Embattled Corporation Commissioner's Conflict Of Interest May Extend To Broadband

KJZZ | By Will Stone

Published December 1, 2015 at 12:27 AM MST

One of Arizona’s top regulators could soon be out of a job.

On Monday, Arizona Attorney General Mark Brnovich filed a petition with the state Supreme Court alleging that Corporation Commission Chair Susan Bitter Smith is violating state conflict of interest laws and should be removed from office.

Bitter Smith’s relationship with the telecommunications industry — part of which she regulates — have been under scrutiny in recent months after a local attorney filed a complaint with the state.

“This isn’t one of these instances where this was maybe somebody skating too close to a line, or maybe somebody that had gone into a grey area. I think the law is very clear on this case,” Brnovich said.

Brnovich cited a variety of ways the commissioner’s regulatory powers conflict with her lobbying for the cable television industry, including broadband. Now others are raising questions about whether Bitter Smith's possible conflict of interest in that area goes deeper than previously reported.

Rural Areas Struggle With Broadband

Between 2010 and 2013, Galen Updike was wrestling with a digital dilemma. While cities enjoyed readily available high-speed internet, the same was not true for rural Arizona.

“We had really, really bad deficits in broadband in the rural areas of the country. Arizona was particularly hurt because our separation of connectivity was so much larger,” Updike said.

At the time, Updike was part of a team of state employees and consultants tasked with mapping the availability of broadband, outlining the barriers to broadband in rural areas and devising policy recommendations, among other things.

A frequent voice throughout that process, Updike said, was Susan Bitter Smith, the director of a cable industry trade group.

“The only reason for Bitter Smith to be there was to talk about telecommunications policy, broadband policy,” Updike said.

In November 2012, Bitter Smith was elected to the Arizona Corporation Commission, the state’s powerful regulatory body responsible for overseeing public utilities, from electricity to water to telecommunications.

While the commission does not regulate cable television or broadband, it does oversee the telephone services of companies like Cox Arizona Telecom and Suddenlink, which market and sell their products in a bundle of internet, cable and telephone.

“Nobody, but nobody, believes these corporations are separate. When you get your bill from Cox at the end of the month, all the services are bundled. It comes through your house on one line,” said attorney Tom Ryan, who filed the complaint with the Arizona Attorney General’s office seeking Bitter Smith’s removal from the commission.

Bitter Smith has refuted Ryan’s complaint, arguing her connections to the cable industry have no overlap or conflict with her regulatory responsibilities as defined by state law.

“The telephone entities of the cable world are separate corporate entities. They have separate identities; they have separate regulatory schemes; they have separate fees; they pay taxes separately,” Bitter Smith said during an interview with KJZZ in mid-November.

For that reason, the commissioner said her involvement in state broadband policy on behalf of her cable association was entirely permissible. For example, Cox Communications Arizona LLC is a member of Bitter Smith’s association as opposed to the telephone branch, Cox Arizona Telecom, which is regulated by Bitter Smith and her fellow commissioners and not a member of the association.

The Broadband Problem

Increasingly, broadband is a matter of survival for rural communities — from economics to education to public safety.

Just this year, the Federal Communications Commission found that 80 percent of rural Arizona lacks a connection speed that fits the federal definition of broadband. In the urban areas of the state, that number is only 10 percent.

Updike was acutely aware of this so-called “digital divide” while working on broadband and telecom issues for the state from 2003 to 2013. He is also a former Republican legislator and past president of the nonprofit Rural Telecom Congress.

A frequent challenge Updike encountered during those years, he said, was that major cable providers had little incentive to build out broadband in the less-populous areas because the return on investment is too low. The poor connectivity in rural communities became more apparent as his team asked the public to run tests, tracking their speeds of connection.

“All the broadband providers were cherry picking — going after the high easy places to put broadband into where there’s high concentration of population dollars,” Updike said. “And basically the low population areas, the rural areas of the state of Arizona, are sucking wind. They have no possibility for it.”

Supported by federal grant dollars, Arizona’s broadband effort involved myriad working groups, overseen by the now-defunct Digital Arizona Council, consisting of representatives from educational institutions, state and local government and the cable telecommunications industry, among others. The findings and policy recommendations were intended to take the form of a weighty report, the Arizona Strategic Broadband Plan, which would serve as a roadmap for bringing broadband to more of the state’s residents and institutions.

But the contention that cable providers were not adequately meeting the needs of rural Arizona did not sit well with Bitter Smith or her association’s members.

