VII. Comments on the Proposed Decision
The proposed decision (PD) of the ALJ in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on ____________ and reply comments were filed on ______________.
1. Applicants seek approval of a transfer of control of AT&T Communications of California, TCG Los Angeles, Inc., TCG San Diego, and TCG San Francisco from first- and second-tier subsidiaries of AT&T to second and second- and-third-tier subsidiaries of the combined organization that will result from AT&T's planned merger with SBC.
2. As a result of the merger between SBC and AT&T, Applicants intend to strengthen the financial position of the combined company and improve its competitive position by combining complementary strengths and skills.
3. The California Attorney General filed his Advisory Opinion pursuant to § 854(b)(3) on July 22, 2005.
4. The Commission examines merger, acquisition, or control activities on a case-by-case basis to determine the applicability of § 854.
5. Applicants concede that § 854(a) applies to this transaction, but challenge the applicability of § 854(b) and (c).
6. Although the proposed merger transaction is technically structured as a merger between the holding companies of SBC and AT&T, the practical result of the merger will have effects on the California utilities that are owned by SBC and AT&T, respectively.
7. In determining whether SBC California is a party within the meaning of Section 854, the Commission focuses on substance rather than form.
8. It would elevate form over substance to find that § 854(b) and (c) do not apply to this transaction merely because Applicants designed the merger using a holding company structure.
9. It would elevate form over substance to conclude that the Legislature was more concerned with competition if the utility was a party to the transaction absent the holding company structure, but was less concerned about competition when a holding company was involved.
10. At the direction of the Assigned Commissioner, Applicants produced a calculation of net synergy benefits to California consumers on a discounted net present value basis, assuming the Commission applies § 854(b) to this transaction over Applicants' objections.
11. Applicants' calculated $14 million in net benefits to California consumers assuming the Commission were to find that § 854(b) applies. The $14 million represents 50% of the discounted net present value of Applicants' five-year forecast of merger synergies attributable to California, or approximately 2/10 of 1% of the total corporate synergies that Applicants forecast from the SBC/AT&T merger.
12. ORA and TURN performed separate calculations using Applicants' synergies model as a starting point. ORA produced a calculation of approximately $1.84 billion in applicable net synergy benefits to California on a discounted net present value basis. TURN produced a calculation of approximately $1.98 billion. ORA and TURN each propose allocating 50% of the calculated net benefits to consumers.
13. The two largest factors accounting for the difference between the ORA/TURN calculation of synergies versus that of Applicants is due to: (1) inclusion of SBC California operations in the allocation and (2) extending the measurement period to incorporate the full period over which total corporate benefits were considered as a basis for shareholders' evaluation of the merger.
14. Based upon the calculations of synergies performed by Applicants, modified to incorporate certain adjustments made by ORA/TURN, the total net synergy benefits reasonably attributable to California is $659.2 Million on a discounted net present value basis under the provisions of Section 854(b).
15. A $329.6 million allocation of net benefits to California consumers represents a 50% share of total benefits of $659.2 million attributable to California, reflecting a six-year forecast period and taking into account the operations of both SBC and AT&T.
16. The adopted net benefit amount incorporates ORA's recommendation to reallocate offsetting costs to implement the merger so that a pro rata share are assigned beyond the period during which ratepayers share in the forecasted synergies.
17. The adopted net benefits incorporates the other miscellaneous adjustments that ORA and TURN have made to the net benefits calculation, except for Wiltel contract termination, investment banking fees, and CallVantage revenues.
18. Defining the "long term" in this proceeding as six years permits reasonable forecasts of economic benefits of the merger and also recognizes the rapid pace of change in the telecommunications marketplace.
19. The Attorney General's Advisory Opinion concluded that the merger will not adversely affect competition in California telecommunications markets with the exception of the market for special access. The Attorney General's Opinion concluded that the merger could affect competition in the market for private network special access, and proposed as a mitigating condition, a one-year freeze on rates paid by current AT&T customers receiving DS1 and DS3 private network services.
20. By focusing its analysis on facilities-based competition, the Attorney General's Advisory Opinion did not fully address the effects of the merger on the overall telecommunications markets in which SBC and AT&T compete. In this respect, the testimony presented by expert witnesses on competitive impacts of the merger provided a more complete analysis with respect to the range of relevant markets.
21. In D.91-05-028, the Commission set forth analytical precedents for interpreting whether a party's proposal "adversely affects competition" within the meaning of § 854(b)(3). The Commission held that precedent developed under Section 7 of the Clayton Act provides a framework for analyzing the competitive effects under § 854(b)(3).
