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STATE OF VERMONTPUBLIC SERVICE BOARD
Petition of City of Burlington dlbla BurlingtonTelecom, for a certificate of public good tooperate a cable television system in the City ofBurlington, Vermont
Summary
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Docket No. 7044
DIRECT TESTIMOIIY OFJIM PORTER
ON BEHALF OF'THE,VERMONT DEPARTMENT OF PUBLIC SERVICE
JULY 3,2014
Mr. Porter testifies in support of the Petition frled with the Board on March 28,
20l4,and explains why the Board should find that the Citibank Settlement and
the Bridge Lease Financing promote the public good and therefore be approved.
Mr. Porter further recommends that Condition 17 of the CPG be amended and that
the Board approve the proposed Assurance of Discontinuance that will fullyresolve all outstanding CPG violations.
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Department of Public ServiceJim Porter, Witness
Docket No. 7044IulY 3, 2014Page I of12
Direct Testimonyof
Jim Porter
Please state your name and title.
My name is Jim Porter. I am the Senior Policy and Telecommunications Director
for the Vermont Department of Public Service ("Department"). My business address is
112 State Street, Montpelier, Vermont.
Please describe your professional background and experience.
I have worked for the Department since May of 2005 where I served as a staff
attorney until February of 2011 at which time I became the Director of
Telecommunications. In March of 2013,I became the Senior Policy and
Telecommunications Director. Prior to my employment with the Department, I was in
private practice.
a. Have you previously testified bef,ore the Vermont Public Service Board?
A. Yes. I have testified in Docket No. 7884..
Please describe the purpose and the structure of your testimony.
The purpose of my testimony is to present the recommendations of the
Department relating to the Petition of the City of Burlington to:
(1) Approve and Authorize Burlington to take such action as necessary for the City of
Burlington to implement the terms of a mediated settlement agreement (the "Citibank
Settlement") reached in Citibank, N.A. v. City of Burlington et al., Docket No. 2:11-cv-
214 (D. Vt.) (the "Citibank Lawsuit") to resolve all claims associated with Burlington
Telecom's lease financing with Citibank (the "Citibank Lease Agreement") and the
Citibank Action;
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Department of Public ServiceJim Porter, Witness
DocketNo.7044J'tlY 3,2014Page2 of 12
(2) Approve and authorize Burlington pursuant to 30 V.S.A. $$ 109 aîd232 to enter into
a $6 million dollar, five year bridge lease financing transaction (the "Bridge Lease
Financing") with a special pufpose lease finance entity to be formed, with Raymond
Pecor, III, as the managing member ("Lessot"), in order to effectuate the Citibank
Settlement;
(3) Amend the City's Certificate of Public Good ("CPG"), pursuant to 30 V.S.A. $ 231'
to reflect Lessor's ownership of certain of BT's assets, but subjecting Lessor to de
minimis regulation;
(4) Amend Condition No. 17 of Burlington's CPG, as further specified herein; and
(5) Approve the Assurance of Discontinuance ("AOD") to be entered into between the
City and the Department pursuant to 30 V.S.A. $ 509(c), which AOD is attached hereto
as Exhibit Joint-l, and to issue an order finding that with the actions outlined in the AOD,
BT is no longer in violation of its CPG conditions.
Please summarize the Department's conclusions and recommendations.
On September 13, 2005,the Board granted the City of Burlington ("City") d/b/a
Builington Telecom ("8T") a CPG to own and operate a cable television system within
the City. On August 9,2007, the City entered into a Lease/Purchase Agreement which
agreement was subsequently assigned to CitiCapital Municipal Finance, now Citibank,
N.A. ("Citibank Lease Agreement") to finance $33.5 million for the build out of the BT
system. In addition to this $33.5 million, BT used approximately $16.9 million from the
City's general fund for build out of the BT system between August of 2007 and October
of 2009 which use was in violation of the Burlinglon City Charter and BT's CPG. On
October 8, 2010, the Board issued an order in which it found that BT had violated
Condition Nos. 2, 17,56 and 60 of its CPG. On September 2,201I, Citibank, N.A.
