ALJ/TRP/eap DRAFT Agenda ID #5025
Ratesetting
Decision PROPOSED DECISION OF ALJ PULSIFER (Mailed 10/19/2005)
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Joint Application of SBC Communications Inc. ("SBC") and AT&T Corp. ("AT&T") for Authorization to Transfer Control of AT&T Communications of California (U-5002), TCG Los Angeles, Inc. (U-5462), TCG San Diego (U-5389), and TCG San Francisco (U-5454) to SBC, Which Will Occur Indirectly as a Result of AT&T's Merger With a Wholly-Owned Subsidiary of SBC, Tau Merger Sub Corporation. |
Application 05-02-027 (Filed February 28, 2005) |
(See Appendix A for List of Appearances.)
OPINION APPROVING APPLICATION TO TRANSFER CONTROL
Table of Contents
Title Pages
OPINION APPROVING APPLICATION TO TRANSFER CONTROL 2
I. Introduction 2
II. Standard for Review 10
A. Applicability of Section 854(b) and (c) 11
III. Net Benefits Showing Pursuant to Section 854(b)(2) 22
A. Qualitative Benefits In Relation to Section 854(b) Requirements 22
B. Applicants' Calculations of Section 854(b) Savings From the Merger 25
C. ORA and TURN Calculations of Section 854(b) Savings
Attributable to California 28
D. Disposition of Issues Relating to Net Synergies Allocated
To California Consumers 30
1. Definition of Short-Term and Long-Term for Measuring
Ratepayer Benefits 30
a) Parties' Positions 30
b) Discussion 33
2. Should Synergies Be Based Only on AT&T's Operations? 36
a) Parties' Positions 36
b) Discussion 37
3. Inclusion of Expenses for UNE Services 39
4. Double Counting of Wholesale Costs 40
5. Savings attributable to AT&T's reduced cost of capital 40
6. Overhead Transactions costs 41
7. Severance Costs 42
8. Exclusion of WilTel Contract Termination Costs 43
9. Investment Banking Fees 43
10. Revenues from CallVantage 44
11. Inclusion of Capital and Revenue Synergies in
Ratepayer Allocation 45
E. Adopted Synergy Benefits to be Allocated to California Consumers 46
F. Ratemaking Authority to Implement Net Benefits Allocation 47
a) Discussion 49
G. Measures to Implement Pass-Through of Synergy Benefits to Consumers 50
IV. Competitive Impacts of the Merger Under Section 854(b)(3) 53
A. Framework for Assessing Competitive Impacts 53
1. Applicability of Section 854(b)(3) 53
2. Methodology for Assessing Competitive Impacts 55
3. Jurisdiction to Address Impacts Involving Federally Regulated Services 57
4. Relevance of Market-Share and HHI Data in Assessing Merger Impacts 59
a) Parties' Positions 60
b) Discussion 62
5. Weight to be Given the Attorney General's Advisory Opinion 64
a) Background 64
b) Discussion 66
B. Effects of the Merger on Specific Markets 69
1. Effects on the Mass Market 69
a) Parties' Positions 69
b) Discussion 73
2. Effects on the Business Market 75
a) Parties' Positions 75
b) Discussion 78
3. Intermodal Competition as a Mitigating Factor 79
a) Overview 79
b) Competition from Cable Telephony 81
c) Competition from Independent VoIP Providers 83
d) Competition from Wireless Technologies 86
C. Mitigation Measures to Address Adverse Competitive
Effects of the Merger 93
1. Price Caps to Mitigate Resource Imbalance 93
a) Parties' Positions 93
b) Discussion 98
2. Proposal for "Opt-In" Rules 100
a) Parties' Positions 100
b) Discussion 102
3. Mitigation Measures for Special Access 102
a) Parties' Positions 103
b) Mitigating Conditions 109
(1) Equal Access to Terms and Conditions 111
(2) Access to Lowest Currently Available Rate 111
(3) Fresh Look Opportunity 112
4. Capping of Special Access Rates 113
5. Internet Peering Arrangements 115
a) Parties' Positions 115
b) Discussion 117
6. Transit Service at Cost-Based Rates 118
a) Parties' Positions 118
7. Extension of Transport Agreements 122
8. Rates Paid for Exchange of VoIP Traffic 123
9. Access to Numbering Resources 124
10. Stand-Alone DSL 125
11. Prohibiting Preferential Access Rates Between SBC and Verizon 127
12. Divestiture of Overlapping In-Region Facilities 128
a) Parties' Positions 128
b) Discussion 134
13. Pac-West Proposal Regarding Packet-Switched Interconnection 137
a) Parties' Positions 137
b) Discussion 138
14. Telscape Proposal 141
V. Other Public Interest Criteria Considered Under Section 854(c) 143
A. Maintaining or Improving Financial Health 143
B. Effects on Quality of Management 149
C. Effects on Public Utility Employees 150
D. Effects on Public Utility Shareholders 151
E. Effects on State and Local Economies and Communities of Interest 152
