STATE OF VERMONT
PUBLIC SERVICE BOARD
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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Docket No. 7270
DIRECT TESTIMONY
OF
GARY J. BALL
ON BEHALF OF SOVERNET AND SEGTEL
MAY 23RD, 2007
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
PLEASE STATE YOUR FULL NAME, TITLE AND BUSINESS
ADDRESS.
A.
My name is Gary J. Ball. I am an independent consultant providing analysis of
4
regulatory issues and testimony for telecommunications companies. My business
5
address is 47 Peaceable Street, Ridgefield, Connecticut 06877.
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7
Q.
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9
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND
PROFESSIONAL EXPERIENCE.
A.
I graduated from the University of Michigan in 1986 with a Bachelor of Science
10
degree in Electrical Engineering. I received a Masters in Business Administration
11
from the University of North Carolina – Chapel Hill in 1991, with a concentration
12
in economic and financial coursework. I have worked in the telecommunications
13
industry for the past sixteen years, and I have extensive experience in negotiating
14
and implementing interconnection arrangements with incumbent local exchange
15
carriers, as well as developing and analyzing financial and costing models
16
associated with telecommunications networks and services.
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18
From 1991 through 1993, I was employed by the Rochester Telephone
19
Corporation (now part of Citizens Communications), where I served in various
20
engineering, financial, and regulatory roles. From 1993 to 1994, I was the
21
manager of Regulatory Affairs for Teleport Communications Group.
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1
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Beginning in 1994, I served initially as the Regional Director of Regulatory
2
Affairs for MFS Communications Company for the Northeast, and subsequently
3
was promoted to Assistant Vice President of Regulatory Affairs. In that capacity,
4
I was responsible for all aspects of implementation of the Telecom Act in the
5
Verizon region, including negotiation of interconnection agreements and
6
participating in the 271 review for New York. In 1996, WorldCom acquired
7
MFS, after which I was promoted to Vice President of Regulatory Policy
8
Development. In that capacity, I was responsible for coordinating and developing
9
the Company's regulatory positions on issues such as access charges,
10
interconnection, intercarrier compensation, unbundled network elements, and new
11
service technologies. I remained at WorldCom until beginning my own
12
consulting practice in 2002. From November 2005 through April 2007, I was
13
engaged by Pac-West Telecom in a consulting arrangement to act as Director of
14
Government Affairs for the Verizon and BellSouth regions.
15
16
I have testified before the FCC and over 25 states on numerous issues related to
17
telecommunications, including rates, terms, and conditions for unbundled network
18
elements, interconnection, intercarrier compensations, and universal service
19
policy
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21
Q.
ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS PROCEEDING?
22
A.
I am testifying on behalf of Sovernet and segTEL, two competitive local
23
exchange carriers operating in Vermont. Sovernet is headquartered in Bellows
2
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Falls, Vermont, while segTEL is based in Lebanon, New Hampshire. Both
2
carriers offer local and long distance voice and data services using their own
3
facilities in conjunction with leased unbundled network elements and
4
interconnection arrangements currently provided by Verizon in Vermont, and are
5
dependent upon Verizon’s wholesale organization and Operational Support
6
Systems (OSS) to provide many of their services.
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8
Q.
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
9
A.
The purpose of my testimony is to describe the impacts of FairPoint’s proposed
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acquisition of Verizon’s local exchange properties in Vermont on competition,
11
and to propose conditions to ensure that the competitive landscape and end users
12
aren’t harmed in the process.
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14
Q.
PLEASE SUMMARIZE YOUR TESTIMONY?
15
A.
FairPoint’s proposal is incomplete, lacking both the necessary details and
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commitments necessary to ensure that competition won’t be harmed in the
17
transition from Verizon’s operations to those of FairPoint to the detriment of the
18
public good in Vermont. FairPoint lacks the resources, experience, and incentive
19
to comply with the wholesale obligations it will take on as the predominant ILEC
20
in Vermont. Without proper conditions, the transfer of Verizon’s assets to
21
FairPoint will result in increased costs and degraded service to wholesale
22
providers. Vermont’s end users will ultimately pay the price if their existing
3
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
competitive provider is no longer able to provide the same levels of service or if
2
competitors are forced to limit or reduce their service offerings.
3
4
There are three primary areas of uncertainty and concern that must be addressed
5
in advance of approving the transaction. First, FairPoint has neither the financial
6
resources nor the experience Verizon has in providing wholesale services to
7
CLECs. FairPoint has no experience providing the scope and volume of
8
wholesale services that Verizon has reluctantly implemented over the past 10
9
years, and, like Verizon, has no incentive to comply with its wholesale
10
obligations.
11
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Second, FairPoint is not acquiring Verizon’s wholesale organization, nor will it be
13
utilizing Verizon’s operational support systems in perpetuity. As a result,
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FairPoint will be left with the monumental task of creating an entirely new
15
wholesale organization while simultaneously cutting over new and unverified
16
operational support systems and billing platforms. FairPoint will be able to use
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Verizon’s support organizations and systems under the Transition Service
18
Agreement (TSA), but plans to transition to a new system designed by
19
Capgemini, a third party vendor. The TSA is structured to require increasing
20
financial obligations on FairPoint the longer it uses Verizon’s systems, so there is
21
a built-in incentive for FairPoint to prematurely cutover to its own organizations
22
and systems. Furthermore, the increasing income that Verizon receives over the
4
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
course of time provides little incentive for Verizon to cooperate with FairPoint in
2
the development of effective systems.
