Colorado Misses the Call
For Sol Trujillo, these are the best of times.
Granted, he's now out of a job. But with unemployment benefits like these, losing your job is even better than winning the lottery: Two weeks ago, Trujillo filed notice of his intent to sell 354,740 shares of US West stock, which had been trading at more than $89 a share. That means Trujillo, the former chairman and CEO of the company, pocketed more than $31.5 million before he even cleared out his desk.
Under the terms of his contract with US West, Trujillo will be entitled to millions more now that the company's merger with Denver's Qwest Communications International has closed. Trujillo could bag as much as $100 million as a result of lump-sum payments, bonuses, additional stock options, and a smorgasbord of other benefits that make the Colorado Lottery jackpot look like servant's rations.
Of course, service is a delicate topic at US West headquarters. While the telephone company's executives can look forward to warm days on the golf links, its customers have had to endure some of the worst service in the country. Thousands of Coloradans have experienced long delays in getting telephone lines, and the company has faced intense criticism in every state it operates in. From Oregon to Iowa, the company is often mocked as "US Worst."
So while Trujillo was busy counting his stock options, US West officials were pacing the floors over the last few months, anxiously waiting for regulatory bodies in eight of US West's fourteen states to approve the merger with Qwest. In hearing rooms in places like Olympia, Washington, and St. Paul, Minnesota, US West was forced to prove what benefit the merger would offer to local consumers. In return for signing off on the deal, seven of these states demanded that the two companies provide guarantees of better service, with substantial penalties if the new company (to be known as Qwest) fails to deliver.
Before the deal closed on Friday, all seven received binding commitments from US West/Qwest to turn things around.
For instance, Arizona -- which on June 23 became the last state to approve the merger -- won a promise of $400 million in annual investments in that state's telephone network, with 12 percent of that devoted to rural areas.
But in Colorado -- the center of operations for both companies -- the story was different. Here, a stony-faced Raymond Gifford, chairman of the Public Utilities Commission (PUC), scoffed at the idea that the state should make any demands at all on the merging companies. And to the disappointment of many, in his ruling on the matter in January, Gifford described the notion of attaching conditions to the merger as a "shakedown."
A Republican who was appointed to the commission by Governor Bill Owens last year, Gifford insisted that Colorado place no conditions on US West/Qwest, which, despite fledgling attempts by other providers to compete, will continue to be the monopoly telephone provider for the large majority of Coloradans. He was supported by one of the other two commissioners, and the decision was approved 2-1.
"The most spectacular instance of complete regulatory caprice is when mergers happen," Gifford says. "It strikes me as a bad way to regulate."
There's a reason why so many of the states served by US West took a tough stance on approving the merger. US West customers have complained bitterly about the company for years, and regulators have often felt helpless in trying to pressure the company to change.
Colorado's experience is typical. As the state's population began to rapidly climb in the mid-'90s, US West fell further and further behind in wiring the new subdivisions that sprang up from Colorado Springs to Fort Collins. Thousands of homeowners had to wait months for a new line, and complaints about US West became common fare in newspapers, on television and at PUC hearings.
Many people were perplexed by the company's consistent failure to meet service goals. Since US West was a regulated utility with profits guaranteed by the PUC, it seemed like there should be abundant funds available for the telephone network.
Their questions about where the money had gone were answered last year, however, when the merger announcement was made. US West had apparently diverted much of that cash into the creation of high-speed Internet lines in urban areas, as well as other high-tech ventures, in order to make itself a more attractive merger partner ("Bells Are Ringing," August 12, 1999). By doing this, US West was able to recast its image from dowdy, old-economy utility to hip, new-economy Internet provider. The strategy paid off for US West shareholders when Qwest signed off on the $47 billion merger last summer.
For several years, the state PUC struggled to find a way to get the company to respond to the service problems. US West was regularly embarrassed by the release of information showing an ever-increasing number of "held orders" around the state, and the PUC began holding hearings on the service issue. In 1998, US West and the PUC entered into an agreement to establish a service-quality plan that required the company to meet basic service standards or return up to $15 million annually in customer bill credits.
In January the commissioners ordered the company to refund $12.7 million to customers for violations of PUC service rules over a sixteen-month period, then tacked on an additional $6.9 million refund this spring.
The PUC's Gifford insists that this is the appropriate way to deal with service-quality problems. He believes the states that have the authority to approve mergers (there are fourteen states in US West's territory, but only eight of them, including Colorado, require state approval of utility mergers) have routinely abused the process.
