V. Other Public Interest Criteria Considered Under Section 854(c)
In addition to § 854(b), Applicants must satisfy the public interest criteria under § 854(c), as previously enumerated. We adopt conditions as set forth below to ensure compliance with § 854(c).
A. Maintaining or Improving Financial Health
1. Parties' Positions
Pub. Util. Code § 854 (c) (1) requires that the merged company maintain or improve the financial condition of the resulting public utility. The Joint Applicants assert that the complete organization created by this merger would enjoy good financial health. (Ex. 43, p. 21, SBC/Kahan.) AT&T has experienced increasing financial challenges in recent years which have resulted in thousands of layoffs and created financial uncertainty for workers and shareholders. Applicants claim the merger creates a stronger combined company through which AT&T and its affiliates will benefit from SBC's stronger balance sheet and better access to capital.212
Applicants' claims focus on the overall operations of the combined company, but do not address specific increased risks on the regulated utility SBC California's financial condition. ORA argues, however, that this merger may adversely impact SBC California's financial condition, and may increase the potential for the parent company and affiliates to exploit regulated California utility operations and cause the latter financial harm.
ORA raises the concern that SBC California's regulated revenues could be eroded by SBC affiliates' unregulated VoIP offerings which contribute substantially to regulated SBC California's intrastate revenues. (Ex. 12C, p. 62, ORA/Tan.) This merger will make it possible to deploy IP-based services, including VoIP, at a faster pace. (A.05-02-027, Ex.43, JA-SBC/Kahan.) VoIP normally provides a wide range of unregulated services including local, toll, and custom-calling features. Such features contribute substantially to regulated SBC CA's intrastate revenues. (Ex. 12C, p. 62, ORA/Tan) Other SBC entities which offer IP platform services may also erode traditional high capacity (and high revenue-generating) data services, such as DS1, DS 3, which currently comprise category II revenues.
SBC classifies the costs for enhancing the network to provide IP-type services as regulated costs (Ex. 12C, p. 65, Tan/ORA) even though these IP-based services are considered non-regulated services. If non-regulated affiliates do not share properly in network upgrade costs, network reliability could suffer in the long run. Alternatively, if SBC California faces the prospect of being unable to meet its obligation to serve, it may likely seek rate increases. ORA reports that SBC California has been raising rates for many services, including recategorized services, such as business toll, centrex, Custom 8, etc., and the rate increases are substantial.
2. ORA Proposed Mitigation Measures
Relating to Section 854(c)(1)
To mitigate financial risks created by the merger, ORA proposes that the Commission ensure that the revenues follow costs and vise versa. The last NRF audit found that SBC California booked several million dollars of the DSL deployment and development costs in SBC CA's books above the line.213 ORA understands that investment for the new roll out of extending fiber to the node or customer premises are all booked above the line. Most of these costs have not been audited. ORA thus proposes that the Commission make sure that where costs are booked as intrastate costs above the line, the associated revenues are also captured as intrastate revenue above the line; and vice versa. Unless network costs are properly allocated based on the revenues generated, not only by traditional voice grade, but also IP revenues, network reliability may suffer in the long term.
We agree with the principle that revenues and associated costs be properly matched. It is not clear from ORA's testimony, however, exactly how this principle translates into a specific proposed condition on the merger. ORA discusses accounting issues that were identified in the last NRF audit, all of which relate to pre-merger activities. While we do not diminish the general importance of these accounting issues, we do not view such issues as merger impacts, per se. Accordingly, we do not view this proceeding as the applicable forum to address compliance with the accounting issues raised in the NRF audit.
ORA also recommends that the Commission review the possibility of directing SBC CA to provide IP-based services itself. It is possible that the whole network will eventually evolve into a packet-switched based, IP network. ORA argues that the Commission has to assess the implication of such network transformations to make sure that the regulated utility can continue to meet its obligation to serve.
ORA does not appear to be proposing a specific merger condition here, but only suggesting that the Commission consider the possibility of directing SBC California to provide IP based services itself. We reserve the option of considering such a possibility at a future time if there appears to be sufficient warrant to do so. Without further elaboration on this proposal by ORA, we are not persuaded that such a study is necessary at this time.
ORA also proposes that the Commission impose a "first priority" condition on the SBC holding company. In fashioning this condition, ORA draws upon D. 02-07-043 in which the Commission clarified a requirement pertaining to the holding company systems of the major California energy utilities. In D. 02-07-043, the Commission required energy utilities' holding companies to infuse capital into the regulated utility when needed to meet its obligation to serve customers. This requirement, known as the "first priority" condition, was intended to protect the regulated utility from being unfairly exploited by its parent and affiliates. For purposes of this proposal, ORA incorporates the principle previously adopted by the Commission in D.02-07-043 requiring that the funding needs of the utility must take first priority. In this regard, the Commission has previously stated:
The holding company must infuse capital into the utility when needed to meet its obligation to serve.214
The Commission emphasized in D.02-07-043 that it will weigh the regulated utility's interests when determining the impact of affiliate ventures.215 The Commission noted its desire and statutory duty to ensure that the holding company system does not eviscerate a regulated utility's ability to fulfill its obligation to serve, and affirmed that a first priority condition, by "requiring its holding company to give the utility preference over all competing potential recipients of capital resources" is necessary to ensure the utility's ability to serve.216
Applicants object to ORA's proposed conditions, arguing that the Commission already has its own affiliate transaction rules and requirements.217 Applicants further argue that the FCC has implemented Customer Proprietary Network Information ("CPNI") protections.218 Applicants contend that the merger does not have any effect on these standards.
Joint Applicants seek to form a global, vertically-integrated telecommunications company. In granting approval, the Commission has the authority to place conditions on the proposed transaction to meet the standards for approval under § 854. The Commission has this authority even if members of the extended SBC corporate family are not subject to the Commission's jurisdiction.219
We shall adopt the "first-priority" condition, as proposed by ORA. We agree with ORA that this condition is appropriate as a mitigation measure here. Applicants have pointed to increased capital spending on advanced technologies as one the anticipated effects of the merger. While such capital expenditures may benefit certain categories of customers, there is also the risk that reduced funds may remain available for traditional regulated services. While D.02-07-043 applied to energy utilities, this principle also applies to holding companies controlling regulated ILEC operations. Under a holding company structure, a regulated utility may be exploited by its parent and affiliates. Ex. 12C, pp. 59-60 & p. 63, citing D.86-01-026, ORA/Tan). Nothing in the record demonstrates that SBC California will be relieved from the various payments it is making to its parent and affiliates. Since SBC acquired Pacific Telesis in 1997, there has been a constant flow of capital/cash from SBC CA to its parent and affiliated companies.220 ORA raises the concern, however, that SBC CA may face additional financial pressure from the new affiliated entity formed by the merger.221 To mitigate the risk that increased capital spending by the merged company is used in a manner that deprives regulated utility operations of necessary funds, we shall therefore adopt ORA's proposal. Thus, as a first priority condition, we shall require that SBC give the regulated ILEC preference over all competing potential recipients of capital resources necessary to ensure the ILEC's ability to serve.
