NY PSC: Two Mergers, Different Concerns

Telecom Policy Report, July 11, 2005

The latest wrinkle in the fabric of the telecom "mega mergers" currently awaiting approval before state and federal regulators is a New York Public Service Commission staff white paper that tends to raise more concerns about the competitive implications and the quality-of-service aspects of the proposed Verizon Communications/MCI deal than for the proposed SBC Communications/AT&T combination.

Issued late last week, the NY PSC staff said the proposed Verizon/MCI merger may pose enough market-power concentration and competitive impact to warrant some structural remedies and/or controlling regulatory measures - ostensibly, at least, within the state's jurisdiction - while the proposed SBC/AT&T merger creates less concern among the New York regulators.

The white paper characterized all of its statements as "tentative" conclusions, but like commissions in California, Illinois and Texas, the New York regulatory agency is believed to have more staff and resources for exhaustive analysis relative to other state counterparts. In addition, such reports could become bellwethers of opinion for collective state positions on the mergers as well as providing significant input to federal agencies charged with approval tasks, including the U.S. Department of Justice Antitrust Division and the FCC.

"We tentatively conclude that while the Verizon/MCI merger will impact the mass market (residential and small business) and while there is significant mass market intermodal competition providing voice and data alternatives in most parts of New York, the Verizon/MCI merger will increase the concentration in that market," the staff wrote. "With respect to the large business (enterprise) and medium size business markets, we tentatively conclude that the Verizon/MCI merger will produce significant consolidation and is, therefore, more troubling."

Potential Remedies Available

In the mass-market area, the white paper said that while MCI may have been moving out of the local circuit switching exchange market, there is no evidence of the company's intent to abandon the overall local telecom market. Like AT&T, it could pursue an Internet protocol (IP) delivery platform.

"To offset what appears to be reduction in choice, there are potential remedies available, for example, requiring that Verizon offer 'naked DSL' wherever it offers DSL services to its own customers. This would allow customers to use DSL to take advantage of the burgeoning Voice over the Internet Protocol (VoIP) market without also subscribing to Verizon's telephone service," the paper said. "Also, another potential remedy is for MCI to continue to offer its retail residential service for a year after the merger is approved."

The white paper also indicated the full state commission will undertake a broad review of telco regulation - an appropriate forum to consider issues like service quality assurances for the residential market. "However, to ensure that Verizon continues to focus on maintaining good service quality in New York, especially in areas where adequate competition does not yet exist, a potential remedy might be that before Verizon is permitted to exercise any potential pricing flexibility in those areas in the future, it must show that it is maintaining good service quality performance according to the commission standards," it said.

On remedies for the large business area, the staff fixated on fair and equitable prices, terms and availability of Verizon/MCI wholesale facilities for competitors ultimately to address the end enterprise markets, saying such remedies "would adequately address the harmful effects of a highly concentrated wholesale market." The staff, however, conceded it would need more input on how the remedies should be implemented and enforced and whether divestiture is a viable alternative.

The staff also indicated there was no basis for instituting a rate proceeding connected with the proposed merger, although the regulators expect Verizon to face a competitive environment, finding it difficult to pass on synergy-related savings and revenue enhancements to customers. However, they think "it is reasonable to expect that New York customers will be insulated from the costs of the merger."

Why SBC/AT&T Is Different

The staff also said the SBC/AT&T merger in general does not raise the same level of concern because both SBC and AT&T operate as competitive local exchange carriers (CLECs) in New York and both are subject to lightened regulation. Therefore, remedies probably are not needed.

SBC has a relatively small share of the New York market, and AT&T will remain a distinct and independent economic entity from the major ILEC in New York (Verizon), according to the white paper, which tentatively concluded the merger will not have a major impact on New York's market. For similar reasons, it reached the same tentative conclusions about the AT&T/SBC merger impacting a consolidation of the nationwide large business market.