Telecommunications MegaMergers: The Effect on Competition and Customers

Senate Energy, Utilities and Communications Committee Hearing
June 21, 2005
 

Senator Escutia and Committee members

Thank you for the opportunity to appear before you today.

I would like to discuss the mergers in question from two perspectives – process and substance. Given that the SBC/AT&T merger is the most immediate I will focus on that but many of my comments apply equally to the Verizon/MCI merger

Process

• The Commission has imposed an incredibly tight time table for this proceeding without any real justification – Joint Applicants have provided no evidence that a PUC decision in the 1st or even 2nd Q 2006 would cause any harm to the deal itself or to the parties
   
• The only rationale that we have heard for a November/December deadline is the desire of the Commission to not be the “last” regulatory authority to rule on this matter. No matter how laudable a goal this might be for administrative efficiency, it should not be used to justify a truncated schedule that will fail to satisfy intervenors’ due process rights and consumer interests. In the press release announcing the proposed transaction attached to SBC’s Form 8-k of Jan. 31, 2005, SBC stated that “The acquisition, which is subject to approval by AT&T’s shareholders and regulatory authorities, and other customary closing conditions, is expected to close by the first half of 2006.”
   
• Given that the Commission found that Joint Applicants needed to supplement their application to permit potential review under PU Code Sections 854(b) and (c), the application was not really effective until March 30, 2005. Counting from that date, the Commission is actually allowing less than 9 months for review.
   
• In the past, the Commission has taken more time to review significant transactions and in fact under statute (PU Code Sec. 1701.5) has at last 18 months to act on this application.
  
  For example, the SBC/Pacific Bell merger took almost a year (it was about equal in financial size - $16.5 billion) ; the Bell Atlantic/GTE merger (which was a $53 billion deal) took 16 months
  
  Another interesting comparison is the spin-off of AirTouch from Pacific Telesis in 1993. I managed that case during my tenure at Pacific and since time was truly of the essence given the uniqueness of the transaction, we made a decision to be as open as possible with all information in an effort to move the process along. That resulted in a decision in about 9 months in large part because there were minimal discovery disputes.
   
• Here, since SBC has essentially been assured of a Nov./Dec. 2005 deadline, they have had no incentive to cooperate on discovery and in fact have been as difficult as they possibly can be in giving intervenors access to necessary information
   
• For example, it took TURN weeks of effort and ultimately a motion to compel to even get to see the synergy model that SBC used to calculate the benefits of the merger – a critical element of the case. And, the only access we have been allowed is to use the model at SBC’s lawyers’ offices.
   
• SBC has been complaining about the supposed “unprecedented” amount of discovery – there are several reasons why there are many data requests:
  
  Joint Applicants’ legal theory is that the Commission should rubber stamp this transaction and exempt it from extensive review. Joint Applicants’ application and testimony is consistent with that theory and their discovery strategy follows the same approach – hence numerous assertions that requests for data are “irrelevant” – in other words, inconsistent with Applicants legal theory
  
  Since they assert that Sec 854(b) and (c) do not apply, their application and testimony contained minimal information to permit any reasonable review under those sections forcing parties to make lots of data requests
  
  Moreover, the reason Joint Applicants need to be asked so many questions is because they are so tricky at not providing answers. For example, TURN asked one data request for all market share studies and did not get them all. We had to ask several more data requests asking for specific studies we saw referenced in documents that were used in response to other questions
  
  Assertions of undue burden in CA pale when compared to what the Joint Applicants had to submit to the FCC. For example, for just one FCC data request, they produced approximately 450,000 pages (FCC DR 3.e re competitive analyses/studies that discuss competition between SBC and AT&T for business or wholesale customers). Thus the 11,000 pages that Joint Applicants have supposedly produced in CA seems pretty insignificant – also many of the supposed pages they are counting contain documents such as multiple copies of huge 10-K reports and FCC studies
  
  Another instructive comparison – in the recently completed SBC UNE case, AT&T/MCI alone asked 1133 data requests not including sub-parts of SBC and SBC itself asked 20 sets of data requests of AT&T/MCI, with 798 requests, not including sub-parts. So, the amount of discovery in the SBC/AT&T merger case has not been so unique.

