Before the Public Utilities Commission of the State Of

BEFORE THE PUBLIC UTILITIES COMMISSION FILED OF THE STATE OF CALIFORNIA 10/05/15 04:59 PM

In the Matter of the Joint Application of Frontier ) Communications Corporation, Frontier ) Communications of America, Inc. (U 5429 C) ) Verizon California Inc. (U 1002 C), Verizon ) Application No. 15-03-005 Long Distance, LLC (U 5732 C), and Newco ) West Holdings LLC for Approval of Transfer ) of Control Over Verizon California Inc. and ) Related Approval of Transfer of Assets and ) Certifications )

Opening Brief of Verizon

(PUBLIC VERSION)

Henry Weissmann Charles Carrathers Carolyn Hoecker Luedtke Verizon John Muller Registered In-House Counsel, Munger, Tolles & Olson LLP State Bar of California 365 South Grand Ave., 35th Floor 2535 West Hillcrest Drive Los Angeles, CA 90071 Mail Code CAM21LB Telephone: 213-683-9100 Newbury Park, CA 91320 Facsimile: 213-683-5150 Telephone: 805-375-4374 Email: [email protected] Facsimile: 805-498-5617 Email: [email protected]

Attorneys for Verizon California Inc., Verizon Long Distance, LLC and Newco West Holdings LLC

Date: October 5, 2015

1 / 57 TABLE OF CONTENTS

Page

I. INTRODUCTION ...... 1 II. DESCRIPTION OF THE TRANSACTION ...... 3 III. THE RECORD DEMONSTRATES THAT THE TRANSACTION MEETS THE CRITERIA OF SECTION 854 AND IS IN THE PUBLIC INTEREST...... 7 IV. THE COMMISSION SHOULD NOT REQUIRE VERIZON TO FUND AN ESCROW ACCOUNT FOR FRONTIER TO SPEND ON THE NETWORK...... 8 A. Verizon California’s Network Is In Good Condition ...... 8 1. Verizon California Has Invested In Its Network ...... 8 2. Verizon California’s Transport Network Is In Good Condition...... 9 3. Verizon California’s Outside Plant Is In Good Condition...... 13 4. Verizon California’s Facilities Are Maintained In Accordance With General Orders 95 and 128 ...... 16 5. Objective Data Demonstrate That Verizon California’s Network Is In Good Condition ...... 17 6. Intervenors Present No Objective Or Reliable Evidence Regarding The Condition Of The Network...... 21 B. The Proposed Escrow Account Condition Is Unrelated To The Transaction...... 23 1. An Escrow Condition Is Not Needed To Mitigate An Adverse Effect Of The Transaction ...... 24 2. The Transaction Does Not Affect The Commission’s Jurisdiction To Address Network And Service Quality Issues On An Industry- Wide Basis ...... 26 C. The Commission Should Not Change The Parties’ Agreement That Frontier Bears Financial Responsibility For The Network Post-Closing ...... 29 D. An Escrow Funding Requirement Would Be Inconsistent With The Commission’s Long-Standing Policy Of Not Regulating Investment...... 32 E. Post-Closing Investments Should Be Determined And Paid For By Frontier...... 33 F. An Escrow Condition Amounts To A Transaction Tax, Which Would Discourage Socially Beneficial Transactions And Investments ...... 34 G. The West Virginia Order Does Not Support Any Escrow Account Here ...... 35 H. An Escrow Condition On Verizon Would Be An Unlawful Penalty...... 37 I. ORA’s and TURN’s Recommendations For An Escrow Amount Are Arbitrary...... 39

2 / 57 TABLE OF CONTENTS (continued) Page

J. An Escrow Condition Would Constitute An Unlawful Taking...... 41 V. VERIZON’S GAIN-ON-SALE IS NOT SUBJECT TO SHARING ...... 41 A. Commission Precedent Holds That The Gain-on-Sale Is Not Subject To Sharing ...... 42 B. Economic And Policy Considerations Preclude A Mandated Sharing Of The Gain-On-Sale ...... 44 1. The Commission Should Not Mandate Any Sharing ...... 44 2. The Gain-on-Sale Does Not Reflect The Economic Benefits Of The Transaction Under Section 854(b)(2) ...... 45 3. The Gain-on-Sale Is An Accounting Calculation That Does Not Reflect Economic Value ...... 45 4. A Mandated Transfer Of Verizon’s Gain To Frontier Would Be Unlawful And Unnecessary ...... 46 VI. THE COMMISSION SHOULD REJECT OTHER PROPOSED CHANGES TO THE SPA ...... 48 VII. THE COMMISSION SHOULD REJECT XO’S RECOMMENDATIONS...... 50 VIII. CONCLUSION...... 50

3 / 57 TABLE OF AUTHORITIES

Page(s)

FEDERAL CASES

Brown v. Legal Found. of Wash., 538 U.S. 216 (2003)...... 41

Dolan v. City of Tigard, 512 U.S. 374 (1994)...... 41

Ramaprakash v. F.A.A., 346 F.3d 1121 (2003)...... 33

Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980)...... 41

STATE CASES

Ponderosa Tel. Co. v. Pub. Utils. Comm’n, 197 Cal. App. 4th 48 (2011) ...... 41

FCC DECISIONS

Application of GTE Southwest Incorporated and Frontier Communications, Order, Docket No. 44630 (PUC of Tex. Sept. 18, 2015)...... 4

Applications of AT&T Mobility Spectrum LLC, New Cingular Wireless PCS, LLC, Comcast Corporation, Horizon Wi-Com, LLC, NextWave Wireless, Inc., and San Diego Gas & Electric Company for Consent To Assign and Transfer Licenses, Memorandum Opinion and Order, 27 FCC Rcd. 16459 (2012)...... 25

Applications of Softbank Corp., Starburst II, Inc., Sprint Nextel Corp., and Clearwire Corp; For Consent to Transfer Control of Licenses and Authorizations, 28 FCC Rcd 9642 (2013)...... 25

General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee, for Authority to Transfer Control, Memorandum Opinion and Order, 19 FCC Rcd. 473 (2004)...... 26

In the Matter of Applications Filed by Frontier Communications Corporation and Verizon Communications Inc. for the Partial Assignment or Transfer of Control of Certain Assets in California, Florida, and Texas, WC Docket No. 15-44 (Sept. 2, 2015)...... 4, 25

iii

4 / 57 TABLE OF AUTHORITIES (continued) Page(s)

In the Matter of Improving 911 Reliability & Continuity of Commc’ns Networks, Including Broadband Technologies, 28 FCC Rcd. 17476 (2013)...... 11, 12

Order Instituting Rulemaking to Evaluate Telecommunications Corporations Service Quality Performance and Consider Modification to Service Quality Rules, R.11-12-001 (Dec. 1, 2011) ...... 26

SBC Communications Inc. and AT&T Corp. Applications for Approval of Transfer of Control, Memorandum Opinion and Order, 20 FCC Rcd 18290 (2005)...... 25

Verizon Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control, Memorandum Opinion and Order, 20 FCC Rcd 18433 (2005)...... 25

STATE STATUTES

Public Utilities Code § 854...... 1, 6, 7, 26

Public Utilities Code § 854(b)(2)...... passim

Public Utilities Code § 854(c)(2)...... 24

Public Utilities Code § 854(c)(8)...... 24

Public Utilities Code § 2107...... 37

FEDERAL RULES

Prac. and Proc. Rule 2.6...... 1

STATE RULES

Rule 18...... 16, 17

STATE REGULATIONS

GO 95...... passim

GO 128...... 17, 38

GO 133-C...... passim

5 / 57 TABLE OF AUTHORITIES (continued) Page(s)

CALIFORNIA PUBLIC UTILTIES COMMISSION DECISIONS

D.01-06-007...... 42, 43

D.03-01-087...... 37

D.04-04-065...... 40

D.05-05-014...... 43, 44

D.06-08-030...... 42

D.06-08-030...... 34

D.13-02-023...... 27

D.15-08-041...... 27, 28, 29, 38

D.87-12-067...... 37

D.97-03-067...... 25

D.98-10-026...... 32, 34

Scoping Memo, GTE-Bell Atlantic, A.98-12-005 (Feb. 16, 1999) ...... 24, 25

6 / 57 Pursuant to Rule 13.11 of the Rules of Practice and Procedure (“Rules”) of the California

Public Utilities Commission (“Commission”), Verizon California Inc. (U 1002 C) (“Verizon

California”), Verizon Long Distance, LLC (U 5732 C), and Newco West Holdings LLC

(“Newco”) (collectively, “Verizon”) respectfully submit this opening brief.

I. INTRODUCTION

In their opening brief filed today, Frontier Communications Corporation and Frontier

Communications of America, Inc. (U 5429 C) (collectively, “Frontier”) explain why the

Commission should approve this application without conditions. Frontier demonstrates that the

Transaction is in the public interest, will enhance the availability and speed of broadband services, will increase employment, and satisfies all of the criteria set forth in Public Utilities

Code section 854.

In this brief, Verizon explains why the Commission should not impose any obligations on

Verizon as a condition of approving the application.

The Commission should reject the recommendation of the Office of Ratepayer Advocates

(“ORA”) and The Utility Reform Network (“TURN”) that the Commission require Verizon to fund an escrow account for Frontier to invest in the Verizon California network. The premise of this recommendation is that Verizon California has “neglected” its network and Verizon must be forced to pay for its repair. The record establishes, however, that Verizon California’s network is in good condition, that its trouble report rate is far below the Commission’s GO 133-C standard and continues to decrease, that its customers report high levels of satisfaction with

Verizon California’s service, and that Verizon California has invested substantial amounts to expand and maintain its FiOS and copper networks.

The ORA and TURN recommendations for an escrow account are unrelated to the

Transaction, as there is no evidence that the Transaction will adversely affect the Verizon

7 / 57 California network or the quality of service it provides. Any examination of network and service quality issues should be conducted on an industry-wide basis, and the Transaction will not affect the Commission’s jurisdiction to do so post-closing.

The record further demonstrates that requiring Verizon to fund an escrow account would contradict the Commission’s long-standing regulatory policy and would be contrary to law and against the public interest. Frontier has agreed to bear financial responsibility for the Verizon

California network post-closing, and Frontier is ready, willing, and able to carry out this agreement. There is no reason for the Commission to negate the parties’ agreement by shifting those costs back to Verizon, which would amount to a forced reduction in the purchase price – a price that even ORA’s witness agrees is already very favorable to Frontier. Requiring Verizon to fund an escrow account to make up for its alleged “underinvestment” in the network would contradict decades of precedent holding that, under the New Regulatory Framework (“NRF”) and the Uniform Regulatory Framework (“URF”), the Commission does not regulate investment levels for Verizon California. Frontier, as the party that will control the network post-closing and that will benefit from investments in that network, is best positioned to decide how to invest and to use its own funds to do so. An escrow condition would be a transaction tax, which would deter socially beneficial transactions and investments. Finally, an escrow condition would be unlawful.

ORA’s alternative theory is that the Commission should require Verizon to share the

“gain-on-sale” of Verizon California by rebating up to half that gain to Frontier. Again, this would result in an unwarranted reduction in the purchase price. In a long and unbroken line of precedent, the Commission has rejected this type of recommendation, finding that the gain on the sale of an entire utility is kept by the seller; that companies subject to regulation under URF

8 / 57 should not be required to share gains on sale; and that gain-on-sale is not an economic benefit within the meaning of Public Utilities Code section 854(b)(2).

The Commission should reject all of the recommendations for conditions on Verizon. It should approve the application expeditiously and without conditions.

