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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Applications of ) ) NYNEX Corporation ) Transferor, ) ) - and - )File No. NSD-L-96-10 ) Bell Atlantic Corporation ) Transferee, ) ) For Consent to Transfer Control ) of NYNEX Corporation and Its ) Subsidiaries ) MEMORANDUM OPINION AND ORDER Adopted: August 14, 1997 Released: August 14, 1997 By the Commission: Commissioners Quello and Chong issuing separate statements. Table of Contents Paragraph I. Introduction . . . . . . . . . . . . . . . . . . . . . . . 1 II. Background. . . . . . . . . . . . . . . . . . . . . . . 17 A. The Applicants. . . . . . . . . . . . . . . . . . . 17 B. The Applications. . . . . . . . . . . . . . . . . . 21 C. Petitioners and Commenters. . . . . . . . . . . . . . 25 D. Hart-Scott-Rodino Documents . . . . . . . . . . . . . 28 III. Legal Standards. . . . . . . . . . . . . . . . . . . . . 29 IV. Analysis of Potential Public Interest Harms . . . . . . . 37 A. Background and Summary. . . . . . . . . . . . . . . . 37 B. Relevant Markets. . . . . . . . . . . . . . . . . . . 49 C. Market Participants . . . . . . . . . . . . . . . . . 58 D. Analysis of Competitive Effects . . . . . . . . . . . 95 1. Effect of the Merger on Unilateral Conduct by Providers of Mass Market Local Services . 101 2. Effect of the Merger on Unilateral Conduct by Providers of Mass Market Bundled Services . . . 114 3. Effect of the Merger on Coordinated Interaction 121 4. Effect of the Merger on Dynamic Market Performance 125 5. Potential Entry and Expansion. . . . . . . . . 128 6. Potential Competition Doctrine and Measurement of Market Concentration. . . . . . . . 136 7. Conclusion . . . . . . . . . . . . . . . . . . 144 E.Other Competitive Effects. . . . . . . . . . . . . . 147 V. Analysis of Potential Public Interest Benefits . . . . . 157 A. Efficiencies. . . . . . . . . . . . . . . . . . . . 158 1. Applicants' Efficiency Claims. . . . . . . . . 160 2. Discussion. . . . . . . . . . . . . . . . . . 168 B. Conditions. . . . . . . . . . . . . . . . . . . . . 177 1. General. . . . . . . . . . . . . . . . . . . . 177 2. Conditions To Be Imposed . . . . . . . . . . . 180 3. Benefits of the Conditions . . . . . . . . . . 192 4. Other Proposed Conditions. . . . . . . . . . . 201 VI. Miscellaneous . . . . . . . . . . . . . . . . . . . . . 233 A. Procedural Matters. . . . . . . . . . . . . . . . . 233 B. Basic Qualifications. . . . . . . . . . . . . . . . 235 VII. Ordering Clauses . . . . . . . . . . . . . . . . . . . .246 Appendix A: List of Commenters and Filings Appendix B: List of Companies Filing Letters in Support of the Application Appendix C: Conditions Appendix D: Performance Monitoring Reports Appendix E: (REDACTED) Summary of Confidential Information and Conclusions I. INTRODUCTION 1. In this order, the Commission considers the applications filed by NYNEX Corporation ("NYNEX") and Bell Atlantic Corporation ("Bell Atlantic") pursuant to Sections 214(a) and 310(d) of the Communications Act of 1934, as amended ("the Communications Act"), for approval of the transfer of control of certain licenses and authorizations from NYNEX to Bell Atlantic in connection with the proposed merger of the two companies. Under the terms of the merger agreement, NYNEX would become a wholly-owned subsidiary of Bell Atlantic. 2. In accordance with the terms of Sections 214(a) and 310(d), before we can approve the transfers of licenses and other authorizations underlying the merger, we must be persuaded that the transaction is in the public interest, convenience and necessity. Applicants bear the burden of demonstrating that the proposed transaction is in the public interest. The public interest standard is a broad, flexible standard, encompassing the "broad aims of the Communications Act." These "broad aims" include, among other things, the implementation of Congress' "pro-competitive, de- regulatory national policy framework" for telecommunications, "preserving and advancing" universal service, and "accelerat[ing] rapidly private sector deployment of advanced telecommunications and information technologies and services." Our examination of a proposed merger under the public interest standard includes consideration of the competition policies underlying the Sherman and Clayton Acts -- the Commission is separately authorized to enforce Section 7 of the Clayton Act in the case of mergers of common carriers -- but the public interest standard necessarily subsumes and extends beyond the traditional parameters of review under the antitrust laws. In order to find that a merger is in the public interest, we must, for example, be convinced that it will enhance competition. A merger will be pro-competitive if the harms to competition -- i.e., enhancing market power, slowing the decline of market power, or impairing this Commission's ability properly to establish and enforce those rules necessary to establish and maintain the competition that will be a prerequisite to deregulation -- are outweighed by benefits that enhance competition. If applicants cannot carry this burden, the applications must be denied. 3. In demonstrating that the merger will enhance competition, applicants carry the burden of showing that the proposed merger would not eliminate potentially significant sources of the competition that the Communications Act, particularly as amended by the Telecommunications Act of 1996, sought to create. When facing a changing regulatory environment that reduces barriers to entry, firms that would otherwise compete directly may, as one possible strategic response, seek to cooperate through merger. As courts have previously recognized, in evaluating whether applicants have demonstrated that the transaction is in the public interest, we consider the transaction in light of "the trends and needs of the industry" as a whole, the factors that "influenced Congress to make specific provision for the particular industry," and the complexity and rapidity of change in the industry. Accordingly, and consistent with the 1996 Act's focus on competition and deregulation, it is incumbent upon applicants to prove that, on balance, the merger will enhance and promote, rather than eliminate or retard, competition. The competition and deregulation Congress sought to foster extends not just to traditional local telephone service, but to related interstate access services, to Commercial Mobile Radio Services ("CMRS"), and to interstate long distance services. 4. We must be especially concerned about mergers between incumbent monopoly providers and possible rivals during this initial period of implementation of the 1996 Act. Competition in the local exchange and exchange access marketplace is still in the earliest stages. This Commission, through its Local Competition Orders, set forth its initial pro-competition rules to implement those provisions of the 1996 Act that are designed to open the local telecommunications marketplace to competition. Together, these orders addressed a range of legal, regulatory, operational and economic barriers to entry. Key portions of these orders recently were vacated, which created even greater uncertainty as to the pace of development of competition. It is particularly difficult to determine at this time exactly how quickly and to what extent existing barriers to entry will decline. As further examples of the current uncertainty, permanent prices for interconnection, unbundled network elements and transport and termination remain to be set in the vast majority of states, and protracted judicial review of both interconnection agreements and state permanent pricing decisions is likely to exacerbate this uncertainty. 5. The process of lowering barriers to entry is, as noted, only beginning, not nearing completion. We are continuing to identify both the barriers to entry themselves and the best and swiftest means to address those barriers. For example, this Commission is currently considering a petition for rulemaking regarding performance standards and enforcement mechanisms for operating support systems. Creating and enforcing the conditions that will permit competition to develop and flourish is an ongoing task, that requires continuous review and study of market conditions, the behavior of incumbents and rivals, and the relative capabilities of parties to safeguard their respective interests by creating private enforcement mechanisms that ensure compliance and cooperation. We do not believe that the best approach to promote competition is to refrain taking any actions to offset incumbent local exchange carriers' ("incumbent LECs") market power. Such a course would ensure that incumbent LECs could use the market power they possess as a result of their historic monopolies to ensure that only minimal competition develops in local exchange and exchange access telecommunications. In such a case, a central purpose of the 1996 Act, the development of robustly competitive markets that permit broad deregulation by federal and state authorities, would thereby be frustrated. 6. We also recognize that, even were we able immediately to lower the barriers addressed by the 1996 Act, significant barriers to entry into the local telecommunications marketplace, including interstate exchange access services, will remain. Entrants must still attract capital, and amass and retain the technical, operational, financial and marketing skills necessary to operate as a telecommunications provider. For mass market services, entrants will have to invest in establishing brand name recognition and, even more important, a mass market reputation for providing high quality telecommunications services. These consumer "goodwill" assets take significant amounts of time and resources to acquire. An unknown entrant's attempts to build "goodwill" by providing reliable, high quality service relies heavily on the cooperation of the incumbent local exchange carrier that is providing wholesale services for resale, interconnection, unbundled network elements or transport and termination, and can be frustrated by the incumbent local exchange carrier if that carrier engages in discriminatory conduct affecting service quality, reliability or timeliness. For all these reasons, we cannot assume that merely writing the rules called for by the 1996 Act eliminates concerns about potentially harmful effects of some mergers on the development of local telecommunications competition. 7. In order properly to evaluate proposed mergers in this evolving marketplace, and to take account of the uncertainties surrounding the pace and extent of the development of competition, we will evaluate the likely effects of the proposed merger on competition both during implementation of the 1996 Act and as that implementation alters market structure in the future. In defining the relevant product markets, for example, we will examine not just the markets as they exist today, but as we expect they will exist after a Bell Company receives authorization to provide in-region interLATA services pursuant to Section 271 of the Communications Act. In evaluating the likely effects of the proposed merger, we will also assume that the most critical provisions of Sections 251 and 252 of the Communications Act regarding interconnection, unbundled network elements, resale, reciprocal compensation for transport and termination, collocation, dialing parity and number portability are being implemented, and that the state has eliminated any prohibitions against entry. Even though there is uncertainty as to how quickly such implementation will actually occur, we make these assumptions in order to attempt to examine the likely effects of the merger on competition that may be just beginning to develop, or, in some cases, may not yet be permitted to develop. Given these assumptions, we will attempt to identify those carriers whose capabilities and incentives make them most likely to enter and, within that group, those most likely to have a significant pro-competitive effect on the relevant markets as those markets open. These most significant market participants may be either actual existing competitors or "precluded" competitors, i.e., those competitors that could not enter prior to the changes contemplated by the 1996 Act and that are most likely to enter in response to implementation of the 1996 Act. We will then attempt to examine the potential effects of the proposed merger on relevant markets, both during and as we move toward hypothetical full implementation of the 1996 Act. We will examine particularly whether the merger will, in the relevant markets, remove significant assets or capabilities that could otherwise be used to enhance competition and constrain market power. 8. With respect to the proposed merger of Bell Atlantic and NYNEX, we conclude that the proposed merger will eliminate Bell Atlantic as a likely significant independent competitor in the market to provide local exchange and exchange access services, and bundled local exchange, exchange access and long distance services, to residential and smaller business customers, particularly in LATA 132 and the New York metropolitan area (including northern New Jersey), but not limited to that area. We conclude that Bell Atlantic did plan to enter LATA 132 and other NYNEX territories, and that Bell Atlantic should be considered a competitor to NYNEX, but for the proposed merger. We base this conclusion on documents showing that, among other things, Bell Atlantic ceased its planning to enter NYNEX territories during the pendency of merger discussions, and on our assessment of Bell Atlantic's incentives and capabilities to compete in the relevant markets. 9. The proposed merger likewise eliminates NYNEX as a possible entrant into Bell Atlantic territories. Although the evidence in the record does not indicate that NYNEX engaged in explicit and documented planning for such entry to the same degree Bell Atlantic contemplated entry into NYNEX territories, the merger eliminates any prospect of NYNEX competing with Bell Atlantic in the southern half of the northeast corridor between Virginia and Maine, and in particular any prospect that NYNEX would have entered northern New Jersey either on its own initiative or as a competitive response to Bell Atlantic entry into New York. 10. We also conclude that Bell Atlantic, as an independent entity, possesses competitively significant assets and capabilities that otherwise would enable it to compete with NYNEX. Bell Atlantic and NYNEX are two of the five likely most significant market participants that would compete to provide local exchange and exchange access or bundled local exchange, exchange access and long distance telecommunications services to residential and small business customers in LATA 132 and the New York metropolitan area. These five most significant competitors have, or are likely to speedily gain, the greatest capabilities and incentives to compete most effectively and soonest in the relevant market during implementation of the 1996 Act. They combine the knowledge and ability to operate a large, mass market- focused local telephone company, access to substantial financial resources, mass marketing capabilities and, particularly in LATA 132, brand reputation -- including a history of providing quality telecommunications services in the residential and smaller business markets. Although Bell Atlantic's arguments in support of the application's focus on whether Bell Atlantic would have entered New York City de novo in competition with NYNEX, the proposed merger in fact eliminates these significant capabilities from any form of competition with NYNEX, whether de novo entry, through acquisition of a smaller, existing entrant, or via joint venture. Indeed, the record reflects the fact that, prior to the merger, Bell Atlantic had entered into some joint ventures as a means of offering service not only in New Jersey, but in New York as well. 11. Merging a dominant market participant, in this case NYNEX, with a participant ranked no less than fifth by competitive significance in terms of its impact in the relevant market, in this case Bell Atlantic, has two predictable effects. First, such a merger strengthens NYNEX's market power against competitive erosion by one of the most significant market participants. Second, the merger would by its own terms increase the likelihood of coordinated action among the remaining four most significant market participants to increase prices, reduce quality or restrict output. Such effects on market power remain important concerns even in a regulated market environment. Our overarching policy goal of developing robust competition, and with competition enabling broad deregulation requires that market performance be permitted to improve to the point where competition, rather than regulation, effectively constrains market power. Moreover, even while subject to regulation, a firm can exercise market power if, for example, (1) a price cap fails to lower prices for services to competitive levels, (2) a bundled product offering, such as combined local and long distance service, is only partially price regulated, or (3) quality is difficult to specify and monitor. The unilateral and coordinated effects of a proposed merger are mitigated by competitive forces only to the extent that barriers to entry or expansion are sufficiently low that actual or other possible competitors can and would expand or enter with sufficient strength, likelihood and timeliness to render unprofitable an attempted exercise of market power resulting from the merger. 12. Cognizant of the uncertainty as to the pace and extent of the lowering of barriers to entry, and taking the merger on its terms alone and without any other considerations, we believe that Applicants have failed to carry their burden of showing, under the public interest standard, that entry would be sufficiently easy to mitigate the potential harms to competition from merging the leading and no less than fifth most significant participant in the market for providing telecommunications services to residential and small business customers. Applicants also have not carried their burden of demonstrating, under the public interest standard, that efficiencies generated by the merger will mitigate entirely the potential competitive harms. On July 19, 1997, however, Bell Atlantic and NYNEX proffered a series of commitments they would be willing to undertake as conditions of the approval of their merger. While this remains a close case, these conditions allow us, in this case, to find that the transaction, as supplemented by the conditions, will be in the public interest. 13. In their proposed commitments, Bell Atlantic and NYNEX agree to provide detailed performance monitoring reports to competing carriers, states and this Commission, regarding network performance and the performance of their operating support systems ("OSS"). Bell Atlantic and NYNEX further commit to negotiate performance standards and enforcement mechanisms, including private or self-executing mechanisms, covering all five aspects of OSS (pre-ordering, ordering, provisioning, repair and maintenance, and billing) and network performance. They also agree to develop and implement, within 15 months, uniform OSS interfaces covering the entire Bell Atlantic/NYNEX combined regions, and to develop uniform interfaces within their current respective regions within 120 days. Bell Atlantic and NYNEX will engage in carrier-to-carrier testing of OSS systems with any carrier that requests such testing, and will provide evidence to this Commission of Bell Atlantic's and NYNEX's ability to handle reasonably expected demand for all OSS functions with respect to resold services, unbundled network elements and combinations of unbundled network elements. Bell Atlantic and NYNEX also commit to offer interconnection, unbundled network elements and transport and termination at rates based on forward looking economic cost. They further agree to provide for purchase, in conjunction with unbundled switching, shared transport offered on a minute-of- use basis, routed in the same manner as Bell Atlantic and NYNEX route their own traffic, and without the imposition of access charges. Bell Atlantic and NYNEX further agree to offer an optional plan that assesses non-recurring charges on a recurring basis, and an installment payment plan for collocation and certain other large non-recurring charges. Bell Atlantic and NYNEX also agree to offer, in interconnection negotiations and arbitrations, payment mechanisms for common construction costs and interconnector-specific construction and equipment costs related to collocation that apportion costs among the incumbent LEC and collocating carriers consistent with the Commission's decision in its Second Physical Collocation Order. 14. We believe these conditions create pro-competitive benefits that at least in part mitigate the potentially negative impacts of the proposed merger on competition in LATA 132 and the New York metropolitan area, and that, when extended throughout the Bell Atlantic and NYNEX regions, outweigh any other adverse effects in those areas. These conditions will make it more likely that other market participants can enter, expand or become more significant market participants that are capable of mitigating in the relevant market, the competitive harms that we otherwise foresee as likely resulting from the elimination of Bell Atlantic as a likely independent market participant. The conditions we impose, particularly the pricing and non-recurring charge conditions, reduce sunk costs and therefore the risk, associated with entry and expansion. The OSS-related conditions will ease entry throughout the Bell Atlantic-NYNEX region by making it possible to use the same interfaces and OSS systems from Maine to Virginia. This will allow entrants to decide the scope of entry that best fits their business plans, and, in particular, facilitates entry by competitors into both New York and New Jersey simultaneously. The reporting, performance standards, and enforcement conditions, as well as the OSS testing conditions, increase the likelihood that other entrants will be able to establish a brand reputation over time for providing high quality telecommunications services, offsetting in part the loss of the availability of Bell Atlantic's capabilities as a competitor to NYNEX in the relevant markets. Moreover, the fact that Bell Atlantic and NYNEX have extended these pro-competitive commitments and benefits across their entire region helps Applicants carry their burden by affirmatively advancing competition throughout the region. In light of the proposed commitments, and conditioned specifically on compliance by Bell Atlantic and NYNEX with those commitments, we find the transfers of licenses and Section 214 certificates are in the public interest, convenience and necessity. 15. Granting this application subject to conditions does not mean applicants will always be able to propose pro-competitive public interest commitments that will offset potential harm to competition. Nor would these particular conditions necessarily justify approval of another proposed merger for which applicants had not otherwise carried their burden of proof. Different cases will present different facts and competitive circumstances. As competitive concerns increase, it becomes significantly more difficult for applicants to carry their burden to show that the proposed transaction is in the public interest. A merger that in the relevant markets, eliminated a competitor with even greater assets and capabilities then Bell Atlantic would present even greater competitive concerns. For some potential mergers, the harm to competition may be so significant that it cannot be offset sufficiently by pro-competitive commitments or efficiencies. In such cases, we would not anticipate the applicants could carry their burden to show the transaction, even with commitments, is pro-competitive and therefore in the public interest. 16. We also note that we are concerned about the impact of the declining number of large incumbent LECs, on this Commission's ability to carry out properly its responsibilities to ensure just and reasonable rates, to constrain market power in the absence of competition, and to ensure the fair development of competition that can lead to deregulation. During the transition to competition it is critical that the Commission be able effectively to establish and enforce its pro- competitive rules and policies. As diversity among carriers declines, both this Commission and state commissions may lose the ability to compare performance between similar carriers that have made different management or strategic choices. We often rely, for example, on cross- carrier comparisons as strong evidence as to technical feasibility or reasonableness. The Bell Companies, being of similar size, history, and regional concentration have, to date, been useful benchmarks for assessing each other's performance. Reducing the number of Bell Companies makes it easier to coordinate actions among them, and increases the relative weight of each company's actions on average performance. Because we approve this merger with conditions, thereby reducing the number of independently controlled large incumbent LECs, future applicants bear an additional burden in establishing that a proposed merger will, on balance, be pro-competitive and therefore serve the public interest, convenience and necessity. II. BACKGROUND A. The Applicants 17. NYNEX is a local exchange carrier providing telecommunications services in New York, New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, and parts of Connecticut. NYNEX currently serves approximately 18 million persons with 17.7 million access lines. The company also offers cable television, directory publishing, video entertainment, information services, and (through joint ventures) wireless communications services. NYNEX has investments in telecommunications businesses in the United Kingdom, Gibraltar, Greece, Poland, Slovakia, and the Czech Republic, and through partnerships and joint ventures is building and operating wireline and wireless networks in Thailand, Indonesia, and the Philippines. 18. Bell Atlantic, through network operations subsidiaries, provides telecommunications services, including voice and data transport and calling services, network access, directory publishing and public telephone services, to customers in New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia, and Washington, D.C. Bell Atlantic serves approximately 20 million customers with 20.6 access million lines. Through various subsidiaries and joint ventures, Bell Atlantic also provides systems integration services, customer premises equipment distribution, video services, and domestic wireless communications. Bell Atlantic also has investments in telecommunications businesses in New Zealand, Mexico, Italy, Slovakia, Indonesia, and the Czech Republic. 19. Bell Atlantic and NYNEX, through subsidiaries, are general partners in Bell Atlantic NYNEX Mobile, which operates cellular mobile radiotelephone systems and provides cellular service in, inter alia, Connecticut, Massachusetts, New York and Rhode Island. Bell Atlantic NYNEX Mobile describes itself as "the largest wireless provider on the East coast . . . [offering] a full range of wireless voice, data & paging communications solutions to customers in the Northeast [and] mid-Atlantic." 20. Bell Atlantic and NYNEX also provide interLATA service between northeastern New Jersey and the New York City metropolitan area. The facilities through which this interLATA service is provided are owned by Bell Atlantic on the New Jersey side of the Hudson River and by NYNEX on the New York side. Each Applicant also has, in and near its "home region," a brand name recognition and a reputation for providing high quality local exchange and exchange access service to the mass market of small business and residential customers. B. The Applications 21. The Applicants have filed fifteen applications requesting consent to the transfer of control to Bell Atlantic of two groups of licenses and authorizations. The first group consists of Section 214 and Title III authorizations that are held or requested by subsidiaries of NYNEX, primarily the New York Telephone Company and the New England Telephone & Telegraph Company. The second group consists of Section 214 and Title III authorizations used to provide cellular services that are held by two partnerships, Cellco Partnership ("Cellco") and PrimeCo Personal Communications, L.P. ("PrimeCo") in which NYNEX holds negative control. The licenses or authorizations sought to be transferred include Section 214 authorizations and licenses to operate domestic public fixed radio services, experimental radio service, public mobile services, satellite radio services, maritime services, aviation services, private land mobile radio services, private operational fixed microwave services, and personal communications services. Many of these licenses are used, or could be used immediately, to provide local exchange service and exchange access. In addition, on July 19, 1997, Bell Atlantic and NYNEX submitted an ex parte filing proffering a number of specific commitments they would undertake as conditions of our approval of the transfer of licenses and Section 214 certificates, and subsequently clarified those commitments in and ex parte filing on August 13, 1997. 22. Under the terms of the merger agreement, Bell Atlantic will form a new subsidiary that will merge into NYNEX. NYNEX, the surviving corporation, will become a wholly- owned subsidiary of Bell Atlantic. NYNEX's shareholders will receive .768 newly issued shares in Bell Atlantic for each NYNEX share owned. Approximately 56 percent of Bell Atlantic shares will be held by current Bell Atlantic shareholders and 44 percent by current NYNEX shareholders. 23. The only change in ownership will occur at the holding company level. NYNEX will survive as a wholly-owned subsidiary of Bell Atlantic, and the NYNEX subsidiaries that hold Section 214 or 310 authorizations will survive as wholly-owned subsidiaries of NYNEX and will continue to provide service to the public. The wholly-owned subsidiaries of Bell Atlantic that hold Section 214 or 310 authorizations will continue to be wholly-owned by Bell Atlantic and to provide service to the public. 24. The proposed transfer was reviewed by the United States Department of Justice ("DOJ") pursuant to the Hart-Scott-Rodino ("HSR") amendment to the Clayton Act. DOJ completed its review without taking action against the proposed merger. On April 24, 1997, DOJ issued a press release stating that the proposed merger does not violate the antitrust laws. We do not regard the DOJ action as resolving the issues before the Commission, which involve consideration of the public interest. C. Petitioners and Commenters 25. Several parties filed timely comments or petitions to deny or impose conditions upon a grant of the transfer applications, arguing primarily that the transfer is not in the public interest because it will impair competition. These commenters are: AT&T Corporation ("AT&T") and MCI Communications Corporation ("MCI"), each of which is a customer of the Applicants as a purchaser of exchange access and, as stated infra, a precluded competitor in LATA 132 and the New York metropolitan area; Teleport Communications Group Inc. ("TCG"), a competitive local exchange carrier operating in Bell Atlantic and NYNEX territories; Consumer Federation of America ("CFA") and Competition Policy Institute ("CPI"), each of which is a consumer advocacy group; Cablevision Systems Corporation ("Cablevision"), a company that develops and markets telecommunications and video programming services, including as a CLEC in the New York City metropolitan area; and Comcast Cellular Communications, Inc. ("Comcast"), a substantial owner and investor in TCG and owner of wireless interests. Diana J. Lutz, a former employee of NYNEX, and Thomas Lutz request that the Commission deny the merger until all outstanding NYNEX labor grievances have been resolved. Applicants replied to these submissions. Commenters supporting the proposed transfer applications included United Homeowners Association et al. and Dr. Barbara O'Connor, chairperson of the Alliance for Public Technology and professor at California State University, Sacramento, California. 26. None of the state commissions in Applicants' regions filed comments in this proceeding regarding the effects of the merger on competition. Thirteen state commissions, however, reviewed the proposed merger. Only three, the New York Public Service Commission, the Maine Public Utilities Commission and the Vermont Public Service Board, discuss the effects of the merger on competition, other than referring to the DOJ's review of the transaction. The Maine and Vermont Commissions concluded that Bell Atlantic was not a likely entrant into those states. The Maine Commission also found, however, that "it was likely that, absent the merger, Bell Atlantic would have been a competitor to NYNEX somewhere (probably in New York) for both local and interexchange services." The New York Commission concluded that "[t]he 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 is difficult to ascertain with certainty. Nevertheless, . . . Bell Atlantic would have had an understanding of the resources, commitment and difficulties of becoming a full-fledged facilities- based competitor of NYNEX." The New York Commission then concluded that the transaction met its public interest standard, subject to certain conditions some of which go beyond policies underlying the federal Communications Act. 27. On June 12, 1997, the Common Carrier Bureau released a public notice designating this a "permit-but-disclose" proceeding, upon determining that "the public interest would be served by modifying the applicable ex parte procedures in this case to permit a fuller exchange on the complex and broad legal and policy issues under consideration." Numerous ex parte presentations were made. D. Hart-Scott-Rodino Documents 28. AT&T requested that the Commission review, and permit parties to review, the Hart- Scott-Rodino documents Bell Atlantic and NYNEX filed with the DOJ. Applicants objected primarily on grounds that the Commission already had sufficient information on which to make an informed decision and that delay would be expensive. On November 22, 1996, the Common Carrier Bureau issued a letter requiring Bell Atlantic and NYNEX to make approximately 30,000 of the documents available pursuant to a simultaneously issued protective order. The Commission requested documents pertaining to the following subjects: (1) Applicants' strategic planning related to the proposed transfers; (2) perceived and actual potential competition; (3) in- region interexchange service; and (4) the state of competition in the local exchange markets in the applicants' service areas. On February 19, 1997 and June 9, 1997, the Common Carrier Bureau issued letters requiring applicants to provide additional access to documents. Pleadings pertaining to the Hart-Scott-Rodino documents have been filed under seal pursuant to the confidentiality agreements. Redacted versions were filed for the public record. On July 22, 1997, at the request of the Common Carrier Bureau, the Applicants filed certain of the Hart- Scott-Rodino documents with the Commission under seal. The portion of this decision that discusses the Hart-Scott-Rodino documents has been issued under seal as Appendix E. III. LEGAL STANDARDS 29. Pursuant to Title II and Title III of the Communications Act of 1934, as amended, the Commission must review the Applicants' requests to transfer the certificates, licenses and authorizations involved in this proposed merger and determine whether the transfer serves the public interest, convenience and necessity. Under both Title II and Title III, applicants bear the burden of demonstrating that the transaction is in the public interest. The Commission also has authority pursuant to the Clayton Act to review proposed mergers of common carriers and to determine whether such a merger violates Section 7 of the Clayton Act. The Communications Act permits the Commission to impose such conditions as are necessary to serve the public interest, and the Clayton Act permits the Commission to issue a cease and desist order and negotiate through a consent order such conditions as the public interest may require. In this case, because we find the transaction as supplemented by the commitments proffered by the Applicants is in the public interest, and because our public interest review here has subsumed Clayton Act considerations, we will not initiate a proceeding under Section 11 of the Clayton Act. 30. Section 214(a) of the Communications Act provides that no common carrier shall acquire any line "unless and until there shall first have been obtained from the Commission a certificate that the present or future public convenience and necessity require or will require" the operation of the line. Section 214(c) of the Communications Act also authorizes the Commission to attach to the certificate "such terms and conditions as in its judgment the public convenience and necessity may require." Similarly, Section 310(d) of the Communications Act provides that no construction permit or station license may be transferred, assigned or disposed of in any manner except upon a finding by the Commission that the "public interest, convenience and necessity will be served thereby." On a Title III application, if the Commission lacks sufficient evidence to find the transaction is in the public interest, then it must either deny the application or designate it for hearing as to material issues of fact. If the Commission is able to determine that the application would serve the public interest if particular conditions are met, the Commission can grant the application subject to compliance with the specified conditions. Section 303(r) of the Communications Act authorizes the Commission to prescribe such restrictions or conditions, not inconsistent with law, as may be necessary to carry out the provision of the Act. 31. Both the Title II public convenience and necessity standard and the Title III public interest convenience and necessity standard are to be "so construed as to secure for the public the broad aims of the Communications Act." These broad aims include those expressed in Section 1 of the Communications Act, to "make available . . . to all the people of the United States . . . a rapid, efficient, Nation-wide, and world-wide . . . communication service," and those expressed in the 1996 Act, to establish a "pro-competitive, deregulatory national policy framework designed to . . . open[] all telecommunications markets to competition." Thus, we believe the public interest standard necessarily encompasses the goals of promoting competition and deregulation. Moreover, because interstate switched access is generally provided over the same "bottleneck" facilities and by the same providers as provide local exchange and exchange access service, failure to create competition among local service providers necessarily means a lack of competition to provide interstate switched access. 