B. Effects on Quality of Management
Section 854(c)(3) requires the Commission to consider whether the proposed merger will "[m]aintain or improve the quality of management of the resulting utility doing business in the state. Applicants have claimed that the overall management of the combined company will be enhanced by combining the separate strengths of the two companies. ORA has raised issues over potential management practices relating to how resources are allocated between regulated and unregulated operations. We address that issue separately in our discussion of how the merger will affect the financial health of the combined utility and our ability to regulate effectively. In other respects, we find no evidence that the quality of management will be adversely affected by the merger. Thus, subject to our discussion of separate affiliate reporting requirements, we find that Applicants have satisfied Section 854(c.)(3) relating to the quality of management.
C. Effects on Public Utility Employees
Section 854(c)(4) requires that the merger be fair and reasonable to public utility employees. ORA claims that SBC has employed a strategy to use SBC California workers as needed in its nationwide workforce, available to shore up performance in other states when SBC carriers in states with stricter standards fall short of those state's standards." (Ex. 26C, p. 70, ORA/Piiru) ORA argues that as long as SBC California adheres to standards that are not as strict as those of the other SBC carriers, California will be vulnerable to service quality arbitrage, and the threat that its workforce will be re-deployed to SBC carriers in other states with stricter standards when standards are not met in those states.
Given the financial incentive to meet service quality standards in other states, ORA expresses the concern that SBC may again be motivated to shift staff resources from states with lax standards, such as in California, to those with higher standards and penalties as a way to minimize the parent company's overall financial burden and maximize profit. These financial incentives can harm California ratepayers as resources and personnel are shifted to other states with tougher standards and penalties, and staff reductions are disproportionately made to California where penalties for service quality degradation are less likely. (Ex. 26C, Reply Testimony of Dale Piiru, p. 80)
ORA also identifies SBC's offshore outsourcing policies as an additional threat to California jobs (Ex. 26C, p. 84, ORA/Piiru). With the merger, SBC will have enhanced opportunities to engage in such offshore outsourcing. Even though SBC California does not have its own outsourcing policies or contracts, the SBC holding company has a significant outsourcing function. (Tr., Vol. 9, pp. 1328-1334, AT&T/Polumbo). Since SBC California is the largest of the SBC carriers, California could suffer proportionately from the holding company's offshore outsourcing policy. We agree with ORA's general concerns and shall adopt this condition.
While ORA raises general concerns with how SBC allocates its employees between California and other states, or through offshore outsourcing, these concerns existed before the merger. Other than raising the possibility that there will be more opportunities for SBC to relocate employees after the merger, ORA has not established a specific link between the merger, per se, and how employees will be allocated. Moreover, ORA has not provided a specific quantifiable measure that could be applied with respect to how employee resources are utilized or allocated. In any event, the conditions we are adopting relating to service quality will mitigate any risk of excessive employee job loss in California.
In addition, we are not predisposed to enforce utility business plans, which would represent a departure from our policy to create incentives for utility managers to assume the risk of their operations rather than rely on our constant oversight. Accordingly, we decline to adopt merger conditions relating to public utility employees. We find that § 854(c)(4) has been adequately satisfied.
D. Effects on Public Utility Shareholders
Section 854(b)(5) requires the Commission to consider whether the proposed merger will "[b]e fair and reasonable to the majority of all affected public utility shareholders." Applicants have argued that the merger will enhance the financial strength of the combined company by the synergies created from the merger. No party argues that the merger will be unfair or unreasonable to existing or future shareholders.
The merger will be fair and reasonable to affected public utility shareholders, as reflected by the approval of the merger by 98% of AT&T's shareholders. Accordingly, we find that Section 854(b)(5) has been satisfied.
E. Effects on State and Local Economies and Communities of Interest
Section 854(c)(6) requires that the merger be beneficial to state and local economies and to local communities. Various parties, as well as speakers at the PPHs, argue that the merger will create significant risks for the state and local economies, and particularly underserved segments therein, served by SBC and AT&T through the effects of diminished competition. TURN argues that diminished competition is harmful to the affected state and local economies. SBC does not compete for residential customers outside of its traditional ILEC service territory, and has no plans even to maintain AT&T's consumer lines in California outside of SBC California's ILEC territory. Thus, TURN raises the concern that the local economies in the Verizon California service territory may suffer by losing one of the main competitive options previously available in the form of a stand-alone AT&T.
TURN also raises the concern that state and local economies may suffer through SBC's cost-cutting measures to generate merger savings. Applicants have suggested that nearly 13,000 jobs will be lost due to the merger.222 Given the substantial portion of the workforce that is located in California, TURN infers that a significant portion of those lost jobs will be from California. ORA states that there is a potential loss of more than 3,000 California jobs. ORA argues that job loss will have a significant adverse impact on the California economy, which would be a basis for rejection of the merger pursuant to § 854(c)(6). TURN also raises the concern that Applicants' planned savings from the merger will come, in part, from reducing purchases from California-based suppliers. Applicants have failed to provide any estimate of the magnitude of such merger-related losses.
TURN also raises concern that the merger will have particularly harsh effects on underserved communities. TURN calls attention to Applicants' claims that the merger will create practically no benefit relating to the bulk of SBC residential and small business customers. TURN views such claims as indications of SBC's motivation to export merger-related savings from California to Texas and beyond.
Similar concerns regarding the effects on underserved communities were expressed by other parties including Greenlining, LIF, DRA, and CFTC. Various parties presented testimony and proposals regarding the need for mitigation measures relating particularly to specialized segments of the communities within which Applicants serve. Two of these groups, Greenlining and LIF entered into a settlement with Applicants to propose a compromise whereby certain commitments would be made by Applicants. We first review the evidence and proposals presented in testimony on these issues, and then evaluate the evidence in view of the subsequent settlement entered into by certain parties.
