-$96-5, on behalf of the Staff of the Idaho Public Utilities Commission, filed November 26, 1996 and February 25, 1997, cross-examined March 19, 1997. A Petition by the Regulatory Operations Staff to Open an Investigation into the Procedures and Methodologies that Should Be Used to Develop Costs for Bundled or Unbundled Telephone Services or Service Elements in the State of Nevada, Nevada Public Service Commission Docket No. 96-9035, on behalf of AT&T Communications of Nevada, Inc., filed May 23, 1997, cross-examined June 6, 1997. Rulemaking on the Commission’s Own Motion to Govern Open Access to Bottleneck Services and Establish a Framework for Network Architecture; Investigation on the Commission’s Own Motion into Open Access and Network Architecture Development of Dominant Carrier Networks, California Public Utilities Commission R.93-04-003 and 1.93-04-002, co-authored a declaration on behalf of AT&T Communications of California, Inc., and MCI Telecommunications Corporation, filed on December 15, 1997 and on February 1 1, 1998. Consolidated Petitions for Arbitration of Interconnection Agreements, Massachusetts Department of Telecommunications and Energy, DPU 96-73174.96-75,96-80/8 1,96-83, and 96-84, on behalf of AT&T Communications of New England, Inc. and MCI Telecommunications Corporation, filed February 3, 1998. In the Matter of the Application of US West Communications, Inc. for Specific Forms of Price Statement of Qualifications of Susan M. Raldwin Page 6 Regulation, Colorado Public Utilities Commission Docket No. 97-A-540T, on behalf of the Colorado Office of Consumer Counsel, filed on April 16, 1998, May 14, 1998 and May 27, 1998, cross-examined June 2, 1998. Joint Application of SBC Communications and Southern New England Telecommunications Corporation for Approval of a Change of Control, Connecticut Department of Public Utility Control Docket No. 98- 02-20, on behalf of the Connecticut Office of Consumer Counsel, filed May 7, 1998 and June 12, 1998, cross-examined June 15-16, 1998. Fourth Annual Price Cap Filing of Bell Atlantic-Massachusetts, Massachusetts Department of Telecommunications and Energy Docket DTE 98-67, on behalf of MCI Telecommunications Corporation, filed September 1 1, 1998 and September 25, 1998, cross-examined October 22, 1998. Applications of Ameritech Corp.. Transferor, and SBC Communications, Inc., Transferee, For Consent to Transfer Control, Federal Communications Commission CC Docket No. 98- 14 1, co-sponsored affidavit on behalf of Indiana Utility Consumer Counselor, Michigan Attorney General, Missouri Public Counsel, Ohio Consumers’ Counsel, Texas Public Utility Counsel and Utility Reform Network, filed on October 13, 1998. In the Matter of the Joint Application of SBC Communications Inc., SBC Delaware, Inc., Ameritech Corporation and Ameritech Ohio for Consent and Approval of a Change of Control, Public Utilities Commission of Ohio Case No.98-1082-TP-AMT, on behalf of Ohio Consumers’ Counsel, filed on December 10, 1998, cross-examined on January 22, 1999. GTE Corporation, Transferor, and Bell Atlantic Corporation, Transferee, For Consent to Transfer Control, Federal Communications Commission CC Docket No. 98- 184, co-sponsored an affidavit on behalf of a coalition of consumer advocates from Delaware, Hawaii, Maine, Maryland, Missouri, Ohio, Oregon, West Virginia, and Michigan, filed on December 18, 1998. In the Matter of the Joint Application of GTE and Bell Atlantic to Transfer Control of GTE’s California Utility Subsidiaries to Bell Atlantic, Which Will Occur Indirectly as a Result of GTE’s Merger with Bell Atlantic, California Public Utilities Commission A. 98-12-005, on behalf of the California Office of Ratepayer Advocate, filed on June 7, 1999. In the Matter of the Investigation on the Commission’s Own Motion Into All Matters Relating to the Merger of Ameritech Corporation and SBC Communications Inc., Indiana Utility Regulatory Commission Cause No. 41255, on behalf of the Indiana Office of Utility Consumer Counselor, filed on June 22, 1999 and July 12, 1999, cross-examined July 20, 1999. In re Application of Bell Atlantic Corporation and GTE Corporation for Approval of the GTE Corporation - Bell Atlantic Corporation Merger, Washington Utilities and Transportation Commission UT-981 367, on behalf of the Washington Attorney General Public Counsel Section, filed on August 2, 1999. Application of New York Telephone Company for Alternative Rate Regulation, Connecticut Department of Public Utility Control Docket No. 99-03-06, on behalf of the Connecticut Office of Consumer Counsel, filed October 22, 1999. Statement of Qualifications of Susan M. Baldwin Page 7 In re: Area Code 51 5 Relief