"Historically, US West's regulatory posture toward state commissions has been, 'What are you going to do about it?'" he says. "It's been a belligerent, tough company to deal with. Now they're coming to you as a supplicant. For the staff, it's payback time. States that have merger authority treat it as a leverage point where anything goes and you can get a variety of concessions. That strikes me as a lawless action."
A highly ideological conservative who is deeply suspicious of government regulation, Gifford is the stepson of Republican congressman Tom Tancredo and a graduate of the University of Chicago Law School.
Although he has been highly critical of US West's service record and voted for the recent PUC-imposed penalties on the company, he is adamant that the proper place to deal with service questions is in PUC service hearings, not when two companies are in a rush to merge.
The Colorado PUC is charged only with determining whether or not a merger will harm consumer welfare, Gifford says, and since the state didn't see any harm in the combination of US West and Qwest, the PUC's interest in the merger ended there. "I don't think it's good policy to use the occasion of the merger to turn it into an investment docket," he says.
For those who have had to live with second-rate telephone service, though, this sounds like philosophical hair-splitting over a squandered opportunity.
"They've rolled over and played dead as far as the public interest," says Florine Raitano of the Colorado Rural Development Council, which works to bring new businesses to struggling parts of the state. "We were just amazed when they said yes to the merger without extracting any concessions. We saw what Arizona and Minnesota did. Even Montana and Wyoming elbowed their way into the fray, but our PUC did nothing."
Raitano says that rural Coloradans are being made into second-class citizens because of their antiquated phone lines and that many small-town residents have to wait hours for faxes or Internet connections as bits of information try to squeeze through. She tells the story of a nationally known graphic designer who moved to Leadville and discovered there was no way to get his work to the East Coast. "He had to drive to Denver to send his work to New York," she says. "It's very frustrating for rural Colorado."
Several of the other US West states successfully negotiated new broadband service for rural areas.
Minnesota Governor Jesse Ventura has made expanding Internet service in rural Minnesota a priority, and his state was particularly successful, winning a guarantee of new high-speed DSL lines in thirteen small towns in rural areas.
"We see it as an economic-development issue," says Bruce Gordon of the Minnesota Department of Commerce, which represents consumers before that state's utilities commission. "The digital divide needs to be narrowed so there isn't a group of haves and have-nots in the state. We saw this as an opportunity to encourage the merged company to deploy advanced services. It's not appropriate to leave these people and businesses behind."
The phone companies also agreed to meet a stringent set of service standards in Minnesota and will have to refund between $15 million and $50 million to customers if Qwest fails to meet those requirements. The agreement even lays down specific refunds for consumers who run into problems; for example, if the merged company fails to fix a broken line within eight days, the customer will get a $300 credit on his bill. Lastly, the new company will also be faced with fines of up to $120 million if it fails to open up its network to competitors.
"In 1999, US West's performance was worse than it had ever been," says Lianne Knych, an assistant attorney general in Minnesota who helped negotiate the agreement. "They've never performed at the level we expected."
US West had no plans to run DSL lines into rural Minnesota, Knych adds, and winning such a provision in the merger agreement was probably the only way to get those lines in place.
In Washington, another state that's been frustrated with US West's service record, the state got the company to agree to follow specific service standards.
"We set up a consumer bill of rights," says Marilyn Meehan, spokeswoman for the Washington Utilities and Transportation Commission. "It includes a right to good service. Every year Qwest will have to report on its service."
Meehan said the agreement spells out eight different service standards, requiring, for example, that the company answer repair calls quickly. Qwest will also have to give automatic refunds to anyone whose phone is out for more than two days; put up $1 million a year to help low-income residents who have difficulty paying their phone bills; provide customer refunds of up to $20 million per year for poor service; and freeze telephone rates for the next four years.
US West has frequently been at odds with Washington officials, who have been intensely critical of the company's failure to keep up with the state's growth. But Meehan hopes the merger agreement represents a new beginning for consumers there. "We're very encouraged that they were willing to commit to providing more service," she says.
Utah also extracted a promise of credits to consumers for inferior service, as well as a commitment to invest $15 million in high-speed DSL Internet lines for rural areas.
In Wyoming the companies agreed to install fiber-optic lines in rural areas from Kemmerer to Bondurant and to freeze the price of essential services for two years.
