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 asset transfer, acquisition of
control by merger and associated transactions
)
)
)
)
)
Docket No. 7270
PREFILED SURREBUTTAL TESTIMONY OF MICHAEL J. ILEO, PH.D.
ON BEHALF OF THE
VERMONT DEPARTMENT OF PUBLIC SERVICE
AUGUST 10, 2007
Summary: Dr. Ileo addresses the economic development implications for Vermont of the
proposed transfer of Verizon wireline telephone facilities, operations, and services in Northern
New England to FairPoint. He finds that, assuming the risks posed by the proposed
Verizon/FairPoint transfer do not materialize, it is in the public interest of Vermont from an
economic development perspective, principally because the proposed venture is likely to
generate a significant addition to goods and services produced in the State of at least $100
million initially and $45 million annually thereafter. Dr. Ileo also concludes that nothing in the
characteristics of the proposed Verizon/FairPoint transfer suggests that it would undermine other
important economic development goals, especially in view of FairPoint’s broadband expansion
plans for Vermont and assuming that FairPoint is able to deliver its promises.
Technical Associates, Inc.
TABLE OF CONTENTS
PAGE
1.0
2.0
3.0
4.0
POSITION AND QUALIFICATIONS ............................................................................1
OVERVIEW OF TESTIMONY .......................................................................................4
ECONOMIC DEVELOPMENT CONSIDERATIONS .................................................7
SUMMARY ......................................................................................................................17
2
Technical Associates, Inc.
1
2
3
4
5
6
7
8
9
BEFORE THE
VERMONT PUBLIC SERVICE BOARD
DOCKET NO. 7270
PREFILED SURREBUTTAL TESTIMONY
OF MICHAEL J. ILEO, PH.D.
1.0
POSITION AND QUALIFICATIONS
11
Q.
PLEASE STATE YOUR NAME, BUSINESS POSITION, AND ADDRESS.
12
A.
10
My name is Michael J. Ileo. I am the President and Chief Economist of Technical
13
Associates, Inc., an economic and financial consulting firm with business offices at 1051
14
East Cary Street, Suite 601, Richmond, Virginia 23219.
15
16
Q.
17
A.
WHAT IS THE BUSINESS OF TECHNICAL ASSOCIATES, INC?
I co-founded Technical Associates, Inc. (“TAI”) more than 35 years ago, along
18
with an economics professor (Charles Schotta) and then a fellow graduate student (David
19
Parcell) at Virginia Tech. Mr. Parcell is now Executive Vice President of TAI. Since its
20
founding in 1969, TAI has rendered a wide-variety of economic and financial consulting
21
services to numerous business and government organizations throughout North America.
22
These services continue to involve the preparation of research reports, including expert
23
testimony, with respect to various issues often contested in business litigation and/or
24
regulation.
25
Regarding the former, TAI has prepared expert reports filed in civil proceedings
26
before state and federal courts regarding such matters as the antitrust implications of
27
restrictive access requirements by natural gas pipelines, the economic damages caused by
28
power plant, digital switch, coal pulverizer, and other major equipment failures, the price
29
discrimination resulting from multiple wholesale drug pricing systems, and the business
30
losses sustained by some 500 automobile dealerships due to a nationwide new vehicle
31
supply bribery scheme.
32
With respect to business regulation, the economic and financial consulting
33
services rendered by TAI have largely pertained to the utility, insurance, and finance
1
Technical Associates, Inc.
1
industries. This includes numerous types of fixed and transport utilities (e.g., electric,
2
water, gas, cable, telephone, pipeline, railroad, etc.), as well as property, casualty, health,
3
and life insurers. The vast preponderance of TAI’s clients in the regulatory arena has
4
consisted of state, federal, and local government agencies, although TAI has represented
5
regulated firms on a limited number of occasions, primarily municipal and cooperative
6
utilities.
7
8
Q.
9
A.
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND.
I hold a Ph.D. in Economics from Virginia Tech (1972), as well as B.S. (1965)
10
and M.S. (1967) degrees in Economics from the University of Rhode Island. I also
11
pursued advanced course work in economics at the University of Missouri (Columbia), as
12
well as taught various classes in economics at that school in its Departments of Electrical
13
Engineering and Economics. During my professional career, I further have held teaching
14
positions in economics at Virginia Commonwealth University, Virginia Tech, and the
15
University of Rhode Island.
16
17
Q.
18
A.
WHAT SUBJECTS IN ECONOMICS HAVE YOU TAUGHT?
My fields of specialization, both as a professor and a consultant, have been in the
19
areas generally known as microeconomic theory, industrial organization, and business
20
regulation, including the application of statistical and other quantitative techniques in
21
performing subject matter analyses.
