The Law Office of Vincent Trivelli, PLLC 178 Chancery Row Morgantown, West Virginia 26505 Phone (304) 291-5223 e Toll Free 1-866-266-5948 Fax (304) 291-2240 e E-mail: [email protected] P.2 c.7 ..-z *” - ,‘a -c1 c-2 “Ti 3 0 *.~ a, 2 7-, c:> r3 _-I ~ -” c-- F February 18,2010 ___.-. --.-re-. i-2 ,.I -2 as r, c -;6’: c-3 24 rj> c;;-co 3 m 0 a r:l W Ms. Sandra Squire, Executive Secretary r,&L: 7.3 a -,I + Public Service Commission of West Virginia _I 0 0 c) P. 0. Box 812 i7-I -4 201 Brooks Street Charleston, WV 25323
RE: Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia, Inc. Case No.09-0871-T-PC
Dear Ms. Squire:
Enclosed for filing in the above-styled and numbered case, please find the original and twelve (12) copies of the Public (Redacted) Version of the Initial Brief of the Communications Workers of America, AFL-CIO.
Also enclosed is the original of the PROPRIETARY VERSION of the Initial Brief of the Communications Workers of America, AFL-CIO which is being filed under seal in this case. Copies of this Proprietary version are being served on the parties of record who have executed a Protective Agreement in this matter.
If you have any questions, please feel free to contact me at (304) 291-5223.
Thank you. Sincerely,
Vincent Trivelli West Virginia Bar #SO1 5
Enclosures Cc: All parties of record
9 PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON
Case No. 09-0871-T-PC
Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia, Inc. Joint Petition for consent and approval of the transfer of Verizon’s local exchange and long distance business in West Virginia to companies to be owned and controlled by Frontier Communications
Initial Brief of the Communications Workers of America, AFL-CIO
The Communications Workers of America, AFL-CIO (hereinafter referred to as
“CWA”) files this Initial Brief of the Communications Workers of America, AFL-CIO and in support thereof states as follows.
Introduction
As this Commission is well aware, the instant matter concerns a Joint Application by Frontier Communications Corporation (“Frontier”) and Verizon West Virginia, Inc.
(“Verizon”)’ (herein referred to jointly as “Applicants”) for approval of the acquisition of
Verizon by Frontier and for approval of the transfer of long distance customer accounts of certain Verizon affiliates to a company to be owned and controlled by Frontier. The
Communications Workers of America, AFL-CIO (“CWA”) intervened in the matter in order to permit the Commission, CWA and the public to obtain complete information
I Specifically, this is the joint application by Frontier Communications Corporation, New Communications Holdings, Inc., New Communications ILEC Holdings, Inc., New Communications Online and Long Distance, Inc., Verizon West Virginia Inc., Verizon Long Distance LLC and Verizon Enterprise Solutions, LLC.
1 about the proposed transaction and to evaluate the impact of the proposed transaction on
CWA’s members, the public, and the State as a whole. Following discovery, four days of
evidentiary hearing and extensive input from experts, public officials’ and lay people it is clear that the proposed transaction will clearly not meet the requirements of the law and
is not in the public’s interest. The CWA therefore urges this Commission to reject the proposed transaction.
The Requirements of the Law -
It is also well established in the law of this state that “the primary purpose of the
PSC is to ‘serve the interests of the public,’”(Lumberport-Shinnston Gas Co. v. Public
Service Commission of W. Va., 165 W. Va. 762, 764, 271 S.E. 2d 438, 440 (1980)
* The record is clear that the vast majority of elected officials that have filed comments on this matter have either urged this Commission to reject the proposed transaction or have raised very serious concerns. The number of elected officials that have informed this Commission of their opposition or concerns is a clear demonstration that this proposed transaction is not in the public interest. The comments of the elected officials again and again include examples of how the proposed transaction will have an adverse impact on the public. In light of this outpouring of opposition by elected officials the record does not support a finding by this Commission that the proposed transaction is in the public’s interest and does not adversely affect the public in this State. Specifically the following Legislators have urged this Commission to reject the proposed sale: Senators Truman Chafm, Douglas E. Facemire, and Jack Yost, Delegates Sam J. Argento, Larry W. Barker, Brent Boggs, Bonnie Brown, Greg Butcher, Ray Canterbury, Mike Caputo, Gerald Crosier, Jeff Eldridge, John N. Ellem, Timothy R. Ennis, Michael T. Ferro, Barbara Evans Fleischauer, John R. Frazier, Roy E. Givens, Daniel J. Hall, Bill Hamilton, Barbara Burruss Hatfield, Mark Hunt, Tal Hutchins, Richard J. Iaquinta, Orphy Klempa, K. Steven Kominar, William R. Laird IV, Tiffany Lawrence, Linda Longstreth, Tom Louisos, Tim Manchin, Michael N. Manypenny, 11, Charlene Marshall, Dave Martin, Rick Moye, Brady R. Paxton, David G. Perry, Dave Pethtel, Daniel J. Poling, Mary M. Poling, Meshea L. Poore, Ralph Rodighiero, Stan Shaver, Alex J. Shook, Doug Skaff, Jr., Sharon Spencer, Margaret Anne Staggers, Dale Stephens, Josh Stowers, Sally Susman, David A. Walker, Danny Wells, Larry Williams, and William R. Wooton. The following Legislators have raised serious concerns about the impact of the proposed sale on this State and its telecommunications system: Senators Edwin J. Bowman, Joseph M. Minard, Michael A. Oliverio, 11, Ron D. Stollings, John R. Unger 11, and Erik P. Wells, and Delegates Tom Azinger, Samuel J. Cann, Sr., Kevin J. Craig, Walter E. Duke, Nancy Peoples Guthrie, Virginia Mahan, Pat McGeehan, Carol D. Miller, Jim Morgan, Don C. Perdue, Margaret Donaldson Smith, Randy Swartzmiller, and Joe Talbott. In addition to legislators, several other public entities have expressed opposition and/or concern regarding the proposed transaction. For example, letters of concern were received from West Virginia State Attorney General, Darrel V. McGraw, Jr., the Roane County Commission, the Monroe County Commission, the Marion County Commission and citizens of the Community of Given, West Virginia. Those calling on the Commission to reject the proposed sale are: the Fayette County Commission, the Wirt County Commission, the Mayor of the Town of Belle, the City Manager of Clarksburg, the City of Glenville, the Boone County Commission and the Logan County Commission.
2 quoting Boaas, v. Public Service Commission, 154 W. Va. 146,154,174 S.E.2d 331, 336
(1970)); and that the PSC is empowered to regulate “in a manner that is just and reasonable and not contrary to the law.” (Lumberport-Shinnston supra, 764 quoting
Delardas v. Morgantown Water Company, 148 W.Va. 776, 137 S.E.2d 426 (1964)).
With regard to the instant matter, the Joint Applicants have applied for approval by this Commission pursuant to West Virginia Code 8 24-2-12 which prohibits utilities from undertaking certain actions, “Unless the consent and approval of the public service commission of West Virginia is first obtained.. .”
Specifically, the Code section provides that the Commission,
may grant its consent in advance or exempt from the requirements of this section all assignments, transfers, leases, sales or other disposition of the whole or any part of the franchises, licenses, permits, plants, equipment business or other property of any public utility, or any merger or consolidation thereof and every contract, purchase of stocks, arrangement, transfer or acquisition of control, or other transaction referred to in this section, upon proper showing that the terms and conditions thereof are reasonable and that neither party thereto is given an undue advantage over the other, and do not adversely affect the public in this state.
The Code of West Virginia further provides that the Commission has the authority and the duty to “ensure fair and prompt regulation of public utilities in the interest of the using and consuming public” as well as to enforce and regulate the practices of public utilities in order to “provide the availability of adequate, economical and reliable utility services throughout the state.” (West Virginia Code 8 24-1 - 1(a)).
