Brief by Central Staff
Communications – September 2001 – Colorado Central Magazine
Citizens Communications Co. of Stamford, Conn., has terminated an agreement to buy rural telephone exchanges from Qwest Communications International of Denver.
The proposed transaction involved 45,000 lines in 17 exchanges in rural Colorado, among them Alamosa, Buena Vista, Crested Butte, Del Norte, Fairplay, Gunnison, Leadville, Meeker, Mesa Verde, Monte Vista, Oak Creek, Salida, South Fork, and Yampa.
The 1999 sales agreement called for Citizens to buy 540,000 lines in nine states for $1.7 billion from US West, which was acquired last year from Qwest. The actual transfer would occur after various state regulators approved it.
The Colorado Public Utilities Commission approved the transaction about a year ago. To get PUC approval, Citizens agreed to invest $20 million during the next four years in improving the rural exchanges in Colorado, to provide service guarantees, and to maintain current prices for at least a year.
William J. Fritzel, administrative law judge for the PUC, wrote that “Each of these factors ensures that customers in the exchanges will be at least as well off, if not better off, than would be the case had they continued to receive service from Qwest.”
But Qwest will continue to own the exchanges. On July 20, Citizens announced it would immediately “terminate all pending acquisition agreements with Qwest.”
Why? According to Citizens, there was “a material shortfall in the actual revenue coming from the exchanges … versus what Qwest had contractually represented.” Citizens became aware of this “shortfall” after buying 17,000 access lines in North Dakota from Qwest last year.
Qwest responded with a statement that, “Citizens is a sophisticated buyer who had a complete understanding of the revenues” before signing the agreements in 1999, and has filed for binding arbitration seeking damages from Citizens.
In other words, Citizens said Qwest lied about how much money the exchanges were bringing in, and Qwest says Citizens went into the deal with its eyes open, and besides, the exchanges are producing more revenue now than when the deal was made.
What happens next?
A Qwest executive said “we welcome the opportunity to continue providing excellent service to the customers who will remain with us.”
As soon as you’ve finished gagging over the word “excellent” in that context, and as soon as you get over swearing about the fact that Qwest doesn’t offer DSL or distinctive-ringing or certain other services in these exchanges, consider the context.
Rural areas are expensive for telephone companies to serve. Installing and maintaining a mile of line costs about the same, whether there are 200 customers or only one along that mile.
To help phone companies cover those costs, the federal government has set up the “Universal Service Fund,” which subsidizes rural telephone companies through a surcharge levied on every phone bill in America.
But Qwest is too big to qualify for that money. The money goes to companies that specialize in rural operations, like Citizens.
That’s one reason it makes sense for Qwest to divest its rural operations, as it did in 1995 when it sold 45 rural exchanges (Saguache and Westcliffe among them) to PTI, which became CenturyTel.
Another reason is that Qwest’s stock price, and thus the compensation of its executives who have stock options, would rise on Wall Street if the company got rid of its expensive rural exchanges and focused on the profitable urban zones.
So Qwest will likely look for another buyer. And that means the company won’t invest anything in improving service in our exchanges. We’re still on hold.
