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.

We now address this application, A.02-03-015, of ABRY and Evans Telephone for the approval of indirect transfer of control from Evans Telephone's parent, Country Road to ABRY. After one year of ownership, Country Road is before us seeking approval of indirect transfer in order to obtain additional equity investment to fund its operations, offset its debt and to allow it to pursue additional opportunities related to the acquisition of rural local telephone exchange carriers.

In order to evaluate this request for change in control, we must determine, among other things, what has occurred since we approved the sale of Evans Telephone to County Road. Has Country Road followed through with its investment plans for Evans Telephone to invest approximately $11 million in network infrastructure over the next five years? Has the company complied with the balance of our order in D.01-06-083?

In the assigned ALJ's ruling on May 9, 2002, we asked Evans to provide us with a history of its investment in network infrastructure and its plan to spend the $11 million in network infrastructure improvement we ordered in D.01-06-084. We also asked Evans what is the increase in the offering of broadband and other services to Evans' customers, over current levels. Evans responded on May 13, 2002, with a supplemental filing. In that filing Evans stated that, since June 28, 2001, the date of D.01-06-084, its network infrastructure new investment as of March 31, 2002 is $3.3 million and its projected expenditures for the year 2002 and 2003 are $5.2 million and $4.5 million, respectively. In addition, Evans stated that it introduced Digital Subscriber Line (DSL) Service, a form of broadband, in its Patterson Exchange in late 2000. In September 2001, Evans introduced DSL service into its Livingston Exchange as a competitive alternative to cable modem service. Evans claims that from June 28, 2001 to May 10, 2002, DSL subscribership has grown from 76 customers to 213. Evans estimates that 54% of its subscriber lines are DSL qualified. In addition, Evans has deployed a fiber network to provide broadband services in the Livingston area, including the Livingston School District.

We note that our review of the 2001 Annual Report, the Form M, to this Commission, that Evans Telephone spent approximately $3.3 million, most of which was for digital switching and circuit equipment. We examined our Consumer Affairs Branch's files for service complaints; there were none. It appears that County Road is following through with its stated goal of investing $11 million over the next five years and is continuing to provide good telephone service.

This brings us to whether or not this application is in the public interest. Applicants state through the declaration⁵ of Royce Yudkoff, Managing Partner of ABRY Partners, LLC, that ABRY does not contemplate a change in the management of Evans Telephone or of Country Road as a result of its investment in Country Road. Country Road, and in turn Evans Telephone, will benefit from ABRY's investment not only through an infusion of capital, but also through ABRY's in-depth industry knowledge, extensive relationships, flexible financing capabilities, and capital market expertise. One of our concerns in A.00-09-045 was the financial health of Country Road. Although we approved Country Road's purchase of Evans Telephone, we were concerned to the degree that we issued two rulings. The responses to those two rulings provided the declaration that Country Road would do a number of things that ultimately allayed our fears and led us to Appendix A of D.01-06-084, in which we set forth our adopted conditions for the sale of Evans to Country Road. The promise of infusion of new capital into Country Road by ABRY gives us greater confidence that Evans Telephone will have the financial wherewithal to continue to provide good telephone service to its 12,000 customers. However, we will still hold Applicants to conditions similar to what we adopted in D.01-06-084, those shown in Appendix A of this decision. There conditions are essentially an updated version of those shown as Appendix A in D.01-06-084.

It appears to us that Evans is following through in compliance with the Commission's decision in D.01-06-084. At its current rate of investment, it should exceed the Commission's mandated network infrastructure investment of $11 million from the 5-year period beginning mid-year 2001. As noted, Evans also represents that it is increasing the number of broadband customers as well as the availability of DSL service offerings to its customers.

We now address applicant ABRY's financial ability to accomplish this proposed indirect transfer of control. Applicants provided Exhibits E and F under seal, Financial Information for ABRY Partners IV, L.P. and "Term Sheet." We examined these unaudited accounts and find that ABRY's balance sheet and income statement indicate that ABRY appears to have the financial wherewithal to affect this transfer. While ABRY's assets are noteworthy, we wonder how ABRY will actually consummate the indirect transfer of control. In response to another ALJ's ruling on May 29, 2002, Applicants replied that ABRY Partners IV, L.P. have capital commitments from its limited partners for over $700 million, far in excess of the $20-30 million required for the investment in Country Road. Applicants state that the new equity provided by ABRY will serve to lower Country Road's costs, in turn furthering Country Road's ability to fulfill investment and broadband commitments made in D.01-06-084.

We note that in one of our conditions for the sale of Evans to Country Road was that Evans Telephone shall not increase rates for its customers due to any increase in costs brought about by its acquisition by Country Road and Evans Holdings. We will hold ABRY to the same condition.

We also note that on December 17, 2001, Evans Telephone filed Advice Letter No. 326 for a general rate increase of $160,863. We expect that staff will carefully review Evans' request to see that none of the request is related to the sale to Country Road's acquisition last year or due to the proposed indirect transfer of control to ABRY in this application.