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September 01, 2010

Decision Looms in Burlington Telecom Regulatory Case

Telecom-cables-250x250A hearing officer reviewing Burlington Telecom's case before the Vermont Public Service Board has recommended the state's chief regulators determine the beleaguered telecom violated four key conditions of its state operating agreement.

If the PSB accepts the hearing officer's suggestions, it could move the case one step closer toward resolution.

The PSB has shown little patience for Burlington's handling of BT's operations. Earlier this year it denied BT the ability to use money from the so-called "cash pool" to make a quarterly lease payment of $386,000. It was the first of several lease payments the utility missed this year.

CitiCaptial gave BT a reprieve until September 30 on making another lease payment. BT is trying to renegotiate the terms of its $33.5 million lease with CitiCapital.

Given BT's current efforts to renegotiate its lease with CitiCapital and find outside partners to help it continue to build out its network within the city and stabilize its finances, the hearing officer recommended that BT provide the PSB with a detailed update regarding these efforts by September 30. After that, BT should file additional updates every two months until the PSB issues a final order.

BT had offered to file quarterly reports to the PSB.

"I have some concern that quarterly reports will not be frequent enough in apprising the Board of developments," wrote hearing officer John Bentley in his proposed ruling. "In addition, these status reports should be detailed enough to provide a basis for the assessment of the progress of Burlington Telecom's efforts to cure the violations or alleviate their effects. For example, a statement in a status report that 'negotiations with CitiCapital Municipal Finance continue on an ongoing basis' would not be sufficient."

In other words, the city's word isn't good enough. The state wants some proof that work is being done and regulators want to evaluate the city's efforts.

The hearing officer's proposal is not a final order — one in which the PSB issues edicts and remedies. Instead, this proposed ruling is a step in that direction. It sets the stage for what CPG violations the PSB should hone in on to make a ruling.

The violations first surfaced almost a year ago when the city admitted it had dipped into the city's cash pool to prop up BT's finances to the tune of nearly $17 million.

A PSB order could spell out more clearly how BT could come into compliance with its certificate of public good (CPG), or face losing its CPG and face costly penalties and sanctions. Before it could issue such an order, however, it is likely the PSB would need to have BT, the state Department of Public Service, which is representing ratepayers, and cable giant Comcast, which has intervened, to further provide evidence as to how BT should be allowed, if it all, to fix its mess.

In his proposed decision, Bentley concluded there is no dispute between DPS, BT and Comcast that BT has violated its certificate of public good.

Those violations include: Failing to build out the network across the entire city (Condition 17); repay any borrowed taxpayer money within 60 days (Condition 60), and not put taxpayers at risk if the venture flounders or fails (Condition 56) as spelled out in the city charter.

BT has also violated Condition 2, which requires BT to remain in compliance with its CPG. Consider this last violation the equivalent of buy three get one free. What a deal. I'm sure Burlington taxpayers will be thrilled.

As an aside, I find it fascinating that multi-billion dollar cable giant Comcast has intervened in an attempt to defend the principle of "competitive neutrality" — an industry standard designed to keep public money from competing with private dollars to build telecom networks.

Amazing to think that Comcast, which wants to by NBC Universal for nearly $14 billion, is threatened by Burlington Telecom. I mean, really? BT can't even payback a $35 million lease, let alone pony up $17 million to taxpayers, or find another $6 to $8 million to finish its network buildout.

But, I digress.

The three parties have until the end of this week to comment on the hearing officer's proposal. The city plans to file its response by the deadline.

"We are currently in the process of reviewing with legal counsel the hearing officer's proposed decision in the case before the Public Service Board," said City Attorney Ken Schatz. "The city has previously acknowledged on several occasions the violations of both Condition 17 and Condition 60 of our Certificate of Public Good for Burlington Telecom.  We'll continue to work through the pending legal process as we address the issues facing Burlington Telecom."

The city had been seeking to amend Condition 17 and seek temporary relief from Condition 60. Before granting such requests, Bentley suggests the PSB should ask the city to submit more specific language related to how it would like to amend Condition 17 and what kind of temporary relief from Condition 60 it is seeking and why. That information should arrive by September 30, Bentley urged in his proposal.

Below is the text of each of the three main conditions BT has violated, and comments from Bentley's report. Interesting reading.

You can download the full report here: (7044 Order re Summary Judgment)

Condition 56 reads: In no event shall any losses or costs, in the event the enterprise is abandoned or curtailed, incurred by BT be borne by the City of Burlington taxpayers, the City of Burlington Electric Department ("BED") ratepayers or the state of Vermont, nor shall the City of Burlington expend any funds received from the State of Vermont to cover any losses or costs, in the event the enterprise is abandoned or curtailed, incurred by BT, as provided in 24 V.S.A. App. § 3-438(c)(1).

From Bentley's report: "Burlington Telecom asserts that the Department's motion is premature with respect to a violation of Condition 56 as there can be no violation until such time as Burlington Telecom abandons or curtails its business. Burlington Telecom notes that the City of Burlington has engaged financial advisors to assist it in developing sale, partnership or restructuring alternatives for Burlington Telecom 'that could alleviate or eliminate risk to the taxpayers.'

"The assertion that there can be no violation of Condition 56 until Burlington Telecom abandons or curtails its business is based on a misreading of the condition and is inconsistent with the intention of the condition and the applicable city charter provision on which it is based. In addition, as the Department observes, such a result would be absurd as it would permit the use of taxpayer funds up until the moment of abandonment or curtailment, at which point it might be impossible to prevent taxpayers from bearing the burden of significant losses and costs.