3
4
The Board has an opportunity to learn from and avoid the mistakes made in
5
Hawaii, when Verizon sold its local exchange network to the Carlyle Group, a
6
private equity firm. In that transaction, the Carlyle Group had no experience as a
7
wholesale provider of CLEC services, hastily replaced Verizon’s existing
8
operation support systems with a new and unverified system, and provided
9
incomplete information in advance of the transaction, relying on future promises
10
and third party vendors. The transaction was approved without adequate
11
safeguards, and the result has been disastrous for both retail and wholesale
12
customers in Hawaii.
13
14
Third, FairPoint has not committed to be subject to the same regulatory
15
obligations as Verizon. This is of great concern to competitive providers such as
16
Sovernet and segTEL, who are reliant upon nondiscriminatory interconnection
17
and access to cost-based unbundled network elements. It is essential that this
18
transaction be made transparent and seamless to Verizon’s existing wholesale
19
customers, who will be reliant upon FairPoint for interconnection and access to
20
network elements. FairPoint must be subject to all of the same regulations and
21
statutory obligations as Verizon, and must be required to continue to provide all
22
unbundled network elements required under Sections 251 and 271, as well as
23
access to poles, conduits and rights of way under Section 224 and continue to be
5
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
subject to the obligations to negotiate for interconnection in good faith as
2
provided under Section 252.
3
4
In my testimony, I will propose specific safeguards to ensure that the Hawaii
5
situation will not be repeated in Vermont. I am proposing that the following
6
safeguards be required before FairPoint is granted approval to assume ownership
7
and control of Verizon’s network in Vermont:
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1. The Vermont Board must retain ongoing jurisdiction over FairPoint and
10
Verizon while the TSA is in effect and during the cutover, and must retain
11
jurisdiction over FairPoint’s system after the cutover to ensure that FairPoint
12
wholesale services, systems, processes and procedures are as at least as good as
13
Verizon’s. The conversion from the TSA should only be allowed after Board
14
review and approval which should be conditioned upon third-party audits of any
15
new proposed system as well as the consideration of CLEC input.
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2. FairPoint must be subject to the same regulatory requirements as Verizon,
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including but not limited to all obligations under sections 251 and 271 of the
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Telecom Act.
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3. The Board should require FairPoint to offer unbundled network elements
22
required under Sections 251 and 271 in Board approved tariffs to ensure
6
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
continued availability of elements to providers on just, reasonable, and non-
2
discriminatory bases at rates that are Board reviewed and approved.
3
4
4. As the acquirer of dominant ILEC status in the 3 northern New England states
5
FairPoint should be required to adopt best competitive practices and make them
6
uniform across their territory. Such practices would include the review and
7
adoption of Maine and New Hampshire determinations regarding (1) wire center
8
impairment evaluations1 , (2) section 271 network element availability2 , (3) pole
9
attachment best practices3, and (4) dark fiber best practices4.
10
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5. FairPoint should assume the key voluntary conditions contained in the
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AT&T/Bellsouth merger, including but not limited to rate freezes on key elements
13
such as UNEs, tandem transit service, and special accesss, agreement to not count
14
MCI’s collocations as part of any impairment analysis, extensions of existing
15
interconnection agreements for 3 more years, and agreement not to seek
16
forbearance from the unbundling of any loop or transport facility.
1
Verizon New Hampshire Wire Center Investigation,DT-05-083, Order No. 24,598 (March 10, 2006;
Supplemental Wire Centers Qualifying for Relief from Certain Unbundled Services, DT 06-020, Order No.
24,723 (January 5, 2007,
2
See, Proposed Revisions to Tariff NHPUC No. 84—(Statement of Generally Available Terms and
Conditions)—Petition for Declaratory Order re Line Sharing, DT 03-201 and DT 04-176, Order Following
Briefing No. 24,442 (March 11, 2005); NHPUC Tariff 84; March 1, 2002 Letter to Edward Dinan from
Dennis Keshl; Proposed Schedules, Terms, Conditions and Rates for Unbundled Network Elements and
Interconnection (PUC 20) and Resold Services (PUC 21), Order-Part II, Docket No. 2002-682 (September
3, 2004 ) and Order (September 13, 2005) and Order-Part 2 (November 17, 2005).;
3
Oxford Networks Request for Commission Invesigation into Verizon’s Practices and Acts Regarding
Access to Utility Poles, Order, Docket No. 2005-486 (October 26, 2006) and Order on Reconsideration
(February 28, 2007).
4
Proposed Tariff to Introduce the Rules, Regulations, and Related Terms and Conditions Pertaining to the
Ordering and Provisioning of Dark Fiber as an Unbundled Network Element, Order, Docket No. 2002-243
(April 11, 2007) and Order (March 31, 2006).
7
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
WHAT IS YOUR UNDERSTANDING OF THE PROPOSED
TRANSACTION?
A.
FairPoint is proposing to purchase Verizon’s local exchange assets in Vermont,
4
New Hampshire, and Maine for $2.7 billion. The sale of three entire states to a
5
company with no BOC background is monumental, and it raises many important
6
regulatory and operational concerns.
7
8
A key point of the transaction is that FairPoint will not be purchasing Verizon’s
9
wholesale organization, including its employees, systems, and procedures, nor
10
will it utilizing Verizon’s operational support systems. FairPoint instead intends
11
to be building its own organization and systems from scratch, and will utilize a
12
Transitional Service Agreement (TSA) in which FairPoint will utilize Verizon’s
13
systems for a fee for a limited time.
14
15
Q.