22
economics, accordingly, my teaching experience has consisted of classes in the indicated
23
three areas.
In addition to macro and micro principles of
24
At the University of Missouri, for example, I taught economic optimization
25
techniques to electrical engineering students. By its very nature, the principal concern of
26
electrical and other engineering disciplines is the design and installation of physical
27
systems that operate in a safe and reliable manner. However, as economic trade-offs
28
exist in the building and operations of all such systems, classes that I taught focused on
29
how to achieve engineering goals at the lowest long-run total cost measured in present
30
value terms.
31
2
Technical Associates, Inc.
1
Q.
2
3
PLEASE OUTLINE YOUR EXPERIENCE BEFORE PUBLIC UTILITY
REGULATORY AUTHORITIES, DR. ILEO.
A.
Over the course of my consulting practice, I have been accepted as an expert
4
witness by numerous state and federal regulatory agencies throughout the United States
5
and Canada involving a spectrum of public utility ratemaking and related issues. This
6
experience consists of various matters typically placed into the categories of revenue
7
requirement, depreciation, embedded and/or incremental cost allocation, and rate design.
8
In connection with this work, I have appeared before more than 30 state regulatory
9
authorities, several provincial regulatory agencies and the National Energy Board in
10
Canada, and the FPC, FERC, NRC, DOE, and FCC in the United States.
11
In addition to representing clients before regulatory bodies, many of which also
12
have been government agencies, I have served as a technical advisor to public utility
13
authorities in evaluating record evidence in regulatory proceedings in Mississippi, Rhode
14
Island, Virginia, Washington D.C., and Ontario. With respect to the Public Service
15
Commission of the District of Columbia, for instance, I and others at TAI have advised
16
the Commissioners comprising that regulatory agency on natural gas and electric rate
17
case matters on numerous occasions over the past 20 years. I also served in a similar
18
capacity at the DOE for several years earlier in my consulting practice.
19
20
Q.
21
22
HAVE
YOU
PERFORMED
ECONOMIC
FEASIBILITY
AND
IMPACT
ANALYSES DURING YOUR PROFESSIONAL CAREER?
A.
Yes, I have conducted economic feasibility and impact studies with respect to
23
proposed ventures in both utility and non-utility industries. By illustration, this work has
24
involved evaluations as to the economic implications of a merger between two large
25
electric utilities with adjoining service territories in the Mid-Atlantic region, the
26
abandonment of a rail-line connecting the U.S. and Mexico, the construction of a 300-
27
mile minemouth coal slurry pipeline to Eastcoast ports, a leveraged buy-out of a
28
prominent shoe manufacturer, and the redeployment of a precious metals mine in The
29
Yukon at alternative world ore prices.
30
More recently, TAI was retained by the City of Bristol, Virginia (“Bristol”) to
31
assess the economic benefits and costs of deploying 100% fiber-based technologies and
3
Technical Associates, Inc.
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facilities to deliver a bevy of broadband (e.g., telephone, data, and television) services to
2
households and businesses within and adjacent to its municipal boundaries. This work,
3
completed for Bristol under my direction and supervision, included the preparation of
4
long-run incremental cost studies by broadband line of business, as well as a cost
5
allocation manual to distribute overhead costs among Bristol’s electric, water &
6
wastewater, and new broadband services. TAI completed a similar engagement for the
7
City of Columbia, Missouri.
8
I also have represented the Connecticut Attorney General in evaluating the public
9
interest implications of the then proposed Fleet/Bank of Boston merger. I conducted
10
specific economic analyses to determine the post-merger impacts on business
11
concentrations in various relevant product and geographic markets, especially regarding
12
loans to small firms, as well as with respect to job and facilities displacements likely to
13
result from the proposed merger.
14
I have performed many comparable economic impact studies for the Virginia
15
Bureau of Insurance during my professional career.
These analyses have involved
16
mergers and/or acquisitions among various life, title, and property and casualty insurers,
17
such as Lawyers Title, Old Colony Life, GE Capital Corp., and Life Of Virginia.
18
19
Q.
20
21
ARE YOU PRESENTING AN EXHIBIT THAT FURTHER DESCRIBES YOUR
EDUCATIONAL BACKGROUND AND PROFESSIONAL EXPERIENCE?
A.
Yes. Exhibit DPS-MJI-1 to my testimony contains a more detailed statement of
22
my professional education and experience, which also contains a listing of my expert
23
witness appearances during approximately the past 10 years.
24
25
2.0
OVERVIEW OF TESTIMONY
27
Q.
WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
28
A.
26
TAI has been retained, in a subcontracting capacity, by the Huron Consulting
29
Group (“Huron”) to assist in its role as the lead consultant to the Vermont Department of
30
Public Service (“Department”) in evaluating the various regulatory, financial, technical,
31
and other dimensions of the proposed transfer of Verizon New England, Inc. (“Verizon”)
4
Technical Associates, Inc.
1
wireline telephone facilities, operations, and services in Vermont to FairPoint
2
Communications, Inc. (“FairPoint”).
3
examine the implications for Vermont of the proposed Verizon/FairPoint transfer from an
4
economic development perspective.
More specifically, Huron requested that TAI
5
Thus, my appearance in this proceeding on behalf of the Department is as a
6
member of the evaluation team of Huron as suggested by the business relationships
7
outlined above. The purpose of my testimony is to present the results of the studies
8
conducted by TAI, under my direction and supervision, for the consideration of the
9
Vermont Public Service Board (“Board”) regarding the economic development
10
implications of the proposed Verizon/FairPoint transfer.
11
12
Q.
13
14
HOW DID TAI PROCEED IN EXAMINING THE ECONOMIC DEVELOPMENT
DIMENSIONS OF THE PROPOSED VERIZON/FAIRPOINT TRANSFER?
A.
The essential question that TAI has sought to address is whether wireline
15
telephone subscribers in Vermont, the State as a whole, and other stakeholders (e.g.,
16
current Verizon employees) will be made better-off or at least no worse-off by the
17
proposed transfer, viewed largely in an economic benefits/costs context. Considerations
18
in this regard, as repeated below, were enumerated at Page 36 of Mr. Lafferty’s May 24,
19
2007 Direct Testimony on behalf of the Department:
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

Impact of the Acquisition on the current level of employment in Vermont.

Potential for job additions in the State.

Specific technology additions planned by FairPoint, especially broadband.

Potential for improved service quality.

Ability of FairPoint to provide the same level of services at similar costs
as Verizon.

Implications of the Acquisition on the level of competition in the State.

FairPoint’s financial condition and its ability to make investments in
technology and service quality.
5
Technical Associates, Inc.
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TAI proceeded, accordingly, to examine the business organization, service
2
provisioning, capital investment, and related plans of FairPoint, including its attendant
3
financial projections, with the objective of establishing the likely economic impacts on
4
those members of the Vermont public most directly affected by the proposed
5
Verizon/FairPoint transfer. In that these plans were initially couched in terms of a
6
consolidated operation (i.e., applicable to the composite of Maine, New Hampshire, and
7
Vermont), significant discovery of FairPoint was necessary to isolate Vermont-specific
8
impacts where possible. FairPoint’s responses to this discovery formed the primary
9
sources of information on which TAI focused its studies of the economic development
10
issue before the Board in determining whether the proposed transfer should be approved.
11
12
Q.
13
14
WHAT
FINDINGS
HAVE
YOU
REACHED
AS
TO
ECONOMIC
DEVELOPMENT IMPACTS?
A.
Ideally in conducting economic development assessments of a proposed venture’s
15
operations within a particular geographical area, quantifications for each of a broad-array
16
of positive and negative considerations are desirable, such as with respect to those cited
17
from Mr. Lafferty’s testimony in my previous answer. These quantifications permit
18
objective benefit/cost criteria to be employed in the evaluation process. As is true in this
19
proceeding, however, complete quantifications are rarely possible in actual practice, since
20
the geographical details of a proposed project (typically circumscribed in a global
21
manner) are either unavailable or available to only limited degrees. Thus, as is frequently
22
the case in evaluating the public interest implications of proposed mergers and/or
23
acquisitions in relevant geographical markets, both qualitative and quantitative
24
assessments must be utilized in evaluating the economic development implications for
25
Vermont of the proposed Verizon/FairPoint transfer. Presumptions in this regard are also
26
necessary.
27
Based on analyses of available information and data pertinent to the matters at
28
hand, I find that the proposed transfer will create positive economic development benefits
29
for Vermont. This finding stems primarily from the fact that, given FairPoint’s stated
30
employment and investment plans to date, the proposed Verizon/FairPoint transfer likely
6
Technical Associates, Inc.
1
will contribute significantly to Vermont’s economy in terms of the production of new
2
goods and services by at least $100 million initially and $45 million on a recurring basis.
