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STATE OF NEW YORKPUBLIC SERVICE COMMISSION
OPINION NO. 97-8
CASE 96-C-0603 - Proceeding on Motion of the Commission as tothe Joint Petition of New York TelephoneCompany, NYNEX Corporation and Bell AtlanticCorporation for a Declaratory Ruling That theCommission Lacks Jurisdiction to Investigateand Approve a Proposed Merger Between NYNEX anda Subsidiary of Bell Atlantic or, in theAlternative, for Approval of the Merger.
CASE 96-C-0599 - Petition of the New York Citizens UtilityBoard, the Consumer Federation of America, theAmerican Association of Retired Persons,Consumers Union, Mr. Mark Green, Ms. CatherineAbate, the Long Island Consumer Energy Projectand the International Brotherhood of ElectricalWorkers T-6 Council (Collectively the "ConsumerCoalition") for an Investigation of theProposed Merger of NYNEX Corporation and BellAtlantic Corporation.
CASE 96-C-0821 - Joint Petition of Cellco Partnership and BellAltantic NYNEX Mobile, Inc. for a DeclaratoryRuling that further Commission Approval is notrequired under Public Service Law Section 99 (2) as a result of the merger a wholly-ownedsubsidiary of Bell Atlantic Corporation intoNYNEX Corporation or, in the alternative, forapproval of this transaction.
OPINION APPROVING PROPOSEDMERGER SUBJECT TO CONDITIONS
CASES 96-C-0603, 96-C-0599 and 96-C-0821
TABLE OF CONTENTS
PageAPPEARANCES
INTRODUCTION 1
Background 1
Overview of the Parties' Positions 4
JURISDICTIONAL ISSUES 5
Commission Authority Under the Public Service Law 5
Petitioners' Interstate Commerce Argument 9
Discussion 12
STANDARD OF REVIEW 15
Parties' Positions 15
Discussion 16
PUBLIC INTEREST ANALYSIS 17
In General 17
Competition 18
Service Quality 21 Economic Impact 23
Impact of the Merger on Regulation 26
The Performance Regulatory Plan and Rates 27
Discussion 28
CONCLUSION 32
APPENDIX A - March 21 Order
CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 1 of 3
APPEARANCES
FOR DEPARTMENT OF PUBLIC SERVICE STAFF:
Saul M. Abrams and Andrew M. Klein, Staff Counsels,Three Empire State Plaza, Albany, New York 12223-1350.
FOR NEW YORK TELEPHONE COMPANY and NYNEX:
Saul Fisher, Counsel, William Smith, Counsel, andRobert P. Slevin, Attorney, 1095 Avenue of theAmericas, New York, New York 10036.
Robinson, Silverman, Pearce, Aronsohn & Berman, LLP (byAndrew Irving, Esq.), 1290 Avenue of the Americas, NewYork, New York 10104.
FOR BELL ATLANTIC CORPORATION:
John M. Walker, Regulatory Counsel, 1320 North CourtHouse Road, 8th Floor, Arlington, Virginia 22201.
FOR NEW YORK STATE ATTORNEY GENERAL'S OFFICE:
Pamela Jones Harbour, Assistant Attorney General,120 Broadway, Anti-Trust Bureau 2601, New York, NewYork 10271.
FOR NEW YORK STATE CONSUMER PROTECTION BOARD:
Alfred Levine, Attorney, and Douglas W. Elfner, UtilityIntervenor, 5 Empire State Plaza, Suite 2101, Albany,New York.
FOR NEW YORK CITIZENS UTILITY BOARD; CONSUMERS COALITION:
Robert Ceisler, Executive Director, 146 WashingtonAvenue, Albany, New York 12210.
FOR PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC.:
B. Robert Piller, Executive Director, 90 State Street,Albany, New York 12207.
FOR AT&T COMMUNICATIONS OF NEW YORK:
CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 2 of 3
APPEARANCES
FOR SPRINT:
Couch, White, Brenner, Howard & Feigenbaum, LLP (byDoreen M. Unis, Esq.), 540 Broadway, Albany, NewYork 12201.
Craig D. Dingwall, Attorney, 1850 M Street, NW,Suite 1100, Washington, D.C. 20036.
FOR TIME WARNER COMMUNICATIONS HOLDINGS, INC.:
LeBoeuf, Lamb, Greene & Macrae (by Noelle M. Kinsch,Esq. and Brian T. Fitzgerald, Esq.), One CommercePlaza, Suite 2020, Albany, New York 12210.
FOR MCI TELECOMMUNICATIONS CORPORATION:
Blumenfeld & Cohen (by Gary M. Cohen, Esq., andElise P.W. Kiely, Esq.), 1615 M Street NW, Suite 700,Washington, D.C. 20036.
FOR NEW YORK STATE TELEPHONE ASSOCIATION, INC.:
Robert R. Puckett, Vice President, RegulatoryRelations, 100 State Street, Albany, New York 12207.
FOR CWA LOCALS 1112, 1104, 1106, 1114, 1116, 1123, 1124, 1127,1128, 1129, and 2336:
Donna M. Conroy, President, Local 1112, 7854 OswegoRoad, Liverpool, New York 13090.
FOR COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO:
Kenneth R. Peres, Research Director, District 1,80 Pine Street, 37th Floor, New York, New York 10005.
FOR COMMUNICATIONS WORKERS OF AMERICA:
Law Offices of Gabrielle Semel (by Gabrielle Semel,Esq.), 218 West 40th Street, 12th Floor, New York, NewYork 10018.
FOR IBEW LOCAL 2213:
Weissman & Mintz (by David A. Mintz, Esq.), 80 PineStreet, 33rd Floor, New York, New York 10005.
CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 3 of 3
APPEARANCES
FOR JMJ ASSOCIATES:
Jeffrey Shankman, Executive Vice President, 271 MadisonAvenue, New York, New York 10016.
FOR COMPETITION POLICY INSTITUTE:
Ronald J. Binz, President, 3773 Cherry Creek NorthDrive No. 1050, Denver, Colorado 80209.
FOR STATISTICAL PHONE INFORMATION SYSTEMS ET AL.:
Karen Burstein, Esq., 258 Broadway, 2C, New York, NewYork 10007.
STATE OF NEW YORKPUBLIC SERVICE COMMISSION
COMMISSIONERS:
John F. O'Mara, ChairmanEugene W. ZeltmannThomas J. Dunleavy
CASE 96-C-0603 - Proceeding on Motion of the Commission as tothe Joint Petition of New York TelephoneCompany, NYNEX Corporation and Bell AtlanticCorporation for a Declaratory Ruling That theCommission Lacks Jurisdiction to Investigateand Approve a Proposed Merger Between NYNEX anda Subsidiary of Bell Atlantic or, in theAlternative, for Approval of the Merger.
CASE 96-C-0599 - Petition of the New York Citizens UtilityBoard, the Consumer Federation of America, theAmerican Association of Retired Persons,Consumers Union, Mr. Mark Green, Ms. CatherineAbate, the Long Island Consumer Energy Projectand the International Brotherhood of ElectricalWorkers T-6 Council (Collectively the "ConsumerCoalition") for an Investigation of theProposed Merger of NYNEX Corporation and BellAtlantic Corporation.
CASE 96-C-0821 - Joint Petition of Cellco Partnership and BellAltantic NYNEX Mobile, Inc. for a DeclaratoryRuling that further Commission Approval is notrequired under Public Service Law Section 99 (2) as a result of the merger a wholly-ownedsubsidiary of Bell Atlantic Corporation intoNYNEX Corporation or, in the alternative, forapproval of this transaction.
OPINION NO. 97-8
OPINION APPROVING PROPOSEDMERGER SUBJECT TO CONDITIONS
(Issued and Effective May 30, 1997)
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Cases 96-C-0603 and 96-C-0599, Order Instituting Proceedingand Inviting Comments (issued August 9, 1996).
2 Cellco, a Delaware general partnership, is owned andcontrolled by entities that are owned or controlled by eitherBell Atlantic or NYNEX. The joint petition, datedSeptember 6, seeks a declaratory ruling that no Commissionapproval is necessary for the impact of the BellAtlantic/NYNEX merger on Cellco or, in the alternative, forapproval of such impact. Hearings in that case had beenrequested by Communications Workers of America (CWA) inOctober 1996. In a letter from its counsel to the Judge datedDecember 13, 1996, CWA announced that it had settled itsissues with BANM and was withdrawing from participation inthese proceedings.
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BY THE COMMISSION:
INTRODUCTION
Background
NYNEX Corporation (NYNEX) and Bell Atlantic Corporation
(Bell Atlantic) announced their intention to merge in April 1996.
These proceedings were instituted following submission of a joint
petition by New York Telephone Company (New York Telephone),
NYNEX and Bell Atlantic (collectively, Petitioners) for a
determination that the Commission lacks jurisdiction over the
proposed merger or alternatively for approval of it, and a
petition by several parties joining forces as the "Consumer
Coalition" to review the merger.1 In November, we referred to
these proceedings the issues raised by a joint petition of Cellco
Partnership (Cellco) and Bell Atlantic NYNEX Mobile, Inc. (BANM),
in Case 96-C-0821, for approval of changes in the ownership
interests of Cellco resulting from the proposed merger of Bell
Atlantic and NYNEX.2
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Cases 96-C-0603 and 96-C-0599, Order Establishing Proceduresand Schedule (issued October 2, 1996); Cases 96-C-0603 and96-C-0599, Order Clarifying Procedure and Granting Rehearingin Part (issued November 20, 1996).
2 In addition to the Petitioners, initial briefs were filed bythe Department of Public Service staff (staff), the ConsumerProtection Board (CPB), the Attorney General of the State ofNew York (Attorney General), the New York Citizens UtilityBoard (CUB), the Competition Policy Institute (CPI), AT&TCommunications of New York, Inc. (AT&T), MCITelecommunications Corporation (MCI), Southern New EnglandTelecommunications Corporation, Inc. (SNET), CablevisionLightpath, Inc. (Lightpath), Time Warner CommunicationsHoldings, Inc. (TW Comm), Teleport Communications Group, Inc.(TCG), Statistical Phone Information Systems (SPIS), J.M.J.Associates, Inc. (JMJ Associates), and Erie County, the Cityof Buffalo, and Nassau County (collectively Erie County).
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The process commenced with the submission of initial
and reply comments. Thereafter, we instituted procedures calling
for discovery by all parties, the filing of direct and responsive
testimony, and an en banc hearing before the full Commission,
General Counsel, and the presiding Administrative Law Judge, held
on December 16, 1996.1 Following the hearing, the parties
convened for settlement negotiations on January 6, 1997, which
ended unsuccessfully on January 9, 1997. A briefing schedule was
subsequently announced, and initial and reply briefs were filed
on February 5 and February 12, 1997.2
The Commission has also received correspondence
concerning these proceedings, and a series of thirteen public
statement hearings and educational forums was conducted around
the state. There were about 90 speakers at the public statement
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Public statement hearings were held in Malone on November 19,Brooklyn on November 26, Troy on November 26, Buffalo onDecember 2, Syracuse on December 3, Queens on December 3,White Plains on December 4, Huntington on December 5,Manhattan on December 6, Glen Falls on December 9, the Bronxon December 10, Poughkeepsie on December 11, and Binghamton onDecember 11.
2 Cases 96-C-0603 and 96-C-0599, Order Approving Proposed MergerSubject to Conditions (issued March 21, 1997) (March 21Order). The March 21 Order is attached hereto as Appendix A.
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hearings,1 including members of the general public,
representatives of private firms and government agencies, as well
as legislators. We have also received approximately 30 letters,
a few from consumers, but mostly from organizations or state or
federal legislators.
At sessions held on March 19 and 20, 1997, we discussed
the proposed merger, and decided to approve it if Petitioners
unconditionally accepted certain conditions2 by
March 31, 1997. In letters filed on March 31, 1997, and April 8,
1997, as discussed below, Petitioners have unconditionally
accepted our conditions, and accordingly we find that the merger
is in the public interest and is approved. This opinion and
order sets forth the positions the parties advanced in these
proceedings, and sets forth more thoroughly than in our March 21
Order the basis for our conclusions and conditions.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 The parties' positions are discussed generally in the body ofthis opinion, and, more detailed description of some of themis included in Appendix B, which is attached hereto. All ofthe arguments raised by the parties have been considered inreaching the decision in this proceeding.
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Overview of the Parties' Positions3
Petitioners have taken the position throughout these
proceedings that we lack the jurisdiction to approve or
disapprove the proposed merger. Should we conclude we have
jurisdiction, Petitioners assert, we should find that the
proposed merger is in the public interest and approve it without
conditions.
The other parties generally oppose Petitioners'
position. Those parties that address the jurisdictional issue
argue that we have approval jurisdiction and responsibility in
connection with the proposed merger. Three parties (AT&T, MCI,
and the Attorney General) argue that merger approval should be
denied, and two parties (SNET and CUB) state that denial of
approval is their primary recommendation, while approval with
certain recommended conditions is their secondary recommendation.
Several other parties (TW Comm, CPB, staff, Lightpath,
and CPI), although not expressly recommending disapproval, argue
that the proposed merger is not in the public interest without
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 In addition, comments were filed by two non-parties, the Cityof New York (the City) and Communication Careers for Latinos,Inc. (CCL), expressing concern about the merger and suggestingspecific conditions for its approval.
Comments and Reply Comments were also filed by the HonorableAlbert Vann, New York State Assembly, Chairman of the StandingCommittee on Corporations, Authorities & Commissions. Assemblyman Vann, who also participated in negotiations.
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substantial conditions.1 Finally, several parties (SPIS, JMJ
Associates, and Erie), argue that the Commission should defer
action on the merger proposal; in particular, SPIS and JMJ argue
that we should resolve the information provider case (Case
93-C-0451) before passing on the proposed merger, and Erie
requests that the merger be delayed until NYNEX agrees to discuss
the issue of rates.
JURISDICTIONAL ISSUES
Commission Authority Underthe Public Service Law
Petitioners argue that the Commission's jurisdiction to
approve or disapprove the proposed merger could only stem from
Public Service Law (PSL) §§99(2), 100, or 108, and that none of
these sections vests us with such authority.
Petitioners argue that the proposed merger involves
none of the transactions contemplated by section 99(2) because
NYNEX is a holding company which holds no franchises and owns no
utility assets. They contend, therefore, that the merger
agreement does not call for the assignment, transfer or lease of
any of the assets or franchises of any regulated New York
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 15.
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Telephone Corporation. The merger, Petitioners say, involves
only the acquisition of the capital stock of NYNEX.
Likewise, Petitioners argue that PSL §100, which
prohibits the acquisition of any stock of a telephone corporation
by another telephone corporation or more than 10% of the stock of
a telephone corporation by any stock corporation without
Commission approval, gives the Commission no authority over the
proposed merger. Petitioners argue that, while New York
Telephone is a "telephone corporation organized or existing under
or by virtue of the laws of this state," its capital stock will
not be "acquired or transferred" as part of the merger.1
Although NYNEX's stock is to be acquired, Petitioners continue,
NYNEX is not a "telephone corporation" as defined by PSL §2(17),
nor is it organized or existing under New York Law, because it is
a Delaware corporation.
As to PSL §108, Petitioners argue that the Commission's
authority to approve the "dissolution . . . merger or
consolidation" of public utility corporations provided in that
section is inapplicable for the same reasons. That is, NYNEX is
not a "public utility corporation" under PSL §2(23) because it is
not a utility company, and because New York Telephone, although
it is such a corporation, "is neither dissolving nor being merged
or consolidated with any other entity." Petitioners state that
NYNEX will not seek to file a certificate of merger with the
Department of State of the type referred to in §108 and,
accordingly, that section does not apply to this transaction.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Case 93-C-0777, American Telephone and Telegraph Company,Ridge Merger Corporation, Order Asserting Jurisdiction AndApproving Transaction (issued December 31, 1993).