HAS FAIRPOINT ADEQUATELY DESCRIBED ITS PLANS FOR ITS
16
WHOLESALE ORGANIZATION AND OPERATION SUPPORT
17
SYSTEMS?
18
A.
No. FairPoint hasn’t provided any specific information about its proposed
19
wholesale organization or its operational support systems, nor has it committed to
20
any type of process to ensure that systems get implemented and tested with the
21
involvement of other parties, including competitors.
22
8
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
HAS FAIRPOINT COMMITTED TO ANY SPECIFIC TIMELINES FOR
2
ITS WHOLESALE ORGANIZATION AND OPERATIONAL SUPPORT
3
SYSTEMS?
4
A.
No. In his testimony, Mr. Smith states that the parties expect that the cutover will
5
occur within 15 months after closing. The agreement allows FairPoint to use
6
Verizon’s services indefinitely, but there are financial penalties that begin to
7
accrue after the first year.
8
9
Q.
DO THE FINANCIAL ARRANGEMENTS IN THE TSA GIVE
10
FAIRPOINT AN INCENTIVE TO PREMATURELY IMPLEMENT THE
11
CUTOVER TO ITS OWN ORGANIZATION AND SYSTEMS?
12
A,
Yes. The TSA includes extremely high fees for use of its support organizations
13
and systems, including significant financial penalties to FairPoint for failing to
14
cutover to its own systems by the end of the first year. Per Mr. Smith’s testimony
15
(page 29), FairPoint must pay Verizon $14.2 million per month for the first eight
16
months of the TSA. The rates then decrease by $500,000 per month for the next 4
17
months, but on the 13th month, the rates go back up to $14.2 million, and increase
18
by $500,000 per month each month after. By the end of the second year,
19
FairPoint will be paying $19.7 million per month, and by the end of the third year,
20
$25.7 million per month. Clearly, even if FairPoint’s systems aren’t ready by the
21
end of the first year, they will be under great financial pressure to cutover to their
22
own systems to avoid the mounting payments to Verizon.
23
9
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
WHY IS IT SUCH A RISK TO ASSUME THAT FAIRPOINT WILL BE
2
ABLE TO IMPLEMENT ITS NEW WHOLESALE ORGANIZATION AND
3
OPERATIONAL SUPPORT SYSTEMS WITHOUT ENCOUNTERING
4
ANY DIFFICULTIES?
5
A.
It would be unreasonable to assume that a company with limited or no experience
6
operating as a wholesale provider, that is also attempting to implement new and
7
untried systems at a breakneck pace, will not encounter any difficulties. It has
8
been my experience that companies always underestimate the complexity of
9
updating and integrating systems as part of a merger or acquisition. This is
10
especially true when existing customer services and processes are reliant upon
11
legacy systems that have been developed over a long period of time.
12
13
Q.
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15
PLEASE DESCRIBE WHAT HAPPENED WHEN VERIZON SOLD ITS
HAWAII PROPERTY TO THE CARLYLE GROUP?
A.
In March of 2004, Verizon and the Carlyle Group requested permission from the
16
Hawaii PUC to transfer ownership of Verizon Hawaii to the Carlyle Group. A
17
TSA was implemented to transition the back office organizations and operational
18
support systems from Verizon to Carlyle. In April of 2006, Hawaiian Telcom,
19
which is the name of the new entity, prematurely cutover to its own systems
20
designed by BearingPoint, a third party vendor, leading to numerous problems for
21
both retail and wholesale customers.
22
10
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
The scope of these problems was detailed in Hawaiian Telcom’s own 10-K filing
2
with the SEC, in which it states:
3
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The 10-K then proceeds to discuss a $52 million settlement reached with
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Bearingpoint for failure to provide the services it had committed to, as well as a
17
subsequent agreement with another third party vendor, Accenture, to fix
18
Bearinpoint’s systems. This restoral effort is planned to continue into 2008.
19
Hawaiian Telcom’s 10-K describes the current problems and the efforts they are
20
being forced to undertake to correct these problems:
21
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25
26
27
28
29
30
31
32
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On the April 1, 2006 cutover date, while the major network operational
systems were built and functioned without significant problems, critical
systems related to back-office functions, such as customer care, order
management, billing, supply chain, and other systems interfacing with our
financial systems, lacked significant functionality. This led to deficiencies
in billings and collections, revenue assurance, and order entry flowthrough. Despite BearingPoint’s efforts to improve the functionality of
the related systems, we continued to experience many of these same
issues, requiring us to incur significant incremental expenses in 2006 to
retain third-party service providers to provide call center and manual
processing services in order to operate our business.
The lack of full system functionality following the Transition Period
substantially impacted both customer satisfaction (as evidenced by large
increases in the customer call volumes at our work centers) and collection
efforts in 2006. However, our remediation and systems recovery efforts
begun in 2006 are beginning to show some improvements. Functionality
is improving for our critical systems related to back-office functions such
as customer care, order management, and billing systems. As a result,
while systems issues still exist, we are experiencing fewer collection
treatment delays, physical bill delivery problems and order flow-through
issues, and customer call volumes at our work centers have decreased. We
continue to work to improve our system functionality.
11
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
IS THERE OTHER IMMEDIATE EVIDENCE TO SUPPORT THE
2
NOTION THAT IMPLEMENTING NEW SYSTEMS IS FRAUGHT WITH
3
PROBLEMS?
4
A.
Yes. On Page 26 of his testimony, Mr. Nixon describes what he terms “a
5
significant service problem in Maine” due to “converting the company billing
6
system to a new vendor.” Clearly, FairPoint’s own experiences in this matter are
7
evidence that even the best intentioned systems upgrades are subject to
8
unforeseen problems that can have dramatic customer-impacting consequences.