Plan, Iowa Utilities Board Docket No. SPU-99-22, on behalf of the Iowa Office of Consumer Advocate, filed November 8,1999, and December 3, 1999, cross-examined December 14, 1999. In re Application of MCI WorldCom. Inc. and Central Telephone Company - Nevada, d/b/a Sprint of Nevada, and other Sprint entities for Approval of Transfer of Control pursuant to NRS 704.329, Nevada Public Utilities Commission Application No. 99-12029, on behalf of the Nevada Office of the Attorney General, Bureau of Consumer Protection, filed April 20,2000. In re: Area Code 31 9 Relief Plan, Iowa Utilities Board Docket No. SPU-99-30, on behalf of the Iowa Office of Consumer Advocate, filed June 26,2000 and July 24,2000. In re: Sprint Communications Company, L.P. & Level 3 Communications, L.L.C., Iowa Utilities Board Docket Nos. SPU-02-11 & SPU-02-13, filed October 14,2002 and January 6,2003, cross-examined February 5,2003. Illinois Bell Telephone Company filing to increase unbundled loop and nonrecurring rates (tariffs filed December 24, 2002), Illinois Commerce Commission Docket No. 02-0864, on behalf of Citizens Utility Board, filed May 6,2003 and February 20,2004. Qwest Petition for Competitive Classification of Business Services, Washington Utilities and Transportation Commission Docket No. 0306 14, on behalf of Public Counsel, filed August 13, 2003 and August 29, 2003, cross-examined September 18, 2003. In the Matter of the Application of CenturyTel of Northwest Arkansas, LLC for Approval of a General Change in Rates and Tariffs, Arkansas Public Service Commission Docket No. 03-041 -U, on behalf of the Attorney General, filed October 9,2003 and November 20,2003. In the Matter of the Board’s Review of Unbundled Network Elements, Rates, Terms and Conditions of Bell Atlantic New Jersey, Inc., New Jersey Board of Public Utilities Docket No. T000060356, on behalf of the New Jersey Division of the Ratepayer Advocate, filed January 23,2004. In the Matter of the Implementation of the Federal Communications Commission’s Triennial Review Order, New Jersey Board of Public Utilities Docket No. T003090705, on behalf of the New Jersey Division of the Ratepayer Advocate, filed February 2, 2004. Unbundled Access to Network Elements, Review of the Section 25 1 Unbundling Obligations of Local Exchange Carriers, Federal Communications Commission WC Docket No. 04-3 13, CC Docket No. 01- 338, sponsored affidavit on behalf of the New Jersey Division of the Ratepayer Advocate, filed October 4. 2004. Unbundled Access to Network Elements, Review of the Section 25 1 Unbundling Obligations of Local Exchange Carriers, Federal Communications Commission WC Docket No. 04-3 13, CC Docket No. 01 - 338, sponsored affidavit on behalf of the Utah Committee of Consumer Services, filed October 4,2004. In the Matter of Verizon New Jersey, Inc. For a Revision of Tariff B.P.U.-N.J. -No. 2 Providing for a Revenue Neutral Rate Restructure Including a Restructure of Residence and Business Basic Exchange Service and Elimination of $.65 Credit, New Jersey Board of Public Utilities Docket No. TT04060442, on Statement of Qualifications of Susan M. Baldwin Page 8 behalf of the New Jersey Division of the Ratepayer Advocate, filed December 22,2004 and January 18, 2005. In the Matter of the Application of Verizon New Jersey, Inc. for Approval (I) of a New Plan for an Alternative Form of Regulation and (11) to Reclassify Multi-Line Rate Regulated Business Services as Competitive Services, and Compliance Filing, New Jersey Board of Public Utilities Docket No. TOO1 020095, on behalf of the New Jersey Division of the Ratepayer Advocate, filed January 10,2005 and February 4,2005. Joint Petition of SBC Communications Inc. and AT&T Corp., Together with its Certificated Subsidiaries for Approval of Merger, New Jersey Board of Public Utilities Docket No. TM05020168, on behalf of the New Jersey Division of the Ratepayer Advocate, filed May 4,2005 and June 1,2005. In the Matter of Verizon Communications Inc. and MCI, Inc., Applications for Approval of Transfer of Control, Federal Communications Commission WC Docket No. 05-75, co-sponsored affidavit on behalf of the New Jersey Division of the Ratepayer Advocate, filed on May 9, 2005. In the Matter of the Application of Southwestern Bell Telephone, L.P., d/b/a SBC Arkansas to Set Rates for Unbundled Network Elements, Arkansas Public Service Commission Docket No. 04-1 09-U, on behalf of the Attorney General, filed May 27,2005. Joint Petition of Verizon Communications Inc. and MCI, Inc. for Approval of Merger, New Jersey Board of Public Utilities Docket No. TM05030189, on behalf of the New Jersey Division of the Ratepayer Advocate, filed July 8, 2005 and August 