990923_dh.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS
STEPHANIE MILLER
TONYA CLARK
RON LAW
LYNN ANDERSON
TERRI CARLOCK
JOE CUSICK
DOUG COOLEY
BEV BARKER
CHERI COPSEY
BRAD PURDY
WELDON STUTZMAN

FROM:

DATE: September 21, 1999

RE: MERGER OF QWEST COMMUNICATIONS INTERNATIONAL AND U S WEST, INC.

On August 30, 1999, the Commission received a “letter” notice regarding the merger of Qwest Communications International, Inc. (Qwest) and U S WEST, Inc. In their letter (attached), the companies assert that the Commission’s prior approval of the merger is not required to consummate the merger transaction. The letter asks that if this assertion is not correct, that the Commission notify the parties. This memorandum examines the merger transaction in greater detail.

THE PARTIES
As described in greater detail in the letter, Qwest, Inc. is a Delaware corporation with its principal offices in Denver, Colorado. Qwest is the parent corporation for at least four wholly-owned subsidiaries: 1) Qwest Communications; 2) LCI International Telecom (dba Qwest Communications Services); 3) USLD Communication; and 4) Phoenix Network. The Qwest subsidiaries provide Internet protocol-enabled services such as Internet access, web hosting, co-location and remote access. They also provide a full range of voice, data, video and related services to businesses, governmental agencies and consumers. They provide high-volume voice and conventional private line services to other communications providers, as well as Internet service providers and other data service companies. Qwest has constructed a nationwide fiber optic network connecting over 150 cities across the United States in a network totaling 18,500 route miles. Qwest has more than 300 miles of fiber in Idaho. Qwest offers 10 gigabit speed based upon a 2.4 gigabit Internet protocol architecture. The network contains “self-healing” SONET rings.
U S WEST, Inc. is a Delaware corporation and the parent of U S WEST Communications. U S WEST Communications serves approximately 25 million customers in the United States primarily in Idaho and thirteen other states. U S WEST Communications provides local and long-distance services, high-speed data networking (including Internet access and digital subscriber line (DSL) services PCS, print electronic telephone directories, operator services, and video services markets).
U S WEST Communications is a telecommunications corporation and a public utility regulated by this Commission under Titles 61 and 62. Idaho Code §§ 61-121, 61-129, 62-603(14). Currently, U S WEST Communications serves more than 500,000 access lines in Idaho and manages a telecommunications network in excess of 1,900 sheath miles of fiber optic cable. In Idaho, LCI International has been granted a certificate to provide competitive local exchange service and is registered as a Title 62 reseller of long-distance services. USLD Communications (aka U.S. Long Distance) is also registered as providing Title 62 services, operator services and possesses a CLEC certificate. Qwest Communications and Phoenix Network are also registered as Title 62 companies. The four Qwest subsidiaries are telecommunications corporations regulated by the Commission under Title 62. Idaho Code §§ 62-603(14) and 62-604(1).

THE TRANSACTION
On July 18, 1999, Qwest and U S WEST entered into an agreement providing for the merger of the two companies. The Board of Directors of each company have approved the merger agreement. The proposed merger is subject to the regulatory approval of at least five regulatory state commissions and several federal agencies. On August 19, the Securities and Exchange Commission decided not to review the companies’ registration filing statement. On September 7, the U.S. Department of Justice cleared the merger agreement. The companies plan to submit the mergers to their respective shareholders on November 2, 1999.
Under the terms of the agreement, U S WEST will be merged into Qwest with Qwest continuing as the surviving corporation. As far as the operating subsidiaries of both parent companies, the notice states:
The direct and indirect wholly-owned subsidiaries of Qwest, Inc. and U S WEST, Inc. that hold operating certificates or other authorizations will suffice as direct or indirect wholly-owned subsidiaries of the post merger Qwest, Inc. Additionally, no changes in the name of the certificated subsidiaries, no transfers of certificates of Public Convenience and Necessity and no assignments of assets of those certificated subsidiaries are contemplated at this juncture.

Letter Notice at 3. The surviving entity will be headquartered at 1801 California Street, Denver, Colorado.
The parties assert that Idaho customers will continue to be served by the existing Qwest and U S WEST subsidiaries. Consequently, the parties allege that “administratively, the merger will be transparent to Qwest’s and U S WEST’s respective customers.” Id. at 4. In other words, customers will be served and billed pursuant to existing tariffs, catalog filings, price lists and operating authorities. However, in order to avoid violating Section 271 of the federal Telecommunications Act, Qwest will be required to cease providing interLATA services in the U S WEST 14-state region. Consequently, Qwest will no longer be able to provide Idaho customers with intrastate/interLATA long-distance services (e.g., Boise to Lewiston) or interstate/interLATA long-distance services for calls to the other 13 U S WEST states (e.g., Boise or Lewiston to Denver).
To effectuate the merger, Qwest will issue shares of its common stock (based upon a value of $69.00 of each share of U S WEST’s common stock subject to a “collar” and Qwest’s average stock price between $28.26 and $39.30 per share. Id. at 3. The number of Qwest shares to be exchanged for each share of U S WEST will be determined by dividing $69.00 by a 15-day weighted average of trading prices for Qwest common stock over a 30-day period ending three days prior to closing, but will not be less than 1.72932 a share (if Qwest’s average stock price exceeds $39.90 per share) or more than 2.44161 shares (if Qwest’s average stock price is less than $28.26 per share). If Qwest’s average stock price is below $38.70 per share, the “collar” will become effective and may be satisfied in whole or in part with cash infusion.

