New Hampshire Approves FairPoint Reorganization, Reworked Regulatory Plan, Expresses Concerns

Many parties wanted conditions imposed on the company before New Hampshire accepted its proposals, the approval order said. “FairPoint has failed to meet the obligations it made in 2008 to the states of New Hampshire, Maine and Vermont and their citizens,” the commission said at the end of its 78-page order. “FairPoint made promises about service quality, relations with wholesale competitors and broadband build-out, and committed itself to performance superior to Verizon, whose performance had become an issue of increasing concern in the three states,” the commission said. “Due to FairPoint’s widespread operational shortcomings arising from its systems cutover, however, residential and business customers, as well as wholesale customers and competitors who rely on FairPoint services, endured even poorer service quality than was the case under Verizon.”

However, the commission said, it declined to impose conditions sought by Accion Group, individual competitive local exchange carriers such as One Communications, segTEL, BayRing and Otel and others. The controls suggested already exist in the commission’s jurisdiction over FairPoint, and the commission will be scrutinizing FairPoint’s performance, ready to act if it deems the company’s efforts insufficient, the regulator said.

"We're definitely pleased that the state of New Hampshire has approved our change of control and, with some adjustments, our proposed regulatory settlement,” a FairPoint spokesman said. “It’s a positive sign, and we hope to be moving forward and out of bankruptcy."

The regulatory settlement with New Hampshire extends the company’s deadline to be delivering 85 percent broadband coverage in the state from March 31 to Dec. 31, 2010, and allows FairPoint to meet its commitment for coverage levels above 87 percent by reselling broadband service from other providers, provided resold service meets the requirements of the original 2008 agreement with the state. The new settlement eliminates the standalone DSL price cap but preserves requirements to offer standalone DSL and to honor “for life” programs.

Shifting the broadband deadline in effect waives a penalty of about $4 million that FairPoint incurred when it didn’t meet its 2008 commitments. In addition, all penalties above the first $500,000 are to be invested by FairPoint in New Hampshire over a three-year period after the penalty is levied. The first $500,000 goes to the state Telecom Planning & Development Fund. The settlement drops broadband installation times from the list of 14 metrics for FairPoint’s performance and, depending on the extent to which the company meets its 2010 quality of service targets, waives in full or in part a $6 million penalty against FairPoint for having failed to meet 2009 service quality commitments. Under the settlement, penalties for calendar 2010 service quality lapses are independent of the potential 2009 waiver. “FairPoint could reduce its 2009 penalties by meeting some of the 2010 QoS subset targets yet still incur new 2010 penalties for failure to meet commitments in the full 13 metrics,” the commission said.

The reorganized company’s new board is to have a supermajority of newly appointed “independent directors” who are to create a “regulatory subcommittee” to monitor compliance with the regulatory agreement, the commission said. At least one new director must live in a northern New England state. The board’s lead director or independent chair must be available to speak or meet with the commission “where appropriate and lawful.” FairPoint must have a state president providing a “senior regulatory presence” in New Hampshire and able to respond to commission dockets involving FairPoint and regulatory telecom issues.

Any management bonuses are to be based on a combination of financial performance and quality of service performance. “Staff Advocates expect that compliance with service quality metrics will be afforded significant consideration in the weighting of those categories,” said the commission. Subject to bankruptcy court approval, FairPoint is to reimburse New Hampshire for out-of-pocket costs incurred in connection with FairPoint’s Chapter 11 petition and post-petition regulatory proceedings. Up to $50,000 of the state’s pre-petition costs are to be deemed allowed under the reorganization. They must be paid in full on the date that the plan takes effect.

The settlement bars FairPoint from issuing dividends for two years after the reorganization plan takes effect if the company hasn’t paid penalties due for failure to meet service quality or broadband coverage commitments. FairPoint may not agree to any materially different term in a proposed settlement with the Maine Public Utilities Commission, the Maine Office of Public Advocate, the Vermont Department of Public Service or the Vermont Public Service Board without offering New Hampshire the same term, the order said.

New Hampshire sees the reorganization, which FairPoint stockholders have approved, as depending on secured lenders’ agreement to slash FairPoint’s debt from $2.7 billion to $1 billion, including discharge of unsecured debt, the order said. Secured lenders will get new common stock in the reorganized entity and FairPoint will install a new board of directors -- both factors the commission finds encouraging.

"Elimination of $1.7 billion in debt places the reorganized FairPoint in a far better financial position,” the New Hampshire commission said. “Moreover, because of their equity interest in the reorganized entity the lenders have a direct economic interest in the Company’s success and through the new board of directors they will have the ability to influence that success.” The reorganization plan still has to pass muster with the bankruptcy court, it added.

"The critical regulatory element of the Plan of Reorganization from the New Hampshire Public Utilities Commission’s perspective is the New Hampshire Regulatory Settlement,” the New Hampshire commission said. Given the improvement in FairPoint’s financial status brought on by debt reduction, it’s difficult “to ascertain a basis for determining that reorganization will have an adverse effect on rates, terms, services or operations,” the commission said.

To live up to its side of the regulatory settlement, FairPoint must do as it promised in 2008 in terms of capital outlays, broadband build-out, service quality and wholesale commitments, the commission said. “The Regulatory Settlement reaffirms previous commitments but forgives penalties for poor retail service quality through Dec. 31, 2009, and for not meeting broadband build-out targets for March 31, 2010,” the state regulator said. “In the context of a Chapter 11 Reorganization … the Regulatory Settlement is reasonable inasmuch as the 2008 Settlement emerges largely intact and a Bankruptcy Court approved Plan of Reorganization makes it possible for FairPoint to meet its obligations."

A fair, quick resolution of FairPoint’s bankruptcy is in customers’ best interests, the commission said. “Accordingly, it is time to move forward. FairPoint has made steady progress in addressing its operational problems and it has significantly upgraded the talent level on its board of directors and in senior management in the most critical areas."

New Hampshire, Maine and Vermont generally back the reorganization, which goes hand in hand with separate company proposals for regulatory settlements with each state. Maine accepted the company’s proposed settlement. Vermont rejected FairPoint’s proposal. That rebuff has stalled movement toward the company’s emergence from Chapter 11, the spokesman said. “We regret that the Vermont Public Service Board voted against approval. There’s no roadmap for this process, but we did have to postpone a July 8 meeting with the court at which we hoped we would be setting a data for emergence,” he said, adding that matters must resolve themselves in some way. “We see a variety of options, but we haven’t chosen any one.”