A letter from her to the Digital Arizona Council dated Nov. 5, 2012, spelled out the objections of the “cable telecommunications" industry to the draft of the broadband plan and “a number of areas in the document” that her association could not support. Among those, Bitter Smith took issue with the team’s data, which contradicted her association’s estimate that the cable industry had the “collective ability to provide broadband service to 96 percent of the state.” She also criticized a proposal to establish a broadband mapping program “for which there is no documented supporting data indicating any real ongoing benefit to anyone.”

In a separate letter, a Cox Communications employee, who was also on the Council, raised concerns about the plan and its focus on availability, rather than adoption. Essentially, Cox argued the state should not take such an active role in expanding broadband networks, but instead encourage more people to purchase the existing broadband offered by the cable industry.

The day after delivering her letter, Bitter Smith was elected to the Arizona Corporation Commission, which she currently chairs.

Public records indicate Bitter Smith stayed active on broadband and telecom issues, even after taking office in January 2013.

A series of emails from March 2013 show Bitter Smith arranged at least one meeting with representatives from Cox, CenturyLink, Cable ONE, AT&T and the head of the agency in charge of the broadband initiative, former Department of Administration Director Brian McNeil.

The subject line reads: “Meeting w/Susan Bitter Smith re: telecommunications.” A calendar invite specifies that meeting was held in McNeil’s office on April 2, 2013.

A document with the agenda from a meeting of the state’s broadband mapping team references that April 2 meeting between Bitter Smith, McNeil and lobbyists, saying “They [Cox, CenturyLink and Bitter Smith’s association] presented their standard talking points about the extent of cable coverage in Arizona. They seem to object to the goals and existence of the Digital Arizona Program.”

When asked by KJZZ about the reason for that meeting, Bitter Smith said it was primarily concerned with broadband deployment and data collection.

“Answering questions about how the data was collected, what are the challenges for broadband deployment … those were, I think, the general issues that were discussed. I can’t precisely tell you what everybody said in every single instance, but that was the purpose of the meeting,” Bitter Smith said.

Bitter Smith said there was nothing improper about such a meeting “since there’s no role of the commission in broadband deployment.”

Still, the Department of Administration, which manages government procurement, earlier this year awarded contracts to companies that go before the commission, like Cox Arizona Telecom, LLC, Mercury Voice & Data, LLC d/b/a Suddenlink Communication, CenturyLink d/b/a Qwest Communications Corp, and AT&T Corp for “carrier and broadband provider services” as part of a federal program, known as E-Rate.

Updike and several sources close to the broadband initiative said Bitter Smith was a regular and influential voice during 2012 and early 2013 on broadband policy and the plan, attending meetings with various state employees and stakeholders.

“She was consistently involved and a factor throughout 2012 in opposition of the state broadband plan,” Updike said.

Aaron Sandeen was the former Chief Information Officer for the State of Arizona at that time and oversaw the broadband initiative. His characterization of Bitter Smith’s involvement was more tempered. He only met with Bitter Smith a couple times, he said, and always viewed her as representing the interests of the cable industry.

“She was a stakeholder providing valuable feedback. I was never aware of her status (as a candidate or commissioner) and never thought she overstepped,” Sandeen said.

Bitter Smith Under Fire

Bitter Smith has long billed herself as a telecommunications expert, from the biography on the website of her small business to lobbying ads published in a trade magazine.

While in office, she has maintained her status as a registered lobbyist for Cox Communications Arizona, LCC and lobbyist/director of the industry group, the Southwest Cable Communications Association. Representatives from the cable side of Cox and Suddenlink sit on the association’s board and approve her $150,000-plus annual salary, which she collects in addition to her state salary.

Bitter Smith and her husband also run a public affairs firm, Technical Solutions, which has had clients in the telecom industry.

These connections have faced heightened scrutiny since August when KJZZ first reported on a possible conflict of interest. Past interviews with two former commissioners, a former attorney general and legal scholars have yielded mixed opinions on the extent to which Bitter Smith’s business ties put her in violation of the conflict of interest law that applies to commissioners.

The statute reads:

“A person in the employ of, or holding an official relation to a corporation or person subject to regulation by the commission, or a person owning stocks or bonds of a corporation subject to regulation, or a person who is pecuniarily interested therein, shall not be elected, appointed to, or hold the office of commissioner or be appointed or employed by the commission. If a commissioner, or appointee or employee of the commission becomes the owner of such stocks or bonds, or becomes pecuniarily interested in such a corporation involuntarily, he shall within a reasonable time divest himself of such stocks, bonds or interest. If he fails to do so, he thereby vacates his office or employment.”

