III. Hearings Are Not Necessary

TURN, Level 3, Qwest, ORA, and DRA filed motions supporting the holding of hearings in this proceeding. The Applicants filed a motion for the submission of the proceeding without evidentiary hearings.

TURN, Qwest and ORA filed responses opposing the request of the Applicants for submission of the proceeding without evidentiary hearings. The Applicants and Greenlining filed responses opposing the motions calling for hearings.

A. Positions of Parties

TURN makes two major arguments supporting the need for hearings. First, TURN argues that this is a significant proceeding that requires hearings in order to ensure that the mandates of §854 are met and that this is a significant proceeding for the telecommunications industry. Second, TURN identifies specific issues that it argues require hearings. These include: a) issues concerning the magnitude of competitive line loses by Verizon; b) issues concerning the significance of intermodal competition; c) issues concerning the significance of the loss of MCI as a competitor in the provision of residential and small business services; d) issues relating the to significance of MCI's new commercial agreement with Verizon regarding UNE pricing; e) issues concerning the proper definition of markets; f) issues concerning the "extent of deference" to be accorded to applicants "business decision" concerning the calculation of merger synergies; g) issues relating to the definition of long-term and short-term; h) issues relating to the calculation of total national synergy benefits prior to allocation to California; i) issues relating to the calculation of net present value; j) issues relating to the calculation of the cost of capital savings for MCI, if any; k) issues relating to the appropriate allocation of benefits identified in the Verizon national synergy model to California for the purposes of calculating shareable benefits subject to §854(b)(2); l) issues relating to the pass-through of merger benefits.

Qwest argues that hearings are necessary because material issues of fact remain in dispute. In particular, Qwest argues that there are; a) issues concerning the role of MCI in the special access market; b) issues concerning "the lack of alternatives to wireline special access; c) issues concerning the availability of stand-alone DSL on "reasonable terms." In addition to these specific issues, Qwest includes three broad arguments supporting the need for hearings: a) hearings are needed to develop a "complete record; b) dispensing with hearings would be "unusual and inappropriate" in light of the importance of this proceeding to California ratepayers; c) the benefits of hearings "are outweighed by any perceived drawbacks.

Level 3 argues that the Commission should hold evidentiary hearings because: a) this merger raises factual issues which the "public interest requires be addressed in public hearings with witnesses subject to cross-examination; b) there are factual matter in dispute and party and witness credibility is at issue; c) the experience of Level 3 and others in the "SBC-AT&T hearings demonstrates that there are factual and policy issues that cannot be addressed without the opportunity to cross-examine..."

DRA argues "that it is necessary and prudent for the Commission to set evidentiary hearings in this proceeding in order to develop a record concerning the constituency of people with disabilities." DRA states that it desires to present a case through cross-examination and that such cross-examination will show the merger "fails to account for the needs of people with disabilities."

ORA also argues that hearings are necessary and it identifies broad areas in which it argues that there are significant factual disputes in issue. These include: a) intermodal competition; b) MCI's "irreversible" exit from the consumer market; c) the allocation of synergies to intrastate California; d) whether Verizon will compete with SBC; e) whether the internet is being monopolized; f) whether there are negative impacts on the California economy.

The Applicants, in their motion for submission of the proceeding without hearings, argue that the Commission already has sufficient information in the record to approve the transaction. More specifically, they argue that the existing record is sufficient for the Commission to render a decision. The Applicants argue further that the Commission has on many occasions resolved complex and contentious proceedings without holding evidentiary hearings. Finally, Applicants note that no provision of law or Commission rules provides a right to an evidentiary hearing in ratesetting cases.

Finally, Greenlining, filing a response, argues that evidentiary hearings are not necessary.³⁸

B. Discussion

There is no need for evidentiary hearings to resolve the issues in dispute in this proceeding. This conclusion is reached in light of six major considerations: a) no statute or Commission rule requires evidentiary hearings; b) there is sufficient evidence in the record to permit the Commission to decide this matter; c) the public has had ample opportunity to participate in this proceeding through six well-attended public participation hearings held in three different sites; d) since §854(b) does not apply to this transaction, many issues of material dispute raised by parties are moot; e) many of the remaining issues conflate issues of policy with issues of fact; f) the Commission can and has frequently resolved issues of fact without hearings;. We discuss each in turn.

1. No statue or Commission rule requires evidentiary hearings

No provision of law or Commission rule provides any party in this proceeding with a right to an evidentiary hearing. Section 1701.1(a) provides that the Commission "consistent with due process, public policy and statutory requirements, shall determine whether a proceeding requires a hearing" (emphasis added). Rule 44.4 of the Commission's Rules of Practice and Procedure provides that the "filing of a protest does not insure that an evidentiary hearing will be held." Moreover, even without the appearance of witnesses or cross examination, the parties are having an adequate opportunity to be hearings, consistent with due process.

