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
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Docket No. 7270
SURREBUTTAL TESTIMONY OF
PERRY L. WHEATON
ON BEHALF OF
THE DEPARTMENT OF PUBLIC SERVICE
August 10, 2007
Summary: The purpose of Mr. Wheaton’s testimony is to respond to financial and
management issues attendant to the proposed transaction that were raised in FairPoint’s
rebuttal testimony.
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A. IDENTIFICATION AND QUALIFICATION OF WITNESS
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Q.
What is your name and business address?
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A.
My name is Perry L. Wheaton, and my business address is P. O. Box 2390, New London,
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NH 03257.
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Q.
By whom are you employed?
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A.
I am a Director in the Utilities Consulting Practice of the Huron Consulting Group
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(Huron).
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Q.
Mr. Wheaton, on whose behalf are you testifying in this proceeding?
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A.
My testimony is presented on behalf of The State of Vermont Department of Public
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Service.
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Q.
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Are you the same Perry L. Wheaton who previously filed testimony on behalf of the
Department in this proceeding?
A.
Yes.
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B. PURPOSE OF REBUTTAL TESTIMONY
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Q.
Mr. Wheaton, what is the purpose of your Rebuttal Testimony?
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A.
My rebuttal testimony addresses issues addressed in the rebuttal testimony of FairPoint
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(primarily Walter E. Leach, Jr. and Michael Balhoff) with respect to the financial and
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management issues of the proposed acquisition of Verizon’s Vermont properties by
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FairPoint.
Surrebuttal Testimony of Perry L. Wheaton (on behalf of Vermont Department of Public Service).
August 10, 2007
Page 1
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C. SUMMARY OF REBUTTAL TESTIMONY
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Q.
Please provide a summary of your Rebuttal Testimony.
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A.
My review of FairPoint’s rebuttal testimony confirms my direct testimony that if the
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acquisition of the consolidated properties indicates is to be successful, FairPoint must
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take appropriate steps to mitigate a number of risks that could jeopardize the transaction.
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These risks include:
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
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Completing the system development and implementation effort on
schedule and within budget as projected.
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
Minimizing the loss of access lines and increasing revenues as projected.
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Deploying DSL as projected.
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
Attaining merger savings as projected.
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
Attracting and retaining seasoned and competent senior management
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team.
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
Developing and implementing an effective state regulatory program.
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
Obtaining an extension of the alternative regulation (alt reg) plan in
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Vermont beyond 2010 without a substantial decrease in revenues.
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
Negotiating a reasonable union contract in 2008.
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
Meeting customer service commitments in Vermont at a time when
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operating costs are being reduced.
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Surrebuttal Testimony of Perry L. Wheaton (on behalf of Vermont Department of Public Service).
August 10, 2007
Page 2
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D. UNRESOLVED ISSUES
Q.
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Do you still believe that FairPoint’s Board of Directors should include
representation from Vermont?
A.
Yes. Mr. Leach’s response in his rebuttal testimony (pages 61 and 62) did not address
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my concerns.
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representative on the Board and that “Verizon’s stated focus on ensuring an adequate
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regional “voice” should be sufficient to address the concern underlying Mr. Wheaton’s
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suggestion”. These facts do not address my concerns. Vermont will have 17.7 percent of
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FairPoint’s total access lines. Vermont is more rural and does not have any concentrated
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urban and suburban areas comparable to those in southern Maine and southern New
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Hampshire. As stated in my prefiled testimony, it is common practice in the utilities
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industry to have Boards of Directors whose membership reflects the geographical mix of
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its customer base. At least one of the nine members of FairPoint’s Board should be a
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Vermont resident who is familiar with and can reflect the unique needs of the State in
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Board deliberations.
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Q.
Mr. Leach indicated that because New Hampshire will have one
Do you still believe that FairPoint should establish a separate legal entity within the
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State of Vermont to segment all Vermont related assets and liabilities, if any, from
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the assets any liabilities of other FairPoint regulated, non-regulated and classic
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operations?
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A.
Yes.
The intent of this recommendation is to provide full visibility for Vermont
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regulators over the financial activities of FairPoint’s operations in the state. It is a
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common practice for utilities to have separate legal entities for operations at a state level.
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FairPoint has given no evidence that the cost of establishing and maintaining a separate
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legal entity for Vermont would be prohibitive.
Surrebuttal Testimony of Perry L. Wheaton (on behalf of Vermont Department of Public Service).
August 10, 2007
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Q.
Do you still believe that the Board should establish safeguards regarding the outflow
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and transfer of cash including dividends and loans of any form from a separate
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Vermont Corporation (related to Vermont FairPoint regulated operations) to
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FairPoint corporate or other affiliates?
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A.
Yes. My recommendation as contained in my prefiled testimony (page 29) provides
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ample flexibility to FairPoint, i.e. a thirty day advance notification to the DPS and the
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Board of all planned loans, dividends and cash transfers of any kind from FairPoint –
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Vermont to FairPoint parent and affiliates, so as to not be onerous. Suspension of such
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transfers by the Board would not take place unless FairPoint had not consistently made
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good on its repeatedly made commitments to meet:
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
Service quality minimum standards.
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
Effectively managing its Vermont regulated operations.
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
The broadband build-out commitments established under Verizon’s
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Alternative Regulation Plan.
Q.
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Do you agree with Mr. Michael Balhoff’s contention that FairPoint will be spending
more on capital expenditures than Verizon did?
A.
No. Mr. Balhoff’s primary rational for making his point is that Verixon’s past FiOS
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investments should be eliminated and that the capital investment should be calculated on
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a per access line basis. The facts are irrefutable. From 2003 to 2006, Verizon’s capital
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expenditures for its Northern New England territories averaged $204.3 million per year.
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For the years 2008 to 2012, FairPoint estimates that it will spend $143.4 million per year
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on its capital investments. (The FairPoint estimate includes the $43.8 for the DSL build-
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out and excludes the $109.0 million for conversion in 2008.) Somehow, Mr. Balhoff
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wants us to assume that Verizon did not make the FiOS investment. It did. Whether
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FairPoint would have made similar investments or whether the investments were
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appropriate is irrelevant. While looking at the level of capital expenditures on an access
Surrebuttal Testimony of Perry L. Wheaton (on behalf of Vermont Department of Public Service).
August 10, 2007
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line basis as suggested by Mr. Balhoff is interesting, it does not change the absolute level
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of capital investment. The real question is: will FairPoint’s proposed level of capital
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expenditures for Vermont meet the needs and expectations of Vermont customers?
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Q.
Does this conclude your Rebuttal Testimony?
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A.
Yes.
Surrebuttal Testimony of Perry L. Wheaton (on behalf of Vermont Department of Public Service).
August 10, 2007
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