MANAGEMENT
The parties propose under the merger agreement that the current Chairman of the Board of Qwest (Phillip Anschutz) will become the Non-Executive Chairman of Qwest. The Chairman and CEO of Qwest will assume those roles in the merged company. Sol Trujillo (currently Chairman, President and CEO of U S WEST, Inc.) will become “a Chairman of Qwest, Inc. and become President of the Broadband Local and Wireless Division of Qwest, Inc.” Id.
Upon approval of the merger, Qwest will establish an “Office of the Chairman” whose members will be Anschutz, and Trujillo. The Office of Chairman will act by majority vote and any member of the office will have the right to bring any matter to the board for its consideration. For a period of one year following closing, the 20 most senior policy-making executives of Qwest will be drawn in substantially equal numbers from among the officers of Qwest and U S WEST.

THE PUBLIC INTEREST
The parties maintain that the proposed merger will be in the public interest because the merger will bring together Qwest’s broadband fiber-optic network and U S WEST’s local telecommunication facility “and technology expertise and advance services.” Id. at 5. The letter states that the “merger will create a new company with a significantly increased ability to meet the rapidly evolving needs of business and residential telecommunications customers.” Id. In particular, the parties recite several benefits that will result from the merger. First, “and foremost,” the parties insist that the merger will cause no adverse impact upon the continuity and quality of services provided to U S WEST’s Idaho customers. The companies also list the following public interest benefits to the merger.
Responsiveness to local customers. The companies claim that following the merger, they will “be in a position to accelerate roll-out of high quality advance broadband services in Idaho, the U S WEST region and throughout the United States.” Id. at 5. Given U S WEST’s and Qwest’s expertise in DSL and advance data networks, respectively, the new company will have a significant greater ability to accelerate local broadband conductivity for consumers. “The result will be greatly increased competition in the broadband services market because the new company’s fiber and DSL broadband technology will offer the most substantial and distinctive alternatives to cable broadband service offerings.…” Id.
Increase 271 incentives. Despite the discontinuance of Qwest’s interLATA services in Idaho and the U S WEST region, the parties are committed to becoming “an end-to-end facilities-based provider of voice, data and integrated services.” Id. at 6. Obtaining 271 approval is a major component of this strategy. For example, U S WEST has already notified this Commission that it has begun discussions with various state commissions and the ROC with respect to the development of a cooperative process for conducting operational support systems (OSS) testing.
Increased competition. At such time as Qwest receives 271 approval from the FCC, it will have the ability to provide end-to-end telecommunication services to all its customers. Combining U S WEST’s customer base (including six of the nation’s fastest growing metropolitan areas) and Qwest’s state-of-the-art fiber optic network, “will enable the merged company to provide a broader array of services with maximum efficiency, which in turn will benefit consumers, who will seek competitive prices and more choices. In addition, the merger will enhance competition in the long-distance market. The merged company will also be able to better compete in the national telecommunications market place with other recently merged companies.
STAFF ANALYSIS
With the exception of Idaho Code § 61-328, the Idaho Public Utilities Law does not contain a specific statute dealing with the Commission’s review of mergers and acquisitions. Historically, the Commission has utilized a transactional analysis. In other words, if a transaction occurrs at a parent corporation level and was “transparent” to Idaho customers, then the Commission has not typically exerted jurisdiction over the transaction. Such was the case with the pending merger of GTE and Bell Atlantic. From Idaho’s point of view, GTE will continue to be the serving entity and that the merger will not affect the rates or services for Idaho customers.
In other transactions involving the actual transfer of assets or the Certificate of Public Convenience and Necessity, the Commission has exerted jurisdiction over those transactions. Idaho Code §§ 61-526, 61-528. For example, United Water’s purchase of other water companies, the purchase of various telephone exchanges by Citizens from GTE, or the sale of the U S WEST rural exchanges to various purchasers. In these types of transactions, the transaction was not transparent to Idaho customers. Rates, services, and customer service functions changed. In these latter cases, the Commission has examined the transaction’s impact upon rates, types of service, customer service, the financial viability of the purchaser, and other public interest issues. Idaho Code § 61-528.
Returning to the merger transaction between Qwest and U S WEST, the parties assert that a merger of the type contemplated does not require the Commission’s approval. As previously mentioned, the parties do not contemplate the need to transfer any Certificates of Public Convenience and Necessity. Idaho Code § 62-704 provides that any telephone corporation may at any time with the consent of two-thirds of its stockholders, sell, transfer or convey any right, privilege, franchise, or property of the corporation, except its corporate franchise.
1. Securities. Idaho Code § 61-901 “authorizes the Commission to exercise jurisdiction over the issuance of stock and stock certificate for any Idaho public utility except telephone corporations earning three-fourths or more of the total gross revenue of such corporation from sources outside the state of Idaho.” Qwest and U S WEST earn more than 75% of their revenues from outside Idaho. Consequently, the Commission has not and does not exercise jurisdiction over the issuance of U S WEST or Qwest stock.
2. Regulatory compliance. With the exception of Phoenix Network, all the operating subsidiaries have paid their 1999 regulatory assessments to this Commission. On September 9, 1999, Phoenix Network was advised that the Commission had not received its first half regulatory assessment. The Company was reminded that failure to receive this regulatory assessment ($25.50 which includes interest) may result in legal actions being taken by the Attorney General to recover the Commission’s regulatory assessment.
As indicated in Exhibit A to the letter notice, the four Qwest operating subsidiaries began operating in Idaho in the early 1990s as resellers of Title 62 long-distance services. All four companies (with the exception of LCI) are exempted from USF and TRS payments because the underlying carrier(s) make these payments. This year, LCI began contributing to the Idaho USF.
3. Customer service. Over the last five years (January 1995 to the present) the Commission has received a number of inquiries and complaints regarding the Qwest subsidiaries. The table below indicates the number of complaints for each subsidiary.