Recently this Commission, with regard to the proposed sale of a utility, has noted that it is also “empowered to attach conditions that it deems proper to the transaction”
(Hope Gas, Inc., Case No. 08- 1761-G-PC, Commission Order, December 22,2009, p. 9), and that the Commission requires “as an incident of that three-part test [West Virginia
3 Code 0 24-2-12], a showing that the buyer ... has, or as a result of the transaction will obtain, the knowledge, experience, and resources that allow it to conduct operations that provide adequate and reliable service at reasonable rates.” (Id., citing Hope Gas, Inc.,
Case No. 99-0462-G-PC, Commission Order, July 27, 1999)3 In that same matter, this
Commission held that the requirements of reasonableness with regard to the terms and conditions of the proposed transaction and the impact of the proposed transaction on the public4 are “intertwined” and have a “‘forward-looking’ element to it and requires that the Commission evaluate how the new utility will function after the transaction has closed.” (Supra, pp. 9-1 0)
The Commission’s actions in considering the instant matter, therefore must be guided by these factors with its jurisdiction and authority bordered by the “statute and the necessary implications there from.” (The Affiliated Construction Trades Foundation v.
The Public Service Commission of West Virginia, Syl. Pt. 6,211 W.Va. 3 15,565 S.E. 2d
778 (2002)).
However, at the end of the day, there is one thing that Frontier and CWA agree upon, as testified to by Frontier witness Mr. Billy Jack Gregg, “there’s an overriding principle for all decisions of the Public Service Commission in West Virginia, and that
It is troubling that Frontier appears to turn this test on its head by arguing that this Commission need not look to the relative financial strength of Verizon and Frontier. In fact, Frontier testified that, “Evaluation of the fmancial strength of the carriers is a distraction from the real issue of whether investment is occurring to benefit POTS and broadband customers.” (Frontier Ex. 2, McCarthy-Swatts Panel Rebuttal, p. 15). What Frontier neglects to perceive is that the financial strength or weakness of the purchasing entity is a key to its ability to provide the level of investment that is required to provide this State with the telecommunications system it deservers and the law requires.
4 The Commission stated, with regard to the provision that proscribes any party to the transaction from having an undue advantage over the other, “The failure to meet this requirement has rarely been asserted in any substantial sale of a public utility in this State.” (Id)
4 that is that [sic] whatever’s proposed has to be in the public’s interest. And that is the ultimate finding that must be made by this Commission.” (Gregg, T. Day 3, p. 2 16)
Argument
As discussed in more detail below, the proposed transaction fails the standards of law and thereby - if permitted to proceed - would fail the public in this State and must therefore be rejected by this Commission.
The reasons that the proposed transaction must be rejected can be organized into one overriding concern - the financial risks associated with this proposed transaction are simply too great for Frontier - particularly with regard to the VST05 areas - and will leave Frontier without the resources that would allow it to conduct operations that provide adequate and reliable service at reasonable rates. Given the financial risks of the proposed transaction, the impact of the proposal on consumers in West Virginia with regard to such issues as the cutover from Verizon’s systems to Frontier’s systems, the needed investments to repair the poor state of the existing copper network in West
Virginia, the critical need to expand broadband in West Virginia and others - simply stated, the approval of the proposed transaction would be adverse to the public interest.
The risk for the future of West Virginia is too great.
It is also a transaction that is driven by the tax-free nature of the overall transaction. That is, it is a transaction which results in Verizon receiving approximately
Beginning on page 30 of CWA expert witness Barber’s testimony he responds to a question regarding the effect of the proposed transaction on the financial condition of VSTO (Verizon’s Operations in West Virginia and 13 other states). Mr. Barber testifies that, “there is no doubt that this transaction would make VSTO significantly weaker financially.” (Zd, p. 3 1) Mr. Barber testifies that the transaction will result in a 600% increase in the amount of debt for every dollar of operating cash flow from 34 cents per dollar to $2.60 per dollar; the VSTO properties will be tied to a company with much lower profits and higher debt service requirements, “a combination that results in a much lower margin for error and much less ability to weather unexpected negative conditions (such as service quality problems, increased competition from cable companies and other carriers, economic downturns in portions of the service area, or new technologies that make existing services obsolete).” (Zd)
5 $3.3 billion tax free in cash and debt relief - if and only if the sale is to a buyer that is considerably smaller than the service areas being sold, with Verizon shareholders owning a majority of the combined entities (Frontier plus VSTO). Verizon’s experience with this type of transaction is a cautionary tale for this Commission and this State. As the record in this proceeding is clear, and uncontested, the sale by Verizon of its landline operations in Maine, New Hampshire and Vermont to Fairpoint Communications has resulted in bankruptcy for Fairpoint and service quality and other problems for the citizens of the three New England states.6 While certainly there are differences between the two transactions (as CWA expert witness Randy Barber’ testified, “I am not suggesting that
Frontier is Fairpoint (although there are unfortunate similarities which I will discuss below”))’, the experience of New England should cause this Commission to seriously
CWA expert witness Susan Baldwin testified at length regarding the FairPointNerizon transaction and the impact of that transaction on the people of the three New England states. For example, she testified that large call volumes at call centers overwhelmed the centers increasing call abandonment rates to very high levels, and order provisioning was late for over 50% of orders. (CWA Direct Ex. 4, Baldwin Direct, P. 47) 7 Mr. Barber has more than 25 years of experience as a financial analyst and occasional expert witness. His clients tend to be labor unions, and public and private pension funds. He has analyzed numerous transactions in several industries, including airlines, telecommunications, and education, among others. Mr. Barber knows what it means for a company to be in financial distress, having worked on several bankruptcy proceedings, including the regulatory and bankruptcy proceedings involving Fairpoint Communications. Mr. Barber’s analysis of Frontier can be found in his direct testimony which appears in the record as CWA Direct Exhibits 2 and 3-C.
’ CWA Direct Exhibit 2, Barber Direct, p. 1 1. Beginning on page 26 of his Direct Testimony Mr. Barber, discusses in detail the VerizonflairPoint transaction. On pages 29-30, Mr. Barber addressed the assertions by Frontier that it is not like Fairpoint and that this proposed transaction will make it stronger and even allow it to approach an investment-grade bond rating. In response Mr. Barber testified as follows: FairPoint made very similar assertions, trying to assure us that it would be a financially strong company if only it could do this next deal. Despite Frontier’s assertions to the contrary, Fairpoint also presented the transaction as delevering. On a pro forma basis, FairPoint projected that its Leverage Ratio would decline from 4.5~to 4.1~at closing. But a dispassionate view of the numbers did not support Fairpoint’s belief and it does not support Frontier’s belief either. It is possible that the transaction may help Frontier for a little while. As I explained, Frontier is on a path to failure, and this deal may help avoid that result for a few years. I am concerned, however, that there is no certainty in that result. This is especially true because Frontier’s debt burden will increase by $3.3 billion, to more than $8 billion overall, if the deal goes through.
6 question a multi-billion dollar utility transaction that is based on the requirements of the tax code and what’s in the best financial interest of Verizon rather than what is in the best interest of the people of West Virginia.’
The Financial Risks of this Proposed Transaction are too great - As the
Commission is well aware, a great volume of the pre-filed and live testimony in this matter was related to financial issues. That testimony, as well as the Commission’s consideration of this matter, focuses in essence on the issue of whether Frontier (the buyer) will, as a result of the transaction, have the resources that will allow it to conduct operations that provide adequate and reliable service at reasonable rates and on whether the public will be adversely impacted by the financial impact of the proposed transaction.
A fair reading of the record demonstrates that as a result of this transaction Frontier will simply not have the required resources and this transaction therefore must be rejected.