2 Petitioners cite, for example, provisions relating toaffiliate transactions and the like, under PSL §110.
3 Petitioners' Initial Brief, p. 19.
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Petitioners acknowledge that we have previously
asserted and exercised jurisdiction to approve the merger of a
parent corporation when we acted upon AT&T's acquisition of the
outstanding capital stock of McCaw Cellular Communications, Inc.,
a holding company with interests in regulated telephone
companies.1 There, Petitioners note, we indicated jurisdiction
under §100 would be asserted over such a transaction absent proof
that transfer of the stock of a holding company that indirectly
has a controlling interest in a New York telephone corporation
does not effectively constitute a transfer of an interest in such
a telephone corporation. However, Petitioner asserts, there is
no basis in the PSL for implying authority over such an indirect
transfer. Direct authority over holding companies elsewhere in
the PSL is fairly limited, Petitioners reason,2 and in any event
NYNEX does not "exercise the kind of control over New York
Telephone contemplated by that standard."3
Moreover, the fact that NYNEX and New York Telephone
are distinct corporations, each with its own independent board of
directors, Petitioners assert, is enough to defeat any claim that
NYNEX is the "alter ego" of New York Telephone. "In short,"
Petitioners state, "there is no question that New York Telephone
exists independently of NYNEX Corporation. There is, therefore,
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 20.
2 AT&T's Initial Brief, p. 4.
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no basis for asserting jurisdiction over this merger based on an
alter ego theory . . . ."1
Staff, CPB, CUB, and AT&T respond, all asserting that
the Commission has the authority and responsibility to assert
jurisdiction in this matter. These parties argue that the Bell
Atlantic acquisition of NYNEX's stock essentially constitutes an
acquisition of New York Telephone. Staff asserts as well that
the proposed merger constitutes a "contract or agreement . . .
with reference to or affecting" New York Telephone's franchise or
right to provide telecommunications services in New York State,
hence invoking PSL §99(2).
AT&T concurs, adding that Petitioners' argument that
NYNEX does not have a direct interest in the franchises and
facilities owned by New York Telephone is specious. The language
of §99(2), AT&T argues, "renders invalid not only a direct
franchise transfer, but also 'any agreement . . . made with
reference to or affecting any such franchise or right,' unless
that agreement is approved by this Commission."2 Indirect
control through a wholly-owned subsidiary, AT&T reasons, confers
the right to "operate" a telephone company. Moreover, in
permitting itself to be acquired by Bell Atlantic, NYNEX is
transferring that right to Bell Atlantic. Explicit in this
record, AT&T argues, are promises and commitments made by Bell
Atlantic and NYNEX as to how the new Bell Atlantic will operate
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 In its reply brief, staff advances the same point, notingnumerous changes to New York Telephone Petitioners say will bebrought about by the merger, including changes to corporatestructure and operations. Staff argues: "Petitioners cannotclaim that the proposed merger would affect NYT by providingsome alleged benefits and then say it would not affect NYTwhen convenient for their jurisdictional argument. Petitioners simply cannot have it both ways." Staff's ReplyBrief, p. 4.
2 AT&T cites Case 95-C-0078, Petition of Sprint Corporation fora Declaratory Ruling Disclaiming Jurisdiction, Order ApprovingTransaction (issued May 19, 1995).
3 AT&T's Initial Brief, p. 9.
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its New York Telephone subsidiary.1 Such reasoning, AT&T
asserts, also establishes that §100 approval is also required
here.2
As to Petitioners' argument that New York Telephone is
independent from NYNEX, and its point that New York Telephone has
its own independent board of directors, AT&T argues that:
"[W]hat this says is that the new holdingcompany will have absolute authority to controlthe independence (or even the existence) of theboard of directors of New York TelephoneCompany but has no present plans to exercisethat authority. The fact of that authority,however, is enough to establish conclusivelythat the Commission has jurisdiction over thismerger under [PSL] §100.3
CUB also argues that our jurisdiction to regulate New
York Telephone can be implied from the need to address regulatory
issues pertaining to New York Telephone that are materially
affected by the proposed merger. Thus, CUB suggests, we have
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 26. Petitioners cite Edgar v. MITE Corp., 457 U.S. 624, 643 (1982) and Tyson Foods, Inc. v. McReynolds, 865 F.2d 99 (6th Cir. 1989).
2 Petitioners cite, inter alia, Healy v. The Beer Institute,491 U.S. 324, 335-36 (1989) as to the need for "maintenance ofa national economic union unfettered by state-imposedlimitations on interstate commerce."
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implied authority to condition approval of the proposed merger
based upon our broad regulatory authority.
Petitioners' Interstate Commerce Argument
Even if New York State law confers upon the Commission
jurisdiction over this transfer, Petitioners aver, "any
administrative order inhibiting the proposed Bell Atlantic/NYNEX
merger would be unconstitutional, because it would have a direct
and impermissible effect on interstate commerce and would amount
to a forbidden attempt by New York to regulate thousands of stock
transactions occurring in other states and involving the
securities of Delaware corporations."1 According to Petitioners,
Commission disapproval of the proposed merger would be in effect
an attempt to regulate commercial activity of the citizens of
other states, and therefore would violate the Commerce Clause of
the Constitution.2
In response, staff, TW Comm, and AT&T argue that
Petitioners' Commerce Clause argument is unsound. TW Comm and
staff assert that State action is permissible if it is designed
"to effectuate legitimate local interests, even where these have
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Reply Brief, p. 5.
2 TW Comm's Reply Brief, p. 8. Both parties cite Pike v. BruceChurch, Inc., 397 U.S. 137, 142 (1970); see also, Healy v. TheBeer Institute, supra, at 337.
3 Staff cites Arkansas Electric Coop. Corp. v. Arkansas PublicServices Commission, 461 U.S. 375 (1983).
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an incidental effect on interstate commerce,"1 and "unless the
burden imposed on commerce is clearly excessive in relation to
the putative local benefits."2 Thus, legitimate state action
which only indirectly affects out-of-state investments is
permissible, staff continues, particularly where in-state
investments are affected in the same manner.3
The State's interest in regulating telecommunications
is clear, staff asserts, and approval of the proposed merger,
with conditions, would clearly have only an incidental effect, if
any at all, on interstate commerce. There is no way, staff adds,
that our action would interfere with the transfer of stock
certificates in connection with the merger. Similarly, TW Comm
argues that the burden of the limited conditions it has proposed
is small compared to the substantial State interest involved.
AT&T argues further that disapproval of the merger,
which it recommends, would also withstand constitutional
scrutiny. First, AT&T asserts, the cases discussed by
Petitioners, staff, and TW Comm involve dormant Commerce Clause
issues, that is, limitation of State action where Congress has
not acted; however, Congress has acted (in the Communications Act
of 1934) to expressly permit State regulation of intrastate
telephone service, making the requirements of the dormant
Commerce Clause irrelevant. The Supreme Court, AT&T continues,
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 AT&T cites Merrion v. Jicarilla Apache Tribe, 455 U.S. 130,154 (1982), citing Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 421-427, 431 (1946).
2 AT&T's Reply Brief, p. 10, citing Northeast Bancorp, Inc. v.Board of Gov. of the Fed. Reserve System, 472 U.S. 159, 174(1985); Wardair Canada v. Florida Dep't of Revenue, 477 U.S. 1, 12-13 (1986).
3 Louisiana Public Service Commission v. FCC, 476 U.S. 355, 370,375 (1986).
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has held that the dormant Commerce Clause is implicated only when
Congress has not acted or purported to act; when Congress has
acted, the courts are no longer needed to prevent States from
burdening commerce, regardless of whether the courts would
invalidate the State regulation under the Commerce Clause in the
absence of congressional action.1 Once Congress chooses to
permit the States to exercise regulatory authority, AT&T asserts,
that authority is "invulnerable to constitutional attack under
the Commerce Clause."2
In the 1934 Act, AT&T continues, Congress created "dual
state and federal regulation of telephone service,"3 reserving to
the States regulation of intrastate communications; and as
relevant here, Congress determined that the authority given to
the FCC to regulate a proposal by "one or more telephone
companies . . . to acquire the whole or any part of the property
of another telephone company or other telephone companies or the
control thereof by the purchase of securities or by lease or in
any like manner" . . . shall not be construed "as in anywise
limiting or restricting the powers of the several States to
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 47 U.S.C. §221(a).
2 AT&T cites Arkansas Electric Coop Corp., supra, 461 U.S. at393-394.
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control and regulate telephone companies."1 Thus, AT&T concludes,
Congress has specifically provided that the States are free to
regulate all aspects of intrastate telephone service, including
the direct or indirect control of a company like New York
Telephone.
Although the Commission need go no further to reject
Petitioners' Commerce Clause argument, AT&T posits, even a
dormant Commerce Clause analysis would not defeat Commission
disapproval of the proposed merger. Unlike the statutes in the
cases relied on by Petitioners, AT&T asserts, PSL §§99(2) and 100
are not aimed at regulating all "interstate mergers and tender
offers," only at regulating the ownership and control of
telephone companies organized under New York law and operating in
New York; and the Commission here is not projecting its
regulatory power into another state, merely reviewing a shift of
control over a New York telephone company.
In accord with staff and TW Comm, AT&T argues the
dormant Commerce Clause analysis to be: "Where [a] statute
regulates evenhandedly to effectuate a legitimate public
interest, and its effects on interstate commerce are only
incidental, it will be upheld unless the burden imposed on such
commerce is clearly excessive in relation to the putative local
benefits."2 In that regard, AT&T continues, it is well
established that States can regulate ownership and control of
local companies, even if the effect is mainly, or even solely,
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 AT&T cites Exxon Corp. v. Governor of Maryland, 437 U.S. 117(1978), holding that a statute providing that no producer orrefiner of petroleum products could operate any retail servicestation within the State did not impermissibly burdeninterstate commerce merely because it adversely affected out-of-state corporations wishing to own retail stations inMaryland. Id. at 127. AT&T goes on to argue that the States'interest in regulating utilities has been held to be one ofthe most important functions of their police power (ArkansasElectric Coop Corp., supra, at 377), and that this interesthas been held to outweigh the "minimal burden on interstatecommerce, . . . of control of a public utility's corporatestructure and investments." (Baltimore Gas & Elec. Co. v.Heintz, 760 F.2d 1408 at 1425 (4th Cir., 1985)).
2 AT&T cites Hoylake Investments Ltd. v. Washburn, 723 F. Supp.42, 47-49 (N.D. Ill., 1989), Doumari v. Casino Control Comm'nof New Jersey, 614 F. Supp. 1465, 1473-74 (D.N.J., 1985), andCentra, Inc. v. Chandlers Ins. Co., Ltd., 248 Neb. 844,863-64, 540 N.W.2d 318, 331-33 (1995).
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upon out-of-state corporations.1 Finally, AT&T posits, it makes
no difference to this analysis that Bell Atlantic does not seek
to acquire New York Telephone directly, but indirectly by
purchasing its parent.2
Discussion
As indicated in our March 21 Order, this merger
includes at least three elements that bring it under the terms of
PSL §§99(2) and 100. First, New York Telephone currently
exercises its rights to operate telephone plant subject to the
control of NYNEX, but after the merger, New York Telephone will
exercise those rights subject to the control of a new
corporation, Bell Atlantic; the merger therefore requires our
consent under §99(2) because it affects the manner in which New
CASES 96-C-0603, 96-C-0599 and 96-C-0821
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York Telephone will exercise its rights to operate its system in
New York State. Second, §99(2) also provides that no telephone
company in New York State may transfer any part of its works or
systems without our approval. Because the merger transfers New
York Telephone's works and systems to another corporation, our
approval of Bell Atlantic's acquisition of NYNEX is required
under this provision of §99(2). Third, the stock of New York
Telephone is controlled by NYNEX. After the merger, it will be
controlled by Bell Atlantic. This acquisition, therefore,
requires our approval under §100.
Petitioners assert that it is New York Telephone's
parent, NYNEX, not New York Telephone, that is being transferred
or affected by the transaction. This assertion, however,
overlooks the fact that NYNEX itself is being reorganized and
absorbed into the new Bell Atlantic subsidiary. Moreover,
although Petitioners assert the merger involves the acquisition
of the capital stock of NYNEX, Bell Atlantic will not merely
assume control of NYNEX by owning its stock. Rather, NYNEX
shareholders will exchange their stock for Bell Atlantic stock,
effecting an absorption of NYNEX into Bell Atlantic. Thus, NYNEX
will cease to exist as a publicly held corporation and will not
continue to exist as anything like the current corporation, if at
all. The reality is that Bell Atlantic plans to purchase NYNEX
and all of its subsidiaries, and include them in a revised
corporate structure. We conclude our statutory authority to
review the proposed merger is clear.
Petitioners' Commerce Clause arguments also lack merit.
AT&T's position that a dormant Commerce Clause review is
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 March 21 Order, p. 3, n. 1.
2 General Motors Corp. v. Tracy, 1997 U.S. LEXIS 692(February 18, 1997).
3 Our approval of the merger with conditions, as staff hasobserved, has no effect whatsoever on securities transactions,the effect complained of by Petitioners.
-17-
inapplicable here, as we pointed out in the March 21 Order,1 is
correct; Congress' protection of the states' jurisdiction over
telephone company acquisitions and mergers is reflected in
47 U.S.C. §221(a).
This conclusion is reinforced by a very recent Supreme
Court decision holding that Ohio's differential tax treatment of
natural gas sales by public utilities (all of whom are in-state)
and independent marketers (most of whom are out-of-state) does
not violate the Commerce Clause.2 Although the issues in that
case are different (there is no alleged discrimination in these
merger proceedings--only alleged effects on interstate commerce),
the court makes clear that where there is complementary federal
and state regulation of monopoly-provided essential services (as
under both the Natural Gas Act and the Telecommunications Act),
state regulation of in-state sales is exempt from attack under
the dormant Commerce Clause.
Our exercise of jurisdiction over this merger would, in
any event, pass muster under a dormant Commerce Clause analysis.
As we have pointed out, §§99 and 100 are even-handed, further the
legitimate interest of New York State in regulating telephone
service, and have a minimal, if any, impact on interstate
commerce.3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 The PRP's "Reservation Clause," §VIII(AXS). See Case92-C-0665, Performance-Based Incentive Regulatory Plans forNew York Telephone Company - Track 2, Recommended Decision(issued March 15, 1995), pp. 66-75.
2 Additional detail concerning the arguments of the parties iscontained in Appendix B.
3 Case 92-C-0238, Teleport Communications Group Inc., OpinionNo. 92-13 (issued November 18, 1992).
-18-
As we pointed out, as well, in our March 21 Order, we
conclude that our jurisdiction here is also grounded in our
authority under New York Telephone's Performance Regulatory Plan
(PRP or Plan). Our reservation of authority under the PRP allows
us to modify the PRP if "unforeseen circumstances in the opinion
of the Commission have such a substantial impact as to render
this Plan unreasonable . . . ."1 We conclude that the proposed
acquisition of NYNEX by Bell Atlantic is such an event, and we
have exercised our discretion under the Reservation Clause to
require modifications of the PRP, as discussed below.
