Liars on the Line
For years, Coloradans have been wondering: What exactly is the problem with US West?
As thousands of customers from Fort Collins to Parker waited for months to get new phone lines, neighbors asked each other why a regulated monopoly with guaranteed profit margins couldn't seem to get its act together.
Now we know.
While US West executives were publicly claiming that Colorado's rapid growth and the rise of the Internet made it impossible for them to keep up with service requests, information released as part of a consumer-fraud lawsuit now under way in Larimer County District Court reveals that the company knew what it was doing all along.
Not only did US West know that its failure to invest in the telephone network would inevitably lead to massive service problems -- the lawsuit estimates that 220,000 customers were affected -- but it was able to divert hundreds of millions of dollars collected from customers into a global financial empire that included cable-television systems in the United Kingdom, cellular-phone networks in Russia and a publishing company in Poland. In 1995 alone, US West invested $681 million in international ventures.
US West eventually spun off its cable assets -- acquired with the booty from its telephone monopoly -- into a separate company, MediaOne. Earlier this year, AT&T spent $62.5 billion to buy MediaOne. Seven MediaOne executives (many of them former US West employees), led by MediaOne CEO and former US West planning chief Charles Lillis, will share as much as $117 million when the deal closes.
US West's wheeling and dealing resulted in appalling telephone service in Colorado, but it gave company executives, including CEO Sol Trujillo, a chance to take turns becoming multi-millionaires. This year they hit the jackpot again when they agreed to merge the company with Qwest Communications International in a $45.2 billion deal.
With so many millionaires on board, it's no wonder that US West has turned out to be extraordinarily class-conscious. In one of the suit's most shocking revelations, the company has apparently ranked every neighborhood in Colorado by the income of its residents, labeled each as "gold," "platinum" or "bronze" and instructed its employees to give priority to the gold neighborhoods.
When angry customers called to complain, the company told its employees: Just lie. "If you don't see a facility in place to install service, give the customer an artificial due date and hope we make it," US West advised its service reps, according to an excerpt from a US West memo. "DO NOT advise the customers of a possible held order situation or that there may be a delay in providing service to them."
This practice even had a name: the "Customer Not Educated" policy, or CNE for short.
But it wasn't just customers whom the company deceived. For the past several years, US West's executives have made constant pronouncements that misled the general public in myriad ways, from arguing for rate hikes to telling the Colorado Public Utilities Commission that the held-order problem would soon be solved.
Call it the Colorado Not Educated policy.
The lawsuit against US West was filed in 1997 on behalf of a half-dozen customers who were unable to get telephone service. Most of them live or work on the outskirts of Denver or in outlying cities and were irate about not being able to get service for months. The Denver lawyers pressing the suit, among them Larry Pozner and Daniel Reilly, have asked the court to grant them class-action status, which would allow them to seek damages on behalf of everyone in the state who was denied service. (The lawsuit was originally filed in Douglas County, but the state courts consolidated it with a similar suit in Fort Collins and assigned it to Larimer County District Court Judge John Sullivan.)
It's likely that Sullivan won't rule on the class-action status until sometime next year. Last week the two sides agreed to meet with a mediator next month to work toward a possible settlement of the lawsuit. Trujillo has also been scheduled for two days of questioning by the plaintiffs' attorneys in January.
The company had demanded that all of the information it gave the plaintiffs be kept from the public -- US West considered it proprietary information -- and as a result, the complaint that was filed in court had pages of blacked-out information. Westword was one of several media outlets who joined in asking the court to release the documents; in a compromise, US West agreed last week to permit the release of all the information in the complaint as long as the documents it filed were kept under seal. In other words, the public can read descriptions of the documents, but it can't read the actual records submitted by the company. (US West has a history of fighting efforts by the media and the PUC to obtain the release of company documents. Three years ago, Westword tried to win the release of information from the PUC about the salaries of several dozen high-level US West executives. The phone company went to Denver District Court and was able to prevent the PUC from releasing the information.)
US West spokeswoman Anna Osborn says she is limited in what she can say about the current lawsuit because the case is in litigation, but she describes it as "inflammatory and untrue.
