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STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
|
DOCKET NO. TM96070504
DOCKET NO. TX96100707 |
______________________________________________________________________________
INITIAL BRIEF OF THE DIVISION OF THE RATEPAYER ADVOCATE
REGARDING THE MERGER PLAN OF BELL ATLANTIC
CORPORATION AND NYNEX CORPORATION
______________________________________________________________________________
INFORMATION THAT BA-NJ CONSIDERS PROPRIETARY HAS BEEN REMOVED FROM
THIS DOCUMENT
B. The Merger Should Be Approved Only If There is a Positive Benefit to the Public Interest
- 1. Ratepayer Benefits to Schools and Libraries
- 2. Ratepayer Benefits to Low Income and Residential Customers
- 1. Service Quality
- 2. Corporate Reorganization and Governance
- 3. Competitive Concerns
- 4. Affiliate Relationships
- 5. Financial Condition
- 6. Consumer Education
- 7. Findings of the Department of Justice
- 8. Violations
- 9. Opportunity New Jersey
APPENDICES
Subject to review in this docket by the Board of Public Utilities ("Board") is a proposed merger transaction ("merger") between Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"). In accordance with the schedule established by the Board, the Division of the Ratepayer Advocate ("Ratepayer Advocate") hereby submits its initial brief in support of Board approval of the merger subject to certain conditions as proposed herein. These conditions, in combination, are designed to ensure that (1) a fair share of the economic benefits resulting from the proposed merger inure to the ratepayers of Bell-Atlantic-New Jersey, Inc. ("BA-NJ" or "Company"); and (2) adequate customer safeguards are in place to minimize the potential financial and/or service quality harm to BA-NJ's customers which might otherwise result from the proposed merger.
The proposed merger between Bell Atlantic and NYNEX will create a formidable new business entity by combining their territories to cover 25% of the United States population and creating a "global powerhouse" with about $30 billion in annual revenues. See Standard and Poor's Stock Reports, February 15, 1997 on the Bell Atlantic Corporation, attached hereto as Appendix A. BA-NJ has stated that just the cost savings alone associated with the merger will be approximately $600 million annually through "head count" reductions and synergies, and that total cash flow benefits will approach $900 million per year by the third year after the merger, resulting from efficiencies in capital budgeting. BA-NJ Exh. 3, attached hereto as Appendix B. With about 30% of the U.S. long distance market or approximately $9 billion in interLATA calls originating and terminating in the Bell Atlantic/NYNEX region, the company expects to realize substantial increased revenues, with profits advancing at double digit rates above historical growth rates. App. A.; see also RPA Exh. 15, attached hereto as Appendix C.1 While the proposed merger promises a harvest of cost savings and earnings to Bell Atlantic's shareholders, BA-NJ's customers, who, through rates, have contributed to the Company's economic prosperity and to the construction and maintenance of the network through which BA-NJ will yield significant revenues without any discernable cost increases, are assured of one thing: the loss of NYNEX as a potential competitor. Accordingly, the merger should be approved only if BA-NJ's customers, whose expenditures have funded the development and maintenance of BA-NJ's telephone system, are reasonably compensated by sharing in the merger benefits on a real dollar basis and are protected from any potential harm.
While the specific details on how BA-NJ should flow-through to ratepayers an equitable portion of the economic benefits to be realized from the proposed merger are set forth below, in general, a sharing should take the form of high technology initiatives for education and rate reductions targeted to schools and libraries, a program for low-income and residential customers. In addition, consumer protections must be introduced to ensure that there is no potential for customer harm resulting from the contemplated merger. These safeguards, which primarily are designed to prevent diversion of managerial attention and capital resources from BA-NJ, relate to service quality, financial integrity, corporate governance, affiliate transactions, competitive conduct and consumer education. Only if these proposed conditions are implemented will the merger be in the public interest.
