7. Discussion

Pub. Util. Code § 854 requires Commission authorization before a company may "merge, acquire, or control...any public utility organized and doing business in this state...." The purpose of this and related sections is to enable the Commission, before any transfer of public utility property is consummated, to review the situation and to take such action, as a condition of the transfer, as the public interest may require. (San Jose Water Co. (1916) 10 CRC 56.) The Commission has held that the relevant inquiry is whether the proposed transaction is in the public interest.

Applicants present the argument that the proposed acquisition of Evans Telephone and subsequent transfer of control of Evans Telephone to Evans Holdings and its parent Country Road has no adverse consequences because nothing about the existing structure of Evans Telephone will change as a result of the stock acquisition. Applicants contend that the proposed transaction merely involves the transfer of corporate stock without any changes to the operations, rates, tariffs, or other regulatory circumstances of Evans Telephone.

In their initial application, and two subsequent amendments, Applicants did not meet their burden of proof that the proposed acquisition is in the public interest. The initial proposed order found that the transaction would be adverse to the public interest because the financial condition of Evans Telephone was not maintained or improved by the transaction.

In a third amendment to the application, Applicants address concerns over the financial consequences of the transaction by providing greater detail about the legal structure of the entities involved in the stock acquisition and the protections that exist to ensure Evans Telephone ratepayers will not be adversely impacted by the acquisition. Specifically, the amendment clarifies that Evans Telephone will not incur any liability for the debt incurred by Country Road or Evans Holdings and that Evans Telephone ratepayers are insulated from the debt of Country Road and Evans Holdings. In response to concerns that the debt of the parent company might negatively impact utility ratepayers, Applicants note that Evans Telephone cannot sell any assets without Commission approval, and it cannot raise rates without Commission approval.

Of equal importance, the amendment provides greater detail on the financing of the proposed acquisition. The declaration of Mendenhall provides information on revenue and earnings assumptions through 2005 which indicate that Evans Holdings will have adequate cash flow to service its $42 million debt obligation and to re-invest earnings into Evans Telephone, without any increase in rates for residential or business local service. The declaration also explains the separation between the Country Road's CLC operations and Evans Telephone and that the CLC will be financed independently of Evans Holdings. Country Road has not relied on revenue from a CLC operation to support debt service obligations resulting from the acquisition of Evans Telephone. The declaration of Motl provides further support that the cash flow projections for Evans Telephone will support debt repayment obligations.

Furthermore, Applicants claim that the transaction benefits the public because Country Road commits to investing approximately $11 million in network infrastructure for Evans Telephone over the next five years. In contrast, Applicants note that Evans Telephone current ownership has decided to exit the industry, and those owners have no incentive to re-invest earnings in Evans Telephone. Applicants provide a declaration by Jane Medlin, an officer of Country Road, which states that Country Road will accelerate the offering of broadband and other services to Evans Telephone ratepayers without increasing local rates to Evans Telephone customers.

We find that the analysis and assumptions provided in the third amendment allay a significant portion of our previous concerns that the financial condition of the parent company, Country Road, could pose a threat to Evans Telephone ratepayers. We particularly note the insulation of Evans Telephone ratepayers from the debt of the parent company, and the cash flow projections that will cover debt repayment without reliance on CLC operations. We also find the transaction will benefit Evans Telephone ratepayers if Country Road follows through with its promised $11 million in infrastructure investment and the acceleration of new service offerings.

With this additional information provided by Applicants, we are reasonably assured that the transfer of control of Evans Telephone to Country Road and Evans Holdings is in the public interest as long as certain conditions are maintained. Specifically, we find that the transaction is in the public interest as long as Evans Telephone ratepayers are insulated from the debt repayment obligations of Country Road and Evans Holdings, and insulated from the success or failure of Country Road's CLC operations. The transaction is also in the public interest as long as Evans Telephone follows through with its commitment to infrastructure investment and new service offerings, while maintaining service to the public that is safe, reliable, and in compliance with all applicable statutes and Commission orders. Therefore, to ensure that the transfer of control of Evans Telephone to Country Road is in the public interest, we shall approve the transaction subject to the following conditions:

We will not require Applicants to pay a surcredit to Evans Telephone ratepayers in the amount of $700,000 over the next five years. As Applicants have noted, Section 854 (b) does not apply to this transaction because the utility that is a party to the proposed transaction does not have gross annual California revenues exceeding $500 million. Therefore, we will not impose a requirement to allocate benefits from the transaction to ratepayers.

Finally, because of the unique facts and circumstances of this case, which involves sale of the privately held stock of Evans Telephone and Evans Communications, we will not impose any conditions on this transaction with regard to gain on sale. In transactions involving the transfer of control of a utility under Section 854(a), the Commission has not recently allocated proceeds from the sale of stock between ratepayers and shareholders. We will not alter this practice here. Nevertheless, we note that this decision is based on the circumstances of this case and should not be considered a precedent for future transactions.

The Commission may wish to reconsider gain on sale issues for future transactions of this sort. Some might argue that requiring sellers to share any gains from the sale of privately held stock might have the effect of dampening equity investments in small and rural local exchange carriers in California. They may also argue that past Commission decisions have established an unalterable precedent. On the other hand, cost-of-service regulated companies are not necessarily subject to the same investment risks as unregulated companies. When shareholders have been insulated from the expense and risk associated with property ownership, and ratepayers have borne substantial costs and risk, it may be fair and reasonable for ratepayers to share in gains from the sale of utility assets. It is not clear whether previous decisions considered this viewpoint. Given these considerations, the Commission may wish to re-examine its policy on allocation of gains from future transfers of control.

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