Tuesday, November 20, 2007

No raises — it gets better: Fewer workers are also part of FairPoint’s plan to remain solvent

Published as an online exclusive at thePhoenix.com

FairPoint, as you might expect, has been in a tizzy since my story on the “unrealistic” financial assumptions underlying that telecommunications company’s attempt to swallow Verizon (see “No Raises for Seven Years,” by Jeff Inglis, November 16). Let’s hope the speed and quality of its response is not a sneak peek at how the company will respond to customer problems if it is allowed to take over phone service in Maine, New Hampshire, and Vermont.

After last week’s Phoenix story came out, the company took a day and a half to have a PR person call (and then, not even from FairPoint directly, but from a Portland flack firm). And after I told the PR guy who called that I would love to talk to someone at FairPoint, it took them another day and a half (plus a weekend) to get someone “authorized to speak” on the phone with me.

Walt Leach, FairPoint’s executive vice-president for corporate development, told me it was “misleading” to say that FairPoint wouldn’t give workers raises for seven years. Though he agreed that the company was expecting not to pay any more wages in 2015 than it will pay in 2008 (after the merger, if it goes through), Leach promised to “honor the existing contract” with Verizon’s 2700 or so union workers in Northern New England, and even to “extend it under existing conditions” if the unions would like.

But, Leach continued — and gave by far my favorite “explanation” from FairPoint about what was wrong with my story: FairPoint will hire 675 new workers, as promised to state officials (to tempt them into the deal), getting its total number of workers up to somewhere around 3400 in all three states. The company predicts that four percent of all those workers will leave within a year — including the equivalent of four percent of the 675 new hires! (Though “not necessarily” just-hired staffers, he says.)

Those workers will not be replaced (Leach calls it “attrition”), so, he says, FairPoint will have plenty of money to give raises to the ones left — the ones with more work to do (like handling billing and payments), with more equipment to install and maintain, the ones on whom residents of Maine, New Hampshire, and Vermont will be depending for reliable phone service (including E-911 service during life-threatening emergencies).

Leach says the company expects its employee numbers to drop by a little more than four percent every year — as landline-customer numbers decrease over time — and says the money those departed workers won’t be making will be enough to cover everyone else’s raises into the future.

Digging the hole deeper, Leach notes that the company’s financial model includes $142 million for dividend payments to shareholders, and says that money could be repurposed “if it’s needed” to improve service to telephone customers. But that puts dividends before service. Leach admits the company has not constructed its model to have $142 million in cash available to make service better (the company does not know how much it will cost to bring Verizon’s existing lines up to workable standards), and then — only if there is money left — to pay dividends.

While still trying to disprove my analysis of filings with the Maine Public Utilities Commission, Leach adds something new: I knew, based on PUC filings, that the company didn’t expect to spend any more money on its operations in 2015 than it would in 2008, but Leach revealed that the company also expects to make the same amount of money on its telephone service in 2015 as in 2008.

But even he calls the landline business “declining.” And sure, Leach says, FairPoint believes its service features can convince customers to stay longer and buy more services than Verizon’s customers do with their phone company now. But he has — and makes — no guarantees of that.

Reasonable doubt
All this — companies’ internal projections, market predictions, assumptions about revenue and the like — matters so much not because every company has to (or even does) behave rationally. Just this company — and any other corporation that is granted a government-approved monopoly to deliver vital services (such as water, sewer, electricity — and telecommunications).

“What our members intuitively know about FairPoint has come to light,” says Rand Wilson, who has been leading “stop-the-sale” efforts for the labor unions involved. The company, he says, is “run on a back-of-the-envelope, pie-in-the-sky basis.”

Pete McLaughlin, business manager for IBEW Local 2327, which represents many of the Verizon workers in Maine, says it seems to him that the company is “making business assumptions that are unrealistically optimistic.”

Normally, utilities companies’ full-scale business models and predictions over time are not of much concern to regulators, says Wayne Jortner, senior counsel at Maine’s Office of the Public Advocate, which works on behalf of the public in cases before the state’s Public Utilities Commission. In most mergers, the issues are “usually pretty clear. There’s really no issue of economic viability” after the merger, Jortner says.

In this one, however, there are significant questions, which have resulted in FairPoint being required to file detailed business plans, with which Jortner and his colleague, Deputy Public Advocate Bill Black, have found significant fault.

Which is not to say that Black, in particular, is glad this information is public.

