Wednesday, June 01, 2011

State Regulators Should Refrain from Reviewing Wireless Mergers

The U.S. Department of Justice and the FCC are undertaking their respective reviews of the AT&T/T-Mobile merger. But Sprint is urging state regulators to conduct their own merger review proceedings. For instance, Sprint urged the West Virginia Public Services Commission to review the merger. Meanwhile, the Louisiana Public Service Commission has sought public comment on the AT&T/T-Mobile merger, but not opened an actual investigation. And the California Public Utility Commission has opened an inquiry concerning the proposed merger.

State regulatory reviews of wireless mergers raise policy concerns about needless and harmful duplication of review efforts. Like other telecom mergers, AT&T/T-Mobile is already subject to separate reviews by two federal agencies. State reviews add yet another layer of multi-agency proceedings to the merger review process. The more agencies conducting reviews, the more likely such reviews are to delay the overall merger process and saddle merging parties with administrative and lost market opportunity costs. And federal law preempting states' authority over wireless rates and entry casts serious doubt about the legal authority of state regulators to place conditions on wireless mergers.

We have previously pointed out significant process concerns with state public utility commission (PUC) reviews of telecom mergers. Many times merging parties gain approval only after state PUCs obtain a series of so-called voluntary concessions that serve as conditions for approval. Those conditions, such as broadband investment and build-out imposed by some state PUCs in the CenturyTel-Embarq merger and in other mergers, may, by themselves, appear laudable. But they are frequently unrelated to any conceivable competitive harm posed by the mergers. For example, some state PUCs reviewing the Qwest-CenturyLink merger and the Frontier-Verizon transactions expressed concerns about the financial solvency of the respective parties following the proposed deals, but they nonetheless imposed conditions requiring the acquiring parties to spend even more money on broadband. Such conditions can also result in ordinary business decisions regarding service and pricing options being cemented into enforceable regulatory mandates that quickly become outdated, assuming they are not unwarranted at the time they are adopted.

State PUCs' leverage over merging parties makes it tempting for such agencies to impose ambitious regulatory-minded conditions on proposed mergers. This is especially so when outside interest groups and competitors press for conditions on the merging parties. In some instances, state PUCs impose conditions on merging parties that they otherwise lack the power to impose through rulemaking because of the narrow scope of their delegated authority. This only heightens concerns about regulatory power grabs posing as state merger reviews. But the individualized nature of mergers means that onerous conditions amount to company-specific regulation that may result in unequal and unfair treatment. Significant policy initiatives should not be the subject of state merger conditions, but where necessary should instead be implemented through industry-wide rulemaking proceedings.

There are additional reasons unique to wireless for keeping states out of the merger review process and avoiding a further agency review pile-up. Wireless merger reviews are incommensurate with states' limited scope of jurisdiction over wireless. And wireless carriers typically don't have carrier-of-last resort or other special public interest obligations that legacy wireline providers have by virtue of rate-of-return or price cap regulation.

All of these policy concerns raised by state regulatory reviews of wireless mergers apply with vigor when it comes to the AT&T/T-Mobile merger. The proposed deal is already subject to scrutiny by DOJ and the FCC. Reviews by those federal agencies will focus on any anticompetitive harm posed by AT&T/T-Mobile. To the extent that the merger raises any anticompetitive concerns in particular geographic markets, the federal agencies conducting market analyses can adopt targeted remedies. In recent telecom merger reviews such as AT&T/Centennial and Verizon/ALLTEL, for example, the FCC ordered partial divestitures of assets in specific geographic areas by merging parties as conditions for approval.

Importantly, serious legal questions about jurisdictional authority surround state regulatory reviews of wireless mergers. For starters, it is questionable whether states have any authority to review such mergers under federal law. The FCC is primarily entrusted with managing the spectrum resource. And in 1993, Congress amended the Communications Act, thereby providing in Section 332 that the federal government has exclusive authority over the "rates charged" for wireless services and "entry" of wireless carriers. States, however, were permitted to continue regulating only "other terms and conditions" of wireless services.

It is reasonable to regard any state regulatory approval for mergers of wireless carriers as a regulation of wireless entry. But if that's the case then states are categorically preempted from subjecting mergers of wireless carriers to regulatory approval.

But even assuming federal law jurisdiction over wireless entry does not categorically preempt state regulatory approval requirements for wireless mergers, one could still reasonably conclude that federal law prohibits states from requiring wireless carriers to receive PUC approval under certain circumstances.

A strong case can be made that federal law restricts state merger reviews of wireless carriers in at least some important respects. For instance, if a state's PUC's review becomes especially prolonged and demands made by the state agency become particularly onerous, such a review could effectively serve as a barrier to market entry for merging wireless carriers within the contemplation of Section 332's preemption provision. Also, federal preemption of wireless rates would most likely mean that no state PUC could make wholesale or retail or other rate-related terms a condition for its approval of a wireless merger.

To be sure, there is a dearth of case law authority concerning state merger approval of wireless carriers. But that is hardly surprising given the similar dearth of cases regarding the merger review authority of the FCC. Merging parties essentially give up any grounds for challenging onerous conditions on the approval of their respective deals because they are said to be voluntarily agreeing to them. Moreover, merging parties who have already spent vast sums of money and time in moving their proposed mergers along the process want to close the deal. Moving administrative disputes into litigation incurs even more costs, delays and uncertainties that merging parties cannot afford in today's competitive landscape.

One shouldn't expect state PUCs to go out of their way to suggest they lack regulatory authority to subject wireless mergers to conditions. But given their limited authority over wireless, they should be expected to realize they are not typically in the best position to review wireless mergers. In fact, the West Virginia Commission provides an example of state regulators sensibly deciding to avoid entangling themselves in mergers that are already subject to review by federal agencies. On prior occasions, West Virginia regulators declined to review mergers involving voice carriers such as Bell Atlantic/GTE, SBC/AT&T and Verizon/MCI, citing ongoing federal reviews. And when it comes to AT&T/T-Mobile, the PUCs in West Virginia and elsewhere should follow the hands-off course once again.

Whatever one's opinion about the merits of the AT&T/T-Mobile merger, those merits should be addressed at the federal level. No wireless merger should be bogged down with the unnecessary costs and delays resulting from duplicative state merger reviews that, in any event, may be in conflict with federal law. Hopefully, West Virginia and other states will show a lot of restraint when it comes to wireless mergers such as AT&T/T-Mobile and defer to the DOJ and FCC merger reviews already underway.