1. Diversity Issues 153
2. Philanthropy Issues 154
3. Bridging the "Digital Divide" for Underserved Consumers 155
4. Concerns of Consumers with Disabilities 156
5. The Settlement Between Greenlining, LIF, and Applicants 160
6. Responses to the Settlement 163
7. Discussion 167
F. Effects on Quality of Service 170
G. Commission's Ability to Regulate and Audit Public Utility
Operations in California 173
VI. Assignment of Proceeding 181
VII. Comments on the Proposed Decision 181
Findings of Fact 181
Conclusions of Law 191
ORDER 194
OPINION APPROVING APPLICATION TO TRANSFER CONTROL
I. Introduction
A. Summary
We hereby approve the application of SBC Communications, Inc. (SBC) and AT&T Corp. (AT&T) (collectively, Applicants) for authority to transfer control of AT&T Communications of California and its related California affiliates subject to the terms and requirements set forth in this order. We have reviewed the proposed merger under the authority of Pub. Util. Code § 854 to determine whether it is in the public interest. We have determined that all of the provisions of § 854 apply to this transaction.
The Applicants must meet the conditions adopted herein in order to provide reasonable assurance that the proposed transaction will be in the public interest in accordance with Pub. Util. Code § 854. The conditions adopted herein are based upon review of the proposals submitted by parties in this proceeding. Although we do not discuss every single proposal that was presented, we have taken parties' proposals into consideration in developing the adopted conditions. We only adopt conditions which mitigate an effect of the merger in order to satisfy the public interest requirements of § 854. The fact that we decline to adopt a particular party's proposed condition should not be construed as an indication of whether or not the proposal may have merit in some other context or proceeding. We find that, subject to Applicants' compliance with the adopted conditions, the merger will produce net benefits for consumers and will not adversely affect competition for telecommunications service in California. Conversely, if the Applicants declined to implement the conditions set forth herein, we would conclude that the merger did not comply with § 854 and could not be approved.
B. Background
On February 28, 2005, SBC Communications, Inc. and AT&T Corp. filed a joint application for authorization to transfer control of AT&T Communications of California, TCG Los Angeles, Inc. TCG San Diego, and TCG San Francisco from subsidiaries of AT&T to subsidiaries of the combined organization that will result from AT&T's planned merger with SBC.1 The proposed merger would create the largest telecommunications firm in the United States.
Under the proposal, AT&T would merge into a newly formed wholly-owned subsidiary of SBC, created for the specific purpose of this transaction. AT&T will be the surviving entity of the merger for legal purposes. AT&T shareholders will receive 0.77942 shares of SBC stock for each share of AT&T stock they own, as well as a one-time cash dividend from AT&T of $1.30 per AT&T share. SBC shareholders will continue to own SBC stock and otherwise will not be affected by the transaction. Upon completion of the merger, former AT&T shareholders will hold approximately 16% of SBC's outstanding shares.
The application, as originally filed on February 28, 2005, requested Commission authorization of the transaction pursuant to Pub. Util. Code § 854(a) on an expedited basis with no evidentiary hearings. Applicants did not initially include a showing under Section 854(b) of the Public Utilities Code, instead claiming that the transaction is exempt from § 854(b).2 Additionally, although Applicants also believe that § 854(c)3 should not apply, they supplied information in the application that they asserted met the § 854(c) criteria for approval.
On March 16, 2005, an Assigned Commissioner's Ruling required supplementation of the application to provide information necessary to comply with all Pub. Util. Code §§ 854(b) and (c) requirements. Although the Assigned Commissioner deferred ruling on the applicability of § 854(b) and (c), he required the supplemental filing in the interest of ensuring that any potential disagreement over the statute's applicability not be a cause for delay in adjudicating the application.
