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An advisory report cites FairPoint's high debt if it buys deteriorated phone and Internet lines.

By TUX TURKEL, Staff Writer November 27, 2007

In a sharply worded report, the advisory staff of the Maine Public Utilities Commission recommended late Monday that the commission reject the proposed $2.7 billion sale of Verizon's telephone network to FairPoint Communications.

If the three-member commission rejects the advice and approves the sale, the staff said, it should impose several conditions, including a recommendation that the parties reduce the effective sale price by $600 million to lower FairPoint's debt.

The long-awaited report represents the opinion of agency lawyers and utility experts who have waded through thousands of pages of legal filings and conducted extensive technical analysis since January, when FairPoint first announced its intentions to purchase Verizon's phone network in Maine, New Hampshire and Vermont.

The commission isn't bound by the staff's opinion.

It has the authority to approve or reject the sale, or approve the deal subject to other conditions. But the staff recommendations carry great weight in complex utility cases and were being carefully reviewed Monday night by intervenors in the case.

The commissioners plan to deliberate on the case Dec. 13. The panel is expected to make a decision then, but has the authority to take more time.

The magnitude of the deal, and the potential impact on telephone and Internet service for residents and businesses in northern New England, has made the proposal one of the most important utility cases in years.

Regulators in New Hampshire and Vermont have been conducting parallel reviews and public hearings, although no final decisions have been made in any of the states.

All three states must approve the deal for it to take place, and any decision can be appealed in court.

Maine's three commissioners and the PUC staff are prohibited by rules from commenting on the report.

But in calling for rejection, the staff wrote that overall, FairPoint would be inheriting a deteriorating network that needs a level of investment that the company would be unable to support under the deal's financial assumptions.

Trina Bragdon, the PUC's hearing examiner in the case, wrote that "the proposed transaction subjects both ratepayers and shareholders to substantial risks and harms that are not outweighed by any of the potential benefits of the transaction."

Verizon said late Monday that it was reviewing the 295-page document and declined comment.

A FairPoint executive said the company was "disappointed" by the recommendation. Its lawyers will review the report's details to prepare counterpoint responses -- known as exceptions -- that will be filed next week.

"We really do remain steadfast in our belief that this is good for consumers and businesses," said Rose Cummings, FairPoint's vice president for corporate communications.

Verizon is Maine's largest phone company, covering 85 percent of the state and providing the majority of local service in its territory.

Its 700,000 access lines here also support Internet service for thousands of home and business customers.

North Carolina-based FairPoint is a much smaller company, operating rural and small urban exchanges in Maine and 17 other states.

The purchase would make FairPoint the nation's eighth-largest phone company, but also saddle it with $1.7 billion in debt.

The PUC staff suggested 49 potential conditions that it said could help lower the risk for ratepayers, if the commission decided to approve the sale. Among them:

• Renegotiate the terms of the agreement, resulting in a $600 million reduction in FairPoint's debt.

• Reduce FairPoint's dividend by 30 percent annually.

• Require FairPoint to increase its investment in high-speed Internet expansion to $28 million from $17.55 million, and focus additional investment in unserved, rural areas.

• Require Verizon to grant FairPoint...