7. Do the Proposed Transactions Meet the
Public Interest Tests Contained in § 854(c)?
As noted above, we have elected to conduct a review using the § 854(c) to guide our determination of whether this transaction is in the public interest. The § 854(c) criteria cause us to ask whether this transaction:
1. Maintains or improves the financial condition of the resulting public utilities doing business in California?
2. Maintains or improves the quality of service to California ratepayers?
3. Maintains or improves the quality of management of the resulting utility doing business in California?
4. Is fair and reasonable to the affected utility employees?
5. Is fair and reasonable to a majority of the utility shareholders?
6. Is beneficial on an overall basis to state and local economies and communities in the area served by the resulting public utility? And
7. Preserves the jurisdiction of the Commission and its capacity to effectively regulate and audit public utility operations in California?200
Finally, the Commission must consider the implications for competitive markets of the application as well as any environmental impacts.
7.1. Will the Change of Control Maintain or Improve the Financial Condition of the Resulting Utilities Doing Business in California?
Section 845(c)(1) requires that we determine the effect of the proposed merger on the financial condition of the resulting utilities doing business in California.
The Applicants state that "because this transaction will occur at the level of the parent holding companies, it will have no structural impact on any of the MCI subsidiaries. The transaction will maintain or improve the financial condition of the MCI subsidiaries," since the new company will have the resources to invest in MCI's facilities.201 Beyond this, Verizon is an established communications provider with a strong balance sheet, investment grade credit and the financial, technological and managerial resources to invest in MCI's network and systems.
MCI states that "the combined company will be in a strong financial position to invest in the existing IP network at a lower cost of capital than MCI could obtain on its own,"202 and Verizon states that "absent this transaction, Verizon would have to spend its resources duplicating, at least to some extent, the presence and network assets MCI already has in place."203 They add that "the combined company will have greater financial strength and flexibility than either company could achieve alone because of its greater size and complementary strengths and assets."204
Applicants also state that "with respect to the mass market, MCI's business is already in decline due to a variety of factors unrelated to this transaction, and MCI would not, absent its deal with Verizon, be one of the more significant competitors going forward for mass market customers."205 The decline of MCI's mass market business is explained in detail in Ex. Verizon/MCI 4, Section IV.
In addition, Applicants state that the increased financial strength of the combined company will support additional investments in advanced technologies. Verizon notes a commitment to invest $2 billion in MCI's networks and information technology systems, including its Internet backbone.206 In addition, Verizon states that it examined whether this transaction would be expected to impair the parent company's ability to attract capital, and determined that it would not.207 No credit downgrade has occurred and Verizon reports that none is expected.208 Applicants conclude that: "consistent with Commission precedent, the transaction will maintain or improve the financial condition of the affected California utility subsidiaries and thus satisfies the concerns of § 854(c)(1)."209
ORA argues that the merger may increase the potential for the parent company and affiliates to exploit the regulated utility and cause the latter financial harm.210 ORA states that Verizon CA's revenues make up only a small percentage of its parent company's revenues and that after the merger, that percentage will be even smaller. Therefore, ORA concludes that is unlikely the holding company will make decisions based on the interests of Verizon CA and its California ratepayers. In particular, this proposed merger is likely to increase demand on Verizon CA's capital, and would elevate the risk that the regulated utility's revenue streams may be exploited for the benefit of the parent company. In ORA's view, inappropriate cost allocation and the overcharging of regulated entities by their unregulated affiliates have occurred in the past.211
ORA argues that the Commission should seek to ensure that a merger that may benefit Verizon's holding company does not result in long-term harm to the subsidiaries providing telecommunications services in California. In particular, ORA recommends that the Commission require the imposition of a "first priority condition" for Verizon to mitigate possible exploitations that affiliates may place upon Verizon CA."212
TURN argues that the Applicants have failed to show that the proposed merger will maintain or improve the financial condition of the resulting public utility doing business in California.213 In particular, TURN notes that the Applicants merger will have a negative financial impact on the merged entity for several years. TURN concludes that it is "implausible that the merger could improve the financial condition of the Verizon-CA utility in the short-run and it is likely to do at least some harm."214
