3. Discussion

We have concluded that although the phased approach outlined in the Scoping Memo for determining § 851 exemptions is sound, some adjustments to that approach are appropriate.

Before discussing those adjustments, however, we think it is appropriate to address DRA's argument that any asset sale or transfer that would implicate any of what DRA refers to as the "five factors" (i.e., competitor access to the telephone network, service quality, services to senior and low income customers, jobs in California, or safety, privacy or security) should be considered "controversial" and dealt with in Phase II of this proceeding.

For several reasons, we believe that such an approach would be unwieldy. First, it would make it more difficult to determine which types of assets the Commission considers non-controversial, and so subject to the § 851 exemption we are granting in today's decision. We note that TURN, in particular, has criticized as "too broad" the use of FCC account numbers for determining which asset types should be subject to a Phase I § 851 exemption. (TURN Supplemental Comments at 6.) But the five factors proposed by DRA are even less specific, and could leave URF carriers seeking to invoke the § 851 exemption uncertain about whether an asset included within a relevant FCC account number might nonetheless not be exempt because it is to be considered in Phase II.¹⁴

Second, the use of DRA's five factor approach could thrust the Commission into consideration of issues as to which our jurisdiction is questionable. For example, while everyone is concerned about the current rate of unemployment in California, delaying or conditioning the sale or other disposition of non-controversial assets because of potential job losses, as DRA appears to propose, seems unjustified. (DRA Supplemental Comments at 5-6.) Section 851 states that Commission approval is required for the sale, transfer, or encumbrance of any utility asset that is "necessary or useful in the performance of [the utility's] duties to the public." Thus, the focus of the statute is on ensuring that asset dispositions do not compromise the utility's ability to serve.¹⁵ The statute does not mention the preservation of employment as one of the factors the Commission should consider in weighing a proposed asset transfer.¹⁶

Third, we fail to see the basis for DRA's argument that any category of asset transfer that might affect safety, security, or privacy (DRA's fifth factor) should be considered in Phase II. DRA cites no authority for this vague argument, nor does it give any examples. Deferring consideration of asset transfers that allegedly raise safety, security, or privacy concerns (apart from those clearly related to service quality) would simply be to invite endless debate over what matters might be covered.¹⁷

However, even though we believe DRA's five factors are too broad to furnish a useful analytical framework for what should be considered in Phase II of this proceeding, we agree that one of the asset types DRA has identified should not be exempted from § 851 review today, but should await consideration in Phase II. As noted above, DRA argues that the sale or other disposition of payment centers (which fall within Uniform Account No. 2121) should not be exempted from § 851 review under Phase I:

Although the communications market has become increasingly accessible via the Internet, mobile devices, and telephone, the local payment center remains a preferred method for many customers to pay bills or inquire about services. This holds especially true for the elderly, poor, and those without access to the Internet. The closure of payment centers will require customers either to pay their bill online or by U.S. mail. (DRA Supplemental Comments at 4.)

DRA also notes that in locations without Internet access, payment by mail "is infeasible for those without access to traditional banking services." (Id. at 5.) We find DRA's reasoning persuasive, and so will exclude payment centers from the Account 2121 assets as to which we are granting an exemption from § 851 review by today's decision.

An important issue concerning assets in Account 2121 is precisely how we should phrase the exemption we are granting. In the PD issued on March 19, 2010, Ordering Paragraph 2 stated that a § 851 exemption should not be granted with respect to assets falling within "Account No. 2121 (buildings) . . . to the extent such buildings are currently being used to provide collocation services, or have space reserved in them to provide such services in the future." (Emphasis supplied.) In its opening comments on the PD, Verizon states that while this language may seem consistent with its original proposal, it is somewhat different, because Verizon proposed that the Phase I exemption "should extend to those `portions of buildings, including central offices, housing administrative and other general support assets.'" (Verizon PD Comments at 4; emphasis in original.) Verizon requests that the Commission confirm that its intent was to adopt Verizon's original proposal and explains:

