‘Secret Deals’ Scandal Overshadows Qwest’s Bid For Minnesota

‘Secret Deals’ Scandal Overshadows Qwest’s Bid For Minnesota

Qwest Communications, already beleaguered by lingering financial problems and highly questionable accounting practices associated with its not-so-distant past, now is engaged in what may well become one of its toughest challenges – the quest for Federal Communications Commission permission to enter Minnesota’s interstate long distance marketplace.

The Bell company’s recently submitted Section 271 application for interLATA entry in Minnesota is drawing harsh criticism from a wide array of opponents, many of them pointing to the company’s past record of poor customer relations and dubious network maintenance.

For its part, Qwest now appears willing to at least concede that its past performance problems were in fact mistakes largely rooted in mismanagement. Even so, no one at the company is voicing words like “regret” and “apologize” in discussing the Baby Bell’s shortcomings. “All of that is the past,” Qwest spokesman Bryce Holloway told TPR. “The people responsible are no longer here.”

Holloway declined to name any of the individuals or provide details about their departure from the company. His dismissive remarks came in response to questions about what Minnesota Public Utilities Commission (MPUC) officials described as “secret deals” that Qwest allegedly struck with some competitive local exchange carriers (CLECs) in the state.

The MPUC, in a lengthy report about the Qwest violations, said the company violated a state law requiring it to file its interconnection agreements with the commission. An administrative law judge (ALJ) that conducted hearings on complaints about the non-filings found that Qwest collectively made 12 interconnection agreements with CLECs – mostly Eschelon Telecom and McLeodUSA – but did not file them with the MPUC for approval. In essence, the deals were kept secret.

Federal law bars local exchange carriers (LECs) like Qwest from imposing “unreasonable or discriminatory conditions” on resale of telecom services. The law requires LECs to provide interconnection based on “rates, terms and conditions that are nondiscriminatory,” and to also provide access to unbundled network elements (UNEs) on the same basis. In examining the Qwest record in Minnesota, the ALJ found that in each of the suspect 12 interconnection agreements, the company provided terms, conditions, and/or rates to certain CLECs that were better than those it made available to other CLECs, and then kept those deals from becoming public knowledge.

In accepting the ALJ’s findings, the MPUC assessed a penalty of $10,000 per day for two of the unfiled agreements that it said had the greatest anticompetitive and discriminatory impact, and $2,500 per day for the remaining 10 agreements for a total of $29.95 million.

Qwest’s past behavior didn’t appear to be much of a factor in the MPUC’s review of its Section 271 application. In fact, the commission focused its attention on the 14 point competitive entry checklist contained in the 1996 Telecom Act. In doing so, three of the four commissioners urged the FCC to deny Qwest’s application, saying that the LEC had met only 12 of the 14 interLATA entry prerequisites. The sole dissenter was MPUC Chairman Leroy Koppendrayer.

Late last week, Qwest supporters were hit with more bad news when The Wall Street Journal reported that an ongoing Securities & Exchange Commission investigation of the company’s past accounting practices is broadening to include allegations that certain company executives entered into secret agreements enabling them to buy Qwest stock at very low prices. TPR’s inquiries to the SEC drew a “no comment” from the agency’s press office, and Qwest spokesman Chris Hardman limited the company’s response to another affirmation of Qwest’s oft-repeated pledge to cooperate with federal investigators.

By law, the FCC is not required to abide by the recommendations of statelevel regulators in deciding the final outcome of Section 271 applications. Neither is the commission known for closely monitoring – and then taking its lead from – media reports about scandalous behavior. If it were otherwise so, Qwest’s bid to make Minnesota the 12th state in its region where it can offer interstate long distance service would most certainly be doomed. But that is not at all the case in this instance. In fact, it may be that the FCC will follow Koppendrayer’s lead.

One thing is for certain: Opponents of the Qwest Minnesota 271 application are putting the proverbial full-court press on the FCC in an effort to torpedo the request. MCI, in comments it recently submitted in connection with the Qwest application, pointed out that the MPUC’s inability to support the Qwest application marks the first time where a Bell Operating Company (BOC) has applied for interLATA entry in a state without support from the relative state commission.