STANDARD OF REVIEW
Parties' Positions2
Assuming our jurisdiction over the proposed merger,
various parties argue, we must determine whether the merger is
"in the public interest" (PSL §100). That standard, according to
Petitioners, is "whether the proposed transaction is likely to
undermine the provision of safe and adequate service at just and
reasonable rates."3
The parties do not appear to disagree with Petitioners'
assertion that a showing of material benefits is not needed.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 CPI's Initial Brief, p. 4.
2 Attorney General's Initial Brief, pp. 29-30.
-19-
CPI presents what appears to be a fair summary of the
public interest assessments required of the Commission, as viewed
by parties other than Petitioners:
CPI suggests that the Commission has threeduties in its review of this merger: (1) toensure that the interests of ratepayers areserved by the transfer of the New YorkTelephone system; (2) to ensure that theCommission can continue effectively toregulate the merged entity; and (3) todetermine what conditions should be placed onthe transfer to serve the policy goals of theCommission, especially the enhancement ofcompetition and the maintenance andimprovement of service quality.1
The major element of our public interest assessment,
other parties also appear to agree, involves the impact of the
merger on competition.
Some parties (notably MCI and the Attorney General)
argue that antitrust merger analysis, under §7 of the Clayton
Act, is somewhat analogous to the public interest review here.
The Attorney General, though noting it is not our task to
determine whether the merger may be actionable under federal or
New York State antitrust laws, urges us to consider the effects
of the merger on competition in New York telecommunications
markets as a "significant, if not determinative, aspect" of our
broader inquiry under the public interest standard; and in that
regard, the Attorney General posits, the antitrust laws can
provide "essential guidance."2
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-20-
These parties also caution, on the other hand, that
mechanical application of standards promulgated for the federal
Merger Guidelines would not necessarily be proper here. The
Merger Guidelines, MCI observes, are typically applied in markets
that are already competitive, whereas a possible inquiry here
would relate to potentially significant competition in
telecommunications markets that are only beginning to emerge from
monopolistic dominance.
Discussion
Although §99(2) requires Commission approval for
actions that could affect the exercise of a franchise, it does
not provide a standard for the Commission to review proposed
actions under §99(2). Accordingly, we need only have a rational
basis for allowing or rejecting such action.
With regard to stock transfers, §100 does not spell out
conditions where the Commission must approve stock transfers. It
provides, however, that we may not consent to the transfers
described therein unless they are shown to be in the public
interest. For the purposes of our §100 public interest analysis,
we agree, as a matter of discretion, that the proposed merger's
impact on competition may properly be considered.
PUBLIC INTEREST ANALYSIS
In General
Petitioners assert that the merger is in the public
interest because it will promote economic development within New
York State, enhance New York Telephone's service improvement
efforts, and will result in operating efficiencies that will
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-21-
enable the merged entity to bring new products and services to
the market more quickly. The merger does not harm competition in
the local exchange market, Petitioners argue, since the market is
already highly competitive, Bell Atlantic had no plans to enter
the New York market, and numerous other competitors possess entry
advantages equal to or greater than those possessed by Bell
Atlantic. In the interexchange market, they assert, the merger
will enhance competition by creating a large facilities-based
competitor that will be able to provide meaningful competition to
the incumbents.
On the other hand, the other parties to the proceeding
contend that unconditional approval of the merger is not in the
public interest, for a variety of reasons. Foremost among these
is the claim that the merger will adversely affect the
competitive landscape, as the merger removes a potentially
significant competitor from the New York market. Bell Atlantic,
they assert, possesses a unique blend of attributes not shared by
any other actual or potential competitor -- incumbent LEC
experience, geographic proximity, existing facilities, and name
recognition being the advantages most commonly cited. Absent the
merger, they argue that Bell Atlantic had plans to use its
advantages to compete in New York. Parties also contend that the
size of the new entity could retard the development of retail and
wholesale competition, and confer an unfair advantage in that it
would eliminate the need for NYNEX and Bell Atlantic to purchase
inter-region carrier access from each other. Various parties
also cite New York Telephone's service quality record, contending
that both end user and carrier-to-carrier service quality will
suffer even further as management attention is diverted,
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-22-
personnel are eliminated, the provisioning processes are
disrupted, and the competitive threat from Bell Atlantic is
removed. Finally, parties question the economic benefits claimed
by Petitioners, particularly with regard to employment and the
headquarters commitment.
The positions of the various parties with respect to
the public interest analysis are summarized below. A more
detailed discussion of the arguments they raised is attached as
Appendix B. All arguments, whether or not they are summarized
below or appended hereto, have been thoroughly considered in
reaching our conclusion that, as we have conditioned it, the
public interest favors approval of this proposed transaction.
Competition
In response to the various contentions that the merger
will impede local exchange competition in New York, Petitioners
concede the New York markets are highly concentrated, but assert
that: (1) while Bell Atlantic at various times studied the New
York local exchange and access markets, it never developed any
plans to enter these markets because it repeatedly found that
these markets were not economically attractive to it; (2) NYNEX's
behavior has never been influenced by Bell Atlantic's proximity,
because NYNEX did not perceive Bell Atlantic as a potential
competitor; and (3) Bell Atlantic entry into New York markets
would not in any event have affected the rates New York
Telephone's customers would pay, or the development of
competition in New York, given the numerous actual and announced
competitors in the New York markets. With regard to the
interexchange, long distance markets, moreover, Petitioners
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 See AT&T's Initial Brief, p. 23; CPI's Initial Brief, pp. 6-7.
-23-
assert that the merger will promote competition, since it will
create a viable competitor to the market share leaders.
The other parties, however, contend that the merger
gravely damages the potential for local competition in New York,
and some of them (particularly IXCs) contend it will have serious
anti-competitive effects in interexchange markets as well.
These parties vehemently dispute Petitioners' contentions,
arguing generally that Petitioners' denial of Bell Atlantic's
potential to be a significant competitive force in New York lacks
credibility. They dispute Petitioners' assertion that New York
is not a logical place for Bell Atlantic to compete out-of-
region. Some parties argue that the merger rationale itself
challenges the Petitioners' stance on this issue.1
The parties, including the Attorney General, staff,
AT&T, and MCI, variously maintain that Bell Atlantic's own
documents show a consistent intent to enter the New York markets,
and that it would have done so absent the merger. Bell Atlantic,
these parties submit, has had a generally expansionistic view,
and a specific strategy to compete out-of-region to offset in-
region competitive losses.
The Attorney General argues generally that Bell
Atlantic's strategy has been to develop a competitive out-of-
region presence, that New York State, and especially New York
City, figured "prominently and continuously" as a target market
for out-of-region long-distance service "from the inception of
such plans," and that Bell Atlantic's plans for long-distance
entry into New York appeared to have been shelved at about the
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Attorney General's Initial Brief, pp. 12-13. The documentsprovided by Attorney General have been received under a claimof confidentiality. Until confidentiality issues have beenresolved, we will not discuss them publicly.
2 See, for example, CPI's Initial Brief, p. 5 and MCI's InitialBrief, p. 4.
3 Petitioners' Reply Brief, p. 48.
-24-
same time that the last key barrier to the merger--disagreement
over the exchange ratio of the merging firms' shares--was
removed.1 Other parties and their witnesses are in accord with
the Attorney General's assessment.
Some parties take issue with Petitioners' contention
that the loss of Bell Atlantic as a potential competitor will
not, in any event, have a material impact on the level of
competition in New York markets. Several parties maintain
competition from other sources is not likely to be robust.2
Petitioners respond specifically to some of the
arguments not fully anticipated in their presentation.
Evidence of Bell Atlantic's intentions cited by other
parties, Petitioners say, are statements from only a few, dated
documents that are taken out of context. They also claim that
competitive options examined relate to large businesses, and not
to targeting small business or residential customers. Moreover,
Petitioners assert, views attributed to Bell Atlantic are "little
more than opinions expressed by individuals below--or entirely
outside--the corporate decision-making process. These statements
are affirmatively not accurate reflections of corporate policy."3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 54 (original emphasis).
2 Ibid., p. 55.
3 Petitioners argue, additionally, that alleged competitiveabuse of the access charge process is also not a merger-related issue, as it is being addressed in Cases 28425 and94-C-0095, as well as by the FCC.
-25-
In connection with the significance of Bell Atlantic's
loss as a potential competitor, Petitioners urge rejection of
arguments that the merger will hurt competition in New York's
long distance market, asserting that Bell Atlantic is no more
than a potential reseller in that market, whereas the merger
enhances competition because it "will eventually result in the
creation of a new facilities-based carrier in the NYNEX and Bell
Atlantic territories"1 whose combined long distance operations
"should result in increased efficiencies for customer benefit."2
Although Petitioners contend that New York Telephone,
because it is regulated and its rates constrained by the PRP,
does not have market power, they assert that any alleged unfair
advantage the merged entity might have does not create a merger
issue, but rather a problem that can be addressed in other
proceedings.3 Finally, they assert that the absolute size of a
merged entity is not relevant to a merger analysis, and they
point to the FCC's conclusion in the Pac Tel/SBC merger
proceeding that a merger of RBOCs is not ruled out by the 1996
Act and the need to enforce its provisions.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 31.
2 Tr. 975, 995, and 1,002-1,003. See, also, Tr. 996.
-26-
Service Quality
Petitioners argue that the merger will improve the
quality of New York Telephone's service in several ways, citing
"efficiencies and economies of scope and scale" that will enable
them "to achieve a minimum of $600 million in annual cost savings
(at the end of the third year following the merger)."1
Petitioners also assert that the merger will enhance
New York Telephone's service improvement efforts and the
achievement of PRP service improvement targets to which it
remains committed. NYNEX has publicly announced plans to
increase its New York State infrastructure investment by $1
billion over the next five years in its infrastructure. It has
also expressed its intention to hire an additional 750 to 1,000
new employees through the end of 1997 to deal with New York
Telephone's service quality issues.
In response to the assertion that the merger will
distract managers or cause service disruptions in New York,
Petitioners argue there is no merger-related need for additional
service quality measures, as evidenced by our acknowledgment that
New York Telephone has "steadily achieved substantial service
improvements in the time since NYNEX and Bell Atlantic announced
their agreement to merge."2
The other parties argue that New York Telephone's
service quality is the lowest among RBOCs in the nation and that,
absent significant competitive pressure, increased regulatory
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Initial Brief, p. 24.
2 See CPB's Initial Brief, p. 20 and Staff's Initial Brief,pp. 37-38.
3 The PRP limited New York Telephone's penalties toapproximately $80 million in 1995 if service quality did notshow any signs of improvement over 1994 base levels.
-27-
incentives and requirements will be necessary if New York
Telephone's service is to improve. They also argue that New York
Telephone's poor service in the wholesale provision of services
for resale and of service elements will adversely affect
competitors other than fully facilities-based service providers,
and that additional measures will therefore be needed to develop
and enforce carrier-to-carrier service standards.
Staff also directly questions the Petitioners'
assertion that cost savings and financial gains generated by the
merger would be used to provide improved service quality in
New York, noting that:
"The Petitioners have unabashedly stated thatthey plan to use the money generated from themerger for new ventures and other markets. . . ."1
Staff and CPB, particularly, emphasize NYNEX's poor
quality of service both in absolute terms, and in comparison with
other RBOCs'.2 Staff also emphasizes the decline in New York
Telephone's service quality during the first year of the PRP, and
observes in that first year New York Telephone incurred $72.9
million in penalties.3 Staff states that we have regarded New
York Telephone's performance under the PRP service quality
incentive program as disappointing, and asserts that "[s]ince the
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Initial Brief, p. 40.
2 SPIS and JMJ Associates urge consideration here of arecommended decision by Administrative Law Judge FrankRobinson concluding that poor service provided to InformationProviders (976 services providers) was not mere negligence,but willful misconduct. SPIS and JMJ Associates ask theCommission to defer action on the proposed merger until thosecases are decided. The Commission decided these cases at itsApril 30, 1997 session.
-28-
financial incentives and penalties have not brought about the
necessary service quality improvements, it is now obvious that
other measures must be undertaken."1
Other parties, including TCG, MCI, Lightpath, and TW
Comm, focus more on carrier-to-carrier service quality.2
Parties advance a variety of service-related proposals.
Several parties urge enhanced incentives for end-user service
quality beyond those now included in the PRP, including
increasing the PRP incentive amount, and other parties proposed
identifying specific carrier-to-carrier standards, reporting
requirements and enforcement mechanisms and penalties.
Economic Impact
Petitioners assert that the merger will have a positive
economic impact for a variety of reasons. First, they point to
the fact that the merger will create operating efficiencies and
economies of scope and scale that will enable the merged entity
to achieve a minimum of $600 million in annual cost savings by
the end of the third year following the merger. These savings,
they contend, will enhance New York Telephone's service
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-29-
improvement efforts, promote research and development, and enable
the merged entity to bring new products and services to the
market more quickly. Petitioners assert that these results, in
turn, will foster economic development within the State, and cite
the Bell Atlantic/NYNEX Mobile venture as evidence that this
merger will increase efficiency, promote competition, and
encourage economic development.
Petitioners also point to the fact that they have
agreed to maintain the headquarters of the merged corporation in
New York, asserting that this will enhance New York's image as
the "telecommunications capital of the world" and become "a
feeder industry" to other businesses. With regard to employment,
NYNEX and Bell Atlantic have committed to no union layoffs as a
result of the merger, and have stated that there will be a net
increase in New York-based jobs in 1997. Petitioners also
maintain that the merger will not undermine the PRP commitments
to freeze basic service rates and reduce other rates by
approximately $1.9 billion over the course of the Plan.
Various parties question the economic benefits claimed
by Petitioners. Staff, for example, questions precisely how the
operational efficiencies and cost savings claimed by Petitioners
will translate into tangible benefits for customers, and asserts
that efficiency savings, service quality improvements, and price
reductions would be expected absent the merger, as a result of
increased competitive pressure. AT&T puts forth a similar
position, citing with approval staff's conclusion that NYNEX and
Bell Atlantic have not demonstrated that efficiencies from the
merger are distinct from those that could be expected as a
response to increased competition. Since the merger results in a
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff observes that the joint proxy statement reports a netpresent value of the projected merger benefits to be between$3.85 billion and $8.33 billion; thus, staff's intrastate costsavings figure, which was not challenged or addressed byPetitioners, staff says is reasonable.
-30-
reduction in competitive pressure on New York Telephone, Staff
asserts, the benefits which Petitioners proclaim will not
translate into benefits for the State absent the implementation
of regulatory measures. Staff estimates that the operational
efficiencies and cost savings cited by Petitioners will generate
an additional $908 million in revenue attributable to New York
State, over the remaining term of the PRP. This amounts to an
average annual increase in net revenue of $182 million during the
transition years, growing, "conservatively," to over $300 million
annually during the later years of the PRP.1
Other parties are critical of the suggestion that the
location of the corporate headquarters in New York City will
provide a material economic benefit, particularly since
Petitioners failed to commit to the number of jobs the new
company will keep either at the headquarters or in the State as a
whole. Economic theory dictates that New York would actually
lose jobs, some conclude, as duplicative organizations are
eliminated and Bell Atlantic's more efficient operations survive.
Moreover, they assert, cost factors also favor the shifting of
operations toward the merged entity's southern major commercial
concentration, the South Jersey/Philadelphia area. And parties
point to their arguments with respect to competitive issues and
service quality impacts to support claims that the merger will
not provide economic benefits to New York State.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-31-
With respect to the Bell Atlantic/NYNEX Mobile example
cited by Petitioners, Southern New England Telephone argues that
the negative impact of the proposed merger is underscored by the
cellular joint venture's own poor record of performance. In
particular, Southern New England Telephone asserts that Bell
Atlantic/NYNEX Mobile exploits its hold on the cellular roaming
market by charging exorbitant access rates to its competitors
while not charging them to its affiliates, extracts huge profits
from fraud in the cellular market, and provides unacceptable
levels of service in the areas of fraud control and credit
refunds.