Substantive Issues

• The Joint Applicants’ entire justification for the merger rests upon the claim that emerging competition is sufficient to limit SBC’s ability to exercise market power—even after a merger with AT&T. If this premise is refuted, the Commission cannot accept the Applicants’ claim that the merger does not have an adverse effect on competition and therefore cannot find that approval of the merger would be consistent with Section 854(b) of the Public Utilities Code.
   
• Local exchange competition in California is a myth
   
• The incumbent local exchange companies (ILECs) have effectively killed-off unbundling and the competition that resulted from availability of reasonably priced UNEs.
  
  Approximately one year ago during the Commission’s Triennial Review proceeding, the ILECs were saying, “look at all the CLEC competition.”
  
  After destroying the UNE platform, the ILECs are now acquiring the two largest potential competitors – AT&T and MCI.
   
• Now that there is no longer intramodal competition, the ILECs and some of the CA PUC Commissioners point to “intermodal” competition as an effective alternative for plain old telephone service
   
• They point to wireless but the wireless industry is also consolidating with the ILECs’ wireless subsidiaries Cingular and Verizon owning the majority of the market.
  
  And, even the FCC in the Cingular/AT&T Wireless merger order in late 2004 has admitted that “substitution between wireless and wireline services is currently limited.”
   
• Other alleged “intermodal” competitors also provide little real competition.
   
• Cable only serves approximately 2 percent of total switched access lines in the entire U.S, hardly a robust competitive threat.
   
• Voice over internet protocol or VOIP not only fits the classic definition of a nascent industry, but is only available to those who can afford and have access to a broadband connection and lacks several critical features such as E-911. And, even with E-911, VOIP will be likely be dominated by the ILECs in the not too distant future
   
• Broadband over Powerline or BPL is still not ready for roll-out.
   
• The fact is the large majority of consumers in California get their basic service from SBC or Verizon and have no meaningful alternative. These consumers are, in effect, captive customers of the ILECs.
   
• Yet, SBC and Verizon want you to believe that further consolidation somehow equals greater competition. My recollection of Economics 101 says that consolidation is meant to shrink the number of competitors, not create more
   
• Bluntly, this merger is very much about SBC eliminating its existing major competitor based on the argument that other competitors will probably arrive soon. It is also critical to put these mergers into a broader context – the potential for total deregulation of telecommunications in CA being urged by the CPUC in the URF proceeding.
   
• Notably, the Applicants—who are in the best position to know the likely forward-looking effect of the merger on market share in various markets—have provided no quantitative information whatsoever concerning their current or anticipated future shares of any geographic or product market within the state of California. And, such information has been exceedingly difficult to extract from the applicants in discovery
   
• In terms of actual benefits for CA consumers, the Applicants claim that California-specific merger benefits total only $27 million (only $13 million would be allocable to CA ratepayers) less than 2/10 of 1% of the $16 billion in total synergies applicants allege would result from the merger. Further, they want the Commission to find the merger is in the public interest because of alleged “substantial qualitative short and long-term benefits”. While many of these supposed benefits may help SBC, it is doubtful that they will benefit CA ratepayers
   
• TURN’s analysis to date indicates that, depending on what assumptions are used, the CA specific merger benefits i.e. the 50% minimum required by 854(b) to flow to ratepayers are roughly around $1 billion – obviously a far cry from what SBC and AT&T state
  
  Assumptions: some of the major assumptions include what allocator is used to apportion the benefits between CA and the rest of SBC/AT&T territory; how “long term” is defined; whether to include revenue and capex synergies; what transactions costs to exclude; whether to include SBC CA in the calculations of benefits