2OB9-I 1 :I6 4’-:51 703 - 696 - 2960 >* 304 340 0325
DEPARTMENT OF THE ARMY UNITED STATES ARMY LEGAL SERVICES AGENCY $01 NORTH STUART STREET ARLINGTON, VIRGINIA 222034837 November 16,2009 REPLY To An‘ltNTION OR Regulatory Law Office U 4192 VnJ&1 on-03 3 Sandra Squire TZaJ a U Executive Secretary 2s Public Service Commission of West Virginia 201 Brooks Street, P.O.Box 812 Charleston, West Virginia 25323-0812 Subject: DoD/FEA’s Direct Testirnonv of Charles W. King In Re: Case No. 09-0871-T-PC- Frontier Communimtions Corporation, Citizens Telecommunications Company of West Virginin, dba Frontier Communications of West Virginia, Verizbn West Virginia hc., et al. 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 Coimunioations. Dear Ms. Squire: Enolosed for filing in the above-captioned proceeding are the hard copy original and Twelve (12) copies of the Direct Testimony of Charles W. King 011 behalf ofthe United States Department of Defense and All Other Federal. Executive Agencies (collectively referred to herein as “DoDFEA”). A Certificate of Service is appended to this filing. Copies of this document are being sent in accord with the Certificate of Service. Inquiries to this office regarding this proceeding should be directed to the undersigned at (703) 696-1643, . Thank you for your cooperation and assistance in this matter.
General Attorney Regulatory Law Office (JALS-RL) US. Army Litigation Center 901 N. Stuart Street, Suite 700 Arlington, Virginia 22203-1 837 Telephone: (703) 696-1643 stmhenmelniko ffmhada. armv .mil Enclosure: TweIve (1 2) Copies CF: See Certificate ofService 20Q9-11-u1616:51 703-696-2960 >> 304 340 0325 P 3
PUBLIC SERVICE COmSSI[ON OF WEST VIRGINIA CHARLESTON
Case No. 09-0871-T-PC
Frontier Communications Corporation, Citizens Telecommunications Company of West Virginia, dbn Frontier Commieations of West Virginia, Verizon West Virginia hc.,et al, Joint Petition for consent and approval. ofthe transfer of Verizon's local exchange and long distance business in West Virginia to companies to 'be owned and controllEd by Prontier Communications.
CERTIFICATE OF SERVICE
1 certify that I have caused two (2) copies of the foregoing document, together with this
Certificate of Service, in Case No. 09-0871-T-PC to be sent this day by electronic service (FAX) to the Public Service Commission of West Virginia and one (1) copy each postage
prepaid, properly addressed, first class US.Mail (OX private courier) to the counsel and
parties nmed below, as indicated:
Sandra Squire (UPS; original: and 12 copies) Lisa Wansley, Esq. Executive Secretary Public Smice Commission Public Service Commission of West Virginia Staff Attorney 201 Brooks S~eet,P.O. BOX812 (25323-0812) p ..0 812 Charleston, West Virginia 25301 Charleston, WV 25323
Joseph J. Starsick, Jr., Esq. Patrick W. Pearlman Goodwin & Goodwin, LLP Deputy Consumer Advocate P. 0.Box 2107 Advocate Division Charleston, WV 25328-2107 Consumer 700 Union Building 723 Kanawha Blvd., East Charleston, West Virginia 25301
1 2009-11 -.I6 16:52 703-696-2960 >> 304 340 0325 P 4
Vincent Trhelli, Esq. Jams V,Kelsh, Esq. The Law Office of Vincent Trivelli Rodecker Law Office 178 Chancery Row P. 0.Box 3713 Morgmtown, WV 26505 Charleston, WV 25337-3723
Steven Hanula, Esq. Jeffkey A, Ray, Esq. Director of Regulatory Affairs Citynet West Virginia LLC FiberNet, LLC I, 13 Platinum Drive, Suite 1200 Greenbrier $keet B Bridgeport, WV 263 3 0 Chadeston, WV 253 11
Trevor R. RoycroR Robert R. Rodecker, Esq. Roycroft Consulting P.Q. Box 3713 51 Sea Meadow Lane Charleston, WV 25337 Brewster, MA 0263 1 Scott J. Rubin Stephen G.Bill 333 oak Lane Hill Associates Bloomsburg, PA 178 15 P.O. Box 587 Hurricane, WV 25526 Amanda M. Ream, Esq. Lewis, Glasser, Casey & Rollins, PLLC PO Box 1746 Charlestdn WV 25326 Kevin Saville, Esq. Lydia Pulley Frontier Communications Corporation 2378 Geilmal Consel- VA, wv, NC & SC Wilshire Blvd. Vwizon Corporate Services Cop- Mound,MN 55364 703 713 E. Grace Street Richmond, VA 232 19
Dated this 16 th day of November 2009, at Arlington County, Virginia. General Attorney Regulatory Law Office (JALS-RL) US. Army Legal Servioes Agency Department of the Army 901 N. Stuart Street, Suite Arlington, VA 22203-1837 (703) 696 - 1643
2 CUUY - 'I 'I - 'I & 'I & :3L
DoDlFEA Exhibit 1
PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON
Case No. 09-O871-T-PC Frontier Communications Corporation, Citizens Telecommunicatioqs Company of West Virginia, dba Frontier Communications of West Virgfda, Verizon West Virginia Inc., et ai. Joint Petition for consent and approval. of the transfer of Verizon's local exchange and long distance business in West Virginia to companies to bc owned and controlled by Frontier Communications.
DIRECT TESTIMONY OF
CHARLES W. KING
On Behalf of THE UNITED STATES DEPARTMENT OF DEFENSE And ALL OTHER FEDERAL EXECUTIVE AGENCIES
November 16,2009 LUUY - ‘I ‘I - ‘I 6 ’I 6 :3L DoD/FEA Exhibit 1 Direct Testimony of Charles W, King
CONTENTS
Qualifications...... 1 Interests of DoD/FEA...... :...... 2
Previous Verizon Spin-offs.,...... ,,.4
Objective of this Intervention...... 11
Financial Health of West Virginia Operations...... 12
Service Quality Concerns.,...... 21
Further Protections,, ...... 28
Summary of Recommendations...... 32
Attachment A,...... Resume of Charles W. King
Attachment B...... Appearances ofCharles W. King before Regulatory Agencies
Attachment C.. .Statement of David Hauser, CEO of Fairpoint Communications
Attachment D ...... Joint Stipulation and Agreement, N.Y.P.S.C.Case Nos. 93-CO103 and 93-C-0033
Attachment E...... Applicants’ response to CWA Data Request No. 19, West Virginia P.S.C. Case No. 09-0871-T-PC
Attachment I;...... Docket No, UT-991358, Ninth Supplemental Order Approving and Adopting Settlement Agreements and Granting Application, June 29,2000, n30.
i CVVY- I I' IO Io:1L N5-6Y6-LYbU >> - 504 540 U5L3 P f DoD/FEA Exhibit 1. Direct Testimony of Charles W. King
1 DIRECT TESTIMONY OF 2 CHARLES W. KING
3 OUALIFXCATXONS
4 .Q* PLEASE STATE YOUR NAME, POSITION AND BUSINESS ARDRESS.
5 A. My name is Charles W. King. I am President of the economic consulting firm of
6 Snavdy King Majoros O'Connor & Bedell, Inc. ("Snavely King"). My business
7 address is 1.11 1 14t11Street, N.W., Suite 300, Washington, D.C. 20005.
8 Q* PLEASE DESCRIBE SNAVELY KING.
9 A. Snavely King, formerly Snavely, King & Associates, Inc., was founded by the
10 late Carl M. Snavely and me in 1970 to conduct research on a consulting basis
11 into the rates, revenues, costs and economic performance of regulated firms and
12 industries. The firm has a professional staff of 12 economists, accountants,
13 engineers and cost analysts. Most of its work involves the development,
14 preparation and presentation of expert witness testimony before federal and state
15 regulatory agencies. Over the course of its 39-year history, members of the firm
16 have participated in over 1000 proceedings before almost all of the state
17 commissions and all Federal commissions that regulate telecommunications,
18 utilities or transportation industries.
19 Q. HAVE YOU PREPARED A SUMMARY OF YOUR QUALIFICATIONS
20 AND EXPERIENCE?
21 A. Yes. Attachment A is a summary of my qualifications and experience.
1 N5-6Y6-LY6U >> 5u4 54u U3L3 Y 0
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 Q. HAVE YOU PREVIOUSLY SUBMITTED TESTIMONY IN 2 REGULATORY PROCEEDINGS?
3 A. Yes. Attachineiit B is a tabulation of my appearances as an expert witness before
4 state and federal regulatory agencies. It shows that I have testified before tlie
5 public utility commissions of over 40 states, and 1 have appeared before all
6 federal agencies that regulate telecommunications, utilities, transportation and
7 postal services.
8 Q. FOR WHOM ARE YOU APPEARING IN THIS PROCEEDING?
9 I am appearing on belxilf of the consumer interests of the Department of Defense
10 (“DoD”) and all other Federal Executive Agencies (“FEAI’) in West Virginia.
11
12 INTERESTS OF DoD/FEA
13
14 Q. WHY HAS DoD/FEA INTERVENED IN THIS CASE?
15
16 A. The Department of Defense and all other Federal Executive Agencies maintain
17 numerous offices, both military and civilian, thoughout West Virginia in areas
18 that include the affected exchanges. These offices and installations vary in size,
19 and tlie business telecoinmunications purchased range fiom large complex
20 systems to small office services. Federal employment in West Virginia, civilian
21 and active military, is approximately 17,500 persons.
22
2 LUUY-’I‘l-’lb ’lb:3L /US-bY6-LYbU >> 5u4 54u ux3 r Y
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 This case involves the transfer of the West Virginia exchanges and associated
2 long distance services of the West Virginia subsidiary of Verizon 3 Communications, Inc. (“Verizon”) to Frontier Communications Corporation
4 (“Frontier”). Federal offices in local exchange areas subject to being transferred
5 to Frontier include medical centers of the Department of Veterans Affairs in
6 Huntington and Martinsburg and the regional office of the Veterans Benefits
7 Administration, also in Huntington. Offices of the Department of Health and
8 Human Services, the Department of the Interior, the Drug Enforcement
9 Administration, the US Trustees Office and other federal agencies are located in
10 Charleston. A number of agencies in the Department of Agriculture, as well as
11 offices of the Department of Energy and the US Govenunent Center for Disease
12 Control, are situated in Morgantown. It is vital to these and other Federal end
13 users that the transition from Verizon to Frontier be made seamlessly and without
14 degradation of service quality or efficiency.
15
16 Moreover, the DoD/FEA interest goes beyond the locations directly affected by
17 the transition. Most DoD and FEA telecommunications services are procured
18 under contract through competitive bidding procurement. The effectiveness of
19 the competitive procurmat process is, of course, dependent upon there being a
20 number of financially strong and technically capable entities that can submit bids.
21 It is therefore important to the DoD/FEA that the West Virginia successor to
22 Vcrizon, the second largest telecommunications company in the nation, be a
23 viable, financially sound and technologically sophisticated company that will be
3 703-696-2Y60 >> 304 54u USL3 Y ’IU/4U
DoD/FEA Exhibit 3 Direct Testimony of Charles W. King
1 able to bid competitively in Federal telecommunication procurements, not just in
2 its own service territory, but th.roughout the state.
3
4 Additionally, the successor to Verizon will be a wholesale provider of services
5 and facilities to competitive retail telecommunications providers. The service 6 quality performance, the practices, and the operations of this successor must
7 support effective competition among carriers in providing services to contract
8 customers and the general public in West Virginia.
9
10 Unfortunately, the record of two recent Verizon spin-offs has not been
11 encouraging.
12
13 PREVIOUS VERIZON SPIN-OFFS
14 15 Q* WHAT PREVIOUS VERIZON SPIN-OFFS ARE YOU REFERRING TO? 16
17 A. Recently, there have been two major Verizon landline spin-offs. The first was the
18 safe of Verizon’s Hawaiian landline assets to The Carlyle Group (“Carlyle”). The
19 second was the sale of Verizon’s northern New England wireline operations to
20 FairPoint Communications (“FairPoint”).
21 22 Q* PLEASE RESCRIBE THE HAWAIIAN TELEPHONE TUNSACTION. 23
4 LUUY- I I- Ib ‘Ib:3L 703-696-2960 >> 304 340 0325 P 11/40
DoD/FEA Exhibit 1 Rirect Testimony of Charles W. King
1 A, The Hawaiian Telephone Company was created in the 1880’s under the laws of
2 the Kingdom of Hawaii. In the mid-20th century it was acquired by General
3 Telephone and Electronics, lata the GTE Corporation. It became part of the
4 Verizon family of companies when Verizon acquired GTE in the 1990s. In 2004,
5 Verizon sought approval to sell its Hawaiian assets to Carlyle, a private equity
6 enterprise. Carlyle created a new entity, Hawaiian Telcom, Inc. (“HT”),to
7 provide the local exchange services previously offered by Hawaiian Telephone.
8 The applicants in that case stated that aRer the transition HT “will have the
9 financial fitness and ability to fund the continuing operations of Verizon Hawaii
10 through the revenue generated from the existing and proposed operations.”l
11 Likewise, the applicants stated that they “. . . acknowledge the importance of
12 ensuing a seamless transition for customers and have conducted a rigorous
13 process to select a world-class systems integrator to replicate the full functionality
14 of the systems currently provided by Verizon.”* In 2005, the Hawaii Public
15 Utilities Commission (“‘HPUC”)approved the transfer subject to nuinerous
16 conditions,
17
18 In its decision approving the sale, the HPUC stated that it would initiate an
19 investigation of HT’s service quality approximately six months after HT assumed
20 the back office operations that Verizon previously provided on a national basis to
21 all of its service territories, including Hawaii. This service quality proceeding,
22 HPUC Docket No. 2006-0400, confirmed that the transition from Verizon was far
Application, Docker No. 04-0140,June 21,2004, pp. 13-14. 2 Id.,p. 15. Docket No. 04-0140, Decision and Order No. 21696, March 16,2005.
Jc LUUY-11-16 16:53 703-696-2960 >> 304 340 0325 P 12/40 DoD/FEA Exhibit 1. Direct Testimony of Charles W. King
1 from seanlcss or hmnless to customers, Although the HPUC has not yet
2 rendered EL decision in that proceeding, it is undisputed that for more than a year
3 following the cutover from Verizon’s back office operations, HT was unable to
4 collect data - even manually - as to six service standards for which the HPUC
5 required report^.^ Thus, the full extent of the problems associated with the
6 transfa could not even be quantified.
7
8 As to the Seven service standards for which HT was able to file reports, five dealt
9 with call mswaing time, HT’s ability to answer calls was lacking compared to
10 the experience under Verizon, For example, during the nine months following the
11 cutover, HT’s percent of residential installation and billing office calls answered
12 in 20 seconds ranged from a low of 8.01 percent to a high of 70.37 percent,
13 compared to tlie objective of 85 percent and Verizon’s 2005 percentage of 87.46
14 percent. Likewise, the answering time achieved for business installation and
15 billing office calls following the cutover ranged from 12.83 percent to 78.82
16 percent compared with the objective of 85 percent and Verizon’s achieved rate of
17 88.23 percent. In an effort to repair tlie damage caused by the non-finctioning
18 systems, HT had to replace the contractor working on the transition!
