Monday, March 06, 2017

Focus on CenturyLink/Level 3 Merger Benefits Should Lead to Prompt Review in States

The proposed merger between CenturyLink and Level 3 Communications, if approved by regulators, would likely enhance competition in the market for enterprise broadband services – with no effect on residential broadband services. The FCC is in the midst of conducting its review of the merger. At the same time, states in which CenturyLink and Level 3 provide service are conducting parallel reviews. While public utility commissions (PUCs) in states such as Ohio and Utah have already approved the proposed CenturyLink/Level 3 merger, other states, such as New York and perhaps Washington, apparently intend somewhat lengthier and more detailed reviews.

The parallel state reviews can be problematic unless conducted properly and without delay. So, state PUCs now considering the proposed CenturyLink/Level 3 merger ought to act with dispatch and focus on merger-specific competitive effects only. The FCC can provide PUCs encouragement in these respects by directing its review of the proposed CenturyLink/Level 3 merger to the likely public benefits and by completing its review proceeding with dispatch.

As explained in my Perspectives from FSF Scholars paper, the “CenturyLink/Level 3 Merger Should Bring Pro-Competitive Public Benefits” in the enterprise broadband market. Enterprise broadband services deliver high volumes of data with performance quality guarantees using dedicated network facilities. These services typically are negotiated at arms-length and used by sophisticated business customers, not residential consumers.

A combined CenturyLink/Level 3 would be better able to serve business customers in multiple geographic locations, relying more on its own fiber network and less on capacity leased from third-party providers. Increased on-network capabilities and end-user connections offer superior technical performance and responsiveness to business customers. Many business customers prefer use of a single provider relying on a single network to meet their enterprise broadband needs. Importantly, the proposed merger presents no genuine concerns for residential broadband or video consumers, since Level 3 serves neither of those residential markets.

By combining resources and thereby creating new efficiencies through economies of scope and scale, mergers enable providers of enterprise broadband or other services to better serve consumers through enhanced offerings, lower prices, or both. It is therefore important that proposed mergers subject to review – particularly transactions that are pro-competitive on their face – be considered promptly and properly. On its face, the proposed CenturyLink/Level 3 certainly appears to be pro-competitive. It ought not be bogged down by multiple regulatory reviews that move slowly or that become preoccupied with issues unrelated to the transaction.

My 2010 FSF Perspectives from FSF Scholars paper, “Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions,” explained how state PUC reviews of mergers can result in costly, time-consuming, redundant reviews by multiple regulators. State PUC regulators can succumb in merger reviews to many of the temptations that have plagued FCC reviews. Regulators can become preoccupied with non-merger specific issues and use their leverage to impose regulatory conditions on their approval that are unrelated to the transaction or perhaps more fit for industry-wide rulemakings.

As I’ve previously written, “[t]he individualized nature of mergers means that onerous conditions amount to company-specific regulation that may result in unequal and unfair treatment.” Lengthy merger reviews become particularly susceptible to interest group special pleading rather than sound analysis of potential competitive effects. And by imposing conditions on merging providers of IP-enabled broadband services, state PUCs can engage in de facto regulation outside their typically narrow scope of delegated authority. Given that one or more federal authorities – such as the U.S. Department of Justice, the Federal Trade Commission, and the FCC – routinely review major proposed mergers, there is indeed reason to question whether state regulators should be conducting such duplicative reviews.

State PUCs reviewing the proposed CenturyLink/Level 3 merger should exercise self-restraint. They should avoid issues unrelated to the transaction and not impose needless administrative expenses or lost market opportunity costs through drawn-out proceedings. For those state PUCs that examine the proposed CenturyLink/Level 3 merger, it should be evident that the transaction will likely improve competitiveness in enterprise broadband services and that residential broadband and video subscribers will not lose a provider – or be impacted at all.

Thus, the states should not allow their reviews to place unnecessary conditions or shackles on what looks to be a pro-competitive merger, or to unduly delay its consummation.