STATE OF NEW YORKPUBLIC SERVICE COMMISSION

OPINION NO. 97-8

CASE 96-C-0603 - Proceeding on Motion of the Commission as tothe Joint Petition of New York TelephoneCompany, NYNEX Corporation and Bell AtlanticCorporation for a Declaratory Ruling That theCommission Lacks Jurisdiction to Investigateand Approve a Proposed Merger Between NYNEX anda Subsidiary of Bell Atlantic or, in theAlternative, for Approval of the Merger.

CASE 96-C-0599 - Petition of the New York Citizens UtilityBoard, the Consumer Federation of America, theAmerican Association of Retired Persons,Consumers Union, Mr. Mark Green, Ms. CatherineAbate, the Long Island Consumer Energy Projectand the International Brotherhood of ElectricalWorkers T-6 Council (Collectively the "ConsumerCoalition") for an Investigation of theProposed Merger of NYNEX Corporation and BellAtlantic Corporation.

CASE 96-C-0821 - Joint Petition of Cellco Partnership and BellAltantic NYNEX Mobile, Inc. for a DeclaratoryRuling that further Commission Approval is notrequired under Public Service Law Section 99 (2) as a result of the merger a wholly-ownedsubsidiary of Bell Atlantic Corporation intoNYNEX Corporation or, in the alternative, forapproval of this transaction.

OPINION APPROVING PROPOSEDMERGER SUBJECT TO CONDITIONS

Issued and Effective: May 30, 1997

CASES 96-C-0603, 96-C-0599 and 96-C-0821

TABLE OF CONTENTS

PageAPPEARANCES

INTRODUCTION 1

Background 1

Overview of the Parties' Positions 4

JURISDICTIONAL ISSUES 5

Commission Authority Under the Public Service Law 5

Petitioners' Interstate Commerce Argument 9

Discussion 12

STANDARD OF REVIEW 15

Parties' Positions 15

Discussion 16

PUBLIC INTEREST ANALYSIS 17

In General 17

Competition 18

Service Quality 21 Economic Impact 23

Impact of the Merger on Regulation 26

The Performance Regulatory Plan and Rates 27

Discussion 28

CONCLUSION 32

APPENDIX A - March 21 Order

APPENDIX B - Detail of Parties' Positions

CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 1 of 3

APPEARANCES

FOR DEPARTMENT OF PUBLIC SERVICE STAFF:

Saul M. Abrams and Andrew M. Klein, Staff Counsels,Three Empire State Plaza, Albany, New York 12223-1350.

FOR NEW YORK TELEPHONE COMPANY and NYNEX:

Saul Fisher, Counsel, William Smith, Counsel, andRobert P. Slevin, Attorney, 1095 Avenue of theAmericas, New York, New York 10036.

Robinson, Silverman, Pearce, Aronsohn & Berman, LLP (byAndrew Irving, Esq.), 1290 Avenue of the Americas, NewYork, New York 10104.

FOR BELL ATLANTIC CORPORATION:

John M. Walker, Regulatory Counsel, 1320 North CourtHouse Road, 8th Floor, Arlington, Virginia 22201.

FOR NEW YORK STATE ATTORNEY GENERAL'S OFFICE:

Pamela Jones Harbour, Assistant Attorney General,120 Broadway, Anti-Trust Bureau 2601, New York, NewYork 10271.

FOR NEW YORK STATE CONSUMER PROTECTION BOARD:

Alfred Levine, Attorney, and Douglas W. Elfner, UtilityIntervenor, 5 Empire State Plaza, Suite 2101, Albany,New York.

FOR NEW YORK CITIZENS UTILITY BOARD; CONSUMERS COALITION:

Robert Ceisler, Executive Director, 146 WashingtonAvenue, Albany, New York 12210.

FOR PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC.:

B. Robert Piller, Executive Director, 90 State Street,Albany, New York 12207.

FOR AT&T COMMUNICATIONS OF NEW YORK:

Harry Davidow, Chief Regulatory Counsel, 32 Avenue ofthe Americas, New York, New York 10013.

CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 2 of 3

APPEARANCES

FOR SPRINT:

Couch, White, Brenner, Howard & Feigenbaum, LLP (byDoreen M. Unis, Esq.), 540 Broadway, Albany, NewYork 12201.

Craig D. Dingwall, Attorney, 1850 M Street, NW,Suite 1100, Washington, D.C. 20036.

FOR TIME WARNER COMMUNICATIONS HOLDINGS, INC.:

LeBoeuf, Lamb, Greene & Macrae (by Noelle M. Kinsch,Esq. and Brian T. Fitzgerald, Esq.), One CommercePlaza, Suite 2020, Albany, New York 12210.

FOR MCI TELECOMMUNICATIONS CORPORATION:

Blumenfeld & Cohen (by Gary M. Cohen, Esq., andElise P.W. Kiely, Esq.), 1615 M Street NW, Suite 700,Washington, D.C. 20036.

FOR NEW YORK STATE TELEPHONE ASSOCIATION, INC.:

Robert R. Puckett, Vice President, RegulatoryRelations, 100 State Street, Albany, New York 12207.

FOR CWA LOCALS 1112, 1104, 1106, 1114, 1116, 1123, 1124, 1127,1128, 1129, and 2336:

Donna M. Conroy, President, Local 1112, 7854 OswegoRoad, Liverpool, New York 13090.

FOR COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO:

Kenneth R. Peres, Research Director, District 1,80 Pine Street, 37th Floor, New York, New York 10005.

FOR COMMUNICATIONS WORKERS OF AMERICA:

Law Offices of Gabrielle Semel (by Gabrielle Semel,Esq.), 218 West 40th Street, 12th Floor, New York, NewYork 10018.

FOR IBEW LOCAL 2213:

Weissman & Mintz (by David A. Mintz, Esq.), 80 PineStreet, 33rd Floor, New York, New York 10005.

CASES 96-C-0603, 96-C-0599, and 96-C-0821 Page 3 of 3

APPEARANCES

FOR JMJ ASSOCIATES:

Jeffrey Shankman, Executive Vice President, 271 MadisonAvenue, New York, New York 10016.

FOR COMPETITION POLICY INSTITUTE:

Ronald J. Binz, President, 3773 Cherry Creek NorthDrive No. 1050, Denver, Colorado 80209.

FOR STATISTICAL PHONE INFORMATION SYSTEMS ET AL.:

Karen Burstein, Esq., 258 Broadway, 2C, New York, NewYork 10007.

STATE OF NEW YORKPUBLIC SERVICE COMMISSION

COMMISSIONERS:

John F. O'Mara, ChairmanEugene W. ZeltmannThomas J. Dunleavy

CASE 96-C-0603 - Proceeding on Motion of the Commission as tothe Joint Petition of New York TelephoneCompany, NYNEX Corporation and Bell AtlanticCorporation for a Declaratory Ruling That theCommission Lacks Jurisdiction to Investigateand Approve a Proposed Merger Between NYNEX anda Subsidiary of Bell Atlantic or, in theAlternative, for Approval of the Merger.

CASE 96-C-0599 - Petition of the New York Citizens UtilityBoard, the Consumer Federation of America, theAmerican Association of Retired Persons,Consumers Union, Mr. Mark Green, Ms. CatherineAbate, the Long Island Consumer Energy Projectand the International Brotherhood of ElectricalWorkers T-6 Council (Collectively the "ConsumerCoalition") for an Investigation of theProposed Merger of NYNEX Corporation and BellAtlantic Corporation.

CASE 96-C-0821 - Joint Petition of Cellco Partnership and BellAltantic NYNEX Mobile, Inc. for a DeclaratoryRuling that further Commission Approval is notrequired under Public Service Law Section 99 (2) as a result of the merger a wholly-ownedsubsidiary of Bell Atlantic Corporation intoNYNEX Corporation or, in the alternative, forapproval of this transaction.

OPINION NO. 97-8

OPINION APPROVING PROPOSEDMERGER SUBJECT TO CONDITIONS

(Issued and Effective May 30, 1997)

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Cases 96-C-0603 and 96-C-0599, Order Instituting Proceedingand Inviting Comments (issued August 9, 1996).

2 Cellco, a Delaware general partnership, is owned andcontrolled by entities that are owned or controlled by eitherBell Atlantic or NYNEX. The joint petition, datedSeptember 6, seeks a declaratory ruling that no Commissionapproval is necessary for the impact of the BellAtlantic/NYNEX merger on Cellco or, in the alternative, forapproval of such impact. Hearings in that case had beenrequested by Communications Workers of America (CWA) inOctober 1996. In a letter from its counsel to the Judge datedDecember 13, 1996, CWA announced that it had settled itsissues with BANM and was withdrawing from participation inthese proceedings.

-2-

BY THE COMMISSION:

INTRODUCTION

Background

NYNEX Corporation (NYNEX) and Bell Atlantic Corporation

(Bell Atlantic) announced their intention to merge in April 1996.

These proceedings were instituted following submission of a joint

petition by New York Telephone Company (New York Telephone),

NYNEX and Bell Atlantic (collectively, Petitioners) for a

determination that the Commission lacks jurisdiction over the

proposed merger or alternatively for approval of it, and a

petition by several parties joining forces as the "Consumer

Coalition" to review the merger.1 In November, we referred to

these proceedings the issues raised by a joint petition of Cellco

Partnership (Cellco) and Bell Atlantic NYNEX Mobile, Inc. (BANM),

in Case 96-C-0821, for approval of changes in the ownership

interests of Cellco resulting from the proposed merger of Bell

Atlantic and NYNEX.2

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Cases 96-C-0603 and 96-C-0599, Order Establishing Proceduresand Schedule (issued October 2, 1996); Cases 96-C-0603 and96-C-0599, Order Clarifying Procedure and Granting Rehearingin Part (issued November 20, 1996).

2 In addition to the Petitioners, initial briefs were filed bythe Department of Public Service staff (staff), the ConsumerProtection Board (CPB), the Attorney General of the State ofNew York (Attorney General), the New York Citizens UtilityBoard (CUB), the Competition Policy Institute (CPI), AT&TCommunications of New York, Inc. (AT&T), MCITelecommunications Corporation (MCI), Southern New EnglandTelecommunications Corporation, Inc. (SNET), CablevisionLightpath, Inc. (Lightpath), Time Warner CommunicationsHoldings, Inc. (TW Comm), Teleport Communications Group, Inc.(TCG), Statistical Phone Information Systems (SPIS), J.M.J.Associates, Inc. (JMJ Associates), and Erie County, the Cityof Buffalo, and Nassau County (collectively Erie County).

-3-

The process commenced with the submission of initial

and reply comments. Thereafter, we instituted procedures calling

for discovery by all parties, the filing of direct and responsive

testimony, and an en banc hearing before the full Commission,

General Counsel, and the presiding Administrative Law Judge, held

on December 16, 1996.1 Following the hearing, the parties

convened for settlement negotiations on January 6, 1997, which

ended unsuccessfully on January 9, 1997. A briefing schedule was

subsequently announced, and initial and reply briefs were filed

on February 5 and February 12, 1997.2

The Commission has also received correspondence

concerning these proceedings, and a series of thirteen public

statement hearings and educational forums was conducted around

the state. There were about 90 speakers at the public statement

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Public statement hearings were held in Malone on November 19,Brooklyn on November 26, Troy on November 26, Buffalo onDecember 2, Syracuse on December 3, Queens on December 3,White Plains on December 4, Huntington on December 5,Manhattan on December 6, Glen Falls on December 9, the Bronxon December 10, Poughkeepsie on December 11, and Binghamton onDecember 11.

2 Cases 96-C-0603 and 96-C-0599, Order Approving Proposed MergerSubject to Conditions (issued March 21, 1997) (March 21Order). The March 21 Order is attached hereto as Appendix A.

-4-

hearings,1 including members of the general public,

representatives of private firms and government agencies, as well

as legislators. We have also received approximately 30 letters,

a few from consumers, but mostly from organizations or state or

federal legislators.

At sessions held on March 19 and 20, 1997, we discussed

the proposed merger, and decided to approve it if Petitioners

unconditionally accepted certain conditions2 by

March 31, 1997. In letters filed on March 31, 1997, and April 8,

1997, as discussed below, Petitioners have unconditionally

accepted our conditions, and accordingly we find that the merger

is in the public interest and is approved. This opinion and

order sets forth the positions the parties advanced in these

proceedings, and sets forth more thoroughly than in our March 21

Order the basis for our conclusions and conditions.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 The parties' positions are discussed generally in the body ofthis opinion, and, more detailed description of some of themis included in Appendix B, which is attached hereto. All ofthe arguments raised by the parties have been considered inreaching the decision in this proceeding.

-5-

Overview of the Parties' Positions3

Petitioners have taken the position throughout these

proceedings that we lack the jurisdiction to approve or

disapprove the proposed merger. Should we conclude we have

jurisdiction, Petitioners assert, we should find that the

proposed merger is in the public interest and approve it without

conditions.

The other parties generally oppose Petitioners'

position. Those parties that address the jurisdictional issue

argue that we have approval jurisdiction and responsibility in

connection with the proposed merger. Three parties (AT&T, MCI,

and the Attorney General) argue that merger approval should be

denied, and two parties (SNET and CUB) state that denial of

approval is their primary recommendation, while approval with

certain recommended conditions is their secondary recommendation.

Several other parties (TW Comm, CPB, staff, Lightpath,

and CPI), although not expressly recommending disapproval, argue

that the proposed merger is not in the public interest without

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 In addition, comments were filed by two non-parties, the Cityof New York (the City) and Communication Careers for Latinos,Inc. (CCL), expressing concern about the merger and suggestingspecific conditions for its approval.

Comments and Reply Comments were also filed by the HonorableAlbert Vann, New York State Assembly, Chairman of the StandingCommittee on Corporations, Authorities & Commissions. Assemblyman Vann, who also participated in negotiations.

-6-

substantial conditions.1 Finally, several parties (SPIS, JMJ

Associates, and Erie), argue that the Commission should defer

action on the merger proposal; in particular, SPIS and JMJ argue

that we should resolve the information provider case (Case

93-C-0451) before passing on the proposed merger, and Erie

requests that the merger be delayed until NYNEX agrees to discuss

the issue of rates.

JURISDICTIONAL ISSUES

Commission Authority Underthe Public Service Law

Petitioners argue that the Commission's jurisdiction to

approve or disapprove the proposed merger could only stem from

Public Service Law (PSL) §§99(2), 100, or 108, and that none of

these sections vests us with such authority.

Petitioners argue that the proposed merger involves

none of the transactions contemplated by section 99(2) because

NYNEX is a holding company which holds no franchises and owns no

utility assets. They contend, therefore, that the merger

agreement does not call for the assignment, transfer or lease of

any of the assets or franchises of any regulated New York

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 15.

-7-

Telephone Corporation. The merger, Petitioners say, involves

only the acquisition of the capital stock of NYNEX.

Likewise, Petitioners argue that PSL §100, which

prohibits the acquisition of any stock of a telephone corporation

by another telephone corporation or more than 10% of the stock of

a telephone corporation by any stock corporation without

Commission approval, gives the Commission no authority over the

proposed merger. Petitioners argue that, while New York

Telephone is a "telephone corporation organized or existing under

or by virtue of the laws of this state," its capital stock will

not be "acquired or transferred" as part of the merger.1

Although NYNEX's stock is to be acquired, Petitioners continue,

NYNEX is not a "telephone corporation" as defined by PSL §2(17),

nor is it organized or existing under New York Law, because it is

a Delaware corporation.