3
I also find nothing in available information and data to suggest that the proposed
4
transfer would undermine present economic development objectives in Vermont, such as
5
with respect to telecommunications service quality, prices, and competition taken in
6
relation to circumstances under Verizon’s present operations. This is especially true in
7
light of FairPoint’s commitments to maintain Verizon’s tariffs, alternative regulatory
8
plan, and interconnection agreements, as well as to increase employment in the State. Put
9
alternatively, even if one were to totally disregard FairPoint’s claims as to
10
telecommunications service quality, rates, competition, and broadband improvements, a
11
quantitative basis exists for deeming the proposed Verizon/FairPoint as beneficial to
12
Vermont from an economic development standpoint.
13
findings are contingent on FairPoint’s ability to actually follow-through with its stated
14
plans.
Importantly, however, these
15
16
3.0
ECONOMIC DEVELOPMENT CONSIDERATIONS
Q.
PLEASE EXPLAIN HOW THE CONSIDERATIONS CITED EARLIER IN YOUR
17
18
19
TESTIMONY PERTAIN TO THE ECONOMIC DEVELOPMENT ISSUE
20
BEFORE THE BOARD.
21
A.
Promoting economic development in a balanced and responsible manner is a
22
primary objective of all state and local governments in my professional experience.
23
Indeed, cities, towns, and states compete for new job creations, plant expansions, and
24
business relocations, both domestically and now internationally. Comparative strengths
25
and weaknesses of localized economic environments play pivotal roles in how such
26
business decisions are made. While the list of considerations that I referenced earlier
27
from Mr. Lafferty’s testimony clearly is not exhaustive in this regard, factors therein
28
surely are of a prominent nature in the instant case.
29
The quality, speed, reliability, and prices of telecommunications services
30
available in a geographic area, extending to voice, data, and video, are critical elements in
31
assessing the comparative strengths and weaknesses of localized economies. Taken
7
Technical Associates, Inc.
1
alone, and due to the heightened importance of processing information in an efficient
2
business operation, deficiencies in available telecommunications services are sufficient
3
causes for removing a geographic area from a list of potential new business sites --
4
including with respect to business expansions, relocations, and closings.
5
considerations played important roles in the project completed by TAI for the City of
6
Bristol, Virginia, as referenced earlier in Part 1.0 of my testimony.
Such
7
8
Q.
9
10
WHAT LED THE CITY OF BRISTOL, VIRGINIA TO PURSUE BROADBAND
DEPLOYMENT?
A.
Well before going forward with its fiber-based broadband system in 2003, Bristol
11
officials received (formally and informally) mounting complaints from businesses and
12
residents about the lack of high-speed data services in and around the City, where it also
13
has been supplying electric, water, and wastewater services for many years. At that time,
14
for instance, only “dial-up” data services were available. Inquires of local telephone
15
companies and cable-TV operators led Bristol to conclude that, while plans for needed
16
broadband services were being contemplated, neither specific timetables nor service
17
scopes had been decided.
18
competitive as a desirable business and residential location, the delivery of “current-
19
edge” telecommunications services was essential using, to the extent possible, the then
20
current electrical and other system facilities of the City. Today, the customer base of
21
Bristol’s fiber-based OptiNet System has grown to about 8,300 residential and business
22
subscribers, many of whom take “triple-play” service; i.e., combined voice, data, and
23
video.
Bristol determined, therefore, that if it were to remain
24
Aside from employment and investment considerations, the same factors
25
considered by Bristol are reflected in the list cited by Mr. Lafferty; namely, the quality,
26
price, and scope of telecommunications services available to residents and businesses in
27
Vermont, before and after the proposed Verizon/FairPoint transfer. This extends to the
28
matter of telecommunications competition, for any material curtailment in this regard
29
would adversely impact Vermont’s economic interests; e.g., its attractiveness as a
30
business location.
31
8
Technical Associates, Inc.
1
Q.
2
3
DR. ILEO, CAN THE BENEFITS OF IMPROVED TELECOMMUNICATIONS
SERVICES BE QUANTIFIED?
A.
Yes, at least in theory. Such quantifications, however, require a considerable
4
undertaking, such as the line of business long-run incremental cost studies that I
5
conducted for the City of Bristol to ensure that anticipated present value benefits equaled
6
or exceeded forecasted present value costs. But at the same time, I hasten to add that
7
quantifications of these highly complex matters do not appear necessary within the
8
context of this proceeding.
9
10
Q.
11
A.
PLEASE ELABORATE ON YOUR PREVIOUS ANSWER.