Impact of the Merger on Regulation
Petitioners assert that we will retain full authority
to regulate New York Telephone after the merger, and that the
various regulatory issues raised during this proceeding can and
should be handled elsewhere. Other parties, however, raise a
number of issues which, they assert, are necessarily intertwined
with the merger itself and must therefore be addressed now. Once
again, the particular arguments of the parties are set forth in
the Appendix.
On a macro scale, these parties raise an issue which
spans across all others -- will this Commission be able to
effectively regulate the new, larger entity? Given the sheer
size of the new company, they argue, any actions we take would
necessarily affect only a proportionately smaller part of the
overall conglomerate. Orders in areas as diverse as end-user
service quality, pensions, and competition, they assert, would
all be affected.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-32-
Parties also raise the issue of inappropriate affiliate
transactions, arguing that the merger may raise the likelihood
and impact of these transactions, and reinvigorate previously
resolved concerns. In the area of pensions and other post-
employment benefits ("OPEBs"), parties are concerned that past
overfunding of the New York Telephone pension plan could result
in a huge windfall to the merged entity and harm to NY
ratepayers.
Petitioners respond that many of the issues raised are
currently being addressed in other proceedings, and, where they
are not, new ones could certainly be instituted. Contrary to the
parties' assertions, Petitioners state that none of the
Commission's regulatory powers will be diminished as a result of
the merger, particularly given the continued importance of the
New York market.
With regard to the affiliate transaction issue,
Petitioners assert that the parties' concerns are unfounded. In
light of recent industry changes, they claim that less, not more,
regulation of affiliates is warranted, and point to New York
Telephone's petition for modification of the NYNEX Restructuring
Plan which was filed in August, 1996, for reasons they assert to
be unrelated to the merger. In the interim, however, both NYNEX
and Bell Atlantic have stated that they will adhere to the
current plan, as it may be amended.
Finally, Petitioners assert that the merger will have
no detrimental effect on pensions and OPEBs. The companies, they
say, will continue to comply with our standards and policies
previously set forth, and, although none are planned, any changes
would only be made in accordance with our policy statements.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-33-
The Performance Regulatory Plan and Rates
Petitioners contend that the merger should not trigger
any revisions to the Performance Regulatory Plan (PRP). New York
Telephone's obligations and actual performance, they argue, will
not be adversely affected as a result of the merger. As a
safeguard, they add, the PRP, with its inherent incentives,
together with all other regulatory measures, protects against any
negative results.
In exchange for the flexibility granted by the PRP,
Petitioners assert that New York Telephone made substantial
commitments. The merger, with its claimed efficiencies and
savings, they continue, is simply one of the ways by which NYNEX
is trying to meet these objectives. Petitioners assert that any
modifications to the Plan, such as rate reductions, without an
offsetting revision of New York Telephone's obligations, would
violate the spirit of the PRP. While acknowledging the existence
of the Reservation Clause in the plan, to which they agreed,
Petitioners argue that the merger is not such an "unforeseen
circumstance" that would be necessary to trigger the operation of
that clause.
Petitioners also assert that, aside from the PRP
itself, we should not make rate changes based on the merger. The
record in this proceeding, they argue, is inadequate to justify
any rate decreases since such a determination necessarily
involves consideration of factors not in the record here. In
addition, they say, the procedural prerequisites necessary for a
rate adjustment are also missing from this proceeding.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-34-
Other parties counter that the merger changes the
fundamental assumptions upon which the PRP was premised. The
merger, they assert, changes the financial and competitive
landscape to such a great extent that the PRP must be changed.
These parties argue that the merger is the paradigm unforeseen
circumstance, since an event of this magnitude was not even
envisioned at the time the PRP was negotiated.
Regarding the adequacy of the record, the parties point
out that it was Petitioners who repeatedly failed to provide
information during the course of the proceeding, and are
therefore barred from asserting any alleged insufficiency at its
conclusion. Despite Petitioners assertions to the contrary, they
add, a sufficient record most certainly exists. The record, they
continue, was built upon numbers and information obtained
directly from Petitioners' documents, some of which were prepared
for their Boards of Directors or filed with the Securities
Exchange Commission.
Discussion As we have concluded, the
question presented for our consideration is whether the merger of
NYNEX into Bell Atlantic is in the public interest. Petitioners
have been persuasive that the combination of these two companies
will result in a number of benefits to New York State, including
the location of the corporate headquarters in New York, up front
investment in resources allocated to improved service quality in
New York, and the potential for more vigorous competition in the
long distance markets. In addition, Petitioners believe the
merger will provide financial and operational benefits to the two
companies which have decided to merge, permitting them to operate
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-35-
more effectively in the global telecommunications market and it
is our view that, unless the public interest is adversely
affected, we should not interfere with a company's ability to
operate in the global telecommunications marketplace as it
chooses.
The opponents of the merger argue that the acquisition
is not in the public interest for a variety of reasons, most of
which focus on the potential impact of the merger on local
competition. As discussed, these arguments are grounded in
assertions that, if they had not chosen to merge, Bell Atlantic
and NYNEX would have been vigorous competitors in the local
exchange market in New York. Opponents have also asserted that
the development of robust local competition will be hindered by
the existence of a larger, richer local monopoly incumbent.
Thus, most of the arguments have centered on whether Bell
Atlantic would have entered New York, whether it would have been
a successful competitor, and whether the removal of the threat of
such entry has removed the incentive from NYNEX to provide its
ratepayers with the improved service and lower prices anticipated
when we approved its Performance Regulatory Plan.
This is an appropriate inquiry for this Commission,
and it differs from the strict anti-trust analysis which is
within the purview of the U.S. Justice Department and state
Attorneys General, because our intention is to ensure that New
York's ratepayers are not deprived, by this transaction, of the
benefits that vigorous local competition will bring.
The record in these proceedings supports the conclusion
that Bell Atlantic might have entered the local exchange market
in New York as a competitor, but that the impact of its absence
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-36-
is difficult to ascertain with certainty. Nevertheless, as a
local service provider, Bell Atlantic would have had an
understanding of the resources, commitment and difficulties of
becoming a full-fledged facilities-based competitor of NYNEX.
We have frequently stated our belief that dynamic local
exchange competition will provide benefits to ratepayers and to
the economy of this state, and therefore, as a general matter,
our preference would be for more, rather than fewer, competitors.
On balance, however, we conclude that, with the conditions we
have attached to our approval of this acquisition to ensure that
the merger provides benefits to New York's ratepayers, this
merger is in the public interest and should be approved.
As we stated in our March 21 order, the conditions we
have enunciated will assure that the benefits of greater
efficiency provided by the merger will be passed on to customers,
as Petitioners have claimed the emerging competitive market would
require them to be. However, it is difficult to predict at this
time how and when competition will emerge to provide the
incentive we anticipated. Many factors, in addition to the
merger, will likely be influential in this regard. For example,
we recently established permanent link rates and if and when
NYNEX is authorized to enter the interLATA market, these, among
other, developments may significantly alter the competitive
landscape.
In these circumstances, it is reasonable to preserve
our ability to assure competition develops timely and the
projected merger benefits are realized by consumers. We have
assured that the public interest is promoted by taking two
significant steps. The conditions we have attached to our
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-37-
approval will: first, protect customers' rights to a portion of
the merger savings; and, second, provide a vehicle for us to
offset the merger's potential diminution of competition.
These two steps will enable the Commission to monitor
the development of NYNEX's markets and if, contrary to
Petitioners' asserted expectations, substantial competition does
not appear to be developing, the Commission will, pursuant to the
authority we are reserving, be able to take corrective actions,
including reducing rates beyond the levels called for by the PRP.
Our objectives can be accomplished by requiring that certain
future costs, including exogenous costs, cost onsets related to
the opening of competitive markets, and revenue losses directly
due to access charge reductions, will be borne by shareholders,
unless NYNEX demonstrates that the company's conduct has promoted
competition, and that ratepayers have benefitted from competition
and from the merger.
The March 21 Order will be expressly incorporated as
part of this opinion, and we do not intend this discussion to
modify it in any way. However, it has become apparent that some
clarification is required.
It is necessary to clarify our intention regarding
order clause 5 of the March 21 Order. First, we reaffirm our
authority to require access charge reductions if necessary to
promote competition or improve efficiency, and second, we make
clear that recovery of revenues associated with any mandated
access charge reductions is conditioned upon our determination
that New York Telephone has met all three of the standards
contained in the March 21 Order. Further, contrary to any
suggestion in Petitioners' letters, our standard cannot
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-38-
reasonably be limited to considering these factors on a
retrospective basis only. Prospective (and individual)
evaluation, as is commonplace in our evaluation of costs and
financial information, is also available and should be
anticipated. Needless to say, however, our decision on access
charges and rate recovery must and will reflect a fair balancing
of ratepayer and shareholder interests.
With respect to the concerns about service quality, we
will consider carefully New York Telephone's progress in
improving service quality as an aspect of the revised PRP review
contemplated in order clause 6 of the March 21 Order. Consistent
with our expectation that the emergence of local exchange
competition can be expected to result in improved service as well
as lower prices, we want to make it clear now that the degree of
service quality improvement is one of the issues we expect to
review in connection with our evaluation of the benefits of
competition that customers have enjoyed.
Beyond that, as the March 21 Order makes clear, we have
revised our end user service quality targets to reflect the much
higher service quality currently achieved by Bell Atlantic and
elsewhere in the merged service territory. We regard the
opportunity permitted by the merger--through, for example,
adoption of best practices--to secure for New York Telephone's
customers service of the same high quality enjoyed by customers
in affiliated service territories as a significant benefit of the
transaction. Moreover, to assure that management is sufficiently
focused on service quality improvements, we have required the
company to set forth its detailed plans for infrastructure
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-39-
investment and acquisition and maintenance of a work force
adequate to achieve these goals.
Our other conditions have been clearly identified and
well-explained in the March 21 Order, and nothing needs to be
added about them here.
Carrier-to-carrier service quality, a concern of many
of the parties to this proceeding, will be addressed in Case
97-C-0139, and has been addressed in interconnection agreements
between NYNEX and a variety of new entrant local exchange
companies; it need not be further addressed here.
CONCLUSION
In their March 31, 1997, letter announcing their
acceptance of the terms and conditions of approval set forth in
our March 21 Order, Petitioners indicated that "our acceptance is
based on our understanding of the terms and conditions set forth
below," and proceeded then to interpret incorrectly some of the
important terms and conditions of the order. In letters dated
April 7 and April 8, respectively, AT&T and MCI pointed out that
Petitioners misinterpreted our March 21 Order in key respects,
and argued that Petitioners' March 31, 1997 letter was not an
unconditional acceptance of our terms and conditions.
In another letter, dated April 8, 1997, NYNEX, on
behalf of Petitioners, responded to AT&T, stating AT&T is "wrong"
in its assertion that "Petitioners have conditioned their
acceptance of the conditions" in our March 21 Order. Petitioners
stated that in setting forth their understanding of our
conditions they "in no way modifie[d] our unconditional
acceptance of the Commission's March 21 Order."
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-40-
We take this statement in Petitioners' April 8 letter
to constitute a full repudiation of the statement in their
March 31, 1997, letter that "our acceptance is based on our
understanding of the terms and conditions as set forth below."
This repudiation permits us to conclude that Petitioners have
unconditionally accepted our terms and conditions in a timely
manner, and permits us to avoid revoking our approval of the
merger, as the March 21 Order stated would be the result of
failure to accept our terms and conditions unconditionally.
As discussed earlier, our approval of the Bell Atlantic
acquisition of NYNEX permits us to approve the associated changes
in the ownership of Cellco, and we hereby do so.
The Commission orders:
1. The "Order Approving Proposed Merger Subject to
Conditions" in these proceedings, issued March 21, 1997 (and
referred to herein as the March 21 Order), including all of its
ordering paragraphs, is expressly incorporated as part of this
opinion.
2. Petitioners New York Telephone Company, NYNEX
Corporation and Bell Atlantic Corporation having submitted,
through letters dated March 31, 1997, and April 8, 1997,
unconditional acceptance of the terms and conditions contained in
our March 21 Order, the proposed acquisition and merger of NYNEX
Corporation into Bell Atlantic Corporation has been approved
subject to those terms and conditions and will be permitted to
proceed.
3. The associated changes described herein in the
ownership of Cellco are hereby approved.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-41-
4. Within 60 days of completion of these transactions,
Petitioners must notify the Secretary to this Commission of their
completion.
5. If these transactions are not completed within one
year of the date of this opinion and order, the approvals granted
herein may be revoked.
6. These proceedings are continued.
By the Commission,
(SIGNED) JOHN C. CRARY Secretary
STATE OF NEW YORK PUBLIC SERVICE COMMISSION
At a session of the Public Service Commission held in the City of
Albany on March 20, 1997
COMMISSIONERS PRESENT:
John F. O'Mara, ChairmanEugene W. ZeltmannThomas J. Dunleavy
CASE 96-C-0603 - Proceeding on Motion of the Commission as to theJoint Petition of New York Telephone Company,NYNEX Corporation, and Bell Atlantic Corporationfor a Declaratory Ruling that the CommissionLacks Jurisdiction to Investigate and Approve aProposed Merger between NYNEX and a Subsidiaryof Bell Atlantic or, in the Alternative, forApproval of the Merger.
CASE 96-C-0599 - Petition of the New York Citizens Utility Board,the Consumer Federation of America, the AmericanAssociation of Retired Persons, Consumers Union,Mr. Mark Green, Ms. Catherine Abate, the LongIsland Consumer Energy Project and theInternational Brotherhood of Electrical WorkersT-6 Council (collectively the "ConsumerCoalition") for an Investigation of the ProposedMerger of NYNEX Corporation and Bell AtlanticCorporation.
ORDER APPROVING PROPOSED MERGER SUBJECT TO CONDITIONS
(Issued and Effective March 21, 1997)
BY THE COMMISSION:
This proceeding was instituted to consider a joint
petition by New York Telephone Company (New York Telephone),
NYNEX Corporation (NYNEX) and Bell Atlantic Corporation (Bell
Atlantic), collectively referred to as Petitioners, for a
CASES 96-C-0603 and 96-C-0599
- 44 -
determination that the New York State Public Service Commission
lacks jurisdiction over the proposed merger of NYNEX and Bell
Atlantic or, alternatively, for approval of it, and also to
consider a petition by several parties, collectively calling
themselves the "Consumer Coalition", seeking review of the
CASES 96-C-0603 and 96-C-0599
1 That is, irrespective of whether parties to a contract aretelephone corporations, the contract cannot, without Commissionapproval, affect the manner in which a telephone corporationexercises its rights to operate its system in New York State.
- 2 -
merger. The proposed merger would be achieved through the
acquisition of NYNEX by Bell Atlantic.
The procedural history of the proceeding, discussion
and resolution of the arguments for and against the merger raised
by the numerous parties, and a fuller discussion of the actions
we are taking today will follow in a more expansive opinion which
we will issue shortly. The purpose of this order is to declare
that we have jurisdiction to approve or disapprove the merger and
to approve the merger, subject to the Petitioners' acceptance
within 10 days of the conditions enumerated in this order. If
the Petitioners fail to accept these conditions within 10 days,
our approval is revoked.