II. DESCRIPTION OF THE TRANSACTION

On February 5, 2015, Verizon and Frontier reached an agreement whereby Verizon will transfer to Frontier its incumbent local exchange carrier (“ILEC”) operations and related assets in California, Florida, and Texas (the “Transaction”) for $10.54 billion. The terms of the

Transaction are set forth in a Securities Purchase Agreement (“SPA”).1 Pursuant to the SPA,

Verizon has created Newco, an indirect wholly-owned subsidiary of Verizon. Prior to closing,

Verizon will transfer to Newco the ownership interests of three ILECs—Verizon California,

Verizon Florida, and GTE Southwest—and related assets. Frontier will then purchase all of the ownership interests of Newco, such that Newco will become a wholly-owned direct subsidiary of

Frontier and the three ILECs will become wholly-owned indirect subsidiaries of Frontier.2 In addition, as part of the Transaction, Verizon Long Distance will transfer to Frontier those customer accounts whose originating switched long-distance traffic is initiated from Verizon

California exchanges.3

1 See Joint Application for Approval of Transfer of Control Over Verizon California Inc. and Related Approval of Transfer of Assets and Certifications (Mar. 18, 2015) (“Application”), Ex. 1. 2 Exhibit FTR-2, John Jureller Testimony (Frontier) (May 11, 2015) (“Jureller Testimony”) at 9. 3 Id. at 10.

9 / 57 The Federal Communications Commission approved the Transaction on September 2,

2015.4 On September 18, 2015, the Public Utility Commission of Texas approved the amendment of Verizon’s certificate to operate as a competitive local exchange carrier

(“CLEC”),5 which was the only regulatory approval required from the State of Texas. No formal regulatory approval from the State of Florida is required. This Commission’s approval is the final regulatory action required in order to consummate the Transaction.

Verizon California is an indirect, wholly-owned subsidiary of Verizon Communications

Inc. After the Transaction closes, Verizon California would remain a distinct corporate entity, but it would be indirectly owned by Frontier.6 Verizon California (which will ultimately be re- named) will continue to own the assets attendant to Verizon California’s more than 2 million residential and business lines in service. Verizon California also will continue to possess licenses, franchises, and other operating authority, including Verizon California’s authority to provide local exchange service as an ILEC, its right to offer CLEC services, its eligible telecommunications carrier status, its state-issued video franchise, and its local video franchise agreements.7 Verizon California will also retain its broadband business, including its FiOS network and operations.

The Transaction does not involve the transfer of any Verizon Wireless assets. Verizon

California’s facilities and equipment provide services to wireless carriers, including Verizon

4 In the Matter of Applications Filed by Frontier Communications Corporation and Verizon Communications Inc. for the Partial Assignment or Transfer of Control of Certain Assets in California, Florida, and Texas, WC Docket No. 15-44 (Sept. 2, 2015) (“FCC Frontier-Verizon Order”). 5 Application of GTE Southwest Incorporated and Frontier Communications, Order, Docket No. 44630 (PUC of Tex. Sept. 18, 2015). 6 Jureller Testimony at 9. 7 Exhibit VZ-5, James Brophy Rebuttal Testimony (Verizon) (Aug. 24, 2015) (“Brophy Rebuttal Testimony”) at 5.

10 / 57 Wireless and numerous landline customers. These services include interconnection, special access, switched access, and commercial services that transport wireless traffic and thereby enable the exchange of traffic between Verizon California and wireless carriers. Verizon

California also owns poles and other structures to which both landline and wireless facilities are attached. These Verizon California assets are not jointly owned with Verizon Wireless. After close, Verizon California will continue to own these assets.8

The SPA is the product of arms’-length negotiations between Verizon and Frontier. Both sides made concessions on many terms, including price, during the bargaining process.9 Frontier has extensive experience in negotiating wireline acquisitions with Verizon and other carriers.10

In 2010, Frontier acquired from Verizon 4.8 million access lines in 14 states, including access lines in California. Frontier also acquired 900,000 customers in 2014 when it purchased

AT&T’s ILEC operations in Connecticut.11 Frontier is now the fourth largest ILEC in the

United States, serving more than 3.5 million residential and business customers, as well as 2.3 million broadband customers, in 28 states.12 J.P. Morgan Securities LLC was Frontier’s lead

8 Brophy Rebuttal Testimony at 3-4. 9 Id. at 15. 10 See Id.; Exhibit FTR-10, John Jureller Rebuttal Testimony (Frontier) (Aug. 24, 2015) (“Jureller Rebuttal Testimony”) at 5, 7; Exhibit FTR-8, Kathleen Quinn Abernathy Rebuttal Testimony (Frontier) (Aug. 24, 2015) (“Abernathy Rebuttal Testimony”) at 12; Exhibit FTR-9, Michael Golob Rebuttal Testimony (Frontier) (Aug. 24, 2015) (“Golob Rebuttal Testimony”) at 18; Exhibit FTR-15, Michael Golob Supplemental Reply Testimony (Frontier) (Sept. 22, 2015) (“Golob Supp. Reply Testimony”) at 2-3; see also Evid. Hr’g Tr. (Verizon/Creager) at 930:7-28 (“I’ve worked very closely with the Frontier team over the past several months on this transaction, [and] this is a team that is very sophisticated…. They understand our network from more than just a California perspective…. I would say it’s even beyond that because not only can they understand our Verizon network, but they purchased assets from other carriers…. [T]hey’re able to do a benchmark of looking at how we perform versus [how] the other folks perform.”). 11 Application at 2-3. 12 Id. at 5 n.2. Frontier’s current service territories are located in Alabama, Arizona, California, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi,

11 / 57 financial and strategic advisor for the Transaction, and Skadden, Arps, Slate, Meagher & Flom

LLP was its legal counsel.13 Frontier’s Chief Financial Officer has affirmed that “Frontier undertook detailed due diligence and extensive negotiations prior to executing the SPA” and that

“[t]he Transaction purchase price was established based on an arms-length assessment of value and taking into consideration all of the material provisions of the SPA.”14

The SPA provides that Frontier will bear the cost of any obligations the Commission imposes as a condition of approval. With specific exclusions not relevant here, the SPA states that Frontier must pay “all amounts,” excluding certain state income taxes, “required to be paid, refunded, deferred, escrowed or foregone pursuant to an Order, settlement agreement or otherwise (including in the form of any contribution or transfer of assets or assumption or retention of liabilities, measured at fair market value …) by [Verizon] or its Subsidiaries … as a condition to obtaining any consent of any Governmental Entity in the States required to consummate the transactions contemplated by this Agreement or to comply with any Order approving the transactions contemplated by this Agreement.”15 Frontier has consistently and repeatedly affirmed that the parties are bound by this provision and that the Commission would risk undoing the Transaction if it attempts to disturb it.16

Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Washington, West Virginia, and Wisconsin. 13 Brophy Rebuttal Testimony at 15. 14 Jureller Rebuttal Testimony at 5. 15 SPA, § 3.2; see also Exhibit VZ-7, Timothy McCallion Rebuttal Testimony (Verizon) (Aug. 24, 2015) (“McCallion Rebuttal Testimony”) at 8-9. 16 Jureller Rebuttal Testimony at 5; Abernathy Rebuttal Testimony at 12-13; see also Golob Rebuttal Testimony at 17-20.

12 / 57 III. THE RECORD DEMONSTRATES THAT THE TRANSACTION MEETS THE CRITERIA OF SECTION 854 AND IS IN THE PUBLIC INTEREST

As discussed more fully in Frontier’s brief, the record demonstrates that the Transaction meets all of the criteria in Section 854 and is in the public interest. Frontier has made a number of commitments that underscore the benefits of the Transaction, including the following:

x Deploying broadband to more than 177,000 households (including more than 77,000 in tribal and rural areas, using CAF II funds), and increasing broadband speeds for another 250,000 households;

x Adding 175 California employees;

x Capping rates for one year;

x Extending certain wholesale agreements and making other commitments to CLECs as set forth in its agreement with CALTEL;

x Agreeing to supplier and employee diversity efforts, as well as other community engagement measures, as set forth in its agreements with the Joint Minority Parties and with Greenlining.17

The FCC found that based on Frontier’s historical performance and fitness to operate the systems and serve the customers implicated by the Transaction, “Frontier is more likely to accelerate broadband service in the transaction market areas than Verizon would be absent the transaction, and that this potential for acceleration represents a tangible public interest benefit.”18

Frontier has demonstrated that the Transaction will produce economic benefits, will not result in any negative impacts, and meets each of the criteria under Section 854(c). Accordingly, the Commission should find that the Transaction is in the public interest and should be approved.19

17 Opening Br. of Frontier Commc’ns Corp. and Frontier Commc’ns of Am., Inc. (“Frontier Opening Br.”) at 24-26. 18 FCC Frontier-Verizon Order, ¶ 34. 19 Fronteir Opening Br. at 22-24.

13 / 57 IV. THE COMMISSION SHOULD NOT REQUIRE VERIZON TO FUND AN ESCROW ACCOUNT FOR FRONTIER TO SPEND ON THE NETWORK

ORA and TURN recommend that the Commission condition approval of the application on a requirement that Verizon fund an escrow account to be invested by Frontier in the Verizon

California network post-closing.20 ORA and TURN premise this recommendation on their erroneous assumption that the Verizon California network has not been properly maintained.21

The Commission should reject these recommendations.

A. Verizon California’s Network Is In Good Condition

1. Verizon California Has Invested In Its Network

As reflected in its safety culture, training, and response to emergencies, Verizon

California has made public safety and the reliability of its wireline network a top priority.22

The significant financial investments that Verizon has made in its California wireline network are a testament to the priority it has placed on the safety and reliability of that network.

Verizon California has made a remarkable investment in the infrastructure to support its state-of- the-art fiber-to-the-premises (“FTTP”) network and its FiOS products.23 Since 2004, Verizon

California has made capital investments of more than BEGIN CONFIDENTIAL

END CONFIDENTIAL in its FTTP network, which is now available to more than 1.4

20 Exhibit ORA-4, Lee Selwyn Testimony (ORA) (July 28, 2015) (“Selwyn Testimony”) at 135; Exhibit TURN-1, Susan Baldwin Testimony (TURN) (July 28, 2015) (“Baldwin Testimony”) at 169. 21 Selwyn Testimony at 121-127; Baldwin Testimony at 128. 22 Exhibit VZ-10, Report By Verizon California Inc. On the Condition of Its Network Pursuant to August 20, 2015 Ruling (Sept. 22, 2015) (“Network Report”) at 3-4, 20-25; Evid. Hr’g Tr. (Verizon/Creager) at 889:4-890:15. 23 Network Report at 5-6. Verizon California offers more FTTP than all other companies in California combined even though its service territory covers only about 20 percent of California households. Id. at 6. See also PPH Tr. Vol. 6, 382:13-383:9 (July 21, 2015) (comments of CWA representative Judy Rapue describing the positive attributes of FiOS product); Evid. Hr’g Tr. (Verizon/Creager) at 890:16-891:22.