19,2005. In the Matter of Joint Petition of United Telephone Company of New Jersey, Inc. d/b/a Sprint and LTD Holding Company for Approval Pursuant to N.J.S.A.48:2-5 1 and N.J.S.A. 48:3-IO of a change in Ownership and Control, New Jersey Board of Public Utilities Docket No. TM05080739, on behalf of the New Jersey Division of the Ratepayer Advocate, filed November 29,2005. In the Matter of the Board’s Review of the Classification of Verizon New Jersey’s Directory Assistance Services (“DAS”) as Competitive and Associated Service Quality, Docket No. TX06010057, In the Matter of the Filing by Verizon New Jersey Inc. for the Reclassification of Existing Rate Regulated Services - Directory Assistance Services as Competitive, New Jersey Board of Public Utilities, Docket No. TT97120889, on behalf of the New Jersey Division of the Ratepayer Advocate, filed May 12, 2006. In the Matter of AT&T Inc. and BellSouth Corporation Applications for Approval of Transfer of Control, Federal Communications Commission WC Docket No. 06-74, sponsored declaration with Sarah M. Bosley on behalf of the New Jersey Division of the Ratepayer Advocate, filed June 5,2006; sponsored declaration with Sarah M. Bosley and Timothy E. Howington on behalf of the New Jersey Division of Rate Counsel, October 3, 2006. In the Matter of Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, sponsored affidavit on behalf of the National Association of State Utility Consumer Advocates and the New Jersey Division of Rate Counsel, filed August 22, 2006. In the Matter of the Board Investigation Regarding the Reclassification of Competitive Local Exchange Carrier (CLEC) Services as Competitive, New Jersey Board of Public Utilities Docket No. TX06120841, Statement of Qualifications of Susan M. Baldwin Page 9 on behalf of the New Jersey Division of Rate Counsel, filed January 7,2007, January 30,2007, and February 20, 2007. Verizon New England Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Company, Verizon Select Services Inc. and Fairpoint Communications, Inc. Joint Petition for Authority to Transfer Assets and Franchise to Fairpoint Communications, Inc., New Hampshire Public Utilities Commission Docket No. DT-07-011, on behalf of the Office of Consumer Advocate, filed August 1,2007, cross- examined November 1,2007. In the Matter of the Commission’s Investigation into Verizon Maryland, Inc.’s Affiliate Relationships, Maryland Public Service Commission Case No. 9120, on behalf of the Office of People’s Counsel, filed October 29,2007 and November 19,2007, cross-examined November 28,2007. In the Matter of the Board Investigation Regarding the Reclassification of Incumbent Local Exchange Carrier (ILEC) Services as Competitive, New Jersey Board of Public Utilities Docket No. TX07110873, on behalf of the New Jersey Division of Rate Counsel, filed December 14,2007, January IO, 2008. In the Matter of Verizon Washington, DC Inc.’s Price Cap Plan 2007 for the Provision of Local Telecommunications Services in the District of Columbia, Public Service Commission of the District of Columbia Formal Case No. 1057, on behalf of the District of Columbia Office of People’s Counsel, filed December 20,2007, January 3 1,2008. In re Possible Extension of Board Jurisdiction over Single Line Flat-Rated Residential and Business Rates for Local Exchange Carriers, Iowa Utilities Board Docket No. INU-08-1, on behalf of Iowa Office of Consumer Advocate, filed March 17, 2008, April 28,2008, cross-examined May 22, 2008. Petition of the Office of Consumer Counsel for Enforcement of Quality of Service Standards for the Southern New England Telephone Company d/b/a AT&T Connecticut, Connecticut Department of Public Utility Control Docket No. 08-07-15, on behalf of the Communications Workers of America, Local 1298, filed January 30,2009, cross-examined February 25,2009. In the Matter of the Board’s Investigation and Review of Local Exchange Carrier Intrastate Exchange Access Rates, New Jersey Board of Public Utilities Docket No. TX08090830, on behalf of the New Jersey Division of Rate Counsel, filed February 13, 2009, April 20, 2009, June 22, 2009, cross-examined October 20,2009. In the Matter of Appropriate Forms Of Regulating Telephone Companies, Maryland Public Service Commission, Case No. 9 133, on behalf of the Communications Workers of America, filed June 1, 2009, October 16, 2009, October 30, 2009, cross-examined November 4,2009. Petition of the Office of Consumer Counsel for Enforcement of Quality of Service Standards for the Southern New England Telephone Company d/b/a AT&T Connecticut, Connecticut Department of Public Utility Control Docket No. 08-07-1 5PH02, on behalf of the Communications Workers of