[A]n URF carrier may own an office building containing a central office in the basement but otherwise consisting of administrative space on the floors above. Carriers should be permitted to subdivide and sell the above floors - without the need for Section 851 approval - so long as the carrier retains the necessary space in the basement for central office and collocation purposes. Such apportionments are increasingly common as carriers require less space for traditional circuit switches. Accordingly, as Verizon noted in its Initial Comments, "carriers should be allowed to consolidate central office space without impacting collocation requirements." The Commission should clarify its intent to include such apportionments within the scope of the Phase I exemption. (Id. at 4; footnotes omitted.)¹⁸

We agree that such apportionments should be permitted, and have amended the ordering paragraphs in this decision accordingly.¹⁹

As noted above, one of the issues on which all of the parties filing supplemental comments agreed (except DRA and Consumer Federation²⁰) was the unworkability of the Scoping Memo's proposal to use a Tier 1 advice letter as a vehicle for an annual report on the use of the § 851 exemption. Among other things, the commenters pointed out that such a process would lead to meritless protests, would threaten to undo transactions that had been effectuated months before, and would make it difficult to attract buyers for unneeded utility assets because of the business uncertainties involved. (See AT&T Supplemental Comments at 5-6; Verizon Supplementary Comments at 2-3; SureWest Supplemental Comments at 2; TURN Supplemental Comments at 2; CALTEL Supplemental Comments at 2-3.)

We find this criticism persuasive, but still think an annual report on the use of the § 851 exemption is necessary. As an alternative to a Tier 1 advice letter, we think the proposal put forward by Verizon is a good starting point:

If . . . reporting is intended as a safeguard to ensure compliance with the new rules, then the annual report should be narrowly tailored for that specific purpose. For example, the report should be submitted to the Communications Division, not filed as a Tier 1 advice letter. It should be limited to a listing of asset transfers that, absent exemption, would have necessitated a section 851 filing in the first place. Parties should not be permitted to "protest" the report. And finally, the reporting requirement should expire within a reasonable sunset period, e.g., two (2) years, so that reporting obligations do not continue in perpetuity in the absence of demonstrated need. (Verizon Supplemental Comments at 3-4.)

We agree with Verizon that this alternative form of annual report should be filed with the Director of the Communications Division (or its successor) and posted on the Commission's website. We also agree that the only transactions that need to be included are those that, absent an exemption, would have necessitated a § 851 filing in the first place. As a report rather than an advice letter, the report will not be subject to protest. However, like the Tier 1 advice letter proposed in footnote 8 of the Scoping Memo, the report should identify the type of asset sold or disposed of, the price, and the nature of the purchaser or transferee. If the purchaser or transferee is an independent third party, no name will be required. However, if the purchaser or transferee is an affiliate of the utility, then the name of the affiliate must be reported.²¹

We do not agree with Verizon that this reporting requirement should be allowed to sunset after a short period, such as two years. One of the reasons we think the report is necessary is to monitor the use of the § 851 exemption we are granting today, which will last for four years. At the end of that time, any party to this proceeding (or a successor to such party) may request a reexamination of whether the § 851 exemption should be continued.²² If no party requests such a reexamination, then the exemption will continue.²³

Another issue requiring discussion is the argument of AT&T, Verizon, and SureWest that we should grant an exemption from § 851 for capital leases and leasehold improvements that are not concerned with facilities used to provide UNEs, collocation, or other wholesale services, such services having been reserved for Phase II in the Scoping Memo. In arguing that we should reconsider the Scoping Memo's determination on this question, AT&T states:

Verizon noted [in its original proposal] that internal records could be used to identify those buildings with collocation space and space reserved for future collocation. Just as Account 2121 does not distinguish between buildings and portions of buildings with collocation space, Accounts 2681 and 2682 do not distinguish between those leases and leasehold improvements covering the type of property within the scope of Phase I and those covering the type of property within the scope of Phase II. However, just as in the case of buildings, internal records can be used to identify specific property within Accounts 2681 and 2682 and to determine whether specific leases or leasehold improvements cover the type of property in Phase I or the type of property in Phase II. (AT&T Supplemental Comments at 4; footnote omitted.)