JURISDICTION
Public Service Law (PSL) §99(2) provides that no
telephone company in New York State may transfer any part of its
works or systems without the approval of the Public Service
Commission. PSL §99(2) provides that no contract or agreement
can affect a company's franchise or right to operate in any way,
without Commission approval.1 Finally, pursuant to PSL §100, no
telephone company, domestic or foreign, may acquire the stock of
a New York State telephone company without Commission approval.
The proposed merger, or acquisition, includes at least
three elements that bring it within the confines of Sections 99
and 100. First, New York Telephone currently exercises its
rights to operate telephone plant subject to the control of
CASES 96-C-0603 and 96-C-0599
- 3 -
NYNEX. After the merger, New York Telephone will exercise those
rights subject to the control of a new corporation Bell Atlantic.
The merger, therefore, requires the Commission's consent under
§99(2) because it affects the manner in which New York Telephone
will exercise its rights to operate in New York State.
CASES 96-C-0603 and 96-C-0599
1 47 U.S.C. §221(a) reflects Congress's protection of the State'sjurisdiction over telephone company acquisitions and mergers. Thus, there is no need for dormant Commerce Clause review. Further, inasmuch as sections 99 and 100 are even-handed, furthera legitimate interest of New York State (regulation of localtelephone service) and have minimal, if any, impact on interstatecommerce, they are, in any event, consistent with the dormantCommerce Clause.
- 4 -
Second, inasmuch as New York Telephone is currently
owned by NYNEX, but will be owned after the merger by Bell
Atlantic the acquisition/merger essentially transfers New York
Telephone's works or systems to another corporation. Therefore,
it cannot take effect without "the written consent of the
Commission" (PSL §99(2)).
Finally, the stock of New York Telephone is owned by
NYNEX. After the merger, New York Telephone stock will be owned
by Bell Atlantic. Thus, for this reason as well, the transaction
requires the Public Service Commission's approval.
Further, as we will discuss at greater length in our
subsequent opinion, while the Petitioners have suggested that the
Commission's jurisdiction runs afoul of the dormant Commerce
Clause, they are incorrect.1
Our jurisdiction here is grounded, additionally, in our
authority under NYNEX's Performance Regulatory Plan (PRP or
plan). Our reservation of authority under the PRP (the
reservation clause, paragraph VIII.A.5.) allows us to modify the
plan if "unforeseen circumstances in the opinion of the
Commission have such a substantial impact as to render this Plan
unreasonable. . . ." We conclude that the proposed acquisition
is such an event and we hereby exercise our discretion under the
reservation clause to require certain modifications of the PRP,
described below, without which the PRP would become unreasonable.
CASES 96-C-0603 and 96-C-0599
- 5 -
The remaining provisions of the PRP remain unchanged and in full
force.
CASES 96-C-0603 and 96-C-0599
- 6 -
CONDITIONS ON APPROVAL OF THE MERGER
There have been many allegations in this case
concerning whether consumers will receive tangible benefits from
savings achievable through this acquisition. Petitioners have
claimed that the emerging competitive marketplace will require
the company to pass on the benefits of greater efficiency to its
customers, in a variety of ways, including the potential for
rates below PRP levels and improved service quality. This was
our anticipation, as well, in approving the PRP. In order to
assure that this happens, benefits will be preserved for
consumers through several steps.
Economic Development
New York Telephone has stated, in proposing its
acquisition by Bell Atlantic, that the permanent headquarters of
the combined entity will be located in New York City, and that
such headquarters will house its corporate officers and
supporting staff. We understand this to mean that this
headquarters presence will be meaningful and long term, and that
all major functions currently located in New York State will
remain in New York State. The merged company's commitment to
establish its permanent headquarters in New York City is a
condition of our approval and existing major New York Telephone
or NYNEX functions shall not be relocated outside of New York
State.
Service Quality
The quality of service offered by New York Telephone
has been a source of consistent concern to us. Over the first
year of the PRP, New York Telephone has failed to meet service
CASES 96-C-0603 and 96-C-0599
- 7 -
quality targets, although its recent service performance has
shown improvement. We note, however, that even at PRP target
levels, service quality in New York may lag behind service
quality in other parts of the merged service territories. We are
concerned that, in pursuing the goals for which this merger is
designed, management may fail to focus sufficiently on service
improvement in New York, or to make the timely commitments of
investment in infrastructure and employee resources that are
necessary for that improvement to occur.
NYNEX has publicly announced plans to increase its New
York State infrastructure investment by $1 billion over the next
five years in its infrastructure. It has also expressed its
intention to hire an additional 750 to 1,000 new employees
through the end of 1997 to deal with New York Telephone's service
quality issues.
To assure that these expressed intentions will
adequately address our service quality concerns, New York
Telephone will be directed to submit a plan, within 30 days of
this order, which:
! sets forth details of New York Telephone's commitmentto hire between 750 and 1,000 additional employeesprior to December 31, 1997, for the purpose ofaddressing service quality problems, and to maintainthe employment level to which that brings New YorkTelephone until service levels meet the PRP targets, asthey are revised herein; and
! describes in detail New York Telephone's commitment toinvest an additional $1 billion in service-relatedinfrastructure improvements over the next five years,including a commitment to invest at least one-half ofthe amount within the next two years on capitalprojects to improve service quality throughout out NewYork State, particularly in areas where service qualityis currently most significantly below standards.
CASES 96-C-0603 and 96-C-0599
- 8 -
Further, consistent with our authority to modify the
PRP pursuant to the reservation clause, we find that the service
improvement plan contained in the PRP must be and is modified.
Because we consider it detrimental to the public interest to have
a lesser quality of service in New York than elsewhere in the
combined service area of the combined companies, the existing PRP
service quality standards target concerning the customer trouble
report rate (CTRR) will be supplemented by a company-wide average
comparison test with the rest of the merged territory, if the
latter are more protective of consumer interests. Thus, by the
sixth year of the PRP, we would expect New York Telephone's
statewide CTRR to match the current CTRR level for the rest of
the Bell Atlantic combined territories. We will require New York
Telephone to continue to meet the CTRR levels established in the
PRP throughout the term of the PRP, but would add that, starting
at the third year of the PRP, New York Telephone will be expected
to meet, in addition, statewide overlay target that will ramp up
in equal increments between now and the sixth year of the PRP.
Failure to meet either the existing PRP or new company-wide CTRR
levels will expose New York Telephone to existing PRP penalties.
A separate proceeding will be initiated to consider how to
reconcile the methodologies used to count trouble reports in the
various jurisdictions.
Finally, with respect to service quality, we would
emphasize that even the achievement of Bell Atlantic CTRR targets
should not represent the goal of the company's service
improvement efforts. Achievement of these minimum goals will
avoid penalties, but we expect New York Telephone to strive for
the best possible service it can provide to its customers, and in
so doing, to adopt the "best practices" of all the operating
entities in the merged company.
CASES 96-C-0603 and 96-C-0599
- 9 -
Other Tangible Customer Benefits
In order to ensure that anticipated savings and other
benefits of the merger are appropriately flowed through to
customers, we will adopt the following standard for the review of
requests for recovery or deferral of any costs, including
exogenous costs, cost onsets related to the opening of
competitive markets, and revenue losses directly due to access
charge reductions. Our determinations on such requests will
include consideration of whether the company's conduct has
promoted the development of competition within the state; whether
consumers have benefitted from competition, including price
reductions greater than contained in the PRP; and whether
consumers have shared in the cost savings resulting from the
merger.
CASES 96-C-0603 and 96-C-0599
1 Case 92-C-0665, Performance-Based Incentive Regulatory Plansfor New York Telephone, Opinion No. 95-13, (issued August 16,1995) pp. 33-34.
- 10 -
This standard requires that, consistent with our
authority under the reservation clause to modify the PRP, the
exogenous cost clause, paragraph IV.G., must be and is modified.
As written, the clause could be interpreted to provide that New
York Telephone is entitled, within certain limits that are not
pertinent here, to rate increases due to Commission mandates
(excluding revenue effects of market share loss). To the extent
that that clause could have made recovery of costs due to any
Commission mandates automatic upon filing and approval of
compliance tariffs, the public interest, in the context of the
merged entity, requires such cost recovery to be within the
Commission's discretion and the clause is modified to make the
recovery discretionary.
Further, with regard to the PRP, contentions have been
made in other proceedings that the Commission can only reduce
access charges if there is a universal fund and additional
reductions of carrier access charges would trigger dollar-for-
dollar recovery by New York Telephone, either through increases
in rates for other New York Telephone services or through
payments from a universal service fund. Those arguments rely, in
part, on a statement in our order approving the PRP. We stated
"further changes to the access charge levels shown in . . . the
Plan beyond those required by this order will not be required
except in connection with the adoption of some form of universal
service fund upon our finding that such a fund is necessary to
promote fair competition while preserving affordable basic
services."1 We hereby declare that neither this clause nor any
other provision of the PRP limits the conditions under which the
CASES 96-C-0603 and 96-C-0599
- 11 -
Commission may reduce access charges and, requests for recovery
of consequent revenue losses will be reviewed under the standard
we have enunciated here.
In any event, a condition of merger approval is
agreement by Petitioners that the plan allows the Commission
discretion, in the event of further access charge reductions,
whether and how to permit recovery of any resulting revenue
losses. It also must be understood that upon further reduction
of access charges, we will exercise that discretion in a fashion
that balances the interests of consumers and shareholders,
consistent with the standard enunciated in this order.
Finally, with respect to the PRP, the Commission
specifically reserves the right, in addition to its rights under
the reservation clause, to further modify or terminate the PRP at
the fifth year checkpoint, including requiring further rate
reductions, based on the same conditions that will govern cost
recovery, discussed above.
Regulatory Issues
We are convinced that the NYNEX Restructure Plan, which
governs inter-company affiliate relations, should remain in
effect after the merger, and extend to relationships among Bell
Atlantic affiliates which affect New York Telephone. New York
Telephone has stated that, although it believes that the
Restructure Plan needs to be modified and has filed a petition
for changes which it intends to supplement, the merged company
intends to abide by conditions of the Restructure Plan, unless
and until it is amended by the Commission. Petitioners have
stated that the new Bell Atlantic will submit its proposed
organizational structure with any request to amend the
Restructure Plan.
CASES 96-C-0603 and 96-C-0599
- 12 -
In order for the Commission to properly discharge its
regulatory function, it is essential that the agency have access
to all necessary records of the merged entity. Therefore, the
merged company is required to grant to the Commission timely,
unimpeded and convenient access to all books and records
necessary to the conduct of the Commission's regulatory
responsibilities.
Further, New York Telephone currently has a surplus in
its pension fund. New York Telephone will be required to provide
an accounting of its pension funds, and propose a method which
protects the funds to assure they are used in accordance with
Commission intent established in its Statement of Policy on
Pension and OPEBs and modified in Opinion 94-2.
Finally, the Commission reserves the right to
reconsider approval of the merger and the conditions attached
thereto should the United States Department of Justice or the New
York State Department of Law take any action on the merger.
CONCLUSION
On the basis of our analysis, the conditions discussed
above, and the following order clauses, we find that the proposed
acquisition and merger of NYNEX into Bell Atlantic is in the
public interest and it is approved. Within 10 days of the
issuance of this order, the Petitioners must submit a written
statement that they agree unconditionally to be bound by the
terms and conditions of this order.
The Commission Orders:
1. Subject to the conditions contained in this order
and the following order clauses, and not otherwise, the proposed
CASES 96-C-0603 and 96-C-0599
- 13 -
acquisition and merger of NYNEX Corporation into Bell Atlantic
Corporation is approved.
2. The merged company shall establish its permanent
headquarters in New York City and existing major New York
Telephone or NYNEX functions shall not be relocated outside of
New York State.
3. The customer trouble report rate (CTRR) contained
in the New York Telephone Performance Regulatory Plan (PRP) will
be supplemented by company-wide CTRR service levels, as discussed
above, if the latter are more protective of consumer interests.
Failure to meet either the existing PRP levels or new statewide
CTRR levels will expose New York Telephone to existing PRP
penalties. A separate proceeding will be instituted to consider
how to reconcile the methodologies used to count trouble reports
in the various jurisdictions.
4. Within 30 days of the issuance of this order, New
York Telephone will submit to the Commission 25 copies of a plan
for its approval which plan shall:
a. Set forth the details of New York Telephone's
commitment to hire between 750 and 1,000
additional employees prior to December 31, 1997,
for the purpose of addressing service quality
problems, and to maintain the employment level to
which that hiring brings New York Telephone until
service levels meet the PRP targets as revised
herein.
b. Describe in detail New York Telephone's commitment
to invest an additional $1 billion in service-
related infrastructure improvements over the next
five (5) years, including a commitment to invest
at least one-half of the amount within the next
CASES 96-C-0603 and 96-C-0599
- 14 -
two (2) years on capital projects to improve
service quality throughout New York State,
particularly in areas where service quality is
currently most significantly below standards.
5. In addition to the other PRP modifications
described in this order the PRP is modified so that in reviewing,
in any subsequent proceedings, any requests by New York Telephone
for recovery of costs, including exogenous costs, cost onsets
related to the opening of competitive markets, and revenue losses
directly due to access charge reductions, the Commission's
determination will consider whether the company's conduct has
promoted the development of competition within the state; whether
consumers have benefitted from competition, including price
reductions greater than PRP levels; and whether consumers have
shared in the cost savings resulting from the merger.
6. The Commission specifically reserves the right in
addition to its rights under the reservation clause, to further
modify or terminate the PRP at the fifth year checkpoint,
including further rate reductions, based on the same conditions
that will govern cost recovery discussed in this order.
7. The merged company will abide by the NYNEX
Restructure Plan, except to the extent that the Plan is modified
by the Commission.
8. New York Telephone will be required to provide an
accounting of its pension funds, as discussed in the text of this
order, that preserves pension gains for the benefit of New York
ratepayers.
9. The merged company will provide timely, unimpeded
and convenient access, as discussed in the text of this order, to
all books and records necessary to the Commission's discharge of
its regulatory responsibilities.
CASES 96-C-0603 and 96-C-0599
- 15 -
10. The Commission reserves the right to reconsider
approval of the merger and the conditions attached thereto should
the United States Department of Justice or the New York State
Department of Law take any action on the merger.
11. Petitioners must submit a written statement of
unconditional acceptance of the terms and conditions of this
order signed and acknowledged by a duly authorized officer of New
York Telephone, NYNEX and Bell Atlantic within 10 days of the
issuance of this order. If such acceptance of these conditions
is not so filed, approval of the merger is revoked. This
statement should be filed with the Secretary to the Commission
and served on all parties to this proceeding.
12. Except as modified herein, the PRP remains in full
force and effect.
13. These proceedings are continued.
By the Commission,
(SIGNED) JOHN C. CRARY Secretary
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Case 92-C-0238 - Teleport Communications Group, Inc., OpinionNo. 92-13 (issued November 18, 1992).
2 Petitioners cite Case 29086, Rochester Telephone Corporation,Opinion No. 86-22 (issued September 10, 1986).
3 AT&T's Initial Brief, pp. 10-11.
4 Tr. 1,700.
APPENDIX B - DETAIL OF PARTIES' POSITIONS
STANDARD OF REVIEW
Petitioners' Arguments
Petitioners argument about the appropriate standard of
review--"whether the proposed transaction is likely to undermine
the provision of safe and adequate service at just and reasonable
rates"--relies in part on the Teleport case,1 where a factor
cited was whether "there would be ample opportunity to review"
issues raised by the merger in other regulatory proceedings.
Moreover, Petitioners assert, no showing is needed that a merger
will yield tangible benefits.2 Petitioners claim, therefore,
that they need not prove that the merger will result in material
benefits for New York before it can be found to be in the public
interest.