"City taxpayers, directly or indirectly, currently bear a substantial portion of the losses and investment costs of Burlington Telecom. Specifically, as a result of the use of general revenues of the City in making payments on behalf of Burlington Telecom from the cash pool in violation of Condition 60, Burlington Telecom now owes the cash pool $16.9 million with no immediate or probable prospects of full repayment by Burlington Telecom. This now leaves City taxpayers effectively bearing the burden of this $16.9 million in Burlington Telecom losses. It is possible, as the City maintains, that there may be a future sale, partnership, financing or other restructuring alternative that could alleviate or eliminate the risk of loss to taxpayers. While any such alleviation or elimination of existing taxpayer losses would clearly be helpful, Burlington Telecom is currently in violation of Condition 56 given the burden of its losses now borne by City taxpayers."

Condition 60 reads: The City shall make payments on behalf of Phase III only when and to the extent that Phase III has cash reserves, revenues receivable, or other payments receivable that, collectively, equal or exceed the sum of the payments to be made by the City plus the balance of any other current payments owed to the City. BT may participate in the City's pooled cash management system provided, however, that BT shall reimburse the City within two months of the City's expenditure for any expenses incurred or payments made by the City in support of services that BT provides to non-City entities. The City shall obtain Board approval prior to appropriating any funds other than as described above in the support of BT's Phase III activities.

From Bentley's report: "When seen in the context of the provisions of the city charter, which the state legislature enacted specifically to protect taxpayers from any liability for the losses and costs of Burlington Telecom, the necessity for strict compliance with Condition 60 should have been absolutely clear to the City of Burlington. The importance of the City's compliance with this condition was further emphasized by the explicit direction at the end of Condition 60 that the City obtain Board approval prior to appropriating any funds on behalf of Burlington Telecom other than as permitted by the condition.

Based on Burlington Telecom's own admissions, significant violations of Condition 60 continued over more than a two-and-a-half-year period and allowed for the accumulation of a $16.9 million deficit to the cash pool. The City's admitted conduct displayed a wanton disregard not only for a significant condition of the CPG, but also for provisions of the city charter that were enacted by the state legislature specifically to prevent such conduct."

Condition 17 reads: BT shall build its network to serve every residence, building, and institution in the City of Burlington within 36 months of the date of this CPG. Until such time as BT's network meets this requirement, the Company shall file a line extension report with the Department by April 15 of each year that provides the following information relative to line extensions completed during the preceding calendar year:
a. Location of line segment, including location of line segment by reference to nearest road(s);
b. Length of strand, in feet or miles;
c. Number of dwellings and multiple-unit business establishments passed, without discounting seasonal dwellings or dwellings with a satellite dish;
d. Date on which line was placed in service;
e. A street map and description of the streets and areas of the City to which BT does not yet provide service. BT shall, at that time, also file with the Department a projected completion date for line extensions to any areas of the City to which BT does not yet provide service and an explanation of the reasons for delay, if any, relative to the build-out plan described by BT in its petition for a CPG.

From Bentley's report: "According to the supplemental prefiled testimony of Burlington Telecom in September 2009 and subsequent updated discovery responses, Burlington Telecom was then capable of providing service to approximately 13,500 service addresses, but there were still 3,297 service addresses that were unable to take service from Burlington Telecom. Of the service addresses unable to take service from Burlington Telecom as of November 2009, 1,942 were located on public rights-of-way. Burlington Telecom acknowledges that the inability of these 1,942 service addresses to take service from it constitutes a violation of the CPG.

"Although there is agreement among the parties that Burlington Telecom violated Condition 17 by failing to complete the build-out of its system to at least 1,942 service addresses in the City of Burlington by September 2008, the extent and nature of the violations has yet to be fully determined. Burlington Telecom contends that it is it not in breach of its obligations under Condition 17 with respect to 1,355 service addresses located on private rights-of-way. Comcast and the Department each raise issues challenging this contention. At minimum, as the Department notes, there are factual issues related to the provision of a standard service drop that may be relevant in considering Burlington Telecom's obligation to provide service to at least some of the addresses on private rights-of-way."

Burlington Telecom is pretty screwed at this point, but to be honest, to have Comcast involved is to rub salt in the wounds, especially given they're most likely to benefit from jacking up prices in the area if BT is dissolved and its parts sold off. A great asset, incompetently mismanaged and sent to hell by Leopold, Kiss et al.

Thanks Bob, thanks Jonathan your combined expertise in mismanagement and deceit has left this city with a debt that we will have to pay as taxpayers of the city. No matter what deals are made with any third party to take the BT debt burden off the backs of taxpayers we will forever be saddled with a lowered bond rating that puts squarely on our back the remnants of your mismanagement and deceit. I again ask for your resignations.

Has there been anything in 7D about the ruling against Leopold? Is the City still paying his extremely high, non-City Attorney legal bills?

Jimmy: Yes, I included an item in last week's "Fair Game" about the ruling against Leopold.

I'll check on the legal bills question. I recall the city's insurance carrier picking up the legal tab for BT & Leopold. I haven't heard a change in that arrangement.

I'm attempting to piece together the total costs of BT's debacle to the taxpayers in terms of legal bills, consultants, increased borrowing costs, etc., since it was about a year ago taxpayers first learned they were on the hook for the $17 million owed to the "cash pool".

Burlington should obviously not be paying Leopold's legal bills for the aspects of the case where he is named personally. If they are, that's a BIG problem. His exposure in this case is no longer the City's concern.

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