5. Discussion

We are not persuaded that under the facts presented in this case we have authority to approve a stock transaction that has already taken place. Public Utilities Code section 852 and 854, specifically and directly prohibit transactions from being completed prior to Commission approval. Those statutes also void those transactions that are completed without our approval. This clear statutory language provides no legal basis for approving a transaction that has already been consumated. In fact, to do so without a solid legal basis allowing deviation from these statutory requirements would contravene the statutory directive that this Commission "proceed in the manner required by law." (Cf., Pub. Util. Code, § 1757, subd (a)(2).)

In response to the order to show cause, applicants assert that we should approve their transaction for practical reasons. SRL and ATC argue that they operate in a highly competitive business environment and that time was of the essence when they completed their transaction. ATC also claims that its acquisition of SRL will be beneficial to the public interest because it will be beneficial to the acquiring company. Unfortunately these policy arguments do not provide with a legal basis that would support the approval of applicants' transactions. In fact, by requiring advance approval for stock purchases, sections 852 and 854 enact a legislative determination that the need to complete transactions is subsidiary to the need to obtain regulatory approval.

Applicants also refer to two decisions that approved already-completed transactions: Re WinStar Communications, Inc. (1995) [D.95-05-009], abstracted at 59 Cal.P.U.C.2d 635, and Re: HTC Communications LLC (2000) [D.00-04-014] __ Cal.P.U.C.2d __. These decisions also do not provide any legal basis for retroactively approving applicants' transaction. They grant "nunc pro tunc" approval of already consummated transactions in contravention of applicable statutes, but contain no discussion of a legal justification for doing so. Rather, they simply state that the transactions are "in the public interest." (E.g. Re WinStar Communications, Inc. (1995) [D.95-05-009], abstracted at 59 Cal.P.U.C.2d 635, Conclusion of Law 1.) As a result, these decisions are questionable, and provide no rationale supporting the approval of the transaction submitted for approval in this application.

The proposed decision of the assigned administrative law judge in this proceeding suggests that a rationale for approving an already-completed transaction might be found by invoking section 701¹. Unfortunately, section 701 does not give the Commission that authority. Although section 701 gives the Commission authority to do "all things" that are necessary and convenient in the exercise of its jurisdiction, the Supreme Court has explicitly "rejected a construction of section 701 that would confer upon the Commission powers contrary to other legislative directives, or to express restrictions placed upon the Commission's authority by the Public Utilities Code." (Assembly v. Public Utilities Com. (1995) __ Cal.3d __, __ slip. op., p. 21.) As a result, this Commission cannot invoke section 701 to "disregard . . . express legislative directions" such as the legislative requirement that stock transactions that are not pre-approved be treated as void. (Cf., Pacific Tel. & Tel. Co. v. Public Utilities Com. (1965) 63 Cal.2d 634, 653.)

The proposed decision also suggests that section 853 grants the Commission discretion to restore the validity of a contract that has become void because it was completed without prior Commission review. However, this conclusion reads too much into section 853. Section 853 gives the Commission authority to determine that certain transactions or types of transactions need not be subject to any form of review at all. In order to grant such an exemption, the Commission must determine that the public interest is not served by even commencing review of particular transactions.

For example, in Re Securities Issuance Transactions of Sierra Pacific Power (2000) [D.00-03-049] __ Cal.P.U.C. __, 2000 Cal. P.U.C. LEXIS 227 the Commission considered that (1) Sierra's securities issuance transactions are reviewed and regulated fully by the Public Utilities Commission of Nevada (PUCN); (2) Sierra has minimal contact with California in relation to its Nevada operations and that greater than 94 percent of Sierra Pacific's revenues are derived from Nevada customers; and (3) the exemption would relieve Sierra from the legal and administrative expenses it incurs and management time it devotes in filing applications for securities issuances that are already reviewed and regulated by the PUCN. (Re Securities Issuance Transactions of Sierra Pacific Power, supra, 2000 Cal. P.U.C LEXIS 227, at LEXIS p. 3.) Applicants have not requested this type of exemption, and do not appear to have provided any justification that would support our granting it.

This authority cannot be relied upon as a legal basis for approving transactions that are void simply because the parties to those transactions chose not to comply with section 852, 854, or other similar provision. The public interest test in section 853 is not met by ordinary transactions that were completed without Commission review as a result of oversight or a business decision to ignore the requirements of the Public Utilities Code. This Commission has a clear practice of invoking section 853 only to address significant practical difficulties created when transactions have been voided in "extraordinary circumstances." (E.g., Re Pacific Gas and Electric Company (1999) [D.99-02-062] __ Cal.P.U.C.2d __, __, 1999 Cal.P.U.C. LEXIS 59, LEXIS p. 9.) We have made clear the use of section 853 must be a "seldom used procedure." Frequent reliance on section 853 would create an exception that swallowed the rule. We cannot rely on section 853 to exempt from review a category of transactions the defining characteristic of which is they fail to meet pre-approval requirements of section 852 or 854. If we did so we would have amended the clear requirement of sections 852 and 854 out of the Public Utilities Code. The Commission is not empowered to take such legislative action.