14 / 57 million households in California.24 From 2010 to 2014, Verizon California made capital investments of more than BEGIN CONFIDENTIAL END CONFIDENTIAL in its network, nearly half of which (BEGIN CONFIDENTIAL END

CONFIDENTIAL) was invested in its non-FiOS network infrastructure in California, which includes copper as well as outside plant relocations, transport, Ethernet, and power.25

Even as Verizon California’s overall capital investment levels have been relatively steady since 2010, Verizon California’s per-customer capital expenditures have increased in that period, demonstrating its commitment to the California network.26

2. Verizon California’s Transport Network Is In Good Condition

The capacity, reliability, and resiliency of Verizon California’s network starts with its

Transport Network. This portion of the network consists of central offices and interoffice facilities as well as remote central offices and microwave systems. The Transport Network supports voice, data, and video between central offices and into the long-haul network.27

Verizon California’s Transport Network is in good condition and has been continually improving.28 As Mr. Poteete has explained, Verizon California has “built a robust and resilient network,” while also recognizing that improving the network “is a race without a finish line.”29

24 Network Report at 5-6; see also Exhibit VZ-3, Timothy Maguire Rebuttal Testimony (Verizon) (Aug. 25, 2015) (“Maguire Rebuttal Testimony”) at 4-5. 25 Network Report at 3; see also Maguire Rebuttal Testimony at 4-5; Evid. Hr’g Tr. (Verizon/Creager) at 891:26-892:10. 26 See Maguire Rebuttal Testimony at 6; Network Report at 4-5, 32 & Table 11; Evid. Hr’g Tr. (Verizon/Creager) at 892:11-21. 27 Network Report at 7. 28 Id. at 8; see also Evid. Hr’g Tr. (Verizon/Poteete) at 895:4-7. 29 Evid. Hr’g Tr. (Verizon/Poteete) at 896:6-10.

15 / 57 In recent years, California’s appetite for high-speed internet access has increased dramatically. For instance, peak data usage for business and residential customers has grown more than BEGIN CONFIDENTIAL END CONFIDENTIAL in the Los Angeles

LATA since December 2010, and nearly BEGIN CONFIDENTIAL END

CONFIDENTIAL over the same period in the Palm Springs LATA.30 To meet this rising customer demand, Verizon California has invested BEGIN CONFIDENTIAL

END CONFIDENTIAL since 2013 in its interoffice facilities to expand data capacity and improve the overall reliability of its Transport Network.31 As a part of these investments,

Verizon California added 284 miles of fiber in the last three years to its interoffice facilities.32

Verizon California has also spent BEGIN CONFIDENTIAL END

CONFIDENTIAL on expanding the capacity of its LATA Core Routers since 2013, which support network capacity to transport data into the long-haul network.33 These investments have kept pace with increasing customer demand for data.34

Verizon California has also taken substantial steps to maintain and upgrade the reliability of its central offices, remote central offices, digital loop carriers, and microwave towers. Since

2013, Verizon California has spent BEGIN CONFIDENTIAL END

CONFIDENTIAL on capital upgrades, preventative maintenance and repairs, and labor costs for these facilities.35 All Verizon California central offices are equipped with battery backup, and all

30 Network Report at 8; see also Evid. Hr’g Tr. (Verizon/Poteete) at 895:10-15. 31 Network Report at 10; see also Evid. Hr’g Tr. (Verizon/Poteete) at 895:16-23. 32 Network Report at 10. 33 Id. 34 Id. 35 Id. at 16.

16 / 57 exceed Verizon’s national standards for reserve time.36 Verizon California’s battery backup systems serving 911 systems, moreover, exceed FCC requirements promulgated in 2013.37 As part of Verizon’s national Network Reliability Program, Verizon also engages in robust and frequent testing of its critical network equipment. Verizon California has consistently met and exceeded the expectations of these tests, which are based on equipment manufacturer recommendations as well as Verizon and industry best practices.38 As an additional safeguard for reliability, Verizon has a national team of subject-matter experts who perform randomly selected audits of Verizon California Transport Network facilities. This program measures performance related to the Network Reliability Program, as well as other measures of quality, including safety. Verizon California has improved significantly year-over-year since the inception of these audits in 2013: from a BEGIN CONFIDENTIAL END

CONFIDENTIAL average compliance score that year, to a BEGIN CONFIDENTIAL

END CONFIDENTIAL average score in 2014, and this year a BEGIN

CONFIDENTIAL END CONFIDENTIAL average score as of August 2015.39

These results reflect the reliability of Verizon California’s Transport Network, which translates to better and more consistent service quality for its customers.

In addition, Verizon California has invested in network diversity, which provides redundancies in the network to maintain continuous service. All of Verizon California’s

Transport Network is logically diverse, such that if any one piece of transmission equipment is

36 Id. at 14. 37 See In the Matter of Improving 911 Reliability & Continuity of Commc'ns Networks, Including Broadband Technologies, 28 FCC Rcd. 17476, 17514 (2013) (“911 Reliability Order”); Network Report at 14-15. 38 Network Report at 15. 39 Id. at 17.

17 / 57 interrupted, backup equipment will handle the load and prevent interruptions in customer service.40 In addition, the vast majority of Verizon California customers—92 percent—are served by a Transport Network that is physically diverse as well.41 For these customers, there are two routes available between any two points in the Transport Network, and those two routes generally maintain at least 25 feet of physical separation from one another.42 Verizon California has also improved the diversity of its 911 circuits consistent with new FCC requirements promulgated in 2013. The FCC has directed that Verizon and other 911 service providers certify that their nationwide networks have completed 50 percent of the work necessary for meeting these new 911 diversity requirements by October 2015, and 100 percent of that work by October

2016.43 Verizon has already met its nationwide 50 percent threshold for these new diversity requirements, and Verizon California has met its internal targets for the requirements as part of the nationwide effort.44 These redundancies in Verizon California’s network further enhance its reliability, reducing service outages and customer-impacting events.

Verizon California also has implemented an extensive real-time network monitoring program to prevent customer-affecting outages from occurring and to resolve them quickly when they do occur.45 Verizon California adopted this program in 2013, adding more accountability and funding to remote monitoring systems that were already in place. The program involves

40 Id. at 11; see also Evid. Hr’g Tr. (Verizon/Poteete) at 901:1-15. 41 Id. at 11; see also Evid. Hr’g Tr. (Verizon/Poteete) at 895:28-896:2; 911 Reliability Order at 17504 (explaining logical and physical diversity); Evid. Hr’g Tr. (Verizon/Poteete) at 1119:17- 1120:8 (discussing the difference between these types of diversity). 42 Network Report at 11-12 & n.17. 43 911 Reliability Order at 17503, 17524, 17498. 44 Network Report at 12-13. 45 Id. at 18-19; see also Evid. Hr’g Tr. (Verizon/Poteete) at 896:24-27.

18 / 57 remote monitoring 24 hours a day, 365 days a year for 670 technical facilities across the state.46

Verizon California monitors, among other things, for loss of power, environmental conditions, including temperature, smoke, and fire, as well as the flow of traffic across the California network.47 Notifications alert Verizon California field supervisors and management when a problem occurs, and technicians are dispatched to address the issue.48 These monitoring efforts allow Verizon California to address potential problems before they impact customers.49

3. Verizon California’s Outside Plant Is In Good Condition

Moving from the Transport Network to outside plant (“OSP”), Verizon California has

766,849 poles, 1.8 million terminals, 64,659 miles of buried and underground plant, and 29,095 miles of aerial plant that are exposed to weather, accidents, vandalism, and normal wear and tear.50 As a result, Verizon California has invested heavily – both capital and operating expenses

– in inspection, repair, and replacement of its vast OSP to improve the reliability and quality of service to its customers. Overall, Verizon California’s OSP is in good condition.

Verizon California maintains its OSP network using a combination of proactive and reactive maintenance programs. Verizon California’s OSP proactive repair, maintenance, and inspection programs include the Proactive Preventative Maintenance (“PPM”) program, the

Infrastructure Improvement Program (“IIP”), the Employee Engagement Network Rehabilitation

Initiative, and the air pressurization inspection and maintenance efforts.51 These programs are

46 Network Report at 18; see also Evid. Hr’g Tr. (Verizon/Poteete) at 900:8-12. 47 Network Report at 18-19; see also Evid. Hr’g Tr. (Verizon/Poteete) at 900:12-27. 48 Network Report at 19; see also Evid. Hr’g Tr. (Verizon/Poteete) at 1004:5-1005:19. 49 Network Report at 19-20. 50 Id. at 20. 51 Network Report at 20-25 (describing the various proactive maintenance and inspection programs and providing data on the substantial money Verizon California has spent in operating

19 / 57 designed to identify and fix problem areas with OSP early and before they become large customer-impacting issues.52

Far from neglecting its network, Verizon California is continually identifying and investing in opportunities to improve its OSP. For instance, since 2012, the PPM and IIP programs have replaced 306,900 feet of cable and cleared more than 10,300 cable trouble issues before they impacted customers’ service.53 TURN witness Baldwin recommends that the

Commission require Verizon California to fix 105,120 feet of cable footage and to complete 71 work orders that Verizon California identified in response to a data request as repairs that were in process.54 Verizon California anticipates completing those cable repairs before the end of 2015, and the 71 work orders are 60 percent complete and are expected to be finished by early 2016.55

These cable repair projects will be completed in the ordinary course of business before the

Transaction closes.

The 80 photographs of OSP locations by the Communications Workers of America

(“CWA”) do not refute this evidence, nor do they demonstrate that Verizon California’s network overall is in poor condition. These photographs represent a tiny fraction of Verizon California’s facilities, which CWA did not randomly select. The photographs show conditions that could exist on any network, but Mr. Stinson, who visually inspected nearly all of the sites photographed by CWA, and who spends most of his time in the field, testified that the conditions

expenses to fund these programs); see also Exhibit VZ-8, Aaron Stinson Rebuttal Testimony (Verizon) (Aug. 24, 2015) (“Stinson Rebuttal Testimony”) at 3-9; Evid. Hr’g Tr. (Verizon/Stinson) at 902:17-27, 1134:2-1135:1. 52 Evid. Hr’g Tr. (Verizon/Stinson) at 993:27-994:13, 1135:8-1136:4. 53 Network Report at 21 & Table 5. 54 Baldwin Testimony at 128. 55 Stinson Rebuttal Testimony at 11-12.

20 / 57 depicted in the photographs are not typical of Verizon California’s network.56 The photographs do not demonstrate any significant problem with the network, and cannot be used to draw any conclusions about the state of Verizon California’s network as a whole.57 None of the photographs depicted an “immediate safety and/or reliability risk with high probability for significant impact,” i.e., none was a GO 95 Priority Level 1 condition.58 Also, none was known to be service-affecting for any Verizon California customer.59 Finally, some of the photographs indicated Priority Level 2 conditions, which Verizon California corrected long before the deadlines set forth in GO 95.60

Mr. Stinson’s testimony at the evidentiary hearing demonstrated why the CWA photographs do not show that Verizon California’s network is in poor condition. Intervenors chose only two of the CWA photographs to use in cross-examining Mr. Stinson, and he explained that both were cross-connects that were hit by cars – an event that is outside Verizon

California’s control. At one location, Verizon California required permits from the local government to place new conduit systems that would allow the new box to be placed further from the roadway to meet the requirements for a new road that was being built. While Verizon

California waited for the permits and ordered the required parts, Verizon California barricaded the box, put up caution tape, and covered it in temporary wrap to protect it from moisture. Once the permits and the parts came through, Verizon California replaced the box on September 14,

56 Evid. Hr’g Tr. (Verizon/Stinson) 957:27-958:14. 57 Network Report at 25-26. 58 Id. 59 Id. 60 Id.

21 / 57 2015.61 The other photograph was of a cross-connect box hit by a drunk driver on July 4, 2015, reported to Verizon California, barricaded off, and subsequently replaced by Verizon California once the new equipment was available.62 This testimony demonstrates that (a) the conditions in the photographs do not demonstrate a widespread problem in the network, and (b) Verizon

California responded promptly and responsibly to those incidents.