7.1.2. Discussion: The Merger Will Maintain or Improve the Financial Condition of the Resulting Public Utility.
We find that this merger will maintain or improve the financial condition of the resulting public utility. First, the transaction, with the resulting influx of $2 billion investment into MCI, will improve the financial condition of that utility. Second, Verizon has demonstrated that the transaction will not impair the holding company's ability to attract capital, and on credit downgrade has occurred or is expected.215
ORA's financial concerns largely focus on the holding-company structure of organization rather than the specifics of the transaction. ORA claims that the holding company structure will lead to adverse financial consequences for the California utilities owned by Verizon.
ORA fails to note that Verizon's California utility is already a small part of a large holding company, and thus ORA's concerns are largely unrelated to this transaction. Despite the fact that this holding company structure has been in place for some time, the Commission has seen no negative consequences for the Verizon California utility that have resulted. Moreover, ORA has not demonstrated that any adverse consequences are even plausible. Thus, ORA's concerns that this transaction will have adverse financial consequences has no credible basis. As a result, there is no reasonable basis for imposing ORA's recommendation that the Commission impose a "first priority condition" on Verizon.
TURN's objections are more subtle. TURN claims that Verizon has simply failed to demonstrate that the merger will produce no adverse consequences, and notes that the initial impact of the merger is projected to have negative consequences on finances.
As noted above, our examination of the facts in this record leads to a different result. We find that Verizon has demonstrated that this transaction will improve the financial situation of MCI's California utilities and that the transaction will not have an adverse impact on Verizon's California utilities. Thus, we conclude that the merger will meet the standard of § 854(c)(1). Moreover, we note that TURN's focus on short term financial flows adopts a "cash" approach, which treats investments as an expense in the year in which it they are made, instead of converting investments into an annual expense based on depreciation and a return on unamortized investment. This later approach is the one more typically used by the Commission.
7.2. Will the Merger of the Parent Companies and the Change of Control Maintain or Improve the Quality of Service to California Ratepayers?
Section 854(c) (2) provides calls for the Commission to examine whether the transaction is likely to "maintain or improve the quality of service to public utility ratepayers" in California.
Verizon California, citing D.03-10-088, notes that the Commission has found that Verizon provides exceptional and high-quality service, and that its overall service is consistent with the Commission standards set forth in General Order 133-B. It further states that its continuing commitment to providing high quality service will not be affected by the transaction.216 In support of this position, the Applicants state that the "structure and operation of the various utility subsidiaries will remain in place, as will the skilled workforce required to operate them."217 The Applicants note that the current companies are the products of numerous prior mergers, and therefore "possess the technical and managerial expertise to maintain focus on customer service and service quality both during and after corporate reorganizations."218 The Applicants further state that the increased financial strength and the investments that will follow the merger will support future service quality.219 Finally, the Applicants cite testimonials given at the public participation hearings as supporting its view that the stronger company will be able to provide better service quality.220
ORA states that it does not dispute Verizon's claim that it had excellent service quality in the period 1990-2001, but argues that service quality, especially as measured by "residential repair interval," has declined since 2001.221 ORA also states that there has been "a substantial volume of customer complaints about MCI's service"222 and recommends an investigation of MCI's local service quality. In addition, ORA recommends the imposition of penalties for service outages and a requirement to maintain or improve service quality. In addition, ORA recommends an investigation of service quality in the Verizon West Coast service territory.
TURN argues that the Applicants have failed to prove that the merger will maintain or improve the quality of service provided to California ratepayers.223 TURN cites apparent contradictions in the testimony of Verizon's witness. TURN speculates that MCI's poor practices will infect Verizon and states that the Applicants' assertions concerning quality as vague.224 TURN further argues that the "best practices" improvements could be made without a merger. TURN also argues that the poor financial situation of MCI is more likely to be a drag on investment by Verizon and more likely to slow down Verizon's network investments.225
DRA states the merger is "not in the interests of public utility ratepayers with disabilities."226 DRA alleges that a shift in focus to the enterprise market "threatens service quality for people with disabilities."227
7.2.2. Discussion: Merger Will Maintain or Improve Service Quality
We find that the merger will maintain or improve service quality. Current operations and networks are largely complementary, with little overlap. No integration of the two companies at the operational level is contemplated at this time. As a result, it is unlikely that the merger will have any impact on service quality in the short run.