On March 30, 2005, the Applicants filed a "Joint Supplemental Application of SBC Communications, Inc. and AT&T Corp." in response to the Assigned Commissioner's Ruling, dated March 16, 2005. Protests to the Application were filed on April 14, 2005, by the following parties: California Association of Competitive Telephone Companies (CALTEL);4 the Communications Workers of America (CWA)5, AFL-CIO; the Community Technology Foundation of California; Eschelon Telecom, Inc. and Advanced TelCom, Inc.; Level 3 Communications, LLC; Navigator Telecommunications, LLC; the Office of Ratepayer Advocates (ORA) and the National Consumer Law Center; Pac-West Telecomm, Inc.; Qwest Communications Corporation (Qwest); the City and County of San Francisco; Telscape Communications, Inc.; The Utility Reform Network (TURN), Utility Consumers' Action Network, Disability Rights Advocates (DRA), Consumers Union of U.S., Inc., the Greenlining Institute (Greenlining) and the Latino Issues Forum (LIF); US LEC; WilTel Communications, Inc.; and XO Communications Services, Inc.6
Intervenors claim that the merger, in the form proposed by Applicants, will not assure net benefits to consumers and will adversely affect competition for telecommunications services in California. Certain intervenors categorically oppose the merger under any conditions, claiming that even with certain mitigating conditions, the merger will still be anticompetitive. They argue that SBC already has a dominant share of the market, and that acquisition of AT&T will only further expand its market power by eliminating its largest competitor. Other intervenors do not oppose the merger, as long as certain conditions are adopted to mitigate perceived adverse impacts. Certain parties express concern that the interests of various underserved communities have not been properly addressed. Parties also argue that the proposed Verizon and MCI merger must be also taken into account, as well, in light of its cumulative effect on reducing competition.
Joint Applicants filed a reply in opposition to the protests on March 30, 2005, asserting that the merger is in the public interest, and that there are no adverse competitive effects. A prehearing conference was held on April 20, 2005, and the Assigned Commissioner issued a Scoping Memo by Ruling on April 26, 2005, directing that evidentiary hearings would be held. Applicants served opening testimony on May 6, 2005, and intervenors served reply testimony on June 24, 2005. Applicants served rebuttal testimony on July 8, 2005. Twenty-eight witnesses submitted testimony. ORA and TURN presented 11 witnesses. Seven witnesses were presented by parties representing competitors including CALTEL, Cox, Qwest, Level 3, Telscape, and Pac-West. Other parties presenting witnesses were Latino Issues Forum(LIF); Community Technology Federation of California (CTFC); Disability Rights Advocates (DRA), The Greenlining Institute (Greenlining); and City and County of San Francisco.
Evidentiary hearings were held from August 8-12 and 15-17. Opening briefs were filed on September 9 and reply briefs were filed on September 19, 2005. Concurrently with their opening briefs, a proposed settlement on certain issues was filed and served, jointly sponsored by Applicants Greenlining, and LIF.
A series of Public Participation Hearings (PPHs) were also conducted in locations throughout the state. The Commission held these hearings in Oakland, Sacramento, Fresno, Culver City, Anaheim, Riverside, and San Diego. These hearings were well attended, particularly in Oakland and Culver City. Many representatives from community organizations and some individuals attended the hearings, presenting a variety of views concerning the proposed merger. Both during and subsequent to the PPHs, many additional individuals and representatives of community organizations contacted the Commission with written letters and by electronic mail expressing their views on the proposed merger. We have reviewed and taken into account, as appropriate, the comments presented by members of the public, both at the PPH and through subsequent cards, letters, and electronic mailings to the Commission. We wish to express our appreciation to all of the individuals who took the time to attend the PPHs or to otherwise communicate their comments.
C. Reasons for the Proposed Merger and Acquisition
This Application seeks approval of the California portion of a larger national and international merger. This merger comes at a time when the entire telecommunications industry is facing major competitive challenges and new technological options.
