PTI-Verizon saga sets milestone with takeover

The CNMI saw the consummation of probably the year’s biggest business deal on the islands when Pacific Telecom Inc. finally took over Verizon Micronesia’s operations and ended inter-island call charges in the Commonwealth.

On Sept. 21, amid a packed crowd of Verizon employees, PTI president and chief executive officer Jose Ricardo P.R. Delgado Jr. officially announced his company’s takeover of the CNMI’s biggest telecom firm at the lobby of Verizon’s Susupe offices. PTI purchased all common stocks of Micronesian Telecommunications Corp., Verizon owner, for an estimated amount of $60 million.

Delgado immediately called on employees to focus on improved customer service and efficiency to help the company increase its savings and cut costs, saying that the company’s takeover of the telecom firm just began the difficult task of maintaining profitability amid tough economic times.

The takeover finally sealed the company’s bid to operate the telecom firm, more than two years after PTI and MTC jointly applied for the approval of the transfer of all common stocks before the Commonwealth Telecommunications Commission. The application lagged due to strong opposition by Gov. Juan N. Babauta and CNMI consumer counsel Brian Caldwell, who intervened in the administrative proceedings before the CTC.

FINAL ORDER

The CTC issued a 107-page final order on the application on the night of Feb. 16, with commissioners led by chairman Norman Tenorio declaring that the telecom deal would serve the public interest. It also said that the telecom firm was financially secure and its profits had been exceeding industry standard.

It expressed concern, however, over PTI’s acquisition of debt to finance the multi-million-dollar purchase of Verizon, noting that one of the firm’s strength was its strong profit and low debt. PTI remains optimistic, promising to become a regional player in the Pacific.

In its order, the CTC ordered the conduct of a separate contested case proceeding on competitive issues related to Verizon’s sole ownership of the CNMI’s only inter-island cable, which the governor and consumer counsel claimed created a monopolistic scenario that they want to break up. The CTC issued a 46-page opinion and order that lays out procedures and guidelines regarding the contested case proceeding.

The governor and consumer counsel appealed several aspects of the CTC order, but the commission issued a modified order and finally approved PTI and MTC’s application some months later. Initially, the CTC gave PTI and MTC until the end of August to consummate the telecom deal, but the companies sought extension of the deadline to the end of September and finally sealed the deal 10 days before the new deadline.

The final order incorporated the 27-point settlement agreement the companies and the intervenors reached in May 2004, which, among other provisions, resolved that there would be no local rate hike for two years from the transaction’s closing and that PTI would invest a minimum of $20 million in capital expenditures during the next five years. Pursuant to the agreement, PTI also retained MTC’s management and employees, except for the board’s membership.

MORE BATTLES AHEAD

PTI’s battles, however, did not end with its takeover of Verizon. On Oct. 3, less than two weeks after PTI officially took over Verizon, the Marianas Public Lands Authority and its board of directors filed a civil action against both PTI and MTC, with negotiations over the telecom firm’s expiring leases of public lands apparently resulting in a deadlock.

The lawsuit seeks to evict the companies from their main Susupe offices and other facilities. The MPLA and its board also asked the Superior Court for unspecified damages for Verizon’s use of public lands where telecom firm’s cables where buried underground. They sued Verizon for alleged violation of the Fiber Optic Act by charging inter-island tolls since it began providing services between Saipan, Tinian and Rota over the fiber optic cables in 1997.

In a 50-page complaint, the MPLA and its board enumerated 18 causes of action seeking compensatory and punitive damages against MTC and PTI. The suit accused Verizon of breaching its leases of public lands that include the 5,728-square meter Susupe facility. The MPLA contends that Verizon failed to remit to it the total rental amount due under the lease, which expired on about June 30, 2000.

MPLA attorneys Matthew Gregory and Ramon Quichocho also enumerated four other land leases that were allegedly breached by Verizon through nonpayment of its obligations. The leases pertain to public lands in As Gonno, Garapan and Kagman, with each measuring 929-sqm, and a 2,090-sqm lot in Sinapalu, Rota. The MPLA and Verizon executed the lease agreements on the first three properties in 1990, while they agreed on the Sinapalu lease in 1992. All the leases have a term of 25 years and entail an option for Verizon to extend the term for an additional 15 years.

MPLA’s attorneys pointed out that those leases provided that Verizon should pay the public agency any surplus resulting from subtracting the minimum annual rental from 3-percent of the gross receipts within 45 days from the end of the quarter, in addition to the guaranteed minimum annual rental. Gross receipts pertain to any revenue derived by Verizon from its services in connection with the use of the leased public lands.

The lease agreements also required MPLA’s approval to any lease assignment. The attorneys said the MPLA had no consent to the assignment of the leases from MTC to PTI, when the latter company acquired the former’s outstanding stocks last Sept. 20.

The MPLA also wants Verizon to pay for public lands easement for buried cables, from which no payment has allegedly been made by the telecom firm to the agency since the ’80s. The MPLA noted that Verizon’s telecom franchise had required it to pay $2.50 as per-telephone-pole charge beginning Oct. 22, 1976, in addition to franchise fees. When Verizon began burying cables underground, it avoided those charges.

Before the filing of the lawsuit, MTC and PTI had been negotiating with the MPLA regarding issues in the complaint. The MPLA demanded the payment of $2.1 million for public lands easement from the companies, which refused to make that payment.

With the inclusion of former CNMI Chief Justice Jose Dela Cruz in PTI’s board and negotiating panel, the company found an ally in former executive director William R. Concepcion of the defunct Marianas Public Lands Corp., the MPLA’s predecessor agency. Concepcion said there was an understanding between MTC and the Trust Territory government that the company has the right to use the public right of way to place its buried cables and telephone boxes.

