STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 7270
Joint Petition of Verizon New England, Inc.
d/b/a Verizon Vermont, Certain Affiliates
Thereof, and FairPoint Communications, Inc.
for approval of an asset transfer, acquisition
of control by merger and associated transactions
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PREFILED TESTIMONY OF
CHRISTOPHER J. CAMPBELL
ON BEHALF OF THE
VERMONT DEPARTMENT OF PUBLIC SERVICE
May 24, 2007
Summary:
The purpose of Mr. Campbell’s testimony is to describe and summarize the
Department’s analysis of the proposed transaction, based on the criteria typically
used by the Board, and to provide the Department’s overall position on the
proposal at this time.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 1 of 49
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Prefiled Testimony
2
of
3
Christopher J. Campbell
4
Table of Contents
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25
Introduction ......................................................................................................................... 1
Standards of Review ........................................................................................................... 5
Legal Authority ................................................................................................................... 8
Availability of emergency services ..................................................................................... 8
Compatibility with neighboring systems .......................................................................... 10
Terms and conditions of service would be just and reasonable ........................................ 10
Service quality and customer service ................................................................................ 17
Quality of the facilities...................................................................................................... 22
Rate of capital investment ................................................................................................. 24
Financial stability and soundness...................................................................................... 28
Control of affiliate interests .............................................................................................. 28
Competence of management and technical knowledge, experience and ability ............... 30
Business reputation ........................................................................................................... 30
Transaction should produce efficiencies ........................................................................... 31
Transition should not impair competition ......................................................................... 32
The Alternative Regulation Plan ....................................................................................... 34
Designation of FairPoint as an Eligible Telecommunications Carrier ............................. 44
Summary of conditions ..................................................................................................... 45
Conclusion ........................................................................................................................ 49
26
Introduction
27
Q.
Please state your name and occupation.
28
A.
My name is Christopher J. Campbell. My business address is 112 State Street,
29
Drawer 20, Montpelier, VT 05620. I am the Director for Telecommunications
30
for the Vermont Department of Public Service.
31
Q.
What is the purpose of your testimony at this time?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 2 of 49
1
A.
My testimony will summarize the recommendations of the Department’s
2
witnesses related to the standards which the Board uses to evaluate
3
transactions under sections 107 and 311 of Title 30, and in some cases I will
4
provide my own analysis of how well FairPoint and Verizon (“the Joint
5
Petitioners”) have met those standards. In addition, I will evaluate the
6
applicability of the terms of Verizon’s current alternative regulation plan to
7
FairPoint as the prospective new owner and recommend modifications to the
8
terms of the plan if FairPoint were to assume control of the operation. Finally,
9
I will provide a recommendation regarding FairPoint’s request to be
10
designated as an Eligible Telecommunications Carrier (“ETC”) in the territory
11
currently served by Verizon in Vermont.
12
Q.
Please summarize your professional background and experience.
13
A.
I received a Bachelor of Arts degree in Economics and Environmental Studies
14
from the University of Pennsylvania in 1993. In 1995 I received a Master of
15
Regional Planning degree from the University of Massachusetts-Amherst. In
16
associated research I focused on the use of telecommunications for rural
17
community development. Subsequent to joining the Department I was a
18
participant in the 1997 Annual Regulatory Studies Program at Michigan State
19
University.
20
I have worked for the DPS since February 1997, with a hiatus during part of
21
2005. I held the positions of Consumer Affairs and Public Information
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 3 of 49
1
Specialist and then Senior Consumer Affairs and Public Information
2
Specialist until October 2000. I then became the Department’s
3
Telecommunications Planner, a post I held through January 2005. During that
4
time I was the primary staff person responsible for the development of the
5
2004 Vermont Telecommunications Plan. I left the Department in January
6
2005 to become Deputy Commissioner of the Department of Information and
7
Innovation. I returned to the Department as the Director for
8
Telecommunications in October 2005.
9
Q.
Have you testified previously before the Public Service Board?
10
A.
Yes. I was a witness in the Board’s investigation into a successor alternative
11
regulation plan for Verizon, Docket 6959. I also provided testimony on behalf
12
of the Department in Dockets 6651, 6533, 6521, 6331, 6209, 6120 and 6018.
13
I have participated on behalf of the Department in Board workshop settings.
14
Also, I have testified on behalf of the Department before legislative
15
committees and administrative bodies, and provided comments on behalf of
16
the Department to the Federal Communications Commission.
17
Q.
Does the Department believe that the Joint Petitioners have sufficiently
18
demonstrated that the proposed transaction meets the standard used by the
19
Board to determine if such a transaction would promote the public good?
20
21
A.
No, not at this time. From early in this case, the Department has been very
concerned that the prefiled testimony and early discovery responses of the
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 4 of 49
1
Joint Petitioners lacked specific information to allow us to fully understand
2
and test the transaction in order to fairly and carefully judge the impact of the
3
proposal on Vermont. Because of the short time frame the petitioners asked
4
for the review of the proposal, the Department expected the Joint Petitioners’
5
supporting initial testimony to be more detailed than it proved to be.
6
We communicated our concerns about how thin the filing seemed to FairPoint
7
and Verizon early on in the case. We encouraged FairPoint to be as open as
8
possible about their plans, intentions, and assumptions about Vermont. We
9
believed that if the petitioners have a good story to tell, openness would be
10
their ally.
11
To FairPoint’s credit, it has responded to the Department’s request in a
12
positive manner. For this reason, the testimony of Department witnesses
13
reflects that they had greater access to interview key FairPoint personnel and
14
to assess the depth and breadth of their planning than they would have if the
15
Department had to rely only on the formal tools of a litigated case.
16
Nonetheless, FairPoint to date has not been able to provide all of the
17
information that we believe is necessary to allow us to complete our
18
assessment and conclude with confidence that the petition should be
19
approved. That said, I do believe the willingness of FairPoint to be open and
20
cooperative with the Department as the public advocate is one important
21
indicator of how well it is likely to serve the public.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 5 of 49
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While FairPoint has yet to persuade the Department that this transaction
2
should be approved, we believe that, as this case goes forward, openness by
3
FairPoint will put it in a better position to communicate to the public, the
4
Department and the Board those things it must still demonstrate in order to
5
conclusively show that this transaction in fact is in the public interest.
6
The Department has pushed to get better, more complete information because
7
we are interested in ensuring that we are able to make the best-informed
8
recommendation on this proposal that we can. Judging the value and merits of
9
this proposed transaction is no academic exercise. This involves Vermont’s
10
most significant telecommunications service provider. To deny this petition
11
would mean retaining Verizon, which has shifted its strategic focus and
12
priorities out of the state—and I believe that the best outcomes for the state
13
are difficult to achieve with a company which does not see Vermont as central
14
to its business. But Vermonters have still less to gain from a decision to
15
approve this petition, should it later prove that FairPoint could not deliver
16
better value for the state. In either case, the decision of the Board should be
17
based on a well-informed assessment of the merits of the transaction, and not
18
on a lack of information.
19
20
21
Standards of Review
Q.
What are the standards that Department has used to assess this proposed
transaction?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 6 of 49
1
A.
The Department has assessed this proposal by examining if the transaction
2
would promote the public good and if it would not obstruct or prevent
3
competition. In doing so, the Department has reviewed the proposal in light
4
of the fifteen considerations that the Board has used to examine other change
5
of control transactions under section 107 in the past, namely,
6
Legal authority:
7
8
9
1. Do the petitioners have any needed authorizations from the Federal
Communications Commission?
