8. The Settlement Between Greenlining, LIF, and Applicants

Greenlining, LIF, and Applicants entered into a settlement agreement regarding the issues raised by Greenlining and LIF in this proceeding. The terms of the proposed settlement were first provided to parties and the Commission concurrently with opening briefs (attached as Exhibit A to the Greenlining and LIF briefs). The settlement provides a set of commitments by Applicants that purport to satisfy the requirements of §§ 854(b) and (c) relating to net benefits to consumers, including underserved communities.

The three main commitments presented in the settlement are:

· An increase in philanthropy from Applicants' current level of philanthropic giving by an additional $4 million for five years beginning the year after the merger;

· Supplier diversity commitments of 20% by 2010; and

· Leadership participation in the creation of a statewide Broadband Task Force to address California's digital divide and provide a forum for collaboration among state agencies, community technology centers, the private sector, major charitable foundations, non-profits and others to address issues affecting lack of technology access for many of California's poor and other underserved populations.

Greenlining and LIF believe that because Applicants' commitment is part of a long-term strategic plan, it is likely to have a greater impact than dollars committed by government, most foundations, or by corporations without long-term philanthropic commitments. Greenlining and LIF argue that the additional philanthropic commitments constitute a § 854(b) benefit.

ORA and TURN argue that the Commission should not approve this settlement at this time because the settlement has not been subject to scrutiny by other parties as required by the Commission's Rules of Practice and Procedure. The settlement proposes to resolve issues now that ORA and TURN have asked to be deferred to a subsequent phase of this proceeding, after the total amount of shared benefits has been determined.

The Commission's Rules require that all parties have an opportunity to review and comment on settlements. Rule 51.1(b) requires that prior to the signing of a stipulation or settlement, the settling parties shall convene at least one conference with notice and opportunity to participate provided to all parties for the purpose of discussing stipulations and settlements in a given proceeding. Notice served in accordance with Rules 2.3 and 2.3.1 of the date, time, and place shall be furnished at least seven days in advance to all parties to the proceeding.

These requirements have not been met. The Rules also provide for an opportunity to comment on the settlement. ORA believes this comment process should occur in a second phase of this proceeding, once the amount of economic benefits to be shared with ratepayers has been established.

In its Opening Brief, Greenlining asks that the additional amounts of corporate philanthropy required under the settlement be credited against any § 854(b) benefits allocated by the Commission. Greenlining asserts that allocating these benefits in accordance with the settlement agreement will be more beneficial than making refunds to customers. ORA does not believe the settlement is clear as to what extent ratepayers would actually benefit. The settlement would establish a broadband taskforce, yet such a body is already contemplated by the Commission's recent rulemaking on advanced technologies, R.03-04-003. In that proceeding, the Commission issued a broadband report which, among other things, made clear its expectations that the ILECs would play an active role in its efforts.⁸². It is unclear what additional effort or value this portion of the settlement represents as compared to the status quo.

The settlement also calls for Applicants to increase their charitable giving, using monies that otherwise would be shared as merger benefits. Verizon's dues, donations and advocacy expenses have traditionally been booked "below the line" in accordance with established ratemaking theory. (GTE California (NRF Review) (1994) 55 CPUC2d 1, 41-42.) Provisions on service quality also seem to duplicate the Commission's requirements.

The provision of the settlement relating to philanthropy also protects shareholders by affirming that Verizon will have no settlement obligation should the merger not go through, or if the merger only gains approval subject to conditions that increase § 854(b)(2) credits beyond the amount envisioned in the settlement. Presumably, if any conditions are imposed that Applicants view as exceeding the settlement amounts, any funding of philanthropy commitments under the settlement would be charged to ratepayers. Yet, the Commission has repeatedly affirmed its prohibition on using ratepayer funds to cover expenses associated with philanthropy.

Both ORA and TURN have asked that the Commission consider how § 854(b) benefits will be allocated after determining the amount of economic benefits that will be allocated to ratepayers. ORA has not argued that these benefits must necessarily be returned to ratepayers in the form of a refund or surcredit, but has asked the Commission to consider how to fund several of the conditions that ORA has proposed or supported.

While the settlement extracts certain concessions from Applicants relating to philanthropy, diversity, and bridging the digital divide, other substantive and procedural defects prevent us from adopting the settlement in its present form. We agree with TURN and ORA that because settling parties failed to convene a settlement conference pursuant to Rule 51.1(b), the settlement is not ripe for Commission adoption.

Moreover, we have already determined the benefits that apply as a result of the synergy calculations discussed previously in this decision. We have also adopted other various mitigating conditions with which Applicants disagree. The settlement presumably would permit Applicants to abandon all of their commitments under the settlement if they unilaterally deem other requirements of this decision to be onerous. Such a condition would unacceptably foreclose the Commission from carrying out its responsibilities to make sure the proposed merger is in the public interest.

While the settlement cannot be adopted in the form that sponsoring parties request, we do find that elements of the settlement contain useful information, particularly in the context of the larger body of testimony and evidence that parties have presented concerning diversity, charitable giving, and bridging the digital divide. Accordingly, we shall require Applicants to agree to the commitments set forth below in order to satisfy the public interest requirements under § 854(c.) The funds required to meet these commitments under § 854(c) are in addition to the synergy net benefits calculated pursuant to § 854(b), as discussed above.

With respect to supplier diversity, we shall require as a condition of the merger that Applicants commit to the minimum diversity goals set forth in the settlement. We conclude that these diversity goals will be instrumental in satisfying the requirements of § 854(c)

With respect to charitable giving, we shall adopt as a condition of the merger that Verizon commit to the level of $20 million in additional philanthropic giving as discussed in the proposed settlement.

The question remains as to how this finite pool of available funds can best be allocated among the needs of these different interests. Now that the total amount of available funds to address § 854(c)(6) concerns has been determined, parties will be in a more informed position to present proposals as to how these funds should be allocated. We therefore solicit comments from parties concerning more specific measures concerning how the philanthropic funds should be allocated among these various interest groups, with particular attention to the specific needs of disabled, low-income, minorities, and other elements of the underserved community, as part of our consideration of the distribution of net benefits. As part of their comments, parties should address the extent to which the funds should be allocated in the form of grants to community-based foundations. Comments shall be due 20 calendar days after the effective date of this decision. Following review of those comments, we shall determine further direction regarding the use and distribution of the additional Verizon philanthropy commitments.

We find that this condition will help to ensure the merger will benefit local communities and economies in accordance with § 854(c), while fulfilling this Commission's mandate to pursue widespread availability of high-quality telecommunications services to all Californians under § 709 of the Public Utilities Code.

⁸² D.05-05-013, Appendix A, p. 77.