19
20 HT admitted in its pleadings that service suffered as a result of the transition from
21 Verizon and that it created enoneous bills and was unable to handle adequately
- ~ ~~
HT’s Post-Hearing Brief, HPUC Docker No. 2006-0400,filed November 9,2007 at p. 118, note 10 1I The missing reports included crucial data such as the percent of trouble reports cleared within 24 hours, the percent of installation and repair commitments met and custoiner trouble reports per 100 lines. HT’s February 15,2007 Statement of Position, HPUC Docket No 2006-0400,pp. 39-41, ‘Id,, pp. 74-77.
6 2009-11-16 16:53 703-696-2960 >> 304 340 0325 P 13/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W, King
1 incoming calk7 HT candidly admitted that ‘b... the cutover did unfortunately
2 create some negative impacts on its customers.” Finally, HT agreed with the
3 assessment of the Consumer Advocate that its bb.,. retail customers following
4 cutover experieiiced long waiting times to reach [its] contact centa, extremely
5 slow and long transaction processing times, high levels of fall out, long waiting
6 times to repair, missed or delayed installation and repair commitments and billing
7 errors.
8
9 The cutover fiom Verizon’s back office operations also caused significant
10 problems for HTs wholesale customers. One Competitive Local Exchange
11 Carrier (“CLEC”), Time Wmer Telecorn of Hawaii, L.P. (“TWTC”),
12 summarized the problems as follows: 13 HT’s conversion to its new back office systems was a failure by any 14 measure. Immediately following cutover, virtually none of the 15 wholesale back office systems were hctioniing. Today, 19 months 16 after cutover, they are still not functioning at the same level as the 17 Verizon systems. Although HT has made significant progress in 18 addressing its issues, those efforts are not complete. 19 20 HT violated the Merger Decision and the Stipulation by failing to 21 provide the same: or similar functionality for wholesale service as 22 previously provided by Vexizoii, and by failing to remain on the 23 Verizon systems until HT’s new systems were hlly tested and 24 operational. These violations significantly harmed TWTC and HT’s 25 other customers. 10
7 Id., pp. 53-57, ’ HT’s ALlgust 3 1,2007 Final Position Statement, HPUC Docket No. 2006-0400, p, 21, Id.. p. 7, ‘‘Time Warner Telecom of Hawaii, L.P., dba Oceanic Communicatiom’ Post-hearing Brief, HPUC Docket No. 2006-0400, November 9,2007, p. 2. (footnote omitted). The texf of the brief contains a detailed description of HT’s numerous failures in connection with providing wholesale service after acquiring the Verizon exchanges, and the adverse impact that the failures had on Time Warner and its customers. Another CLEC, Pacific LightNet, Inc., filed a Post-hearing Brief asserting that die flawed transfer of operations caused it to incur additional expense to resolve interconnection problems and billing mors.
7 2009-11-16 16:53 703-696-2960 >> 304 340 0325 P 14/40
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 In summary, the applicants in the Hawaii sale promised a seamless transition to
2 HT’s back office systems, but the record in that case - including HT’s own
3 pleadings -- shows that both wholesale and retail customers suffered significantly
4 from the failure of automated systems, dropped calls, long call answMng and
5 holding times, billing errors and costly manual efforts to correct the deficiencies.
6 HT was not able to track repair and installation times, so that data for these
7 critical service quality metrics could not evm be assessed in determining the 8 adverse effects of the transition to HT’s systems.
9
10 On December 1, 2008, RT filed for Chapter 11 bankruptcy protection.” The
11 public explanation for the bankruptcy was the impending inability to refinance its
12 debt, but the costs and lost customers resulting from HT’s poor service quality 13 probably contributed to the Company’s inability to service its debt.
14 15 Q. PLEASE DESCRIBE VEIUZON’S SALE OF NEW ENGLAND 16 OP’ERATIONSTO FAIRPOINT.
17
18 A At the beginning of 2007, FairPoint was an incumbent focal exchange
19 telecommunications company with about 330,000 access lines. In that year,
20 Verizon New England, Inc., Fairpoint, and affiliated finns announced a planned
21 $2.4 billion transaction, generally similar to that proposed in West Virginia, under
“ See Hawaiian Telcom Communications, Inc., Securities and Exchange Commissiou Form 8-K filed December 1,2008, and HT’sDecember 1,2008 Press Release contained in that filing.
8 2009-11-16 16:53 703-696-2960 ).> 304 340 0325 P 15/40
DoD/FEA Exhibit 1 Direct Testimony of Charles W, King
1 which Fairpoint would obtain Verizon7s landline businesses in Maine, New
2 Hampshire and Vermont.
3
4 The proposed transaction was controversial and the implementation of the sale
5 was seriously flawed. In Vermont, for example, the Public Service Board initially
6 denied the application. The petitioners submitted a revised proposal in which
7 they improved the transaction fiom the standpoint of ratepayers in several ways.
8 The revised proposal bettered Fairpoint’s financial standing after the acquisition
9 by substantially reducing the initial debt and decreasing dividends. In addition,
10 the proposal was revised to include a Performance Enhancement Plan, which was
11 designed to prompt more investment and improve service quality by mandating
12 that FairPoint set aside funds when it fails to meet certain specified service
13 standards. Also, Fairpoint agreed to an independent monitor of the transition
14 from Verizon’s systems to its own, with the objective of making the transition
1s more seamless and firther safeguarding coxxmners.’’
16
17 The Vermont Public Service Board approved the transfer with additional
18 conditions on February 15, 2008. l3 Following the transaction, there began EL series
19 of “cut-over” problems that are still not fully resolved. Indeed, service
20 deteriorated to the extent that the Board instituted an investigation into whether
21 the Coiiipany should be allowed to continue its operations in the state if it cannot
~
l2 Vennont Public Service Board Docket No. 7270, Order entered February 15,2008. 1..
9 fU3-0YO-LYOU .. 3U4 34U U3L3 Y 10/4U DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 overcome its customer service, billing and operational problems. Fairpoint is
2 scheduled to file testimony in that docket December 8, 2009.14
3
4 On July 1, 2009, Fairpoint's new CEO, David Hauser, candidly acknowledged
5 that Fairpoint's reputation has been damaged by operational problems following
6 the takeover of Verizon's northern New England lmdline telqhone and Intenlet
7 business. Attachment C to this testimony is a complete copy of Mr. Hauser's
8 statement.
9 On October 26, 2009, FairPoint announced that it had filed for Chapter 11
10 bankruptcy protection.15 On the same date, the Maine Public Utilities
11 Commission stated that it had retained special bax.lknrptcy counsel and that the
12 Commission will participate in the federal proceedings to protect the interests of
13 Maine's ratepayers. The Commission continues to analyze and monitor the
14 company's customer service and back office systems performance. Moreover, the
15 Commission has conducted meetings with Fairpoint's management, as well as
16 with staff and counsel of the public regulatory agencies of New Hampshire and
17 Vermont, subsequent to the announcement of voluntary reorganization.
18 Q. WHAT IS THE LESSON FROM THESE PREVIOUS VERIZON SPIN-
19 OFFS?
~~ '* Vermont Public Service Board, Docket No. 7540, Petition of Vermont Department of Public Service for an Investigation and for an Order Directing.. .Fairpoint Communications to Show Cause Why its Certificate of Public Good Should Not be Revoked, Order Extending Schedules, entered November 13, 2009. ''FairPoint Fonn 8-K,filed with the Securitiw and Exchange Commission, Octotcr 26,2009. ' See http://www.m~ine,gov/toolslw1~atsncw/i~dex.php'?topic=puc-pressreleases&id=8 3655&v .
10 fu3-wo-Lyeu >> 5U4 54U U5L3 Y 'I//4U DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 A. Both the Hawaii and the Fairpoint transactions were described as seamless and of
2 no hann to consumers, much as this transaction in West Virginia bas been
3 described by Frontier and Verizon. Events proved otherwise in each case. In view
4 of this history, this Commission must view with great suspicion any statements by
5 Verizon and Frontier that there will be no impact on customers fiom the transfer.
6
7 I therefore believe it is important that this Commission establish safeguards to
8 ensure that the difficulties that arose in these previous spin-offs will not be 9 repeated in West Virginia,
10
11 OBJECTIVE OF THIS INTERVENTION
12
13 Q. DO YOU OPPOSE THIS TRANSACTION? 14
15 A. As it is now structured, I do. However, with adequate and focused safeguards
16 such as I will describe in this testimony, this transaction could be in the public
17 interest. As Frontier's witnesses state in their testimony, Frontier is a rurally
18 oriented local exchange carrier with many years of experien~e.'~It appears eager
19 to expand the scope of services offered in West Virginia, particularly high-speed
20 Internet service. To deny this transaction would be to require Verizon to continue
21 to serve exchanges it would prefer to exit and customers it would prefer not to
l7 Direct Testimony of Daniel McCarthy and 1. Michael Swatts, p. 10.
11 Lwv7- I I- IO 10;Ja IU3-bYb-LYbU >> 5u4 54u U3L3 Y lW4U
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 have. This would not be a prescription for reliable, efficient and responsive
2 telecommunications service.
3
4 Q. WHAT, THEN, IS YOUR CONCERN IN THIS PROCEEDING?
5
6 A. I am concerned that the transition from Verizon to Frontier be as seamless as
7 possible and that there be no rate increases, disruptions, or other service quality
8 losses arising fiom this transaction. In this testimony, I recommend several 9 conditions that should be imposed on Frontier and Verizon as part of the appx-oval
10 of the transaction. If these two companies are prepared to meet the commitment
11 they have made to trmsparency and seamlessness, then these conditions should be
12 altogether painless.
13
14 These conditions relate to two principal. areas of concern to DoD/FEA. The first
15 is the financial health of the West Virginia operation. The second is the
16 maintenance of adequate service quality in the West Virginia exchanges,
17
18 FINANCIAL HEALTH OF WEST VIRGlNXA OPERATIONS
19
20 Q. WHY ARE YOU CONCERNED ABOUT THE FlNANClAL HEALTH OF
21 THE WEST VIRGINIA OPERATIONS?
22 A. Some historical numbers describing Frontier will explain this conceni:
23
12 CUUY' I I' IO 10:34
DoD/FEA Exhibit 1 Direct Testimony of Charles W. Icing
Frontier Communications 9 Mos. 2004 200s 2006 2007 2008 2009 Earnings per Share $0.23 $0.60 $1.06 $0.65 $0.57 $0.37 Dividends per Share $2.50 $1.00 $1. .oo $1 .oo $1 .oo $0.75
Book Capital Structure;
Long-term Debt ($000) 4,266,998 3,999,376 4,467,086 4,736,897 4,721,685 4,898,535
Equity ($000) 1,362,240 1,041,809 1,058,032 997,899 5 19,045 428,761
Total Capital ($000) 5,629,238 5,041,185 5,525,l I8 5,734,796 5,240,730 5,327,296
Percent ages Long-term Debt 75.8% 79.3% 80.9% 82.6% 90.1 % 92.0% Equity 24.2% 20.7% 19.1% 17.4% 9.9% 8.0% Total Capital 100.0% 100.0% 100,0% 100.0% 100.0% 100 .O%
Source: Frontier SEC Forms 10-K and 10-Q
This table demonstrates that Frontier has repeatedly issued dividends well in
excess of its net income with the result that the equity portion of its capital
structure has declined from an already low level of 24.2 percent in 2004 to only
8.0 percent as of September 30,2009.
8
9 Frontier has promised to reduce its post-transaction dividend to $0.75 per share,
10 Unless earnings per share improve dramatically, this reduction will. still result in a
11 dividend greater than net income. A $0.75 dividend is more than 30 percent
12 greater than the Company's 2008 earnings per share. Moreover, as of the third
13 quarter of 2009, Frontier's earnings are down almost 20 percent from the same
14 period in 2008.
15
13 CUUY- I I- IO 10:34 /US-bYb-LYbU >> 9u4 94u u3~3 r LU/W
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 As a result of this over-generous dividend policy, Frontier’s stock price, currently
2 at about $7.30 per share, is over four times its book value. Even at the reduced
3 dividend of $.75, the dividend yield is close to 10 percent. This very high
4 dividend yield indicates that investors have little expectation of firther stock
5 appreciation, iiot a good harbinger for the fbture.
6
7 This strategy of paying sliareholders in excess of the Company’s earnings is
8 unsustainable. The book value of Frontier’s equity is now only about eight
9 percent of the total asset value of the Company. Thanks to Frontier’s very
10 generous treatment of its shareholders, the market value of its equity is
11 considerably higher, so that its market capitalization (as opposed to book
12 capitalization) is about 35 percent equity. But Frontier cannot continue
13 indefinitely to issue dividends greater than its net income because otherwise its
14 book equity will be wiped out altogether. Either Frontier must dramatically
15 increase its earnings per share or it must reduce further its dividend. If the
16 Company reduces its dividend, the market value of its stock will likely decline,
17 and the Company’s market capitalization will become as severely over-leveraged
18 as its book capitalization is now.
19
20 Frontier must change its ways; otherwise it will be unable to raise further capital.
21 Even now, Frontier bears an S&P rating of BB, beiow the level acceptable for
22 investment by pension and benefit funds. Any further deterioration of Frontier’s
23 financial condition will constrain Frontier’s access to both debt aiid equity capital,
14 /05-6Y6-2Y60>> 504 540 0523 P 21/40 DoDIFEA Exhibit 1 Direct Testimony of Charles W. King
1 and that will threaten the investments that Frontier has indicated that it will make
2 in its newly acquired West Virginia exchanges.’*
3
4 Q* WHAT WILL BE THE EFFECT OF THIS TRANSACTION ON
5 FRONTIER’S HEALTH?
6
7 A. Frontier is absorbing an entity more than twice its size:”
8 Frontier Verizon Lines ((‘SpinCo’’) 9 Lines 2,254,333 4,790,673 10 Revenues (Millions) $2,137 $4,287 11 12 There are important financial and service implications from his relationship, The
13 principal financial implication is that Frontier’s balance sheet and income
14 statement will be very significantly impacted by the debtiequity mix and
15 profitability of the newly acquired exchanges. In the near tern, the impact will be
16 quite positive thanks to the financial strength of the acquired assets. The
17 approximately 60 percent ($5,247 inillion) of the value of the transferred assets
18 ($8,580 million) will take the form of a transfer of equity. Verizon will create a
19 temporary corporation, termed “SppinCo,” the stock of which will be distributed to
20 Verizon’s existing shareholders. That stock will then be transferred to Frontier,
21 so that each Verizon shareholder will bccomc a sharcholder in Frontier. This is a
22 tax-free transaction for Frontier, Verizon and Verizon’s shareholders. The
On September 29,2009, Fitch, one of the bond rating agencies, repoited that it had evaluated 30 companies with what it termed “junk bond” ratings. It found that Frontier was among tlie tlxee companies most in danger of breaching lender requirements. On Septeiiiber 30, Fitch clarified that this assessment WRS based on the pre-merger condition of Frontier and that the merger will iinprovc that coiidition. I9 Presentation of Frontier Communications at the Barclays Capital Worldwide Wircless and Wireline Conference, May 2009, pp. I9 and 24.