Services:
10
2. Availability of emergency services
11
3. Compatibility with neighboring systems
12
4. Terms and conditions of service would be just and reasonable
13
5. Service quality
14
6. Customer Service
15
Facilities:
16
7. Quality of the facilities
17
8. Rate of capital investment
18
Company Structure:
19
9. Financial stability and soundness
20
10. Control of affiliate interests
21
Personnel:
22
11. Competence of management
23
12. Technical knowledge, experience and ability
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 7 of 49
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2
13. Business reputation
Economic Effect:
3
14. Transaction should produce efficiencies
4
15. Transition should not impair competition
5
In this case, I believe the analysis performed for the fifteenth criterion will
6
also serve to address the standard under section 311.
7
In addition, the Department has considered how those elements of the public
8
good obtained through the mechanism of Verizon’s alternative regulation
9
plan, established under Docket 6959, would be affected. Finally, since
10
FairPoint has requested designation as an ETC in the territory currently served
11
by Verizon-Vermont, the Department has considered how well FairPoint has
12
met the standards for ETC designation, namely,
13

whether it provides-
14
o voice grade access to the public switched network,
15
o local usage,
16
o touch-tone service,
17
o single-party service,
18
o access to emergency services,
19
o access to operator services,
20
o access to interexchange service,
21
o access to directory assistance,
22
o toll limitation;
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 8 of 49
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2

whether designation is in the public interest, convenience and
necessity;
3
4

whether the carrier offers qualifying low-income customers access to
Lifeline and Link-Up; and
5
6

whether the carrier advertises and publishes to the public the
availability of and prices for each of the required services.
7
8
Legal Authority
Q.
9
10
Do the petitioners have the authorizations which they need from the Federal
Communications Commissions and other states?
A.
This question is discussed by Mr. Lafferty in his testimony. In general, Mr.
11
Lafferty points out that various state and FCC approvals are still pending, and
12
the ability of the Joint Petitioners to close this transaction should depend on
13
them obtaining the necessary approvals.
14
15
Availability of emergency services
Q.
16
17
Have the petitioners demonstrated that emergency services would be
available?
A.
The petitioners have not specifically addressed this issue. Nevertheless,
18
because the petitioners are proposing essentially to transfer control of
19
Verizon’s network in Vermont to FairPoint, the Department would not expect
20
that most aspects of Verizon’s provisioning of Enhanced 911 service would
21
change. One area in which the Department does have concern, however, is
22
the potential for disruptions or errors in the provisioning of information to
23
Vermont’s Enhanced 911 system because of the transition from legacy
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 9 of 49
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Verizon systems to the new systems FairPoint will be using after ceasing to
2
take services under the Transition Services Agreement (TSA). This is one
3
aspect of the Department’s larger concerns with the potential for disruption or
4
degradation of service due to the systems development which FairPoint will
5
be required to perform as a result of the transaction. The Department’s
6
assessment of systems development issues appears in the testimony of Mr.
7
Mills.
8
Q.
9
10
Do you have any concerns about the ability of FairPoint to restore and
continue service in a widespread emergency, such as a natural disaster?
A.
Yes. Verizon has one of the largest telephone operations in the country and
11
provides service to millions of customers, with a commensurately large
12
workforce. This provides the ability for Verizon to bring to bear in Vermont a
13
larger number of company workers than FairPoint would be capable of in an
14
emergency like a natural disaster. It may very well be possible for FairPoint
15
to adequately prepare for such contingencies, but it has not stated how it plans
16
to do so. The Department has also been involved in an ongoing conversation
17
with Verizon and Vermont electric utilities related to pole setting and
18
removal. This is described in the testimony of Mr. Mertens. Coordination and
19
performance on pole setting in storm or other emergency situation is very
20
important. The ability of FairPoint to respond effectively in an emergency is a
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 10 of 49
1
matter of concern to the Department and members of the public1, and it is one
2
which FairPoint has not to date specifically addressed in its petition or
3
testimony.
4
5
Compatibility with neighboring systems
Q.
6
7
Have the Joint Petitioners demonstrated that the proposed operation will be
compatible with neighboring systems?
A.
Based on the information that the Department has reviewed to date, it is still
8
not possible to say with confidence if the operation, under the control of
9
FairPoint, would be compatible with neighboring systems. Verizon’s network
10
currently provides a critical means of interconnection between a wide range of
11
telecommunications carriers in Vermont. A transition from Verizon to
12
FairPoint has the potential to create disruption in these relationships. Mr.
13
Lafferty addresses this question in greater detail in his testimony.
14
Furthermore, Mr. Wierson in his testimony identifies some gaps in the plan
15
for the transition to FairPoint regarding the important SS7 (System Signalling
16
7) network.
17
18
Terms and conditions of service would be just and reasonable
Q.
19
What is the context in which you would judge the justness and reasonableness
of the rates under the proposed transaction?
1
Docket 7270 Public Hearing of May 3, 2007, statements of Dominic Montuori (transcript pp. 40-41) and
George Diedrich (transcript pp. 58-59).
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 11 of 49
1
A.
It is important to judge this issue in light of the fact that Verizon’s terms and
2
conditions of service are set according to the terms of an alternative regulation
3
plan adopted in Docket 6959 on September 26, 2005, and modified on April
4
27, 2006, and which FairPoint proposes to assume. In that docket, the Board,
5
found that Verizon’s initial rates exceeded just and reasonable levels by $8.18
6
million annually. The Board ordered Verizon to reduce rates by that amount
7
at the commencement of the plan, and to further reduce rates by $1.26 million
8
effective July 1, 2007, and $1.80 million effective July 1, 2007, unless
9
Verizon delivered an offsetting benefit to Vermont telecommunications
10
consumers. Unlike in the prior alternative regulation plan under which
11
Verizon operated, which left the form that the benefit might take relatively
12
open-ended, the Board adopted in Docket 6959 a mechanism through which
13
Verizon could offset scheduled rate reductions through increased investment.
14
After the Board adopted this mechanism, the Department and Verizon
15
negotiated a specific broadband commitment in lieu of implementing the
16
required rate reductions over the life of the plan. The Board approved this
17
negotiated settlement. Therefore, it would be difficult to judge that Verizon’s
18
current rates, which FairPoint proposes to adopt, are just and reasonable but
19
for the offsetting value which is delivered through the broadband commitment
20
and the other benefits of the plan.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 12 of 49
1
Q.
Would the Verizon terms and conditions of service set under the alternative
2
regulation plan be just and reasonable at the present time if adopted by
3
FairPoint?
4
A.
At a high level, I agree that if FairPoint complied with the terms of Verizon’s
5
alternative regulation plan, Verizon’s rates under the plan could be presumed
6
just and reasonable for FairPoint as well. However, I believe that at least
7
some specific modifications to Verizon’s present alternative regulation plan
8
would be necessary for practical reasons or to meet the public good related to
9
this and other considerations. I will identify these specific modifications
10
when I speak about the alternative regulation plan later in my testimony. In
11
addition, the Board should consider the potential impact on the justness and
12
reasonableness of the rates of the customers served by FairPoint’s existing
13
operating company here in Vermont (to which I will refer as “classic”
14
FairPoint). I will discuss this issue in greater detail when I speak about the
15
form of regulation for classic FairPoint’s operations here in Vermont. Finally,
16
the judgement of the justness and reasonableness of Verizon’s present rates
17
presumes that a level of public good can be and is being delivered by the
18
company. To the extent that this transaction were to diminish or place at risk
19
important public benefits (for example service quality and reliability), then the
20
justness and reasonableness of the company’s terms and conditions of service,
21
at their present levels could also be called into question.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 13 of 49
1
Q.