32. In fulfilling the statutory obligation to serve the public interest, the Commission examines whether a proposed license transfer is consistent with the policies of the Communications Act, including, among other things, the transfer's effect on Commission policies encouraging competition and the benefits that would flow from the transfer. Commission analysis of the effect of the transfer on competition is informed by antitrust principles, but not limited by the antitrust laws. The public interest standard, and the competitive analysis conducted thereunder, are necessarily broader than the standard applied to ascertain violations of the antitrust laws. Under the public interest standard, the burden of proof is on the applicant, not the Commission. In addition, under the public interest standard, the Commission may consider the trends within and needs of the industry, the factors that influenced Congress to enact specific provisions for a particular industry, and the complexity and rapidity of change in the industry. 33. The Commission also has concurrent jurisdiction with the DOJ and the FTC under Sections 7 and 11 of the Clayton Act to disapprove acquisitions of "common carriers engaged in wire or radio communications or radio transmissions of energy . . . where in any line of commerce in any section of the country" the effect of such acquisition may be "substantially to lessen competition, or to tend to create a monopoly." Section 7 of the Clayton Act incorporates the policies underlying Sections 1 and 2 of the Sherman Act prohibiting combinations in restraint of trade and actual or attempted monopolization. Because our jurisdiction under the Communications Act is sufficient to address the competitive concerns raised by this merger -- including the issue of whether the proposed transfer may injure competition -- and because the conditions modifying the merger sufficiently offset our concerns regarding potential adverse competitive impacts flowing from the merger, we choose not to exercise our Clayton Act authority in this case. However, we would not hesitate to exercise our Clayton Act authority, issue a complaint and initiate a hearing in the appropriate case. 34. In their June 23 Comments, for the first time Applicants challenge the Commission's jurisdiction under the Communications Act to consider the competitive effects of the proposed merger in local exchange and exchange access services. Bell Atlantic and NYNEX assert that the Commission cannot use Sections 214 and 310 to disapprove the merger because of concerns over intrastate wireline services. Bell Atlantic and NYNEX also assert that the Commission cannot utilize Sections 214 or 310 to impose conditions related to intrastate wireline services because to do so would overstep the jurisdictional limitation on Commission authority contained in Sections 2(b) and 221(b) of the Act. Applicants further argue that even if it has jurisdiction, the Commission lacks the authority to review the competitive concerns raised in this proceeding because there is no "nexus" between the alleged competitive harms resulting from the transaction (i.e., the elimination of potential competition for wireline service in LATA 132) and the scope and purposes of the specific licenses to be transferred. The Applicants also challenge the Commission's authority under Sections 7 and 11 of the Clayton Act. 35. Because Applicants have now proffered a set of commitments they would be willing to undertake as a condition of approval, these arguments are moot. We disagree, however, with all of the Applicants' arguments relating to our authority under the Communications Act. We also disagree with all of the Applicants arguments regarding our authority under the Clayton Act. Because we do not herein invoke our Clayton Act authority, however, we will not address these arguments. As noted at the outset, our public interest authority is very broad and encompasses the goals of promoting competition and deregulation. There is long-standing precedent supporting fulsome public interest analyses of the competitive implications of transfers of Title II certificates and Title III licenses, and for review of large merger transactions even where the Commission authorized licenses represent only a very small part of the overall transaction. This Commission cannot approve transfers of certificates or licenses that, on balance, are not in the public interest. There is also ample precedent for the imposition of conditions that would render the transaction consistent with the public interest. In addition, the public interest analysis necessarily includes a review of the nature and extent of local competition, as exemplified by the fact that Section 271 of the Act specifically applies the public interest standard to, inter alia, a review of local market conditions. 36. Moreover, as noted above, the Applicants had the burden of demonstrating that the transaction served the public interest. In our rapidly evolving telecommunications marketplace, they must demonstrate not only the efficiency benefits of the merger, but how the merger would enhance or not retard competition. Failure to carry the burden of proof means the Commission must deny the applications or designate them for hearing. As discussed below, by considering both the transaction and Applicants' proffered conditions, we reach the conclusion that Applicants have met their burden of demonstrating that the transaction is in the public interest. We will, therefore, grant the applications expressly conditioned on compliance with the proffered commitments. Such conditions will be enforceable through our usual processes. IV. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS A. Background and Summary 37. In evaluating the competitive impact of a proposed merger and thus whether a proposed merger will enhance competition, we use a framework for competitive analysis that we use for assessing market power in other contexts and that is also embodied in the antitrust laws, including the Department of Justice and Federal Trade Commission 1992 Horizontal Merger Guidelines and the April 8, 1997 revisions. With respect to mergers that may present horizontal market power concerns, we begin by defining the relevant markets, both in terms of the relevant products and geographic scope. Once we have defined the relevant markets, we identify the market participants, especially the most significant market participants. Next, we evaluate the effects of the merger on competition in the relevant market, such as whether the merger is likely to result in either unilateral or coordinated effects that enhance or maintain the market power of the merging parties. In addition, we also consider the effect of the merger on the Commission's ability to constrain market power as competition develops, but before competition is itself sufficient to constrain market power. We also consider whether the proposed transaction will result in merger-specific efficiencies such as cost reductions, productivity enhancements, or improved incentives for innovation, and whether the merger will support the general policies of market-opening and barrier-lowering that underlie the 1996 Act. In the appropriate case, we would also examine whether the proposed merger has vertical effects that enhance market power. As previously discussed, the burden is on the applicants to demonstrate that the transaction will be in the public interest, convenience and necessity. 38. To determine whether the proposed merger enhances competition, we examine the proposed merger in light of a number of significant changes to the laws governing the provision of telecommunications services made by the 1996 Act. As previously noted, that Act set forth a "pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition. . . ." To implement this framework, the 1996 Act amended the Communications Act of 1934 to add provisions that, inter alia: proscribe state and local laws, regulations and legal requirements that "prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service;" require incumbent local exchange carriers ("incumbent LECs") to offer to competitors interconnection and the ability to lease on an unbundled basis elements of the incumbent LEC network ("unbundled network elements") at just, reasonable and non- discriminatory rates, terms and conditions; require incumbent LECs to offer retail services at wholesale rates; require incumbent LECs to provide reciprocal compensation for the transport and termination of traffic at rates not exceeding the additional costs of terminating such calls; require incumbent LECs to protect competitors physically to collocate equipment necessary for interconnection or access to unbundled network elements; and require all local exchange carriers, including incumbent LECs, to implement number portability and dialing parity. The Act also terminated the Modification of Final Judgment ("MFJ") that had precluded Bell Companies from providing any interLATA service, and substituted Section 271, which permits a Bell Company immediately to provide long distance services outside those states in which it provided wireline local exchange service prior to the 1996 Act, and to receive authorization from this Commission to provide long distance service originating within any of its "in-region" states upon satisfaction of specific criteria. These requirements, when and to the extent fully implemented, will reduce barriers to entry to providing both local and long distance telecommunications. 39. Declining entry barriers affect our competitive analysis in at least four ways. First, the definition of the relevant product market may change as a result of entry, as providers enter currently complementary product markets from which they were previously precluded by law, regulatory, or the economic or operational barriers addressed by the 1996 Act. As these providers create bundled offerings, the manner in which consumers perceive the product may change, shifting away from the traditional view of a local service package and a long distance service package to a view of the product as a package of all telecommunications regardless of distance. Second, the geographic scope of the relevant market may also change if, as a result of changes in entry barriers, firms enter adjacent geographic markets such that the area within which consumers face similar choices expands. Third, in identifying market participants, we must include not only those firms currently in the market, but also those firms that are "precluded" competitors, i.e. that would be likely to enter in the absence of the entry barriers the 1996 Act seeks to address, such as the need to build a full parallel local distribution network, the unavailability of retail services for resale, the inability to receive reciprocal compensation for transport and termination at no more than additional cost, the inability to collocate equipment necessary for interconnection or access to unbundled network elements, the lack of dialing parity and number portability, or the legal prohibition against Bell Company provision of in-region long distance service prior to receiving authorization from this Commission under Section 271. We must also evaluate the capabilities and incentives of both actual and precluded competitors to compete effectively in the relevant market, and in particular which carriers are the most significant market participants in terms of their effect on competition in the relevant markets as these markets are developing. Finally, we must consider whether applicants have met their burden of showing the merger will enhance competition taking into account the competitive significance of the merging parties compared with other actual or precluded competitors, and any efficiencies created by and attainable only through the proposed merger. 40. In evaluating the extent to which a proposed merger potentially alters the market structure, conduct or performance, we examine the potential impact of the merger both during and as the 1996 Act is more fully implemented. In examining the markets as if the 1996 Act were more fully implemented, we are not making a judgment that such implementation will occur swiftly. Indeed, as previously discussed, there is considerable uncertainty as to how quickly the barriers the 1996 Act sought to address will actually decline. Examining market structure as if the 1996 Act were more fully implemented, however, illuminates the extent to which the merger will change future market structure, and increase market power or slow its decline. Changes in the speed of fuller implementation of the 1996 Act may alter the amount of time necessary to see any potentially harmful effects on competition manifest themselves, but not whether the proposed merger would tend to produce such effects. 41. In evaluating the potential impact of the proposed merger on telecommunications markets during and as the 1996 Act is more fully implemented, we will necessarily be making predictions of future market conditions and the likelihood of success of individual competitors. In making our predictions, we are not bound by the rules of evidence that may apply in judicial contexts, because as the Supreme Court stated in FCC v. RCA Communications Inc.: To restrict the Commission's action to cases in which tangible evidence appropriate for judicial determination is available would disregard a major reason for the creation of administrative agencies, better equipped as they are for weighing intangibles by specialization, by insight gained through experience, and by more flexible procedure. In the nature of things, the possible benefits of competition do not lend themselves to detailed forecast . . . . Predictions of market evolution are the most judgmental when, as now, competition in a key portion of the marketplace, local exchange and exchange access services, is in the earliest stages. It is, however, precisely because such competition is just beginning at this time and uncertainties exist that care in evaluating the potential impact of mergers in evolving markets is crucial to ensuring the development of a pro-competitive, deregulatory national telecommunications industry structure. 42. Even upon hypothetical full implementation of the Telecommunications Act of 1996, significant barriers to entry into the local telecommunications marketplace will remain. Entrants must still be able to attract capital, as well as to amass and retain the technical, operational, financial and marketing skills necessary to operate as a telecommunications provider in the local market. For mass market services, entrants will have to invest in establishing the brand name recognition and, even more importantly, the mass market reputation for providing high quality telecommunications services. These consumer "goodwill" assets take significant amounts of time and resources to acquire. An unknown entrant's attempts to build "goodwill" by providing reliable, high quality service relies heavily on the cooperation of the incumbent LEC that provides interconnection, unbundled elements, resold services or transport and termination, and can be frustrated by the incumbent LEC if that carrier engages in discriminatory conduct affecting service quality, reliability or timeliness. For all these reasons, we cannot at this time simply assume that implementation of the Telecommunications Act of 1996 and the potential for development of competition will eliminate any concerns about potential competitive effects of mergers, particularly the effects on the pace of the development of competition. Nor should we lose sight of the fact that mergers can raise competitive concerns even in markets that appropriately are not subject to regulation, as competition is often a matter of degree. 43. With respect to the proposed merger of Bell Atlantic and NYNEX, we conclude that the proposed merger will likely eliminate Bell Atlantic as a competitor to NYNEX and therefore retard competition and its development. We conclude first that the relevant market is the provision of local exchange and exchange access services to residential and small business customers, particularly in LATA 132. There is significant evidence that bundled local and long distance services may become a relevant product market as well as firms begin to enter complementary markets. Because there is also significant evidence that the New York metropolitan area, including northern New Jersey, may likely become a relevant geographic market as competition develops, we will treat the New York metropolitan area as a relevant geographic market as well. The record further suggests that other geographic markets may also be relevant, including Boston, Massachusetts and Providence, Rhode Island. 44. We next identify the market participants in the relevant markets, including LATA 132 and the New York metropolitan area market. We conclude that Bell Atlantic was likely to enter the LATA 132/New York metropolitan area and other NYNEX territories to provide service to the relevant markets. Bell Atlantic did plan to enter these markets and that it first halted those plans during the pendency of merger discussions. While the universe of actual competitors and "precluded" competitors is potentially large, we conclude that Bell Atlantic and NYNEX are two of the five most significant market participants in the relevant markets in terms of their competitive assets and incentives for serving the mass market, and their ability to more quickly to serve the relevant markets. 45. We then examine the competitive effects of the merger, considering the relative significance of Bell Atlantic, NYNEX and other market participants, particularly other significant market participants. We conclude that the proposed merger likely strengthens NYNEX's unilateral market power against erosion from competition by removing one of the most significant market participants. We also conclude that the merger increases the likelihood of coordinated action among the remaining four most significant market participants to increase prices, reduce quality or restrict output. Moreover, although Bell Atlantic's arguments focus on whether Bell Atlantic would have entered de novo in competition with NYNEX, the proposed merger eliminates these significant capabilities from any form of competition with NYNEX, whether by de novo entry, acquisition of a smaller, existing entrant, or joint venture. Market power, moreover, remains an important concern, even in the present regulated market environment. In order to reach a pro-competitive de-regulatory industry structure, market performance must improve to the point where competition, rather than regulation, effectively constrains market power. Even under regulation, a firm can exercise market power if, for example, (1) a price cap fails to bind sufficiently to lower prices to competitive levels or allows flexibility with respect to a basket of services, (2) a bundled product offering, such as combined local and long distance service, is only partially price regulated, or (3) quality is difficult to specify and monitor. 46. We also conclude that the potential unilateral and coordinated effects of the proposed merger will not likely be mitigated by competitive forces. Barriers to entry or expansion are not likely to be sufficiently low that actual or potential competitors can and would expand or enter with sufficient strength, likelihood and timeliness to render unprofitable an attempted exercise of market power resulting from the merger. 47. We also examine the effects of the proposed merger on the Commission's ability to develop and enforce the pro-competitive rules necessary to achieve competition and deregulation. We conclude that the merger will to some extent reduce this Commission's ability to develop and enforce such rules, and to constrain market power during the period until competition develops sufficiently to constrain market power. 48. Accordingly, we conclude that the evidence in the record suggests that the proposed merger likely will eliminate or retard competition, and therefore that applicants must demonstrate offsetting pro-competitive benefits in order for this Commission to find that the transaction, on balance, is in the public interest. B. Relevant Markets 49. The first step in a merger analysis is to define the relevant product and geographic markets. It is important to note that no party to the proceeding, including the Applicants, proposed any definition of relevant markets even though the burden is on the Applicants to establish the relevant markets. 50. In defining the relevant product and geographic markets, the Commission follows the approach taken in the LEC In-Region Interexchange Order. In that Order, the Commission defined a product market as a service or group of services for which there are no close demand substitutes. This is consistent with the 1992 Merger Guidelines, which state that, "market definition focuses solely on demand substitution factors, i.e., possible consumer responses." To determine relevant product markets, the Commission must consider whether, if, in the absence of regulation, all carriers raised the price of a particular service or group of services, customers would be able to switch to a substitute service offered at a lower price. In the LEC In-Region Interexchange Order, we further observed that for purposes of analysis we could aggregate separate products markets for which customers faced the same competitive alternatives. For the reasons described below and for purposes of this proceeding, we define the following three relevant product markets: (1) local exchange and exchange access service; (2) long distance service; and, (3) local exchange and exchange access service bundled with long distance service. 51. In the LEC In-Region Interexchange Order, we treated, for purposes of determining proper regulatory treatment of interexchange affiliates of the Bell Companies and independent LECs, interstate, domestic, long distance service as a separate product market. We will treat local exchange and exchange access services as a relevant product market separate from interstate, interexchange, long distance service, because while each point to point local calling route constitutes a separate market, the fact that each customer faces the same competitive alternatives for each route allows us to aggregate these routes into a service called local exchange and exchange access service. In addition, the MFJ's prohibition on Bell Company provision of interexchange services and the federal-state regulatory structure have lead to consumers facing different competitive alternative sources for local exchange and exchange access service and long distance service. 52. As competition increases, however, and more and more companies enter each others' markets, we believe that telecommunications services packages that bundle a combination of services may become a separate product market as well. Applicants clearly contemplate providing "one-stop shopping" to their customers. Once the Bell Companies comply with the requirements of Section 271 of the Communications Act, they will be able to offer both local exchange and exchange access services and in-region long distance services. As both Applicants and other competitors move to offer bundled local exchange and exchange access services and long distance services, consumer expectations and perceptions of the product may also change. We believe that to the extent consumer demand for bundled service packages forces carriers to offer such bundles, the bundling of local exchange and exchange access services with long distance services may well become a relevant product market even if, today, it is still nascent in most markets and nonexistent in many others. 53. Within a product market it is possible to identify and aggregate consumers with similar demand patterns. We conclude there are at least three customer groups that can be identified as having similar patterns of demand: (1) residential customers and small businesses; 2) medium-sized businesses; and 3) large businesses/government users. Each of these customer groups exhibits distinct buying patterns. Bundles of services that appeal strongly to one segment (e.g., residential customers may want local service featuring Call-Waiting) are often not acceptable substitutes for the services preferred by the other segments (e.g, large businesses may not need Call Waiting but may want multiple lines, ISDN and an extensive voice mail system). Additionally, residential or small business customers may have a different decision making process than do large businesses or government users. Residential and small business customers are served primarily through mass marketing techniques including regional advertising and telemarketing. In our experience, medium sized businesses are targeted by specialized firms that do not necessarily seek to address the mass market. Larger business and governmental users, in contrast, are served under individual contracts and marketed through direct sales contracts. Because the greatest competitive concerns arise with respect to service to residential and small business customers and because this is the market segment that Bell Atlantic was most likely to enter, we focus our examination of competitive concerns on that market segment. 54. A geographic market aggregates those consumers with similar choices regarding a particular good or service in the same geographical area. In the LEC In-Region Interexchange Order, we found that each point-to-point market constituted a separate geographic market. We further concluded, however, that we could consider groups of point-to-point markets where customers faced the same competitive conditions. We will therefore treat as a geographic market, an area in which all customers in that area will likely face the same competitive alternatives for a product. This approach allows assessment of the market power of a particular carrier or group of carriers based on unique market situations by recognizing, for example, that certain carriers may target particular types of customers, provide specialized services or control independent facilities in specific geographic areas. 55. We conclude that LATA 132, which essentially covers the same territory as NYNEX's New York Metropolitan Regional Calling Area, currently constitutes a relevant geographic market for the three product markets. At present, any carrier that offers service in the New York Metropolitan Regional Calling Area offers that service to all customers in that area. Thus, with respect to mass market customers, each customer in the area can select service from the same alternative providers. Applicants appear to concede that LATA 132 is a relevant geographic market. Additionally, the New York television advertising market, as well as most of the New York radio advertising market, encompasses all of LATA 132. 56. We also conclude, however, that as new entry occurs and customers in a broader area come to have the same choice among competitors, there may well be a wider geographic market. We therefore will also treat the New York metropolitan area, including northern New Jersey (the "New York metropolitan area") as a relevant market. There are economies of scope for advertising in this market. The television advertising market, as well as most of the radio advertising market, of New York City extends into northern New Jersey. Many residents from New Jersey work or travel to New York on a regular basis, making it increasingly likely that the New York advertising market reaches these potential consumers. Bell Atlantic itself advertises in New York media in order to target New Jersey residents. The record also contains other evidence indicating that many companies, including Bell Atlantic, believe the New York Metropolitan market may extend beyond LATA 132. To the extent, however, that the market would permit price discrimination between services offered in New York City and those in northern New Jersey, northern New Jersey may continue to be a separate geographic market. 57. While parties generally agreed that the most serious competitive concerns focused on LATA 132, some parties raised concerns that there may be competitive effects in other parts of the northeast. Bell Atlantic was planning entry not only in LATA 132, but in other parts of the NYNEX territory as well. Bell Atlantic's Chairman and Chief Executive Officer noted in an announcement of the proposed merger: "[O]ur two regions are really one big market, with all the major urban areas up and down the east coast and lots of communities of interest." Demographers refer to contiguous areas in the country, irrespective of political boundaries, that have similar economic and social characteristic as communities of interest. We note that various demographers identify communities of interest that extend well beyond the New York Metropolitan area. For example, the Office of Management and Budget's ("OMB") New York Consolidated Metropolitan Statistical Area (CMSA), includes portions of Connecticut, Pennsylvania, New York and New Jersey. The Department of Commerce's Bureau of Economic Analysis includes within its New York Economic Area, portions of New York, northern New Jersey, Pennsylvania, Connecticut, and Massachusetts. For the purposes of this decision, however, we will focus on the competitive effects of the merger on local exchange and exchange access service in LATA 132/New York metropolitan area and on bundled local and long distance services originating in LATA 132/New York metropolitan area ("the relevant markets") that are offered to residential and small business customers. C. Market Participants 58. The second step in our competitive analysis is to identify those companies in each relevant market we have defined that are the most significant market participants. From the universe of actual and precluded competitors, we identify these participants based on an analysis of capabilities and incentives to compete effectively in the relevant market. Of particular interest are those market participants that are likely to be at least as significant a competitive force as either of the merging parties. 59. We first identify "actual competitors" as market participants. We define "actual competitors" as firms that are now offering the relevant products in the relevant geographic market and that we expect to be doing so as the 1996 Act, and particularly Sections 251, 252, and 271, become more fully implemented. 60. We also identify as market participants those firms that have been effectively "precluded" from the market. These "precluded competitors" are firms that are most likely to enter but have until recently been prevented or deterred from market participation by barriers to entry the 1996 Act seeks to lower. Such barriers can be legal, regulatory, economic, or operational, and include exclusive franchises, the MFJ prohibition on the provision long distance service by the Bell Companies and the Section 271 limitations on in-region long distance service, the availability and price of interconnection, unbundled network elements, retail services for resale, transport and termination, and collocation, as well as dialing parity and number portability and access to poles, conduits and rights of way. 61. Even as the 1996 Act is more fully implemented, however, significant entry barriers will remain, including economic and operational barriers such as difficulties in obtaining financial capital; obtaining and retaining the technical, operational, financial and marketing skills necessary to operate as a telecommunications vendor; and attracting and holding customers. Indeed, implementation of the 1996 Act will also not eliminate all legal and regulatory restrictions: for example, licenses will still need be required, and spectrum assignments will continue to be made pursuant to legislative and regulatory procedures. These remaining entry barriers narrow the universe of significant market participants who will be able more quickly to enter and serve the relevant markets. Accordingly, we will also analyze the capabilities and incentives of each possible competitor to see whether that possible competitor (a) has the capabilities and incentives such that it would be reasonably likely to enter the relevant market as the 1996 Act is implemented and (b) would likely exert pressure on competitors in the absence of regulation to lower prices, innovate or upgrade services. 62. In determining the most significant market participants from the universe of actual and precluded competitors, we identify the market participants that have, or are likely to speedily gain, the greatest capabilities and incentives to compete most effectively and soonest in the relevant market. Some of these capabilities are basic to the operation of a local telephone company, relatively technical, and concern access to the necessary facilities, "know how," and operational infrastructure such as sales, marketing, customer service, billing and network management. Other capabilities are less tangible. They include brand name recognition in the mass market, a reputation for providing high quality, reliable service, existing customer relationships, or the financial resources to obtain these intangible assets. Another factor is whether the actual or precluded competitor had plans to enter the relevant market or was engaged in such planning. Such plans would be probative evidence of a perception of possession of capabilities and incentives necessary to affect the market. 