II. DISCUSSION

A. Exemption From Section 854 Review

TURN and ORA contend that the Decision improperly grants a Section 853(b) exemption from the merger review standards under Section 854(b) and (c). TURN and ORA state this is a departure from all other decisions involving an ILEC merger, for which the Commission did conduct review of the proposed transactions under Section 854 (b) and (c). In particular, TURN and ORA contend the Decision errs because: a) exemptions are only permissible in "extraordinary circumstances;" b) the three justifications for the exemption stated by the Decision are inaccurate and unsupported; and c) it ignores compelling legal and policy reasons supporting Section 854 review. (TURN/ORA Rhg. App., pp. 6-26.) Each of these arguments is discussed below.

1. Circumstances Warranting Exemption From Section 854 Review

TURN and ORA argue that the Decision errs in granting an exemption from Section 854 review because it did not apply the proper test for granting a Section 853(b) exemption. TURN and ORA assert that the Commission must establish "extraordinary circumstances" to grant an exemption and that this same test applies for granting an exemption from approvals requested under both Section 851 and 854. (TURN/ORA Rhg. App., pp. 9-12.) This argument is incorrect.

TURN and ORA allege that the Decision takes an overly selective approach which cites only certain past Commission authority to support granting an exemption in this case. (TURN/ORA Rhg. App., p 13.) Yet in arguing that we should have used the "extraordinary circumstances" test, TURN and ORA almost exclusively rely upon exemption cases pertaining applications for approval under Section 851 - not merger cases approved under Section 854. Similarly, TURN and ORA simply enumerate cases in which the Commission has conducted a full Section 854 merger review to suggest a full review must also be performed in this case. TURN and ORA argue we exercised our authority to exempt transactions from review pursuant to Section 853(b) in a "carte blanche" manner. However, this argument disregards the analytical approach we previously authorized, and applied in this case, in granting Section 853(b) exemptions for merger applications.⁹

Our Decision relies on several cases which establish our broad discretion to grant a Section 853(b) exemption, when evaluated on a case-by-case basis, as well as cases illustrating where such exemptions have been applied to merger applications. (D.05-11-029, pp. 15-18, and Appendix A.) However, we noted three cases in particular to illustrate the current exemption test commonly applied in merger proceedings.¹⁰ These cases applied three key principles: 1) does the transaction involve putting together two traditionally regulated telephone systems; 2) does the Commission exercise ratemaking authority as contemplated by Section 854(b) to allow allocation of benefits to ratepayers; and 3) do the requirements in Section 854(b) fit to allow allocation of merger benefits or alternatively, have the involved entities grown under competitive forces at the sole risk of shareholders. (Merger of MCI/BT [D.97-05-092], supra, pp. 664-665.)

The September 19, 2005 ACR used these exact three principles in determining the transaction was exempt from Section 854 review. Our Decision also notes these and relies on them, though altering the descriptive headings of the text for our own discussion purposes. Nevertheless, the underlying factual inquiry is consistent with that of the prior merger decisions. Accordingly, the Decision reasonably relies upon an existing and applicable exemption test in this case. (D.05-11-029, pp. 21-28.)

TURN and ORA cite to WorldCom Bankruptcy to assert that merger cases do in fact apply the "extraordinary circumstances" test.¹¹ However, this assertion is somewhat misleading. In WorldCom Bankruptcy, we granted exemptions from review under both Sections 851 and 854. Accordingly, we did note the "extraordinary circumstances" test related to the Section 851 aspect of the case. (Id., p. 6 (slip op.).) However, we also went on to discuss Section 854 review and used neither the "extraordinary circumstances" test nor the three principles enumerated in the above mentioned merger cases to grant the exemption. In WorldCom Bankruptcy we found four different factors relevant in granting the exemption: 1) the transaction changes no rates or terms of service for existing customers and the Commission retains full authority to review any such changes in the future; 2) the Company is taking extraordinary steps to change the practices of the past; 3) evidence that the transaction is in the public interest is strong; and 4) the Commission and the commissions of several other states have stipulated in the bankruptcy proceeding to use their best efforts to act on WorldCom's state applications by a specific date. (Id., pp. 6-7 (slip op.).)

Then in Merger of WorldCom/Intermedia, we rejected any hard and fast rule applicable to exemptions and instead stated that Section 853(b) gives the Commission discretion to decide on a case-by-case basis whether the exemption is appropriate.¹² In Merger of WorldCom/Intermedia we determined it appropriate to apply another set of factors in determining to grant an exemption. Specifically, that: 1) at least as to the Internet backbone, the merger will simply preserve the status quo at least until subsequent transactions are concluded and the merger will preserve Intermedia as a player in the California market; 2) Intermedia primarily serves business customers, a market where there is a great deal of competition; and 3) Intermedia has a small number of customers, dollar revenues, and employees in California. (Id., pp. 4-5 (slip op.).)

Indeed, there is no one hard and fast test which must be applied in granting an exemption pursuant to Section 853(b). We have looked to differing factors, depending upon the particular facts of a case and the situation at hand. In this Decision we relied on a set of factors we have repeatedly used in granting exemptions from Section 854 review. Accordingly, there is no legal error.

