going through the motions

SOME PEOPLE SAY THE RBOCs ARE eviscerating their big traditional rivals, AT&T Corp. and MCI Inc., by buying them. That is why Michigan Public Service Commissioner Robert Nelson believes regulators should impose conditions that would protect the competitive market, such as possibly assigning certain AT&T customers and assets within the 13-state territory of SBC Communications Inc. to rivals.

Nelson’s commission has no authority to approve mergers under state law, but regulators in other big states, including California, New Jersey and New York, do. SBC Chairman and CEO Ed Whitacre said the $16 billion acquisition of AT&T would require review of 24 to 26 state commissions. The FCC and Justice Department also are analyzing the merger and will review the acquisition of MCI by Verizon Communications Inc.

Regulators are not expected to finish the merger reviews for several months, but the benchmarks they use and the requirements government agencies have imposed under previous megamergers may offer some guidance for how it could all play out.

For example, in 1999 the FCC approved SBC’s $70 billion acquisition of Chicago-based Ameritech Corp., but imposed 30 conditions designed to open the local phone market to competition, stimulate broadband services and achieve other objectives. One of those conditions required San Antonio-based SBC to enter at least 30 big markets outside of its region as a facilities-based competitor of local services to residential and business customers within 30 months of the merger closing.

SBC complied with the condition while it was in effect, according to an FCC spokesman. The condition was among several FCC requirements that expired in October 2002, three years after the merger order was adopted. But the FCC does not have information on SBC’s current presence outside of its territory. And SBC would not specify the number or names of areas where SBC is vying for customers outside of its territory.

SBC spokesman Mike Balmoris would only offer: “We are competing today outside our 13 states, and that will only intensify after we close the AT&T merger.” He adds of Cingular Wireless, a joint venture of SBC and BellSouth Corp.: “We compete in wireless every day, and it’s cutthroat. Additionally, our out-of-region efforts have placed us in direct competition with a host of companies for business customers out of our region.”

However, many in the industry have long questioned the extent to which SBC really competes in 30 major out-of-region markets. “It ended up being kind of a joke,” says John Hester, director of the telecommunications division with the Illinois Commerce Commission.

Beyond the FCC requirements, Illinois regulators imposed numerous conditions on the Ameritech acquisition designed to promote local competition. SBC also made a number of voluntary commitments with the Illinois Commerce Commission, which included a promise not to reduce its headcount in the five-state Ameritech region.

The Illinois Commerce Commission is reviewing documents submitted by AT&T and SBC for that deal, but ICC Chairman Ed Hurley says it appears the commission does not have authority under the state’s telecommunications law to approve or block the merger. However, Hurley adds, that does not mean the commission cannot seek concessions if state regulators think the acquisition will negatively impact the state.

The Public Utility Commission of Texas, where SBC is based, is not reviewing the merger because it does not have jurisdiction since AT&T is not a regulated provider of local phone service, says PUC spokesman Terry Hadley. He says the commission has not commented on the agreement.

The New Jersey Board of Public Utilities, however, is reviewing the AT&T and SBC merger. Eric Hartsfield, a spokesman with the regulatory agency in the state in which AT&T is headquartered, says the board is required to evaluate four key areas: the effect of the transaction on competition; the effect on rates for consumers and businesses; the effect on employees; and whether the combined company can provide “safe, adequate and proper service at reasonable rates.”

The New York Public Service Commission also is reviewing the merger.

Meanwhile, AT&T and SBC are seeking to move the regulatory process along fairly quickly in at least one of the biggest states: California. The telcos have asked the California Public Utilities Commission for a review by July, according to a PUC spokesperson.

While SBC must allay the potential concerns of regulators in some two dozen states, the most crucial reviews will arguably be at the FCC and Justice Department where regulators could require a number of conditions, including divestitures, and in a worst case scenario for SBC, a move to block the merger.

The review at the Department of Justice is confidential, but an antitrust veteran explains the DOJ initially uses a so-called HHI, or Herfindahl-Hirschman Index, to measure market concentration. The index examines market shares before and after a pending merger, but it is “only a preliminary screen” to determine whether the Justice Department should conduct a further investigation, says the antitrust expert, who worked as the lead attorney for the Justice Department when it reviewed — and opposed — the proposed merger of Sprint Corp. and WorldCom Inc.

Federal regulators could require the telcos to divest properties in markets where they believe the merged entities’ market share is too great. When Cingular Wireless acquired AT&T Wireless last year, the DOJ required Cingular to divest assets in 11 states, while the FCC prohibited AT&T and Cingular from merging their operations in 16 markets.

The Consumer Federation of America, Consumers Union and other groups opposing the pending mergers are asking federal regulators to order large divestitures of long-distance backbone capacity and impose other requirements, including a mandate that would allow customers to buy high-speed Internet access from the Bells without having to also purchase local phone service. These groups claim the newly formed Bells under the AT&T and MCI acquisitions would control 90 percent market share in the local residential wireline market.

But for regulators, defining market share is becoming increasingly tricky as cable TV operators and other companies advance into the phone business and technologies such as wireless and VoIP call into question the traditional definitions of phone competition.

Ultimately, the big test at the DOJ will be determining whether a merger will result in an increase in prices for consumers and businesses, says the antitrust expert.