9
10
Q.
WHAT CONDITIONS SHOULD BE IN PLACE TO MINIMIZE THE
11
CUSTOMER AND COMPETITIVE IMPACTS OF TURING UP A NEW
12
OSS?
13
A.
It is essential that whatever new systems FairPoint wishes to implement be fully
14
tested by an independent auditor before being cutover for live usage. The Board
15
should require Verizon and FairPoint to be bound to operate under the TSA until
16
FairPoint’s systems are fully tested and audited at FairPoint’s sole expense.
17
Additionally, the Board should require the formation of a rapid response team
18
similar to that created in Maine as part of the Maine PUC’s 271 review to
19
immediately deal with any problems that might arise post cutover. Furthermore,
20
the Board should order the establishment of a funding mechanism to provide
21
CLECs the ability to recover any costs they are required to incur to conform their
22
existing systems and process to FairPoint’s new systems, as well as provide
23
insurance to CLECs if any competitive damage is encountered due to systems not
12
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
being appropriately implemented. I recommend that this be funded by placing 10
2
percent of the amounts billed by Verizon to FairPoint under the TSA into such a
3
fund. This funding mechanism could be simply administered by an independent
4
third party across the three FairPoint states.
5
6
Q.
7
8
9
PLEASE DESCRIBE THE CURRENT COMPETITIVE ENVIRONMENT
IN VERMONT AND ELSEWHERE.
A.
Since the passage of the Telecom Act, there have been two parallel trends that
together have diminished the ability of competitors to operate and grow their
10
business as well as secure financing. The first is the massive consolidation that
11
has occurred among AT&T and Verizon. Both carriers have extended their
12
scopes both horizontally, through acquisitions of additional ILEC assets, as well
13
as vertically, through the acquisitions of AT&T and MCI. These acquisitions of
14
the two largest interexchange carriers provided a dual benefit of simultaneously
15
eliminating their two major competitors, while dramatically extending the scopes
16
of their services, adding long distance, internet backbone, and local fiber and
17
enterprise customer assets. Additionally, both AT&T and MCI have grown to be
18
the predominant wireless providers in their own regions, and are now
19
implementing their own fiber-based cable television offerings as well.
20
21
During this period of consolidation of market power, regulators have been
22
systematically deregulating AT&T and MCI.
23
their obligations to provide unbundled network elements in such areas as
13
They have been able to eliminate
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
switching and broadband services, have obtained increased price flexibility on
2
key special access services, and have been able to avoid living up to their
3
obligations to implement and honor publicly available interconnection
4
agreements.
5
6
This counterintuitive approach to regulation, in which carriers receive less
7
regulatory oversight as they build market power, has left the competitive
8
landscape scarred and barren. Very few of the original competitors that were
9
formed after the Telecom Act are still in existence, and many of those that are
10
have had to endure endless cycles of bankruptcies, layoffs, and withdrawal of
11
service offerings.
12
13
Q.
HOW DO VERIZON’S REGULATORY OBLIGATIONS INFLUENCE
14
THE ABILITY OF COMPETITORS TO PROVIDE SERVICES IN
15
VERMONT?
16
A.
The cornerstone of competition in the telecom industry is Section 251 of the
17
Telecom Act, which requires incumbent local exchange carriers such as Verizon
18
to interconnect with other carriers and provide unbundled network elements at
19
cost-based TELRIC rates in a nondiscriminatory manner. As a BOC that chose to
20
enter the lucrative long-distance market, Verizon also has additional obligations
21
under Section 271 of the Act, which require it to provide a much broader array of
22
unbundled network elements than is required under Section 251 due to the FCC
14
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
limiting UNEs in its Triennial Review Order5and Triennial Review Remand
2
Order6 decisions as well as various forbearance petitions. The provisions in the
3
Act requiring nondiscriminatory access and cost-based pricing for interconnection
4
and network elements were put in place in recognition that the incumbent LECs
5
would have no incentive to provide these critical components without regulatory
6
oversight and intervention. Competitors should be able to access elements either
7
through their own negotiated interconnection agreements, through opting into
8
other carriers agreements, or through a generally available tariff approved and
9
enforced by the Board.
10
11
Q:
12
13
WHAT IS THE DIFFERENCE BETWEEN VERIZON’S OBLIGATIONS
UNDER SECTIONS 251 AND 271?
A.
It is helpful to understand that Congress attempted to balance the Telecom Act
14
with both incentives and regulatory obligations for the incumbent local exchange
15
carriers to open their markets. Section 251 of the Act provides a list of
16
obligations required of the ILECs and Section 271 provides incentives that will
17
allow BOCs to enter new lines of business in exchange for voluntarily offering to
18
open their markets:
19
5
Report and Order and Order on Remand and Further Notice of Rulemaking, Review of the Section 251
Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket 96-98 et al, FCC 03-36, 18
FCC Rcd 16978 (rel Aug 21, 2003) (TRO).
6
In the Matter of Unbundled Access to Network Elements; Review of the Section 251 Unbundling
Obligations of Incumbent Local Exchange Carriers, WC Docket No. 04-313, CC Docket No. 01-338, Order
on Remand, FCC 04-290 (rel Feb. 4, 2005) (TRO Remand Order or TRRO)
15
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Section 251 is the “stick” in this “carrot and stick” approach.. Section 251
2
obligations are involuntary obligations that were placed by Congress upon most
3
incumbent local exchange carriers (including all Bell Operating Companies).
