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HomeNewsArchivesFacing 'Unprecedented Financial Strain,' Vitelco Asks FCC to Change Accounting Rules

Facing 'Unprecedented Financial Strain,' Vitelco Asks FCC to Change Accounting Rules

Dec. 10, 2008 — Saying unusual expenses imposed by Hurricane Omar and the V.I. Public Services Commission had caused an "unprecedented financial strain," Vitelco has appealed to the Federal Communications Commission for a suspension of a recent ruling that Vitelco's lawyers say was a "draconian confiscation of nearly $1 million … we believe to be rightfully owed to the company."
As is the case with most such matters, the devil is in the details. A nonprofit corporation controlled by the FCC had recently changed the rules on its subsidy program in a way unfavorable to Vitelco. So Vitelco appealed to the nonprofit against the new rules, to no avail. Then Vitelco asked the FCC to hold the usual subsidy in place until Vitelco had a chance to argue for a modification of the new rules.
In a preliminary move, the FCC has agreed to part of the request, and has stabilized the subsidy until Vitelco has a chance to make its case.
While most financial and other corporations appealing to Washington for assistance take their case to Congress or the U.S. Treasury Department, Vitelco gets its funding from the ongoing subsidy program for stretched rural and insular phone systems run by the Universal Service Administrative Company (USAC), a nonprofit entity funded and controlled by the FCC.
USAC's subsidy of Vitelco, one of the largest in the States, currently runs about $25 million a year. That amount constitutes a major income component for Vitelco, whose finances remained secret for years when it was owned by Jeffrey Prosser, now in bankruptcy proceedings
The USAC program is supported by small additions to the monthly phone bills of tens of millions of urban telephone users on the mainland. The program is a grandchild of a New Deal program designed to bring telephone services to unserved rural residents of the United States.
E. Clarke Garnett, CEO of the phone company, told the Source that the initial USAC rules change — now held in abeyance by order of the FCC — was issued on "extremely short notice," and USAC "refused to hear our arguments against the decision and directed us to the FCC for … a decision."
The rules change apparently impacted, among other things, how storm damage to Vitelco's infrastructure was to be calculated in connection with the ongoing USAC payments.
According to the petition filed by Vitelco's communications lawyers, Wiley Rein,
Vitelco is "under unprecedented financial strain." The petitiion continued, "Absent relief from … accounting rules, Vitelco will face a significant and inequitable reduction in its high-cost loop [i.e., USAC] support that could be financially disastrous for the company," which it terms "the carrier of last resort in the U.S. Virgin Islands."
Wiley Rein made two specific requests of the FCC. It asked that the FCC waive two sections of its accounting rules, and that it order USAC to hold in abeyance until Feb. 28 the annual "true-up" of the universal-service subsidies. The USAC program distributes its funds, according to complex formula, on an advanced-estimate basis. Then, at the end of its fiscal year, USAC figures out how much is actually owed and sends additional money to the individual carriers, or sends them a bill to refund any overpayment.
The FCC has ordered USAC to hold the "true-up" in abeyance, as Vitelco requested, and will decide on the requested waivers later.
The financial benefit to Vitelco from the FCC decision to, in effect, freeze USAC subsidies (for awhile) at present levels can be calculated from an obscure corner of USAC's website. During the first nine months of 2007, the USAC subsidy to Vitelco averaged $2.2 million a month; in the first nine months of this year it declined (for reasons that are not immediately obvious) to an average of $1.7 million a month, and then in October it shrunk, suddenly, to $922,967. A spokesman for USAC said that the October number would be recalculated as a result of the FCC ruling, with the expected total closer to the average monthly payments made earlier this year.
The petition cited, with differing degrees of emphasis, three causes of Vitelco's financial problems, but did not mention a fourth factor. The heaviest stress was on Hurricane Omar, which ripped through the islands Oct. 16.
"It is estimated," the petition said, "that the network damage sustained from Hurricane Omar will result in a $2.5 million funding requirement related to the deductible portion of the company's insurance coverage."
The document said that the damage was "especially bad on St. Croix," where there was "massive damage to the wireline infrastructure."