The facts of Frontier’s financial condition prior to the sale are clear - Frontier does not have an investment-grade bond rating (T. Day 2, Whitehouse, p. 189), Frontier’s revenues and net income have been in a steady state of decline (CAD Direct Ex. 1,
Frontier argues that the deal will make it finally stronger by reducing its leverage. But that calculation is based on unsubstantiated and unrealistic assumptions about revenues and expense savings, none of which are certain (or even likely) to occur. What will be certain, however, is that Frontier’s debt burden will nearly double and Wall Street lenders will need to be paid out of an ever-shrinking pool of revenues. I am especially cautious about believing Frontier’s rosy projections because it made similar projections before the Commonwealth Telephone deal that did not pan out, as I discussed above.
’In this regard the Commission should note that on or about November 13,2009 the Vermont Senate President Pro Tempore, Senator Peter Shumlin, and the Speaker of the Vermont House, Representative Shap Smith, filed correspondence in this matter that discusses the impact of the VerizodFairPoint transaction on Vermont and raises “many parallels” with the proposed transaction in the instant matter. The correspondence concludes, “We hope that by sharing our story we have highlighted the risks involved in a Reverse Morris Trust sale from Verizon to a smaller telecommunications company and that your PSC does not make the same mistakes that the Vermont Public Service Board did when they approved the Verizon-Fairpoint transaction.” It is also worth noting the public testimony of Senator Illuui, Chairman of the Senate Economic Development, Housing and General Affairs Committee of the Vermont Senate. (T. Day 1, pp. 22-35) and the public testimony of Mr. Matthew Vinci, President, Professional Fire Fighters of Vermont. (T. Day 1 pp. 36 - 41) Both gentlemen provide detailed testimony of the negative impact of the Fairpoint - Verizon transaction on New England and its telephone customers.
7 Roycroft Direct at p. 74, citing Frontier Communications Form 8-K, November 3, 2008) and Frontier has an unsustainable business model that pays out more in dividends then its earned net income” which has led to a decline in property, plant and equipment.” The business model of Frontier paying out more in dividends than it earned in income is set to continue if this transaction is approved.”
lo Mr. Randy Barber, CWA’s financial expert testified as follows: Q. Are you saying that Frontier’s business model is not sustainable? A. Yes, that is exactly right. Frontier’s business model is based on high dividend pay-outs, financed by reducing the value of its assets. A company can support this business model over the short- term by adding assets through new acquisitions. But such a model is not sustainable over the long-term, particularly if the company takes on large debt to finance the purchase. This is precisely what Frontier proposes to do in this transaction. Frontier has consistently paid out more to shareholders than it has earned in net income. During 2008, Frontier paid out dividends equal to 173 percent of net income. In the first three quarters of 2009, the payout has been 199 percent of profits ($234 million in dividends, $1 18 million in net income (See Schedule 4) The result is that Frontier’s shareholders’ equity has declined steadily. It stood at almost $2 billion in 2001, but is less than $418 million (as of September 30,2009). During the ftrst nine months of 2009, Frontier’s shareholder equity fell 18.9%,or $100 million. [citing Frontier SEC form IOK, filed March 12,2002, p. F-3 and Frontier SEC Form lOQ, filed November 4,2009, p. 21 (CWA Direct Ex. 2, Barber Direct p. 22)
Mr. Barber testified, “If a company pays out more in dividends than it earns in profits, there are basically two other sources ftom which dividends can be paid: retained earnings and non-cash charges to the income statement. By far the largest non-cash charge for most companies, including Frontier, is depreciation and amortization (D&A). As can be seen in Schedule 5, Frontier’s D&A has been roughly double its capital expenditures. A fundamental result of Frontier’s practice of using depreciation-based cash flows to fund dividends is an inevitable decline in its property, plant, and equipment. Even with the 2007 Commonwealth Telephone acquisition of 434,000 access lines, Frontier’s net property, plant and equipment has declined by more than $1.2 billion dollars since its peak in 200 1. (See the previously referenced Schedules 3 and 5) Frontier’s business model is based on failing to adequately reinvest in its network - in essence, cannibalizing its network assets - to pay high dividends to shareholders.” (Supra Barber Direct, pp. 22-23) In 2007, the Montana Public Service Commission rejected a proposed merger and acquisition in significant part because the purchasing entity was projecting to pay out more in dividends than the utility earned in net income. The Montana Commission explained, “In normal utility operations, retained earnings provide a vital source of financial strength for capital investment and as reserves that are available during unexpected financial strains. Regularly paying out dividends in excess of net earnings by a utility is inappropriate and risky because having insufficient reserves on hand could adversely affect the utility’s ability to provide adequate service.” (Northwestern Corn., 2007 Mont. PUC LEXIS 54, Mont. PSC July 31, 2007, paragraph 149).
I’ As Mr. Barber testified, even though Frontier has stated (Frontier SEC Form 425, filed May 13,2009, page 7) that if the transaction is completed it would reduce its per-share dividend pay-out by one-fourth, from $1 to 75 cents per share annually, “Even with this dividend reduction, it is likely that Frontier will still end up paying far more in dividends than it earns in profits. Depending on the price at which Frontier’s stock is issued to Verizon’s shareholders, Frontier’s new dividend would represent between 125 percent and 142 percent of the combined company’s (Frontier + VSTO) 2008 net income. (See schedule 1 1) And
8 Despite Frontier’s assertions that the proposed transaction will improve its financial situation, the facts of Frontier’s financial condition if the sale were to close are equally clear and troubling. One such troubling issue concerns the financing for the debt that Frontier will take on due to this transaction. The testimony in this matter is clear that
Frontier has not yet obtained financing for $3.1 billion to $3.3 billion in new debt in order to provide the required cash payment (or debt exchange) to Verizon (T. Day 2,
Whitehouse, pp. 145-146) and is asking this Commission to approve the proposed transaction prior to the financing being ~btained.’~Therefore, there is simply no way of knowing the interest rate, debt service requirements, security requirements, restrictions on business operations or any other terms and conditions that Wall Street bankers will require to provide this financing to Frontier. Without such critical information it is impossible for this Commission to find that the transaction meets the standard of the law.
The financial projections offered by Frontier in support of their assertion that the proposed transaction would improve Frontier’s financial condition are of no avail to the
Applicants. First, none of the projections show Frontier’s financial condition improving to the point that the company would achieve even a minimal investment-grade bond rating, let alone a financial condition on par with Verizon’s. Second, Frontier’s financial projections are not credible. Specifically, Frontier projects an annual decline in VSTO’s revenues of <<< BEGIN CONFIDENTIAL END CONFIDENTIAL>>> (CWA Direct Ex. 3-C, Barber Direct, p. 46).- In comparison, for the past two years since net income is likely to decline in the future because of the large debt burden taken on by Frontier, these numbers will get even worse.” (CWA Direct Ex. 2, Barber Direct, p. 33)
I3 Mr. Whitehouse testified on behalf of Frontier that the utility “anticipate[d]” obtaining a portion of the financing in the first quarter of 20 10 but was unable to provide any details with regard to the amount, terms or conditions that the utility has proposed for any financing of the proposed transaction. (Supra, pp. 148- 150)
9 VSTO has actually had declines in revenues of 3.1 percent and 3 -9percent (2007 v. 2006 and 2008 v. 2007 respectively). (See Frontier Ex. 3, Whitehouse Rebuttal Exhibit DW-1,
Frontier form 424B, ProxyProspectus (Sept. 16,2009) pp. 148-149) Moreover, the most recent information available -the change in revenues from the year ending June 30,2009 as compared to the year ending June 30, 2008 shows VSTO’s revenues decline by 5.8 percent. (CWA Direct Ex. 2, Barber Direct, p. 36) It is worth noting that Frontier has not explained the basis for its assumption that VSTO’s revenue losses will be so much less in the future than the company - or the VSTO properties - have experienced in recent years which include a period of a robust national economy in 2007.
Another area that Frontier asserts will assist in improving its financial condition post transaction concerns “synergies.” As the Commission is aware, Frontier has projected that it will be able to run Verizon’s VSTO service areas on $500 million less than Verizon spends to do so. Frontier projects that these so-called annual “synergies” will gradually increase until fully realized in the year 2013. (T. Day 2, Whitehouse, pp.
