The phones will work, but FairPoint might not

Vermont regulators can't say they weren't warned that FairPoint might fail to keep its promises to maintain and improve telephone and broadband services in the state.

Two unions representing hundreds of northern New England telecom workers campaigned for months against the sale of Verizon's landline business to FairPoint. Labor leaders and their allies argued that FairPoint lacked the resources and expertise to fulfill commitments made as part of the $2.3 billion deal with Verizon that closed in April 2008 with the blessings of regulators in New Hampshire, Maine and Vermont.

“I don't know whether to start out by saying 'we told you so,' Mike Spillane, business manager of a Vermont local of the International Brotherhood of Electrical Workers, said in regard to testimony he was scheduled to present to regulators in September. “This is where we thought things would end up with FairPoint. Nobody listened to what we were saying.”

FairPoint was scheduled to learn in late September whether it will be permitted to continue operating as Vermont's largest telephone company. The state's Public Service Board is due to decide if FairPoint has shown persuasively that it will address the customer-service issues that have produced thousands of complaints from residential and business users in recent months. The board has said it might use its power to revoke the Certificate of Public Good that allows FairPoint to operate in Vermont.

Regulators insist that their threat to pull the cord on FairPoint is not a bluff. But Stephen Wark, a spokesman for the Public Service Department, said in mid-September that it is unclear what would happen next if FairPoint's license is terminated. Wark did offer assurance that “the phones will continue to work regardless of the outcome.”

Ralph Montefusco, a staffer for a Vermont local of the Communications Workers of America, says “FairPoint can be replaced” by a telephone company better equipped to serve customers.

Montefusco notes that Verizon took advantage of a federal tax provision known as a Reverse Morris Trust (RMT) that enabled it to save millions of dollars in the sale of its northern New England access lines to FairPoint. As a result, the North Carolina-based company was saddled with substantial debt obligations and dividend commitments that left it with less money to invest in new technology and to maintain existing infrastructure, the unions say.

The company reported losing $23 million during the first half of this year. Its shares are trading for less than $1, and FairPoint said at the end of July that the New York Stock Exchange has warned the company it is no longer in compliance with listing requirements for the Big Board.

“Verizon’s use of the RMT loophole prevented other communication companies with the essential financial resources from making bids on the northern New England properties,” Montefusco wrote recently in The Rutland Herald.

“Verizon’s desire to avoid paying taxes apparently was so great that it did not auction the properties or entertain other offers from more financially qualified firms. This left the northern New England states to be served by a debt-laden company and is the root cause of what we’re dealing with today.”

A replacement for FairPoint would presumably not be handicapped by similar obligations, union officials suggest.

Even as it seeks to satisfy state regulators, FairPoint is trying to reschedule its debt payments to private creditors. That effort could entail a bankruptcy filing, company officials acknowledge.

“We are considering all [debt] restructuring alternatives available to us, which may include the commencement of an in-court resolution under Chapter 11 of the US Bankruptcy Code, with or without a pre-arranged plan of reorganization,” FairPoint spokeswoman Beth Fastiggi wrote in an e-mail message.

Union local leader Spillane says FairPoint is “right on the edge of declaring bankruptcy.” And fellow unionist Montefusco adds that some of his union's financial experts “feel it is in FairPoint's best interests to avoid making debt payments that come due in October.”

Despite the Public Service Department's “great disappointment” in FairPoint's performance, Wark doesn't concede that the state should have heeded unions' demands that Verizon be prevented from selling its northern New England landline operations to FairPoint. Forcing Verizon to continue doing business in the three states was not a sound option, in Wark's estimation.

“Verizon was not an active partner. It didn't make the investments it should have,” Wark says.

“In a universe of imperfect choices,” he adds, allowing the sale to FairPoint to go forward was “the least imperfect choice” at that time.

The response to FairPoint's service problems has been unfair, company spokeswoman Fastiggi says. She takes particular issue with a Burlington Free Press headline in September that branded FairPoint's performance in Vermont “a disaster.”

“It hasn't been a disaster,” Fastiggi argues. She notes that the company's telecom network continued to function normally even as its customer service operations suffered major disruptions following a “cut-over” of software systems from Verizon to FairPoint. And the company has taken long strides toward fixing breakdowns in its response to customers' complaints and in its fulfillment of orders, Fastiggi says.

The cut-over of some 600 software systems qualified as “the most complex telecommunications systems conversion undertaken to date in the United States,” FairPoint President Peter Nixon told Vermont regulators in mid-September. That assessment is shared by Vermont Telecommunications Authority director Bill Shuttleworth, who has more than 30 years' experience in the field. Shuttleworth adds, however, that the problems arising from the cut-over were “predictable,” and should have been addressed more effectively. FairPoint officials themselves admit that while they anticipated many of the difficulties that did occur, they were not prepared for the magnitude of the challenges.