As one might expect, the Commission has addressed this issue previously. The Commission previously has considered its due process obligations with respect to whether evidentiary hearings are required. In Re Competition for Local Exchange Service, D.95-09-121, 1995 Cal. PUC LEXIS 788, at *13-*14, the Commission stated:

Due process is the federal and California constitutional guarantee that a person will have notice and an opportunity to be heard before being deprived of certain protected interests by the government. Courts have interpreted due process as requiring certain types of hearing procedures to be used before taking specific actions.

The California Supreme Court has laid down a simple rule regarding the application of due process. According to the Court if a proceeding is quasilegislative, as opposed to quasi-judicial, there are no vested interests being adjudicated, and therefore, there is no due process right to a hearing. (Citing Consumers Lobby Against Monopolies v. Public Utilities Com. (1979) 25 Cal.3d 891, 901; Wood v. Public Utilities Commission (1971) 4 Cal. 3d 288, 292).

This proceeding is not a quasi-judicial proceeding in which a hearing is required; no vested interests of any party are being adjudicated. Rather, it is a ratesetting, proceeding and no party even argued in its protest that the proceeding should be classified as adjudicatory for purposes of Section 1701 of the Public Utilities Code or the Commission's rules. For purposes of determining whether evidentiary hearings are necessary, ratesetting cases are treated like quasi-legislative proceedings. The California Court of Appeal has confirmed that the Public Utilities Code does not require CPUC to conduct public hearings concerning rates, but leaves the matter to CPUC s discretion. Pacific Gas & Electric Co. v. State Department of Water Resources, 112 Cal. App. 4th 477, 500-502 (2003). The Court in PG&E also noted that the Code expressly permits the Commission to determine whether or not to hold hearings. Id. at 500-501. For example, Section 1701.3 states that if the Commission determines that a ratesetting case requires a hearing, certain procedures should apply, indicating that whether to hold a hearing in a ratesetting case is a matter within the Commission's discretion. (Emphasis added). Similarly, Section 454(b) of the Code allows the Commission to adopt rules that apply in ratesetting cases including the form and manner of the presentation of the showing, with or without a hearing, and the procedure to be followed in the consideration thereof. . . . These statutes and precedents amply demonstrate that, in a ratesetting case such as this one, the Commission has discretion to determine whether to hold an evidentiary hearing.

The Commission has also affirmed that due process does not require a hearing that serves no useful purpose. In Touch Communications, Inc. and Inflexion California Comm. Corp., For the Sale and Purchase, Respectively of the Customer Base, Operating Authorities and other Assets, D. 04-09-027, 2004 Cal. PUC LEXIS 417 *6-7.

2. There is sufficient evidence in the record to permit the Commission to decide this matter

The record in this proceeding is extensive. This evidentiary record was developed through exhaustive discovery, which has proceeded efficiently and with few disputes requiring Commission resolution. Applicants have responded to approximately 800 data requests, or over1400 when subparts are counted separately, and produced well over a million pages of documents. Every intervenor has had ample opportunity to discover the facts on which the Applicants positions are based and to present facts which support their own positions with respect to the Application. The parties presented their positions in many hundreds of pages of opening, reply and rebuttal testimony. Briefs and Reply Briefs are still to be filed.

Because the Commission has ample information in this extensive record to determine whether the proposed transaction satisfies the requirements of law, no evidentiary hearing is needed. See AT&T/MediaOne, D.00-05-023, 2000 Cal. PUC LEXIS 355 at *17.

3. The public has had ample opportunity to participate in this proceeding

The Commission conducted six Public Participation Hearings on August 15, 16 and 18, 2005, in Whittier, Long Beach and San Bernardino to take comments from consumers on the proposed merger. Verizon and MCI sent notices to all of their customers and posted newspaper announcements inviting the public to attend the public hearings. Nearly 400 persons turned out for the meetings, and the Commission heard from 245 speakers.

The overwhelming majority of speakers supported the proposed merger. Most of the speakers represented non-profit organizations, schools and other community organizations that had received financial and volunteer support from Verizon. They praised Verizon as a leading corporate citizen, and they endorsed the proposed merger for combining what they said were the complementary technological strengths of Verizon and MCI. For example, Vince Vazquez, a policy fellow in technology studies at the Pacific Research Institute in San Francisco, said that with new technologies like wireless, satellite and cable becoming more affordable, "traditional wireline companies like Verizon and MCI [must] seek additional ways to hone their competitive edge." Long Beach Mayor Beverly O'Neill praised Verizon as a leader in supporting community literacy efforts and added that in 2003 Verizon won the award of excellence for public/private partnership from the United States Conference of Mayors Business Council.

