Testimony of Federal Communications Commissioner Harold W. Furchtgott-Roth
Before the House Committee on Commerce, Subcommittee on Telecommunications, Trade, and Consumer, Tuesday, March 14, 2000, 10:00 am
The Telecommunications Merger Review Act of 2000
Chairman Tauzin, distinguished Members of the Subcommittee, thank you for inviting me to testify before you today on the FCC's merger review process. It is an honor to be here.
The FCC Lacks "Merger" Review Authority
As a threshold matter, I would like to define the scope of the Commission's actual authority when reviewing, under sections 214 and 310 of the Communications, license transactions involving merging parties. Contrary to its frequent assertions, the Commission does not possess statutory authority under those provisions to review, writ large, the mergers or acquisitions of communications companies.
Rather, that Act charges the Commission with a much narrower task: review of the proposed transfer of radio station licenses from one party to another and review of the proposed transfer of interstate operational authorizations for common carriers. Nothing in the Communications Act speaks of jurisdiction to approve or disapprove the mergers that may occasion a transferor's desire to pass licenses on to a transferee. Under that Act, the Commission is required to determine whether the transfer of licenses serves the public interest, convenience and necessity.
To be sure, the transfer of radio licenses and common carrier authorizations is an important part of any merger. But it is simply not the same thing. A merger is a much larger and more complicated set of events than the transfer of FCC permits. While we can consider the use of the licenses by the proposed transferee, the Commission almost always involves itself in an extended discourse on, and analysis of, lines of the company's business that have nothing to with the use of the licenses at issue.
By using the license transfer provisions of the Communications Act to bootstrap itself into possession of jurisdiction over the entire merger of two companies that happen to be the transferee and transferor of licenses, the Commission greatly expands its organic authority.
The Commission does possess authority under the Clayton Act, which prohibits combinations in restraint of trade, to review mergers per se. See 15 U.S.C. section 21 (granting FCC authority to enforce Clayton Act where applicable to common carriers engaged in wire or radio communication or radio transmission of energy). That power is rarely invoked by the Commission, however.
If the Commission intends to exercise authority over mergers and acquisitions as such, it ought to do so pursuant to the Clayton Act, not the licensing provisions of the Communications Act. And under those provisions, I repeat, we review radio license transfers, not mergers.
Duplication of Department of Justice & Federal Trade Commission Efforts
The Commission's focus on mergers rather than on license and authorization transfers creates another problem: our work often duplicates that of the Department of Justice's Antitrust Division and the Federal Trade Commission.
Merging companies should not have to jump through excessive federal antitrust hoops, and those hoops should be held out by the institutions with the express statutory authority and expertise to do so. Those agencies are the Department of Justice and the FTC. When the FCC gets into the game as well, it increases the costs of the merging parties and expends taxpayer funds, while adding little value from an antitrust perspective. A report issued last month by the International Competition Policy Advisory Committee reached this very conclusion.
If the Commission limited its review to the actual subject matter of 310 - the transfer of radio licenses, as opposed to the proposed merger that triggered the transfer -- this problem of duplicated efforts and wasted resources would be avoided.
Potentially Arbitrary Review: Choice of Transfers for Full-Scale Review and Substantive Standards To Be Applied
I also have grave concerns about the process and practices employed in FCC merger reviews. The current system - or rather, the lack of a clearly delineated one - puts merging entities in an inequitable and difficult situation.
The Commission annually approves tens of thousands of license transfers without any scrutiny or comment; others receive minimal review, and a select few are subjected to intense regulatory scrutiny. For example, mergers of companies like Mobil and Exxon involve the transfer of a substantial number of radio licenses, many of the same kind of licenses as those at issue in other high-profile proceedings, such as AT&T/TCI, and yet we take no Commission level action on those transfer applications. I do not advocate extensive review of all license transfer applications, but mean only to illustrate that we apply highly disparate levels of review to applications that arise under identical statutory provisions.
Unfortunately, there is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not. Nor do any of the Commission's orders in "merger" reviews
elucidate the standard. Regulated entities and even their often sophisticated counsel are left to wonder whether or not their applications will receive relatively quick, pro forma review by the relevant Bureau, or whether their applications will take many months to process and engender open meetings, so-called public "fora," and full Commission action.