initiated the Citibank Lawsuit in United States District Court for the District of Vermont,
seeking $33.5 million plus costs and punitive damages. On January 29,2014, the City
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Department of Public ServiceJim Porter, Witness
Docket No. 7044Jlly 3,2014Page 3 of 12
and Citibank, N.A. entered the Citibank Settlement, the terms of which stayed the
litigation pending implementation and approval of the Citibank Settlement. BT has
never reimbursed the City's general fund for the $16.9 million it appropriated in direct
violation of Conditions 56 and 60 of BT's CPG, which require that the general fund be
reimbursed within two months of withdrawal.
Regarding the violation of Condition No. 60, the Board found, "The City's
admitted conduct displayed a wanton disregard not only for a significant condition of the
CPG, but also for provisions of the city charter that were enacted by the state legislature
specifically to prevent such conduct."l The Department shares the opinion of the Board
as well as that of Mayor Weinberger who, in his prefiled testimony, states: "I was
appalled by the misconduct of my predecessors and particularly the expenditure of
taxpayer funds to pay for Burlington Telecom... '"2
In an action brought in Vermont Superior Court, the court found that the Chief
Administrative Officer ("CAO") of the City was notified in November of 2008 by the
City's outside counsel that BT was in violation of Condition 60 of its CPG and that the
violation had been occurring since January of 2008.3 At the time the CAO was informed
of the CPG violation, BT owed the City's general fund $10.8 million. However, BT
continued to spend money from the City's general fund and by December of 2009, BT
owed the City $16.9 million. The CAO never advised the then mayor of the CPG
violation and the then mayor was not told of the CPG violation until the City's outside
counsel notified him in a memorandum in April of 2009.4
As of this date of this filing the City has invested in excess of $50 million in BT
that remains unpaid with approximately $33 million owed to Citibank and $16.9 million
owed to the Burlington taxpayers. Based upon the revenues generated by BT, $50
million, $33 million or even $16.9 million is more debt than BT can repay. This debt,
and the uncertainty of the outcome of the Citibank Lawsuit, has resulted in the City
having a poor credit rating requiring it to pay a higher than usual interest rate which
I Docket No. 7044, Order of 10/8/2010 at 8.2 Prelrled Testimony of Mayor Miro Weinberger of 512912014 at2.3 Fred Osier, et ql., v. Jonathan Leopold, Docket No. S 1588-09 CnC, Ruling on the Merits,613l20l4, at p.9o td. Atro.
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Department of Public ServiceJim Porter, Witness
DocketNo.7044July 3, 2014Page 4 of 12
negatively affects the Burlington taxpayers.
As a regulator, the easy response to the current situation, which was caused by
the egregious conduct of those responsible for overseeing BT, would be to remove those
responsible for the CPG violations from their duties, require a sale of the asset, assess
fines, and require compliance with the violated CPG conditions. This was certainly the
course we took some years ago when another company holding a cable television CPG
violated its CPG conditions and suffered gross mismanagement. The case at hand
however requires a different approach for several reasons. First, the CAO of the City, as
well as the general manager of BT and most of the BT executive staff who were in place
at the time of the misdeeds are long gone and have been replaced. The City has elected a
new mayor who is committed to assuring the best resolution possible for the City and BT.
Second, if fines were to be assessed they would be bome by the taxpayers-who have
already lost $16.9 million and who bear no culpability for the misdeeds of those who
were responsible for the management of BT. Third, BT has had no more violations of
Condition 60 since the fall of 2010 and has agreed to the AOD that will ensure that its
CPG compliance continues. Finally, within five years BT will be sold to a private entity,
which will remove any further liability from the Burlington taxpayers and may provide
some amount of reimbursement for the $16.9 million.
a. Does the Department believe that the Citibank Settlement and the Bridge Lease
Financing will promote the general good of the State of Vermont?