As to PSL §108, Petitioners argue that the Commission's

authority to approve the "dissolution . . . merger or

consolidation" of public utility corporations provided in that

section is inapplicable for the same reasons. That is, NYNEX is

not a "public utility corporation" under PSL §2(23) because it is

not a utility company, and because New York Telephone, although

it is such a corporation, "is neither dissolving nor being merged

or consolidated with any other entity." Petitioners state that

NYNEX will not seek to file a certificate of merger with the

Department of State of the type referred to in §108 and,

accordingly, that section does not apply to this transaction.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Case 93-C-0777, American Telephone and Telegraph Company,Ridge Merger Corporation, Order Asserting Jurisdiction AndApproving Transaction (issued December 31, 1993).

2 Petitioners cite, for example, provisions relating toaffiliate transactions and the like, under PSL §110.

3 Petitioners' Initial Brief, p. 19.

-8-

Petitioners acknowledge that we have previously

asserted and exercised jurisdiction to approve the merger of a

parent corporation when we acted upon AT&T's acquisition of the

outstanding capital stock of McCaw Cellular Communications, Inc.,

a holding company with interests in regulated telephone

companies.1 There, Petitioners note, we indicated jurisdiction

under §100 would be asserted over such a transaction absent proof

that transfer of the stock of a holding company that indirectly

has a controlling interest in a New York telephone corporation

does not effectively constitute a transfer of an interest in such

a telephone corporation. However, Petitioner asserts, there is

no basis in the PSL for implying authority over such an indirect

transfer. Direct authority over holding companies elsewhere in

the PSL is fairly limited, Petitioners reason,2 and in any event

NYNEX does not "exercise the kind of control over New York

Telephone contemplated by that standard."3

Moreover, the fact that NYNEX and New York Telephone

are distinct corporations, each with its own independent board of

directors, Petitioners assert, is enough to defeat any claim that

NYNEX is the "alter ego" of New York Telephone. "In short,"

Petitioners state, "there is no question that New York Telephone

exists independently of NYNEX Corporation. There is, therefore,

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 20.

2 AT&T's Initial Brief, p. 4.

-9-

no basis for asserting jurisdiction over this merger based on an

alter ego theory . . . ."1

Staff, CPB, CUB, and AT&T respond, all asserting that

the Commission has the authority and responsibility to assert

jurisdiction in this matter. These parties argue that the Bell

Atlantic acquisition of NYNEX's stock essentially constitutes an

acquisition of New York Telephone. Staff asserts as well that

the proposed merger constitutes a "contract or agreement . . .

with reference to or affecting" New York Telephone's franchise or

right to provide telecommunications services in New York State,

hence invoking PSL §99(2).

AT&T concurs, adding that Petitioners' argument that

NYNEX does not have a direct interest in the franchises and

facilities owned by New York Telephone is specious. The language

of §99(2), AT&T argues, "renders invalid not only a direct

franchise transfer, but also 'any agreement . . . made with

reference to or affecting any such franchise or right,' unless

that agreement is approved by this Commission."2 Indirect

control through a wholly-owned subsidiary, AT&T reasons, confers

the right to "operate" a telephone company. Moreover, in

permitting itself to be acquired by Bell Atlantic, NYNEX is

transferring that right to Bell Atlantic. Explicit in this

record, AT&T argues, are promises and commitments made by Bell

Atlantic and NYNEX as to how the new Bell Atlantic will operate

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 In its reply brief, staff advances the same point, notingnumerous changes to New York Telephone Petitioners say will bebrought about by the merger, including changes to corporatestructure and operations. Staff argues: "Petitioners cannotclaim that the proposed merger would affect NYT by providingsome alleged benefits and then say it would not affect NYTwhen convenient for their jurisdictional argument. Petitioners simply cannot have it both ways." Staff's ReplyBrief, p. 4.

2 AT&T cites Case 95-C-0078, Petition of Sprint Corporation fora Declaratory Ruling Disclaiming Jurisdiction, Order ApprovingTransaction (issued May 19, 1995).

3 AT&T's Initial Brief, p. 9.

-10-

its New York Telephone subsidiary.1 Such reasoning, AT&T

asserts, also establishes that §100 approval is also required

here.2

As to Petitioners' argument that New York Telephone is

independent from NYNEX, and its point that New York Telephone has

its own independent board of directors, AT&T argues that:

"[W]hat this says is that the new holdingcompany will have absolute authority to controlthe independence (or even the existence) of theboard of directors of New York TelephoneCompany but has no present plans to exercisethat authority. The fact of that authority,however, is enough to establish conclusivelythat the Commission has jurisdiction over thismerger under [PSL] §100.3

CUB also argues that our jurisdiction to regulate New

York Telephone can be implied from the need to address regulatory

issues pertaining to New York Telephone that are materially

affected by the proposed merger. Thus, CUB suggests, we have

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 26. Petitioners cite Edgar v. MITE Corp., 457 U.S. 624, 643 (1982) and Tyson Foods, Inc. v. McReynolds, 865 F.2d 99 (6th Cir. 1989).

2 Petitioners cite, inter alia, Healy v. The Beer Institute,491 U.S. 324, 335-36 (1989) as to the need for "maintenance ofa national economic union unfettered by state-imposedlimitations on interstate commerce."

-11-

implied authority to condition approval of the proposed merger

based upon our broad regulatory authority.

Petitioners' Interstate Commerce Argument

Even if New York State law confers upon the Commission

jurisdiction over this transfer, Petitioners aver, "any

administrative order inhibiting the proposed Bell Atlantic/NYNEX

merger would be unconstitutional, because it would have a direct

and impermissible effect on interstate commerce and would amount

to a forbidden attempt by New York to regulate thousands of stock

transactions occurring in other states and involving the

securities of Delaware corporations."1 According to Petitioners,

Commission disapproval of the proposed merger would be in effect

an attempt to regulate commercial activity of the citizens of

other states, and therefore would violate the Commerce Clause of

the Constitution.2

In response, staff, TW Comm, and AT&T argue that

Petitioners' Commerce Clause argument is unsound. TW Comm and

staff assert that State action is permissible if it is designed

"to effectuate legitimate local interests, even where these have

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Reply Brief, p. 5.

2 TW Comm's Reply Brief, p. 8. Both parties cite Pike v. BruceChurch, Inc., 397 U.S. 137, 142 (1970); see also, Healy v. TheBeer Institute, supra, at 337.

3 Staff cites Arkansas Electric Coop. Corp. v. Arkansas PublicServices Commission, 461 U.S. 375 (1983).

-12-

an incidental effect on interstate commerce,"1 and "unless the

burden imposed on commerce is clearly excessive in relation to

the putative local benefits."2 Thus, legitimate state action

which only indirectly affects out-of-state investments is

permissible, staff continues, particularly where in-state

investments are affected in the same manner.3

The State's interest in regulating telecommunications

is clear, staff asserts, and approval of the proposed merger,

with conditions, would clearly have only an incidental effect, if

any at all, on interstate commerce. There is no way, staff adds,

that our action would interfere with the transfer of stock

certificates in connection with the merger. Similarly, TW Comm

argues that the burden of the limited conditions it has proposed

is small compared to the substantial State interest involved.

AT&T argues further that disapproval of the merger,

which it recommends, would also withstand constitutional

scrutiny. First, AT&T asserts, the cases discussed by

Petitioners, staff, and TW Comm involve dormant Commerce Clause

issues, that is, limitation of State action where Congress has

not acted; however, Congress has acted (in the Communications Act

of 1934) to expressly permit State regulation of intrastate

telephone service, making the requirements of the dormant

Commerce Clause irrelevant. The Supreme Court, AT&T continues,

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 AT&T cites Merrion v. Jicarilla Apache Tribe, 455 U.S. 130,154 (1982), citing Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 421-427, 431 (1946).

2 AT&T's Reply Brief, p. 10, citing Northeast Bancorp, Inc. v.Board of Gov. of the Fed. Reserve System, 472 U.S. 159, 174(1985); Wardair Canada v. Florida Dep't of Revenue, 477 U.S. 1, 12-13 (1986).

3 Louisiana Public Service Commission v. FCC, 476 U.S. 355, 370,375 (1986).

-13-

has held that the dormant Commerce Clause is implicated only when

Congress has not acted or purported to act; when Congress has

acted, the courts are no longer needed to prevent States from

burdening commerce, regardless of whether the courts would

invalidate the State regulation under the Commerce Clause in the

absence of congressional action.1 Once Congress chooses to

permit the States to exercise regulatory authority, AT&T asserts,

that authority is "invulnerable to constitutional attack under

the Commerce Clause."2

In the 1934 Act, AT&T continues, Congress created "dual

state and federal regulation of telephone service,"3 reserving to

the States regulation of intrastate communications; and as

relevant here, Congress determined that the authority given to

the FCC to regulate a proposal by "one or more telephone

companies . . . to acquire the whole or any part of the property

of another telephone company or other telephone companies or the

control thereof by the purchase of securities or by lease or in

any like manner" . . . shall not be construed "as in anywise

limiting or restricting the powers of the several States to

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 47 U.S.C. §221(a).

2 AT&T cites Arkansas Electric Coop Corp., supra, 461 U.S. at393-394.

-14-

control and regulate telephone companies."1 Thus, AT&T concludes,

Congress has specifically provided that the States are free to

regulate all aspects of intrastate telephone service, including

the direct or indirect control of a company like New York

Telephone.

Although the Commission need go no further to reject

Petitioners' Commerce Clause argument, AT&T posits, even a

dormant Commerce Clause analysis would not defeat Commission

disapproval of the proposed merger. Unlike the statutes in the

cases relied on by Petitioners, AT&T asserts, PSL §§99(2) and 100

are not aimed at regulating all "interstate mergers and tender

offers," only at regulating the ownership and control of

telephone companies organized under New York law and operating in

New York; and the Commission here is not projecting its

regulatory power into another state, merely reviewing a shift of

control over a New York telephone company.

In accord with staff and TW Comm, AT&T argues the

dormant Commerce Clause analysis to be: "Where [a] statute

regulates evenhandedly to effectuate a legitimate public

interest, and its effects on interstate commerce are only

incidental, it will be upheld unless the burden imposed on such

commerce is clearly excessive in relation to the putative local

benefits."2 In that regard, AT&T continues, it is well

established that States can regulate ownership and control of

local companies, even if the effect is mainly, or even solely,

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 AT&T cites Exxon Corp. v. Governor of Maryland, 437 U.S. 117(1978), holding that a statute providing that no producer orrefiner of petroleum products could operate any retail servicestation within the State did not impermissibly burdeninterstate commerce merely because it adversely affected out-of-state corporations wishing to own retail stations inMaryland. Id. at 127. AT&T goes on to argue that the States'interest in regulating utilities has been held to be one ofthe most important functions of their police power (ArkansasElectric Coop Corp., supra, at 377), and that this interesthas been held to outweigh the "minimal burden on interstatecommerce, . . . of control of a public utility's corporatestructure and investments." (Baltimore Gas & Elec. Co. v.Heintz, 760 F.2d 1408 at 1425 (4th Cir., 1985)).

2 AT&T cites Hoylake Investments Ltd. v. Washburn, 723 F. Supp.42, 47-49 (N.D. Ill., 1989), Doumari v. Casino Control Comm'nof New Jersey, 614 F. Supp. 1465, 1473-74 (D.N.J., 1985), andCentra, Inc. v. Chandlers Ins. Co., Ltd., 248 Neb. 844,863-64, 540 N.W.2d 318, 331-33 (1995).

-15-

upon out-of-state corporations.1 Finally, AT&T posits, it makes

no difference to this analysis that Bell Atlantic does not seek

to acquire New York Telephone directly, but indirectly by

purchasing its parent.2

Discussion

As indicated in our March 21 Order, this merger

includes at least three elements that bring it under the terms of

PSL §§99(2) and 100. First, New York Telephone currently

exercises its rights to operate telephone plant subject to the

control of NYNEX, but after the merger, New York Telephone will

exercise those rights subject to the control of a new

corporation, Bell Atlantic; the merger therefore requires our

consent under §99(2) because it affects the manner in which New

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-16-

York Telephone will exercise its rights to operate its system in

New York State. Second, §99(2) also provides that no telephone

company in New York State may transfer any part of its works or

systems without our approval. Because the merger transfers New

York Telephone's works and systems to another corporation, our

approval of Bell Atlantic's acquisition of NYNEX is required

under this provision of §99(2). Third, the stock of New York

Telephone is controlled by NYNEX. After the merger, it will be

controlled by Bell Atlantic. This acquisition, therefore,

requires our approval under §100.

Petitioners assert that it is New York Telephone's

parent, NYNEX, not New York Telephone, that is being transferred

or affected by the transaction. This assertion, however,

overlooks the fact that NYNEX itself is being reorganized and

absorbed into the new Bell Atlantic subsidiary. Moreover,

although Petitioners assert the merger involves the acquisition

of the capital stock of NYNEX, Bell Atlantic will not merely

assume control of NYNEX by owning its stock. Rather, NYNEX

shareholders will exchange their stock for Bell Atlantic stock,

effecting an absorption of NYNEX into Bell Atlantic. Thus, NYNEX

will cease to exist as a publicly held corporation and will not

continue to exist as anything like the current corporation, if at

all. The reality is that Bell Atlantic plans to purchase NYNEX

and all of its subsidiaries, and include them in a revised

corporate structure. We conclude our statutory authority to

review the proposed merger is clear.

Petitioners' Commerce Clause arguments also lack merit.

AT&T's position that a dormant Commerce Clause review is

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 March 21 Order, p. 3, n. 1.

2 General Motors Corp. v. Tracy, 1997 U.S. LEXIS 692(February 18, 1997).

3 Our approval of the merger with conditions, as staff hasobserved, has no effect whatsoever on securities transactions,the effect complained of by Petitioners.

-17-

inapplicable here, as we pointed out in the March 21 Order,1 is

correct; Congress' protection of the states' jurisdiction over

telephone company acquisitions and mergers is reflected in

47 U.S.C. §221(a).

This conclusion is reinforced by a very recent Supreme

Court decision holding that Ohio's differential tax treatment of

natural gas sales by public utilities (all of whom are in-state)

and independent marketers (most of whom are out-of-state) does

not violate the Commerce Clause.2 Although the issues in that

case are different (there is no alleged discrimination in these

merger proceedings--only alleged effects on interstate commerce),

the court makes clear that where there is complementary federal

and state regulation of monopoly-provided essential services (as

under both the Natural Gas Act and the Telecommunications Act),

state regulation of in-state sales is exempt from attack under

the dormant Commerce Clause.

Our exercise of jurisdiction over this merger would, in

any event, pass muster under a dormant Commerce Clause analysis.

As we have pointed out, §§99 and 100 are even-handed, further the

legitimate interest of New York State in regulating telephone

service, and have a minimal, if any, impact on interstate

commerce.3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 The PRP's "Reservation Clause," §VIII(AXS). See Case92-C-0665, Performance-Based Incentive Regulatory Plans forNew York Telephone Company - Track 2, Recommended Decision(issued March 15, 1995), pp. 66-75.

2 Additional detail concerning the arguments of the parties iscontained in Appendix B.

3 Case 92-C-0238, Teleport Communications Group Inc., OpinionNo. 92-13 (issued November 18, 1992).

-18-

As we pointed out, as well, in our March 21 Order, we

conclude that our jurisdiction here is also grounded in our

authority under New York Telephone's Performance Regulatory Plan

(PRP or Plan). Our reservation of authority under the PRP allows

us to modify the PRP if "unforeseen circumstances in the opinion

of the Commission have such a substantial impact as to render

this Plan unreasonable . . . ."1 We conclude that the proposed

acquisition of NYNEX by Bell Atlantic is such an event, and we

have exercised our discretion under the Reservation Clause to

require modifications of the PRP, as discussed below.

