Background

1. The Parties

WorldCom, Inc. is a long-distance carrier currently in bankruptcy proceedings.² It has filed a Plan of Reorganization (Plan) in the Bankruptcy Court for the Southern District of New York seeking to emerge from bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.³ It seeks a decision from this Commission finding that § 853(b) exempts WorldCom from the requirement that we approve the restructuring and related intra-corporate transactions required to implement the Plan.

WorldCom does not agree that the Commission has jurisdiction over this matter, and states that it has filed this application with the Commission out of respect for the Commission and in order to provide the Commission with full information about the post-emergence structure of WorldCom's California public utility subsidiaries, and to avoid litigation over the extent of the Commission's jurisdiction.

The Greenlining Institute and the Latino Issues Forum (Greenlining) filed an "initial response" indicating that it was conducting discovery "that [would] enable [WorldCom] to demonstrate . . . how it will become a responsible corporate citizen." Greenlining did not protest the application and has presented us with no argument against approval of the application.

The Commission's Office of Ratepayer Advocates (ORA) filed a response stating that it does not oppose WorldCom's request for an exemption from §§ 851 and 854. It reasons that the proposed Plan will not result in any change to rates or to the terms and conditions of service, and will not disrupt service to customers. By the same token, ORA "vehemently disagrees that the Chapter 11 process substitutes for Commission jurisdiction."

2. WorldCom's Recent History

As detailed in a document entitled "Restoring Trust," which WorldCom filed as a supplement to its application,⁴ in recent years certain personnel at WorldCom committed "what appears to be the largest accounting fraud in history."⁵ "In WorldCom's saga approximately $200 billion in shareholder value was first created, and then destroyed."⁶ The previous board of directors of WorldCom "consistently ceded power over the direction of the Company to [former WorldCom CEO Bernard J.] Ebbers. As CEO, Ebbers was allowed nearly imperial reign over the affairs of the Company, without the board of directors exercising any apparent restraint on his actions. . . ."⁷ Mr. Ebbers received lavish compensation and loans in the hundreds of millions of dollars.

Moreover, WorldCom was engaged in a

massive use of improper accounting practices, such as the capitalization of billions of dollars of normal operating costs . . . result[ing] in reported profits that were overstated enormously. The best current estimates suggest that income was overstated by at least $11 billion over a multiyear period . . . . [T]he phony accounting created the false impression that the Company's management was highly successful . . . .⁸

There is, however, reason for hope. As a result of the foregoing activities, the SEC brought suit against WorldCom.⁹ On June 11, 2003, District Judge Rakoff entered an order memorializing a partial settlement of the case. In that order, WorldCom agreed to be bound by recommendations in the soon-to-be-issued "Restoring Trust" document:

[A]bsent further Order of the Court, WorldCom shall adopt and implement each of the recommendations that will be made by the Corporate Monitor in his report with respect to corporate governance.¹⁰ In the event WorldCom determines that adopting and implementing any particular recommendation made by the Corporate Monitor¹¹ would be too costly, or would be otherwise inappropriate, unreasonable or unnecessary, WorldCom may move the Court for entry of an Order providing that it need not adopt and implement such recommendation. Any such motion by WorldCom shall be made, on notice to the [SEC], within 60 days of the receipt of the report of the Corporate Monitor.

Thus, WorldCom shall be bound by the recommendations in the "Restoring Trust" report unless, within 60 days of receiving the document, it files a motion seeking to be relieved from any provision of the report. In a letter submitted in this proceeding on October 8, 2003,¹² WorldCom's counsel explained that this 60-day period runs on October 25, 2003. Its counsel also stated that "WorldCom has no plans to file any such motion in Judge Rakoff's court and it fully intends to adopt and implement all of the recommendations made by Mr. Breeden." WorldCom's counsel later confirmed that it made no such motion.

The "Restoring Trust" report contains 78 individual recommendations. These cover the selection of directors; qualification, conflicts and independence standards for board members; the functioning of the board and its committees; establishment of the position of non-executive chairman; specific limits on compensation practices; equity compensation programs; accounting and disclosure issues; ethics and legal compliance programs; and other areas. According to the report, the recommendations shift the balance of power in governance of the company to the shareholders, while still allowing management to have flexibility to meet business challenges.

In summary, in accordance with Judge Rakoff's order, the foregoing 78 recommendations will be enforceable by the District Court against WorldCom unless WorldCom persuades the Court to waive some of the recommendations.

3. WorldCom's Reorganization

Under the terms of the reorganization, WorldCom will continue to operate its long distance business in California and elsewhere without interruption. None of its California rates or terms of service will change, and WorldCom represented that it has not discontinued or diminished its service to its utility customers despite its bankruptcy filing.

The proposed Plan will reorganize the capital structure of WorldCom. The new company will change its name to MCI, Inc. (MCI), which will continue to be a widely held public corporation regulated by the SEC. While currently there are eight subsidiaries of WorldCom providing service in California as competitive local exchange carriers, only one firm, MCImetro Access Transmission Services (MCImetro) will remain after the reorganization. All customers of the dissolving subsidiaries will nonetheless continue to receive service under the same rates, terms and conditions they currently enjoy pursuant to existing tariffs unless those tariffs are changed in accordance with normal Commission policy. These customers will also receive notice of the organizational changes, and the Commission will review any tariff changes.

The services, rates, terms and conditions of service provided to MCI and MCImetro customers will remain subject to the jurisdiction of this Commission to the same extent as they were prior to the bankruptcy. MCI and its subsidiaries will continue to file tariffs, notices, and reports with state commissions, as appropriate, regarding all of their intrastate services.

WorldCom expects final Bankruptcy Court approval of the Plan shortly.¹³

4. The Application

With its application, WorldCom asks us to exempt the restructuring and related intra-corporate transactions undertaken to consummate WorldCom's Chapter 11 Plan from prior Commission approval under Pub. Util. Code §§ 851 and 854. It explains that the reorganization will have direct and indirect effects on the legal structure of the Company's California public utility subsidiaries that might, on their face, be subject to the approval requirements of §§ 851 and 854, but asks us to exempt it from obtaining such approval pursuant to § 853(b).

Section 853(b) provides that "The commission may from time to time by order or rule . . . exempt any public utility . . . from this article¹⁴ if it finds that the application thereof with respect to the public utility . . . is not necessary in the public interest." Thus, we have the authority to exempt a utility from §§ 851 and 854 if we find the public interest does not require that we apply them.