13 December 2007

Regulation or micromanagement?

This item from Forbes reports on the process of gaining regulatory clearance for a sale of access lines. FairPoint Communications had agreed to purchase Verizon's 1.6 million landline operations in northern New England for US$2.7 billion (or about US$1700 per access line). Transactions such as this are subject to regulatory approval because they involve the transfer of an operating license. According to the article,

An MPUC staff report last month recommended that the proposal be rejected unless the companies satisfy dozens of conditions.

The most controversial conditions would require Verizon to lower the selling price by $600 million and make FairPoint cut its dividends to shareholders by 30 percent, spend more to expand high-speed Internet and meet stronger quality standards for service.

According to the Examiner's Report, this recommendation is a result of concerns about FairPoint's ability to meet the needs of the residents, i.e., FairPoint is highly leveraged, and so will be limited in its ability to accommodate adverse results. This despite the fact that the examiner's report mentions that the price of the transaction is "considerably less than the price of other recent transactions".

Do you think that this is reasonable regulation, or is this micromanagement by a governmental agency? If this transaction is not approved, would the citizens of Maine be better off with an operator who (apparently) does not want this business (since they are selling it for a low price), or with one who wants to be there and isn't financially as solid as regulators would like them to be?

Update (2007-12-27): According to this article in Forbes, Vermont regulators have rejected the Fairpoint bid. Quoting the article:

The ruling by the Vermont Public Service Board cited FairPoint's financial viability.

"The Board found that FairPoint had not demonstrated that it would be financially sound as it seeks to operate the newly-acquired territories in Vermont, Maine and New Hampshire -- a service territory that has five times the number of access lines as Fairpoint presently has," the board said in a prepared statement.

FairPoint, based in Charlotte, N.C., would have to borrow $2.5 billion to complete the transaction, the debt service on which could exert "significant financial pressure" when combined with operating costs and revenue projections, the board said.

State regulators, however, left the door open to a revised bid.

The article mentions that the union representing some of the employees was opposed to the sale. This also comes through in the papers from Maine. I wonder if they were shareholders ...


David Burstein said...

I take the attitude that Maine, New Hampshire, and Vermont deserve an Internet with similar capabilities to the FIOS building in Massachusetts. If that requires strong regulation, so be it.

That said, I'm actually writing because of your comment that Verizon is selling these lines at a cheap price. Verizon refuses to provide numbers, but have indicated that the deal would involve substantial taxes if not carefully structured. That implies the price is highly profitable.

These are some of the worst served territories in the developed world. Since Verizon decided to sell in about 2001, they have pulled almost all capital investment. The result is some of the lowest rates of DSL coverage in the U.S. or a network that is badly out of date.

Overbuilding almost all of Verizon's network with fiber is essentially admitting the copper network is obsolete and of little value where alternatives exist.

Which leads me to the conclusion the price is actually quite high for the network. The states should require whoever owns the network to build it to the Massachusetts standard. Fairpoint has no cash left to do that at the current price. To me, that means teh price is too high, not too low. The best solution, if Verizon wants to cash out, would be a state mediated renegotiation of the deal to a price that allows Fairpoint to rebuild.

Martin Weiss said...

To me, an asset is worth what someone is willing to pay for it, so it is hard for me to engage in an abstract discussion of what something is "worth". While, I'm not a tax expert, I do know that one possibility is that the taxes may arise from capital gains on assets due to depreciation. If that is the case, you can't conclude profitability.

Verizon is clearly refocussing its business strategy ... the company has a fiduciary responsibility to its shareholders to do so as appropriate. Having said that, they are still the "carrier of last resort", so some public responsiblities obtain. We have a definition of universal service that is technologically biased toward landlines. Wireless technologies are cheaper in areas with lower population density. Furthermore, there is nothing in the universal service definition that promises broadband (yet).

Should Verizon be forced to respond to the public interest using uneconomical technology (copper-based wireline)? Should Verizon be prevented from exiting a market that they no longer want to serve? If so, is that in the best interest of Mainers?