A. Yes. First, I will address the Citibank Settlement that satisfies all claims against
the City and BT in exchange for a $10.5 million payment to Citibank.s The $10.5 million
payment will be comprised of the following: $6 million will be provided by the Bridge
Lease Financing, $500,000 will be provided by the City's insurance providers,
$1,468,915 million will be provided from McNeil, Leddy & Sheahan andlor its insurance
provider, $ 1 .3 million will be provided from a combination of a direct City payment and
use of BT retained earnings, 5260,235.07 will be provided from funds held by Citibank's
t Mediated Settlement Agreement, Exhibit Petitioner RR-l at 2.
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Department of Public ServiceJim Porter, Witness
Docket No. 7044July 3, 2014Page 5 of 12
counsel, $250,000 from monthly payments, and $720,850 from funds on deposit with the
Court. It is my understanding that the amount remaining on the Citibank Lease is in
excess of the original $33 million. As such, the Citibank Settlement allows the City to
extinguish the $33 million it owes under the Citibank Lease for $10.5 million, or roughly
33 cents on the dollar. It also fully settles the Citibank Lawsuit which, if continued,
exposes the City to a judgment possibly well in excess of the $33 million owed on the
Citibank Lease. In addition, the approval and effectuation of the Citibank Settlement is a
significant factor that could allow Moody's Investors Service ("Moody's") to upgrade the
City's rating.6 Although Moody's has recently upgraded the City's outlook from negative
to stable, the City continues to have a general obligation rating of Baa3. As Mr. Rusten
states in his prefiled testimony, "Baa3 is the lowest investment grade rating. Moody's
states that Baa3 ratings present a moderate long term credit risk with certain speculative
elements. Ratings below Baa3 areconsidered 'speculative grade' or 'junk bond' status."7
In 2010, Moody's also noted that "future rating action will depend on the city's ability to
produce a viable plan to place the telecommunications system on a more sustainable path
and provide additional detail of the prospects for the system to meet its obligations,
including repayment of the interfund loan. . .."8 It is undisputed that the current Baa3
Moody's rating is due in substantial measure to the issues related to BT and the Citibank
Lawsuit. The current low rating is a cost to Burlington taxpayers in that it is causing the
City to issue indebtedness at a higher interest rate. Mr. Rusten estimates that a change
from the Baa3 credit rating to an A credit rating would result in a I .7%o lower interest
rate.e As the Citibank Settlement allows the City to settle the $33.5 million debt under
the Citibank Lease for $10.5 million and presents a realistic ópportunity for the City to
obtain a higher credit rating that would allow it to issue debt at a lower interest rate,
approval of the Citibank Settlement will immediately limit the Burlington taxpayers'
financial exposure by some $20 million and will create apaththat will benefit the City
taxpayers in future reduced interest rates. The Department believes that limiting the
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A.DPS :Burlington Telecom. I -6 :
Prefiled Testimony of Robert Rusten of 3/281 2014 at 5
Id. at 10-ll.Id. at 13.
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Department of Public ServiceJim Porter, Witness
Docket No. 7044July 3, 2014Page 6 of 12
financial exposure of the Citibank Lawsuit and the prospect of lowered future interest
rates are sufficient in and of themselves to provide a basis for approval of the Citibank
Settlement. In addition, the Citibank Settlement anticipates "the eventual arm's-length
sale of the System to a private entity"lO which will further minimize the City's ltnancial
exposure.