1. Diversity Issues
Greenlining specifically questioned how the merger will impact supplier diversity. Greenlining raises this concern, particularly because AT&T has compared unfavorably with SBC in its track record regarding supplier diversity. Greenlining claimed that SBC appears to be doing little more than the bare minimum to identify diverse suppliers through unique channels and innovative measures. Greenlining argued that unless SBC and AT&T set an aggressive minority contracting goal for the merged company and commit to go beyond the typical means to seek diverse suppliers, the merged company's supplier diversity record will be weak. Witness Gamboa supported a goal of a 30% increase by 2007 in the merged company's supplier diversity.
Greenlining also expressed concern about the lack of diversity among the leadership of the merged company and its potential inability to serve the diverse populations of California. Greenlining states that minority groups are underrepresented among the most highly paid employees of SBC. The Application, however, identified no plans regarding how the merged firm's workforce will reflect the diverse populations of California. Greenlining asked the Commission to urge Applicants to address weaknesses in their diversity policies as a condition of the merger, and to approve a reporting process for tracking progress in this regard.
2. Philanthropy Issues
Greenlining also was critical of SBC's philanthropy to underserved communities. Greenlining claims that SBC's current philanthropy to underserved communities is very low compared with its executive compensation. Greenlining argues that a major company interested in becoming a good corporate citizen should contribute at least 2% of pre-tax income in cash philanthropy with 80% of that philanthropy going to benefit underserved communities. SBC and AT&T have not yet reached this goal, and Applicants established no charitable giving goals in their Application. Greenlining recommended a commitment of $40 million per year in charitable giving over a 10-year period, with at least 80% going to low-income, minority and underserved communities. Gamboa testified that this level of giving is consistent with the philanthropy of other large regulated corporations.
3. Bridging the "Digital Divide" for Underserved Consumers
Greenlining also advocated measures to bridge the "digital divide" between underserved low income and minority customers versus more affluent customers. Greenlining proposed that the merged company commit to free wireless broadband for public schools and libraries located in low-income areas and households in very low-income areas, as well as reduced rates for broadband for qualifying low-income households.
LIF likewise notes that in contrast to this merger, in the SBC/Pacific Telesis merger of 1997, important § 854(b) benefits were created for underserved communities. D.97-03-067 approved "Community Partnership Commitment...activities to support customer service, underserved markets and local communities."
LIF believes that specific § 854 short and long-term commitments should be directed at the most vulnerable segments of California's telecommunications customers to bring about economic and educational benefits for underserved communities, especially in terms of broadband access and Universal Service.
Subsequent to approval of the SBC/Pacific Telesis merger, SBC was found to have engaged in highly aggressive and deceptive marketing practices targeted, in part, at Latinos and other language minority communities. Some of the unethical activities centered around expensive packages of services which customer service representatives were compelled to try to sell on every service call, regardless of the customer's reason for calling. Thus, as a condition of the merger, LIF proposed long-term guarantees on low-cost basic unbundled service options without aggressive marketing. LIF argues that it is critical that access to basic local service at a low cost be protected and guaranteed through the Commission's oversight power and through the Applicants' voluntary commitments.
LIF argues that Latinos and other immigrant communities are particularly susceptible to unethical marketing for a variety of reasons. Therefore, LIF believes that a condition of the merger should be a "zero tolerance" policy on slamming, cramming and marketing abuse for the merged company, especially as it pertains to language minority customers. The Commission announced its zero tolerance policy for marketing abuse in its Rulemaking on the Commission's Own Motion to Consider Adoption of Rules Applicable to Interexchange Carriers, R.97-08-001, I.97-08-002.
LIF also expresses concern Applicants make no specific commitments with respect to Universal Service. LIF believes commitments in this area are important particularly as landline service and the funding base for Universal Service erodes. LIF believes the question of funding for Universal Service programs needs to be examined and the definition of "basic service" must be retooled to match advanced technologies. LIF argue that low-income customers are constrained to "horse and buggy" technology of telephones only rather than Internet with the Universal Service program. LIF thus argues that mandatory funding of Universal Service for the long term should be a condition of this merger as it was with the Pacific Telesis/SBC merger, including the creation of a Blue Ribbon Task Force to study funding and advanced technology issues.
4. Concerns of Consumers with Disabilities
Disability Rights Advocates (DRA) sponsored testimony regarding disabled consumers' interests in promoting affordability, availability and accessibility of telecommunications services. DRA seeks to ensure that the new merged entity provides accessible programs and services to consumers with disabilities, and that basic service will continue to be available at affordable rates, particularly in light of the trend towards "bundled" services.
DRA seeks assurances that the merged entity will provide bills and other communication in an accessible format, such as Braille, large print, and other accessible, electronic formats. Consumers with disabilities are also concerned about communication problems with the new entity due to changes in management and personnel, particularly regarding service installations, billing disputes and other transactions, and the specialized needs of customers with disabilities. DRA proposes that as a condition of the merger, SBC's website, including the portions of the website that allow individual transactions to take place, be fully accessible to consumers with disabilities.
DRA claims that the Applicants have not addressed the concerns identified by the disability community, or how the new entity would maintain or improve the quality of service to customers with disabilities. Prior to its merger with SBC, Pacific Telesis was recognized as a leader on disability related issues within California, particularly in its commitment to Universal Design principles. The merger between SBC and Pacific Telesis imbued SBC with a new sense of commitment to consumers with disabilities. AT&T, however, lags behind SBC on issues of concern to the disability community
The Applicants assert generally that the new entity will be "well equipped to increase investment in research and development, and to bring new products and services to customers." (Application at 30.) DRA questions whether this claim is focused on products and services that can be offered to the low-income market, including people with disabilities. Applicants do claim that potential new products and services may include speech and text technologies that would be beneficial to customers with disabilities. However, there is no mention of the affordability of such services.
If the merger proceeds, DRA proposes that the Commission condition approval on SBC's commitment to ensure that the telephone, as a basic communication tool, remains a low cost service of the new entity in the future.
