Qwest: Trouble Brewing in Arizona, Minnesota

In Arizona, where Qwest Communications International Inc. struck secret interconnection agreements with 30-some-odd communications providers, two of those deals barred phone companies from participating in the regulatory process that is integral in determining whether the telephone giant has opened its network to competitors and should be allowed to provide long-distance services, according to the state regulator.

In a hearing that has yet to be set, an administrative law judge will recommend to the commissioners of the Arizona Corporation Commission appropriate penalties to impose on Qwest, the Denver-based telephone giant that has yet to file applications with the Federal Communications Commission for long-distance approval in five states within its local territory, including Arizona.

Heather Murphy, a spokeswoman with the Arizona Corporation Commission, declined to comment Friday on the possible penalties.

"We are not going to go down that road at this point," she said. "The commissioners and the judge will probably be looking at a spectrum of options. What those options might be, it’s premature to say.”

A ruling in Minnesota, however, indicates the penalties could be severe. On Monday the Minnesota Public Utility Commission agreed with an administrative law judge’s report that Qwest violated state and federal laws by failing to file interconnection agreements with the commission.

Under Minnesota state law, commissioners could revoke Qwest’s certificate to operate in Minnesota, a penalty that would require the phone company to sell its local operations. Qwest also could be fined up to $195 million, according to the commission’s staff.

The state regulator has extended the period for public comments from all interested parties to Nov. 8 and the commission is scheduled to discuss the possible penalties Nov. 19. The commission could make a ruling that same day, a person familiar with the matter said.

On Wednesday Qwest spokeswoman Bill Myers said the company hopes to file long-distance applications with the FCC for approval in Arizona and Minnesota by the end of the year. Qwest also said it plans to file applications in the "next several months" to provide long-distance service in New Mexico, Oregon and South Dakota.

Meantime, the Justice Department has conditionally recommended the FCC approve the carrier’s application filed Sept. 30 to provide long-distance service in nine states: Colorado, Idaho, Iowa, Montana, Nebraska, North Dakota, Utah, Washington and Wyoming.

The Justice Department has deferred a few matters to the FCC: verification that Qwest’s wholesale prices are appropriately cost-based and an allegation by a former employee that Qwest directed employees at a meeting to conceal results of a loop test from the FCC.

The former employee, Edward Stemple, left the company in September. After an investigation, Qwest found the allegations are "totally false," Myers said. Qwest plans to file sworn affidavits from Stemple’s co-workers that dispute his claims, Myers said.

In September Qwest withdrew its application to file for long-distance approval in nine states, citing regulators’ concern over its accounting methods. Regulators have raised questions regarding a section in the 1996 Telecommunications Act that requires a local phone company’s long-distance affiliate to maintain books records and accounts in a manner prescribed by the FCC.

Qwest disclosed this summer it improperly accounted for up to $1.16 billion in revenue over three years. The Securities and Exchange Commission and U.S. Attorney’s Office are investigating the company.

To allay regulators’ concerns over the company’s accounting methods, Qwest created a new long-distance subsidiary, Qwest Long Distance Corp.

However, AT&T Corp. maintains the creation of a long-distance subsidiary does not solve the carrier’s accounting woes. AT&T, the No. 1 long distance provider, filed motions last month with nine state commissioners urging regulators to provide evidence that Qwest’s new subsidiary is in compliance with Section 272 of the Telecom Act.

But Myers said "no commission has sided with AT&T on that motion" and all commissioners that took "formal action rejected AT&T’s motion.”

It is no surprise to find AT&T challenging the local incumbent. The largest inter-exchange carriers are struggling to stave off churn as the regional bell operating companies gain federal approval to offer long-distance services within their dominant territories.

In its third-quarter earnings announcement today, Verizon Communications Inc. disclosed it has captured 30 percent long-distance market share in Massachusetts and New York.

Qwest calculates the long-distance market is valued at $13 billion in its 14-state region. Even if the company could garner 20 percent market share in those 14 states, Qwest would boost its revenue by $2.6 billion.

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