Rural America Is Being Left off the Information Superhighway

Northern New England is just emerging from its annual "mud season" -- long the bane of back-road drivers throughout the region. Nevertheless, residents of Maine, Vermont and New Hampshire are now worried about getting stuck in a different way. That's because their local phone company, the corporate giant Verizon, wants to ditch them as customers.

Labor and consumer activists, joined by some public officials, are organizing against this move, in a high-stakes regulatory and political battle with consequences for the future of telecommunications in all of rural America.

Verizon's proposed $2.7 billion transfer of local access lines to FairPoint Communications -- a small, largely nonunion North Carolina firm -- is part of a nationwide trend toward rural telecom redlining. Everywhere it can, Verizon is trying to abandon "low-value" landline customers and is focusing instead on building its wireless customer base and investing billions of dollars in a new "FIOS" service. FIOS provides voice, video and high-speed broadband connections on a single fiber-optic cable network, now being extended directly to homes and businesses in big cities and affluent suburbs.

While "high-value" customers in these areas move into the fast lane of the information superhighway, the contested sale to FairPoint would leave northern New Englanders far behind. Residential customers -- not to mention schools, businesses, hospitals and emergency responders -- will still be dependent on "dirt-road dial-up" for their Internet access or, at best, will move into the slow lane of digital subscriber line (DSL) service, a technology that some regard as outdated and prohibitively expensive for rural economic development.

"FairPoint, a highly leveraged company, will have great difficulty meeting the big dividend and debt commitments it has made as part of this purchase, while simultaneously investing enough to maintain current facilities, improve service quality and expand broadband availability," argues Kenneth Peres, research economist for the Communications Workers of America (CWA). As Peres points out in the union's April 27 petition to the Federal Communications Commission opposing the sale, "FairPoint plans to expend less capital on network infrastructure than was previously spent by Verizon" -- a $120 billion company with $6.2 billion in net income last year and thus far deeper pockets.

So if "small is not beautiful" in this case -- and bigger would be better (if state and federal policy-makers compelled Verizon to continue as the incumbent carrier and make its broadband build-out more universal) -- how did little FairPoint, worth only $630 million, become Verizon's buyer of choice?

According to union consultant Randy Barber, the answer to that question lies in an obscure IRS loophole called a Reverse Morris Trust. As Barber explains, "a parent corporation can spin off a subsidiary into an unrelated company, tax free, if the shareholders of the parent end up controlling more than 50 percent of the voting rights and economic value of the merged company." So the Verizon-FairPoint deal has been structured as just this type of "tax-driven transaction"; if approved, it will yield $600 million in tax savings for Verizon.

But here's the hitch -- and the downside for other federal taxpayers and adversely affected consumers (since, in northern New England, they are one and the same). Verizon's tax avoidance is possible only if pieces of its old copper-wire network are chopped up and sold to a "tiny partner" rather than a more financially stable and secure buyer, which, in this case, would have been a larger operator of rural telephone exchanges like Embarq, Windstream, Citizens or Century Tel.

Grassroots resistance to this self-serving corporate scam is growing, despite Verizon's costly push to get utility regulators in all three states to rubber-stamp the deal by next January. Vermont's Bernie Sanders weighed in as a vocal critic last fall, during his successful campaign for the US Senate. Since then, other federal office holders, state legislators and consumer advocates have also joined the fray. (In Maine, a Public Utilities Commission hearing examiner just recommended a $32 million annual reduction in Verizon's rates -- a future revenue loss that threatens to become a deal-breaker for FairPoint if the full commission agrees. Meanwhile, in Vermont, an influential Republican state Senator, Vince Illuzzi, has attached an amendment to pending telecom legislation that would make the "proposed sale null and void," according to Vermont Public Service Commissioner David O'Brien.)