DRA also proposes that the Commission require specific commitments by the Applicants to increase funding levels and spending on disability programs and services, consistent with the proposed entity's increased financial resources. Because programs and services for consumers with disabilities can be costly, DRA expresses concern that they are at risk for potentially coming into conflict with a new entity's anticipated focus on cost-cutting efficiencies. Without explicit requirements in support of these services, DRA argues, such programs may be in jeopardy. DRA proposes an ongoing commitment to providing specialized customer service programs for consumers with disabilities, including improved training for dedicated representatives addressing accessibility resources, as well as training for other customer service representatives so that they are aware of the dedicated program's existence and are prepared to refer customers to the dedicated program when appropriate. DRA also proposes expanded outreach to the disability community regarding the existence of such programs, including outreach in accessible formats.
To the extent that consumers are offered the opportunity to pay lower prices for a service when purchasing "bundled" services at the same time, DRA argues that all of the "bundled" services should be accessible to persons with disabilities. DRA proposes that if any services in a bundled offering are inaccessible, such inaccessibility must be transparent, and people with disabilities should be permitted to drop such services from the bundle and receive a correspondingly reduced rate, without increased charges for the remaining services.
In reference to Universal Design principles, DRA proposes that the new entity expand its commitment to developing and supporting products and services meeting its principles through in-house efforts and through procurement involving products provided by outside manufacturers.
SBC currently maintains a Telecommunications Consumer Advisory Panel and a Disability Advisory Group, both of which provide valuable advice to SBC regarding the implementation of its policies that benefit persons with disabilities. DRA proposes that, at a minimum, the new entity be required to maintain comparable or expanded internal committees so that the opinions and ideas of persons with disabilities will continue to be heard and have influence within the new entity.
DRA also suggests SBC establish a monitoring and reporting system to evaluate whether disability related improvements are implemented effectively and timely, with review of customer service satisfaction levels from consumers with disabilities. The report would also include a comparison of customer satisfaction levels pre and post merger, to ensure that the overall level of customer satisfaction among customers with disabilities does not decline.
DRA recommends that some portion of § 854 (b) merger benefits be used to establish grants aimed at providing telecommunications access to underserved communities, with programs specifically targeted to reach the disability community. DRA suggests that the funding could be administered through an existing telecommunications foundation with a portion of the fund designated for disability related issues. As other alternatives, DRA suggests establishing a new foundation aimed at closing the digital divide and providing access to telecommunications services generally, or contributing to an existing fund, such as the DRA Fund, a donor-advised fund administered by the San Francisco Foundation, with directions to fund programs to increase the accessibility and availability of telecommunications technology.
Community Technology Foundation of California (CTFC) proposes that a minimum of $100 million (on a net present value basis) be allocated to a community benefit fund targeted toward the underserved community. CTFC defines "underserved communities" as including low-income, inner-city, minority, disabled, and limited English-speaking community sectors who lack equal access to basic and advanced telecommunications infrastructure and services.
5. The Settlement Between Greenlining, LIF, and Applicants
Greenlining, LIF, and SBC entered into a settlement agreement regarding the issues raised by Greenlining in this proceeding. The terms of the proposed settlement were first provided to parties and the Commission concurrently with opening briefs (attached as Exhibit A to the Greenlining Brief). The settlement provides a set of commitments by Applicants that purport to satisfy the requirements of §§ 854(b) and (c) relating to net benefits to consumers, including underserved communities.
The three main commitments presented in the settlement relate to:
a. increased supplier diversity commitments consistent with this Commission's General Order (GO)-156 goals;
b. increased access by underserved communities to advanced technologies; and
c. increased philanthropy commitments to underserved communities.
As one of the prongs of the settlement, SBC commits to raise its corporate and foundation philanthropic contributions in California from $6.6 million a year to $15 million a year for two years beginning in 2006 (assuming merger approval) and to $20 million a year for the subsequent three years or until 2010. As part of this long-term commitment, SBC has pledged to ensure that at least 60% of such philanthropy is directed at underserved communities.
The overall § 854(b) benefits through the settlement, just through the philanthropy portion, are $57 million over five years. The $57 million figure is based upon SBC's corporate and foundation giving in 2004, which represented $6.6 million a year. The philanthropic commitment in the settlement agreement is $90 million over five years, or an increase of $57 million.
SBC commits to direct at least 60% of these benefits toward underserved communities. Greenlining argues that this commitment is greater than the typical corporate commitment and greater than the percentage of the population that is considered underserved.
Greenlining believes that because SBC's commitment is part of a long-term strategic plan, it is likely to have a greater impact than dollars committed by government, most foundations, or by corporations without long-term philanthropic commitments.
In terms of supplier diversity, SBC commits to achieving 25% minority supplier diversity by 2006 and 27% by 2010. Using its base for 2004 of 23%, Greenlining estimates that additional minority supplier diversity spending in California in 2006 could grow to $40 million, and by 2010, to $80 million a year. Assuming a midpoint figure of 26%, Greenlining estimates that over five years, additional minority supplier diversity spending could grow to $300 million.
As another element of the settlement, SBC agrees to actively participate in the creation of "a statewide broadband taskforce, a public-private partnership focused on addressing California's digital divide." Greenlining argues that the value of this commitment could be considerable and have the potential, assuming cooperation from the CPUC, the legislature, high technology corporations, and the leadership of the CEO of SBC, to be even more valuable to underserved communities than § 854(b) benefits from philanthropy and supplier diversity.
Greenlining argues that this additional $57 million in philanthropic commitments constitutes a § 854(b) benefit. In evaluating the dollar amount of the § 854(b) requirements imposed on SBC, Greenlining urges that, at a minimum, this $57 million should be credited against any § 854(b) benefits; and be considered substantially more valuable than unleveraged refunds to all telecommunications consumers.
Greenlining calculates that the $57 million over five years in refunds to 10 million customers would constitute the equivalent of only 10 cents a month per customer. Greenlining also urges that the § 854(b) benefits be examined in the context of typical government, foundation, or corporate grants. Government grants, replete with bureaucracy and political motivation, frequently involve little long-term planning or strategy. Corporate grants, particularly when made from year to year, lack long-term strategic objectives and most corporations contribute 20% or less of their philanthropy to underserved communities. And in regard to foundations, the vast majority of foundation funding to underserved communities ignores the minority community. (The national average for foundation giving is 2% to African American communities, 1% to Latino communities, and one-third of 1% to Asian American communities).
6. Responses to the Settlement
ORA and TURN argue that the Commission should not approve this settlement at this time because the settlement has not been subject to scrutiny by other parties as required by the Commission's Rules of Practice and Procedure ("Rules"). The settlement proposes to resolve issues now that ORA and TURN have asked to be deferred to a subsequent phase of this proceeding, after the total amount of shared benefits has been determined.