Aside from the potential risks addressed by other witnesses in this case, the
12
evidence suggests that the retail wireline telecommunications services of FairPoint in
13
Vermont, upon consummating the proposed transfer, will be at least comparable in price
14
and quality to those rendered by Verizon. I say this because my reading of relevant
15
documents leads me to conclude that FairPoint will be taking over the totality of
16
Verizon’s wireline network facilities, operations, personnel, and practices, including
17
retention of all attendant technical personnel of Verizon in Vermont (as well as Maine
18
and New Hampshire). FairPoint has similarly pledged to abide by the existing policies
19
and procedures of Verizon with respect to the wholesale wireline services supplied to
20
competing carriers; e.g., incumbent local exchange carriers (“ILECs”).
21
While the Board may wish to impose assurance conditions with respect to such
22
matters, I see nothing in this picture that indicates a degradation of telecommunications
23
services or attendant price increases will unequivocally occur in Vermont upon
24
consummation of the proposed Verizon/FairPoint transfer -- at least not in the near-term
25
and especially when FairPoint has a track record of supplying the same services in similar
26
environments (albeit on a smaller scale) in many parts of the nation. By the same token,
27
in that Vermont’s economy is unlikely to be made worse off by the proposed transfer
28
with respect to telecommunications services assuming that the promises of FairPoint are
29
fulfilled, an effort to measure potential adverse impacts as an offset to quantified
30
potential benefits need not be pursued.
31
9
Technical Associates, Inc.
1
Q.
2
A.
TO WHAT DO YOU REFER BY THE PHRASE POTENTIAL BENEFITS?
In addition to the overall impacts of new employment and investment directly
3
placed in the State, FairPoint has provided specific plans by which it intends to materially
4
expand broadband capabilities and availabilities in Vermont relative to what exists
5
presently. As I read the rebuttal testimony of its witnesses (e.g., Dr. Sicker and Messrs.
6
Harrington, Brown, and Smee), Fairpoint first plans to spend some $14 million in
7
Vermont on fiber-based facilities and technologies in a three-phased, 24-month effort to
8
upgrade the “backbone” of the Verizon wireline network that it takes over upon the
9
proposed transfer. While perhaps imprecise, I liken the term “backbone” for ease of
10
reference to transmission facilities or plant and equipment that interconnect central
11
offices and/or switches. This upgrading will then permit FairPoint to determine the most
12
cost-effective means of expanding the delivery of broadband services to end-users over
13
the distribution parts of its network; e.g., from central offices and/or switches to customer
14
premises. Such decisions will involve assessments as to whether digital subscriber line
15
(DSL) technologies over existing copper facilities should continue to be primarily relied
16
upon in supplying broadband services to end-users, or whether fiber should be fully
17
extended to customer premises.
18
Witnesses for FairPoint seek to assure the Board that coupled with its “backbone”
19
upgrades, DSL technologies over copper will facilitate the broadband needs of most
20
residential and small business customers. I tend to agree. On the other hand, and as
21
recognized by the FairPoint witnesses, this is not likely to be the case for large business
22
and government organizations. Nor is the DSL/copper solution likely to be the most
23
cost-effective option for many new residential developments or business complexes. Dr.
24
Sicker reports that FairPoint’s broadband plans for Vermont will enable it to exceed
25
Verizon’s current obligations of being 80% broadband qualified in the State by 2010,
26
although other witnesses in this proceeding question whether FairPoint’s planned
27
investments in and deployment of broadband facilities can be realistically achieved, as
28
well as reflect an increase over the levels that Verizon would make. Relative to current
29
conditions, however, FairPoint’s plans will significantly increase the availability of
30
broadband facilities in Vermont.
10
Technical Associates, Inc.
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The details with which FairPoint has presented its broadband plans for Vermont
2
also suggest a genuine commitment, one that may or may not have been forthcoming in
3
the State from Verizon given its national, if not global, interests and perspectives. I note
4
this uncertainty, even though Verizon has provided discovery responses that suggest it
5
would meet applicable broadband deployment targets in Vermont.
6
differing from Verizon, FairPoint seeks flexibility to determine the most cost-effective
7
broadband deployment given individual circumstances. My judgment is that this is a
8
reasonable request, for promises to install fiber to-the-premises in all instances would not
9
be indicative of prudent management.
Perhaps further
10
11
Q.
12
13
IS IT POSSIBLE TO QUANTIFY THE BENEFITS OF FAIRPOINT’S
BROADBAND PLANS FOR VERMONT?
A.
Yes, although any such measurement necessarily would be shrouded by premises
14
as to the courses of broadband action that Verizon may have taken in the State. As I
15
interpret Verizon’s testimony in this case, a prime mover in the decision to transfer its
16
Northern New England wireline properties and operations to FairPoint is Verizon’s
17
interest in promoting its wireless operations, as well as with respect to its wireline
18
ventures in more urbanized areas. Thus, to use a common colloquialism, one in the hand
19
(FairPoint’s stated commitment) is worth more than two in the bush (Verizon’s uncertain
20
commitment). I regard, therefore, the proposed Verizon/FairPoint transfer as a positive
21
economic development step for Vermont with respect to broadband deployment, although
22
with potential risks of non-realization.