By letter dated July 3, 1996, BA-NJ advised the Board of its intention to merge a new subsidiary of Bell Atlantic with and into NYNEX and filed a copy of the Amended and Restated Agreement and Plan of Merger dated as of April 21, 1996 by and between Bell Atlantic and NYNEX. Pursuant to the contemplated transaction, NYNEX would survive the merger as a wholly-owned subsidiary of Bell Atlantic. 2
In an Order dated, October 9, 1996, ("October 9 Order") 3 the Board initiated a proceeding to examine, inter alia, whether the proposed merger between Bell Atlantic and NYNEX would impair BA-NJ's ability to meet its obligations under BA-NJ's existing modified Plan for Alternative Form of Regulation ("Plan"), which was approved by the Board on May 6, 1993.4 The Plan, which replaced the traditional rate-base/rate of return regulation with an incentive ratemaking system, included a commitment of BA-NJ to accelerate deployment of advanced technologies for its communications network. This accelerated deployment plan was coined Opportunity New Jersey ("ONJ") by BA-NJ.5 Accordingly, the Board directed that hearings be held on December 12, 13, and 19, 1996 to examine BA-NJ's progress under the Plan and the merger's effect on BA-NJ's ONJ obligations. October 9, 1996 Order at 4. The Board subsequently rescheduled these hearings to January 16, 17, and 23, 1997, and then, upon motion of the Ratepayer Advocate further adjourned these hearings to February 6, 10, and 11, 1997.6
Subsequently, by Order dated January 22, 1997 (January 22 Order), the Board combined its review of the proposed Bell Atlantic/NYNEX merger with the ONJ Proceedings.7 According to the Board, a combined review of the merger was appropriate considering the overlap and inextricable interrelationship of the merger issues and BA-NJ's compliance with ONJ. Thus, the Board directed that ONJ hearings be expanded to include all merger-related issues. To accommodate the expanded scope of review, the Board modified the hearing dates by rescheduling the February 10, 1997 hearing date to February 18, 1997 and reserving an additional hearing date for February 20, 1997. Finally, while the only party permitted to participate in the ONJ Proceedings was the Ratepayer Advocate, in its January 22 Order, the Board decided to grant participant status to parties interested in the merger proceeding. October 9 Order, at 4. The Board granted AT&T, MCI and Cablevision Lightpath, Inc., participant status in this proceeding.
In accordance with the Board's schedule, hearings were conducted on February 6, 11, and 18, 1997 at which BA-NJ presented witnesses Len Lauer, Frank Cronin, and Ronald Hubert. At the conclusion of the hearings on February 18, 1997, the Board established a briefing schedule and directed the parties to file separate briefs regarding the Bell Atlantic /NYNEX merger and BA-NJ's compliance with, and progress under ONJ. Initial briefs on both matters were to be filed on or before March 12, 1997, with reply briefs on the Bell Atlantic/NYNEX merger and ONJ issues by March 21, 1997 and March 26, 1997, respectively. These filing dates were thereafter modified by letter from Secretary Nappi dated March 12, 1997, extending the deadline for the initial briefs on both issues to March 17, 1997, with reply briefs on both issues due on March 26, 1997. These filing dates were again revised, extending the deadline for the initial briefs on both issues to March 21, 1997, with reply briefs on both issues due on March 26, 1997.
Under the Board's general jurisdictional powers codified in 48 N.J.S.A. 48:1 et seq., the Board is obligated to ensure that the merger is in the public interest and that it does not adversely affect the provision of safe and adequate service at just and reasonable rates.8 To ensure adherence to these fundamental principles of utility regulation, the Board should be guided by the standards that are employed when a "public utility" in the State of New Jersey "merge[s] or consolidate[s] its property, franchises, privileges or rights . . . with that of any other public utility." N.J.S.A. 48:3-7(a); New Jersey Resources Corp. V. NUI Corp., BPU Docket No. 8312-1-93, 57 PUR4th 709 (January 31, 1984).
In NUI Corp., the Board, in setting these standards concluded that "the basic standard that must be established is that the planned merger is of positive benefit to the public interest and not merely that it would not adversely affect the ability of the merged utilities to provide safe, adequate, and proper service at reasonable rates." Among the 12 factors the Board set as bearing upon its standard most relevant here, are:
-The effect of the planned merger upon the competitive situation of the utility industry; are there monopolistic concerns with respect to the planned merger;
-The impact of the planned merger on service standards and the continued provision of safe, adequate and proper service;
-The effect of the merger on rates to be charged to the consumers both now and in the foreseeable future; and
-The effect on obligations to employees with respect to pensions and other benefits pursuant to N.J.S.A. 48:3-7 and N.J.S.A. 48:3-10.
NUI Corp., 57 PUR4th at 714.