In the PD issued on March 19, 2010, we declined to adopt this proposal, because we were "not satisfied that most URF carriers have internal records that can be used with confidence to determine whether a particular lease or leasehold improvement is concerned with non-controversial assets being considered in Phase I, or with assets used to provide wholesale services or other controversial matters being considered in Phase II." We noted that while we believed the records maintained by the carriers were sufficiently detailed with respect to assets they owned, we did not have this same degree of confidence with respect to assets that were leased. However, we invited the carriers to address this issue by submitting, along with their comments on the PD, declarations concerning the documentation they maintained on leased assets. (PD at 21.)

In the opening comments it filed on April 8, 2010, Verizon included the declaration of James E. Tousignant, who is Director of Real Estate Services for the Western Region (which includes California) of Verizon Corporate Services Group Inc. In this capacity, Tousignant leads a team of 180 employees who are responsible for "the daily operation, maintenance, design and construction associated with a portfolio of approximately 20.5 million square feet." (Tousignant Declaration ¶ 1.) The employees Tousignant manages are divided into a number of groups, including Operations, Planning, Lease Administration, and Transactions. Tousignant says all of these groups use a centralized database that "contains a listing of properties owned or leased by Verizon, including Capital Leases and Leasehold Improvements booked to FCC Accounts 2681-2682. The database includes such information as the address, net book value, and use of each property as documented by a Primary Use Code (`PUSE')." (Id. ¶ 4.)

Tousignant asserts that the PUSE designations allow the assets leased by Verizon to be adequately differentiated between those being considered in Phase I and those being considered in a second phase of this proceeding:

The Planning Group is primarily responsible for maintaining the PUSE designation in the system based on periodic property inspections and data verification. The PUSE code allows for identification of properties that should be exempted in Phase 1. For example, properties utilized for Administrative purposes (e.g., office space) are coded as "ADM." In addition, Warehouses, Garage Work Centers and Storage Facilities are coded as WAR, GWC, and STOR, respectively, and should also be exempted in Phase 1. On the other hand, facilities used for housing network equipment like Central Offices, Remote Switching Modules, Towers, Points-of-Presence, Super Head Ends, and Microwaves, are coded as CO, RSM, TWR, POP, SHE, and MW, respectively, and would not be exempted in Phase 1. (Id. ¶ 6.)

Based on the Tousignant declaration, we are satisfied that Verizon maintains records sufficient to differentiate between leased assets of the kind being considered in Phase I and leased assets that will be considered in a second phase. Accordingly, we will grant Verizon's request to include FCC Accounts 2681 and 2682 in the list of accounts eligible for Phase I treatment by Verizon.²⁴

Although the declaration submitted by AT&T suggests that its process for determining the purpose of leased assets is somewhat more convoluted than Verizon's, its explanation is sufficient to justify including Accounts 2681 and 2682 in the list of accounts eligible for Phase I treatment by AT&T.²⁵

SureWest did not submit a declaration concerning the records it keeps for leased assets, nor did any other URF carrier that might be affected by this decision. In view of the misgivings expressed in both the Scoping Memo and the PD about including Accounts 2681 and 2682 within the proposed § 851 exemption without more evidence about the carriers' record-keeping, we decline at this time to include these two account numbers within the scope of the exemption being granted to SureWest. If SureWest (or any other qualifying URF carrier) wishes to expand its exemption to include these two accounts, it should file a Tier 3 advice letter explaining the records that it keeps concerning leases. Upon approval of such an advice letter by Commission resolution, the carrier will be permitted to invoke the § 851 exemption granted herein with respect to assets included in Accounts 2681 and 2682.