Furthermore, as this Commission has previously found, Verizon has a record of excellent service quality, and it is more likely that the service quality orientation of the larger acquiring entity will cause a cultural change in the acquired company. Verizon's record concerning the provision of telecommunications services to the disabled community and its demonstrated commitment to disabled access make the concerns raised by DRA highly dubious. DRA's argument rests heavily on the assumption that a company can do only one thing well, and that by entering the enterprise market, service will slip to Verizon's disabled customers. This argument lacks a credible basis. In the long run, we are confident that the merger will result in improved service quality for both the general customer base and the disabled community.
Finally, there is no credible basis for ordering investigations into service quality that ORA recommends.
7.3. 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?
Section 854(c)(3) calls for an examination as to whether the transaction will "maintain or improve the quality of management of the resulting public utility" subsidiaries.
Applicants state that, since the transaction takes place at the holding company level, the merger "will have no immediate effect on the management of Verizon's California subsidiaries." 228 Applicants also state that likewise there will be "no diminution in the management quality of MCI's subsidiaries because gaining access to MCI's skills and expertise, particularly those addressing the enterprise market, is one of the reasons Verizon entered into the Agreement."229 Verizon further notes that the management of the combined company will be drawn from the current management of both companies, and states that the "experience and expertise will benefit the combined companies and its California subsidiaries."230
Verizon also states that it will draw on its previous experience and success in past transactions to ensure a smooth transition.231
Our review of the record in this proceeding cannot find any allegation that the merger would have an adverse impact on the management of the California subsidiaries of the resulting company.
7.3.2. 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 that a goal of the transfer is to acquire the expertise of MCI in the enterprise market. Moreover, the proposed transfer of control will have no immediate impact on the management of the subsidiaries offering telecommunications services within California. Second, we find no evidence in the record that the proposed transaction will have an adverse impact on management. Thus, the Applicants' statements that there will be no diminution of managerial quality stand unrebutted.
In summary, we find that the proposed transaction will maintain or improve the quality of management.
7.4. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to the Affected Employees?
Section 854(c)(4) provides for an examination as to whether the transaction will be fair and reasonable to the affected utility employees.
The Applicants state that the transaction will not have any direct impact on either Verizon's or MCI's California operations because the amended Agreement does not call for a combination of the companies' operating subsidiaries.232 The Applicants state that "Approximately one-half of MCI's employees in California at the time of closing will be in the U.S. Sales and Service organization, which encompasses MCI's enterprise sales and support teams."233 The Applicants note that since gaining MCI's enterprise sales and support expertise is a principal rationale for the transaction, material cutbacks are unlikely.234 MCI's witness notes that MCI has few California employees in corporate overhead functions or mass market activities, which are the areas most subject to cutbacks.235 Applicants further argue that the transaction should actually benefit employees by providing more opportunities for employment.236 Finally, Applicants envision that the stronger company emerging from the transaction will have better growth opportunities and financial stability, and this should result in a higher degree of stability for employees than either company could provide standing alone.237
ORA argues that the transaction, as proposed, will have a negative effect on employees and recommends the imposition of a merger condition that the Commission "limit California job counts to no more than 5% of MCI's total headcount reductions."238 ORA argues that to achieve the contemplated merger synergies, that the Applicants "will be eliminating thousands of jobs nationally across both companies."239 ORA further argues that the proposed merger has the potential to eliminate "hundreds of high-paying California jobs."240
TURN argues that the Applicants "have failed to prove that the proposed merger will be fair and reasonable to the affected utility employees."241 TURN argues that "Having one's job transformed from useful to redundant overnight through no fault of one's own hardly seems a model of fair or reasonable treatment."242
7.4.2. Discussion: Changes will be Fair to Utility Employees
The changes proposed will be fair to utility employees. First, the transaction will have no direct impact on either Verizon's or MCI's California operations because it does not call for a combination of the companies' operating subsidiaries.243 Both ORA and TURN fail to acknowledge that much of MCI's business is in irreversible decline and, consequently, the emergence of a stronger company with the ability to grow will result in a higher degree of stability for employees, particularly for those employees working for MCI.244
For these reasons, we find that that the changes resulting from the merger will be fair to employees.