4. Verizon California’s Facilities Are Maintained In Accordance With General Orders 95 and 128

The Commission’s General Order (“GO”) 95 sets forth standards for aerial plant and directs utilities to correct nonconformances. Verizon California presented detailed and unrebutted testimony regarding its inspection and maintenance program to comply with GO 95.63

GO 95 categorizes nonconformances based upon three priority levels. Priority Level 1 conditions are those that create an “immediate safety and/or reliability risk with high probability for significant impact.”64 Verizon California’s records indicate that, as of September 15, 2015, it has zero pending identified Priority Level 1 conditions.65 GO 95 describes Priority Level 2 conditions as those that pose “[v]ariable (non-immediate high to low) safety and/or reliability risk,” and requires that they be corrected within either 12 or 59 months, depending on the nature of the condition.66 GO 95 describes Priority Level 3 conditions as posing “[a]cceptable safety and/or reliability risk” and permit action to be taken “as appropriate” (without any specific time

61 Evid. Hr’g Tr. (Verizon/Stinson) at 955:8-17, 956:20-22, 956:27-957:27. 62 Evid. Hr’g Tr. (Verizon/Stinson) at 955:8-17, 956:20-22, 957:27-958:14. 63 Network Report at 36-38. 64 GO 95, Rule 18. 65 Network Report at 38. 66 GO 95, Rule 18.

22 / 57 limit).67 While Verizon California’s records indicate that potential Priority Level 2 and 3 GO 95 nonconformances exist, the time to correct those conditions under GO 95 has not yet passed.68

The GO 95 audits conducted by the Commission’s Safety and Enforcement Division

(“SED”) confirm the effectiveness of Verizon California’s GO 95 compliance program and the success of its efforts to maintain its OSP. From 2010 to 2014, SED reported an average of 18.9 conditions per audit for all companies, whereas Verizon California’s average was only 8.14 conditions per audit. In fact, of all the companies with more than one SED audit between 2010 and 2014, Verizon California had the lowest average nonconformances per SED audit.69

General Order 128 (“GO 128”) establishes standards for underground facilities. Again,

Verizon California regularly inspects facilities for compliance with GO 128. Verizon California is not aware of any conditions on its network that fail to conform with GO 128.70

5. Objective Data Demonstrate That Verizon California’s Network Is In Good Condition

The objective data demonstrate that the network is in good condition and the quality of service provided by Verizon California is also good. Indeed, the data indicate that Verizon

California performed better than its peers.71

67 Id. 68 Network Report at 36-39; Evid. Hr’g Tr. (Verizon/Stinson) at 1147:6-22. 69 Network Report at iv; see also id. at 26-28, Illustration 1 & Table 10. The fact that other companies had a higher number of nonconformances during this period does not mean their networks are not well maintained. Rather, this fact illustrates that, at any point in time, every network will have noncomformances and that Verizon’s network is in good condition. 70 Network Report at 39. 71 Network Report at 5, 27-28, 33-36, Table 10, Table 12, & Illustration 1; Exhibit ORA-5, Ayat Osman Supplemental Testimony (ORA) (Sept. 11, 2015) (“Osman Supp. Testimony”) at I-8 (citing a variety of J.D. Powers surveys where Verizon performed well in the Western Region, sometimes rating first, in terms of customer satisfaction); Exhibit ORA-1, Adam Clark Testimony (ORA) (July 28, 2015) (“Clark Testimony”) at III-45 (noting that market research

23 / 57 First, the effectiveness of Verizon California’s investment, repair, maintenance, and inspection programs in both the Transport Network and OSP is demonstrated by the low incidence of trouble reports. The incidence of trouble reports is the best indicator of the health of the network.72 As TURN’s witness Baldwin admits, “[a] well-maintained network most likely leads to fewer calls for repair.”73 For more than 20 years, Verizon California’s trouble reports have been well below the GO 133-C standards:74

studies “paint Verizon in a favorable light and as a ‘market leader’ in terms of customer satisfaction”). 72 Network Report at 30; Maguire Rebuttal Testimony at 6-10; see also Golob Rebuttal Testimony at 6; Exhibit FTR-5, Billy Jack Gregg Rebuttal Testimony (Frontier) (Aug. 24, 2015) (“Gregg Rebuttal Testimony”) at 17. 73 See Exhibit TURN-4, Susan Baldwin Supplemental Testimony (TURN) (Sept. 11, 2015) (“Baldwin Supp. Testimony”) at 50. 74 Network Report at 31, Illustration 7.

24 / 57 These low trouble report rates are not hiding problems in an average. To the contrary, each and every one of Verizon California’s exchanges has trouble report rates below the GO

133-C metric.75

Verizon California’s trouble report rates have continually declined.76 Nor do the data support the hypothesis that Verizon California is neglecting its copper network. Verizon

California has a low – and decreasing – number of trouble reports for both its fiber and copper

75 Id. at 33, Illustration 8. 76 Id. at 31 & Table 1.

25 / 57 networks.77 Verizon California’s performance on the GO 133-C trouble report metric is better than AT&T’s.78

The other GO 133-C standards applicable to Verizon California (Out of Service (“OOS”) repair interval and answer time) are not relevant in this proceeding. OOS repair interval and answer time do not reflect or relate to the safety or reliability of Verizon California’s network.

Rather, they relate to the level of staffing for a call center and for scheduling appointments.79

The OOS repair interval metric under GO 133-C is not based on the absolute number of repairs.

A well-maintained network with very low trouble reports could get a poor OOS repair interval score if the company was slow scheduling service for its nominal number of repair issues, whereas a network in poor condition with scores of trouble reports and service problems could get a good OOS repair interval score if it repaired its copious problems quickly.80 The OOS repair interval score in both scenarios is irrelevant to the condition of the underlying network.

Second, Verizon California’s network availability data further demonstrates the success of its investment, repair, maintenance and inspection programs. Network availability measures the percentage of time the central office switches within the Transport Network are operable and customers are not experiencing service outages as a result of problems with those switches or the power infrastructure and batteries supporting those switches. Verizon California’s statewide

77 Id. at 32 & Table 2. 78 Id. at 33-34. 79 See Exhibit VZ-6, Jeffrey Eisenach Rebuttal Testimony (Verizon) (Aug. 24, 2015) (“Eisenach Rebuttal Testimony”) at 14-17; Exhibit VZ-3, Maguire Rebuttal Testimony at 22-24; Network Report at 34-35; Evid. Hr’g Tr. (Verizon/Maguire) at 983:24-27; Golob Rebuttal Testimony at 4:16-5:6; Gregg Rebuttal Testimony at 17. 80 Network Report at 34-35.

26 / 57 network availability ranged from BEGIN CONFIDENTIAL END

CONFIDENTIAL.81

Third, Verizon California’s customers – both those served by copper facilities as well as those served by FiOS – are satisfied. Verizon receives top scores on various industry customer satisfaction surveys, such as J.D. Powers, which ranked Verizon first in its 2013 and third in its

2014 Residential Telephone Service Provider Satisfaction Studies (West). These high levels of customer satisfaction reflect the strong performance and reliability of Verizon California’s network, among other factors.82 Further, Verizon’s own customer studies confirm that its customers are satisfied with both copper and FiOS services.83 And the data show a decline in

Verizon California customer complaints since 2010, further demonstrating that the network is in good condition.84

6. Intervenors Present No Objective Or Reliable Evidence Regarding The Condition Of The Network

In contrast to the extensive and objective evidence, summarized above, demonstrating that Verizon California’s network is in good condition, intervenors present only their subjective impressions, unsupported by data or other reliable evidence. Intervenors primarily rely on comments made at the workshops and public participation hearings.85 Those comments,

81 Network Report at 35; Maguire Rebuttal Testimony at 10-11. 82 Osman Supp. Testimony at 2-1 to 2-2; Network Report at 5, 35-36. 83 Network Report at 35-36. 84 Evid. Hr’g Tr. (Verizon/Maguire) at 907:20-908:1; Maguire Rebuttal Testimony at 12-13; Exhibit ORA-3, Ayat Osman Testimony (ORA) (July 28, 2015) (“Osman Testimony”) at 50, Table 5. 85 Baldwin Supp. Testimony at 4:16-6:3; Exhibit ORA-6, Adam Clark Supplemental Testimony (ORA) (Sept. 11, 2015) (“Clark Supp. Testimony”) at IV-1 to IV-4; Exhibit ORA-8, Lee Selwyn Supplemental Testimony (ORA) (Sept. 11, 2015) (“Selwyn Supp. Testimony”) at 87; Osman Supp. Testimony at I-9 to I-10, I-18 to I-20.

27 / 57 however, were not sworn testimony subject to cross-examination, and as such their weight should be discounted, particularly given the interests of certain commenters such as CWA.86 In addition, the comments (even if accepted as true) reflected anecdotal experiences. They cannot be relied upon to reach any conclusions about the condition of Verizon California’s network generally. Intervenors also rely on the CWA photos,87 which, as noted, cannot be relied upon to form any conclusions regarding the condition of Verizon California’s network, let alone provide a basis to compare Verizon California’s network to that of other providers.

Intervenors’ reference to certain network outages similarly fails to demonstrate that

Verizon California’s network is substandard.88 Outages can be caused by a variety of events outside Verizon California’s control and unrelated to the health of the network, such as vandalism, weather, accidents, and problems with third-party equipment.89 There is no evidence that the level of Verizon California’s outages is excessive relative to other carriers. Nor do intervenors cite any regulatory standard with respect to outages. Neither this Commission nor the FCC has set a standard for outages. As ORA’s Dr. Osman concedes, “the CPUC has not established specific standards, reporting requirements and/or enforcement strategies to address major service outages. Instead, the only requirement for telecommunication carriers . . . is to provide copies of their FCC NORS reports to the CPUC.”90 The very data Dr. Osman cites

86 Exhibit VZ-9, Timothy McCallion Supplemental Reply Testimony (Verizon) (Sept. 22, 2015) (“McCallion Supp. Reply Testimony”) at 8. 87 Evid. Hr’g Tr. (Verizon/Stinson) at 955:8-17, 956:20-22, 956:27-957:27 (questioning by intervenors’ counsel using CWA photographs); Osman Testimony at 20:5-7 & Attachment C. 88 Osman Supp. Testimony at 1-12 to 1-18 (listing various outage data without comparison to any standards or other carriers); Maguire Rebuttal Testimony at 16-19 (responding to Dr. Osman’s July testimony and explaining how the outage data relied upon by Osman is not a reliable measure of the health of the network). 89 Maguire Rebuttal Testimony at 16-17. 90 Osman Testimony at I-1.

28 / 57 demonstrates that Verizon California’s reported outage minutes declined from 2010 to 2014, which is inconsistent with intervenors’ theory that the network is deteriorating.91

Finally, intervenors’ suggestion that the existence of Voicelink indicates that the network is in poor condition is misplaced.92 Verizon California offers the Voicelink product on a very limited basis as an option to qualified customers who have experienced service problems associated with particular copper facilities.93 Verizon California has only << BEGIN

CONFIDENTIAL

END CONFIDENTIAL >>.94 The decision of this minute fraction of Verizon California’s customers to opt for the Voicelink product says nothing about the condition of Verizon

California’s network in general.

Beyond these inapposite references, intervenor witnesses freely use adjectives to describe the Verizon California network,95 but they fail to support their negative characterizations with actual data or other evidence. Only Verizon California’s Network Report, and the testimony of the Verizon witnesses at the evidentiary hearing and the written testimony of Dr. Eisenach, provide the objective and reliable evidence upon which the Commission can rely to evaluate the condition of Verizon California’s network.

B. The Proposed Escrow Account Condition Is Unrelated To The Transaction

91 Maguire Rebuttal Testimony at 18 (citing Osman’s data). 92 Baldwin Supp. Testimony at 57:6-59:2. 93 Maguire Testimony at 14-15; see also Evid. Hr’g Tr. (Verizon/Maguire) at 1069:22-1071:14 (explaining that customers with copper service problems who qualify are given the option to switch voice service to Voicelink or to have Verizon California repair the copper, but nobody is forced to switch to Voicelink). 94 Id. 95 Selwyn Supp. Testimony at 87 (describing network as “deteriorated” based on PPH comments and expert testimony, which in turn cites PPH comments); Osman Supp. Testimony at 1-10 (describing network as “deteriorated” and “neglected” with citation to PPH hearing comments).