Twelve speakers opposed or had misgivings about the merger, expressing concern about the market power of the combined organization, the elimination of a strong competitor like MCI and the risk of reestablishing telephone monopolies. For example, Rick Werniche, speaking at one of the Whittier hearings, said, "The only thing I can see this merger doing is diluting shareholders' value and possibly adding a huge debt to the ratepayers, which the PUC will probably add on to our bill...This is a power play by a bunch of guys in New York that circles the wagons trying to put back together what Judge Green took apart [in the AT&T divestiture]."

In addition to those attending the Public Participation Hearings, the Commission also heard from more than 325 consumers who wrote letters or sent electronic mail in response to the announcement of the hearings. In contrast to the public speakers, the letters and e-mails were running about 80% in opposition to the transaction and about 12% in favor of it, with the rest undecided or urging conditions to keep rates low and improve service. Many cited individual service complaints, particularly against MCI. A typical message commented that, "As in the past with Pacific Bell and SBC, or AT&T Wireless and Cingular, mergers proved detrimental to the consumers as I could witness through decreased customer service, increased prices and overall lower quality."

In summary, this proceeding has already benefited from a review by the public of this proposed transaction.

4. Since §854(b) does not apply to this transaction, many issues raised by parties become moot.

The first part of this ruling demonstrated: 1) that as a matter of law, §854(b) does not apply to this transaction; 2) as a matter of Commission precedent, §854(b) should not apply to this transaction; 3) as a matter of policy, §854(b) should not apply to this transaction.

Since neither law nor policy support an application of §854(b) to this transaction, the factual disputes concerning the exact enumeration and division of merger benefits become moot. In particular, of the twelve factual issues identified by TURN, a full six (issues g through l) become moot. Similarly, major portions of ORA's testimony address the enumeration and distribution of merger benefits become moot.

5. Many remaining issues identified conflate policy issues with issues of fact.

Many of the remaining issues identified by parties conflate policy disputes with disputes of facts. For example, ORA mentions two issues: (1) the definitions of "short-term" and "long-term" and (2) treatment of up-front merger implementation costs. Each of these issues is a matter that can and should be determined based on policy considerations and precedent, and cross-examination will shed no further light on them. Whether MCI's operations should be included in the calculation is plainly such an issue. The Commission has consistently exempted synergies associated with fully competitive services and declined to impose sharing obligations on nondominant interexchange and competitive local exchange carriers. The question in this case is simply whether the Commission should adhere to these precedents or, for policy reasons, depart from them. TURN admits that "the legal theory on which Applicants" exclude MCI-related synergies or revenue synergies "is an issue for briefs."³⁹ These legal issues account for a majority of the differences among the synergy estimates, and the estimates of synergies that would result from applying one policy conclusion as opposed to another are not disputed as a factual matter. Likewise, the time period over which to calculate synergies, which TURN acknowledges is "one of the most significant determinants of the differences in estimates of shareable merger benefits,"⁴⁰ is a matter of policy and precedent. Neither ORA nor TURN disputes the estimates that would result depending on the various time periods chosen. While

TURN argues that Applicants' management used a longer period than the one proposed here in calculating synergies, Applicants do not dispute that fact." Accordingly, the debate concerns whether this discrepancy is significant, as TURN claims, or irrelevant under Commission precedents that recognize that management calculations performed for purposes other than Section 854(b)(2) are not controlling, as Applicants claim. Either way, these are matters for the briefs.

6. The Commission can and has rrequently resolved issues of fact without hearings

Clearly, there are a series of factual issues identified above for which there remain factual differences between parties. For example, the assessment of the transaction's impact on the competitive situation in California specific issues concerning special access circuits, as well as the need for regulation to ensure non-discriminatory treatment of packets moving across networks remain to be made.

The Commission on many occasions including cases involving the merger or change in control of telecommunications utilities pursuant to Section 854 has decided complex and contentious proceedings without holding evidentiary hearings. The Commission is fully capable of deciding this case without holding evidentiary hearings.

The Commission has approved a number of contested applications involving mergers or changes in control of telecommunications utilities without holding evidentiary hearings. Mergers or changes in control involving AT&T and Comcast (D.02-11-025), Qwest Communications Corporation (D.00-06-079), AT&T and Media One (D. 00-05-023), MCI and

WorldCom (D.98-08-068), and MCI and British Telecom (D. 97-07-060) all were protested by one or more parties and all (except for AT&T/Comcast) were subjected by the Commission to an analysis of the public interest factors set forth in Section 854(c). Despite extensive differences of opinion and disputes of facts presented and argued in the protests and the replies to protests in these cases regarding the public interest factors and other matters, the Commission elected not to hold evidentiary hearings, generally concluding instead that there is sufficient information in

the record to determine whether the application complies with the requirements of §§ 851-854 and whether the application should be approved. In Re AT&T and Media One, supra, 2000 Cal.PUC LEXIS 355, at *17. While these decisions briefly discussed Section 854(c) public interest factors, the Commission determine that each transaction was exempt from review under Section 854(b) and (c).

