Qwest Mess

But don't panic about your Qwest phone service—yet.

While Qwest Communications struggles under the burdens of a $26 billion debt, potential bankruptcy, and at least three federal investigations into its accounting practices, should Seattle phone and Internet users be worried about telephonic interruptus? Not so far, officials say, though they're unsure whether the company's implosion and attempted recovery will lead to higher rates and surprise outages or service interruptions—more than usual, anyway.

"It's difficult to tell what kind of impact this will have on Washington customers," says consumer advocate Simon ffitch ("Two f's, lowercase, it's Scottish."). ffitch, of the state Attorney General's Office of Public Counsel, says it is the parent company, Qwest Communications International based in Denver, not Qwest Corp., the telecom subsidiary, that's hurting. "To our knowledge, Qwest Corp. is reasonably financially stable," he says, and the state, as part of an approval agreement for Qwest's $57 million purchase of Baby Bell US West in 2000, also has frozen phone rates until 2004.

But that doesn't mean Qwest can't make an emergency application to increase charges or to make operational changes. It has already cut services by eliminating 13,000 workers since September. A new CEO vows the company will bounce back from the troubles that have cost Qwest $100 billion in market value in the last year. But, whether it declares bankruptcy or not, the country's fourth-largest local phone carrier will need more revenue to pay its considerable tab. Sooner or later, that burden will most likely fall on its 29 million phone and Internet customers in 14 states, including 2.6 million in Washington.

Just this week, Qwest informed its customers and dejected shareholders that from 1999 through 2001 it applied its accounting policies "incorrectly" and will eventually "restate" its earnings. It couldn't say what the company's true value was, however, due to "inappropriate" financial practices—pretty much exhausting the corporate dictionary of euphemisms for lying, cheating, and stealing.

Atlanta-based telecom expert Jeff Kagan says he can't yet decipher what Qwest has in the works. "The bottom line for now is that they have a new management team in place," he says, headed by CEO Richard Notebaert, 54, respected former chief executive of phone giant Ameritech. "These are among the most ethical people I know," Kagan says of Notebaert and his managers. "Whatever needs to be fixed, I can't think of a better team to fix it." Notebaert, whose June hiring sent the company's sagging stock up 20 percent, has indicated he wants to take Qwest back to telephone basics, perhaps selling off its wireless phone business and its yellow pages, bringing in $10 billion to pay bills. ffitch says Washington and other states would want to share in such sales. "The ratepayer should get the benefits, under our agreement," he says. Notebaert, however, apparently plans to sell off those services state by state, starting with those that don't have the same benefits-sharing agreement as Washington.

That is comparatively positive news in light of the stock market's dive and the parade of America's CEOs in handcuffs, standing in court alongside accused bank robbers or taking the Fifth at congressional hearings. Still, the company is laboring under U.S. securities, congressional, and criminal investigations, part of the epidemic of corporate accounting and ethics scandals the Federal Reserve's Alan Greenspan says was spread by Wall Street's "infectious greed." Qwest spokesperson Michael Dunne told Seattle Weekly last week that the company still doesn't know what possible wrongdoing the Justice Department is investigating—three weeks after the company tersely acknowledged the probe and claimed that "the U.S. attorney's office did not disclose the subject matter." But among the suspected regulatory and congressional targets is former CEO Joseph Nacchio, who earned $27 million in salary and other incentives in 2001, and walked away with another $75 million after exercising his stock options, while his company was sinking in debt. Investigators are also reviewing a $4 million loan at a sweetheart 5.5 percent interest rate by Qwest to company president Afshin Mohebbi and are attempting to learn if the company's swapping of network space with other carriers was done in a way to inflate its bottom line.

If the company is to avert collapse, experts say, it needs to maintain or increase cash flow from local phone customers and grab new revenue, such as from long distance service. Qwest is awaiting the FCC's OK to do just that in Washington, possibly as early as October, says Dunne. He says the company indeed hopes its return to long distance service (which it gave up as part of the US West deal) will be "very beneficial to the financial health of the company." The state Utilities and Transportation Commission recently gave its blessing to re-entry, despite opposition from Attorney General Christine Gregoire. She's still upset there is only "token competition" in the local phone marketplace. The company controls 99 percent of the state residential service market.

The state did extract a number of Qwest/US West merger concessions to ensure improved service and equipment upgrades and can fine the company up to $20 million a year for failing to meet performance standards. But none of those conditions made Qwest mismanagement-proof. "We might see a request for emergency rate relief," says ffitch, and "service could take a hit. But we would hope the utilities commission would stand firm against having captive ratepayers bail out the unregulated parent corporation." For further information, please hold.


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