154-155) This “savings’’ represents an approximately 20 percent reduction in VSTO’s expenses - a level that is unprecedented for a transaction of this magnitude.14 It is also important for this Commission to note that Frontier testified that it does not know how much of the $500 million in annual savings will come from West Virginia and has no plan to develop state-by-state synergy estimates. (T. Day 1, p. 147) Thus, Frontier has come to this Commission urging it to approve this massive transaction without any information whatsoever on how Frontier’s proposed $500 million annual savings will impact West Virginia now or any time in the future. Without such critical information it
l4 See discussion of the testimony of Frontier witness Mr. Whitehouse below.
10 is impossible to determine the extent of the adverse impact on the public in this State, making it clear that the Commission must Reject this proposal.
Many of the Parties in this proceeding raised another area of the financial practices of Frontier that calls into serious question Frontier’s financial situation both pre- and post-transaction” -- its business model. As mentioned above, Frontier has a business model that is based upon generating cash flows from landline telephone utilities operations and paying out most of that cash to its investors. From 2004 through 2008
Frontier paid $2,984,000,000 to its stockholders, but earned net income of only
$1,017,000,000. (See CWA Direct Ex. 2, Barber Direct Schedule 4, citing Frontier
Schedule 10K filed with SEC March 1, 2007 and February 27, 2009, page F-8 in both filings)
In an effort to counter the testimonies of Mr. Barber for CWA (see footnotes 10 and 11 above), Mr. Roycroft for the Consumer Advocate, and Mr. King for the
Department of Defense, that Frontier’s business model and dividend payout policy is unsustainable, as well as a number of other financial issues, Frontier presented the
Rebuttal testimony of its Senior Vice President and Treasurer, Mr. David R. Whitehouse.
With regard to the concerns raised about Frontier’s business model, Mr. Whitehouse testified that Frontier has generated free cash flows in the years 2005 through 2008 of approximately $493 million to $562 million and that the proposed transaction would increase Frontier’s annual free cash flow, based on pro forma 2008 results to over $1.4 billion without synergies and $1.7 billion after synergies are concluded. After dividend payouts the historical amounts for the years 2005 - 2008 ranged from $175 - 238 million
l5 As discussed above (see footnote lo), despite the statements by Frontier, this is a business model that is set to continue if this transaction is approved.
11 with a total free cash flow after dividends for those years of over $794 million. Mr.
Whitehouse also testified, “in the post-transaction period will generate significantly greater annual free cash flow after dividends - $681 million without synergies, and $991 million with synergies based on 2008 pro forma figures.” (Frontier Ex. 3, Whitehouse
Pre-filed Rebuttal, pp. 38-39)
There are, however, several problems with Mr. Whitehouse’s efforts. First, Mr.
Whitehouse testified at the recent hearing that for the years between 2005 and 2008
Frontier repurchased approximately $800 million in stock and thus the actual free cash flow for those years was zero or less than zero. (T. Day 2, pp. 152-153) Second, by basing his projected free cash flow figures on “2008 pro forma figures” Mr.
Whitehouse’s projections are essentially meaningless. That is, Frontier prepared those projections utilizing actual 2008 results for VSTO and legacy Frontier and then catapulted the 2008 results into the year 2013 when the synergies would be fully implemented (Supra, pp. 154-155) - fully five years later. However, in its purported confidential projections - which Frontier did not provide as a part of its supplemental testimony - Frontier projects that its revenues, expenses, cash flows, earnings and other important financial measures will be very different in 2013 than they were in 2008. Thus calling into serious question the “illustrative”16nature of the figures put forward by Mr.
Whitehouse.
In fact, at the hearing, Mr. Whitehouse testified that in Frontier’s pro forma model provided to the Commission and the parties during discovery in this matter for the years of 2010 and 2014 that none of the projected free cash flow figures came within
<<
~~~ ~ ~ ~ ~ 16 See Transcript, Day 2, Whitehouse, p. 154.-
12 Whitehouse’s $991 million figure (Confidential T., January 14, 2010, p. 24) and that without the proposed synergies the projected free cash flow figures would be <<
Likewise, Mr. Whitehouse testified in response to a question comparing Frontier’s
“current leverage ratio and pro forma leverage ratio” with other ILECS, that, “Frontier’s leverage ratio will not be as low as Verizon’s (although Verizon’s proportionate ratio 2.0 times is not significantly better than Frontier’s expected ratio of 2.2 times including synergies), or as low as AT&T’s.” (Frontier Ex. 3, Whitehouse Rebuttal, p. 20) Once again, however, when one looks to the pro forma model provided by Frontier to the
Commission and the Parties in this matter, Mr. Whitehouse testified that, even assuming the projected synergies, the projected leverage ratio for the years 2010 through 2014 projected by the pro forma model << PROPRIETARY>>> the 2.2 contained in his pre-filed testimony.-l8 (Confidential T. Jan~ary14,2010, pp. 28-29) 13 Mr. Whitehouse also attempted to counter the testimony of Mr. Barber regarding the “unprecedented” level of the proposed synergies.l9 Simply stated, Mr. Whitehouse testified that, “the level of expense savings is not ‘unprecedented’.” (Frontier Ex. 3, Whitehouse Rebuttal, p. 63) However, during the hearing Mr. Whitehouse testified that in evaluating the proposed transaction just before announcement of the proposed sale, Frontier’s Board of Directors was presented with information from its advisors that the proposed $500 million in synergies accounted for a projected << << Given the record with regard to the post-Frontier financial situation, it is clear that this Commission does not have the foundation to make the required finding that from the transaction Frontier will obtain the resources that allow it to conduct operations that Mr. Barber testified as follows regarding the unprecedented nature of the proposed Frontier expense savings: It is unprecedented to have expense savings of the magnitude projected by Frontier for a transaction of this size. Frontier projects that it will be able to cut VSTO’s annual operating expenses by $500 million (21 percent of total VSTO expenses) by 2013. In order to achieve savings of this magnitude, Frontier will need to reduce the VSTO workforce and cut deeply into other costs. By comparison, when Fairpoint purchased Verizon’s access lines in Maine, New Hampshire and Vermont, Fairpoint projected reducing costs by 8 to 10 percent (and Fairpoint has not been able to achieve even those savings). The most recent major merger involving rural landline operations, the CenturyTel-Embarqtransaction, entailed projected synergy savings of 9 percent of Embarq’s expenses (See Table 1). Frontier’s so-called synergy savings are either wishful thinking, or will require such draconian reductions in service, workforce, and maintenance that Frontier will not be able to deliver on its promises to improve service and broadband deployment.” (CWA Direct Ex. 2, Barber Direct, p. 38) 14 provide adequate and reliable service at reasonable rates. Therefore, this transaction must be Rejected. The Impact of the Financial Risks of the Transaction Jeopardize Service Quality and Broadband Build Out - CWA’s expert Susan Baldwin” testified at length about the impact of the financial issues on the ability of Frontier to provide quality service to the customers in West Virginia2’and CWA will not attempt to repeat that testimony at this point. There are, however several points that should be emphasized. Ms. Baldwin testified with regard to the impact of the financial constraints: The serious financial risks that Mr. Barber describes in detail jeopardize the quality of service that Frontier would offer consumers for several reasons. The post-transaction financial constraints on Frontier would limit its ability to follow through on its promise to expend more on capital investment than Verizon has. Instead, in pursuit of synergies, Frontier would face strong economic incentives to cut costs, particularly where the anticipated cost of such investment is not offset by the anticipated increase in revenue (or decrease in expenses). As a result, for example, customers may experience long delays for the restoration of out-of-service troubles. (CWA Direct Ex. 4, Baldwin Direct, p. 101) The issue of the ability of Frontier, should this transaction be approved, to have the financial strength to improve the copper network in West Virginia is particularly important given the current state of the Verizon copper network in this State. As the Commission is well aware, there is an ongoing General Investigation into service quality in the Verizon areas of the State. (See PSC Case No. 08-0761-T-G1, Verizon WV Inc.) In that matter, the Commission has been monitoring the investment of approximately $1 1 2o Ms. Baldwin is the former director for telecommunications of the Massachusetts Department of Public Utilities. She holds Masters’ degrees in economics and public policy. Ms. Baldwin has testified as an expert witness on telephone service quality and related issues before twenty regulatory commissions, including this Commission and the Federal Communications Commission, and has authored numerous papers on regulatory issues. Her extensive analysis is found in her direct testimony and schedules that appear in the record as CWA Direct Exhibits 4 and 5-C. 21 See CWA Direct Ex. 4, Direct Testimony of Susan M. Baldwin. 