"US West believes the suit is without merit and the PUC is the proper forum for these concerns," she says. "We are already working with the PUC on service-quality issues. The statements in the filings are claims, not facts. Much of the information is distorted and not true. When the evidence is presented, it will show that US West made every reasonable effort to serve customers. I can't comment on the specifics."
But the complaint is highly detailed and makes specific references to dozens of different company records, including internal memos, consultant reports and corporate documents. The picture that emerges is one of a company whose rank-and-file employees were deeply frustrated by their inability to meet the needs of customers while executives were slashing jobs, shifting money out of telephone operations and boasting of record profits.
The debacle may have begun in April 1992, when several executives flew to Japan to study ways to increase profits. They became enamored of a Japanese strategy to raise profits by cutting jobs and reducing inventory. Soon after, senior executives Tom Bystrzycki, Will Smith and Charles Lamar created a company-wide "re-engineering" plan that set a four-year goal of increasing revenues by 5 percent per year, reducing costs by 4 percent per year and laying off more than 4,000 employees.
US West chose to undertake this re-engineering just as Colorado and the other mountain states faced a massive influx of new residents. Several of the departments targeted for layoffs were directly involved in providing new telephone service; the company cut hundreds of positions in its telephone-network division, according to documents cited in the complaint.
As customer complaints skyrocketed, US West did what it frequently does in a crisis: It hired a consultant to tell it what had gone wrong.
In 1994, the consultant, who was not identified in the complaint, told the company that the re-engineering was poorly planned and had resulted in chaos for employees and customers; it also warned that US West had a history of not dealing with deteriorating service "until things were awful." The consultant also reported that many US West managers believed the company's decisions were driven by financial considerations and not customer service.
US West's conduct was "an extraordinarily clear example of the ways of evasion of the truth in the example of the deteriorating customer service this past summer," the consultant wrote. "That had to be known, because there are daily requirements for critical outcomes. Yet no one stood up and acknowledged the problem until it became a crisis. Several levels of management had to have known what was happening."
The consultant went on to warn that company executives must "stop contributing to doubts about strategy by saying customer service is the highest priority -- a strategic decision -- and making decisions that put financial considerations first."
In 1992, the PUC logged 2,500 complaints against the company; last year they numbered more than 6,000. (Most of the other states in US West's territory -- which extends from Oregon to Iowa -- reported similar experiences.) Yet US West executives continually assured the public that the problems were only temporary and that they would soon have things in hand.
"We are making significant strides in Colorado to meet the growing demand for our telecommunications services," former US West vice president John Scully boasted in January 1995.
A few weeks later Scully claimed that US West had increased its investment in the telephone network by almost 50 percent to meet the increasing demand for phone lines. Later that year he even launched a campaign to hike residential phone rates in Colorado, claiming the company was losing money on its residential phone service. "Prices need to be more reflective of the true costs in all parts of the business," he told the Rocky Mountain News.
While Scully was trying to shake down Coloradans, US West's number of "primary held orders" -- customers who couldn't get a single phone line into their homes or businesses -- was rising dramatically. Over a period of about six weeks in the spring of 1995, the company reported 1,186 held orders.
At the same time, US West was becoming increasingly paranoid about negative publicity -- in one memo an executive fretted that reporters were "following the service story closely. They are educated and have access to data" -- and chose to deal with the problem by fighting with the PUC over the definition of held orders.
For example, requests for additional lines weren't counted as held orders, and service delays that didn't fall within the time periods that US West reported to the PUC were deleted. The lawsuit refers to documents that reportedly show the company removed held orders from its system at the end of 1994 to reduce the annual number reported to the PUC; those same held orders then reappeared in January 1995.
A current US West employee who asked not to be named claims the company still engages in this practice. "They're deleting the date from the held orders so the PUC won't know that it's a held order," says the employee.
The extent of this deception may be far greater than anyone has realized. In 1997 the company reported 3,656 held orders, but a February 1998 memo cited in the lawsuit quotes a manager admitting that US West "disappoints a quarter of a million customers due to held orders."