7.5. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to a Majority of the Utility Shareholders?
Section 854(c) (5) provides for an examination as to whether the transaction will be fair and reasonable to the majority of affected utility shareholders.
Applicants state that they "have every expectation that the benefits of this merger will enhance the combined entity's prospects for long-term viability, stability and growth, which will benefit all shareholders, and no party has alleged otherwise."245 The Applicants state that the transaction is expected to eliminate duplicative expense and create operational efficiencies. The Applicants further state that the Boards of Directors of both Verizon and MCI concluded that the transaction is in the best interest of their respective shareholders. On October, 6, 2005, MCI shareholders voted to approve the merger.
Although TURN's protest to the merger raised questions concerning whether the offer of Qwest would be better for MCI's shareholders, TURN submitted no testimony or evidence pursuing this part of its protest.
7.5.2. Discussion: Transaction is in the Interest of Shareholders
In the GTE/Bell Atlantic merger, the Commission found that the approval of boards of directors, financial advisors and shareholders meets the test of "preponderance of evidence."246 Further, the proposed merger was accepted by a majority of MCI shareholders on October 6, 2005. There is no evidence in the record alleging that the merger conditions will not be "fair and reasonable to a majority of the utility shareholders."
Thus, we find that the proposed transaction is fair and reasonable to shareholders.
7.6. Will the Proposed Merger of the Parent Companies and Change of Control Be Beneficial on an Overall Basis to State and Local Economies and the Communities Served by the Resulting Utility?
Section 854(c)(6) calls for the Commission to consider whether the merger will be "beneficial on an overall basis to state and local economies, and the communities in the area served by the resulting utility."
The Applicants argue that the transaction "will result in overall benefits to the State of California and all of its constituencies."247 The Applicants state that the transaction will promote competition and result in improved service quality and more competitive prices. The Applicants further state that the transaction will be beneficial on an overall basis to state and local economies, and the communities in the areas served by the resulting public utility. Specifically, the Applicants state that the merger will produce cost savings and other synergies that will be passed through to California customers through competition and market forces. They also state that transaction will also result in the combined company's ability to offer a broader range of services, and more advanced services, to California consumers. The Applicants also argue that the transaction will promote competition in communications in California, resulting in improved quality of service, more competitive prices, and greater technological innovation that will inure to the benefit of customers.
The Applicants further note that during the public participation hearings held throughout the state, many customers and community groups expressed this view. Applicants dispute ORA's estimates of job losses, which we have discussed elsewhere.
Furthermore, the Applicants note that Verizon has a strong tradition of community support, community service, and corporate philanthropy, which it states it "will continue after this transaction."248 The Applicants state further that the Greenlining Agreement further demonstrates the Applicants' commitment to the community. The Applicants note that under the Greenlining Agreement, they will:
· Participate in a statewide Broadband Task Force.
· Increase corporate philanthropy over the next five years by an additional $20 million above current levels, with a good faith effort to maintain the aggregate contributions to minorities and underserved communities in a manner consistent with its past practice.
· Make a good faith effort to increase the supplier diversity goal for minority business enterprises from the current 15% to 20% by 2010. To achieve this goal, Applicants anticipate spending $1 million over five years in technical assistance to minority businesses and another $1 million to develop Verizon's internal infrastructure devoted to such efforts.