15 LUUY-’I’l-’I6 ‘lb:!34 (U5-6Y6- ZY6U >> su4 54u U5L3 IJ LL/4U
DoD/FEA Exhibit 1. Direct Testimony of Charles W. King
1 remaining 40 percent ($3,333 million) will be debt (or debt relief) that the new
2 entity, Spinco, will pay to Verizon.’’
3
4 The result of this transaction will be a Frontier that is considerably less leveraged
5 than the existing company. Its equity proportion of total market capitalization
6 will increase fiom 35 percent to 49 percent, and its debt proportion will fall
7 correspondingly fiom 65 percent to 5 1 percent. The ratio of net debt to Earnings
8 Before Interest, Taxes, Deprecation and Amortization (“EBITDA”)will decline
9 fiom 3.8 times to 2.2 times. Other ratios will improve as well, although not quite
10 so dramatically. For example, the ratio of EBITDA to total revenue will increase
11 fiom 54.3 percent to 55.7 percent, and the annual free cash flow per share of stock
12 will increase from $1.58 to $1.75.
13
14 Q4 WILL THESE IMPROVED FINANCIAL RATIOS ALLEVIATE YOUR 15 CONCERN ABOUT FRONTIER’S FINANCIAL HEALTH?
16
17 A. No. From the standpoint of ratepayers, the improvement in Frontier’s financial 18 condition is not particularly relevant. What is relevant is Frontier’s financial
19 condition following the transaction relative to Vexizon’s financial condition now.
20 Fronticr has an S&P rating of BB compared with Verizon’s rating of A, and there 21 is no indication that this relationship will change after the transaction. Following
22 the transaction, Frontier will have B market equity capitalization of $7.7 billion
2o Id., pp. 15 and 19. Luu7- I I- 10 10;3L) NS-bYb-CYbU >> 5u4 54u U5L3 Y L5/4U DoDIFEA Exhibit 1 Direct Testimony of Charles W. King
compared with $86.0 billio? for Verizon. Frontier will have a revenue margin
over EBETDA of 55.7 percent.” Verizon currently has a revenue margin of 92.1
percent.” The West Virginia exchmges transferred to Frontier will be leaving a
4 strong, well-capitalized company and joining a company with a lower bond 5 rating, a highly leveraged capital structure and much weaker financial. ratios.
6
7 Additionally, I am concerned that the improvement in Frontier’s financial.
8 condition will. serve merely to perpetuate the past pattern of paying shareholders
9 more than the earnings of the Company. Unless Frontier is willing to limit its
10 dividends to the level of earnings per share, it will again erode its ability to raise
11 capital for the investments needed to expand services to its customers in West
12 Virginia.
13
14 Q. WHAT CAN THE WEST VIRGINIA COMMISSION DO ABOUT THIS
15 SITUATION?
17 A. I doubt that the West Virginia Commission is interested in micxo-managing
18 Frontier, or that it wishes to dictate the aation-wide financial policies of the
19 Frontier Communications Corporation. The Commission’s focus is on
20 tdecommunicatioiis services in West Virginia.
21
’’Frontier Presentation at Barclays Capital Worldwide Wireless and Wireline Conference, May 2009,p. 19. Also the source of the $7.7 billion market equity value. ” Verizon Form 10-Q,September 30,2009.
17 LUUY- I I‘ IO lo:>+ 703-696-2960 >> 304 340 0325 P 24/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. Ung
1 The West Virginia exchanges transferred from Verizon to Frontier will be served
2 by a Frontier subsidiary successor to Verizon to be named Frontier of West
3 Virginia. Frontier of West Virginia will prepare balance sheets, income
4 statements and cash flow statements The income statements will identify the
5 income for the previous year. The cash flow statements will identify the
6 dividends that the subsidiary pays to its parent.
7
8 I can suggest two actions the Commission might take. The first is to condition
9 approval of this transaction on a requirement that the subsidiary serving West
10 Virginia will not in any year issue dividends from its West Virginia operations
11 that exceed the level of its West Virginia net income in the previous year. This
12 provision will help keep West Virginia secure froin any raid by tho parent
13 company on the cash generation of the subsidiary serving the state. In a small
14 way this condition may also discourage the parent company fiom distributing
15 more dividends to its shareholders than it earns from its operations. If there are
14 no service quality problems after the first three years following the completion of
17 the transaction, then the Commission’couldsuspend this limitation.
18
19 The second proposal is to tie the resolution of the two concerns 1 Iiavc with this
20 transaction - financial and service quality - together. The Commission can
21 condition any dividend from rile West Virginia operations on Frontier’s meeting
22 the service quality thresholds in Verizon’s Retail Seiwice Quality Plan (“RSQP”)
23 that it adopted in Case No. 08-0761-T-GI. The sme condition should apply to
18 703-696-2960 >> 304 340 0325 P 25/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 Frontier’s meeting its obligations in the Carrier-to-Carrier ((‘C2C’’) Guidelines
2 mid Performance Assurance Plan (“PAP”). These provisions will help keep
3 Frontier from draining cash out of West Virginia when it is clear that Frontier
4 needs to devote more resources to the state. This provision, too, should remain in
5 effect for at least thee years following the closing of the transaction.
6
7 These two requirements can be enforced by periodic audits and the application of
8 the Commission’s existing general powers to enforce its orders.
9
10 Q. ARE THERE ANY PRECEDENTS FOR THESE REQUIFtEMENTS?
11
1.2 A. Yes. The first restriction - 1-10 dividends in excess of net income - is similar to
13 that imposed by the Oregon Public Utilities Commission when it approved the
14 merger of CenturyTel, Inc. and Embarq Corporation on May 11,2009. The exact 15 language of the Oregoii restriction is as follows:
‘1 6 At any time when the condition in subsection (i) [below] exists, the 17 Operating Companies of the merged company will limit payments of 18 dividends on cominoii equity distributed to any company (including 19 affiliates aiid subsidiaries) of [Frontier] holding shares of the operating 20 companies in any year to an amount not more than 50% of net income in 21 the preceding fiscal year. The Operating Companies will limit payment 22 of dividends on common equity in any quarter, if dividends are 23 distributed quarterly, to not more than one-fourth of the annual limitation 24 amount. 25 26 (i) The average market vdue of [Frontier’s] common equity is less than 27 50 percent of the book value of [Frontier’s] net debt. The average 28 market value of [Frontier’s] common equity will be calculated using 29 the average stock price and the average number of fully-diluted shares 30 outstanding during the preceding 120 calendar days. As used in this 31 section, ‘bet debt” means total long-term debt less cash. This test will
19 LUUY- I I-lb ‘lb:33 703-696-2960 >> 304 340 0325 P 26/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
be calculated prior to the determination of each declaration of dividend, whether quarterly, special, or
As regards the second restriction - no dividends if service quality is inadequate -
5 there is precedent relating directly to Frontier. Last year, Frontier, the New York
6 Commission Staff and the Consumer Protection Board signed an agreement
7 whereby Frontier’s New York subsidiary would not be allowed to issue dividends
8 to its parent if its service quality fell below certain levels specified in the
9 agreement. This provision was among a number of conditions relating to finances,
10 corporate governance and reporting. It replaces a much more restrictive regime 11 known as the “Open Market Plan” that was adopted when the Rochester
12 Telephone Company merged with other corporate entities to form Frontier
13 Communications. 24
14
15 Q. ARE THERE ANY OTHER CONCE’RNS REGARDING FRONTIER’S 16 MNANCES?
17
18 A. Yes. As I have noted, the $0.75 dividend that Frontier proposes to pay to its
19 shareholders still exceeds its 2008 earnings per share by about 30 percent, and it
20 appears it: may exceed 2009 earnings by a yet larger margin, Frontier is therefore
21 under fairly severe pressure to increase its earnings. This pressure could result in
23 Oregon P.U.C.Order No. 09-169, May 11,2009,Appendix B, SGC. 4j. 24 A copy of this agreement is Attachment D to this testimony.
20 703-696-2960 >> 304 340 0325 P 27/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1. a campaign of rate increases that would burden ratepayers who remain dependent
2 on Frontier’s landline services.2s
3
4 Q. WHAT CAN THE COMMISSION DO TO AVERT THIS OUTCOME?
5
6 A, I reconmend that the Commission condition approval of the transaction on
7 Frontier’s comrnitmcnt not to increase rates for a period of three years following
8 the transaction. This condition could be waived in cases offorce majeure or if
9 Frontier presented persuasive evidence that it imposes an undue burden on the
10 Company that threatens the quality of its services.
11
12 SERVICE OUALlTY CONCERNS
13
14 Q. WHY ARE YOU CONCERNED ABOUT THE SERVICE QUALITY
15 RESULTING FROM THIS TRANSACTION?
16
17 A. As noted earlier in my testimony, the two recent large Verizon spin-offs have
18 resulted in severe service quality degradation. I am concerned that this pattern not
19 be repeated in West Virginia following the Verizon-to-Frontier transition. This
20 concern is amplified by the following service quality indicators published by the
21 Federal Communications Commission (“FCC”):
22
~ 2s Transaction costs associated this transfer add a further incentive to increase revenue. The recovery of these costs from ratepayers in most cases would be inappropriate because ratepayers arc not responsible for them. These costs would not be incurred were it not for the transaction.
21 cwu7- I I - IO lo:>> 703-696-2960 >> 304 340 0325 P 28/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 Nationwide West Virginia 2 Frontier Verizon Frontier Vcrizon 3 1. Installation Interval (days) 4 Business Lines 5.9 1.9 6.6 2.1 5 All Lines 5.6 1.7 5.9 1.1 6 2. % Local Installation Commitments Not Met 7 Business Lines 4.3% 2.8% 8.8% 4.2% 8 All Lines 3.7% 1.7% 10.4% 2.9% 9 3. Trouble Rmorts #er Month per 100 Lines 10 Business Lines 1.58 0.77 1.90 0.87 11 All Lines 2.78 1.63 3.83 2.78 12 4, Repeat Out of Service Trouble Reports as a Percentage 13 Of Initial Out of Service Trouble Reports 14 Business Lines 13.4% 13.7% 16.5% 12.5% 15 All Lines 16.9% 15.5% 18.9% 19.3% 16 5. Out of Service Reaair Interval (hours) 17 Business Lines 21.3 18.9 22.8 17.4 18 All Lines 24.2 35.5 26.8 68.2 19 20 Source: 2008 FCC ARMIS 43-05 Reports. The Frontier observations are the simple 21 average of indications for the three Frontier subsidiaries reporting in West 22 Virginia. 23
24 In every case but two, Frontier scores worse than Verizon both nationally and
25 within West Virginia. These comparisons do not bode well for the service quality
26 that can be expected following the transfer of Verizon’s West Virginia operations
27 to Frontier. They are of particular concern in West Virginia where Frontier
28 proposes to appoint its own management team to oversce the previous Verizon
29 operations26 It also plans to abandon Verizon’s back office operating support
30 systems in favor of its own.
31
26 Testimony ofDaniel McCartliy and J. Michael Swatts, pp. 43-44.
22 cww7- I I’ IO 10;33 /US-bY6-LYbU >> 5u4 540 U5L3 P LY/4U DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
FRONTIER WITNESSES McCARTHY AND SWATTS ARGUE THAT
FRONTIER WILL NOT ENCOUNTER THE SERVICE PROBLEMS
THAT PLAGUED THE TWO PREVIOUS VERIZON SPIN-OFFS. WHAT
IS YOUR RESPONSE?
5 A. The position of these witnesses is that Frontier is already a substantial operating
6 company with established billing, operational and custoiner service systems in 7 place. According to the witnesses, Frontier’s new service territories will be
8 transferred seamlessly and without any deterioration in service quality.*’
9 I very much hope Messrs. McCarthy and Swatts are correct. However, the reality
10 is that Frontier is proposing to cut over all of Verizon’s West Virginia billing,
11 operating and customer service systems, which are not the same as Frontier’s,
12 over to Frontier’s systems. This same’plan was followed by FairPoint in northern
13 New England with disastrous results that were costly and highly disruptive to both
14 retail and wholesale customers.
15 Another concern relates to plaxming. In response to a data request, Frontier stated
16 that it had no detailed capital budget for the year 201 0.28This is ominous because
17 most utility companies have capital budgets five years out If Frontier has no plan
18 for capital expenditures, the Commission should question the seriousness of its
19 promise to increase greatly the proportion of West Virginia subscribers with
20 access to the Xntemet.”
27 Id., pp. 34-35. Attachment E is a copy this data request and its response. ’‘)Joint Testimony ofDaniel McCutiiy and J. Michael Swatts, p- 15.
23 LUWY’ I I’ IO 10:33 fU5-6Y6-ZY60 >> 304 340 0523 P 50/4U
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
Fox these reasons, it is important for the West Virginia Commission to monitor
Frontier’s service performance. To be a deterrent against service degradation, the
Commission should be prepared to impose sanctions if service performance
deteriorates.
5
4 Q* DOES THE WEST VIRGINIA COMMISSION HAVE ESTABLISHED 7 SERVICE QUALITY STANDARDS FOR VERIZON?
8
9 A. Yes. In Case No. 08-076l-T-GI,the Commission adopted the RSQP for Verizon.
10 This plan establishes a series of services quality standards and mctrics that went
11 into effect on July 1, 2009, become tighter on July 1, 2010 and tighter again on
12 January 1, 201 1. Frontier has agreed to abide by the terms of this plan.30 For
13 wholesale services, there are the C2C and PAP with which Frontier has also
14 committed to comply.”
15
16 Q. HOW ARE THESE STANDARDS ENFORCED?
17
18 A. The Verizon Retail Service Quality Plan establishes a system of customer credits
19 that increase over the three phase-in dates.
20
21 Q. WHAT ADDITIONAL ENFORCEMENT MECHANISMS COULD YOU
22 SUGGEST IN ADDITION TO THOSE CUR.IU3NTLY IN THE RULES?
30 Id., p. 38. 3‘ id.,p. 37.
24 CUUY- 1 I -'I6 lb:33 703-696-2940 >> 304 340 0325 P 31/40
DoDlFEA Exhibit 1 Direct Testimony of Charles W. King
I A* As an initial. step, I have already recommended that as a condition of approving
2 the transaction, the Commission adopt the mechanism currently in place for
3 Frontier in New York State. If the service quality metrics currently being
4 reported to the Commission fall. below those specified in the RSQP, C2C or PAP
5 during any quarter, then the Frontier subsidiary operating in West Virginia will be
6 precluded from issuing dividends to its parent in the following quartex. Of course,
7 the Commission can excuse the Company from these provisions if it can
8 demonstrate that it was not responsible for the failure to achieve the service
9 quality thresholds.
10
11 Q. ASIDE FROM DIVIDEND RESTRICTIONS, WHAT FURTHER 12 SANCTIONS SHOULD THE COMMISSION IMPOSE IN ORDER TO 13 ENSURE ADEQUATE SERVICE QUALITY?
