Verizon is the dominant telecommunications carrier in the state, and FairPoint is but a fraction of its size. In January of 2007, Verizon, Inc. (Verizon) announced its intention to sell its local and interstate wireline assets for a price of $2.715 billion to FairPoint Communications, Inc. (FairPoint) of North Carolina. The form of the transaction is complex, and structured to minimize the tax consequences to Verizon and its shareholders. The transaction does not include the cellular telephone system in the states (Verizon Wireless), nor does it include the fiber optic system used to deliver the integrated internet, television, and telephone products marketed as FIOS, neither of which is regulated by the state Public Utilities Commission. Although FairPoint will come to own and operate the wireline system, Verizon and its shareholders will own 60 percent of FairPoint, and will appoint a majority of the members of the FairPoint Board of Directors.
The transaction is subject to the regulatory approval of the Federal Communications Commission, as well as the Public Utilities Commissions (PUC) in Maine, New Hampshire and Vermont. All of these regulators have now approved the sale, but each has added a long series of financial and operational conditions. The sale will close at the end of March, when the ability to appeal the decisions to courts in the three states has expired. Once the closing and transition to FairPoint is complete, the local and long distance wireline telephone system will be owned by a “landline consolidator” company. The transaction continues Verizon’s national effort to exit from the regulated telephone business to pursue unregulated business opportunities, which it regards as the best means to increase shareholder value for the future.
The proceeding generated thousands of pages of evidence in each state, and it is impossible to adequately summarize the details of the decisions in this short space. While there are many potential impacts upon municipalities, the two that stand out are whether the poles installed within municipal rights of way are likely to be better maintained, and whether there is a likelihood of an improvement in the quality of telephone service after the sale.
On the first point, the Commission found that Verizon had failed in its responsibility to adequately maintain poles in an estimated 7,000 locations in New Hampshire alone. When a new pole was installed to improve service or safety, Verizon failed to move its equipment from the old pole over to the new pole. The Commission found this practice to be “unconscionable” and the “double pole” condition to cause inadequate telephone service, problems for other utilities and a safety hazard for users of the highway. FairPoint committed to reduce the number of double poles to 500 within a period of two years, which the Commission found to be reasonable and manageable. There are financial penalties to FairPoint in the event they do not achieve this goal. For municipalities, removal of these “double poles” will have a substantial positive impact upon the ability to maintain sidewalks and other places in the public right of way, and will reduce the number of places where a motor vehicle could leave the roadway and strike a pole. This alone could avoid instances of death, severe personal injury or substantial property damage to vehicles.
All four regulatory bodies focused on the issue of service quality, particularly in the area of access to “broadband.” The term “DSL” stands for “digital subscriber line” and refers to a type of Internet service offered via copper wires as opposed to fiber-optic or wireless technology. The term “Broadband Availability” in this proceeding means the ability to provide: (1) not less than 1.5 megabits per second (Mbps) of bandwidth for distances up to 22,000 feet from a DSL-equipped central office or wire center, and (2) not less than 764 kilobits per second (kbps) of bandwidth beyond 22,000 feet. By contrast, cable providers such as Comcast offer broadband speeds of 6 Mbps to 16 Mbps, while the FIOS product offers speeds of 5 Mbps to 15 Mbps. FairPoint agreed to provide Broadband Availability to 75 percent of its access lines in New Hampshire within 18 months of the closing, 85 percent of its lines within 24 months, and 95 percent of its lines within 60 months of the closing, with that availability including a minimum of 75 percent Broadband Availability to access lines in “UNE Zone 3 exchanges” located in rural areas. Should FairPoint fail to achieve its Broadband Availability commitments, the Company agreed to certain penalties payable to the New Hampshire Telecommunications Planning and Development Fund. The penalty is $500,000 for each percent by which FairPoint does not achieve the 18-month and two-year availability commitments.
While this commitment is likely to improve the level of service in some areas of the state, at least one Commissioner was not persuaded that the commitment was adequate to justify approval of the sale. Commissioner Morrison filed a spirited dissent to the overall approval of the transaction. He found that Verizon’s current poor performance on service quality benchmarks, as well as the limits of the proposed FairPoint technology plan, offered very little reason to hope that municipalities would see the installation of improved broadband services before expiration of the agreement in 2015. That is, he believes that FairPoint will deliver only the DSL level of service that copper-based technology can offer, and will not come to deliver any significant amount of fiber-optic connectivity in the future. For him, this concern was important enough to vote against approval of the transaction.
Neither of the other two Commissioners were satisfied with Verizon’s current level of performance. They specifically found (Order p. 71) that, as the Office of Consumer Advocate (OCA) argued, “The statement in OCA’s brief—that Verizon ‘demonstrates no intention of achieving PUC-established service quality standards before selling its landline assets to FairPoint,’ OCA Brief at 59—is a fair one.” However, they also determined that rejection of the sale to FairPoint would not yield improvement, saying, “Moreover, we are compelled to address a recurring theme in many of the comments filed in this case, which pursue the faulty line of reasoning that rejecting the transaction will somehow result in Verizon rolling out fiber in New Hampshire. The facts are clearly otherwise as demonstrated by the testimony of Verizon witness Smith who testified that New Hampshire, Maine and Vermont are not priority states for Verizon and that Verizon intends to focus the roll-out of its FIOS product in bigger markets.”
Thus, the order approving the sale was not an endorsement of FairPoint or its business model, but instead a recognition that Verizon simply had no intention of improving service in New Hampshire. The majority hopes that the commitments and conditions resulting from the proceeding have at least a chance of improving the quality of telecommunications service in the state. As the majority stated, “Requiring broadband deployment is beyond our regulatory jurisdiction and, in our judgment, we have no authority to direct a telephone utility that it must provide such services via fiber technology as distinct from the DSL-based service FairPoint has committed to provisioning in New Hampshire. Even if we had such authority, it would be at least highly plausible to find that economic reality supports opting for DSL-based service as opposed to awaiting a fiber-based build out that is unlikely to attract investor capital to rural areas, given the long distances and sometimes difficult terrain in those areas.”
The Public Utilities Commission order warns all of us that there is little that government may do to compel private companies to invest in state-of-the-art telecommunications equipment and services in relatively small markets such as New Hampshire. Yet, as Commissioner Morrison states, “No one can seriously argue that the residents of New Hampshire can compete successfully with Massachusetts and their fiber-optic network while relying on Digital Subscriber Loop (DSL) technology invented in the 1980s, which rides over a copper-based infrastructure that once made our grandparents proud.” This issue will soon be before the legislature, as we search for ways to keep our economy vibrant, and provide our citizens with state of the art tools to compete both nationally and globally.