Greenlining supports the Greenlining Agreement, and urges that it be considered in the Commission's determination of whether the transaction meets its general public interest standards as required by § 854. In addition, Greenlining links this Agreement to the one it earlier reached with SBC, and states that "Verizon, to its credit, has agreed to join SBC in jointly leading the efforts to create this Statewide Broadband Task Force."249
LIF also supports the Greenlining Agreement, and urges the Commission to approve the pending merger and Greenlining Agreement.250 LIF believes that the merger and Greenlining Agreement "promotes sound public policy and meets § 854 benefits tests."251 LIF cites demographic evidence that it states "dictates that a significant part of § 854 benefits should be directed at low-income communities."252 LIF cites evidence of the digital divide as demonstrating a need for the initiatives contained in the Greenlining Agreement.253 Finally, LIF cites a variety of Commission decisions that it argues constitute precedents for adoption of the Greenlining Agreement.254
ORA, in contrast, argues that the transaction will have a negative effect on the California economy, citing its testimony and arguments concerning employment.255 ORA argues that the Greenlining Agreement is "procedurally defective,"256 citing Rule. 51.1(b) of the Commission's Rules of Practice and Procedure, which it says "specifies that the proper way to introduce a proposed settlement is to file a motion ..."257
TURN argues that the Applicants have failed to "meet a reasonable burden of proof that the proposed [merger] will not harm the state and local economies in California."258 TURN also argues that that the Greenlining Agreement requires a conference under Rule 51.1(b) and states that the Commission should defer action on the Greenlining Agreement.259 TURN then raises a series of questions concerning terms of the Greenlining Agreement and the targeting of philanthropic giving by Verizon.
We find that the transaction will benefit Californians particularly in light of the Greenlining Agreement.
Pub. Util. Code § 709 identifies access to advanced telecommunications service as a key public policy objective260. Several parties to the proceeding identified enhanced access to high speed Internet (broadband) and advanced telecommunications services as a primary benefit to consumers embodied in this transaction. Applicants state that "the transaction is intended to complement and accelerate Verizon's continuing transformation into a premier wireless and broadband provider," and will "further its investment strategy to bring enhanced broadband capabilities to the mass market." 261
Greenlining and LIF and their respective affiliates intervened in the instant proceeding primarily to ensure that underserved communities receive benefits as a result of the proposed change of control between Verizon and MCI and to ensure that the merger is not adverse to the public interest.
As briefly noted above, on September 15, 2005, Greenlining, LIF and Verizon California entered into the Greenlining Agreement reflecting a five-year commitment by Verizon California to increase corporate philanthropy in California by $20 million above current levels over five years and continue to be a leader in serving underserved communities with a focus, among other things, on bridging the digital divide.
As part of the Applicants' commitment to fulfilling state policy objectives and the Commission's goal of achieving ubiquitous availability of broadband and advanced services in California, and to enhance the broadband connectivity section of the Greenlining Agreement, thus ensuring that this transaction is beneficial on an overall basis to communities served, we order that Applicants commit $3 million per year for five years in charitable contributions ($15 million total), to a non-profit corporation, the California Emerging Technology Fund (CETF), to be established by the Commission for the purpose of achieving by 2010 ubiquitous access to broadband and advanced services in California, particularly in underserved communities, through the use of emerging technologies. No more than half of Applicants' total commitment to the CETF may be counted toward satisfaction of the Greenlining Agreement to increase charitable contributions by $20 million over five years.
The CETF will be organized under the Nonprofit Public Benefit Corporation Law for charitable and public purposes as a nonprofit public benefit corporation, and not organized for the private gain of any person or entity.
In addition to the goal of providing ubiquitous access to broadband and advanced services in California, the CETF should also have its goals expanded to include adoption and usage. We note that the Greenlining Agreement and SB 909, proposed legislation sponsored by Senator Escutia, included these components in the broader vision for addressing the Digital Divide and believe that we should do so as well262.
Consistent with the diverse needs of California's low income, ethnically diverse, rural and disabled communities, the members of the Governing Board should have a broad array of backgrounds, experiences and expertise. SB 909 proposed the establishment of a California Broadband Access Council, and we will use this as a guide in constituting the Governing Board of CETF.263
The Commission will bring together representatives of this Commission, authors of the Broadband Task Force concept and the Broadband Access Council proposal, and CETF to work collaboratively from the outset to maximize effectiveness. In order to facilitate implementation of this program, our Telecommunications Division will assist in the logistics of collecting the names of the appointees and arranging the initial meeting. The Applicants should forward the list of appointees and their availability to the Director of the Telecommunications Division. There is no additional role for the Telecommunications Division after the initial meeting occurs.
