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Consumers should sit tight on Qwest's rock ride

It’s been a rough year for Qwest Communications. In July 2001, their stock traded at $27.74 per share. Exactly a year later, it had fallen to $1.11 under the shadow of federal inquiries into the company’s finances and an investigation for suspected criminal activities.

Like many corporations, Qwest’s fortunes appear to be following an infamous trajectory first traveled by companies like Tyco and Enron, where revenues were exaggerated, expenses disguised and the gap in between exploited for profit by executives.

Montanans are understandably concerned. Qwest is no faraway legend of the stock market boom but sells a real product to real people in Montana. Qwest is the primary local phone service provider to 14 western states, from Minnesota to Washington to Arizona.

But according to consumer advocates, Qwest, and public regulators alike, that very fact—the dependence of thousands of people upon its ability to provide local phone service—will be its strongest pillar of support during these rough times.

According to Ed Mierzwinski, director of consumer programs for the U.S. Public Interest Research Group, the most worrisome prospect—how Qwest would continue to provide service if it were to declare bankruptcy—is also the most reassuring, because portions of the company are a monopoly regulated in the interests of consumers.

“Local phone customers are in good shape,” Mierzwinski says. “Part of what [Qwest] does is regulated. Therefore, they’re forced to do certain things to keep business going. As much as it’s going to hurt investors, let’s hope it will be seamless for local phone users.”

According to Michael Dunne, a Montana spokesman for Qwest, the company has been in constant communication with the Public Service Commission (PSC) to ensure that it doesn’t violate its responsibilities to residents. Local phone service is the bedrock of the company, Dunne says, providing 80 percent of its revenue and 90 percent of its profits.

“We don’t anticipate it will affect local service, [although] we’re allowed to transfer money [between regulated and unregulated operations],” Dunne says. “We don’t believe we are going to go bankrupt. Despite financial challenges, we’re still bullish. We’re certainly not like the other telecommunication companies who are more reliant on less stable revenue streams.”

According to PSC Commissioner Bob Anderson, whether Qwest faces bankruptcy or simply self-directed rehabilitation, Montana residents could be affected by the current situation in two ways. First, Qwest may try to cut expenses by not investing in capital improvements and by reducing personnel. Nationwide, Qwest employs 53,000 people; in Montana, the company employs 500 people.

Laying off employees would have other immediate effects on consumers. US West, the predecessor to Qwest, had a long history of poor customer service. That supposedly changed when operations changed ownership, at least according to Anderson, but it’s not hard to imagine the company taking a step backwards. On the other hand, Qwest could try to solve its financial woes by asking the PSC for a rate increase.

Anderson, a 12-year veteran of the commission, cannot recall another instance in which a Montana utility was facing bankruptcy and multiple financial and criminal investigations.

“It’s unusual in this world because utilities are typically stable,” Anderson says.

This year the telecommunication industry has been rocked by the downfalls of multiple corporations, including WorldCom, Global Crossing and Adelphia Communications.

WorldCom, the second largest long-distance carrier in the country, admitted in June that it concealed $3.9 billion in expenses. That put Qwest Chief Executive Officer Richard C. Notebaert in the awkward position of distancing the problems at his company from those of WorldCom. WorldCom’s bankruptcy is the largest in U.S. history.

Global Crossing, a broadband provider, admitted in February that it was being investigated by the Securities and Exchange Commission as well as the FBI. And Adelphia admitted in April that it was under investigation for $2.3 billion in questionable loans to its chairman and his son. Adelphia filed for bankruptcy in June.

Qwest’s financial problems began in March, when the SEC initiated an investigation into Qwest’s financial statements for the past two years for allegedly overstating revenues. In July, Qwest admitted to being the subject of a criminal probe as well.

Most recently, Qwest announced that it will indeed have to revise its financial statements for the past two years. Qwest also warned federal regulators that it will miss an Aug. 14 deadline to certify its accounting. On Monday, Qwest stock closed at $1.69 per share.

Other recent Qwest actions include attempts to sell some portions of the company and expand others. For several months, Qwest has been accepting bids on QwestDex, its directory publishing business, in an attempt to raise cash.

And last month, Qwest filed an application with the Federal Communications Commission for permission to offer long-distance service to 380,000 phone lines in Montana. Similar applications were filed for Washington, Utah and Wyoming, which augment pending applications in five other states.

Dunne may be confident that Qwest can avoid bankruptcy with such maneuvers. However, even if the company does need to seek protection from its creditors, Mierzwinski and Anderson agree that the interests of consumers will be looked after.

“If [Qwest] were to file for total bankruptcy, the local telephone service would be the most valuable part they would have for sale,” Mierzwinski says. “Unless they completely drained it somehow, which would be difficult to do.”

However, in a bankruptcy, consumers are considered not for who they are, but what they provide, according to Anderson.

“[Consumers] don’t have ownership,” Anderson says. “They are a source of revenue.”

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