Since Bitter Smith took office in 2013, the commission has voted at least seven times on matters involving companies related to members of her cable association. She has recused herself from some of those votes and participated in others. Bitter Smith has said any decision to abstain from voting was out of a desire to be transparent and for “optics sake,” not because she had a legal obligation to do so.

Nonetheless, these relationships with the telecom industry, as well as the activity of her public affairs firm, struck attorney Tom Ryan as a major violation — serious enough to merit her removal from office.

Among other things, his complaint to the attorney general highlights how the various services offered by Cox cannot be entirely teased apart.

For example, a report from Cox, cited in the complaint, discusses the effectiveness of bundling telephone, internet and cable, including a substantial uptick in new telephone customers between 2006 and 2007 thanks to this marketing strategy.

GovNet Allegations

According to Updike, Bitter Smith’s attempts to influence broadband policy went beyond simply providing input on the state plan.

During a meeting in early February 2013, Updike said Bitter Smith and Cox Communications lobbyist Susan Anable approached him and several others working on the plan. He said Bitter Smith solicited their help in trying to cancel the state contract with a company called GovNet Inc., which had previously received $39 million in federal funds to expand broadband in rural Arizona.

“(Bitter Smith) was saying that many of the customers that GovNet had made contracts with were not being fulfilled. There was a better alternative. You’ve got existing cable companies in the area that are having now to compete against these dollars that came in from the federal government,” Updike said.

“‘Can you help us get rid of GovNet’s contract?’ is what the request was,” recounted Updike. “It took my breath away.”

Bitter Smith’s account of that meeting differs. She pointed out that GovNet was, at the time, under audit by the federal government.

“I don’t recall saying, 'Can you cancel the contract with GovNet?' I do think, though, that it’s fair to suggest that those in the room collectively were asking about the status of the contract and would it continue? And would it make sense if it’s under federal review and financial audit? What were the next steps? Whether that could be translated as would you cancel it? I don’t know,” said Bitter Smith in response to Updike’s allegations.

Bitter Smith added that Updike is a major supporter of GovNet and approaching him with such a request would not have made sense.

Among the people who were in that meeting, there are differing accounts of what was said. Some agree with Updike’s account of the GovNet conversation, but others do not.

A Cox Communications spokesperson issued a statement on behalf of Anable.

"While concerns about GovNet were well known and broadly discussed during that time frame, I was not present in any meetings where state employees were asked by anyone to cancel the State's contract with GovNet," said Anable in the statement.

Bitter Smith’s opposition to GovNet can be traced back to April 2010 when she wrote a letter to the governor’s office critical of awarding federal grant dollars to the company.

“Our chief concern with the following applications is that they are all proposing to build broadband transport networks and/or provide broadband services to communities/areas where Arizona’s cable industry and others are already offering broadband …” Bitter Smith wrote on behalf of her cable association.

When contacted by KJZZ, GovNet said it could not comment on the story.

Anable also pushed back against any implication that Bitter Smith was lobbying for Cox or that her involvement in the state’s broadband efforts were inappropriate.

“Cox had its own representatives involved in the development of the State Broadband Plan and were not represented by Susan Bitter Smith on this issue. Further, the State Broadband Plan was developed prior to Ms. Bitter Smith being elected to the Commission, which has no jurisdiction over broadband service,” she said in the emailed statement.

Broadband And The Arizona Corporation Commission

Broadband “commonly refers to high-speed Internet access that is always on and faster than the traditional dial-up access,” according to the Federal Communications Commission, which regulates internet. It can be transmitted using a variety of technologies, including Digital Subscriber Line (DSL), cable modem, fiber optic and wireless.

The Arizona Corporation Commission does not have jurisdiction over broadband, but it does oversee telecommunications that can rely on the same delivery mechanisms.

The corporation commission’s website states that internet “utilizes the cellular/digital system, traditional landline service and other systems such as cable to connect digital communications.”

“(Broadband and telephone) share some infrastructure at a minimum. And if they are owned by the same company, they may share more resources,” said Mark Goldstein, who worked on the state broadband plan and runs the consulting company International Research Center.

“They’re often carried on the same pipes, at some point the services coalesce. They’re billed under the same consumer bill,” he said.