23
24
Q.
WHAT CONSIDERATIONS THAT ARE SUBJECT TO QUANTIFICATION
25
HAVE
26
ASSESSMENT?
27
A.
BEEN
EXAMINED
IN
YOUR
ECONOMIC
DEVELOPMENT
I have considered two sets of factors in my economic development evaluation that
28
can be circumscribed in a quantitative manner, although also with certain premises and
29
caveats. These pertain to Vermont-specific employment and investment plans reported
30
by FairPoint as of this writing, taken in relation to the corresponding employment and
31
investment levels in Vermont that may have been maintained by Verizon.
11
The
Technical Associates, Inc.
1
differentials between these FairPoint plans and Verizon levels, measured in dollar terms,
2
are relevant indicators of the extent to which the proposed Verizon/FairPoint transfer will
3
promote economic development in Vermont.
4
5
Q.
6
7
HOW DID YOU PROCEED REGARDING FAIRPOINT’S EMPLOYMENT
PLANS FOR THE STATE?
A.
In addition to pledging to maintain current Verizon employment levels in
8
Vermont, in terms of both positions and compensation, FairPoint announced plans during
9
the course of this proceeding to create 145 new jobs in the State (primarily in and around
10
Burlington), as well as 50 new positions in the neighboring Littleton, New Hampshire
11
area. With respect to the latter, FairPoint has also reported that it expects some of these
12
50 new jobs to be filled by Vermont residents.
13
To determine the probable economic impact on the State of these new positions,
14
FairPoint was asked in discovery to provide corresponding compensation levels in terms
15
of salary, benefit, and related expenditures.
16
estimates of these amounts in its discovery responses, based on averages for current
17
FairPoint management and non-management personnel. Given my experience in the
18
telecommunications consulting business, FairPoint’s initial estimates appear consistent
19
with what occurs elsewhere in the industry. I have utilized these estimates, accordingly,
20
along with an expenditures multiplier that is likely to be appropriate in the instant case
21
for developing measures of the overall economic impact on Vermont of FairPoint’s
22
employment plans.
FairPoint provided initial confidential
23
24
Q.
25
26
PLEASE EXPLAIN THE TERM “EXPENDITURES MULTIPLIER” IN YOUR
PREVIOUS ANSWER?
A.
A well-understood principle of economics is that an additional dollar of
27
expenditures made directly within a geographic market will bring about considerably
28
more than a dollar increase in the aggregate production of goods and services in that
29
market. By simple illustration, suppose that this additional dollar is in the form of
30
household income and is spent at a local, one-person barber or beauty shop, such that the
31
sole proprietor/employee also realizes additional sales of a dollar. In turn, he or she may
12
Technical Associates, Inc.
1
proceed to similarly spend the extra dollar locally, resulting in a dollar increase in the
2
sales of other local suppliers of goods and services.
3
Economic studies show that relevant expenditures multipliers may range from less
4
than 2 times to more than 5 times depending on a host of factors, such as how the
5
economy under study is geographically delineated, applicable marginal propensities to
6
consume and government tax burdens therein, and the extent to which imports are relied
7
upon by local consumers. Again by hypothetical illustration, if the 145 new positions
8
planned by FairPoint in the Burlington area were filled by individuals who vacationed
9
frequently in Canada, relevant expenditures multipliers will be lower than would be the
10
case otherwise.
11
12
Q.
13
14
WHAT EXPENDITURES MULTIPLIER IS UTILIZED IN YOUR ECONOMIC
DEVELOPMENT STUDIES FOR THIS PROCEEDING, DR. ILEO?
A.
I have employed an expenditures multiplier of 3 times, which is a conservative
15
measure in my judgment given that the issue involves measuring the economic impact on
16
Vermont as a whole attributable to 145 new job creations in a localized area (e.g.,
17
Burlington). If the economic impact evaluation were limited to the Burlington area, an
18
expenditures multiplier of 3 times might be too high. But surely this is not likely to be
19
the case under the statewide circumstances noted.
20
21
Q.
HAVE YOU EMPLOYED THE SAME EXPENDITURES MULTIPLIER WITH
22
RESPECT TO THE NEW POSITIONS THAT FAIRPOINT PLANS TO FILL IN
23
LITTLETON, NH?
24
A.