While there is no firm definition of what constitutes a "positive benefit to the public interest," where, as here, a transaction promises astronomical cost savings and unprecedented revenues and profits to utility shareholders, the Board may and should justifiably allocate an equitable portion of the net gains to the utility's customers. The notion of an equal sharing in the economic benefits of a proposed transaction between utility shareholders and New Jersey ratepayers is well founded. For example, in I/M/O The Petition of The Hackensack Water Company For Approval of the Transfer of Real Property,BPU Docket No. 8312-1096, Decision and Order (November 1, 1984), (hereinafter "Hackensack Water") the Board made the sale of utility property conditional upon a 50% sharing of the potential net gain with the utility's ratepayers.9 In doing so, the Board concluded that the company's ratepayers were entitled to a fair share of the gain potentially realized from the transfer for their past contributions towards the maintenance of the property.10
Indeed, the sharing principles espoused by the Board in Hackensack Water and its progeny are now being recognized by New Jersey utilities as the sine qua non for approval of utility merger transactions. On February 21, 1997, Atlantic City Electric Company and Delmarva Power & Light Company filed a petition seeking approval of a merger between these two entities unilaterally proposing, in their respective States, that one-third of each State's allocable share of average annual estimated net merger savings over the first 10 years after consummation of the merger be shared with customers. I/M/O Petition of Atlantic City Electric Co., for Approval of a Change of Ownership and Control, BPU Docket No. EM9720103. In fact, on a nationwide basis, the majority of utility mergers proposed and approved involve an equitable sharing of benefits with utility customers. See, e.g., I/M/O Pacific Telesis Group, et al., Cal. PUC Docket No. 96-04-038, ALJ Decision (February 21, 1997) (Administrative Law Judges concluded that approval of a merger between SBC Communications Inc. and Pacific Telesis Group should be conditional upon a 50-50 sharing between shareholders and consumers);11 Re Southwestern Public Service Co., Case No. 2678, Jan. 28, 1997 (N.M.P.U.C.) (New Mexico Public Utility Commission authorized proposed merger of Southwestern Public Service Co. with Public Service Company of Colorado subject to, intera alia, a guarantee by Southwestern of an automatic minimum annual credit for its New Mexico customers based on projected merger-related savings); I/M/O the Application of Enron Corp., for an Order Authorizing the Exercise of Influence over Portland General Electric Co., Oregon PUC, Docket No. UM814 (August 30, 1996) (Staff of the Oregon Public Utility Commission recommended approval of the merger between Portland General and Enron Corp. subject to 23 conditions, including a $47.4 million rate reduction and a requirement that Portland and Enron reduce the utility's cost of service with earnings from non-regulated businesses inside and outside of Oregon; a Commission decision is pending);12 I/M/O Puget Sound Power and Light Company, et al., Washington UTC, Docket Nos. UE-951270, UE-960195 (July 10, 1996) (In February, 1997, the Washington Commission approved a settlement agreement between Puget Sound Power and Light Company and the Washington Energy Company and the Commission's Staff regarding a merger of the two noted companies, which outlined a 5-year rate stability plan, that among other things, would provide a period of rate certainty for customers).
Guided by these principles, the Board should condition approval of the proposed merger between Bell Atlantic and NYNEX on the ratepayer benefits and protections described immediately below.
B. The Merger Should Be Approved Only If There is a Positive Benefit to the Public Interest
As indicated above and as set forth in the record (App. B), the merger is expected to produce annual savings of $600 million, and capital savings of almost an additional $300 million by the end of the third year after the merger. New Jersey's total share of just the $600 million annual savings associated with the merger would be $74 million per year, of which $54 million per year would be the intrastate savings.13 If the additional quantified savings from capital were separately calculated for New Jersey, the merger savings allocated to New Jersey ratepayers would be $111 million. In addition to achievable savings, Bell Atlantic has estimated the present value of the benefits of the merger through synergy earnings impact to be [BA-NJ PROPRIETARY BEGINS] [BA-NJ PROPRIETARY ENDS] The combined territories of Bell Atlantic and NYNEX will cover 25% of the United States, producing about $30 billion in annual revenues. Apps. A & C.
While Bell Atlantic's shareholders have profited during the years of the ONJ Plan and stand to continue to profit enormously through the proposed merger, New Jersey and BA-NJ's customers who, through the payment of rates, have provided the revenues which have permitted the Company to build the network, meet its expenses and pay dividends to its corporate parent, only stand to gain a negative: the loss of a viable competitor in NYNEX.14 Accordingly BA-NJ's ratepayers are entitled to and should realize real, tangible, positive benefits from the proposed merger -- not just the academic, nebulous and nonquantifiable benefits that BA-NJ asserts its customers will realize from synergies and economies of scale and scope. According to BA-NJ, cost savings associated with BA-NJ operations would be reflected in higher returns on equity ("ROE"), and if these savings were to drive the ROE for rate-regulated services above 13.7%, sharing would take place.15 However, the possibility that this hypothetical may occur, provides no assurance that any amount of merger-related gains will ultimately be realized by New Jersey ratepayers. To date, earnings sharing has not taken place at all because earnings levels on non-rate regulated services conveniently are high, while the earnings levels on rate-regulated services have nowhere near approached the sharing threshold. In the Matter of the Board's Review of the Amended and Restated Agreement and Plan of Merger Dated as of April 21, 1996 by and between NYNEX Corporation and Bell Atlantic Corporation, Docket No. TM96070504 and I/M/O the Board's Inquiry into Bell Atlantic-New Jersey, Inc.'s, Progress and Compliance with Opportunity New Jersey, its Network Modernization Program, Docket No. TX96100707, at 4 (January 22, 1997). To provide a measure of certainty that an appropriate level of merger benefits inure to BA-NJ's customers, BA-NJ should be required to share the merger benefits on a more specific basis - particularly in the form of education initiatives funded at a specific dollar level of capital expenditure, rate reductions targeted to schools and libraries, and specific assistance for low income and residential customers.