29 / 57 1. An Escrow Condition Is Not Needed To Mitigate An Adverse Effect Of The Transaction

No party has presented evidence demonstrating that the Transaction will adversely affect the condition of Verizon California’s network or the quality of service provided over that network. As a result, there is no basis to condition approval of the Transaction on the creation of a Verizon-funded escrow account.

Mitigation measures must be tailored to the incremental effects of the Transaction.

Public Utilities Code section 854(c)(2) directs the Commission to consider whether the

Transaction will “[m]aintain or improve the quality of service” currently being provided. In other words, service quality is relevant to this proceeding only to the extent that the Transaction might have an incremental effect on the quality of service provided to consumers. Similarly, under Public Utilities Code section 854(c)(8), the Commission is to consider “mitigation measures to prevent significant adverse consequences which may result” from the Transaction.

Existing conditions do not constitute adverse “consequences” that may “result” from the

Transaction. Absent a showing that the Transaction will bring about an adverse effect beyond the status quo, a mitigation measure is not consistent with the statute.

In its review of prior transactions, the Commission has limited its review to the change to existing conditions resulting from the transaction. As explained in the scoping memo in the proceeding to consider the GTE-Bell Atlantic merger:

this proceeding will neither focus on the merits of, nor remedies for, the current situation. The issue is not the applicants’ past or present conduct, except to the extent that past or present conduct relates to the incremental effect on California of the proposed merger. Rather, the issue is the incremental effect on California operations as a result of the proposed merger…96

96 Scoping Memo, GTE-Bell Atlantic, A.98-12-005 (Feb. 16, 1999).

30 / 57 The GTE-Bell Atlantic scoping memo further stated: “[t]he Commission’s task is to make a judgment about the proposed [transaction] by assessing the overall incremental effects of the

[transaction].”97 In other words, transactions “will be examined from the viewpoint of how the

[transaction] changes current conditions.”98

The Commission’s focus on transaction-specific, incremental effects is consistent with established principles of regulatory review of transfers of control. The FCC stated in its decision approving this Transaction: “As the [FCC] has repeatedly held, we will generally not impose conditions to remedy pre-existing harms or harms that are unrelated to the transaction at issue.”99

As the FCC has concluded: “An application for a transfer of control of [FCC] licenses is not an

97 Id. 98 Id.; see also D.97-03-067, 1997 Cal. PUC LEXIS 629, at *73-74 (“Thus, whatever market power Pacific possesses in the various relevant markets discussed below, our inquiry focuses on specific evidence as to whether this merger increases or otherwise enhances that market power. Several of intervenors’ arguments regarding alleged barriers to entry, as more fully discussed below, would exist with or without the merger. . . . [W]e do not find, in the absence of specific evidence, that a merger in itself adversely affects competition simply by making a larger and strong company larger and stronger.”). In GTE-Bell Atlantic, the scoping memo encouraged parties “to present current conditions (i.e., the baseline), from which the effect of the [transaction] will be assessed, in factual, nonjudgmental terms.” Scoping Memo, GTE-Bell Atlantic, A.98-12-005 (Feb. 16, 1999). 99 In the Matter of Applications Filed by Frontier Communications Corporation and Verizon Communications Inc. for the Partial Assignment or Transfer of Control of Certain Assets in California, Florida, and Texas, WC Docket No. 15-44 (Sept. 2, 2015), ¶ 23. See also Applications of Softbank Corp., Starburst II, Inc., Sprint Nextel Corp., and Clearwire Corp. for Consent to Transfer Control of Licenses and Authorizations, 28 FCC Rcd. 9642, 9676 ¶ 85 (2013); see also, e.g., Applications of AT&T Mobility Spectrum LLC, New Cingular Wireless PCS, LLC, Comcast Corporation, Horizon Wi-Com, LLC, NextWave Wireless, Inc., and San Diego Gas & Electric Company for Consent To Assign and Transfer Licenses, Memorandum Opinion and Order, 27 FCC Rcd. 16459, 16474 ¶ 39 (2012); Verizon Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control, Memorandum Opinion and Order, 20 FCC Rcd. 18433, 18445 ¶ 19 (2005) (“Verizon/MCI Order”); SBC Communications Inc. and AT&T Corp. Applications for Approval of Transfer of Control, Memorandum Opinion and Order, 20 FCC Rcd. 18290, 18302-03 ¶ 19 (2005).

31 / 57 opportunity to correct any and all perceived imbalances in the industry. Those issues are best left to broader industry-wide proceedings.”100

As Mr. McCallion explains, “Parties should not be permitted to use the regulatory approval process as leverage to obtain an order requiring changes to existing conditions unrelated to the effects of the transaction.”101 In addition to contravening section 854 and

Commission precedent, imposing requirements to address existing conditions that are not adversely affected by the Transaction unfairly singles out a particular provider, while also creating uncertainty for the rest of the industry.102 Mr. McCallion’s testimony on these points is unrebutted.

2. The Transaction Does Not Affect The Commission’s Jurisdiction To Address Network And Service Quality Issues On An Industry-Wide Basis

Because the Transaction will not adversely affect the condition of Verizon California’s network, the Commission should not impose any network-related condition on its approval of the

Transaction. Instead, any examination of existing conditions should be undertaken on an industry-wide basis, including in the pending service quality docket, and whatever decisions the

Commission makes in those proceedings will apply to Verizon California before and after the

Transaction closes.

For example, in the Commission’s ongoing service quality docket,103 the Commission recently issued D.15-08-041, ordering a study of the network infrastructure of Verizon California

100 General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee, for Authority to Transfer Control, Memorandum Opinion and Order, 19 FCC Rcd. 473, 534 ¶ 131 (2004). 101 McCallion Rebuttal Testimony at 6. 102 Id.; see also McCallion Supp. Reply Testimony at 3. 103 Order Instituting Rulemaking to Evaluate Telecommunications Corporations Service Quality Performance and Consider Modification to Service Quality Rules, R.11-12-001 (Dec. 1, 2011).

32 / 57 and AT&T California. That study will continue post-closing, and Verizon California will retain records relevant to the study.104 Far from supporting the imposition of an escrow condition, as some parties have claimed,105 D.15-08-041 demonstrates that the Commission’s examination of the condition of Verizon California’s network will proceed regardless of the Transaction.

The Commission should not leapfrog the network study. First, imposing a network funding obligation on Verizon uniquely would distort competition. The Commission has not required any other carrier to spend specific sums on its network, and requiring Verizon to do so would unfairly tilt the competitive playing field.106 Second, until the network study is completed, the Commission has no record on which to comprehensively compare Verizon

California’s network to AT&T California’s network or other ILEC networks in California– let alone to the networks of cable companies.107 Absent such evidence, parties’ assertions that

Verizon California has not spent “enough” on its network are subjective and arbitrary.108 Third, the Commission has not decided what action, if any, to take based on the findings of the network study. For example, the Commission has not determined whether to change its service quality metrics or to require carriers to modify their networks. In making that determination, the

Commission would consider not only the existing conditions of the carriers’ networks, but also the costs and social benefits of any regulatory obligations.109 Parties who recommend that

104 McCallion Supp. Reply Testimony at 14-15. 105 Baldwin Supp. Testimony at 45. 106 McCallion Supp. Reply Testimony at 5. 107 D.15-08-041 at 11 (describing network study as a “foundational” activity that is designed to obtain “empirical data on the condition of network infrastructure”); see also id. at 5 (quoting D.13-02-023, FOF 1), and id. at 9 (“Simply put, the Commission needs empirical data about the state of the network as it is deployed today, and as it is likely to exist tomorrow.”) 108 McCallion Rebuttal Testimony at 11; McCallion Supp. Reply Testimony at 4-5. 109 McCallion Supp. Reply Testimony at 6.

33 / 57 Verizon be required to spend more on the network do not present any analysis of whether the social benefits of such spending would outweigh both the direct financial costs as well as the indirect costs to society resulting from an interventionist regulatory approach. Finally, any action the Commission would take in the service quality docket—such as imposing automatic penalties for failures to meet service quality metrics, as some parties propose—could be prospective only, not retroactive.

D.15-08-041 also confirms that the Commission cannot impose a financial obligation on

Verizon California based on alleged violations of the existing service quality standards in GO

133-C. The Commission observed that a purpose of the network study is to establish a record for the Commission to evaluate whether the GO 133-C standards “remain relevant and appropriate” in any respect.110 Pending completion of that evaluation, the Commission should not impose an obligation on Verizon (or any other party) based on GO 133-C metrics that may not be relevant to consumers (or connected with the physical condition of the network). D.15-08-041 reinforces this conclusion by noting that GO 133-C currently contains no penalty mechanism,111 which precludes as a matter of law the imposition of a financial obligation on Verizon California for its past performance relative to those standards.

D.15-08-041 does not make any findings regarding the condition of Verizon California’s network that the Commission could rely upon to order Verizon to fund an escrow account in this proceeding. Contrary to ORA’s assertion,112 the Commission did not find that the Verizon

California’s performance relative to the OOS repair interval was indicative of the physical

110 Id. at 6-7. 111 D.15-08-041 at 9-10 (“until the Commission adopts a decision requiring penalties for underperformance on existing [GO 133-C] standards, none will be in place”). 112 Osman Supp. Testimony at I-4.

34 / 57 condition of its network. On the contrary, the Commission noted that a purpose of the study is to determine whether this metric, or any other, is in fact correlated with the health of the network.113 Further, the Commission stated that the network study “is not directly related to the outcome” of this proceeding to consider the Transaction,114 which precludes reliance on D.15-

08-041 to support a finding in this proceeding regarding the existing condition of the network of any potential changes to that network.

C. The Commission Should Not Change The Parties’ Agreement That Frontier Bears Financial Responsibility For The Network Post-Closing

Frontier has repeatedly affirmed that it is willing and able to identify and respond to any issues with respect to the Verizon California network.115 There is no question that the Verizon

California network will be maintained and improved as a result of the Transaction; the only question is Verizon or Frontier will fund the network improvements.

Verizon and Frontier deliberately agreed that the financial responsibility for the network will be Frontier’s post-closing. In the SPA, Verizon and Frontier agreed that Frontier will bear the cost of all post-closing investments in the network, as well as the cost of any conditions the

Commission may impose.116 There is no basis for the Commission to invalidate this agreement.

First, the purchase price reflects the condition of the Verizon California network, as well as the allocation of financial responsibilities between the parties in the SPA.117 Specifically, the

113 D.15-08-041 at 15 (“the study is intended to be a foundational task in evaluating whether those [GO 133-C] measures are indeed correlated with the objective health of the network”). 114 Id. at 17. 115 Golob Rebuttal Testimony at 19-20; Exhibit FTR-7, Melinda White Rebuttal Testimony (Frontier) (Aug. 24, 2015) (“White Rebuttal Testimony”) at 4-5, 13-16, 44. 116 Securities Purchase Agreement, § 3.2 (Joint Application Exhibit 1); see also McCallion Rebuttal Testimony at 8-9. 117 McCallion Rebuttal Testimony at 9; Exhibit VZ-4, Declaration of Dr. Debra J. Aron (Verizon) (Aug. 24, 2015) (“Aron Declaration”) at 16-20.