14
15 A. There are thee types of sanctions which the Commission could impose for poor
16 service quality:
. 17
18 1. Require annual credits to the bills of all Frontier customers for Frontids
19 failure to meet service standards state-wide for a consecutive number of
20 months, or for a total number ofmonths during a year.
21
25 LUUY-11-16 16:35 703-696-2960 >> 304 340 0325 P 32/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W, King
I. 2. Impose a fine on Frontier, payable to the Commission or to the state
2 treasury, as appropriate, for its failure to meet service quality standards for
3 a certain consecutive or total monthly period during a year.
4
5 3. Require credits to Frontier’s customers on a customer-by-customer basis
6 for failure to meet a Commission-mandated provisioning or restoration
7 standard in a particular instance, with a credit applied to the bill following
8 the failure,
9
10 The first approach would provide an incentive to Frontier to provide service
11 according to the prescribed standards. The disadvantage, however, is that the
12 annual credit is spread over the general ratepayer base and may be seen as
13 inadequate for customers who experienced severe problems. Moreover, because 14 the credit is annual, a customer who experienced problems may have moved or
15 changed carriers by the time that the credit is issued. In that respect, the benefit is
16 received by ncw customers whose service was not affected negatively. The
17 approach would be of value in a situation where service problems are extended
18 and severe, and the credit is large in amount, because the action would heighten
19 public awareness of the carrier’s service deficiencies and bring pressure to
20 improve.
21
22 The second approach - payment of penalties for failure to meet service standards
23 - has merit as an incentive to the carrier to meet the designated smice criteria.
26 /05-6Yb-ZYb0 >> 304 340 0325 P 33/40
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 The approach, however, provides no coinpensation to customers who received
2 poor service. Rather, it is a punishment that reduces the carrier’s earnings and
3 generates negative publicity if the finc is issued in a significant amount,
4 Frontier’s failure to provide service quality reports fox ai extended period is the
5 type of situation that this approach should encompass. This approach could be
6 combined with the prior approach in egregious situations to preserve the
7 Commission’s processes and orders while making whole the affected customers.
8
9 Arguably most appropriate is the third approach - immediate credits to individual
10 customers’ bills, Customers who do not receive the quality of service according
11 to the standard that the Coinmission specifies should not be expected to pay full
12 price for what they received. This approach - which has been adopted elsewhere
13 for both retail and wholesale customers - provides a financial incentive for
14 Frontier to provide high quality sewioe, and the beneficiaries of the credit are the
15 individual customers who suffered. Irnportaintly, the immediate nature of the
16 credit guarantees that the customer directly affected receives the hull. benefit of
17 Frontier’s obligation to redress service failures, Appropriately, this foxm of
18 sanction is already embedded in the Retail Service Quality Plan.
19
20 I recommend that the Commissioii monitor closely Frontier’s service quality
21 performance under the RSQP, C2C and PAP, as well. as those measured by the
22 FCC’s ARMIS program. If service quality begiiis to deteriorate, the Coininission
27 CLJUY’ I I- I6 ‘l6:36 703-696-2960 >> 304 340 0325 P 34/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 should open a special proceeding to determine the causes and to consider remedial
2 action, including additional sanctions.
3
4 FURTHER PROTECTIONS
5
6 Q* ARE THE SAFEGUARDS YOU HAVE RECOMMENDED FULLY 7 ADEQUATE TO PROTECT CUSTOMERS FROM SERVICE
8 DETERIORATION?
9
IO A. No. The safeguards I have recommended are probably adequate only so long as
11 Frontier is a healthy, fully functional provider of local. exchange
12 telecommunications services. But if Frontier’s financial condition deteriorates in
13 similar manner as Hawaiian Telcom and Fairpoint have deteriorated, tliese
14 protections will be of little value from tho customers’ standpoint. The limitations
15 on dividend payments would be irrelevant when there is little or no net income
16 from which to pay dividends. The fines and credits for poor service would off=
17 little incentive to improve performance when there is no money to fund the
18 improvements. Indeed, the sanctions would only aggravate the Company’s
19 deteriorating finmciail condition.
20
21 Q. HOW MIGHT THE COMMISSION SAFEGUARD CUSTOMERS 22 AGAINST THE mssmrr,Im OF FRONTIER’S BANKRUPTCY? 23
28 cwu7- I I’ IO 10;30 /U3-bYb-ZYb0 >> 504 540 0523 P 35/40 DoD/FEA Exhibit 1. Direct Testimony of Charles W. King
1 A. If Frontier’s financial condition deteriorates, it will likely be the result of the
2 failure of the back office functions to perform properly. That was certainly the
3 case on the Hawaiian Telcom and FairPoint spin-offs.
4
5 One of the more disturbing aspects of this transaction, as with the previous
transactions, is the extent to which Verizon walks away fkom it after it is consummated. Once the transfer is completed, Verizon will take no further
responsibility for the performance its previous subsidiary.
9
10 1 recommend that the Commission challenge Verizon’ s lack of responsibility for
11 the exchanges it is transfening to Frontier, The Commission should require that
12 Verizon continue its involvement with Frontier’s performance - financial and
13 operational. The length of that involvement would depend on the effectiveness of
14 Frontier’s operations, management and financial arrangements. Only when
15 Frontier has demonstrated that it can provide adequate service to its customers in
16 West Virginia should the Commission let Verizon “off the hook” for its former
17 operations in the state, This commitment by Verizon should also continue until
18 all of its systems and programs have been successfully transitioned over to
19 Frontier’s own back ofice operations and Froiitier has demonstrated that it can
20 handle its greatly expanded footprint in West Virginia.
21
22 There are a variety of ways that this involvement could be maintained. Among
23 the possibilities are:
29 LUUY- I I - IO ‘14:36 /U5-6Yb-ZYbU >> 504 540 0523 P $6/4U DoWFEA Exhibit 1 Direct Testimony of Charles W. King
1 0 Require Verizon to operate its back office systems in parallel with those of
2 Frontier until Frontier’s own systems have proved to be reliable and
3 efficient.
4 4 Require Verizon and Frontier jointly to plan and execute the cutover of
5 former Verizon systems to Frontier’s systems, take joint responsibility for
6 any necessary corrective actions, and assume joint liability for sanctions
7 that may be imposed for service problems resulting from the cutover.
8 e Require Vexizon to compensate Frontier and its customers for
9 inadequacies in its data files that result in failures of Frontier’s systems.
10 e Require Verizon to retain a portion of the stock in “SpinCo” that it would
11 otherwise distribute to its shareholders.
12 b Condition the transfer of the West Virginia operating authority on
13 Frontier’s performance and financial health so that if conditions
14 deteriorate, the authority reverts to Verizon.
15 e Prior to the integration of the back office operation into Frontier, require II
16 third party certification that it fully replicates all hnctionalities provided
17 by the Verizon system(s) it will replace.32
18
19 Each of thcse alternatives could involve significant operational, financial and
20 possibIy legal complications. For this reason, I do not specifically recommend
’’ In approving this transaction, the South Carolina Public Service Commission imposed the condition thnt Frontier notify it of each change or xepracernent of former Verizon systems and provide it assurance that all systems have been tested and certified bcfote any irreversible cutover is made. South Carolina Public Service Commission Docket No. 2009-22042,Order No. 2009-769 Approving Transfer of Assets, Authority, and Certificates, October 29, 2009, p. 21, decretal 710. h.
30 LUUY’ 11- IO lb:m
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 any one or a combination of these approaches. Nor do I suggest that this is a
2 complete list of alternatives. There is, however, one contractual obstacle that
3 must be eliminated, and that is the “make whole” provisions of the agreement that
4 require Frontier to compensate Verizon for any added costs or obligations
5 Verizon experiences as a result of any commission’s regulatory action.33 This
6 aspect of the agreement would make any conditions imposed on Verizon self-
7 defeating by shifting Verizon’s financial burden back onto Frontier and Frontier’s
8 customers. The Commission should not approve the transaction if it contains
9 these provisions,
10
11 I recommend that the Commission require the joint parties themselves devise and
12 present a mutually acceptable and workable arrangment that will preserve
13 Verizon’s involvement and responsibility through the successful integration of
I4 Verizon’s systems into those of Frontier. The objective should be to maintain
15 Verizon as an operational and financial “safety net” until the transaction is fully
16 implemented and Frontier has demonstrated that it can provide efficient, reliable
17 service and that it retains sufficient fiiiancial strength to filfill its service quality
18 md perfomance assurances including broadband depl~ynent.~~The plan should
19 spell out the responsibilities of cach party, the fair distribution of any costs, and
20 their respective liability for any penalties, refix& or othcr sanctions that may
21 result from Coinmission action. A sharing plan that imposes all responsibility,
______33 Frontier Corp. Prospcctns, Form 424B3,filed with the Securities arid Exchange Commission on September 16,2009, Mary Agnes Wildcrofter cover letter to Frontier Shareholders, p.1. 34 Verizon’s involvement should terminate only after the Commission has solicited commcnts and has determined affiimatively that Frontier’s assmnces have been fldfilled.
31 LUUY- I I- IO ‘Ib:36 /U5-6Y6-ZY6U >> 504 54u 0523 P 55/40 DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 costs and liability on Frontier will not be a~ceptable.~~The plan should be 2 submitted for Commission approval after interested parties have had an
3 opportunity to provide comments.
4
5 SUMMARY OF RECOMMENDATIONS
6
7 Q. PLEASE SUMMARIZE YOUR RECOMMENDATIONS. * 8
9 A. In this testimony, 1have recommended that:
10
11 ’ e The Commission prohibit Frontier West Virginia from issuing dividmds
12 to its parent that exceed the level of net income earned in the previous
13 period.
14
15 e For at least the first three years following the closing of the transaction, if
16 any of the standards and requirements in the RSQP, C2C or PAP are
17 below their prescribed levels during any quarter, then Frontier West
18 Virginia be constrained from issuing dividends to its parent company in
19 the following quarter.
20
35 The costs of this “safety net” are not appropriately the responsibility of ratepayers. But for the sale of thcsc cxchangcs, thc~ccosts would not havc beeu incun-cd.
32 LUUY’ I I- IO 10:30 N5-6Yb-LYbU >> 5u4 54u U5L3 Y 5Y/4U
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
The Commission condition approval of the transaction on Frontier’s
corninitment not to increase rates fox a period of three years following the
transaction.
5 The Commission monitor closely Frontier’s service quality pexfomance,
6 and if it begins to deteriorate, open a specid proceeding to determine the
7 causes and to consider remedial action, including additional sanctions,
8
9 e The Commjssion disallow the provisions in the agreement between
10 Frontier and Verizon that require Frontier to coinpensate Verizon for any
11 costs resulting fiom conditions imposed by regulatory agencies.
12
13 The Commission require the joint parties to devise terms and conditions
14 acceptable to both that will maintain Verizon’s involvement and
15 responsibility through the successful integration of Verizon’s systems into
16 those of Frontier and until Frontier has demonstrated that it can provide
17 efficient, reliable service and that it retains sufficient financial strength to
18 filfill its service quality and performance assurances including broadband
19 deployment.
20
21
22 Q. DOES THIS COMPLETE YOUR TESTIMONY?
23
33 LlJU7’ 11- IO 10:10
DoD/FEA Exhibit 1 Direct Testimony of Charles W. King
1 A. Yes, It does, although I should note that there are some aspects of this transaction
2 that I have not addressed. These include SUG~issues as the likelihood of cost
3 savings fiom the transaction or the quality of the broadband services that Frontier