63. In evaluating the relative significance of market participants, we also consider matters that would be material to the entry of all precluded competitors as a class, but not to any one entity in particular. Such factors would include whether the relevant market is expanding, prevailing prices in the relevant market, and the availability of capital both generally and in the relevant market. 64. The foregoing factors are similar to those factors used in cases applying the antitrust doctrine of actual potential competition to determine whether firms proposing to merge would have entered relevant markets with capabilities equivalent to those of other potential entrants. And, as in actual potential competition cases, in deciding whether a given precluded competitor has the capabilities and incentives to be a market participant, probative evidence may be documents from the precluded competitor's files showing it would likely have entered the relevant market. Documents, if they demonstrate serious consideration of entry, may create an inference of a capability to effect the market without a detailed examination of the competitor's capabilities and incentives. 65. Finally, in determining the most significant market participants from among the actual and precluded competitors, it is particularly relevant to identify which competitors, other than the merging parties, are likely to be as significant a competitor as the lesser of the merging parties. If one of the merging parties has the same capabilities and incentives as a large number of other competitors, then the loss of that one participant may be unlikely to remove much individual discipline from the market. But, to conclude that a merger would have little or no competitive effect on these grounds, the number of similar (i.e., most significant) market participants must be large. 66. In assessing just how many other significant market participants must remain for our competitive concern to diminish, we are guided by the underlying policy and economic analysis of the 1984 Merger Guidelines. Our conclusion, however, departs from the standard articulated in those Guidelines for several reasons. First, telecommunications markets such as local exchange and exchange access services presently have only one supplier as a practical matter or, as in the case of mass market bundled local exchange and exchange access, and long distance services, no current actual suppliers. In contrast, in the typical potential competition case the relevant markets are oligopolies with four or more competitors. In a four member oligopoly with four potential competitors, the loss of one potential competitor that leaves behind three equivalent ones still holds out the possibility of a seven-firm market. In telecommunications markets that are virtual monopolies or that are not yet developed, however, the loss of even one significant market participant can adversely affect the development of competition and the attendant proposals for deregulation. 67. In addition, the doctrine of actual potential competition as reflected in the 1984 Merger Guidelines has usually been applied to stable markets that potential entrants have decided not to enter. In contrast, telecommunications markets are undergoing major change, with new entry anticipated as implementation of the 1996 Act progresses. 68. We therefore see no reason to apply mechanistically the 1984 Merger Guidelines' provisions on potential competition to the novel features of telecommunications markets, and will evaluate the number of most significant market participants and the competitive effects of mergers among them, even where three other potential competitors with equivalent competitive capabilities to the merging parties will remain. Our decision in SBC-PacTel might be read to suggest that we would examine the competitive effects of a proposed merger only when fewer than three potential competitors would remain following the merger. We believe that the relevant provision of the 1984 Merger Guidelines, to which we referred in SBC-PacTel, does not support such a reading of SBC-PacTel. Section 4.133 of the 1984 Merger Guidelines does not provide immunity from antitrust review when at least three potential competitors with equivalent competitive capabilities would remain, but indicates only that the Department of Justice is "unlikely" to challenge the merger. As discussed above, the structure of our analysis here is a more complete and fully developed articulation of potential and precluded competition issues presented by mergers during implementation of the 1996 Act, and is therefore more consistent with reviewing the effect of the proposed merger on the public interest. 69. We also note that our analysis in this Order would not compel a contrary result in SBC -PacTel. Nothing in the record of the SBC-PacTel proceeding suggested that SBC or PacTel had incentives to enter each others' local service territory, or capabilities that would have made them among other than a large number of most significant market participants. In that case, unlike this one, the two merging companies' territories were not adjacent (and certainly without a major center of population and telecommunications on their border); neither company had assets, customers, or a recognized brand name in the other's territory; and there was no realistic suggestion that either one had ever considered entering the other's markets for local exchange service. We note, however, that the determination of the identification and number of likely most significant market participants is fact specific; and that it is certainly possible, in an appropriate case, to find that a merger of non-adjacent LECs would present competitive concerns. 70. Having defined our analytical framework, we now identify, and assess, the relative strengths of actual and precluded competitors for local exchange and exchange access services to residential and small business consumers, i.e., the mass market in LATA 132 and the New York metropolitan area. We conclude that five companies -- NYNEX, Bell Atlantic, AT&T, MCI, Sprint -- are the most significant market participants: that is, they are either in the market already or are the most likely to enter and to have an effect on the market for local exchange and exchange access services, and bundled local exchange, exchange access and long distance services to the mass market. NYNEX is currently both an actual provider of local exchange and exchange access services and a precluded provider of bundled local exchange, exchange access, and long distance services in LATA 132, as is Bell Atlantic in a broader New York metropolitan area market. The remaining four most significant market participants distinguish themselves from the universes of actual and precluded competitors and of other market participants by their experience and strong brand reputation in the provision of telephone service to the mass market. Technological change, successful marketing, and modification of consumer perceptions may eventually result in additional companies having significant competitive effects in this market should their comparable or substitutable services achieve widespread acceptance. As we explain below in greater detail, we, at present, do not consider other potential providers identified by the Applicants such as cable multiple system operators ("MSOs"), competitive access providers ("CAPs"), or commercial mobile telephone service providers to be among the most significant market participants in the relevant markets in LATA 132 on a par with Bell Atlantic, although we would certainly hope that they will so evolve. 71. We first consider whether NYNEX and Bell Atlantic are market participants with respect to the mass market for local exchange, exchange access, and bundled services in LATA 132 and the New York metropolitan area. 72. NYNEX. NYNEX is an actual participant in the market for local exchange and exchange access services for the mass market in LATA 132 and in at least a portion of the New York metropolitan area market. NYNEX is also a precluded competitor in the market for bundled local exchange, and exchange access, and long distance telecommunications service in LATA 132 and at least a part of the New York metropolitan area. NYNEX is precluded from providing this bundled product until it receives authorization to provide in-region interLATA services pursuant to Section 271 of the Communications Act. 73. Bell Atlantic. We find that Bell Atlantic is both a precluded competitor and among the most significant market participants both in the market for local exchange and exchange access, and in the market for bundled local exchange, exchange access, and long distance services for the mass market in LATA 132 and the New York metropolitan area. The basis for this conclusion is that Bell Atlantic was actively seeking to enter those markets using wireline technology and has the capabilities necessary to have an effect on those markets. As described in greater detail in Appendix E, Bell Atlantic's internal documents establish that Bell Atlantic was, until merger discussions were well underway, engaged in planning out-of-region entry into local exchange, exchange access, and long distance services in a number of locations in the NYNEX region, most notably LATA 132. The extent of planning reflected in the documents persuades us that Bell Atlantic would likely have entered LATA 132. The documents also show Bell Atlantic would have been most likely to target mass market, not large business, customers. 74. Bell Atlantic seeks to minimize its potential participation in LATA 132 by distinguishing between "the plans of a company, with resource commitments behind them, and business case studies or evolving explorations of business options by middle management or outside consultants." Bell Atlantic claims that its planning amounted only to the latter and describes its documented activities as reflective of "the undeveloped conditional, provisional, character of even the middle managers' consideration of a local-service add-on to a long-distance offering." Essentially, Bell Atlantic asserts that the work done by middle management was exploratory and did not amount to a "plan" because senior management had not given a go-ahead to commit significant resources to the project. 75. Although a decision by the Board of Directors actually to commence entry into LATA 132 would be conclusive evidence that Bell Atlantic was a precluded competitor, we believe that planning done prior to such a decision remains important and probative, especially when done with the continued oversight of senior management. We do not accept Bell Atlantic's view that the actual potential competition doctrine considers a company's plans to enter in determining whether it is a market participant only if it is shown that the decision to enter had been made irrevocably and at the company's highest levels or until the company had committed resources to entry. The case law under the actual potential competition doctrine does not compel this level of proof. The more authoritative and reasonable case law applying the doctrine of actual potential competition requires only a showing that a company was reasonably likely to enter, not that entry be certain as shown by vote of the Board of Directors or by the commitment of resources. Based on the documents before us, we find that Bell Atlantic's officials, including those at the highest levels, had advanced sufficiently far in their detailed planning that it is likely that Bell Atlantic would have entered LATA 132 but for the proposed merger. In this regard, we wish to make clear for the future that we consider all plans, regardless of whether they have been formally adopted or backed by a commitment of resources, as potentially relevant to the analysis of market participants. Accordingly, the facts and circumstances concerning such planning should be forthrightly presented to the Commission. 76. Our analysis of Bell Atlantic's documents is buttressed by other indications that Bell Atlantic had incentives to enter LATA 132. With respect to capabilities, local exchange and exchange access services for the mass market are product offerings most strongly tied to Bell Atlantic's capabilities, as it currently provides these services within its own region. While Bell Atlantic also has substantial experience in providing mobile telephony in both its own region and the NYNEX region through its combined operation with NYNEX, we do not believe that it planned to use this technology as an entry vehicle. We reach this conclusion both based on a review of documents and because the economics of such an entry strategy are not favorable at present. Bell Atlantic is now providing mobile telephony in LATA 132 at higher prices than the prices for wireline local exchange and exchange access services. For Bell Atlantic to enter the market for those services pursuant to a wireless strategy and compete with NYNEX's wireline service, it would have to price its wireless service to mass market customers at a fraction of what its current mobile telephone customers are paying. This would create a significant risk of arbitrage by customers that would force down the price of Bell Atlantic's mobile telephone service. Bell Atlantic, we think, would be unwilling to undertake this risk. 77. We observe that relative rate structure differences between New Jersey and New York, revealed in the record, may create incentives for Bell Atlantic to enter not only LATA 132, but also other markets in New York State. Flat rates for local exchange service charged by NYNEX in New York State substantially exceed the flat rates charged by Bell Atlantic in New Jersey. Bell Atlantic's highest flat rate, charged to customers in the Newark and Jersey City free calling areas, is $8.19, compared to a rate of $20.16 charged to customers in Buffalo and Albany. NYNEX's lowest standard rate of $12.45, charged in free calling areas with 1,300 customers or fewer, still substantially exceeds Bell Atlantic's highest New Jersey rate. This evidence, although not dispositive because it does not expressly take cost information into account (such data is not in the record), suggests that Bell Atlantic may be able to enter any of a number of markets in New York state and profitably undercut NYNEX. 78. All of the above factors, as well as the specific planning and marketing information further detailed in Appendix E, lead us to conclude that Bell Atlantic is a precluded competitor and among the most significant market participants in the market for providing local exchange and exchange access services or bundled local exchange, exchange access, and long distance services to the mass market in LATA 132. Of course, in a New York metropolitan area market, Bell Atlantic would also be an actual competitor, and among the most significant market participants. 79. Bell Atlantic described its brief and apparently unsuccessful experience in providing out-of-region long distance service in North Carolina. Bell Atlantic has not, however, sustained its burden of proof that such effort is a significant predictor of results were it to enter LATA 132. For the thirteen years since divestiture, Bell Atlantic advertising to its northern New Jersey customers has reached New York metropolitan area consumers outside of its service territory because of the reach of the New York area broadcast and print market outlets. There is also significant commuting and business activity shared between LATA 132 and Bell Atlantic's territory in northern New Jersey. From the record in this case, it appears that no such special relationship exists between Bell Atlantic's in-region services in southern Virginia and the area in North Carolina where it briefly offered long distance services. 80. Other Entities. We next consider whether other entities are actual or precluded competitors and whether they can be classified among the most significant market participants in the market for local exchange and exchange access services or bundled local exchange, exchange access, and long distance services to the mass market in LATA 132 and the New York metropolitan area. 81. The Applicants have provided us with a list of selected carriers to which the New York Public Service Commission has granted "Certificates of Public Convenience and Necessity to Resell All Forms of Telephone Service in New York" as of January 27, 1997. We do not consider, however, certification alone as defining any class of competitors. We view such certification as a step necessary for entry, but not dispositive of the company's capabilities and incentives. Many such entrants target large business customers with specialized service offerings, and offer little or no small business or residential service. As discussed above, for purposes of analyzing this merger, we are evaluating whether actual and precluded competitors have the requisite capabilities and incentives to enter and have an effect on the provision of local exchange and exchange access services and bundled local exchange, exchange access, and long distance service to the mass market. 82. AT&T, MCI, and Sprint. We conclude that the three largest interexchange carriers are precluded participants and among the most significant market participants in the mass market for local exchange and exchange access or bundled local exchange, exchange access and long distance service. The Applicants draw similar conclusions. Each of these carriers meets our definition of precluded competitors, i.e., each is likely to enter the relevant markets. Each is also among the most significant market participants because each has the capabilities and incentives to acquire a critical mass of customers in the relevant markets and to do so relatively rapidly. AT&T still serves 63% of long distance customers nationwide and in fiscal year 1996 had total revenues of $52.2 billion and a net income of $5.9 billion. MCI serves approximately 15% of long distance customers nationwide and had operating revenues of $18.5 billion in 1996, with net income of $1.2 billion. Sprint currently serves approximately 7% of long distance customers nationwide and had net operating revenues of $14 billion in 1996, with net income $1.2 billion. Each has announced major local entry initiatives. Our conclusion that AT&T, MCI, and Sprint are among the most significant market participants is further supported by the customer preference survey information in the record. 83. Other Interexchange Carriers. We disagree with Applicants' implicit suggestion that the smaller interexchange carriers ("IXCs") should be considered as more significant market participants than Bell Atlantic. We distinguish the three largest IXCs from all other IXCs in our analysis with respect to their capabilities to serve the mass market more quickly and effectively. While many long distance providers have access to facilities, knowledge and operational infrastructure, the smaller ones do not have as significant an existing customer base or as great a financial ability as AT&T, MCI, Sprint. The smaller IXCs' infrastructure investments are not on the same scale, and their experience in serving the mass market is not as broad as the three largest carriers. In addition many focus primarily on serving large business customers. 84. Most significantly, these smaller IXCs generally lack the brand reputation and recognition in the relevant markets that are critical assets for offering services to the mass market. As further described in Appendix E, Bell Atlantic has a much higher brand recognition and consumer preference in the relevant markets than any of the small IXCs. Only one smaller IXC showed signs of brand recognition and consumer preference, but with lower recognition and consumer preference than Bell Atlantic. Developing a stronger brand reputation will require significant investments of time and resources, as well as substantial, reliable performance. We remain unconvinced, therefore, that any of the smaller IXCs currently have other capabilities that compensate sufficiently for them to be considered among the most significant market participants at this time. 85. Cable MSOs. Incumbent cable television providers ("Multiple System Operators" or "MSOs") have facilities in LATA 132 and the New York metropolitan area that are capable of being upgraded to provide local exchange and local exchange access services to residential and business customers. Among the major New York area MSOs are Time Warner Communications, Cox Communications, Comcast, TCI, U S West Media Group, and Cablevision Lightpath. Each has a discrete territory within which it is the only coaxial cable television provider. 86. Like the other current service providers, MSOs have name recognition and a reputation with their customers (although not a reputation for providing telecommunications services). Like the three largest IXCs, a major component of their customer base is residential. Their reputation for dependable, high-quality service, however, is significantly less than those of the three largest IXCs. Documents provided by the Applicants indicate that only an inconsequential share of surveyed consumers in LATA 132 would select a cable company as a local telephony service provider. We do believe, however, that MSOs are endeavoring to improve their performance, and, hence their service reputation among their existing customer base. Insofar as improvements in service performance are related to improved facilities, the record contains evidence that suggests some MSOs in the New York area are moving toward a technology platform that could support telephony or Internet services to an emerging market. MSOs have the capabilities and incentives that potentially enable them to become significant market participants sometime in the future. Still evolving technical and financial constraints may limit their ability to enter and compete in the relevant markets as quickly as the most significant market participants we have identified. 87. CAPs. We accept the Applicants' assertion that a few of the larger CAPs, such as Teleport Communications Group (TCG) and MFS/Worldcom (MFS), have the requisite access to facilities, knowledge and operational infrastructure to qualify them as precluded competitors in the relevant market. As of May 1995, Teleport had 600 business customers for local exchange and exchange access services in New York, and as of October 25, 1995, it had three switches in New York and a fiber optic network that extended 400 miles through Manhattan and parts of Queens, Brooklyn, Nassau and Suffolk Counties, and White Plains. MFS also provides service in the New York metropolitan market. MFS offers voice, data and other enhanced services and telecommunication systems oriented toward business and government users. According to the Applicants, MFS has begun to provide local exchange and exchange access services in the New York City metropolitan market with approximately 250 miles of fiber optic cable. 88. Nevertheless, the financial capabilities of these larger CAPs are limited compared to those of Bell Atlantic, AT&T, MCI, and Sprint. (TCG had 1996 gross revenues of $267.7 million in 1996 and a net loss of $114.9 million. MFS had 1996 revenues of $4.49 billion and a net loss of $2.2 billion.) Both companies are experiencing substantial growth in their core business. Although reputation among the existing customer base is an important asset to a CAP, Bell Atlantic's market research indicates that the CAPs have a limited brand name reputation among residential and small business customers in LATA 132. We have no reason to believe that CAPs would have a stronger brand reputation in other parts of the New York metropolitan area. Because of their relatively limited access to capital and their low brand name recognition among small business and residential customers, we are unpersuaded by the Applicants that CAPs are, either singularly or as a class, likely to have significant competitive impact in the relevant markets. Accordingly, while this is a close case, we do not consider even the larger CAPs among the most significant market participants in terms of their ability quickly to enter and serve the relevant markets. 89. Mobile Telephone Service Providers. Providers of mobile telephone service via radio consist primarily of cellular and broadband Personal Communications Services licensees, but also include digital specialized mobile radio providers. Several of these firms have formidable financial resources and are recognized and regarded favorably by both wireless and wireline users. Among the principal wireless providers that currently compete in LATA 132 and the New York metropolitan area are AT&T, Sprint Telecommunications Venture, SBC, Omnipoint, Nextel, and Bell Atlantic-NYNEX Mobile ("BAMS-NYNEX Mobile"), a joint venture involving the Applicants. As explained below, this competition takes place in a market distinguishable from the relevant markets at issue in this proceeding. 90. Mobile telephone service providers are currently positioned to offer products that largely complement, rather than substitute for, wireline local exchange. These providers utilize spectrum whose carrying capacity is relatively finite. There are economic and technical limits to increasing spectrum reuse through reduction in cell size and use of compression and encoding techniques. Additionally, their installed technology and facilities are specialized for use in mobile communications. These factors limit the ability of wireless carriers to compete on a mass market scale with wireline providers in the local exchange and exchange access services market. Although the Applicants predict that some of these providers will become competitors to wireline providers, the Applicants recognize that, as stated supra, such competition is currently precluded as a practical matter by the higher prices that mobile telephone service providers can charge. Thus, only if wireline prices were to increase or other factors caused wireless prices to decline materially, would this class of entrants become viable competitors in the relevant market. Accordingly, we are unpersuaded by the Applicants and CFA that mobile telephone service providers are, at this time, either singularly or as a class, significant market participants; they lack the requisite incentives and access to facilities that would allow them to compete effectively in the relevant market. We are mindful, however, of the possibility that conditions could alter significantly as a result of increased spectrum being made available (either through reallocation or through developments in mobile and fixed wireless technologies), major pricing shifts as a result of competition, or the alteration of consumer perceptions as to the substitutability of wireless for wired telephony. 91. We do believe that fixed wireless may ultimately become a viable (and, in some markets, a formidable) substitute for wireline service, but whether that occurs depends on spectrum availability, technological issues, and other future events. Fixed wireless service for the mass market will be among the potential applications that will benefit as more spectrum becomes available for wireless or is used more efficiently, and as this Commission continues to allocate and license such spectrum. These regulatory proceedings and the business rollout for such new competitors, however, will take considerable time. Neither the Applicants nor AT&T, the largest wireless carrier in this country, nor any other party has submitted any evidence on the underlying business and technological issues pertaining to near term prospects for wireless competition in the relevant markets. 92. We also reject CFA's arguments that: (1) the grant of the application to transfer the relevant authorizations would eliminate wireless as an effective competitive threat in the Applicants' markets for local exchange and exchange access services; and (2) a combination of the Applicant's wireless services will inhibit the development of competition in the wireless industry. Within their wireline service areas, the Applicants hold no more than one block of the currently issued licenses, and are constrained by our CMRS spectrum cap in their ability to acquire additional licenses. Multiple blocks of licenses have been issued to other companies expected to compete with the Applicants' wireless operations. Accordingly, we find that divestiture is unnecessary to promote effective wireless-wireline competition. Moreover, CFA's general concerns about prospects for competition in wireless services ignore the fact that the vast majority of the Applicant's wireless license holdings are already jointly operated; the Commission is considering an appeal of this decision and it would be inappropriate to address the issue here. 93. Non-Adjacent Out-of-Region Bell Companies. We do not doubt that non-adjacent out-of-region Bell Companies have financial strength and expertise in providing local exchange and exchange access services. This expertise should permit them to enter LATA 132 and the New York metropolitan area via resale and unbundled network elements. The fact that each Applicant contemplated entry into the other's territory supports the inference that other Bell Companies may contemplate entry into such attractive markets as LATA 132. No party, however, has shown that any one of those companies, or that those companies as a class, have a broadly recognized brand name and reputation for quality service, and/or an existing customer base in the mass market in LATA 132 or the New York metropolitan area. Accordingly, we view them as precluded competitors in LATA 132, but not among the most significant market participants. 94. Conclusion. We conclude that five companies -- NYNEX, AT&T, MCI, Sprint, and Bell Atlantic -- are the most significant market participants in LATA 132. NYNEX is an actual competitor in the market for local exchange and exchange access services to small business and residential customers, and a precluded competitor in the market for bundled local exchange, exchange access, and long distance services to small business and residential customers. AT&T, MCI, Sprint, and Bell Atlantic are each precluded competitors, and among the most significant market participants, in both these relevant markets. We find that although many other companies are precluded competitors, and some may be actual market participants in one or both of the relevant markets, no other company is among the most significant market participants in either of the relevant markets. We note that because our identification of the most significant market participants focuses on those carriers that have the greatest capabilities and incentives to compete most effectively and soonest, our evaluation does not in any way indicate any opinion as to the long term viability of other market participants as competition develops over time in the relevant markets. D. Analysis of Competitive Effects 95. Having identified the relevant markets and the most significant market participants, we now examine the competitive effects of the merger. There are several reasons we believe that some competitive effects -- those producing an increase in market power, or an enhanced ability to maintain market power -- will generally not be in the public interest, even when the exercise of market power arguably is constrained by regulation. The 1996 Act set a clear national policy that competition leading to deregulation, rather than continued regulation of dominant firms, shall be the preferred means for protecting consumers. Mergers that increase market power or retard the decline of market power conflict with this policy by maintaining rather than decreasing, the need for continued regulation. A merger that reverses or slows the decline of market power may also hinder or make more costly the transition to competitive, deregulated telecommunications markets. Finally, to the extent that regulation is not completely effective at preventing the exercise of market power, a merger that increases market power adversely affects consumer welfare. 96. Ordinarily, our analysis of the competitive effects of a particular horizontal merger (between two firms that compete with each other) will follow the framework of the 1992 Horizontal Merger Guidelines, with an assessment of present market conditions and an analysis of the ways in which the transaction is likely to alter the market. We believe that this is a useful way of applying economic principles in most merger cases (indeed, this is the precise purpose for which the 1992 Horizontal Merger Guidelines have been developed). In some cases, however, the transaction will have a greater effect on future, rather than present, market performance. This is especially true if a merger may be a strategic response to declining entry barriers, in which an incumbent firm is seeking to avoid competition by eliminating a potentially significant future competitor. In the case of local telecommunications markets, competition is only now emerging and a merger between a current monopolist and one of the new competitors may have a substantial adverse impact on future market performance even though the new competitor currently has only a small number of customers. 97. When faced with a proposed merger that affects markets that are themselves in a process of rapid change (e.g., where competition is emerging as a result of regulatory change, or where necessary technology and resources are only beginning to be deployed), the best way to analyze the likely effect of the merger is to isolate the effect of the merger from all other factors affecting the development of the relevant markets over time. This is achieved by framing the analysis in a way that holds constant the effects of all changes in market conditions other than those directly caused by the merger. An example of our use of this approach in analogous circumstances is the analysis we used to assess the likely competitive effects of particular outcomes in the auction of Direct Broadcast Service ("DBS") spectrum. When we conducted that analysis, we assumed that the spectrum being auctioned would be deployed, and compared the ways in which the identity of the licensee could affect market development. Such an approach, when applied to the merger before us, would remain faithful to the structure of the 1992 Horizontal Merger Guidelines (i.e., by examining the effect of the merger on market structure and competition) while assuming an appropriate set of market conditions (i.e., emerging competition in telecommunications markets due to the implementation of the 1996 Act). 98. To isolate the effects of the merger, we first assume that the key local competition provisions of the 1996 Act, are being implemented, and that new entrants take advantage of the opportunities created by these provisions to enter markets from which they have historically been precluded. Although we could also isolate the effect of the merger by looking at markets as they existed prior to the first effects of the local competition provisions of the 1996 Act, such an approach would be inconsistent with the competitive paradigm established by the Act and would be unlikely to reveal the extent to which the merger is likely to affect future market structure, conduct, and performance. Our analysis also assumes that both Bell Atlantic and NYNEX have received authorization to provide in-region interexchange services pursuant to Section 271 of the Act. Finally, we consider whether entry and expansion by other firms (in response to the merger) may alter the merger's effects. 