COM/SK1/MP1/cvm DRAFT Agenda ID #5027

Ratesetting

Decision DRAFT DECISION OF COMMISSIONERS KENNEDY AND PEEVEY

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Joint Application of Verizon Communications, Inc. (Verizon) and MCI, Inc. (MCI) to Transfer Control of MCI's California Utility Subsidiaries to Verizon, Which Will Occur Indirectly as a Result of Verizon's Acquisition of MCI

Application 05-04-020

(Filed April 21, 2005)

DECISION AUTHORIZING CHANGE IN CONTROL

TABLE OF CONTENTS

Title Page 1

DECISION AUTHORIZING CHANGE IN CONTROL 2 2

1. Summary 2 2

2. Procedural Background 4 4

3. The Corporate Entities and the Financial Transaction 9 9

3.1. Verizon 9 9

3.2. MCI 10 10

3.3. Description of Financial Transaction Transferring Control 12 12

4. Jurisdiction and Scope of Proceeding 13 13

4.1. Section 854(a) Applies to this Transaction 13 13

4.2. Application of §§ 854 (b) and (c) to this Transaction 14 14

4.2.1. Sections 854(b) and 854(c) do not apply to this application because no party to the transaction is a utility with California revenues of at least $500 million within the meaning of § 854(b). 15 15

4.2.2. Exemption under § 853(b) makes consideration of affiliate revenues irrelevant. 18 18

4.2.3. It is not reasonable to "pierce the corporate veil" as Verizon California is not the subject of the acquisition and is not "key to the merger." 19 19

4.2.4. Prior applications of § 854(b) to transactions involved the acquisitions of ILECs, not NDIECs or CLECs 20 20

4.2.5. Legislative history demonstrates that the Legislature intended to give the Commission flexibility in the application of § 854(b) where traditional cost-of-service utilities are not involved in the transaction. 21 21

4.2.6. Exempting this transaction from § 854(b) is in the public interest pursuant to the authority granted in § 853(b) and consistent with Commission precedent. 24 24

4.2.7. Commission precedent and § 854(c) provide the appropriate guidelines for determining whether this transaction is in the public interest. 27 27

4.3. Summary of Applicable Law 29 29

5. Are Hearings Necessary To Decide This Matter? 30 30

5.1. No statute or Commission rule requires evidentiary hearings 31 31

5.2. There is sufficient evidence in the record to permit the Commission to decide this matter 33 33

5.3. The public has had ample opportunity to participate in this proceeding 34 34

5.4. Since § 854(b) does not apply to this transaction, many issues raised by parties become moot. 36 36

5.5. Many remaining issues identified conflate policy issues with issues of fact. 36 36

5.6. The Commission can and has frequently resolved issues of fact without hearings 37 37

5.7. Consistent with Rule 6.5(b), the Assigned Commissioner's Ruling of September 19 determining that hearings are not necessary is affirmed. 40 40

6. Does the Proposed Merger of the Parent Companies and Change in Control "Not Adversely Affect Competition?" 41 41

6.1. Mass Market Local Exchange 43 43

6.1.1. Advisory Opinion finds merger "will not have adverse effects upon competition in local markets" 43 43

6.1.2. Position of Parties 44 44

6.1.3. Discussion 48 48

6.2. Mass Market Long Distance 54 54

6.2.1. Advisory Opinion finds long distance services "readily available" and that merger will "have minimal effects in concentration." 54 54

6.2.2. Position of Parties 56 56

6.2.3. Discussion 57 57

6.3. Enterprise Services 58 58

6.3.1. Advisory Opinion finds merger tentatively concludes that "merger will not cause undue increases in concentration levels." 58 58

6.3.2. Position of Parties 60 60

6.3.3. Discussion 62 62

6.4. Special Access Services 63 63

6.4.1. Advisory Opinion finds "potential entry here should be sufficient ... to counteract any potential anticompetitive effects." 64 64

6.4.2. Position of Parties 65 65

6.4.3. Discussion 68 68

6.5. Internet Backbone 70 70

6.5.1. Advisory Opinion finds markets "are unconcentrated and will remain so after completion of the merger." 70 70

6.5.2. Position of Parties 72 72

6.5.3. Discussion 73 73

7. Do the Proposed Transactions Meet the Public Interest Tests Contained in § 854(c)? 74 74

7.1. Will the Change of Control Maintain or Improve the Financial Condition of the Resulting Utilities Doing Business in California? 75 75