22. The goal of analyzing the competitive effects of the merger is to protect consumers by preventing transactions likely to result in increased prices or reduced output. Mergers can harm consumers when they cause structural changes to the marketplace that increase a firm's ability to exercise market power, defined as the ability to affect prices or reduce output of the industry.
23. Under traditional market analysis, the market power resulting from the merger of two competitors is usually measured in terms of concentration, or market shared. This is a statistical analysis using the Herfinhdahl-Herschman Index (HHI) which calculates the sum of the squares of each firm's market share.
24. The analysis of market share and HHI measures is a necessary starting point for analyzing market power due to a merger, after which additional indicators of prospective competition are properly considered.
25. Traditionally, the competitive effects of a proposed merger are analyzed by identifying the relevant product markets affected by the merger. The geographic scope of the market, the area in which the sellers compete and in which buyers can practicably turn for supply are identified as part of this analysis.
26. The relevant markets for purposes of analyzing the competitive effects of this merger include retail markets (i.e., mass market, medium and large enterprise customers) and wholesale markets.
27. Applicants did not perform an analysis of market concentration relating to this merger, either in the aggregate or for individual markets, since they believe that only forward-looking indicators of competition are meaningful in assessing the SBC/AT&T merger.
28. ORA and TURN witnesses presented calculations of the HHI with respect to individual market segments. This analysis showed that the HHI was already highly concentrated before the merger, and becomes more highly concentrated as a result of the AT&T acquisition.
29. Although the mass market is already highly concentrated, SBC's acquisition of AT&T will not significantly change the degree of mass market concentration since AT&T had already ceased actively marketing to this sector before entering into the merger.
30. Mass market customers could be adversely affected by the merger to the extent that merger-related costs could increase their utility bills, or utility resources could be diverted to reduce the level or quality of service offered to them.
31. SBC and AT&T chose to merge rather than to compete against each other through facilities-based expansion of their respective networks.
32. Given the failure of AT&T to succeed as an independent competitor pursuing facilities-based expansion, the prospects for other carriers with less financial resources to compete successfully against the post-merger SBC is called into question.
33. In the retail business markets and in wholesale markets in which SBC and AT&T compete, the measures of market concentration measured by the HHI indicates a material increase in SBC's market power from the merger.
34. Evidence presented concerning forward-looking measures of competition in sectors other than the mass market does not paint a picture of a robustly competitive market today or in the immediate future.
35. Although some competition from intermodal sources such as cable, VoIP, and wireless technologies exists within certain sectors of the SBC California service territory, such competition is not ubiquitous nor sufficiently developed in all relevant markets today to avoid the need for conditions to mitigate SBC's increased market power from the merger.
36. Although their marketing focus differs to some degree, SBC and AT&T have been competing head-to-head for enterprise business customers throughout the SBC footprint.
37. Certain proposed measures, as identified below, will mitigate the competitive harm that could otherwise result from the proposed merger.
38. Capping UNE rates in the manner proposed by CALTEL would undermine the TRRO policy with respect to those UNE provisioned under Section 251 for which TELRIC-based pricing has been eliminated. On the other hand, for those UNEs for which TELRIC-based pricing was not eliminated by the TRRO, the CALTEL price cap proposal is an appropriate remedy to mitigate the resource imbalance between SBC and its competitors. Commission-imposed price caps on those UNEs provisioned under Section 271 could conflict with broader FCC "just-and-reasonable" principles relating to the pricing of such UNEs.
39. CALTEL's proposal is an appropriate mitigation measure seeking to permit carriers to opt in on any agreement negotiated by SBC in another state or any provision(s) arbitrated in California
40. SBC possesses significant market power in the provision of special access services in California.
41. AT&T has played a pivotal role in disciplining the rates, terms, and conditions under which SBC offers special access generally, both as an alternative source of supply to other competitors and by its negotiating leverage in obtaining more favorable terms and rates.
42. Absent mitigating conditions, the removal of AT&T as a competitor in the special access market will give SBC additional opportunities to leverage its market power against competitors to the detriment of consumers.
43. A reasonable mitigating condition on special access is that SBC be required to disclose publicly transactions between SBC and AT&T affiliates, and that the same complete package of terms and conditions be offered to competing carriers.
44. An additional reasonable mitigating condition on special access is that SBC be required to make available to carriers the lowest rate available from SBC or AT&T.
