STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

May 11, 2010

TO: ALL PARTIES OF RECORD IN RULEMAKING 09-05-006

Decision 10-05-019 is being mailed without the Concurrence of Commissioner Timothy Alan Simon. The Concurrence will be mailed separately.

Very truly yours,

/s/ JANET A. ECONOME for

Karen V. Clopton, Chief
Administrative Law Judge

KVC/tcg

Attachment

COM/MP1/tcg Date of Issuance 5/11/2010

Decision 10-05-019 May 6, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Rulemaking on the Commission's own Motion into the Exemption From Pub. Util. Code § 851 for Uniform Regulatory Framework and other Competitive Carriers.

Rulemaking 09-05-006 (Filed May 7, 2009)

PHASE I DECISION GRANTING EXEMPTION FOR CERTAIN TELECOMMUNICATIONS CARRIERS FROM COMPLIANCE WITH SECTION 851 OF THE PUBLIC UTILITIES CODE IN CONNECTION WITH
THE DISPOSITION OF NONCONTROVERSIAL ASSETS

In this decision, we complete the first phase of this proceeding, as that phase was defined in the Scoping Memo issued on November 9, 2009.¹ Consistent with the intention stated in the Scoping Memo, we hereby grant an exemption from compliance with Pub. Util. Code § 851² with respect to the disposition of certain non-controversial assets (as defined below) by California telecommunications carriers subject to the Uniform Regulatory Framework set forth in Decision 06-08-030. The exemption we are granting today will not, however, apply to asset dispositions by incumbent local exchange carriers that must still file general rate cases. Such incumbent local exchange carriers will remain subject to § 851.

The exemption granted in this decision will last for four years, at the end of which time we will reexamine, at the request of any party to this proceeding, whether the exemption has served its purpose and should be continued, or has not achieved its purpose and should be terminated. In addition, we will require each carrier subject to the Uniform Regulatory Framework and relying on the § 851 exemption granted herein to file an annual report with the Director of our Communications Division setting forth a summary of the asset sales and dispositions for the prior year to which the § 851 exemption has applied. The Director will post this annual report on the Commission's website.

1. Background

1.1. The OIR and the Parties' Comments

The Commission issued the Order Instituting Rulemaking (OIR) in this proceeding on May 7, 2009. The OIR stated that the purpose of the rulemaking was to consider exemptions from the requirements of Pub. Util. Code § 851 for specific actions by California telecommunications carriers subject to the Uniform Regulatory Framework (URF). The OIR also stated, however, that the proposed exemptions would not apply to incumbent local exchange carriers (ILECs) still required to file general rate cases (GRCs). The OIR continued that as part of the inquiry into whether exemptions from § 851 were appropriate for certain dispositions of property by URF carriers, the rulemaking would also consider whether any conditions should be placed on such exemptions pursuant to Pub. Util. Code § 853(b).³

After setting forth a history of the various exemptions from § 851 that the Commission has granted to telecommunications carriers, the OIR set forth a list of eight specific issues, invited affected parties to submit comments and proposals on these issues, and proposed a preliminary schedule for the proceeding. (OIR at 7-10.)

Pursuant to the schedule outlined in the OIR (as modified by a ruling issued on May 22, 2009), ⁴ the parties filed their opening comments and proposals on June 26, 2009. The parties filing such comments and proposals consisted of Pacific Bell Telephone Company d/b/a AT&T California (AT&T), Verizon California Inc. and its certificated California affiliates (Verizon), the Division of Ratepayer Advocates and The Utility Reform Network (DRA/TURN), the California Association of Competitive Telecommunications Companies (CALTEL), SureWest Telephone (Surewest), and the Consumer Federation of California (Consumer Federation).

In their comments, AT&T and Verizon argued that URF carriers (except ILECs still filing GRCs) should be granted a full and unconditional exemption from the requirements of § 851, and that many of the concerns raised in the OIR could be addressed through the special Telecommunications Industry Rules set forth in General Order (GO) 96-B. However, while AT&T sought a full § 851 exemption immediately, Verizon acknowledged that special issues might be raised by sales or other dispositions of assets that could be used to provide unbundled network elements (UNEs), collocation or related wholesale services. Verizon therefore proposed that the proceeding be bifurcated, with the first phase being devoted to sales or dispositions of assets unlikely to be controversial.