Montana won a commitment for $40 million in annual investment in the phone network and established a time frame for the delivery of new high-speed Internet access.
Iowa's agreement calls for bigger payouts to customers whose phones are installed late, as well as more rigorous service standards throughout the state.
"When the US West/Qwest merger was announced, most people assumed there would be conditions," says Ken Reif, director of the Colorado Office of Consumer Counsel. "The commissioners very narrowly defined what the commission would review. None of the other states took such a view."
Reif acknowledges that Colorado has already taken action against US West on the service-quality issue, but he believes the PUC missed a chance to help get DSL service into rural areas.
The commission's decision not to place conditions on the merger was also questioned by AT&T, which unsuccessfully appealed the ruling. (Many of US West's competitors -- including AT&T -- have accused the company of trying to prevent them from entering the local telephone market by denying access to the telephone network. This concern was addressed by several states in their merger approval agreements.)
In his formal statement on the ruling, Robert Hix, the lone dissenter on the PUC and a Democrat, said his agency made a big mistake by approving the merger with no conditions. "Other regulatory bodies with authority over the merger did not rush to conclude their proceedings," he wrote. "As a result, ratepayers in those states, unlike ratepayers in Colorado, benefited from a regulatory review of the merger. Even now, events are revealing that the Colorado PUC did not serve the public well by the limited scope of review and the rush to approve the merger."
Chuck Malick of the Colorado Public Interest Research Group (CoPIRG) says the other states recognized that ratepayers were owed something for their support of the company. "They've been a government-protected monopoly for a hundred years, and the people of Colorado should get something for that," he says. "Ratepayers have been keeping their part of the bargain by paying their bills. I think the Colorado commission gave US West a free ride."
Gifford was joined in his decision not to put conditions on the merger by former commissioner Vincent Majkowski, also a Republican. (Earlier this year, Bill Owens appointed former Arapahoe County commissioner Polly Page to take Majkowski's place on the three-person board.)
Owens has long been known as a friend of US West's, and the company was a generous contributor to his campaign for the governorship, delivering several thousand dollars to help put him in office. US West also donated $50,000 -- more than any other company -- for Owens's inaugural ball last year. The governor has made it clear that his administration is skeptical of government regulation, Malick points out, and his appointees to the PUC share that attitude.
"The new commissioners think everybody is better off with less regulation," he says. "The ideological bent of the new commissioners is that we're not going to force anything out of US West."
As for US West, spokeswoman Anna Osborn says the company saw each state as a separate challenge. Except, perhaps, Colorado.
"We were very pleased by the Colorado commission's ruling, because they recognized the value of the merger to Colorado, to customers here, to employees, to communities and to the state itself," she says. "The issues are different in each of our states. That's what we recognized and were prepared for. That's how the process works. We were willing to work with the commissions in all of the states where merger approval is required."
Few people will miss US West now that the name has disappeared from the corporate landscape.
The nadir of the company's reputation in Colorado was probably reached last fall, when stunning revelations of US West's corporate deception came to light in Larimer County District Court. Information released as part of a consumer-fraud lawsuit against US West showed that the company knew its failure to invest in the telephone network would inevitably lead to massive service problems affecting tens of thousands of people.
US West cynically told its own employees to lie to customers about installation dates for new service, a policy that was known as "customer not educated." The phone company even went so far as to rank every neighborhood in the state by the income of its residents, labeling them "gold," "platinum" or "bronze," and telling its employees to give priority to servicing the gold neighborhoods.
Qwest, which is very aware of these problems, claims it will invest more money in the network and make service a higher priority. There are signs it may already have influenced US West to change its ways: In the last six months, the number of service complaints against the phone company has started to drop.
A new management team will soon be in place, and it shouldn't take long to know whether or not Qwest will live up to its promises -- not that any of those promises were made to Colorado.
And with the telecommunications world in constant flux, there may soon be other mergers affecting telephone service in the state. The German phone company Deutsche Telekom, which almost derailed the US West/Qwest merger earlier this year when it expressed an interest in buying Qwest, is still sniffing around. Sprint and Bell South have also been mentioned as potential merger partners for Qwest.
But don't expect the PUC to demand anything from these companies if they wind up asking Colorado for merger approval.
"If it's an efficient merger, why attach any conditions to it?" Gifford asks. "It's inappropriate to depart from well-defined lawful behavior and treat [the merger] as a free-for-all. We're here to regulate monopoly power, and it's my view that we don't go beyond that."
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