Despite Blessing The Deal, FCC Panel Splits On FairPoint/Verizon

Telecom Policy Report, Jan 14, 2008

With the Republican leaders of the Federal Communications Commission (FCC) voting in favor of the deal last week, FairPoint Communications Inc. continues to forge ahead with its plan to buy Verizon's wireline operations in Maine, New Hampshire and Vermont.

N.C.-based FairPoint provides local and long distance voice, data, Internet, video and broadband services to rural and small urban communities across the country. It owns and operates 30 local exchange companies in 18 states. However, FairPoint doesn't provide local exchange service in the exchanges in which Verizon currently operates in Maine, Vermont and New Hampshire, thus the $2.7 billion acquisition proposition that now is almost a year old (Telecom Policy Report, Feb. 3, 2007).

Commenting on the FCC's approval, Gene Johnson, chairman and CEO of FairPoint, says, "In providing the approval for the necessary license transfers related to this merger, the FCC has recognized this transaction is in the best interest of consumers and businesses. As we continue to make progress toward closing this transaction, we look forward to serving our new customers in northern New England and offering enhanced communications products and services."

Added Susanne A. Guyer, Verizon's senior vice president/federal regulatory affairs, "The Federal Communications Commission did the right thing in approving the license transfers between Verizon and FairPoint. With its broad industrywide view, the commission is in a position to see the clear benefits this transaction holds for consumers and businesses in the three-state region. The FCC's action...is another positive step in obtaining all necessary approvals for the transaction to proceed across the three-state region."

The Commission's Decision-Making Process

In answer to those who have been fighting the deal based on anti- competition fears, the FCC's decision says in part, "Based on evidence in the record, we find that the proposed transaction is not likely to increase market concentration. The record evidence indicates that the proposed transaction is not likely to adversely affect competition because Verizon and FairPoint do not compete for local exchange customers in the affected exchanges. This finding is consistent with our view that the sale of rural exchanges from large incumbent LECs to smaller incumbent LECs that specialize in providing service in rural areas is unlikely to raise the potential of competitive harm. In addition, the Applicants contend that after the transaction, Verizon affiliates will continue to provide 'large business and long-distance services' in Maine, New Hampshire and Vermont in competition with FairPoint. Accordingly, we find no potential public interest harms related to market concentration."

The agency also believes FairPoint won't want to - or be able to - discriminate in the provision of wholesale inputs. "To the contrary, we find that, because FairPoint has a much smaller footprint than Verizon, it will have a smaller incentive to discriminate," it wrote. "Further, FairPoint states that it will retain all obligations under Verizon's current interconnection agreements, tariffs, SGATs, and other existing arrangements, in addition to the statutory obligations applicable to all incumbent LECs under sections 251 and 252. Moreover, FairPoint asserts that it is devoting significant resources to providing wholesale services, and that competitive LECs will not be charged for the training, job aids, or reference materials necessary to interact with FairPoint's updates to its existing wholesale systems."

At the state level, opponents to the acquisition expressed concern that FairPoint can't afford to spend the more than $2 billion for Verizon's lines, but the commission said, "We reject the commenters' claims that FairPoint lacks the financial qualifications to handle acquiring Verizon's operations in Maine, New Hampshire, and Vermont. While FairPoint would assume a higher level of debt than either of the companies absent the merger, FairPoint represents that it will have adequate cash flows to support its investment plans and service debt...Moreover, FairPoint states that it intends to spend more per line than Verizon has in recent years. Specifically, FairPoint represents that it anticipates making a capital expenditure of at least $100 per access line per year in the three states for the five years following the merger closing date...While it is difficult to calculate the exact amount per access line that will be required to maintain and improve service quality and broadband availability, we take comfort in FairPoint's representation that this level of investment will serve as a significant step in reaching those goals."

Broadband Proliferation Influences The Dems

In its decision, the FCC said it believes there will be more, and not less, broadband buildout in the three states affected by the FairPoint purchase, with special attention paid to the more rural areas.