5. Discussion

Pub. Util. Code § 854 requires Commission authorization before a company may "merge, acquire, or control...any public utility organized and doing business in this state...." The purpose of this and related sections is to enable the Commission, before any transfer of public utility property is consummated, to review the situation and to take such action, as a condition of the transfer, as the public interest may require. (San Jose Water Co. (1916) 10 CRC 56.) The Commission has held that the relevant inquiry is whether the proposed transaction is in the public interest.

Applicants present the argument that the proposed acquisition of Evans Telephone and subsequent transfer of control of Evans Telephone to Evans Holdings and its parent Country Road has no adverse consequences because nothing about the existing structure of Evans Telephone will change as a result of the stock acquisition. The application is presented as merely involving a transfer of corporate stock without any changes to the operations, rates, tariffs, or other regulatory circumstances of Evans Telephone.

On the other hand, Applicants do not make any claim that the transaction provides any benefits to the public, or even that the transaction is in the public interest. The application does assert, however, that the transaction provides benefits to the current shareholders of Evans Telephone and provides benefits to Country Road to help it grow its unregulated businesses through the accompanying acquisition of the unregulated Evans Communications. Essentially, applicants contend that the stock acquisition and transfer of control should be approved because Country Road does not intend to change any aspects of Evans Telephone's current business.

We do not find that Applicants have provided reasonable assurance that the transaction is in the public interest. Applicants merely assert that there is no harm caused by the acquisition because of their intent to change nothing about Evans Telephone's current operations and management. We are concerned that the record provides no evidence that the merger will provide benefits to ratepayers of Evans Telephone or the public generally. The record does not indicate that the public interest is promoted by the transaction. Furthermore, although Applicants repeatedly claim that Country Road does not "intend" to make changes to service, management, or operations, their intentions fall short of the reasonable assurance such a transaction should require.

More importantly, we are concerned that the financial condition of Evans Telephone may not be improved or even maintained following the transfer of control to Evans Holdings and its parent, Country Road. In examining Country Road's balance sheet as of June 30, 2000, we note Country Road has total assets of $39.7 million, of which $30.3 million are listed as "Intangibles."¹ In response to inquiry about these intangibles, Applicants revealed that they represent "goodwill" associated with two acquisitions of local exchange carriers in other states and organizational expenses associated with the creation of Country Road. Country Road's balance sheet also indicates that its long-term debt of $22.5 million is greater than its equity of $14.7 million. In addition, the most recent income statement for Country Road indicates a net loss for the company of $3.3 million for the year ended June 30, 2000.

In reviewing these financial statements, we are concerned with Country Road's negative net income, its high proportion of long-term debt relative to equity, and its high percentage intangible assets. We are also concerned that after the acquisition of Evans Telephone, Country Road will have even more long-term debt from an additional $42 million in loans to finance the acquisition. We do not find that these financial conditions would either maintain or improve the current financial condition of Evans Telephone. Country Road is currently highly leveraged and will be even more so after the proposed acquisition of Evans Telephone. We are concerned that despite its intent not to alter the current operations of Evans Telephone, Country Road may need to seek a rate increase for service to Evans Telephone customers or sell Evans Telephone assets in order to pay debt obligations should financial conditions change or competitive ventures not succeed. The application provides no assurance that Evans Telephone's customers would be protected from any negative impact under this scenario.

In reviewing transfers of control under Section 854(a), the Commission must exercise its power to protect captive ratepayers from exploitation or abuse, either actual or threatened. Based on the information supplied, we find that the proposed transaction is adverse to the public interest because the financial condition of Evans Telephone is not maintained or improved. We find that the financial condition of Country Road could pose a threat to captive ratepayers of Evans Telephone. We will deny the application for the transfer of control of Evans Telephone to Country Road because it would be adverse to the public interest given that there is no showing that the current ratepayers of Evans Telephone would not be affected in the event of a financial crisis for Country Road, and there appear to be no benefits for these customers from the transaction.