As previous Source reports have indicated, the USAC program is nightmarish in its complexities. It focuses not on operating costs or people served, nor on profits or losses, but on investments in equipment and depreciation thereof. The formulae, and the new rules, are apparently unhelpful to Vitelco under current circumstance. The Vitelco lawyers have sought to explain the resulting complications to FCC's lawyers in terms that will be opaque to most readers, such as:
"Under this condition, the current study area [i.e., Vitelco] unseparated loop-cost algorithm at Section 36.621 of the commission's rules, incorporates a negative return component and eliminates the return on cable and wire facilities-related materials and supplies investment and deferred tax assets."
The second problematic financial factor, according to Wiley Rein, relates to the V.I. Public Service Commission: "Vitelco is also incurring extraordinary expenses related to the statutorily mandated earnings investigation of the company being conducted by the U.S. Virgin Islands Public Services Commission. The sum of the government's assessment for costs related to the rate case, which must be borne by Vitelco, in addition to Vitelco's own expenses in the proceeding, will exceed $1 million."
The petition only mentions in passing the huge ongoing financial problem of Vitelco: the long history of transferring funds from it and the other Prosser operating companies to fund the Prosser lifestyle. (See "Court Documents: Prosser Owes ICC More than $156 Million.") There were, however, muted references to the need to correct "past operations and financial-management practices."
Not mentioned at all are the ongoing costs of the U.S. Bankruptcy Court-appointed officials and their sets of lawyers and accountants. To the extent that they have been paid, a large portion
of their fees came out of the ongoing receipts of Vitelco and, to a lesser extent, other subsidiaries of Innovative Communications Corporation, the old Prosser holding company.
Vitelco's law firm in this case, the Washington-based Wiley Rein, is one of the nation's most prominent communications-law firms, and Prosser used it in the past. The name partner, Richard Wiley, served as chair of the FCC during the Reagan Administration. A former name partner, Fred Fielding — Richard Nixon's house lawyer during the latter stages of the Watergate era — left the firm about a year ago to become White House counsel for President George W. Bush. The firm was retained, with the consent of the bankruptcy judge handling the Prosser cases, by Stan Springel, the court-appointed Chapter 11 trustee for Prosser's former corporate properties.
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Dec. 10, 2008 -- Saying unusual expenses imposed by Hurricane Omar and the V.I. Public Services Commission had caused an "unprecedented financial strain," Vitelco has appealed to the Federal Communications Commission for a suspension of a recent ruling that Vitelco's lawyers say was a "draconian confiscation of nearly $1 million ... we believe to be rightfully owed to the company."
As is the case with most such matters, the devil is in the details. A nonprofit corporation controlled by the FCC had recently changed the rules on its subsidy program in a way unfavorable to Vitelco. So Vitelco appealed to the nonprofit against the new rules, to no avail. Then Vitelco asked the FCC to hold the usual subsidy in place until Vitelco had a chance to argue for a modification of the new rules.
In a preliminary move, the FCC has agreed to part of the request, and has stabilized the subsidy until Vitelco has a chance to make its case.
While most financial and other corporations appealing to Washington for assistance take their case to Congress or the U.S. Treasury Department, Vitelco gets its funding from the ongoing subsidy program for stretched rural and insular phone systems run by the Universal Service Administrative Company (USAC), a nonprofit entity funded and controlled by the FCC.
USAC's subsidy of Vitelco, one of the largest in the States, currently runs about $25 million a year. That amount constitutes a major income component for Vitelco, whose finances remained secret for years when it was owned by Jeffrey Prosser, now in bankruptcy proceedings
The USAC program is supported by small additions to the monthly phone bills of tens of millions of urban telephone users on the mainland. The program is a grandchild of a New Deal program designed to bring telephone services to unserved rural residents of the United States.
E. Clarke Garnett, CEO of the phone company, told the Source that the initial USAC rules change -- now held in abeyance by order of the FCC -- was issued on "extremely short notice," and USAC "refused to hear our arguments against the decision and directed us to the FCC for ... a decision."
The rules change apparently impacted, among other things, how storm damage to Vitelco's infrastructure was to be calculated in connection with the ongoing USAC payments.