If the Commission did establish a threshold test for determining which license transfer applications should receive strict scrutiny, the Commission would still need to set out the substantive tests for the differing scrutiny levels. As a general matter, our decisional precedents provide little concrete guidance on the substantive standard for approval of Title II or Title III license transfers: the proposition that a merger is in the "public interest" if it is not anti-competitive (or if it is also pro-competitive) is too generalized to be of any real help.
Moreover, there is clearly a different "public interest" test being applied, sub silentio, in different cases under the very same statutory provisions, usually sections 310 and 214. The cases that undergo extensive inquiry exhaustively discuss all kinds of service areas and issues ancillary to the use of the actual radio licenses, and the decisions that are granted at the Bureau level are relatively perfunctory in their public interest analysis. We should, after identifying the threshold test for license transfers that warrant thorough inquiry, articulate clearer substantive criteria to guide the Commission's inquiry
The long and short of it is this: regulated entities currently have little basis for knowing how their applications will be treated, either procedurally or substantively. The license transfer process at the Commission is lacking in any transparent, fixed and meaningful standards. A person -- even a well-trained lawyer -- who wished to prepare for this process could find scant guidance in public sources of law. Rather, one would have to be trained in the unwritten ways of this Commission to know what to expect, and those expectations would often have little to do with the text of the Communications Act..
In my opinion, the "public interest" test for license transfers is satisfied if, at the time of filing, the proposed transfer complies with all applicable provisions of the Communications Act and all extant Commission rules and regulations. This interpretation of the public interest has the benefits of simplicity and administrability. It promotes clarity and transparency for regulated entities and the Commission itself.
Under this understanding of the public interest, regulated entities could refer to Title 47 of the U.S. Code and of the Code of Federal Regulations in order to ascertain, ex ante, the substantive standards to which their contemplated transfers would be subject. The ability to gauge in advance whether a particular transaction is likely to be permissible or not could save parties a lot of time, energy, and costs in the transactional marketplace. And the ability to know which standards to apply would allow the Commission to dispatch its duties with greater efficiency; clearly, if the Commission's inquiry were not such an open-ended one, it would go a lot faster.
"Conditional" Approval of License Transfer Applications
Finally, I would like to express today, as I have done many times before, great apprehension about the Commission's practice of "conditioning" grants for license transfer applications.
I think it is entirely appropriate, under the Commission's organic statute, for the Commission to condition license transfer on compliance with existing statutory provisions and the FCC regulations that implement them. In fact, the Communications Act specifically contemplates such conditions. Section 303(r) provides that the "Commission shall . . . prescribe such . . . conditions, not inconsistent with law, as may be necessary to carry out the provisions of this Act."
All too often, however, this Commission places conditions on license transfers that have no basis in the text of the Communications Act. That is, the Commission requires companies to do certain things -- things that it could not for lack of
statutory authority require outright in a rulemaking -- as a quo for the quid of receiving a license. Thus, the Commission imposes rules on merging companies that at best have never been considered, and at worst have been considered and rejected, by Congress.
Even where the condition in question could conceivably be grounded in the Communications Act, company-specific, regulation-by-condition - as opposed to industry-wide, regulation-by-rulemaking - is a problematic practice. If, in the context of a license transfer, opponents of the transfer allege that additional regulations are necessary to achieve a certain end, that contention is most properly addressed in the context of rulemaking, not a company-specific order. It is the exceedingly rare case, I believe, in which a substantive duty ought to be required of one only telecommunications company but not similarly situated others, who happen not to have filed license transfer applications. Such regulation begins to look like irrational regulation.
The selective application of regulatory burdens to some entities but not others is not only difficult to justify as a legal matter, but creates competitive disadvantages in the marketplace. When one company, due to the fortuity of a license transfer application, is subject to strictures not applicable to its competitors, the Commission in effect handicaps that company.
