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Mergers, Consumers, and the FCC

Remarks of Commissioner Gloria Tristani
before the
National Association of Regulatory Utility Commissioners

November 8, 1998

Good afternoon, and thank you for the opportunity to be with you today. I'm delighted to have a chance to share some observations on telecommunications mergers.

But before I do that, I wanted to mention that yesterday I had the great pleasure of taking my son on his first visit to Disney World. It was a memorable day for both of us. My son had a great time on the rides, he ate lots of junk food, and bought some overpriced souvenirs.

I, on the other hand, found myself pondering the vast Disney empire and the power that company wields in America and around the world. I was thinking how appropriate it was that tomorrow I'd be giving a speech on issues relating to the concentration of corporate power. These are the thoughts going through my head as I took my son to Disney World. I guess that's what a year in this job has done to me.

The panel discussion that will begin in a few minutes is about consumer issues. When I think of consumer issues, things like slamming and cramming come to mind. But today I wanted to talk about another type of consumer issue -- mergers.

As you know, the FCC has been asked to approve three mergers -- Bell Atlantic-GTE, SBC-Ameritech, and AT&T-TCI. While the confluence of these mergers is undoubtedly causing the FCC's merger experts to work around the clock, I welcome the opportunity presented by these mergers. I think it's useful to have a few mergers pending at the same time to see how the telecom world might look if all were granted or all were denied.

In my view, the two LEC mergers in particular bring us to a crossroads in the development of the telecommunications market. Twenty or thirty years from now, the right answer to these merger questions may be patently obvious. But in the whirlwind that is today's telecommunications market, we are asked to predict whether these transactions will enhance or diminish consumer welfare. That's a very tall order.

There are two current views of what the market can and should look like. On one side, some say that an efficient global market structure would consist of five or six supercarriers. Perhaps two or three of those carriers would grow out of today's Bell Companies. The supercarriers would provide a complete package of services on an end-to-end basis. According to this view, these supercarriers will serve American consumers most effectively and will keep American companies at the forefront of global telecommunications. Big LECs are the natural building blocks of such supercarriers, and if the FCC prevents them from evolving, ultimately American consumers will pay the price. That's one view.

The other view is that we must not allow the United States to be divided into Bell East and Bell West -- mega-carriers with the incentive and ability to stifle competition. For all we know, if the pending mergers were never proposed, the merging companies might have ended up competing against each other. Some say that the lost consumer welfare due to diminished competition would be a critical failure of government to protect consumers.

As if trying to settle that dispute weren't enough, even the involvement of the FCC in reviewing mergers is questioned. Those issues range from whether we should be involved in mergers at all, to questioning the scope of our merger review.

I'd first like to address a few of these issues. Then I'd like to offer some initial observations about the mergers pending before the FCC.

Why the FCC Reviews Mergers

Why does the FCC review mergers? To put it simply, because it is required to by law. In addition, Congress recently indicated that dual review by the FCC and DOJ is preferable to only one agency's review. And third, the FCC review is good public policy because we consider important factors that are not within the scope of DOJ's inquiry.

In discussing the FCC's merger review process, it's good to begin with the law. When carriers seek permission to transfer FCC licenses, the FCC must determine whether the transfer would be "in the public interest." And courts have said that a proper inquiry under the public interest test must include -- not "may include" but "must include" -- an analysis of the competitive impact of the transaction.

It is also instructive that as recently as 1996, Congress signaled that all telecommunications mergers should receive thorough review. Congress did this by deleting section 221 of the Communications Act, which had allowed the FCC both to approve a common carrier merger and to preclude DOJ from reviewing that merger. In essence, Congress was saying that it didn't want any one agency to be able to greenlight a telecom merger.

Some have said, however, that the FCC should defer to DOJ for merger review, because that's its core expertise. There is no question that part of the FCC's analysis overlaps DOJ's analysis. But the FCC's analysis is different in at least two significant ways: The first is that the burden of proof differs under the dual review. At the DOJ, the Department of Justice bears the burden of proving to a court that the merger will harm the public. At the FCC, it's the parties seeking to merge -- not the agency -- that carry the burden of proof.

One way to understand this difference is to think of what would happen to a proposed merger that neither improves nor harms consumer welfare. When analyzed under the DOJ's standard, the merger would be allowed to proceed because DOJ can't prove the merger will harm competition. But the same merger would fail the FCC's review because the parties can't show that the merger actually serves the public interest.