America, Local 1298, filed September 2 I, 2009. In the Matter of the Application of Frontier Communications Corporation, New Communications Holdings, Inc. and Verizon Communications Inc. for Consent and Approval of a Change in Control, Public Utilities Commission of Ohio Case No. 09-454-TP-ACO, on behalf of the Communications Statement of Qualifications of Susan M. Daldwin Page IO Workers of America and International Brotherhood of Electrical Workers, Local 986, filed October 14, 2009. Frontier Communications Corporation, Verizon Communications, Inc., Verizon North Inc., Verizon South Inc., New Communications of the Carolinas, Inc. Joint Application for the approval of a Reorganization, Illinois Commerce Commission Docket No. 09-0268, on behalf of the International Brotherhood of Electrical Workers, Locals 2 I, 5 I, and 702, filed October 20, 2009. In re Verizon Service Quality in Western Massachusetts, Massachusetts Department of Telecommunications and Cable D.T.C. 09-1, on behalf of the Office of the Attorney General, filed November 9.2009. Testimony before State Legislatures: Testified on September 24, 1997, before the Massachusetts State Legislature Joint Committee on Government Regulations regarding House Bill 4937 (concerning area codes). Pu blicationsb’resentations Articles on telecommunications and energy policy in trade journals, and presentations at industry associations and conferences include the following: Reports: “The Cable-Telco Duopoly’s Deployment of New Jersey’s Information Infrastructure: Establishing Accountability” (with Sarah M. Bosley and Timothy E. Howington). Prepared for the Public Advocate of New Jersey, January 19,2007. “Assessing SBC/Pacific’s Progress in Eliminating Barriers to Entry: The Local Market in California Is Not Yet ‘Fully and Irreversibly Open’” (with Patricia D. Kravtin, Dr. Lee L. Selwyn, and Douglas S. Williams). Prepared for the California Association of Competitive Telecommunications Companies, July 2000. “Where Have All the Numbers Gone? (Second Edition): Rescuing the North American Numbering Plan from Mismanagement and Premature Exhaust” (with Dr. Lee L. Selwyn). Prepared for the Ad Hoc Telecommunications Users Committee. June 2000. “Price Cap Plan for USWC: Establishing Appropriate Price and Service Quality Incentives for Utah” (with Patricia D. Kravtin and Scott C. Lundquist). Prepared for the Utah Division of Public Utilities, March 22,2000. “Telephone Numbering: Establishing a Policy for the District of Columbia to Promote Economic Development” (with Douglas S. Williams and Sarah C. Bosley). Prepared for the District of Columbia Office of People’s Counsel. February 2000 (submitted to Eric W. Price, Deputy Mayor, April 6,2000). “The Use of Cost Proxy Models to Make Implicit Support Explicit, Assessing the BCPM and the Hatfield Statement of Qualifications of Susan M. Baldwin Page 11 Model 3.1” (with Dr. Lee L. Selwyn). Prepared for the National Cable Television Association, submitted in FCC CC Docket No. 96-45, March 1997. “The Use of Forward-Looking Economic Cost Proxy Models” (with Dr. Lee L. Selwyn). Prepared for the National Cable Television Association, submitted in FCC Docket No. CCB/CPB 97-2, February 1997. “Continuing Evaluation of Cost Proxy Models for Sizing the Universal Service Fund, Analysis of the Similarities and Differences between the Hatfield Model and the BCM2” (with Dr. Lee L. Selwyn). Prepared for the National Cable Television Association, submitted in FCC CC Docket No. 96-45, October 1996. “Converging on a Cost Proxy Model for Primary Line Basic Residential Service, A Blueprint for Designing a Competitively Neutral Universal Service Fund” (with Dr. Lee L. Selwyn). Prepared for the National Cable Television Association, submitted in FCC CC Docket No. 96-45, August 1996. “The BCM Debate, A Further Discussion” (with Dr. Lee L. Selwyn and Helen E. Golding). Prepared for the National Cable Television Association, submitted in FCC CC Docket No. 96-45, May 1996. “The Cost of Universal Service, A Critical Assessment of the Benchmark Cost Model” (with Dr. Lee L. Selwyn). Prepared for the National Cable Television Association, submitted in FCC CC Docket No. 96- 45, April 1996. “Funding Universal Service: Maximizing Penetration and Efficiency in a Competitive Local Service Environment” (with Dr. Lee L. Selwyn). Prepared for Time Warner Communications, Inc., October 1995. “A Balanced Telecommunications Infrastructure Plan for New York State” (with Dr. Lee L. Selwyn). Prepared for the New York User Parties, December 4, 1992. “A Roadmap to the Information Age: Defining a Rational Telecommunications Plan for Connecticut” (with Dr. Lee L. Selwyn, Susan M. Gately, JoAnn