1. Ratepayer Benefits to Schools and Libraries
Consistent with the "universal service" principles of the federal Telecommunications Act of 1996 (Telecom Act) and the recent nationwide emphasis on societal concerns, affordable and accessible telephone services must be available to all New Jersey schools and public libraries. Toward this end, BA-NJ should be required to establish a $200 million fund to provide inside wiring, high-speed Internet connection and low cost telephone service, spread out over 5 years, for an annual amount of $40 million.16 To ensure the proper allocation of these dollars, the fund should be administered by an independent financial manager and all requesting institutions should be required to submit detailed requisitions explaining how they propose to spend the requested contribution. In addition, BA-NJ should be directed to introduce a tariff for schools and libraries at residential rates as opposed to the commercial rates these institutions currently are charged. Finally, in accordance with ONJ, BA-NJ should be required to accelerate deployment of wideband and broadband services and fiber to all schools and libraries no later than the year 2000. These conditions must be implemented in tandem -- mere deployment of the broadband network without the physical ability of schools and libraries to connect to BA-NJ's network at affordable prices is meaningless.
2. Ratepayer Benefits to Low Income and Residential Customers
Universal Service also means affordable service for low-income ratepayers.
The Advocate maintains that the Board should approve the merger contingent upon BA-NJ implementing affordable Lifeline telecommunication services to residential and low income consumers. The Advocate recommends that the Board direct BA-NJ to implement free toll blocking to all Lifeline eligible customers, make a good faith effort to establish a viable Lifeline program, and increase public awareness of the Linkup program. The Advocate believes that these programs are in the public interest.
The Ratepayer Advocate has continually pointed to the fact that BA-NJ fails to provide adequate measures to ensure the availability of affordable telephone service for the state's low income consumers.17 An examination of comparative statistics on New Jersey's residential penetration rate shows that in November 1983, New Jersey's penetration rate of 91.4% exceeded the national average. However, over the next few years, while residential subscribership has increased throughout the United States, New Jersey has countered that trend with a continual decline in the penetration rate. In 1995, New Jersey was identified as the only state that experienced a statistically significant decrease in residential penetration, and in 1996, New Jersey was only one of three states (plus the District of Columbia) to have experienced a decrease in subscribership. Belifante, Alexander, Telephone Subscribership in the United States, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission, Chart 3 (February 1996), attached hereto as Appendix G. Although New Jersey's annual average penetration rate rose slightly from 92.3% in 1995 to 93.6% in 1996, the fact still remains that New Jersey has experienced a declining subscribership for the past several years, and that, despite the increase reflected in the most recent monitoring report, we continue to fall below the national average. See BA-NJ Exh. 9, attached hereto as Appendix H. In stark contrast, Pennsylvania, one of our neighboring states served by Bell Atlantic, has experienced a continual rise in its penetration, and has continued to hold one of the highest penetration rates in the country. Notice of Proposed Rulemaking, CC Docket No. 95-115 at 30 (FCC No. 95-281, Adopted July 13, 1995). The decline in penetration rates evidences the pressing need to have a Lifeline program, free toll blocking for eligible subscribers, and to educate more customers about the availability of Linkup.18 Accordingly, BA-NJ should be required to reduce rates for these customers and other residential customers by at least 10 percent.
In this connection, the Company should be directed to implement a toll blocking service at no charge for eligible low income customers. Toll blocking service is consistent with the Recommended Decision issued by the Federal-State Joint Board on Universal Service ("Joint Board") adopted November 7, 1996 In the Matter of Federal-State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96-45, at 244 (November 7, 1996) (hereinafter Recommended Decision). In its Decision, The Joint Board recommended that eligible carriers receive universal service support for providing toll blocking and limitation services to low income customers, finding that voluntary toll limitation service offered free of charge to low-income customers, should help increase subscribership among low income customers. For the last decade, Pennsylvania has provided a toll blocking service. During that time, Pennsylvania's overall penetration rate has become the highest in the nation (97 percent in 1994, up from 94.9 or 8th place a decade earlier). Furthermore, among Pennsylvania households with incomes below $10,000, subscribership as of March 1993 was 92.3 percent significantly higher than the national average for that income group of 87.4 percent. Moreover, in 10 states that prohibit disconnection for non-payment of interstate toll, the average subscribership level is 95.0%, which exceeds the national average. Notice of Proposed Rulemaking, CC Docket No. 95-115 at 5 (FCC No. 95-281, Adopted July 13, 1995). The FCC has referred to Pennsylvania's program as being a significant factor in that state's high penetration rate. Id. None of these services has ever been offered in New Jersey and our dismal record on residential subscribership stands as stark testimony to the need for a low-income subscriber initiative.
