5. Do the Proposed Transactions Meet the
Public Interest Tests Contained in § 854(c)?

As set out in the Scoping Memo and D.00-06-079, the public interest tests contained in §854(c) concerning the proposed transaction are quite specific. The statute asks whether the change in control in the parent company as proposed by AT&T Broadband Phone and CBC will:

A. Maintain or improve the financial condition of the resulting public utilities doing business in California?

B. Maintain or improve the quality of service to California ratepayers?

C. Maintain or improve the quality of management of the resulting utility doing business in California?

D. Be fair and reasonable to the affected utility employees?

E. Be fair and reasonable to a majority of the utility shareholders?

F. Be beneficial on an overall basis to state and local economies and communities in the area served by the resulting public utility? And

G. Preserve the jurisdiction of the Commission and its capacity to effectively regulate and audit public utility operations in California?

Finally, the Commission must consider the anti-trust implications of the applications as well as any environmental impacts.

A. Will the Change of Control Maintain or Improve the Financial Condition of the Resulting Utilities Doing Business in California?

1. Position of Parties

The applicants note that both CBC and AT&T Broadband Phone have provided copies of 10-K reports and an AT&T Comcast Pro Forma Financial Statement. These indicate that Comcast had a ratio of debt to 2001 operating cash flow of less than 4 to 1, compared to AT&T Broadband's ratio of over 8 to 1. After the merger, the applicants estimate that the first year combined debt to operating cash flow of less than 5 to 1.²⁹ Similarly, the applicants point out that Comcast is "currently generating high `free cash flow' from its operations."³⁰ The applicants state that these financial results "constitute significant benefits to California customers."³¹ In particular, the applicants note that the improved financial condition will make it easier from AT&T Broadband Phone to "continue and expand its service in California."³²

In addition to the improvements in cash flow statements, the applicants also anticipate that the "parent company merger should result in synergies and efficiencies worth approximately $1.25 to $1.95 billion a year. . ."³³ In support of this statement, the applicants attach a Declaration of Robert Pick, Comcast Senior Vice President of Corporate Development. In addition, he testified that AT&T Comcast should generate "an additional $600 to $800 million . . . annually by providing cable telephony in Comcast's former service areas."³⁴

In its protest, Qwest does not contest that the application will improve the financial condition of AT&T Broadband Phone, but Qwest points out "Comcast's financial condition will worsen."³⁵ Moreover, Qwest states that AT&T's financial position is weak, and cites recent actions by Moody's Investor Services and Fitch Ratings to downgrade AT&T long-term debt.

Similarly, TURN-CFA argue that the "acquisition price is high" and that the "debt load is heavy."³⁶ They conclude that the new entity's need to increase cash flow will be severe.

2. Discussion: Transaction Will Create an Important California Operator with Strong Finances

There is no doubt that AT&T Broadband Phone will emerge from this merger with greater financial strength and a greater ability to meet the financial demands needed to expand its California operations. The applicants' demonstration that the ratio of debt to operating cash flow changes from 8 to 1 from 5 to 1 incontrovertibly demonstrates the greater strength of AT&T Broadband Phone. In addition, the promised operating efficiencies and economies of scope and scale will make AT&T Comcast a fitter California operator than AT&T Corp.

Qwest's observation that Comcast will have a weaker financial ability to operate in California is not evidence that shows that the transaction is adverse to the public interest. Although Qwest rightly points out that the ratio of debt to operating cash flow for Comcast erodes from 4 to 1 to about 5 to 1, this erosion is less significant than the improvement of the ratio of the new parent of AT&T Broadband Phone, which improves from 8 to1 to 5 to 1. Further, we note that it is AT&T Broadband Phone (with 145,000 customers in California to CBC's 75 California customers) that has the stronger California presence. CBC, despite its stronger financial ratios, has declined to operate in California's telephony market in a significant way. Thus, we conclude that a principal result of this merger is to strengthen the finances of a principal California provider of telephony services.

Finally, the TURN-CFA argument that the acquisition price is too high and that the debt is heavy is not convincing. The applicants have shown, and TURN-CFA does not contest, that the underlying financial ratios remain strong.

In conclusion, the proposed transaction strengthens the ability of the resulting utilities to provide competitive telecommunications services in California. The increased ability of the merged entities to compete, in conjunction with the intentions of senior managers (as revealed in their declarations) to compete in offering telephony services, will provide benefits to Californians by increasing their choice of suppliers of telecommunications services.