35 / 57 price and terms agreed upon between sophisticated parties reflects the parties’ expectations of the costs that may be incurred in the future to continue to maintain or replace assets.118

Frontier witnesses confirm this principle as applied to the Transaction. Mr. Jureller testified that that the Transaction purchase price “was established based on an arms-length assessment of value and taking into consideration all of the material provisions of the SPA.”119

Ms. Abernathy testified that “Frontier entered into the SPA with a very good understanding of the operations it was acquiring, including the fact that Verizon’s network was newer and better positioned in some areas than in others. This understanding informed its negotiations with

Verizon and is reflected in the totality of terms included in the SPA.”120 Mr. Golob testified to the due diligence Frontier performed on the Verizon California network before signing the SPA, as well as the additional review of the network it has conducted since.121 While affirming that trouble report rates indicate that the Verizon California network is generally in good condition,122 and that Frontier’s examination of the network confirms this assessment,123 Mr.

Golob also testified that the “state of the Verizon California network and facilities was explicitly considered by Frontier in the purchase price that was negotiated for the Transaction.”124 At the evidentiary hearing, Mr. Golob testified that Verizon California’s description and estimated cost

118 Aron Declaration at 17. 119 Jureller Rebuttal Testimony at 5. 120 Abernathy Rebuttal Testimony at 13. 121 Golob Rebuttal Testimony at 2-4, 18; Golob Supp. Reply Testimony at 3-4. 122 Golob Rebuttal Testimony at 6; Golob Supp. Reply Testimony at 2. 123 Golob Rebuttal Testimony at 19; Golob Supp. Reply Testimony at 3-5. 124 Golob Rebuttal Testimony at 19.

36 / 57 to resolve the pending GO 95 non-conformances was consistent with Frontier’s expectations at the time it signed the SPA.125

The parties’ allocation of financial responsibility to Frontier for post-closing investments, and their agreement that Frontier is purchasing the assets on an “as is” basis, are commercially and economically reasonable.126 No party has presented contrary evidence.

Second, conditioning approval of the Transaction on a requirement that Verizon fund an escrow account would amount to a reduction in the purchase price.127 There is no basis for the

Commission to change the price of the Transaction, especially in light of Dr. Selwyn’s testimony that Frontier got a very good price, even under what Frontier considers to be its “worst case” scenario.128 Securities analysts likewise view the purchase price as attractive for Frontier based on the cash flow and quality of the Verizon operations.129 As Mr. McCallion testifies: “The

Commission should not override the agreement between Verizon and Frontier as to a fair price for the Transaction. The Commission’s responsibility is to ensure that the Transaction will benefit the public, not to make the Transaction more lucrative than it already is for Frontier.”130

No party has presented evidence that the purchase price is unreasonable, nor has any party justified second-guessing Frontier’s deliberate and well-informed evaluation of how much it should pay for the Verizon operations, taking into account its post-closing obligations to invest

125 Evid. Hr’g Tr. (Frontier/Golob) at 1151:1–1152:2, 1154:8–1155:7. 126 Aron Declaration at 17-18. 127 McCallion Rebuttal Testimony at 9; Aron Declaration at 17. 128 Selwyn Testimony at 32-33. 129 Jureller Testimony at 28; Exhibit FTR-17, John Jureller Supplemental Reply Testimony (Frontier) (Sep. 22, 2015) (“Jureller Supp. Reply Testimony”) at 13-14; Exhibit FTR-13, Michael Balhoff Supplemental Reply Testimony (Frontier) (Sept. 22, 2015) (“Balhoff Supp. Reply Testimony”) at 6-8. 130 McCallion Supp. Reply Testimony at 17.

37 / 57 in the network. In fact, Ms. Baldwin’s supplemental testimony seems to back away from her initial recommendation that Verizon be required to fund an escrow account, instead suggesting that the Commission might require Frontier to do so.131 While Ms. Baldwin continues to assert that “Verizon has reaped the benefits of this network for decades, and should bear the responsibility of paying to fix the problems,”132 she offers no rebuttal to the testimony of Dr.

Aron and Mr. McCallion that the price of the Transaction reflects the condition of the network and no evidence that Verizon is reaping rewards in excess of the value of the network it created.133

D. An Escrow Funding Requirement Would Be Inconsistent With The Commission’s Long-Standing Policy Of Not Regulating Investment

Requiring Verizon to fund an escrow account for Frontier to invest in the Verizon

California network would also contradict decades of precedent holding that the Commission does not regulate investment. The premise of ORA’s and TURN’s recommendation for an escrow account is that Verizon California has not invested sufficiently in its network.134 This premise, however, assumes that the Commission determines the amount of investment that is reasonable.

Since 1989, the Commission has rejected that assumption.135 Instead, as Dr. Aron summarized, the Commission has consistently ruled that “investment decisions are the province of the carrier, which should not be distorted by ill-advised regulatory intervention.”136

131 Baldwin Supp. Testimony at 48 n.120. 132 Id. 133 See McCallion Supp. Reply Testimony at 14. 134 Selwyn Testimony at 71-73, 130; Baldwin Testimony at 117-118. 135 D.89-10-031 (FOF 98, 99, 102, 103, 104, 106 & COL 47); D.98-10-026 at 32-35; D.06-08- 030 (FOF 109, 112, 113, 116). See Aron Declaration at 11-16. 136 Aron Declaration at 12.

38 / 57 No party has presented any evidence or argument to distinguish these precedents. As Mr.

McCallion explains, requiring Verizon to set aside funds that some parties believe Verizon should have invested in the past would retroactively change the Commission’s long-standing and industry-wide policy against regulating investment levels.137 Such an about-face would be arbitrary and capricious and an abuse of discretion.138

E. Post-Closing Investments Should Be Determined And Paid For By Frontier

Respecting the parties’ agreement that Frontier will bear the costs of post-closing investments in the network also promotes economic efficiency. Dr. Aron explains that the party who owns and controls the assets should be the party who pays for their upkeep and improvement, for two reasons.

First, the party making the investment decision has the information and incentive to spend its money where it is most needed and in a manner that adds the most value.139 Parties that recommend that the Commission dictate that Frontier spend Verizon’s money in a particular way erroneously presume that the Commission is better able than Frontier to decide what types of investments are most highly valued by consumers. As the Commission has repeatedly recognized, carriers are better positioned than the Commission to make those judgments, which is why the Commission has for many years not regulated Verizon California’s investment decisions.140 In addition, there is no way to ensure that an escrow would actually increase the amount invested in the network, as the escrow funds may simply displace the amounts that

137 McCallion Rebuttal Testimony at 10-11. 138 See Ramaprakash v. F.A.A., 346 F.3d 1121, 1125 (2003) (“An agency’s failure to come to grips with conflicting precedent constitutes an ‘inexcusable departure from the essential requirement of reasoned decisionmaking.”). 139 Aron Declaration at 36. 140 Id. at 37-38.

39 / 57 Frontier would otherwise have chosen to spend out of its own coffers.141 Dr. Aron presented a regression analysis showing that states in which Frontier made a regulatory commitment to deploy broadband did not show a statistically significant difference in the growth of broadband relative to the states in which no such commitments were made.142

Second, because Frontier will earn the rewards of any post-closing investments in the

Verizon California network, it should bear the costs.143 Again, the Commission has long endorsed the principle that the party that bears the costs is the one that is entitled to the rewards.144

No party offers any contrary evidence on these points.

F. An Escrow Condition Amounts To A Transaction Tax, Which Would Discourage Socially Beneficial Transactions And Investments

Requiring Verizon to fund an escrow account, as a condition of approval of the

Transaction, is equivalent to imposing a tax on the transaction. Assuming that a corresponding adjustment to the purchase price is not permitted, such an obligation reduces the value of the

Transaction to Verizon. Even if an adjustment to the purchase price were permitted, the cost of the condition may exceed the benefit to Frontier.145 As a tax, an escrow funding requirement directly discourages this and other transactions that produce social benefits.146

A transaction tax also indirectly discourages investment in assets, which harms infrastructure and economic development. Dr. Aron explains that investors consider the costs

141 Id. at 37. 142 Id. at 31. 143 Id. at 38. 144 D.98-10-026 at 35; D.06-08-030 at 271 (FOF 109); see Aron Declaration at 38. 145 Aron Declaration at 39. 146 Id. at 39-40.

40 / 57 and rewards, including the rewards that may be realized in the context of a sale to another party who can increase the value of the investments by more than the original investor. A tax that makes transactions less likely reduces the probability of such an exit strategy, which in turn makes it more difficult to justify the investment decision in the first place.147

No party offers any contrary evidence on these points.

G. The West Virginia Order Does Not Support Any Escrow Account Here

Both ORA and TURN point to the order of the West Virginia Public Service Commission

(“PSC”) requiring Verizon to fund an escrow account as support for their recommendation in this proceeding.148 ORA and TURN fail, however, to respond to the testimony of Verizon California and Frontier witnesses, who explain why the West Virginia order does not apply here.

First, the procedural history of the West Virginia order was materially different because the escrow account issue predated and was unrelated to the Frontier 2010 acquisition in West

Virginia. The West Virginia PSC initiated a service quality investigation in 2008, two years before the Frontier transaction. The PSC required Verizon West Virginia both to spend specified amounts and also to meet specified service quality benchmarks. In another decision two years later in the service quality proceeding, the PSC found that, while Verizon West Virginia met the spending requirements, it had failed to meet the service quality benchmarks. The PSC therefore ordered Verizon to increase its expenditures and to escrow the funds needed to do so. The PSC then found that Verizon was not relieved of the obligation to fund the escrow by virtue of the sale to Frontier.149

147 Id. at 40-42. 148 Selwyn Testimony at 131-133; Baldwin Testimony at 124, 129 n.198; Baldwin Supp. Testimony at 46 n.114. 149 Gregg Rebuttal Testimony at 14-15; McCallion Rebuttal Testimony at 12-13.

41 / 57 Here, the Commission has not imposed on Verizon California in the service quality docket any obligation to spend or to meet specified performance obligations. The Commission has jurisdiction to consider such matters on a prospective basis in the service quality docket (and the Transaction would not affect the Commission’s jurisdiction to do so), but unlike West

Virginia, there is no basis for the Commission to require Verizon to fund an escrow as a means of enforcing a prior order. There is no such prior order.

Second, the condition of Verizon West Virginia’s network, and its service quality, as found by the West Virginia PSC, were materially worse than Verizon California’s.150 Mr.

Golob, who was personally involved in the West Virginia operations, states that “the network quality in West Virginia was inferior to the condition of the Verizon California network. As one example, Verizon California’s trouble report rate is significantly lower than West Virginia’s rate….the network condition in California does not compare with the challenges [Frontier] experienced in West Virginia.”151 Mr. Gregg, who was the Director of the Consumer Advocate

Division of the West Virginia PSC, corroborates this conclusion based on customer trouble reports, which he affirms indicates the quality of the network. Mr. Gregg notes that Verizon

West Virginia had 3.56 customer trouble reports per 100 lines prior to the Frontier sale, whereas

Verizon California has less than 1 customer trouble report per 100 lines.152

No party offers any contrary evidence on these points. Ms. Baldwin admits that the West

Virginia PSC imposed the escrow requirement in a separate service quality docket.153 She also

150 Gregg Rebuttal Testimony at 18. 151 Golob Rebuttal Testimony at 19; see also Maguire Rebuttal Testimony at 19-21 (noting also that Verizon California has a higher per line capital expenditure than was the case in West Virginia). 152 Gregg Rebuttal Testimony at 18. 153 Baldwin Supp. Testimony at 51 n.129.

42 / 57 tacitly admits that the service quality conditions were more “pervasive” in West Virginia than in

California.154 She calls that consideration “beside the point” because “there are ‘hot spots’ of troubles”155 – an allegation she does not support with evidence, and which does not justify the imposition of an escrow funding requirement on Verizon.