4
These obligations require the ILECs to open their networks to competition and
5
provide competitors the ability to purchase unbundled network elements at cost-
6
based rates on a non-discriminatory basis. The primary determinant of eligibility
7
for a Section 251 element is not based on the ILEC, but based upon whether a
8
new competitive entrant would be “impaired” without access to the UNE. As
9
such, Section 251’s primary purpose is to provide incentives and to promote
10
competition, and it has been implemented with the knowledge that the ILECs
11
would not provide these network elements at these conditions without being
12
forced to by law.
13
14
Section 271 obligations are very different. They apply to the Bell Operating
15
Companies and their successors and assigns. Section 271 is voluntary in that
16
compliance with Section 271 carries a reward to Bell Operating Companies
17
allowing the BOCs to sell inter-Lata competitive services for the first time since
18
the 1984 consent decree that finalized the AT&T divestiture. The BOCs were
19
never forced to comply with Section 271 – instead they chose to comply (and
20
promise ongoing compliance) in return for legalized access to lucrative markets.
21
The Section 271 approval process for Verizon’s predecessors (such as New
22
England Telephone) in many states was contentious and participating parties were
23
very concerned about the Bells backsliding on their continuing Section 271
16
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
obligations after they received approval. A half-decade later these fears have
2
been proven to be well-founded.
3
4
Q.
5
6
WHAT HAS BEEN VERIZON’S APPROACH TO ITS REGULATORY
OBLIGATIONS UNDER THE TELECOM ACT?
A.
Verizon has been the most aggressive BOC in terms of attempting to shed its
7
regulatory obligations and transition to a purely commercial environment.
8
Despite the promises of Verizon’s predecessor entities to provide Section 271
9
elements in their state approval processes they have resisted any attempts to
10
enforce these obligations, Verizon has appealed PUC orders in Maine and New
11
Hampshire which would require them to include network elements required under
12
Section 271 in their wholesale tariff. Instead of making these UNEs publicly
13
available on a non-discriminatory basis, Verizon seeks to offer them only through
14
confidential commercial arrangements, which Verizon apparently asserts are not
15
under the jurisdiction of state regulators. It is important to note that Verizon’s
16
approach to these obligations has been substantially more aggressive than the
17
other Bell Companies.
18
19
Q.
20
21
HOW DOES THIS TRANSLATE INTO CONCERNS OVER THE
FAIRPOINT TRANSACTION?
A.
Competitors could very well end up with the worst of both worlds, inheriting
22
Verizon’s hostile regulatory stance combined with FairPoint’s inexperience and
23
limitations as a wholesale provider. FairPoint’s current offer to simply adopt
17
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Verizon’s existing regulatory approach is insufficient for competitors. The Board
2
should use this as an opportunity to begin healing the regulatory environment for
3
competitors in Vermont.
4
5
Q.
6
7
WHY IS IT IMPORTANT THAT FAIRPOINT BE SUBJECT TO THE
SAME SECTION 271 REGULATION AS VERIZON?
A.
Absent Section 271, FairPoint’s obligations to provide certain UNEs will be
8
limited to those available under the FCC’s impairment analysis conducted in the
9
TRO and TRRO. The FCC in the TRO has ruled that, even if a UNE is no longer
10
required based upon the 251 necessary and impair standard, it still may be
11
required under Section 271.
12
13
Q.
14
15
WHAT ARE SOME OF THE KEY UNES THAT ARE IMPACTED BY
THE DISTINCTION BETWEEN SECTION 251 AND SECTION 271?
A.
In its TRO and TRO Remand orders, the FCC’s impairment analysis concluded
16
that certain loop, switching, and transport UNEs did not meet the necessary and
17
impair standard contained in Section 251. Included it this analysis was its
18
conclusion that CLECs would not be impaired without TELRIC access to certain
19
types of loops and loop functions, including dark fiber and line sharing, and
20
transport also including dark fiber in certain locations.
21
22
23
18
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
WHAT IS LINE SHARING?
2
A.
Sharing allows providers to lease the high frequency portion of a customer’s loop
3
for the provision of broadband DSL services. This is beneficial to customers,
4
who can avail themselves of competitive broadband services without being
5
required to change voice service providers. It also broadens the scope and
6
availability of broadband service providers by removing the significant barrier to
7
entry that would exist if all providers were required to provide both voice and
8
broadband services.
9
10
Q.
WHAT IS DARK FIBER?
11
A.
Dark Fiber provides for the ability to lease fiber optic strands between two
12
points, allowing a competitive provider to design and control its own services by
13
attaching its own optical terminating equipment to the fiber. Dark Fiber can be
14
used in the form on loops, providing fiber connectivity between and end users’
15
premises and a competitive providers network, sub-loops, providing connectivity
16
between a remote terminal or comparable facility and a competitive providers’
17
network, or it can in the form of interoffice transport, providing connectivity
18
between wire centers allowing competitive providers to link different components
19
of their networks. Dark fiber can also be used for entrance facilities, which
20
allows competitive providers to access their transport services in a aggregated
21
form at a given wire center.
22
23
19
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
CAN LINE SHARING AND DARK FIBER BE REQUIRED AS 271 UNES?
2
A.