99. In evaluating the competitive effects of the proposed merger between Bell Atlantic and NYNEX, we first analyze the competitive effect in LATA 132, and then use these findings as a proxy for the likely competitive effects of the merger on the broader New York metropolitan area. Based on the data provide by the applicants, we include precluded competitors as participants in the relevant markets, with AT&T, Bell Atlantic, MCI, and Sprint joining NYNEX (currently the sole provider throughout most of LATA 132) as the most significant participants in the market for local and exchange access services provided to the mass market (residential and low-volume and medium-volume (collectively, small business) customers) in LATA 132. We also include NYNEX in the market for interexchange services in LATA 132, which means that it and other competitors in the market can offer bundled local and interexchange services in LATA 132. Finally, we include Bell Atlantic in the market for interexchange services in New Jersey, which means that it can offer bundled services in northern New Jersey as well as LATA 132. 100. Based on our review of the record, we find that it likely that the proposed merger will limit or retard the development of competition. The evidence demonstrates that, by removing one of the five most significant market participants, the merger is likely to: (1) increase firms' ability to exercise market power unilaterally in the market for local mass market services in LATA 132; (2) increase firms' ability to exercise market power unilaterally in the market for bundled local and interexchange services in LATA 132; (3) increase the likelihood that firms will exercise market power through coordinated interaction; and (4) adversely affect the dynamic development of competition in both local and bundled markets in LATA 132. The presence of other, less significant market participants is not likely to constrain such behavior. We also find that additional entry that could occur in response to an exercise of market power is unlikely to have a constraining effect on such an exercise of market power. Finally, we conclude that the commitments made by Bell Atlantic, and made a condition of our approval of the merger, mitigate, but do not fully offset, the potential adverse effects of the merger on consumers in the relevant markets. 1.Effect of the Merger on Unilateral Conduct by Providers of Mass Market Local Services 101. A merger that eliminates a significant market participant may increase the unilateral market power of the acquiring firm as well as other competitors, enabling such market participants acting individually to raise prices, reduce quality, or restrict output profitably. Such effects can occur even under price cap regulation since the removal of an independent alternative may permit a firm in the post-merger market might profitably and unilaterally reduce its level of service quality or innovation, or offer smaller price reductions than it would have offered in the absence of the merger. This is particularly true where the firms in the market are offering products that are perceived by consumers as differentiated, rather than as perfect substitutes. 102. With respect to the merging firms, a merger may lead to particularly strong increases in the acquiring firm's ability to affect market performance unilaterally where the merging firms' services are very close substitutes for each other. As set forth in the 1992 Horizontal Merger Guidelines, "[a] merger between firms in a market for differentiated products [such as brand-name services] may diminish competition by enabling the merged firm to profit by unilaterally raising the price of one or both products above the pre-merger level. . . . . The price rise will be greater the closer substitutes are the products of the merging firms, i.e., the more the buyers of one product consider the other product to be their next best choice." In simple terms, if the services offered by Bell Atlantic and NYNEX would be viewed as close substitutes by significant numbers of customers, the merger of the two firms can remove the strongest constraint on the acquiring firm's ability to raise prices (or restrict output and/or quality). 103. With respect to other market participants, a merger that eliminates a market participant can also increase these other firms' incentives to behave less competitively. This occurs when the merger eliminates an alternative set of services to which customers could turn if their current provider were to raise its prices or reduce the quality of its services. To the extent the eliminated services are viewed as less close substitutes for other competitors' services than for the acquiring firm's services, the unilateral effects with respect to other competitors will be less strong than with respect to the acquiring firm. 104. Analysis of unilateral effects may also consider any unique capabilities the merging firms may bring to the market, such as access to the technical facilities that are needed to provide service, a reputation for providing quality service, and the financial ability to expand as market opportunities present themselves. As markets open, we expect different market participants initially to possess different combinations of assets. One may be particularly skilled at network operation, another at marketing and sales, and so on. A significant precluded competitor is likely first to exploit any area(s) in which it has a relative advantage while it increases its abilities with respect to those in which it does not. Firms with similar advantages would tend to compete for the same customers and, therefore, exert relatively more competitive pressure on the market. Consequently, a merger of two firms that consolidates a particular kind of asset, especially an asset that is difficult to replicate in the short run, likely will reduce competition. 105. Under the proposed merger, Bell Atlantic will join forces with NYNEX, the incumbent LEC in LATA 132, rather than compete head-to-head with NYNEX and other market participants in LATA 132. We find that the elimination of Bell Atlantic as an independent significant market participant likely will increase the unilateral market power of NYNEX and the major IXCs for several reasons: (1) mass market customers place a premium on reputation of local exchange and exchange access services; (2) the mass market local exchange and exchange access services that would be offered by NYNEX, Bell Atlantic, and the three major IXCs will be differentiated from competing services by brand name reputation; (3) mass market local exchange and exchange access services offered by Bell Atlantic would be an important substitute (or "second choice") for the services of NYNEX and the three major IXCs; (4) Bell Atlantic possesses significant advantages for competition in the relevant markets that are not possessed to a comparable degree by the other most significant market participants; and (5) other, less significant, market participants will not soon be able to offer close substitutes for the services offered by Bell Atlantic and the major IXCs in the relevant markets because they lack the brand name assets that differentiate significant market participants. 106. Following the merger, Bell Atlantic's services will be eliminated as an independent alternative in the relevant markets. Contrary to the arguments made by the Applicants, the evidence presented in the record demonstrates that services offered by Bell Atlantic would contribute substantially to the development of competition in LATA 132. These services are a "second choice," i.e., closest substitute, with respect to the services of other participants for a significant percentage of customers. The evidence also demonstrates that significant numbers of customers prefer Bell Atlantic in head-to-head comparisons with other market participants. One reason Bell Atlantic may be viewed as such a strong second choice is its unique position among precluded competitors as a known provider of local (as opposed to long distance) telecommunications services. Bell Atlantic currently markets itself to its local exchange and exchange access customers using the same media as NYNEX uses to reach its own customers in LATA 132. Due to Bell Atlantic's extensive marketing through the principal media outlets that serve LATA 132, we believe it is reasonable to conclude that Bell Atlantic has a certain measure of reputation in the market as a local telephone company, which is something that it shares only with NYNEX among the firms that are participants in the markets for mass market local and bundled telecommunications services in LATA 132. 107. We also disagree with the Applicants, and find that Bell Atlantic possesses unique advantages not possessed by other market participants. Unlike AT&T or MCI, Bell Atlantic has substantial experience serving mass market customers of local exchange and exchange access services (as does Sprint, but not in the New York metropolitan area). We also agree with AT&T that an incumbent LEC entering an out-of-region local market would bring particular expertise to the interconnection negotiation and arbitration process because of its intimate knowledge of local telephone operations. Finally, we find that the competitive assets possessed by Bell Atlantic are unlikely to be quickly duplicated by smaller market participants, such as cable operators and CAPs. As discussed above, it is costly and time-consuming to acquire the brand name assets, particularly a reputation for providing high quality telecommunications services, that differentiate the most significant participants offering mass market telecommunications services in LATA 132. 108. In sum, the merger eliminates one of just four new significant market participants, and one that is the "second choice" alternative for a significant number of customers. As a result, the merger as proposed (without commitments) appears likely to increase the risk that a carrier may find it profitable to exercise unilateral market power in the relevant markets. The commitments made by the companies, and made a condition of our approval, however, go a long way to addressing this loss of customer choice by making it easier for firms remaining in the market and firms entering the market to expand quickly and offer services in competition with those offered by other providers. 109. Other Arguments That the Merger Will Adversely Affect Local Competition. MCI and TCG assert that the proposed merger and the likely subsequent entry of the merged entity into in-region long distance service will permit strategic conduct to inhibit competition in the local exchange and exchange access market. First, MCI argues that the merged entity will rely entirely on itself to provide exchange access services to its long distance affiliate within its home region. Accordingly to MCI, this could foreclose competition in the local market by shrinking the amount of access charges other would-be entrants could earn by supplying switched access services. Second, both MCI and TCG claim that the merged entity will bundle exchange access and interexchange services into "packages," thus solidifying its control in the local exchange market. Cablevision makes a similar argument with regard to bundling video and telephone services. 110. We are unpersuaded by MCI's first argument about foreclosure of competition through self-selection for the provision of switched access services. Although it is true that interexchange carriers can, and often do, select providers of transport services (to and from LEC central offices), for most of the rest of the switched access charges they pay, the IXCs are unable to choose a carrier other than the LEC chosen by the end user -- it is the end user and not the IXC that determines the identity of the primary access provider. For the most part, therefore, the share of access charges that the Applicants can earn remains unchanged by the merger. Under the proposed merger, the merged entity will lose access payments as precluded competitors gain customers and minutes of local exchange traffic. Accordingly, MCI's foreclosure argument does not present anything that we are not considering in our analysis of the effect of the merger on the development of competition in LATA 132. 111. With respect to transport services, there are already a number of competitors offering such services, and individual interexchange carriers (including MCI) often choose particular providers to carry large amounts of traffic on a dedicated basis. If, after receiving interexchange authority under Section 271, the merged entity's interexchange affiliate similarly chooses a particular provider of transport services, it will simply be operating like other firms in the market, particularly while its share of traffic is relatively modest. Moreover, MCI can also self-provision interstate, interexchange transport services on an exclusive basis by becoming a competitive LEC through the procedures in the 1996 Act or by establishing arrangements pursuant to our expanded interconnection rules. 112. With regard to the second argument, concerning the bundling of services into packages composed of local exchange, exchange access, interexchange, and other services such as video or Internet, we initially note that commenters have not provided any example of a way in which the merger increases the ability of Bell Atlantic or NYNEX to bundle services. Balanced against any possible harm to competition (whether in the local exchange market or in the market for the service bundled with local exchange service), is the consumer benefit associated with bundling -- a form of one-stop shopping -- which is considered desirable by many customers. The balancing of these issues involved with bundling is one of the principal subjects of rules such as the accounting and non-accounting safeguards provided by Section 272 of the 1996 Act and the rules promulgated thereunder, and opponents have not presented any reason for reconsidering that balance in the context of the proposed merger. In addition, we note that the merged entity will not have an exclusive ability to create such packaging. We believe that, by using the entry routes contemplated by the 1996 Act, MCI and other market participants also will be capable of offering one-stop shopping. The customers who want one- stop shopping may choose the combined services of the merged entity or those of one of its competitors. 113. The Conditions on Our Approval of the Merger Substantially Address the Unilateral Exercise of Market Power. The commitments made by Bell Atlantic, which we have made conditions of our approval of the merger, help to mitigate the ability of the merged entity unilaterally to exercise market power. They also address the likelihood that other market participants may be able to behave less competitively as a result of the merger. In particular, those conditions increase the likelihood that precluded competitors that are not currently among the most significant market participants will become such significant participants. They reduce the risk to competitors of receiving inferior access and interconnection from Bell Atlantic- NYNEX; they reduce the time and expense associated with OSS development; they make it more feasible to use unbundled transport facilities, permitting smaller scale deployment of facilities; and they facilitate the ability of competing carriers to make investment and pricing decisions based on a cost structure that more accurately reflects the true economic cost of the facilities and services obtained from Bell Atlantic-NYNEX. Thus, the conditions increase the ability of precluded firms to become significant market participants, and the speed with which they may do so. Therefore, the potential harm to consumers through the unilateral exercise of market power brought on by the elimination of Bell Atlantic as a significant market participant will be reduced, and will be more quickly addressed. 2. Effect of the Merger on Unilateral Conduct by Providers of Mass Market Bundled Services 114. For the same reasons that the proposed merger would likely have unilateral effects in the relevant markets for local exchange and exchange access services, the proposed merger is likely to have effects in a market for bundled local and long distance telecommunications provided to residential and small business customers. The evidence in the record demonstrates that many of these mass market customers would like to purchase both local and long distance telecommunications services as part of a single bundled service. Therefore, we must also consider the extent to which the merger may adversely affect market performance in the bundled service market in LATA 132. For the most part, this analysis does not differ from the analysis in the prior section of competitive effects in the local exchange market. Arguments raised in opposition to the merger, however, present an additional concern. The merging parties control facilities and services that are essential for providers of interexchange telecommunications services, and those services are an integral component of the bundled services that may emerge as a relevant market. Accordingly, we must consider whether the merging parties would gain an increased ability to price strategically to inhibit competition among interexchange service providers and, thereby, adversely affect market performance in the bundled service market. 115. Price Squeeze Concerns. Opponents to the proposed merger have raised arguments about a particular form of strategic pricing involving the applicants' monopoly control over bottleneck local loop facilities to inhibit competition from long-distance rivals. AT&T and MCI argue that, once the merged entity begins selling in-region long distance service through an interexchange affiliate, it will charge higher prices to its long distance rivals for switched access than it charges to its interexchange affiliate, thereby setting up a "price squeeze." By imposing this price squeeze, commenters contend, the merged entity will be able to acquire market share unfairly, and ultimately obtain market power in the interexchange market. 116. A price squeeze, as the term is used by MCI, refers to a particular, well-defined strategy of predation that would involve the merged entity setting "high" prices for interstate exchange access services, over which it has monopoly power (albeit constrained by regulation), while its long distance affiliate offers "low" prices for long-distance services in competition with the other long-distance carriers. Because interstate exchange access services are a necessary input for long-distance services, MCI argues that applicants can create a situation where the relationship between the merged entity's "high" exchange access prices and its affiliate's "low" prices for long-distance services forces competing long-distance carriers either to lose money or to lose customers even if they are more efficient than the merged entity's long distance affiliate at providing long-distance services. It is this unprofitable relationship between the input prices and the affiliate's prices, and not the absolute levels of those prices, that defines a price squeeze. 117. As we discussed in the recent First Access Reform Report and Order, absent appropriate regulation, Bell Atlantic-NYNEX and its interexchange affiliate could potentially implement a price squeeze once its affiliate began offering in-region, interexchange toll services. In that decision, however, we concluded that we have in place adequate safeguards against such conduct. One basis for our conclusion was that interconnection and unbundled network elements ("UNEs") are available at rates based on the economic costs of providing such services and facilities. Although we are less convinced today that we may generally rely on the availability of interconnection and UNEs to provide alternatives to exchange access services in light of the Eighth Circuit's decision, the commitments made by Bell Atlantic and implemented as conditions to our approval of the merger that interconnection and UNEs will be offered as forward looking economic cost-based prices largely mitigate this new concern. Accordingly, in light of the conditions we impose today, together with the reasons set forth in the Access Charge Reform Order, we believe that price squeeze tactics are likely to fail under the circumstances presented here as a predatory tactic aimed at eliminating competition among interexchange competitors. 118. MCI argues that the transfer will increase applicants' ability to engage in anticompetitive price squeezes because the merged entity will provide in-region long distance over a larger area than would each company separately. MCI argues that, with a larger proportion of long distance calls both originating and terminating in-region, a merged Bell Atlantic-NYNEX will be the sole access provider and, thus, receive all of the alleged benefits of access price discrimination, for a greater proportion of calls. While we agree with MCI that the merged entity will provide both originating and terminating services on a substantially greater proportion of individual interexchange telephone calls than either Bell Atlantic or NYNEX does separately, it is not apparent how the merger increases the likelihood of a successful price squeeze. The combined firm will provide access services in precisely the same instances as did the two firms separately. Accordingly, MCI has not explained how the combined entity will reap a greater share of the benefits of a price squeeze than would the two firms separately. 119. Non-Price Discrimination. MCI also argues that risks of non-price discrimination against long distance carriers will increase if the proposed transfer is approved. MCI alleges that once Applicants and other Bell Companies are allowed to compete against other carriers offering in-region long distance services, the Bell Companies will try to stifle competition by engaging in non-price discrimination such as refusing or delaying interconnection or degrading connections to competitors. Cablevision makes similar claims with respect to video services. 120. In theory, each applicant could, albeit unlawfully, currently engage in non-price discrimination within its own territory. Although the merger increases the number of instances in which the same incumbent LEC is the access provider at both ends of an interexchange call, opponents of the proposed merger have not indicated how this could increase Applicants' incentive or ability to engage in non-price discrimination. For the most part, non-price discrimination practiced at one end of a telecommunications circuit (origination or termination) would seem to be sufficient to harm a competitor. In any event, non-price discrimination is a violation of several provisions of the Communications Act, including those requiring Bell Companies to provide interexchange service only through a separate subsidiary, not to favor their subsidiaries, and to provide nondiscriminatory access to all long distance carriers. In addition, the Commission has adopted rules designed to prevent such discrimination. The protection afforded by these provisions should reduce the merged entity's ability to engage in non-price discrimination in interexchange markets. Moreover, the conditions to our approval of the merger should increase the ability of additional firms to become more significant market participants, and to do so more quickly. We believe this will significantly reduce the merged firm's ability to profitably engage in non-price discrimination against rivals in interexchange markets 3.Effect of the Merger on Coordinated Interaction 121. Market performance can also be adversely affected if a merger increases the potential for coordinated interaction by firms remaining in the post-merger market. Coordinated interaction is defined as "actions by a group of firms that are profitable for each of them only as a result of the accommodating reactions of the others." A merger can adversely affect market performance when it increases the ability of the most significant market participants to engage in coordinated interaction that harms consumers. As the number of most significant market participants decreases, all other things being equal, the remaining firms are increasingly able to arrive at mutually beneficial market equilibria, to the detriment of consumers. In general, increased concentration facilitates coordinated interaction for at least three reasons: (1) with fewer firms, the relative gains from "cheating" against the other firms decrease (as market share increases there are fewer customers to win from other providers); (2) it becomes easier to detect deviations from the coordinated conduct; and (3) other firms are more able to punish cheating by a deviant firm through retaliation. 122. The markets for mass market local and bundled local and long distance telecommunications services in LATA 132 and in the New York metropolitan area possess many of the characteristics identified by Merger Guidelines as conducive to coordinated interaction. For example, as the incumbent LEC, NYNEX has access to significant amounts of information about the rival firms' customers and services because all market participants will need to terminate the majority of their traffic over NYNEX's network. In addition, its control over essential inputs such as transport and termination services could afford NYNEX the ability act as a "ringleader" and discipline other firms that did not cooperate in arriving at mutually beneficial coordinated outcomes. Accordingly, it is not unreasonable to conclude that the risk of coordinated interaction is particularly high in the markets in which Bell Atlantic and NYNEX compete. Therefore, the removal of one of the five most significant market participants substantially increases the likelihood that coordinated interaction could adversely affect consumers in LATA 132. 123. In addition, the removal of Bell Atlantic appears especially likely to increase the risk of coordinated interaction in the mass market for bundled services. Unlike the other most significant market participants, Bell Atlantic would enter LATA 132 with no existing customer relationships and no market share to protect. As such, Bell Atlantic would have little incentive to participate in tacitly coordinated pricing arrangements. Each of the other most significant market participants, however, has "something to lose," in that each is an incumbent in LATA 132, either in local exchange service or long distance service. As a result, these other most significant market participants have the incentive to price their services in a coordinated manner to protect market share and maintain prices at as profitable a level as possible. With no such customer base to protect in LATA 132, Bell Atlantic would be unlikely to profit from a coordinated arrangement, at least initially. Rather, Bell Atlantic would have the incentive to price competitively (that is, to undercut prices that were above the competitive level) in order to win customers. Thus, absent the merger, Bell Atlantic could have been classified as a "maverick firm," i.e., a competitor well situated to disrupt any coordinated pricing that might occur among the likely largest competitors. 124. The Conditions on Our Approval of the Merger Substantially Address the Exercise of Market Power Through Coordinated Interaction. The commitments made by Bell Atlantic, and made conditions of our approval of the merger significantly address the incentive and ability of remaining market participants to exercise market power through coordinated interaction. In particular, the conditions concerning unbundled transport facilities and providing interconnection and unbundled elements at the economic cost of the facilities and services should permit smaller- scale deployment of facilities. This may make it more likely that larger numbers of market participants can successfully establish significant market shares, thereby reducing the likelihood of coordinated interaction. In addition, the operational support systems and performance and reporting requirements should inhibit coordinated interaction by reducing the possibility that Bell Atlantic/NYNEX could discriminate against other market participants when providing access and interconnection. 4.Effect of the Merger on Dynamic Market Performance 125. When considering the likely competitive effect of a particular merger, we will also look at factors that are not properly thought of as affecting "unilateral conduct" or "coordinated interaction" but, rather, affect the development of the market over time without regard to any individual firm's products or prices. These other factors affect the dynamic performance of the market including, for example, inhibiting the efforts of regulators to promote conditions that facilitate competition. 126. Several opponents of the proposed merger argue that an incumbent LEC brings special advantages to competition in an out-of-region local market. In particular, AT&T argues that an incumbent LEC entering an out-of-region local market would bring particular expertise to the process of implementing the 1996 Act and other pro-competitive measures, and further argues that this would benefit all other competitors because they could take advantage of the better terms obtained by such a superior bargaining agent. This is similar to the argument, discussed below, that the process of opening markets to competition benefits from more, rather than fewer, independent incumbent LECs. It is different, however, in that it is specifically focused on the effect of the merger on the development of competition in the relevant markets. 127. We agree that the removal of Bell Atlantic as a significant participant in the market for mass market telecommunications services in LATA 132 is likely to impede the process of opening and fostering competition. Not only would Bell Atlantic have brought to the market substantial skills not possessed by other market participants (as discussed above), it would have contributed a unique perspective to the competitive process. In particular, Bell Atlantic's position as an incumbent LEC extending into another incumbent LEC's region would surely have led it to make significant pro-competitive contributions to efforts by this Commission and the New York Commission to implement pro-competitive policies and rules. Accordingly, the loss of Bell Atlantic as an independent market participant will likely slow the development of market- opening measures in the relevant markets. The commitments made by Bell Atlantic and made a condition of our approval, however, significantly mitigate these negative effects of the proposed merger because they produce solutions to important issues that could hasten the competitive process in the relevant markets. 5.Potential Entry and Expansion 128. We next consider whether competitive entry will be likely, prompt and effective enough to counteract the price-raising and quality-lowering incentives that may result from the proposed merger. The exercise of market power can be constrained if rivals and new entrants have the capacity and incentive to expand output in response to practices of incumbents that allow them to earn supra-competitive profits. In this part of the analysis, we move beyond simply identifying potential entrants. The focus is on the extent, if any, to which entry would increase as a result of an attempted exercise of market power. Specifically, we consider the increased incentives for entry brought on by the supra-competitive margins associated with eliminating Bell Atlantic as an independent market participant. 129. Our analysis of entry and expansion lead us to conclude that the supply of telecommunications services is unlikely to increase quickly in response to an exercise of market power. We reach this conclusion because we believe that, despite the entry provisions of the 1996 Act, there will continue to be significant barriers to quick and relatively costless entry, expansion, and exit. Among potential barriers to entry and exit are the need to incur sunk-cost investments and non-recurring charge obligations associated with interconnection and unbundled elements. The fact that these barriers inhibit quick and relatively costless exit from the market is particularly significant. For a firm to reasonably calculate that it can benefit from entry or expansion of existing operations for the purpose of taking advantage of supra- competitive profits resulting from the exercise of market power, the firm must be able to exit quickly in response to the restoration of competitive market conditions. Otherwise, entrants will understand that, after they enter, they may have to compete in the market under pre-merger conditions, and the exercise of market power provides little additional incentive for entry or expansion. This realization could very well deter entry or expansion in response to a price increase or other exercise of market power. 130. The 1992 Horizontal Merger Guidelines distinguish between two types of entry, committed entry and uncommitted entry. Committed entry is defined as "new competition that requires expenditure of significant sunk costs of entry and exit," such as by a new carrier that intends to commit itself to the market for the long term. The extent to which committed entry can counteract a merger's effect on competition depends on the timeliness of such entry (firms must be able to enter within two years), the likelihood of such entry (it must be profitable at pre- merger prices and the minimum viable scale must be smaller than the likely sales opportunities), and the sufficiency of entry (entrants must be able to offer comparable services to a substantial percentage of customers). If barriers to entry into a market are substantial, then entry will be less likely, especially entry that is significant enough to discipline the exercise of market power. If, however, barriers to entry are few and insubstantial, then the potential for entry as a market disciplining force is given considerable weight. 131. Uncommitted entry refers to entry that can occur quickly (within one year) and without expenditure of significant sunk costs, and is likely to occur in response to the exercise of market power. Because uncommitted entry, by definition, is entry that is possible without making a commitment to stay in business for the long term, such entrants can enter and steal customers from firms that attempt to exercise their market power, and then exit without having to continue operating profitably after the market returns to a more competitive equilibrium. Such "hit and run" entry can, therefore, provide a substantial check against the exercise of market power. In general the prospects for uncommitted entry in telecommunications markets appear limited. In markets for mass market local exchange and exchange access and bundled telecommunications services, uncommitted entry might occur through resale or use of unbundled elements, provided the non-recurring charges and marketing costs are not so high that they impose significant costs on entry and exit in order to acquire significant numbers of customers. 132. As mentioned above, we believe that substantial legal, regulatory, and economic factors make entry and expansion a costly and time-consuming process in local telecommunications markets. Although the 1996 Act put in place a number of mechanisms that dramatically increase the opportunities for competitive entry, the business of telecommunications will still involve substantial barriers to rapid and costless entry and exit that are intrinsic to the economics of the industry. These barriers include very high reliance on sunk cost investment in facilities (or reliance on the cooperation of competitors), a high value on brand name reputation for providing quality services and proficiency in the marketing services to residential and small business customers. Moreover, the process of implementing the 1996 Act and establishing those mechanisms is not likely to be completed quickly. Many arbitration agreements remain to be negotiated and enforced, rates for unbundled network elements ("UNEs") have not been finalized in many states (and may be appealed once finalized in some of those states), and OSS interfaces are still being developed. 