7.1.1. Position of Parties 75 75

7.1.2. Discussion: The Merger Will Maintain or Improve the Financial Condition of the Resulting Public Utility. 78 78

7.2. Will the Merger of the Parent Companies and the Change of Control Maintain or Improve the Quality of Service to California Ratepayers? 80 80

7.2.1. Position of Parties 80 80

7.2.2. Discussion: Merger Will Maintain or Improve Service Quality 82 82

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? 83 83

7.3.1. Position of Parties 83 83

7.3.2. Discussion: Proposed Transaction Will Maintain or Improve Management Quality 84 84

7.4. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to the Affected Employees? 84 84

7.4.1. Position of Parties 85 85

7.4.2. Discussion: Changes will be Fair to Utility Employees 86 86

7.5. Will the Merger of the Parent Companies and Change of Control Be Fair and Reasonable to a Majority of the Utility Shareholders? 87 87

7.5.1. Positions of Parties 87 87

7.5.2. Discussion: Transaction is in the Interest of Shareholders 87 87

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? 88 88

7.6.1. Position of Parties 88 88

7.6.2. Discussion: Transaction Will Benefit Californians 91 91

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? 96 96

7.7.1. Positions of Parties 96 96

7.7.2. Discussion: Transaction Will not Diminish Jurisdiction of Commission or its Capacity to Regulate and Audit Utility Operations in California. 97 97

8. Does the Proposed Merger of the Parent Companies and Change in Control Create Environmental Issues of Concern? 98 98

9. Other Issues § 854(c) (8) § 854(d) 98 98

9.1. Position of the Parties 99 99

9.2. Discussion 104 104

10. The Commission Should Approve this Application for a Proposed Merger of the Parent Companies and Change in Control at this Time 106 106

11. Comments 106 106

12. Assignment of Proceeding 107 107

Findings of Fact 107 107

Conclusions of Law 115 115

ORDER 119 119

Appendix A: Cases Exempting NDIEC and CLEC Transactions from § 854 (b) Review 1 1

DECISION AUTHORIZING CHANGE IN CONTROL

1. Summary

Subject to three conditions, we grant the Joint Application of Verizon Communications, Inc. (Verizon) and MCI, Inc. (MCI) (known together as "Applicants") to transfer control of MCI's California utility subsidiaries to Verizon.

The three conditions are:

1. Verizon shall, by February 28, 2006, cease forcing customers to separately purchase traditional local phone service as a condition for obtaining digital subscriber line (DSL) service (this condition is commonly known as a requirement to provide "naked DSL"). We further order that no later than February 28, 2006 Verizon shall submit an affidavit evidencing compliance with this condition of the merger.

2. Applicants shall adopt the agreement that Verizon California negotiated with The Greenlining Institute (Greenlining) and Latino Issues Forum (LIF) (The Greenlining Agreement). Under the key terms of this agreement, the Applicants agree to:

a. Participate in a statewide Broadband Task Force.

b. 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.

c. Make a good faith effort to increase the supplier diversity goal for minority business enterprises from the current 15% to a minimum of 20% by 2010. To achieve this goal, Verizon California anticipates 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.

3. Applicants shall 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 ubiquitous access to broadband and advanced services in California, particularly in underserved communities, through the use of emerging technologies by 2010. No more than half of Applicant's total commitment to the CETF may be counted toward satisfaction of the Applicants' commitment in the Greenlining Agreement to increase charitable contributions by $20 million over five years.

These conditions ensure that the proposed merger will bring the benefits of advanced telecommunications services and telecommunications competition to all Californians.

We find that this transaction raises no "concerns adverse to the public interest" when carefully examined against the criteria enumerated in Pub.Util. Code § 854.¹ Further, our analysis confirms the findings of the Advisory Opinion of the Attorney General² that the transaction raises no antitrust issues that require further mitigating actions. Finally, this is a purely financial transaction, and has no environmental consequences.

As a result of this detailed review, we find that the proposed transaction, subject to the three conditions listed above, is not adverse to the public interest and is therefore approved.

Finally, we affirm the Assigned Commissioner's Ruling of September 19, 2005 that, among other things, determined that no hearings are necessary in this proceeding.

¹ All code section references are to the Public Utilities Code.

² Opinion of the Attorney General on the Proposed Merger of Verizon Communications, Inc., and MCI, Inc., September 16, 2005 (Advisory Opinion).