D0412021 Decision granting CPCN to Blue Ridge Telecom Systems, LLC to provide limited facilities-based and resold local exchange telecommunication services

B. The July 19, 2004 Hearing on the Application

The next step in the process of revitalizing the Blue Ridge application occurred on July 19, 2004, when a hearing was held on the application. Blue Ridge's only witness at the hearing was Joseph Koppy, the president of NOS and the man who, along with Mr. Arnau, had been identified in the application as one of Blue Ridge's principal managers. Except for a handful of clarification questions, all of the questioning at the July 19 hearing was conducted by the ALJ.

Although Messrs. Arnau and Koppy are CEO and president, respectively, of NOS and the other companies named in I.02-05-01, neither of them owns any stock in these firms. Instead, 50% of the stock is owned by Robert Lichtenstein, 25% by Samuel Delug, and 25% by Delug's former wife, Rosette Delug. Lichtenstein is a director of NOS and the other companies, but Samuel Delug is not. (Transcript, pp. 6-7.) Koppy testified that so far as he is aware, the FCC has brought no proceedings against either Lichtenstein or Samuel Delug. (Id. at 25-26.)⁶ Koppy also stated that no civil litigation has been brought against the NOS companies based on the conduct described in the FCC's Winback Order to Show Cause;⁷ all of the private litigation of which he is aware relates to the marketing of TCU plans. (Id. at 20-21.)

Koppy also described the nature of the local exchange service offered by the NOS companies⁸ and the marketing thereof. First, he stated that the NOS companies offer local exchange service in about 40 states, and that in 90% of these states the local service that is offered consists of a combination of resold service and facilities-based service (using the unbundled network element platform, or UNE-P.). (Id. at 9, 14.) The only local service that the NOS companies currently offer in California is resold service. (Id. at 9-10.)⁹

According to Koppy, the NOS companies currently have about 6000 local exchange customers nationwide, and all the marketing of local exchange service is done in-house. (Id. at 14, 28.) In late 2001 and early 2002, the NOS companies employed about 20 people who marketed local exchange service, but today all the marketing of such service is handled by a single person. (Id. at 28, 32.) This person (who operates from the company headquarters in Las Vegas) obtains his leads for new customers from the long distance marketing, or "cold call," staff. Koppy stated that as the number of long distance customers of the NOS companies declined between 2000 and 2002, so did the number of local exchange customers. (Id. at 32-33.)¹⁰

According to Koppy, a principal reason the cold call staff declined during this period was that "it just became financially unfeasible for us to continue to try to sell cold call customers in the United States. Between the labor and the overhead and the drop in the retail price point and the competition, they weren't paying for themselves." (Id. at 33.)

As a result of these difficulties, the NOS companies have now outsourced their cold calling operations to a firm in Cairo, Egypt. Trial runs were conducted in Cairo beginning in November 2003, and full cold call operations were underway there by March 2004. (Id. at 27, 33.) The NOS management considers the cold calling staff in Cairo to be independent contractors, and they sell long distance service to customers in the United Kingdom and Australia as well as the United States. (Id. at 29-30.) Those who sell to the United States work off of standard marketing scripts devised in response to the consent decree that ended the FCC's TCU enforcement proceeding. (Id. at 30.) However, the cold call staff in Cairo does not sell local exchange service. Koppy stated that local exchange service is such a complex product that he thought it unlikely the Cairo marketers would be selling it in the foreseeable future. (Id. at 38.)

Koppy also testified that a significant fraction of the local exchange customers of the NOS companies receive a discount on this service. The company has a program called "Every Fourth Invoice Free," under which the customer receives a credit every fourth month equal to the average of the customer's monthly use during the three previous months. This promotion, which is in NOS's tariffs, is offered only when necessary to obtain a long distance customer's local exchange business. (Id. at 34-37.) The MacBride letter indicates that about 17% of the NOS companies' local exchange customers are on the Every Fourth Invoice Free program, while another 54% receive every sixth or ninth invoice "free."

Koppy conceded that the recent decision of the United States Court of Appeals in United States Telecom Ass'n v. FCC, 359 F.3d 554 (D.C. Cir. 2004), which invalidated significant portions of the FCC's most recent order on the UNE-P, has raised some doubts about the viability of Blue Ridge's business plan, but he still hopes that the company will be able to offer resold facilities-based service:

"Q. In light of [the D.C. Circuit decision] and the fact that it may be difficult to purchase UNEs in California in the near future, . . . [d]o you still think it's feasible for you in California to be offering facilities-based local exchange service?

"A. Well, if UNE-P truly does go away, then it's probably not very likely that we would be able to provide facilities-based resale. But based upon what our regulatory counsel has told us, there is a chance that, albeit slight, that UNE-P may survive in some form." (Id. At 11-12.)

At the conclusion of the July 19 hearing, the application was deemed submitted.

⁶ However, paragraph 2(g) of the "Winback Consent Decree," which is described on pages 10 and 15-17 of D.04-06-017, includes Lichtenstein and Samuel Delug in its definition of "affiliate." ⁷ The formal citation for this order to show cause, which appears in footnote 8 of D.04-06-017, is NOS Communications, Inc., Affinity Network Incorporated and NOSVA Limited Partnership, Order to Show Cause and Notice of Opportunity for Hearing, EB Docket No. 03-96, 18 FCC Rcd 6952 (April 7, 2003). ⁸ At the July 19 hearing, Koppy confirmed that NOS has the following affiliates and doing-business-as (d/b/a) names: 011 Communications, International Plus, Internet Business Association (INETBA), I-Vantage Network and Cierracom Systems. (Id. at 8.) NOS and these entities are collectively referred to hereinafter as the "NOS companies," unless the context requires otherwise. Koppy also testified that of the companies named in the two FCC enforcement proceedings, only the NOS companies are tariffed or certified to provide local exchange service; neither ANI and its affiliates nor NOSVA Limited Partnership and its affiliates are authorized to provide such service. (Id. at 12-13.) ⁹ On July 22, 2004, counsel for Blue Ridge, Thomas J. MacBride, Jr., sent a letter to the ALJ enclosing certain materials that had been requested at the July 19 hearing and providing more definite answers on points Koppy was unsure about. According to Mr. MacBride, the NOS companies offer local exchange service in 35 of the "lower" 48 states. In all of these states except California and Arizona, the local service is provided through a combination of resale and facilities-based arrangements, the latter using the UNE-P. Hereinafter, the July 22 letter will be referred to as the "MacBride letter." ¹⁰ Koppy also noted that cold calling and efforts to win former customers back are considered separate functions within the NOS companies, and that different staffs conduct these activities. However, depending on the companies' needs, some employees have moved from cold calling to the Winback Department, and vice versa. (Id. at 19.)