The final issue meriting discussion is the request of CALTEL that Phase II of this proceeding should be deferred for four years. In its opening comments on the PD, CALTEL argued:

[T]he Proposed Decision should be revised to provide that Phase II of this proceeding will begin only, if at all, following the end of the four-year exemption granted in Phase I. This approach would allow the Commission and all parties to evaluate the efficacy of Phase I reporting before determining whether Phase II is even necessary, thus preserving Commission and party resources.

Allowing the Phase I exemption to be concluded before considering Phase II will also allow the Commission and parties to determine, based on the reports filed during the exemption period, if there are "Phase I" assets that should be more properly addressed in Phase II. The reverse could also be true. That is, the parties could determine based on the experience of Phase I that some assets now scheduled for consideration in Phase II [] could be appropriately dealt with under the Phase I reporting plan.

In sum, Phase II will be much more meaningful, create better policy and potentially be less contentious if the Commission and the parties have Phase I data in hand before beginning Phase II. (CALTEL PD Comments at 1-2.)

In its reply comments on the PD, AT&T stated that it was not opposed to CALTEL's suggestion, provided that the PD was modified to (1) allow buildings with current or future collocation space to be apportioned as described above, (2) permit AT&T to invoke the § 851 exemption granted herein with respect to assets included within FCC Account Nos. 2681 and 2682, and (3) provide that the Phase I exemption would continue in effect unless and until the Commission acted on any petition for modification seeking reexamination of the exemption. (AT&T PD Reply Comments at 4-5.) In its reply comments on the PD, Verizon stated that it would also not oppose a reasonable delay if the modifications it proposed were adopted, and added, "[i]ndeed, such a delay would allow the parties to explore informal resolution of Phase 2 without the need for further proceedings." (Verizon PD Reply Comments at 1.)

In view of the fact that the changes we have made in the PD satisfy the conditions that AT&T and Verizon set forth for supporting CALTEL's request, and because we are also supportive of reasonable proposals that conserve the scarce resources of the Commission and the parties, we have decided to grant CALTEL's request to delay Phase II of this proceeding. Accordingly, with the issuance of this decision, this proceeding will be closed. If any party (or a successor to such party) believes that a second phase of this proceeding as described in the Scoping Memo is necessary, it may include such a request in a petition for modification of this decision. Under ordinary circumstances, we would not expect such a petition to be filed until four years after issuance of this decision.²⁶

¹⁴ In the same vein, we disagree with Consumer Federation that the showings made thus far in the comments are inadequate, and that more proof is required from URF carriers that "the disposal or encumbrance of property in exempted accounts will not have an effect on `the health, safety, comfort, and convenience'" of the utility's patrons. (Consumer Federation Supplemental Comments at 3.)

To support its argument, Consumer Federation relies largely on D.01-05-041, which denied an application by 360networks (USA) Inc. to exempt transfers of assets and interests between non-dominant interexchange carriers (NDIECs) and competitive local exchange carriers (CLCs) pursuant to § 853. Consumer Federation argues that the decision stands for the proposition that the Commission prefers the use of advice letters for routine transfers of assets under § 851. However, it is evident from discussion that Consumer Federation does not quote that the Commission's principal ground for denying the application was that the relief sought was too broad. The Commission stated:

First, we note that it is not appropriate for 360networks to request relief for an entire class of carriers in an application by a single carrier. Rather, an exemption from § 851 for all NDIECs and CLCs is more appropriately the subject of a rulemaking so that all persons or entities who would be affected by the exemption would receive notice and an opportunity to comment. At this time, we are unwilling to dedicate the resources necessary to address this issue in a rulemaking proceeding, and it would not be appropriate, here, to grant exemptions to all carriers based on this single application that was not served on any other parties. (D.01-05-041 at 5.)

