Consumer Advocates Cautiously Optimistic About Connecticut Frontier/AT&T Deal

Frontier’s business model differs from AT&T’s, said Connecticut Office of Consumer Counsel (OCC) attorney Elin Katz. While AT&T is trying to transition out of the copper line business, Frontier is “not only committed to maintaining copper lines but actually wants to increase subscribers,” Katz said. That could be positive for state consumers, she said, especially for those who depend on “the kitchen telephone” that keeps working when the power goes out. But on the “broad downside,” it’s also important that Frontier look to the future in terms of deploying fiber, Katz said: “I don’t think that’s in Frontier’s business model, to have sort of a broad fiber rollout."

When the Connecticut Public Utilities Regulatory Authority (PURA) opens its docket on the proceeding, which will probably happen in January, the OCC wants to ensure that the price cap formula that applies to AT&T continues to apply to Frontier, Katz said. The office will also seek penalties if service quality decreases, she said. OCC will also ask that PURA continuously monitor compliance with any terms of the merger, Katz said. “We're going from one of the largest companies in the entire world, in AT&T, to obviously a much smaller -- but certainly a very capable and capitalized company."

"They're pretty overleveraged,” OCC State Broadband Policy Coordinator Bill Vallee said. Vallee pointed to a Fitch Ratings downgrade from BB+ to BB, which came after Frontier and AT&T announced the $2 billion sale. That follows a 2010 Frontier acquisition of Verizon’s wireline business in 14 states for more than $8 billion, he said. “They had a lot of transition problems,” Vallee said. Given all of Frontier’s acquisitions, OCC “is just concerned about the financial viability going forward,” he said.

Some companies have had problems when trying to acquire a landline business, said Public Knowledge Senior Vice President Harold Feld. The chief concern is typically “whether the companies are able to appropriately handle the transition,” Feld said. “The thing about Frontier is that they're a much bigger company now,” he said: When Frontier was taking over Verizon systems, the company was essentially doubling in size; now, there’s less of a question about whether Frontier can manage the transition in an appropriate way. A lot of the concerns based on previous mergers several years ago “may be a little exaggerated today,” Feld said.

To Feld, the real question for the FCC and state governments is what is Frontier’s plan for conversion to IP. While AT&T is dedicated to moving to IP, “Frontier is not a company that has announced aggressive plans to transition to an all-IP network,” he said. “So if you're Connecticut you're thinking to yourself, ‘OK, does this mean we're not going to get the upgrade that people are expecting from AT&T’s transition? Are we going to be stuck with the same technology that we have now?'"

After the deal was announced, Connecticut Attorney General George Jepsen said it could have a “substantial impact on the quality and affordability of wireline telephone, internet broadband and video services” for customers throughout the state. Sen. Richard Blumenthal, D-Conn., also expressed concern over potential harm to his state’s consumers. Before the merger, Frontier had an incentive to “be all things to all people,” a public interest attorney said. That includes working for all potential customers, and expanding on its own in areas where it wants to be more active. “After the merger a lot of those incentives are dissipated,” he said: Frontier could decide “there’s no need to build something to compete with an existing network, because we bought one and now we're set,” the attorney said. Then there are the “horizontal” factors, he said: If Frontier sees AT&T’s wireline services as actually or potentially competing with it, then the acquisition reduces the number of competitors and might harm competition.

Free Press had a lot of concerns about the Verizon/Frontier deal in 2009 and 2010, said Policy Director Matt Wood. “We're still gathering the facts on this new transaction, which covers a much smaller area but still could have a big impact on the Connecticut customers that Frontier hopes to acquire,” he said. “It’s probably fair to say that Frontier has done a better job in general in the former Verizon territories than FairPoint did, but that’s a pretty low bar.” FairPoint declared bankruptcy soon after acquiring Verizon’s wireline assets (CD Oct 27/09 p4).

Frontier has been reaching out to consumer groups to talk about the sale, public interest attorneys said. The OCC has spoken at length to Frontier and AT&T, and Frontier officials seem “genuinely enthusiastic about the merger,” Katz said. “We're cautiously optimistic but obviously going to be closely following both the terms of the acquisitions and what happens after.”