Nixon sought to assure Vermont regulators in mid-September that the problems are being solved. “There has been significant progress on all operational fronts and many of the key business processes have already returned to normalized levels,” Nixon said. “For most of our customers, the customer service experience has returned to pre-cut-over levels.”

He indicated in prepared testimony that the current average wait time for someone calling FairPoint's customer service lines is nine seconds. The company also claims that it has reduced its backlog of current work orders from 40 percent earlier this year to 22 percent in September.

Vermont officials are not appeased by those improvements, however.

"I don't doubt for a second that they're better than where they've been” Public Service Commissioner David O'Brien told WCAX following FairPoint's status report. “They've passed the sort of low point, if you will, of the system cut-over problems, the response rate in the call center is much better, but there's still real service problems on the ground. There continues to be difficulty closing out issues for customers.”

Sarah Hoffman, a public advocate with the Public Service Department, added in a written response to FairPoint's filing: “The department does not dispute that FairPoint’s filing precisely reflects to the letter that which it was asked to provide. Unfortunately, it also precisely reflects FairPoint’s inability and unwillingness to address the managerial, systemic and service quality issues in a manner upon which the department, or ultimately, the greater public, can rely.”

In an e-mail message following FairPoint's report to Vermont regulators, Fastiggi said, “We know further work is needed in billing accuracy for large business and wholesale accounts [as well as] the time it takes for some installations and repairs.”

Some telecom monitors suggest that FairPoint will never be able to achieve financial stability because of fading demand for the basic service it offers. Growing numbers of home owners across the country are abandoning their landlines and relying exclusively on cellular phone coverage. Shuttleworth cites estimates that about 20 percent of US homes no longer have landline service.

In addition, FairPoint, like most large companies operating in Vermont, relies on about 10 percent of its customers for about 90 percent of its revenues, Shuttleworth says.

“The problem for FairPoint is that its 10 percent has other choices,” he observes, suggesting that some of the company's largest corporate customers may opt for a different service provider.

Fastiggi does not dispute that FairPoint is seeing its residential accounts shrink in the three northern New England states.

“Landlines are declining,” she says, but the company's phone-based Internet connections “are inclining.” The company recorded Internet customer growth in excess of 250 percent in Vermont during the 12-month period ending in July, Fastiggi says.

FairPoint links many of its customers to the Internet through digital subscriber lines that make use of landlines. The company is building out its DSL network in Vermont as it works to meet deadlines for expanding customers' access to high-speed Internet access.

While agreeing that the residential wire service business appears to be a no-growth zone, Montefusco of the Communications Workers' union points out that landlines continue to form “the skeleton of the telecommunications infrastructure all over the country.” That seemingly old-fashioned network continues to be “at the bottom of all the technological whiz-bang,” Montefusco says.

Several competitive local exchange telephone companies, known in the business as CLECs, depend on the FairPoint network to serve their customers, Montefusco adds. Sovernet is one of the best-known CLECs operating in Vermont.

Just as FairPoint's network remains indispensable, its workforce cannot be radically reduced without jeopardizing telecom services throughout Vermont, union officials say. Neither Montefusco nor Spillane expects the company to lay off employees even if it does file for bankruptcy.

FairPoint's “revenue stream depends on us,” Montefusco says, noting that the company will have to maintain cash flow, regardless of its debt rearrangements. “They already don't have enough workers to run the business effectively,” Spillane adds. He notes that payroll numbers have tumbled to about 625 today, compared to what Spillane says was a peak of 1,400 in the late 1980s when Verizon owned the business. Spillane's IBEW local represents more than 300 FairPointers in Vermont while Montefusco's Communications Workers bargaining unit includes 125 FairPoint workers.

Far from moving to trim its payroll, FairPoint has been hiring in Vermont, Fastiggi points out. She says the company has hired about 100 workers since the takeover from Verizon 18 months ago. “The vast majority of our workers are providing direct service,” Fastiggi says. “We need them.”

FairPoint is continuing its broadband buildout in accordance with the schedule it jointly set with state regulators, Fastiggi adds. She says the company now offers DSL to about 76 percent of its customers, compared to less than 65 percent at the time of the handoff from Verizon. FairPoint has committed to reaching 95 percent within five years, with an interim goal of 100 percent broadband availability on half of its Vermont telephone exchanges by the end of next year. The company will be using wireless links to provide Internet service to some customers in areas far from a DSL central distribution point, Fastiggi adds.

Kevin Kelley is a freelance writer from Burlington.