The different approaches of DOJ and the FCC are not just academic. When Bell Atlantic sought to merge with NYNEX, the DOJ did not challenge the merger in court. At the FCC, however, the Commission found that the merger, standing alone, was not in the public interest. To address the FCC's concerns, Bell Atlantic agreed to a variety of conditions on the merger. In the FCC's view, those conditions tipped the scales back in favor of the merger and justified approval.

So with Bell Atlantic-NYNEX, two agencies looked at the same merger and reached different conclusions. I think that experience is an example of how separate merger reviews by both the FCC and DOJ provide an important consumer protection function.

The second difference between the FCC and the DOJ merger review is the scope of review. DOJ considers whether "the effect of the acquisition may be substantially to lessen competition." The FCC's inquiry is much broader. It includes the effect on competition as well as other factors derived from the FCC's public interest obligations under the Communications Act.

One example is the impact a merger might have on universal service. Suppose MCI-WorldCom had proposed their merger prior to passage of the 1996 Act. Before 1996, an end-to-end company like MCI-WorldCom could have avoided paying access charges to incumbent LECs. While that would be good for MCI-WorldCom's customers, that would have been bad for universal service because access charges help support universal service.

If this merger had come before us before the 1996 Act, the impact of the proposed merger on universal service would have been an important concern under the FCC's public interest evaluation. Yet under DOJ's standard of review, the impact of a merger on universal service probably would be irrelevant.

Another factor that I think we should consider -- which DOJ does not consider -- is the question of how other communications markets are affected. As you know, Ameritech provides competing cable service in many parts of its region. Some have said that allowing SBC to buy Ameritech will harm consumers because SBC will phase out that video business, just like they did when they bought PacTel. I would argue that competition in the cable market is relevant to the FCC's review.

Here's another interesting public interest argument some have made in the context of the pending LEC mergers. A few parties have argued that we should not allow a merger to go through if it would permit one of the companies to export anticompetitive behavior to other parts of the country.

Under this inquiry, I would want to know about any credible evidence about anticompetitive behavior by a party to a merger. Most likely this evidence would consist of judgments by courts or regulatory bodies, but there may be other indicia as well. Even if we detect a pattern of anticompetitive behavior, it's only relevant if it can be reduced to a fair and predictable factor in our public interest analysis. I don't know whether that's possible or not.

A few months ago, the Texas Public Service Commission rejected an application by Southwestern Bell to enter the long distance market. In its decision, it signaled that corporate attitude is relevant. The Texas Commission noted a variety of concrete failings that indicated a conscious plan to resist congressionally-imposed obligations. Again, however, we may all know it when we see it, but if we can't define it we shouldn't consider it.

So in addition to the competition factor, the FCC considers other important public policies in reviewing mergers. But just because public interest is not a specific set of criteria, I don't believe the FCC has free rein to sweep in every matter that is raised by opponents of a particular merger. For example, individual complaints against a merging company are usually best left to the complaint process. Parties with individual grievances against carriers should not expect us to adjudicate their claims in a merger proceeding.

Imposing conditions on merging parties

Another important question that has been raised with regard to mergers is whether the FCC should impose conditions. Some argue that we should be very cautious about imposing conditions on the merging companies that we are unwilling -- or unable -- to impose on other carriers through an industry-wide rulemaking.

A couple of reactions. First, conditions are unquestionably within our authority to impose. In fact, they're specifically provided for in the Communications Act. Section 214(c) says the Commission may attach to a transferred license "such terms and conditions as in its judgment the public interest may require."

We then ask, "Should we attach conditions that, in our judgment, would benefit consumers?" I would answer that with a resounding yes. Merger conditions have the potential to bring consumers benefits that otherwise would be lost. In the Bell Atlantic-NYNEX merger, the FCC imposed conditions that it believed would more quickly bring the benefits of competition to consumers in the affected region. Even stronger conditions would, presumably, have brought even greater consumer benefits.

In the two-and-a-half years since the 1996 Act passed, I'm concerned that consumers may have seen more changes for the worse in telecommunications than for the better. If there ever were a time for the Commission to ensure that consumers' interests don't take a back seat to the interests of telecom giants, it is now. One powerful tool the FCC has to make that happen is the imposition of meaningful merger conditions.

I don't deny or apologize for the notion that the FCC has a greater ability to affect carrier behavior in the context of a merger than it does otherwise. But I would argue that we can best serve consumers by imposing -- where appropriate -- pro-competition, pro-consumer conditions on mergers. If there are specific, identifiable measures that can make a bad transaction acceptable -- measures that would improve consumer welfare -- the FCC can and should impose those conditions.