The Commission's Rules require that all parties have an opportunity to review and comment on settlements. Rule 51.1(b) specifically requires that prior to the signing of a stipulation or settlement, the settling parties shall convene at least one conference with notice and opportunity to participate provided to all parties for the purpose of discussing stipulations and settlements in a given proceeding. Notice served in accordance with Rules 2.3 and 2.3.1 of the date, time, and place shall be furnished at least seven (7) days in advance to all parties to the proceeding.
This requirement has not been met. The Rules also provide for an opportunity to comment on the settlement. ORA believes this comment process should occur in a second phase of this proceeding, once the amount of economic benefits to be shared with ratepayers has been established.
In its Opening Brief, Greenlining asks that the additional amounts of corporate philanthropy required under the settlement be credited against any § 854(b) benefits allocated by the Commission. Greenlining asserts that allocating these benefits per the settlement agreement would be more beneficial than making refunds to customers. ORA does not believe the settlement is clear as to what extent ratepayers would actually benefit. The settlement would establish a Broadband Taskforce, yet such a body is already contemplated by the Commission's recent rulemaking on advanced technologies, R.03-04-003. In that proceeding, the Commission issued a broadband report which, among other things, made clear its expectations that the ILECs would play an active role in its efforts.223. Therefore, it is unclear what additional effort or value this portion of the settlement represents as compared to the status quo.
The settlement also calls for SBC to increase its charitable giving, using monies that otherwise would be shared as merger benefits. SBC California's dues donations, and advocacy expenses have traditionally been booked "below the line" in accordance with established ratemaking theory. GTE California (NRF Review) (1994) 55 Cal. P.U.C. 2d 1, 41-42. Provisions on service quality also seem to duplicate the Commission's requirements.
The provision of the settlement relating to philanthropy also protects SBC shareholders by affirming that SBC "pays no financial price for its philanthropic leadership" should the merger not go through, or if it only gains approval subject to "onerous conditions." The settlement fails to clarify how "onerous conditions" would be defined. Presumably, if any conditions are imposed with which Applicants view as "onerous," any funding of philanthropy commitments under the settlement would be charged to ratepayers. Yet, the Commission has repeatedly affirmed its prohibition on using ratepayer funds to cover expenses associated with philanthropy.
TURN also raises questions about the basis for the claim that the settlement results in an increase in $57 million in philanthropic giving. TURN points out that in order for the $57 million commitment to be meaningful, there should be a comparison against pre-merger levels of giving, not just for SBC but also for AT&T's California operations. Otherwise, SBC could reduce AT&T's level of donation to offset the increased donations by SBC California. TURN also notes that no basis has been provided for finding that 2004 donations are an appropriate benchmark for assessing the significance of the $57 million figure as a commitment of increased giving levels. Likewise, there has been no showing as to whether, or by how much, SBC may have increased its philanthropic contributions absent the merger. Only the portion of philanthropy that would not have occurred absent the merger can be properly attributed as a merger benefit.
The settlement is further constrained only by a "good faith" goal that 60% of the new incremental spending will go to "underserved communities or to nonprofits whose primary mission is to serve underserved communities, minorities, or the poor." That means that up to 40% of the funding could go to other charitable purposes having nothing to do with underserved communities. Moreover, there is no requirement that even the 60% earmarked for underserved communities be spent on activities related to improving the access of those communities to telecommunications or other information services.
DRA argues that philanthropy commitments, by themselves, are no substitute for ensuring accessibility of Applicants' programs and services to consumers with disabilities. DRA disagrees with the claim made in the settlement that philanthropy is likely to have a greater impact than funds committed by government and most foundations without long term philanthropic commitments. DRA notes that several parties testified that foundations created in past mergers serve as a model for the way benefits to ratepayers can be leveraged to benefit underserved communities.
With respect to the interests of consumers with disabilities, the Settlement would extend the life of the California Disability Advisory Group (DAG) until December 31, 2009, and expand it to include national issues and universal design. There is no provision in the Settlement, however, to ensure that the DAG's recommendations are reviewed by upper management so that they may be acted upon. Without this requirement, DRA is concerned that post-merger, the DAG will lack authority or audience to have its recommendations implemented.
TURN also points out that in order to measure the value of SBC's commitment with respect to supplier diversity, there needs to be some baseline regarding the company's goals absent the settlement. Otherwise, there is no way to assess the value of the promise, or to measure SBC's compliance therewith.
ORA argues that these requests ask for relief that is not appropriate at this time. Both ORA and TURN have asked that the Commission consider how § 854(b) benefits will be allocated after determining the amount of economic benefits that will be allocated to ratepayers. ORA has not argued that these benefits must necessarily be returned to ratepayers in the form of a refund or surcredit, but has asked the Commission to consider how to fund several of the conditions that ORA has proposed or supported.
The conditions proposed and supported by ORA are designed to have an overall benefit on ratepayers in California. They will either improve or maintain the competitive environment, improve service quality, or insulate ratepayers from the risks of this transaction, including increased rates. ORA believes the recommendations of the settlement should not be considered in isolation, but should be compared with other proposals to use allocated ratepayer benefits in the public interest. As a result, ORA believes the Commission should consider this settlement in a subsequent phase of this proceeding, once the amount of economic benefits to be shared with ratepayers has been established.
The settlement states the terms and conditions of the agreement will be "the equivalent of § 854(b) requirements."224 ORA has asserted that the total economic benefits of this transaction lie in the range of $1.87 billion. ORA, therefore disputes the claim that an increase in charitable giving and other incremental refinements to SBC's business practices is "equivalent" to a proper 50% allocation to consumers of $1.87 billion in synergies.
7. Discussion
While the settlement extracts certain concessions from Applicants relating to philanthropy, diversity, and bridging the digital divide, other substantive and procedural defects prevent us from adopting the settlement in its present form. We agree with TURN and ORA that because settling parties failed to convene a settlement conference pursuant to Rule 51.1(b), the settlement is not ripe for Commission adoption. Nonetheless, to the extent that parties have commented on the settlement to a limited extent through reply briefs, they have identified various questions and concerns with the terms of the settlement.
