When is a telecom not a telecom? We may soon find out in the case of Burlington Telecom.
Burlington Telecom told state regulators at an hourlong hearing that its state-of-the-art fiberoptic network is now owned by CitiCapital thanks to the utility's decision to cancel its lease with the global financier.
How BT replaces CitiCapital's equipment — and when CitiCapital will demand its return — remain open questions. BT offered no answer to repeated questions on either front.
Talks with CitiCaptial to renegotiate its $33.5 million lease agreement broke down last month and the city cancelled the lease; by default, CitCapital now owns all of BT's equipment.
BT attorney Wiliam Ellis told the three-member Vermont Public Service Board that it is in talks with private equity firms and in-state telcom providers to stay in business now that it's cancelled its lease. He did not name those firms.
"There are a number of private equity firms that have expressed an interest," said Ellis. "And these firms have experience in the cable and telecom business. As well, we are talking with strategic telecom partners in the state."
Ellis projected BT will be about $600,000 in the black by the end of FY 2011 given its current customer base of more than 4500. Of course that "profit" doesn't account for lease payments or paying down any of the debt it owes taxpayers. Quarterly lease payments to CitiCapital alone were roughly $750,000, Ellis noted.
Repaying taxpayers is a key component of discussions without outside financiers.
"One of the aspects of those discussions is ways in which we can make the taxpayers whole," added Ellis, referring to the $16.9 million BT owes to the city's checkbook.
City Hall officials, including Chief Adminsitrative Office Jonathan Leopold and Mayor Bob Kiss, okayed the diversion of nearly $17 million in funds to BT over a period of several fiscal years, without explicit approval from voters, the city council or regulators. BT's certificate of public good — its license to do business in Vermont — requires it to repay any borrowed taxpayer money within 60 days. It also forbids the city from saddling the taxpayers with losses from the telecom operation.
Officials from the state Department of Public Service, which represents ratepayers in all cases before the quasi-judicial PSB, said their months-long financial review of Burlington Telecom's operations should be made public tomorrow.
A separate criminal review being conducted by Orleans County State's Attorney and federal law enforcement officials is not due to be released until later this month.
PSD attorney Geoff Commons told the PSB that the review's release has been delayed because the contractor became seriously ill. He also said that the PSD and city have agreed to withhold minor bits of information contained in the report.
"Any of these minor redactions do not affect the report," Commons noted.
After the hearing, PSD Commissioner David O'Brien told reporters that the review will demonstrate "wanton foolishness" and "careless" spending by city officials, but he said nothing in the report will point to illegal activity. Minutes later, however, O'Brien said Burlington taxpayers had millions of dollars "stolen from them in broad daylight."
O'Brien said it's the department's position that the city should hold no interest in Burlington Telecom as a way to protect ratepayers and taxpayers.
City Councilor Kurt Wright (R-Ward 4) said he's not sure he agrees with Commissioner O'Brien that the city should cleave itself entirely from owning BT.
"If the city doesn't retain some interest, there's even less chance that we'll see that money repaid," said Wright. "I think that even a minor stake in whatever comes next has to be considered if we are to make taxpayers whole."
Wright said he would not be in favor of the city retaining a majority stake in a reconfigured BT given the risks.
Wright was one of several city councilors in attendance. Also in the room was City Council President Bill Keogh (D-Ward 5) and City Councilors Ed Adrian (D-Ward 1), Karen Paul (I-Ward 6) and Joan Shannon (D-Ward 5). Mayor Kiss was also at the meeting, along with outside consultant Terry Dorman, BT external affairs manager Amber Thibault and several attorneys. Leopold was not at the hearing. He did attend a hearing before the PSB in February.
Just how much time Burlington has to find a new partner and new equipment seems to be a mystery, and is partially based on when CitiCapital will seize BT's assets.
Ellis also told the PSB that CitiCaptial informed Queen City leaders on Monday that it has hired an outside firm to help it begin to assess and value the equipment it plans to repossess as a result of the city's termination of the lease. "They told us they would let us know when that process will begin," said Ellis.
PSB members repeatedly pressed Ellis on whether the city owes anything else to CitiCapital other than the equipement. Ellis said no, the city technically doesn't owe anything to CitiCapital other than all of the equipment it purchased under the lease agreement. However, that equipment includes 186 miles of fiberoptic cable, set top boxes, remote controls, the "head end" (or brains of the entire network) as well as other installed equipment.
"However, it does not include customer lists, customer accounts or any real estate interests," Ellis noted.
When and how CitiCapital will want that equipment returned — at the city's expense — has yet to be determined. CitiCapital has hired a firm to help it assess exactly what it now owns; BT, too, is in the process of conducting an inventory of what it will need to replace in order to keep operating.
The scrap value of BT"s equipment is about $300,000 to $600,000, said Ellis. He expects it will cost $6 to $8 million to replace the equipment, however, in order to stay in business.
Before any final restructuring or switchover of services occurs, Ellis noted, the city will present the plan to the Public Service Board for approval. A plan was supposed to be in place by December 31, but Ellis said the city may need more time to develop a detailed plan. The delay, he said, is due to the city's long-term focus on trying to renegotiate with CitiCapital.
Ellis said he did not know if CitiCapital would sue for damages or use of the fiberoptic network between the time that the city terminated the lease and when it provides Citi with replacement equipment.
"I can't speak for CitiCapital," said Ellis.
As it stands now, CitiCapital owns the entire BT fiberoptic network. It had tried to charge a monthly rental fee of $311,000, but city officials balked at the price. They countered with an offer to pay $40,000 a month. CitiCapital rejected that deal.
Commons said the PSD wants assurances that any costs borne by BT to return equipment or defend lawsuits from CitiCapital will not be charged off to taxpayers.
Ellis said BT's interim management team is making that caveat clear to any potential strategic or investment partner. The cost of returning equipment, replacing equipment and any damages would be part of a new financing deal with new partners, Ellis noted.
Common also said BT customers needed plenty of warning regarding any service stoppage or interruptions due to either complete cessation of activities or switching over to new equipment.
Ellis said any plan for switching over customers to new equipment would be part of a "cure" plan approved by state regulators and the PSD.
"We anticipate only brief interruptions of two or three hours over a period of a few days for some customers," said Ellis. Any interruptions would be based on what kinds of equipment the city needs to replace. Again, Ellis noted, CitiCapital hasn't said what equipment it wants returned.
Comcast's attorney told the board that it was prepared to provide any help necessary to BT customers — including businesses and city operations — to ensure there was no loss of service during a switchover.
On the issue of the 186 miles of fiberoptic cable, Ellis said the city plans to offer new spools of replacement fiber to CitiCapital rather than digging up the existing fiberoptic network.
Commons said the department believes the PSB should place limit the amount of time it gives BT to "cure" or fix its problems rather than allow it to continue indefinitely.
PSB Board Member John Burke suggested the PSD and BT come to a mutual agreement on setting a deadline for filing a complete reorganization and refinancing plan.
PSB Chairman Jim Volz asked Ellis if CitiCapital is aware that it needs a certificate of public good to own a fiberoptic network in Vermont. Ellis said the city had informed CitiCapital of state law, but was unsure if the financier would apply for a CPG. Commons said the PSD had not yet taken a position on whether it would seek to force CitiCapital to apply for a CPG in order to own the fiberoptic network.
"That is a point that we have not pursued to date," said Commons. 'Developments have been coming in pretty quickly and we were not sure where this was going to land."