STANDARD OF REVIEW

Parties' Positions2

Assuming our jurisdiction over the proposed merger,

various parties argue, we must determine whether the merger is

"in the public interest" (PSL §100). That standard, according to

Petitioners, is "whether the proposed transaction is likely to

undermine the provision of safe and adequate service at just and

reasonable rates."3

The parties do not appear to disagree with Petitioners'

assertion that a showing of material benefits is not needed.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 CPI's Initial Brief, p. 4.

2 Attorney General's Initial Brief, pp. 29-30.

-19-

CPI presents what appears to be a fair summary of the

public interest assessments required of the Commission, as viewed

by parties other than Petitioners:

CPI suggests that the Commission has threeduties in its review of this merger: (1) toensure that the interests of ratepayers areserved by the transfer of the New YorkTelephone system; (2) to ensure that theCommission can continue effectively toregulate the merged entity; and (3) todetermine what conditions should be placed onthe transfer to serve the policy goals of theCommission, especially the enhancement ofcompetition and the maintenance andimprovement of service quality.1

The major element of our public interest assessment,

other parties also appear to agree, involves the impact of the

merger on competition.

Some parties (notably MCI and the Attorney General)

argue that antitrust merger analysis, under §7 of the Clayton

Act, is somewhat analogous to the public interest review here.

The Attorney General, though noting it is not our task to

determine whether the merger may be actionable under federal or

New York State antitrust laws, urges us to consider the effects

of the merger on competition in New York telecommunications

markets as a "significant, if not determinative, aspect" of our

broader inquiry under the public interest standard; and in that

regard, the Attorney General posits, the antitrust laws can

provide "essential guidance."2

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-20-

These parties also caution, on the other hand, that

mechanical application of standards promulgated for the federal

Merger Guidelines would not necessarily be proper here. The

Merger Guidelines, MCI observes, are typically applied in markets

that are already competitive, whereas a possible inquiry here

would relate to potentially significant competition in

telecommunications markets that are only beginning to emerge from

monopolistic dominance.

Discussion

Although §99(2) requires Commission approval for

actions that could affect the exercise of a franchise, it does

not provide a standard for the Commission to review proposed

actions under §99(2). Accordingly, we need only have a rational

basis for allowing or rejecting such action.

With regard to stock transfers, §100 does not spell out

conditions where the Commission must approve stock transfers. It

provides, however, that we may not consent to the transfers

described therein unless they are shown to be in the public

interest. For the purposes of our §100 public interest analysis,

we agree, as a matter of discretion, that the proposed merger's

impact on competition may properly be considered.

PUBLIC INTEREST ANALYSIS

In General

Petitioners assert that the merger is in the public

interest because it will promote economic development within New

York State, enhance New York Telephone's service improvement

efforts, and will result in operating efficiencies that will

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-21-

enable the merged entity to bring new products and services to

the market more quickly. The merger does not harm competition in

the local exchange market, Petitioners argue, since the market is

already highly competitive, Bell Atlantic had no plans to enter

the New York market, and numerous other competitors possess entry

advantages equal to or greater than those possessed by Bell

Atlantic. In the interexchange market, they assert, the merger

will enhance competition by creating a large facilities-based

competitor that will be able to provide meaningful competition to

the incumbents.

On the other hand, the other parties to the proceeding

contend that unconditional approval of the merger is not in the

public interest, for a variety of reasons. Foremost among these

is the claim that the merger will adversely affect the

competitive landscape, as the merger removes a potentially

significant competitor from the New York market. Bell Atlantic,

they assert, possesses a unique blend of attributes not shared by

any other actual or potential competitor -- incumbent LEC

experience, geographic proximity, existing facilities, and name

recognition being the advantages most commonly cited. Absent the

merger, they argue that Bell Atlantic had plans to use its

advantages to compete in New York. Parties also contend that the

size of the new entity could retard the development of retail and

wholesale competition, and confer an unfair advantage in that it

would eliminate the need for NYNEX and Bell Atlantic to purchase

inter-region carrier access from each other. Various parties

also cite New York Telephone's service quality record, contending

that both end user and carrier-to-carrier service quality will

suffer even further as management attention is diverted,

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-22-

personnel are eliminated, the provisioning processes are

disrupted, and the competitive threat from Bell Atlantic is

removed. Finally, parties question the economic benefits claimed

by Petitioners, particularly with regard to employment and the

headquarters commitment.

The positions of the various parties with respect to

the public interest analysis are summarized below. A more

detailed discussion of the arguments they raised is attached as

Appendix B. All arguments, whether or not they are summarized

below or appended hereto, have been thoroughly considered in

reaching our conclusion that, as we have conditioned it, the

public interest favors approval of this proposed transaction.

Competition

In response to the various contentions that the merger

will impede local exchange competition in New York, Petitioners

concede the New York markets are highly concentrated, but assert

that: (1) while Bell Atlantic at various times studied the New

York local exchange and access markets, it never developed any

plans to enter these markets because it repeatedly found that

these markets were not economically attractive to it; (2) NYNEX's

behavior has never been influenced by Bell Atlantic's proximity,

because NYNEX did not perceive Bell Atlantic as a potential

competitor; and (3) Bell Atlantic entry into New York markets

would not in any event have affected the rates New York

Telephone's customers would pay, or the development of

competition in New York, given the numerous actual and announced

competitors in the New York markets. With regard to the

interexchange, long distance markets, moreover, Petitioners

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 See AT&T's Initial Brief, p. 23; CPI's Initial Brief, pp. 6-7.

-23-

assert that the merger will promote competition, since it will

create a viable competitor to the market share leaders.

The other parties, however, contend that the merger

gravely damages the potential for local competition in New York,

and some of them (particularly IXCs) contend it will have serious

anti-competitive effects in interexchange markets as well.

These parties vehemently dispute Petitioners' contentions,

arguing generally that Petitioners' denial of Bell Atlantic's

potential to be a significant competitive force in New York lacks

credibility. They dispute Petitioners' assertion that New York

is not a logical place for Bell Atlantic to compete out-of-

region. Some parties argue that the merger rationale itself

challenges the Petitioners' stance on this issue.1

The parties, including the Attorney General, staff,

AT&T, and MCI, variously maintain that Bell Atlantic's own

documents show a consistent intent to enter the New York markets,

and that it would have done so absent the merger. Bell Atlantic,

these parties submit, has had a generally expansionistic view,

and a specific strategy to compete out-of-region to offset in-

region competitive losses.

The Attorney General argues generally that Bell

Atlantic's strategy has been to develop a competitive out-of-

region presence, that New York State, and especially New York

City, figured "prominently and continuously" as a target market

for out-of-region long-distance service "from the inception of

such plans," and that Bell Atlantic's plans for long-distance

entry into New York appeared to have been shelved at about the

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Attorney General's Initial Brief, pp. 12-13. The documentsprovided by Attorney General have been received under a claimof confidentiality. Until confidentiality issues have beenresolved, we will not discuss them publicly.

2 See, for example, CPI's Initial Brief, p. 5 and MCI's InitialBrief, p. 4.

3 Petitioners' Reply Brief, p. 48.

-24-

same time that the last key barrier to the merger--disagreement

over the exchange ratio of the merging firms' shares--was

removed.1 Other parties and their witnesses are in accord with

the Attorney General's assessment.

Some parties take issue with Petitioners' contention

that the loss of Bell Atlantic as a potential competitor will

not, in any event, have a material impact on the level of

competition in New York markets. Several parties maintain

competition from other sources is not likely to be robust.2

Petitioners respond specifically to some of the

arguments not fully anticipated in their presentation.

Evidence of Bell Atlantic's intentions cited by other

parties, Petitioners say, are statements from only a few, dated

documents that are taken out of context. They also claim that

competitive options examined relate to large businesses, and not

to targeting small business or residential customers. Moreover,

Petitioners assert, views attributed to Bell Atlantic are "little

more than opinions expressed by individuals below--or entirely

outside--the corporate decision-making process. These statements

are affirmatively not accurate reflections of corporate policy."3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 54 (original emphasis).

2 Ibid., p. 55.

3 Petitioners argue, additionally, that alleged competitiveabuse of the access charge process is also not a merger-related issue, as it is being addressed in Cases 28425 and94-C-0095, as well as by the FCC.

-25-

In connection with the significance of Bell Atlantic's

loss as a potential competitor, Petitioners urge rejection of

arguments that the merger will hurt competition in New York's

long distance market, asserting that Bell Atlantic is no more

than a potential reseller in that market, whereas the merger

enhances competition because it "will eventually result in the

creation of a new facilities-based carrier in the NYNEX and Bell

Atlantic territories"1 whose combined long distance operations

"should result in increased efficiencies for customer benefit."2

Although Petitioners contend that New York Telephone,

because it is regulated and its rates constrained by the PRP,

does not have market power, they assert that any alleged unfair

advantage the merged entity might have does not create a merger

issue, but rather a problem that can be addressed in other

proceedings.3 Finally, they assert that the absolute size of a

merged entity is not relevant to a merger analysis, and they

point to the FCC's conclusion in the Pac Tel/SBC merger

proceeding that a merger of RBOCs is not ruled out by the 1996

Act and the need to enforce its provisions.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 31.

2 Tr. 975, 995, and 1,002-1,003. See, also, Tr. 996.

-26-

Service Quality

Petitioners argue that the merger will improve the

quality of New York Telephone's service in several ways, citing

"efficiencies and economies of scope and scale" that will enable

them "to achieve a minimum of $600 million in annual cost savings

(at the end of the third year following the merger)."1

Petitioners also assert that the merger will enhance

New York Telephone's service improvement efforts and the

achievement of PRP service improvement targets to which it

remains committed. NYNEX has publicly announced plans to

increase its New York State infrastructure investment by $1

billion over the next five years in its infrastructure. It has

also expressed its intention to hire an additional 750 to 1,000

new employees through the end of 1997 to deal with New York

Telephone's service quality issues.

In response to the assertion that the merger will

distract managers or cause service disruptions in New York,

Petitioners argue there is no merger-related need for additional

service quality measures, as evidenced by our acknowledgment that

New York Telephone has "steadily achieved substantial service

improvements in the time since NYNEX and Bell Atlantic announced

their agreement to merge."2

The other parties argue that New York Telephone's

service quality is the lowest among RBOCs in the nation and that,

absent significant competitive pressure, increased regulatory

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Initial Brief, p. 24.

2 See CPB's Initial Brief, p. 20 and Staff's Initial Brief,pp. 37-38.

3 The PRP limited New York Telephone's penalties toapproximately $80 million in 1995 if service quality did notshow any signs of improvement over 1994 base levels.

-27-

incentives and requirements will be necessary if New York

Telephone's service is to improve. They also argue that New York

Telephone's poor service in the wholesale provision of services

for resale and of service elements will adversely affect

competitors other than fully facilities-based service providers,

and that additional measures will therefore be needed to develop

and enforce carrier-to-carrier service standards.

Staff also directly questions the Petitioners'

assertion that cost savings and financial gains generated by the

merger would be used to provide improved service quality in

New York, noting that:

"The Petitioners have unabashedly stated thatthey plan to use the money generated from themerger for new ventures and other markets. . . ."1

Staff and CPB, particularly, emphasize NYNEX's poor

quality of service both in absolute terms, and in comparison with

other RBOCs'.2 Staff also emphasizes the decline in New York

Telephone's service quality during the first year of the PRP, and

observes in that first year New York Telephone incurred $72.9

million in penalties.3 Staff states that we have regarded New

York Telephone's performance under the PRP service quality

incentive program as disappointing, and asserts that "[s]ince the

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Initial Brief, p. 40.

2 SPIS and JMJ Associates urge consideration here of arecommended decision by Administrative Law Judge FrankRobinson concluding that poor service provided to InformationProviders (976 services providers) was not mere negligence,but willful misconduct. SPIS and JMJ Associates ask theCommission to defer action on the proposed merger until thosecases are decided. The Commission decided these cases at itsApril 30, 1997 session.

-28-

financial incentives and penalties have not brought about the

necessary service quality improvements, it is now obvious that

other measures must be undertaken."1

Other parties, including TCG, MCI, Lightpath, and TW

Comm, focus more on carrier-to-carrier service quality.2

Parties advance a variety of service-related proposals.

Several parties urge enhanced incentives for end-user service

quality beyond those now included in the PRP, including

increasing the PRP incentive amount, and other parties proposed

identifying specific carrier-to-carrier standards, reporting

requirements and enforcement mechanisms and penalties.

Economic Impact

Petitioners assert that the merger will have a positive

economic impact for a variety of reasons. First, they point to

the fact that the merger will create operating efficiencies and

economies of scope and scale that will enable the merged entity

to achieve a minimum of $600 million in annual cost savings by

the end of the third year following the merger. These savings,

they contend, will enhance New York Telephone's service

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-29-

improvement efforts, promote research and development, and enable

the merged entity to bring new products and services to the

market more quickly. Petitioners assert that these results, in

turn, will foster economic development within the State, and cite

the Bell Atlantic/NYNEX Mobile venture as evidence that this

merger will increase efficiency, promote competition, and

encourage economic development.

Petitioners also point to the fact that they have

agreed to maintain the headquarters of the merged corporation in

New York, asserting that this will enhance New York's image as

the "telecommunications capital of the world" and become "a

feeder industry" to other businesses. With regard to employment,

NYNEX and Bell Atlantic have committed to no union layoffs as a

result of the merger, and have stated that there will be a net

increase in New York-based jobs in 1997. Petitioners also

maintain that the merger will not undermine the PRP commitments

to freeze basic service rates and reduce other rates by

approximately $1.9 billion over the course of the Plan.

Various parties question the economic benefits claimed

by Petitioners. Staff, for example, questions precisely how the

operational efficiencies and cost savings claimed by Petitioners

will translate into tangible benefits for customers, and asserts

that efficiency savings, service quality improvements, and price

reductions would be expected absent the merger, as a result of

increased competitive pressure. AT&T puts forth a similar

position, citing with approval staff's conclusion that NYNEX and

Bell Atlantic have not demonstrated that efficiencies from the

merger are distinct from those that could be expected as a

response to increased competition. Since the merger results in a

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff observes that the joint proxy statement reports a netpresent value of the projected merger benefits to be between$3.85 billion and $8.33 billion; thus, staff's intrastate costsavings figure, which was not challenged or addressed byPetitioners, staff says is reasonable.

-30-

reduction in competitive pressure on New York Telephone, Staff

asserts, the benefits which Petitioners proclaim will not

translate into benefits for the State absent the implementation

of regulatory measures. Staff estimates that the operational

efficiencies and cost savings cited by Petitioners will generate

an additional $908 million in revenue attributable to New York

State, over the remaining term of the PRP. This amounts to an

average annual increase in net revenue of $182 million during the

transition years, growing, "conservatively," to over $300 million

annually during the later years of the PRP.1

Other parties are critical of the suggestion that the

location of the corporate headquarters in New York City will

provide a material economic benefit, particularly since

Petitioners failed to commit to the number of jobs the new

company will keep either at the headquarters or in the State as a

whole. Economic theory dictates that New York would actually

lose jobs, some conclude, as duplicative organizations are

eliminated and Bell Atlantic's more efficient operations survive.

Moreover, they assert, cost factors also favor the shifting of

operations toward the merged entity's southern major commercial

concentration, the South Jersey/Philadelphia area. And parties

point to their arguments with respect to competitive issues and

service quality impacts to support claims that the merger will

not provide economic benefits to New York State.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-31-

With respect to the Bell Atlantic/NYNEX Mobile example

cited by Petitioners, Southern New England Telephone argues that

the negative impact of the proposed merger is underscored by the

cellular joint venture's own poor record of performance. In

particular, Southern New England Telephone asserts that Bell

Atlantic/NYNEX Mobile exploits its hold on the cellular roaming

market by charging exorbitant access rates to its competitors

while not charging them to its affiliates, extracts huge profits

from fraud in the cellular market, and provides unacceptable

levels of service in the areas of fraud control and credit

refunds.

