9. Other Issues § 854(c) (8) § 854(d)

Section 854(c) (8) states that the Commission shall "Provide mitigation measures to prevent significant adverse consequences which may result." Unlike the other sub-sections of § 854, § 854(c)(8) does not establish criteria for reviewing the transaction, other than ordering that we provide mitigation measures to prevent "significant adverse consequences."²⁷¹

Section 854(d) states that:

When reviewing a merger, acquisition, or control proposal, the commission shall consider reasonable options to the proposal recommended by other parties, including no new merger, acquisition, or control, to determine whether comparable short-term and long-term economic savings can be achieved through other means while avoiding the possible adverse consequences of the proposal.²⁷²

Consistent with the provision of this section, we will therefore consider whether there are "reasonable options" to the merger, including modifying conditions.

9.1. Position of the Parties

The Applicants argue that, consistent with the wording of the statute, "mitigation measures should be imposed only if necessary to mitigate some `significant adverse consequences that may result' from the transaction."²⁷³ The Applicants argue that the Commission has "consistently refused to approve merger conditions unrelated to the issues raised by the merger itself."²⁷⁴ The Applicants accuse the Intervenors of using this proceeding "as an opportunity to satisfy their own agendas by attempting to impose merger conditions unrelated to the transaction itself."²⁷⁵ The Applicants argue that the "Commission should not accede to intervenors' attempts to fulfill their wish-lists by imposing conditions that have little or nothing to do with the transaction itself."²⁷⁶ Applicants claim that since the transaction does not produce significant adverse consequences, no conditions are appropriate.

The Applicants further argue that the Commission lacks authority to impose specific conditions proposed by the Intervenors.²⁷⁷

CALTEL proposes a series of mitigation measures, including: 1) a price cap plan for Verizon's wholesale network elements; 2) a requirement that Verizon provide fair interconnection prices, terms and conditions for IP facilities and capabilities; 3) the imposition of a cap on Verizon's intrastate special access rates for five years (discussed above).²⁷⁸

Cox cites § 854(c)(8) and argues that the Commission "is required to provide mitigation measures."²⁷⁹ Cox then argues that three conditions are needed: 1) a condition allowing CLECs to opt-in to interconnection agreements that Verizon has negotiated and/or interconnection agreement provisions that Verizon has arbitrated in California; 2) a condition requiring Verizon to transit traffic consistent with TELRIC pricing and free of burdensome and unnecessary restrictions; and 3) a condition requiring Verizon to offer extension on existing IP backbone agreements.

Level 3 asks for 1) divestiture of overlapping in-region facilities (discussed above); 2) a series of conditions on special access pricing (discussed above); 3) require Verizon to exchange all VoIP traffic at the local compensation rate; 4) require the merged company to return unused telephone number blocks; and 5) require that Verizon offer "stand-alone" DSL (discussed above).

ORA proposes an extensive set of requirements tied specifically to the various elements of § 854(b) and § 854(c). An extensive summary is provided on pages 54-59 in ORA's Opening Brief.

Pac-West proposes a merger condition to "ensure the availability of non-discriminatory interconnection with the packet-switched network facilities of Verizon."²⁸⁰ The condition is:

In the absence of a negotiated agreement acceptable to any requesting CLEC, Verizon's affiliates certificated as public utilities in California shall consent to participate in arbitration proceedings conducted by this Commission pursuant to Section 252 of the Communications Act, the purpose of which shall be to establish reasonable and non-discriminatory terms and conditions of interconnection between the networks of Verizon's certificated affiliates in California and the network of the requesting CLEC. This interconnection shall include all technologies and network architectures deployed by the Verizon affiliates in California, including but not limited to all packet-switched network technologies. As a condition of this merger, Verizon shall further waive any claims that such interconnection obligation involving all of its deployed network architectures exceeds the scope of permissible arbitration under Section 252.²⁸¹

Qwest proposes six conditions for the merger: 1) divest all overlapping facilities; 2) institute a price freeze on special access; 3) show no favoritism post-merger to new affiliates; 4) agree to resell services purchased from other ILECs out of region; 5) give a "fresh look" right for customers to terminate all contracts; 6) agree to offer "stand-alone" DSL.²⁸²

Telscape asks that the Commission require Verizon to sell its UNE-L facilities at a 50 percent discount.²⁸³

TURN's chief focus is to fight approval of the merger, and proposing conditions is a minor part of TURN's showing. In a 170-page brief, only 8 pages focus on merger conditions.²⁸⁴ Nevertheless, the litany of conditions is extensive and includes:

1. A five-year rate freeze for residential and small business basic exchange rates;

2. A requirement that the 1FR, 1MR, 1MB, and local measured usage and ZUM services be available on a stand-alone basis.

3. A requirement that Applicants agree to prominently list the availability of these services in phone books, on the web, and in bill inserts;

4. A requirement that Applicants offer an intrastate long distance calling without a minimum monthly fee;

5. A requirement that Verizon provide a competitive alternative for residential and small business customers in SBC's service territory no later than 18 months from the consummation of the merger. This alternative must be made available at prices comparable to or less than SBC's.