15 million by Verizon into the existing copper network in order to improve service quality. In that the General Investigation is a separate and ongoing proceeding, CWA will not attempt to litigate those matters in the instant case. It is worth noting however, that it seems that all Parties concur that the investment of the $1 1 million has simply not been sufficient to reverse all of the service quality problems in the Verizon22network and that substantial additional investment is needed. While at this late date in the proceeding23Frontier, through its settlements with the CLEC’s, informed the Commission and the Parties at the hearing that it was committed to investing $12 million in the area of service quality in 201 124 (T. Day 1, p. 88 and Exhibit 1, Joint Stipulations) it is an amount that apparently bares no relationship to the needs of the network. When asked if Frontier had undertaken a study to determine what it would take in terms of funds to improve the service quality in the Verizon areas in order to meet the service quality metrics of the Commission, Frontier testified that they “had not done a 22 Verizon witness Ms. Buckley, testified “As we said before, the work is not done here. We have not declared victory on the service quality.” (T. Day 4, p. 127) Ms. Buckley goes on to state that the 15 percent reduction in complaints shows that Verizon is making progress. (Id)It is worth noting that as testified to by Consumer Advocate Byron Harris, “It is a fact that the number of complaints went down 15 percent, but they’re down from their all-time high. You know, the fact of the matter remains that the Commission still gets over 2,000 complaints. And five, six, seven, eight years ago, they were getting 300,400, 500 complaints. So there’s a huge change there.” (T. Day 4, p. 201) 23 As the Commission is aware, it has recently stated, in a 42T case, that applicants are required to carry their burden of proof in their direct testimony and not by filing substantial new testimony as rebuttal. (Hope Gas, Inc., Case No. 08-1783-6-42T. Order 11/20/09) In the instant matter, not only did the Applicants file substantial new testimony as rebuttal but continued to provide new information during the hearing. 24 In the pre-filed Frontier Rebuttal Testimony of Mr. McCarthy and Mr. Swatts, with regard to the issue of investing in West Virginia, they attempt to contrast Frontier and Verizon stating, “The Commission should understand that diversified carriers, such as Verizon, have made strategic business decisions to direct their capital resources toward growth objectives like wireless. As a result, other Verizon operations such as lower-density local exchange operations of VSTO must compete for capital with these growth businesses.” (T. Day 1, p. 15) What the Frontier panel fails to note is that Frontier itself has criteria for investments and projects must compete for capital. During the hearing Mr. McCarthy testified that Frontier looks to a four- year payback and a 15 percent rate of return or discount rate on such investments. (T. Day 2, pp, 93 and 94) 16 comprehensive analysis on service quality.” (T. Day 1, p. 140)25Without Frontier having studied the needs of the physical plant in this State and not having placed anything in the record whatsoever as demonstrating how the $12 million was determined or how much is needed to repair the copper network in this State, how can this Commission have any confidence that the amounts of investment proposed by Frontier are in any sense sufficient to ensure that adequate, economical and reliable telecommunications services will be provided in the VSTO areas of West Virginia by Frontier should the transaction be approved - particularly given the current poor state of the copper infrastructure? In addition, Frontier testified that it was making no commitments beyond the $12 million. (Id.) Rather, Frontier testified that one should look to the “amount of capital”26and to Frontier’s pending application for stimulus funding. (Id.) With regard to Frontier’s newly announced proposed level of capital investment over the next three to four years, the Company produced no evidence that its proposals would be sufficient to repair, maintain and upgrade the copper network. In fact, the proposed levels are not fundamentally different than the current inadequate investment levels of Verizon. In this regard, the PSC Staff expert Michael Fletcher, testified as follows: 25 Mr. Gregg, on behalf of Frontier also testified that neither he nor Frontier had undertaken any formal study of the physical plant in the VSTO areas of West Virginia to determine what it would take to bring that plant up to a level to meet service quality standards. (T. Day 3, p. 213) The Commission should note that the record is clear that Frontier made no physical inspection of the VSTO areas of West Virginia during its due diligence period (T. Day 1, p. 157); made only two brief trips to West Virginia for physical inspection in November of 2009 and then only to limited areas. (T. Day 3, p. 210 and CAD Cross Ex. 7) As testified to by CWA expert witness, Ms. Susan Baldwin in her pre-filed Direct Testimony, “Frontier has not demonstrated that it has conducted comprehensive due diligence regarding the state of Verizon West Virginia’s infrastructure.” (CWA Direct Ex. 4, Baldwin Direct, p. 6). The record following the hearing is clear that Frontier has simply never undertaken a detailed review of the VSTO areas in West Virginia. 26 See Commission Request Exhibit 1 which states at point number 2: “Frontier WV shall make capital investments of $75 million in 201 1 (including $12 million targeted to service quality), $63 million in 2012, $63 million in 2013. Assuming the transaction closes in the 2nd quarter of 2010, Frontier will expend an additional $30 million during the 2nd half of 2010.” (McCarthy Hearing Testimony). 17 “What has happened in 2009 is that as a result of the quality of service case, Verizon has had a surge, if you will, of $1 1 million --- yeah, $1 1 million. That hasn’t helped. For the first time in oral testimony, I heard Mr. McCarthy offer $75 million the first year, $63 and $63. That, essentially, is another surge of $12 million to address quality of service issues and then drop back to the current $60 million, approximately $60 million per year that Verizon currently uses. Well, if the $60 million average that Verizon is using today is insufficient, as evidenced by their own metrics and the quality of service complaints, and for Frontier to go back to $63 million in two years is not going to change things.” (T. Day 4, pp. 232-233) During the recent hearing on this proposed transaction a significant focus of the testimony was on the issue of broadband, the importance of its expansion in West Virginia and the impact of the proposed transaction on its deployment. The Applicants in this matter have consistently urged the public and this Commission to look to the supposed stark contrast between the two companies and compare Frontier which has stated that it intends to expand broadband and Verizon which it has been said has no such intention. For example, the Rebuttal Testimony of Stephen E. Smith and Kathy L. Buckley on behalf of Verizon includes the following exchange: Q. CWA witness Barber suggests that the transaction “most likely will represent a step backward” for high-speed broadband deployment because Verizon likely will deploy it in West Virginia. Is this correct? A. For the reasons described in Mr. McCarthy’s testimony, Frontier has been clear about its intent to bring the acquired territories to the same level of broadband deployment as its current WV territories. Verizon has been equally clear that Verizon has no intention to increase its deployment of wireline broadband in West Virginia.” Only one party to this transaction has applied for stimulus funding for broad band expansion and that was Frontier. (Verizon Panel Ex. 2, pp. 17- 18)28 ’’ The testimony included the following footnote, “Verizon intends to meet its current and limited ‘matching’ commitments in the Commission-approved USF Stipulation, but has no plans to increase that deployment. Commission Order, Case No. 07-1989-T-P (November 8,2007), Stipulation 7 6.” 