S. Hanson, David N. Townsend, and Scott C. Lundquist). Prepared for the Connecticut Office of Consumer Counsel, October 30, 1992. “Analysis of Local Exchange Carrier April 1988 Bypass Data Submissions” (with William P. Montgomery and Dr. Lee L. Selwyn). Prepared for the National Association of State Utility Consumer Advocates, August 1988. “Strategic Planning for Corporate Telecommunications in the Post-Divestiture Era: A Five Year View” (with Dr. Lee L. Selwyn, William P. Montgomery, and David N. Townsend). Report to the International Communications Association, December 1986. “Competitive Pricing Analysis of Interstate Private Line Services.” Prepared for the National Telecommunications Network, June 1986. “Analysis of Diamond State Telephone Private Line Pricing Movements: 1980-1990.” Prepared for Network Strategies, Inc., April 1985. “Analysis of New York Telephone Private Line Pricing Movements: 1980-1990.” Prepared for Network Statement of Qualifications of Susan M. Baldwin Page 12 Strategies, Inc., February 1985. Presentations: “Broadband: Where it is, where it ain’t, and where it oughta be,” June 29,2009, National Association of State Utility Consumer Advocates Mid-Year Meeting, Boston, Massachusetts. “Deregulation and Price Increases: The Hallmarks of a Competitive Market?” November 18,2008; 2008 National Association of State Utility Consumer Advocates Annual Meeting, New Orleans, Louisiana. “Forbearance: What is it? What’s wrong with it? How to fix it,” November 12, 2007; “Net Neutrality - Not Dead Yet!,” November 13, 2007; 2007 National Association of State Utility Consumer Advocates Annual Meeting, Anaheim, California. “FCC’s Regulatory Stance - Consumer Advocates’ Role More Important Than Ever,” 2005 National Association of State Utility Consumer Advocates Winter Meeting, March 2, 2005, Washington, D.C. “Impact of Federal Regulatory Developments on Consumers and Consumers’ Impact on Regulatory Developments,” Presentation for the Washington Attorney General’s Office, Seattle, Washington, May 27,2003. “The Finances of Local Competition” Presentation at the New England Conference of Public Utilities Commissioners 54th Annual Symposium, Mystic, Connecticut, May 2 1,2001. “Facilities-Based Competition” Presentation at the New England Conference of Public Utilities Commissioners 52nd Annual Symposium, Bretton Woods, New Hampshire, May 24, 1999. “Exploring Solutions for Number Exhaust on the State Level” and “A Forum for Clarification and Dialogue on Numbering Ideas,” ICM Conference on Number Resource Optimization, New Orleans, Louisiana, December 10-1 1, 1998. “Telecommunications Mergers: Impact on Consumers,” AARP Legislative Council 1998 Roundtable Meeting, Washington, D.C., November 18, 1998 “Consumer Perspectives on Incumbent Local Exchange Carrier Mergers,” National Association of Regulatory Utility Commissioners 110th Annual Convention, Orlando, Florida, November 1 1, 1998. Federal Communications Commission En Banc Hearing on “Proposals to Revised the Methodology for Determining Universal Service Support,” CC Docket Nos. 96-45 and 97-1 60,” June 8. 1998, panelist. “Universal Service: Real World Applications,” 1997 National Association of State Utility Consumer Advocates Mid-Year Meeting, Charleston, South Carolina, June 9, 1997. “Modeling operating and support expenses” and “Modeling capital expenses,” panelist for Federal-State Joint Board on Universal Service Staff Workshops on Proxy Cost Models, January 14-1 5, 1997, CC Docket 96-45. Statement of Qualifications of Susan M. Baldwin Page 13 “Evaluating the BCM2: An Assessment of Its Strengths and Weaknesses,” presentation to the AT&T Cost Team (with Michael J. Dewinter), December 4, 1996. “Interpreting the Telecommunications Act of 1996 Mandate for the Deployment of Advanced Telecommunications Services in a Fiscally Responsible and Fully Informed Manner” (with Helen E. Golding), Proceedings of the Tenth NARUC Biennial Regulatory Information Conference, Volume 3, September 1 1 - 13, 1996. “Making Adjustments to the BCM2.” Presentation to the Staff of the Federal-State Joint Board on Universal Service, September 16, 1996. “Converging on a Model: An Examination of Updated Benchmark Cost Models and their Use in Support of Universal Service Funding.” Presentation to the National Association of Regulatory Utility Commissioners Summer Committee Meetings, July 22, 1996. “The Phone Wars and How to Win Them” (with Helen E. Golding). Planning, July 1996 (Volume 62, Number 7). “ETI’s Corrections to and Sensitivity Analyses of the Benchmark Cost Model.” Presentation to the Staff of the Federal-State Joint Board on Universal Service,” May 30, 1996. “Redefining Universal Service.” Presentation at the Telecommunications Reports conference on “Redefining Universal Service for a Future Competitive Environment,” Washington, D.C., January 18, 1996. “Funding Universal Service: Maximizing Penetration and Efficiency in a Competitive Local Service Environment,” (with Lee L. Selwyn, under the direction of Donald Shepheard), a Time Warner Communications Policy White Paper, September 1995. “Stranded Investment and the New Regulatory Bargain,” (with Lee L. 