I will now discuss why the approval of the Bridge Lease Financing promotes the
general good of the state. The City has presented four draft leasing documents to
implement the Bridge Lease Financing: 1) the Lease Agreement for the Lease of the
Telecom System Assets ("Telecom Lease");lt 2¡ the Management and Sale Agreement
(..MAS,');l' 3¡ theDeposit Trust Agreement ("DTA");13 and,4) the Real Estate Lease
Agreement for 200 Church Street ("RE Lease").to Mt. Dorman's Direct and
Supplemental Prefiled Testimony discuss in detail the benefits of the terms of the Bridge
Lease Financing; so I will discuss why the Bridge Lease Financing should be approved
from a policy perspective. Mayor Weinberger testified that the Bridge Lease Financing is
"...the only viable option to maximize the future recovery for the City's taxpayers,
minimize the losses they will otherwise bear as a result of the City's past conduct, and
completely resolve the $33.5 million litigation with Citibank."ls The Bridge Lease
Financing is necessary to effectuate the Citibank Settlement, and as I have already
discussed, approval of the Citibank Settlement is in the best interest of the Burlinglon
taxpayers. The Bridge Lease Financing anticipates a sale of BT to a private entity, and
the City is entitled to the following percentages of Net Sale Proceeds: 50% if the sale
occurs within 0-36 months of closing,35yo if the sale occurs within 37-48 months of
closing, 25Yo if the sale occurs within 48-60 of closing, and I0o/o after 60 months of
closing assuming there is no Event of Default.t6 While the City would have to share its
portion of the Net Sale Proceeds with Citibank, N.4., the Bridge Lease Financing does
r0 Mediated Settlement Agreement,Exhibit Petitioner RR-l at 6.t' Lease Agreement, Exhibit Petitioner Supp. TD-4 (512912014).12 Burlington Telecom Management and Sale Agreement, Exhibit Petitioner Supp. TD-5 (512912014).13 Deposit Trust Agreement, Exhibit Petitioner Supp. TD-6 (512912014)'to Lease Agreement,Exhibit Petitioner Supp. TD-7 (512912014).1s Prefiled Testimony of Mayor Miro Weinberger, 512912014 at 6'16 Burlington Telecom Management and Sale Agreement (Draft: 5.28.201Ð; Exhibit Petitioner Supp. TD-5
(s/2et2014).
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Department of Public ServiceJim Porter, Witness
Docket No. 7044July 3, 2014PageT of12
allow for the possibility that the Burlington taxpayers might recoup some of the money
that they have lost. Perhaps most importantly however, the Bridge Lease Financing
provides a cap on additional losses to the Burlington taxpayers.
It is difhcult to project the actual value, if any, to the City of the Bridge Lease
Financing at the time of the sale to a private entity. I can project what the additional
losses to the City would be in the worst case scenario which would be an uncured event
of default. In that event, the Lessor would have the right to offer the Telecom System for
sale, and the City would lose its interest in any of the Net Sale Proceeds. In addition, the
Lessor would have the right to purchase the building located at200 Church Street for
$100. The building has a current assessed value of $1,227,400. The additional exposure
in the event of a default would be loss of the initial $500,000 deposit in the Merchants
Bank operating fund, and the City would lose the $1.3 million from the Citibank
Settlement payment. In sum, the exposure to the City and its taxpayers in the event of an
uncured default would be $3,027,400.17 While there is no reason to assume that a default
will occur, even if it did, the additional loss of 53,027,400 is preferable to the uncertainty
of the outcome of the $33.5 million Citibank Lawsuit.
Do you believe that Condition No. 17 of the CPG should be amended?
Yes. Condition l7 of the CPG reads as follows:
17. BT shall build its network to serve every residence, building, and institution
in the City of Burlington within 36 months of the date of this CPG. Until such
time as BT's network meets this requirement, the Company shall file a line
extension report with the Department by April 15 of each year that provides the
following information relative to line extensions completed during the preceding
calendar year:
a. Location of line segment, including location of line segment by
reference to nearest road(s);
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A.
tt A.DPS:Burlington Telecom.l-13
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Department of Public ServìceJim Porter, Witness
Docket No. 7044July 3, 2014Page 8 of 12
b. Length of strand, in feet or miles;
c. Number of dwellings and multiple-unit business establishments
passed, without discounting seasonal dwellings or dwellings with a
satellite dish;
d. Date on which line was placed in service;
e. A street map and description of the streets and areas of the City to
which BT does not yet provide service. BT shall, atthattime, also hle
with the Department a projected completion date for line extensions to
any areas of the City to which BT does not yet provide service and an
explanation of the reasons for delay, if any, relative to the build-out
plan described by BT in its petition for a CPG.