45. Parties' proposed condition to permit a "fresh look" period following the close of the merger has not been shown to be justified except for the limited purpose of allowing carriers to accept the same package of terms and rates negotiated between affiliates of SBC.
46. In order to facilitate network efficiencies and to mitigate the uncertainties as to how the post-merger environment will stabilize, a reasonable merger condition is for SBC to be required to offer transit at cost-based rates.
47. It is reasonable as a mitigation measure in response to AT&T's elimination as a competitor in the short-haul market, to require that AT&T extend its existing transport agreements for a five-year period at the same rates, terms and conditions.
48. Level 3 has not shown that Commission intervention is warranted in calling for the exchange of VoIP traffic at reciprocal compensation rates.
49. Applying numbering resource allocation rules to SBC and AT&T as a single entity is a reasonable requirement to enhance efficient utilization of number resources among carriers.
50. SBC's practice of refusing to offer standalone DSL service harms competition by making it more difficult for competitors to provide voice service to customers subscribing to broadband Internet access over SBC's DSL facilities. The potential harm from this practice will increase through acquisition of AT&T.
51. A reasonable merger mitigation measure is to require SBC to offer DSL on a stand-alone basis.
52. In order to mitigate the potential for SBC to engage in discriminatory arrangements with Verizon, a reasonable condition is to prohibit SBC from engaging in reciprocal arrangements with SBC for more favorable access than either company offers to other competitors.
53. Parties have not justified the proposed condition requiring divestiture of AT&T facilities given the potential adverse impact on customers and the administrative complexities that would be involved in implementing such a requirement.
54. In order to mitigate the adverse competitive merger impacts resulting from SBC's accelerated conversion from a circuit switched to a packet switched network, the Pac-West proposal is reasonable calling for SBC to consent to include packet-switched networks within the scope of arbitration proceedings conducted by this Commission pursuant to Section 252.
55. With the conditions as adopted in this decision, the merger will improve the financial condition of SBC and AT&T.
56. The merger will maintain or improve the quality of management of the combined company.
57. Service quality will be maintained or improved as a result of the merger, with the service quality conditions adopted in the ordering paragraphs below.
58. 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.
59. With the adoption of conditions set forth in this order, the Commission will preserve its jurisdiction and ability to regulate and audit public utility operations in the state.
60. Subject to adoption of the mitigating conditions relating to philanthropy, workplace diversity, and outreach to underserved segments of the community, as set forth in the ordering paragraphs below, the merger will be beneficial on an overall basis to state and local economies and to the communities served by the combined company.
61. Applicants entered into a settlement with Greenlining and LIF addressing the issues of net benefits to consumers, supplier diversity issues, and corporate philanthropic commitments to local communities.
62. While the terms of the settlement would result in greater commitments than Applicants otherwise propose to offer, the settlement, in total, is procedurally defective and contains unacceptable restrictions that would prevent the Commission from adopting it in its present form consistent with § 854.
63. A reasonable measure to assure that the proposed merger is in the public interest of local communities, including the underserved segments thereof, SBC should be required to commit to philanthropic contributions in the amount of $57 million over a five-year period. A minimum of 80% of such contributions should be reserved for addressing the service requirements of the underserved segments of communities in which SBC serves. SBC should also to commit to achieving the supplier diversity targets as described in the settlement with Greenlining and LIF.
64. The merger will create a fundamental change in the conduct of SBC's long distance operations, which without mitigating conditions, will adversely impact the ability of this Commission to effectively regulate and audit SBC's utility operations in California.
65. 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.
66. The "first-priority" condition proposed by ORA will help assure that regulated utility operations are not adversely affected by the parent company's diversion of funds to other purposes as part of the post-merger implementation.
67. 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.
68. Existing imputation rules fail to adequately prevent SBC 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.
69. The set of imputation rules proposed by ORA provide a more effective means to limit the ability and opportunity for SBC (post-merger) to impose these types of price squeezes on their rivals than is currently available through Section 272.
70. Without independent monitoring of competition, the Commission will have no way of determining whether competition actually develops over time within the markets in which the merged company operates.
71. An independent monitoring process is needed to provide empirical verification of the extent to which competition develops within the markets in which the merged company operates.
1. Section 854(e) requires that the Applicants have the burden of proof by a preponderance of evidence to demonstrate that the requirements of § 854(b) and (c) are met.
2. In order to determine whether § 854(b) applies to this application, the actual language of the statute should first be examined. In examining the statute's language, decisionmakers should give the words of the statute their ordinary, everyday meaning. If the meaning is without ambiguity, doubt, or uncertainty, then the language controls. Only if the meaning of the words is not clear, decisionmakers should take the second step and refer to the legislative history.