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Presentation to the New England Telecommunications Association, March 1990. “Tariff Data is Critical to Network Management.” Telecommunications Products and Technology, May 1988 (Volume 6,No. 5). “How to Capitalize on the New Tariffs.” Presentation at Communications Managers Association conference, 1988. “Auction Methods for the Strategic Petroleum Reserve” (With Steven Kelman and Richard Innes). Prepared for Harvard University Energy Security Program, July 1983. “How Two New England Cities Got a $1 00 Million Waste-to-Energy Project” (with Diane Schwartz). Planning, March 1983 (Volume 49, Number 3). “Evaluation of Economic Development and Energy Program in Lawrence, Massachusetts.” (with Richard Innes). Prepared for US. Department of Energy, August, 1982. “Energy Efficiency in New England’s Rental Housing.” New England Regional Commission, 198 1. “Low Level Radioactive Waste Management in New England.” New England Regional Commission, 1981. “The Realtor’s Guide to Residential Energy Efficiency.” Prepared for the US. Department of Energy and the National Association of Realtors, 1980. Advisor to: United States General Accounting Office Report to the Subcommittee on Antitrust, Business Rights and Competition, Committee on the Judiciary, U.S. Senate, Characteristics and Competitiveness of the Internet Backbone Market, GAO-02- 16, October 200 1. OF WEST VIRGINIA CHARLESTON Case No. 09-087 1-T-PC Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. CERTIFICATE OF SERVICE The undersigned counsel for the Communications Workers of America, AFL- CIO, certifies that service of the foregoing Public (Redacted) Version of Direct Testimony of Susan M. Baldwin on Behalf of the Communications Workers of America, AFL-CIO has been made b depositing a true and exact copy thereof in the U.S.Mail, postage pre-paid on the 16tK day of November, 2009 to the following: Joseph J. Starsick, Jr., Esq. Jeffiey A. Ray, General Counsel Goodwin & Goodwin, LLP C it yne t P.O. Box 2107 113 Platinum Drive, Suite B Charleston, WV 25328-2107 Bridgeport, WV 26330 Patrick W. Pearlman, Esq. Richard L. Gottlieb, Esq. Deputy Consumer Advocate Amanda M. Ream, Esq. Consumer Advocate Division Lewis, Glasser, Casey & Rollins, PLLC 700 Union Building BB&T Square, Suite 700 723 Kanawha Blvd., East 300 Summers Street Charleston, WV 25301 Charleston, WV 25301 Lisa Wansley, Esq. Kevin Saville, Associate General Public Service Commission Counsel P.O. Box 812 Frontier Communications Corporation Charleston, WV 25323 2378 Wilshire Blvd. Mound, MN 55364 James V. Kelsh, Esq. Law Office of James V. Kelsh Lydia Pulley 300 Summers Street, Suite 1230 General Counsel - VA, WV, NC & SC P.O. box 3713 Verizon Corporate Services Corporation Charleston, WV 25337-3713 703 - 713 E. Grace St. Richmond, VA 232 19 Steven Hamula, Esq. Director of Regulatory Affairs Stephen S. Melnikoff, General Attorney Fibernet Regulatory Law Office (JALS-RL) 1200 Greenbrier Street U.S. Army Litigation Center Charleston, WV 253 14 901 N. Stuart Street, Suite 700 Arlington, VA 22203-1837 Scott J. Rubin, Esq. 333 Oak Lane Bloomsburg, PA 178 15 Robert R. Rodecker, Esq. P.O. Box 3713 Charleston, WV 25337 Stephen G. Hill Hill Associates P.O. Box 587 Hurricane WV 25526 Trevor R. Roycroft Roycroft Consulting 51 Sea Meadow Lane Brewster, MA 0263 1 The Law Office of Vincent Trivelli,' PLLC 178 Chancery Row Morgantown ,WV 26505 Phone: (304) 291-5223 Fax: (304) 291-2240 PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON Case No. 09-0871-T-PC Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. Joint Petition for consent and approval of the transfer of Verizon’s local exchange and long distance business in West Virginia to companies to be owned and controlled by Frontier Communications Direct Testimony of John Pusloskie on Behalf of the Communications Workers of America, AFL-CIO November 16,2009 1 Q. Please state your name? A. John Pusloskie. Q* What is your title? A. President, Communications Workers of America, Local 1170. Q* What is your business address? A. My office is located at 1451 Lake Avenue, Rochester, NY 14615. Q. Who does your Local represent? A. C WA Local 1 170 represents outside plant