4 offms. My silence: on such issues does not mean that they we not important to
5 DoD/FEA or that DoD/FEA will not address them later in this proceeding.
34 2009-11-16 16:57 703-696-2960>> 304 340 0325 P 1/38
OEPARfMENT OF THE my UNITED STATES AWVLEGALSERVICES AGENCY 901 NORM STUART STREW ARUNoWN VA 222Q31887 Regulatory Law Office WLYro A~KFIONOF Facsimile Transmission Cover Sheet
DEPARTMENT OF THE ApMy Office of the Judge Advocate General
STEPHEN 5. MELMKOFF Principal Telecornrnunlcatlons Trial Caunrel
Regulatory Law Office tel: (703)696.1 643 US, ~rmyLltlgation Center Fax; (703)696-2980 901 N. Stuart Street, Sulte 700 Arlington. VA 22203.1837 siephen.rnelniN0i10 hqda.army.mil Charles W. King Attachment A
In Canada, Mr. King designed and directed an Experience extended inquiry into the principles and procedures for regulating the telecommunication carriers subjsct to the jurlisdiotlon of the Canadian Transport Commission. We Snavely King Majoros U’Connor also was the principal Investigator in the Canadlan & Lee, Inc. Transport Commission’s comprehensive review of ‘rail Washington, DC eostlng procedures. President (7989 to Present) EBS Management Consultants, Inc., Vice President (1970 - 798G) Washington, DC Mr. King, a founder of the firm and acknowledged Director, Ecorlomic Development Dep a rfment author& on regulatory economics, brings over thlrty (f 968-?970) years af experlenke in ’ economic consulting to hls direction of the firm’s work in transportation,, utility and Wlr. King organlred and directed a fivapersan staff of telecornmunlcations economics. emonomlsts . performing resehrch, evalualatl, Bnd plannlng relatlng to economic development of Mr. Klng has appeared as an expert witness on over depressed areas and cammunities wlthin the US. 300 separate occasions before more than hlQ state Most of this work was on behalf of federal, state. and and nine U.S. and Canadian federal regulatory munklpal agencies responslble for community or agencles, presenting testimony on rate base regional econnamlc development calculations, rate of return. rate design, wfhg methocjology, depreclatbn market forecasting, and Prin cip 81 Consulfanf(f9 SS~ISSS) ratemaking principles. Mr. King has also testified before House and Senate Comrnlitetess on energy and Mr. Klng conducted research on a broad range of telecommunications legislatbn pending before the US. .ecanomlc topics, Including transpar2ation, regional congress. economic development, communications, and physicet dlstribution. In telecommunications, Mr. Klng has testifled before the Federal Communications Commisslon on a number of W.B. Saunders & Company, Em., pdicy Issues. service authorization, competitive Washhgton, impacts, vldea dialtone, and prescription of interstate DC depreclatlon rates. 86fOre state regulabty badles, he Staff €CO~OI?M(.19624986) has presented testlmony In proceedings on Intrastate retes, msts earnings and depreciation. For this economic consulting firm, which later merged with EBS Management Consultants, Ira.. Mr. Kin$ Mr. King has testrfisd in eleclrk, gas and water utility engaged in numerous research efforts relstlng primarily 0868s on virtually every aspect of regulation, including to economic development and transportation. cast of capital, mvenue requirements, depreclatlon, oosl allocatlan and rate deeign. Mr. Wng Is one of the US. Bureau of the Budget, Office of nation’s teadlng abfhoritles on utlllty deprcdatlon practioes, having testifled on this subject in several Statlstlcat Standards dozen cases befo!Y! state regulatory bodles. Analyf;cd Stafistioian (.I961-1962)
In addftlan to his appearances 8s 8 witness In judlcial Mr. Klng was responslble for the review of all and administrative proceedings, Mr. King ha$ federal statjstical data-gathering programs negotiated settlements among private parties and and to transporhtlon. between private patties and regulatory offices. Mr. relating Klng also has dkeotsd diprecIst10n studies, Investment Wbsl benefit analyses, demahd forecash, cost Education allocation studies and anillrust damage calculations. Mr. King directed analyses of the prioes of services Washhgtoon 13 Lee University,g.A. in Ecor@gfcs under Federal Government’s FTS2000 long distance “s system. ‘ CHARLES W. KING Attachment B $mQKing MajomUConnor & lm, Inc, Page 1 of 15 1220 LStreet, N.W, Sulte 410 Wasliingbn, O.C. 2130[15 (2a2) 371-llll Appearancss befom State Regulatory Agencies
State Case Date of Cross-Examination clrent
Case Number UflIiQr
AK ExxonUSA ?-841,2 Trans Alaska Pipeline System aCtdber 18,1990
A2 AmaCorporalion Commission U-f345[ Arizona Publjc Smice Co. December lS,lg80 Arizona Retailers Assaclation u-1345-ll Mzona PublicServlce cd. January 15, fB81 -~ California Retailers Assoclatim 51666 PaoiRc Gas & Eleaic co. March 6, IS76 CalhlaRelailsrs Assodalion 57602 Southern Califamla Ediroo pprll25,1978 CA Cslifornla Rebailers kwdalian 59351 PaMc Gas & Electric Co. June 12,1981 CallfDmia Retailers 8 CaiWnmTa Manulmrers 5935 1 Saudhtrrn Cafiirnia Edbon MayZO, $982 Y Califomla Retailers Assoclalbn 61138 Southern Califanla Edkcm May 26,1982 C b .. I 0 u. s. oeparbnmtnl d Defense I&s 1too Cdorado Springs (Elec) June 14,1977 rc JC.Panney Compny 56% All EkddG u#%b$ March 8,1976 P US, Depabnent of Defense !&s 1338 Spiinga DPU {Gas) Octohes 16,1979 n Cotoradd U CO W. S. flepai-bnentuf Defsnse lsls 7640 WOtW Sprltlgs DPU (a) February9,1982 0 U.S. Deparlment of Defense c. cwndl aomdosp~ow (W) S~tember30,1984 c U.S. Deparbnent of Defwrse c. council Calorad~Spdngs DPU (Bec) &ll86,1985 V U.S. Department of Derense C. Council Colorado Springs DPlt (Elec) May 19,1986 V US. Oepament of Defense C. &unci1 Wwado Sprirrgs DPU @ec) June 30,1887
! CF Retajlers Merchants ksociatiori 72-0204 Various Eeclric Utjiities JulyP, 1976 C Division ol Camurner Counsel 784804,5 :CL&P and H€LCO November IO, 1977 Public UMitkts Conlrd Auto 78.0303 Bddgepott Hydraulic Go. (none} CF Iljrisian of Consume? Counsei 80-W,4 CLW and HELCO Augwtil, 1880 P C DiWnof Consurns Counsel 8f-0413 'United lllumlnaiingCompany July 20,195i CT c Dtvlsion d Cawumer Camsel Sl-O-aO24 CUP and HUCO October 5,1981 CF Division of Consumer Counsel 82~01 CW September 28, 4982 n V Codihof Hottjls,AIky~8 Relaiten 0$10-22 CW Pow CXrdftJon of Hotels, Allays & Reldkers 87-07-01 cw April 25,19as CHARES w. KlNO Appearancss before Sfate Regulatory Agencies
1 Hemic, Gas, Water Utllky Caws I t 1 State Cllent
' Case Number Utillly I
, D.C. People's Counsel 885. Paaomc Elsetrlc Povrer Company illarch 0, $078 ' D.C. People's Counsd 71 5 fotomsc Eledric Power Oompasvy (none) 0.C. People's Counsel 725 mmc Wechic PowCompany Apd[ 4 1860 D.C, Peopte's Cwnsel ?3? PotDmao B~chloPower Company Jannrary I, lSSl Weshfngtan blem Area Transit Authority 748 Pobmao Eleclrie Power Cmpny June 26,198.1 Washingkoa Mew Area Tmnstt &*of@ 758 Patornac Electric Power Company 'December 15,1981 D.C. People% Cowsef 786 .PatomacEleotrlcir Campany September 21, j982 Washington Mew Area Tansit AuthorKy 758 Patamac EtecMc powctr Company Idarch 24,1884 OG D.C. Peopdek Counsel 6s Remand POtMnac EleCtriG Povtn compmy June 10, $985 D.C. People's Counsel w5 POtMnac OeCMc Power Company Augusrt 20,1991 O.C. Pwpee's Counse! 912 PofornacEledJlc Power Company May 7, I992 D4C.People's Caunsel 834, 111 'Pmmac aedrie Pawer Company May22,199? O.C. Peoplds Caunsd $17 Palomao Elearlc Pewer Company September 24,1992 D.C. People's Counsd 922 Washingbn Gas LlpMCompany June 15,1993 0.C: People's Counsel 929 Pabmsc Etectn'c Poww Company Omember 16, Z9?3 D.C, People's Counsel 934 Washh@r~ Gas Qht Company Filed April 21,1994 5.C. Pecplz's Counsel 939 Pa&~matEtMc Povrer Company March 16,1995 D.C. People's Ccurrsel 91 7 FWamac Electrk PawCompany &til 19,1995 D.C. PeQpb's &We! 957 Potamac Ekctric Power Cornpew February 20, t997 D.C. People's Counsel 945 potbmac Ekclrio Power Company Se@mber 29,3999 . D.C. Peapkk Counsel a47 Washlngtan Gas ahtCompany June 27,2007 D.C. People%Counsel 989 Washlngbn Gas Lbht Company May 22 2002 D.C. Peaplek Co~rrsel 101 6 Washinptorr Gas Ughf Cornparry SeplemM 23,2003 D.C. PmpW Cornel $053 potomac €!edrioPcwer Company June 27,2007 1 I I V 1 V Oelerva re PSC Sktf AFtesien Water Company flled March 10,1595 DE DekmPSC Staff Irvl~mlqlortSudnaban Water Company March IO, 1995 Dstawara PSC Staff 06152 u(RHies Cmpany flled July 26,2004 w I 0 .c4 79058a-Eu Ehtrtc UElii March 5,1981 w 8100024U Florida Power and Qht Company July=, 1981 .c4 azoo97-~u Rorida PcKNer ard light Company Sepbmber 22,1982 0 820097-EU Rorlda Pawer and Light Cowny April 11,1983 0 August IS, 1983 w B30012-EU Tampa EhMCornpsny N 890485EI Flodda Merand tight Company April 19, 1984 ul W0465-EI Tampa Ezsoblc Company 1I I W -P \ w & r C mohment B C 9 Page 3 of 15
I I Efdc,Gas, Wafer UtNfy Cases
I State Case Date of Cross-Examination Client
Case Number usirrty
: 1 f Georgia -€ad Federation ' 32704 Gwrgla Pwrer Company Georgia Publtc $errr6ce Commission 407-u Georgla PowsrCompany Georgia Public Senrfce Cmnissinn 43844 AllEIeCPfCllWibs Georgia Pubtlo Senrice Comldsslcn 4796-u Geargia Power Campany Georgia Public Servb Camrnlssian 40874 All uuufies May 10,1994 Wrgisr Public SswbComrnialon 93554 Georgia PwCompany November 4, $998 (3edrgls Publk Service Comrnislon 14000.U Gee@ Puwr Chnm mglaPubnc Service dommhssion 14676.11 $ammah EitMc8 PWW Cornpiny 'Georpla Publtc Servsce Cammissloo 143Il.u Atlanta Gas UQhtCdmpany Gebrgla Publlo Seivlce Comrniasbn 17p8W Geprgia PmwQmpany Georgia PuWlc Swvla, Ckmmnbsbn 18300-U Geieorgfa Pmw Qmpany ocraber 20,2004 Georgia pu#lo Service cmmnlsslan 18638U Name Gas Qht Campany Georgia PuUk Service Cornmisstom 19768-U ,Savannah Wecbic&Rwx Company ' Georgia Public Service CDrnmlssSon -a-u Abnm Energy Cap. GeOrgk PublicSewbo ~MtlllSShl wvaa-u &or$a Wwr Campany GeorgIa Public Sewbe Cdrnmlsslon ma Aimoa Energy Carp. ugust IB, 2008
C (r 0I r< 0 I
0s C
(r C f (r f C C (r n U KS J.C. Penney Company 116,37%U All Kansas Uulitfes January22,1981 n C C Y 4
I r I
T C CE I 0 Y 0 I R rc $ V V
b I (E C .P CE E C crC R v
T Attachment 8 Page 5 of 15
- C Clcsnt fi March 22,1983 Navember6, I&% Nowmber18, iens DezwrnbwvB, fQQ9 meember 15,1999 Sap€anber7.2000 October 5,2000 July IS, 2901 January 29,2002 Septemaer 9,2062 Aprn Z4,20a3 bee $2.2003; Jan 30, Mar 5,Od March 10,2004 August 23,2904 Fidmaember 5.2004' Rld Februaiy 15,2065 Fled March Z 25,200$ J@ 20, aW5 Wember 7,2005 4 September 27,2(J05 Nbwlmbtilf, 2005 NbK7, Zam Mar. 22.7.00B Atarch 21, an8 Apau it.ZOM Jure f, 2oc6 Deeember 8,2048 Apil2,2008Dboember 11,2007
\ J& 15,2006 \ September 12,20(18 Oclobw58,2008 n C AttaEfrment B C Page 6 of % U
CHARLESW. KING Appearances before State Resulrtory Agendeo
ElecMc, Gas, Water Utflky Cases
State caw Date Ctlent
Case Numher Ut[Iiiy
North &ta PWCServiGe Commission North D&Ob PUbk %WkJe Conmission NOM,Dakola Publlc Servlce Carnmlssbn NO North DatmC Public Service Ccmmlosbn Nom oekots Puw3c ssrvtoe Corrmlssbn Nordh Daltala Publtc Smb Commisskn North nata Public Service CammlstFlon North Dakota PuMe ServZce Corniselon I 1. I' Business & ksociation of N.H, 79-187-11 ~.Pub!lcSerV[oe of N.H. febNW6,1981 NH Business & Induslry mdatlon ofN.H. Bb%O Pudic Senrloe of N,H. Feku~5,1981 Business & ~ndustryAsdloeialion of NH, 82-333 PUMtc Service af N.H. November 2,1983
N.J. Retail Merchants AasodZitbfl 803-161 All NewJersey Utllilies Match 31, 1981 MI Department of Public Advooata 01 6459 NA Natural Gas Campany {none) ,Resorts tntematlcinal Hold, Inc. 8011-827 AIlanllc Clly Sewerage CO. (none) tkpL of PuMic Advacete 822-1 16 Atfantic CilyE!Elsctrlo CO, Augusl il,1982 Depl a[ PobliCAdvOFa~ 355.67 BlzabetWn Gas June 9,lSgt Dover Tovmship Fire CM& Bw1BDBW Tam's Rlver Watm Company February 22,1989 V V NY Council of Relail Marchants 26806 All Ele&bioUlilities Fekua~y3.3976 NY Metraporiten M.Y. Retell CauncU nazs CamaaBdated Wson Company (none] Mehplilan N.Y. Relail Qundl 27136 Long Island Ughting Company JW 1.1977 N.Y. Metra. lransil Aulhad& 27353 Cansdlidated Edlsan company September 5,1980 Ir C E Cleve%md E[& IltrrrninW (nane) . Ir 88470.EL .P 83.1529.R mdmabt QWaEIecUiC February 15, 1992 C D8-03BELSSO FirSLb- cdmPank;S FUd September 26,2008 C Ir n u Awiichmenl B .- Page 7 of IS
V V
w C P k -P 0 CHARLES W. KING Attachment B Appearanas before State Regulabry Agenck Page 8 ot 15
Telecornrnunlcaiions Cases I 1 Stale CBse Dace of Crosr-Examinatk~n Client Case Nurnbot.- utnsly
AL U.5. Deparlment aiDefense 24472 All TelephoneCampantes June 14, l9Q5 i
AK GCL Cammunlcahns, fno. 11-e742,W-97-143 Alaska CmmunicsUonsS~s Ned Feb 25,April 5,2004 GCf ComrnunlcaLns, [no. Wd6 Matmuska Talephone Assodation OotabsraB, 20s
f 1 Arizona Burglar& FlreAlann Asdalion kZ Mzona Burglar & Fire &ann Amdalian