133. We find that firms other than the most significant market participants are unable to quickly and effectively enter local exchange markets in response to the exercise of market power. A new entrant into the relevant markets will need the following assets: (1) a strong reputation for providing acceptable levels of service at current prices; (2) access to facilities or services, either via ownership, leasing UNEs, or reselling the incumbent's services; and (3) financial incentives and access to financial resources adequate to fund start-up operations as well as future expansion in this market. The most significant market participants have expended considerable resources developing their brand reputations and mass-market telecommunications operations. Moreover, they have been doing this for many years. No other firms are in such a position, however. Accordingly, we find that every firm not currently in the market, whether a competitive LEC, cable MSO, wireless provider, or other potential entrant, would have to expend considerable resources over an extended period of time in order to offer a strong check on the exercise of market power. 134. Finally, we observe that market participants other than NYNEX would also face considerable obstacles in expanding their local operations in response to the exercise of market power. Such expansion would, among other things, require additional sunk cost investment. In sum, it appears that the adverse competitive effects resulting from the removal of Bell Atlantic as a significant participant in the market for mass market local telecommunications services in LATA 132 will not be obviated by the ability of other, less significant actual and precluded competitors to enter or expand in response to the exercise of market power. Neither the firms remaining in the market nor other telecommunications firms not currently in the market appear able to quickly and effectively increase their presence in response to any exercise of market power in the relevant market. 135. The Conditions on Our Approval of the Merger Substantially Address the Inability of Entry to Discipline an Exercise of Market Power. The commitments made by Bell Atlantic, and our conditions based on those commitments, are designed explicitly to help overcome some of the obstacles to entry discussed in this section. In particular, Bell Atlantic has made commitments that should have the effect of making resale and UNEs available on a lower-priced and more efficacious basis than they generally are at present. As a result, we believe that remaining market participants will more easily be able to rapidly expand their operations in response to the exercise of market power. In addition, entry and exit will be much easier, and therefore will become materially more attractive to some precluded competitors. Such improved resale and UNEs may afford entrants a longer period to establish brand identity in customers' minds, and to begin a revenue stream before substantial investment of sunk costs is necessary. . 6.Potential Competition Doctrine and Measurement of Market Concentration 136. Finally, we will compare the results of our analysis of the competitive effects of the merger with those produced using the antitrust law's Potential Competition doctrine, and by measuring market concentration using the quantitative analysis used in the 1992 Horizontal Merger Guidelines -- the Herfindahl-Hirschman Index (HHI). These are tools of general application that have been developed from economic principles. Because the telecommunications industry has a relatively unique history and is characterized by economic, legal, and technical circumstances that are not shared by many other industries, we generally conduct our own expert analysis developed through our experience dealing with telecommunications and competition policy. We still use these tools of general application, but we are not bound by rigid adherence to their results where our independent expert analysis produces differing outcomes. 137. Analysis Under Potential Competition Doctrine. The Applicants and the parties opposing the proposed merger have argued extensively about the merits of the antitrust doctrine of potential competition and its application to the facts of this case. Potential competition doctrine focuses on whether a merger will effectively remove either merging company from "the edge" of the other's market and will, as a result, reduce a competitive effect that existed before the merger or would have existed but for the merger. 138. The traditional actual potential competition doctrine has five elements: (1) the market in question ("the target market") is highly concentrated; (2) few other potential entrants are "equivalent" to the company that proposes to enter the target market by merger; (3) the company entering the target market by merger was reasonably likely to have entered the market but for the proposed merger; (4) that company had other feasible means of entry; and (5) such alternative means of entry offer a substantial likelihood of ultimately producing de- concentration in the target market or other significant pro-competitive effects. The doctrine applies to situations where a firm (e.g., Bell Atlantic) proposes to enter a concentrated market (e.g., local exchange and exchange access services in New York City) by merging with a company that is already in the market (NYNEX) and, but for the merger, the firm likely would have entered in another way (de novo or by acquiring a smaller firm in a "toe-hold" merger) that would have reduced concentration. 139. Because we are determining whether the Applicants have carried their burden of demonstrating that the proposed merger is in the public interest rather than whether the transaction violates the antitrust laws, we do not reach the question of whether the record establishes a violation of Section 7 of the Clayton Act. Accordingly, we need not conduct an analysis under this doctrine. However, we note that the record contains sufficient evidence of potential harm to competition under application of the actual potential competition doctrine, including evidence of likely entry and de-concentrating effect in the relevant markets, that we cannot, in the absence of pro-competitive conditions, conclude that Applicants have met their burden of demonstrating that the merger is in the public interest. We also note that, consistent with the actual potential competition doctrine, even if a new entrant is able merely to "shake things up" or "engender competitive motion" in the monopolized market, that alone may make a significant contribution to competition. 140. Analysis of Concentration Using Herfindahl-Hirschman Indices. We now develop a quantitative analysis of market concentration using the Herfindahl-Hirschman Index (HHI) to calculate changes in market concentration and post-merger concentration. The HHI analysis is typically used as a "screen" to identify cases in which a merger significantly aggravates or creates highly concentrated markets. Further analysis is conducted using the economic principles discussed throughout this section. Because competition in the relevant markets in this case, has been precluded until recently, we will compute hypothetical future market shares based on our analysis of the most significant market participants. 141. We recognize that evidence of firms' and consumers' expectations as to their likely choice of provider has only limited usefulness as a predictor of future market shares. Nonetheless, we use such evidence in this case to estimate market shares for the limited purpose of confirming our results through HHI analysis of concentration in the relevant local markets. This HHI analysis can be interpreted as characterizing the consequences of the merger for the concentrated ownership of brand name assets. In other circumstances, market shares may be more appropriately calculated for the purpose of HHI analysis based on capacity, revenue, minutes of use, or other measures of economic performance. In fact, under the 1992 Horizontal Merger Guidelines, "[m]arket shares will be calculated using the best indicator of firms' future competitive significance." In the case of future mergers involving wireline carriers, for example, we would urge parties, where appropriate, to provide us with data regarding the share of total wireline revenues (including local service, toll, and access) possessed by each market participant in the relevant local markets. 142. Based on confidential market research results submitted under seal in this proceeding, we assign hypothetical market shares to each of the most significant market participants in the markets we are analyzing. Using the HHI to calculate changes in market concentration and post-merger concentration based on these hypothetical market shares, we find that the proposed merger would increase the HHI by over 200 points, to a post-merger HHI above 3400. This is well above the thresholds of the 1992 Horizontal Merger Guidelines for identifying a merger "likely to create or enhance market power or facilitate its exercise," absent other contrary evidence. In fact, any measurable entry may be reasonably expected to produce a significant pro-competitive effect in a monopolized market. For example, even if entry by a merging firm would reduce the dominant firm's market share by only 2%, from 95% to 93%, that would be significant. A merger between those two firms would increase the HHI in the market by 372 points, far more than the 100 that leads to a presumption under the 1992 Horizontal Merger Guidelines that a merger would be "likely to create or enhance market power or facilitate its exercise." 143. The fact that HHI analysis indicates that the merger is "likely to create or enhance market power or facilitate its exercise," however, does not substitute for our more detailed examination of competitive concerns. Rather, it confirms our analysis by showing that the merger does generate competitive concerns. In fact the 1992 Horizontal Merger Guidelines state, "market share and concentration data provide only the starting point for analyzing the competitive impact of a merger. Before determining whether to challenge a merger, . . . other market factors" must be considered. 7.Conclusion 144. Based on the evidence in the record and our analysis of competitive market conditions, we find the proposed merger of Bell Atlantic and NYNEX is likely to have two predictable effects. First, we conclude that the merger is likely to strengthen NYNEX's market power against erosion from competition, and to increase the likelihood that one or more of the most significant market participants may unilaterally exercise market power, Second, we conclude that the merger increases the likelihood of coordinated interaction among the most significant remaining market participants to increase (or not reduce) prices, reduce quality or restrict output. 145. We further conclude that, although this remains a regulated market environment, the possible increase in market power remains an important concern. Such increased market power would be fundamentally inconsistent with the primary policy goal of the 1996 Act -- the development of competition in, and the deregulation of, telecommunications markets. 146. Finally, we find that the Applicants have not demonstrated that additional entry and expansion that might occur in response to the exercise of market power is likely to be rapid or sufficient enough to mitigate our concern that the proposed merger may have an adverse impact for consumers. We do find, however, that the commitments made by Bell Atlantic, and made a condition of our approval of the merger, mitigate the concerns that we have as a result of our analysis of the likely competitive effects of the merger. E.Other Competitive Effects 147. Until competition develops sufficiently to erode market power and permit deregulation, we will be concerned with the impact of proposed mergers on the effectiveness of this Commission's and state commissions' ability to constrain market power and ensure fair rules for competition. A reduction in the number of separately owned firms engaged in similar businesses will likely reduce this Commission's ability to identify, and therefore to contain, market power. One way that this can happen is by reducing the number of separately owned and operated carriers that can act as "benchmarks" for evaluating the conduct of other carriers or the industry as a whole. We find that the ability to compare actions of a larger number of carriers improves our ability to identify and constrain market power. Recently, for example, we determined whether any individual LEC's physical collocation tariff was unreasonable by examining whether that tariff substantially deviated from averages of the tariffs submitted by all LECs. Also, in establishing the productivity adjustment factor for price cap LECs, we rely on calculations of industry-wide productivity. The smaller the base on which this number is calculated, the more likely it is to include distortions and create unwanted incentives for cost misallocation by regulated companies that price caps were intended to mitigate. 148. The existence of several Bell Companies as an important regulatory tool has been praised by the DOJ, the Courts, and the Bell Companies themselves. In commenting on the proposed divestiture of local Bell Companies by AT&T ("the divestiture), the DOJ observed that it would consider the impact of the proposed configuration of Bell Companies on the likelihood that the MFJ's non-discrimination requirements would be achieved. Several years later, responding to an appeal of the MFJ's line-of-business restrictions, the U.S. Court of Appeals for the District of Columbia Circuit noted: There is a lot of evidence that the break-up and other recent developments have enhanced regulatory capability. . . . [T]he existence of seven [R]BOCs increases the number of benchmarks that can be used by regulators to detect discriminatory pricing. . . . Indeed, federal and state regulators have in fact used such benchmarks in evaluating compliance with equal access requirements . . . and in comparing installation and maintenance practices for customer premises equipment. 149. Aside from the DOJ and the courts, the Bell Companies themselves have emphasized the importance of benchmarks, and especially seven benchmarks, as an important regulatory tool. Ameritech stated: "No amount of sophistry can suppress the importance of benchmarks" and that "division of the local exchange networks among seven independent companies has greatly enhanced the detectability of any monopoly abuse and the effectiveness of regulation. Anticompetitive conduct was far less detectable in the predivestiture era . . ." Bell Atlantic stated: "Each BOC serves as a benchmark against which the Commissions can measure the performance and behavior of the next; such comparisons were quite impossible before divestiture." BellSouth stated: "The [seven RBOCs] will also facilitate the detection of questionable competitive practices by allowing each BOC to serve as a benchmark for the others." NYNEX stated: "Without such benchmarks, there was no uncomplicated and ready test for uncovering anticompetitive conduct. Divestiture changed all this. There are now seven independent companies. A firm, constant and readily available basis exists for comparing the actions of any one against the actions of another." Pacific Bell stated: ""The ability to discriminate has also been markedly reduced by the post-divestiture emergence of vigorous competition among the BOCs providing real yardsticks against which to evaluate any individual BOC's actions." Southwestern Bell stated that seven benchmarks provide "an effective deterrent against even subtle attempts to abuse any advantage which might arise from the ownership of local exchange communications facilities." U.S. West stated that "lingering concerns about discrimination are unwarranted" after the divestiture because benchmarking would effectively detect any discrimination which might occur when a Bell Company attempts to abuse access to customer or network information. 150. Not only the number, but also the size, of Bell Companies influences the Commission's benchmarking practices. As part of its price cap regulation, the Commission calculates a single "X Factor" applied to all "Price-Cap LECs" based on industry-wide increases in productivity. The Commission has committed to review the level of the X Factor every two years. Periodically re-adjusting a carrier's X Factor to reflect its own productivity gains can blunt that carrier's incentives to increase its productivity. Also, when a carrier's productivity gain is a small component of a calculation of an industry-wide X Factor, readjustment of the X Factor will have very little effect on the carrier's incentives to become more efficient. A merger between Bell Companies, however, increases the relative importance of the newly formed carrier in the calculation of the industry-wide X Factor. This increases the blunting effect on productivity incentives that any readjustment of the X Factor will have on the merged carriers. Thus, a merger between large incumbent LECs will reduce the Commission's ability both to give carriers the incentive to become more effective and to reflect accurately the state of productivity in the X Factor. 151. Third, a decrease in the number of Bell Companies impairs the Commission's ability to monitor service quality. Large incumbent LEC service quality is monitored by the Commission through the use of data collected in the Commission's Automated Reporting Management Information System ("ARMIS"). If the number of large incumbent LECs is reduced, the Commission would obtain service quality information from fewer independent entities. As a result, the Commission would have fewer diverse sources of information about the service quality of incumbent LECs. 152. In addition, consolidation among major incumbent LECs may also hinder and delay the transition to competitive, deregulated telecommunications markets by making it more difficult for the Commission and state regulators to develop and enforce necessary pro- competitive rules. Mergers between incumbent LECs will likely reduce experimentation and diversity of viewpoints in the process of opening markets to competition. Also, mergers increase the likelihood that cooperation among incumbent LECs can effectively inhibit or delay the implementation of the 1996 Act and other pro-competitive initiatives. 153. As AT&T notes, the proposed combinations of major incumbent LECs may deprive this Commission, state commissions, and the courts of a unique and valuable contribution to the continued implementation of the 1996 Act and to the process of replacing regulation with competition. During the implementation of the 1996 Act, we will attempt to determine the best ways to encourage competition and pave the way for deregulation in local markets. The more independent LECs there are in this process, the more experimentation in different implementation efforts they will likely attempt. Through such experimentation and diversity, we are likely to discover solutions to issues and to resolve problems sooner than we otherwise would. We believe that the process of opening local telecommunications markets to competition and deregulation will likely be slowed by consolidation among incumbent LECs who would otherwise be participating in the process. 154. Another likely harmful effect of mergers of major incumbent LECs is to increase their ability and incentive to resist the pro-competitive process. On many issues, incumbent LECs as a group would best serve their collective interest if they all cooperated minimally with regulators and competitors during the process of opening their local markets to competition. On any particular issue, however, one incumbent LEC may have an incentive to cooperate with its competitors, contrary to the interests of other LECs. If the incumbent LEC cooperates, that will reduce the others' ability to refuse to cooperate the same way (or in some other ways of their own devising). This incentive for individual incumbent LECs to "break ranks" speeds the pro- competitive process. If two major incumbent LECs merge, however, then this incentive may be reduced. To the post-merger incumbent LEC, cooperation in one area may have untoward consequences in another and cooperation may be against the firm's overall interests. This may result in the post-merger incumbent LEC cooperating less than the pre-merger incumbent LECs would have in enabling competition to grow. 155. With respect to the proposed merger, combining Bell Atlantic and NYNEX would reduce the number of Bell Companies by one, from six to five. Opponents of the proposed merger also present arguments concerning the optimum number of Bell Companies. AT&T contends that the MFJ created seven regional Bell Companies so that each would be the size required for efficient operations. AT&T also argues that there are no close historical parallels that can be used to determine what regulatory measures will best ensure competition, so that the development of local competition will be advanced by having the greatest number of major incumbent LECs acting independently to unbundle their networks. CPI and others contend that the merged LECs will be more difficult for regulators to police, and that Congress expected the Bell Companies to compete, not merge. In response, applicants respond merely that AT&T's interpretation of the MFJ is wrong and that even after the proposed merger there will remain "5 RBOCs, GTE, SNET, and countless other independents." 156. We agree with Applicants that the reduction in the number of Bell Companies from six to five does not sufficiently impair our ability to ensure just and reasonable rates, constrain market power, or establish and enforce the pro-competition rules necessary to achieve competition and deregulation that we should find the proposed merger is not in the public interest. In this case, too, the commitments made by Bell Atlantic represent substantial cooperation with our pro-competitive goals. Further reductions, however, become more and more problematic as the potential for coordinated behavior increases and the impact of individual company actions on our aggregate measures of the industry's performance grows. We therefore reject suggestions in the record that there would be no issues raised by the consolidation of all Bell Companies into a single company. Accordingly, although we do not find the reduction in major incumbent LECs caused by the proposed merger sufficient to render it against the public interest, further reductions in the number of Bell Companies or comparable incumbent LECs would present serious public interest concerns. V. ANALYSIS OF POTENTIAL PUBLIC INTEREST BENEFITS 157. Once we have examined the potential harms to competition of the proposed merger, we next examine any potential pro-competitive benefits of the transaction. These pro- competitive benefits include any efficiencies arising from the transaction if such efficiencies are achievable only as a result of the merger, are sufficiently likely and verifiable, and are not the result of anticompetitive reductions in output or increases in price. Pro-competitive benefits also include pro-competitive conditions either proffered by the applicants, by other parties, or imposed by the Commission on its own motion. Applicants can carry their burden of demonstrating that the proposed transaction is in the public interest only if the transaction on balance will enhance and promote, rather than eliminate or retard, competition. This necessarily is a balancing process that weighs the potential public interest harms against public interest benefits. As the harms to the public interest become greater and more certain, the degree and certainty of the public benefits must also increase commensurately in order for us to find that the transaction on balance serves the public interest, convenience and necessity. A. Efficiencies 158. Efficiencies are the pro-competitive benefits of a merger that improve market performance. Efficiencies generated through a merger can mitigate competitive harms if such efficiencies enhance the merged firm's ability and incentive to compete and therefore result in lower prices, improved quality, enhanced service or new products. Pro-competitive efficiencies include only those efficiencies that are merger specific, i.e., that would not be achievable but for the proposed merger. Efficiencies that can be achieved through means less harmful to competition than the proposed merger, therefore, cannot be considered to be true pro- competitive benefits of the merger. Efficiencies are particularly significant if they improve market performance in a relevant market and thereby reduce the competitive harms otherwise presented by the proposed merger. In order to mitigate competitive harms, however, efficiencies cannot result from anticompetitive reductions in output or service. Applicants bear the burden of showing both that merger specific efficiencies will occur, and that they sufficiently offset any harm to competition such that we can conclude that the transaction is pro-competitive and therefore in the public interest. Finally, applicants cannot carry their burden if their efficiency claims are vague or speculative, and cannot be verified by reasonable means. 159. Efficiencies are most likely to make a difference in our public interest review of a merger when the likely adverse competitive effects, absent the efficiencies, are not great. However, efficiencies almost never justify a merger to monopoly or near-monopoly. 1. Applicants' Efficiency Claims 160. Bell Atlantic and NYNEX contend that the proposed merger will produce substantial cost savings that are "hard, real and certain." In particular, Applicants foresee four main efficiency benefits from the proposed merger: (1) cost-of-service efficiencies from eliminating redundant functions; (2) the creation of a more viable long-distance competitor; (3) improved telephone service quality in the New York and New England areas; and (4) more rapid and widespread deployment of broadband services. 161. Cost-of Service Efficiencies. Applicants represent that within three years of consummating the merger, Applicants expect to achieve annual cost savings that approach $1 billion per year. According to Applicants, these savings fall into two broad classifications: operating expenses (totalling approximately $600 million per year) and capital savings (totalling $250 to $300 million per year). These asserted cost savings are described further in Appendix E. 162. Applicants break-down their purported operating expense savings into ten basic accounts: (1) corporate staff reductions; (2) procurement savings from expanded base; (3) development of new software systems; (4) research and development consolidation; (5) advertising savings; (6) combined business development and strategic planning; (7) consolidation of corporate fees (auditing, bank fees, etc.); (8) product management and development savings; (9) consolidation of White and Yellow Page directories; and (10) savings in the cost to provide long-distance services. 163. In addition to the aforementioned operating expense savings, Applicants expect the merger to produce $250 to $300 million in annual capital expenditure savings in two basic ways: first, Applicants expect to achieve capital purchasing savings from increased volume discounts the two companies will obtain when they pool their annual network capital expenditures. Second, Applicants expect to save substantial dollars in capital expenses annually by consolidating field trials of new equipment and test laboratories. 164. Creation of a More Viable Long-Distance Competitor. Applicants contend that the merger will generate additional efficiency savings because the merger will create a more viable long-distance competitor to AT&T, Sprint and MCI. These efficiencies are detailed further in Appendix E. 165. Improvements to NYNEX Service Quality. Applicants maintain that the merger will enhance NYNEX's ability to fix its quality of service problems. In support, Applicants point out that the NYPSC, in its March 21, 1997 decision approving the proposed merger, specifically recognized that the merger holds the very real prospect of significantly improving the level of NYNEX's service quality to the level enjoyed by the Bell Atlantic states. Applicants further argue that the magnitude of the opportunity to achieve these efficiency savings is even supported by the Commission own data. 166. Broadband Deployment. According to the Applicants, telephone companies, as a generic industry necessity, are beginning a process of replacing their existing networks with new "broadband" networks constructed from high capacity, digital equipment capable of carrying video signals. 167. Applicants state that despite the necessity of this upgrade, network deployment has been slower and more difficult than expected. Thus, argue Applicants, the merger will hasten the deployment of broadband in three ways: (1) the merger will reduce certain per-unit costs such as software development which, post-merger, could then be spread across a larger customer base; (2) not only will the merger increase the merged entity's financial strength (and, with such strength, hopefully lower its cost of capital), but the merger will also create substantial cash savings, some or all of which Applicants intend to invest into broadband network deployment; and (3) given the size of the merged entity's geographic footprint, the merger would help mitigate many of the numerous network compatibility problems the industry is currently experiencing. These alleged efficiencies are detailed further in Appendix E. 2. Discussion 168. We conclude, based upon review of the evidence submitted in the record, that Applicants have not carried their burden of demonstrating that the proposed merger will create verifiable merger-specific efficiencies that offset the merger's competitive harms. Applicants have not proved that the alleged cost savings will offset the unilateral and coordinated effects of the proposed merger in the relevant markets. Nor have they demonstrated that the merger is necessary to create from two ineffective long distance carriers a single effective competitor. In addition, they have not demonstrated that the improvements to service quality could not be achieved but for the merger. Finally, they failed to prove that improved deployment of broadband services is merger-specific, and that the improved deployment of broadband services is sufficiently likely to occur to offset the loss of competition in the relevant markets. 169. Cost-savings. Even if we accept Applicants' claims as to the amounts of the asserted efficiencies, Applicants have failed to show that all of these cost-savings are merger- specific, or that they mitigate the competitive harms. We have previously found that the merger will likely have unilateral and coordinated effects that harm competition. Merger generated efficiencies can offset unilateral effects to the extent that such efficiencies reduce marginal costs and thereby counteract the merged firm's incentive to elevate price. Merger generated efficiencies can also make coordinated interaction less likely or effective if those efficiencies are reductions in marginal costs that make coordination less likely or effective by enhancing the incentive of a maverick firm to lower price or by creating a new maverick firm. 170. First, we note that, at best, only a small fraction of Applicants' asserted cost savings reduce marginal costs, rather than fixed or overhead costs. Procurement savings and savings in the costs to provide long-distance services appear to be the only asserted savings that arguably could reduce marginal costs. Accordingly, most of the claimed cost-savings will do little to eliminate the unilateral or coordinated effects of the proposed merger. Moreover, Applicants have not even asserted that the claimed cost savings would turn NYNEX into a maverick competitor in the market to provide local exchange and exchange access, or bundled local exchange, exchange access and long distance services to residential and small business customers in either LATA 132 or the New York metropolitan area. To the contrary, we have previously found that the merger would likely eliminate a firm, Bell Atlantic, that had incentives to act as a maverick firm in the relevant market. 171. Second, some of Applicants' asserted cost savings may be the result of the reduction of competition between two firms that would otherwise compete. Research and development, for example, is a means through which firms engage in non-price competition, by seeking means to differentiate products either in function or quality. Elimination of parallel research and development efforts would eliminate this form of non-price competition. Applicants bear the burden of proving that the asserted efficiencies are not another form of reducing output, in this case research and development, and they have not carried that burden. 172. Creation of a More Viable Long-Distance Competitor. Merger-generated efficiencies can also enhance competition if they permit two ineffective competitors to become one effective competitor. Applicants have not, however, shown that Bell Atlantic and NYNEX would be ineffective competitors to AT&T, Sprint, MCI and other interexchange carriers. To the contrary, the experience of GTE and SNET in offering in-region, interexchange services suggests that Applicants will be quite effective competitors once they receive authorization pursuant to Section 271 of the Communications Act to offer in-region interexchange services. 173. For reasons outlined above, and more fully described in Appendix E, we therefore conclude that Applicants have not demonstrated in a specific and verifiable manner that these efficiencies could not be achieved in the absence of the merger. 174. Improvements to Service Quality. Applicants have also not carried their burden of showing that service quality improvements could not be achieved but for the proposed merger. To the extent that service quality improvements result from greater expertise at network operation or management, Applicants have not demonstrated that this expertise could only be achieved through merger. Nor have Applicants demonstrated that the merger is the only means of financing any necessary network improvements. Accordingly, we cannot find that these claimed efficiencies are merger-specific. 175. Broadband Deployment. Applicants, and parties supporting Applicants, have not demonstrated that the asserted efficiencies of the merger with respect to broadband deployment are merger-specific, likely to occur and reasonably verifiable. Applicants do not even assert, much less demonstrate, that accelerated broadband deployment and improved connectivity between broadband systems cannot be achieved in the absence of the proposed merger or that such benefits can only be achieved through means that have comparably harmful effects on competition. 176. Accordingly, for the reasons stated above and as further detailed in Appendix E, we conclude that Applicants have demonstrated only that the merger generates a small amount of likely, verifiable efficiencies that could not be achieved through means other than the merger. We also conclude that even if Applicants fully substantiated all of their claims of cost savings, those efficiencies are not likely fully to mitigate the proposed mergers' potential competitive harms because they do not sufficiently reduce the likelihood or the magnitude of either the coordinated or unilateral effects of the proposed merger. B.Conditions 1.General 177. Previously in part IV, we discussed the potential competitive harms that may arise, especially in the LATA 132 residential and small business local markets, as a result of the merger of NYNEX and one of the most significant participants in this mass market. We have also discussed our concerns that the merger of Bell Atlantic and NYNEX will continue to reduce the diversity, and hence the quality, of comparisons of regulatory and market performance between the Bell Companies. We have also concluded that these concerns are not substantially mitigated by the potential efficiencies the Applicants posit. If our analysis of the effect of the proposed merger ended at this point, we would have to conclude that the Applicants had not demonstrated that the transaction was pro-competitive, and, therefore, served the public interest, convenience, and necessity. 