The Commission's resolution of complex and contentious cases without holding evidentiary hearings is not restricted to telecommunications merger cases. In Rulemaking ReThird Triennial Review of the New Regulatory Framework, D. 98-10-026, 1998 Cal. PUC LEXIS 669, the Commission made several significant modifications to the new regulatory framework applicable to Pacific Bell and GTE, including the suspension of sharing mechanisms by which cost savings related to streamlined regulation were shared with ratepayers and the elimination of Z factor adjustments related to the LECs recovery of certain costs. Although parties to the NRF proceeding differed greatly on whether such modifications should be made and the impact on ratepayers from making or not making such modifications, the Commission made its decision without holding evidentiary hearings.

In Re PG&E Energy Recovery Bonds, D. 04-11-015, 2004 Cal. PUC LEXIS 538, the Commission resolved a number of contested issues regarding PG&E s issuance of bonds related to its bankruptcy including the timing of the bond issuances, the permitted uses of bond proceeds, and the recovery of bond charges from departing load and new municipal load. Again, despite the fact that parties differed greatly on the resolution of these issues and their impact on ratepayers and others, the Commission resolved these matters without holding evidentiary hearings.

The mere existence of disputed facts does not require that evidentiary hearings be held. As in the telecommunications merger cases cited above, the question of whether to hold evidentiary hearings depends on whether there is sufficient information in the record to enable the Commission to determine whether the Application should be approved. Here, the record is clearly sufficient.

IT IS RULED that:

1. Section 854(a) of the Public Utilities Code applies to this transaction.

2. Section 854(b) of the Public Utilities Code does not apply to this transaction.

3. The proposed transaction will be assessed against the seven criteria identified in § 854(c),⁴¹ and include a broad discussion of antitrust and environmental considerations.

4. No hearings are necessary in this proceeding.

5. The motions of TURN, ORA, DRA, Level 3 and Qwest are denied.

6. The motion of the Applicants is granted to the extent discussed herein. The proceeding will be deemed submitted upon the filing of reply briefs.

Dated September 19, 2005, at San Francisco, California.

		/s/ SUSAN P. KENNEDY
		Susan P. Kennedy Assigned Commissioner

CERTIFICATE OF SERVICE

I certify that I have, by electronic mail to the parties for which an electronic mail address has been provided, this day served a true copy of the original attached Assigned Commissioner's Ruling of Commissioner Susan Kennedy on all parties of record for proceeding A.05-04-020 or their attorneys of record.

I further certify that tomorrow, September 20, 2005, I shall place true copies of the attached original Assigned Commissioner's Ruling in the United States Mail to all parties of record.

Dated September 19, 2005, at San Francisco, California.

/s/ CHRISTOPHER V. MEI

Christopher V. Mei

NOTICE

Parties should notify the Process Office, Public Utilities Commission, 505 Van Ness Avenue, Room 2000, San Francisco, CA 94102, of any change of address to insure that they continue to receive documents. You must indicate the proceeding number on the service list on which your name appears.

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The Commission's policy is to schedule hearings (meetings, workshops, etc.) in locations that are accessible to people with disabilities. To verify that a particular location is accessible, call: Calendar Clerk (415) 703-1203.

If specialized accommodations for the disabled are needed, e.g., sign language interpreters, those making the arrangements must call the Public Advisor at (415) 703-2074, TTY 1-866-836-7825 or (415) 703-5282 at least three working days in advance of the event.

³⁸ We will not summarize the responses of other parties in detail, but will address significant arguments in the course of the discussion.

³⁹ TURN, Motion, at 15.

⁴⁰ TURN, at 11.

⁴¹ Public interest factors enumerated under this code section are whether the merger will" (1) maintain or improve the financial condition of the resulting public utility doing business in California; (2) maintain or improve the quality of service to California ratepayers; (3) maintain or improve the quality of management of the resulting utility doing business in California; (4) be fair and reasonable to the affected utility employees; (5) be fair and reasonable to a majority of the utility shareholders; (6) be beneficial on an overall basis to state and local economies and communities in the area served by the resulting public utility; and (7) preserve the jurisdiction of the Commission and our capacity to effectively regulate and audit public utility operations in California."