Impact of the Merger on Regulation

Petitioners assert that we will retain full authority

to regulate New York Telephone after the merger, and that the

various regulatory issues raised during this proceeding can and

should be handled elsewhere. Other parties, however, raise a

number of issues which, they assert, are necessarily intertwined

with the merger itself and must therefore be addressed now. Once

again, the particular arguments of the parties are set forth in

the Appendix.

On a macro scale, these parties raise an issue which

spans across all others -- will this Commission be able to

effectively regulate the new, larger entity? Given the sheer

size of the new company, they argue, any actions we take would

necessarily affect only a proportionately smaller part of the

overall conglomerate. Orders in areas as diverse as end-user

service quality, pensions, and competition, they assert, would

all be affected.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-32-

Parties also raise the issue of inappropriate affiliate

transactions, arguing that the merger may raise the likelihood

and impact of these transactions, and reinvigorate previously

resolved concerns. In the area of pensions and other post-

employment benefits ("OPEBs"), parties are concerned that past

overfunding of the New York Telephone pension plan could result

in a huge windfall to the merged entity and harm to NY

ratepayers.

Petitioners respond that many of the issues raised are

currently being addressed in other proceedings, and, where they

are not, new ones could certainly be instituted. Contrary to the

parties' assertions, Petitioners state that none of the

Commission's regulatory powers will be diminished as a result of

the merger, particularly given the continued importance of the

New York market.

With regard to the affiliate transaction issue,

Petitioners assert that the parties' concerns are unfounded. In

light of recent industry changes, they claim that less, not more,

regulation of affiliates is warranted, and point to New York

Telephone's petition for modification of the NYNEX Restructuring

Plan which was filed in August, 1996, for reasons they assert to

be unrelated to the merger. In the interim, however, both NYNEX

and Bell Atlantic have stated that they will adhere to the

current plan, as it may be amended.

Finally, Petitioners assert that the merger will have

no detrimental effect on pensions and OPEBs. The companies, they

say, will continue to comply with our standards and policies

previously set forth, and, although none are planned, any changes

would only be made in accordance with our policy statements.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-33-

The Performance Regulatory Plan and Rates

Petitioners contend that the merger should not trigger

any revisions to the Performance Regulatory Plan (PRP). New York

Telephone's obligations and actual performance, they argue, will

not be adversely affected as a result of the merger. As a

safeguard, they add, the PRP, with its inherent incentives,

together with all other regulatory measures, protects against any

negative results.

In exchange for the flexibility granted by the PRP,

Petitioners assert that New York Telephone made substantial

commitments. The merger, with its claimed efficiencies and

savings, they continue, is simply one of the ways by which NYNEX

is trying to meet these objectives. Petitioners assert that any

modifications to the Plan, such as rate reductions, without an

offsetting revision of New York Telephone's obligations, would

violate the spirit of the PRP. While acknowledging the existence

of the Reservation Clause in the plan, to which they agreed,

Petitioners argue that the merger is not such an "unforeseen

circumstance" that would be necessary to trigger the operation of

that clause.

Petitioners also assert that, aside from the PRP

itself, we should not make rate changes based on the merger. The

record in this proceeding, they argue, is inadequate to justify

any rate decreases since such a determination necessarily

involves consideration of factors not in the record here. In

addition, they say, the procedural prerequisites necessary for a

rate adjustment are also missing from this proceeding.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-34-

Other parties counter that the merger changes the

fundamental assumptions upon which the PRP was premised. The

merger, they assert, changes the financial and competitive

landscape to such a great extent that the PRP must be changed.

These parties argue that the merger is the paradigm unforeseen

circumstance, since an event of this magnitude was not even

envisioned at the time the PRP was negotiated.

Regarding the adequacy of the record, the parties point

out that it was Petitioners who repeatedly failed to provide

information during the course of the proceeding, and are

therefore barred from asserting any alleged insufficiency at its

conclusion. Despite Petitioners assertions to the contrary, they

add, a sufficient record most certainly exists. The record, they

continue, was built upon numbers and information obtained

directly from Petitioners' documents, some of which were prepared

for their Boards of Directors or filed with the Securities

Exchange Commission.

Discussion As we have concluded, the

question presented for our consideration is whether the merger of

NYNEX into Bell Atlantic is in the public interest. Petitioners

have been persuasive that the combination of these two companies

will result in a number of benefits to New York State, including

the location of the corporate headquarters in New York, up front

investment in resources allocated to improved service quality in

New York, and the potential for more vigorous competition in the

long distance markets. In addition, Petitioners believe the

merger will provide financial and operational benefits to the two

companies which have decided to merge, permitting them to operate

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-35-

more effectively in the global telecommunications market and it

is our view that, unless the public interest is adversely

affected, we should not interfere with a company's ability to

operate in the global telecommunications marketplace as it

chooses.

The opponents of the merger argue that the acquisition

is not in the public interest for a variety of reasons, most of

which focus on the potential impact of the merger on local

competition. As discussed, these arguments are grounded in

assertions that, if they had not chosen to merge, Bell Atlantic

and NYNEX would have been vigorous competitors in the local

exchange market in New York. Opponents have also asserted that

the development of robust local competition will be hindered by

the existence of a larger, richer local monopoly incumbent.

Thus, most of the arguments have centered on whether Bell

Atlantic would have entered New York, whether it would have been

a successful competitor, and whether the removal of the threat of

such entry has removed the incentive from NYNEX to provide its

ratepayers with the improved service and lower prices anticipated

when we approved its Performance Regulatory Plan.

This is an appropriate inquiry for this Commission,

and it differs from the strict anti-trust analysis which is

within the purview of the U.S. Justice Department and state

Attorneys General, because our intention is to ensure that New

York's ratepayers are not deprived, by this transaction, of the

benefits that vigorous local competition will bring.

The record in these proceedings supports the conclusion

that Bell Atlantic might have entered the local exchange market

in New York as a competitor, but that the impact of its absence

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-36-

is difficult to ascertain with certainty. Nevertheless, as a

local service provider, Bell Atlantic would have had an

understanding of the resources, commitment and difficulties of

becoming a full-fledged facilities-based competitor of NYNEX.

We have frequently stated our belief that dynamic local

exchange competition will provide benefits to ratepayers and to

the economy of this state, and therefore, as a general matter,

our preference would be for more, rather than fewer, competitors.

On balance, however, we conclude that, with the conditions we

have attached to our approval of this acquisition to ensure that

the merger provides benefits to New York's ratepayers, this

merger is in the public interest and should be approved.

As we stated in our March 21 order, the conditions we

have enunciated will assure that the benefits of greater

efficiency provided by the merger will be passed on to customers,

as Petitioners have claimed the emerging competitive market would

require them to be. However, it is difficult to predict at this

time how and when competition will emerge to provide the

incentive we anticipated. Many factors, in addition to the

merger, will likely be influential in this regard. For example,

we recently established permanent link rates and if and when

NYNEX is authorized to enter the interLATA market, these, among

other, developments may significantly alter the competitive

landscape.

In these circumstances, it is reasonable to preserve

our ability to assure competition develops timely and the

projected merger benefits are realized by consumers. We have

assured that the public interest is promoted by taking two

significant steps. The conditions we have attached to our

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-37-

approval will: first, protect customers' rights to a portion of

the merger savings; and, second, provide a vehicle for us to

offset the merger's potential diminution of competition.

These two steps will enable the Commission to monitor

the development of NYNEX's markets and if, contrary to

Petitioners' asserted expectations, substantial competition does

not appear to be developing, the Commission will, pursuant to the

authority we are reserving, be able to take corrective actions,

including reducing rates beyond the levels called for by the PRP.

Our objectives can be accomplished by requiring that certain

future costs, including exogenous costs, cost onsets related to

the opening of competitive markets, and revenue losses directly

due to access charge reductions, will be borne by shareholders,

unless NYNEX demonstrates that the company's conduct has promoted

competition, and that ratepayers have benefitted from competition

and from the merger.

The March 21 Order will be expressly incorporated as

part of this opinion, and we do not intend this discussion to

modify it in any way. However, it has become apparent that some

clarification is required.

It is necessary to clarify our intention regarding

order clause 5 of the March 21 Order. First, we reaffirm our

authority to require access charge reductions if necessary to

promote competition or improve efficiency, and second, we make

clear that recovery of revenues associated with any mandated

access charge reductions is conditioned upon our determination

that New York Telephone has met all three of the standards

contained in the March 21 Order. Further, contrary to any

suggestion in Petitioners' letters, our standard cannot

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-38-

reasonably be limited to considering these factors on a

retrospective basis only. Prospective (and individual)

evaluation, as is commonplace in our evaluation of costs and

financial information, is also available and should be

anticipated. Needless to say, however, our decision on access

charges and rate recovery must and will reflect a fair balancing

of ratepayer and shareholder interests.

With respect to the concerns about service quality, we

will consider carefully New York Telephone's progress in

improving service quality as an aspect of the revised PRP review

contemplated in order clause 6 of the March 21 Order. Consistent

with our expectation that the emergence of local exchange

competition can be expected to result in improved service as well

as lower prices, we want to make it clear now that the degree of

service quality improvement is one of the issues we expect to

review in connection with our evaluation of the benefits of

competition that customers have enjoyed.

Beyond that, as the March 21 Order makes clear, we have

revised our end user service quality targets to reflect the much

higher service quality currently achieved by Bell Atlantic and

elsewhere in the merged service territory. We regard the

opportunity permitted by the merger--through, for example,

adoption of best practices--to secure for New York Telephone's

customers service of the same high quality enjoyed by customers

in affiliated service territories as a significant benefit of the

transaction. Moreover, to assure that management is sufficiently

focused on service quality improvements, we have required the

company to set forth its detailed plans for infrastructure

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-39-

investment and acquisition and maintenance of a work force

adequate to achieve these goals.

Our other conditions have been clearly identified and

well-explained in the March 21 Order, and nothing needs to be

added about them here.

Carrier-to-carrier service quality, a concern of many

of the parties to this proceeding, will be addressed in Case

97-C-0139, and has been addressed in interconnection agreements

between NYNEX and a variety of new entrant local exchange

companies; it need not be further addressed here.

CONCLUSION

In their March 31, 1997, letter announcing their

acceptance of the terms and conditions of approval set forth in

our March 21 Order, Petitioners indicated that "our acceptance is

based on our understanding of the terms and conditions set forth

below," and proceeded then to interpret incorrectly some of the

important terms and conditions of the order. In letters dated

April 7 and April 8, respectively, AT&T and MCI pointed out that

Petitioners misinterpreted our March 21 Order in key respects,

and argued that Petitioners' March 31, 1997 letter was not an

unconditional acceptance of our terms and conditions.

In another letter, dated April 8, 1997, NYNEX, on

behalf of Petitioners, responded to AT&T, stating AT&T is "wrong"

in its assertion that "Petitioners have conditioned their

acceptance of the conditions" in our March 21 Order. Petitioners

stated that in setting forth their understanding of our

conditions they "in no way modifie[d] our unconditional

acceptance of the Commission's March 21 Order."

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-40-

We take this statement in Petitioners' April 8 letter

to constitute a full repudiation of the statement in their

March 31, 1997, letter that "our acceptance is based on our

understanding of the terms and conditions as set forth below."

This repudiation permits us to conclude that Petitioners have

unconditionally accepted our terms and conditions in a timely

manner, and permits us to avoid revoking our approval of the

merger, as the March 21 Order stated would be the result of

failure to accept our terms and conditions unconditionally.

As discussed earlier, our approval of the Bell Atlantic

acquisition of NYNEX permits us to approve the associated changes

in the ownership of Cellco, and we hereby do so.

The Commission orders:

1. The "Order Approving Proposed Merger Subject to

Conditions" in these proceedings, issued March 21, 1997 (and

referred to herein as the March 21 Order), including all of its

ordering paragraphs, is expressly incorporated as part of this

opinion.

2. Petitioners New York Telephone Company, NYNEX

Corporation and Bell Atlantic Corporation having submitted,

through letters dated March 31, 1997, and April 8, 1997,

unconditional acceptance of the terms and conditions contained in

our March 21 Order, the proposed acquisition and merger of NYNEX

Corporation into Bell Atlantic Corporation has been approved

subject to those terms and conditions and will be permitted to

proceed.

3. The associated changes described herein in the

ownership of Cellco are hereby approved.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-41-

4. Within 60 days of completion of these transactions,

Petitioners must notify the Secretary to this Commission of their

completion.

5. If these transactions are not completed within one

year of the date of this opinion and order, the approvals granted

herein may be revoked.

6. These proceedings are continued.

By the Commission,

(SIGNED) JOHN C. CRARY Secretary

APPENDIX A

March 21 Order

STATE OF NEW YORK PUBLIC SERVICE COMMISSION

At a session of the Public Service Commission held in the City of

Albany on March 20, 1997

COMMISSIONERS PRESENT:

John F. O'Mara, ChairmanEugene W. ZeltmannThomas J. Dunleavy

CASE 96-C-0603 - Proceeding on Motion of the Commission as to theJoint Petition of New York Telephone Company,NYNEX Corporation, and Bell Atlantic Corporationfor a Declaratory Ruling that the CommissionLacks Jurisdiction to Investigate and Approve aProposed Merger between NYNEX and a Subsidiaryof Bell Atlantic or, in the Alternative, forApproval of the Merger.

CASE 96-C-0599 - Petition of the New York Citizens Utility Board,the Consumer Federation of America, the AmericanAssociation of Retired Persons, Consumers Union,Mr. Mark Green, Ms. Catherine Abate, the LongIsland Consumer Energy Project and theInternational Brotherhood of Electrical WorkersT-6 Council (collectively the "ConsumerCoalition") for an Investigation of the ProposedMerger of NYNEX Corporation and Bell AtlanticCorporation.

ORDER APPROVING PROPOSED MERGER SUBJECT TO CONDITIONS

(Issued and Effective March 21, 1997)

BY THE COMMISSION:

This proceeding was instituted to consider a joint

petition by New York Telephone Company (New York Telephone),

NYNEX Corporation (NYNEX) and Bell Atlantic Corporation (Bell

Atlantic), collectively referred to as Petitioners, for a

CASES 96-C-0603 and 96-C-0599

- 44 -

determination that the New York State Public Service Commission

lacks jurisdiction over the proposed merger of NYNEX and Bell

Atlantic or, alternatively, for approval of it, and also to

consider a petition by several parties, collectively calling

themselves the "Consumer Coalition", seeking review of the

CASES 96-C-0603 and 96-C-0599

1 That is, irrespective of whether parties to a contract aretelephone corporations, the contract cannot, without Commissionapproval, affect the manner in which a telephone corporationexercises its rights to operate its system in New York State.

- 2 -

merger. The proposed merger would be achieved through the

acquisition of NYNEX by Bell Atlantic.

The procedural history of the proceeding, discussion

and resolution of the arguments for and against the merger raised

by the numerous parties, and a fuller discussion of the actions

we are taking today will follow in a more expansive opinion which

we will issue shortly. The purpose of this order is to declare

that we have jurisdiction to approve or disapprove the merger and

to approve the merger, subject to the Petitioners' acceptance

within 10 days of the conditions enumerated in this order. If

the Petitioners fail to accept these conditions within 10 days,

our approval is revoked.