178. On July 19, 1997, Bell Atlantic and NYNEX submitted an ex parte filing proffering a number of specific commitments they would undertake as conditions of the approval of the transfer of licenses and 214 certificates, and subsequently clarified those commitments in an ex parte filing on August 13, 1997. As discussed further below, these conditions to some extent mitigate the potential adverse competitive effects of the proposed merger in the LATA 132 residential and small business local exchange and exchange access telecommunications markets. These proposed conditions, however, would also apply both inside and outside LATA 132 and the New York metropolitan area. Accordingly, we will also consider whether the pro- competitive benefits of the conditions applying to service areas outside LATA 132 and the New York metropolitan area are sufficient to outweigh any residual concerns regarding competitive harms in LATA 132 or the New York metropolitan area. For the reasons set forth below, we conclude that with these commitments, which we incorporate into our order and make express conditions of our approval of the requested transfer of licenses and certificates, the transaction will serve the public interest, convenience and necessity. 179. By our finding that these commitments are sufficient to outweigh the harm to the public interest due to increased market power arising from the removal of a significant potential competitor, we do not suggest that it will be possible in all instances for either applicants or the Commission to craft a set of conditions that create public interest benefits that are sufficient to offset harms to the public interest. It is quite plausible that there will be some mergers of actual or precluded competitors that will present such significant potential harms to competition that there will be no means to conclude that the transaction serves the public interest, convenience and necessity. The elimination of an even more significant market participant than Bell Atlantic would raise even greater competitive concerns. That is not, however, the case we address today. 2.Conditions To Be Imposed 180. As noted above, on July 19, 1997, Bell Atlantic and NYNEX filed an ex parte letter in which they specified certain commitments that they would undertake if the transaction were approved, and they further clarified those commitments in an ex parte letter filed on August 13, 1997. We incorporate these commitments and clarifications into our order and make them express conditions of our approval of the transfer of licenses and certificates. As stated above, these conditions apply to the entire Bell Atlantic-NYNEX region after the merger. Bell Atlantic's and NYNEX's proffered commitments, and the conditions we impose, are not limited to interconnection agreements that are executed after approval of the merger. As clarified by their August 13, 1997 ex parte, Bell Atlantic-NYNEX must negotiate supplements and amendments to existing interconnections agreements where necessary in response to a request that is covered by the conditions, regardless of whether such existing agreements expressly provide for amendment or modification. Bell Atlantic and NYNEX must also treat these conditions as changes in the Commission's rules for the purposes of any clauses in existing interconnection agreements that permit amendments to account for changes in the Commission's rules. To the extent competing carriers wish to take advantage of the benefits offered by the conditions, they may do so. There is, however, no obligation imposed on competing carriers to incorporate the conditions into preexisting interconnection agreements, or to use the conditions in negotiating future interconnection agreements. 181. The specific conditions that we impose on Bell Atlantic and NYNEX as a result of this merger are set forth in Appendices C and D to this Order. We expect Bell Atlantic-NYNEX to implement each of these conditions in good faith and in a reasonable manner to ensure that competing carriers are able to obtain the full benefits of these conditions as described below. These conditions will sunset forty-eight months after the release of this Order. By requiring these conditions as conditions of the approval of this transaction, we neither preclude this Commission or state commissions from adopting additional requirements in other proceedings, nor do we affect conditions imposed by state commissions on the merging parties. We do not concur with Applicants' assertions that this Commission otherwise lacks jurisdiction to impose these conditions in the context of reviewing a transaction under Sections 214 and 310(d) of the Communications Act, or Sections 7 and 11 of the Clayton Act, or in considering an application for approval to provide in-region, interLATA service pursuant to Section 271(d) of the Communications Act. 182. Several of the conditions listed in Appendix C concern Bell Atlantic-NYNEX's OSS systems. Pursuant to these conditions, Bell Atlantic-NYNEX must prepare and provide performance monitoring reports for the OSS functions it provides to its retail operations, any separate local exchange affiliate, requesting carriers in the aggregate, and individual requesting carriers. These reports cover the provision of unbundled network elements (UNEs), both individually and on a recombined basis, interconnection, as well as resold services. The measurements in the performance monitoring reports will cover no larger an area than a single state. In addition, Bell Atlantic-NYNEX must negotiate with requesting carriers to establish in interconnection agreements performance standards for network performance and the following OSS functions: pre-ordering, ordering, provisioning, billing, and maintenance and repair. Bell Atlantic-NYNEX must negotiate with requesting carriers to establish enforcement mechanisms to ensure compliance with each performance standard, including private or self-executing remedies. By imposing these conditions, we do not preclude requesting carriers from seeking to modify or to expand upon the listed items in the context of negotiating performance standards. For example, a requesting carrier and Bell Atlantic-NYNEX could agree that information about services and facilities that are provided be separately reported for business and residential customers. 183. Bell Atlantic-NYNEX must, within fifteen months, provide uniform interfaces for OSS functions throughout the Bell Atlantic-NYNEX region (including both a GUI-based or other comparable interface and an EDI-based or other comparable application to application interface), while continuing to provide to individual requesting carriers any interfaces agreed upon in preexisting interconnection agreements. Within the current NYNEX region, Bell Atlantic-NYNEX must offer uniform interfaces (including both a GUI-based or other comparable interface and an EDI-based or other comparable interface) no later than 120 days following Commission approval of the merger. Similarly, within the current Bell Atlantic region, Bell Atlantic-NYNEX must offer uniform interfaces (including offering an EDI-based or comparable application-to-application ordering interface and making available, upon request, PC-based software comparable to a GUI-type interface) no later than 120 days following Commission approval of the merger. In meeting the requirement for uniform interfaces, Bell Atlantic- NYNEX must implement any future standards or guidelines established under the aegis of the Alliance for Telecommunications Industry Solutions (ATIS) within 180 days after final adoption through ATIS. This condition is not limited to any subset of OSS functions, and, therefore, necessarily applies to interfaces for all OSS functions, including pre-ordering, ordering, provisioning, billing, and maintenance and repair. For those standards or guidelines that were adopted through ATIS prior to Commission approval of the merger, Bell Atlantic-NYNEX must implement these no later than 180 days after final approval of the standards or within 150 days from Commission approval of the merger, whichever is later. Bell Atlantic-NYNEX must, however, continue to offer both an EDI-based and a GUI-based interface, or comparable interfaces, throughout the Bell Atlantic-NYNEX region. Thus, for example, if an ATIS- sponsored committee adopts EDI-based standards for ordering and provisioning, Bell Atlantic- NYNEX must continue to offer a GUI-based interface. Likewise, because Bell Atlantic-NYNEX has committed to undertake all commercially reasonable efforts to implement each industry adopted standard or guideline, the commitment covers the latest industry standard for any function. 184. Also with respect to OSS, Bell Atlantic-NYNEX must allow a requesting carrier to conduct carrier-to-carrier testing within forty-five days of Bell Atlantic-NYNEX's receiving a request for such testing. Requesting carriers may engage in such testing prior to entering into an interconnection agreement. We expect Bell Atlantic-NYNEX to work with carriers to establish reasonable parameters for any such tests. Moreover, within six months after the release of this Order, Bell Atlantic-NYNEX must provide evidence to the Commission demonstrating that its OSS interfaces are capable of handling reasonably expected demands for all OSS functions with respect to resold services, UNEs, and combinations of UNEs. 185. The conditions also contain certain pricing requirements. As an initial matter, we note that Bell Atlantic-NYNEX must offer in negotiations, and in certain instances in proposals to state commissions, rates for interconnection, UNEs, and transport and termination that are based upon the forward-looking economic cost of providing these items. This condition extends to both recurring and non-recurring charges. As noted above, Bell Atlantic-NYNEX must, irrespective of whether either Bell Atlantic or NYNEX has a prior agreement with a competing carrier, offer all of the terms contained in the conditions to all competing carriers upon request. 186. In addition to the forward-looking cost requirement, Bell Atlantic-NYNEX must offer to requesting carriers the payment schemes listed in Appendix C for payment of the non- recurring charges associated with resold services, UNEs, and collocation. These payment schemes must be proposed in addition to the option of paying a one-time non-recurring charge. These payment schemes cover four types of non-recurring charges. We note that in requiring Bell Atlantic-NYNEX to offer different payment schemes for certain non-recurring charges, we are not suggesting that in all instances it is appropriate to impose a charge at all, nor are we endorsing the level at which the charge is set. 187. Under the first payment scheme, Bell Atlantic-NYNEX must offer all competing carriers an optional plan that assesses non-recurring charges on a recurring basis for UNEs and resold services used in the provision of basic residential and business services. The second payment scheme applies to collocation and certain other large non-recurring charges. Under this scheme, Bell Atlantic-NYNEX must offer to competing carriers, with gross revenues of less than two billion dollars, an installment payment plan over a period of up to eighteen months. 188. The third and fourth payment schemes provide payment mechanisms for carrier specific construction and equipment costs, and common construction costs, related to collocation that apportion costs between Bell Atlantic-NYNEX and collocating carriers consistent with the requirements that the Commission recently established for LECs in the federal context. Essentially, Bell Atlantic-NYNEX must offer competing carriers the same payment options for the recovery of intrastate non-recurring charges associated with collocation that they are currently required to offer for interstate non-recurring charges. Under the third payment scheme, an interconnector may apportion the non-recurring charges for equipment or construction dedicated to that specific interconnector if the interconnector discontinues service before the end of the useful life of these assets. Pursuant to the Commission's requirement, Bell Atlantic- NYNEX must provide the initial interconnector a pro rata refund for the undepreciated value of the assets, provided that a subsequent interconnector takes service and uses the assets or Bell Atlantic-NYNEX uses the assets. 189. The fourth payment scheme, consistent with the Commission's requirements in its Rates for Expanded Interconnection Through Physical Collocation order, requires Bell Atlantic- NYNEX to choose between three different payment options for the recovery of non-recurring charges associated with common construction costs. Each of the three payment options enable the initial interconnector to divide the common costs between itself and subsequent interconnectors, or Bell Atlantic-NYNEX. Under the first option, Bell Atlantic-NYNEX may require the initial interconnector to pay a non-recurring charge equal to the full amount of common costs that may be incurred in serving the initial interconnector and subsequent interconnectors. Subsequent interconnectors must then pay their proportionate share of the remaining undepreciated value of the common physical collocation assets and Bell Atlantic- NYNEX must refund the initial interconnector an amount reflecting what is collected from subsequent interconnectors. Under the second option, if Bell Atlantic-NYNEX requires an initial interconnector to pay for all of the common physical collocation construction through a recurring charge, Bell Atlantic-NYNEX must reduce this recurring charge when subsequent interconnectors take service and use the same assets. Finally, under the third option, Bell Atlantic-NYNEX may charge the initial interconnector a portion of the common construction costs based on a reasonable estimate of the total demand by interconnectors for physical collocation. 190. Finally, Bell Atlantic-NYNEX must provide shared transport as a network element for purchase and use in conjunction with unbundled local switching. Bell Atlantic-NYNEX is required to price shared transport based on forward-looking economic cost on a per minute of use basis. Under this shared transport requirement, Bell Atlantic-NYNEX must provide requesting carriers access to the same routing instructions as used by Bell Atlantic-NYNEX to route its own local traffic. This will ensure that traffic originated by and terminated to a purchasing carrier's end user subscriber will be routed in the same manner as Bell Atlantic-NYNEX's own traffic. Finally, Bell Atlantic-NYNEX must offer shared transport without the imposition of interstate access charges. 191. In response to multiple ex parte filings regarding this Commission's authority to enforce the Bell Atlantic and NYNEX commitments, we note that, as conditions of the license and 214 certificate transfers, these commitments will be binding upon the Applicants. Individuals may bring any violations of the conditions to our attention through, for example, the filing of complaints pursuant to Section 208 of the Communications Act or oppositions to future applications of the Bell Atlantic-NYNEX for additional radio licenses under Section 309 or for certificates of convenience and necessity under Section 214. In addition, we note that individuals may also bring suit in federal district court pursuant to Section 207 for a violation of the conditions. The Commission also remains free to investigate any possible violations on its own motion. Resulting enforcement actions may lead to sanctions, including, for example, award of damages, imposition of forfeitures, and license revocation. We find that it is not appropriate, as part of this merger review proceeding, to link the adherence of the conditions listed in Appendices C and D, or related requirements, to Bell Atlantic-NYNEX's ability to market long distance services. We conclude that issues concerning the marketing and provision of long distance services by Bell Atlantic-NYNEX are better addressed in the context of a Section 271 proceeding. 3.Benefits of the Conditions 192. As noted above, the proposed merger will remove a significant precluded competitor from local markets throughout the NYNEX region, in particular LATA 132. The Commission finds, however, that the conditions described above will, to some extent, mitigate the potential adverse competitive effects of this loss in the LATA 132 and New York metropolitan area residential and small business markets. By reducing the risk and the high sunk costs associated with entry, the conditions will increase the threat of potential entry, and the likelihood of actual entry, as a discipline to any market power exercised by Bell Atlantic- NYNEX. Competing carriers will have a better opportunity to compete, by obtaining better quality service, UNEs, and interconnection, which will assist them in developing a brand reputation in Bell Atlantic-NYNEX's local market. The Commission also finds that the loss of one of the most significant precluded competitors in the LATA 132 and New York metropolitan area is mitigated to some extent by the fact that entry barriers throughout the Bell Atlantic and NYNEX regions will be reduced as a result of the conditions. Below, we describe how each of the conditions reduce the barriers to entry. 193. As stated above, several of the conditions concern Bell Atlantic-NYNEX's OSS systems. Many competing carriers have emphasized to the Commission the importance of obtaining nondiscriminatory access to OSS functions and of establishing mechanisms to ensure that incumbent LECs comply with the Commission's nondiscrimination requirements. In this proceeding, several commenters have suggested that we impose reporting requirements on Bell Atlantic-NYNEX as a means of ensuring that it does not discriminate against its rivals. We agree that the requirement to produce performance monitoring reports will assist competing carriers in gauging whether they are receiving nondiscriminatory access to OSS functions. The performance monitoring reporting requirements established in Appendices C and D will assist in identifying discrimination in the provision of UNEs, resale, and interconnection by Bell Atlantic- NYNEX. To the extent that the reports indicate a lack of parity, the reports can serve as the basis for an appropriate complaint. As a result, it will be easier to enforce compliance with the Commission's nondiscrimination requirements. 194. Moreover, the combination of reporting requirements and negotiated performance standards subject to enforcement mechanisms will help to provide competing carriers with an enforceable means to ensure they will consistently receive nondiscriminatory access and interconnection. The Commission believes that the combination of performance monitoring reports and performance standards is helpful in two ways. First, the threat of private or self- executing remedies, such as, for example, liquidated damages or performance credits, provides Bell Atlantic-NYNEX an incentive to meet the predetermined performance standards, independent of complaints to any regulatory authority or the courts. We emphasize that the standard for negotiated enforcement mechanisms is "to ensure compliance with each standard," which may, in some cases, go beyond compensation for tangible economic harm. Second, to the extent that the access and interconnection provided by Bell Atlantic-NYNEX falls below the predetermined standards, competing carriers will be able to negotiate to receive some compensation. By reducing the potential for discrimination in the provisioning of OSS functions and by allowing competing carriers to establish performance standards, subject to enforcement mechanisms, the risk of receiving inferior access and interconnection from Bell Atlantic- NYNEX is thus reduced. As the level of risk associated with entering the market is reduced, we anticipate that competing carriers will be able to enter the local exchange market more quickly and efficiently. 195. The requirement to provide uniform interfaces on a region-wide basis will also lower entry barriers for new entrants throughout the joint Bell Atlantic and NYNEX region. The condition requiring Bell Atlantic-NYNEX to adopt industry standards promptly and on a region- wide basis will reduce the barriers to entry for competing carriers throughout the entire Bell Atlantic-NYNEX region. In the interim, we anticipate that the requirement that Bell Atlantic- NYNEX provide, within fifteen months after approval of the merger, both the GUI-based and the EDI-based interfaces or other comparable interfaces will ensure that large and small carriers can select the interface that best meets their needs. In this regard, we note that the GUI is a user-to- system electronic interface intended for smaller-scale carriers, who seek quick market entry, combined with low investment and an easy-to-use solution. By contrast, the EDI-based interfaces are often preferred by larger carriers. The grandfathering of any existing interfaces provided for in preexisting interconnection agreements ensures that competing carriers do not lose the benefits of prior agreements. The establishment of uniform interfaces will lower the barriers to entry for competing carriers on a region-wide basis. With region-wide uniform interfaces, an entrant that wants to enter more than one state will not have to test different interfaces for each state. Similarly, if a competing carrier has already entered one state and its interface becomes the region-wide standard, it will be easier for that carrier to enter elsewhere in the region. 196. Similarly, the requirement to allow new entrants to engage in carrier-to-carrier testing within forty-five days of receiving a request for such testing, as well as the requirement that Bell Atlantic-NYNEX demonstrate operational readiness of OSS capabilities to the Commission, will assist competing carriers in entering the Bell Atlantic-NYNEX local market more quickly, as well as in reducing the risks associated with such entry. Requesting carriers will now be able to assess whether the capabilities of Bell Atlantic-NYNEX's OSS are sufficient to support their entry into the local exchange market, as well as the sufficiency of the requesting carriers' own OSS. Thus, requesting carriers are likely to be better informed about their systems and their ability to order from Bell Atlantic-NYNEX before entering the local market, which increases the potential for successful entry. Moreover, the uniform interface requirement, in conjunction with the testing requirement, will enable a competing carrier to assess Bell Atlantic- NYNEX's OSS functions on a region-wide basis, rather than being required to test these systems on a separate state-by-state basis. 197. The required payment options for compensation of non-recurring costs are also likely to facilitate entry by competing carriers. The payment option allowing competing carriers who enter as resellers, or with UNEs and/or interconnection, to pay non-recurring costs on a recurring basis, thereby lowers the cost of entry and reduces the risk associated with entry and expansion. We expect that the effect of initially reducing the sunk cost of winning a customer will provide a greater incentive to competing carriers to enter the local market. This pricing structure is expected to increase the threat of potential entry and expansion if the firms in the market engage in coordinated anticompetitive behavior. Moreover, the installment payment option for collocation eases capital requirements for switch deployment by carriers. This encouragement of entry by firms compensates somewhat for the loss of a significant market participant. 198. We anticipate that the shared transport requirement will help make entry on both a large and small scale more economically feasible. As the Commission noted in the Local Competition Order, by unbundling various dedicated and shared interoffice facilities, a new entrant can purchase all interoffice facilities on an unbundled basis as part of a competing local network, or it can combine its own interoffice facilities with those of the incumbent LEC. The opportunity to purchase unbundled interoffice facilities will make the cost of entry much lower than the cost that an entrant would incur if it had to construct all of its own facilities. An efficient new entrant might not be able to compete if it were required to build interoffice facilities when it would be more efficient to use the incumbent LEC's facilities. 199. We believe that access to transport facilities on a shared basis is particularly important for stimulating initial competitive entry into the local exchange market, because new entrants have not yet had an opportunity to determine traffic volumes and routing patterns. Moreover, requiring competing carriers to use dedicated transport facilities during the initial stages of competition would create a significant barrier to entry because dedicated transport is not economically feasible at low penetration rates. We note that incumbent LECs have significant economies of scope, scale, and density in providing transport facilities. Requiring transport facilities to be made available on a shared basis will assure that such economies are passed on to competing carriers. Further, if new entrants were forced to rely on dedicated transport facilities, even at the earliest stages of competitive entry, they would almost inevitably miscalculate the capacity or routing patterns. Therefore, we anticipate that Bell Atlantic- NYNEX's commitment to provide shared transport will further the entry of competing carriers by allowing additional entry opportunities. 200. Finally, the forward-looking costs requirement allows competing carriers to make investment and pricing decisions based on a cost structure that more accurately reflects the true economic cost of the facilities and services obtained from Bell Atlantic-NYNEX, and permits competing carriers to share the economies of scale and scope the incumbent LEC enjoys by virtue of its historic position as a monopolist. We note that the combination of forward-looking costs and the various payment options for the non-recurring charges allows the competing carrier to amortize a lower cost over time. We also anticipate that the forward-looking cost requirement will encourage efficient competitive entry and lead competitors to exert downward pressure on prices. The provisioning of UNEs at prices based on forward-looking costs is crucial for the development of local competition. Requiring Bell Atlantic-NYNEX to set prices based on forward-looking costs will create an environment in which competitors may enter on an effective basis and drive prices down toward forward-looking costs. 4.Other Proposed Conditions 201. Many parties have suggested other conditions, which we do not impose as conditions of our approval of the proposed merger. Some of these proposals are not related to the potentially harmful effects of the merger that we have identified. Others would merely serve to delay the merger. Other proposed conditions we have adopted in some form. We discuss all these conditions below. 202. Requiring Bell Atlantic and NYNEX to Meet the Section 271 Checklist Prior to Consummation of the Merger. Several commenters propose that we require the applicants to meet the checklist of Section 271(c)(2)(B) of the Communications Act in each state of their "home" regions as a precondition to our approval of the proposed merger. TCG argues that this procedure will provide at least some assurance that the vertical expansion of the Bell Atlantic and NYNEX operations would not produce anticompetitive effects in local exchange markets as the combined entity enters the interLATA market. AT&T proposes that there should be demonstrated competition throughout the combined region before Applicants may apply for in-region interLATA relief pursuant to Section 271 in any one state. 203. We believe that the expeditious fulfillment by the Bell Companies of the competitive checklist set forth in Section 271(c)(2)(B) would certainly be in the public interest. We also believe, however, that the Section 271 requirement that the competitive checklist be fully implemented prior to this Commission's approval of any request by the Bell Companies for authorization to provide in-region, interLATA services provides a strong incentive for Bell Companies to promptly implement the checklist. We do not believe that requiring the parties to delay consummation of the merger pending implementation of the checklist would further materially expedite full checklist implementation. We also note that merely delaying consummation of the merger does not serve to mitigate any potential harmful effects on competition, as it is unlikely that, during the period prior to consummation, Bell Atlantic would act as an independent entrant in the relevant markets. Moreover, the determination of whether the proposed merger is in the public interest has no bearing on the question of whether authorization of Bell Atlantic-NYNEX to provide in-region interLATA services would be consistent with the public interest, convenience, and necessity. 204. Separate Subsidiaries and Nondiscrimination Safeguards. Cablevision proposes that the Commission establish structural safeguards that would require Bell Atlantic-NYNEX to provide non-regulated or "lightly regulated" services through a separate subsidiary. In addition to its proposed structural separation requirements, Cablevision urges the Commission to impose certain nondiscrimination safeguards that would control such conduct as Bell Atlantic-NYNEX's providing exclusive referrals to its non-regulated subsidiaries. Cablevision is also concerned that Bell Atlantic-NYNEX will have sufficient purchasing power to influence industry hardware and software standards. Cablevision proposes that Bell Atlantic-NYNEX be precluded from purchasing these goods unless it can show that the same terms are available to a competitor. Finally, Cablevision proposes that we adopt rules similar to those the Commission adopted to implement Section 616 of the Communications Act, which prohibits multichannel video programming distributors (MVPDs) from imposing unfair conditions, such as the forced sale of an interest in the programming to the MVPD, as a condition of carriage. 205. We find that it is unnecessary, in the context of this merger review proceeding, to require Bell Atlantic-NYNEX to establish a separate subsidiary for its "lightly regulated" or non- regulated activities. We note that several of the applicants' non-regulated or lightly regulated businesses, such as cellular, electronic publishing, and video services, are already subject to regulatory and/or statutory separation requirements. 206. We have attempted to address the other nondiscrimination concerns raised by parties through the conditions relating to reporting requirements, performance standards, and private or self-executing enforcement mechanisms. These conditions are sufficient for us to find the transaction to be in the public interest. Therefore, we decline to go further and impose additional separation or nondiscrimination conditions in this case. By adopting these conditions we do not, however, foreclose this Commission or state commissions from imposing additional requirements through other proceedings, should such requirements be necessary or appropriate. 207. Requiring the Pass-Through of Cost Savings to Telephone Users. CPI would have us require Bell Atlantic-NYNEX to pass through to consumers any benefits that it realizes from operating efficiencies. CPI proposes that we achieve this by requiring rate reductions that reflect cost savings. It acknowledges that such rate reductions would require a change in regulatory regime, because current price cap regulations employed by the Commission and most states do not require rates to fall when carriers reduce their costs. We decline to force the pass-through of efficiencies through regulation rather than by creating competitive market conditions. The conditions proffered by Bell Atlantic and NYNEX, which we make conditions of the grant of the applications, will help foster a competitive environment that will ultimately yield consumer benefits. Moreover, mandating pass-through of all claimed efficiencies would undermine the incentives our price cap rules create for carriers to become more efficient. 208. Establishment of Reporting Requirements. Multiple commenters suggest that we impose reporting requirements on Bell Atlantic-NYNEX as a means of ensuring that it does not discriminate against its rivals. After the filing of the Bell Atlantic-NYNEX commitments letter, the Commission received several ex partes regarding, among other things, Bell Atlantic- NYNEX's commitments to provide performance monitoring reports. TCG asserts that the companies appear to disconnect the performance monitoring reports from the Section 251(c)(2)(C) and (c)(3) requirements to provide parity of performance and quality by stating that these measures can not be used "for any other purpose." We disagree with this reading of the proposed commitments. The performance monitoring reports are designed to facilitate detection of discrimination. TCG also argues that without enforcement mechanisms, reporting requirements are "meaningless." We agree, and, therefore, Bell Atlantic-NYNEX is required to negotiate performance standards and enforcement mechanisms under the conditions we impose. TCG states that the performance measurement data should be provided now, not ninety days after approval, because the obligation to provide performance parity exists now. While we encourage Bell Atlantic-NYNEX to begin making such reports available as soon as possible, it is reasonable to allow some period for implementation of this requirement, with an outer limit of ninety days. 209. Both AT&T and LCI state that Bell Atlantic and NYNEX should commit to provide performance reports on a monthly basis, not quarterly, so that deficiencies can be promptly identified and cured. We note that the conditions provide for monthly tabulation with quarterly publication. Nothing precludes AT&T from seeking in negotiation to obtain reports on a monthly basis. Nor are state commissions, or this Commission, precluded from requiring more frequent or more detailed reporting in the context of other proceedings. AT&T asserts that Bell Atlantic-NYNEX should commit to retain raw data for at least two years to allow audits of its reports and performance. Because it is not clear whether this is feasible, given the state of Bell Atlantic's and NYNEX's information systems, we decline to adopt AT&T's proposed modification at this time. 210. Both AT&T and LCI seek modifications to the Bell Atlantic-NYNEX performance measurements. AT&T states that Bell Atlantic-NYNEX should supply (and provide support for) measurement objectives. LCI asserts that all of the measurement categories listed in its initial comments to its Petition for Expedited Rulemaking should be included as part of the Bell Atlantic and NYNEX commitments. AT&T and LCI assert that Bell Atlantic and NYNEX should provide measurement formulas (including any sampling techniques) for each function that will be measured, to assure that the data provided reflect an accurate assessment of its performance. According to LCI, it has set forth in its initial comments to its Petition for Expedited Rulemaking the minimum measurement formulas that it believes should be adopted for each of the associated measurement categories. LCI also states that Bell Atlantic and NYNEX fail to address how measurement categories and measurement formulas would be modified periodically to reflect changes in their own systems and the market to ensure parity is maintained. We will address AT&T's and LCI's concerns more fully in the context of proceedings related to LCI's Petition for Rulemaking. The conditions imposed in this order will provide some base of experience that may be useful to this Commission or state commissions, as the Commission further considers these issues. Because we lack the record here to determine whether all of the performance measurement categories are technically feasible, we decline to specify additional measures at this time based on this record. Similarly, we conclude that the issue of evolving measurement categories and formulas is better addressed in the context of the LCI proceeding, which focuses on performance measurement and reporting. 