Friday, August 21, 2009

Vermont Telecom Regulator to FairPoint: Respond to Accusations in E-mail About OSS Failures

An Exclusive Breaking News Report from 08/21/09 - The State of Vermont's telecom regulator, the Vermont Public Service Board (PSB) today ordered FairPoint Communications (NYSE: FRP) to respond to serious accusations relative to the rural telephone operating company's decision to proceed with the switch from computer systems of Verizon Communications, Inc. (NYSE: VZ) to its own system supporting the operations of FairPoint in 3 Northern New England states.

The accusations, made in an anonymous e-mail, claim that FairPoint’s senior management ignored warnings that FairPoint was not prepared for the “cutover” from the Verizon operational support systems (OSS).

The anonymous e-mailer states he was an employee or consultant associated with one of the firms involved in the OSS transition effort.

The order by the PSB to FairPoint was issued in the form of a Memorandum (reproduced, below) by PSB Clerk, Ms. Susan Hudson, Friday afternoon. FairPoint was also given a copy of the e-mail at that time. The Memorandum and e-mail copy was subsequently e-mailed by Ms. Hudson to some 40 parties of record to the ongoing FairPoint Docket of the Board, Docket 7270. acquired a copy of the Hudson e-mail, the attached Memorandum, and accusatory and anonymous e-mail.

The cutover, from a plethora of Verizon legacy systems to a new FairPoint system, executed on January 30th of this year, triggered the single worst upsurge of consumer complaints against an operating telephone company in the history of American telecommunications. FairPoint customers in Maine, New Hampshire, and Vermont have complained bitterly and frequently in the press and to regulators about billing errors, installation delays, and repair delays.

FairPoint agreed to acquire the 1.48 million access lines in the 3 Northern New England states in a Reverse Morris Swap deal tax-advantaged for Verizon, announced in January of 2007. FairPoint paid Verizon a total of $2.72 billion for the customers and telecom facilities in the 3 states. The acquisition was for wireline assets of Verizon only. Verizon Wireless assets in the states of Maine, New Hampshire, and Vermont were not involved. Previous to the acquisition, FairPoint had operated a total of 248,000 access lines.

With the final approval of regulators in the 3 states, FairPoint operationally took over the Verizon assets on March 31, 2008. In the intervening time between April 2008 and February 2009, FairPoint supported its New England customers using the legacy operational support systems (OSS) of Verizon, under a Transition Services Agreement with the larger carrier.

The Memorandum issued by the PSB Clerk earlier today states that the office of Vermont Attorney General, William H. Sorrell (D-VT), which had previously reviewed the e-mail, informed the PSB the Board was free to pursue its own investigation.

The accusations against FairPoint senior management were made in an anonymous e-mail sent to the PSB earlier this month. Although is publishing yesterday's Memorandum from the PSB to FairPoint (below), we have refrained from republishing a full text copy of the accusatory e-mail itself, based on our assessment that the investigatory and regulatory branches of the State of Vermont are better prepared to evaluate the veracity of the charges.

FairPoint itself, in its most recent Form 10-Q disclosure dated August 5, 2009, states that the operational disruptions caused by its OSS malfunctions have delayed the company’s effort to reposition itself competitively in the New England market.

The company filing states, in part, “while we were operating under the transition services agreement, dated as of January 15, 2007, which we entered into with certain subsidiaries of Verizon in connection with the merger, as amended on March 31, 2008 (the "transition services agreement"), we had limited ability to change current product offerings.

Upon completion of the cutover from the Verizon systems to the new FairPoint systems on January 30, 2009 (the "cutover"), we expected to be able to modify bundles and prices to be more competitive in the marketplace. However, due to certain systems functionality issues (as described herein), we have had limited ability during the first half of 2009 to make changes to our product offerings. In late June 2009, we began actively marketing and promoting our DSL product for the first time since the cutover.”

The Memorandum issued by the Vermont PSB on Friday, August 21, is reproduced in full:

To: Telephone Operating Company of Vermont LLC, d/b/a FairPoint Communications ("FairPoint Communications or "FairPoint")

cc: Parties in PSB Docket No. 7270

From: Susan M. Hudson, Clerk of the Board

Re: E-mail Communication

Date: August 21, 2009

On August 14, 2009, the Public Service Board received an e-mail communication
entitled "Information about Fairpoint that PUC should know", as it relates to the transition and cut-over from Verizon New England Inc., d/b/a Verizon Vermont, to FairPoint.Communications. A copy of the e-mail is enclosed.

At that time, we contacted the Vermont Attorney General's Office ("AG's Office")
to make sure they knew about the e-mail communication. The AG's Office asked the Board to not take any action until they had reviewed the matter. On August 20th, the AG's Office informed the Board that it could pursue this matter on its own.

Would you please provide the Board with a response to the e-mail communication
by August 31, 2009. Parties wishing to submit comments on FairPoint's August 31 filing, are requested to do so by September 8, 2009.
Enclosure (1)
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