H. An Escrow Condition On Verizon Would Be An Unlawful Penalty

Because there is no evidence that Verizon California’s network would be adversely affected by the Transaction, ORA and TURN are essentially arguing that Verizon should be punished for allowing its network to exist in a condition that those parties believe (albeit without objective benchmarks) is substandard. While not expressly described as a penalty, the logic and language of ORA’s and TURN’s recommendation leaves no doubt that the escrow condition is intended to be a punitive measure.156

The Commission, however, cannot impose a penalty on Verizon. A penalty may be imposed only when the Commission finds that a utility has violated or failed to comply with a statute, order, decision, rule, or other Commission directive.157 Parties advocating for the imposition of a penalty carry the burden of proof.158

154 Id. at 47-48. 155 Id. 156 See Baldwin Testimony at 109-110 (recommending an escrow condition based on the “responsibility” of Verizon “to fix the network” that it “has maintained inadequately”); Baldwin Supp. Testimony at 48 n.120 (asserting that Verizon “should bear the responsibility of paying to fix the problems”); Selwyn Testimony at 125 (“The apparently deteriorated state of Verizon’s infrastructure should be addressed prior to approval of the proposed transaction. To the extent that remedial measures are required, these should be the responsibility of Verizon.”); id. (asserting that Verizon’s shareholders should not be left “unscathed”). 157 Public Utilities Code § 2107; D.93-05-013 (distinguishing disallowances from penalties). 158 D.93-05-013; D.03-01-087 at 8; D.87-12-067 at 31.

43 / 57 No party has proven that Verizon California’s network violates any statute, order, rule or other directive of the Commission, as is required to justify the imposition of a penalty. Parties cite only anecdotal examples and have not proven the existence of any widespread or systemic defect in Verizon California’s network. As discussed above, the record shows that Verizon

California’s network is in good condition. In addition, parties have not pointed to any rule that

Verizon California has violated that would justify a penalty. Parties note that Verizon California has not met the GO 133-C metrics for OOS response intervals and answer time, but those metrics are not currently enforceable standards and cannot form the basis for the imposition of any penalties. As noted, the Commission recently affirmed that “until the Commission adopts a decision requiring penalties for underperformance on existing [GO 133-C] standards, none will be in place.”159 As noted previously, OOS repair intervals and answer time reflect staffing levels, not the physical condition of the network.160

No party has presented evidence that Verizon California has violated GO 95 or GO 128.

Verizon California has shown that it has no records of any GO 128 nonconformances, and that all GO 95 nonconformances in its system are Priority Level 2 or Priority Level 3 conditions as to which the time established in GO 95 for bringing those conditions into conformity has not yet passed.161

In recommending that the Commission require Verizon to fund an escrow account, ORA and TURN are relying on their own subjective opinions that Verizon California should have

159 D.15-08-041 at 9-10. 160 See footnote 79 above. 161 Network Report at 36-39; Evid. Hr’g Tr. (Verison/Stinson) at 1147:6-22.

44 / 57 spent “more” on the network. Those subjective opinions, however, cannot justify the imposition of any financial obligation on Verizon, particularly an obligation that amounts to a penalty.162

I. ORA’s and TURN’s Recommendations For An Escrow Amount Are Arbitrary

The multitude of recommendations by ORA and TURN regarding the amount of the escrow fund underscore their arbitrary nature. Dr. Selwyn first recommends that Verizon be required to escrow BEGIN CONFIDENTIAL END CONFIDENTIAL,163 which he claims is the gain-on-sale to Verizon and which should be used for “maintenance upgrades [sic].”164 Dr. Selwyn then refers to the West Virginia PSC’s order, which he scales to

California based on a comparison of access lines, yielding a figure of “about $500-million.”165

Dr. Selwyn characterizes this figure as “the same order-of-magnitude” as his gain-on-sale calculation,166 BEGIN CONFIDENTIAL

END CONFIDENTIAL. Ms. Baldwin, purporting to use the same access-line scaling factor as Dr. Selwyn, initially recommended an escrow fund of either $235 million167 or $234 million.168 In her supplemental testimony, Ms. Baldwin changed her mind as to the scaling methodology and increased her recommendation to BEGIN CONFIDENTIAL

END CONFIDENTIAL.

162 McCallion Rebuttal Testimony at 11. 163 Selwyn Testimony at 130, Table 13. 164 Id. 165 Id. at 132. 166 Id. at 132-133 167 Baldwin Testimony at 129. 168 Id. at 169.

45 / 57 All of these recommendations are arbitrary.169 ORA and TURN do not justify their scaling factors, which have no relationship to the considerations that the West Virginia PSC relied upon in determining the size of the escrow fund.170 In the absence of any record evidence establishing a basis to compare the conditions of the Verizon West Virginia and Verizon

California networks, any extrapolation is arbitrary.

The only evidence specific to Verizon California’s network is contained in the Network

Report, which states that Verizon California has estimated the cost to correct all pending Priority

Level 2 and Priority Level 3 conditions shown in its records as BEGIN CONFIDENTIAL

END CONFIDENTIAL. The existence of these conditions does not constitute a violation of GO 95. The Commission has recognized that “100 percent compliance with these GOs [95, 128, and 165] at all times is not realistic….It is impossible for a utility to keep its distribution system in full compliance with the safety GOs at all times, and, at any given time, there will be multiple violations on a utility’s system.”171 As noted, GO 95 specifies the time frames within which Priority Level 2 and 3 conditions must be addressed, and a utility is not in violation of GO 95 as long as it acts within those time frames. All of the pending conditions identified in Verizon California’s records are either Priority Level 2 conditions for which the 59- month period has not expired, or Priority Level 3 conditions for which there is no specific time limit.

The Commission should not require Verizon to fund an escrow in the amount Verizon

California estimates it will cost to correct pending Priority Level 2 and Priority Level 3

169 McCallion Supp. Reply Testimony at 12-13; McCallion Rebuttal Testimony at 15-16. 170 Exhibit FTR-16, Billy Jack Gregg Supplemental Reply Testimony (Frontier) (Sept. 22, 2015) (“Gregg Supp. Reply Testimony”) at 3-6. 171 D.04-04-065 at 31, 62.

46 / 57 conditions. In addition to all of the reasons given above, the pendency of those conditions does not violate GO 95. Frontier is able to address any remaining conditions post-closing, consistent with the SPA. Mr. Golob testified that these conditions reflect the “normal course of business” and that Frontier expected and is prepared to address them post-closing.172

J. An Escrow Condition Would Constitute An Unlawful Taking

In the absence of evidence that Verizon California’s network would be adversely affected by the Transaction, conditioning approval of the Transaction on Verizon depositing funds in an escrow account would constitute an unlawful taking of private property, in violation of the federal and California constitutions. ORA’s and TURN’s recommendation amounts to nothing more than a request that the Commission use this proceeding as a means to seize Verizon’s money. Such an order would constitute “an illegal appropriation of [the company’s] property.”173 Where, as in this proceeding, the proposed condition has no nexus to the incremental effects of the Transaction, a requirement that Verizon pay money as a condition of obtaining approval to consummate the Transaction amounts to a direct and unlawful taking.174

V. VERIZON’S GAIN-ON-SALE IS NOT SUBJECT TO SHARING

In his initial testimony, Dr. Selwyn, on behalf of ORA, recommended that the

Commission treat Verizon’s gain on the sale of Verizon California as an “economic benefit” subject to sharing under Public Utilities Code section 854(b)(2).175 Dr. Selwyn calculated this

172 Evid. Hr’g Tr. at 1152. 173 Ponderosa Tel. Co. v. Pub. Utils. Comm’n, 197 Cal. App. 4th 48, 59 (2011) (citing Brown v. Legal Found. of Wash., 538 U.S. 216, 233, 235-36 (2003) and Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 163-64 (1980)). 174 Dolan v. City of Tigard, 512 U.S. 374, 391 (1994) (government may not impose a condition on the exercise of a constitutional right unless the condition “is related both in nature and extent to the impact” of the proposed action). 175 Selwyn Testimony at 120, 126, 129-130.

47 / 57 gain by subtracting the net book value of the companies being sold to Frontier from the purchase price, and he then allocated that gain to California. On this basis, Dr. Selwyn recommends that the Commission order Verizon to set aside BEGIN CONFIDENTIAL END

CONFIDENTIAL in an escrow account, to be used by Frontier to invest in the acquired network.176 Dr. Selwyn’s theory is contrary to law and the record, and the Commission should reject it.

A. Commission Precedent Holds That The Gain-on-Sale Is Not Subject To Sharing

Under long-standing precedents, Verizon’s gain-on-sale is not subject to ratepayer sharing. First, the Commission has affirmed that gain-on-sale for carriers subject to NRF and

URF remain with shareholders.177 In the 2006 URF decision, for example, the Commission stated that “all gains or losses from the sale of utility property should accrue to shareholders.”178

The Commission applied this principle in the 2001 decision conditionally approving the sale of GTE West Coast and certain GTE California exchanges to Frontier (then called

Citizens).179 In that proceeding, Del Norte County asserted that ratepayers should receive at least half of Verizon’s gain-on-sale. Del Norte County’s rationale was similar to ORA’s in this case: the gain-on-sale should be shared in part because it had provided what Del Norte County claimed was “inferior service,” and because Citizens “is paying a significant premium” so that

“it may not have sufficient capital leftover to upgrade the antiquated telecommunications

176 Id. at 130, Table 13. 177 McCallion Rebuttal Testimony at 14. 178 D.06-08-030, 2006 Cal. PUC Lexis 367, at *327-28. 179 D.01-06-007, 2001 Cal. PUC Lexis 390, at *153. Following this decision, which imposed extensive and burdensome conditions, the transaction was not consummated. White Rebuttal Testimony at 38.

48 / 57 infrastructure.”180 The Commission rejected these arguments. With respect to the gain-on-sale realized by GTE California, the Commission concluded that its prior precedent, which held that the gain-on-sale should be treated the same as other revenues under NRF, was “dispositive.”181

Because earnings were not subject to sharing under NRF, “the effect of today’s decision, like

D.94-09-080, is to allocate the entire gain on sale to GTEC’s shareholders.”182 With respect to

GTE West Coast, the Commission applied its precedent “involving the sale of an entire utility,” noting that it had “always allocated to shareholders the gains and losses from the sale” in such situations.183

While the foregoing precedents are, as the Commission has said, “dispositive,” another line of Commission precedent reinforces the same conclusion. The Commission has specifically distinguished gain-on-sale from economic benefits subject to allocation under section 854(b)(2).

In D.05-05-014, the Commission approved the sale of a small local exchange carrier and did not require the seller to share the gain-on-sale. The Commission first cited its precedent holding that the gain-on-sale is always allocated to shareholders when the entire utility is sold.184 The

Commission then distinguished gain-on-sale from economic benefits under section 854(b)(2):

The approach that the Commission has taken in allocating gain-on-sale should not be confused with the allocation of other benefits from a transaction. With respect to certain transactions (not including this one), § 854(b)(2) requires that ratepayers receive an equitable allocation of the transaction’s benefits. Even in transactions not explicitly covered by § 854(b)(2) the Commission has sometimes allocated a portion of the transaction benefits to ratepayers. However, those cases did not involve an

180 D.10-06-007, 2001 Cal. PUC Lexis 390, at *145. 181 Id. at *151 (citing D.94-09-080). 182 Id. 183 Id. at *153 (citing D.98-09-038 and D.89-07-016). 184 D.05-05-014 at 11 (citing D.01-06-007).