Specifically, we have already determined the benefits that apply as a result of the synergy calculations discussed previously in this decision. We have also adopted other various mitigating conditions with which Applicants disagree. Yet, the settlement would permit Applicants to abandon all of their commitments under the settlement if they unilaterally deemed other requirements of this decision to be "onerous." Such a condition would unacceptably foreclose the Commission from carrying out its responsibilities to make sure the proposed merger is in the public interest.
While the settlement, as a complete package, cannot be adopted in the form that sponsoring parties request, we do find that individual elements of the settlement contain useful information, particularly in the context of the larger body of testimony and evidence that parties have presented concerning diversity, charitable giving, and bridging the digital divide to underserved communities. Accordingly, we shall require Applicants to agree to the commitments set forth below in order to satisfy the public interest requirements under § 854(c.) The funds required to meet these commitments under § 854(c) are in addition to the synergy net benefits calculated pursuant to § 854(b), as discussed above.
With respect to supplier diversity, we shall require as a condition of the merger that Applicants commit to the minimum diversity goals set forth in the settlement. We conclude that these diversity goals will be instrumental in satisfying the requirements of § 854(c)
With respect to charitable giving, we shall adopt as a condition of the merger that SBC commit to the level of $57 million in additional philanthropic giving as discussed in the proposed setttlement. The settlement proposes that SBC make only a "good faith" commitment to allocate 60% of this increased philanthropy to underserved communities. Given the testimony served on the concerns of the underserved communities, we conclude that more specific commitments are needed beyond the limited terms of the settlement.
We shall require that at least 80% of the increased SBC philanthropy be reserved for the low-income, underserved disabled, and minority communities. The 80% level is consistent with the recommendation in the testimony of Greenlining prior to the settlement. We believe that each of the parties representing the various underserved sectors of the community have raised valid concerns as to the effects of the merger on these various sectors. The question remains as to how this finite pool of available funds can best be allocated among the needs of these different interests. Now that the total amount of available funds to address § 854(c)(6) concerns has been determined, parties will be in a more informed position to present proposals as to how these funds should be allocated. We shall therefore solicit comments from parties concerning more specific measures concerning how the philanthropic funds should be allocated among these various interest groups, with particular attention to the specific needs of disabled, low-income, minorities, and other elements of the underserved community, as part of our consideration of the distribution of net benefits. As part of their comments, parties should address the extent to which the funds should be allocated in the form of grants to community-based foundations. Comments shall be due 20 calendar days after the effective date of this decision. Following review of those comments, we shall determine further direction regarding the use and distribution of the additional SBC philanthropy commitments.
We find that this condition will help to assure the merger will benefit local communities and economies in accordance with § 854(c), while fulfilling this Commission's mandate to pursue widespread availability of high-quality telecommunications services to all Californians under § 709 of the Public Utilities Code.
F. Effects on Quality of Service
Pub. Util. Code § 854(c)(2) mandates that the Commission consider, in its evaluation of a merger proposal, whether the merger maintains or improves service to public utility ratepayers in the state. Applicants are not able to engage in detailed planning until the transaction closes, but anticipate that the integration of AT&T's national and global IP network with SBC's in-region data network will create efficiencies that improve service quality for IP-based services. AT&T has experienced a declining credit rating and seen declining capital investment.225 The merger will address this problem, thereby allowing for increased expenditures to develop advanced technologies and services. Applicants claim that the merged company's technology deployment and innovation will result in service quality at least being maintained or improved for California.
TURN raises the concern that merger-related workforce reductions and system consolidation will increase the risk of harm to service quality in California, particularly in the short run. Service quality reductions may affect some types of customers more than others. Applicants, for example, may be able to exploit merger-related increases in market concentration to cut back on service quality for low-revenue, basic service customers.226 In areas with few competitive options, Applicants would have an incentive to cut back on maintenance of basic services and divert resources to more profitable services, such as broadband build out. To the extent the merger increases the incentive for capital spending, the adverse effects of such an incentive to redirect priorities would be heightened.
ORA proposes that SBC be required to maintain its 2001 level of service quality in the areas in which it exceeds or is statistically indistinguishable from the industry standard (reference group) established in D.03-10-088 (the NRF Phase 2 B Service Quality Decision).227 ORA proposes that the merged company be required to improve service quality in those areas identified in the Phase 2B decision in which its performance was significantly worse than the industry standard. When customers suffer service outages, ORA argues, they should be compensated more than the pro rata share of their monthly charges. (Ex. 26C, p. 72, ORA/Piiru.) ORA proposes remedies for poor service quality. (Ex. 26C, pp. 77, 81-82, ORA/Piiru.)
ORA proposes that SBC California be required to meet national standards within two years after a decision is rendered approving the merger. ORA favors extending this requirement for ten years after a decision is rendered approving the merger, unless stricter standards are adopted before then. ORA argues that failure to meet the target level of performance for any of the ARMIS 35-05 measures, as described above, including those for which SBC CA equaled or exceeded the reference group, should constitute a violation of the conditions of the decision approving this merger, with concomitant penalties.
ORA argues that until advanced capabilities are developed and used in the merged company to improve service quality where it is currently weak, SBC CA should perform at least to the level of the rest of the industry on those measures. The Phase 2B Decision identified the major LECs (reference group) used to compare performance on ARMIS service quality measures with SBC. The Phase 2B Decision found that SBC California performed significantly worse than the reference group on Residential Initial and Repeat Out of Service Intervals and on Residential Initial and Repeat All Other Repair Intervals.
In the SBC/Telesis merger, SBC provided certain assurances that service quality would be maintained or improved, although SBC's repair service subsequently deteriorated. ORA states that the merged company also engaged in unscrupulous and illegal customer practices. ORA argues therefore that the Commission should hold SBC to its claims concerning service quality standards.
We shall require Applicants, at a minimum, to maintain the 2001 level of service performance in those areas where SBC exceeds or is indistinguishable from the industry standards established in D.03-10-088 (the NRF Phase 2 Service Quality Decision). We shall also require Applicants to improve service quality to the level of the industry standard in those areas where SBC was found to perform below industry standards. These requirements shall apply for a period of no less than five years or until the Commission changes those standards. In particular, Applicants shall maintain the quality of service to low-revenue basic service customers.
ORA has also proposed certain modifications to existing service quality standards in different areas. While we do not minimize the importance of service quality in the areas presented in ORA's analysis, we are not convinced that this merger proceeding is the appropriate forum in which to address such modifications in service quality standards, even if some rule revisions may ultimately be in order.