2
3
Would the present rates offered by Verizon, if adopted by FairPoint, and
continued at historical levels be just and reasonable in the future?
A.
Not necessarily. Assume for the sake of example that FairPoint’s regulated
4
revenues and costs were to remain the same as Verizon’s were at the time that
5
the Board performed its analysis in Docket 6959, and the Board considers a
6
successor to the present alternative regulation plan that FairPoint would
7
inherit from Verizon. Assume further that competition remains sufficiently
8
limited such that the Board does not find a reason to substantially deregulate
9
large portions of the operation’s rates. I would anticipate the Board might
10
find that FairPoint’s rates exceed just and reasonable levels by approximately
11
$11.24 million per year, unless FairPoint were delivering some comparable
12
value in another form. Based on the information FairPoint has provided, I
13
cannot yet identify what that might be. While FairPoint has spoken in general
14
terms of benefits such as broadband expansions, more locally-focused service,
15
and new bundled service offerings, it has not identified consumer benefits
16
with enough specificity for the Board to rely upon.
17
Q.
Is it necessary to identify at this time whether FairPoint’s terms and conditions
18
of service would be just and reasonable under a future alternative regulation
19
plan or after a future rate case?
20
A.
No, but it is important to determine whether or not there is a substantial risk
21
that approving the transaction would preclude the Board from taking actions
22
necessary to establish just and reasonable terms and conditions in the future.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 14 of 49
1
As Mr. Wheaton explains in his testimony, FairPoint’s ability to reduce costs
2
while maintaining revenue, and thus achieving a desired level of cash flow,
3
appears to be critical to its ability to achieve financial stability and soundness.
4
The risk is that state regulators might determine that rate reductions were
5
necessary to meet the public good but would not have an option to implement
6
warranted reductions to FairPoint’s regulated rates in the future without
7
endangering the financial stability of the company, due to the way the
8
company has chosen to structure and finance the transaction. FairPoint must
9
adequately explain why this would not happen if the Board is to approve this
10
transaction.
11
12
BEGIN CONFIDENTIAL
Q.
13
END CONFIDENTIAL
14
A.
Yes, these projections are discussed in the testimony of Mr. Wheaton.
15
Q.
If these projections were correct, would that have an impact on the justness
16
and reasonableness of FairPoint’s rates, if they were to remain at the levels
17
Verizon currently has?
18
A.
Potentially. If FairPoint were able to reduce expenses while maintaining
19
regulated revenue, this would only increase any difference between
20
FairPoint’s rates and their cost-based level. If FairPoint were to earn more
21
than their costs would justify under traditional ratemaking, by itself this would
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 15 of 49
1
not necessarily be inconsistent with Vermont regulation. In its April 27, 2006,
2
order in Dockets 6959 and 7142, the Board said:
3
4
5
6
7
8
9
10
Our goal in adopting an incentive regulation plan and delineating its terms
and conditions has never been solely to force rate reductions or require
that rates remain cost-based during the term of such a plan. The rate
levels certainly are a relevant consideration, particularly at the outset of
the plan; such a review at the outset is necessary to assure that the rewards
derived from incentive regulation are based upon the company’s efforts
and are not the result of starting rates that produce excessive revenue (p.
18).
11
If FairPoint was able to achieve efficiencies greater than Verizon could while
12
maintaining or improving service, that would be desirable, and the
13
Department would not object if FairPoint were to benefit financially because
14
of those efficiencies. Indeed, one of the criteria that the Board has used in
15
evaluating these transactions is that they should produce efficiencies.
16
(Analysis of the likelihood of FairPoint achieving the synergies it claims is
17
part of Mr. Wheaton’s testimony.) However, the Board, in the same order in
18
Dockets 6959 and 7142, goes on to say in the same discussion, “As we have
19
said, ‘consumer benefit is the overarching goal of 30 V.S.A. § 226b’ [the
20
alternative regulation statute for telecommunications companies in Vermont.]”
21
While the Department certainly sees part of the point of alternative regulation
22
to permit the regulated company to realize benefits for more efficient
23
behavior, consumers should also see some of the benefits of that efficiency,
24
either through lower rates or other improvements in the services that they can
25
receive.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 16 of 49
1
Q.
If this transaction were to be approved, should FairPoint be barred from
2
attempting to recover any expenses related to the transaction or the transition
3
from Verizon to FairPoint in any future rate proceeding?
4
A.
Yes. FairPoint’s witness Mr. Nixon, in his testimony of March 23, 2007,
5
states, “FairPoint will not seek to recover through rates the transaction costs or
6
any acquisition premium associated with this transaction” (p.27). The Board
7
should hold FairPoint to this promise, and also clarify that any increased costs
8
which are due to FairPoint’s need to develop and transition to new systems
9
currently supported by Verizon, or which are incurred as a result of continued
10
reliance on Verizon under the Transition Services Agreement (TSA), should
11
also not be recoverable from ratepayers in any future ratemaking proceeding.
12
Q.
13
14
Has the Department’s ability to provide analysis on this issue been limited due
to a lack of information from the Joint Petitioners?
A.
Yes. Because FairPoint to date has not yet produced state-specific
15
projections, it is difficult to apply the information that they have provided to
16
the situation in Vermont. Furthermore, Verizon has objected to the
17
Department’s requests to produce proprietary documents which Verizon was
18
required to produce during Docket 6959, the last time the justness and
19
reasonableness of its rates was reviewed by the Board. (See Exhibit DPS-
20
CJC-1, Verizon’s responses to information requests DPS: VZ 2-166 and 2-
21
167.) The information that the Department has in this case is substantially
22
different than it would be if the justness and reasonableness of FairPoint’s
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 17 of 49
1
terms and conditions were being judged in the context of a rate proceeding.
2
Nevertheless, FairPoint has made a number of claims, directly or indirectly, in
3
its petition and in responses to discovery, that indicate to me that they believe
4
that they will be able to reduce costs while maintaining revenue levels. (See
5
Exhibit DPS-CJC-2, FairPoint’s responses to information requests DPS: FP 1-
6
78, 1-310, and 2-168.)
7
8
Service quality and customer service
Q.
9
10
How might this proposed transaction impact service quality and customer
service?
A.
This transaction could negatively impact service quality and customer service
11
if FairPoint is unprepared to improve on the level of Verizon service quality
12
which the Department believes is inadequate, or by disruption caused by the
13
systems transition necessary for this transaction. As described in the
14
testimony of Ms. Pariseau, the Department already has serious concerns about
15
Verizon’s performance in Vermont on certain important service quality
16
metrics, in particular residential troubles not cleared within 24 hours. In
17
addition, the testimony of Ms. Pariseau describes several parts of the state
18
where Verizon has allowed chronic reliability complaints to develop. Because
19
there are issues with Verizon’s service quality performance, the Joint
20
Petitioners must demonstrate that service quality will improve under this
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 18 of 49
1
proposal, not merely stay the same, in order for this transaction to be in the
2
public interest.
3
Q.
If Verizon’s performance has been poor, at least in some areas, doesn’t the
4
Joint Petitioners’ proposal represent an opportunity to improve service under a
5
new owner?
6
A.
Perhaps. Mr. Lafferty describes in his testimony how FairPoint has expressed
7
a commitment to meet service quality expectations, and how the service
8
quality compensation payments required under the alternative regulation plan
9
would likely provide a stronger incentive for positive behavior by FairPoint
10
than they have for Verizon. FairPoint has an opportunity to put in place better
11
systems and processes for monitoring and reacting to the factors which impact
12
service quality and reliability.
13
Q.