“If somebody has gamed the system and used some sort of technological loophole to find and reveal information that we are bound to keep confidential by law, it is certainly unfortunate,” he says. When I tell him that a watchdog blogger (at verizonvsfairpoint.com) has posted confidential information from PUC filings, and a method for getting that information — by copying-and-pasting it right out of electronic documents provided by Black’s office — Black gets frustrated.

“The requirements of the proceeding have been violated,” he says. He won’t say by whom, but will admit to being “very unhappy.”

Keeping secrets
As the law now stands, companies involved in PUC proceedings have to answer a lot of questions about how they operate, and about their finances. As a trade-off for being forced to open themselves to scrutiny, companies can designate information as confidential, to keep some of their internal projections from becoming known to competitors, labor unions, and the public. The PUC staff, and the Public Advocate’s staff, “get absolutely everything,” says Jortner — the restrictions are on who else can see the information.

There is a process for claims of confidentiality to be challenged, but in this case, Black says, his office has spent time fighting for its own access to information, never mind fighting for others to be able to see it, too. And he adds, “these cases involve lots and lots of paperwork and lots and lots of information and it is not possible to ... object to everything.”

Maine House Speaker Glenn Cummings (D-Portland) is watching the proceedings closely, and says the confidentiality provisions are a concern.

With the “high level of public investment and a high level of public interest in the outcome” of the deal, he says Maine consumers need to be sure that the PUC’s ultimate decision is one in which they can have confidence.

Because “some of it can’t legally be transparent,” he says, “we all suffer.” As a result, he and other lawmakers are concerned about “making sure that those processes are transparent” and ensuring they can “hold the PUC accountable for that transparency.”

Cummings is worried that the process has allowed FairPoint to keep secret not just arcane technical and budgetary details, but sweeping assumptions underlying its entire business model. “Long term, it raises a question of public transparency and public access to vital information,” he says.

More questions
Now that the information is out, even more questions are coming up. Cummings is still uncertain about whether the deal would ultimately work out well for Maine, but is now even more concerned about FairPoint’s finances, asking, “was this simply a shell game to help Verizon avoid taxes, or is FairPoint a company that can build infrastructure and deliver?”

Governor John Baldacci, a business-friendly Democrat, is more circumspect, says his spokesman, David Farmer, who observes that Baldacci appoints members of the PUC and the OPA, and says the gov is therefore trying to stay out of the details. He “thinks that Maine needs more investment in broadband capabilities,” and wants to be sure that any company that promises investment can deliver it.

Numerous people have written letters to the Portland Phoenix, saying they want the deal killed, or at the very least expressing serious concerns about it. One Verizon worker wrote, “I am afraid of the repercussions this will have not only on the state of Maine but on my fellow union brothers and sisters. We are in fear of losing our jobs.”

The next development in Maine is a report from PUC staff, analyzing all the filings and suggesting a course of action for the commissioners to take. That may be released before Thanksgiving.

McLaughlin, from the Maine union, says he hopes that report and the OPA’s analysis will prove persuasive: “I just hope that the Public Utilities Commission is listening to the stuff they’re being told by the experts.”

The aftermath
The deal is unlikely to be killed outright by regulators in any of the three states that must approve it, say observers and insiders alike. And “nobody is projecting it would be approved with no conditions,” says the OPA’s Jortner.

Rather, all three states are expected to be planning to put significant conditions on it — the most onerous is Jortner’s and Black’s recommendation that the purchase price be reduced by $600 million. (That’s one of 24 conditions suggested in Maine; Vermont’s regulators have received recommendations for 56 conditions, including requiring FairPoint to create a Vermont-only subsidiary whose finances and performances would be tightly controlled by its Public Service Board. New Hampshire has yet to issue recommended conditions for the sale.)

Any one of those conditions, or some combination of them, may cause Verizon or FairPoint to walk away from the deal. Or they may continue with it. (Verizon’s Maine spokesman never returned any calls seeking comment.)

“I expect to see a substantial, major sum of money from Verizon,” says union spokesman Wilson — he estimates at least $200 million and perhaps as high as $600 million, which could be knocked off the deal’s price tag or otherwise kicked in by Verizon to get FairPoint off to a better start.

“It’s going to be a brand-new company,” says Wilson, noting that the deal would more than quadruple the number of customers — and employees — FairPoint now has. “Having it be nearly $2 billion in debt on day one is not seen as an auspicious beginning.”

Click here to read the full-length redacted text from the Office of the Public Advocate (PDF)