Wednesday, January 22, 2014

New Year, New Approach: A Turn Towards Regulatory Modesty in the FCC’s Transaction Review Process

The New Year has just begun, and the FCC, like the rest of us, could stand to make some New Year’s resolutions. A key one could be reforming its transaction review process.
Already, there are a few potential mergers and acquisitions that may require Commission review in the coming months. Frontier Communications announced in December that it seeks to acquire AT&T’s wireline business and statewide fiber network assets in Connecticut, and Sprint is reportedly seeking to acquire T-Mobile, according to the Wall Street Journal. In perhaps a leap of anticipation, the American Antitrust Institute (AAI) has already urged the FCC and the Department of Justice to block any merger of Sprint and T-Mobile, arguing that it would stifle competition and harm consumers. And it is at least conceivable we could see a transaction involving Time Warner Cable and other parties.
The FCC’s transaction review process has drawn much attention and discussion over the last few years. In 2011, the House Subcommittee on Communications and Technology held several hearings on FCC process reform. On May 13, 2011, the Subcommittee heard testimony from Chairman Julius Genachowski, Commissioner Michael Copps, Commissioner Robert McDowell and Commissioner Mignon Clyburn on what was working at the FCC, recent improvements to the FCC’s processes, and what still needed attention.
Chairman Walden opened the hearing by proposing several reforms to FCC processes. Regarding the FCC’s transaction review process, Congressman Walden stated, “the FCC’s transaction review standards are vague and susceptible to abuse.” The Congressman also highlighted an observation by Chairman Emeritus Dingell, who stated in a hearing back in March 2000 that there is “great need to address and to reform the way the FCC handles its merger reviews. These are a remarkable exercise in arrogance, and the behavior of the Commission, oft-times by reason of delay and other matters, approaches what might well be defined as not just arrogance, but extortion.” Congressman Stearns, Congressman Christensen, and Commissioner McDowell particularly focused on the need for reform of the FCC’s transaction review process throughout the May 2011 hearing.
In July 2011, Congressman Walden circulated a Discussion Draft of the FCC Process Reform Act of 2011. Later that month, the Subcommittee held another hearing on “Reforming FCC Process,” and heard testimony from industry representatives, think tanks, consumer groups, academia, and the States. FSF President Randolph May testified and supported many of the proposed reforms in the Discussion Draft, particularly reform of the Commission’s transaction review process:
In my view, the provision reforming the Commission's transaction review process is as important as any other in the bill in light of the abuse of the process for many years now. The agency often imposes extraneous conditions -- that is, conditions not related to any alleged harms caused by the proposed transaction after they are "volunteered" at the last-minute by transaction applicants anxious to get their deal done. The bill's requirement that any condition imposed be narrowly tailored to remedy a transaction-specific harm, coupled with the provision that the Commission may not consider a voluntary commitment offered by a transaction applicant unless the agency could adopt a rule to the same effect, would go a long way to reforming the review process.
In November 2011, Congressman Walden introduced H.R. 3309, the FCC Process Reform Act of 2012. Among many reforms, the bill proposed changes to the Commission’s transaction review standards. That bill passed the House in March 2012, but died in the Senate. 
Another Discussion Draft was circulated during the summer of 2013. Now entitled the "FCC Process Reform Act of 2013," it retained two substantial reforms proposed for the Commission’s transaction review standards from the original 2012 bill: that the Commission could only condition its approval of a transfer of lines, licenses or other transaction if:
“(A) the imposed condition is narrowly tailored to remedy a harm that would likely arise as a direct result of the specific transfer or specific transaction,” and;
“(B) the Commission could impose a similar requirement under the authority of a specific provision of law other than a provision empowering the Commission to review a transfer of lines, a transfer of licenses, or other transaction.”
In addition, the 2013 Discussion Draft added a provision, which would require that the Commission could not impose conditions on approval of transactions unless “(C) the likely harm described in (A) is uniquely presented by the specific transfer of lines, transfer of licenses, or other transaction, such that the harm is not presented by persons not involved in the transfer or other transaction.” By adding this provision, the Discussion Draft proposed to further strengthen the transaction review standards contained in the original 2011 draft of the FCC Process Reform Act of 2012. 
In his July 2013 testimony on the Discussion Draft before the House Subcommittee on Communications and Technology hearing, “Improving FCC Process,” FSF President Randolph May specifically praised the proposed transaction review process reforms included in the most recent draft of the bill:
The provisions [proposed], especially the addition that would allow the Commission to condition approval of a proposed transaction only if the condition addresses a likely harm uniquely presented by the specific transaction, would go a long way toward combating abuse of the transaction review process.  
A few months after the Discussion Draft was circulated, a compromise version of the bill was reintroduced in December 2013 as H.R. 3675, the FCC Process Reform Act of 2013. The compromise version of the bill removes the provision in the FCC Process Reform Act of 2012 that would have required conditions to be “narrowly tailored” and that would have more narrowly defined the “harm” resulting from the transaction. Although it would have been preferable for these provisions to remain, the FCC Process Reform Act of 2013 nonetheless retains important improvements for the Commission’s transaction review process.
The current bill still provides that the Commission may only condition its approval of transactions if the condition remedies a harm likely to result from the specific transfer or transaction pending, the harm is unique to that transaction, and the imposition of the condition is within the Commission’s authority other than that granted by sections 214, 309, or 310. These provisions would make it more difficult for the Commission to impose conditions on transactions under review unless they are necessary and appropriate.
Even absent congressional action, the FCC itself could institutionally reform its transaction review process to reflect the changes proposed in the FCC Process Reform Act of 2013. The Commission could do so by approaching pending mergers and acquisitions with regulatory restraint.
The FCC currently reviews transactions under the broad public interest standard. As such, the Commission could undertake reforms absent passage of the FCC Process Reform Act of 2013 by issuing a formal policy statement expressing its intent to abide by the proposals included in the Act. Or, the Commission could simply act in accordance with the transaction review standards proposed in the Act when approaching pending transactions. Modifying its transaction review process by issuing a policy statement or by acting consistently with the reforms proposed in the FCC Process Reform Act is within the FCC’s discretion. Further, these institutional changes by the agency would remove unnecessary burdens, promote efficient marketplace transactions, and in turn, benefit consumers.
For a long time, FSF scholars have focused on the need to limit the Commission’s ability to manipulate the transaction review process. As far back as 2000, in Any Volunteers?, FSF President Randolph May discussed how the Commission regulates, in effect, by imposing “voluntary” conditions on transaction approvals rather than engaging in general rulemaking proceedings that would be applicable to all similarly situated parties. Mr. May stated, “Indeed, even when the ‘volunteered’ conditions relate more closely to the Commission's articulated competitive concerns … regulation by condition is unsound, because it imposes new burdens only on the merging parties.”
There are many other pieces on the FCC’s transaction review process on FSF’s blog. The point is, the FCC has imposed unnecessarily burdensome, “voluntary” conditions on many major transactions in the past, even when those conditions were not related to the unique issues or harms presented by the pending transaction.
The FCC Process Reform Act of 2013 would substantially improve the transaction review process. However, without awaiting the passage of new legislation, the Commission should begin the New Year by committing to take a new approach to this process by acting with regulatory restraint, and reviewing proposed transfers and transactions in conformity with the review standards proposed in the Act.
Perhaps under Chairman Wheeler, reform of the transaction review process could be a New Year’s resolution the Commission can keep.