Among its goals, the state’s broadband effort was aimed at improving and expanding what is known as “middle mile,” the stretch of infrastructure linking a community’s network to the metro areas where the major carriers are.

By building out broadband, a company might also improve the resiliency and redundancy of its telephone networks, Goldstein said.

“There is some overlap of interests. But in terms of regulatory structure, they are treated separately, and I never really encountered her [Bitter Smith] acting on behalf of telephony’s specific interests. Cable interests might serve telephony’s interests; better infrastructure for one is better infrastructure for another,” said Goldstein.

Bitter Smith maintains the commission has no jurisdiction over broadband.

Still, a company that offers broadband, for example, might use the public telephone network and, in order to do so, needs approval from the commission.

Voice Over Internet Protocol (VoIP) — essentially broadband-based telephone — is a prominent example.

“(VoIP) is still going to utilize the telephone network,” said Allen S. Hammond, professor at the Santa Clara University School of Law and director of the Broadband Institute of California.

Hammond said a user may also have access to fiber or cable, but “you’ll be traveling over lines that are part of the telephone system, part of the public switched network, as well,” he said.

Some companies “are regulated by Commission-approved tariffs, which set the maximum rates the companies can charge customers for VoIP and impose other conditions on operating in Arizona,” according to Brnovich’s petition with the Arizona Supreme Court.

Despite the regulatory separations, Hammond said from an infrastructure perspective broadband and the telephone network are “connected.”

“It’s unwise to think of telephone separately from video separately from other types of data because it’s traveling over the same network, even though that network has various portions that are fiber optic, coaxial cable, or some hybrid mix, but they are doing the functions, and they are connecting the vast majority of people,” Hammond said.

From a business standpoint, Hammond said the telephone side of a provider and the cable or broadband side cannot be easily insulated from each other, either.

“I may have to operate my various divisions consistent with the law that governs that particular division, but it’s not as if I’m not, at the end of the day, sitting down in a boardroom and understanding that I have these divisions that are all reporting in as to what they are doing,” said Hammond.

The commission’s regulatory authority can have other implications for broadband providers, as well. For example, in February of this year, Level 3 Communications — described as providing “high quality voice and data services to enterprise, government, wholesale and carrier customers over its IP-based network” — requested the commission exempt it from certain rules related to financing.

At times, the commission also manages transactions between public service corporations that relate to broadband. For example, the commission approved the 2011 merger of CenturyLink and Qwest Communications and, according to a press release, “as part of the approval process, the companies committed to investing a minimum of $70 million in broadband infrastructure.” Earlier this year, CenturyLink d/b/a Qwest Communications Corp filed an application with the commission seeking to classify some of its services as competitive and for the ability to adjust rates. The basis for that, cited in the filing, is the growth of the broadband market and VoIP.

Bitter Smith Response

Bitter Smith rejected the notion that these regulatory responsibilities conflict with her efforts to influence broadband on behalf of cable companies.

She reiterated that broadband services are not within the jurisdiction of the commission and therefore no conflict exists.

When asked how VoIP was not relevant to broadband, Bitter Smith said “Voice Over Internet Protocol is not broadband, so you need to make sure that’s very clear ...”

Later in the interview, she said the commission only regulates telephone entities with Certificates of Convenience & Necessity and VoIP entities do not require those.

“Anyone in that business who wants to diversify and do something differently would need to set up that separate corporate entity and come forward and get a CC&N (Certificate of Convenience & Necessity) that component would necessarily be regulated by the commission, not the other aspects of what they are doing in other realms,” Bitter Smith said.

She also said the commission has no authority over rates related to broadband, how those services are dispersed or how they market them.

As recently as June, Bitter Smith has spoken publicly about broadband regulatory issues when she participated in a policy discussion hosted by the Internet Innovation Alliance, which was titled “The Role for Regulators in an Expanding Broadband Economy.”

During that panel, the moderator asked Bitter Smith, “What’s the role going forward for state regulators and how does state actions influence both national and global actors?”

To that, she responded she doesn’t “like the word regulator” and prefers “to say policymaker. Because, as an elected official, regulator is a scary word, and sometimes becomes all too real particularly as elected officials look at the demands, the inquiries and oftentimes the requests from constituents.”

“In Arizona, the commission is the entity that would deal with these issues, not the legislature … state policymakers are very tempted to do something, to say they did something,” Bitter Smith said.