Are you confident about FairPoint’s readiness to deliver on this potential?
14
A.
Not yet. The substantial systems development and conversion challenges
15
FairPoint will require, if not handled successfully, provide numerous
16
opportunities for customer-impacting malfunctions, as Mr. Mills describes in
17
his testimony. Mr. Wierson describes additional challenges FairPoint must
18
overcome. It is operating on limited information about the state of the
19
Verizon network and the reasons for past service quality problems. It must
20
absorb and re-orient a large number of existing workers while hiring and
21
training a substantial number of new workers. It must create a management
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 19 of 49
1
team and management policies to oversee service quality and customer
2
service.
3
Furthermore, as Mr. Wheaton describes in his testimony,
4
BEGIN CONFIDENTIAL
5
6
7
8
9
END CONFIDENTIAL
10
given the level of uncertainty about the quality and quantity of information
11
FairPoint has about the operation it proposes to acquire from Verizon, it is
12
enough to question whether FairPoint’s assumptions about the level of
13
spending which will be required to maintain and improve service quality in
14
Vermont are durable. It is important to test what the effect would be on the
15
financial stability of FairPoint if it were required to increase spending in order
16
to improve service quality.
17
The ability of the Department’s consultants to interview members of the
18
FairPoint team responsible for the transition planning has been important to
19
our ability to conduct even a preliminary assessment of FairPoint’s readiness
20
for the transition. The Department concludes, based on the assessment that
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 20 of 49
1
Mr. Mills and Mr. Wierson have been able to conduct so far, that the level of
2
activity and preparation at FairPoint to provide good service quality and
3
customer service after the transition is greater than would be evident from the
4
company’s filing and prefiled testimony. However, the Department also
5
concludes that FairPoint is still at a relatively early stage in its preparation,
6
and that there are still important unknowns. This, in conjunction with the
7
scope of the undertaking to put in place systems, programs, policies, and
8
management that will not only maintain but improve service quality, means
9
that delivery for Vermont consumers on service quality and customer service
10
is one of the biggest risks of this transaction. FairPoint still must demonstrate
11
that it has adequately mitigated these risks and that it will be prepared to
12
deliver high-quality service.
13
Q.
14
15
Do you believe that any transaction which involves major systems conversion,
as this one does, would create an unacceptable customer service risk?
A.
I would not automatically rule out a transaction because it involved a major
16
systems conversion. Any transaction which would split off the Vermont
17
operation from Verizon, not just this one, would likely require major systems
18
conversions. I therefore believe it is more important to assess how well the
19
risk is managed and minimized. Mr. Mills deals with this question at length in
20
his testimony. The Department believes it would not be in the public interest
21
to run the risk to customer service and service quality of a major systems
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 21 of 49
1
conversion unless there are also some commensurate public benefits to the
2
conversion or the transaction which requires it.
3
Q.
4
5
What has been the recent track record of FairPoint on service quality and
customer service in Vermont?
A.
This subject is addressed in greater detail by the testimony of Ms. Pariseau.
6
While FairPoint has met the fairly modest service quality standards required
7
by Docket 5903, it has not always compared favorably to its peers in Vermont
8
on service quality. Vermont was impacted by the billing system issues which
9
affected the FairPoint operation in Maine, and which are described in the
10
11
testimony of Mr. Lafferty.
Q.
12
13
Have you been involved at all in the resolution of FairPoint service quality
issues?
A.
Yes. I participated in a series of meetings between FairPoint and the
14
Department last summer and autumn, along with the Department’s Consumer
15
Affairs and Public Information Division. The Department requested these
16
meetings because of the pattern of network trouble rate reports described by
17
Ms. Pariseau, and because of incidents where the cuts in non-diverse
18
interoffice facilities connecting FairPoint and Verizon offices resulted in the
19
isolation of a FairPoint central office. We discussed ways that FairPoint could
20
improve its trouble report rate and reduce incidents of central office isolation.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 22 of 49
1
CAPI and FairPoint also discussed various issues arising from informal
2
consumer complaints.
3
Q.
Were the meetings productive?
4
A.
Yes. As a result of the meetings, FairPoint made informal commitments to
5
take various corrective actions, including an audit of certain facilities, adding
6
a technician in Vermont, and seeking additional interoffice route diversity
7
from a provider other than Verizon. We agreed that it would be necessary to
8
wait and see the extent to which these actions improved service quality
9
numbers reported to the Department, especially after the third quarter of the
10
year, which is when FairPoint’s highest level of network troubles had been
11
reported in prior years. Therefore, while I feel that the Department and
12
FairPoint made good progress on these issues last year, it is still too early to
13
judge if all issues are completely resolved.
14
Q.
Does the Department have concerns about how this transaction might affect
15
the pole-setting obligations of Verizon and the service quality of electric
16
utilities?
17
A.
Yes. These concerns and recommendations regarding how to address them
18
are described in the testimony of Mr. Mertens.
19
Quality of the facilities
20
21
Q.
Has FairPoint made adequate provision for the quality of the facilities that it
would be receiving in this transaction?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 23 of 49
1
A.
At this time, there is good reason to doubt that FairPoint has enough
2
information about the quality of Verizon’s facilities to fully understand what
3
steps will be required to maintain and improve the quality of Verizon’s
4
facilities after closing, as described in the testimony of Mr. Wierson. This
5
introduces risk that improvements to the quality of Verizon’s facilities to
6
provide service quality improvement and broadband deployment will be more
7
costly or time consuming than FairPoint has forecasted. Because FairPoint is
8
a company with fewer resources than Verizon, it is important to test if
9
FairPoint would be able to provide a quality network even if its assumptions
10
do not ultimately prove correct. I will discuss this further when I discuss
11
capital investment and the financial soundness and stability of the company.
12
Q.
In your opinion, has FairPoint made any commitments in this docket to
13
expand broadband service in Vermont beyond that to which Verizon is
14
already obligated?
15
A.
No. FairPoint has stated that it will provide expanded broadband service, but,
16
in response to the Department’s information request, the company did not
17
identify if or by how much they might exceed the broadband availability
18
milestones to which Verizon is already subject. (See Exhibit DPS-CJC-3, the
19
response to information requests DPS: FP 1-213.) FairPoint has stated that
20
they are committed to what they characterize as an acceleration of broadband
21
investment in 2008. However, under Verizon’s alternative regulation plan,
22
Verizon already must reach the milestone of 75% of its lines qualified for
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 24 of 49
1
broadband, up from 56% at the beginning of the plan. Over the last two years
2
of the plan, Verizon is only obligated to achieve an additional five percentage
3
points of additional broadband availability.
4
Q.
5
6
Should the Board consider the broadband commitments made so far by
FairPoint to be an enhancement to the public good of the state?
A.
7
No, it should not because they are not specific enough to judge if they are
actually an improvement over the obligations which Verizon already has.
8
Q.
Are there other issues related to quality of facilities?
9
A.
Yes. Mr. Mertens identifies the Department’s concern in his testimony that
10
whoever owns the faculties currently owned by Verizon participate actively in
11
a program to remove old double utility poles.
12
13
Rate of capital investment
Q.
14
15
Has FairPoint committed to a rate of capital investment which is sufficient to
meet the public good?
A.