211. CFA would require Bell Atlantic-NYNEX to provide the Commission detailed periodic reports on the cost savings to telephone users in the Bell Atlantic-NYNEX service areas. It would also require the merged company to report to the Commission prior to making passive and non-passive investments in, or other equity or ownership agreements with, any entity engaged in providing program content over electronic mass media. 212. For the reasons stated above, we decline to adopt CFA's proposal that we monitor any cost savings that Bell Atlantic-NYNEX will achieve. Also, given the limited involvement of Bell Atlantic and NYNEX now in the business of program content, we detect no prospect that the proposed merger will confer market power on them in that business. We therefore find no need to monitor their expansion in that business. 213. Establishment of Specific Performance Standards in Conjunction with Enforcement Mechanisms. LCI and TCG ask that we establish specific performance standards. TCG and MCI request that we also impose substantial performance penalties if Bell Atlantic-NYNEX fails to meet certain performance levels. In particular, LCI states that Bell Atlantic and NYNEX should establish default performance intervals. According to LCI, default performance intervals are required in instances in which: 1) Bell Atlantic-NYNEX lacks the historical data to establish performance intervals; or 2) Bell Atlantic-NYNEX simply fails to disclose its own performance intervals. According to LCI, the reliance on good faith negotiations for the establishment of performance standards is inappropriate. LCI claims that under this approach it will be harder for a smaller carrier, with less bargaining power, to obtain the same terms as can be obtained by a larger carrier. LCI claims that the parity mandated by the Commission's Local Competition Order cannot be achieved through negotiations. 214. TCG urges the Commission to require Bell Atlantic and NYNEX each to demonstrate that their pre-merger performance satisfies the requirements of Sections 251(c)(2)(C) and (c)(3). Moreover, TCG asserts that the Commission should require the merged entity to automatically pay substantial monetary compensation to competing carriers for any quarterly performance that falls below pre-merger levels. In addition to monetary penalties, TCG argues that the Commission should retain the authority to impose additional structural safeguards upon the merged entity, including an unwinding of the merger, for chronic and substantial inability to meet pre-merger performance levels. 215. With respect to performance standards, we note that Applicants must negotiate appropriate performance standards and enforcement mechanisms, including private and self- executing remedies. We decline to establish specific performance intervals, because we lack the data on this record to determine appropriate intervals for performance. We are separately considering this issue in other proceedings. We also decline to establish specific enforcement levels because it is difficult to do so without determining appropriate performance standards or determining whether meeting a particular standard requires actions by both parties. We will consider these issues further in other proceedings. TCG's request that we expressly retain authority to "unwind" the merger is unnecessary in light of our decision to impose the proposed commitments as conditions of the transfer of licenses. Any failure to abide by the conditions is grounds for appropriate enforcement, including, where appropriate, revocation of the license transfer authorizations. 216. Compliance with the Commission's Local Competition Requirements. Two parties request that we condition the merger on compliance with various aspects of our Local Competition rules. Cablevision proposes that we condition the merger on each Applicant's entering into one or more binding agreements that have been approved under Section 252. AT&T asserts that applicants should be required, before consummation of the merger, to comply in each of their states with the requirements of Sections 251 and 252, as interpreted by the Commission in the First Report and Order and Second Report and Order in Docket No. 96-98. Specifically, AT&T notes that these requirements include comprehensive unbundling of network elements, TELRIC-based pricing, unrestricted resale at appropriate wholesale rates, and fully tested OSS that have been demonstrated to support local exchange systems (including multiple competing carriers and significant churn). The conditions we adopt today, however, should help to ensure that the Applicants provide requesting carriers with interconnection, collocation, UNEs, and transport and termination on just reasonable and nondiscriminatory rates, terms, and conditions, and that services are available for resale without unreasonable or discriminatory conditions, which is consistent with the Section 251(c) requirements. We conclude that the concerns raised by AT&T and Cablevision regarding adherence to our rules should be addressed by the conditions imposed by this order. 217. Access Charge Reform. AT&T argues that the Commission should require Applicants, prior to applying for authorization to offer any in-region long distance service now prohibited by Section 271, to demonstrate that for all states in their combined region they provide access service to competitors at direct economic cost based on total service long-run incremental cost. In addition, AT&T asserts that the Commission should require the Applicants to file and maintain uniform interstate access rates (all rate elements and charges) for all states in the merged region to reduce the potential competitive distortions arising from strategic pricing. AT&T also argues that the Commission should require Bell Atlantic and NYNEX to establish terminating switched access rates at zero for all calls to reduce the opportunity for unfair price squeeze. 218. Each of these proposals appears to be designed to prevent a "price squeeze" as discussed by AT&T and MCI. We decline to adopt these conditions for the same reasons, including the condition of offering interconnection, UNEs, and transport and termination at forward-looking costs, described in part IV.D. above, in which we found the allegations of potential "price squeeze" unpersuasive on this record and in light of the conditions we impose. We also do not believe that it is appropriate here to impose conditions on the filing of a request for Section 271 authorization, rather than evaluating such concerns as part of Section 271 proceeding. 219. Billing and Collection. According to MCI, "numerous [Bell Companies]," including NYNEX and Bell Atlantic, have been misrepresenting to MCI's customers that its billing and collections agreements with these companies are either invalid or near expiration. According to MCI, the Bell Companies are also representing that the customer may have difficulty obtaining one bill in the future, and that to avoid any such difficulties the customer should switch to the Bell Company for long distance service. MCI states that Bell Atlantic and NYNEX should commit to continue "Casual Billing Services" indefinitely and extend current contracts through the year 2000. MCI also states that the Commission should require Invoice Ready billing and collection under reasonable terms after the expiration of the current terms through the year 2000. In addition, MCI states that the Commission should require Bell Atlantic and NYNEX to adhere to the provisions proposed in its Casual Billing petition. Moreover, MCI states that the Commission should require Bell Atlantic and NYNEX to refrain from engaging in any deceptive practices and making misrepresentations to consumers regarding MCI's and any other entity's ability to provide "all in one" billing. 220. The Commission declines to impose these conditions as conditions of the approval of the merger. It is not clear in this regard how the proposed conditions would remedy the potential harms to competition that result from the merger, or how the proposed conditions would speed entry by smaller carriers. Moreover, as MCI notes, however, there is currently a petition pending before the Commission that seeks to address some of these issues. We will examine MCI's billing and collection concerns further in that proceeding. In addition, we note that to the extent that any Bell Companies are in fact marketing long distance services to their customers, by suggesting the customers should switch carriers to avoid future billing problems, Section 272(g)(2) of the Communications Act bars a Bell Company from marketing its affiliate's in-region interLATA service prior to receiving Section 271 authorization. 221. Primary Interexchange Carrier (PIC) Freeze. MCI expresses concern about an "increasing number of sales rejections of its long distance changeover or PIC requests by NYNEX." MCI states that Bell Atlantic and NYNEX should agree to comply with the requirements set out in MCI's recent petition for rulemaking for PIC freeze and carrier restrictions as a condition of merger approval. MCI also urges the Commission to incorporate the additional requirements suggested by AT&T in its comments supporting MCI's rulemaking petition. We lack here a sufficient record to conclude whether such a requirement would be in the public interest. Accordingly, we conclude that the PIC freeze concerns identified by MCI should be addressed in the context of reviewing MCI's petition for rulemaking. 222. Operational Support Systems. Cablevision asserts that the Commission should impose certain requirements on Bell Atlantic-NYNEX with respect to its OSS. According to Cablevision, Bell Atlantic-NYNEX's carrier to carrier support and provisioning systems must be operational, capable of handling the generated traffic volumes, and of equal quality as that provided to itself, consistent with any state and federal requirements. In addition, Cablevision states that Bell Atlantic-NYNEX must maintain adequate personnel and capital to meet the requirements of the Communications Act, including the provisioning of services and all interfaces necessary for the seamless and timely transfer of customers to competitors. Finally, Cablevision states that intercarrier service standards must be in place with relevant penalties that include liquidated damages for nonperformance. 223. MCI expresses concern about recent statements suggesting that Bell Atlantic's or NYNEX's OSS and related business processes, currently being discussed with MCI, are subject to change following a merger between Bell Atlantic and NYNEX. According to MCI, the Commission should require Bell Atlantic and NYNEX to state, by a specific date, any changes expected to either Bell Atlantic's or NYNEX's business processes affecting competing carriers' provision of local service, or affecting interexchange service, as related to system access, functionality, or performance. MCI states that competing carriers and interexchange carriers should then be given an opportunity to comment on any such proposed changes prior to Commission action on the merger. 224. We note that many of the issues raised by Cablevision are addressed by the conditions we have imposed on Bell Atlantic and NYNEX in this order. The requirement to produce evidence of operational readiness within six months of the Commission's approval of this merger should address Cablevision's concern about Bell Atlantic-NYNEX's OSS not being operational and about Bell Atlantic-NYNEX not maintaining adequate personnel and capital to ensure that its OSS is functional. Cablevision's request for intercarrier service standards, along with relevant penalties, is addressed by the requirement that Bell Atlantic-NYNEX engage in good faith negotiations with requesting carriers to establish performance standards in conjunction with appropriate enforcement mechanisms for nonperformance. 225. We find that it is unnecessary to delay this merger by requiring Bell Atlantic and NYNEX to provide us with information about impending changes to OSS systems and then allowing individuals to comment on such changes. In fact, we find that granting MCI's request at this time would delay the pro-competitive benefits to be derived from the establishment of uniform interfaces throughout the Bell Atlantic-NYNEX region. 226. Minority Business Contracts. O.P.G. Industries has requested the Commission to seek from Bell Atlantic and NYNEX a commitment to allocate to small and minority businesses ten to twenty percent of contracts for supplies and services. We conclude that our review of the Bell Atlantic and NYNEX merger, which is focused on the loss of a precluded competitor in LATA 132, is not the appropriate forum for determining whether Bell Atlantic-NYNEX as a merged entity should allocate a certain portion of its contracts to small and minority businesses. 227. Timing of Bell Atlantic-NYNEX Commitments. AT&T states that each commitment should be accompanied by a firm date by which Bell Atlantic-NYNEX will be in compliance. According to AT&T, most if not all of these commitment dates should be no later than the closing date of the merger. 228. In response to AT&T's request that each Bell Atlantic-NYNEX commitment should be accompanied by a date certain by which Bell Atlantic-NYNEX will be in compliance, we note that most of the commitments are accompanied by fixed compliance dates. For example, we note that Bell Atlantic-NYNEX must comply with the performance monitoring reports requirement, the uniform interfaces requirement, and the testing requirement within specified time periods following the Commission's approval of the merger. Those conditions that are not subject to a date certain are those which cover terms that Bell Atlantic-NYNEX must make available to competing carriers upon request, beginning immediately after the Commission's approval of the merger. Moreover, we note that individuals may file Section 208 complaints with the Commission if Bell Atlantic-NYNEX does not meet any of the deadlines specified in the commitments letter. Therefore, we decline to require Bell Atlantic and NYNEX to implement all of the conditions prior to the approval of this merger. 229. Combinations of Network Elements. According to AT&T, Bell Atlantic-NYNEX should commit to provide the combination of loop, switch, transport (shared and/or dedicated), signaling and OSS (with or without Operator Systems) (i.e, the "Platform") at rates based on forward-looking economic costs. Alternatively, AT&T states that Bell Atlantic-NYNEX should commit to immediately reduce access charges to levels based on Total Element Long Run Incremental Cost. AT&T also states that Bell Atlantic-NYNEX should commit to provide all other combinations of network elements requested by telecommunications carriers, unless Bell Atlantic-NYNEX can prove that the requested combination is not technically feasible. In addition, AT&T states that Bell Atlantic-NYNEX should commit to abide by Section 51.315 of the Commission's rules concerning the combination of UNEs, notwithstanding the Eighth Circuit's decision in Iowa Utilities Board v. FCC. Finally, AT&T states that Bell Atlantic- NYNEX should commit to comply with industry guidelines and procedures for ordering combinations of UNEs, including the Platform. 230. With respect to AT&T's concerns about pricing, we note that, pursuant to the conditions listed in Appendix C, Bell Atlantic-NYNEX must offer all carriers rates for UNEs, including shared transport, based on forward-looking economic costs. With respect to AT&T's assertions regarding the combination of network elements and requiring Bell Atlantic-NYNEX to adhere to Section 51.315 of the Commission's rules, irrespective of the Eighth Circuit's decision, we note that the Eighth Circuit upheld our rule prohibiting an incumbent LEC from separating network elements that the incumbent LEC currently combines. The Commission will continue to examine the effects of the Eighth Circuit's decision on the use of combinations of UNEs where the competing carrier seeks to activate additional features or capabilities that are already present in the incumbent LEC network. As to industry guidelines and procedures for ordering UNEs, we note that these are a critical part of establishing and operating reliable OSS interfaces. 231. Sunset. LCI expresses concern about the expiration of the commitments forty-eight months after the Commission's approval of the merger. Similarly, TCG requests that the Commission require Bell Atlantic-NYNEX to provide periodic performance and quality reports for five years. Cablevision asserts that the Commission should, prior to the expiration of the conditions, conduct a review of their impact on competitive entry. 232. We conclude that a sunset date is appropriate in the context of the approval of this merger, because our concern here is to accelerate the development of competition that may substitute for the loss of Bell Atlantic as a market participant and as an offset to potential harm to competition and the public interest. Under the circumstances, given the number of market participants in the relevant markets, we believe that four years is likely to be sufficient time for the conditions to have had the bulk of the pro-competitive effects that we are balancing against potential harms to competition. We note that this determination is based on the record presented in the context of this merger review proceeding. A different record could, however, compel a different result. VI. MISCELLANEOUS A. Procedural Matters 233. Applicants requested that pursuant to Section 212 of the Communications Act and Section 62.12 of the Commission's rules, the Commission find and declare that, upon consummation of the amended Agreement, (1) Bell Atlantic will own more than 50 percent of the voting stock of NYNEX and (2) Bell Atlantic, NYNEX, and their respective subsidiaries will there be deemed to be "commonly owned carriers" as that term is defined in Section 62.2 of the Commission's Rules. Applicants state that the merger contemplates that, as a result of the combination of the companies, Bell Atlantic will hold all of the stock of NYNEX, and that this satisfies the requirement of Section 62.12 that the applicants be commonly owned as a result of the transaction. Because this request is reasonable and unopposed, we grant the request and make the requested finding and declaration. 234. The Applicants make additional procedural requests that are reasonable and unopposed. Accordingly, we grant them. First, pursuant to section 21.39 of our Rules, we find that the transfer of authorized but unconstructed microwave facilities that are controlled by NYNEX does not implicate the Commission's anti-trafficking restrictions. Second, pursuant to sections 1.2111 and 24.839 of our Rules, we find that no trafficking or unjust enrichment is involved in the transfer of control of licenses for facilities in the Personal Communications Services which were obtained through competitive bidding in the last three years. Finally, pursuant to sections 21.23(c)(6), 22.123(a), 24.823(g)(3), and 25.116(b)(3) of our Rules, we grant applicants a blanket exemption from any applicable cut-off rules which would otherwise apply to subsidiaries or affiliates filing amendments to pending Part 21, 22, 24, or 25 applications or other applications to reflect the consummation of the proposed transfer of control. B. Basic Qualifications 235. Comcast and AT&T each raise issues concerning Bell Atlantic's character. Comcast asserts that Bell Atlantic and NYNEX have engaged in anti-competitive conduct in connection with their joint wireless operations, and that Bell Atlantic has not provided truly reciprocal compensation to cellular interconnectors. AT&T contends that the confidential documents demonstrate Bell Atlantic's inconsistencies on central issues in this proceeding and that the inconsistencies warrant an investigation of Bell Atlantic's character. 236. We are not persuaded by Comcast's arguments. The relevant Commission policy statements indicate that in deciding character issues, the Commission will consider adjudicated non-FCC misconduct that includes: (a) all felonies, (b) fraudulent representations to governmental units, and (c) violations of antitrust or other laws protecting competition. The acts alleged by Comcast, whether by Bell Atlantic or NYNEX of their cellular or other operations, do not fit any of these three categories. 237. Comcast refers to allegations of anti-competitive conduct previously raised in its comments in the proceeding involving the BAMS-NYNEX Mobile merger and raised again on appeal of that decision. Comcast alleges that Bell Atlantic and/or BAMS, individually or in concert; 1) restricted competitors' access to certain databases; 2) prevented Comcast from advertising at Veteran's Stadium in Philadelphia by threatening to terminate its own advertising if stadium officials allowed Comcast to advertise; 3) forced Comcast to temporarily "turn-off" its cell site at the Philadelphia Spectrum; and 4) discriminated against Comcast by providing only very short notice to participate in a personal numbering trial. 238. Each of these allegations, insofar as they pertain to Bell Atlantic's cellular operations, has been previously reviewed and adjudicated by the Wireless Telecommunications Bureau. The Bureau found that Comcast, aside from not fitting the alleged misconduct into any of the three criteria stated above, had neither alleged nor shown that the acts were likely to occur more often or to be more severe as a result of the proposed cellular merger than they were before. We find that the Bureau's analysis fits Comcast's allegations in this proposed merger of Bell Atlantic and NYNEX. Insofar as the acts alleged by Comcast involve Bell Atlantic and NYNEX, none of them is a felony, a fraudulent representation to a governmental unit, or a violation of an antitrust or other law protecting competition. Nor is there any showing that the merger proposed here will make such alleged acts more frequent or harmful than they were before. Accordingly, the conduct alleged by Comcast has no relationship to the proposed merger of applicants and will not influence our analysis of its competitive effects or its acceptability under the public interest standard. 239. We are also not persuaded by AT&T's allegations that a substantial and material question of fact exists as to whether Bell Atlantic has breached its duty of candor or engaged in misrepresentation. In its application, Bell Atlantic attempted to show that this merger is not barred by the "actual potential competition" doctrine, under which a relevant factor is the likelihood that Bell Atlantic would enter NYNEX's local service market. Bell Atlantic supported its assertions with a declaration by its Vice Chairman, James G. Cullen, stating, "Bell Atlantic has not at any time had plans to enter NYNEX's local service markets." In addition, Bell Atlantic has stated in pleadings filed in this proceeding that "applicants had no company plans" to compete with NYNEX in local service. In pleadings and submissions filed under seal, the Applicants repeat similar statements. AT&T asserts that such statements appear to be inconsistent with the activities reflected in Bell Atlantic's documents, which, according to AT&T and our findings, demonstrate considerable internal planning for and analysis of the advantages of entry into NYNEX's market. 240. Bell Atlantic responds that AT&T's candor allegations are based on mischaracterizing as company "decisions" or "plans" what were merely business case studies or explorations of possibilities by middle management or outside consultants. According to Bell Atlantic, it is appropriate to distinguish between "the plans of a company," with resource commitments behind them, and more tentative activities. 241. We agree with Bell Atlantic that it significantly qualified its representations that it had no "plans" to enter NYNEX's market. Thus, its application recites: Any "[i]nternal plans that have not been approved at [the governing levels of corporate management] cannot be relied upon, regardless of how enthusiastically they promote independent entry, because they cannot be categorized as the concrete plans of the corporation itself." (Citation omitted) . . . . Here, quite simply, there are no such company-adopted plans for . . . Bell Atlantic . . . to enter [NYNEX's] local service market . . . . Similarly, the Cullen declaration states, after acknowledging that Bell Atlantic staff studied the economics of entering the New York market on two occasions: Neither of these studies matured into actual company-adopted plans for entry. Thus, Bell Atlantic has never been an "actual" potential competitor to NYNEX's local exchange and exchange-access business. 242. As discussed above, although we disagree with Bell Atlantic's assertions that no relevant plans existed, we agree that the case law has not been consistent as to the types of plans that are probative. This does not imply that we believe Bell Atlantic lacked candor. As the Commission reiterated in Fox Television Stations, Inc., an intent to deceive is an essential element of a violation of the duty of candor. In its application, Bell Atlantic explicitly described both the criteria it had used to evaluate whether relevant plans existed and its interpretation of the case law regarding such criteria. In view of the foregoing, the record does not suggest that Bell Atlantic's narrow interpretation of the word "plan" was offered with an intent to deceive. These factors persuade us that Bell Atlantic simply advocated in good faith a position that its exploratory efforts did not have significance with respect to the proposed merger. In this regard, we also note that the Commission has reviewed Hart-Scott-Rodino documents in the past in connection with proposed mergers. Therefore, Bell Atlantic had every reason to expect that the Commission would take into account the various studies that were made, some of which were expressly mentioned in Bell Atlantic's application. Thus, there is no indication that Bell Atlantic attempted to conceal relevant information from the Commission or the parties. 243. Accordingly, we find no substantial and material questions of fact suggesting lack of candor or misrepresentation by Bell Atlantic. We note, however, that Bell Atlantic's narrow use of the term "plan" has caused unnecessary confusion, and we counsel Bell Atlantic and others to use the term "plan" in accordance with our discussion above. Future applicants now are on notice of both the significance of entry plans, and our definition of such plans. We also note, as we did in the Fox Broadcasting case, that we expect absolute candor from our licenses, particularly when the precise material fact about which a candor issue is raised is one upon which the Commission may rely and base its ultimate decision. Our analysis of Bell Atlantic's application would have been greatly assisted by a fuller description of its actual plans, even if Bell Atlantic believed those plans were irrelevant. Nevertheless, as discussed above, the evidence here does not raise a substantial and material question of fact warranting designation for hearing. 244. Finally, we note that Diana J. and Thomas Lutz propose that we withhold approval of the merger until all outstanding NYNEX labor grievances have been resolved. They state that Mrs. Lutz was driven from her job with NYNEX by the actions of a NYNEX supervisor, and that neither NYNEX nor the Communications Workers of America, her union, has adequately addressed her grievances. None of these allegations involve the kinds on non-FCC misconduct deemed relevant to an applicant's character qualifications, let alone an adjudication of such misconduct. 245. None of the parties contends that Bell Atlantic lacks the citizenship, financial, and technical qualifications to provide service consistent with the public convenience and necessity. Given the company's long history and broad experience in communications, we have no reason to conclude otherwise, and find that Bell Atlantic satisfies the necessary citizenship, financial, and technical qualifications. VII. ORDERING CLAUSES 246. Accordingly, having reviewed the applications and the record in this matter, IT IS ORDERED, pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the applications filed by Bell Atlantic Corporation and NYNEX Corporation in the above-captioned proceeding ARE GRANTED subject to the conditions stated below. 247. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the above grant shall include authority for Bell Atlantic to acquire control of: a) any authorization issued to NYNEX's subsidiaries and affiliates during the Commission's consideration of the transfer of control applications and the period required for consummation of the transaction following approval; b) construction permits held by licensees involved in this transfer that mature into licenses after closing and that may have been omitted from the transfer of control applications; and c) applications that will have been filed by such licensees and that are pending at the time of consummation of the proposed transfer of control. 248. IT IS FURTHER ORDERED that as a condition of this grant Bell Atlantic and NYNEX shall comply with the conditions set forth in Appendices C and D of this Order. 249. IT IS FURTHER ORDERED that all references to Bell Atlantic and NYNEX in this Order shall also refer to their respective officers, directors and employees, as well as to any affiliated companies, and their officers, directors and employees. 250. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition of AT&T Corp. to Deny or, in the Alternative, to Defer Pending Further Investigation and Briefing" IS DENIED IN PART AND GRANTED IN PART. 251. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition to Deny of Cablevision Systems Corp." IS DENIED IN PART AND GRANTED IN PART. 252. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition to Impose Conditions" of the Competition Policy Institute IS DENIED IN PART AND GRANTED IN PART. 253. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition to Deny" of the Consumer Federation of America IS DENIED. 254. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition to Deny" of Teleport Communications Group Inc. IS DENIED IN PART AND GRANTED IN PART. 255. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 214(a), 214(c), 309, 310(d), that the "Petition to Deny" of Thomas L. and Diana J. Lutz IS DENIED. 256. IT IS FURTHER ORDERED that this Memorandum Opinion and Order SHALL BE EFFECTIVE upon release in accordance with 47 C.F.R.  1.103. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A Comments Comcast Cellular Communications, Inc., filed September 23, 1996 MCI, filed September 24, 1996 Petitions to Deny AT&T, filed September 23, 1996 Cablevision Systems Corporation, filed September 23, 1996 Consumer Federation of America, filed September 23, 1996 Thomas L. and Diana J. Lutz, filed September 23, 1996 Teleport Communications Group Inc., filed September 23, 1996 Petitions to Impose Conditions Competition Policy Institute, filed September 23, 1996 Opposition to Petitions to Deny and Reply to Comments Dr. Barbara O'Connor, filed October 23, 1996 United Homeowners Association, et al., filed October 23, 1996 Joint Opposition to Petitions to Deny and Reply to Comments Bell Atlantic and NYNEX, filed October 24, 1996 Supplemental Comments AT&T, filed December 26, 1996 (filed under seal) AT&T, filed February 25, 1997 (filed under seal) AT&T, filed March 4, 1997 (filed for public record; redacted version of December 26 comments) AT&T, filed March 24, 1997 (filed for public record; redacted version of February 25 comments) MCI, filed December 26, 1996 (filed under seal) MCI, filed December 26, 1996 (redacted version filed for public record) MCI, filed February 25, 1997 (filed under seal) MCI, filed February 25, 1997 (redacted version filed for public record) MCI, filed June 19, 1997 (filed under seal with a separate redacted version filed for the public record) Supplemental Replies to Comments Bell Atlantic and NYNEX, filed January 3, 1997 (filed under seal; response to AT&T and MCI comments filed December 26, 1996) Bell Atlantic and NYNEX, filed February 27, 1997 (filed under seal; response to AT&T and MCI comments filed February 25, 1997) Bell Atlantic and NYNEX, filed March 6, 1997 (filed for public record; redacted version of January 3 reply) Bell Atlantic and NYNEX, filed March 6, 1997 (filed for public record; redacted version of February 27 reply) Bell Atlantic and NYNEX, filed June 23, 1997 (both confidential and redacted versions) Ex Parte Filings Bell Atlantic and NYNEX, filed November 18, 1996 NYNEX, filed June 17, 1997 (filed for public record) City of Buffalo, rec'd June 17, 1997 (filed for public record) Bell Atlantic, filed June 18, 1997 (Confidential) Bell Atlantic, filed June 20, 1997 (Confidential) NYNEX, filed June 20, 1997 (filed for public record) Cablevision Industries, filed June 20, 1997 (filed for public record) Competition Policy Institute, filed June 20, 1997 (filed for public record) NYNEX, filed June 23, 1997 (filed for public record) WorldCom, filed June 23, 1997 (filed for public record) Association for Local Telecommunications Services, filed June 24, 1997 (filed for public record) Competition Policy Institute, filed June 25, 1997 (filed for public record) Bell Atlantic, filed June 25, 1997 (Confidential) Bell Atlantic, filed June 26, 1997 (Confidential) Bell Atlantic, filed June 26, 1997 (Confidential) Bell Atlantic, filed June 26, 1997 (filed for public record) MCI, filed June 26, 1997 (filed for public record) AT&T, filed June 26, 1997 (filed for public record) Bell Atlantic, filed June 27, 1997 (filed for public record) Bell Atlantic, filed June 27, 1997 (filed for public record) Bell Atlantic, filed June 27, 1997 (filed for public record) Bell Atlantic, filed June 27, 1997 (filed for public record) Bell Atlantic, filed June 27, 1997 (correction, filed for public record) NYNEX, filed June 30, 1997 (filed for public record) Bell Atlantic, filed June 30, 1997 (Confidential) Bell Atlantic, filed June 30, 1997 (filed for public record) MCI, filed June 30, 1997 (filed for public record) NYNEX/Bell Atlantic (Joint), filed July 1, 1997, (filed for public record) MCI, filed July 1, 1997, (filed for public record) MCI, filed July 2, 1997, (filed for public record) MCI, filed July 2, 1997, (filed for public record) NYNEX, filed July 3, 1997, (filed for public record) Bell Atlantic, filed July 3, 1997, (filed for public record) MCI, filed July 7, 1997, (filed for public record) MCI, filed July 7, 1997, (filed for public record) Bell Atlantic, filed July 7, 1997, (filed for public record) NYNEX, filed July 8, 1997 (filed for public record) WorldCom, filed July 9, 1997 (filed for public record) Bell Atlantic, filed July 9, 1997 (filed for public record) AT&T, filed July 10, 1997, (Confidential) Ron Danielian, filed July 10, 1997 (filed for public record) AT&T, filed July 11, 1997, (filed for public record) NYNEX, filed July 11, 1997 (filed for public record) Bell Atlantic, filed July 11, 1997 (Redacted version of previous confidential filings) Bell Atlantic, filed July 11, 1997 (Confidential versions of previous confidential filings) Bell Atlantic, filed July 11, 1997 (filed for public record) Bell Atlantic, filed July 11, 1997 (filed for public record) NYNEX, filed July 16, 1997 (filed for public record) NYNEX, filed July 16, 1997 (filed for public record) NYNEX, filed July 16, 1997 (filed for public record) NYNEX, filed July 17, 1997 (filed for public record) NYNEX, filed July 17, 1997 (filed for public record) AT&T, filed July 17, 1997 (filed for public record) AT&T, filed July 17, 1997 (filed for public record) Teleport Communications Group, filed July 17, 1997 (filed for public record) NYNEX, filed July 18, 1997 (filed for public record) NYNEX, filed July 18, 1997 (filed for public record) NYNEX, filed July 18, 1997 (filed for public record) Bell Atlantic/NYNEX, filed July 19, 1997 (filed as an attachment to Bell Atlantic/NYNEX July 21, 1997 Ex Parte) Bell Atlantic/NYNEX, filed July 21, 1997 (filed for public