Though supported by the Department at the time it was proposed, we did not
request or require BT to build out its cable plant to every address in Burlington. The
requirement for a build out to every service address came from BT. As Mr. Barraclough
testifies, BT was found to be in violation of CPG Condition 17 for failure to build out to
all of the addresses within the public right-of-way. To date there remain 1,913 addresses
within the City's public right-of-way that are not passed by BT. The most current
estimate to provide service to the 1,913 unserved addresses is $3,661,621for which BT
has insufficient cash flow after debt service to complete the build out. There is an
existing cable provider in the City who can provide service to the 7,913 addresses that are
unserved by BT. Board Rule 8.313(I) reads in relevant part that "No cable company shall
be required to overbuild another company...." Accordingly, I think it appropriate to
amend Condition 17 as the City requests on p.10 of its Petition, with the additional
requirement for BT to comply with the Cable Television Rules under Section 8.000 of the
Board Rules, including the line extension provisions, and to remove the part of Condition
17 thatrequires it to serve every "residence, building and institution in the City of
Burlington...."
a. Please describe the Assurance of Discontinuance the Department has negotiated with the
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Department of Public ServiceJim Porter, rùy'itness
Docket No. 7044July 3, 2014Page 9 of 12
City and explain why its approval is in the public good.
As discussed earlier in my testimony, the Board has already found that the City
and BT violated Conditions 2,17,56 and 60 of its CPG. The Board further found that
these CPG Conditions were material provisions of the CPG for purposes of 30 V.S.A. $
509(b), which reads in relevant part, "If the Board finds that a company has violated any
material provision of its certificate or this chapter, it shall allow the company a
reasonable opportunity to cure the violation." The violation of Conditions 56 and 60
occurred over a sustained period of time, and there was a city official who knew of'the
violation and failed to call it to anyone's attention - much less cure the violation. The
violation of Condition 60 has caused the Burlington taxpayers to experience a loss of
$16.9 million for which I believe they will likely never be reimbursed. Vy'ere BT an
investor owned utility I would recoÍìmend that the Board require reimbursement to the
taxpayers the $16.9 million they are owed. In this instance however, the Burlington
taxpayers have been unwitting "investors" and to require repayment andlor impose
penalties would only fuither exacerbate the wrongs that have been perpetrated upon
them.
Further, I believe that since the fall of 2010, the City has taken appropriate action
to ensure that further violations would not occur, and in fact they have not. As explained
in the testimony of Mr. Barraclough, Dorman and Fawcett ("D&F") was retained by the
City as its financial advisor in March of 2010, and in September of 2010, D&F assumed
the additional responsibilities of overseeing the day-to-day operation and management of
BT. D&F caused an internal rcorganizaiion of BT that included lowering its operation
and staffing costs, and since the fall of 2010, BT has been managed to a positive cash
flow. In addition, there only remains one manager at BT who was in place in the fall of
2010.
As Mr. Rusten states in his testimony, there has been no violation of Condition 60
since 2010 in that the City has been properly reimbursing the General Fund Main
Operating Account for any BT expenses. As explained in the proposed AOD, the City
will implement the following financial and accounting protocols to ensure that no further
violations of Condition 60 occur:
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Department of Public ServtceJim Porter, Witness
Docket No. 7044Iuly 3,2014
Page l0 of l2
o All revenues from the use and operation of Burlington Telecom will be directly
deposited to a trust account established by the City at Merchants Bank.
o The City shall establish a new segregated operating account for BT at Merchants
Bank.