Other Parties' Arguments
The parties do not appear to disagree with Petitioners'
assertion that a showing of material benefits is not needed. AT&T
asserts, nonetheless, that the burden is on Petitioners to show
the merger is in the public interest, and that "it is rather
astonishing how little effort Petitioners have given to
satisfying this obligation."
3 AT&T cites staff's observation that "Petitioners submitted
little substantive information along with their filing,"4 and
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Case 94-C-0095, Transition to Competition In the LocalExchange Market, Opinion No. 96-13 (issued May 22, 1996),p. 3.
2 Staff's Initial Brief, p. 6.
3 Attorney General's Initial Brief, pp. 28-29.
-2-
argues that Petitioners have submitted briefs and arguments
rather than facts for the Commission's consideration.
Staff and the Attorney General cite our statement that
"[t]he goal of ensuring the provision of quality
telecommunication services at reasonable rates is primary . . . .
Where feasible, competition is the most efficient way by which
the primary goal may be achieved."1
Seeing the loss of a potentially significant competitor
as the merger's pivotal detriment, staff suggests that:
[t]he determinative question is whether there areenough benefits resulting from the merger,including conditions which may be imposed by theCommission, to offset this loss of competition. The proposed merger will only be in the publicinterest if that question can be answered in theaffirmative.2
Similarly, the Attorney General argues:
In considering how best to promote the publicinterest in this area, the Commission has itselfheld competition to be the most effective means ofachieving its primary goals. . . . The AttorneyGeneral agrees. Enabling and fostering effectivecompetition in New York telecommunications marketsis the best means of protecting consumers . . . .*** [T]he Attorney General believes that theCommission should give substantial weight to theproposed merger's impact on competition indetermining whether it is in the public interest.3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Tr. 857.
2 Petitioners' Initial Brief, p. 85.
-3-
PUBLIC INTEREST ANALYSIS
Competition
1. Petitioners' Arguments
Petitioners take the position that Bell Atlantic
generally has not been interested in competing in New York
markets and, absent the merger, would not have done so. Bell
Atlantic, according to Petitioners, was dissuaded from entering
New York markets because of the presence in New York of numerous
actual and potential competitors, over which Bell Atlantic would
have no demonstrable advantage. Petitioners characterize as
awesome the list of actual and announced potential competitors in
the New York local exchange markets and cite a reference by its
panel of witnesses to an analyst's characterization of the New
York metropolitan area as "the most ferocious competitive
territory in the country."1 These circumstances, according to
Petitioners, have been perceived negatively by Bell Atlantic:
"With no facilities or existing customer base and with little
brand recognition that could be used advantageously, Bell
Atlantic's senior managers concluded that it did not make
economic sense to invest in these markets."2
Moreover, Petitioners continue, despite its common
border with New York Telephone Company, Bell Atlantic/New Jersey
would not be able to use its facilities to provide service in New
York. Pointing to its panel's testimony that "[r]etaining and
expanding the return from its existing important markets has
always been and must remain a top priority within Bell
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Tr. 859.
2 Petitioners' Initial Brief, p. 86.
3 Id.
4 Ibid., p. 90.
-4-
Atlantic,"1 Petitioners assert that even if New York City is the
most lucrative market in the nation, it is not the logical place
for Bell Atlantic to compete, were it to decide to provide
service anywhere out-of-region. In fact, Petitioners continue,
"to the extent Bell Atlantic chose to invest outside of its
footprint in the 1980s and 1990s, it decided to invest in
locations other than New York, such as Mexico and New Zealand."2
Nor does the passage of the Telecommunications Act of
1996 make it more likely that Bell Atlantic would have become a
competitor in New York, had it not agreed to merge with NYNEX,
Petitioners assert, for the Act has constrained the ability of
Regional Bell Operating Companies (RBOCs) like Bell Atlantic and
NYNEX to compete out-of-region, because they will have to devote
resources to defending their home turf and providing their
competitors with the unbundled facilities and interconnection
mandated by the Act. Although the Act creates more opportunities
for RBOCs to compete out-of-region in local exchange markets,
they say, it also creates greater in-region opportunities (e.g.,
long distance and video) and in-region risks.
Contrary to staff's suggestion, Petitioners aver, "Bell
Atlantic never had a corporate policy or 'strategy goal' to
compete out-of-region to offset contemplated in-region market
losses."3 Although Bell Atlantic looked at a number of out-of-
region options, Petitioners reiterate, it "decided in every
instance that the New York market was not attractive."4 Senior
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 93.
-5-
management at Bell Atlantic has been more cautious than internal
champions of out-of-region prospects, Petitioners continue, and
Bell Atlantic never acted upon or funded any of its out-of-region
analyses.
Bell Atlantic's perception that it could not
effectively compete in New York was reasonable, Petitioners aver,
because it does not, in fact, have any special advantages over
other potential competitors in New York Telephone's service
territory. Factors cited by other parties such as brand
awareness, experience in operational support, and nearby
facilities are not special advantages, according to Petitioners,
nor would they better position Bell Atlantic to enter New York
than numerous other current and potential competitors. To the
contrary: "Bell Atlantic has no facilities or customer
relationships in New York. Thus it lacks the two most important
building blocks for meaningful local-service entry."1
Petitioners concede that Bell Atlantic has some cross-
border brand awareness created by advertising "spill" into New
York from advertising in northern New Jersey. However, according
to Petitioners, that brand awareness cannot even match, much less
exceed, customers' recognition of the heavily advertised brands
of AT&T, MCI, Sprint and others. And the large interexchange
carriers already have customer bases in New York.
As to the availability of Bell Atlantic/New Jersey
facilities to provide local service in New York, Petitioners
argue that the existing New Jersey switching facilities are
already at capacity and could not be used by Bell Atlantic to
meaningfully compete in New York. Nor does physical proximity
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 96. For example, Petitioners note that AT&T'sformer affiliate Lucent Technologies boasts that it"invented dial-tone," that AT&T provides local wirelessservice to some six million customers nationwide, and thatAT&T "gave birth" to the Bell System and "knows better thanany company how a local telephone company is run." Ibid.,p. 97.
2 See Tr. 947.
-6-
provide any other advantages, Petitioner aver, such as with
installation and repair service.
As to the claim that Bell Atlantic has special
advantages in the systems and know-how needed in the provision of
local services, Petitioners assert that these assets are already
possessed or can be readily acquired by any other entrants into
the local-service market, all of whom assertedly have significant
experience in providing local service."1 Moreover, Petitioners
continue, Bell Atlantic possesses no special advantage with
respect to "back office" systems; and other competitors can, in
any event, obtain the use of NYNEX's or Bell Atlantic's own
billing and support services on an unbundled basis under the 1996
Act.
Petitioners also assert that Bell Atlantic's removal as
a potential competitor would not in any event have a material
effect on New York's local markets, because: (1) there is no
evidence NYNEX has perceived Bell Atlantic to be a serious
potential threat and it would not have appreciably reacted to
Bell Atlantic's threat;2 and (2) Bell Atlantic's incremental
influence would not have been material due to the large number of
other active, successful competitors in New York. The Attorney
General and staff, Petitioners continue, ignore "today's fiercely
competitive landscape in New York and merely assume that Bell
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 31.
2 Id.
3 Ibid., p. 32 (original emphasis).
-7-
Atlantic's entry would be competitively significant."1 Noting
the Attorney General's acknowledgment that this Commission "has
been a nationally recognized leader in opening local telephone
markets," Petitioners argue that our "leadership role means . . .
that the local market in New York already is among the most
competitive in the country . . . ."2
Petitioners assert that staff further ignores AT&T's
and MCI's announced competitive intentions, and the presence of
51 certificated competitive local exchange providers in New York
operating 27 switches (with 11 Class 5 switches in New York
City). Thus, Petitioners assert, the Attorney General and staff
have failed to assess whether the absence of Bell Atlantic's
entry in New York would substantially lessen the competitive
discipline imposed on NYNEX. "Only if the answer to that
question 'yes'," Petitioners continue, "can it be argued that the
public interest is somehow impaired by the merger."3
2. Other Parties' Arguments
The parties also variously argue that Bell Atlantic's
current non-presence in New York is beside the point, as is the
Petitioners' statement that Bell Atlantic has no actual "plans"
to enter New York markets. Staff and CPI both observe that
RBOCs, under the divestiture restrictions of the MFJ, were
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Initial Brief, p. 9.
2 In response to Chairman O'Mara's questions concerning plansat the en banc hearing, TW Comm observes, Petitioners'witness Whelan stated that "plan" means "the dedication ofresources, a decision to move forward with . . . a specifictargeted goal," as opposed to "studies or analysis ofvarious options . . . that the corporation maybe looked at."Tr. 1,027. See, also, MCI' Initial Brief, p. 33.
3 Tr. 1,712. See, also, Tr. 1,733-1,734.
-8-
prohibited from competing in out-of-region long distance until
passage of the 1996 Act.4 TW Comm argues that Petitioners use a
strained definition of the word "plan."2
Parties other than Petitioners also generally agree
that the merger is a direct reaction by Bell Atlantic and NYNEX
to their perceived mutual competitive threat, and an attempt to
avoid that threat. As the staff panel testified:
It is likely that NYNEX and Bell Atlantic havemore to gain by not competing and merging than anyother potential RBOC paring. From a quick glanceat a map showing RBOC service territories, itappears that no other pair of RBOCs have so muchof their population base in such close proximityto an adjacent RBOC's border.3
These parties point to various Bell Atlantic documents
to demonstrate that Bell Atlantic had intentions to compete in
New York. Bell Atlantic's plans to enter New York markets are
not surprising, they argue, in view of significant advantages it
would have in New York relative to other potential competitors.
CPI states: "Owing to its geographic proximity to the NYNEX
region and its experience in providing local exchange service,
Bell Atlantic is an obvious candidate to be one of the
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 CPI's Initial Brief, p. 6.
2 See, for example, Tr. 1,359 and Tr. 1,723.
3 While these switches are now asserted to be at capacity,staff contends that generally accepted engineeringprinciples would compel the installation of new switcheswith spare capacity. (Staff's Initial Brief, p. 14.)
-9-
first and strongest competitors to NYNEX, especially in New
York."1 Other parties' witnesses expressed similar views.2
With regard to brand awareness, staff asserts Bell
Atlantic's marketing studies showed its brand recognition to be
higher in New York where, staff observes, Bell Atlantic already
spends approximately 25% of its region-wide advertising budget.
Moreover, staff and other parties opine the Bell Atlantic/NYNEX
Mobile joint venture, with its advertising and store locations,
adds further awareness of the Bell Atlantic name across the
State.
Bell Atlantic's proximity not only provides broad
awareness, the opposing parties (such as AT&T and MCI) contend,
but with a service area contiguous to Manhattan, Staten Island,
the Bronx and the rest of New York City and, as well, bordering
also on Westchester, Rockland, Orange, and Sullivan counties, and
then stretching out along the southern border of New York State,
Bell Atlantic could install switching capacity in northern New
Jersey to serve New York City.3
AT&T also challenges Petitioners' claim that Bell
Atlantic has no available capacity in its northern New Jersey
switches, and asserts it is not credible that, in the face of
demand forecasts and the interconnection requirement of the 1996
Act, Bell Atlantic's entire local exchange switching operation in
one of its most densely populated and lucrative markets is
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Affidavit of Brian D. Oliver, sworn to January 17, 1994,¶9(c). Mr. Oliver, President of Bell Atlantic EnterprisesBusiness Development (BAEBD), testified in United States v.Western Electric Company, (Civ. No. 82-0192 (D.C. Dist. ofCol.) in connection with Bell Atlantic's then planned mergerwith TCI.
2 See, also, Tr. 1,360.
3 MCI's Initial Brief, p. 24. MCI relies here on a BellAtlantic newsletter, Competitive News $$$, June 10, 1996. See, also, Tr. 1,359.
-10-
operating on average at 102% of optimal capacity and that Bell
Atlantic has no plans to avoid the patent disaster staring it in
the face.
In addition to its switching facilities, the parties
variously argue, Bell Atlantic has other significant advantages
as an existing, incumbent local exchange competitor, among them,
a fully developed and operational back office system. In this
regard, both AT&T and the Attorney General cite an affidavit of
Brian D. Oliver.1 This assert, AT&T continues, is not fully
shared by any firm not a local service provider.2
In addition, MCI asserts, Bell Atlantic's operational
experience with local network architecture can help it overcome
entry barriers by assisting in a variety of ways. MCI claims
that Petitioners' argument that other carriers, such as cable,
wireless, and interexchange carriers already have facilities,
customers, and brand recognition in New York, making them more
likely to enter New York markets than Bell Atlantic, "fails to
recognize the fundamental network differences between LECs and
other carriers, and ignores Bell Atlantic's own statements
regarding the limitation affecting some of these carriers'
ability to provide local exchange service in the near term."3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 MCI's Initial Brief, p. 17. Affidavit of Jeffrey A. Bowden,July 2, 1996, submitted to the FCC, p. 4.
2 See, for example, MCI's Initial Brief, p. 37.
3 AT&T's Initial Brief, pp. 34-35, citing Tr. 1,725.
-11-
Various parties also reject Petitioners' claim that
NYNEX was not concerned about Bell Atlantic as a potential
competitive threat. MCI cites an expectation expressed in a
NYNEX staff report that, following the TCI merger, Bell Atlantic
would enter the New York markets which "noted Bell Atlantic's
proximity to the highly competitive New York City market, and
expressed the view that Bell Atlantic might well enter that
market at some point."1
Regarding competition from sources other than Bell
Atlantic, the Attorney General also points to recent reports that
large firms, including IXCs and Cable companies, have revised
previously ambitious plans to enter New York local exchange
markets because of financial and technical hurdles. Several
parties also maintain the merger's impact on competition goes
beyond elimination of the most promising potential competitor.2
Similarly, AT&T and other parties contend that merger eliminates
the necessity for NYNEX and Bell Atlantic to purchase carrier
access from each other, and that the merger therefore extends and
increases the overall magnitude of the artificial advantage in
the toll market created by the provision of access services to
competitors at above-cost rates. And, AT&T continues, in a
competitive world of bundled service offerings, this would
quickly translate into an artificial advantage in the local
exchange market, which could inhibit entry of other firms in the
local exchange market.3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 See, for example, SNET's Initial Brief, pp. 10-11, andStaff's Initial Brief, p. 16.
2 See, for example, CPI's Initial Brief, pp. 9-10.
3 The rate change would be gradual, reducing the charge tosomewhere in the 1.5-1.75¢ per minute range by September 1,1999, a time at which the PRP now envisions access chargeswould be reduced to 2.25¢ per minute.
4 CPB would reduce basic service rates by $200 million peryear over the next five years, to reflect merger-relatedcost savings and revenue growth, while CUB proposes areduction, in residential basic rates only, of $250 millionper year over five years.
-12-
Several parties, including MCI, staff, SNET, and TW
Comm, emphasize the competitive discipline they claim even Bell
Atlantic's potential availability as a competitor would impose
upon NYNEX, absent the merger.1
Several parties also advance a general claim that the
increased size and power of the new merged entity has an anti-
competitive impact.2
The parties offer a variety of proposals to deal with
the perceived adverse impact of the merger on competition. AT&T,
MCI, and the Attorney General argue for rejection of the merger,
on the ground that no conditions can adequately offset its
harmful effects. Other parties argue for rate decreases that,
they argue, competition with Bell Atlantic would otherwise have
provided. For example, staff proposes reductions in carrier
access charges, to spur competition,3 while CPB and CUB propose
basic rate decreases.4
Several other parties, from among New York Telephone's
potential local service competitors, argue that certain
competitive safeguards are needed in response to the merger. For
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 31.