JURISDICTION

Public Service Law (PSL) §99(2) provides that no

telephone company in New York State may transfer any part of its

works or systems without the approval of the Public Service

Commission. PSL §99(2) provides that no contract or agreement

can affect a company's franchise or right to operate in any way,

without Commission approval.1 Finally, pursuant to PSL §100, no

telephone company, domestic or foreign, may acquire the stock of

a New York State telephone company without Commission approval.

The proposed merger, or acquisition, includes at least

three elements that bring it within the confines of Sections 99

and 100. First, New York Telephone currently exercises its

rights to operate telephone plant subject to the control of

CASES 96-C-0603 and 96-C-0599

- 3 -

NYNEX. After the merger, New York Telephone will exercise those

rights subject to the control of a new corporation Bell Atlantic.

The merger, therefore, requires the Commission's consent under

§99(2) because it affects the manner in which New York Telephone

will exercise its rights to operate in New York State.

CASES 96-C-0603 and 96-C-0599

1 47 U.S.C. §221(a) reflects Congress's protection of the State'sjurisdiction over telephone company acquisitions and mergers. Thus, there is no need for dormant Commerce Clause review. Further, inasmuch as sections 99 and 100 are even-handed, furthera legitimate interest of New York State (regulation of localtelephone service) and have minimal, if any, impact on interstatecommerce, they are, in any event, consistent with the dormantCommerce Clause.

- 4 -

Second, inasmuch as New York Telephone is currently

owned by NYNEX, but will be owned after the merger by Bell

Atlantic the acquisition/merger essentially transfers New York

Telephone's works or systems to another corporation. Therefore,

it cannot take effect without "the written consent of the

Commission" (PSL §99(2)).

Finally, the stock of New York Telephone is owned by

NYNEX. After the merger, New York Telephone stock will be owned

by Bell Atlantic. Thus, for this reason as well, the transaction

requires the Public Service Commission's approval.

Further, as we will discuss at greater length in our

subsequent opinion, while the Petitioners have suggested that the

Commission's jurisdiction runs afoul of the dormant Commerce

Clause, they are incorrect.1

Our jurisdiction here is grounded, additionally, in our

authority under NYNEX's Performance Regulatory Plan (PRP or

plan). Our reservation of authority under the PRP (the

reservation clause, paragraph VIII.A.5.) allows us to modify the

plan if "unforeseen circumstances in the opinion of the

Commission have such a substantial impact as to render this Plan

unreasonable. . . ." We conclude that the proposed acquisition

is such an event and we hereby exercise our discretion under the

reservation clause to require certain modifications of the PRP,

described below, without which the PRP would become unreasonable.

CASES 96-C-0603 and 96-C-0599

- 5 -

The remaining provisions of the PRP remain unchanged and in full

force.

CASES 96-C-0603 and 96-C-0599

- 6 -

CONDITIONS ON APPROVAL OF THE MERGER

There have been many allegations in this case

concerning whether consumers will receive tangible benefits from

savings achievable through this acquisition. Petitioners have

claimed that the emerging competitive marketplace will require

the company to pass on the benefits of greater efficiency to its

customers, in a variety of ways, including the potential for

rates below PRP levels and improved service quality. This was

our anticipation, as well, in approving the PRP. In order to

assure that this happens, benefits will be preserved for

consumers through several steps.

Economic Development

New York Telephone has stated, in proposing its

acquisition by Bell Atlantic, that the permanent headquarters of

the combined entity will be located in New York City, and that

such headquarters will house its corporate officers and

supporting staff. We understand this to mean that this

headquarters presence will be meaningful and long term, and that

all major functions currently located in New York State will

remain in New York State. The merged company's commitment to

establish its permanent headquarters in New York City is a

condition of our approval and existing major New York Telephone

or NYNEX functions shall not be relocated outside of New York

State.

Service Quality

The quality of service offered by New York Telephone

has been a source of consistent concern to us. Over the first

year of the PRP, New York Telephone has failed to meet service

CASES 96-C-0603 and 96-C-0599

- 7 -

quality targets, although its recent service performance has

shown improvement. We note, however, that even at PRP target

levels, service quality in New York may lag behind service

quality in other parts of the merged service territories. We are

concerned that, in pursuing the goals for which this merger is

designed, management may fail to focus sufficiently on service

improvement in New York, or to make the timely commitments of

investment in infrastructure and employee resources that are

necessary for that improvement to occur.

NYNEX has publicly announced plans to increase its New

York State infrastructure investment by $1 billion over the next

five years in its infrastructure. It has also expressed its

intention to hire an additional 750 to 1,000 new employees

through the end of 1997 to deal with New York Telephone's service

quality issues.

To assure that these expressed intentions will

adequately address our service quality concerns, New York

Telephone will be directed to submit a plan, within 30 days of

this order, which:

! sets forth details of New York Telephone's commitmentto hire between 750 and 1,000 additional employeesprior to December 31, 1997, for the purpose ofaddressing service quality problems, and to maintainthe employment level to which that brings New YorkTelephone until service levels meet the PRP targets, asthey are revised herein; and

! describes in detail New York Telephone's commitment toinvest an additional $1 billion in service-relatedinfrastructure improvements over the next five years,including a commitment to invest at least one-half ofthe amount within the next two years on capitalprojects to improve service quality throughout out NewYork State, particularly in areas where service qualityis currently most significantly below standards.

CASES 96-C-0603 and 96-C-0599

- 8 -

Further, consistent with our authority to modify the

PRP pursuant to the reservation clause, we find that the service

improvement plan contained in the PRP must be and is modified.

Because we consider it detrimental to the public interest to have

a lesser quality of service in New York than elsewhere in the

combined service area of the combined companies, the existing PRP

service quality standards target concerning the customer trouble

report rate (CTRR) will be supplemented by a company-wide average

comparison test with the rest of the merged territory, if the

latter are more protective of consumer interests. Thus, by the

sixth year of the PRP, we would expect New York Telephone's

statewide CTRR to match the current CTRR level for the rest of

the Bell Atlantic combined territories. We will require New York

Telephone to continue to meet the CTRR levels established in the

PRP throughout the term of the PRP, but would add that, starting

at the third year of the PRP, New York Telephone will be expected

to meet, in addition, statewide overlay target that will ramp up

in equal increments between now and the sixth year of the PRP.

Failure to meet either the existing PRP or new company-wide CTRR

levels will expose New York Telephone to existing PRP penalties.

A separate proceeding will be initiated to consider how to

reconcile the methodologies used to count trouble reports in the

various jurisdictions.

Finally, with respect to service quality, we would

emphasize that even the achievement of Bell Atlantic CTRR targets

should not represent the goal of the company's service

improvement efforts. Achievement of these minimum goals will

avoid penalties, but we expect New York Telephone to strive for

the best possible service it can provide to its customers, and in

so doing, to adopt the "best practices" of all the operating

entities in the merged company.

CASES 96-C-0603 and 96-C-0599

- 9 -

Other Tangible Customer Benefits

In order to ensure that anticipated savings and other

benefits of the merger are appropriately flowed through to

customers, we will adopt the following standard for the review of

requests for recovery or deferral of any costs, including

exogenous costs, cost onsets related to the opening of

competitive markets, and revenue losses directly due to access

charge reductions. Our determinations on such requests will

include consideration of whether the company's conduct has

promoted the development of competition within the state; whether

consumers have benefitted from competition, including price

reductions greater than contained in the PRP; and whether

consumers have shared in the cost savings resulting from the

merger.

CASES 96-C-0603 and 96-C-0599

1 Case 92-C-0665, Performance-Based Incentive Regulatory Plansfor New York Telephone, Opinion No. 95-13, (issued August 16,1995) pp. 33-34.

- 10 -

This standard requires that, consistent with our

authority under the reservation clause to modify the PRP, the

exogenous cost clause, paragraph IV.G., must be and is modified.

As written, the clause could be interpreted to provide that New

York Telephone is entitled, within certain limits that are not

pertinent here, to rate increases due to Commission mandates

(excluding revenue effects of market share loss). To the extent

that that clause could have made recovery of costs due to any

Commission mandates automatic upon filing and approval of

compliance tariffs, the public interest, in the context of the

merged entity, requires such cost recovery to be within the

Commission's discretion and the clause is modified to make the

recovery discretionary.

Further, with regard to the PRP, contentions have been

made in other proceedings that the Commission can only reduce

access charges if there is a universal fund and additional

reductions of carrier access charges would trigger dollar-for-

dollar recovery by New York Telephone, either through increases

in rates for other New York Telephone services or through

payments from a universal service fund. Those arguments rely, in

part, on a statement in our order approving the PRP. We stated

"further changes to the access charge levels shown in . . . the

Plan beyond those required by this order will not be required

except in connection with the adoption of some form of universal

service fund upon our finding that such a fund is necessary to

promote fair competition while preserving affordable basic

services."1 We hereby declare that neither this clause nor any

other provision of the PRP limits the conditions under which the

CASES 96-C-0603 and 96-C-0599

- 11 -

Commission may reduce access charges and, requests for recovery

of consequent revenue losses will be reviewed under the standard

we have enunciated here.

In any event, a condition of merger approval is

agreement by Petitioners that the plan allows the Commission

discretion, in the event of further access charge reductions,

whether and how to permit recovery of any resulting revenue

losses. It also must be understood that upon further reduction

of access charges, we will exercise that discretion in a fashion

that balances the interests of consumers and shareholders,

consistent with the standard enunciated in this order.

Finally, with respect to the PRP, the Commission

specifically reserves the right, in addition to its rights under

the reservation clause, to further modify or terminate the PRP at

the fifth year checkpoint, including requiring further rate

reductions, based on the same conditions that will govern cost

recovery, discussed above.

Regulatory Issues

We are convinced that the NYNEX Restructure Plan, which

governs inter-company affiliate relations, should remain in

effect after the merger, and extend to relationships among Bell

Atlantic affiliates which affect New York Telephone. New York

Telephone has stated that, although it believes that the

Restructure Plan needs to be modified and has filed a petition

for changes which it intends to supplement, the merged company

intends to abide by conditions of the Restructure Plan, unless

and until it is amended by the Commission. Petitioners have

stated that the new Bell Atlantic will submit its proposed

organizational structure with any request to amend the

Restructure Plan.

CASES 96-C-0603 and 96-C-0599

- 12 -

In order for the Commission to properly discharge its

regulatory function, it is essential that the agency have access

to all necessary records of the merged entity. Therefore, the

merged company is required to grant to the Commission timely,

unimpeded and convenient access to all books and records

necessary to the conduct of the Commission's regulatory

responsibilities.

Further, New York Telephone currently has a surplus in

its pension fund. New York Telephone will be required to provide

an accounting of its pension funds, and propose a method which

protects the funds to assure they are used in accordance with

Commission intent established in its Statement of Policy on

Pension and OPEBs and modified in Opinion 94-2.

Finally, the Commission reserves the right to

reconsider approval of the merger and the conditions attached

thereto should the United States Department of Justice or the New

York State Department of Law take any action on the merger.

CONCLUSION

On the basis of our analysis, the conditions discussed

above, and the following order clauses, we find that the proposed

acquisition and merger of NYNEX into Bell Atlantic is in the

public interest and it is approved. Within 10 days of the

issuance of this order, the Petitioners must submit a written

statement that they agree unconditionally to be bound by the

terms and conditions of this order.

The Commission Orders:

1. Subject to the conditions contained in this order

and the following order clauses, and not otherwise, the proposed

CASES 96-C-0603 and 96-C-0599

- 13 -

acquisition and merger of NYNEX Corporation into Bell Atlantic

Corporation is approved.

2. The merged company shall establish its permanent

headquarters in New York City and existing major New York

Telephone or NYNEX functions shall not be relocated outside of

New York State.

3. The customer trouble report rate (CTRR) contained

in the New York Telephone Performance Regulatory Plan (PRP) will

be supplemented by company-wide CTRR service levels, as discussed

above, if the latter are more protective of consumer interests.

Failure to meet either the existing PRP levels or new statewide

CTRR levels will expose New York Telephone to existing PRP

penalties. A separate proceeding will be instituted to consider

how to reconcile the methodologies used to count trouble reports

in the various jurisdictions.

4. Within 30 days of the issuance of this order, New

York Telephone will submit to the Commission 25 copies of a plan

for its approval which plan shall:

a. Set forth the details of New York Telephone's

commitment to hire between 750 and 1,000

additional employees prior to December 31, 1997,

for the purpose of addressing service quality

problems, and to maintain the employment level to

which that hiring brings New York Telephone until

service levels meet the PRP targets as revised

herein.

b. Describe in detail New York Telephone's commitment

to invest an additional $1 billion in service-

related infrastructure improvements over the next

five (5) years, including a commitment to invest

at least one-half of the amount within the next

CASES 96-C-0603 and 96-C-0599

- 14 -

two (2) years on capital projects to improve

service quality throughout New York State,

particularly in areas where service quality is

currently most significantly below standards.

5. In addition to the other PRP modifications

described in this order the PRP is modified so that in reviewing,

in any subsequent proceedings, any requests by New York Telephone

for recovery of costs, including exogenous costs, cost onsets

related to the opening of competitive markets, and revenue losses

directly due to access charge reductions, the Commission's

determination will consider whether the company's conduct has

promoted the development of competition within the state; whether

consumers have benefitted from competition, including price

reductions greater than PRP levels; and whether consumers have

shared in the cost savings resulting from the merger.

6. The Commission specifically reserves the right in

addition to its rights under the reservation clause, to further

modify or terminate the PRP at the fifth year checkpoint,

including further rate reductions, based on the same conditions

that will govern cost recovery discussed in this order.

7. The merged company will abide by the NYNEX

Restructure Plan, except to the extent that the Plan is modified

by the Commission.

8. New York Telephone will be required to provide an

accounting of its pension funds, as discussed in the text of this

order, that preserves pension gains for the benefit of New York

ratepayers.

9. The merged company will provide timely, unimpeded

and convenient access, as discussed in the text of this order, to

all books and records necessary to the Commission's discharge of

its regulatory responsibilities.

CASES 96-C-0603 and 96-C-0599

- 15 -

10. The Commission reserves the right to reconsider

approval of the merger and the conditions attached thereto should

the United States Department of Justice or the New York State

Department of Law take any action on the merger.

11. Petitioners must submit a written statement of

unconditional acceptance of the terms and conditions of this

order signed and acknowledged by a duly authorized officer of New

York Telephone, NYNEX and Bell Atlantic within 10 days of the

issuance of this order. If such acceptance of these conditions

is not so filed, approval of the merger is revoked. This

statement should be filed with the Secretary to the Commission

and served on all parties to this proceeding.

12. Except as modified herein, the PRP remains in full

force and effect.

13. These proceedings are continued.

By the Commission,

(SIGNED) JOHN C. CRARY Secretary

APPENDIX B

Detail of Parties' Positions

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Case 92-C-0238 - Teleport Communications Group, Inc., OpinionNo. 92-13 (issued November 18, 1992).

2 Petitioners cite Case 29086, Rochester Telephone Corporation,Opinion No. 86-22 (issued September 10, 1986).

3 AT&T's Initial Brief, pp. 10-11.

4 Tr. 1,700.

APPENDIX B - DETAIL OF PARTIES' POSITIONS

STANDARD OF REVIEW

Petitioners' Arguments

Petitioners argument about the appropriate standard of

review--"whether the proposed transaction is likely to undermine

the provision of safe and adequate service at just and reasonable

rates"--relies in part on the Teleport case,1 where a factor

cited was whether "there would be ample opportunity to review"

issues raised by the merger in other regulatory proceedings.