No, I have utilized an expenditures multiplier of 2 times for the 50 new FairPoint
25
jobs slated for Littleton. Further in this regard, I have assumed that only 25% of these
26
positions will be filled by residents of Vermont.
27
28
Q.
29
30
31
WHAT IS YOUR ESTIMATE OF THE OVERALL IMPACT ON VERMONT’S
ECONOMY AS RESULT OF THE NEW JOBS PLANNED BY FAIRPOINT?
A.
As shown in Confidential Exhibit DPS-MJI-2, I estimate that FairPoint’s plans to
create 195 new positions in and nearby Vermont will boost the State’s economy by at
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least $45 million annually in the production of new goods and service. By inference, and
2
assuming that these 195 new jobs are actually created, this annual output increase of $45
3
million in Vermont implicitly includes additional employment and income; i.e., beyond
4
the 195 new jobs and associated payroll expenditures by FairPoint.
5
6
Q.
7
8
DO OTHER TYPES OF ECONOMIC MULTIPLIERS EXIST IN ADDITION TO
EXPENDITURES MULTIPLIERS?
A.
Yes.
The Bureau of Economic Analysis (BEA) of the U.S. Department of
9
Commerce, for example, publishes Regional Multipliers (i.e., output, earnings, and
10
employment multipliers) for a large number of BEA Economic Areas in the U.S.
11
applicable to some 500 business sectors, as well as a User Handbook for applying the
12
BEA’s Regional Multipliers.
13
To illustrate, one example presented in the User Handbook involves the location
14
of a hypothetical new glass-container manufacturer in the Kansas City Economic Area,
15
which is presumed to have annual output of $50 million, 350 employees, $15 million in
16
payroll, and localized expenditures (including payroll) of $34.4 million. Application of
17
the BEA’s Regional Multipliers to this hypothetical scenario produces total economic
18
impacts in the Kansas City Economic Area of $106.9 million in new output, $30.4
19
million in new earnings, and 1,041 in new employment -- or an output multiplier of 3.11,
20
an earnings multiplier of 2.02, and an employment multiplier of 2.97.
21
Thus, as indicated by this hypothetical illustration, the total number of new jobs
22
created in Vermont by FairPoint’s employment plans should materially exceed 195,
23
which is implicitly taken into account in my $45 million estimate of new goods and
24
services output. Total new jobs might grow to over 450; e.g., (145 x 3) + (50 x 2 x 25%)
25
= 460.
26
27
Q.
HOW DID YOU TREAT FAIRPOINT’S INVESTMENT PLANS IN ASSESSING
28
THE ECONOMIC DEVELOPMENT IMPLICATIONS FOR VERMONT OF THE
29
PROPOSED VERIZON/FAIRPOINT TRANSFER?
30
31
A.
Measuring the economic impact on Vermont of FairPoint’s investment plans is a
more complex endeavor than the new jobs creation issue. This is true because the
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locational dimensions of FairPoint’s planned investment expenditures remain unknown.
2
Put otherwise, while FairPoint has provided estimates of its initial and recurring capital
3
investment expenditures on Vermont-specific facilities, the locational disbursements of
4
these funds is not known at this time; i.e., the portions of these planned expenditures that
5
will involve purchases of goods and services directly produced in the State. Presumably,
6
given the regional structure of FairPoint taken in relation to the national character of
7
Verizon, a greater portion of these capital expenditures will be placed with businesses in
8
Northern New England, including Vermont.
9
Moreover, and as explained in the testimony of other witnesses on behalf of the
10
Department, questions arise regarding the extent to which FairPoint’s capital
11
expenditures will actually exceed those that Verizon would have made in the future. My
12
economic impact estimates with respect to investment expenditures, therefore, have been
13
developed under alternative assumptions as displayed for Scenarios (A) and (B) in
14
Confidential Exhibit DPS-MJI-2. These involve the following presumptions taken in
15
relation to Verizon: (1) that 50% of the additional capital investments to be made by
16
FairPoint will be placed directly with Vermont businesses; and, (2) that of the capital
17
investments to be made by FairPoint, which are equivalent to those that Verizon would
18
make, an additional amount will be placed directly by FairPoint with Vermont businesses
19
equal to 10% of the capital investments. I have also assumed that no controversy exists
20
regarding the $30 million in system/network conversions to be made by FairPoint in
21
2008; i.e., that Verizon would not have to make these conversions, as well as that the
22
applicable expenditures multiplier is 3 times.
23
Under the premises noted, Exhibit DPS-MJI-3 shows an increase in new 2008
24
goods and services in Vermont attributable to the capital investment component of the
25
proposed Verizon/FairPoint transfer ranging from roughly $62 million to $79 million.