28 On or about January 22,20 10, subsequent to the hearing in this matter, the National Telecommunications and Internet Administration (“NTIA”) denied fiinding of both of Frontier’s grant applications for federal stimulus funding for broadband in West Virginia. (See Consumer Advocate Division ’s Motionfor Leave to Supplement the Record and Notice Supplementing the Record filed on or about February 2,20 10) 18 When asked about when this decision not to expand broadband in West Virginia was made and whether it was related to the announcement of the proposed transaction in May of 2009, Mr. Smith appeared to amend the pre-filed testimony by stating that rather than having no plans for increased broadband deployment, Verizon had “no announced plans to increase broadband” (T. Day 4, p. 21) (emphasis added) and that while they “certainly do” have unannounced plans for increased deployment, such plans were “likely to be confidential” and he did not know of the plans. (Supra, p. 22) The record is then not the stark contrast that has been portrayed and this Commission must not base its decision in this matter on the Applicants’ apparent attempt to create such a contrast where there is nothing of support in the record. Near the onset of the public hearing, Frontier announced that its plan was to spend “approximately $48 million” on broadband in West Virginia. This amount was “the capital necessary to enable broadband 85 percent of the service territory.” (T. Day 1 pp. 135-136) Frontier testified that this amount was based on a “model” that was “verified” about which they could not find any “problems” (Supra, pp. 137 - 138). In this regard the Commission should note that this amount is dramatically lower than the amount estimated by Verizon’s engineers. In fact the difference is striking. Verizon’s engineers estimated << CONFIDENTIAL>>> (CAD Cross Ex. 41-C, Day 4) With the Verizon estimate leaving the VSTO areas << 19 Day 4, Smith, pp 26-27) it is in fact it an estimate of the cost of the expansion of broadband in West Virginia from Verizon’s own engineers that Verizon appears to have decided not to provide to Frontier based on the decision of a non-engineer. (T. Day 4, p. 32) It is also important for the Commission to note that CWA’s expert, Susan Baldwin, has provided the Commission with both public and confidential estimates of the cost of broadband build out in the VSTO areas of West Virginia - both of which are << In that the record is devoid of any support for Frontier’s $48 million plan3’ and that Verizon and Baldwin estimates are << the record as put forward by the Applicants. 29 Using publicly available information Ms. Baldwin estimates that it would cost between $123 million to $246 million to com~letebroadband build out by Frontier in the VSTO areas of West Virginia. (Baldwin CONFIDENTIAL >>> (Supra, page 140) In fact all of these figures are underestimates because Ms. Baldwin based her figures on a VSTO service area of 617,036 lines in West Virginia obtained from Mr. Gregg’s testimony which corresponds with the number of lines that Verizon actually serves, when in reality the total number of lines in the VSTO area (Verizon plus competitors) is << 30 It is also worth noting as discussed in footnote 24 above, that Frontier capital investments are subject to Frontier criteria and projects must compete for capital. During the hearing Mr. McCarthy testified that Frontier looks to a four-year payback and a 15 percent rate of return or discount rate on such investments. (T. Day 2, pp. 93 and 94) 20 In addition, of course the fact remains, as discussed at length above, “The financial constraints that Frontier will likely confront will jeopardize its ability to follow- through on its pre-transaction broadband plans.” (CWA Direct Ex. 4, Baldwin Direct, p. 75) The future of the economic development of West Virginia is simply too important to risk it on unsupported “plans” by a company whose financing will not permit it to undertake the needed investment. Once again, this proposed transaction must be rejected. Frontier s Billy Jack Gregg and the Public Interest - In an effort to bolster their contention that the proposed transaction is in the public interest, the Applicants hired former West Virginia Consumer Advocate Mr. Billy Jack Gregg. Mr. Gregg, in fact, testified in this proceeding that the transaction would provide a benefit to the customers of West Virginia and was in the public interest. (Frontier Ex. 6, Gregg Direct, p. 2) However, given the testimony in this matter, Mr. Gregg’s opinions must be evaluated within the context of the facts of this case. In his Direct Testimony before this Commission Mr. Gregg also testified with regard to his role in this proceeding. He testified: I have been retained by Frontier to review the parent company merger of Verizon West Virginia Inc. into Frontier, with special emphasis on the impact of the transaction on customers in West Virginia. I have also been asked to provide my opinion on the likely impact of the transaction on broadband deployment and quality of telecommunications service in West Virginia. (Id.,p. 2) It was based on this “review of the transaction” and his previous history with both providers, that Mr. Gregg testified that the transfer of assets can provide benefits to the consumers of West Virginia and “is in the public interest.” (Id.) It is clear that Frontier 21 relies heavily on the former Consumer Advocate’s testimony in favor of this proceeding in its public statements and its filings before this Commission. Unfortunately, it is clear that the facts do not support the implication from Mr. Gregg’s statements that after a review of the proposed transaction he has reached a conclusion that the transaction is in the public’s interest. The fact is that within thirteen duys3*of the announcement of the proposed transaction, Mr. Gregg, on behalf of his one- person company, Billy Jack Gregg Universal Consulting (“Universal”), signed a contract with Frontier that placed Mr. Gregg in a position to advocate for the approval of the proposed transaction. In fact, Mr. Gregg’s commitment was extensive. The Agreement states that the services to be provided by Mr. Gregg are as follows: This Agreement commissions Universal to assist Frontier in gaining approval of Frontier’s purchase of the assets of Verizon Communications Inc. (“Verizon”) in fourteen states (“the transaction”) by Universal’s performance of the following activities: e Advocacy in the affected states concerning the benefits of the transaction, with particular attention to consumer advocates in the impacted states. e Advocacy concerning the benefits of the proposed transaction with state and federal elected officials. e Possibly providing testimony and/or work as a witness in the state approval process, focusing on the public benefits of the transaction. e Providing ideas on general strategy through the approval process. It is understood that in providing these services Universal will give special focus to the state of West Virginia since Frontier will become the largest incumbent telecommunications carrier in that state following approval of the transaction. (CWA Cross Ex. 3) At the hearing Mr. Gregg testified that taking a position on a large, complex transaction as the one before the Commission while he was the Consumer Advocate in West Virginia would not have taken place within 13 days and would have required CAD to go through the discovery and testimony processes. (T. Day 3, p. 207) 31 The proposed transaction was announced on May 13,2009 and Mr. Gregg signed a contract with Frontier on May 26,2010. (See T. Day 3, p. 204-205) 22 With all due respect, in that Mr. Gregg was so quickly hired to advocate in the manner set out in his Agreement with Frontier, as well as his separate agreement with Verizon,32the opinions of Mr. Gregg with regard to this proposed transaction, including that the transaction is in the public interest, are opinions that the Commission must place within the context of the facts of this case and therefore give them the lack of weight they deserve. There are signiJcant risks with regard to the cutover - One of the key factors in this transaction, concerning West Virginia specifically, is that in West Virginia Frontier must cutover fiom Verizon’s support systems (for example for retail ordering and billing, wholesale ordering and billing and network monitoring and maintenance) on the day of the closing.33 The record is uncontested‘that this cutover in West Virginia will be significantly different than in any of the other 13 states, and that the cutover in West Virginia is the first such effort for a former Bell Atlantic property.34 Before this Commission, Frontier has touted its purported “successful track record” of past acquisitions. The Company has also testified that it has “successfully integrated other telecommunications companies, including Rochester Telephone, 32 Mr. Gregg had entered into a prior agreement with Verizon “in the fall of 2008 to provide consulting services and assistance on national issues related to broadband intercarrier compensation and universal service.” (T. Day 3, p. 208) 33 As testified to by CAD Expert, Trevor Roycroft: “Because Verizon West Virginia is part of the legacy Bell Atlantic operations, it is served by a distinct set of systems separate from the former GTE systems that Verizon is replicating for Frontier for the Spinco states outside of West Virginia.” (CAD Direct Ex. 1, p. 33) Roycroft goes on to say that “[f‘Jorthe 4.2 million access lines in the Spinco properties outside of West Virginia, Frontier will use a “replication” approach to take control of these systems. Meanwhile, as discussed above, the the West Virginia property, Frontier will “cut over” the former Verizon West Virginia operations to Frontier’s existing systems to coincide with the closing. Viewed in isolation, the physical network cutover, and either of the two processes associated taking over company operations is complex. However, the simultaneous approach outlined in the Merger Agreement for Frontier greatly increases the overall risks associated with the operation and integration of the Verizon Spinco properties.” (Id. at pp. 52- 53) 34 See testimony of Smith, Transcript, Day 4, pp. 46-47. 