o The City shall pay all operating expenses of BT directly from the BT operating
account.
o The City shall pay all lease payments on the Bridge Lease Financing solely from
BT revenues and will not use any general fund monies or tax revenues to make
any such payments.
o The City shall perform an internal monthly closing of its books within 15 days of
the end of the prior month.
o The City shall establish a separate general ledger for BT.
o The City shall meet with representatives of the Department on a quarterly basis
to discuss progress related to BT's operations, frnances, and pending sale of the
system.
o The City shall operate BT on as close to a stand-alone basis as is commercially
and legally practicable.
o The City shall submit a three year business plan within six months of issuance of
a Board order in this proceeding. The Business Plan shall include capital
spending, financing and marketing/sales plans, and forecasted income statement,
balance sheet and cash flow statements for a three year period starting on the
date of a Board order. The Business Plan will be submitted under confidential
seal. Every six months the City shall report to the Department on the progress
under the Business Plan.
o The City shall continue to file monthly reports with the Board and Department
detailing the status of BT's ongoing operations and financial status, as well as its
activities and progress in finding a private buyer for an ultimate sale of BT, in
accordance with the Board's Order in this proceeding.
o The monthly reports shall be f,rled with 15 days after the end of each calendar
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A.
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Department of Public ServiceJim Porter, WitneSs
Docket No. 7044July 3, 2014
Page ll of12
month.
o The City shall file quarterly reports shall include an income statement, balance
sheet, and cash flow statement, as well as financial information for and as of the
end of the previous quarter which shall continue to include sources and use of
cash and proflt and loss statements:
o The quarterly reports shall include an accounting of any expenses related to BT
that are made from the City's general fund and are not charged to BT along with
an explanation and description ofeach such expense.
o The City shall also submit monthly an uffeconciled cash flow statement for the
BT operations.
Prior to the filing of this Petition, the City and BT had taken steps and initiated
changes whereby BT came into compliance with Conditions 56 and 60. In the proposed
AOD BT has agreed to further steps to ensure that no violation of Condition 60 will
occur. I believe that the requirements set forth in the proposed AOD are sufficient to
ensure that no further violations of Condition 60 occur.
How can the Department recommend that it is in the public good to approve this Petition,
the result of which is to effectively forgive the $16.9 million that has been
misappropriated from the Burlington taxpayers?
Quite simply I do not believe there is a source available from which the $16.9
million can be recouped. If I believed there was a source available the Department would
recommend that it be vigorously pursued. I do know that the City faces a $33.5 million
lawsuit that exposes the City and its taxpayers to a liability far in excess of $16.9 million.
I further know that those responsible for the $16.9 million loss to the City's taxpayers are
no longer in the City's employ and are beyond the reach of our jurisdiction.
As frustrating as it is to not be able to rectify the past, it is within the power of the
Board to ensure no further losses in the future. For the reasons provided in my testimony,
I believe that approval of the Citibank Settlement, Bridge Lease Agreement and the
proposed AOD allow the best opportunity to ensure a quantifiable cessation of further
harm and the potential for some recovery when BT is sold to a private entity.
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Department of Public ServtceJim Porter, Witness
Docket No. 7044JulY 3,2014
Page 12 of 12
a. VAN is a party to this proceeding. Are you aware of any concerns that VAN has and ifso do you a recoÍìmendation regarding those concerns?
A. I have not seen VAN's testimony but I am generally aware of some of their
concerns, particularly how BT having new ownership might affect the AMOs. While I
am not unsympathetic to their concerns and understand that under the current proposal
title to BT will pass to Mr. Pecor, as explained in the Bridge Lease Agreement, I do not
believe the instant proceeding will have any effect on the AMOs. The current agreement
does anticipate afuture sale to a private entity and I believe that it will be during that
proceeding that the issues raised by VAN should be addresses by the Department and the
Board.
Does this conclude your testimony?
Yes.
I 5 18638 1. I
a.
A.