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A group of telecom startups charged Tuesday that the Federal Communications Commission is rewarding a giant for squashing a dwarf. The Association for Local Telecommunications Services said the FCC should not have recognized a payment Verizon Communications made to NorthPoint Communications Group Inc. in August 2000 as helping to fulfill a requirement that the former Baby Bell make certain investments outside its principal operating region. NorthPoint filed for bankruptcy and was later liquidated after Verizon canceled their merger agreement. The FCC decided Monday it would count $90.5 million out of a $150 million payment that Verizon made to NorthPoint as part of its commitment to make at least $500 million in out-of-region investments in the three years following the June 2000 merger between Bell Atlantic Corp. and GTE Corp. The $65 billion merger produced Verizon. New York-based Verizon needed the FCC to recognize the NorthPoint payment if it was to satisfy a condition that the company invest $300 million outside its East Coast region by June 30, 2002. The agency said Verizon has made $387.9 million in such investments. ALTS, a Washington lobbying group funded by startup telecom service providers, said the FCC should not have recognized the payment because Verizon never used NorthPoint’s assets to offer out-of-region telecom services. “Verizon fabricated a patently absurd argument in its merger obligations to avoid having to compete out-of-region, and the FCC bought it,” said ALTS general counsel Jonathan Askin in a statement. “This end-run around Verizon’s merger commitment simply reveals Verizon’s utter fear of having to compete where it does not maintain monopoly control over the essential facilities.” Until it was liquidated in May 2001, NorthPoint was a member of ALTS. Verizon spokesman Bob Bishop said the FCC’s decision properly recognized that money was spent in an attempt to invest out-of-region, even if the deal itself was a failure. “The FCC correctly determined that some investments go sour,” Bishop said. In August 2000, Verizon agreed to combine its high-speed Internet business with San Francisco-based NorthPoint, a company dedicated to selling high-speed Internet connections to homes and businesses using digital subscriber line technology. Having had trouble operating its own DSL business, Verizon planned to turn over the management of its nationwide high-speed Internet operation to NorthPoint in exchange for a 55 percent stake in the new company. The merger agreement called for Verizon to invest $800 million in the company and contribute its own high-speed Internet network, valued at about $500 million. Verizon made its first $150 million installment toward the merger in September 2000. But Verizon that November called off the deal, charging that NorthPoint had misrepresented the health of its business. NorthPoint filed a $1 billion lawsuit against Verizon alleging a breach of contract, fraud and negligent misrepresentation. The discovery phase of the trial is expected to end this week, and the trial itself is scheduled to begin July 29 in San Francisco Superior Court. The San Francisco law firm Folger Levin & Kahn is to represent NorthPoint; Chicago-based Kirkland & Ellis is representing Verizon. NorthPoint, headed by a former USWest Corp. executive, was one of a handful of companies to get its start following the passage of the Telecommunications Act of 1996. The act forced the Baby Bells to open their networks to competitors on a fee basis. While the Bells were slow to embrace DSL technology, NorthPoint, Covad Communications and others were far quicker to market. Ostensibly looking for a partner to jump-start its troubled DSL program, Verizon agreed to a merger with NorthPoint. Once Verizon withdrew its support, other lenders canceled their parts of a $155 million financing agreement. Short on cash, NorthPoint filed for bankruptcy in January 2001. Unable to attract exit financing, the company had to sell its assets in May 2001 to AT&T Corp. for $135 million. Copyright �2002 TDD, LLC. All rights reserved.

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