IV. CONCLUSION

We have reviewed each and every allegation of error asserted by Verizon in its application for rehearing of D.06-03-025, and are of the opinion that legal error was not demonstrated. However, we modify D.06-03-025 to include additional evidentiary support for the capital structure adopted and we correct a clerical error involving a citation. Therefore, for the reasons stated herein, we deny the rehearing of D.06-03-025, as modified.

THEREFORE, IT IS ORDERED that:

1. D.06-03-025 is modified as follows:

a. Paragraph 1 on Page 11 is modified to read as follows:

"JC's Murray cites several financial economists' views that ideally, a firm's target or optimal capital structure should be used in weighting the cost of equity and cost of debt. (Id., 11/3/03, p. 66; 8/6/04, p. 62.) Murray says respected researchers, such as Prof. R. Glenn Hubbard and Dr. William H. Lehr, have found evidence that, in the long run, market equity tends to move toward book equity. (Id. 8/6/04, pp. 62-63.) On the other hand, high market-to-book ratios predict future book profitability. Thus, on balance, this suggests the best prediction of a firm's target capital structure incorporates both book and market information. Murray says Hubbard and Lehr further provide the relevant market weighting is the target weighting of debt and equity that an informed management team would employ over the long run. This target weighting almost certainly has much less equity, and much more debt, than the current market weightings. (Id. 8/6/04, pp. 62-63.) Murray, therefore, gives equal weight to the market and book capitalization of the companies in her proxy group. She recommends a capital structure of 66.44% equity, 28.63% long-term debt and 4.93% short-term debt. (Id., 11/9/04, p. 3.) Murray provides information that this capital structure is highly consistent with the publicly stated target capital structures of other major ILECs, corroborating the reasonableness of her approach. (Id., 11/3/03, p. 69 and 8/6/04, p. 63.) (D.06-03-025, p. 76).

2. The rehearing of D.06-03-025, as modified, is hereby denied.

This order is effective today.

Dated January 29, 2009, at San Francisco, California.

MICHAEL R. PEEVEY

President

DIAN M. GRUENEICH

JOHN A. BOHN

RACHELLE B. CHONG

TIMOTHY ALAN SIMON

Commissioners