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Capitol Comment 272 – Telecommunications Mergers: Who’s on First?

Just when a glut of telecom mega-mergers has us wondering who’s minding the antitrust store, along comes a report from a Justice Department commission recommending that the traditional antitrust authorities should take control of merger approval back from the Federal Communications Commission (FCC).

What’s up with that?

The 99.98 percent of Americans who do not specialize in telecommunications policy have every right to be confused. Antitrust is complex enough, but telecommunications mergers are even more complicated, thanks to the overlapping jurisdiction of the FCC and federal antitrust authorities.

Telecommunications mergers should only have to pass antitrust scrutiny, and not an additional merger review masquerading as a licensing proceeding under a misnamed “public interest” standard.

In most American industries, merger partners above a certain size threshold must notify the Justice Department and the Federal Trade Commission, which have authority under the Clayton Act to block mergers when the effect “may be to substantially lessen competition or tend to create a monopoly.” The Hart-Scott-Rodino Act specifies that antitrust agencies have 30 days to decide whether they want additional information, and then another 20 days to decide if they want to block the merger. One agency or the other usually takes the lead, depending on which agency has more expertise on the industry under consideration.

But telecommunications firms face additional hurdles. The FCC and state public utility commissions have an opportunity to get into the act. The AT&T-TCI merger, for example, faced approval by two federal agencies, the European Commission, nine state public utility commissions, and 970 local governments. These costly and duplicative proceedings are a bonanza for attorneys, but no bargain for consumers.

Congress could at least reduce the number of reviewing bodies by one, consistent with the recommendations of the Justice Department’s International Competition Policy Advisory Commission. The commission’s final report stated, “[T]he majority of Advisory Commission members recommend removing the competition policy oversight duty from the sectoral regulators and vesting such power exclusively in the federal antitrust agencies.”

There’s more at stake here than a bureaucratic turf war. FCC merger review is dangerous for consumers, for at least three reasons.

First, the FCC analyzes competition using standards different from those employed by the antitrust authorities. Antitrust enforcers are supposed to block mergers that threaten real consumer harm by substantially reducing competition. If two companies do not currently compete, then it is unlikely that antitrust authorities will find that their merger reduces competition.

The FCC takes a more activist stance, preventing or attaching costly conditions to mergers that it speculates will reduce “actual potential competition.” The FCC engages in detailed speculation about whether a proposed merger eliminates an independent firm that might have competed with its merger partner. Because potential competition is competition that has not yet happened, analysis in this area can be fuzzy and arbitrary. To decide whether companies are potential competitors, the FCC asks whether they have “equivalent” capabilities, whether one planned to enter the other’s market, and whether the entrant would have had a substantial likelihood of succeeding. Anyone qualified to answer such questions should probably be running a telecommunications company, not a regulatory agency!

The FCC holds additional potential to harm consumers because mergers are subject to a vague “public interest” test. Since there is no objective definition of the public interest, any pressure group posing as a representative of the public can use merger proceedings to demand special concessions for its benefit. In the MCI-Worldcom case, for example, the FCC considered claims that the merger should not be permitted because it would reduce employment and because the firms allegedly practiced redlining, showed insufficient affirmative action progress, lacked sufficient representation of racial minorities on their boards, and had outstanding contract disputes with suppliers. None of these considerations has anything to do with competition or consumer welfare.

A third problem with FCC merger review is that it has no time limit. Technically, FCC merger proceedings are reviews of communications license transfers. The merging firms must get FCC approval if the transaction is to take place, but the FCC can take as much time as it wants. In most other industries, firms are free to merge after the 30-day waiting period if the antitrust authorities decide to do nothing. This disparity means that the FCC is more likely than antitrust authorities to delay pro-consumer mergers.

Telecommunications mergers should only have to pass antitrust scrutiny, and not an additional merger review masquerading as a licensing proceeding under a misnamed “public interest” standard. If Congress does not take the FCC out of the merger review business, then it should at least mandate that the FCC evaluate mergers under the Clayton and Hart-Scott-Rodino Acts, using the same consumer welfare standard and procedural deadlines employed by the antitrust agencies.