record) NYNEX, filed July 21, 1997 (filed for public record) NYNEX, filed July 21, 1997 (filed for public record) NYNEX, filed July 21, 1997 (filed for public record) NYNEX, filed July 21, 1997 (filed for public record) Bell Atlantic, filed July 22, 1997 (Confidential Filing) NYNEX, filed July 22, 1997 (Filed Under Seal - Confidential) NYNEX, filed July 22, 1997 (Resubmission - Confidential) NYNEX, filed July 22, 1997 (filed for public record) NYNEX, filed July 22, 1997 (filed for public record) Helen Patterson, filed July 22, 1997 (filed for public record) O.P.G. Industries, filed July 23, 1997 (filed for public record) Richard H. James, filed July 23, 1997, (filed for public record) Bell Atlantic, filed July 23, 1997 (Filed Under Seal - Confidential) Teleport Communications Group, filed July 24, 1997 (filed for public record) AT&T, filed July 24, 1997, (filed for public record) LCI International, filed July 25, 1997 (filed for public record) Ron Danielian, filed July 25, 1997 (filed for public record) Helen Patterson, filed July 25, 1997 (filed for public record) Cablevision Industries, filed July 29, 1997 (filed for public record) Bell Atlantic, filed July 30, 1997 (Filed Under Seal - Confidential) NYNEX, filed July 31, 1997 (Filed Under Seal - Confidential) MCI, filed July 31, 1997 (filed for public record) NYNEX, filed August 1, 1997 (filed for public record) Richard James, filed August 1, 1997, (filed for public record) NYNEX, filed August 5, 1997 (Filed Under Seal - Confidential) Bell Atlantic, filed August 5, 1997 (Filed Under Seal - Confidential) OPG Industries, filed August 12, 1997 (filed for public record) Teleport Communications Group (TCG), filed August 12, 1997 (filed for public record) Bell Atlantic/NYNEX, filed August 13, 1997 (filed for public record) APPENDIX B Companies filing letters in support of the application: Abacon Telecommunications Altec Industries, Inc. Amdahl Corporation ARI Audiosears Corporation Avanti/Case-Hoyt Corporation Banta Corporation Barrueta & Associates Basic Communication Group Incorporated Butler Fleet Services Brilliant Color Cards Byers Engineering Company Capital Building Services, Inc. Cedar Direct Centigram Communications Corporation C. A. Chowns Communication, Inc. Clark Specialty Company Inc. Colonial Data Technologies Corp. Colonial Ford Truck Sales, Inc. Computer Associates International, Inc. COPE Systems Inc. CRWaldman Danella Line Services Company, Inc. Dawn Brite, Inc. EMC Corporation Guardian Companies, Inc. Hitachi Data Systems Howard Press Information Builders, Inc. Innovative Telecom Corporation Kline Construction Company, Inc. Liberty General Contracting Inc. Mars Electronics International NEPTCO Incorporated Northern Telecom Opinion Research Corporation Siecor Corporation Southeast Service Corporation TAD Resources International, Inc. Technology Service Group, Inc. Telamon Corporation TT Systems Corporation Unisys Corporation Wallace Computer Services, Inc. Wayne Lachman Productions, Ltd. APPENDIX C CONDITIONS As a condition of the grant authorized herein, Bell Atlantic and NYNEX shall comply with the following conditions: 1. Bell Atlantic/NYNEX shall prepare and provide Performance Monitoring Reports as follows: a.Bell Atlantic/NYNEX shall, at a minimum, develop and maintain the data necessary to complete Performance Monitoring Reports that include the performance measures set out in Appendix D. b.Bell Atlantic/NYNEX shall, at a minimum, provide upon request to each carrier purchasing interconnection (which for purposes of this letter includes interconnection, transport and termination, services for resale, and/or access to unbundled network elements under section 251 of the Communications Act of 1934, as amended) Performance Monitoring Reports regarding Bell Atlantic/NYNEX's provision of: i) services to Bell Atlantic/NYNEX's retail customers in the aggregate; ii) services and facilities provided to any Bell Atlantic/ NYNEX local exchange affiliate purchasing interconnection (if Bell Atlantic/NYNEX decides to operate a wholesale carrier); iii) services and facilities provided to carriers purchasing interconnection in the aggregate; and iv) services and facilities provided to individual carriers purchasing interconnection. Bell Atlantic/NYNEX shall provide the Performance Monitoring Reports for an individual carrier to that carrier only. c.Bell Atlantic/NYNEX shall ensure that any individually identifiable carrier information contained in the Performance Monitoring Reports is disclosed only to the individual carrier. Bell Atlantic/NYNEX shall not use any individually identifiable carrier information for any purpose other than providing and reporting on its provision of services and unbundled network elements to the individual carrier. d.Bell Atlantic/NYNEX shall provide Performance Monitoring Reports to carriers purchasing interconnection from Bell Atlantic/NYNEX beginning 90 days after Commission approval of the merger and no less than quarterly thereafter, except that data for certain measures may not be available by the time of the first report, in which case the measure shall be included beginning with the second report. Bell Atlantic/NYNEX shall make the Performance Monitoring Reports available to the Commission and to state commissions, and shall permit carriers receiving such reports to make the reports available to the Commission and to state commissions, subject to requests for confidential treatment on behalf of Bell Atlantic/NYNEX. e.Bell Atlantic/NYNEX shall maintain in its files each quarterly Performance Monitoring Report for a period of three years from publication. f.As provided in Attachment A, Bell Atlantic/NYNEX shall provide access to the available data and information necessary for a carrier receiving Performance Monitoring Reports to verify the accuracy of such reports. g.To the extent that Bell Atlantic/NYNEX is required by a state commission to produce performance reports containing information in addition to that set out in Attachment A, Bell Atlantic/NYNEX also shall provide such reports to the Commission upon request. h.Bell Atlantic/NYNEX shall develop a detailed narrative description of the processes it employs in responding to calls from: i) its retail customers, and/or its local exchange affiliate's customers (if Bell Atlantic/NYNEX decides to operate a wholesale carrier); and ii) customers of carriers purchasing interconnection (e.g., what happens if a Bell Atlantic/NYNEX customer calls to report trouble with a line versus what happens if a competing carrier's customer calls with the same complaint). These narrative descriptions shall be made available to carriers purchasing interconnection, the Commission and state commissions upon request. i. The measurements in the Performance Monitoring Reports described herein will cover no larger an area than a single state. 2. Bell Atlantic/NYNEX shall provide uniform interfaces for use by carriers purchasing interconnection to obtain access to operations support systems as follows: a.Bell Atlantic/NYNEX shall undertake all commercially reasonable efforts to implement each industry adopted standard or guideline established by the Alliance for Telecommunications Industry Solutions (ATIS) for interfaces used by carriers purchasing interconnection to obtain access to operations support systems (OSS) as soon as reasonably possible, and in any event no later than 180 days after final adoption by ATIS. For those standards or guidelines that have been adopted prior to Commission approval of the merger, BA/NYNEX shall fully implement such standards or guidelines as soon as reasonably possible, and in any event no later than 180 days after final approval of the standards or within 150 days from the date of Commission approval of the merger, whichever is later. b.For those functions for which ATIS has not adopted industry standards, Bell Atlantic/NYNEX initially shall undertake all commercially reasonable efforts to offer to all carriers purchasing interconnection uniform interfaces (including both a GUI-based or other comparable interface and an EDI-based or comparable application to application interface) within the NYNEX region as soon as reasonably possible and in any event within 120 days following Commission approval of the merger. Similarly, Bell Atlantic/NYNEX shall initially offer to all carriers purchasing interconnection uniform interfaces (including offering an EDI- based or comparable application-to-application ordering interface and making available, upon request, PC-based software comparable to a GUI-type interface) within the Bell Atlantic region as soon as reasonably possible and in any event within 120 days following Commission approval of the merger. c.Subsequently, Bell Atlantic/NYNEX shall undertake all commercially reasonable efforts to offer to all carriers purchasing interconnection throughout the joint Bell Atlantic/NYNEX region uniform interfaces (including both a GUI-based or other comparable interface and an EDI-based or comparable application to application interface) as soon as reasonably possible and in any event no later than 15 months following Commission approval of the merger. d.Throughout this period, Bell Atlantic/NYNEX shall continue to make available to carriers purchasing interconnection any existing interfaces that Bell Atlantic and NYNEX have agreed to provide in any interconnection agreements previously entered into with such carriers (unless such carriers agree otherwise). 3. Bell Atlantic/NYNEX shall conduct operational testing of the interfaces used by carriers purchasing interconnection to obtain access to operations support systems as follows: a.Bell Atlantic/NYNEX shall conduct carrier-to-carrier testing of its interfaces for obtaining access to operations support systems with carriers that request to engage in such testing. Bell Atlantic/NYNEX shall agree to conduct such carrier-to-carrier testing prior to entering into an interconnection agreement with a requesting carrier, and shall be ready to begin such testing as soon as reasonably possible after receiving a request and in any event upon no more than 45 days after a request for such testing has been received. This carrier-to-carrier testing shall be conducted using noncommercial orders to ensure compatibility between the two carriers' systems. The two carriers shall determine the appropriate time period for the duration of such a test. Bell Atlantic/NYNEX shall not limit the opportunity for carrier-to-carrier testing to any individual carrier. b.Bell Atlantic/NYNEX shall provide evidence to the Commission, by no later than 6 months following Commission approval of the merger, to demonstrate that its interfaces for obtaining access to operations support systems are capable of handling the reasonably expected demands for pre-ordering, ordering, provisioning, billing, repair and maintenance with respect to resold services, unbundled network elements, and combinations of unbundled elements. This evidence shall include, among other things, the operation of such interfaces at actual commercial volumes, the results of testing conducted in conjunction with independent third parties, the results of carrier-to-carrier testing, and the results of internal testing. 4. Bell Atlantic/NYNEX shall propose in interconnection negotiations and arbitrations, and shall propose to state regulatory commissions within 90 days following Commission approval of the merger, the following options to carriers purchasing interconnection and that otherwise would incur one-time, non-recurring charges. These options shall be proposed in addition to the option of paying one-time, non-recurring charges. a.With respect to non-recurring charges for resold services and for unbundled network elements, Bell Atlantic/NYNEX shall propose an option to permit carriers purchasing interconnection that otherwise would incur one-time, non-recurring charges to pay instead recurring charges for those services that are set at levels to recover the non-recurring amounts. Bell Atlantic/NYNEX shall charge an amount for this recurring charge option that reflects the cost of money, anticipated bad debts, churn rates and costs of administration of the option. The price charged for the recurring charge option shall be designed to be revenue neutral to Bell Atlantic/NYNEX compared to the payment of a one-time charge, and shall be subject to periodic prospective adjustments to reflect actual bad debt experience and churn rates. Such adjustments shall occur, at a minimum, one year after any such option takes effect, and periodically thereafter as warranted. The offer shall apply to non-recurring charges incurred for resold services and for unbundled network elements purchased by telecommunications carriers for the provision of basic residence and business dial tone line exchange or exchange access services (including vertical features) to retail customers. b.With respect to non-recurring charges for collocation and for the establishment of office dialing plans, Bell Atlantic/NYNEX shall propose an option to permit carriers purchasing interconnection that otherwise would incur one-time, non-recurring charges to pay instead such charges on an installment basis over a period of up to 18 months. A carrier shall be eligible for this installment option only if it and its affiliates (as affiliates are defined in the Communications Act of 1934, as amended), if any, have gross revenue of less than $2 billion per year arising from the provision of telecommunications services or facilities. Bell Atlantic/NYNEX shall charge an amount for this installment option that reflects the cost of money, anticipated bad debts, and costs of administering the option. The price charged for the installment option shall be designed to be revenue neutral to Bell Atlantic/NYNEX compared to the payment of a one-time charge, and shall be subject to periodic prospective adjustments to reflect actual bad debt experience. Such adjustments shall occur, at a minimum, one year after any such option takes effect, and periodically thereafter as warranted. c.Bell Atlantic/NYNEX shall propose, in interconnection negotiations and arbitrations, mechanisms for the payment of non-recurring charges for collocation that are consistent with the Commission standards established in Local Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection Through Physical Collocation for Special Access and Switched Transport, CC Dkt 93-162, Second Report and Order, FCC 97-208  32- 33, 45-51, 54-56 (June 13, 1997). 5. Bell Atlantic/NYNEX shall provide, to carriers purchasing interconnection, shared transport as an unbundled network element at usage sensitive (minutes of use) rates that are based upon forward-looking, economic costs for use in providing telephone exchange and exchange access service. Bell Atlantic/NYNEX shall provide such shared transport in conjunction with unbundled local switching, for traffic that is originated by and terminated to a purchasing carrier's end user subscriber to be routed in the same manner as Bell Atlantic/NYNEX's own traffic without the payment of interstate interexchange access charges. 6. To the extent Bell Atlantic/NYNEX proposes rates, including in interconnection negotiations and arbitrations, for interconnection, transport and termination, or unbundled network elements, including both recurring and non-recurring charges, any such proposal shall be based upon the forward-looking, economic cost to provide those items. 7. Bell Atlantic/NYNEX shall engage in good faith negotiations with carriers purchasing interconnection in response to reasonable requests to establish performance standards subject to reasonable requirements governing mutuality of performance in the following areas: a) Pre-ordering, including the response time of the pre-ordering interface and the availability of the pre-ordering interface; b) Ordering, including the timeliness of order confirmation and order rejection notifications; c) Provisioning, including the average provisioning interval offered, the average interval in which provisioning is completed, missed installation appointments, and installation trouble reports received within 30 days; d) Billing, including the timeliness of the wholesale bill and the timeliness of the daily usage feed; e) Maintenance and repair functions, including the mean time to repair, missed repair appointments, and the percentage of repeat trouble reports; and f) Network performance, including network blockage. In addition, Bell Atlantic/NYNEX shall engage, upon reasonable request, in good faith negotiations to establish appropriate enforcement mechanisms to ensure compliance with each standard, including good faith negotiations upon reasonable request for private or self-executing remedies. 8. These commitments shall sunset 48 months after Commission approval of the merger. 9. Bell Atlantic/NYNEX shall negotiate supplements or amendments to existing interconnection agreements where necessary in response to a request that is covered by the conditions contained herein from a carrier purchasing interconnection. This condition shall apply regardless of whether such existing agreements expressly provide for amendment or modification. Bell Atlantic/NYNEX shall treat the commitments as amendments to Commission rules in interpreting any clauses that permit amendments to interconnection agreements to take into account changes in Commission rules. APPENDIX D PERFORMANCE MONITORING REPORTS As a condition of the grant authorized herein and as specified in Appendix C, Bell Atlantic and NYNEX shall provide Performance Monitoring Reports as set forth below. General Notes & Definitions: Provide reports on a Quarterly basis with monthly information detail. Resale POTS services includes basic residential or business local services, also includes ISDN Resale Specials include Services at the DS0, DS1 or DS3 level requiring design intervention. Includes Chantries, PBX trunks, channelized services or any service where engineering or special design is required. UNE POTS elements include individual or any combination of the following elements: Local loop, analog line switch port, with or without shared transport. UNE Specials include individual or any combination of the following elements: DS0 loop with Interoffice facility (extended link - similar to fx line); any DS1 channelized or not channelized loop; any DS3 loop; with or without switching element and with or without shared transport, and; signaling links. Interconnection Trunks: generally provided at DS0 level, but ordered at DS1. Flow-Through Orders are orders (not rejected) where no manual intervention is required by BA/NYNEX personnel until the order reaches Provisioning (legacy) Systems (i.e., Assignment, Translation, and dispatch systems) Unless limited by existing system constraints, raw data (including paper) will be kept for a minimum of 150 days. Provisioning data will be maintained for 2 years, with the exception of Installation Trouble Reports. When complaints are pending, BA/NYNEX agrees to capture all available data before automatic system data purges. A status report on development of new metrics, including average provisioning time of customers switching back to BA/NYNEX, for UNE loop will be provided in 120 days. Pre-Ordering 1. Response time OSS Interface Definition: Average Response time per transaction for: 1) Customer Service Record 2) Due Date Availability, Address Validation, Feature Function Availability and Telephone number selection and reservation Methodology: Sample method via simulation of Service representative requests. Sampled throughout the day. Note: information will be provided to Carriers in greater detail upon receipt of reasonable request. Report Level: Not Carrier specific. Overall performance of OSS, not product/service specific 2. OSS Interface Availability Definition: % of Time OSS Interface is actually available compared to scheduled availability. Methodology: System Reports. Note: Scheduled downtime of legacy OSS to be provided to carriers. Major legacy system failures will be communicated to carriers as soon as possible. Report Level: Not Carrier specific. Overall performance of OSS, not product/service specific Ordering 3. Order Confirmation Timeliness Definition: Average response time from receipt of service request to distribution of order confirmation Methodology: Flow-Through Orders: OSS to provide data on a carrier specific basis. Manual Input Orders: Manual Tracking - 100% sample by carrier for Trunks and UNE. Resale - currently statistical sample. 100% metric under development. Report Level: Carrier specific. Reported on a per order basis as follows: Interconnection Trunks: Average Response Time % > 10 Days UNE (POTS): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders UNE (Specials): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders Resale (POTS): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders Resale (Specials): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders 4. Reject Timeliness Definition: Average response time from receipt of service request to distribution of rejection. Methodology: Flow-Through Orders: OSS to provide data on a carrier specific basis. Manual Input Orders: Manual Tracking - 100% sample by carrier for Trunks and UNE. Resale - currently statistical sampling. 100% sample under development Report Level: Carrier specific. Reported on a per order basis as follows: Interconnection Trunks: Average Response Time % > 10 Days UNE (POTS): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders UNE (Specials): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders Resale (POTS): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders Resale (Specials): < 10 lines/circuits and ò 10 lines/circuits Mechanized Orders and Non-Mechanized Orders 5. % Rejects Definition: % of total orders received rejected by BA/NYNEX due to error or omission. Methodology: Manual tracking for non-flow through orders. Mechanized tracking for flow-through. Report level: Carrier specific. Tracked separately for Interconnection Trunks, UNE and Resale. 6. Timeliness of Completion Notification Definition: Average response time from actual completion date to distribution of order completion notification. Methodology: Under development - Notification for Trunks and HOT Cut (Loop) orders is done via live phone call upon turn up of circuit. Serial numbers need to be provided by Competing Carriers for systems tracking. Notification for Other UNE and Resale to be completed via electronic notification. Mechanized metric under development. Report level: Carrier specific. Tracked separately for Interconnection Trunks, UNE and Resale. 7. % Flow Through Orders Definition: The number of orders processed directly to legacy Provisioning system without manual intervention as a percent of total orders received. Methodology: Mechanized metric Report level: Initially aggregate measure. Carrier specific under study for development. Reported separately for UNE and Resale. Provisioning 8. Average Offered Interval Definition: Average time from receipt of (accepted) service request to due date provided on order confirmation. Excludes orders where customer requested Due Date is beyond offered interval. Methodology: Mechanized metric from ordering system. Report level: Reported by Carrier on a per order basis as follows: Interconnection Trunks: UNE (POTS): by groups of lines on single order. NYNEX breakout, separately tracked for dispatch and no dispatch, as follows (BA breakout to be provided within 10 days): 5 lines/circuits 6 - 9 lines/circuits 10 lines/circuits UNE (Specials): by groups of lines on single order similar to UNE (POTS) described above Resale (POTS): by groups of lines on single order similar to UNE (POTS) described above Resale (Specials): by groups of lines on single order similar to UNE (POTS) described above 9. Average Completed Interval Definition: Average time from receipt of (confirmed) service request to actual order completion date. Excludes orders where customer requested dates are beyond offered interval. Methodology: Mechanized metric from ordering system. Report level: Interconnection Trunks: UNE (POTS): by groups of lines on single order. NYNEX breakout, separately tracked for dispatch and no dispatch, as follows (BA breakout to be provided within 10 days): 5 lines/circuits 6 - 9 lines/circuits 10 lines/circuits UNE (Specials): by groups of lines on single order similar to UNE (POTS) described above Resale (POTS): by groups of lines on single order similar to UNE (POTS) described above Resale (Specials): by groups of lines on single order similar to UNE (POTS) described above 10. % Completed within 5 days (POTS 5 or less lines) Definition: Measure of orders completed within 5 days of receipt of confirmed service request for POTS services - with 5 or less lines on an order. Excludes orders where customer requested dates are beyond offered interval. Excludes HOT Cut Loop orders (due to coordination requirements). Methodology: Mechanized metric from ordering system. Report level: Resale and UNE POTS NOTE: Metric developed for NYNEX region. Under development for BA region. BA metric to be developed within 120 days of merger approval 11. % Missed Installation Appointments Definition: % of Orders where completions are not done by due date on order confirmation. Excludes misses where the competing carrier or end user causes the missed appointment. Information on details for reason is available on an order specific basis upon reasonable request by carriers. Methodology: Mechanized metric from ordering system. Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS - dispatch and no dispatch UNE Specials Resale POTS - dispatch and no dispatch Resale Specials 12. Facility Missed Orders % orders with missed committed due dates due to lack of facilities.. Carrier specific basis as follows: Interconnection Trunks UNE POTS - dispatch and no dispatch UNE Specials Resale POTS - dispatch and no dispatch Resale Specials NOTE: Additional metric under development for NYNEX region. Metric under development for BA region. BA/NYNEX metric to be developed within 120 days of merger approval 13. % Installation Troubles within 30 Days Definition: Troubles received on lines within 30 days of service order activity as a percent of lines ordered in 30 days. Methodology: Mechanized metric trouble reports captured in maintenance data, lines ordered from ordering system. Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS UNE Specials Resale POTS Resale Specials Maintenance 14. Customer Trouble Report Rate Definition: Initial Customer direct or referred troubles reported within a calendar month where cause is determined to be found to be in the network (not customer premises equipment, inside wire, or carrier equipment) per 100 lines/circuits in service. Methodology: Mechanized metric trouble reports and lines in service captured in maintenance data base. Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS UNE Specials Resale POTS Resale Specials 15. Missed Repair Appointments Definition: % of Trouble reports not cleared by date and time committed. Excludes misses where the competing carrier or end user causes the missed appointment. Appointment intervals vary with force availability in the POTS environment. Specials and Trunk intervals are standard interval appointments of no greater than 24 hours Methodology: Mechanized metric from maintenance data base(s). Report level: Carrier specific. Reported on a per line basis. Reported as follows: UNE POTS - Dispatched and Not Dispatched Resale POTS - Dispatched and Not Dispatched 16. Mean Time to Repair Definition: Average duration time from receipt of trouble report to clearing of trouble report. Stop Clock (for specials and trunks). Stop clock refers to the time from trouble clearance to validation of trouble closure by carrier. (Administrative time) Methodology: Mechanized metric from maintenance data base(s). Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS UNE Specials Resale POTS Resale Specials 17. Out of Service > 24 Hours Definition: For Out of Service Troubles (No Dial Tone, can not be called or can not call out): the percent of troubles cleared in excess of 24 hours. Methodology: Mechanized metric from maintenance data base(s). Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS UNE Specials Resale POTS Resale Specials 18. % Repeat Trouble Reports within 30 days Trouble reports on the same line/circuit as a previous trouble report within the last 30 calendar days as a percent of total troubles reported. Methodology: Mechanized metric from maintenance data bases Report level: Carrier specific. Reported on a per line basis. Reported as follows: Interconnection Trunks UNE POTS UNE Specials Resale POTS Resale Specials Network Performance 19. % Common Trunk Blocking Measure of trunk groups above .005 standard during busy hour on a monthly basis. Standard blocking report for trunk groups for local traffic from all end offices to tandems. Engineering design blocking standard = P.005. Not Carrier or BA/NYNEX specific. 20. % Dedicated Final Trunk Blocking Measure of final trunk groups above .01 standard during busy hour on a monthly basis. Engineering design blocking standard = P.01. Carrier specific metric for dedicated trunks. Billing 21. Timeliness of Daily Usage Feed % in 3 business days % in 4 business days % in 5 business days % in 8 business days Measure the number of business days from message creation date to date message information is available to CLEC on Daily usage feed (DUF). Includes messages originating at BA/NYNEX switches (resale and UNE switching), and not alternately billed messages received from other incumbent LECs. Not currently carrier specific. (Note: when carrier specific measures are available - this will be provided). Until new report is available, upon reasonable request of carrier, carrier specific reports will be run. 22. Timeliness of Carrier Bill Measure % of carrier bills ready for distribution to carrier within 10 business days of bill date. Methodology: Mechanized measure out of CABS billing system for UNE and Interconnection Trunks and Minutes of Use. For NYNEX, utilizes retail billing system for Resale and manually tracks billing timeliness. BA mechanically tracks resale billing. Report Level: per carrier Separate Statement of Commissioner James H. Quello Re: In re The Applications of NYNEX Corporation and Bell Atlantic Corporation, for Consent to Transfer Control of NYNEX Corporation and its Subsidiaries, Memorandum Opinion and Order The Bell Atlantic-NYNEX Merger Order takes two important steps: It sets out a comprehensive framework for the Commission to review future telecommunications mergers, and it imposes conditions that will protect consumers in the Bell Atlantic- NYNEX region by improving the opportunity for competitors to enter those markets. Although I would have preferred to conclude our review of this merger more promptly, I support today's action by the Commission. First, the Bell Atlantic-NYNEX Merger Order represents new thinking in how the FCC will evaluate telecommunications mergers. The competitive analysis in this Order is guided by the traditional antitrust principles that the government has used to evaluate whether particular mergers would tend to enhance or diminish competition. The Order builds upon these principles by recognizing that only recently have some of the country's best potential competitors, such as Bell Atlantic and NYNEX, been allowed to compete outside of their own territories. I am optimistic that the principles established in this Order will permit the Commission to protect consumers in newly-deregulated markets. Second, the narrowly-tailored, pro-competitive conditions contained in this Order underscore the Commission's unique role in reviewing telecommunications mergers pursuant to the public interest test in the Communications Act. During the past 18 months, the Commission has gained valuable insight and expertise in local competition matters by implementing the Telecommunications Act of 1996. Our ability to impose market-opening conditions in this Order is due in large measure to our ongoing experience with local competition issues. I have long supported the principle that regulators should provide guidance to the industries we regulate whenever possible. I believe that today's Order provides such guidance without prejudging any future transactions that might come before the Commission. I am also confident that the conditions we impose on this merger will result in lower prices and increased choice for local telephone customers in the Bell Atlantic/NYNEX region. Separate Statement of Commissioner Rachelle B. Chong Re: In re the Applications of NYNEX Corporation, Transferor, and Bell Atlantic Corporation, Transferee, for Consent to Transfer Control of NYNEX Corporation and its Subsidiaries I support today's decision granting the merger applications of two of the Bell Operating Companies, Bell Atlantic Corporation and NYNEX Corporation. This is a significant merger which comes in the midst of a whirlwind of great change in the telecommunications marketplace. This whirlwind has been wrought by the implementation of the historic Telecommunications Act of 1996, the dizzying pace of technological change, and the determined efforts of this Commission over the last decade-and-a-half to introduce more competition in the telephone market. This particular merger has drawn heightened interest because Bell Atlantic and NYNEX are incumbent monopoly local service providers that were possible rivals due to their neighboring service areas. I write separately to emphasize that our grant of this application comes only after a very careful analysis of the likely market effects of the merger, and the imposition of certain enforceable procompetitive conditions to help ensure that the local network is opened -- and stays opened -- to new competitors. In this order, we have performed an analysis using not only traditional antitrust principles, but also broader public interest considerations. In our public interest analysis, we considered whether the merger will enhance and promote competition as weighed against any harms to competition. This balancing of public interest considerations took place against the backdrop of the "trends and needs of the industry" as a whole. In this case, I am pleased that we looked at this merger in the context of this unique time when we are implementing the 1996 Act. As we point out in this decision, competition in the local exchange and exchange access market is still, at best, in its earliest stages. Accordingly, we took a hard look at whether this merger truly would foster competition, or would have adverse competitive effects. We were acutely aware that Bell Atlantic would have been a competitor and among the most significant market participants in the local telephone market in LATA 132 and the New York metropolitan area. I am particularly pleased that we took a forward-looking approach in this order. Because the local telephone market is undergoing a historic transformation, we looked at the likely effects of the proposed merger on competition in the future. There, we made some assumptions that the most critical provisions of Sections 251 and 252 of the 1996 Act are being implemented and that there are no prohibitions against entry by new competitors. I hope we were not overly optimistic in making these assumptions. If it turns out we were wrong, the next Commission may wish to be less optimistic about such assumptions if another BOC merger comes its way. Finally, some have voiced fears that a nationwide "Ma Bell" monopoly will be rebuilt if the remaining BOCs continue to merge. I believe these fears are misplaced. If Congress' goal of a procompetitive, deregulatory telecommunications marketplace is realized, there will be multiple competitors in the local telephone market -- including incumbent and competitive local telephone companies, long distance telephone companies, wireless telephone companies, and cable operators. In a vibrantly competitive environment, having five instead of six BOCs will not be particularly problematic. Having said that, I would be concerned if the remaining BOCs focused less on opening their networks to competition, than on merging with other BOCs, who are the most likely possible rivals in the short term.