She went on to articulate her views on how government should participate in broadband, some of which echoed the position of the cable industry she represents.

“I personally see a lessening role in the regulatory side from elected officials,” said Bitter Smith. "And, perhaps, more an opportunity for statewide regulators or policymakers to look at adoption programs and education programs. Many of the commentary that I get as a policymaker, and that I know certainly from my background in the telecom industry, is that, as suggested, there is deployment in lots of places, even in rural America.”

She concluded that existing broadband services are being “underutilized, and I think we have an opportunity in that role to move forward to do that, and it’s something that could be done on a more regional, state-by-state basis ...”

When asked about those comments, Bitter Smith said she was speaking in general about the need to jumpstart a conversation among policymakers, not specifically commissioners, and she “was talking as a citizen of the United States” when making comments about the need for more adoption of broadband, not as a commissioner.

Bitter Smith said she was a logical choice to speak on the subject because of her experience in the cable and telecom world, adding that it was very clear from her introduction that she was appearing there in both roles, as commissioner and cable industry representative.

However, Bitter Smith’s introduction in the video of the discussion did not mention her current position as director of the cable association. Instead, she is described as the Chair of the Arizona Corporation Commission and “prior to her service on the commission she served as President of the Central Arizona Water Conservation District Board, Vice Mayor of the City of Scottsdale and Chairman of the Arizona Competitive Telecommunications Coalition.”

The End Of The Digital Arizona Council

After Bitter Smith was elected in November 2012, Updike said he began voicing his concerns about what he perceived as the conflict between her dual roles. Eventually, he said he was told to be quiet about the issue.

“I was told to stop poking the bear. The bear was the combination of Cox, CenturyLink and Susan Bitter Smith,” Updike said.

The other Republican candidate elected to the commission alongside Bitter Smith in 2012 was former state Senate President Bob Burns. He was also closely involved in the state’s broadband planning efforts and was a member of the Council. After being elected, Burns resigned his position “in order to avoid any appearance of conflict,” according to a letter filed by the commissioner.

By May 2013, the Council’s public meetings began to be cancelled. The strategic broadband plan was never adopted.

That same month, Updike was notified he had lost his job with the Arizona Department of Administration.

Henry Goldberg is an independent consultant who also helped draft the state broadband plan.

“To me when you stop discussions of the plan, disband this council, which is supposed to advise the governor on digital policy,” Goldberg said. “There’s something inappropriate going on there. Something like this is critical for the citizens of Arizona.”

Goldberg said halting the Council has stalled broadband deployment in Arizona, particularly in rural areas.

“I was saddened by the outcome,” said Jodie Filardo who was on the Council and heads the Community & Economic Development Department for the Town of Clarkdale.

Without government to help level the playing field and enable more competition, Filardo said the major providers are typically not motivated to bring broadband to rural areas like hers.

“When you think about the providers being profit-oriented companies, they need a reason to listen to us. Traditionally, with deployment of any kind of telecommunications, it really is profit based,” Filardo said.

She said swaths of the state are still without adequate broadband.

“If we look back to 2012 and 2013 with the demise of the DAC (Digital Arizona Council), if we had been able to maintain momentum, we would have had going on three years of progress that we have now lost,” she said.

Legal Implications

Attorney Tom Ryan said the state conflict of interest laws that apply to the corporation commission took effect as soon as Bitter Smith declared her candidacy. As a result, her involvement in state broadband and telecom policy throughout much of 2012 and after was illegal, he said.

“Obviously, this is further evidence of Susan Bitter Smith’s violation of Arizona’s very strict anti-conflict of interest laws that relates to corporation commissioners,” Ryan asserted when presented with the new information, including her letter to the council and the email records.

He called Bitter Smith’s effort to divide the telephone services of her cable members and the broadband services a “red herring.”

“The idea that these can be separated, that’s a great tax trick but it doesn’t apply in the real world of the corporation commission’s responsibilities, especially when it comes to this whole concept of conflict of interest,” he said.

“There’s lots of perceptions by lots of entities,” said Bitter Smith about her ties to the telecom industry.

“The rules are very specific at the commission. The constitution is very specific at the commission. Commissioners are very clear about what their roles are and take it very seriously as I have,” she said.

There is precedent for removing a corporation commissioner for violating conflict of interest laws. In 1999, the state Supreme Court ousted then-Commissioner Tony West for holding a securities dealer license — despite West cancelling his securities registration before actually taking office.