The governing board of the CETF will be composed as follows: The Commission will select four appointees. Assuming that this proposal is also adopted in the pending proposed merger of SBC and AT&T, Verizon will nominate one appointee and SBC will nominate three. These eight appointees shall determine the remaining four appointees to the governing board.
Funds dedicated to the CETF will be used to attract matching funds in like amounts from other non-profit public benefit corporations, corporate entities or government agencies. It is anticipated that initial funding provided by the Applicants in this proceeding ($15 million) will be combined with funds from other sources for a total initial endowment for the CETF of $60 million over five years. It is further anticipated that a majority of CETF funds will be used to seek matching funds from other private or non-profit entities for specific projects to reach a total goal of at least $100 million in funding over five years.
The CETF should earmark at least $5 million to fund telemedicine applications that serve California's underserved communities, particularly those that serve rural areas of the state or serve a large number of indigent patients. Grants for telemedicine applications may be made directly to health care providers that operate under a not-for-profit structure or not-for-profit public charities that provide telecommunications or technology grants. Such grants shall be used to provide telemedicine applications for the direct benefit of underserved communities and may not be used for policy advocacy work in any area including telecommunications or health care policy. Consistent with the federal telemedicine program, the funds earmarked for telemedicine applications should not be used to construct broadband transmission facilities outside of the consumer's premise, although the CETF may fund such investments with other funds.
The Articles of Incorporation, Bylaws and Charter for the CETF will be established by the governing board. The Charter will specify that the purpose of the CETF is to fund deployment of broadband facilities and advanced services to underserved communities. "Underserved communities" are defined as communities with access to no more than two broadband service providers, including satellite, or below-average broadband adoption rates. Communities with below average broadband adoption rates primarily include: low-income households, ethnic minority communities, disabled citizens, seniors, small businesses and rural or high-cost geographic areas.
The CETF will form advisory groups on deployment of broadband facilities and access to advanced services, such as online education and telemedicine, in rural and high-cost areas. The advisory groups, to the extent possible, shall incorporate the goals and intent of the Broadband Taskforce (as outlined in the Commission's Broadband Report) and the involvement of impacted communities as proposed in SB 909. The CETF will work with these advisory groups as well as organizations and agencies such as Greenlining, the California Telemedicine and eHealth Center (CTEC), the Corporation for Education Network Initiatives in California (CENIC), the California Business and Transportation Agency (BTH), the Broadband Institute of California and others to identify ways in which the CETF can coordinate and fund projects to link primary care health clinics and educational facilities in rural and high-cost areas to high-speed broadband networks.
It is the intent of this Commission that broadband facilities funded by the CETF will be owned and operated by private corporations, non-governmental organizations (such as universities or health facilities) and/or local governments, or some public-private partnerships involving a combination of these entities, and not owned and operated by the CETF. Any remuneration for CETF facilities transferred to other entities will be returned to the CETF fund for use in future projects.
In D. 03-12-035, the Commission established a similar fund as part of the PG&E bankruptcy reorganization plan. The California Clean Energy Fund (CalCEF), a non-profit public benefit corporation, was established by the Commission for the purpose of supporting research and investment in clean energy technologies in California.
We find that this structure will ensure fidelity to the vision and goals contained in the Greenlining Agreement while fulfilling this Commission's mandate to pursue widespread availability of high-quality telecommunications services to all Californians under §709 of the Public Utilities Code.
In summary, we find that the Greenlining Agreement, combined with the commitment to focus on broadband deployment in underserved communities pursuant to the discussion above establishing the CETF, will ensure that the merger transaction produces benefits to state and local economies and is consistent with overall state telecommunications goals.
Finally, we find little merit in the procedural and substantive objections of TURN and ORA. First, we do not deem the Greenlining Agreement to be a "Settlement" governed by Rule 51. Rule 51(c) defines a "Settlement" as "an agreement ... on a mutually accepted outcome to a Commission proceeding." An outcome to the proceeding would be a decision to approve or deny the application.