The MPUC has “ongoing concerns with Qwest’s secret deals and Qwest’s unwillingness to either accept the remedy plan established in the penalty phase of the secret deals proceeding or to admit any culpability for its actions,” MCI told the FCC.

MCI noted that the FCC pretty much ignored the Qwest secret deals issue when it approved the company’s previous Section 271 applications. And the federal agency did so, MCI said, “despite the discriminatory treatment Qwest provided to certain CLECs and the silencing of CLECs who could have provided critical information that would have been useful to state commissions and enabled other CLECs … to more easily enter the local market.”

Some industry sources interpret MCI’s criticism of the FCC’s lack of action in the Qwest Minnesota case as a carefully worded slight aimed not so much at the agency, but rather its leadership – in particular, Chairman Michael Powell, who is widely viewed as pro-RBOC, pro-deregulation. This perception is bolstered by the FCC’s record of approving nearly every 271 application submitted by the BOCs since Powell assumed the chairmanship. That record stands in stark contrast to the FCC of the Clinton era when the agency appeared to routinely deny Bell applications for interLATA entry (see TPR, April 21).

Even so, FCC records indicate the agency steered clear of the Minnesota case, in large part, because of the state commissions’s involvement in trying to resolve the matter. But as MCI noted, the state investigation led to the MPUC’s refusal to support Qwest’s 271 application. It also led to a remedy plan whose implementation Qwest continues to resist. Consequently, now is not the time for the FCC to disregard the Qwest experience in Minnesota, MCI said.

MPUC’s ‘Remedy Phase’ Gives RBOC $25.95 Million Spanking

In the “penalty phase” of the Minnesota case, the MPUC found that Qwest “acted in an anticompetitive and discriminatory manner by knowingly and intentionally violating federal and state law.” On Feb. 4, 2003, the MPUC adopted a motion addressing the “remedy phase” of the proceeding. The basic components of that motion required Qwest to:

* Make available to all CLECs all of the 26 contract provisions that, in violation of federal and state law, were not filed for approval by the MPUC;

* Pay each CLEC, in cash or credit form (at the CLEC’s option) a sum in the amount of 10 percent of all purchases of Qwest services made by the CLEC in Minnesota between Nov. 15, 2000, and Nov. 15, 2002;

* Give each CLEC a 10 percent discount on all purchases of Qwest services made by the CLEC in Minnesota during a 24-month period commencing on Feb. 4, 2003;

* Pay a fine of $25.95 million.

Earlier this month, the MPUC reconsidered its Feb. 4 decision. In so doing, it adopted a motion that included :

* Elimination of a requirement that Qwest offer CLECs the 10 percent discount it gave Eschelon and McLeod for all services they would purchase during a 24-month period starting with the date of the MPUC’s order;

* A reduction from 24- to 18-months the look-back period for which the MPUC will require Qwest to give CLECs (except Eschelon and McLeod) the equivalent of a 10 percent discount (cash or credit at the CLEC’s option) on all products and services that the CLEC purchased from Qwest during that look-back period. Rather than the look-back period running 24 months from Nov. 15, 2000, to Nov. 15, 2002, it will now run 18 months from Nov. 15, 2000 to May 15, 2002.

* Qwest must make all 26 provisions of the “unfiled agreements” at issue in this case available to the CLECs for the length of time they were offered to the CLEC signatory to the unfiled provision in question.

The state commission decided not to pursue an investigation of the CLECs that signed the unfiled agreements.A written order detailing the MPUC’s official findings is expected to be issued in the coming weeks.

Source: Minnesota Public Utilities Commission

Qwest ‘Secret Deals’ – By The Numbers

Name of Agreement Start Date End Date Number of Violation Days

Eschelon I 2/28/00 3/1/02 732

Eschelon II 7/21/00 3/1/02 588

Eschelon III 11/15/00 3/1/02 471

Eschelon IV 11/15/00 3/1/02 471

Eschelon V 7/3/01 3/1/02 241

Eschelon VI 7/3/01 3/1/02 213

Covad 4/19/00 3/1/02 681

Small CLECs 4/28/00 3/1/02 672

McLeod I 4/28/00 3/1/02 672

McLeod II 10/26/00 3/1/02 491

McLeod III 10/26/00 9/20/02 694

US Link/InfoTel 7/14/99 3/1/02 961

Source: Minnesota PUC

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