COM/MP1/SK1/llj/acb DRAFT Alternate Agenda ID # 5026

Alternate to Agenda ID # 5025

Ratesetting

Decision ALTERNATE PROPOSED DECISION OF COMMISSIONERS PEEVEY AND KENNEDY (Mailed 10/19/05)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Joint Application of SBC Communications, Inc. ("SBC") and AT&T Corp. Inc. ("AT&T") for Authorization to Transfer Control of AT&T's Communications of California (U-5002), TCG Los Angeles, Inc. (U-5462), TCG San Diego (U-5389), and TCG San Francisco (U5454) to SBC, Which Will Occur Indirectly as a AT&T's Merger With a Wholly-Owned Subsidiary of SBC, Tau Merger Sub Corporation.

Application 05-02-027

(Filed February 28, 2005)

(Appendix A for List of Appearances, see PD.)

OPINION APPROVING APPLICATION TO TRANSFER CONTROL

TABLE OF CONTENTS

Title Page

1. Summary 2 2

2. Procedural Background and Description of Financial Transaction 2 2

3. The Corporate Entities 8 8

3.1. SBC 8 8

3.2. AT&T 8 8

4. Jurisdiction and Scope of Proceeding 9 9

4.1. Background 9 9

4.2. §854(a) Applies to this Transaction 9 9

4.3. Application of §§ 854 (b) and (c) to this Transaction 10 10

4.3.1. It is not reasonable to "pierce the corporate veil" as neither SBC California nor AT&T California is "key to the merger." 11 11

4.3.2. Exemption under §853(b) makes consideration of affiliate revenues irrelevant 13 13

4.3.3. Prior applications of §854(b) to transactions involved the acquisitions of ILECs, not NDIECs or CLECs 14 14

4.3.4. Legislative history demonstrates that the Legislature intended to give the Commission flexibility in the application of §854(b) where traditional cost-of-service utilities are not involved in the transaction. 19 19

4.3.5. Exempting this transaction from § 854(b) is in the public interest pursuant to the authority granted in § 853(b) and consistent with Commission precedent. 22 22

4.3.6. Commission precedent and § 854(c) provide the appropriate guidelines for determining whether this transaction is in the public interest. 24 24

4.4. Summary of Applicable Law 27 27

5. Does the Proposed Merger of the Parent Companies and Change in Control "Not Adversely Affect Competition?" 27 27

5.1. Mass Market Local Exchange 29 29

5.1.1. Advisory Opinion finds merger "will not have adverse effects upon competition in local markets" 29 29

5.1.2. Position of Parties 30 30

5.1.3. Discussion 35 35

5.2. Mass Market Long Distance 41 41

5.2.1. Advisory Opinion finds long distance services "readily available" and that merger will "have minimal effects on concentration." 41 41

5.2.2. Position of Parties 42 42

5.2.3. Discussion 43 43

5.3. Enterprise Services 44 44

5.3.1. Advisory Opinion finds merger tentatively concludes that "merger will not cause undue increases in concentration levels." 44 44

5.3.2. Position of Parties 46 46

5.3.3. Discussion 48 48

5.4. Special Access Services 49 49

5.4.1. Advisory Opinion finds "potential entry here should be sufficient ... to counteract any potential anticompetitive effects." 49 49

5.4.2. Position of Parties 51 51

5.4.3. Discussion 54 54

5.5. Internet Backbone 55 55

5.5.1. Advisory Opinion finds markets "are unconcentrated and will remain so after completion of the merger." 55 55

5.5.2. Position of Parties 56 56

5.5.3. Discussion 57 57

6. Do the Proposed Transactions Meet the Public Interest Tests Contained in § 854(c)? 58 58

6.1. Will the Change of Control Maintain or Improve the Financial Condition of the Resulting Utilities Doing Business in California? 59 59

6.1.1. Position of Parties 59 59

6.1.2. Discussion: The Merger will maintain or improve the Financial Condition of the resulting public utility 61 61

6.2. Will the Merger of the Parent Companies and the Change of Control Maintain or Improve the Quality of Service to California Ratepayers? 63 63

6.2.1. Position of Parties 63 63

6.2.2. Discussion: Merger Will Maintain or Improve Service Quality 65 65

6.3. Will the Merger of the Parent Companies and Changes of Control Maintain or Improve the Quality of the Management of the Resulting Utility Doing Business in California? 66 66

6.3.1. Position of Parties 66 66

6.3.2. Discussion: Proposed Transaction Will Maintain or Improve Management Quality 67 67

6.3.3. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to the Affected Employees? 67 67

6.3.4. Position of Parties 67 67

6.3.5. Discussion: Changes will be Fair to Utility Employees 69 69

6.3.6. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to a Majority of the Utility Shareholders? 70 70

6.3.7. Positions of Parties 70 70

6.3.8. Discussion: Transaction is in the Interest of Shareholders 71 71

6.3.9. Will the Proposed Merger of the Parent Companies and Change of Control Be Beneficial on an Overall Basis to State and Local Economies and the Communities Served by the Resulting Utility? 71 71

6.3.10. Position of Parties 72 72

6.3.11. Discussion: Transaction Will Benefit Californians 74 74

6.4. Will the Proposed Merger of the Parent Companies and Change of Control Preserve the Jurisdiction of the Commission and its Capacity to Effectively Regulate and Audit Public Utility Operations in California? 82 82

6.4.1. Positions of Parties 82 82

6.4.2. Discussion: Transaction Will not Diminish Jurisdiction of Commission or its Capacity to Regulate and Audit Utility Operations in California. 83 83

7. Does the Proposed Merger of the Parent Companies and Change in Control Create Environmental Issues of Concern? 84 84

8. Other Issues § 854(c)(8) § 854(d) 84 84

8.1. Position of Parties 85 85

8.2. Discussion 89 89

9. The Commission Should Approve this Application for a Proposed Merger of the Parent Companies and Change in Control at this Time 91 91

10. Comments 91 91

11. Assignment of Proceeding 91 91

Findings of Fact 91 91

Conclusions of Law 98 98

O R D E R 101 101

ATTACHMENT A

OPINION APPROVING APPLICATION TO TRANSFER CONTROL

1. Summary

We hereby approve the application of SBC Communications, Inc. (SBC) and AT&T Corp. (AT&T) (collectively, Applicants) for authority to transfer control of AT&T Communications of California and its related California affiliates from AT&T to SBC subject to the terms and requirements set forth in this order. We have reviewed the proposed merger under the authority of Public Utilities Code § 854 to determine whether it is in the public interest. We have determined that § 854(a) applies to this transaction. Sections 854(b) and (c) do not apply to the transaction and even if it could be argued that those sub-sections apply, it is appropriate to grant an exemption under § 853(b).

The Applicants must meet the conditions adopted herein in order to provide reasonable assurance that the proposed transaction will be in the public interest in accordance with § 854(a). We find that, subject to Applicants' compliance with the adopted conditions, the merger will produce net benefits for consumers and will not adversely affect competition for telecommunications service in California. Conversely, if the Applicants declined to implement the conditions set forth herein, we would conclude that the merger did not comply with § 854 and could not be approved.