Pull the Plug

Increasingly, telecommunications companies are attempting to become the 1-stop shop for subscribers' telecommunications needs. Whereas companies previously relied on joint ventures or strategic alliances to provide additional services in various markets, telecommunications companies increasingly are using acquisitions to achieve this goal.

Standing at the crossroads of this entrepreneurial activity are the regulators. Three federal regulatory bodies play a central role -- the Department of Justice (DOJ), the Federal Trade Commission (FTC) and the FCC. Recently, Sen. John McCain (R-AZ) and Sen. Michael DeWine (R-OH) have proposed bills that would limit or eliminate the FCC's merger supervision.

McCain seeks to strip the FCC of virtually all of its authority to impose terms and conditions on license transfers and assignments associated with mergers. His opening statements while introducing the Telecommunications Merger Review Act of 1999 leave no doubt as to his intentions: "The (FCC)'s ability to pass on underlying licenses gives it a choke hold on the parties to the merger .... (The) real harm lies in the fact that the FCC is foisting needless burdens and restrictions on the merging companies that translate into higher costs for consumers."

His bill explicitly grants the DOJ and the FTC primary authority in reviewing mergers. During the DOJ or FTC review process, the FCC would not be permitted to review the merger or impose any term or condition on the assignment or transfer.

The FCC's only means of participation during that review process would be to file comments with the DOJ or FTC. If either approves the transaction or issues a statement of nonintervention, the FCC must authorize the assignment or transfer without imposing any terms, conditions or other types of obligations on the parties to the transaction. The FCC's ability to review a merger is restricted to one circumstance -- when neither the DOJ nor the FTC issues a decision or statement in connection with the merger. Even then, the FCC is constrained to a 60-day period to review the transaction.

DEWINE'S BILLDeWine's bill does not attempt to limit or even address the FCC's authority to review transactions. Instead, this bill seeks to restrict the time frame in which the FCC reviews and issues a decision on the transaction. Under DeWine's bill, the FCC either may review the decision without asking for additional documents, or it may request additional documentation. If it reviews only the application with no supporting documents, it must approve or deny the application within 30 days. If the FCC receives documents supporting an application, it has 180 days to render a decision. Failure by the FCC to act within the appropriate time frame will result in application approval.

THE FCC'S ROLEThe FCC currently has a 2-pronged role in reviewing telecommunications mergers. First, it has the authority to review the competitive effect of mergers by virtue of the Clayton Act and the Communications Act of 1934. Second, it must review transactions to ensure that its own rules and policies are not violated.

Section 21(a) of the Clayton Act allows the FCC to enforce compliance with anti-price discrimination, anti-price fixing and other provisions designed to discourage monopolies. Section 314 of the communications act prohibits the acquisition of cable lines, wire lines, radio stations or radio systems if the purpose or effect would be to lessen competition. In addition, the FCC has broad authority under the 1934 communications act to disapprove any assignment or transfer of an FCC license if it determines such assignment or transfer would not serve the public interest or if the sale would violate the FCC's policies or rules.

The FCC, faced with several applications for mega-mergers, has demonstrated its willingness to use its competitive review authority to attach "strings" to the transaction. In granting the AT&T-TCI transfer-of-control application, for example, the FCC imposed conditions upon both TCI and AT&T having to do with a block of Sprint PCS stock owned by TCI.

The FCC also imposed conditions when it granted Bell Atlantic/NYNEX's application. These conditions include requiring that Bell Atlantic provide performance-monitoring reports and uniform interfaces to the company's operations support systems (OSS), conduct operating testing of its OSS interfaces and propose rates based on forward-looking economic costs.

After 11 months, the SBC and Ameritech transfer application still is under consideration at the FCC. Chairman William Kennard recently indicated that the FCC has "serious concerns" about the proposed merger. The parties and the FCC are engaged in discussions, and the FCC will issue a public notice seeking comments on the conditions that should be imposed if the application is approved.

Without Congressional intervention, the FCC's role in reviewing mergers will not change. In his May 26 statement before the Senate Subcommittee on Commerce, Science and Transportation, Kennard expressed his desire that the FCC maintain its role. According to Kennard, the FCC must " ... continue to review mergers of telecommunications companies that raise significant public interest issues related to competition and consumers."

ROLE CHANGE?McCain has proffered a proposal that would have draconian effects. In his desire to eliminate the FCC's review of the competitive aspect of a merger, McCain's proposal would leave the DOJ and FTC responsible for passing upon compliance with a myriad of regulations enacted by the FCC. Many complex transfer-of-control applications call for waivers of specific FCC rules. It is unclear how or whether a non-FCC agency could waive these rules.

The real question is not whether the FCC should take part in reviewing transactions, but what role is most appropriate. Although the status quo could be maintained, the senators' proposals raise an important issue: Can the status quo be improved? A quick fix would be to statutorily shorten the time frame by which the FCC must act on a transaction. DeWine's bill embodies this approach, permitting the FCC to maintain its present role while truncating the delay. On the other hand, one must ask whether the FCC's role is worth preserving.

There is an unmistakable trend toward consolidation, and Kennard has made it clear that he envisions an FCC that actively reviews mergers. Carriers are unlikely to support either proposal vocally for fear of alienating the very agency that may later be reviewing their applications. The fact that the chairman of the Committee on Commerce, Science and Transportation and the chairman of the Subcommittee on Anti-Trust, Business Rights and Competition have sponsored legislation seeking to curtail or limit the FCC's role is significant and endangers the chairman's vision. The prudent course may be to limit the FCC's time frame in which to consider mergers while leaving intact its ability to regulate meaningfully.