11. The Settlement Agreement

Citizens and DRA are the only Parties in this proceeding. At the May 27, 2008 prehearing conference, Citizens and DRA agreed to meet and discuss possible settlement of the issues. A duly noticed telephonic settlement conference was held on June 17, 2008. The Parties agreed that evidentiary hearings would not be necessary, and this matter should be submitted to the Commission for decision upon execution of a settlement agreement. Following further discussions, the Parties provided the Commission with an executed Settlement Agreement dated July 30, 2008 (Attachment A). The reasonableness of the Settlement Agreement is addressed below.

11.1. Standard of Review

Rule 12.1(d) of the Commission's Rules of Practice and Procedure provides that the settlement must be reasonable in light of the whole record, consistent with the law, and in the public interest for the Commission to approve it. We examine the Settlement Agreement, in light of these three criteria.

The protest filed by DRA identified the following concerns: (a) Citizens should not be allowed to include its affiliate territories in calculating its High Cost Fund-B draw since the affiliates currently do not draw from the High Cost Fund-A and of the potential impact on the B Fund and (b) Joint Applicants be directed to file a petition to modify D.97-09-115 in order to address procedurally the incorporation of the three small rate-of-return ILECs into the one legal entity that was approved as a competitive entity in the decision.

First, in response to DRA's concerns, as part of the settlement the Joint Applicants agree that the territory of the three small ILECs Frontier-Golden State, Frontier-Tuolumne and Frontier-Global Valley will not be included in the High Cost Fund-B claims process until the Commission has concluded its review of the B-fund as ordered in D.07-09-020, specifically, the resolution of the remaining issues contained in Ordering Paragraph 13. If the High Cost Fund-B docket (R.06-06-028) remains open upon conclusion of the completed review of the B-Fund, the Merged Affiliates will be allowed to participate in the B-Fund claims process as set out in any rule or process changes. Notwithstanding the foregoing, the Merged Affiliates will be allowed to participate in a trial reverse auction and/or permanent reverse auction ordered by the Commission prior to conclusion of the review as ordered in D.07-09-020.

Second, in response to DRA's concerns regarding the need to modify D.97-09-115,4 as part of the Settlement Agreement, Joint Applicants provided notice of the pending merger application to the most recent service list for the D.97-09-115 proceeding.5 Joint Applicants also provided notice of the pending application to customers of the three smaller ILECs, consistent with Pub. Util. Code § 454. No protests to the application were received. We find that no further action with regard to D.97-09-115 is necessary. The D.97-09-115 proceeding is over a decade old and has been closed. By providing notice to the D.97-09-115 service list, the need to reopen that proceeding and to modify D.97-09-115 has been resolved. Accordingly, any modification to D.97-09-115, should be undertaken in this proceeding.

In response to DRA's concerns regarding the continued participation of the three small ILECs in the B-Fund program, we will adopt the language proposed in the Settlement Agreement. We will also adopt the language proposed in the Settlement Agreement to confirm that with the merger, the service area of Frontier-California will be expanded to include the service areas of the pre-merger three smaller ILECs thus, making these areas subject to local exchange competition. Accordingly, we conclude that D.97-09-115 should be modified to reflect the granting of the merger application now before us, and modification of that decision should be accomplished in this proceeding.

The Settlement Agreement is also consistent with applicable law and in the public interest. In 1997, in implementing competition for local exchange service, the Commission stated:

Pursuant to both state and federal legislative mandates, this Commission has undertaken a comprehensive program to institute competition in the local exchange telecommunications market throughout California. Assembly Bill 3606 (Ch. 1260, Stats. 1994) expresses the California Legislature's intent to open all telecommunications markets to competition (D.97-09-115, 75 CPUC2d 722, at 725.)

Therefore, we find that the proposed merger and the Settlement Agreement is consistent with state and federal mandates.

Under the Settlement Agreement, Frontier-California would be the serving ILEC entity, which is currently under the Uniform Regulatory Network. As a result of the merger, the three smaller ILECs will become open to CLEC competition, which is advantageous to the customers and communities being served. Also, the merger will allow the consolidated companies to increase operational efficiencies and enable the companies to operate under a consistent regulatory framework. The efficiencies would create advantages for the merged company and its customers. Under the Settlement Agreement, until January 1, 2011, the basic primary residential rate for each of the Merged Affiliates will be capped at their current levels as of the date of the Commission's order approving the merger. Also, until January 1, 2010, Caller ID, call waiting, single line business, directory assistance, non-published listings and inside wire maintenance plan rates for each of the Merged Affiliates will be capped at their current levels as of the date of the Commission's order approving the merger. Thereafter, the Merged Affiliates will be subject to applicable Commission orders governing service rate caps for URF companies. We believe the Settlement Agreement reflects a reasonable compromise on many items and offers a certain level of customer rate protection. Accordingly, we find that the Settlement Agreement is in the public interest and should be adopted.

4 D.97-09-115 adopted rules applicable to competition within the local territories of the states' two midsized local exchange telephone carriers (LECs), Roseville Telephone Company and Citizens Telephone Company.

5 Local Competition Docket. R.95-04-043/I.95-04-044.

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