Moreover, Petitioners assert, no showing is needed that a merger

will yield tangible benefits.2 Petitioners claim, therefore,

that they need not prove that the merger will result in material

benefits for New York before it can be found to be in the public

interest.

Other Parties' Arguments

The parties do not appear to disagree with Petitioners'

assertion that a showing of material benefits is not needed. AT&T

asserts, nonetheless, that the burden is on Petitioners to show

the merger is in the public interest, and that "it is rather

astonishing how little effort Petitioners have given to

satisfying this obligation."

3 AT&T cites staff's observation that "Petitioners submitted

little substantive information along with their filing,"4 and

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Case 94-C-0095, Transition to Competition In the LocalExchange Market, Opinion No. 96-13 (issued May 22, 1996),p. 3.

2 Staff's Initial Brief, p. 6.

3 Attorney General's Initial Brief, pp. 28-29.

-2-

argues that Petitioners have submitted briefs and arguments

rather than facts for the Commission's consideration.

Staff and the Attorney General cite our statement that

"[t]he goal of ensuring the provision of quality

telecommunication services at reasonable rates is primary . . . .

Where feasible, competition is the most efficient way by which

the primary goal may be achieved."1

Seeing the loss of a potentially significant competitor

as the merger's pivotal detriment, staff suggests that:

[t]he determinative question is whether there areenough benefits resulting from the merger,including conditions which may be imposed by theCommission, to offset this loss of competition. The proposed merger will only be in the publicinterest if that question can be answered in theaffirmative.2

Similarly, the Attorney General argues:

In considering how best to promote the publicinterest in this area, the Commission has itselfheld competition to be the most effective means ofachieving its primary goals. . . . The AttorneyGeneral agrees. Enabling and fostering effectivecompetition in New York telecommunications marketsis the best means of protecting consumers . . . .*** [T]he Attorney General believes that theCommission should give substantial weight to theproposed merger's impact on competition indetermining whether it is in the public interest.3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Tr. 857.

2 Petitioners' Initial Brief, p. 85.

-3-

PUBLIC INTEREST ANALYSIS

Competition

1. Petitioners' Arguments

Petitioners take the position that Bell Atlantic

generally has not been interested in competing in New York

markets and, absent the merger, would not have done so. Bell

Atlantic, according to Petitioners, was dissuaded from entering

New York markets because of the presence in New York of numerous

actual and potential competitors, over which Bell Atlantic would

have no demonstrable advantage. Petitioners characterize as

awesome the list of actual and announced potential competitors in

the New York local exchange markets and cite a reference by its

panel of witnesses to an analyst's characterization of the New

York metropolitan area as "the most ferocious competitive

territory in the country."1 These circumstances, according to

Petitioners, have been perceived negatively by Bell Atlantic:

"With no facilities or existing customer base and with little

brand recognition that could be used advantageously, Bell

Atlantic's senior managers concluded that it did not make

economic sense to invest in these markets."2

Moreover, Petitioners continue, despite its common

border with New York Telephone Company, Bell Atlantic/New Jersey

would not be able to use its facilities to provide service in New

York. Pointing to its panel's testimony that "[r]etaining and

expanding the return from its existing important markets has

always been and must remain a top priority within Bell

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Tr. 859.

2 Petitioners' Initial Brief, p. 86.

3 Id.

4 Ibid., p. 90.

-4-

Atlantic,"1 Petitioners assert that even if New York City is the

most lucrative market in the nation, it is not the logical place

for Bell Atlantic to compete, were it to decide to provide

service anywhere out-of-region. In fact, Petitioners continue,

"to the extent Bell Atlantic chose to invest outside of its

footprint in the 1980s and 1990s, it decided to invest in

locations other than New York, such as Mexico and New Zealand."2

Nor does the passage of the Telecommunications Act of

1996 make it more likely that Bell Atlantic would have become a

competitor in New York, had it not agreed to merge with NYNEX,

Petitioners assert, for the Act has constrained the ability of

Regional Bell Operating Companies (RBOCs) like Bell Atlantic and

NYNEX to compete out-of-region, because they will have to devote

resources to defending their home turf and providing their

competitors with the unbundled facilities and interconnection

mandated by the Act. Although the Act creates more opportunities

for RBOCs to compete out-of-region in local exchange markets,

they say, it also creates greater in-region opportunities (e.g.,

long distance and video) and in-region risks.

Contrary to staff's suggestion, Petitioners aver, "Bell

Atlantic never had a corporate policy or 'strategy goal' to

compete out-of-region to offset contemplated in-region market

losses."3 Although Bell Atlantic looked at a number of out-of-

region options, Petitioners reiterate, it "decided in every

instance that the New York market was not attractive."4 Senior

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 93.

-5-

management at Bell Atlantic has been more cautious than internal

champions of out-of-region prospects, Petitioners continue, and

Bell Atlantic never acted upon or funded any of its out-of-region

analyses.

Bell Atlantic's perception that it could not

effectively compete in New York was reasonable, Petitioners aver,

because it does not, in fact, have any special advantages over

other potential competitors in New York Telephone's service

territory. Factors cited by other parties such as brand

awareness, experience in operational support, and nearby

facilities are not special advantages, according to Petitioners,

nor would they better position Bell Atlantic to enter New York

than numerous other current and potential competitors. To the

contrary: "Bell Atlantic has no facilities or customer

relationships in New York. Thus it lacks the two most important

building blocks for meaningful local-service entry."1

Petitioners concede that Bell Atlantic has some cross-

border brand awareness created by advertising "spill" into New

York from advertising in northern New Jersey. However, according

to Petitioners, that brand awareness cannot even match, much less

exceed, customers' recognition of the heavily advertised brands

of AT&T, MCI, Sprint and others. And the large interexchange

carriers already have customer bases in New York.

As to the availability of Bell Atlantic/New Jersey

facilities to provide local service in New York, Petitioners

argue that the existing New Jersey switching facilities are

already at capacity and could not be used by Bell Atlantic to

meaningfully compete in New York. Nor does physical proximity

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 96. For example, Petitioners note that AT&T'sformer affiliate Lucent Technologies boasts that it"invented dial-tone," that AT&T provides local wirelessservice to some six million customers nationwide, and thatAT&T "gave birth" to the Bell System and "knows better thanany company how a local telephone company is run." Ibid.,p. 97.

2 See Tr. 947.

-6-

provide any other advantages, Petitioner aver, such as with

installation and repair service.

As to the claim that Bell Atlantic has special

advantages in the systems and know-how needed in the provision of

local services, Petitioners assert that these assets are already

possessed or can be readily acquired by any other entrants into

the local-service market, all of whom assertedly have significant

experience in providing local service."1 Moreover, Petitioners

continue, Bell Atlantic possesses no special advantage with

respect to "back office" systems; and other competitors can, in

any event, obtain the use of NYNEX's or Bell Atlantic's own

billing and support services on an unbundled basis under the 1996

Act.

Petitioners also assert that Bell Atlantic's removal as

a potential competitor would not in any event have a material

effect on New York's local markets, because: (1) there is no

evidence NYNEX has perceived Bell Atlantic to be a serious

potential threat and it would not have appreciably reacted to

Bell Atlantic's threat;2 and (2) Bell Atlantic's incremental

influence would not have been material due to the large number of

other active, successful competitors in New York. The Attorney

General and staff, Petitioners continue, ignore "today's fiercely

competitive landscape in New York and merely assume that Bell

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 31.

2 Id.

3 Ibid., p. 32 (original emphasis).

-7-

Atlantic's entry would be competitively significant."1 Noting

the Attorney General's acknowledgment that this Commission "has

been a nationally recognized leader in opening local telephone

markets," Petitioners argue that our "leadership role means . . .

that the local market in New York already is among the most

competitive in the country . . . ."2

Petitioners assert that staff further ignores AT&T's

and MCI's announced competitive intentions, and the presence of

51 certificated competitive local exchange providers in New York

operating 27 switches (with 11 Class 5 switches in New York

City). Thus, Petitioners assert, the Attorney General and staff

have failed to assess whether the absence of Bell Atlantic's

entry in New York would substantially lessen the competitive

discipline imposed on NYNEX. "Only if the answer to that

question 'yes'," Petitioners continue, "can it be argued that the

public interest is somehow impaired by the merger."3

2. Other Parties' Arguments

The parties also variously argue that Bell Atlantic's

current non-presence in New York is beside the point, as is the

Petitioners' statement that Bell Atlantic has no actual "plans"

to enter New York markets. Staff and CPI both observe that

RBOCs, under the divestiture restrictions of the MFJ, were

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Initial Brief, p. 9.

2 In response to Chairman O'Mara's questions concerning plansat the en banc hearing, TW Comm observes, Petitioners'witness Whelan stated that "plan" means "the dedication ofresources, a decision to move forward with . . . a specifictargeted goal," as opposed to "studies or analysis ofvarious options . . . that the corporation maybe looked at."Tr. 1,027. See, also, MCI' Initial Brief, p. 33.

3 Tr. 1,712. See, also, Tr. 1,733-1,734.

-8-

prohibited from competing in out-of-region long distance until

passage of the 1996 Act.4 TW Comm argues that Petitioners use a

strained definition of the word "plan."2

Parties other than Petitioners also generally agree

that the merger is a direct reaction by Bell Atlantic and NYNEX

to their perceived mutual competitive threat, and an attempt to

avoid that threat. As the staff panel testified:

It is likely that NYNEX and Bell Atlantic havemore to gain by not competing and merging than anyother potential RBOC paring. From a quick glanceat a map showing RBOC service territories, itappears that no other pair of RBOCs have so muchof their population base in such close proximityto an adjacent RBOC's border.3

These parties point to various Bell Atlantic documents

to demonstrate that Bell Atlantic had intentions to compete in

New York. Bell Atlantic's plans to enter New York markets are

not surprising, they argue, in view of significant advantages it

would have in New York relative to other potential competitors.

CPI states: "Owing to its geographic proximity to the NYNEX

region and its experience in providing local exchange service,

Bell Atlantic is an obvious candidate to be one of the

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 CPI's Initial Brief, p. 6.

2 See, for example, Tr. 1,359 and Tr. 1,723.

3 While these switches are now asserted to be at capacity,staff contends that generally accepted engineeringprinciples would compel the installation of new switcheswith spare capacity. (Staff's Initial Brief, p. 14.)

-9-

first and strongest competitors to NYNEX, especially in New

York."1 Other parties' witnesses expressed similar views.2

With regard to brand awareness, staff asserts Bell

Atlantic's marketing studies showed its brand recognition to be

higher in New York where, staff observes, Bell Atlantic already

spends approximately 25% of its region-wide advertising budget.

Moreover, staff and other parties opine the Bell Atlantic/NYNEX

Mobile joint venture, with its advertising and store locations,

adds further awareness of the Bell Atlantic name across the

State.

Bell Atlantic's proximity not only provides broad

awareness, the opposing parties (such as AT&T and MCI) contend,

but with a service area contiguous to Manhattan, Staten Island,

the Bronx and the rest of New York City and, as well, bordering

also on Westchester, Rockland, Orange, and Sullivan counties, and

then stretching out along the southern border of New York State,

Bell Atlantic could install switching capacity in northern New

Jersey to serve New York City.3

AT&T also challenges Petitioners' claim that Bell

Atlantic has no available capacity in its northern New Jersey

switches, and asserts it is not credible that, in the face of

demand forecasts and the interconnection requirement of the 1996

Act, Bell Atlantic's entire local exchange switching operation in

one of its most densely populated and lucrative markets is

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Affidavit of Brian D. Oliver, sworn to January 17, 1994,¶9(c). Mr. Oliver, President of Bell Atlantic EnterprisesBusiness Development (BAEBD), testified in United States v.Western Electric Company, (Civ. No. 82-0192 (D.C. Dist. ofCol.) in connection with Bell Atlantic's then planned mergerwith TCI.

2 See, also, Tr. 1,360.

3 MCI's Initial Brief, p. 24. MCI relies here on a BellAtlantic newsletter, Competitive News $$$, June 10, 1996. See, also, Tr. 1,359.

-10-

operating on average at 102% of optimal capacity and that Bell

Atlantic has no plans to avoid the patent disaster staring it in

the face.

In addition to its switching facilities, the parties

variously argue, Bell Atlantic has other significant advantages

as an existing, incumbent local exchange competitor, among them,

a fully developed and operational back office system. In this

regard, both AT&T and the Attorney General cite an affidavit of

Brian D. Oliver.1 This assert, AT&T continues, is not fully

shared by any firm not a local service provider.2

In addition, MCI asserts, Bell Atlantic's operational

experience with local network architecture can help it overcome

entry barriers by assisting in a variety of ways. MCI claims

that Petitioners' argument that other carriers, such as cable,

wireless, and interexchange carriers already have facilities,

customers, and brand recognition in New York, making them more

likely to enter New York markets than Bell Atlantic, "fails to

recognize the fundamental network differences between LECs and

other carriers, and ignores Bell Atlantic's own statements

regarding the limitation affecting some of these carriers'

ability to provide local exchange service in the near term."3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 MCI's Initial Brief, p. 17. Affidavit of Jeffrey A. Bowden,July 2, 1996, submitted to the FCC, p. 4.

2 See, for example, MCI's Initial Brief, p. 37.

3 AT&T's Initial Brief, pp. 34-35, citing Tr. 1,725.

-11-

Various parties also reject Petitioners' claim that

NYNEX was not concerned about Bell Atlantic as a potential

competitive threat. MCI cites an expectation expressed in a

NYNEX staff report that, following the TCI merger, Bell Atlantic

would enter the New York markets which "noted Bell Atlantic's

proximity to the highly competitive New York City market, and

expressed the view that Bell Atlantic might well enter that

market at some point."1

Regarding competition from sources other than Bell

Atlantic, the Attorney General also points to recent reports that

large firms, including IXCs and Cable companies, have revised

previously ambitious plans to enter New York local exchange

markets because of financial and technical hurdles. Several

parties also maintain the merger's impact on competition goes

beyond elimination of the most promising potential competitor.2

Similarly, AT&T and other parties contend that merger eliminates

the necessity for NYNEX and Bell Atlantic to purchase carrier

access from each other, and that the merger therefore extends and

increases the overall magnitude of the artificial advantage in

the toll market created by the provision of access services to

competitors at above-cost rates. And, AT&T continues, in a

competitive world of bundled service offerings, this would

quickly translate into an artificial advantage in the local

exchange market, which could inhibit entry of other firms in the

local exchange market.3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 See, for example, SNET's Initial Brief, pp. 10-11, andStaff's Initial Brief, p. 16.

2 See, for example, CPI's Initial Brief, pp. 9-10.

3 The rate change would be gradual, reducing the charge tosomewhere in the 1.5-1.75¢ per minute range by September 1,1999, a time at which the PRP now envisions access chargeswould be reduced to 2.25¢ per minute.

4 CPB would reduce basic service rates by $200 million peryear over the next five years, to reflect merger-relatedcost savings and revenue growth, while CUB proposes areduction, in residential basic rates only, of $250 millionper year over five years.

-12-

Several parties, including MCI, staff, SNET, and TW

Comm, emphasize the competitive discipline they claim even Bell

Atlantic's potential availability as a competitor would impose

upon NYNEX, absent the merger.1

Several parties also advance a general claim that the

increased size and power of the new merged entity has an anti-

competitive impact.2

The parties offer a variety of proposals to deal with

the perceived adverse impact of the merger on competition. AT&T,

MCI, and the Attorney General argue for rejection of the merger,

on the ground that no conditions can adequately offset its

harmful effects. Other parties argue for rate decreases that,

they argue, competition with Bell Atlantic would otherwise have

provided. For example, staff proposes reductions in carrier

access charges, to spur competition,3 while CPB and CUB propose

basic rate decreases.4

Several other parties, from among New York Telephone's

potential local service competitors, argue that certain

competitive safeguards are needed in response to the merger. For

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 31.