At this point, it is not possible to determine if the rate of capital investment
16
proposed by FairPoint is adequate in Vermont. As Mr. Wheaton describes in
17
his testimony,
18
19
BEGIN CONFIDENTIAL
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 25 of 49
1
2
3
4
END CONFIDENTIAL
5
Furthermore, none of the projections FairPoint has provided to date on the rate
6
of capital investment are specific to Vermont. Because FairPoint has not
7
provided this, I have used as a proxy for planned Vermont capital
8
expenditures a share of FairPoint’s projected three-state capital expenditures,
9
allocated by an assumed proportion of access lines which Vermont would
10
have in the three-state region FairPoint would be acquiring. This produces the
11
following result:
12
BEGIN CONFIDENTIAL
13
14
END CONFIDENTIAL
15
It is possible to compare this to past Verizon capital expenditures. The
16
Department asked Verizon for its capital expenditures going back to 1997 and
17
through a projection for 2007 in information request DPS: VZ 1-143.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 26 of 49
1
.
BEGIN CONFIDENTIAL
2
3
4
5
6
7
8
9
END CONFIDENTIAL
Q.
10
11
Has the Board required a capital spending condition as part of past
transactions involving predecessors of Verizon?
A.
Yes. In Docket 5900, in which the Board considered the merger of Bell
12
Atlantic and NYNEX, the Board imposed a condition that NYNEX continue
13
to invest in telecommunications infrastructure within the state at a rate
14
comparable to the average rate of investment for the last four years (Order of
15
Feb. 26, 1997, p. 43). In Docket 6150, in which the Board considered the
16
merger of Bell Atlantic and GTE, the Board found that this condition required
17
a minimum investment of $47 million per year and that in 1998, Bell Atlantic-
18
Vermont’s investment had been$50.9 million. The Board renewed this
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 27 of 49
1
condition through the end of 2003 in that docket (Order of Sept. 13, 1999, p.
2
17-18).
3
Q.
4
5
Do you believe that a dollar-specific minimum capital investment requirement
is necessary to ensure adequate capital investment?
A.
In general, possibly but not necessarily. For example, in the modification of
6
Verizon’s alternative regulation plan in Docket 6959 last year, the
7
Department, as part of a Memorandum of Understanding with Verizon, agreed
8
to support the removal of the Board’s prior condition that Verizon make at
9
least $40 million annually in capital investment. Instead, the plan was
10
modified to remove this requirement and include a non-dollar specific
11
requirement that Verizon maintain at all times a level of infrastructure
12
investment and operating expenditures sufficient to maintain the ongoing
13
reliability of its network and the reliability and availability of its services.
14
However, Verizon as a company obviously has the resources to spend
15
whatever amounts might be necessary in Vermont. As a smaller company, I
16
believe that FairPoint must show how the capital expenditures it expects to
17
make in Vermont would be adequate to provide for needed investments to
18
maintain and improve service quality and expand broadband, especially if it
19
were not to have a minimum capital investment requirement. It must
20
demonstrate that it will have the resources to deal with contingencies which
21
require additional capital, and that it will have the ability not only to meet
22
investment requirements through the end of the alternative regulation plan in
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 28 of 49
1
2010, but to support an upgrade path for a network that will support increasing
2
levels of broadband service capability. Because FairPoint has not yet
3
provided more than preliminary plans for Vermont to improve the network,
4
make investments in service, and expand broadband, it is difficult to judge
5
that it has demonstrated these things.
6
7
Financial stability and soundness
Q.
8
9
Does the information available to date indicate that FairPoint will be
financially stable and sound after the transaction?
A.
Mr. Wheaton discusses this issue in detail in his testimony. Based on Mr.
10
Wheaton’s analysis, the Department believes FairPoint’s cash flow
11
projections have been enough to convince many in the financial community
12
that the company would indeed be financially stable and sound. However, the
13
Department believes that it is necessary to further test FairPoint’s assumptions
14
and see what less favorable revenue and expense scenarios would produce.
15
The Department has asked FairPoint for a copy of the financial model which
16
FairPoint used to develop financial projections as well as for Vermont-specific
17
financial information, but did not receive this information in time to complete
18
an analysis for this filing deadline.
19
20
Control of affiliate interests
Q.
Does the proposal provide for adequate control of affiliate interests?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 29 of 49
1
A.
This consideration is addressed by the testimony of Mr. Wheaton. Based on
2
his testimony, I conclude that the affiliate structure proposed by FairPoint
3
would be acceptable. However, Mr. Wheaton has identified some important
4
safeguards to ensure that FairPoint would conduct its affiliate transactions in
5
an important manner, which the Board should require if it were to approve the
6
transaction. This includes requiring the establishment of a separate legal
7
entity for FairPoint’s Vermont operations and restricting the ability of
8
FairPoint to move cash from its Vermont operation to the parent corporation if
9
it was unable to demonstrate that it was effectively managing Vermont
10
operations, meeting service quality standards, and achieving broadband
11
expansion milestones. Mr. Wheaton also recommends that FairPoint file
12
copies of all affiliate contracts over a predetermined amount.
13
Q.
Is there a good model requirement for affiliate contracts in this case?
14
A.
Yes. In Docket 7213, the docket in which the Board approved the acquisition
15
of Green Mountain Power by Gaz Metro, the Board imposed a condition that
16
GMP provide notice of, and file copies upon request, all contracts with
17
affiliates other than contracts of less than $25,000 and contracts with existing
18
affiliates. The Board required all such contracts to be based upon arms-length
19
negotiations. The Department believes a similar condition would be
20
appropriate in this case.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 30 of 49
1
2
Competence of management and technical knowledge, experience and ability
Q.
3
4
Does FairPoint have adequate staff and talent in place to successfully
complete this transition?
A.
Not yet. Mr. Wheaton, Mr. Mills, and Mr. Wierson all speak about the very
5
significant management challenges that FairPoint faces in scaling up and
6
putting together the team which is capable of effectively overseeing the very
7
large system conversion and running the company apart from the support that
8
Verizon provides for the Vermont operation. FairPoint will need to
9
substantially supplement its management capabilities in order to be successful.
10
The Department’s witnesses have been able to identify some of the ways that
11
FairPoint has financial management savvy and is appropriately adding to its
12
ability to oversee the transition and the operations of the new company.
13
However, the development of FairPoint’s management team is still a work in
14
progress at this time, and it is still difficult to judge if it will be up to the job
15
FairPoint is putting before it.
16
17
Business reputation
Q.
18
19
What is the business reputation of FairPoint, as understood by the
Department?
A.
As part of the Department’s investigation into the proposal, the Department
20
conducted a survey of regulators in the other states in which FairPoint
21
operates, as well as at the federal level, as well as relying on discovery. The
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 31 of 49
1
results of the Department’s analysis are presented by Mr. Lafferty. Mr.
2
Wheaton’s testimony discusses the reputation of FairPoint in the financial
3
community. Ms. Pariseau’s testimony also provides information that is
4
relevant to assessing FairPoint’s reputation here in Vermont to date, based on
5
its consumer complaint record. The results of the Department’s investigation
6
point to illustrations of our concerns regarding service quality and customer
7
service. Other than these concerns, they have not uncovered adverse
8
information regarding the general business reputation of the company which
9
should be a bar to this proposal.
10
Transaction should produce efficiencies
11
Q.
Is the proposal likely to produce efficiencies or other economic benefits?
12
A.
This is difficult to judge based on the information at hand. Mr. Leach, in his
13
testimony of March 23, 2007, asserts that FairPoint will be able to achieve
14
operating efficiencies of $60 million to $75 million dollars by running
15
operations less expensively than what Verizon allocates internally for
16
functions like network monitoring, customer care, and back office support.