-13-
example, SNET and CPI propose compliance with the Act's §271
"competitive checklist" as a precondition to merger approval, and
Lightpath argues that we should require a separate subsidiary for
the provision of services other than basic local exchanges
service.
Beyond these measures, with respect to conditions that
would tend to compensate for a diminution of competition, the
parties focus mainly on conditions that would force improvements
in the quality of New York Telephone's services, both to end
users and other carriers. The parties' arguments respecting the
merger's impact on service quality are discussed below.
Service Quality
1. Petitioners' Arguments
Petitioners argue that the merged company will engage
in a host of new activities:
Included in the expanded array of new activitiesin which the merged corporation expects to engageare: video services, expanded Internet services(such as Internet access), application of AdvancedIntelligent Network (including single numberservice), and expanded application of broadbandservices (including ATM). All of this will makethe company more competitive and customerresponsive.1
Regarding service quality, according to Petitioners, the merger
will enhance New York Telephone's ability to meet the PRP service
improvement targets in several ways. First, the aforementioned
efficiencies and cost savings will ensure that the company
continues to have adequate resources available for service
improvement efforts. Second, the merger will enhance the
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 33.
2 Ibid., p. 34.
3 Id.
4 Petitioners' Initial Brief, p. 71.
-14-
effectiveness of "Emergency Preparedness Disaster Recovery
Operations and Systems," since "[j]oint development of future
systems . . . will enable the integration of existing systems
within a standard operating environment."1 Third, Petitioners
assert, New York Telephone's ability to provide high quality
service will be enhanced by the ability to use the "best
practices" of the merging firms, including Bell Atlantic's
leadership in preventive maintenance systems and practices.2
Fourth, "an expanded pool of managers is expected to bring new
ideas and give rise to creative and innovative approaches to New
York Telephone's service improvement efforts."3 And fifth,
Petitioners assert, New York Telephone will benefit from the
merged firms' combined research and development organizations and
shared information concerning new and existing technologies.
Petitioners also take issue with CPB's claim that New
York Telephone has been motivated to improve service mainly to
gain approval of the merger. Petitioners state that the
institution of the Network Services Group by NYNEX in December
1996 "marks the beginning of a movement by the company toward a
more focused, functionalized means of providing service, one that
will ensure that managers pay close attention to service
provisioning without concern for such other business demands as
marketing and revenue growth."4
Petitioners assert that the merged corporation will
continue to follow the same type of approach and that this "will
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Id.
2 Tr. 905.
3 Staff's Initial Brief, p. 42.
-15-
ensure that New York Telephone's recent service improvements are
not merely a flash in the pan that will dissipate after the
merger is approved."1
2. Other Parties' Arguments
Regarding the comparison of New York Telephone's
service quality with that of others, staff notes that New York
Telephone has labeled comparison of its service quality
measurements with those of other BOCs as "inherently unreliable"
because of alleged differences in measurement, reporting
practices and "service environment."2 Nonetheless, staff points
out, New York Telephone's overall CTRR is double that of the Bell
Atlantic region, and almost twice as high as that of New England
Telephone Company. Staff concludes it is extremely unlikely that
reporting differences would account for these gaps and asserts
Petitioners have not made that claim.
Staff and CPB both acknowledge the recent improvement
in service quality, reversing the trend of the first year of the
PRP. Staff is not sanguine, however, and urges measures "to
ensure that New York Telephone's service quality is raised to the
level of adjoining regions."3 CPB attributes the recent turn-
around to the Commission's indication that service quality is
related to the public interest assessment of the merger
application.
TW Comm argues that the merger will exacerbate service
quality problems because the merger "will likely consume
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 TW Comm's Initial Brief, p. 17.
2 Staff note that New York Telephone's overall CTRR of 3.8RPHL (reports/100 lines/month) is considerably higher thanBell Atlantic's 1.8 average CTRR and NET's 2.2 CTRR.
-16-
NYNEX/Bell Atlantic management's attention and avert it away from
all forms of service quality,"1 while competition from Bell
Atlantic, or the threat of such competition, would force
improvement in New York Telephone's service quality.
TCG argues that the merger threatens provisioning
service quality that CLECs receive from New York Telephone and
that the loss of Bell Atlantic as a potential facilities-based
competitor eliminates a potential source of unbundled elements
for other CLECs, thereby eliminating a competitive stimulus to
New York Telephone to improve its own service quality.
Lightpath and MCI also emphasize the potential
disruption of service quality caused by the merger and its
downsizing of personnel claiming that an incentive exists to
provide CLECs and competitive IXCs with poor service in order to
undermine the effectiveness of competition.
CPB urges conditioning merger approval on a doubling of
the current service quality incentive amounts in the PRP. Staff
makes a similar proposal, arguing that about one-third of
estimated merger savings (approximately $300 million) should be
assigned as an incentive for New York Telephone to close the gap
between its very poor CTRR levels and those of Bell Atlantic and
New England Telephone (NET), over a four-year period.2 Unlike
CPB's proposal, staff's would not alter the PRP, but would add
independent service quality requirements.
TW Comm, Lightpath, and TCG also propose measures
designed to improve carrier-to-carrier service quality. TW Comm
CASES 96-C-0603, 96-C-0599 and 96-C-0821
-17-
suggests that Petitioners should at least be required to agree,
as a condition of approval, that service quality standards are
needed in five specific areas: (1) interconnection trunks;
(2) loops and high capacity local facilities; (3) number
portability; (4) other unbundled network elements; and
(5) operational support systems.
TCG and TW Comm argue as well that the merged companies
should be required to provide reports permitting a determination
of whether New York Telephone is meeting its obligations under
the Act. These parties also ask for a variety of enforcement
mechanisms and penalties including damages for failure to meet
service standards.
Both TW Comm and Lightpath, moreover, recommend that we
require specific resource commitments for carrier-to-carrier
service quality and number portability before merger approval,
including our pre-approval of any changes in the geographic
location or assignment of employees devoted to carrier-to-carrier
services in New York.
Economic Impact
1. Petitioners' Position
Petitioners maintain that the merger is in the public
interest, among other things, because it would not undermine the
rate schedules of the PRP, especially the commitment to freeze
rates for basic services and reduce other rates by approximately
$1.9 billion over the course of the plan. Petitioners argue:
"[T]he Plan thus provides all the assurance regarding rates which
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 31.
2 Id.
3 Id.
-18-
this Commission requires to conclude that a merger is in the
public interest."1
Although Petitioners assert there is no need or
justification for requiring any rate decreases, they also assert
that:
It is undisputed that the merger will createefficiencies and economies of scope and scale thatwill enable those corporations to achieve aminimum of $600 million in annual cost savings (atthe end of the third year following the merger). . . . [T]he Commission has consistently regardedthe likely achievement of cost efficienciesthrough a proposed merger as a positive result ofsuch a transaction which in and of itselfjustifies a finding that the transaction is in thepublic interest.2
Petitioners claim these savings will enhance the potential for
improvements in service quality, as discussed earlier, and also
for additional effectiveness in research and development. The
expansion of financial resources brought about by the merger,
Petitioners continue, will enable New York Telephone to create
new and innovative products and services and bring them to market
faster. Petitioners point out that the merged corporation
expects to engage in providing video services, expanded Internet
services (such as Internet access), applications of Advanced
Intelligent Network (AIN) and expanded application of broadband
services. "All of this," Petitioners argue, "will make the
Company more competitive and customer responsive."3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 35.
2 Tr. 101-112; Ibid., p. 36.
-19-
Petitioners also contend that the proposed merger will
promote economic development in New York State, and that although
such an effect is not necessary to conclude the merger is in the
public interest, this alleged positive benefit should be taken
into account.
Petitioners state that NYNEX and Bell Atlantic have
agreed to maintain the headquarters of the newly merged
corporation in New York. As a result, Petitioners continue, New
York will be home to the second largest telecommunications
company in the country and the only global telecommunications
company to maintain its headquarters here. "This will certainly
enhance New York's image as the telecommunications capital of the
world," Petitioners state; and although "[t]he merging
corporations have yet to determine precisely how many positions
will be transferred to New York to work at the headquarters,"
Petitioners continue, "[t]he corporate headquarters will be a
working headquarters in every sense of that term."1 Among the
offices they expect to locate in New York are the office of the
Chairman, Strategic Planning, General Counsel, External Affairs,
and Chief Financial Officer. Petitioners quote Mr. Seidenberg's
assertion that the location of Bell Atlantic's headquarters in
New York would become "a feeder industry to other industries,"
that it "would be a center of gravity for the new business, and I
think you can rest assured that this is a wonderful opportunity
for the State of New York to participate in."2
NYNEX and Bell Atlantic have also committed that there
would be no union layoffs as a result of the merger. Petitioners
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 37.
2 Id.
3 Id.
4 Id.
-20-
continue to explain that approximately 3,000 positions--1,500
from each corporation--will be eliminated over a two- to three-
year period as a result of the merger, and that the corporations
have "committed to achieving these reductions through attrition,
retirements and other voluntary means wherever possible."1 Even
so, Petitioners also state that there will actually be a "net
increase in hundreds of New York-based jobs in 1997."2 According
to Petitioners, New York Telephone expects a net force increase
after the merger, "to meet its service obligations under the
[PRP]."3
Also cited as an economic benefit is New York
Telephone's "ability to offer the highest quality service at
competitive prices using the world's most advanced technology."4
Petitioners also cite the merger of Bell Atlantic and NYNEX
Mobile companies as evidence that this merger will give rise to
increased efficiencies, promote competition, and encourage
economic development. Petitioners cite Mr. Seidenberg's
testimony to the effect that Bell Atlantic/NYNEX Mobile (BANM)
was the first cellular company to introduce single roaming
charges and to reduce prices through efficiency gains.
2. Other Parties' Positions
Other parties, led by staff, CPB and AT&T, challenge
the claim that financial gains attending the merger are a public
interest benefit. For example, staff claims the proponents have
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Initial Brief, p. 21.
2 Staff observes that the joint proxy statement reports a netpresent value of the projected merger benefits to be between$3.85 billion and $8.33 billion; thus, staff's intrastatecost savings figure, which was not challenged or addressedby Petitioners, staff says is reasonable.
3 AT&T's Initial Brief, p. 13.
-21-
not explained how operational efficiencies will translate into
benefits for customers.1 Staff argues as well that efficiency
savings might be expected absent the merger, as a result of
prudent management reaction to increased competitive pressure.
Likewise, staff asserts, service quality improvements as well as
price reductions would have been forced in a more competitive
environment.
As noted earlier, staff concludes that the merger will
not be in the public interest unless the cost efficiencies are
sufficient to overcome the loss of competition, and if the
benefits flow through to consumers. Thus, staff concludes that
the merger is not in the public interest unless conditions are
attached to it which provide value to customers.
Staff's panel estimated that over the remaining term of
the PRP, the merger will generate an additional $908 million of
savings in New York. This amounts to an average annual increase
in net revenue of $182 million, an amount that begins lower but
grows "conservatively" to over $300 million annually during the
later years of the PRP.2 AT&T strikes a similar theme,3 and
cites with approval staff's conclusion that NYNEX and Bell
Atlantic have not demonstrated that efficiencies will become
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 19.
2 Id.
3 Ibid., p. 20.
4 Id.
-22-
available from the merger that are distinct from those that could
be expected as a response to more competition.
Like staff, CPB bases its recommendations on the
Petitioners' cost estimates, and characterizes its
recommendations as conservative.
AT&T, CPB, New York City, and staff also challenge the
contention that the merger will provide economic benefits for New
York; SNET also comments on Petitioners' reference to BANM. AT&T
is particularly critical of the suggestion that the location of
corporate headquarters in New York City provide a public interest
benefit.1 More fundamentally, AT&T continues, Petitioners cannot
"responsibly promise that the merger will bring jobs to New York
State."2
According to AT&T, the economics belie the rhetoric,
suggesting that the merger could be very harmful to the New York
economy, because the two firms appear to be substantially
different in terms of their current levels of efficiency. NYNEX
has the highest cost per access line of any RBOC, AT&T observes,
and if there are duplicate organizations, "the firm will likely
merge inefficient operations into efficient," possibly resulting
in "the migration of support functions south."3 Moreover, AT&T
argues there may be sound economic reasons for the new merged
corporation to shift operations toward its southern major
commercial concentration, the South Jersey/Philadelphia area.4
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 New York City's comments, p. 4.
-23-
Finally, AT&T posits, to the extent competition is
harmed by the merger, the loss of competition will be a direct
and material loss to the economy of New York State. According to
AT&T, New Yorkers have received the highest cost and lowest
quality telephone service in any major location in the United
States, and AT&T cites staff's conclusion that the deprivation of
competition caused by the merger will reduce pressure on New York
Telephone to improve service quality, satisfy customers, and
speed the development of technological innovations.
CPB argues that the prestige and other possible
benefits from the headquarters may be outweighed by the reduction
in the overall number of employees in New York. CPB notes that
there have been no commitments by NYNEX or Bell Atlantic
regarding the staffing of the New York headquarters location, or
regarding the number of personnel who would work in New York
State. CPB expresses concern that a significant reduction in
NYNEX's New York work force could negatively impact New York's
economy and service quality.
New York City sounds similar themes.1 If NYNEX is
creating a bottleneck in the creation of necessary infrastructure
for new media and technology firms, New York City continues, it
could have a significantly negative effect on the City's economic
growth. New York City opines that transition problems, post-
merger pressures to downsize, and a potential reduction in the
importance of New York City in the geographically more diverse
post-merger company, could all have negative effects on the
provision of new services in New York.
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 5 and Staff's Initial Brief, p. 35.
2 In response to SNET, Petitioners argue that SNET'sallegations concerning roaming and fraud problems havenothing to do with this merger and should not have beenraised in this proceeding. Moreover, Petitioners continue,SNET allegations are completely baseless as to the claimthat BANM charges discriminatory rates; Petitioners respondthat BANM's intracorporate roaming rates are competitive. Moreover, Petitioners say, BANM has not discriminatedagainst SNET in its roaming arrangements, which areprivately negotiated, and which have resulted in significantrate decreases after Bell Atlantic and NYNEX merged theirmobile companies. Finally, Petitioners assert, BANM is anindustry leader in pressing for rapid deployment of anti-
-24-
New York City and staff also urge the Commission to
review carefully the potential effect of the proposed merger on
City employment.1
With respect to the BANM example, SNET argues that the
negative impact of the proposed merger on the development of
competition is underscored by the record of performance of the
Bell Atlantic/NYNEX cellular joint venture. When its customers
roam into the New York City area, SNET explains, SNET Mobility is
forced to take service from its principal competitor, BANM,
because it is the only "Band B" carrier in New York, and because
SNET Mobility's customers are limited to Band B frequencies when
they roam into BANM's service areas. SNET has three complaints
about BANM: First, it says, BANM exploits its hold on the
cellular roaming market by charging exorbitant access rates to
its competitors which are not charged to affiliates Second, SNET
maintains that BANM extracts huge profits from fraud in the
cellular market. Finally, SNET argues, SNET Mobility has
experienced unacceptable service from BANM in the areas of fraud
control and credit refunds.2
CASES 96-C-0603, 96-C-0599 and 96-C-0821
fraud technology, and has worked with SNET cooperatively tomitigate individual fraud exposure. SNET, Petitionersassert, inappropriately attempts to use this proceeding togain leverage in its private dealings with BANM on issuesconcerning their shared responsibility to control fraud.