The Greenlining Agreement constitutes little more than a common position by certain parties and their experts that offers an appropriate way to address issues of specific concern to California communities, including those issues know as "digital divide issues."
Moreover, as noted above, we have used our oversight to add another condition to specifically address issues relating to the digital divide and this Commission's obligations pursuant to § 709 in the context of the merger. Thus, not only is the Greenlining Agreement not a "Settlement within the meaning of Rule 51," we have not given it the deference reserved for a Settlement. We have treated it for what it is - a an agreement among parties and their experts that participating in a broadband task force, targeting philanthropy, and contracting practices can address specific needs of California communities.
7.7. 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?
Section 854(c) (7) provides that the Commission should consider whether the change of control preserves the jurisdiction of the Commission and its capacity "to effectively regulate and audit public utility operations in the state."264
Applicants state that because the transaction will not affect the structure of MCI Subsidiaries, the Commission's ability to regulate those subsidiaries will not be diminished in any respect. Applicants state that all MCI subsidiaries will continue to be subject to all the terms and conditions that the Commission previously required.265 Applicants further state that the transaction will not adversely affect the Commission's jurisdiction nor its ability effectively to regulate the combined company's public utility operations in California.
Although no party alleges that the transaction diminishes the Commission's jurisdiction, several raise questions concerning the capacity of the Commission to continue to regulate utility operations in a new market environment. ORA states that "MCI, with AT&T, has been one of the most vigorous CLEC voices in Commission proceedings, frequently representing interests in conflict with those of SBC and Verizon."266 In addition, both ORA and TURN claim that the regulatory task of auditing will become more complex, and then proposes that the Applicants fund two $1 million audits post merger.267 TURN further argues that the merger "will complicate discovery processes."268
7.7.2. Discussion: Transaction Will not Diminish Jurisdiction of Commission or its Capacity to Regulate and Audit Utility Operations in California.
We find that the transaction will not diminish the jurisdiction of the Commission or its capacity to regulate and audit utility operations in California. First, we note that nothing in this transaction in anyway affects the jurisdictional authority of this Commission.
Second, the allegations by TURN and ORA that the merger will decrease the Commission's regulatory capacity are unsubstantiated. Monitoring the compliance of the merged company with applicable laws and regulations will certainly require no more Commission resources than monitoring the separate companies and could require fewer such resources as it is likely that fewer separate proceedings will be initiated.
Similarly, concerning audits, we note that this Commission's decisions in D.04-02-063 and D.04-09-061 demonstrate that changes in industry structure have not diminished the Commission's authority or capacity to audit utility operations. Thus, even as corporate structures have become more complex, the ability of the Commission to exercise regulatory oversight has adapted with regulatory structures more attuned to the competitive environment, including a shift from traditional rate-of-return regulation to price cap regulation in the telecommunications industry, while at the same time maintaining the Commission's auditing authority.
200 As noted earlier, § 854(c)(8) enables the Commission "Provide mitigation measures to address significant adverse consequences that may result." Since this does not create a standard of review, but provides authority to impose mitigation measures, we will not address this section explicitly here. Instead, we will use the authority to propose any needed mitigation measures in conjunction with our review of criteria 1 through 7. In addition, we will also explicitly address § 854(c)(8) in section 10 (below) in conjunction with our § 854(d) analysis, which gives us the authority to consider "reasonable options" offered by other parties.