2. The Justifications For Exemption Under The Decision

TURN and ORA broadly argue that the three prong test used by the Decision to exempt the merger from Section 854 review errs because it is not based on the record, it is factually incorrect, and it does not consider the public interest. (TURN/ORA Rhg. App., p. 15.)

As discussed above, the Decision granted a Section 853(b) exemption based on an evaluation of three principles similar to those used in Merger of MCIC/BT, Merger of MCI/WorldCom, and Merger of AT&T/MediaOne. The principles we evaluated in the Decision are: 1) specific characteristics of the merger applicants; 2) the state and impact on the market as a whole; and 3) the likelihood that competitive pressures and our regulatory regime will cause benefits achieved through the combination to flow through to customers. (D.05-11-029, p. 21.) The inquiry under these principles was conducted in a manner to comport with the principles in the prior merger cases where we looked generally to: 1) whether the transaction involves combining traditionally regulated companies; 2) the nature of the Commission's ratemaking authority; 3) and whether the allocation of benefits to ratepayers fits or whether the entities have grown under competitive forces at the sole risk of shareholders.

a. Specific Characteristics of the Merger Applicants

TURN and ORA contend the Decision's analysis under this prong errs because: 1) it cites no case where a Section 853(b) exemption has been granted in a transaction involving an ILEC; 2) most other merger transactions were relatively small from a financial perspective; and 3) most other cases were non-controversial. (TURN/ORA Rhg. App., pp. 16-17.)

In analyzing the first prong, the Decision demonstrates how this transaction qualifies for exemption by noting facts such as: the holding companies which are the subject of this merger are not regulated by the Commission as public utilities; while the California subsidiaries of each company are regulated public utilities in California, none are subject to traditional cost-of-service rate regulation; all of MCI's California subsidiaries are non-dominant interexchange carriers (NDIECs or CLECS); and while Verizon California is an ILEC, post-merger the revenues of the combined company will account for only 2.7 to 3 percent of the combined company's revenues. Thus, we reasoned that California interests are not uniquely affected. (D.05-11-029, pp. 22-23.) We also noted that MCI has grown (and shrunk) under competitive market forces at the sole risk of its shareholders, as well as the fact that many services provided by the California subsidiaries of both Verizon and MCI are not subject to regulation by this Commission, such as interstate communications and information services. (D.05-11-029, pp. 27-28.)

The three arguments raised by TURN and ORA are not convincing for purposes of determining whether the first prong of the test was met or whether it was lawful for the Decision to exempt the proposed transaction from Section 854 review. Accordingly, there is no legal error.

⁹ TURN and ORA also allege the Decision claims to have "unfettered" power to grant an exemption. (TURN/ORA Rhg. App., p. 10.) However, this claim is not supported by D.05-11-029, which notes only the Commission's broad authority, case-by-case evaluation, and the application of established principles to grant an exemption. (D.05-11-029, p. 17.)

¹⁰ In the Matter of the Joint Application of MCI Communications Corporation (MCIC) and British Telecommunications plc (BT) for All Approvals Required for the Change in Control of MCIC's California Certificated Subsidiaries That Will Occur Indirectly as a Result of the merger of MCIC and BT ("Merger of MCIC/BT") [D.97-05-092] (1997) 72 Cal.P.U.C. 2d 656, 1997 Cal. P.U.C. LEXIS 340; In re Application of WorldCom, Inc. and MCI Communications Corporation for Approval to Transfer Control of MCI Communications Corporation to WorldCom, Inc. ("Merger of MCI/WorldCom") [D.98-08-068] (1998) 81 Cal.P.U.C. 2d 704, 1998 Cal. P.U.C. LEXIS 912; and In the Matter of the Joint Application of AT&T Corp., Meteor Acquisition Inc., and MediaOne Group, Inc. for Approval of the Change in Control of MediaOne Telecommunications of California, Inc. That Will Occur Indirectly as a Result of the Merger of AT&T Corp. and MediaOne Group, Inc. ("Merger of AT&T/MediaOne") [D.00-05-023] (2000) __ Cal.P.U.C. 3d __, 2000 Cal. P.U.C. LEXIS 355.

¹¹ In re Application of WorldCom, Inc. Pursuant to Public Utilities Code Section 853(b) for Exemption from the Requirements of Sections 851 and 854 of the Public utilities Code With Respect to its Bankruptcy Reorganizations ("WorldCom Bankruptcy") [D.03-11-015] (2003) __ Cal. P.U.C. 3d __, 2003 Cal. P.U.C. LEXIS 554.

¹² In re Request of WorldCom, Inc. and Intermedia Communications, Inc., for Approval to Transfer Control of Intermedia Communications Inc. and its Wholly-Owned Subsidiary to WorldCom, Inc. ("Merger of WorldCom/Intermedia") [D.01-03-079] (2001) __ Cal.P.U.C. 3d __, 2001 Cal. P.U.C. LEXIS 219, pp. 3-4 (slip op.).