17
However, FairPoint has not presented much information on which this claim
18
can be evaluated. Mr. Wheaton identifies in his testimony that FairPoint’s
19
claims have been received with some skepticism. As Mr. Wheaton testifies,
20
the complexity and scale of this transaction makes projecting costs and
21
synergies difficult. FairPoint is the closest to the situation and has the greatest
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 32 of 49
1
control over its success in realizing the efficiencies it is projecting. For
2
consumers, the benefit of FairPoint’s greater efficiency, if true, should be the
3
ability to share in the benefits, through reduced rates or better services. Yet,
4
as I have stated previously, FairPoint’s claims of how it will benefit Vermont
5
consumers have lacked specificity.
6
Transition should not impair competition
7
Q.
Would the proposal impair competition?
8
A.
Possibly. There are a number of potential legal and practical ways in which
9
the transfer of ownership from Verizon to FairPoint could impair competition
10
in Vermont, and against which the Board should guard. The primary concern
11
is how the transaction would affect the relationship that Verizon now has with
12
its wholesale customers.
13
Q.
How could the transaction affect Verizon’s wholesale customers?
14
A.
While FairPoint has expressed a willingness to assume Verizon’s wholesale
15
obligations, FairPoint may not be bound to exactly the same set of legal
16
obligations with regard to its wholesale customers as Verizon is, without
17
Board action. Mr. Lafferty identifies some of the issues which might arise
18
related to Sections 251 and 271 of the Telecommunications Act of 1996, and
19
recommends that the Board condition approval of the transaction on
20
FairPoint’s fulfillment of Verizon’s obligations arising under these statutory
21
provisions. Beyond the obligations which Verizon has under the Telecom
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 33 of 49
1
Act, the testimony of Mr. Mills describes the systems development challenges
2
that FairPoint faces, including the systems which would support the wholesale
3
business, are large. Failure by FairPoint to successfully convert to a new set
4
of wholesale systems could adversely affect the ability of CLECs to service
5
their customers.
6
Q.
were to assume control of Verizon’s operation in Vermont?
7
8
Are there wholesale obligations which the Board should modify if FairPoint
A.
9
Yes. The Board should modify its present requirement that Verizon comply
with the conditions of its Performance Assurance Plan (PAP) for wholesale
10
service quality.
11
Q.
Why would it be desirable to modify the PAP?
12
A.
The PAP used in Vermont is tied to the PAP used by the New York DPS to
13
monitor Verizon’s wholesale service quality. Because Verizon operates
14
wholesale systems across multiple states, there is a logic to requiring a very
15
similar PAP in each of those states. However, that logic would be broken if
16
the operator of the system were FairPoint, which does not have significant
17
wholesale operations in New York. Furthermore, the current Verizon PAP is
18
an exceedingly complex document which has undergone many changes as it
19
has been changed in New York. It is a document which is much better suited
20
to be effectively policed by a large state like New York with a large regulatory
21
staff. (By the same token, Vermont has benefited indirectly from the size and
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 34 of 49
1
expertise of the New York staff in monitoring and changing the PAP, much
2
like one carrier may benefit from another carrier’s efforts when it adopts an
3
interconnection agreement negotiated by the other carrier.) If Vermont were
4
to be more completely responsible for the terms of a FairPoint PAP, it would
5
make a great deal of sense to take the opportunity to craft a PAP that is less
6
complex, more transparent to both regulators and the CLECs which operate in
7
Vermont, and which would better leverage the new wholesale systems which
8
FairPoint would need to implement.
9
Q.
What specific condition would you recommend in regards to the PAP?
10
A.
If the Board were to approve this transaction, I would recommend that the
11
Verizon PAP in place at the time of closing be frozen and applied to FairPoint
12
until the Board orders a successor PAP. I would further recommend that the
13
Board open a successor investigation into a new PAP for FairPoint, after it
14
approves the transaction. This should allow all parties, including FairPoint,
15
CLECs, and the Department to provide input into a Vermont PAP for
16
FairPoint.
17
18
The Alternative Regulation Plan
Q.
What obligations of Verizon under its current alternative regulation plan
19
should be re-examined if FairPoint were to assume control of the Verizon’s
20
operation in Vermont?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 35 of 49
1
A.
I believe a number of conditions would be appropriate which would have the
2
effect of modifying the terms of the current Verizon alternative regulation
3
plan. These would include:
4
5
6
1. No regulated intrastate telecommunications product or service offered
by Verizon under tariff when the transaction closes should be
considered a “new service” under the alternative regulation plan.
7
8
9
10
11
12
2. Where classic FairPoint currently reports a Service Quality
Performance Area under the requirements of Docket 5903, and there is
a Performance Area standard under the alternative regulation plan
which is essentially the same, the performance of classic FairPoint
should be included in the measurement of the alternative regulation
performance area standard.
13
14
15
3. The classic FairPoint operation in Vermont should be required to
comply with the Annual Investment requirement of the alternative
regulation plan.
16
17
18
19
20
4. FairPoint should be required to demonstrate that it has obtained legally
binding commitments from Verizon to continue to provide the statespecific information for the states which would not become part of
FairPoint operations, contained in the Performance Benchmark Report
which Verizon is currently required to provide annually.
21
22
23
5. The classic FairPoint operation in Vermont should be excluded from
measurements of progress toward the alternative regulation plan’s
broadband deployment milestones.
24
25
26
27
28
29
6. Lines should be considered broadband-qualified for the purposes of
the alternative regulation plan only in locations where FairPoint offers
broadband service plans which provide upload and download speeds
which are not less than those offered by Verizon in Massachusetts,
Rhode Island, and New York for prices which are not greater than
those offered by Verizon in those states.
30
31
32
33
34
7. Additional lines or line equivalents qualified for broadband service in
the territory served out of the Burlington Central Office after July 1,
2005, should be excluded from the number of additional lines the
qualified broadband service for purposes of the calculations under the
alternative regulation plan.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 36 of 49
1
2
3
8. The classic FairPoint operation in Vermont should be included in the
provisions of the plan related to changes in pricing, terms, and
conditions of service.
4
5
6
7
8
9. Notwithstanding any other provision of the alternative regulation plan,
the Board or the Department should have the ability to seek rate
reductions commensurate with any increase in Federal Universal
Service Funding which the Vermont operation may be eligible to
receive as a direct or indirect result of the transaction.
9
Q.
“new service” under the plan?
10
11
Why would it be desirable to adjust what FairPoint would be allowed to call a
A.
Currently, the alternative regulation plan allows Verizon to call a new service
12
any product or service designated as such and introduced since the inception
13
of the alternative regulation plan approved by the Board in Dockets
14
6167/6189. Verizon is allowed enhanced pricing flexibility, including upward
15
pricing flexibility, on these services and the ability to withdraw those services.
16
Verizon is a company that markets its services across multiple states, and
17
Vermont benefits to a degree from that, as services, packages, bundles, and
18
prices which are offered in other states are introduced into Vermont as part of
19
their spread more or less consistently across the Verizon footprint. FairPoint
20
may choose to exploit different marketing opportunities, and might even
21
eventually offer new services which are more attractive to some than their
22
Verizon counterparts. There is, however, no guarantee that this will happen.
23
FairPoint will at the very least be constrained in its ability to introduce new
24
services during its new systems development. Concern was expressed at the
25
public hearing of May 3, 2007, that FairPoint might limit access to bundles or
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 37 of 49
1
packages which Verizon customers currently enjoy and instead offer less
2
attractive alternatives.2 Vermont consumers should not have reduced or less
3
attractive choices for service from FairPoint than Verizon, if the proposed
4
transaction is to be found to be in the public good. FairPoint’s witness Mr.
