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William R. Lloyd Jr. v. Pennsylvania Public Utility

March 1, 2011


The opinion of the court was delivered by: P. Kevin Brobson, Judge

Argued: December 6, 2010



Petitioner William Lloyd, Small Business Advocate (SBA), petitions for review of two orders of the Pennsylvania Public Utility Commission (PUC). The PUC's first order approved the joint application of Embarq Pennsylvania (Embarq PA), now known as The United Telephone Company of Pennsylvania d/b/a CenturyLink,*fn1 and Embarq Communications*fn2,*fn3 (collectively either Embarq, Joint Applicants, or the companies, as pertinent) for the indirect transfer of control of the Joint Applicants to CenturyTel (to which the PUC referred collectively as the Merging Parties). The PUC issued its approval subject to the companies' acceptance by Embarq's officers of certain conditions. One of the conditions was that the PUC reserved the right to issue a subsequent order, incorporating additional conditions that the Federal Communications Commission (FCC) might impose in its consideration of a concurrent transfer application by the companies. In accordance with the conditional language of its initial order, the PUC issued a second order, which modified the initial order by incorporating merger conditions that the FCC imposed in its order resolving the transfer request. SBA also petitions for review of this latter order.

I. Factual and Procedural Background

The companies submitted their Joint Application in November 2008. The PUC published notice of the proposal and assigned the matter to Administrative Law Judge Wayne Weismandel (ALJ). The ALJ held a hearing on March 3, 2009.

The facts as revealed in the record and the ALJ's Initial Decision and PUC's Opinion and Order are summarized below. Embarq PA, as noted above, is an ILEC.*fn4 Embarq PA's certificate of public convenience authorizes it to provide local exchange services in ninety-two exchanges in all or part of twenty-five counties in Pennsylvania. Embarq PA serves approximately 326,078 access lines in Pennsylvania. Embarq Communications is an interexchange toll reseller,*fn5 and it has approximately 160,000 customers in Pennsylvania. Embarq, CenturyTel, and CenturyTel's newly created and wholly-owned subsidiary Cajun Acquisition Company (CAC), entered into an agreement and plan of merger (Merger

Agreement), under which the parent company, Embarq Corporation, would merge with CAC. CAC would then cease to exist and Embarq would survive, adopting CAC's By-Laws and Certificate of Incorporation. The stock-for-stock transaction effectuating the merger would result in Embarq becoming a direct, wholly-owned subsidiary of CenturyTel.

On April 3, 2009, the ALJ issued a decision in which he recommended to the PUC approval of the Joint Application without conditions. The ALJ rendered numerous factual findings relating to CenturyTel's experience and practices in the telecommunications market. The ALJ determined that CenturyTel had acquired and integrated many access lines, enabling it to serve approximately 2.1 million access lines and 600,000 broadband connections.

CenturyTel, the ALJ determined, had a managerial organization with developed and tested acquisition skills and a highly-skilled technical staff. The ALJ found that CenturyTel has extensive experience with the integration of acquired access lines and that CenturyTel has a similar degree of experience in converting large numbers of customers to new systems, with a sophisticated system of customer support that ensures effective operations.

The ALJ concluded that the merger reflected the combination of similar entities (both focusing on the ownership and operation of subsidiary ILECs in predominantly rural areas in multiple states) with complimentary cultures. The ALJ's factual findings observed the significant impact of "intense" intermodal competition*fn6 on traditional ILECs such as Embarq PA.*fn7 CenturyTel, in contrast, based upon its more rural service area, has fewer switched lines (and expected lower rates of line loss), resulting in less financial pressure on that company. The ALJ also determined that while Embarq experienced a decline in revenue, the merger would result in "more modest levels of revenue declines than at Embarq alone." (ALJ Initial Decision, Finding of Fact (F.F.) No. 46, attached to SBA's definitive brief.) "[T]he combined entity will have less exposure to access line loss and competitive pressures." (Id., F.F. No. 47.) The combination of assets, resources, and complementary strengths resulting from the merger would enable the new company to "achieve greater economies of scale and scope" than the two companies would experience independently. (Id., F.F. No. 50.)

A key subject of the ALJ's decision related to the "synergy" savings (estimated to reach $400 million annually) that the merged company could anticipate.*fn8 Merger, the ALJ determined, would likely result in the following beneficial outcomes for the new company: (1) a better credit rating; (2) a higher investment grade rating; (3) access to capital for strategic investment opportunities; (4) positive bond market views; (5) greater access to both equity and debt capital; (6) a dividend payout ratio that will permit an appropriate balance between debt and equity to be maintained; (7) increased financial strength, which will "provide a better basis for engaging in intermodal competition." (Id., F.F. No. 62). The merger would result in a benefit to Pennsylvania customers by, among other things, (1) enhancing the ability to bring emerging technologies and resulting advanced services to Pennsylvania customers; (2) pooling the expertise of Embarq and CenturyTel to better serve the needs of customers; (3) improvement through the use of best practices; and (4) using CenturyTel's customer-focused billing and customer care systems. (Id., F.F. Nos. 65, 67, 69, and 70.)

Ultimately, the ALJ approved the merger without conditions. SBA filed exceptions to the ALJ's order, suggesting that a single condition be incorporated into the decision relating to the use of synergy savings. On May 28, 2009, the PUC issued its first order,*fn9 adopting the ALJ's decision, but adding conditions to the ALJ's order, including the right to amend its order based upon conditions the FCC might later place on the merger. The PUC rejected the condition suggested by SBA. A key factor in the PUC's adoption of the ALJ's decision was the determination that the merger would make the companies financially stronger and better able to compete in the intermodal marketplace.

SBA filed a timely petition for review of the PUC's order, asking this Court to remand the matter to the PUC to reconsider its analysis regarding the effect of "synergy savings." On August 31, 2009, the PUC filed an application with this Court for an order remanding the case to the PUC to modify its order in light of the issuance by the FCC of an order approving the merger. This Court granted the application and remanded the case to the PUC for the PUC's consideration of "safeguards and conditions" included in the FCC's order.

Following the PUC's issuance of a tentative order and SBA's submission of comments in response to the tentative order, the PUC issued a final order and opinion on March 1, 2010. In that final order, the PUC rejected SBA's recommendations and incorporated the conditions adopted by the FCC in its order. SBA filed a petition for review of that March 1, 2010 order, which is now before this Court.

SBA appealed the PUC's orders raising the following single issue: "May the PUC consider the strengthening of Embarq PA as a competitor to be a detriment when the PUC is determining whether the proposed transfer of control will result in substantial affirmative public benefits?"*fn10

III. Analysis

This Court's standard of review of a decision of the PUC is limited to considering whether substantial evidence supports necessary factual findings, whether the PUC erred as a matter of law, and whether any constitutional rights were violated. 2 Pa. C.S. § 704; PECO Energy Co. v. Pub. Util. Comm'n, 568 Pa. 39, 46, 791 A.2d 1155, 1160 (2002). The PUC is the ultimate finder of fact in matters involving certificates of public convenience. Kviatkovsky v. Pub. Util. Comm'n, 618 A.2d 1209 (Pa. Cmwlth. 1992). We hasten to point out that courts should defer to the PUC's interpretations of the Code and its own regulations unless the PUC's interpretations are clearly erroneous. Popowsky v. Pa. Pub. Util. Comm'n, 550 Pa. 449, 462, 706 A.2d 1197, 1203 (1997). This Court may not "substitute its judgment for that of the PUC when substantial evidence supports ...

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