3. The plain language of § 854(b) is clear, and applies where a utility of a specified financial size is a party to the proposed transaction.
4. Because the substance of the transaction should take precedence over its mere form, SBC California and AT&T California should both be considered as parties to this transaction in applying § 854(b).
5. Past mergers of telecommunications companies which were granted an exemption from review under § 854(b) and (c) are not analogous precedents for this transaction which involves consolidating the assets of the largest ILEC in California with those of its largest competitor in California.
6. Section 854(b) and (c) apply to this transaction.
7. Section 854(b) requires the Commission to allocate certain forecasted benefits to ratepayers which accrue as a result of the merger where it has ratemaking authority.
8. Section 854(b) requires that ratepayers be allocated a minimum 50% share of short-term and long-term economic benefits accruing as a result of the merger.
9. A reasonable estimate of long-term economic synergies accruing to California consumers under the merger consistent with § 854(b) is $329.6 million on a discounted net present value basis representing 50% of the total synergies of $659.2 million.
10. The Commission should require as a condition of the merger that SBC pass on to consumers the § 854(b) economic benefits associated with the merger as quantified in this decision.
11. An equal sharing of the economic benefits between consumers and shareholders measured over the long term, defined as a six-year period, is reasonable in this case and compliant with § 854(b).
12. The specific distribution and/or utilization of the § 854(b) net benefits among various consumer interests should be addressed in a subsequent order following opportunity for parties to file comments.
13. Section 854(b)(3) requires the Commission to find that Applicants' proposal does not adversely affect competition. In making this finding, the Commission is required to request an Advisory Opinion from the Attorney General regarding whether competition will be adversely affected and what mitigation measures could be adopted to avoid this result.
14. The Commission must determine the appropriate weight to give the Attorney General's Advisory Opinion, also taking into account the substantive evidence on competitive harm and proposed mitigation measures presented through expert witness testimony in the proceeding.
15. The Commission need not find a technical violation of the Clayton Act in order to deny a merger under § 854. The Commission may disapprove a transaction whole impacts are harmful, but less than "substantial" under the Clayton Act.
16. The proposed merger should not have an adverse effect on competition within the meaning of § 854.
17. In carrying out its obligation to evaluate potential adverse effects under § 854, the Commission should examine all relevant effects on California consumers, even if a particular impact may involve services that are regulated by a federal agency.
18. In order to meet the § 854(b) standard that the proposed merger does not have an adverse effect on competition, conditions should be imposed as set forth in the ordering paragraphs below to mitigate competitive harms that would otherwise result from the transaction.
19. In order to support findings that this transaction meets § 854(c ) public interest criteria, Applicants should implement the measures set forth below relating to each of the designated subsections thereof.
20. With the imposition of the conditions as set forth in the ordering paragraph below, the proposed transaction meets the requisite criteria under § 854(b) and (c), and should be approved subject to those conditions.
IT IS ORDERED that:
1. The application of SBC Communications, Inc. (SBC) and AT&T Corp. (AT&T) is hereby granted for approval of a transfer of control of AT&T Communications of California, TCG Los Angeles, Inc., TCG San Diego, and TCG San Francisco from first- and second-tier subsidiaries of AT&T to second and second- and-third-tier subsidiaries of the combined organization that will result from AT&T's planned merger with SBC, with the conditions as set forth herein.
2. Applicants shall notify the Commission in writing that the merger which is the subject of this application has been accomplished. The written notice shall be delivered to the Commission within five business days of the effective date of the merger.
3. SBC shall maintain a cap on basic residential and small business local exchange services, including 1 FR, 1 MR, 1 MB, and residential inside wire maintenance plans, to continue for a period of five years from the effective date of this decision. These services shall be made available to consumers on a stand-alone basis without any requirement to purchase other bundled services. The services shall be listed separately in SBC phone directories and in any advertising on web sites or through bill inserts. SBC shall retain a pricing option for California-jurisdictional long distance calling that does not have a minimum monthly fee.
4. SBC shall implement appropriate measures to distribute Section 854(b) net benefits in the amount of $329.6 million on a discounted net present value basis covering a six-year period. The specific measures to be implemented shall be determined through a subsequent Commission order following opportunity for parties to comment on the manner in which the Section 854(b) net benefits should be distributed and/or utilized for the benefit of consumers. Comments on this issue shall be filed 20 calendar days from the effective date of this decision.