-13-

example, SNET and CPI propose compliance with the Act's §271

"competitive checklist" as a precondition to merger approval, and

Lightpath argues that we should require a separate subsidiary for

the provision of services other than basic local exchanges

service.

Beyond these measures, with respect to conditions that

would tend to compensate for a diminution of competition, the

parties focus mainly on conditions that would force improvements

in the quality of New York Telephone's services, both to end

users and other carriers. The parties' arguments respecting the

merger's impact on service quality are discussed below.

Service Quality

1. Petitioners' Arguments

Petitioners argue that the merged company will engage

in a host of new activities:

Included in the expanded array of new activitiesin which the merged corporation expects to engageare: video services, expanded Internet services(such as Internet access), application of AdvancedIntelligent Network (including single numberservice), and expanded application of broadbandservices (including ATM). All of this will makethe company more competitive and customerresponsive.1

Regarding service quality, according to Petitioners, the merger

will enhance New York Telephone's ability to meet the PRP service

improvement targets in several ways. First, the aforementioned

efficiencies and cost savings will ensure that the company

continues to have adequate resources available for service

improvement efforts. Second, the merger will enhance the

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 33.

2 Ibid., p. 34.

3 Id.

4 Petitioners' Initial Brief, p. 71.

-14-

effectiveness of "Emergency Preparedness Disaster Recovery

Operations and Systems," since "[j]oint development of future

systems . . . will enable the integration of existing systems

within a standard operating environment."1 Third, Petitioners

assert, New York Telephone's ability to provide high quality

service will be enhanced by the ability to use the "best

practices" of the merging firms, including Bell Atlantic's

leadership in preventive maintenance systems and practices.2

Fourth, "an expanded pool of managers is expected to bring new

ideas and give rise to creative and innovative approaches to New

York Telephone's service improvement efforts."3 And fifth,

Petitioners assert, New York Telephone will benefit from the

merged firms' combined research and development organizations and

shared information concerning new and existing technologies.

Petitioners also take issue with CPB's claim that New

York Telephone has been motivated to improve service mainly to

gain approval of the merger. Petitioners state that the

institution of the Network Services Group by NYNEX in December

1996 "marks the beginning of a movement by the company toward a

more focused, functionalized means of providing service, one that

will ensure that managers pay close attention to service

provisioning without concern for such other business demands as

marketing and revenue growth."4

Petitioners assert that the merged corporation will

continue to follow the same type of approach and that this "will

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Id.

2 Tr. 905.

3 Staff's Initial Brief, p. 42.

-15-

ensure that New York Telephone's recent service improvements are

not merely a flash in the pan that will dissipate after the

merger is approved."1

2. Other Parties' Arguments

Regarding the comparison of New York Telephone's

service quality with that of others, staff notes that New York

Telephone has labeled comparison of its service quality

measurements with those of other BOCs as "inherently unreliable"

because of alleged differences in measurement, reporting

practices and "service environment."2 Nonetheless, staff points

out, New York Telephone's overall CTRR is double that of the Bell

Atlantic region, and almost twice as high as that of New England

Telephone Company. Staff concludes it is extremely unlikely that

reporting differences would account for these gaps and asserts

Petitioners have not made that claim.

Staff and CPB both acknowledge the recent improvement

in service quality, reversing the trend of the first year of the

PRP. Staff is not sanguine, however, and urges measures "to

ensure that New York Telephone's service quality is raised to the

level of adjoining regions."3 CPB attributes the recent turn-

around to the Commission's indication that service quality is

related to the public interest assessment of the merger

application.

TW Comm argues that the merger will exacerbate service

quality problems because the merger "will likely consume

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 TW Comm's Initial Brief, p. 17.

2 Staff note that New York Telephone's overall CTRR of 3.8RPHL (reports/100 lines/month) is considerably higher thanBell Atlantic's 1.8 average CTRR and NET's 2.2 CTRR.

-16-

NYNEX/Bell Atlantic management's attention and avert it away from

all forms of service quality,"1 while competition from Bell

Atlantic, or the threat of such competition, would force

improvement in New York Telephone's service quality.

TCG argues that the merger threatens provisioning

service quality that CLECs receive from New York Telephone and

that the loss of Bell Atlantic as a potential facilities-based

competitor eliminates a potential source of unbundled elements

for other CLECs, thereby eliminating a competitive stimulus to

New York Telephone to improve its own service quality.

Lightpath and MCI also emphasize the potential

disruption of service quality caused by the merger and its

downsizing of personnel claiming that an incentive exists to

provide CLECs and competitive IXCs with poor service in order to

undermine the effectiveness of competition.

CPB urges conditioning merger approval on a doubling of

the current service quality incentive amounts in the PRP. Staff

makes a similar proposal, arguing that about one-third of

estimated merger savings (approximately $300 million) should be

assigned as an incentive for New York Telephone to close the gap

between its very poor CTRR levels and those of Bell Atlantic and

New England Telephone (NET), over a four-year period.2 Unlike

CPB's proposal, staff's would not alter the PRP, but would add

independent service quality requirements.

TW Comm, Lightpath, and TCG also propose measures

designed to improve carrier-to-carrier service quality. TW Comm

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-17-

suggests that Petitioners should at least be required to agree,

as a condition of approval, that service quality standards are

needed in five specific areas: (1) interconnection trunks;

(2) loops and high capacity local facilities; (3) number

portability; (4) other unbundled network elements; and

(5) operational support systems.

TCG and TW Comm argue as well that the merged companies

should be required to provide reports permitting a determination

of whether New York Telephone is meeting its obligations under

the Act. These parties also ask for a variety of enforcement

mechanisms and penalties including damages for failure to meet

service standards.

Both TW Comm and Lightpath, moreover, recommend that we

require specific resource commitments for carrier-to-carrier

service quality and number portability before merger approval,

including our pre-approval of any changes in the geographic

location or assignment of employees devoted to carrier-to-carrier

services in New York.

Economic Impact

1. Petitioners' Position

Petitioners maintain that the merger is in the public

interest, among other things, because it would not undermine the

rate schedules of the PRP, especially the commitment to freeze

rates for basic services and reduce other rates by approximately

$1.9 billion over the course of the plan. Petitioners argue:

"[T]he Plan thus provides all the assurance regarding rates which

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 31.

2 Id.

3 Id.

-18-

this Commission requires to conclude that a merger is in the

public interest."1

Although Petitioners assert there is no need or

justification for requiring any rate decreases, they also assert

that:

It is undisputed that the merger will createefficiencies and economies of scope and scale thatwill enable those corporations to achieve aminimum of $600 million in annual cost savings (atthe end of the third year following the merger). . . . [T]he Commission has consistently regardedthe likely achievement of cost efficienciesthrough a proposed merger as a positive result ofsuch a transaction which in and of itselfjustifies a finding that the transaction is in thepublic interest.2

Petitioners claim these savings will enhance the potential for

improvements in service quality, as discussed earlier, and also

for additional effectiveness in research and development. The

expansion of financial resources brought about by the merger,

Petitioners continue, will enable New York Telephone to create

new and innovative products and services and bring them to market

faster. Petitioners point out that the merged corporation

expects to engage in providing video services, expanded Internet

services (such as Internet access), applications of Advanced

Intelligent Network (AIN) and expanded application of broadband

services. "All of this," Petitioners argue, "will make the

Company more competitive and customer responsive."3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 35.

2 Tr. 101-112; Ibid., p. 36.

-19-

Petitioners also contend that the proposed merger will

promote economic development in New York State, and that although

such an effect is not necessary to conclude the merger is in the

public interest, this alleged positive benefit should be taken

into account.

Petitioners state that NYNEX and Bell Atlantic have

agreed to maintain the headquarters of the newly merged

corporation in New York. As a result, Petitioners continue, New

York will be home to the second largest telecommunications

company in the country and the only global telecommunications

company to maintain its headquarters here. "This will certainly

enhance New York's image as the telecommunications capital of the

world," Petitioners state; and although "[t]he merging

corporations have yet to determine precisely how many positions

will be transferred to New York to work at the headquarters,"

Petitioners continue, "[t]he corporate headquarters will be a

working headquarters in every sense of that term."1 Among the

offices they expect to locate in New York are the office of the

Chairman, Strategic Planning, General Counsel, External Affairs,

and Chief Financial Officer. Petitioners quote Mr. Seidenberg's

assertion that the location of Bell Atlantic's headquarters in

New York would become "a feeder industry to other industries,"

that it "would be a center of gravity for the new business, and I

think you can rest assured that this is a wonderful opportunity

for the State of New York to participate in."2

NYNEX and Bell Atlantic have also committed that there

would be no union layoffs as a result of the merger. Petitioners

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 37.

2 Id.

3 Id.

4 Id.

-20-

continue to explain that approximately 3,000 positions--1,500

from each corporation--will be eliminated over a two- to three-

year period as a result of the merger, and that the corporations

have "committed to achieving these reductions through attrition,

retirements and other voluntary means wherever possible."1 Even

so, Petitioners also state that there will actually be a "net

increase in hundreds of New York-based jobs in 1997."2 According

to Petitioners, New York Telephone expects a net force increase

after the merger, "to meet its service obligations under the

[PRP]."3

Also cited as an economic benefit is New York

Telephone's "ability to offer the highest quality service at

competitive prices using the world's most advanced technology."4

Petitioners also cite the merger of Bell Atlantic and NYNEX

Mobile companies as evidence that this merger will give rise to

increased efficiencies, promote competition, and encourage

economic development. Petitioners cite Mr. Seidenberg's

testimony to the effect that Bell Atlantic/NYNEX Mobile (BANM)

was the first cellular company to introduce single roaming

charges and to reduce prices through efficiency gains.

2. Other Parties' Positions

Other parties, led by staff, CPB and AT&T, challenge

the claim that financial gains attending the merger are a public

interest benefit. For example, staff claims the proponents have

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Initial Brief, p. 21.

2 Staff observes that the joint proxy statement reports a netpresent value of the projected merger benefits to be between$3.85 billion and $8.33 billion; thus, staff's intrastatecost savings figure, which was not challenged or addressedby Petitioners, staff says is reasonable.

3 AT&T's Initial Brief, p. 13.

-21-

not explained how operational efficiencies will translate into

benefits for customers.1 Staff argues as well that efficiency

savings might be expected absent the merger, as a result of

prudent management reaction to increased competitive pressure.

Likewise, staff asserts, service quality improvements as well as

price reductions would have been forced in a more competitive

environment.

As noted earlier, staff concludes that the merger will

not be in the public interest unless the cost efficiencies are

sufficient to overcome the loss of competition, and if the

benefits flow through to consumers. Thus, staff concludes that

the merger is not in the public interest unless conditions are

attached to it which provide value to customers.

Staff's panel estimated that over the remaining term of

the PRP, the merger will generate an additional $908 million of

savings in New York. This amounts to an average annual increase

in net revenue of $182 million, an amount that begins lower but

grows "conservatively" to over $300 million annually during the

later years of the PRP.2 AT&T strikes a similar theme,3 and

cites with approval staff's conclusion that NYNEX and Bell

Atlantic have not demonstrated that efficiencies will become

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 19.

2 Id.

3 Ibid., p. 20.

4 Id.

-22-

available from the merger that are distinct from those that could

be expected as a response to more competition.

Like staff, CPB bases its recommendations on the

Petitioners' cost estimates, and characterizes its

recommendations as conservative.

AT&T, CPB, New York City, and staff also challenge the

contention that the merger will provide economic benefits for New

York; SNET also comments on Petitioners' reference to BANM. AT&T

is particularly critical of the suggestion that the location of

corporate headquarters in New York City provide a public interest

benefit.1 More fundamentally, AT&T continues, Petitioners cannot

"responsibly promise that the merger will bring jobs to New York

State."2

According to AT&T, the economics belie the rhetoric,

suggesting that the merger could be very harmful to the New York

economy, because the two firms appear to be substantially

different in terms of their current levels of efficiency. NYNEX

has the highest cost per access line of any RBOC, AT&T observes,

and if there are duplicate organizations, "the firm will likely

merge inefficient operations into efficient," possibly resulting

in "the migration of support functions south."3 Moreover, AT&T

argues there may be sound economic reasons for the new merged

corporation to shift operations toward its southern major

commercial concentration, the South Jersey/Philadelphia area.4

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 New York City's comments, p. 4.

-23-

Finally, AT&T posits, to the extent competition is

harmed by the merger, the loss of competition will be a direct

and material loss to the economy of New York State. According to

AT&T, New Yorkers have received the highest cost and lowest

quality telephone service in any major location in the United

States, and AT&T cites staff's conclusion that the deprivation of

competition caused by the merger will reduce pressure on New York

Telephone to improve service quality, satisfy customers, and

speed the development of technological innovations.

CPB argues that the prestige and other possible

benefits from the headquarters may be outweighed by the reduction

in the overall number of employees in New York. CPB notes that

there have been no commitments by NYNEX or Bell Atlantic

regarding the staffing of the New York headquarters location, or

regarding the number of personnel who would work in New York

State. CPB expresses concern that a significant reduction in

NYNEX's New York work force could negatively impact New York's

economy and service quality.

New York City sounds similar themes.1 If NYNEX is

creating a bottleneck in the creation of necessary infrastructure

for new media and technology firms, New York City continues, it

could have a significantly negative effect on the City's economic

growth. New York City opines that transition problems, post-

merger pressures to downsize, and a potential reduction in the

importance of New York City in the geographically more diverse

post-merger company, could all have negative effects on the

provision of new services in New York.

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 5 and Staff's Initial Brief, p. 35.

2 In response to SNET, Petitioners argue that SNET'sallegations concerning roaming and fraud problems havenothing to do with this merger and should not have beenraised in this proceeding. Moreover, Petitioners continue,SNET allegations are completely baseless as to the claimthat BANM charges discriminatory rates; Petitioners respondthat BANM's intracorporate roaming rates are competitive. Moreover, Petitioners say, BANM has not discriminatedagainst SNET in its roaming arrangements, which areprivately negotiated, and which have resulted in significantrate decreases after Bell Atlantic and NYNEX merged theirmobile companies. Finally, Petitioners assert, BANM is anindustry leader in pressing for rapid deployment of anti-

-24-

New York City and staff also urge the Commission to

review carefully the potential effect of the proposed merger on

City employment.1

With respect to the BANM example, SNET argues that the

negative impact of the proposed merger on the development of

competition is underscored by the record of performance of the

Bell Atlantic/NYNEX cellular joint venture. When its customers

roam into the New York City area, SNET explains, SNET Mobility is

forced to take service from its principal competitor, BANM,

because it is the only "Band B" carrier in New York, and because

SNET Mobility's customers are limited to Band B frequencies when

they roam into BANM's service areas. SNET has three complaints

about BANM: First, it says, BANM exploits its hold on the

cellular roaming market by charging exorbitant access rates to

its competitors which are not charged to affiliates Second, SNET

maintains that BANM extracts huge profits from fraud in the

cellular market. Finally, SNET argues, SNET Mobility has

experienced unacceptable service from BANM in the areas of fraud

control and credit refunds.2

CASES 96-C-0603, 96-C-0599 and 96-C-0821

fraud technology, and has worked with SNET cooperatively tomitigate individual fraud exposure. SNET, Petitionersassert, inappropriately attempts to use this proceeding togain leverage in its private dealings with BANM on issuesconcerning their shared responsibility to control fraud.

1 CPI and Erie County do not have specific proposals, but bothargue that rate decreases are an important condition tomerger approval.