We- Burglar&-FireAlarnr Aseoclafion Marah 25,1981 Wesm Burg[ar& Flnr Alarm .4ssod~on dune 23,1982 Westem Burglar& Flre Alarm Assodah June 29,1983 Westem Burglar 8 Fire Alam Assodelioft Janw 77,1804 7 & Firs Alarm AssdaOon C Western 6urgFgtat Jan, 18, Oet, 31, Nov28,1984 k CA Westam Burgtar 8 Flre Alarm Assaddon June 4, t#5, Octobw 2,1886 I ,We6t~rnBurglar & Fire Atam A6;sociaHw Qctober 22,1987 Western Eiurgtar & Rre Ahrm Association January a,?em Calfomla Cellular Resellecs Aqwt 11,1989 Federal ExecuUve Agencies Manh 6-7,1981 Califomla Cellular Rssellen August IB, 1991 Cellular Sennas, Inc. October 3. IS1 Federal EweEuUvs 4mdes June 8, fW V v I I I 1 I i I I I U.S. DeparbnenlofDefense 1072 U.SI Department of Defense b-1 .S. Departmentof Defense (E U September 18, <8W c US4Dspadrnentot Defense November 28,718 P Cobredo Muoicipsl League December 13,1988 (E CO U.S. DspaWent af Defense February 21.199D P US. Octpwtmenl of Olnse Myi7,lWI C U.S. DapBs(menl of Defense OclobW23, f9B1 C US. DepiPbncnt at Oeknse February 24-24.1992 n(E U,S, Department of Oeknse July3051.1992 V V.S. Oepartmentof Defense Nwernber 6,1998 AT&T hdl 17,1997 1 I T n C C Attachment B < CHARLES W. KlNC I Appearancas before Slate KegubCry Agencies Page 9 of $5 - Telecommunfcafions Cases -0 0 State Cast! Date af Crass-ExaminatIan v.. cumt rc
Case Number Utili&
Connecticut mnsumef Cnunset 770526 Soulhem NwEn@and Telephone Ca November 10,1977 CT CT Cellular Resallers Awn 89-12-06 Souhem New England Telephone Ca (none) CT Cellular Resdlers ChaRLIan 94-09-27 Springw'ch CeliularlBeO Atlantk May 16, June, 1994 AT&T AT&T/SNff Arbltradon Soulham New Engfand Te[ephane Rled October 28,1996 Cmectlart Consumw Counsel 98-04-07 Saulhern Mew Engaandla[ephone February 10,I BO8 Cannecticul Consumer Cdunsei 00.07-1 7 Souham Mew Emland Te[@hane d December 5,ZWL) D.C. People's C~un5d D.C. People's Cowel DC G8ml Ssrulces Adminislratian &wal SewIces AdPnlnlslratbn General Services AcfmhlsVatian Genersl Servbes MmhlsWon I I I I I I I I
I I 0 I I I rc GTE Sprint Communications Company 720536;rp All Telephone CamOanies September 12.1983 P Office of Public Counsel Depr.Repre SrruWm Belf July 36,1888 h ' Fl rc FederalExecutheAgencIes 8BwpiS-TL SOUU~~Belt .My 21,1gSs Q FedeFal tbdW&WCh 8800W-TL SOU~~WBell November 30,I$QO C Federal Ag~dass ' February 11, lQ42 Ertecuthte 88006Q-TL Souhem Bat4 V I I V Qeargia Attorney General 38924 Swtllm Bell Telaphne Co. Januvy 8,2990 GA Fedffel Executive Agandes 3905-Ll Sauthern Bell Telephune Co, June 12, ?990 Federal EKedw Agendw 3987-tl Southern Bdl7MephaneCos Febntary 13,1992 ta C Georgla PuUlc Service Commission 401 84 Southern Bell TelaphoneOo, Jan 14, Feb 10,1995 c
I CF I. c Havrail PutJic Ubaity Cammission 1871 Hawifllan Telephone Compacy July 8,1971 C Four Havreli Counlies 4588 , Hawaiian Talephone Company December 15,1963 C Oepflrnent af Defense 7579 Hmaian TelephffneCcmpaw April 26,1994 cr Department of Defense Oceank Oamrnum lcetlpns Mach 13,199& R 94-0093 V Departmant of Defwrse no2 AU communkarlionsCarriers June 2,1995 Department of Defense 94.4298 C(avskn ~ekiphoneCompany May 7,1998 Ihpartrnenl of Defense 77% Vari2OWHwrati. ,Mowembar 15,2000 T IY C C CHAliLES W. KING Attachment 13 Appearances belbre Skate Regulatory Apndes Page $0 of 15
TelecffmmunicalionsCases
I State cgsa Date of Cross-Examination Clm
Case Number utirifv
U.S. Oapartment of Energy U-1000-63 lkOounMn Bel! Tekphone Co. May 16,1933 US. Oepartrnent of Energy L&1OWto Mountain 8ellTelephmCon March 8,1984 'I3 I I I I
Illinois Alarm Companlss 79-0143 Illinois BeU Wephone fSepternbw 26, 1979 IL Atlorney Genemi of Illmais a14478 llinois Belt 'Telephone Oember 25, 1881 GTE Spdnt CommuoiEations Co, 83-0142 All Tehphane Companies August4,1983 Federal Executiw Agencies 89.0033 Illinois Bell Telephone June 12,4989
State Corpmtim Comrnisslon Depr, Rev. Soulhweatrrm Bell 12-~,i~a~i KS Federal Executive Agencies 166.858-W Southwestam Bell Nwsmber 7, '1989 Fsderat Executive Agmdes I 140,492 1All Telephone Companies November 4,1994 I 1 I I. 1 KY Kenhtcky Cable rdecornmunicatlons Aaso. 20ooL414 81ue Grass Energy Cooparative Januay 11 ,2001 1Kentucky Cable Telecomm[catlons &m. I 2000-39 ICumbettend Valley Electric, lnc, I January 1 I,2001 I C&P Telephone Company Maryland People's Counsel 681 3 1975 Maryland Peapie's Counsel 6881 WTdeohone Company December 17,1975 Maryland People's Counsel 7025 CW Telephone Corny M& 15,1975 MD Maryfand People'sCounsel 7467 CBTelephone Company October 20,1981 kederal ExecuAve Agencies 7851 C&P Telephone Company Mar& 20, 1985 Faded Executive Agencies aim C&PTd8phOM CmpEny M~YD, 1888 Federal Executive Agmdes 8274 CW Telephone Comrry August 2,1990 t
u-aQt1 Mlchfgan Bell Telephone Co. November 7,1988 f ua53 IATaT Cornmunl~mdMCI December 4,1990 I I I I1 6 I i hW GTE Sprint CommunicaUcmCa. 83-102-HC All Telephone Companles August 5,1983 IUS. Department of Defense 97.Q2l.BC INarthwast Bell Tdephone'Co. I(none} I I I I I n C C CHARLES W. KING Attachment 5 < I Appearmcea before Stab Regulatory Ageodes Page 11 of35
Telecernmunicalons Casts - I ..0 Case Dateof Cross-Examination U Glient U I state I
I I I t I I I GTf Sprint Cornrnmicabns MO Federal Executive Agencies Federat Executive Agencies
I I 1 I f I I 1- Dapari~nentof Publk Adwmte 0epr.Kepr. N.J, Bell Tekphone Company har-?g Depament of Public Adwcatg - aa5-45~ N.J, Bell Tekphone: Company Omber 15,1981 NJ Depatbnentof PubKc Adrocale Oepr,Ryrr. , NJ. Bell Tekghone Company Oepartolentof PubRc Advocale Depr.Repr. MI. Bel Tefepliaoe Company MarchFebruary I. 19821,1985 Dwariment of PublicAdvocate m92w0358 N.J, BelTdephone Compeny Sqtwnber 30,1992 Dogament of Public Advacate ~k10116060739 Unff ed Tetephone Co. d New Jersey a January 5,2006 1 I I I I I Y C fiew Mexico CorporaUon Conmission Mamtain &If Telfmhune CO. November 14, 7983 b New Mwko Corpamkn Commission 86-151-TC Qened Telephone of Southwest I lo= 0 I I I * 1 1 I I I 0 I Prime Cable of Las Vegas filed November 22,1995 K Prime Cable afbs Vega 964036 June 2, lW7 * 1 0 I I 1 1 C t I I I I V ,HofinesPmteclion, Inc, 27350 New Yark Telephane Campany Chth 17, 1978 V NY Holmes Pmtectjm, Inc. 27409 New%& Telepbne Cwnpany hky17,1079 5 Alarm Companies 2nia NewYalkTelephDna Company Juty24, %80
I GlX Spdnt Cornmun~catioosCo. 28425 Al[ Telrqhone Companies JUQ~,1983 b C P PA C!of Philadelphia R-832316 PaflflMania Bed Telephone Sepbmber 20,1983 b P C Olceof Consumer Advacate Depr.Repr. Southern Bell JUty 1,1986 C Office Consumer Advocate 86-51 1-C Southern Bell Pcscember 1I, 1986 b of h SC ofiioe of Consumer Advocate 86-5414 General Tefephone of South Aprlif 8,1987 v Office of Consumer Acovocate Depr.Repr. Southern Bell .JulylO, 4989 O&e of ConsumerAdvocafe asmc ALLTEL of South Carolina September 26,1989 T I I I I 1 Attachment 13 Page 12 of 15
CHARLES W. KINQ Appearsnees before Sfate Regrrlatory&encies
I .. Telecommunleabns Cases
State . Case Date of Cross-Examination I Client Case Number utnw
YX U.S.Department of Defense 858Rr821B Southwestern Bell Telephone Co. (none!
VA ' U.S. Dept Of Defense, GSA, et $9896 C&P Telephone Cmany October 6, $976 Federal Executtva Agench PUC 890014 All Telephone Compmiss February 13,1989
VI V.I. Deparlmant d Cammera , 205 Virgln Islands Tslephmo Co, Aprll29,1OBO V.I. Public Service Cornmission 341 Wrgin Islands Telephone Coo Msrch 20,1981
US, DepaFhent of Defenss U-72-39 Padfic Na~ihvtestBell 1973 'U.S, Department of Qefenss U-87-796-T Padflc Narlhvrest 8sll Decernba 20,1883 U.S. Department of-fehse W20624 PaOlRo Northwest Bell November 8,lQtt3 US. Department of Defense U.84269&F US Wat Communlcatlons Nw&nber 28,4989 WA WA Wmey OensraVTfUUXFt UT-940641 us west Cammunt~uls Rled October 14,1984 US.Deparfmeniof Defeme UT441484 . US West ComunfcaCiwre June=, 1995 U.S. Department ofi)efense US West CommunlcaOons January 22, t996 WA &tormy GanwMWCER UT451425 LIS West Comnwnieallons .Filed Juna 23,1997 WA Attorney GenemU7RACER UT-981632 GTE Norttnrvssf, Inc July 29, f9Q7 U.S. Oaparlrnent of Ddme UT-021 420 ClviesI Camunicatlans May 22,2003 WA Attorney GeneraVWesTEClRARP UT-wO788 Verhon Ma!thw& Inca Augusl72,2004 , WA Attorney Geqeral uf-040520 'Verizon Northwest, Inc. February2,2005 WA Attorney General ur-uaai4 Veciron - MCI Nrger November 2,2005
WI :G'fESprSot 6720-37348 All Tdephone Companies October 24 1983 Waansin Consumers Utrlity hard 2055.TR-i02 CmturyTel of Central Wisconsin June 26,2002 Wisconsin Consumers Utility Board Telephone USA, LCC Juna 28,2002
L + CHARLES W. KIM Atlachrnent 8 Appearances before Federal Regulatory&endss Page 13 of15
I Federal Comrnunlcatlans Cemkrlon c f I I Client Date of CrossZmmination Ooeket I.I I tI I I I Oepartment of Defense 16020 Consat Rabof Return 1873 Airline Parttes 18258 Bell System Rates July 22,1988 Airline Padies 18128 TELPAK 3~22,1M5 1871, feb. 22,1972 National Data Carpomtion f99W WATS (none] Press Wlre Se9Vlw 19818 Privale heRake (none) Aemnaullcal Kadb mt4 Prtvale UneRates ChXober5,1@78 Department of Defense 20680 1,544 Mbp5 Serulce 30, ?979 State of Hawaii ~JBnUBNFebruary 7, 18T8 21263 InCrstate SsparaOon Intamnaljrrrtal Read Caniers cc7Wf T.?Jrntf% Rates Mmtcn 6,198(1 IlT World Comrnunicatkns oC64633 Pste of Return (none) 8 Aemutical R&o m8-72 Access Une Charges ,(none) MCI Oc84-B110 Rate af Return ‘(none] ind. Data Cam. Mtg, AS$h CC86-26 ~l%TAamd~Plan Iknonel TymneC lac, ENF84-22 Packet SvlltcMng Casts ‘(Mne) Adebhia Jones Intercable, et at. Sell Attanlk :We0Dfaltone IRled 7128/84 ,Adefphla knes Intetcabie. et. al. Bell Ahntic Video Dialtone ‘kit& 8/23/84 :Ade!phia Jones Intercable, et ai. Bell Al!antfc Udec, Dfdtone Wled m1195 I I I.
Nuclear Regubtory Cammfaslon
Falrquiw League Iw EnrAronrnent Protection I 5o-m I 50429 I I Postal Rate Cornmlsslon V 1 V I I I Associatbn of THrd Class Mail Users R71-1 11970 Dmv Jones 8 Cmpany R72-1 :I972 Dow Jones 8 Company w R74-I Seplember 13, 1974 0 0ownrJone.s 8 Campany MC7i3-2 January 6,1979 -F Daw Jonas 8 Camparty Mc793 September 12,1979 w Dow Jones 8 Company Raw Noveq1ber25,IOBO .cI Warshawsky & Company ca2-i @One) 0 ,Dow Jane & Company R84-1 ‘June 14,1984 0 Jones & campany w om Rs7-I N OmJams & Campany RQO-1 VI L)ow Jones E Company MC91-1 UOVJJones & Company MCWS 1 I I I N C c CHARLES W. KlNG Attachment B Appearances before Federaat Regutatory AgenciBs Page 14 ot 35
Client Docket Subject Date of Cross-f3am[nation
Natlonal Wail Cvlerchants Associatfon 1 HousdSaatt, IElsdrk Rate Reform LegIdalion 11976,1977 d 1979 Hearlngs Natlonal Wlreless Resellen Assocktion House Commerce intermnedion & Resale Cri OctobefIZ,.[QB5 Comltlee Wireless Services
Slate of Hawaii 71-18 Ocean Shipping Rates October-7l Fos 6 Alaska Cine 7944 Bags Rate inaease I July1979 Palmatlo Shipping and Steuadoring 05-20 Vessel Chatgekbiiily October 27,1986
Watern Coal Traffic League Ex Parte 340 RR.Rate Increase w2 Western Caal Traffic League Ex Parte 357 R.R. Rate Inwease I OI Wesbrn Caal Traffic League Ex Parte 375 {Subl) R.R. Rale increase 9 Arkansas Power & Light Co. 37276 Cost of Capital ? Cmlral Illinois Light Go. 37450 Cast af Capital N Western Coal Traffic League Ex Parts 347 Costing Methods 9 Snavely King Maloras Q'Connor & tee. I nc. Ex Parte 884 cast of Capital !2 Williams Energy Swvices. Inc Ex Parte 582, Sub 5 i?atl Merger Guidelines V V
Ctvfl Aerorraullcs Board w 0 Thomas Cwk, Inc. 36595 Air fare Dereguktion (none) .P w .P 0 Capyrfght Royalty Trib mal w0 I N VI Public 8madcasPng Service 88-2-86CD Talevision Valuation (none) i n C C Attachment 8 \c Page 15 of 25
? Client Docket Subjact Date
I I I 1 I Exxan USA OR89-2-000 Pipdie Qualily Bank October 18,1890 Consumer kdvocdea of OE,DC,OH,MD,N J,PA,WV,VA ER08986400 El& ~~nsmlssbnCost of €qully March 26,2008 Consumer Advocates of OE,rX;,OH,MD,NJ,PA,WV Ui08.23.000 Eldcransmlssion Cast of Equlty May 21,2006 Maryland Ofnce uf People's Counsel ERQ8-686-01 Etem'c Tramsmis$ion Cast df Equ& Apfl7,2008; July 8.2008, Maryland Officeof People's Counsel ERq8-1329 : UecMc Transmission Cast of Equity August, 2008 L I I Canadan Tansport Camrnisslon t I RalCosting Inquiry, 1567-1969 TelecommunicationsCosting fnquiry, 19f2-1975 1 1
V v
aCF LUUY-'l1-16 1/:UU 703-696-ZYbU >> 504 540 W5L3 Y 'IW3U
Att achrnent C
New Fairpoint CEO seeks to avoid bankruptcy filing Suly 1,2009 3:01 PM ET &mwPw PORTLW,Maine (AP)- The new head of Fairpoint Communications said Wednesday the compmy will haye to make some big changes to get out of its financial pinch, but he's optimistic it won't have to file for bmkmptcy reorganization. -Inhis first day on the job, David Hauser acknowledged that Fairhint's reputation has been damaged by operational problems it has had since it took over Verizon Communications Xnc.'s landline telephone and Internet business in northern New &gland,
He said fixing the company's pmblems requires restructuring debt, getting __------...- - . -. , -- operations to run s&oot.~y,qttihg costs andEtenmg to ctwtomms.
"I. fidybelieve I have a good shot at dghting the ship," Hauser said in a phone interview from company headquarters in Charlotte, NC, FairPaint is now seeking to. postpone a bond interest payment due in October ox1 debts totaling $53 1 million. If it can" be pat off, the company might seek alternative debt-festructwhg plans, which could include bankruptcy, Fairpoint said in a Securities and Exchange Cohssion filing last week. "I have every intenth of taking the steps we need to take witbout going through bankruptcy," Hauser said. "But that depends on other people dso, like the debt holders. '' FairPoiqt owns and opeyates '32 phone companies in 18 states, with a total of 1.7 million lines. Most ofthern are in northern New England, where last year it bought VeTizon's assets in Maim, New Hampshire and Vermont for $2.3 billion. Since taking total control ofEhe Verizon system last winter, Fairpoint has been plagued by custornm service, billing and other operational problems.