5
Nixon, in his testimony of March 23, 2007, states, “FairPoint, in short, will
6
initially offer substantially the same retail services as customers receive
7
today” (p.27). Therefore, a condition essentially re-setting the point in time
8
from which services can be considered “new” would make this promise
9
binding on FairPoint and would give the assurance that FairPoint would not be
10
able raise the price of services which Verizon has been offering or alter their
11
terms and availability without Board approval.
12
Q.
Why should the classic FairPoint operations be included, at least in part, in the
13
measurements of FairPoint’s service quality under the alternative regulation
14
plan?
15
A.
The service quality standards under Verizon’s alternative regulation plan are
16
more stringent than the generic service quality standard set under Docket
17
5903, and also carry an explicit financial consequence for noncompliance.
18
The Board’s decision of July 2, 1999, in docket 5903 contained the concern
19
that the standards approved in that docket might not be sufficiently stringent
20
to reflect reasonable consumer expectations (p.17). It could create unfair
21
situations if FairPoint were to operate two service territories under different
2
Statement of Bernie Henault (transcript pp. 23-24).
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 38 of 49
1
sets of performance standards. There is no good reason why FairPoint
2
consumers in Montgomery, for example, should expect any lower service
3
quality than consumers in Troy. Furthermore, two different standards could
4
create a perverse incentive for FairPoint to remedy service quality issues in
5
the acquired Verizon territory in part by shifting capital, staff, or other
6
resources from its classic territory, at the expense of service quality in that
7
territory.
8
Q.
9
10
Why should the classic FairPoint operation in Vermont be required to comply
with the Annual Investment requirement of the alternative regulation plan?
A.
This provision of the plan requires Verizon to maintain at all times a level of
11
infrastructure investment and operating expenditures sufficient to maintain the
12
ongoing reliability of its network and the reliability and availability of its
13
services. For reasons like those I mentioned in connection with service quality
14
standards, it would be best if FairPoint faced the same requirement in both
15
operating territories. This is the fairest thing for the consumers, who should
16
not be treated differently, and it avoids creating a perverse incentive for
17
FairPoint to shift resources from one of its operations to another.
18
Q.
Why should FairPoint be required to demonstrate that it has obtained legally
19
binding commitments from Verizon to continue to provide the state-specific
20
information for the states which would not become part of FairPoint
21
operations, contained in the Performance Benchmark Report?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 39 of 49
1
A.
One of the statutory requirements for the Board in approving, modifying, or
2
renewing an alternative regulation plan is to establish “standards and
3
procedures by which the effectiveness of the alternative form of regulation
4
can be determined” (30 V.S.A. § 226b(d)). The Performance Benchmark
5
Report provides the Board and Department with comparative information
6
about how well Verizon is performing on a number of measures compared to
7
a number of other states. The other-state Verizon operations against which
8
Verizon compares Vermont are diverse in size, level of competition, level of
9
urbanization, and form of regulation. In short, they provide a good basis for
10
comparison. If Verizon were to not continue to provide FairPoint with this
11
data, the Department and the Board would be less well equipped to evaluate
12
the effectiveness of the plan, using a consistent time series of information.
13
Furthermore, the ability to compare FairPoint’s performance in Vermont and
14
in the other New England states against Verizon’s operations in other states
15
would provide a useful indicator of whether or not FairPoint had improved the
16
relative value to Vermont consumers.
17
Q.
Why should the classic FairPoint operation in Vermont be excluded from
18
measurements of progress toward the alternative regulation plan’s broadband
19
deployment milestones?
20
A.
This would be the most consistent with the purpose of including the
21
broadband deployment milestones in the alternative regulation plan, namely,
22
to ensure improvements in the availability of broadband service. FairPoint’s
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 40 of 49
1
DSL availability in Vermont already exceeds the 80% broadband availability
2
that Verizon would be required to achieve over the life of the plan. If the
3
broadband-qualified lines that are already in FairPoint’s territory were
4
included in the calculation, it would reduce the total number of additional
5
lines that FairPoint would be required to qualify, compared to Verizon.
6
Q.
Why should the lines which FairPoint could count as broadband-qualified
7
under the alternative regulation plan be linked to the characteristics of
8
broadband services offered by Verizon in Massachusetts, Rhode Island, and
9
New York?
10
A.
The price at which FairPoint offers broadband services is important to the
11
degree of value Vermont consumers would receive through the broadband
12
commitments contained in the alternative regulation plan. If broadband
13
services are expanded in Vermont, and those services are expensive, it is less
14
valuable than if the services are priced more affordably. The current
15
alternative regulation plan negotiated by the Department and Verizon does not
16
contain any requirements related to the price of the broadband service offered.
17
However, Verizon has a history of offering DSL packages and prices
18
uniformly across its footprint where it makes DSL service available.
19
FairPoint’s present practice is to offer higher prices for slower-speed DSL
20
services than Verizon does in Vermont. (See Exhibit DPS-CJC-4, the
21
responses to information requests DPS: FP 1-210, and Labor: VZ 1-102.)
22
Benchmarking the services which would count toward the fulfillment of the
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 41 of 49
1
alternative regulation plan obligation to the pricing and performance offered
2
by Verizon in nearby states would help to ensure that FairPoint’s broadband
3
services offered at least equal value to what the state might reasonably have
4
expected from Verizon. FairPoint should provide broadband service offerings
5
which have the same or better price/performance combinations as similar
6
Verizon broadband services in these nearby states.
7
Q.
Why should additional lines or line equivalents qualified for broadband
8
service in the territory served out of the Burlington Central Office after July 1,
9
2005, be excluded from the number of additional line counted as qualified for
10
broadband service for purposes of the calculations under the alternative
11
regulation plan?
12
A.
In the Memorandum of Understanding between the Department and Verizon
13
agreeing to modifications to Verizon’s alternative regulation plan, which was
14
signed March 2, 2006, in Dockets 6959/7142, Verizon agreed “that it [did] not
15
intend to meet the additional broadband service milestones through qualifying
16
additional lines or line equivalents in the territory served by its Burlington
17
Central Office.” While this agreement is part of the MOU between the
18
Department and Verizon, it is not part of the amended plan. Nevertheless, the
19
assurance provided by Verizon in the MOU was important to the Department
20
in deciding to support the settlement. The Department was primarily
21
concerned with expansions of broadband service in unserved areas. The
22
representation in the MOU that Verizon would not claim credit under the plan
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 42 of 49
1
for any broadband expansions in Burlington, which already had ubiquitous
2
service, was significant to the Department. FairPoint was not a party to the
3
MOU, and therefore the Department would want to see comparable
4
assurances if FairPoint would be assuming Verizon’s obligations under the
5
plan.
6
Q.
7
8
If this transaction were to be approved, do you believe that classic FairPoint’s
operations in Vermont would be eligible for regulation under 30 V.S.A 227d?
A.
9
No. Section 227d applies to carriers which serve fewer than ten percent of
subscriber lines installed in the aggregate statewide. While the classic
10
FairPoint company would continue to exist after the proposed transaction, it
11
would be controlled by the same corporate parent. Clearly FairPoint would
12
control more than ten percent of the subscriber lines installed in Vermont.
13
Therefore, if the Board were to approve the transaction, it should terminate
14
classic FairPoint’s election to be regulated under Section 227d.
15
Q.
Why should the classic FairPoint operation in Vermont be included in the
16
provisions of the plan related to changes in pricing, terms, and conditions of
17
service?
18
A.