49 / 57 allocation of any gain on sale. They involved a quantification of economic benefits of a transaction and an allocation of an equitable share of those benefits to ratepayers.185

Dr. Selwyn did not even attempt to argue that these precedents are inapplicable. Instead,

ORA admitted that Dr. Selwyn “does not rely upon a prior CPUC decision as a basis for his testimony regarding the treatment of Verizon’s gain on sale as an economic benefit” under section 854(b)(2).186

Commission precedent forecloses ORA’s recommendation that the Commission require

Verizon to share the gain-on-sale of Verizon California.

B. Economic And Policy Considerations Preclude A Mandated Sharing Of The Gain-On-Sale

Economic and policy considerations support the Commission’s precedent and demonstrate that a mandated sharing of the gain-on-sale would be contrary to the public interest.

1. The Commission Should Not Mandate Any Sharing

ORA’s recommendation that the Commission require Verizon to rebate a portion of the gain-on-sale to Frontier is another example of mandated sharing that is foreclosed by

Commission precedent. As Frontier’s brief discusses at length, the Commission has repeatedly held that mandated sharing is not appropriate where the Commission has decided not to regulate rates.187 Any mandated sharing of benefits would be both unnecessary and contrary to the

Commission’s sound policies. ORA’s recommendation that the Commission mandate that

Verizon share the gain-on-sale contravenes these established principles.

185 Id. at 11-12 (emphasis added). As Frontier explains, section 854(b)(2) does not require or permit a mandated sharing of benefits in this proceeding. Frontier Opening Br. at 44-53. 186 McCallion Rebuttal Testimony at 14 (quoting ORA Response to Verizon First Set of Data Requests, Question 11). See also Selwyn Supp. Testimony at 41 (acknowledging, but not contesting, Verizon’s argument that “the Commission has never imposed such a requirement [for the seller to share gains] in the past”). 187 Frontier Opening Br. at 48-53.

50 / 57 2. The Gain-on-Sale Does Not Reflect The Economic Benefits Of The Transaction Under Section 854(b)(2)

From an economic perspective, the “economic benefits” of a Transaction (as referenced in Section 854(b)(2)) are the increase in social value (i.e., consumer surplus plus producer surplus).188 The change in social value is a function of how the buyer manages the assets purchased.189 The price of the transaction reflects the transacting parties’ agreement regarding the split of the value of the transaction to the buyer minus their value to the seller, which is entirely different from the value of the transaction to consumers or to society.190

Dr. Aron explained this distinction at length, using an example of two home builders.

Her declaration makes clear that the price at which an asset is sold “does not tell us how the social economic gains from the transaction were split between consumers and producers,”191 which “will depend not only on the effect of the transaction on the price of the product or service consumers buy, but also on how competition affects the value of the goods and services produced and the innovations stimulated and achieved post-transaction.”192 For these reasons,

“it is futile for a regulator to attempt to engineer a particular division of the gains from a transaction among the stakeholders in a competitive environment.”193

3. The Gain-on-Sale Is An Accounting Calculation That Does Not Reflect Economic Value

The gain-on-sale is calculated by subtracting book value from the purchase price. As such, gain-on-sale reflects the historic cost of the assets, which is a backward-looking measure of

188 Aron Declaration at 23-24. 189 Id. at 24-25. 190 Id. at 25. 191 Id. at 27. 192 Id. at 28. 193 Id. at 29.

51 / 57 value. In contrast, the economic value of the assets is based on their forward-looking potential to generate cash flows.194 Book value bears no necessary relationship to economic value, and the two often diverge for a number of reasons, including accounting rules that do not permit recording intellectual capital.195

The gain-on-sale does not reflect the economic value of the Transaction to Verizon. But for the Transaction, Verizon California would earn a stream of future cash flow, which (under

URF) would belong to shareholders and would not be subject to sharing.196 This stream of future cash flow is the economic value of Verizon California to Verizon. That cash flow has no necessary relationship to the book value of Verizon California, since depreciation of book value is a non-cash expense. The purchase price essentially capitalizes that stream of future earnings, subject to Verizon’s and Frontier’s evaluation of how those earnings might change in the future under Frontier’s ownership.197 As such, the purchase price, and its relationship to book value, are not relevant in measuring the economic value of the assets either to Frontier or to Verizon – and certainly not to society (which is the focus of Section 854(b)(2)).

4. A Mandated Transfer Of Verizon’s Gain To Frontier Would Be Unlawful And Unnecessary

In his supplemental testimony, Dr. Selwyn admits that the Commission has never treated the gain-on-sale as an economic benefit under section 854(b)(2). Nor does Dr. Selwyn respond in any way to the reasons set forth in Dr. Aron’s and Mr. McCallion’s testimony, summarized above, supporting the Commission’s multiple precedents against mandating sharing of gains-on- sale in this situation. In fact, Dr. Selwyn appears to have abandoned entirely any argument that

194 Id. at 32. 195 Id. at 33. 196 McCallion Rebuttal Testimony at 15. 197 Aron Declaration at 35.

52 / 57 the gain-on-sale is an economic benefit under section 854(b)(2). Nevertheless, Dr. Selwyn argues that transferring a portion of the gain from Verizon to Frontier is needed to mitigate what he asserts are the negative financial consequences of the Transaction to Frontier.198 The

Commission should reject Dr. Selwyn’s new theory as well.

Dr. Selwyn again confuses the benefits of the Transaction to society (including to consumers) with the benefits of the Transaction to Verizon and to Frontier. The agreed-upon purchase price, and Frontier’s decisions about how to finance that purchase price, reflect a private allocation of the gains between Verizon and Frontier, which is entirely distinct from the economic benefits of the Transaction under Section 854(b)(2).199 Frontier has shown that the economic benefits of the Transaction under Section 854(b)(2) are substantial and include increasing broadband deployment and speeds, as well as increasing employment in the State.

Those benefits have nothing to do with the purchase price or Frontier’s financing.

Dr. Selwyn’s new theory is nothing more than a plea that the Commission reduce the purchase price. For all the reasons previously discussed, the Commission should not do so.200

As noted, Dr. Selwyn has previously opined that the purchase price is extremely favorable to

Frontier,201 an opinion that financial analysts share.202 There is no warrant for the Commission to alter the agreement between Verizon and Frontier as to the purchase price. As Mr. McCallion

198 Selwyn Supp. Testimony at 41. 199 McCallion Supp. Reply Testimony at 17; see also Aron Declaration at 23-30. 200 See Part IV.C, above. 201 Selwyn Testimony at 32-33. 202 Jureller Testimony at 28; Jureller Supp. Reply Testimony at 13-14; Balhoff Supp. Reply Testimony at 6-8.

53 / 57 states: “The Commission’s responsibility is to ensure that the Transaction will benefit the public, not to make the Transaction more lucrative than it already is for Frontier.”203

VI. THE COMMISSION SHOULD REJECT OTHER PROPOSED CHANGES TO THE SPA

The Commission should likewise reject the recommendations of ORA and TURN that the

Commission require certain other changes to the SPA.

First, the Commission should reject Dr. Selwyn’s recommendation that the Commission require Verizon to grant Frontier the right to use any Verizon-owned FiOS software, including the interactive media guide, indefinitely.204 Frontier and Verizon agreed that Frontier would have the right to use certain Verizon-owned software for five years, a period of time the parties agreed was sufficient. Frontier is free to develop its own software, license software from a third party, or seek an extension from Verizon. Again, there is no reason for the Commission to interfere with the parties’ agreement on this point.205 Similarly, Frontier has chosen to maintain the licensed software itself, rather than pay Verizon to do so, and the Commission should not second-guess that decision.206 In his supplemental testimony, Dr. Selwyn did not respond to these points, which remain unrebutted.

Second, the Commission should reject ORA’s recommendations that the Commission require Verizon to make certain warranties. Dr. Selwyn recommends that the Commission require Verizon to warrant that the assets being transferred meet the Commission’s service quality standards.207 Dr. Selwyn never explains what it means for an asset to meet a service

203 McCallion Supp. Reply Testimony at 17. 204 Selwyn Testimony at 136. 205 Brophy Rebuttal Testimony at 15-16. 206 Id. at 17. 207 Selwyn Testimony at 11.

54 / 57 quality standard, given that the latter measures performance and not asset condition. In addition,

Frontier has agreed to assume the obligation, post-closing, to meet any service quality standards the Commission may choose to impose, and Dr. Selwyn has not responded to the many reasons

(summarized above) that the Commission should not alter that agreement. Mr. Gallardo recommends that the Commission require Verizon to warrant that the Transaction will not impair

911 functionality.208 Verizon, however, cannot control Frontier’s operations post-closing and cannot warrant its performance.209 Frontier has shown that it is an experienced operator and that it is fully aware of its 911 obligations.210

Third, the Commission should reject Mr. Brevitz’s recommendation that Verizon pay

Frontier for certain bridge financing costs.211 Initially, this recommendation appears to be moot in light of Mr. Jureller’s testimony, which indicates that Frontier now has the long-term capital structure in place to complete the Transaction without bridge financing.212 In addition, requiring

Verizon to subsidize Frontier’s financing costs would be another way of reducing the purchase price, which the Commission should not do for the many reasons previously discussed. Once again, the Commission should not second-guess the parties’ agreement that Frontier would bear its own financing costs.213

208 Exhibit ORA-7, Enrique Gallardo Testimony (ORA) (July 28, 2015) (“Gallardo Supp. Testimony”) at 3-4. 209 McCallion Rebuttal Testimony at 18. 210 Exhibit FTR-4, Golob Testimony at 24; Exhibit FTR-1, Melinda White Testimony (Frontier) (May 11, 2015) (“White Testimony”) at 22. 211 Exhibit TURN-2, David Brevitz Testimony (TURN) (July 28, 2015) (“Brevitz Reply Testimony”) at 74. 212 Jureller Supp. Reply Testimony at 3. 213 McCallion Rebuttal Testimony at 17.

55 / 57 VII. THE COMMISSION SHOULD REJECT XO’S RECOMMENDATIONS

The Commission should reject the recommendation of XO Communications Services,

LLC (“XO”) that Verizon be required to resolve its disputes with XO prior to closing the

Transaction.214 XO is a particularly disputatious CLEC, and the disputes between XO and

Verizon nationwide are the subject of pending federal court litigation.215 The Commission should not embroil itself in these disputes, which will be resolved in an orderly fashion. XO has not shown any way in which the Transaction will adversely affect it, let alone justified the extreme remedy it proposes. Frontier will be responsible for continuing to work through any pending disputes with XO post-closing,216 and Verizon personnel with knowledge of those disputes will transfer to Frontier.217

Frontier’s brief elaborates on these points and also demonstrates why the Commission should reject CALTEL’s recommendations for post-closing obligations with respect to copper retirement and IP interconnection.218

VIII. CONCLUSION

The Commission should approve the Application without conditions.

214 Exhibit XO-1, Richard Jackson Testimony (XO) (July 28, 2015) (“Jackson Testimony”) at 10. 215 Brophy Rebuttal Testimony at 9. 216 Id. at 9-10. 217 Id. at 10; see also McCallion Supp. Reply Testimony at 22. 218 Frontier Opening Br. at 80-81.

56 / 57 Respectfully submitted,

October 5, 2015

By: /s/ Henry Weissmann

Charles Carrathers Verizon Registered In-House Counsel, State Bar of California 2535 West Hillcrest Drive Newbury Park, CA 91320 Telephone: 805-375-4374 Fax: 805-498-5617 [email protected]

Henry Weissmann Munger, Tolles & Olson LLP 335 South Grand Avenue, 35th Floor Los Angeles, CA 90071-1560 Telephone: 213-683-9100 Fax: 213-683-5150 [email protected]

Attorneys for Verizon California Inc., Verizon Long Distance, LLC and Newco West Holdings LLC