Page 1 of 2 LUUY'I I- IO 1r:uu
The company's subscriber access line count fell roughly 200,000 in the 12-month period ending March 3 1. Now, with. falling revenues brought on by a shrinking cu~tom.t%base and bill collection problems, the dompany says it night not be able to make its October interest payment.
If the company is forced into bankruptcy it would be able to restructure financially, which probably wouldn't have a direct impact on customers, said Andrew Hagler, director of telephone utility industries at the Maine Public UtiIities Cornmissin. "It certainly wouldn't be a liquidation," Hagler said. "And in that context, continuing to provide service, continuing to bill for service and continuing to collect payment for service is entirely consistent with.the interests of creditors." Hauser took over as Fairpoint's chairmaa and chief executive. officer aRqr working for 35 yews at Duke Energy Cop,most recently as its chi& financial officer, He replaces FairPoint co-founder Eugene Johnson, who retired Tuesday.
Page 2 of 2 LUUY - 'I 'I - 'I b 'I t :uu
At tachment 13 STATE OF NEW YOpK DWARTMENT OF PUBLIC SERVICE. TMREE EMPIRE STATE PLAZA, ALBANY, NY 12223-3350
July 3 1.3008 E2 VIA HAND DKLIVERY Uep .! L '9 Won. .laclp A. Bdhg . IO F ... St!CEvdry w -. - .r New York Public Service Commission .i -c. Three Empjre Slak Plaxa .. - :,*: Albany. New York 12223-1350 Gw9 " P' 0 RE:: Case 934-0IO3 - Pelition of Rochester "klcphoneC'orporarion for ApproIfal of Proposed Restrucuring Plan - Status of Frontier Telephone of Rochester. Inc.'s Open Marker Plan
Case 93-C-0653- Petition of Rochester Telephone Corpration for Approval ot'a Muiti-Year Rare StalriIity agreement
Dear Secretary Rritling:
Enclosed please tind on original and fivc copies at'a Join1 Proposal xnd Stipulation that Staff is filiily in the ahei r-referenced maw.
Any yudatis rcyarding this filing should be directcd to me.
Enclosures
w: Active parties in Case 99-C-0949 (with enclosures) LUUY-'I 'I -'I6 'I f:UU 703-696-2960 >> 304 340 0325 P 21/58
july 17,2008
STATE OF NEW YORK PUBLIC SERVICE COMMISSION
Petition af Rochester Tekphone Corporalion for Approval aC 1 case93-c-0103 Proposed Restructuhng Plan - Status of Frontier Telephone pf Rochester, Xnc.'s Open Market PIan 1 1 Petition of Rochester Telephone Corporation far Approval af 8 1 New Multi-Year Rate Stability Agreement ) Care 93-C-0033
JOfNT STIPULATION AND AGREEMENT LUUY - ‘I ‘I - 16 1 f :00 f05-bY6-ZY60 >> 504 540 U5L5 Y LL/5U
July 17,2008
STATE OF NEW YORK PUBLIC SERVICE COMMISSION
- - 1 Petition ol Rochester Telephone Corporation for Approval af case9J-C-0103 Proposed Restructuring Plan - Status of Wrontier Telephone of Rochester, Inc’s Open Market Plan 1
Petition of Rochester Telephone Corporation for Approval of a 1 New Mid ti-Year Ratc StablIIty Agreement ) Case 93-C-0035 z
JOINT STIPULATION AND AGREEMENT
This Joint Stipulatian and Agreement, resolving all issues raised in
connection with the April 5,2005 petition by Frontier Telephone of Rachestex, Inc.
(Frontier) seeking removal of provisjons of the Open Market Plan (OMP or Plan), ‘ is
mde’this day of July 2008, by and among Frontier, all of its affiliattd incurnbenl local
telephone companies (collectively Citizens NYS ILZCs),’ the Siaff ofthe Department of
Public Service (Staff), the NOWYork State; Cansurner Protection Board (CPB), and such
other parties whose signature pages are attached to this Joint Stipulation and Agreement (collectively Signatory Parties),
’ Caw 93-C-9 103.93-C-0033,*Qp.md Order -Joint Stiuulation and Aptternmy, Opinion No. 84-25 (isrued November 2s. 1994). Cases 03-C-QIO3,93-C4033,wd Order EstabtishinrJ pew Terms oPOatn Rat e Pian, Opinion No. 004 (issued March 30,2000). ’ As used in chis Joint Proposal, Citizans NYS lLECs refers to Frtm!ior Tdcphone of Rochester. fnc.; Citizens TelecommunicationsCompany of New York, Inc.; Pronljer Commun ical5ons oPNctw Y ork, inc.; Frontier Communicarionr of Ausable Valley, Inc.; Fkontier Comrnunicalions ofSeneca-Garham, Inc.; Frontier Communicationsof Sylvan Lake, hac; Ogdcn Telephone Company, and any incumbent local exchange card+) operating in New York Statc that may be acquired by Citizws Communications or any of its affiliarcg.
2 LUUY - ‘I ‘I - ’I 6 ’I f :UU /05-6Yb-ZYbU>> 5u4 54u U5L3 P L5/56
July 17, 2008
I. Introduction
The OMP was instituted on January I 1495 pursuant to the Commission’s
approval of a Joint Stipulation and Agreement.’ At its inception, the OMP was a progressive alternative regulatory plan that incorporated both price cap regulation and extensive mechanisms to bdstcr the entry and opeations ofcompetitors in Frontier’s
local exchange markets. The OMP also included odnrate reductions and incentives to
maintain high sewice quality. A key element of the OMP was rhat Frontier was allowed
to establish a new,unteplated holding company, At the time, the Commission and Staff
had a number of concerns about thc creation of this new holding company structure for
Frantier. As o result, the OMP contained a number of pemanent provisions to provide protections rehting to the risks of creating and operating an unrcgulated holding company. While the OMP expired on December 3 1,2004, the permanent provisions
associated with the creation of ii holding company remain in effect unless modified by the
Commission. Many of these provisions are in addition to the Commission’srules and regulations covering all New York ItECs. Since the OMP commenced, thexe were fundamental and material changes in the teleconriiiunicsttions marketplace consisting of consolidation and expansion of traditional services over new platfbrms. As discussed in the Comp 111 Order,‘ the market conditions that existed when the OMP was instituted changed dramatically and he
See Qpiniar~and Order Approving Joint Slipulalion and Agreement, Opinioh No. 94-25 (Nov. IO, 1994). as modified by Opinion and Qrder Esmblishing New Tmsof Open Market Plan and Rate Plan, Opinion No. 00-4(Mmh 30,2909). Some of the provisions d the OMP 81s6 apply to FrontiaPs New York LEC afliliates. ‘Case 05-C-06I6, ]Procec&@a~ M otion oftbe Commjmmn14 4. Intcrmodal Carnn- ISon d Te~ecommunicationsSa, Staiemcnt of Policy on Further Steps Toward CompetitiofI in the Intermodat Telecommunications Market and Order Allowing Raro Filinp (issued April II, 1006).
3 LUUY’ I I - IO I f:u I /US-bYb-LYbU >>
July 17, 2008
vslrious players in the marketplace expanded their services well beyond those traditionally offered. In addition, the Telecornrnuniattons Act of I996 was enacted to
dmelop and foster competition. Moreover, Citizens Commuiiications Company
(Citizens) purchased tho stock of Frontier and its aEliated NEWYork 1LECs. Citizens, a long-established holding company, alrcady had tLEC subsidiaries in New York and many
other states On Aprif 5,2005 Frontier fled a petition requesting that the Commission remove all remaining permanent restdctions of the OM.On May 24,2005 the
Commission issued a Notjce Soliciting Ccmments. Caminants were filed by the CPB
and Reply Comments were filed by Frontier. Tbe Commission invited further comments
pursuant to a Notice in the New York State Register dated June 7, ZOOG, Comments were filed by the CPB, On January 30,2007the Conmission issued aNotice Regarding
Settlemefit Codtrence and Active P& List. Pursuant to that Notice, StFiff, the CPB, the
New York State Telecommunications Association and Frontier (col~ect~velythe Parties)
initiated negotiations. The Parties engaged in many telephonic and in-person meetings in
2007 and 2008 and achanged severat draft proposals as part of their discussions.
*heParties have now reached a consensus and offer the fallowing
replacemeht bf the permanent ieslnciions in the OMP for the Commission’s review and
approval. Each of the remaining provisions of the OMP “aimed at ehinating or
minimizing potential impropricfies under a holding campmy structure” is addrcssed below? Except for the restrictions md requiremcnts stated blow, the! Parries propose
Frontier ngreev rhat helist of provisions below includes all of the rcmafning proviskm of the OMP, but believes that rhe list may be over-inatushe, latludins some previsions that are not rekited to tl holding company structure and that haw, Ulercfore, expired, However, Fronrier agrees lo the molution ofeach issue as provided herein.
4 5u4 54u U5L3 tJ L3/5U
July 17,2008 that the Commission declare that the remaining pcrmanenf restrictionsofthe OMP,to the extent that they go beyond tho restrictions *andrequirements of the New York State Public Service Law (Psi.,) and the Commission's own rules and regulations, we no longer effective.
11. Proposed Rcplwement to the Remaining Restrictions of the Open Market Plan.
The Parties Prupdsc tho Elimioetion af the Bollowing Provisions, fl)through (11):
A. Coraorate Governance,
Frontier must provide quarterly director certification tht payment of a dividend by Frontier will not impair Frontier's service quality or it5 ability to maintain a debt rating target oPA" (for Standard and Paors (S&P), or the equivalent for other rating agencies).
A majority of Frontier's Board of Directors must be outside members, only one director may be a holding company or aftiliate officer or employee, and new directors must be nominated by outside members of the Board,
Frctnticr must maintain the position of legal counsel far the provision of legal services to Frontier only.
Frontier is allowed to impose a termination charge to reimburse itself for urncovered investment in the event a person or entity terminates sexvice before cap; tal expenditures are fuIly recoved for specifically requested purchased network functions or services,
The annual compensation ofofficers and employees of Frontier must be based on Frontier's performance only and Frontier's officcrs and senior managers cannot collectively own more than 10% of the holding company's stock.
i3. Affiliate Transactionst
Staffhas access, upon a showing of need, to the books and records of afiliates not having an obvious relationship with the Citizens NYS ILECs (see item 21 bel ow).
* Thwe provisions wcrc eiiminatedbemuectho OMP':, specific provisions rue eithar na longer necessary or arc duplicative with lhe PSL and the Commission's ~Iesand regulations rcquircd of[LE&.
5 CWWY‘I 1-10 If :VI fU5-6Y6-LYbU >> 5U4 54U U5L3 P Lb/5U
July 17, 2008
Transactions between Frontier mnd its affiiiatcs and between its holding company and its affiliates &all be limited to purchases and sales made pursuant to tariff except for the non-tariffed transactions discussed in (8), This restriction applies to transactions between Citizens NYS lLECs, dacr than Frontier, and the holding company and its affiliates.
Monetary caps on non-tariffed transactions are limited to $4 million annually plus 1993 allocated cost unless otherwise authorized by the Cornmission.
All non-tariffed transactions must be subject to arms-length bargaining and written contracts.
Where common costs arc to be albcaled, thc allocation procedures must be Ned with and approved by the Commission. Frontier’s managers must annulally certify their kmiliarity with .the Commission’s affiliate transaction rules.
The Parties Propose lo Retain, Elimhmate aadlor Modi$ the Bollowing Provisions:
8 (12) When Citizens or my of its affiliates seek to acquire an incumbent New York telephone corporation, the petiticmer(s) must consent to tbe treatment of the acquisition as a Citizens NYS JLEC subject to the treatment of this Joint Stipulation and Agreement or provide justification why the acquisition.should not be so treated.
Par ties’ Propwak Maintain this provision.
(13) Frontier bears the burden ofjustifying continuation of transactions with mliates at the end of the rate plan.
Partfw’ Propwsal: All Citizens NYS ILECs bear the burden of demonstrating the reasonableness oftr~tionswith affiliates in the event of any future ate caw.
C. Ilividend Restrictions.
(14) Frontier may not make dividend payments to parent hoIdlag company ifits service quality falls below a dnlevel (see item IS, below).
Parties’ Froopoeal! No Citizens NYS lLECs may make dividend payments to the parent holding company if its service quality faIls beIow a certain level 8s described in item IS below. For the purposes of dclwmining the service quality dividend restriction, service quality will be LUUY-’I‘I “‘16 1 /:U1 703-696-2960 >> 304 340 0325 P 27/38
July 17, 2008
considered for ail Citizens NYS 1LECs an a combined basis 8s described in item i 5,
ID. Sewice Oualltv.
(1 5) Frontier must maiatain service quality minimums. Parties’ Prapasal: Eliminate duplicative service quality reporting and base any rebate or dividend resttictian on the CO~~SS~OD’Scurrent Telephone Scxvioe Standards as follows: Citizans NYS ILECs’service quality will be measured and reported monthly on a combined basis.
A customer rebate system will be in &~ct and will be based on the total number of measwamnt opportunities on Itwelve month rolling basis using the previous twelve months. If the Commission adopts this Plan, the date the Commission issues its approvat order will be the date the Ran commences using the previous kwelve month analysis as service quality data,
A “m-urement opportunity” is the monthly Customer Trouble Report Rate (CrTRR) performance of each central ofice. Thus, the total number of measurement opportunities in a year reprt3Sem the number of central ofices times 12 (months), For purposes of this rebate, the Citizens MYS lLECs currently have a total of 210 centrid ofices. Thus the total numbcr of measurement opportunities on a rolling 12-rnmth basis would be 2,520.
A customer rebate equal to 25% of the flat monthly basic service charge as prcsentod in each of ?herespective Citizen NYS ILECs’ tariffs (this applies to retail ’business and residence customers that aye jurisdictionally regdated with respect to retail service quality’) shall be applied to customer bills when the companies fail a 90% CTRR (90% of the central ~ffi~~entities) with CTRR of at or Lower than 3.3 per 100 access lines over a rolling 12-month average ?Performame Thresliold”). The 2S% rcbate to customers will go to customers in the affected central office entities, will be based upon spe~ifiorate groups, ar;d message rate customers will receive the same rebate as flat rate customen within their stme rate groups. The rebates shall be credited in within 40 days ofreport ofMure to fhE Conmission, which occurs on the 10’ day of &.e month following the failure to meet the Performance ThreshoId(s).
’This rcbatc will not apply to private line services.
I 7 703-696-2960 >> 304 340 0325 P 28/38
July 17,2008
During periods when the Performance Threshold is missed, the rebate shall double to 50% of the monthly service chge for each office where the CTRR measurement cxceeds the higher threshold of 5.5 CTRR per 100 access lines. The 50% rebate is payable when the 25% rebate would haw been payable.