This proceeding, by contrast, is a rulemaking to which the Commission has already devoted considerable resources. The parties have already filed three sets of comments, and more comments can be expected. Fairly read, D.01-05-041 does not reject the use of § 851 exemptions for particular classes of assets.

¹⁵ This purpose is made clear by the second paragraph of § 851, which provides, inter alia, that "this section does not prevent the sale, lease, encumbrance or other disposition by any public utility of property that is not necessary or useful in the performance of its duties to the public."

¹⁶ As DRA points out in its opening comments on the Proposed Decision (PD) that was issued on March 19, 2010, other provisions of the Public Utilities Code require us to take effects on employment into account in making our decisions. Section 854(c), for example, instructs that in evaluating any proposed merger, acquisition, or change of control of a public utility that meets the $500 million threshold set forth in § 854(b), the Commission shall take into account whether the proposed transaction is "fair and reasonable to affected utility employees" and will be "beneficial on an overall basis to state and local economies, and to the communities in the area . . ." However, DRA has not cited any case in which employment effects were considered as a factor in an application filed solely under § 851.

DRA's comments also cite an October 29, 2009 letter from State Senator Padilla and Assemblymember Fuentes to the Commission expressing concern about job losses at AT&T and Verizon facilities in California. President Peevey responded to this letter on November 24, 2009. In the response, he pointed out that while both companies have experienced a decrease in the number of their California access lines between 2006 and 2009, both companies have also seen an increase in the number of jobs devoted to their video products, the development of which was encouraged by the Digital Infrastructure and Video Competition Act of 2006.

¹⁷ It should be noted, however, that the final ordering paragraph of this decision provides that nothing herein relieves any carrier from having to file any reports that may be required by other Commission decisions concerning safety, service quality, or other matters.

¹⁸ In a footnote to the quoted passage, Verizon points out that "the reference to `subdivision' is only an example. Verizon understands that there are various legal instruments available to effectuate a transaction where the owner wishes to retain rights in a portion of a building while selling, leasing, or otherwise encumbering other portion(s) of the same building." (Id. at 4, n. 11.) The building apportionments we are authorizing in this decision do not preclude the use of other "legal instruments," provided that Verizon, AT&T or any other URF carrier invoking the § 851 exemption takes care to ensure that the portions of affected buildings that are currently being used to provide collocation services, or have space reserved in them to provide such services in the future, remain fully available.

¹⁹ At page 5 of its reply comments on the PD, CALTEL notes that it is not opposed to the request by Verizon and AT&T for clarification that "space not reserved for collocation does not lose its [Phase I] exemption because it is located in a building that also contains space reserved for collocation," because the request is "consistent with the [PD's] intent."

²⁰ In its supplemental comments in response to the Scoping Memo, DRA argued that "the Commission should require annual reporting of `five factor' transactions for at least five years from the effective date of the Phase 1 decision." (DRA Supplemental Comments at 7.) Neither DRA nor Consumer Federation commented directly upon the proposal to use a Tier 1 advice letter as the vehicle for an annual report.

²¹ Although it did not comment on the form of a report, Consumer Federation seems to be advocating financial reporting to the extent it argues that URF carriers invoking the § 851 exemption granted in this decision "should be required to share with customers any profit made from the sale of utility property which is exempted from section 851 review." (Consumer Federation Supplemental Comments at 5.) Consumer Federation argues that under D.06-05-041 and D.06-12-043, ratepayers are entitled to 100% of the gain from sales of depreciable assets, and 67% of the gain from sales of non-depreciable assets. (Id.)

Consumer Federation's argument is without merit because the gain-on-sale rules set forth in the decisions it cites do not apply to URF carriers. In D.06-05-041, the Commission dismissed AT&T, Verizon, SureWest and Frontier Communications as parties, finding that "the URF proceeding seems to be the best forum to resolve gain on sale issues" for these companies, because "that proceeding is examining all aspects of telecommunications regulation." (D.06-05-041 at 6.)