I am also concerned about situations in which this agency becomes an enforcer of the rules and regulations of other governmental agencies. We have no jurisdiction to enforce rules not promulgated under the Communications Act. We cannot and should not do the enforcement work of others, thus putting ourselves in the position of potential enforcer of non-FCC rules should the transferee fail to conform to that regulation. For instance, if the Department of Justice enters into an antitrust agreement with a party, we have no business attempting to enforce the obligations created thereunder in our licensing orders, as the Commission has in the past suggested.
I am doubly concerned about conditional FCC approval when the rule at issue is not just that of another agency, but when that agency has made no formal, final, and material findings of a violation. That is, I do not think we should take official notice
of alleged violations, including matters under investigation or in litigation, or of informal concerns that an agency is not yet ready or willing to pursue through their own established procedures. When we give formal weight to anything short of formal,
final findings by other agencies, we create a situation that is rife with incentives for inter-agency gaming of the system, e.g., registering an objection with an agency about a matter that the complaining agency is not prepared to pursue itself, and requires the Commission to do extensive reviews in areas where it simply has no experience or authority.
In sum, at the intersection of two areas -- non-FCC rules and no final determination of a violation by a responsible entity -- our authority to impose conditions on a license transfer is at its weakest. Where non-FCC rules are at issue but there is a final, record finding of a material infraction thereof, there is a middle ground: we should take notice of that fact in deciding upon the application but not condition approval upon compliance. Finally, where extant FCC rules are involved, our power to condition a proposed transfer upon compliance with those rules and to enforce compliance, if
necessary, is at its apex. We should never, however, impose conditions that have no basis in the text of the Communications Act, thus using our license transfer authority to impose new substantive obligations that Congress never contemplated.
There are many examples in the Commission's recent proceedings that illustrate the problems that I have described. I think the most forceful one, however, is that involving Southwestern Bell and Ameritech.
A recent article in the Legal Times by Randolph J. May, entitled "Any Volunteers? The FCC unfairly regulates 'by condition' when it extracts concessions from merging telecom companies," explains it well. I quote:
To merge their local telephone companies, SBC Communications and Ameritech had to obtain the FCC's permission to transfer the necessary licenses. After months of waiting for agency approval, the companies "volunteered" last October to abide by 30 regulatory conditions, filling more than 60 pages. Most of these conditions-such as requiring the merged company to substantially restructure, provide huge discounts for competitors' use of its network, and roll out advanced services to low-income households-go far beyond the requirements of the Communications Act or the FCC's rules.
Legal Times, March 6, 2000, page 62. And, as the article further explains:
[R]egulation by condition is unsound, because it imposes new burdens only on the merging parties. In the case of SBC and Ameritech, the merged companies are in no different position than other incumbent carriers, like BellSouth, which are not subject to the same requirements. The bottom line is that this process unfairly singles out merger applicants for regulation that, if justified at all, should be applied on an industrywide basis.
Mr. Chairman, I am aware that the Chairman of the Commission has established a task force to review the FCC's merger review process. As I have told him, as well as the capable staff heading that project, I applaud them for this step in the right direction. It is gratifying to know that my comments on this topic during my tenure at the Commission have been heard by the Chairman, and I deeply appreciate his responsiveness to my concerns.
It is not clear, however, that the scope of the task force's review will be adequate to solve the problems associated with merger reviews. The task force is focusing solely on the procedural issues involved in merger applications, primarily timing. (As an aside, I note that on the topic of time limits, the Commission's blanket 180-day (or 6-month) proposal is arguably inconsistent with section 5 of the Communications Act, which provides that with respect to applications not requiring a hearing the Commission should have "the objective of rendering a final decision . . . within three months from the date of filing."
More importantly, however, I feel obligated to observe that the Commission's merger review team has no plans to address any substantive issues related to merger review, such as legal standards of review or the practice of conditioning mergers. Quick perusal of the web page dedicated to the review effort will confirm this.
Thus, Mr. Chairman, the Commission merger review does nothing to address the problems at which your legislation is aimed. While any procedural reforms are to be commended, the substantive issues must, in my opinion, be addressed. Reform of merger review that goes only to process, and leaves in place the problems of ill-defined standards and conditional grants, will have no effect on what commentators have called "the FCC's version of 'Let's make a deal.'" Id.