As a result, there is no basis on which this Commission can approve the transaction that has been brought before us in this application. Pursuant to the clear terms of sections 852 and 854, this transaction is void. We are therefore compelled to deny the application. To ensure that appropriate steps are taken to accommodate the fact that this transaction is void, we will order applicants to unwind the transfer of control from CRL to ATC, and make appropriate notification.

The order to show cause contemplated applying other penalties to ATC and CRL, such as fines on the revocation of authority to operate. We believe the consequences for failing to follow sections 852 and 854 should be the voiding of the transaction specified in the statute, not a fine. However, we will order applicants to provide us with copies of their opinions of counsel regarding this transaction to determine if it was completed in good faith, given applicants' statement that they disregarded our requirements because they felt a need for the speedy completion of their deal.

In Resolution ALJ 176-3037, dated April 17, 2000, the Commission preliminarily categorized this proceeding as ratesetting, and preliminarily determined that hearings were not necessary. Based on the record, we conclude that a public hearing is not necessary, nor is it necessary to alter the preliminary determinations in Resolution ALJ 176-3037.

This is an uncontested matter in which the decision grants the relief requested. Accordingly, pursuant to Pub. Util. Code Section 311(g)(2), the otherwise applicable 30-day period for public review and comment is being waived.

Findings of Fact

1. Notice of this application appeared in the Commission's Daily Calendar of April 17, 2000.

2. The parties seek after-the-fact approval pursuant to Public Utilities Code section 852 and section 854 of a stock purchase transaction by which ATC would acquire control of CRL, a non-dominant telecommunications carrier.

3. CRL is authorized to provide intrastate telecommunications services, including local and interexchange services.

4. ATC provides internet technology products and services to mid-sized businesses and entities.

5. There will be no change in current services or rates provided by CRL as a result of the transfer of control.

6. The parties believe the merger will benefit the acquiring company.

7. The parties determined the fast-paced nature of their industry precluded them from meeting applicable statutory requirements.

8. The parties did not claim their failure to seek advance approval was the result of extraordinary circumstances.

Conclusions of Law

1. This proceeding is designated a ratesetting proceeding; no protests have been received; no hearing is necessary.

2. Sections 852 and 854 require utilities to obtain approval from this Commission before completing certain stock transactions.

3. Sections 852 and 854 clearly establish that transactions which this Commission has not pre-approved are void.

4. Section 701 does not give the Commission authority to act contrary to the explicit directives of the Public Utilities Code.

5. Section 701 cannot not confer upon this Commission power to approve, retroactively, a transaction that is already void.

6. Section 853 does not give the Commission the authority to restore the validity of a void contract.

7. Section 853 gives the Commission authority to determine that certain types of transaction need not be subject to any review under sections 851 through 856.

8. The circumstances of this case do not support the application of section 853.

9. Section 853 cannot be interpreted to exempt from review a category of transaction the defining characteristics of which is that they do not meet the pre-approval requirements of sections 851 through 856.

10. The purchase of 100% of the stock of CRL by ATC, completed January 5, 2000 is void.

ORDER

IT IS ORDERED that:

1. This application is denied because the purchase of 100% of the shares of CRL Network Services, Inc. (CRL) by AppliedTheory Corporation (ATC) is void and cannot be approved.

2. ATC is ordered to return to the shareholders of CRL the stock purchased in the transaction completed January 5, 2000 by August 3, 2000.

3. ATC and CRL are ordered to take all other steps necessary to unwind this transaction, including the reimbursement of the consideration paid for the shares of CRL.

4. CRL and ATC shall notify the Director of the Commission's Telecommunications Division in writing of the re-transfer shares within 5 days of the date of that event. A true copy of the instruments of transfer shall be attached to the notification.

5. CRL and ATC shall notify all other appropriate regulatory authorities, including the California Secretary of State, and state, federal and foreign securities regulators of this event.

6. CRL and ATC shall provide to this Commission copies of all opinions of counsel rendered in connection with the share transaction completed January 5, 2000.

7. This docket will remain open to allow the filing of these documents.

This order is effective today.

Dated , at San Francisco, California.