The Company also should be required to work with the State to establish a viable and substantial lifeline service in New Jersey and be required to emphasize and publicize its Link-up program. To further the universal service objectives of the Telecom Act, the Joint Board and the FCC established two programs (Lifeline and Link-Up America) to ensure that low income subscribers do not drop off the telephone network, and additionally to encourage low-income households without service to connect to the network. Lifeline support is an option available to states and territories for reducing the recurring costs of plain old telephone service (known as "POTS") for low income subscribers. Under this program, local exchange carriers reduce monthly bills by either half, or the full amount of the federal subscriber line charge. Half of the reduction is reimbursed to the carrier by the National Exchange Carriers Association through funds supplied by interexchange carriers, while the other half is funded through interstate jurisdictional matching state funds. New Jersey does not participate in the Lifeline program. Therefore, BA-NJ should be required to coordinate its activities with the Board and other state agencies so that a Lifeline program can be established. The State portion of Lifeline funds should be recovered directly from BA-NJ as part of the savings that will be realized from the merger. We currently calculate this at about $8,500,000 per year.
Link-Up America is a program for reducing the start-up costs of telephone service for low income new subscribers. Under this program, Federal assistance is available to pay one-half the connection charge, up to $30, for low income households. Federal assistance will also pay market rate interest on time-payments (for up to 12 months) allowed by a local exchange carrier to low income new subscribers, up to a $200 maximum principal amount. While BA-NJ participates in this program, New Jersey has very low participation in Link-Up America.19 In 1994, New Jersey had 567 participants in Link-Up, who received a total of $11,814. See Addendum III - Table 2.2 of the FCC Monitoring Report: Link Up America: Lifeline Connection Assistance and Deferred Payments, January 1 thru December 31, 1994, attached hereto as Appendix J. This is less than 0.07% of the participants and aid provided under Link-Up in that year. The Ratepayer Advocate believes that New Jersey's low participation in Link-Up America is primarily due to lack of subscriber information concerning availability of the program. To eliminate this barrier to participation, BA-NJ should be directed to increase public awareness of this program through various dissemination channels, including, but not limited to, bill inserts, press releases, public interest advertising, targeted mailings and meetings with social workers.
In addition to the low income initiatives described above, BA-NJ should be required to implement a number of others similar to those implemented in Ohio, as described above. These further initiatives include (1) access to 911 service when local service has been disconnected; (2) no disconnection of local service for a customer's failure to pay toll call charges; (3) a waiver of the deposit normally required for new service; and (4) free touch-tone service.
Given the magnitude of the savings and earnings expected to be realized from the proposed merger, BA-NJ's ratepayers who, year after year, as captive local exchange customers, have supported the utility and fully paid for its network, are entitled to share in these benefits. These same customers soon will be free to choose a different local exchange carrier. So, not only will BA-NJ soon be vying to capture these customers once it enters the long distance markets, but simultaneously struggling to maintain them as local exchange customers. Given the fierce competition BA-NJ soon will face in both the local and long distance markets, sharing a portion of the economic benefits with those ratepayers who BA-NJ hopes will remain loyal, is also in the Company's best interest.
The proposed merger must be approved only if safeguards exist such that the transaction does not in any way (1) limit or impede BA-NJ's service obligations or diminish the quality of service, (2) result in cross-subsidization by BA-NJ of NYNEX operations, (3) jeopardize BA-NJ's financial integrity, or (4) impair BA-NJ's commitment in general to the State of New Jersey and specifically to ONJ. The conditions proposed herein, each of which are discussed in turn below, are designed generally to address the concerns identified in the four of the twelve factors articulated in NUI Corp., supra, and specifically, to prevent diversion of management attention and capital resources from BA-NJ to NYNEX in order to minimize the potential identified risks to ratepayers.
NYNEX has failed to meet service quality requirements in a number of the jurisdictions in which it operates20 and there also is evidence that BA-NJ and a number of Bell Atlantic companies may have experienced some decline in the quality of service.21 The merger creates a potential for net harm in the form of diminished service quality, given the merged company's need to concentrate on changeover of systems, reorganization of personnel and other forms of necessary disruption of operations during the implementation of the merger. To minimize the impact of potential diversion of management attention from BA-NJ utility operations to merger-related activities, BA-NJ should be required to improve, or at an absolute minimum maintain the existing quality of service standards set forth in the ONJ Plan.22 In addition, BA-NJ should be subject to automatic penalties for a failure to meet these standard. The penalty mechanism should have a built-in "trend" factor so that fines may be invoked when service may still be adequate, but quality is declining.