B. Will the Merger of the Parent Companies and the Change of Control Maintain or Improve the Quality of Service to California Ratepayers?

1. Position of Parties

The applicants argue that "a purpose of the merger of the parent companies is to obtain the financial flexibility to grow the telephony business."³⁷ In particular, the applicants submitted a declaration of Gregory Braden, Executive Vice President for Strategy and Business Development for AT&T Broadband that notes that nationally AT&T Broadband has over 1.15 million cable telephony customers and is adding 40,000 customers per month. This strong growth, however, "will continue to need financial support."³⁸ Thus, the applicants note that this continued expansion of telephony services is facilitated by the financial benefits offered by the merger.

Concerning the day-to-day delivery of service to customers, the applicants note that they "only seek a change of control of their ultimate parent companies."³⁹ Moreover, the applicants point out that it is "AT&T Broadband that has developed the necessary experience and expertise to deploy efficiently cable telephony services. . ."⁴⁰ These assets will move into the new company. Because of these actions, the applicants argue that "California customers will continue to receive the high quality service they now enjoy. . . "⁴¹

Qwest argues that Comcast will clearly have a weaker financial position and that this deserves investigation. In addition, Qwest urges that the Commission "investigate whether the newly formed AT&T Comcast's financial condition will, in fact, as the applicants claim, allow for expanded deployment of cable telephony and cable modem services."⁴² Further, Qwest raises the possibility that "Comcast, which has not made any substantial investment in cable telephony, might, upon consummation of the transaction, exercise its substantial voting power in the newly formed AT&T Comcast to slow AT&T's broadband rollout."⁴³

2. Discussion: Merger Will Have Positive Effects on Service Quality, if Any

We find that the merger will have positive effects on service quality, if any. First, all of software systems providing services to AT&T Broadband Telephone's customers will remain in AT&T Broadband Telephone. Thus, the merger and change of control should have no impact on these systems that serve customers. Second, the merger strengthens the financial picture of AT&T Broadband Telephone. The additional financial resources make it possible to improve telephony services. Third, CBC provides almost no service to Californians, and its change in ownership will have no effect on California customers. Fourth, there is no credible allegation that this financial transaction will lead to a diminution or deterioration of telephony service in California. Qwest's speculation that the new company may abandon telephony is no more

than speculation, and it is countered by declarations by Comcast and AT&T executives that this is not the case.⁴⁴

In summary, the record in this proceeding leads us to include that there will certainly be no adverse impacts on service quality arising from this change in control. Indeed, the likelihood is that the financial resources that will become available to the newly formed AT&T Comcast hold the promise of improving service quality.

C. Will the Merger of the Parent Companies and Changes of Control Maintain or Improve the Quality of the Management of the Resulting Utility Doing Business in California?

1. Position of Parties

The applicants argue that the merger of the parent companies will maintain or improve the quality of the management of the resulting utility doing business in California. First, the applicants point out "CBC does not provide local exchange service in California and does not actively market its toll service."⁴⁵ Second, the applicants state "AT&T Broadband Phone . . . will retain its management expertise both on a California and nationwide basis."⁴⁶ Finally, the applicants point out that as a result of the merger, AT&T Broadband Phone "brings its cable telephony expertise, including its management expertise, to the merger of the parent companies."⁴⁷

Qwest responds that the concentration of voting power in Sural LLC makes it unclear "how much of the present AT&T management will remain or what its influence will be."⁴⁸

TURN-CFA similarly criticize the "management structure" of the new company.⁴⁹ TURN-CFA note that "Worse still, AT&T management cannot be removed for three years and Comcast management cannot be removed for six years."⁵⁰ TURN-CFA argue that this ensures "many layers of entrenched bureaucracy."⁵¹

2. Discussion: Proposed Transaction will Maintain or Improve Management Quality

We find that the new company will maintain the quality of its management. First, there is no reason to doubt the statements of the applicants concerning the goal of stabilizing management. Moreover, the proposed transfer of control will have no immediate impact on the management of the subsidiaries offering telecommunications services within California. Second, TURN-CFA provides evidence that the very structure of the merger has incorporated safeguards to provide a stable environment for managers. Third, Qwest's argument based on the power of the Sural LLC voting shares carries little weight. Qwest's argument fails to answer the question why would Sural, with its strong stake in the performance of the new company, use its voting power to remove effective managers? Moreover, Qwest overlooks the very safeguards identified by TURN-CFA to protect current management.

In summary, the proposed transaction will maintain management quality.

D. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to the Affected Employees?