employees and support staff for the Frontier Rochester Telephone operating territory. Q. What is your background? A. I have been President of CWA Local 1170 since January 1,2009. Prior to that, I was the Vice-president of Local 1 170 for 9 years. I have been an employee of Frontier for approximately 20 years as a sales and service technician. In 1999 Frontier was purchased by Global Crossing, but they experienced financial problems and sold the ILEC to Citizens on July 1,2001. I have been employed by the company throughout. Q. What can you tell us about the effect on your membership of the transition from Global Crossing to Citizens/Frontier in 2001? A. Following the sale of Global Crossing to CitizensProntier in July of 2001 the transition was marked by constant downsizing in the form of layoffs and voluntary 2 severances. For example, beginning in December of 2001 the company did away with senior management personnel such as Marty Mucci and shortly after his leadership team, then, in 2002 the first union layoffs occurred. In 2002 the company declared three different layoffs in April, June, and November. Twenty-seven (27) ,forty-two (42) , and seventy-two (72) employees were affected respectively by the layoffs, losing employees in almost every job classification, most of these being frontline service affecting jobs. At the time of the purchase of Global Crossing by Frontier in July of 2001 our local had 843 members, now we have 456 members. When Citizens took over we had 81 cable splicers and 29 lineman, through layoffs and retirements we’re down to 34 cable splicers and 19 linemen, a reduction of over 50% of the construction work force. The number of our service technicians has been reduced from 305 at the time of purchase to 195. Every other job classification has seen a reduction in employees as well. Following the layoffs in 2002, the company began transferring bargaining unit work to other places within the corporation. In about 2003 the monitoring of remote switches was moved from Rochester to Johnston, New York, and in approximately 2003 or 2004 residential repair service calls were transferred to Sherburne, New York. In 2004 repair service clerks were laid off. In 2006 the company offered a retirement incentive and thirty-five (35) employees agreed to it and were off the payroll as of the end of February 2006. In 2007 a new collective bargaining agreement was negotiated and provisions for a voluntary severance program were negotiated. The company, in June of 2007, declared a force reduction of fifty-four (54) bargaining unit employees. Forty-nine (49) accepted the offer and were off the payroll by the end of July. In January of 2008 the company 3 declared a force reduction of thirty-eight (38) more positions. These employees had to be off the payroll in February and March of 2008. In November of 2008 the company declared a force reduction of fifteen (1 5) more bargaining unit employees. There were also other losses: In August or September, 2007 the company moved repair service calls from Rochester to DeLand, Florida for Rochester based customers. Q. What, if any, was the result of this move of repair service to Florida? A. This created service issues such as incorrect orders being placed and poor customer service because the repair service technicians in Rochester were very experienced, tenured employees who knew how to handle whatever issues they were presented with. They were then replaced with $9 an hour employees in Florida with little experience and there has been a lot of turnover. Q. Did the number of access lines remain constant from July of 2001 to the present? A. No. In 2001 the company had about 600,000 access lines and now they only have about 300,000. Q. Do you have any idea why the number of access lines declined? A. In my opinion, customers left, in part, due to competition from Time Warner and Frontier was not competitive enough. Also, Frontier scaled back its capital investment. A lot of the jobs lost in 2002 were in construction. Q. Are you familiar with the cutover of the billing system in September of 2008? 