G. Commission's Ability to Regulate and Audit Public Utility Operations in California
1. Separate Affiliate Accounting Rules
ORA argues that the merger will increase the risk of cost misallocation, cross-subsidization, and discriminatory treatment by SBC as a result of its acquisition of AT&T's facilities. ORA argues that the merger will create a fundamental change in the conduct of SBC's long distance operations, and without mitigating conditions, will adversely impact the ability of this Commission to effectively regulate and audit SBC's utility operations in California. Whereas today SBC provides long distance service by purchasing capacity from long distance wholesalers and reselling it to their local service customers, the post-merger SBC will presumably seek to operate its own (formerly AT&T-owned) long-haul facilities on an integrated basis with its own operations, and to self-provide long distance service over the AT&T network.
Up until now, SBC has had to pay for wholesale long distance capacity to a third-party vendor. This wholesale arrangement limited the opportunities for SBC to engage in anticompetitive conduct and cost shifting by significantly limiting the number of services and facilities of its own for providing long distance service.
TURN likewise raises concerns that the merger would add to the complexity of SBC's affiliate transactions, which already are difficult to regulate and audit. TURN believes this concern is heightened because SBC has previously expressed opposition to further comprehensive audits.228
TURN further argues that the Commission's ability to regulate effectively will be impacted by the elimination of AT&T as an independent voice of competition in regulatory proceedings before the Commission. AT&T, along with MCI, has been distinguished by its considerable resources to monitor and participate in a broad range of Commission telecommunications proceedings. TURN is concerned that the elimination of AT&T will create a significant void in the deliberative process, particularly in complex dockets involving cost models put forth by SBC and Verizon.229
ORA thus proposes reviving provisions of Section 271 and 272 of the 1996 Telecommunications Act, and also in Public Utilities Code Section 709.2(c) relating to (1) conduct requirements applicable to separate affiliates and their relationship to SBC ILEC operations and (2) requirements for separate accounting records to prevent improper cross subsidization of intrastate interexchange telecommunications services.
ORA raises concerns that the additional competitive advantages that SBC will gain from integrating its facilities will coincide with the scheduled automatic expiration of certain currently existing requirements under Section 272(f)(1) of the 1996 Telecommunications Act relating to separate affiliate activities. Section 272 required the RBOCs initially to operate their long distance services out of a separate affiliate that transacts business with the ILEC on an "arms-length" basis.
The Section 272 requirement for SBC to use of separate affiliates for its long distance business is scheduled to expire automatically by October 2006 unless the FCC takes affirmative action to extend the requirement for a longer period. ORA expresses concern that if the automatic expiration takes effect, SBC will no longer be subject to any competitive safeguards with respect to the joint operation of their local and long distance businesses. ORA argues that without these safeguards, the post-merger integration of SBC/AT&T operations will make it very difficult for state commissions and other regulatory bodies to set rates and allocate costs. Accordingly, as a condition of the merger, ORA thus proposes reviving provisions of Section 271 and 272 of the 1996 Telecommunications Act, and also in Public Utilities Code Section 709.2(c) relating to (1) conduct requirements applicable to separate affiliates and their relationship to SBC ILEC operations and (2) requirements for separate accounting records to prevent improper cross subsidization of intrastate interexchange telecommunications services. These provisions are due to expire in 2006.
Applicants oppose this recommendation, arguing that the proposal does not address any issue directly related to the merger, or any adverse consequences therefrom. Applicants claim that ORA has failed to establish any underlying problem related to the merger requiring mitigation.
We agree that ORA raises a valid concern regarding the ability of the Commission to effectively regulate the merged entity as required under § 854(c.)(7). Applicants have not provided a convincing argument show that ORA's concerns are unfounded or unrelated to the merger. If the separate affiliate requirements of Section 272 are allowed to expire in October 2006, the post-merger integration of SBC/AT&T operations will make it very difficult for state commissions and other regulatory bodies to set rates and allocate costs. The merged entity would not be subject to any regulatory oversight of its ownership of its combined facilities, making it virtually impossible to detect and prevent cost misallocation, cross-subsidization, and discrimination favoring the merged entities services at the expense of customers. ORA witness Tan indicates that, as revealed in the most recent staff NRF audit, internal control relating to SBC-California and its affiliate transactions was found to be inadequate. Moreover, SBC California has been paying several layers of fees to its parent and affiliates since SBC acquired Pacific Telesis, and its payments to affiliates for services have grown substantially. ORA is concerned that if such a pattern continues, it could lead to a dangerous drain on capital needed for California's own telecommunications infrastructure. The merger makes this concern more significant because of the effects of combining AT&T and SBC facilities under one holding company, as explained by ORA.
Thus, we shall impose as a condition of the merger that SBC continue to maintain the separate affiliate requirements of Section 272 beyond the date that they are scheduled to automatically expire. We shall require that these requirements be extended for an additional three year period beyond the effective date of this decision. After this additional three year period has elapsed, parties may file a formal petition for extension of the requirements for a longer period if they believe conditions at that time so warrant.
2. ORA Proposed Condition Relating to Imputation Rules
As an another mitigation measure, ORA proposes that additional price imputation conditions be imposed. ORA witness Selwyn testified that unless or until the retail competition for local and long distance services previously offered by AT&T (as well as MCI) is replaced, the potential exists for significant price increases by SBC. To address this risk, Selwyn proposes that additional price imputation rules be imposed beyond those currently required under Section 272(e) of the 1996 Act. Section 272(e)(3) requires that SBC impute into its own long distance prices the same SBC access charges that would be paid by rival carriers.
Theoretically, SBC/AT&T should be indifferent between providing long distance service to an SBC ILEC customer or to a customer of a different LEC where actual cash payments for access would be required. In fact, however, SBC has chosen not to market is long distances service to customers of other LECs. ORA witness Selwyn argues that SBC's behavior in this regard underscores the need for an imputation requirement to prevent discrimination.
Selwyn believes that existing imputation rules under Section 272(e) are too general in nature to fully address the potential for discriminatory pricing as a result of the SBC/AT&T merger. For example, the issues of exactly what should be "imputed" has been very controversial. Selwyn thus proposes that more effective imputation rules need to be imposed. As a basis for ORA's recommendation on imputation rules as a condition of this merger, Selwyn draws upon an an ex parte filing made in June 2004 in WC Docket No. 02-112 by AT&T. In this filing, AT&T addressed the inability of existing imputation rules to adequately prevent the RBOCs from subjecting rivals to a price squeeze by simultaneously imposing high access charges while setting retail prices that fail to reflect those same access charge levels. AT&T proposed a specific, and detailed, set of imputation rules intended to limit the RBOCs' ability and opportunity to impose these types of price squeezes on their rivals.230 A copy of AT&T's proposed Imputation Rule is set forth as Attachment 4 to Selwyn's testimony.