Many US West employees genuinely want to provide decent service to their customers, but the documents in the lawsuit portray a workforce that's been consistently undermined by executives at the highest level. While employees in the field continually told management they needed more funding to meet the demand for phone lines, their requests were ignored, according to the consultant's report. The company even calculated the number of held orders that would result from specific funding levels, allowing it to forecast its own failures.
One source in the company who works with the technicians who hook up new telephone customers says US West's anemic investment in service has taken a terrible toll on the technicians, who regularly face angry customers and have even been pelted with rocks as they drive down the streets of new subdivisions.
"The technicians are dropping like flies from heart attacks and stress," says the source. "The customers are beyond livid, and the poor technicians bear the brunt of it." (Apparently, turnover has become a problem for the company: A 24-page advertising supplement that ran in the Denver Rocky Mountain News two weeks ago was filled with glowing stories about what a great employer US West is.)
In September 1995, US West once again turned to an outside consulting firm -- at a cost of $2.1 million -- to tell it what it was doing wrong. The consultant spent six months investigating, and in early 1996 warned the company that it was not spending enough money to meet the demand for new lines and that a "massive" number of held orders would be the inevitable result; the firm also forecast that demand would grow by 37 percent, rather than the 7 percent US West had budgeted for. The consultant found that the wait for a new line in Colorado was longer than in any other US West state -- it took an average of 61 days to clear a held order in most of 1995 -- and that the number of held orders was growing by 26 percent per year.
The company hired yet another consultant that same year to analyze its re-engineering program. That consultant found that US West held no one accountable for poor customer service and that "US West managers tended to look for silver-bullet solutions for complex problems."
At the same time that US West execs were telling the public and the PUC that they were surprised by the level of growth in Colorado, it was boasting to investors that "seven of the ten fastest growing states are in our region." Colorado has been consistently ranked as one of the fastest-growing states for much of the past decade.
But not all Coloradans would share the pain of poor service equally. The company ranked each of its 1,231 wire centers -- equipment stations that cover a given part of the state -- according to profits and told its employees to give priority to the high-income areas. Each area was ranked either "gold," "platinum" or "bronze," and investment decisions were made based on these categories. Not only were wealthy customers more likely to cause trouble if they ran into service delays, but they were also much more likely to order profitable services like call waiting and voice messaging.
A form letter the company sent a customer in Conifer earlier this year makes it clear just what US West's priorities were:
"Due to the high cost of this project [to provide telephone service], it is not in our 1999 Business Plans and will most likely not be worked this year. We will consider this work for our 2000 program, however, it may prove too costly for that as well.
When service demands in this area support our investment, we will proceed with the work required to provide the service."
Apparently, US West had bigger things on its agenda than irate customers in Conifer. In early 1996, US West CEO Sol Trujillo told a meeting of company managers that he wanted to increase profits by $1 billion over the next two years. "I'm on a mission to generate cash," Trujillo said.
Trujillo made it clear that money would be invested in profit-making ventures all over the world, and he proved to be a man of his word. The company began a campaign to bolster its financial interests in projects far from home, putting together an exotic portfolio that included wireless service in India, cable systems in Belgium and cellular telephones in Russia. Huge amounts of money flowed into these ventures, just as the number of held orders in Colorado reached crisis levels. US West invested $681 million in foreign operations in 1995 and another $420 million the following year.
While all of this international cherry-picking was going on, US West was routinely ranked as the worst local telephone company in the country on national surveys. But this reputation for bad service didn't seem to affect the compensation levels of the company's top executives.
US West was created after the federal government broke up the former Bell system monopoly in 1984. The new company -- which incorporated Colorado's longtime telephone provider, Mountain Bell -- was given a vast territory that stretched from the Pacific Northwest to the cornfields of Iowa. Meanwhile, new technology was transforming telecommunications and bringing fierce competition to the once stodgy local telephone world. Cellular-phone networks and the swift rise of the Internet brought new challenges to regional phone companies like US West. One by one, the other successors to the Baby Bells merged or were bought out by larger companies -- Bell Atlantic and Nynex merged to create a colossus in the Northeast, and three others -- SBC, Pacific Telesis and Ameritech -- are in the midst of joining forces to form a company that will extend from Chicago to Houston to Los Angeles. In addition, long-distance companies MCI and WorldCom have already joined together to form a huge telecom pipeline company, and AT&T has announced it will make local telephone service available over its cable television lines in the next few years.