2 Although the revenue impact of staff's proposal, either on anominal or present value basis, is not computed, staffindicates its intention is to produce approximatelyone-third of the merger net savings ($908 million), orroughly $300 million.

3 CUB's Reply Brief, p. 3.

-25-

Based on the merger's claimed competitive and economic

impacts, several parties argue for rate reductions as a condition

of merger approval.1

Staff proposes a reduction in carrier access charges,

which would be required to be flowed through by interexchange

carriers to reduce end-users' interexchange usage rates.2 CPB

and CUB support reductions in basic rates. CPB recommends a

decrease in basic rates of $200 million while CUB recommends an

average rate cut of $250 million over the next five years, and

CUB's witness Cooper argues that the reduction should be

allocated to residential ratepayers.3

Impact on Regulation

1. Parties' Claims

A number of parties have alleged that the merger will

have negative impacts on our ability to effectively regulate New

York Telephone Company. CPI's witness, Ronald J. Binz, addressed

the issue in general terms:

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Tr. 1,321. AT&T advanced a similar assertion, Tr. 1,372.

2 See, also, Staff's Initial Brief, p. 31.

3 Tr. 1,691.

-26-

A second set of costs relates to the Commission'sability to continue to effectively regulateutility operations in the state. If the merger isapproved, ownership of NYNEX will reside with amuch larger holding company . . . the Commissionshould also recognize that decisions of the NewYork Public Service Commission will affect arelatively much smaller share of Bell Atlantic'sbusiness post-merger than of NYNEX's businesstoday--all things being equal, the merger willlessen the PSC's ability to command the attentionof the post-merger company.1

AT&T also asserts there is a real issue of the efficacy

of our continued exercise of authority. Governance problems,

AT&T continues, are likely to impact both competition and local

service quality. A particular concern for AT&T are issues of

cross subsidization involving affiliate transactions.

Staff and CPB also argue generally that the merger will

aggravate the difficulty associated with regulating affiliate

transactions. CPB contends that the merger, as proposed, would

increase the likelihood of inappropriate transactions between New

York Telephone and its affiliates, thereby resulting in

subsidization of New York Telephone's competitive affiliates.2

According to staff, the Liberty Consulting Group, in its

investigation of affiliate transactions in two Bell Atlantic

States, "stated that it encountered an unprecedented amount of

opposition to its review of information regarding Bell Atlantic's

unregulated affiliates . . . ."3 Moreover, staff continues,

Petitioners are planning to combine their respective procurement

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 CPB's Initial Brief, p. 27.

-27-

organizations, and the location of the procurement entity in the

merged organization resurrects the issue of protecting ratepayers

from irregularities and excess profits earned by the procurement

organization, concerns largely eliminated within NYNEX by moving

the Material Enterprises Company (MECO) from an unregulated

profit center to a regulated, telco-owned cost center.

In this regard, CPB's witness testified that NYNEX has

a strong incentive to "shift revenue and profits to competitive

operations and costs to less competitive business segments such

as [New York Telephone]."1 This incentive continues even under

the price cap regime in the PRP, CPB continues, because we may

consider New York Telephone's earnings in informal evaluations of

the PRP, or in determining New York Telephone's entitlement to

future revenues or its liability for future costs.

Likewise, CPB continues, the PRP does not prevent

consumers from being harmed from cross-subsidization. Because

earnings from monopoly services can be used to finance Bell

Atlantic's competitive activities, CPB asserts, New York

Telephone would be less likely to reduce rates and more likely to

implement the full extent of rate increases permitted under the

PRP than without such subsidization.

Finally, CPB asserts, New York Telephone will have an

incentive to favor Bell Atlantic's affiliates over rivals, which

could have anti-competitive effects and impede the development of

fair and effective competition. The control over affiliate

transactions established under the "Planned Comprehensive

Restructuring of NYNEX Corporation and its Affiliates" (the

Restructuring Plan) agreed upon by New York Telephone and NYNEX

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Staff's Initial Brief, p. 33.

2 Ibid., p. 34.

-28-

and approved in 1992, staff and CPB fear, will be lost after the

merger, because Bell Atlantic might withdraw commitments made by

NYNEX under the Restructuring Plan.

Staff also raises concerns about the post-merger

treatment of pensions and Other Post-Employment Benefits (OPEBs),

consumer operations, and outreach and education. With respect to

pensions and OPEBs, staff states that past overfunding of the New

York Telephone pension plan has resulted in approximately

$1 billion in unrecognized gain. Petitioners have told staff

that there are no current plans to merge or change the NYNEX and

Bell Atlantic pension plans, but staff maintains that steps must

now be taken to protect New York ratepayers in the event of an

eventual merger of NYNEX and Bell Atlantic pension plans and

related funds.1

The merged corporation may also have a reduced interest

in satisfying customer complaints, staff continues, and in

reaching out to customers with special needs.2

2. Petitioners' Responses

Petitioners respond to these various arguments. First,

they oppose the suggestion that Bell Atlantic be required to

adhere to the Restructuring Plan as it is currently written.

They point to New York Telephone's petition with the Commission

of August 29, 1996 seeking modifications of the Restructuring

Plan for reasons unrelated to the merger. Those proposals, they

continue, were advanced in view of the many changes occurring in

the industry, particularly the passage of the 1996 Act and the

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Initial Brief, p. 104.

2 Petitioners' Initial Brief, p. 105.

-29-

adoption of the PRP. The proposed modifications are important,

Petitioners continue, for it to engage in joint marketing of

services and the use of a single sales force "that will

dramatically affect [its] ability to compete and that would

otherwise be prohibited under the Restructuring Plan."1 Although

Petitioners did not request that petition be addressed in these

proceedings, they assert there is a need to limit, not expand,

the application of the Restructuring Plan to the newly merged

corporation.

Noting an inconsistency in their testimony as to

whether Bell Atlantic affiliates would be voluntarily included

under the Plan, Petitioners explain:

NYNEX and Bell Atlantic are now in the process ofdesigning a corporate structure for the new BellAtlantic. Given the complexity of the effort, weanticipate that the organizational design will notbe completed until several weeks after the mergeris consummated. At that time, the new BellAtlantic will submit the proposed organizationstructure to the Commission along with a requestto approve any additional Restructuring Planamendments required to implement the newstructure. For the interim period [the periodfrom the effective date of the merger until thedate of implementation of the new corporatestructure together with finally approvedRestructuring Plan amendments] NYNEX and BellAtlantic will operate in a manner consistent withthe Restructuring Plan, as outlined below and asmay be amended.2

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Petitioners' Reply Brief, pp. 86-87.

2 Petitioners' Initial Brief, p. 109.

-30-

With respect to pensions, Petitioners assert that the

merger presents no potential detrimental impact. The company

cites its interrogatory response to staff:

New York Telephone will continue to exist afterthe merger and will continue to comply in allrespects with the Public Service Commission's"Statement of Policy and Order Concerning theAccounting and Ratemaking Treatment for Pensionsand Post-Retirement Benefits Other Than Pensions"adopted in Case 91-M-0890 . . . and with theaccounting plan adopted in Case 92-C-0665.

The merger itself will have no effect on New YorkTelephone's or NYNEX's pension funds. At thistime, the merging company has no plans to changethe pension plans as a result of the merger. However, should the merging company seek to changethe pension plans at any time after the merger iscompleted, those changes will only be made inaccordance with the Policy Statement.1

Nor will the merger have any effect on New York

Telephone's outreach and education efforts, Petitioners state.

"NYNEX does not now require New York Telephone to follow a

'homogenized' outreach and education program that is used across

the entire NYNEX territory," Petitioners continue, "and there

will be no such requirement after the merger."2 Moreover

Petitioners assert New York Telephone will continue to maintain

its Consumer Advisory panels that are in place throughout New

York, will continue to place customer messages in bills, and will

publish its Customer Guide, use 800 numbers for information

regarding company products and services, send newsletters to

special needs customers, conduct targeted advertising, and

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Id, p. 109.

2 Ibid., pp. 110-111.

-31-

conduct face-to-face field outreach. "In short," Petitioners

conclude, "the merger is not expected to affect the company's

outreach and education program in any way."1

Likewise, Petitioners assert that the merger will not

interfere with customer complaint handling procedures.

Petitioners argue that staff is mistaken about its perceived

"persistent problem of backlogged complaints" and that "there are

far fewer open customer complaints than staff believes exist, and

the number of such complaints presents no reason to believe the

company is not handling customer complaints in an efficient and

effective way."2 Regardless, Petitioners argue, the issue of

complaint handling procedures is best left for resolution

elsewhere, and New York Telephone is committed to ensuring that

the transition to a merged company does not interfere with those

procedures and does not give rise to increases in customer

complaints.

In short, Petitioners claim the merger does not suggest

the need for any new regulatory measures.

The Performance Regulatory Plan and Rates

Interspersed among the various topics already reviewed

are references by the parties to the Performance Regulation Plan

(PRP), the seven-year incentive regulation program for New York

telephone that commenced in 1995. Petitioners argue the PRP is

not subject to revision in response to the merger. According to

Petitioners, New York Telephone's performance will not be

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Ibid., p. 43.

2 Ibid., p. 44.

3 Id.

-32-

adversely affected in any way that is not adequately dealt with

by the PRP and its incentive, or other regulatory measures we may

take not covered by the PRP. They argue as well that reducing

rates as a response to the merger would violate both the spirit

and the letter of the PRP. New York Telephone made a number of

substantial financial and service improvement commitments in the

PRP, they say, and it assumed all of the risks associated with

meeting those commitments. Moreover, Petitioners continue:

While the rate scheme established under the Planassumed a certain level of efficiencies, it was byno means clear that the Company would be able toachieve those efficiencies and the Plan did notspecify any particular means by which the Companywould (or must) attempt to do so. In return, theCompany earned the needed flexibility to compete,grow and change in the increasingly competitivetelecommunications marketplace, and to do sowithout the constraints of traditional rate ofreturn regulation.1

According to Petitioners, the proposed merger is simply one means

by which NYNEX is "working to achieve the efficiencies and cost

savings required under the Plan."2 And, Petitioners add:

"stripping away merger-related cost savings and efficiencies

while maintaining all of the other financial obligations included

in the Plan would hobble the Company and do violence to the very

purpose for which the Plan was adopted."3

Petitioners acknowledge the Plan has a reservation

clause which provides:

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 PRP §VIII (A)(5).

2 Petitioners' Initial Brief, p. 45.

3 See, for example, CPB's Reply Brief, p. 9.

-33-

The Commission reserves the authority to modifythis Plan if unforeseen circumstances in theopinion of the Commission have such a substantialimpact as to render this Plan unreasonable,unnecessary, or insufficient for the continuedprovision of safe and adequate service by New YorkTelephone at just and reasonable rates orotherwise contrary to the Public Service Law.1

According to Petitioners, however, there is a high threshold for

an "unforeseen circumstance" that would trigger operation of this

clause, and the merger does not rise to that level. It would not

be enough, Petitioners assert, to change the Plan on the

"possibility that some event--in this case, the merger--might

cause increased profits."2

Other parties, however, variously reject these

arguments. They contend that the merger has changed the

fundamental premises regarding New York Telephone's financial

expectations and the development of competition on which it was

based, noting that this merger was not a recognized possibility

at the time the PRP terms were negotiated. Other parties have

advanced proposals that would, in effect, modify the PRP, arguing

that the Reservation Clause contemplates our revision of the PRP

for material changes in conditions brought about by unforeseen

circumstances.3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 In a related argument, Petitioners claim revising the PRP inresponse to the merger would be unconstitutional, violatingan asserted "unconstitutional conditions" doctrine, becauseof Petitioners' asserted constitutional right to merge,without State interference under the Interstate CommerceClause arguments addressed earlier.

2 Cases 29086, Rochester Telephone Corporation, OpinionNo. 86-22 (issued September 10, 1986).

3 Petitioners cite Chenango & Unadilla Telephone Corp. v. PSC,45 A.D. 2d 409, 413 (3d Dep't. 1974).

4 Petitioners' Initial Brief, pp. 48-49.

-34-

Beyond the PRP,1 Petitioners also argue that our

determination in a Rochester Telephone Corporation proceeding not

to impose a royalty as a quid pro quo for approval of an

agreement that would allow Rochester to make investments in

unregulated affiliates2 is a precedent establishing that it would

be improper to condition approval of this petition on the

provision of merger benefits to New York Telephone's customers.

Petitioners also argue that the record in this

proceeding is inadequate to justify any rate decreases. Their

argument, in effect, is that consideration of the effects of the

merger, without considering all other factors that might affect

current costs and revenues, would be improper.3 Petitioners go

on to argue this point with more specificity:

Whether fixing rates under §97(1) or §114, theCommission must adduce sufficient evidence toallow for a complete and adequate determination ofa utility's just and reasonable rates.4

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 Bronx Gas and Electric Co. v. Maltbie, 271 N.Y. 364 (1936).

2 Petitioners' Initial Brief, p. 50.

3 Ibid., p. 53.

-35-

Petitioners cite factors that must be considered, including "the

original cost, less accrued depreciation of the physical property

of the utility company used and useful in the public service."1

In addition to the considerations involved in a rate

case, Petitioners maintain there are procedural prerequisites

that must be met before the company can be required to decrease

rates. In short, Petitioners argue:

The record developed in this proceeding fallswoefully short of the requirements forestablishing rates under [the Public Service Law]. The record contains none of the requisite data orinformation . . . [a]nd whatever financialinformation is in the record, it is nowhere near'rate case quality' and does not begin to conformwith the rigors and demands of the Commission'sStatement Of Policy On Test Periods In Major RateProceedings.2

Rate decreases also cannot be justified, Petitioners

continue, as an offset to any harm to competition caused by the

merger. Petitioners repeat, in effect, their claim that the

proposed merger does not do violence to the premises of the PRP

and add that "there is absolutely no evidence in the record to

support the assumption that Bell Atlantic would itself have

caused New York Telephone to reduce any particular rate by any

particular amount in any particular area of its service

territory."3

CASES 96-C-0603, 96-C-0599 and 96-C-0821

1 CPB's Reply Brief, p. 16.

2 Ibid., p. 15.

-36-

In response, CPB argues that rate decreases are

justified to ensure that ratepayers obtain the same benefits from

the merger they would obtain if New York Telephone operated in a

competitive market place. With respect to Petitioners' claim

that an inadequate record basis exists for rate reductions, CPB

responds that its proposal "is based on real and unambiguous

information reviewed by the Bell Atlantic Board of Directors and

estimates of cost savings resulting from the merger."1

Petitioners themselves acknowledge the annual cost savings, CPB

continues, and the notion that a review of New York Telephone's

financial situation is needed is belied by "the record earnings

reported publicly by NYNEX--which reflect the seventh consecutive

quarter of double-digit income growth and the second consecutive

year of record access line growth, including access line growth

that is double the rate assumed in establishing the PRP."2

Petitioners assert that any modifications to the plan, such as

rate reductions, without an offsetting revision of NYT's

obligations, would violate the spirit of the PRP. While

acknowledging the existence of the reservation clause in the

plan, to which they agreed, Petitioners argue that the merger is

not such an "unforeseen circumstance" that would be necessary to

trigger the operation of that clause.

Other parties counter that the merger changes the

fundamental assumptions upon which the PRP was premised. The

CASES 96-C-0603, 96-C-0599 and 96-C-0821

-37-

merger, they assert, changes the financial and competitive

landscape to such an extent that the PRP must be changed.

These parties argue that the merger is the paradigm unforeseen

circumstance, since an event of this magnitude was not even

envisioned at the time the PRP was negotiated.