Notably, the Ratepayer Advocate's suggested service quality condition is consistent with the Board's May 6, 1993 Order approving the Plan (mimeo at 139) which provided as follows:
"[T]he Board reserves the right to make any revisions to the service quality standards that it may hereafter determine to be appropriate and reasonable after affording . . . [BA-NJ] an opportunity to be heard with regard to the need for any such revisions."
Considering the potential for compromised quality of service, the service quality condition proposed herein is not only "appropriate and reasonable," it is absolutely essential.
2. Corporate Reorganization and Governance
To further ensure that there is no diversion of management attention from BA-NJ, the Board should impose conditions relating to the composition of the Board of Director and various BA-NJ employment issues. First BA-NJ's Board of Directors must consist of 3 inside directors and 2 outside directors. An inside director would include anyone affiliated with Bell Atlantic or any of its subsidiaries (currently those directors being Len Lauer, CEO and President, Anne Babineau, Esq., General Counsel and the CFO). An outside director would be anyone not affiliated with Bell Atlantic or any of its subsidiaries. These directors would be local citizens and therefore their interests would lie solely with BA-NJ and the State of New Jersey. In a similar vein, no senior operating officer or senior employee of BA-NJ should be permitted to serve in that same capacity at an existing NYNEX company. As the hearing record reflects, BA-NJ used to have a Board of Directors with a majority of directors from outside the company. The decision of BA-NJ to discontinue the practice of having outside directors was accomplished without the knowledge much less the approval of the Board. Considering the enormous change that would take place once the merger is consummated, the Ratepayer Advocate considers it essential that outside directors be appointed to the Board of Directors.
In addition BA-NJ should be required to increase New Jersey employment levels by at least 2000 additional employees, measured against a 17,000 base. RPA Exh. 23, attached hereto as Appendix N. It also should be required to commit to maintain a strong local presence in the State of New Jersey.
To address concerns that the merger of Bell Atlantic and NYNEX would diminish competition in the region rather than promote it as BA-NJ asserts (App. B), BA-NJ should be required to comply with the 14-point "competitive checklist" in section 271 of the Telecom Act by a date certain in order to create the conditions needed in New Jersey for competition in local telephone markets. The Ratepayer Advocate proposes that BA-NJ fully comply with the Checklist no later than June 1, 1997 or be subject to financial penalties at the rate of $5 million per month until such time BA-NJ satisfied the Checklist.23
It is important that BA-NJ's resources are not diverted to NYNEX such that there is a resultant increase in utility costs due to affiliate transactions and/or a degradation of service quality and availability. For these reasons, BA-NJ should be required to continue to comply with established rules regarding transactions between affiliates and audits thereof. In addition, BA-NJ should be prohibited from lending employees to NYNEX except for restoration after storms or other such cataclysmic events. Finally, all technology transfers from BA-NJ to NYNEX should be at the greater of cost or market price.
In order to preserve BA-NJ's financial integrity after the merger, the Board should impose conditions to ensure the utility's continued economic viability. First, if the current credit rating of Bell Atlantic or BA-NJ drops to BBB+ and the rating is not restored within two years after the merger, BA-NJ must notify the Board of same and submit a plan to restore the rating. In addition BA-NJ should be prohibited from making loans or otherwise providing credit support to the NYNEX companies except for short-term debt issued under market terms and so long as such issuance does not impair the financial integrity of BA-NJ.
Average telephone consumers will not understand how the proposed merger transaction will affect their rates, service quality and miscellaneous rights as utility customers. For this reason, BA-NJ should be required to provide customer outreach and education to BA-NJ ratepayers on the impact of the merger both through general media channels and bill inserts. All informational materials should be reviewed by Staff and the Ratepayer Advocate before dissemination to the public to ensure the accuracy and completeness of BA-NJ's statements.
7. Findings of the Department of Justice
The Board should be able to modify and/or rescind its approval, if appropriate, after a review of any finding made by the DOJ that either rejects or conditionally approves the merger. Accordingly, BA-NJ should be instructed to contact the Board and the Ratepayer Advocate upon receipt of any determination by the DOJ to approve, disapprove or condition the merger.
The Ratepayer Advocate recommends that any violation of the Board's order approving the merger should be subject to appropriate remedial action by the Board in the form of an enforcement process and penalties.
The merger should have no impact on BA-NJ's current ONJ commitment on deployment of AIN and broadband. At the cornerstone of this review is BA-NJ's progress under and commitment to ONJ. The benefits that the Board reasonably expects to be flowed back to the State of New Jersey should not be forsaken or placed at risk as a result of the merger.