Yes. The Board can condition its approval of the transaction on FairPoint’s
3
agreement to offer Section 271 elements such as dark fiber and line sharing. In
4
fact, two of the three states where FairPoint proposes to acquire assets from
5
Verizon have already required Verizon to do so. Both the Maine and New
6
Hampshire commissions have ruled that, while the FCC determined that line
7
sharing and certain dark fiber facilities are no longer required at TELRIC rates
8
under section 251, Verizon still has an independent legal obligation to offer them
9
under section 271. Both commissions ruled that they had the authority to enforce
10
section 271 commitments Verizon had made and required Verizon to offer such
11
elements in a wholesale tariff at “just and reasonable rates.” (Both of these
12
Orders have been appealed by Verizon.) Furthermore, the FCC’s 271 orders
13
approving Verizon’s entry into the long distance markets in many states including
14
New Hampshire and Maine relied upon Verizon’s provision of dark fiber and line
15
sharing, explicitly referring to line sharing and dark fiber loops and or transport as
16
checklist items 4 and 5 s and instructing the states to be vigilant to guard against
17
backsliding. The FCC’s Order for Vermont analyzes line sharing as an offering
18
under checklist item 4 as well. At the same time the Triennial Review Order
19
(TRO) explicitly removed any requirement that Section 271 UNEs be provided at
20
TELRIC rates, simply requiring that the rates be “just and reasonable.”
21
22
20
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
DID MAINE AND NEW HAMPSHIRE REQUIRE VERIZON TO
CONTINUE OFFERING THESE 271 UNES IN A WHOLESALE TARIFF?
A.
4
Yes. Both Maine and New Hampshire require Verizon to offer 271 UNEs in a
wholesale tariff.
5
6
Q.
WOULD IT PROMOTE THE PUBLIC GOOD IF FAIRPOINT OFFERED
7
TO PROVIDE THE SAME 271 ELEMENTS IN A WHOLESALE TARIFF
8
IN VERMONT AS PART OF ITS COMMITMENT TO IMPROVE THE
9
COMPETITIVE ENVIRONMENT IN VERMONT?
10
A.
Yes. Competitive providers would have access to these elements without the
11
need for protracted negotiation and potential litigation. Additionally, the Board
12
would have oversight of the rates, terms, and conditions of these offerings, and
13
would be able to ensure that FairPoint was providing nondiscriminatory access to
14
these elements. The existence of such a tariff would also help to ensure that the
15
proposed transaction will not obstruct or prevent competition.
16
17
Q.
18
19
IS FAIRPOINT OFFERING TO ASSUME VERIZON’S REGULATORY
OBLIGATIONS RELATIVE TO THESE OFFERINGS?
A.
No. In response to data requests, Faripoint has stated that it does not consider
20
itself to be a Bell Operating Company (BOC), and FairPoint has made it clear that
21
it will not assume any of Verizon’s obligations under Section 271, meaning that
22
FairPoint wishes to expand on Verizon’s already aggressive level of deregulation,
23
which will certainly be to the detriment of wholesale providers in Vermont.
21
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
IS FAIRPOINT OFFERING TO PROVIDE 271 UNES WITHOUT THE
NEED FOR LITIGATION?
A.
No. In responses to SOV/SEG 1-3, 1-4, and 1-85, FairPoint asserts that it does
4
not concede it will become a “BOC” as a result of the transaction, will not be
5
generally subject to Section 271, and will not include Section 271 elements in a
6
wholesale tariff or an SGAT.
7
8
Q.
9
10
DO YOU AGREE THAT FAIRPOINT WILL NOT BE A BELL
OPERATING COMPANY?
A.
No. In Section 3(4)(A) of the Telecom Act, New England Telephone is
11
specifically identified as a Bell Operating Company, and Section 3(4)(B) includes
12
in the definition “any successor or assign of any such company that provides
13
wireline telephone exchange service.” Clearly, FairPoint, as a purchaser of
14
Verizon’s New England Telephone assets, meets this definition.
15
16
Q.
17
18
WHAT COMMITMENTS HAS FAIRPOINT MADE TO IMPROVE ITS
ABILITY TO SERVE ITS WHOLESALE CUSTOMERS?
A.
None. In his testimony (page 6 and 7), Mr. Leach discusses FairPoint’s plans for
19
expansion of its retail services, specifically attempting to increase DSL
20
penetration and provide new bundles of service, but provides no mention of any
21
specific improvement for wholesale providers, except the assertion that the
22
wholesale customers will benefit generally from FairPoint’s network
23
improvements.
22
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
IS FAIRPOINT’S APPROACH TOWARDS WHOLESALE CUSTOMERS
ADEQUATE IN THIS INSTANCE?
A.
No. It is clear from Mr. Leach’s testimony that FairPoint’s focus is going to be on
4
pursuing retail customers and satisfying its investors. It would be irrational for
5
FairPoint to focus on its wholesale customers, who are also competitors, with this
6
goal in mind. That is why it is critical that FairPoint be subject to all of Verizon’s
7
regulatory requirements and preexisting agreements with regulators, as these
8
contain the necessary protections for competitors who must purchase critical
9
network elements and interconnection services from incumbents who control
10
bottleneck facilities.
11
12
Q.
IN HIS TESTIMONY (PAGE 28), MR. NIXON STATES THAT, AMONG
13
OTHER THINGS, FAIRPOINT WILL ADOPT ALL OF VERIZON’S
14
INTERCONNECTION AGREEMENTS AND WHOLESALE TARIFFS,
15
AND WILL NOT SEEK AN EXEMPTION FROM OR MODIFICATION
16
OR SUSPENSION OF SECTION 251(B) OR (C) AS A RURAL CARRIER
17
UNDER THE TELECOM ACT. WHY IS IT ALSO NECESSARY THAT
18
THEY ADOPT VERIZON’S 271 OBLIGATIONS?
19
A.
