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Vitelco Officials: Lowering Rates Could Make Company a Harder Sell

Nov. 9, 2008 — With the V.I. Telephone Co. going up sale for next month, a recent recommendation from consultants to the Public Services Commission to lower the company's rates by about 14 percent — or $4.8 million annually — will have a negative affect on the ongoing bidding process, according to phone company representatives.
"All we've asked for is to keep the rates stable," said Byron Smyl, managing director at Alvarez and Marsal, during a recent public hearing on St. Thomas. "The return the company is getting on its investment at this point is below the allowable 11.5 percent and should be maintained. Any rate reduction at this point would have a negative affect on the bidding process."
Vitelco is currently in the midst of a rate investigation by the PSC, which, by law, must occur every five years. The process has continued over the past week with a series of hearings meant to take testimony from the public, along with PSC consultants and Vitelco representatives, on the status of the phone company's operations. (See "Consultants Paint Grim Picture of Vitelco's Infrastructure.")
Only one member of the public showed up for the hearing on St. Thomas. No one showed up for the other two hearings held last week.
On Friday, representatives from Georgetown Consulting Group acknowledged that the PSC has, over the years, been lax in its dealings with Vitelco, but said it's now time to hold the company to higher accountability and financial-reporting standards. These sentiments were first put forth during a PSC hearing in September, when Georgetown principal Walter Schweikert asked commission members to begin treating Vitelco "like any other utility" by monitoring how the company's funds are being spent and requiring such things as the development of a capital-improvement plan.
Jeffrey Prosser's failure to meet his financial obligations to his many creditors has landed the phone company in the sale proceedings. During the years Prosser headed the company, the PSC refused to allow public access to Vitelco's audited financial reports, despite repeated requests by the Source.
Furthermore, in its rate investigation five years ago, the PSC also ignored the recommendations of its hearing examiner Fred Watts to reduce the rates, giving the phone company a 17-percent increase. Watts was subsequently replaced as the PSC's consultant on Vitelco. (See "PSC Approves 17 Percent Increase in Phone Rates.")
The increase was predicated on the promise by then Vitelco executives that the company had no intention of reapplying for Economic Development Commission tax benefits. However, it was later learned the company was already in the process of applying for those lucrative benefits. Later, Vitelco President David Sharp apologized to the commission for his failure to notify them of the application. (See "PSC Hears Apologies from Phone Company President.")
It its recent filings with the PSC, Georgetown has described Vitelco's current rates as "excessive," and takes issue with the fact that the company has asked the commission to keep them at the same level.
"They (Vitelco) claim that without excessive rates, the (Chapter 11 U.S. Bankruptcy Court) trustee will not be able to fulfill its obligations for the sale … to a new owner and that the expensive receivership process with the trustee at the helm will unfortunately have to continue," Georgetown wrote. "The commission's response to these claims should be that the trustee's problems are not within the purview of the commission, especially when they amount to asking the ratepayers be responsible for over $100 million of Vitelco liabilities that were never invested in the telephone plant."
It would be reasonable for the commission to stipulate that any agreement with a buyer should also come with requirements — such as a commitment to invest $75 million to $100 million in the company over the next five years, according to testimony provided by Georgetown's consultants during the hearing.
While Vitelco representatives said they weren't averse to the consultants' suggestions, they also said that tying a bidder down at this point with a variety of different conditions could also affect the sale process. Vitelco suggested that any specific condition be made during a transfer of control proceeding, as opposed to being outlined at during the rate investigation.
PSC hearing examiner David Nissman, a former U.S. Attorney, took a balanced approached in looking at the arguments. While acknowledging the need to set "fair and just" rates for the company, which should be based on quality-of-service issues, it is also clear that the company's new management team has not been hiding the facts, he said.
As hearing examiner, Nissman has been given the task of going through the testimony presented throughout the hearings, along with a variety of documents submitted by each of the players in the case, and presenting a list of findings to the commission. The PSC will then decide whether to adopt the hearing examiner's findings.
"This is a very unusual rate investigation because Vitelco, or the parent company to Vitelco, is currently going through a bankruptcy investigation," Nissman said Friday. "In this case, Vitelco has hired a team of independent experts that have produced information that could be very damaging to the company."
During the hearing, company head E. Clarke Garnett said Vitelco is currently in "band-aid mode," spending the past year trying to make upgrades in its plants, along with settling outstanding payroll and vendor obligations. Little of the company's revenues trickled down from the executive level over the years, resulting in low maintenance standards and an "antiquated" network that has been in place since the 1980s, Garnett said.
The PSC is expected to make a decision in the rate case before the sale in December, according to the commission's schedule.
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