23 Commonwealth Telephone and Global Valley Networks. In these transactions Frontier successfully consolidated different operating systems, including five different billing systems.” (Verizon Panel Ex. 1, Smith-Buckley Direct, p. 16). However, a review of history shows a different result. In her direct testimony, CWA expert witness Susan Baldwin provided an analysis of service quality in areas previously acquired by Frontier: Global Valley, Commonwealth Telephone and Rochester Telephone. (C WA Direct Ex. 4, Baldwin Direct, pp. 55-66) Following her review of Rochester Telephone and Global Valley Ms. Baldwin testified: Whether because of network issues, insufficient resources, billing disputes, integration of customer support systems, or other reasons, service quality in territories acquired by Frontier have deteriorated. For some metrics, there have been spikes that coincide with the transfer from the acquired company’s platform to Frontier’s platform. Furthermore, the two acquisitions that I examined were relatively small, 13,000 access lines in the case of Global Valley Network and approximately 500,000 access lines (at the time) in the case of Rochester. In contrast, Verizon’s Spin Co lines will add approximately 4.8 million access lines. (Supra, pp. 64-65). Following her review of Commonwealth Telephone Ms. Baldwin testified that “[clontrary to the assertions of Frontier’s and Verizon’s witnesses, Frontier’s previous acquisitions have not gone smoothly, and have not necessarily brought about a higher level of service quality.” (Supra, p. 66) Ms. Baldwin’s review is supported by the testimony of Mr. John Pusloskie, President of CWA Local 1170, Rochester, New York. Mr. Pusloskie has been an employee of Frontier for approximately 20 years and a Local elected official for over 9 years. Mr. Pusloskie was able to provide first hand testimony of the impact of the 2001 24 acquisition of Rochester Telephone by Fr~ntier.’~Mr. Pusloskie’s testimony details the severe reductions in the workforce, the movement of repair service calls from the Rochester area to DeLand, Florida, the thousands of repair ticket and service order problems that arose from the cutover of the billing system to Frontier’s DPI billing platform and severe service quality issues that resulted from the Frontier acquisition. He further details the Local’s attempts to bring the service quality issues to the attention of Frontier and the Company’s failure to respond. It is an on-the-scene history that is another cautionary tale for West Virginia. (T. Day 3, pp. 138-195). It is a history that West Virginia simply doesn’t need to have repeated here. The Commission is empowered to attach conditions to transfer transactions - As discussed above, the Commission has recently reiterated that in matters such as the instant matter, statute empowers the Commission to attach conditions that it deems proper to the transaction (Hope Gas. Inc., Case No. 08-1761-G-PCYCommission Order, December 22,2009 page 9).36In CWA’s testimony before this Commission in the instant matter, its experts have clearly stated that there is “no set of conditions [that] would offset 35 Mr. Pusloskie testified that Rochester Telephone was purchased by Global Crossing in 1999 which in turn was acquired by Frontier in 2001. (T. Day 3, pp. 146-147) 36 As noted by the Chairman during the hearing, “Our statute authorizes us to approve/disapprove or approve in part or disapprove in part and to condition. And now, we don’t - we don’t have the authority under the statute to condition it and order you to undertake it, but we do have the authority, I think, without abrogating contracts, to condition an approval. And then you [Verizon] can, as the entity, undertake to close the deal with that condition inherent in your documents.” (T. Day 4, pp. 189-190) This power stands in stark contrast with the testimony of Mr. Vasington, a Verizon witness that, “The Commission should not interfere with the private contract, negotiated at arms-length and overwhelming approved by Frontiers’ shareholders.” (Verizon Ex. 3, Vasington, Direct Testimony, p. 15- 16) In this regard, Mr. Vasington testified that he was referencing a provision of the merger agreement regarding the allocation of regulatory risks. In addition he testified that he considered any requirement that Verizon “guarantee” the service quality of the network for a period of time would be an “interference with a private contract.” (T. Day 4, p. 172). 25 the risks of the transaction” (CWA Direct Ex. 4, Baldwin Direct, p. 7)37and they urge this Commission to reject the proposed transaction. At the same time, in the event that the Commission does not agree with CWA that this proposed transaction must be rejected, CWA’s experts have proposed a series of conditions for many areas of the transaction that, if implemented, would “at least partially offset the risks to consumers” (Id)CWA will not take the Commission’s time to repeat those conditions in this Brief but would urge this Commission, should it determine that the transaction can be approved, to utilize the conditions set out by CWA.38 These conditions, taken together, can ameliorate some of the most serious risks of this transaction. There is one proposed condition that received some attention in the hearing on this matter that deserves some discussion - the concept requiring a continuing involvement by Verizon after the closing of the transaction. CWA expert Barber testified that, “Simply put, the Commission should not agree to let Verizon walk away from its operations at closing. The last three asset divestitures resulted in the financial failure of the new firm (Hawaii Telcom, Idearc, and Fairpoint). Verizon must remain responsible until it has been demonstrated that the new Frontier is truly financially viable.” (CWA Direct Ex. 2, Barber Direct, p. 62). While Mr. Barber proposed two alternatives in this regard, the concept of a Verizon warranty or guarantee received the most focus and attention. In his pre-filed Direct Testimony Mr. Barber described the concepts as follows: 37 Likewise, CWA expert witness Barber states, “I must reiterate that I do not believe it is possible to adequately protect the public from the very serious risks that would be posed by having Frontier take over Verizon’s operations in West Virginia. Frontier simply does not have the financial capability to safety and reliably operate, maintain and enhance Verizon’s network.” (CWA Direct Ex. 2, Barber Direct, p. 60) 38 See CWA Direct Ex. 2 and 34,Barber Direct at pages 60 through 69 and CWA Direct Ex. 4 and 5-C, Baldwin Direct at pages 69-73 (Cutover), 98-99 (Broadband), 128 (Service Quality) and 129- 147(Summary). 26 Verizon Warranty or Guarantee: An alternative to the JV would require Verizon to provide a warranty (or guarantee). The warranty would remain in place for the longer of five years or the time it takes for Frontier to achieve certain milestones (see below). Verizon (or its predecessors GTE / Bell Atlantic) has owned these utilities for many decades. Verizon should be required to stand behind these operations for a reasonable period while Frontier works to absorb them. The warranty would cover system operations (all computer systems, network operations center, etc.), condition of plant and equipment, adequacy of inventory, accuracy of billing and customer data. Verizon would be required to compensate Frontier for access line losses greater than the industry average and for increased costs (and revenue losses) Frontier incurs as a result of faulty, incorrect, or inappropriate data passed by Verizon to Frontier as part of the closing and cutover to Frontier or standalone former GTE systems. Verizon would also be required, at its expense, to correct any deficiencies that existed at closing, regardless of when the deficiencies became apparent to Frontier (or customers or regulators). Needless to say, the terms of a Verizon guarantee would need to be extensively documented and clear dispute-resolution procedures created. (CWA Direct Ex. 2, Barber Direct, pp. 64-65) In response, Verizon testified that, “The suggestion is nonsensical.” (Verizon Ex. 2, Smith-Buckley Panel, p. 46). At the hearing, Mr. Smith repeated this assertion arguing that there was no need because the existing network is “in appropriate