1. Position of Parties

AT&T Broadband Phone and CPC state that the merger and change of control will be fair and reasonable to the affected workers. The applicants state that the combination of the "parent companies would not itself impact the level of skilled employees now available to provide cable telephony service in California."⁵² The applicants point out that because Comcast has only a minor California presence, the new company will need to rely on AT&T Broadband personnel and little change is likely. Although the applicants state that any merger may create change, they note "AT&T Comcast is committed to maintaining a skilled work force and the partners have shown a willingness to work with utility employees.⁵³

The applicants document their willingness to work with utility employees by citing filings made by the Communications Workers of America to the Commission's Telecommunication Division. They cite a June 12, 2002 letter as follows:

"We are writing on behalf of the Communications Workers of America ("CWA") with regard to the protest filed by CWA concerning Advice Letter No. 16 filed by Comcast Corporation on March 13, 2002, and Advice Letter No. 29, filed by AT&T Corporation on March 7, 2002. (Letter from Katherine S. Poole to Jack Leutza (April 2, 2002 ("Protest"). Since its Protest was filed, CWA has engaged in extensive discussions with AT&T Corporation and Comcast Corporation regarding the concerns raised in its filing. The parties have now resolved those concerns to their mutual satisfaction. CWA, therefore, no longer intends to pursue the issues identified in its Protest before the Commission."⁵⁴

Neither Qwest nor TURN-CFA addresses this issue in their protests.

2. Discussion: Changes will be Fair to Employees

The holding company merger and change of control will be fair to utility employees. First, the likely impacts on utility employees will be small since the changes take place at the holding company level. Second, concerning California operations, we note that there will likely be little change at the level of utility employees because there are almost no CBC employees in California. Third, CWA's protests of associated advice letter filings, its subsequent withdrawal of these protests, its statements, and non-participation in this proceeding indicate that CWA has succeeded in resolving its concerns through discussions with these companies. Fourth, no party protesting this merger raised this issue in their filings.

Based on the information provided, we conclude that the proposed holding company merger and change of control will be fair to utility employees.

E. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to a Majority of the Utility Shareholders?

1. Positions of Parties

The applicants argue that the merger of the parent companies is fair and reasonable to the majority of the utility shareholders. The applicants point out that both companies are publicly traded companies. In addition, the merger proposal is subject to shareholder approval, and both companies have provided their shareholders with full information regarding the transaction, "pursuant to the rules of the Securities and Exchange Commission."⁵⁵ In addition, the applicants point to the results of the voting: 99.8% of the votes cast by Comcast's shareholders favored both the merger and the governance provisions of the AT&T Comcast charter and 95% of the votes cast by AT&T's shareholders ratified the merger and other aspects of AT&T's Corp.'s restructuring. In addition, the applicants point out that in the proxy statement, the investment banks of Morgan Stanley & Co. Incorporated, JP Morgan Securities Inc., Merrill Lynch Pierce Fenner & Smith Inc., Credit Suisse First Boston Corporation and Goldman Sachs & Co.," opined that the proposed exchange of stock was fair to the Shareholders of the company retaining them."⁵⁶

Neither Qwest nor TURN-CFA challenged the fairness of the transaction to shareholders.

2. Discussion: Transaction in the Interest of Shareholders

We conclude that the terms of this transaction are in the interest of the shareholders. First, the supervision of this transaction and the information disclosures by the Securities and Exchange Commission provides us with confidence that shareholders had an accurate picture of the transaction before they voted. Second, the shareholders of both companies have overwhelmingly supported this transaction. Third, there is no allegation by any party that this transaction is counter to the interests of shareholders. Thus, for all these reasons we conclude that the transaction is fair to shareholders.

F. Will the Proposed Merger of the Parent Companies and Change of Control Be Beneficial on an Overall Basis to State and Local Economies

1. Position of Parties

The applicants argue that to the extent that there is any impact of the proposed merger of the parent companies and change of control, it will be a positive impact. The applicants cite beneficial outcomes that they believe that the merger will produce. They state that the transaction "will produce a broader base for financing, create efficiencies and operating cost savings and provide addition capital for expansion."⁵⁷ The applicants stress AT&T Comcast's continuing commitment to the roll out of "cable telephony to former AT&T systems and to commence the roll-out of cable telephony to former Comcast systems."⁵⁸ Moreover, the applicants comment that the changes in the state of the telephony marketplace make successful competition by "small niche players" infeasible.⁵⁹ They argue that the merger will create the "kind of major competitor for local exchange service that California regulators have been seeking."⁶⁰ Finally, they note that a weaker stand-alone AT&T Broadband Phone will be a less capable provider of telephony service to California.