4 A. Yes, this was a critical issue. In September of 2008, when Frontier cutover the billing system into the new DPI billing platform, the result was thousands of repair tickets and service order processing problems. Q. Could you elaborate on the problems that were experienced as a result of this cutover? A. The problems included programming issues associated with porting and address problems - not knowing where the customers were. There were also general information problems on tickets and orders such as incorrect services being ordered, which comes as a result of inexperience of the Florida employees and the fact that the DPI system that the company converted to was not well-suited to an urban market like Rochester. But, the company wanted to use one platform for the whole system instead of tailoring it to urban or rural areas. They had converted Commonwealth of Pennsylvania before Rochester and they used that system there. There have been hundreds, if not thousands of issues with billing since integrating the systems in 2008. For example, the bulk of the problems are probably that customers were billed for services that they didn’t have. Also, there were major problems for employees in getting their employee discounts. Q. Were there any service quality issues as a result of this? A. When they integrated the system in 2008, and just prior to integration, service quality really took a hit. Commitments to customers declined dramatically from 2007. Evidence of this was proved out in our 2008 bonus metrics. The overtime hours for 2008 5 for the months of September, October, November, and December of 2008 were 41,701 hours which was an increase of 14,823 hours for the same period for the prior year. A 55% increase. Most of this was attributable to the cutover in my opinion. Out of service over 24 hours also increased from 2007 as well as missed commitments for repairs. Q. Given your experience in Rochester, would you have any concerns with the Frontier purchase of Verizon’s landlines in West Virginia? A. My main concern for West Virginia would be the potential loss of frontline employees to do the jobs that are necessary. As I said earlier, our local has experienced a significant loss of members, but it wasn’t just our people. The cuts were across-the- board. The business office, whose employees are represented by UNITE, has also experienced the same reductions. The cuts were across-the-board. I’m also aware that Frontier bought a small independent family-owned telephone company called Ogden Telephone in New York. At the time of the buy-out Ogden had fifty-five (55) employees and now they have only eight (8). That transaction took place approximately in the late 1990’s. As I understand it, Commonwealth Telephone of Pennsylvania, under the recent 2007 collective bargaining agreement between C WA and Frontier, began contracting-out linemen, got rid of the garage mechanics and is transferring cable splicers to service technician positions. Their pensions have also been frozen. I believe that one problem overall is that in 2004 Frontier declared a special dividend of $2 billion to shareholders. Since that time they’ve been saddled with a $1 per share dividend which is a very high yield. They’ve continued to cut employee numbers 6 OF WEST VIRGINIA CHARLESTON Case No. 09-0871-T-PC Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. CERTIFICATE OF SERVICE The undersigned counsel for the Communications Workers of America, AFL- CIO, certifies that service of the foregoing Direct Testimony of John Pusloskie on Behalf of the Communications Workers of America, AFL-CIO has been made by depositing a true and exact copy thereof in the U.S. Mail, postage pre-paid on the 16thday of November, 2009 to the following: Joseph J. Starsick, Jr., Esq. Jeffrey A. Ray, General Counsel Goodwin & Goodwin, LLP Citynet P.O. Box 2107 113 Platinum Drive, Suite B Charleston, WV 25328-21 07 Bridgeport, WV 26330 Patrick W. Pearlman, Esq. Richard L. Gottlieb, Esq. Deputy Consumer Advocate Amanda M. Ream, Esq. Consumer Advocate Division Lewis, Glasser, Casey & Rollins, PLLC 700 Union Building BB&T Square, Suite 700 723 Kanawha Blvd., East 300 Summers Street Charleston, WV 25301 Charleston, WV 25301 Lisa Wansley, Esq. Kevin Saville, Associate General Public Service Commission Counsel P.O. Box 8 12 Frontier Communications Corporation Charleston, WV 25323 2378 Wilshire Blvd. Mound, MN 55364 James V. Kelsh, Esq. Law Office of James V. Kelsh Lydia Pulley 300 Summers Street, Suite 1230 General Counsel - VA, WV, NC & SC P.O. box 3713 Verizon Corporate Services Corporation Charleston, WV 25337-3713 703 - 713 E. Grace St. Richmond, VA 23219 Steven Hamula, Esq. Director of Regulatory Affairs Stephen S. Melnikoff, General Attorney Fibernet Regulatory Law Office (JALS-RL) 1200 Greenbrier Street U.S. Army Litigation Center Charleston, WV 253 14 901 N. Stuart Street, Suite 700 Arlington, VA 22203-1837 Scott J. Rubin, Esq. 333 Oak Lane Bloomsburg, PA 17815 Robert R. Rodecker, Esq. P.O. Box 3713 Charleston, WV 25337 Stephen G. Hill Hill Associates P.O. Box 587 Hurricane WV 25526 Trevor R. Roycroft Roycroft Consulting 5 1 Sea Meadow Lane Brewster, MA 02631 The Law Office of Vincent Trivelli,’PLLC 178 Chancery Row Morgantown , WV 26505 Phone: (304) 291-5223 Fax: (304) 291-2240