shape” and that the business being sold “is a fine business.” (T. Day 4. pp. 35-36) That is, it seems that the Verizon contention is that there is no need to guarantee the network since the network is in good shape. With all due respect, if the network is in such good shape (which the record before the Commission demonstrates that it is not) then why would Verizon oppose providing a guarantee since it would likely never be utilized? The more likely explanation for the reaction of Verizon to the guarantee is the one the Mr. Smith also stated: “The guarantee is a notion that we just can’t do, but that would, in our opinion, avoid the tax fiee nature of the transaction we have introduced under the guidelines set by the - well, the laws enacted by Congress and those by the IRS.” (Supra, p. 37). Whether this transaction is or is not tax-free to Verizon is not and should not be this Commission’s 27 concern. Its concern is, and should be, the impact of this transaction on West Virginia and the customers in the VSTO and Frontier areas. It is also of deep concern that the Applicants attempted to tie the hands of this Commission with regard to at least one potential key condition - the ability of the Commission to condition the transaction on Verizon investing additional funds in the transaction. As Byron Harris, Director of the Consumer Advocate Division, stated: “The Applicants have basically presented the Commission with a “take it or leave it” proposition. To the best of my knowledge, the Commission has never been presented with a utility acquisition application that contains this type of provision. I believe that any provision that attempts to eliminate the ability of the Commission to require meaningfbl financial conditions is unreasonable.’’ (CAD Direct Ex. 6, Harris Direct, pp. 11-12) Not only is this provision an unreasonable provision, the provision is an attempt by the Applicants to handcuff the Commission in direct contradiction to the law of this State and it alone is sufficient for this Commission to reject this proposal. Conclusion Given the record in this proceeding one might ask, why would Frontier push ahead with this proposed deal? The record in this proceeding provides some indication of Frontier’s possible true motivation. CWA’s expert, Randy Barber, testified (CWA Direct Ex. 3-C, p. 26) as to this motivation: Q. Are there indications that Verizon understood Frontier’s true motivations for this deal? A. Yes, there are. In an internal email message on April 19,2009, the head of Verizon’s negotiating team, Verizon Vice President of Business Development for the Domestic Telecommunications group, Stephen Smith, wrote to other members of the Verizon team: 28 Not only does this exchange shed some light on the motivations for this deal, it amplifies the serious concerns regarding Frontier’s financial condition. As discussed above, this proposed transaction can only be approved upon proper showing that the terms and conditions thereof are reasonable, that neither party thereto is given an undue advantage over the other, and that the transaction does not adversely affect the public in this state. These findings must be made in light of the Commission’s duties to serve the interests of the public, ensure fair and prompt regulation of public utilities in the interest of the using and consuming public and to enforce and regulate the practices of public utilities in order to provide the availability of adequate, economical and reliable utility services throughout the state. The Commission must also find that the buyer has shown that as a result of the transaction it will obtain the knowledge, experience, and resources that allow it to conduct operations that provide adequate and reliable service at reasonable rates. The record of this proceeding does not support the Commission making these required findings. For example, given the fact that the Applicants have not performed nor presented to this Commission a study of the problems of the existing copper network, nor the amount of investment that would be required to repair and maintain the network this 39 Mr. Barber’s testimony contained the following citation “Email message from Stephen E. Smith to John W. Diercksen, Jackson 6. Bennett, John P. Fitzgerald, dated April 19,2009 (document 4(c)(42) attached to Verizon’s Hart- Scott-Rodino filing).” 29 Commission cannot find that Frontier, post-transaction, will be able to provide adequate, economical and reliable utility services throughout the state even with its promise of capital investment amounts over the next few years, particularly given the poor condition of the copper network in West Virginia as evidenced by the ongoing service quality problems in the VSTO areas. Given the financial situation of Frontier, post-transaction, the Commission simply cannot find that Frontier will have the resources to provide adequate and reliable telecommunications services. Given the overwhelming opposition by this State’s elected leadership, the record does not support a finding that this transaction is in the public’s interest or that it will not adversely affect the public. Given the Applicant’s attempt to circumscribe the conditions that this Commission can place upon any approval of this transaction, the record does not support a finding that the terms and conditions of the transaction are reasonable. Given Frontier’s history of problems with transitions of this type, as evidenced by the Rochester telephone issues discussed above, the record does not support a finding that the public will not be adversely impacted the proposed transaction if it were to go forward, particularly given the fact that the West Virginia portion of the proposed transaction is the first such transaction for a former Bell Atlantic property. Given Verizon’s history with transactions of this type, as evidenced by the FairPointNerizon transaction discussed above, the record does not support a finding that the public will not be adversely impacted by the proposed transaction if it were to go forward. Given Verizon’s strong objections to guaranteeing this transaction, the record does not support a finding that following the close of the proposed transaction Frontier will be able to conduct operations that provide adequate and reliable service at reasonable rates. Given all of the above, it is evident that the 30 Applicants simply have failed to create a record that would permit the Commission to make the required findings. The issue before this Commission is not whether Verizon can, given the proper transaction, sell the VSTO areas of West Virginia. The issue before this Commi,ssion is whether the record in this proceeding supports the Commission’s approval of the terms and conditions of this transaction. Given all of the above, the Applicants have left the Commission no choice but to reject this proposed transaction. CWA, therefore, respecthlly requests that this Commission issue an Order Rejecting this proposed transaction. Respectfully submitted, this 18th day of February, 201 0. , I Vincent Trivelli (WV Bar No. 8015) ‘I The Law Office of Vincent Trivelli, PLLC 178 Chancery Row Morgantown ,WV 26505 Phone: (304) 291-5223 Fax: (304) 291-2240 31 OF WEST VIRGINIA CHARLESTON Case No. 09-0871-T-PC Citizens Telecommunications Company of West Virginia, dba Frontier Communications of West Virginia and Verizon West Virginia Inc. CERTIFICATE OF SERVICE The undersigned counsel for the CommunicationsWorkers of America, AFL- CIO, certifies that service of the foregoing PUBLIC VERSION of the Initial Brief of the Communications Workers of America, AFL-CIO has been made by depositing a true and exact copy thereof in the U.S. Mail, postage pre-paid on the 1Sfh day of February, 20 10 to the following: Joseph J. Starsick, Jr., Esq. Jeffrey A. Ray, General Counsel Goodwin & Goodwin, LLP Citynet P.O. Box 2107 113 Platinum Drive, Suite B Charleston, WV 25328-2107 Bridgeport, WV 26330 Patrick W. Pearlman, Esq. Amanda M. Rem, Esq. Deputy Consumer Advocate Richard L. Gottlieb, Esq. Consumer Advocate Division Lewis, Glasser, Casey & Rollins, PLLC 700 Union Building BB&T Square, Suite 700 723 Kanawha Blvd., East 300 Summers Street Charleston, WV 25301 Charleston, WV 25301 Lisa Wansley, Esq. Kevin Saville, Associate General Public Service Commission Counsel P.O. Box 812 Frontier Communications Corporation Charleston, WV 25323 2378 Wilshire Blvd. Mound,MN 55364 James V. Kelsh, Esq. Law Office of James V. Kelsh Lydia Pulley 300 Summers Street, Suite 1230 General Counsel - VA, WV, NC & SC P.O. box 3713 Verizon Corporate Services Corporation Charleston, WV 25337-3713 703 - 713 E. Grace St. Richmond, VA 232 19 Steven Hamula, Esq. Director of Regulatory Affairs Stephen S. Melnikoff, General Attorney Fibernet Regulatory Law Office (JALS-RL) 1200 Greenbrier Street U.S. Army Litigation Center Charleston, WV 253 14 901 N. Stuart Street, Suite 700 Arlington, VA 22203-1 837 Scott J. Rubin, Esq. 333 Oak Lane Bloomsburg, PA 17815 Robert R. Rodecker, Esq. P.O. Box 3713 Charleston, WV 25337 ‘Vincent Trivelli (WV Bar No. S015)p The Law Office of Vincent Trivelli, PLLC 178 Chancery Row Morgantown , WV 26505 Phone: (304) 291-5223 Fax: (304) 291-2240