For generations up until 1984, telecommunications services had been provided nationally by monopolies subject to traditional state and federal price regulation. This arrangement ended in 1984 with the divestiture of American Telephone and Telegraph Company (also known as the "Bell System") through an antitrust consent decree between the United States Department of Justice (DOJ) and AT&T. The consent decree divested AT&T of its local telephone operations from which several independent "Regional Bell Operating Companies" (RBOCs) were created. The 1984 divestiture was required to address various ways in which the former Bell System impeded competition, particularly through its exercise of bottleneck monopoly control over the critical "last mile" linking individual customer premises to the public switched network.
Concurrent with the divestiture, state and federal regulators began initiatives to open the telecommunications marketplace to competition. Competitive barriers to entry were first lifted in the long distance market for carriers other than the incumbent local exchange carriers. With the passage of the 1996 Telecommunications Act, further progress was made toward opening local exchange markets to competition. More recently the long distance market has been opened to the Incumbent Local Exchange Carriers (ILEC).
Concurrently with opening of more markets to competition, there has been continuing evolution in the industry structure, including the introduction of new technologies to compete with the traditional telephone service. In response to these regulatory, technological, and economic challenges, various carriers, including the traditional RBOCs, have progressively consolidated their operations through mergers and acquisitions in recent years.
The proposed SBC/AT&T merger marks a significant crossroads in the trend toward consolidation within the industry. Some parties have characterized this merger as the recombining of the Bell System, albeit without the regulatory controls that formerly existed. We fully recognize, however, that the regulatory, economic, and technological climate in which this merger arises is very different from that of the 1984 divestiture. Although AT&T remains the largest competitor of SBC in California, the AT&T of today is different in many respects from the company that was divested 21 years ago. Nonetheless, fundamental concerns over this transaction's effects on competition and the public interest remain equally paramount today. Accordingly, given the far-reaching scope and implications of this merger for the industry and the public interest, we approach our review of this merger with great care.
SBC's stated purpose in the acquisition of AT&T is to combine the complimentary strengths of the two companies to enable the merged company to compete more effectively in the telecommunications marketplace. The SBC network is nearly ubiquitous where it is the incumbent but virtually nonexistent outside of its ILEC footprint. On the other hand, AT&T's network was initially constructed as a long distance network, and not limited by a need to serve any end points in a local service area. In contrast to SBC's largely local and regional presence, AT&T operates in more than 50 countries, serving the largest global enterprises with a broad array of voice, data and IP-based services. AT&T focuses on enterprise business and government customers through its national and global network.
By combining their respective strengths, Applicants claim that the merger will enable the combined company to become a stronger competitor, and to serve a wider range of customers across all segments of the telecommunications marketplace beyond just the traditional SBC California territory.
AT&T likewise views the merger as an appropriate response to developments that have challenged its competitive stance in certain markets. Among the most significant changes in this regard has been SBC California's entry into the long-distance market. Once SBC California entered the long distance market, it could successfully bundle long distance with local service offerings. SBC thereby strengthened its competitive position compared with that of AT&T. Since receiving authority to offer long distance service, SBC has accumulated in-region market share faster than any other non-ILEC competitor.7 AT&T has been less successful in being able to offer bundled service without the vast local exchange network that its competitor, SBC, possesses. To a great extent, AT&T had relied on the unbundled network element platform (UNE-P) in providing mass market local exchange service and the purchase of special access for other applications. With the elimination of UNE-P as a competitive resource, AT&T stopped marketing local service to new mass market customers. AT&T chose to consider new options, leading ultimately to the merger that is the subject of the application before us.
1 Unless otherwise noted, subsequent references herein to AT&T California include, by reference these TCG affiliates.
2 Section 854(b) requires the Commission to find that the proposed change in control provides short-and long-term benefits to customers (§ 854(b)(1), equitably allocate forecasted short-and long-term economic benefits where the Commission has ratemaking authority (§ 854(b)(2), and determine that the change in control does not adversely affect competition (§ 854(b)(3)).
3 Section 854(c) requires the Commission to apply eight criteria in its evaluation of whether a transaction is in the public interest.
4 CALTEL filed its protest on behalf of its member companies.
5 CWA formally withdrew its protest on June 14, 2005.
6 The following parties subsequently withdrew their protests as follows: WilTel on June 18, 2005; US LEC on June 21, 2005; Eschelon Telecom and Advanced TelCom on June 24, 2005; and XO on June 24, 2005.
7 Ex.109, Sumpter Testimony (Pac-West) at 11-12.