Carriers act on behalf of their shareholders, not consumers in general. In most cases, company actions coincide with consumer benefits. Companies make money by winning customers through better products and lower prices.

But Congress long ago recognized that corporate self-interest is not always synonymous with the public interest. That's why Congress interposed a careful set of checks and balances to make sure that mergers don't benefit companies and their shareholders at the expense of consumers. I believe one of those checks and balances is a readiness by the FCC to impose conditions on mergers.

Our purpose in reviewing the proposed mergers, when reduced to its essence, is to determine whether American consumers would benefit from the proposed transactions. If a particular merger doesn't meet that test, we either reject the merger or we impose conditions that tip the balance in favor of consumers. Of course, it's possible that conditions may be unable to offset the other problems with some mergers. In those cases, the merger should simply be rejected. The imposition of conditions can end up being a win for both sides. Without a clear willingness to impose conditions on otherwise problematic mergers, we eschew our obligations under the law and we lose a potential win-win situation for the companies and consumers.

Some thoughts about current mergers

I'd like to say just a few words about the pending mergers. First, AT&T-TCI. There are clearly some upsides to this merger. It could be an opportunity to stimulate competition in the residential market by giving TCI specialized expertise, greater financial resources, and a trusted brand name. On its face, AT&T-TCI certainly has some appeal. I'll reserve final judgment until I've had the benefit of reviewing the Commission staff's analysis.

The incumbent LEC mergers may prove to be a watershed. At this point, two-and-a-half years after passage of the 1996 Act, those two mergers require us to make an important prediction about how far consolidation can go without contravening the pro-competitive purpose of the 1996 Act. This is an extraordinarily difficult judgment to make. The companies argue that the world is changing, and we must permit them to merge. Otherwise, they say, they will be caught between nimble upstarts on the one side and ventures like AT&T-BT and WorldCom-MCI.

An important question to ask about the mergers between SBC-Ameritech and GTE-Bell Atlantic is whether these companies were likely, absent the merger, to compete with each other. If they were, then allowing all this consolidation would be contrary to the public interest. But if such competition was unlikely, then consumers are not losing a choice they otherwise would have had. If we were 10 years into the new competitive paradigm, it would be easier to see whether ILEC-to-ILEC competition was realistic. But I'm not sure whether we've given this form of competition enough of a chance after two-and-a-half years.

This is where I am intrigued by the commitments made by the four merging LECs to compete out-of-region. Why make a commitment? Why not just start doing it now? In all candor, I'm a little skeptical of the notion that a $25 billion dollar company needs to get bigger before it can compete successfully out-of-region.

For example, SBC commits to entering the top 30 out-of-region markets simultaneously if its merger with Ameritech is approved. Today, there are customers in those 30 cities sending checks to some other carrier, and SBC elects not to compete for that business. Why not go and compete for that money now?

If the merged company can enter 30 new cities with Ameritech, are they saying they can't enter any out-of-region cities without first buying Ameritech? And if the response is that "Well, maybe some out-of-region competition is feasible," then wouldn't it be a disservice to consumers in Ameritech's region if we allowed SBC to buy Ameritech rather than compete with Ameritech?

There are only two conclusions one can draw from today's lack of out-of-region competition by SBC: One, out-of-region entry by SBC is simply not economically feasible without the resources and managerial talent that Ameritech brings to the mix. Or two, out- of-region competition is feasible today but, for some reason, SBC chooses not to compete.

DOJ's merger guidelines put a fine point on this question. Those guidelines say merger applicants must prove that only through the merger could the companies achieve specific efficiencies. For SBC, that means they must show us they simply can't compete out-of-region in a meaningful way without acquiring Ameritech. I look forward to hearing their explanation.

Of course, even if the applicants demonstate that they were unlikely to compete with each other, a number of other serious questions have been raised. One is whether the merged carriers would have a greater incentive and ability to diminish competition. Another is whether mergers will limit "benchmarking" as a tool for policymakers to compare carriers' "best practices." These are difficult and important questions.

As you can tell, I am somewhat skeptical of the proposed mergers between major incumbent LECs. But it should also be clear from my observations today that I have more questions than answers, and that I have an open mind on all three mergers. I have confidence in our able staff at the Commission to help us resolve all three merger applications in a way that truly brings the benefits of the telecommunications revolution to all Americans.

Again, thank you for your attention.