1 CPI and Erie County do not have specific proposals, but bothargue that rate decreases are an important condition tomerger approval.
2 Although the revenue impact of staff's proposal, either on anominal or present value basis, is not computed, staffindicates its intention is to produce approximatelyone-third of the merger net savings ($908 million), orroughly $300 million.
3 CUB's Reply Brief, p. 3.
-25-
Based on the merger's claimed competitive and economic
impacts, several parties argue for rate reductions as a condition
of merger approval.1
Staff proposes a reduction in carrier access charges,
which would be required to be flowed through by interexchange
carriers to reduce end-users' interexchange usage rates.2 CPB
and CUB support reductions in basic rates. CPB recommends a
decrease in basic rates of $200 million while CUB recommends an
average rate cut of $250 million over the next five years, and
CUB's witness Cooper argues that the reduction should be
allocated to residential ratepayers.3
Impact on Regulation
1. Parties' Claims
A number of parties have alleged that the merger will
have negative impacts on our ability to effectively regulate New
York Telephone Company. CPI's witness, Ronald J. Binz, addressed
the issue in general terms:
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Tr. 1,321. AT&T advanced a similar assertion, Tr. 1,372.
2 See, also, Staff's Initial Brief, p. 31.
3 Tr. 1,691.
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A second set of costs relates to the Commission'sability to continue to effectively regulateutility operations in the state. If the merger isapproved, ownership of NYNEX will reside with amuch larger holding company . . . the Commissionshould also recognize that decisions of the NewYork Public Service Commission will affect arelatively much smaller share of Bell Atlantic'sbusiness post-merger than of NYNEX's businesstoday--all things being equal, the merger willlessen the PSC's ability to command the attentionof the post-merger company.1
AT&T also asserts there is a real issue of the efficacy
of our continued exercise of authority. Governance problems,
AT&T continues, are likely to impact both competition and local
service quality. A particular concern for AT&T are issues of
cross subsidization involving affiliate transactions.
Staff and CPB also argue generally that the merger will
aggravate the difficulty associated with regulating affiliate
transactions. CPB contends that the merger, as proposed, would
increase the likelihood of inappropriate transactions between New
York Telephone and its affiliates, thereby resulting in
subsidization of New York Telephone's competitive affiliates.2
According to staff, the Liberty Consulting Group, in its
investigation of affiliate transactions in two Bell Atlantic
States, "stated that it encountered an unprecedented amount of
opposition to its review of information regarding Bell Atlantic's
unregulated affiliates . . . ."3 Moreover, staff continues,
Petitioners are planning to combine their respective procurement
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 CPB's Initial Brief, p. 27.
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organizations, and the location of the procurement entity in the
merged organization resurrects the issue of protecting ratepayers
from irregularities and excess profits earned by the procurement
organization, concerns largely eliminated within NYNEX by moving
the Material Enterprises Company (MECO) from an unregulated
profit center to a regulated, telco-owned cost center.
In this regard, CPB's witness testified that NYNEX has
a strong incentive to "shift revenue and profits to competitive
operations and costs to less competitive business segments such
as [New York Telephone]."1 This incentive continues even under
the price cap regime in the PRP, CPB continues, because we may
consider New York Telephone's earnings in informal evaluations of
the PRP, or in determining New York Telephone's entitlement to
future revenues or its liability for future costs.
Likewise, CPB continues, the PRP does not prevent
consumers from being harmed from cross-subsidization. Because
earnings from monopoly services can be used to finance Bell
Atlantic's competitive activities, CPB asserts, New York
Telephone would be less likely to reduce rates and more likely to
implement the full extent of rate increases permitted under the
PRP than without such subsidization.
Finally, CPB asserts, New York Telephone will have an
incentive to favor Bell Atlantic's affiliates over rivals, which
could have anti-competitive effects and impede the development of
fair and effective competition. The control over affiliate
transactions established under the "Planned Comprehensive
Restructuring of NYNEX Corporation and its Affiliates" (the
Restructuring Plan) agreed upon by New York Telephone and NYNEX
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Staff's Initial Brief, p. 33.
2 Ibid., p. 34.
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and approved in 1992, staff and CPB fear, will be lost after the
merger, because Bell Atlantic might withdraw commitments made by
NYNEX under the Restructuring Plan.
Staff also raises concerns about the post-merger
treatment of pensions and Other Post-Employment Benefits (OPEBs),
consumer operations, and outreach and education. With respect to
pensions and OPEBs, staff states that past overfunding of the New
York Telephone pension plan has resulted in approximately
$1 billion in unrecognized gain. Petitioners have told staff
that there are no current plans to merge or change the NYNEX and
Bell Atlantic pension plans, but staff maintains that steps must
now be taken to protect New York ratepayers in the event of an
eventual merger of NYNEX and Bell Atlantic pension plans and
related funds.1
The merged corporation may also have a reduced interest
in satisfying customer complaints, staff continues, and in
reaching out to customers with special needs.2
2. Petitioners' Responses
Petitioners respond to these various arguments. First,
they oppose the suggestion that Bell Atlantic be required to
adhere to the Restructuring Plan as it is currently written.
They point to New York Telephone's petition with the Commission
of August 29, 1996 seeking modifications of the Restructuring
Plan for reasons unrelated to the merger. Those proposals, they
continue, were advanced in view of the many changes occurring in
the industry, particularly the passage of the 1996 Act and the
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Initial Brief, p. 104.
2 Petitioners' Initial Brief, p. 105.
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adoption of the PRP. The proposed modifications are important,
Petitioners continue, for it to engage in joint marketing of
services and the use of a single sales force "that will
dramatically affect [its] ability to compete and that would
otherwise be prohibited under the Restructuring Plan."1 Although
Petitioners did not request that petition be addressed in these
proceedings, they assert there is a need to limit, not expand,
the application of the Restructuring Plan to the newly merged
corporation.
Noting an inconsistency in their testimony as to
whether Bell Atlantic affiliates would be voluntarily included
under the Plan, Petitioners explain:
NYNEX and Bell Atlantic are now in the process ofdesigning a corporate structure for the new BellAtlantic. Given the complexity of the effort, weanticipate that the organizational design will notbe completed until several weeks after the mergeris consummated. At that time, the new BellAtlantic will submit the proposed organizationstructure to the Commission along with a requestto approve any additional Restructuring Planamendments required to implement the newstructure. For the interim period [the periodfrom the effective date of the merger until thedate of implementation of the new corporatestructure together with finally approvedRestructuring Plan amendments] NYNEX and BellAtlantic will operate in a manner consistent withthe Restructuring Plan, as outlined below and asmay be amended.2
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Petitioners' Reply Brief, pp. 86-87.
2 Petitioners' Initial Brief, p. 109.
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With respect to pensions, Petitioners assert that the
merger presents no potential detrimental impact. The company
cites its interrogatory response to staff:
New York Telephone will continue to exist afterthe merger and will continue to comply in allrespects with the Public Service Commission's"Statement of Policy and Order Concerning theAccounting and Ratemaking Treatment for Pensionsand Post-Retirement Benefits Other Than Pensions"adopted in Case 91-M-0890 . . . and with theaccounting plan adopted in Case 92-C-0665.
The merger itself will have no effect on New YorkTelephone's or NYNEX's pension funds. At thistime, the merging company has no plans to changethe pension plans as a result of the merger. However, should the merging company seek to changethe pension plans at any time after the merger iscompleted, those changes will only be made inaccordance with the Policy Statement.1
Nor will the merger have any effect on New York
Telephone's outreach and education efforts, Petitioners state.
"NYNEX does not now require New York Telephone to follow a
'homogenized' outreach and education program that is used across
the entire NYNEX territory," Petitioners continue, "and there
will be no such requirement after the merger."2 Moreover
Petitioners assert New York Telephone will continue to maintain
its Consumer Advisory panels that are in place throughout New
York, will continue to place customer messages in bills, and will
publish its Customer Guide, use 800 numbers for information
regarding company products and services, send newsletters to
special needs customers, conduct targeted advertising, and
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Id, p. 109.
2 Ibid., pp. 110-111.
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conduct face-to-face field outreach. "In short," Petitioners
conclude, "the merger is not expected to affect the company's
outreach and education program in any way."1
Likewise, Petitioners assert that the merger will not
interfere with customer complaint handling procedures.
Petitioners argue that staff is mistaken about its perceived
"persistent problem of backlogged complaints" and that "there are
far fewer open customer complaints than staff believes exist, and
the number of such complaints presents no reason to believe the
company is not handling customer complaints in an efficient and
effective way."2 Regardless, Petitioners argue, the issue of
complaint handling procedures is best left for resolution
elsewhere, and New York Telephone is committed to ensuring that
the transition to a merged company does not interfere with those
procedures and does not give rise to increases in customer
complaints.
In short, Petitioners claim the merger does not suggest
the need for any new regulatory measures.
The Performance Regulatory Plan and Rates
Interspersed among the various topics already reviewed
are references by the parties to the Performance Regulation Plan
(PRP), the seven-year incentive regulation program for New York
telephone that commenced in 1995. Petitioners argue the PRP is
not subject to revision in response to the merger. According to
Petitioners, New York Telephone's performance will not be
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Ibid., p. 43.
2 Ibid., p. 44.
3 Id.
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adversely affected in any way that is not adequately dealt with
by the PRP and its incentive, or other regulatory measures we may
take not covered by the PRP. They argue as well that reducing
rates as a response to the merger would violate both the spirit
and the letter of the PRP. New York Telephone made a number of
substantial financial and service improvement commitments in the
PRP, they say, and it assumed all of the risks associated with
meeting those commitments. Moreover, Petitioners continue:
While the rate scheme established under the Planassumed a certain level of efficiencies, it was byno means clear that the Company would be able toachieve those efficiencies and the Plan did notspecify any particular means by which the Companywould (or must) attempt to do so. In return, theCompany earned the needed flexibility to compete,grow and change in the increasingly competitivetelecommunications marketplace, and to do sowithout the constraints of traditional rate ofreturn regulation.1
According to Petitioners, the proposed merger is simply one means
by which NYNEX is "working to achieve the efficiencies and cost
savings required under the Plan."2 And, Petitioners add:
"stripping away merger-related cost savings and efficiencies
while maintaining all of the other financial obligations included
in the Plan would hobble the Company and do violence to the very
purpose for which the Plan was adopted."3
Petitioners acknowledge the Plan has a reservation
clause which provides:
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 PRP §VIII (A)(5).
2 Petitioners' Initial Brief, p. 45.
3 See, for example, CPB's Reply Brief, p. 9.
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The Commission reserves the authority to modifythis Plan if unforeseen circumstances in theopinion of the Commission have such a substantialimpact as to render this Plan unreasonable,unnecessary, or insufficient for the continuedprovision of safe and adequate service by New YorkTelephone at just and reasonable rates orotherwise contrary to the Public Service Law.1
According to Petitioners, however, there is a high threshold for
an "unforeseen circumstance" that would trigger operation of this
clause, and the merger does not rise to that level. It would not
be enough, Petitioners assert, to change the Plan on the
"possibility that some event--in this case, the merger--might
cause increased profits."2
Other parties, however, variously reject these
arguments. They contend that the merger has changed the
fundamental premises regarding New York Telephone's financial
expectations and the development of competition on which it was
based, noting that this merger was not a recognized possibility
at the time the PRP terms were negotiated. Other parties have
advanced proposals that would, in effect, modify the PRP, arguing
that the Reservation Clause contemplates our revision of the PRP
for material changes in conditions brought about by unforeseen
circumstances.3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 In a related argument, Petitioners claim revising the PRP inresponse to the merger would be unconstitutional, violatingan asserted "unconstitutional conditions" doctrine, becauseof Petitioners' asserted constitutional right to merge,without State interference under the Interstate CommerceClause arguments addressed earlier.
2 Cases 29086, Rochester Telephone Corporation, OpinionNo. 86-22 (issued September 10, 1986).
3 Petitioners cite Chenango & Unadilla Telephone Corp. v. PSC,45 A.D. 2d 409, 413 (3d Dep't. 1974).
4 Petitioners' Initial Brief, pp. 48-49.
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Beyond the PRP,1 Petitioners also argue that our
determination in a Rochester Telephone Corporation proceeding not
to impose a royalty as a quid pro quo for approval of an
agreement that would allow Rochester to make investments in
unregulated affiliates2 is a precedent establishing that it would
be improper to condition approval of this petition on the
provision of merger benefits to New York Telephone's customers.
Petitioners also argue that the record in this
proceeding is inadequate to justify any rate decreases. Their
argument, in effect, is that consideration of the effects of the
merger, without considering all other factors that might affect
current costs and revenues, would be improper.3 Petitioners go
on to argue this point with more specificity:
Whether fixing rates under §97(1) or §114, theCommission must adduce sufficient evidence toallow for a complete and adequate determination ofa utility's just and reasonable rates.4
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 Bronx Gas and Electric Co. v. Maltbie, 271 N.Y. 364 (1936).
2 Petitioners' Initial Brief, p. 50.
3 Ibid., p. 53.
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Petitioners cite factors that must be considered, including "the
original cost, less accrued depreciation of the physical property
of the utility company used and useful in the public service."1
In addition to the considerations involved in a rate
case, Petitioners maintain there are procedural prerequisites
that must be met before the company can be required to decrease
rates. In short, Petitioners argue:
The record developed in this proceeding fallswoefully short of the requirements forestablishing rates under [the Public Service Law]. The record contains none of the requisite data orinformation . . . [a]nd whatever financialinformation is in the record, it is nowhere near'rate case quality' and does not begin to conformwith the rigors and demands of the Commission'sStatement Of Policy On Test Periods In Major RateProceedings.2
Rate decreases also cannot be justified, Petitioners
continue, as an offset to any harm to competition caused by the
merger. Petitioners repeat, in effect, their claim that the
proposed merger does not do violence to the premises of the PRP
and add that "there is absolutely no evidence in the record to
support the assumption that Bell Atlantic would itself have
caused New York Telephone to reduce any particular rate by any
particular amount in any particular area of its service
territory."3
CASES 96-C-0603, 96-C-0599 and 96-C-0821
1 CPB's Reply Brief, p. 16.
2 Ibid., p. 15.
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In response, CPB argues that rate decreases are
justified to ensure that ratepayers obtain the same benefits from
the merger they would obtain if New York Telephone operated in a
competitive market place. With respect to Petitioners' claim
that an inadequate record basis exists for rate reductions, CPB
responds that its proposal "is based on real and unambiguous
information reviewed by the Bell Atlantic Board of Directors and
estimates of cost savings resulting from the merger."1
Petitioners themselves acknowledge the annual cost savings, CPB
continues, and the notion that a review of New York Telephone's
financial situation is needed is belied by "the record earnings
reported publicly by NYNEX--which reflect the seventh consecutive
quarter of double-digit income growth and the second consecutive
year of record access line growth, including access line growth
that is double the rate assumed in establishing the PRP."2
Petitioners assert that any modifications to the plan, such as
rate reductions, without an offsetting revision of NYT's
obligations, would violate the spirit of the PRP. While
acknowledging the existence of the reservation clause in the
plan, to which they agreed, Petitioners argue that the merger is
not such an "unforeseen circumstance" that would be necessary to
trigger the operation of that clause.
Other parties counter that the merger changes the
fundamental assumptions upon which the PRP was premised. The
CASES 96-C-0603, 96-C-0599 and 96-C-0821
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merger, they assert, changes the financial and competitive
landscape to such an extent that the PRP must be changed.
These parties argue that the merger is the paradigm unforeseen
circumstance, since an event of this magnitude was not even
envisioned at the time the PRP was negotiated.