That left US West increasingly isolated in a relatively remote area of the country. This year the company got serious about finding a partner that would allow it to play with the big boys in telecommunications. In May, US West agreed to a $37 billion merger with Global Crossing Ltd., a Bermuda-based company that's raised billions for an ambitious endeavor to lay fiber-optic lines linking several continents. That company was seen as an odd choice for US West, since it had just 200 employees and no real experience with customer service.
There was widespread speculation on Wall Street that Denver-based Qwest Communications might make a hostile bid to the US West-Global Crossing deal, and that was exactly what happened in June. Qwest, which was created in 1988 by Denver billionaire Philip Anschutz as a spinoff from the Southern Pacific railroad, had grown rapidly to become the country's fourth-largest long-distance provider. (Anschutz sold the railroad in 1996, but Qwest kept the right to lay its fiber-optic cables on the railroad's right-of-way.)
Qwest had become a Wall Street favorite, and its stock price rose so quickly that Anschutz's billion-dollar fortune grew exponentially. Earlier this year he was ranked as the fifth-richest man in the world, with an estimated $16.5 billion in holdings.
Anschutz played a pivotal role in striking the deal between Qwest and US West. To pacify Global Crossing, he said that the company could merge with Frontier Corporation, a major long-distance operator that was being pursued by both Qwest and Global Crossing. In a July 14 dinner at the Brown Palace Hotel, Anschutz, Trujillo and Qwest chief executive Joseph Nacchio hashed out the final $45.2 billion deal. They agreed that Trujillo would become president of the new company's local phone and wireless business and would be a "co-chairman" of Qwest along with Anschutz and Nacchio. Many doubt this unusual leadership structure will endure, and they speculate that Trujillo may be out the door after the merger is finalized next year.
But no one is shedding tears for Trujillo or his friends in the executive suites at US West. Last week's approval by shareholders of the merger between US West and Qwest will make Trujillo and his colleagues extraordinarily wealthy. Trujillo has claimed that the merger is necessary for US West to survive in the fast-changing telecommunications world. He told the Denver Post that the merger was the best thing for both companies. "When I initiated this, I believed in the value of this, and our shareholders are saying, 'Yup, I agree,'" Trujillo told the newspaper.
Whatever value the merger will have for shareholders, it has an enormous value for Trujillo, who began his US West career more than twenty years ago in his native Wyoming, where he dug ditches and spliced lines as an entry-level employee. After working his way through the University of Wyoming and earning a business degree, Trujillo became a US West success story, rising through the company's power structure until he finally stepped into the CEO position in 1995 at age 43. His 1.6 million shares of US West stock will be worth an estimated $97.5 million after the merger is finalized. At that time, he'll also receive a cash bonus of $2.7 million plus a lump sum payment equal to three times his last annual bonus of $650,000, or another $1.95 million. The deal also calls for Trujillo to receive about $1.2 million under the "long-term incentive" plan the executives who drew up the merger created for themselves. That same agreement calls for the merged company to pay all of the taxes on these payments as well. Finally, Trujillo will enjoy an annual pension of between $592,000 and $684,300 when he retires. During his tenure as CEO, Trujillo -- whose base salary is a mere $900,000 per year -- had already collected more than $54 million worth of stock, with the option to buy millions more at a discount.
Several other executives at the company will divvy up $11.9 million, as well as stock options totaling 950,000 shares.
Qwest's Nacchio has said that US West's investments in high-speed Internet technology and other endeavors that have little to do with local telephone service were what made the company attractive to Qwest ("Bells Are Ringing," August 12).
Even though the merger won't be consummated until the middle of 2000, Nacchio has already openly speculated about possible future mergers between the new company (to be known as Qwest) and other telecommunications firms like GTE Corporation, Bell South, or even Deutsche Telecom AG of Germany. Any such couplings would undoubtedly make the executives of the new firm even wealthier and dramatically increase the value of their stock.
So whether or not US West's unhappy customers have a chance to tell their stories in Larimer County court sometime next year, the company's top executives will have already pocketed their millions.
After all, life's better here.
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