5. As a condition of Commission approval, SBC shall implement the following measures to remain in effect for a five-year period from the effective date of this order.
a. SBC shall maintain price caps on network elements to be made available under Sections 251 to the extent that TELRIC-based requirements were not eliminated by the TRRO. No reduction shall be made for a productivity offset.
b. SBC shall be required to disclose publicly transactions between SBC and AT&T affiliates, and that the same complete package of terms and conditions be offered to competing carriers
c. SBC shall be required to make available to carriers the lowest rate for special access available from SBC or AT&T.
d. Rates paid by current SBC and AT&T customers receiving DS1 or DS3 special access service shall be capped.
e. SBC shall be required to honor existing Internet peering arrangements and to offer extensions, if requested, for up to five years.
f. SBC shall be required to allow any CLEC to adopt in California any agreement that SBC has negotiated in any other state (except for state-specific prices and performance standards), or any provision or set of interrelated provisions that SBC has included in an agreement as the result of arbitration in California.
g. SBC shall be required to offer transit of traffic at cost-based TELRIC rates
h. AT&T shall extend its existing transport agreements for a five-year period at the same rates, terms and conditions.
i. Numbering resource allocation rules shall be applied to SBC and AT&T as a single entity.
j. SBC shall offer DSL on a stand-alone basis without being tied to SBC voice service.
k SBC shall be prohibited from engaging in reciprocal arrangements with SBC for more favorable access than either company offers to other competitors.
l. SBC shall consent to include packet-switched networks within the scope of arbitration proceedings conducted by this Commission pursuant to Section 252.
m. In order to ensure that there is no discriminatory pricing between AT&T and SBC with respect to VoIP services, such transactions shall be conducted at arms length, publicly disclosed and the prices in that agreement offered to all other providers without regard for any volume or term discounts.
6. Applicants shall agree to the following conditions in order to satisfy the criteria under Section 854(c).
7. To provide assurance that the merger is beneficial to local communications pursuant to §854(b)(c), Applicants shall agree to an increased cumulative philanthropy commitment of $57 million over a five-year period, with a minimum of 80% of that commitment reserved for the low-income, underserved, minority, disabled sectors of its service territory. A more specific determination of how the philanthropy funds should be distributed, either among the affected groups, and/or through grants to community based foundations shall be made following opportunity for parties to comment. Comments on the issue of the appropriate distribution and/or utilization of the philanthropy funds shall be filed 20 calendar days from the effective date of this decision.
8. To provide assurance that the merger maintains or improves the financial condition of public utility operations, SBC shall be subject to a "first-priority" condition, as proposed by ORA. SBC shall accordingly give utility operations first priority preference over all competing potential recipients of capital resources necessary to ensure the utility's ability to maintain its quality of service.
9. As a condition of the merger, SBC shall continue to maintain the separate affiliate requirements of Section 272 for an additional three-year period. Beyond the date that those requirements are scheduled to automatically expire in 2006. 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.
10. As a condition of the merger, Applicants shall comply with the price imputation rules set forth in Attachment 4 to ORA Witness Selwyn's testimony.
11. To assure that the merger maintains or improve utility service quality, Applicants shall, at a minimum, 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). This requirement shall apply for a period of no less than five years or until the Commission changes those standards. Applicants shall maintain the quality of service, in particular, to low-revenue basic service customers. Applicants shall improve service quality to the level of the industry standard in those areas where SBC was found to perform below industry standards in D.03-10-088.
12. Applicants shall be required to implement a process of monitoring of competitive conditions within which they provide service to provide for the necessary information for the Commission to make informed decisions in the future about the extent to which SBC's market power may be curbed by competitive market forces.
13. The ALJ shall schedule a workshop to provide for input from interested parties as to the manner in which the process for the independent monitoring of competition should be designed and implemented.
14. Applicants shall file written notice with the Commission in this proceeding, served on all parties to this proceeding, of their agreement, evidenced by a resolution of their respective boards of directors, duly authenticated by a secretary or assistant secretary, to the conditions set forth in this decision. Failure of Applicants to file such notice pursuant to this order within 60 days of the effective date of this decision shall result in the lapse of the authority granted in this decision.
This order is effective today.
Dated ____________________, at San Francisco, California.
APPENDIX A - LIST OF APPEARANCES
David J. Miller |
Esther Northrup |
Janine L. Scancarelli |
Tarah S. Grant |
Nancy D. Sidhu |
Martin A. Mattes |
Adam L. Sherr |
Glenn Stover |
Margaret L. Tobias |
(END OF APPENDIX A)
