For embattled telecom Qwest Communications International Inc. , when it rains it pours. The newest addition to the company’s litany of woes: investigations that it bought competitors’ silence on regulatory matters through secret deals for access to its local phone network.
According to a report in the Wall Street Journal, state regulators are probing whether the Denver-based telecom gave some carriers better terms of use in its 14-state area in exchange for support of Qwest’s plans to add to its long-distance business. Qwest denied it did anything wrong, and has tried to head off state investigations by asking the FCC to issue a ruling.
In addition to investigations in Arizona, New Mexico, Oregon, and Utah, Qwest faces up to $200 million in fines in Minnesota after a yearlong investigation by that state’s Department of Commerce.
According to the Journal, the agreements centered on Qwest giving discounted access to its network in return for agreements not to oppose its proposals to offer long-distance service in its local-phone markets. One agreement under scrutiny required companies not to oppose Qwest’s merger with U.S. West. Another with Eschelon Telecom Inc. gave the company a $2.5 million discount in return for a pledge not to oppose Qwest returning to long-distance market in Minn.
The 1996 Telecommunications Act requires Baby Bells like Qwest to provide equal access to their lines, and to make all agreements public.
In a statement this afternoon, Qwest painted the investigations as much ado about nothing. “The agreements at issue are not about Qwest failing to allow competition,” said Steve Davis, Qwest’s senior vice president of policy and law. “The issue is about whether 11 contracts between Qwest and individual wholesale customers should have been filed with state public utility commissions.”
Qwest said it does not believe public disclosure was necessary, but it was willing to let the FCC decide.
The news added to the mounting pile of challenges Qwest faces. The company is already under investigation by the Securities and Exchange Commission (SEC) over its 2000 and 2001 earning reports. The SEC is also investigating Qwest’s dealings with bankrupt telecommunications firm Global Grossing. Earlier this year, the SEC issued staff recommendation that action should be taken against the company for not releasing some information when it acquired U.S. West in Jan. 2001 for $44 billion.
One analyst said the regulatory question itself wasn’t so troubling, as much as Qwest’s habit of treading in murky areas. “Other Bells have made similar deals (SBC’s investment in Covad comes to mind),” Morningstar.com analyst Michael Hodel wrote in a research note this morning. “But the idea that Qwest management didn’t disclose the terms of its deals, once again pushing the envelope of acceptable conduct, leaves us questioning the quality of the firm’s leadership.”
With the scrutiny of these many investigation, a general market skittishness over telecoms’ accounting practices in the wake of the Global Crossing meltdown, and weak demand from the economic recession, Qwest’s shares have been hammered. Since the beginning of the year, the company’s stock has lost 84 percent of its value. This morning, the shares gave back an additional 9 percent to trade at $5.23, an all-time low
With $25 billion in long-term debt on its balance sheet at the end of last year, Qwest has been cutting costs and lining up financing agreements to avoid the prospect of default. In February, it was forced to draw on $4 billion credit line to finance day-to-day operations after the commercial paper market slammed shut on the company when its credit rating was lowered.
