04 January 2008

Update on the Fairpoint case

I thought you might be interested in an update of this item, posted earlier. As Forbes reported today, the Maine PUC approved Fairpoint's acquisition of Verizon's lines in its state. Recall that Vermont did not approve this.

Questions about appropriate regulation or inappropriate micromanagement aside, I think this case provides an interesting window into the machinations necessary in telecom for commercial transactions such as this. These kinds of processes are not required in other industries and adds to the "friction" of these markets, which leads to economic inefficiency. Quoting the article:

The deal also requires approval from Vermont and New Hampshire regulators. On Dec. 21, Vermont's Public Service Board rejected the deal but invited the company to submit a revised application. New Hampshire's PUC staff recommended against the initial proposal, but it is also willing to consider a revised deal.

The deal is subject to review by the Federal Communications Commission.

Maine's PUC attached several conditions to its approval. The commission suggested reducing FairPoint's debt to Verizon by $100 million by scaling back fees FairPoint will pay to lease equipment from Verizon Communications.

Verizon general counsel Don Boecke dismissed that approach as "pretty much a nonstarter," but left the door open to an alternative. FairPoint Chief Executive Officer Gene Johnson then told the PUC a number of options that would have the same financial impact were available.

Some of those include reducing dividends, selling noncore assets, selling more stock and suspending dividends if necessary, he said.

Other conditions ordered by the PUC included having FairPoint develop and implement a policy protecting customers' privacy, and not having the other two states' regulators materially change FairPoint's financial condition.

Johnson said he did not see the latter condition as a problem, saying he believes the agreement approved in Maine will serve as a "roadmap" in New Hampshire and Vermont.

Update (2008-1-15): The FCC approved this transaction (see the order for details):
In accordance with the terms of sections 214(a) and 310(d), we must determine whether the Applicants have demonstrated that the proposed transactions would serve the public interest, convenience, and necessity. Based on the record before us, we find that the transaction meets this standard. We conclude that it is unlikely the merger will result in any anticompetitive effects or other public interest harms. Specifically, the Applicants do not compete in any of the relevant local exchanges. Moreover, after consummation of the transaction, the Applicants will compete for large business and long distance customers. The transaction also is likely to produce public interest benefits, including the accelerated deployment of broadband throughout the region.

Note that the FCC's analysis is motivated by a different set of concerns than the states' ... the latter group is interested (at least on paper) in the viability of Fairpoint after the transaction. This difference can be seen in Commissioner Copps's dissent.

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