II. Background

A. Inflexion's Management's History in other States

1. Pennsylvania Fine

Inflexion's management team consists of Dwayne Goldsmith (CEO and President), Keith Machen (Vice President - Legal/Business Development) and two others. On January 23, 2003, the Pennsylvania Public Utility Commission ordered Ntegrity Telecontent Services (Ntegrity), a company then run by Goldsmith and Machen, to pay $400,550.00 in fines. Machen and Goldsmith founded Ntegrity. At the time of the misconduct, Machen was Ntegrity's Vice President, and Goldsmith was an executive officer (we believe CEO) in the company. Machen and Goldsmith are still shareholders in Ntegrity. (1/21/04 Supplement at 2; Pennsylvania decision at 8.)¹ Ntegrity did not pay the Pennsylvania fine, although it was due 20 days from the date of the Pennsylvania Commission's January 23, 2003 order. (1/29/04 Second Supplement at 2.)

The Pennsylvania Commission's penalty consisted of $339,250.00 for 27 instances of slamming (switching a customer's telephone service without securing proper consent), and $61,300.00 for Ntegrity's failure to cooperate with that Commission's staff inquiries related to 63 informal complaints of slamming by Ntegrity.

Machen was directly involved in discussions with such staff, the latter representing the Pennsylvania Commission's Bureau of Consumer Services (BCS). (Pennsylvania decision at 8.) During a February 18, 1999 meeting with Machen and another Ntegrity vice president, BCS expressed concerns about the slamming and reminded them of Ntegrity's regulatory obligations and their responsibility to address consumer complaints promptly. At various times during 1999, BCS contacted Ntegrity personnel by telephone, fax, and letter to secure information on an ever-increasing number of complaints against the company. On July 23, 1999, BCS sent a letter to Ntegrity regarding the company's failure to timely respond to BCS' requests for information. (Id. at 8-9.) The Pennsylvania Commission found that Ntegrity did not cooperate with the BCS' request for information.

Ntegrity unsuccessfully tried to reach a settlement with the Pennsylvania Commission, but when it failed to do so, stopped participating in the case and failed to appear at the hearing. (1/21/04 Supplement at 2.) While Ntegrity alleged in its answer that the slamming resulted from the activities of independent telemarketers, the Pennsylvania Commission gave the answer no weight because it was not supported by witnesses. (Pennsylvania decision at 3.) As noted, Ntegrity never paid the fine, and does not claim it has appealed the fine or that it was otherwise procedurally improper.

2. New Jersey Investigation - Ntegrity

According to Inflexion, the New Jersey Division of Consumer Affairs and Board of Public Utilities opened an investigation into slamming allegations against Ntegrity. According to Inflexion, the investigation was closed without imposition of any sanction.

3. Verizon - New Jersey - Ntegrity

Verizon California, Inc. (Verizon) protested Inflexion's application here, alleging that as of April 2001, Ntegrity had accumulated a past-due balance to Verizon of nearly $4 million for wholesale services Ntegrity purchased from Verizon to serve telephone customers in New Jersey. The New Jersey Commission permitted Verizon to discontinue service to Ntegrity. (Verizon 11/21/03 Limited Protest at 3-4.) Verizon and Ntegrity settled the claim without payment or admission of liability in exchange for mutual releases of litigation each side had filed against the other. (Inflexion 1/5/03 Reply to Limited Protest of Verizon at 2-4.) Inflexion does not deny that the New Jersey Commission allowed Verizon to discontinue service to Ntegrity.

4. Verizon - Virginia - Stickdog Telecom, Inc.

Verizon also alleges that as of February 2003, Stickdog Telecom, Inc., (Stickdog) in which an Inflexion executive was formerly involved, had accumulated a past-due balance to Verizon of $1.1 million, which Verizon never recovered. On February 18, 2003, the Virginia State Corporation Commission issued an order permitting Verizon to disconnect wholesale telecommunications services to Stickdog beginning in April 2003. Stickdog's CEO was Mr. Marion Spina, Inflexion's Vice President of Operations.

According to Inflexion, Stickdog was forced to discontinue operations during very difficult economic times, and Verizon failed to provide evidence that Spina, Stickdog's CEO, "was responsible for Stickdog's problems." Inflexion does not deny that Stickdog incurred the debt to Verizon or that Verizon discontinued services to Stickdog in Virginia.

B. Parties to the Transaction

In Touch was granted local resale authority and interexchange authority as a switchless reseller in Decision (D.) 98-04-042 (Application (A.) 98-02-010), and was granted local facilities-based authority in D.03-05-005 (A.02-12-023).

Inflexion is a California corporation located at 65 Cadillac Square, Suite 2200, Detroit, Michigan 48226, telephone (866) 291-4392. Inflexion was established for the purpose of completing the acquisition of the In Touch assets, and is a wholly-owned subsidiary of Inflexion Corporation. Inflexion Corporation provides local and interexchange telecommunications services directly or through subsidiaries in several states and on an interstate basis.

Inflexion has used a third party, EZ Phone, as an "intermediary wholesale service provider" pending Inflexion's receipt of § 851 authority and a CPCN. In its Motion for Emergency Ex Parte Temporary Restraining Order and Additional Interim Relief, filed on November 10, 2003 (TRO Motion), Inflexion explained that the former customers of In Touch were in jeopardy of losing all telephone service unless Inflexion stepped in, using EZ Phone, to serve these customers.² It explained that most of the customers are credit impaired and unable to meet standard credit or deposit requirements of other carriers. EZ Phone was granted interexchange authority as a switchless reseller in D.97-09-090 (A.97-08-024) and was granted local resale authority in D.97-12-073 (A.97-08-038). D.98-01-033 (A.97-08-038) modified D.97-12-073.

C. Proposed Transaction

In Touch filed a voluntary Chapter 11 Bankruptcy petition in the United States Bankruptcy Court for the Central District of Texas, Santa Ana Division (Court) on August 1, 2003.³ On October 23, 2003, In Touch filed a motion to convert the bankruptcy case to Chapter 7 pursuant to 11 U.S.C. § 1112(a), which the Court granted on October 31, 2003. In the context of the Chapter 7 proceeding, Inflexion bought in Touch's assets and wishes to step in and serve In Touch's former customers. The customers are typically low-income consumers who purchase prepaid monthly telephone service.

The Bankruptcy trustee approved Inflexion's purchase of In Touch's assets and sought Court approval of the purchase. The Court granted such approval at a November 7, 2003 hearing, and entered its written order on November 18, 2003.⁴

Inflexion proposes the transactions in order to take over the provision of telephone service to In Touch's customers.

D. Protests

Both Pacific Bell Telephone Company, dba SBC California (SBC) and Verizon have protested the applications. They object to A.03-11-011 on the ground that, (1) Inflexion has not demonstrated the authority to represent and bind the bankruptcy estate of In Touch, and (2) the arrangement with EZ Phone - which Inflexion terms a "multi-layered resale serving arrangement" is unclear and unprecedented. They ask the Commission to impose several conditions on the acquisition.

Verizon protests A.03-11-013 due to the debts incurred by Ntegrity and Stickdog, as recited earlier in this decision. Verizon asks the Commission to require Inflexion to post a performance bond, periodically furnish the Commission financial information, and file reports if it anticipates bankruptcy or other insolvency.