1BA-NJ considers the information in this Appendix to be proprietary. Back
2According to BA-NJ's July 3rd letter, the original agreement between Bell Atlantic and NYNEX contemplated that both companies would become wholly-owned subsidiaries of a new company to be named Bell Atlantic. However, that structure was changed to eliminate the need for Congressional approval which would have been required under the District of Columbia's "Antimerger Law." Back
5Accordingly, the proceeding initiated by the Board in its October 9 order will be referred to herein as the "ONJ Proceedings. Back
6The Ratepayer Advocate filed a motion on December 31, 1996 requesting an adjournment of the January hearing dates until the first week of February because its consultant, Michael Dirmeier, would be unavailable on these dates. Without an adjournment, the Ratepayer Advocate's review and participation in the hearings would have been severely impaired. Back
7In the Matter of the Board's Review of the Amended and Restated Agreement and Plan of Merger Dated as of April 21, 1996 by and between NYNEX Corporation and Bell Atlantic Corporation, Docket No. TM96070504 and I/M/O the Board's Inquiry into Bell Atlantic-New Jersey, Inc.'s, Progress and Compliance with Opportunity New Jersey, its Network Modernization Program, Docket No. TX96100707 (January 23, 1997). Back
8See, e.g., N.J.S.A. 48:2-13, which provides in pertinent part that "[t]he Board shall have general supervision and regulation of and jurisdiction and control over all public utilities . . .," and Petition of Elizabethtown Water Co., 107 N.J. 440, 449 (1987) (holding that the Board has been given "considerable discretion on exercising those powers."). Back
9See also I/M/O the Proposed Transfer of Realty consisting of a 365.42 Acre Piece of Property Located in Bridgewater Township by Elizabethtown Water Company, BPU Docket No. WM8602235 (July 2, 1987). Back
10Specifically, the Board held as follows:
". . . [T]he Company's ratepayers are equitable entitled to a fair share of the gain potentially realizable on the fair market value of the subject property in return for their contribution toward the cost of maintaining this property during the period in which it was included in rate base. Toward this end, we determine a 50% sharing of the potential net gain on the fair and equitable sharing between the Company's ratepayers and the shareholders of its parent corporation. We believe that such distribution will adequately compensate the ratepayers for their past contributions towards the maintenance of the property and will allow the Company its fair share commensurate with the risks borne by its shareholders . . ."
Hackensack Water, at 2. Back
11See also I/M/O Pacific Enterprises, et al., Cal. PUC Docket No. 96-04-038 (Petition filed by Pacific Enterprises and Enova Corp. recommending a 50-50 sharing of a $1.2 billion merger savings). Back
12The Federal Energy Regulatory Commission ("FERC") approved the merger between Enron and Portland General, noting that the combined company proposed a four-year wholesale rate freeze, thereby limiting ratepayer concerns. Enron Corp., on behalf of Enron Power Marketing, Inc., et al., Docket Nos. EC96-36-000, ER96-3065-000, ER97-708-000, 78 F.E.R.C. 61 (February 27, 1997). This approval is consistent with a policy statement recently issued by FERC on evaluating public utility mergers. FERC Order No. 592, Docket No. RM96-6-000. That statement requires all petitions requesting approval of utility mergers to propose various ratepayer protections, including wholesale rate freezes and/or reductions. Back
13See Appendix D attached hereto. Back
14It is curious that BA-NJ asserts that there is no indication that NYNEX and Bell Atlantic would have competed against one another absent the merger, (See Lauer Supplemental Response to DRA-4-32, attached hereto as Appendix E), when the United States Department of Justice ("DOJ") recently discovered information in an electronic mail message that Bell Atlantic planned to invade NYNEX's market. See J.R. Wilke, NYNEX Sale Is Set To Clear Justice Hurdle, Wall St. J., Feb. 28, 1997, attached hereto as Appendix F). Back
16The $40 million annual cost to BA-NJ is only 7% of the cost savings quantified by Bell Atlantic and 4% of the cash flow benefits quantified by Bell Atlantic. Back
17By contrast, other states have instituted initiatives to ensure affordable services to customers in this category. For example, the State of Ohio offers a range of low income assistance, including special funding for basic services (including a waiver of deposits, service connection charges and the federal subscriber line charge, as well as other bill discounts), free touch-tone service, discounted rates for call control features like toll restriction and blocking; reasonable payment arrangements, access to 911 when local service has been disconnected and the option of flat-rate or usage-sensitive local service. I/M/O the Commission's Investigation Relating to the Establishment of Local Exchange Competition and Other Competitive Issues, 164 P.U.R.4th 214 (Ohio P.U.C., Sept. 27, 1995). Back