6. The submission of quarterly reports on the progress of competitive offerings in SBC's territories.

7. The imposition of a non-trivial penalty, "e.g., $10 million," each month if Verizon fails to meet a "target of providing meaningful competitive alternative within 18 months."²⁸⁵

8. Adopt a cost of capital now for use in upcoming UNE proceedings (the specific figure is confidential);

9. Make approval conditional upon Applicants' agreement to fund independent third-party monitoring of competitive conditions in California;

10. Require corporate affiliates to cooperate with third-party monitoring;

11. Require Applicants to agree to the service quality monitoring recommendation outlined in TURN's Comments in the Rulemaking on General Order 133-B;

12. Adopt further conditions to require the tracking of the deployment of new technology by wire center, along with statistics about wire center demography;

13. Make Commission approval contingent on Applicants' agreement to fund two independent audits of Verizon's affiliate transactions;

14. Require Applicants to commit in writing that all corporate affiliates of Verizon will make their books and records available for inspection by Commission staff and the third-party auditor;

15. Require that Applicants modify their standard non-disclosure and protective agreement so that it allows parties to use material obtained in one Commission docket in any other regulatory proceeding as long as the confidentiality of the information is maintained.

DRA argues that the Commission should adopt merger conditions in six areas: 1) ensure that Applicants maintain and improve customer service for customers with disabilities; 2) require that Applicants renew their commitment to universal design principles; 3) require improvements in accessibility of all communications; 4) improve polices related to bundled services and basic phone service; 5) ensure that an internal committee for voicing the concerns of the disability community is created; 6) establish auditing and reporting requirements.

Finally, we note that the Advisory Opinion expresses a concern arising from the merger: that the merger will "produce incentives for the two `independent' entities to engage in anticompetitive cross-subsidization that could occur in which Verizon ratepayers end up paying for purchases made by MCI at inflated prices."²⁸⁶ The Advisory Opinion makes no recommendation on mitigation measures, but admonishes the Commission to "scrutinize post-merger transactions between Verizon's regulated and non-regulated affiliates"²⁸⁷ to ensure that anti-competitive cross-subsidization does not occur.

9.2. Discussion

The Intervenors in this proceeding have proposed a litany of conditions that they ask the Commission to apply to this transaction. To the extent possible, we have considered each proposed condition in the context of the adverse consequences that the Intervenors allege would result from the proposed transaction. As discussed at length in prior sections of this decision, we find no basis upon which to conclude that such adverse consequences which these conditions are designed to mitigate would result from this transaction. Therefore the requests for conditions recommended by Intervenors have little merit.

For example, Cox's conditions that the Commission regulate Internet peering arrangements and transit traffic are unsupported by any compelling evidence that failure to do so will result in an adverse consequences. This is not surprising in light of the small percentage of the Internet backbone that Verizon will control after the merger. Thus, there is no evidence of a potential adverse consequence of the merger that warrants imposition of these conditions.

Concerning Pac-West's proposed condition of non-discriminatory interconnection with ILEC networks, it is unclear to us that such a condition is needed. Although we reach no legal conclusion on this matter, on first impression it appears that § 251 of the Communications Act applies to the packet-switched network facilities of ILECs. Moreover, Verizon states that it has never taken a position that § 251 does not apply to packet networks, and asserts that the FCC has already ruled that §§ 251(a) and 251(c)(2) obligations apply to an ILEC s packet-switched network and notes that Pac-West cannot cite a refusal by Verizon to provide this type of interconnection. For this reason, we see no dispute over this matter and no reason to impose a new merger condition concerning interconnection. This is a matter better left to a § 251 proceeding.

There are still other conditions that we have not listed above. The voluminous record in this proceeding makes it clear that the proposed transaction will not produce adverse anticompetitive consequences, and that the merger, when combined with the conditions set forth herein and the agreement reached by the Applicants, Greenlining and LIF, is in the public interest. There is therefore no rational basis for imposing any of the additional conditions on this transaction that are proposed by TURN, ORA, Telscape, CALTEL (with Covad), Cox, Pac-West, Level 3 or Qwest. Since these parties have failed to make a convincing case that the transaction will produce adverse consequences, then these proposed conditions cannot be justified for they are neither needed to "prevent serious adverse consequences"²⁸⁸ nor do they represent "reasonable options."²⁸⁹

Concerning the proposals of DRA, we find no reasonable basis to adopt the mitigation measures that it proposes. The acquiring entity, Verizon, recently earned an award from DRA for its "ten year commitment of providing high-quality service"²⁹⁰ to the disabled community. According to Verizon's testimony, DRA honored the company in 2004 with its "Eagle Award" for "leadership in developing products that enhance the accessibility of its communications products for a broad range of users."²⁹¹ Based on the record in this proceeding, we have no reason to believe Verizon will not continue this level of service after the transaction.

The Advisory Opinion, to which we give great weight, identified two issues that we will now discuss. Concerning the issue of "anti-competitive cross- subsidies," we note that the Commission has in place safeguards to protect against anti-competitive cross-subsidization by current affiliates of Verizon, and these existing safeguards automatically cover these new affiliates. Any modifications that are necessary to guard against anticompetitive actions by the new entity will be considered in separate and subsequent proceedings to ensure that that they remain effective and appropriate in a converging industry.

²⁷¹ As noted previously, for §§ 854(c)(1) through (7), we have considered mitigation measures at the same time as we have assessed the transaction against the criteria.

²⁷² § 854(d).

²⁷³ Joint Applicants, Opening Brief, p. 56.

²⁷⁴ Id.

²⁷⁵ Id.

²⁷⁶ Joint Applicants Opening Brief, p. 57.

²⁷⁷ Joint Applicants Opening Brief, pp. 57-61.

²⁷⁸ CALTEL, Opening Brief, p. 8.

²⁷⁹ Cox, Opening Brief, p. 18.

²⁸⁰ Pac-West, Opening Brief, p. 25.

²⁸¹ Pac-West, Opening Brief, p. 25, citing Pac-West Ex. 1, p. 28.

²⁸² Qwest, Opening Brief, pp. 48-49.

²⁸³ Telscape, Opening Brief, p. 3.