CALTEL's comments supported the idea of a bifurcated proceeding, although CALTEL took a narrower view than Verizon of what asset sales and dispositions might be viewed as noncontroversial. Like AT&T and Verizon, SureWest sought an unconditional exemption from the requirements of § 851. In their comments, DRA/TURN argued strongly against a wholesale § 851 exemption, and also urged the Commission to address alleged inconsistencies between the trial program for asset dispositions authorized in Resolution ALJ-202 and Decision (D.) 07-11-048, which extended the advice letter process used for non-dominant interexchange carriers and competitive local exchange carriers to URF ILECs. Consumer Federation argued that a broad exemption from the requirements of § 851 was against the public interest and that the Commission should continue to require URF ILECs to file § 851 applications, while considering waivers on a case-by-case basis.

On August 6, 2009, the assigned Commissioner and the assigned ALJ issued a joint ruling concerning the issues raised by the parties' initial comments.⁵ The August 6, 2009 Ruling asked the parties to address these issues in reply comments, and noted that a scoping memo would not be issued until after the reply comments had been received and analyzed. Among other things, the August 6, 2009 Ruling asked the parties to address what refinements, if any, should be made to Verizon's proposal to divide the proceeding into two phases, whether CALTEL's alternative phasing proposal should be adopted instead, and whether § 851 requirements should be retained in situations where a change-of-control of a utility was contemplated, but the proposed change-of-control was not subject to Pub. Util. Code § 854. In addition, the ruling asked how, in formulating any § 851 exemption, the Commission could ensure that review of relevant projects under the California Environmental Quality Act (CEQA) could continue to be adequate, and whether the Commission should rely on the fact that some of the key obligations of URF carriers (such as withdrawals of basic service and carrier-of-last-resort obligations) are set forth in the Telecommunications Industry Rules in GO 96-B, and thus must be complied with independently of any § 851 exemptions. The parties submitted their reply comments on these issues on September 4, 2009.

1.2. The Phase I Scoping Memo

On November 9, 2009, the assigned Commissioner issued the Scoping Memo. In that document, he concluded that, with some modifications, Verizon's proposal for a two-phase proceeding should be adopted, with the first phase devoted to the identification of asset dispositions unlikely to be controversial. However, the assigned Commissioner rejected the suggestion in the reply comments of DRA/TURN and CALTEL that workshops should be held to identify non-controversial assets with greater precision, concluding that "such workshops would most likely result in unnecessary delay," and noting that the parties had had a full opportunity to comment on Verizon's detailed bifurcation proposal in their reply comments. (Scoping Memo at 6-7.) He also concluded that, subject to certain exceptions set forth in the Scoping Memo, assets with the following account numbers in the Uniform System of Accounts of the Federal Communications Commission (FCC)⁶ should, as Verizon had proposed, be considered in Phase I:

The Scoping Memo also pointed out that the list of FCC accounts to be considered in Phase I did not include Account 2681 (capital leases) and 2682 (leasehold improvements). These two accounts were omitted, the Scoping Memo explained, because the same issues that Verizon had identified with respect to buildings might also apply to capital leases and leasehold improvements. Since URF ILECs do not file rate cases and are not subject to rate-of-return regulation, there appeared to be no regulatory advantage to them in owning an asset rather than leasing it. Thus, it seemed possible the ILECs might be parties to leases covering assets used to provide UNEs, collocation, or other wholesale services, and that the assignment or other disposition of such leases might raise issues more appropriately considered in Phase II of the proceeding. (Scoping Memo at 8, n. 7.)⁸

The Scoping Memo also made clear that even with the exemption from § 851 requirements contemplated for assets covered by Phase I, URF carriers would continue to have reporting requirements. The Scoping Memo described these requirements as follows:

Although I propose to grant an exemption from § 851 in Phase I for non-controversial asset transfers, I believe URF ILECs should still be required to report these dispositions in an annual report. The report would take the form of a Tier 1 advice letter, which would serve to give interested parties notice of the transfers and an opportunity to protest one or more of them if the interested party believes that a particular transfer cannot legitimately be considered non-controversial. In its advice letter, the utility would be required to identify the type of asset, the sales price, and the nature of the purchaser. In the event the purchaser was an independent third party, no name would be required. In the event the purchaser was an affiliate of the utility, the utility would be required to name the affiliate. (Id. at 10, n. 8.)