Section 271 requires that the BOCs maintain the specific list of checklist items
20
above and beyond what has been required under Section 251, including UNEs
21
such as dark fiber loops and transport, as well as line sharing. Carriers that wish
22
to obtain these elements will be harmed if they are no longer have the right to
23
obtain them as UNEs due to FairPoint being released from Verizon’s obligations.
23
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
SHOULD TRANSPARENCY BE A MINIMUM REQUIREMENT?
2
A.
Yes. A core goal of the Telecommunications Act of 1996 was to benefit the
3
public good by increasing competition in the local telecommunications market. I
4
can’t imagine how it would be in the public interest to diminish the rights of
5
competitors as part of this transaction. Indeed, it will tend to obstruct or prevent
6
competiton if competitors’ rights are diminished. FairPoint has stressed that it
7
will be able to improve service quality and increase the number of services
8
throughout the region by being more focused and efficient than Verizon. This
9
should apply to wholesale services to competitors in equal measure.
10
11
Q.
IN HIS TESTIMONY (PAGE 28), MR. NIXON STATES THAT
12
FAIRPOINT WILL NOT TAKE THE POSITION THAT IT IS A RURAL
13
TELEPHONE COMPANY UNDER SECTION 251(F) AND WILL NOT
14
SEEK EXEMPTION FROM OR MODIFICTION OR SUSPENSION OF
15
ANY OF THE ILEC REQUIREMENTS CONTAINED IN SECTION 251
16
OF THE TELECOM ACT. IS THIS ADEQUATE?
17
A.
No. There is nothing binding about FairPoint’s commitment. Without a binding
18
commitment, there is nothing stopping FairPoint or any future owner of the
19
company from claiming that changed circumstances warrant a different approach.
20
21
22
24
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
2
3
WHAT WOULD THE BENEFITS OF IMPLEMENTING A BEST
COMPETITIVE PRACTICES CONDITION ACROSS THE REGION?
A.
Implementation of such a rule would guarantee that competitive providers could
4
maximize their service offerings across the region, and also be able to have
5
consistent service offerings across the region by avoiding situations in which
6
elements either aren’t available, or aren’t available under the same terms and
7
conditions from state to state. A best practices approach would avoid forcing
8
competitive providers to continuously litigate issues in each state, and would also
9
free up regulatory resources to focus on oversight of the key transitional and
10
operational issues associated with this transaction.
11
12
Q.
CAN YOU PROVIDE SOME SPECIFIC EXAMPLES OF WHOLESALE
13
SERVICES THAT FAIRPOINT SHOULD BE PROVIDING AND
14
IMPROVING IN VERMONT AS PART OF A COMMITMENT TO
15
PROVIDE BEST COMPETITIVE PRACTICES ACROSS THE REGION?
16
A.
Yes. FairPoint should voluntarily commit to providing all of the Section 271
17
UNEs that the Maine and New Hampshire Commissions have ordered Verizon to
18
provide in a wholesale tariff subject to ongoing Board review and authority. The
19
Board should also require that Verizon’s SGAT be reviewed and then converted
20
into a Tariff for section 251 elements in Vermont, giving it the full force and
21
effect of law. Additionally there are improvements that FairPoint should make to
22
Verizon’s Section 251 dark fiber transport offering.
23
25
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Verizon’s policies for the installation of dark fiber transport in Vermont are more
2
restrictive than in New Hampshire and Maine, where Fairport also proposes to
3
acquire Verizon’s assets. The Verizon wholesale organization that has
4
responsibility over dark fiber is not being transferred to Fairport. In response to
5
Sov/Seg 2-9 and 2-7, Fairport states that it has no written policies or procedures in
6
connection with dark fiber and would be willing to enter into negotiations in the
7
normal course of business to make changes regarding the provision of dark fiber.
8
As the FCC has determined and the courts have upheld, CLECs are impaired
9
without having access to dark fiber transport [except for limited circumstances].
10
There can be no question that 251 obligations are continuing obligations not
11
“open for discussion,” but mandated to be implemented.
12
13
Sovernet and segTEL propose that FairPoint commit to the following
14
improvements over Verizon’s current dark fiber transport offering. First, if an
15
inquiry reveals that there is no dark fiber available, FairPoint should provide the
16
CLEC with written documentation and a fiber map in a reasonable time frame,
17
along with an evaluation of any alternative indirect routes as it is required to do in
18
Maine. Second, FairPoint should agree to provision continuous dark fiber within
19
one or more intermediate central offices without requiring the CLEC to be
20
collocated at those offices. Third, Verizon’s current policy for reserving spare
21
fiber pairs for its own maintenance and repair in Vermont is overly conservative,
22
which in reduces the fibers that are available to CLECs. FairPoint should agree to
23
implement spare and maintenance reservations in Vermont according to the same
26
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
policy Verizon currently provides in Maine. FairPoint should agree to to provide
2
parallel provisioning services as Verizon presently does in New Hampshire and
3
Maine, and to provide dark fiber separation services as Verizon provides in
4
Maine.
5
6
Furthermore, as FairPoint will be acquiring Verizon’s poles, conduits, and rights-
7
of-way within Vermont they should subject themselves to an evaluation of their
8
practices for access to these important facilities and to adopt any recent pole
9
attachment best practices ordered in either Maine or Vermont.
10
11
Q.
HOW ARE THESE SERVICES CURRENTLY OFFERED IN VERMONT?
12
A.
The 271 UNEs identified above don’t appear to be generally available.
13
According to Verizon’s response to Sov/SegTel 2-32, Verizon states that it has no
14
obligation to provide dark fiber loops, dark fiber sub-loops, dark fiber transport,
15
dark fiber entrance facilities, and line sharing as Section 271 elements in
16
Vermont.
