(3) The Proposed Settlement is in the Public Interest. The Settlement Agreement is in the public interest because its provisions provide added assurance that the public interest standard of § 854 is satisfied. There is a residential rate cap for one year as well as rate caps for specific services. The settlement is fair and reasonable in light of the whole record, and should be adopted.

Immediately following the completion of the transaction, Verizon's
end-user customers in the 13 transferred exchanges will continue to receive substantially the same services, service rates, and service terms and conditions as immediately prior to the transaction. NewILEC and NewLD will file new tariffs appropriate to adopt the rates, terms, and conditions in the tariffs under which the Verizon companies have been operating in California. The Commission will retain the same regulatory authority over Verizon West Coast, NewILEC, and NewLD that the Commission possesses prior to the consummation of the transaction.

Pub. Util. Code § 851 provides in pertinent part that "No public utility ... shall sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its . . . system, . . . nor . . . merge or consolidate its . . . system . . . or franchises or permits or any part thereof, with any other public utility, without first having secured from the commission an order authorizing it so to do."

In addition, when the sale of an entire company is proposed, as is the case with Verizon West Coast, the Commission also applies § 854(a), which provides that no person "shall acquire or control . . . any public utility" without Commission authorization. The primary standard for review under both of these sections is whether the transaction is "adverse to the public interest."⁷ In assessing whether the public interest standard is met under § 854(a), the Commission often considers some or all of the factors from § 854(c) on a discretionary basis to provide context for a public interest assessment.

We have noted in a number of recent decisions approving transfers of control that, because California "reaps enormous benefits" from public utility services, it is "in the public interest to foster a business climate in California that is hospitable to utilities." Accordingly, we have ruled that § 854(a) transactions "should be approved absent a compelling reason to the contrary."⁸ The evidence persuades us that, the proposed transaction should be approved.

Frontier currently has approximately 2.3 million access lines in 24 states, and provides telecommunications services to rural and small urban markets across the country. Frontier and its operating companies have a long history in serving rural areas in California and elsewhere.⁹ Frontier has pursued a strategy of enhancing its local presence in the communities in which it operates. With the proposed transaction, the residential and business consumers in the service areas it is acquiring from Verizon will become a key focus for Frontier.

The transaction will accelerate Frontier's growth, creating a much larger company with increased financial strength and flexibility. Frontier will be the fifth-largest ILEC in America, serving predominantly rural communities and smaller cities, and it will have 8.6 million voice and broadband connections, including more than 7 million access lines and $6.5 billion in revenues. It asserts it will be the largest provider of voice, broadband, and video services focused on rural to smaller city markets in the United States.

In addition, Frontier expects to have an even stronger balance sheet and greater cash flow generation capabilities. This transaction will "delever" Frontier, i.e., it will reduce significantly the company's debt-to-EBITDA ratio.¹⁰ The increased financial strength is expected to improve Frontier's access to capital and lower its cost of capital, which will inure to the benefit of the California exchanges and their customers.

The transaction will be transparent to the current customers of Verizon West Coast, Verizon California, VLD, and VES in California. Customers are expected to receive substantially the same services post-merger that they received pre-merger, and at the same prices. No existing customer service will be discontinued or interrupted as a result of the transaction, and Frontier will use the same operational systems that Verizon uses today to provide service. At closing, Frontier will have full control over these systems. Verizon and Frontier representatives are expected to work together so that Frontier can ensure customer continuity including billing, customer account systems, and plant record systems. Further, the transaction should not have any adverse impacts on wholesale service customers in California. Frontier will retain all obligations under Verizon's current interconnection agreements and other existing arrangements, in addition to the statutory obligations applicable to all ILECs.

Frontier will continue to be managed by employees with extensive knowledge of the local telephone business and with a commitment to the needs of the local community. Frontier will continue to employ Frontier and Verizon company employees that are experienced in providing local services in California. Frontier will honor the union labor agreements in the affected states. Verizon will fund pensions for the pre-closing services of employees moving to Frontier, and Verizon will remain responsible for people who retire from the transferred areas before closing.

The proposed transaction is structured to achieve Frontier's broadband investment and growth strategy while enhancing Frontier's ability to serve customers in all 27 states in which it will operate after the merger. As noted, this transaction will improve Frontier's overall financial flexibility and stability by reducing its relative leverage. After the transaction, Frontier's leverage will be decreased from 3.8 times EBITDA to 2.6 times combined 2008 pro forma EBITDA, even without considering expected operating efficiencies.

From Verizon's perspective, shareholders will benefit as a result of this transaction. This is part of a multi-year effort to transform the company's growth profile and asset base to focus greater attention on wireless, fiber-optic services and other broadband development, and global Intellectual Property.

The proposed transaction will benefit the local economies served by Frontier California and the affected Verizon exchanges because it will continue and enhance Frontier's service. These areas will continue to benefit from Frontier's increased financial strength and service in rural areas and expanding the availability of broadband.

The proposed transaction will preserve the Commission's jurisdiction. The Verizon California exchanges are currently operated under the URF and will continue to be operated as such. Verizon West Coast is currently a rate-of-return company and will continue as such until such time as Frontier chooses to seek modification of that status.

Because the proposed transaction involves only an indirect change in ownership of stock and exchanges, it does not constitute a "project" under the California Environmental Quality Act ("CEQA"). The application does not request authority for new construction, nor will it result in any changes to the current use of assets. Accordingly, there is no possibility of any significant environmental impact associated with the joint application, and no CEQA review is necessary.

The proposed transaction will not reduce retail or wholesale competition and, indeed, will expand it. In California as in other states, none of the local exchanges being acquired by Frontier from Verizon overlap with any of the local exchanges already served by Frontier. Frontier and Verizon do not currently compete for customers in any of the affected exchanges as Frontier operates neither local exchange nor mobile facilities in these areas; therefore, the transaction will not reduce the number of competitors in any region. Once the transfer is complete, Verizon will continue competing in the affected areas by providing wireless services, enterprise services, and long distance services.

Because the transaction will result in no adverse consequences to customers, employees, shareholders, or the public in California, no mitigation measures are needed. We grant the application.

⁷ D.07-05-061 (CalNev Pipeline) at 24.

⁸ See D.04-08-018 (SureWest reincorporation); D.04-09-023 (Comm South/Arbros);
D.05-05-014 (Cal-Ore Telephone/Lynch Interactive); D.05-06-012 (Supra Telecommunications); D.05-08-006 (Highspeed Communications/Northwest Telephone); D.06-02-033 (PacifiCorp).

⁹ In addition to serving rural areas, Frontier also has experience serving mid-size communities including Elk Grove, California; the South Metro of Minneapolis/St. Paul, Minnesota; and Rochester, New York.

¹⁰ Currently, Frontier Communication's leverage is approximately 3.8 x EBITDA; after the transaction, its leverage will be reduced to 2.6 x EBITDA. (EBITDA is earnings before interest, taxes, depreciation, and amortization.)