201 Application Section X(A) and Verizon/MCI 3 Section VII(A).
202 Verizon/MCI 4 Section VI #61.
203 Verizon/MCI 3 Section V(A).
204 Verizon/MCI 3 Section VII(A).
205 Verizon/MCI 3 Section VI #64.
206 Ex. Verizon/MCI 1, ¶ 17.
207 Ex. Verizon/MCI 23, p. 19.
208 Id.
209 Joint Applicants Opening Brief, p. 46.
210 ORA, Opening Brief, page 38.
211 ORA 3.
212 ORA, Opening Brief, p. 41, citing Ex. ORA 3, pp. 12-13.
213 TURN, Opening Brief, p. 69.
214 TURN, Opening Brief, p. 71.
215 See Applicants Reply Brief, p. 46.
216 Joint Applicants' Opening Brief, p. 46.
217 Joint Applicants' Opening Brief, p. 47.
218 Id.
219 Verzion/MCI-3, ¶ 47.
220 Joint Applicants' Opening Brief, p. 47.
221 ORA Opening Brief, p. 43.
222 ORA Opening Brief, p. 47.
223 TURN Opening Brief, p. 71.
224 TURN Opening Brief, p. 72.
225 ORA Opening Brief, p. 73.
226 DRA Opening Brief, p. 2.
227 DRA Opening Brief, p. 3.
228 Joint Applicants Opening Brief, p. 48.
229 Id.
230 Joint Applicants Opening Brief, p. 48.
231 Verizon/MCI 3 ¶ 48.
232 Verizon/MCI 3, ¶ 50.
233 Joint Applicants Opening Brief, p. 49.
234 Id.
235 Id.
236 Ex. Verizon/MCI 3 ¶ 51 and Ex. Verizon/MCI 23 p. 28-29.
237 Joint Applicants Opening Brief, p. 50.
238 ORA Opening Brief, p. 58.
239 Id,, citing Ex. ORA 1 at 60.
240 Id.
241 TURN, Opening Brief, p. 75.
242 Id.
243 Ex. Verizon/MCI 3 ¶ 50.
244 Ex. Verizon/MCI 23 at 28-29.
245 Joint Applicants Opening Brief, p. 50.
246 D.00-03-021, 2000 Cal. PUC LEXIS 398 *218-19 (March 2, 2000).
247 Joint Applicants Opening Brief, p. 51.
248 Joint Applicants Opening Brief, p. 52.
249 Greenlining, Opening Brief, p. 4.
250 LIF, Opening Brief, p. 2
251 LIF, Opening Brief, p. 4.
252 Id.
253 Exhibit LIF 1 and Exhibit LIF 2.
254 LIF, Opening Brief, pp 7-10.
255 ORA, Opening Brief, p. 48.
256 ORA, Reply Brief, p. 38.
257 ORA, Reply Brief, p. 39.
258 TURN, Opening Brief, pp. 76-79; TURN, Reply Brief, p. 50.
259 TURN, Opening Brief, p. 84.
260 California Public Utilities Code §709 says in relevant part: "The Legislature hereby finds and declares that the policies for telecommunications in California are as follows: (c) To encourage the development and deployment of new technologies...(d) To assist in bridging the "digital divide" by encouraging expanded access to state-of-the-art technologies for rural, inner city, low income and disabled Californians."
261 Joint Application of Verizon Communication Inc. and MCI, Inc. at pp. 12 & 13.
262 We understand that without computers and computer literacy neither availability nor access will ensure use. It is low use that is at the heart of the digital divide. CETF should consider the possibility of private/public partnerships to develop community broadband access points that provide both.
263 Consistent with the vision of SB 909, the governing board should consist of representatives of a broad range of interests. In particular, the composition of the governor board should include, to the extent possible consistent with the size limitations of the governing board, representatives of this Commission, the Legislature, SBC-AT&T, Verizon-MCI, Greenlining, Latino Issues Forum, consumer advocates, groups supporting rural economic development (such as the Great Valley Center), the small business community (such as the California Small Business Association), the disability community (such as the World Institute on Disability), computer and equipment manufacturing, high-technology corporations, Broadband Institute of California, California Telemedicine and ehealth Center ("CTEC"), the Corporation for Education Network Initiatives in California ("CENIC"), the California Business, Housing and Transportation Agency ("BTH"), as well as individuals with experience in grant making and non-profit management.
264 § 854(c)(7).
265 Verizon/MCI 3 ¶ 58.
266 ORA Opening Brief, p. 50.
267 ORA Opening Brief, p. 51; TURN Opening Brief, p. 79.
268 TURN Opening Brief, p. 80.