17
18
Q.
19
20
WHAT DO YOU PROPOSE TO MAKE CERTAIN THESE SERVICES
ARE READILY AVAILABLE?
A.
In Maine and New Hampshire, the state commissions have required Verizon to
21
offer these services in a wholesale tariff, making them generally available to any
22
requesting carrier without the need to engage in lengthy and protracted
23
negotiation, and also making them subject to the oversight of the respective state
27
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
commissions. I recommend that, as a condtion of approval, FairPoint must agree
2
to file a wholesale tariff in Vermont that contains all of the services required
3
under Section 271. Alternatively, the Board could require that Verizon allow
4
carriers to utilize their SGAT without any pre-existing agreements or waiver of
5
any rights.
6
7
Q.
ARE THERE CONDITIONS FROM OTHER MERGERS AND
8
TRANSACTIONS THAT WOULD BE HELPFUL FOR THE BOARD TO
9
CONSIDER IN THIS TRANSACTION?
10
A.
Yes. Verizon itself is still subject to conditions related to its acquisition of MCI.
11
Also, the recent merger between BellSouth and AT&T also contained many
12
conditions that would be beneficial if applied to this transaction.
13
14
Q.
WHAT ARE THE KEY CONDITIONS THAT VERIZON AND SBC
15
VOLUNTARILY AGREED TO IN THE VERIZON/MCI AND SBC/AT&T
16
MERGERS?
17
18
A.
There are numerous agreed-to provisions in these merger proceedings that should
be applicable to this transaction as well. Some key provisions:
19
20
1. Rate freezes on UNEs. Both Verizon and AT&T agreed to freeze the rates
21
they charge for UNEs.
22
2. Agreement to not count preexisting company-owned collocation arrangements
23
as part of any impairment analysis. FairPoint should not count MCI collocations
28
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
as part of its impairment analysis to help ensure that the transition doesn’t enable
2
additional deregulation.
3
3. Allow carriers to extend existing interconnection agreements for 3 additional
4
years. Also, allow carriers to use pre-existing interconnection agreements as
5
starting point for new negotiations, and to allow carriers to opt-into any available
6
agreement in any other states.
7
4. Agreement to cease all ongoing or threatened audits of the FCC’s EELs
8
eligibility criteria.
9
5. Rate freeze and limits on pricing flexibility for special access services.
10
6. Rate freeze for tandem transit services.
11
7 Agreement not to seek forebearance on any loop or transport UNEs under the
12
Act.
13
14
Q.
15
16
HOW WOULD THESE CONDITIONS BE BENEFICIAL TO ENSURING
THAT COMPETITON IS NOT HARMED IN THIS TRANSACTION?
A.
These merger conditions essentially renew many of the protections that should be
17
maintained under 251 and 271 of the Act. By ensuring stable rates for
18
competitively sensitive services, and by allowing competitors to avoid having to
19
renegotiate existing agreements with a new entity, the Board can ensure that
20
competitive harm will be minimized by requiring these conditions.
21
29
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
Q.
YOU’VE MADE NUMEROUS RECOMMENDATIONS THROUGHOUT
2
YOUR TESTIMONY. CAN YOU SUM THEM UP IN THE FORM OF A
3
CHECKLIST?
4
A.
Yes. It is a significant risk to Vermont to allow its local exchange network to be
5
sold to an inexperienced provider, especially if this provider is introducing new
6
systems. I am proposing that the following safeguards be required before
7
FairPoint is granted approval to assume ownership and control of Verizon’s
8
network in Vermont:
9
10
1. The Vermont Board must retain ongoing jurisdiction over FairPoint and
11
Verizon while the TSA is in effect and during the cutover, and must retain
12
jurisdiction over FairPoint’s system after the cutover to ensure that FairPoint
13
wholesale services, systems, processes and procedures are as at least as good as
14
Verizon’s. The conversion from the TSA should only be allowed after Board
15
review and approval which should be conditioned upon third-party audits of any
16
new proposed system as well as the consideration of CLEC input.
17
18
2. FairPoint must be subject to the same regulatory requirements as Verizon,
19
including but not limited to all obligations under sections 251 and 271 of the
20
Telecom Act.
21
22
3. The Board should require FairPoint to offer unbundled network elements
23
required under Sections 251 and 271 in Board approved tariffs to ensure
30
Testimony of Gary J. Ball of behalf of Sovernet and segTEL
PSB Docket No. 7270
1
continued availability of elements to providers on just, reasonable, and non-
2
discriminatory bases at rates that are Board reviewed and approved.
3
4
4. As the acquirer of dominant ILEC status in the 3 northern New England states
5
FairPoint should be required to adopt best competitive practices and make them
6
uniform across their territory. Such practices would include the review and
7
adoption of Maine and New Hampshire determinations regarding (1) wire center
8
impairment evaluations, (2) section 271 network element availability, (3) pole
9
attachment best practices, and (4) dark fiber best practices.
10
11
5. FairPoint should assume the key voluntary conditions contained in the
12
AT&T/Bellsouth merger, including, but not limited to, rate freezes on key
13
elements such as UNEs, tandem transit service, and special accesss, agreement to
14
not MCI’s collocations as part of any impairment analysis, and extensions of
15
existing interconnection agreements for 3 more years, , and agreement not to seek
16
forbearance from the unbundling of any loop or transport facility.
17
18
Q.
DOES THAT CONCLUDE YOUR TESTIMONY?
19
A.
Yes, it does.
20
21
22
31