According to the petition filed by Vitelco's communications lawyers, Wiley Rein,
Vitelco is "under unprecedented financial strain." The petitiion continued, "Absent relief from ... accounting rules, Vitelco will face a significant and inequitable reduction in its high-cost loop [i.e., USAC] support that could be financially disastrous for the company," which it terms "the carrier of last resort in the U.S. Virgin Islands."
Wiley Rein made two specific requests of the FCC. It asked that the FCC waive two sections of its accounting rules, and that it order USAC to hold in abeyance until Feb. 28 the annual "true-up" of the universal-service subsidies. The USAC program distributes its funds, according to complex formula, on an advanced-estimate basis. Then, at the end of its fiscal year, USAC figures out how much is actually owed and sends additional money to the individual carriers, or sends them a bill to refund any overpayment.
The FCC has ordered USAC to hold the "true-up" in abeyance, as Vitelco requested, and will decide on the requested waivers later.
The financial benefit to Vitelco from the FCC decision to, in effect, freeze USAC subsidies (for awhile) at present levels can be calculated from an obscure corner of USAC's website. During the first nine months of 2007, the USAC subsidy to Vitelco averaged $2.2 million a month; in the first nine months of this year it declined (for reasons that are not immediately obvious) to an average of $1.7 million a month, and then in October it shrunk, suddenly, to $922,967. A spokesman for USAC said that the October number would be recalculated as a result of the FCC ruling, with the expected total closer to the average monthly payments made earlier this year.
The petition cited, with differing degrees of emphasis, three causes of Vitelco's financial problems, but did not mention a fourth factor. The heaviest stress was on Hurricane Omar, which ripped through the islands Oct. 16.
"It is estimated," the petition said, "that the network damage sustained from Hurricane Omar will result in a $2.5 million funding requirement related to the deductible portion of the company's insurance coverage."
The document said that the damage was "especially bad on St. Croix," where there was "massive damage to the wireline infrastructure."
As previous Source reports have indicated, the USAC program is nightmarish in its complexities. It focuses not on operating costs or people served, nor on profits or losses, but on investments in equipment and depreciation thereof. The formulae, and the new rules, are apparently unhelpful to Vitelco under current circumstance. The Vitelco lawyers have sought to explain the resulting complications to FCC's lawyers in terms that will be opaque to most readers, such as:
"Under this condition, the current study area [i.e., Vitelco] unseparated loop-cost algorithm at Section 36.621 of the commission's rules, incorporates a negative return component and eliminates the return on cable and wire facilities-related materials and supplies investment and deferred tax assets."
The second problematic financial factor, according to Wiley Rein, relates to the V.I. Public Service Commission: "Vitelco is also incurring extraordinary expenses related to the statutorily mandated earnings investigation of the company being conducted by the U.S. Virgin Islands Public Services Commission. The sum of the government's assessment for costs related to the rate case, which must be borne by Vitelco, in addition to Vitelco's own expenses in the proceeding, will exceed $1 million."
The petition only mentions in passing the huge ongoing financial problem of Vitelco: the long history of transferring funds from it and the other Prosser operating companies to fund the Prosser lifestyle. (See "Court Documents: Prosser Owes ICC More than $156 Million.") There were, however, muted references to the need to correct "past operations and financial-management practices."
Not mentioned at all are the ongoing costs of the U.S. Bankruptcy Court-appointed officials and their sets of lawyers and accountants. To the extent that they have been paid, a large portion
of their fees came out of the ongoing receipts of Vitelco and, to a lesser extent, other subsidiaries of Innovative Communications Corporation, the old Prosser holding company.
Vitelco's law firm in this case, the Washington-based Wiley Rein, is one of the nation's most prominent communications-law firms, and Prosser used it in the past. The name partner, Richard Wiley, served as chair of the FCC during the Reagan Administration. A former name partner, Fred Fielding -- Richard Nixon's house lawyer during the latter stages of the Watergate era -- left the firm about a year ago to become White House counsel for President George W. Bush. The firm was retained, with the consent of the bankruptcy judge handling the Prosser cases, by Stan Springel, the court-appointed Chapter 11 trustee for Prosser's former corporate properties.
Back Talk Share your reaction to this news with other Source readers. Please include headline, your name and city and state/country or island where you reside.