Applicants object to any additional imputation rules, and argue that ORA has failed to show that its proposal is direct result of the merger. Applicants believe that existing imputation rules are sufficient.
ORA raises a valid concern regarding the effects the merger will have on the ability of SBC/AT&T to engage in discriminatory behavior. The increased market power from the merger will cause the potential risk of competitive harm from such behavior to be greater. The imputation rules proposed by ORA provides a more effective means to address this concern than is currently available through Sec. 272. Accordingly, we shall adopt ORA's proposed condition to impose the imputation rules set forth in Attachment 4 to Selwyn's testimony.
Selwyn argues that a strictly enforced imputation regime is critical to the development of competition, and should be retained until such time as sufficient and ubiquitously deployed alternative facilities-based competition capable of supporting services in the same product market as wireline telephone service comes into existence. We shall direct that these conditions remain in place for a five year period from the date of this decision. If any party believes conditions at that time warrant a further extension of the requirement, the party may file a petition seeking such extension.
3. Third-Party Monitoring of Competitive Conditions
TURN proposes that, as a condition of approving the merger, that Applicants fund third-party monitoring of competitive conditions in California, with particular emphasis on how effectively competition is constraining the prices, terms, and conditions under which SBC offers service to various customer segments. TURN also proposes that Applicants' corporate affiliates be required to cooperate fully with the third-party monitor to provide all information necessary to ascertain the degree to which competitive losses for SBC's public utility operations in California are attributable to competitive gains by affiliates. TURN witness Murray set forth further detail in Appendix B of her testimony concerning the manner in which the monitoring of competition should be implemented. TURN suggests that a workshop forum be used to develop the specific survey approach and requirements to maximize the usefulness of the third-party monitoring product.
TURN argues the results of such monitoring would be of great value to the Commission in confirming whether, or to what extent, a competitive market actually develops over time, and whether competition is producing an equitable distribution of options and information for all consumer groups. Such monitoring would also provide advance warning if competition is failing to deliver anticipated benefits or failing to develop at all.
Applicants object to this condition, arguing that it does not address any issue directly related to the merger, or any adverse consequences of the merger. Applicants claim that TURN has failed to establish any underlying problem related to the merger requiring this measure as mitigation.
We conclude that third-party monitoring of the progress of competitive conditions within the various market segments in which the merged entity offers service is an appropriate condition. As previously noted, the markets in California in which SBC operates are not sufficiently competitive today to approve the merger without conditions. It is hoped that competition will grow over time to curb the market power of the merged company. Without independent monitoring of competition, however, the Commission will have no way of determining whether competition actually develops over time within the markets in which the merged company operates. We have adopted mitigating measures in this decision to continue only for a limited period of time. Without an independent monitoring process, there will be no empirical verification of the extent to which mitigating conditions adopted in this decision may no longer be needed after the expiration dates established in this decision.
Accordingly, to provide for the necessary information for the Commission to make informed decisions in the future about the extent to which mitigating measures remain necessary to protect the public interest, we shall adopt TURN's proposal for third-party monitoring of competition. Applicants' corporate affiliates shall be required to cooperate fully with the third-party monitor to provide all information necessary to ascertain the degree to which competitive losses for SBC's public utility operations in California are attributable to competitive gains by affiliates. We shall adopt TURN's proposal to convene a workshop as an initial step through which all interested groups may participate in developing the procedures and details whereby effective independent third party monitoring of competition can be effectively developed and implemented. We direct the ALJ to schedule a workshop for this purpose.
212 Kahan (JAs) Ex. 43, p. 21.
213 Telecommunications Division Audit Report,Vol II, p.19-3.
214 D.02-07-043, mimeo., Ordering paragraph 2.
215 D.02-07-043, mimeo., p.30.
216 Id.
217 See, e.g., Order Instituting Rulemaking on the Commission's Own Motion to Adopt Reporting Requirements for Electric, Gas, and Telephone Utilities Regarding Their Affiliate Transactions, Decision 93-02-019, 48 Cal. P.U.C.2d 163 (1993).
218 In the Matter of Implementation of the Telecommunications Act of 1996: Telecommunications Carriers' Use of Customer Proprietary Network Information and Other Customer Information, Third Report and Order and Third Further Notice of Proposed Rulemaking, CC Docket Nos. 96-115, 96-149, 00-257, FCC 02-214, (rel. July 25, 2002) (Third CPNI Order), 2002 WL 1726815; 2002 FCC LEXIS 3663; see also 47 C.F.R. §§ 64.2005, 64.2007-64.2009.
219 PG&E Corp. v. Public Utilities Com, supra, 118 Cal.App.4th at pp. 1197-1198.
220 Ex. 12C, pp. 57, 58, ORA/Tan.
221 Ex. 12C, p. 58, ORA/Tan.
222 TURN Opening Brief, note 356, citing Applicants' Special Analyst Meeting 2/1/05.
223 D.05-05-013, Appendix A, p. 77.
224 Settlement Agreement, at p. 7.
225 Polumbo (JAs) Ex. 15, p. 19; Kientzle (TURN) Ex. 135 at Ex. ERYK-4.
226 Ex. 136C, Murray Testimony, pp. 127-128
227 The Phase 2B Decision identified the major LECs (reference group) used to compare performance on ARMIS service quality measures with SBC. The Phase 2B Decision found that SBC California performed significantly worse than the reference group on Residential Initial and Repeat Out of Service Intervals and on Residential Initial and Repeat All Other Repair Intervals.
228 Ex. 136C, Murray Testimony, Ex. TLM-2, SBC Response to TURN 6-17.
229 Ex. 136C, Murray Testimony, p. 131.
230 Section 272(f)(1) Sunset of the BOC Separate Affiliate and Related Requirements, WC Docket No. 02-112, 2000 Biennial Regulatory Review Separate Affiliate Requirements of Section 64.1903 of the Commission's Rules, CC Docket No. 00-175 ("Non-Dominant Proceeding"), Ex Parte Declaration of Lee L. Selwyn and Covering Letter of AT&T, filed June 9, 2004.