26
On a recurring bases thereafter; i.e., for the years 2009-2015, the comparable annual
27
impact is $11 million to $15 million.
28
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2
Q.
3
4
WHAT IS THE BASIS FOR THE FAIRPOINT INVESTMENT EXPENDITURES
IN EXHIBIT MJI-3?
A.
In response to discovery by the Department (e.g., see DPS:FP.3-88), FairPoint
5
provided Vermont-specific financial forecasts of its activities in the State subsequent to
6
the proposed transfer. FairPoint acknowledges that these forecasts do not represent its
7
detailed plans for the State, as they have yet to be developed, but rather allocations of
8
FairPoint’s composite Northern New England plans to Maine, New Hampshire, and
9
Vermont. FairPoint also reports, however, that the results of these allocations with
10
respect to capital investment expenditures are likely to approximate what it will actually
11
spend in Vermont.
12
FairPoint’s allocation forecasts show that it will expend some $86 million on new
13
plant and equipment facilities in the State during 2008, as well as $37 million to $40
14
million annually thereafter through 2015. Of the $86 million in 2008, FairPoint also
15
reports in response to discovery that $42 million will consist of the same new and
16
recurring investments made by Verizon and that $44 million will involve a combination
17
of system/network conversions ($30 million) and broadband expansions ($14 million) as
18
referenced earlier in my testimony.
19
20
Q.
TAKING INTO ACCOUNT BOTH JOB CREATIONS AND INVESTMENT
21
EXPENDITURES, WHAT IS THE COMBINED ESTIMATED ECONOMIC
22
DEVELOPMENT
23
VERIZON/FAIRPOINT TRANSFER?
24
A.
IMPACT
ON
VERMONT
OF
THE
PROPOSED
Beyond the quantitative levels that Verizon may have contributed to Vermont’s
25
economy, the proposed Verizon/FairPoint transfer likely will add in the range of $110
26
million to $125 million in new goods and services production within the State during
27
2008. These consist of more than $45 million in new employment impacts and a range of
28
$60 million to $80 million in new investment impacts. On a recurring basis; i.e., over the
29
years 2009-2015, roughly $45 million to $60 million annually in new goods and services
30
production within the State can be ascribed to the proposed transfer. Both of my initial
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and recurring economic impact findings are subject to the caveat that FairPoint is able to
2
complete its employment and investment plans as presently stated.
3
4
5
4.0
SUMMARY
7
Q.
PLEASE SUMMARIZE YOUR TESTIMONY, DR. ILEO.
8
A.
6
9
As reflected in the rebuttal testimony of Dr. Sicker, Vermont has expressed a keen
interest in promoting broadband deployment within the State in at least two recently
10
written documents.
Available information in this proceeding further suggests that
11
Verizon is focusing greater business attention on wireless markets and wireline activities
12
in more densely populated geographical areas. Questions arise, accordingly, as to the
13
future willingness of Verizon to meet Vermont’s broadband expectations. Given the
14
stated broadband plans of FairPoint, the proposed transfer appears to substantially
15
mitigate (if not obviate) concerns in this issue area -- although attendant risks loom as
16
noted by other witnesses.
17
Some questions are also posed as to FairPoint’s ability to improve traditional
18
telecommunications services, relative to those currently rendered by Verizon in Vermont.
19
On the other hand, the evidence in this case does not indicate that a degradation in this
20
regard can be expected upon consummation of the proposed Verizon/FairPoint transfer.
21
Also reasonably clear in my professional judgment is that, to the extent the employment
22
and investment plans of FairPoint come to fruition, Vermont will enjoy a substantial
23
boost to its economy.
24
development, the proposed transfer warrants the Board’s approval.
Thus, from the sole and qualified perspective of economic
25
This is not to say that the Board should disregard the imposition of possible
26
conditions on the proposed transfer that will guarantee the realization of some specified
27
levels of economic benefits for Vermont within designated timeperiods. Such conditions,
28
however, should be crafted in light of the Board’s findings with respect to other issue
29
areas.
30
Verizon/FairPoint transfer is generally in Vermont’s public interest when viewed from
31
various standpoints, the Board may conclude that no economic benefit conditions are
By hypothetical illustration, should the Board be satisfied that the proposed
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necessary. Alternatively, should concerns arise with FairPoint’s broadband plans, the
2
Board may wish to require minimum levels of annual broadband expenditures within the
3
State, and which flow to businesses located in Vermont.
4
5
Q.
6
A.
HAVE YOU COMPLETED YOUR SURREBUTTAL TESTIMONY?
Yes.
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