In the event that a customer rcbatc is paid, a bill message briefly explaining the ZCBSOD for the rebate shaIl be placed on the customers’ bills the rnonth(s>dudng which the mba’La(s) appear.
Rebates shall end with the month the company meets the Performance Threshold.
Further, dividends shall be suspended if service quality fails, such that Citizens NYS LE& CTRR level falls below the Performance Threshold for three consecutive months. The dividend suspension ends when the Citizens NYS lLECs meet the Pedommct Threshold for consecutive months.
([Sa) Consequences of Missing Gemice Quality. Parties’ Proposal: Waivers can be requcsted pursuant to the Commission’s rules. Thc conditions for a waiver are tixosc specified in 16 NYCRR $603.1(c) ofthe Commission’s reeutntions,
E. Financial Xnfcpcifv.
(16) There must be a review With Sm, at Icast annually but aka following any circumstance that could reasonably be expected b atTect adversely Citizen$ debt ratings, inctuding but not limited to a downgrading of Citizens’ debt ratings. Frontier will review with rho Department of Public Service’s OffJce of Accounting and Finance Director its activities and plnns relating to the attraction of capitat and review Frontier’s dividend and f5mcial experience over the past fiscal year and projections for the approaching fiscal yew.
Parties’ P~opossl:€%minate this provision and replace it with the
I fotbwing:
The Citizens NYS ILECs will provide copies of the debt rating agencies’ reports from Moody’s Investors Service and Standard & Poors, with respect IO Citizens’ dcbt, to Staff upon request. in addition, the Citizens NYS ILECs will provide copies of any company presentations given to analysts or credit agencies to Staff upon request. Jf the senior unsecured credit ratiap of Citizens should aver fall below Ba3 by Moody’s 1nve.m~
8 LUUY- I I-’lb ’I (:u1 703-696-2960 >> 304 340 0325 P 29/38
July 17, 2008
Service and BB- by Standard & Poor’s, Citizens NYS ILECs shail file with the Commission within 45 days of the downgrade; (1) a description of the actions and plans that Citizens is taking in response to the downgrades; (2) an analysis showing Citizens’ current and ptojectrd invcstrnents in the Citizens NYS ILECs’ facilities; and, (3) plans and programs to ensure the safety and reliability dthe network. For any business phsor other non-public information qualifying for confidentid treatment under Subpart 6-1 of the Commission’srules, the Citizens NYS JLECs will file and the Commission wil1,protcd such information pursuant to such ruIcs,
Frontier’s assets cannot be pledged for debt obligations other than Frontier’s own. Partid Proposal: No Citizens NYS XLEC assets can be pledged for debt oblligatiohs or provide financiat guarantees without approval by the Commission,
Frontier’s services, functionatities or databases cannot be transferred to afiiliates without Commission approval,
Parties’ Proposal: All Citizens NYS XLECs will comply with thc applicable provisions of the PSL and the Commission’s rules and regufations.
Frontier’s total debt, fund transfers to affiliates, customer deposits and preferred stock annot exceed 45% of total capital.
Parties’ hqmud: All Citizens NYS ILECs’ total debt, fund transfers to affibates, customer deposits and preferred stock cstnnot exceed 45% of total capital far its NYS UCson a statewide basis, or 60% af total capital for any individual New Y ork company.
A cash management agreement (CMA) among the affiliates must be maintained wherein the holding company (Frontier Corporation) is the cash manager. The CMA must include specific pmtccdons against potential financial manipulation of the cash management €mcl including (1) a requirement that Frontier’s fund transfer balances not exceed 5% of total capital, and (2) the authority for the Commission, ifneccssary, to modify the CMA,
Parties’ Proposal: Eliminate the restriction on fuund trailsfer balances BS long as (19) is met. Maintak-r the requirements for a CMA including notifying the Commission when modifications are necessary. Continue thc current accounting to establish evidence of indebtedness ktwecn Citizens
9 LWUY - ’I 1 - 14 1 t :01 703-696-2960 >> 304 540 0523 P 50/58
July 17, 2008
NYS ILECs and the holding company. This Will be applicable to all of Citizens’ NYS ILECs.
Staff has furl access upon rcqucst (and, in some instances, without: nolice), to the books and records of the holding company and its affiliates having a direct or indirect reIationship to Citizens.
Parties’ Proposal: Maintain this provision.
None
Parties’ Prapasab Add new provision,
Service Qudity and Infrastructure Protection Fund - To the extent Citizens NYS ILECs sc&ce quality misses the PerfPrmance Threshold a5 provided in (15) above, a Service Quality and Infrastructure Protection Fund (SQIPF) shdl be estabfishd, Citizens’ NYS 1LBCs shdl bc required to set aeide $15 million into a fund over which each of its NYS LECs will have legal control. Funds shall be transferred to the SQJPF within 30 days of the date the Performance Threshold is missed,
Further, within 30 days ahrthe funds art traderred into the SQIPF, the Company shall submit to the Semtiary of the Commission a detailed service improvement plan that wit1 obtain consistent morhly perfommcc.
The SQXPF shall be released once the Performance Thrashold has been met for thmc consecutive months.
JXI. General Provisions.
A Dispute Resoluti~n,
If a disagreement over the interpretation or implementation of any provision of
thii Joint Proposal cannot be resolved informally among the Signatory Parties, it will be
resolved as blbws: (a) the Signatory Parties will promptly convene a conference and in
good faith attempt to resolve the disagrcement; and (b) if o molution cannot be achieved,
10 LUUY'I I- IO If:UL fU5 - 696- 2960 >> 304 340 0325 P 31/38
July 17,2008
then any Signatory Party may petition the Commission for a decision of the disputed
matter,
B, Provisfone Not Precedent. This Joint Proposal is a negotiated agreement. Its terms and provisions apply
solely to, and are binding on each Signatory party only in, rht context of this proceediry,
None of the positions taken herein by any Signatory Party, including agrement to the
terms and provisions of this Joint Proposal and any rnethodoiogy or principle utilized
herein, may be cited or relied upon in any fashion as precedent in any other proceeding before the Commission, another regulatory agency or a court of law for any purpose,
except in hrtherance ofthe purposes and results afthis Joint Proposal.
C. Commission Authority to Modify.
All Commission rules, regulations and orders remain in eEect. Nothing in thjs
Joint Stipulation and.Agreement shall be construed to affect or otherwise limit the
Commission's authority unkthe Public Service Law or any other law or regulation applicable in ihe State of New Yark. The Parties understand that the Commission
restme5 the authority to modify this Joint StipuIation and Agrmment if ciroumstances a1
the opinion of the Commission have such a substantial impact 85 to render this Joint
Stipulation and Agraanent unreasonable, unnecessary, or insufficient for the continued provision of safe and adequate service by Citizens NYS dLECs at just and reasonable
rates or otherwise conrrary to the Public Service Law or any other Inw deor regulation
in the State ofNcw York.
I1 LLJUY' I 1-10 II:uL 5u4 54u U5L3 Y 5L/5U
July 17, 2008
D. Xntegrated Agreement.
Each provision of this Joint Proposal is in consideration and-support of all the
provisions and is expressly wnditiancd upon approval of the hint Proposal in full by the
Commission. If the Cowmission fails to adapt the terms of this Joint Proposal as
presented, the Signatory Parties are her to pursue their respective positions in this
proceeding wit houl prejudice.
E. Entire Agreement.
"his Joint Proposal conlains the cdtc agreement of the Signatory Parties
regarding the niatlas contained herein and SupErsedes and replaces any and all prior or
conternporanww written ar oral agreements pr ,understandings.
G. Intent of Signatory Patties The Sigmtury Parties agree that the ROO^^ in this pmccxding fully justifiies
approval of the terns of this Joint Proposal, and Inread to submit the Joint Proposal to the
Commission with the recommendatjan that it be apprwed as being in the public interest.
H. Counterparts. This Joint Proposal is being executed in counterpart originals and will be binding
on each Signatory Party that executes a counterpart.
IV. Conclusion
The Paxties believe that the proposals stated in this Joint Stipulation are in the
public interest, because they eliminate wsthtions that are no longer necessary or
12 LUUY- I I-'I6 'I /:UL 703-696-2960 >> 304 340 0325 P 33/38
July 17, 2008
appmprhte, retain or modify restrictions that remain in the public intcrcst, and refocus Citizens NYS ELECs' regulatory plan on the achievement ot high quality service not only in thc Rochester area, but throughout the service territories of al1 of the New York State IUCSunder the common ownership of Citizens Communications Campmy.
IN WlTNUS WHIWEOF, the Parties have duly executed this Joint Stipulation and Agreement and respectfully submit it for the Commission's review and approval.
FROmER'I'ELE~O~ OF ROCHWIZR, XNC., on its awn behalf and M behalf of its Affiliated New Yurk State Laad Exchange
13 WJY- 'I 1 - 16 1 t :02 703-696-2960 *> 304 340 0325 P 34/38
July 17,2008
NEW YORK STATE CONSUMER LUWY' I I - IO If :uL N5-bYb-LYbU >> 5u4 54u U5L3 Y 53/52)
July 21,2009
Tl~ankyou for your attention to this matter.
Very truly yours,
IJSjrtsc Enclosure
. cc: l&y Ray? Esq,{with enclosure) Vincent Trivdti, Rsq. (with enclosure) Lisa Wansley-Layne, Esq. (with enclosure) Steven Ha~inila,Esq. [with endosure) Pat Pearlman, Esq. (with enciosure) Amanda M. Reirn, Bsq. James Kelsh, Esq.
Page 1 of 2 LUUY-'1'1-'I6 'I /:UL /05-6Y6-ZY60>> 504 540 0523 P 56/5tl
Respoosa:
Without limitation of th6 Other Gcneraf Objomions, pleasc see, h po.rticular, Qmgrd ObjdonNos. 3,7; 8,9,10,11 and 12. ThbMerger Agrecmcnt and other trwreacdon doornuits speak for rhemsdves. Subject to and without waiving its objectibns, Rontier responds as ~MOWS:
a. At the time of closing, herestriction is rmbved. b. Sd~h7.101) refers ro fhe 2010 aphal expenditure budget, to the extat it is substantially simi1ar in sfl maarid respcGts to the 20D9 capital ~.xpnditUra budget. The 2010 capital budget htts fiat been prepared or approvad yet.- G. Sec objections above. The. Merger Agrcmm#and other tmnsaction documents speak for thmeelves.
Prepared By: Cassandra Guinness D'ate: July 21,2009
28 .. Page'Z.o€ 2' . .. .-'.;,:' LLJUY'I I- IO II:uL 304 340 0325 P 37/38
Attachment F
Docket No. UT-991358. Nirithi Ai
30. More specifically, the Retail Settlement Agreemeat states the terms summarized below:
1. Thirty days after the merger doses, USWC $e, the principal corporate operating subsidiary in Washhgton State both pre- and post-merger) will file tariff revisions to include a Consumer Bill of Ri$s. The proposed Consumer Bill of Rights is to include statements of oustomer tights such as privacy, accuracy, courtesy, and good service. Xn addition, the proposed Consumer Bill of Rights will state, or restate, ce.rtain specific customer service credits or service alternatives, and the availability of an order confirmation nwbaso customers may more easily track service comitments. Joint Applicants commit that they will not seek tariff revisions to eliminate the customer credits or alternatives for a period of three years from the merger closing date,
2. Jojnt Applicants commit that they will retain existing held order customer service guarantee program (e.g., installation charge waiver, wireless loaner phone], as mrmntly tariffed (VSWC Tariff W-U31, Section 2, Sheets 27 and 27.1.
3. USWC will retain the existing $50 missed appoinbcnt and commitment credit (USWC Tariff wWU31, Section 2, Sheets 27.2 and 27.3) for an indefinite period.
4. Effective thirty days after the merger closing date, any customer who experiences an out-of-service condition @e., no dial tone) for mmthan two days (excluding Smdays and holidays) and less than eight calendar days will receive a $5.00 aedit. If such a condition that lasts more than seven days, the affected customer($) will receive credit €or the full month's reaming charges (local exchange service and assodoted regulated features). Out-of-service conditions caused by force majeure and related muses, or by customer preinises equipmmt, are expressly excepted from this commitment.
5. Effwtive thirty days after the merger closing date, all custmers within a given wire center will receive a credit of one month's recurring charges (local exchange service and associated regulated features) during any month in which customers within the wire center am unabie to obtain a dial tone within three seconds on at least ninety percent of calls placed during a normal busy bow. Thae are certain exceptions for wire centers that use analog switches, force majeure conditions, holidays, and disruptions caused by third parties.
6. Effective thirty days afkr the merger closing date, all customers in any exchange that falls out of compliance with the trouble report rate of4.0 per
1 LUUY-'1'1 -'I6 1 /:UZ /OS-6Y6-ZY6U >> 5u4 54u USL3 Y 36/56
Attachment F
hundred access lines in a given month Will receive a $0.25 credit per line, per month,
7. By October 1,2000, WSWC will complete all orders for local exchange service and retail jntraLATA private line service that on February 29,2000,were pending and had been held due to company reasons for more than sixty days. DOCUT NO, UT-991358 Page 11 There is an exception fbr held orders that require fiber optic capabilities and USWC may petition by June 1,2000,to be relieved of its obligation with respect EO held orders shown to be "unreasonablyexpensive" to complete.
8. Effective thirty days after the merger closing date, USWC will use Washington based employees to respond to customer complaints lodged with the Commission, and will do SO c thin two business days of an inquiry.
9. Within sixty days after the conclusion of each calendar year, for at least three years, USWC will provide its customas with a service quality pwfomanct report far the preceding year. Jhe first mp~fiwill be filed in 2002 for calendar year 2001. The Retail Settlement Agreement states &ght service quality pexfomcemeasures and requires the establishment of baseline performance lev& against which performance will be measured and reported to the Commission on a monthly basis. These reports will be the basis for calculating the amount of credits payable to customers each month. The December report will include a calculation of any calendar year credits due to customers under the Service Quality Performance Program, subject to a petition for mitigation based on demonstrable "unusud or exceptional circumstances" that US WC will have the burden to show, WSWC may petition to terminate the Service Quality Pexfomance Program that is not required of all telecommunications carriers operating in exchanges in which USWC operatas after calendar year 2003, and will not 'be obligated to continue the p~~griunafter calendar year 2005, in any went.
lo. Gny credits paid will be excluded from USWc's rtgufated results of'operations' and hmce will not be recovered through prospective rates established following a rata case.
2 2-1 YJY L4YY 2009-11-16 17:03 703-696-2960 >> 304 340 0325 P 1/40 - --
DEPARTMENT OF MEARMY UNtlED STAES ARMY EGALSERWCES AGENCY 901 Nom STUART STREET ARlJNkirON VA 2m31tU7 Regulatory Law Office REPLY x) AT~ZW~ONOF, Bacsimile Traasmission Cover Sheet
DWARTMmT OF THE Office of the Judge Advocate General
STEPWEN S. MELNIKOFP Principal TefecommunicatlonsTrial Couneel
ReQulatoryLaw Office Tel: (703)696-1643 us.~rmy Utlgatian Canter Fw: (703)696-2980 901 N. SluM Street, Suite 700 Afltngton. vA 22209.3 837 stsphen.meinika~Ohqda.~~Y,~~l