Finally, the Scoping Memo concluded that while hearings would not be necessary in Phase I of the proceeding (owing to the non-controversial nature of the assets included in that phase), the parties should be given an additional opportunity to file comments on any remaining concerns they might have. On this question, the Scoping Memo said:

. . . I also recognize that questions may remain after this Scoping Memo about the precise inventory of assets to be included in Phase I, as well as about specific issues the parties may have in connection with particular Phase I asset types. Accordingly, all parties are invited to file supplementary comments on December 18, 2009 setting forth any such issues. Based on what is received, reply supplementary comments may also be requested. (Id. at 9.)

¹ Assigned Commissioner's Ruling and Scoping Memo on Phase I of Proceeding, issued November 9, 2009. Hereinafter, this ruling will be referred to as the "Scoping Memo."

² Section 851 concerns dispositions or encumbrances of utility property and provides in pertinent part:

A public utility . . . shall not sell, lease, assign, mortgage, or otherwise dispose of, or encumber the whole or any part of its . . . line, plant, system, or other property necessary or useful in the performance of its duties to the public . . . without first either having secured an order from the commission authorizing it to do so for qualified transactions valued above five million dollars ($5,000,000), or for qualified transactions valued at five million dollars ($5,000,000) or less, filed an advice letter and obtained a resolution from the commission authorizing it to do so . . .

On March 2, 2010, the Commission issued Resolution ALJ-244, which implements changes to the § 851 advice letter process made by Assembly Bill (AB) 698, which became effective on January 1, 2010.

³ Pub. Util. Code § 853(b) provides in full:

The commission may from time to time by order or rule, and subject to those terms and conditions as may be prescribed therein, exempt any public utility or class of public utility from this article if it finds that the application thereof with respect to the public utility or class of public utility is not necessary in the public interest. The commission may establish rules or impose requirements deemed necessary to protect the interest of the customers or subscribers of the public utility or class of public utility exempted under this subdivision. These rules or requirements may include, but are not limited to, notification of a proposed sale or transfer of assets or stock and provision for refunds or credits to customers or subscribers.

⁴ The May 22, 2009 joint ruling issued by the assigned Commissioner and the assigned Administrative Law Judge (ALJ) revised the schedule set forth in the OIR to provide for the filing of opening comments and proposals on June 26, 2009, the issuance of a scoping memo on July 24, 2009, and the filing of reply comments and proposals on August 21, 2009.

⁵ Joint Assigned Commissioner's and Administrative Law Judge's Ruling Concerning Reply Comments and Proposals, issued August 6, 2009. Hereinafter, this ruling will be referred to as the "August 6, 2009 Ruling."

⁶ The FCC's Uniform System of Accounts is set forth at 47 C.F.R. §§ 32.1-32.9000. These section numbers comprise Part 32 of 47 C.F.R.

⁷ The assigned Commissioner adopted Verizon's suggestion in its June 26, 2009 Initial Comments that not all buildings covered by FCC Account 2121 be included in the first phase of this proceeding. (Scoping Memo at 7, n. 6.) As Verizon pointed out in these comments, Account 2121 "does not distinguish between buildings and portions of buildings with collocation space versus buildings without collocation space (like administrative buildings)." (Verizon Initial Comments at 4; emphasis in original.) Verizon noted that only the latter type of building should be included in Phase I under its proposal, and that "internal records should be readily available to identify those buildings including collocation space and space reserved for future collocation use." (Id.)

⁸ The Scoping Memo made clear that because Phase II of the proceeding would be significantly more complex than Phase I, no decision could yet be made on the precise scope or need for hearings in Phase II. (Id. at 10-11.) The general scope of Phase II was described as follows:

In Phase II of this proceeding, the Commission will consider to what extent a § 851 exemption should be granted for assets used to provide telecommunications service directly, i.e., switched network facilities, and if so, whether any conditions should be imposed on such an exemption. These assets include working telephone plant, collocation space, and vacant space reserved for future collocation use. In keeping with Verizon's suggestion, and subject to the caveats noted [above,] the specific asset types to be covered in Phase 2 will be those included within FCC Account Nos. 2211-2232 (Central Office assets), 2311-2362 (Information origination/termination assets), 2411-2441 (Cable and wire facilities assets), and 2681-2682 (capital leases and leasehold improvements). (Id. at 8-9.)