If classic FairPoint were not regulated under Section 227d, it would revert to
19
traditional rate-of-return regulation unless it was included in the alternative
20
regulation plan. Including classic FairPoint in the provisions of the plan
21
related to changes in pricing, terms, and conditions of service (in addition to
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 43 of 49
1
the other aspects of the plan I have described previously) would have the
2
effect of placing classic FairPoint under a form of price cap regulation, as
3
Section 227d is a form of price cap regulation, but one which would be more
4
consistent with the regulation governing the rest of FairPoint’s operation. It
5
would protect classic FairPoint customers from price increases and provide
6
FairPoint the same pricing incentives to introduce new services in its classic
7
territory as it would have in its new territory. Using this form of regulation
8
would be a better and more efficient use of company and regulatory resources
9
than would be, for example, a potential rate case to adjust rates for classic
10
FairPoint’s approximately 6,000 customers. This would be especially true as
11
FairPoint would be in the midst of transitions which could have a potentially
12
much greater impact on a much larger set of consumers in Vermont, and
13
which should command the first attention of the company and the regulatory
14
oversight on the company.
15
Q.
16
17
Why would it be important to include a condition related to the potential for
increased universal service funding?
A.
The current Verizon alternative regulation plan limits the ability of the Board
18
or Department to propose reductions in rates for existing services to revenue-
19
neutral rate restructurings or specified exogenous events, which do not include
20
changes in federal universal service funding due to a change in ownership.
21
However, this possibility was not considered during the docket establishing
22
the plan. Any potential increases in universal service funding should accrue
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 44 of 49
1
to the benefit of consumers, either through demonstrable increases in
2
investment which benefit consumers, or otherwise in the form of lower rates.
3
4
Designation of FairPoint as an Eligible Telecommunications Carrier
Q.
5
6
Has FairPoint demonstrated that they would provide the nine services required
for carriers which are designated as an Eligible Telecommunications Carrier?
A.
FairPoint’s witness Mr. Nixon, in his testimony of March 23, 2007, states,
7
“FairPoint will provide all of the services necessary to qualify as an ETC
8
under the federal Communications Act.” This is only minimal evidence that
9
FairPoint would provide the services. However, it does seem reasonable to
10
conclude that FairPoint, if it were to take over Verizon’s telephone operation
11
in Vermont in total, would in fact continue to provide the required nine
12
services as Verizon does today. The Board should condition any approval of
13
the transaction on FairPoint continuing to provide these services prior to
14
making this designation and approving the joint petitioner’s request.
15
Q.
16
17
Would designation of FairPoint as an ETC in the territory of Verizon in
Vermont be in the public interest, convenience, and necessity?
A.
Yes, if the Board were to approve the transfer of control of Verizon’s
18
operations to FairPoint, and if FairPoint did provide the required nine
19
services. There are Vermonters in the territory served by Verizon for whom
20
Verizon and Verizon’s network is still the only option for receiving
21
affordable, reliable telephone service. Verizon is (and FairPoint would be) the
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 45 of 49
1
only wireline ETC. It would be important for FairPoint to step into Verizon’s
2
shoes as an ETC if it were to assume control of Verizon’s operation in
3
Vermont.
4
Q.
5
6
Would FairPoint offer qualifying low-income customers access to Lifeline
and Link-Up within the former Verizon service territory?
A.
FairPoint has not specifically addressed this question in its testimony. I
7
interpret FairPoint’s commitment to continue to provide all of the tariffed
8
services of Verizon to include a commitment to continue to provide Lifeline
9
and Link-up, but FairPoint should declare if in fact this is their intention.
10
Q.
Will FairPoint, in the former Verizon territory, advertise and publish to the
11
public the availability of and prices for each of the services required for ETC
12
designation?
13
A.
I have little reason to believe that FairPoint would do less than Verizon has
14
done in this regard. However, I did not find a place in FairPoint’s testimony
15
where the company addressed what it would do regarding advertising and
16
publishing the availability of the services required for ETC designation. The
17
company should do so before the Board makes a finding on this point.
18
19
20
Summary of conditions
Q.
What are the conditions that you have recommended that the Board impose on
FairPoint if it were to approve the transaction?
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 46 of 49
1
A.
Where classic FairPoint currently reports a Service Quality Performance Area
2
under the requirements of Docket 5903, and there is a Performance Area
3
standard under the alternative regulation plan which is essentially the same,
4
the performance of classic FairPoint should be included in the measurement of
5
the alternative regulation performance area standard.
6
The classic FairPoint operation in Vermont should be required to comply with
7
the Annual Investment requirement of the alternative regulation plan.
8
The classic FairPoint operation in Vermont should be excluded from
9
measurements of progress toward the alternative regulation plan’s broadband
10
deployment milestones.
11
Lines should be considered broadband-qualified for the purposes of the
12
alternative regulation plan only in locations where FairPoint offers broadband
13
service plans which provide upload and download speeds which are not less
14
than those offered by Verizon in Massachusetts, Rhode Island, and New York
15
for prices which are not greater than those offered by Verizon in those states.
16
Additional lines or line equivalents qualified for broadband service in the
17
territory served out of the Burlington Central Office after July 1, 2005, should
18
be excluded from the number of additional line the qualified broadband
19
service for purposes of the calculations under the alternative regulation plan.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 47 of 49
1
FairPoint should provide notice of, and file copies upon request, all contracts
2
with affiliates other than contracts of less than $25,000 and contracts with
3
existing affiliates. All such contracts should be based upon arms-length
4
negotiations.
5
FairPoint should be barred from attempting to recover any expenses related to
6
the transaction or the transition from Verizon to FairPoint in any future rate
7
proceeding, including any acquisition premium or any increased costs which
8
are due to FairPoint’s need to develop and transition to new systems currently
9
supported by Verizon, or which are incurred as a result of continued reliance
10
on Verizon under the Transition Services Agreement.
11
No regulated intrastate telecommunications product or service offered by
12
Verizon under tariff when the transaction closes should be considered a “new
13
service” under the alternative regulation plan.
14
The classic FairPoint operation in Vermont should be included in the
15
provisions of the alternative regulation plan related to changes in pricing,
16
terms, and conditions of service.
17
Notwithstanding any other provision of the alternative regulation plan, the
18
Board or the Department should have the ability to seek rate reductions
19
commensurate with any increase in Federal Universal Service Funding which
20
the Vermont operation may be eligible to receive as a direct or indirect result
21
of the transaction.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 48 of 49
1
The Verizon PAP in place at the time of closing be frozen and applied to
2
FairPoint until the Board orders a successor PAP.
3
FairPoint should continue to provide the nine services required of ETCs.
4
FairPoint should be required to demonstrate that it has obtained legally
5
binding commitments from Verizon to continue to provide the state-specific
6
information for the states which would not become part of FairPoint
7
operations, contained in the Performance Benchmark Report which Verizon is
8
currently required to provide annually.
9
Q.
Is it the Department’s recommendation at this time that Board approve the
10
Joint Petitioners’ proposal with these conditions and the conditions
11
recommended by the Department’s other witnesses?
12
A.
No. The Department believes these conditions are necessary but not sufficient
13
for approval of the transaction. As I explained at the beginning of my
14
testimony, the Joint Petitioners have not yet convincingly demonstrated that
15
this transaction is in the public interest. In part, this is true because it has not
16
yet been possible to conduct a full analysis of the proposal’s impacts specific
17
to Vermont. Furthermore, FairPoint has not clearly articulated the Vermont-
18
specific benefits which would offset the risks inherent in a substantial
19
transition in the operation of Vermont’s largest telecommunications service
20
provider.
Department of Public Service
Christopher J. Campbell, Witness
Docket 7270
May 24, 2007
Page 49 of 49
1
Conclusion
2
Q.
Does this conclude your testimony?
3
A.
Yes, it does.