“There was never an issue raised during my 15 years with MPLC by either the staff or the board of directors regarding charging MTC rent or some form of royalty for the use of the public right of way,” Concepcion said. “The improvement and expansion of the telephone system was viewed by the MPLC not as commercial venture but a quasi-public capital improvement project in partnership with the CNMI government.”

“The expansion project significantly improved the reliability and accessibility of telephone service in each of the three islands. The public land rental generated by the switching center leases were a welcome addition to MPLC rental income but the primary source of rental income were the hotel and golf course public land leases,” he added.

During his term, Concepcion said public lands were being leased not strictly for strict monetary gain but for the “greater impact in inducing the economic growth and enhancing the quality of life of the people.”

Concepcion later retracted those statements to the detriment of PTI and, just when the investor had just began operating the telecom firm, Gov. Babauta and the CNMI consumer counsel asked the CTC to impose monetary sanctions of at least $170,000 on the company over its failure to submit all financing documents to the commission at least 10 days prior to closing of the telecom purchase deal.

PTI submitted incomplete financing documents six days after the consummation of the telecom purchase on Sept. 20. However, PTI said it would work closely with the CTC regarding the submission of the required documents, which the company fulfilled. The CTC issued PTI a $25,000 conditional fine, which will only be enforced if the company commits another violation of its orders within one year.

AN APPEAL TO BABAUTA

With less than a month before the Nov. 5 CNMI elections, PTI’s mostly local resident employees mobilized themselves and signed a petition asking Gov. Babauta, who was seeking re-election, to intervene in the company’s legal dispute with the MPLA. The employees demanded that the CNMI government stop engaging in political “vendetta” against their employer, fearing that the company’s failure would result in massive job losses.

The employees, many of whom trooped to the Governor’s Office on Capitol Hill, said the government’s “vendetta” not only hurts the economy, but puts their jobs at risk, claiming that the company would likely relocate its facilities on Guam if evicted as prayed for by MPLA in its lawsuit.

“The consequences of the recent lawsuit filed by MPLA would be enormous, far-reaching, and devastating for the entire Commonwealth. For if evicted from its premises, there will be massive disruption of telecommunications services in the Commonwealth. Government operations will be extremely handicapped, business operations will be paralyzed, and local residents will not have access to make much needed phone calls. The Commonwealth will literally be disconnected from the rest of the world. This scenario is not a make-believe one; it is real, if MPLA’s threat is carried out. Is this what we want to happen?” raises the petition.

Babauta heeded the PTI employees’ request and urged the MPLA, an autonomous CNMI government agency whose board members are appointed by the governor, to get back to the negotiating table with the telecom firm. On Oct. 20, Babauta paid PTI workers a visit at the company’s Susupe offices and broke the news.

Babauta said he met with the MPLA’s board members, who agreed to a 30-day “cooling off” period to allow the agency and Verizon’s owners to proceed with negotiations to settle their dispute. He also said the MPLA had agreed to extend the Superior Court’s deadlines on PTI for the filing of responsive pleadings related to the lawsuit so the parties could focus on negotiations.

PTI welcomed this development, with board member and former Chief Justice Dela Cruz saying that nothing is gained by fighting things out. Dela Cruz said that, while he disagreed with the MPLA’s $2.1-million demand for retroactive application of public land easement fees on PTI, the company would be willing to agree on a “reasonable” amount. Dela Cruz maintained that the public land right-of-way forms part of MTC’s telecommunications franchise from the Trust Territory and CNMI governments.

Renewed talks between the MPLA and PTI had just begun when they were stalled again last Oct. 27, when MPLA’s Quichocho and Dela Cruz figured out in a verbal spat while putting their legal positions on the table. Quichocho allegedly raised his voice at Dela Cruz and called the telecom firm a “trespasser”; Quichocho alleged that he and Dela Cruz raised their voices at each other after the former chief justice yelled at him, accusing the latter of intimidation.

On Nov. 2, PTI and MTC sought the transfer of the MPLA lawsuit to Saipan’s federal court, alleging that the agency’s causes of action were based on claims that infringe upon the U.S. Constitution and federal law.

The companies asserted that MTC is a duly franchised CNMI telecommunications local exchange carrier subject to the provisions of the Federal Telecommunications Act of 1996. The companies also accused the MPLA of engaging in discriminatory practices, particularly in the agency’s bid to impose certain public land lease and easement requirements. The companies’ attorney, Colin M. Thompson, asserted that MTC holds various rights-of-way or easements from the CNMI government for its underground cables that are used to transmit telecommunications data.

Thompson also assailed the MPLA’s assertion of the CNMI’s fiber optic law, saying that the local statute is premised upon the two other local laws—the Marine Sovereignty Act of 1980 and the Submerged Lands Act—that vested ownership of submerged lands in the CNMI government. Thompson said those two local laws have been declared preempted by federal law, citing a ruling by the U.S. Court of Appeals for the Ninth Circuit, which declared those laws as unconstitutional.

Since PTI and MTC sought the transfer of the lawsuit to the federal court, negotiations between PTI and the MPLA have yet to resume. Just as the holiday season was approaching, PTI publicly expressed its desire to resume negotiations with agency and end the lawsuit. The MPLA publicly welcomed the possibility of renewed talks. The year 2006 stands as witness as to whether the company and the government agency will actually resume talks or proceed with litigation to resolve their dispute.