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City and Burlington Telecom likely to part ways, bankruptcy no option

first_imgBurlington Telecom,By Kevin Kelley, Vermont Business Magazine. Burlington Telecom appears to have little chance of surviving its debt crisis as a city-owned utility. But some financial experts say it’s possible BT could work a deal leaving the city with at least a minority stake in a reconfigured, non-profit ownership arrangement.Such a set-up would keep the advanced fiber-optic network in place as a local alternative to Comcast and other private, for-profit telecom businesses. And that’s an outcome many Burlington politicians ‘ not just Progressives ‘ say they favor.The administration of Mayor Bob Kiss, which has remained relentlessly optimistic throughout the crisis, suggests that salvation for BT could be forthcoming from private-equity firms and/or in-state telecom operations with which it is holding talks. Springfield-based VTel, the recipient of $116 million in federal stimulus funds, has already offered to lend BT equipment to replace what must be returned to BT’s private creditor, CitiCapital. Following last month’s breakdown of negotiations on the $33.5 million BT owes CitiCapital, the lender indicated it intends to repossess the telecom infrastructure it had financed.But that may not be the last word from CitiCapital, suggests Burlington Chief Administrative Officer Jonathan Leopold. He says talks between the city and the lender have not ceased. Leopold suggests some sort of financial agreement with CitiCapital might yet emerge.BT owes an additional $17 million that it also cannot repay. That’s the amount it borrowed from a city cash pool, allegedly beginning six years ago, in violation of an agreement BT had signed with state regulators. Burlington Telecom, city government and Chief Administrative Officer Jonathan Leopold are all targeted in a civil suit seeking payback of the $17 million to taxpayers.Given the track record of BT’s management, it’s not clear how the utility can hope to raise the $50 million needed to clear its debts. Burlington Telecom also needs additional millions to complete the buildout of its system and to conduct a marketing campaign that might enable it to corral more than its current total of 4700 customers. BT has, in essence, spent more than $10,000 to reach and service each of the homes and businesses using its network.The utility has also incurred $625,000 in expenses for the services of lawyers and consultants during the past 18 months. According to a memo to two city councilors from Assistant Chief Administrative Officer Scott Schrader’first reported by SevenDays columnist Shay Totten in a December 22 blog posting’the costs included $227,795 paid from the city’s general fund to the consulting firm Dorman & Fawcett for its representation of BT in the apparently unsuccessful negotiations with CitiCapital. Dorman & Fawcett have been paid another $76,000 for overseeing BT’s operations.Even if financial stability were somehow achieved, BT could still face penalties from the state for violating at least three conditions of its operating license, known as a certificate of public good. In addition to failing to repay borrowed city funds within 60 days, BT is out of compliance with a condition stipulating that the entire city be given access to its network. And an auditing firm retained by the state Public Service Department suggested last month that BT violated another condition by providing discounted telecom services to city departments.BT and city officials are looking to incoming Gov. Peter Shumlin, a Democrat, as a potential source of help. BT’s mess is probably not something Shumlin wants to get involved in, however. At the same time, he has expressed concern about the utility’s contamination of the credit rating of Vermont’s largest city. BT’s problems have also helped drag down the scores for Burlington International Airport and the municipally owned Burlington Electric Department. ‘I would anticipate that’s the beginning of a trend and not the end of a trend,’ Shumlin told Vermont Public Radio in regard to Moody’s Investors Service’s downgrading of the city’s rating.The governor-elect’s choice as his public service commissioner also does not appear eager to press for a bail out of BT. Liz Miller, a Burlington attorney with no experience in telecom regulation, called the audit’s critical findings ‘troubling.’ Miller added that Burlington taxpayers and ratepayers should be protected financially.Even though she may not be sympathetic to BT’s plight, Miller is still viewed by the Kiss administration and its allies as a potential improvement over Gov. James Douglas’ public service commissioner, David O’Brien. Progressives argue that BT’s troubles were worsened due to what amounted to a political vendetta carried out by O’Brien, a Republican.Then-City Councilor Marissa Caldwell, a Progressive, denounced O’Brien a few months ago as ‘a political hack.’ She charged the he and Douglas ‘only want private telecom in the state. He is out to get rid of the competition for private companies. That’s very clear.’As BT slid into financial disarray, some Progressives contended that the public utility’s options had been deliberately circumscribed by state regulators in an effort to ‘protect Comcast.’ It is argued, for example, that BT was being set up to fail because of the state’s refusal to give it access to public funds. One figure knowledgeable about BT’s history, who does not want his name used because of ties to city and state officials, sees irony in BT’s being fenced-off from taxpayer financing while VTel has gotten more than $100 million in taxpayer funds to build a telecom network for parts of Vermont lacking broadband connections.Those making such points do acknowledge, however, that BT agreed to abide by all the state’s conditions and then failed to do so.Kiss himself has not gone as far as some Progressives in blaming the Douglas administration for BT’s troubles, but he did take an indirect swipe at O’Brien in a response last month to the state-commissioned audit of BT. Carried out by the Michigan firm of Larkin and Associates, the audit ‘lacks credibility,’ Kiss said. ‘It is dated, incomplete and contains numerous omissions. This report has been characterized as independent, which is not true,’ Kiss added. ‘In reality, it was prepared for the Department of Public Service and David O’Brien in the context of an adversarial proceeding.’O’Brien incensed BT’s defenders by stating that the utility is ‘not viable’ ‘ a comment they took as an attempt to sabotage BT’s efforts to obtain new financing. The commissioner has also singled out the Kiss administration for strong criticism, charging that its officials ‘put their interests before the interests of the taxpayers.’For his part, Kiss specifically criticized the Larkin report on the grounds that the firm’s investigators had not bothered to talk with city officials or with a consulting firm retained by the city to manage BT.Some Progressives have also accused Burlington Democrats of wanting to wreck BT. They point to the City Council’s refusal a year ago to allow BT to move ahead in negotiating a $61.6 million loan on offer from Piper Jaffray, a Minneapolis investment firm. Council Democrats argued at the time that caution was the right response to any BT borrowing request, given the emerging dimensions of its financial problems.A commentary written in March 2010 by longtime Progressive activist and attorney John Franco accused the Democrats of ‘bloodlust.’ They were determined, Franco said, ‘to settle old scores with the Progressives that date back to Bernie Sanders’ upset victory in 1981.’ Franco’s broadside, published in SevenDays, said Democrats on the City Council ‘led a withering campaign against BT that went on for months, seemingly unmindful that BT is their own startup business.’Everything might still have turned out OK for Burlington Telecom, some of it defenders add, had it not been for the global financial crisis. The meltdown struck just as BT found itself in need of new borrowing. But the needed funds could not be found due to the freeze-up of equity markets, Leopold has said.The Larkin audit report implies, however, that BT has never been in sound financial shape.The utility was hobbled from the outset by delays in building its network and launching its services, which did not formally become available until May 2006 ‘ six years after Burlington voters had reaffirmed their approval of a city-owned telecom operation.BT began dipping into city accounts in 2005 during the mayoralty of Peter Clavelle, a Progressive ally. By September of that year the utility was out of compliance with the state condition requiring it to repay borrowed municipal funds within two months, the audit found.BT’s original manager, Tim Nulty, wrote in an online commentary on December 21 that there was nothing unusual about a capital-intensive investment, such as a telecom network, failing to break even in its first couple of years of operation. Nulty argued, however, that BT was fixed on a course toward profitability by the time he resigned in October 2007. ‘BT’s failure to reach profitability in early 2009 as originally projected had nothing to do with flaws in its business plan and everything to do with flaws in management after I left,’ Nulty maintained.His commentary did not address the allegation in the auditors’ report that Burlington Telecom had violated a condition of its licensing agreement during his tenure as its manager.A declaration of bankruptcy is a recourse often followed by entities with financial troubles as acute as those hounding BT. That option too is apparently unavailable to the beleaguered utility, however. Because it is city-owned, Burlington itself would have to declare bankruptcy in order for BT to gain relief from its creditors. And Shumlin and the State Legislature would surely block any move by the Queen City to declare itself unable to pay its debts.last_img

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