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Friday, April 16, 2010

State Utilities & Transportation Commission okays Verizon's exit from Washington State

Verizon Communications, one of the nation's largest phone and Internet service providers, has received the green light to bid adieu to the Evergreen State.

Washington's Utilities & Transportation Commission issued a final order today giving its stamp of approval to Verizon's mulitstate deal with Frontier Communications, a Connecticut based company that mostly serves rural areas. Verizon will receive $8.6 billion in exchange for its landlines in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin.

If the deal goes through as expected, Frontier will triple in size, becoming the new phone and Internet provider for hundreds of thousands of Washington homes and businesses. It would also become the new television provider for customers who subscribe to Verizon's FiOS television service, which is available in several of the Evergreen State's suburban neighborhoods (like Redmond).

Verizon Wireless, which is jointly owned by Verizon Communications and Vodafone of Europe, is not affected by the transaction.

Curiously, Verizon is continuing to aggressively market its FiOS service (fiber to the premises) without mentioning to would-be customers that it is selling its Washington fiber to Frontier. Frontier reportedly has an agreement to use the FiOS name for a few years after it takes over, although we haven't confirmed that.

Comcast, however, is running ads on the sides of Metro and Sound Transit buses announcing that "Verizon FiOS is Leaving Washington". In Oregon, Comcast has sent letters to some of its customers, urging them to switch away from Verizon.

In its order, the UTC acknowledges that previous Verizon deals - in which Verizon unloaded landlines in several New England states and Hawaii - didn't work out so well for consumers. (For instance, the acquiring entity in New England - FairPoint - was forced to file for bankruptcy). Nevertheless, the UTC has decided to put its faith in Frontier. From page nine of the final order:
The overarching decision we face here is which entity, Frontier or Verizon, is the most capable and willing to address the long-term interests of the assets and consumers affected by the proposed transaction. Although we consider the choice between approving and disapproving the transaction to be a close call, we are persuaded that, on balance, Frontier is that entity.
And isn't it convenient that that's also what Verizon and Frontier want?

The UTC may think the Frontier/Verizon transaction should go ahead - albeit with certain conditions which Verizon and Frontier have ten days to accept - but the Communications Workers of America disagree.

They've set up a website dedicated to opposing the deal, contending the proposal is "good for Wall Street, bad for you."

CWA notes that Verizon will not be paying taxes on the deal, thanks to a federal tax loophole, which allows the company to pocket an extra $600 million. (That loophole, incidentally, would be closed by the passage of H.R. 4849, the Small Business and Infrastructure Jobs Act of 2010.)

CWA is not, however, a party to the joint application filed by Frontier and Verizon before the UTC in Washington State, so its opposition is unmentioned in the commissioners' final order. But that doesn't mean nobody is objecting.

The text of the ruling notes that Attorney General's Public Counsel unit believes the deal is not in the public interest and should not go through, even with the conditions imposed by the UTC. (The Attorney General's Public Counsel unit represents the customers of state regulated utility companies).

Last November, in a news release announcing its filing of expert witness testimony with the UTC, Assistant Attorney General Sarah Shifley explained why Public Counsel opposes the sale. "As proposed, the transaction raises serious risks that Verizon customers will be transferred to a new company, Frontier, that will be financially weakened by the takeover. We are concerned those customers could experience poorer service quality," she said.

The UTC's final order extensively documents Public Counsel's concerns, laying them out point by point. We at NPI share those concerns and agree that the UTC has not done enough to protect consumers. The UTC, however, contends:
We are convinced that Frontier has the managerial and financial capability to operate the acquired property. Frontier has extensive experience operating telecommunications systems in rural, suburban, and small urban areas; areas comparable to those being acquired in this transaction. Frontier's experience acquiring telecommunications properties included incorporating such systems into its operations. Its managerial and financial capability, combined with the technical expertise in operating the replicated systems possessed by current Verizon NW employees, should ensure that service quality remains at, or exceeds, its current level.

Moreover, as a result of this transaction, Frontier should emerge a financially stronger company with greater access to financial markets and the resulting ability to obtain capital at lower rates.
That remains to be seen. Although most of the states that must sign off on the deal have done so, regulators in Illinois and West Virginia have not yet given their approval, and could potentially torpedo the whole thing. Such a possibility doesn't seem that far-fetched, considering that Verizon's exit from West Virginia would make Frontier a near monopoly in the Mountain State, and that CWA is concentrating its opposition to the transaction there.

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