Qwest argues that on an overall basis, the merger will not prove beneficial to the state or local economies. Qwest argues that an effect of the merger is to dilute the financial strength of Comcast. Qwest speculates that "[a]bsent the proposed transaction, in contrast, if Comcast were interested in investing in cable telephony, its stronger balance sheet, cash flow and ability to raise capital could be put toward increasing competition, rather than either wasted or used to increase monopolization."⁶¹ Qwest further argues that the applicants have failed to provide an adequate record "upon which to determine whether the proposed transaction is beneficial on an overall basis to the state and local economies."⁶² Qwest specifically alleges that the applicants "have not demonstrated that the State is better off with one potentially stronger AT&T than with a strong Comcast and a weaker AT&T."⁶³

TURN-CFA state that "Comcast management has not previously been committed to local telephone service. . ."⁶⁴ In addition, TURN-CFA state that the two companies, once under a common parent, "will not compete with each other for the California consumer's communications business."⁶⁵ They conclude that the transaction "must be closely scrutinized to see if there are ways to mitigate this elimination of potential competition in California."⁶⁶

2. Discussion: Transaction Will Benefit Californians

We find that the completion of this transaction will benefit Californians. First, AT&T Comcast will have an increased ability to finance network construction. Second, executives have declared a continuing commitment to the rollout of cable telephony. Third, Qwest's concern for the reduced financial strength of Comcast is misplaced - it does not provide significant telephony services to California, and there is no indication, absent this proposed merger, that it would become significantly involved in broadband telephony in California. Fourth, the TURN-CFA protest is unpersuasive. TURN-CIFA observe that Comcast has not competed to provide telephony service in California, and then speculates that the merger will reduce competition. TURN-CIFA fail to note that since Comcast does not now compete, there is no reduction in competition that directly results from the merger. In addition, TURN-CIFA fail to note that CBC and AT&T Broadband Telephone have no overlapping service areas, thereby making competition virtually impossible.

Thus, we have adequate reasons to conclude that this proposed transaction will benefit Californians by strengthening AT&T Broadband Telephone, which provides service to California customers, and making it better able to compete with other carriers and ultimately providing California consumers with more telephony choices.

G. Will the Proposed Merger of the Parent Companies and Change of Control Preserve the Jurisdiction of the Commission and its Capacity to Effectively Regulate and Audit Public Utility Operations in California?

1. Positions of Parties

The applicants state that the change of control "will not in any way denigrate the Commission's authority over the telephony services provided pursuant to the California certificates of public convenience and necessity held by AT&T Broadband Phone of California and CBC."⁶⁷ The applicants state that the proposed transaction is similar to that considered by this Commission in AT&T's acquisition of MediaOne. The applicants note that the Commission found "approval of this change in control will have no adverse impact on the Commission's jurisdiction over AT&T's current telecommunications companies under our jurisdiction." (D.00-05-023; 2000 Cal. PUC LEXIS 355 *34.)

TURN-CFA argue that the Limited Liability Company (LLC) form of organization that the applicants propose will make it "more difficult to investigate" the new entity and that the reporting and governance rules "may be substantially different."⁶⁸ TURN-CFA urge us to investigate this more fully.

2. Discussion: Transaction Will not Diminish Jurisdiction of Commission and its Capacity to Regulate and Audit Utility Operations in California.

We find that the proposed transaction will not diminish the jurisdiction of this Commission or its capacity to regulate and audit utility operations in California. First, the applicants are correct in citing the acquisition of MediaOne by AT&T as similar structure to this acquisition, and correct in noting our finding that it would have no adverse impact on our jurisdiction. In particular, we note that at the level of the entities holding a CPCN, the merger is creating no change. All change takes place at the holding company level. In addition, auditing the relationship between a utility and its parents is always a difficult task. The change in ownership at the holding company level leaves the task of auditing and regulating unchanged.

Finally, TURN-CFA's objection to the proposed LLC is not supported; TURN-CFA merely alleges that a LLC "may" change reporting and governance requirements. We note that a LLC remains a legal form of corporate organization approved by the SEC. Moreover, this issue of corporate governance is also subject to review by shareholders. In summary, the TURN-CFA protest fails to explain how the SEC could approve or shareholders adopt a corporate form of organization that would frustrate review. Thus, we do not believe that an investigation of this commonly used form of corporate governance is needed.