Since 1-1-95

Since 1-1-98

From 1-1-99 AG Complaints
Slamming/Cramming Since 1-1-98___
Qwest
LCI
USLD
Phoenix
U S WEST-N
U S WEST-S
42
23
8
4
40
7
7
NA
30
1
4
ø
44
889
18
4
1
ø
>
>
4. MTS Discontinuance. As previously mentioned, the Qwest subsidiaries must cease their interLATA exchange business in Idaho as part of the transaction so as not to violate Section 271 of the federal Telecommunications Act. The merged company is prohibited from providing interLATA long-distance services interstate or intrastate or until such time as it receives Section 271 authorization from the Federal Communications Commission. U S WEST has advised the Staff that the procedures for advising the Qwest subsidiaries’ customers of the service discontinuance have not been formalized nor has the date for discontinuance been established.
Although the Commission may not possess statutory authority to approve or disapprove the merger, it does possess authority over Title 62 telephone corporations discontinuing MTS service in Idaho. Idaho Code § 62-612 provides that a Title 62 telephone corporation providing MTS “may not withdraw or otherwise discontinue such service to a local exchange area unless one or more alternative telephone corporations are furnishing the respective telecommunication service or equivalent service to the customers in such local exchange area at the time such service is withdrawn or otherwise discontinued.” This statute further provides that a company planning to discontinue MTS service “shall file a notice of such withdrawal or discontinuance of the service with the commission and shall publish a notice of such withdrawal in a legal newspaper circulated within the local exchange area, and provide such other reasonable notice as may be required by the commission.” Idaho Code §62-612(2). Persons or other telephone corporations affected by the withdrawal may Petition the Commission within 30 days from the date of publication and request that the Commission determine whether such discontinuance is authorized. Idaho Code § 62-612(3).
Although Qwest’s discontinuance of MTS service in Idaho is required by the federal Telecommunications Act, there is no reason to assume that Qwest cannot comply with both federal and state law in this matter. Qwest is aware of this notice requirement and shall comply with the statute. Pursuant to Idaho Code § 62-612(2), the Consumer Division recommends that the Commission direct the Qwest subsidiaries to provide 30 days’ written notice to their customers of the service discontinuation. Staff believes that a separate mailing notice would be best but that a bill insert coordinated with Staff would be sufficient to accomplish public notice.

STAFF RECOMMENDATION
Based upon the nature and structure of the proposed merger and the statutory jurisdiction of the Commission, Staff recommends that the Commission need not approve or exert jurisdiction over the proposed merger. Staff further recommends that the Commission require the Qwest subsidiaries to provide their customers with individual 30 days’ notice of the discontinuance of certain MTS services.

COMMISSION DECISION
Does the Commission agree that it need not exert authority over or approve the Qwest-U S WEST merger?
Does the Commission desire to require Qwest to provide individual notice to its customers concerning the discontinuance of certain MTS?
Anything else?

vld/M:U S WEST merger_dh
SONET is an acronym for Synchronous Optical Network standard developed by the industry to ensure the compatibility of transmission networks that use equipment from different manufacturers. The SONET standard includes a network band width of 2.488 gigabits per second or 2.488 billion bits per second.

The term “telephone corporation” means every telecommunications corporation providing telecommunication services for compensation within this state.

The term “public utility” includes every telephone corporation and each such corporation “is hereby declared” to be subject to the jurisdiction, control and regulation of the Commission and to the provisions of this [Title 61] act.” Idaho Code § 61-129. This section goes on to read that the term “public utility” shall “cover cases both where the service is performed and the commodity delivered directly to the public or some portion thereof, and where the service is performed and the commodity delivered to any corporation or corporations, or any person or persons, who in turn, directly or indirectly or mediately or immediately, perform the service or deliver such commodity to or for the public or some portion thereof.”

This is the current corporate headquarters for U S WEST Communications.
The Idaho Telephone Service Assistance Program (ISTAP) surcharges are only recovered on a per line basis.

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