18See also Belinfante, Alexander, Telephone Penetration By Income By State, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission (February 1997), attached hereto as Appendix I. Back
19In BPU Docket No. TX94090388, it was reported that New Jersey had 2,549 customers participating in the Link-Up America program. Transcript p. 1272, May 15, 1995. Back
20In the last three years, NYNEX has been penalized for its failure to meet telephone service quality standards and, consequently, subject to penalties in at least three of the jurisdictions in which it operates: New York, Massachusetts and Maine. Staff Exhibit 5, attached hereto as Appendix K. In New York alone, in November 1996, the Commission found that NYNEX's performance warranted $72.9 million in penalties, and after granting certain waivers, ordered $62.3 million in rebates. See Id. Back
21BA-NJ's performance in the following categories was lower in the year ending September 1996 than in 1993, 1994 and 1995: (1) percentage of service order provisioning completed within 5 working days; (2) percentage of service order provisioning appointments met; and (3) percentage of directory assistance calls answered within 10 seconds. RPA Exh. 18, attached hereto as Appendix L. In addition the service standards regarding the percentage of BA-NJ customers having no difficulty reaching repair were below the targeted levels in July and September 1996. Id. These standards also dropped from 1995 to the year ending 1996 by approximately 450 to 500 basis points. Id. In addition, the service standard regarding the percentage of service trouble reports cleared within 48 hours experienced a percentage decrease of approximately 480 basis points from 1995 to the year ending September 1996 and this service standard was below the exception and surveillance levels in July 1996 and August 1996. Id. Finally, in a recent survey Bell Atlantic ranked fifth among the seven regional Bells in customer satisfaction according to the Federal Communications Commission. Staff Exh. 8, attached hereto as Appendix M. Back
22The ONJ Plan contains a comprehensive set of service quality standards established by the Board which cover service installation, operator handled calls, network call completion, transmission and noise criteria, and customer trouble reports. Back
Dated: March 21, 1997
Cases
I/M/O Petition of Atlantic City Electric Co., for Approval of a Change of Ownership and Control, BPU Docket No. EM9720103
I/M/O the Board's Inquiry into BA-NJ's Progress and Compliance with Opportunity New Jersey, Its Network Modernization Program, Docket No. TX96100707 (October 18, 1996)
I/M/O the Board's Review of the Amended and Restated Agreement and Plan of Merger Dated as of April 21, 1996 by and between NYNEX Corporation and Bell Atlantic Corporation, Docket No. TM96070504 (Jan. 22, 1997)
I/M/O Enron Corp., on behalf of Enron Power Marketing, Inc., et al., Docket Nos. EC96-36-000, ER96-3065-000, ER97-708-000, 78 F.E.R.C.P61, 179 (February 27, 1997)
I/M/O the Application of Enron Corp., for an Order Authorizing the Exercise of Influence over Portland General Electric Co., Oregon PUC, Docket No. UM814 (August 30, 1996)
I/M/O The Petition of The Hackensack Water Company For Approval of the Transfer of Real Property,BPU Docket No. 8312-1096 7,8I/M/O the Application of New Jersey Bell Telephone Company for Approval of its Plan for an Alternative Form of Regulation, Docket No. TX96100707 (May 6, 1993)
New Jersey Resources Corp. V. NUI Corp., BPU Docket No. 8312-1-93, 57 PUR4th 709 (January 31, 1984)
I/M/O Pacific Enterprises, et al., Cal. PUC Docket No. 96-04-038
I/M/O Pacific Telesis Group, et al., Cal. PUC Docket No. 96-04-038, ALJ Decision (February 21, 1997)
I/M/O Puget Sound Power and Light Company, et al., Washington UTC, Docket Nos. UE-951270, UE-960195 (July 10, 1996)
I/M/O the Proposed Transfer of Realty consisting of a 365.42 Acre Piece of Property Located in Bridgewater Township by Elizabethtown Water Company, BPU Docket No. WM8602235 (July 2, 1987)
Re Southwestern Public Service Co., Case No. 2678, Jan. 28, 1997 (N.M.P.U.C.)
Statutes
N.J.S.A. 48:2-13
N.J.S.A. 48:3-7
N.J.S.A. 48:1 et seq.
N.J.S.A. 48:3-10
N.J.S.A. 48:3-7(a)
Miscellaneous
Addendum III - Table 2.2 of the FCC Monitoring Report: Link Up America: Lifeline Connection Assistance and Deferred Payments, January 1 thru December 31, 1994
Belifante, Alexander, Telephone Subscribership in the United States, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission, Chart 3 (February 1996)
BPU Docket No. TX94090388
FERC Order No. 592, Docket No. RM96-6-000.
In the Matter of Federal-State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96-45, at 244 (November 7, 1996).
Notice of Proposed Rulemaking, CC Docket No. 95-115 at 5 (FCC No. 95-281, Adopted July 13, 1995)
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