In the URF decision, D.06-08-030, the Commission concluded that because "the link between costs and rates was broken nearly twenty years ago with the adoption of NRF," ILEC shareholders should be allocated 100% of any gains or losses from the sale of ILEC assets. The Commission said:

Adopting a policy that allocates all gains or losses to shareholders will simplify the regulatory program and make it consistent with the economic principle that those who bear the risk should reap the rewards. We expect this reform will have a minimal impact on ratepayers. As Verizon's review of its records makes clear, under current rules, little gain is allocated to ratepayers despite complex calculations following a negotiated allocation rule, and elaborate record-keeping requirements.

We further note that the companies with which the ILECs compete retain all gains or losses from the sale of their utility property. Thus, adopting a policy that allocates one hundred percent of all gains and/or losses from the sale of property by ILECs to their shareholders will place ILECs on an even footing with their competitors. This reform serves our interests in promoting fair competition between communications providers. (D.06-08-030 at 224.)

²² In their opening comments on the PD, both Verizon and AT&T requested that we clarify what will happen in the event such a petition is filed. AT&T stated that it was concerned our statements

. . . could be misconstrued by some parties to mean the § 851 exemption can be rendered ineffective after four years merely by filing a petition for modification and requesting a reexamination of the exemption, without any further action on the petition by the Commission. The Commission should avoid potential disputes about its intent and provide certainty in the process by making it clear that if a petition for modification requesting a reexamination of the § 851 exemption is filed, the exemption will remain in effect unless and until the Commission acts on the petition and determines otherwise. (AT&T PD Comments at 6.)

The concern expressed by AT&T is reasonable. If a party (or successor thereto) files a petition for modification at the end of the four-year period requesting termination or modification of the § 851 exemption granted in this decision, the exemption will remain in effect unless and until the Commission acts on the petition.

²³ By providing for a reexamination after four years of the § 851 exemption we are granting today, we do not mean to suggest that any party will be foreclosed from seeking reexamination sooner if, in a petition for modification of this decision, the party can demonstrate that the exemption has been abused.

²⁴ At page 5 of its reply comments on the PD, CALTEL notes that it is not opposed to the request of Verizon and AT&T to include assets coming within Account Nos. 2681 and 2682 in the Phase I exemption, because the request is "consistent with the [PD's] intent."

²⁵ The declaration submitted by AT&T is from Thomas M. Koch, who is the Controller of AT&T California. With respect to Account 2681, Koch notes that the only AT&T California lease in that account is "a lease of land." (Koch Declaration ¶ 5.) With respect to Account 2682, Koch states:

AT&T maintains detailed records associated with all assets in Account 2682 (leasehold improvements). First, the leasehold improvements in Account 2682 are recorded in the General Ledger by Field Reporting Code (FRC). The only FRC currently used by AT&T California in this account is 510C, which accounts for improvements to buildings and building grounds held under lease which are subject to amortization treatment. Second, AT&T's Oracle Fixed Assets (FA) system tracks the location, year-placed in service, and cost of each leasehold improvement. The FA system identifies the location of the leasehold improvement using the Common Language Location Identifier (CLLI), an alphanumeric code used to identify a geographic location. Third, we can determine whether the location contains a central office with collocation space based on the CLLI information identified in the FA system. Using the same CLLI code information used in FA, the Collocation Application Portal (CAP) system identifies every building with active or reserved collocation space. Based on the records AT&T maintains in these systems, we can determine with confidence whether a particular leasehold improvement is to a building with active or reserved collocation and, therefore, whether a leasehold improvement included in Account 2682 covers assets being considered in Phase I or in Phase II of R.09-05-006. (Id. ¶ 6.)

²⁶ As AT&T pointed out in its reply comments on the PD, "under the Commission's rules, the decision in Phase I (including the provision delaying Phase II) could be modified if a future petition for modification justifying such action were granted by the Commission." (AT&T PD Reply Comments at 5; footnote omitted.)