OPENING STATEMENT

of

MICHAEL K. POWELL

Commissioner

Federal Communications Commission

Before the

Subcommittee on Telecommunications, Trade

and Consumer Protection of the House Committee on Commerce

on

## The Telecommunications Merger Act of 2000

## 

## 

Tuesday, March 14, 2000

10:00 a.m.

2322 Rayburn House Office Building

Good morning, Mr. Chairman and other distinguished members of the House
Subcommittee on Telecommunications, Trade and Consumer Protection. Thank
you for inviting me here to testify on the "Telecommunications Merger
Review Act of 2000."

The FCC's "merger" review process is rightly the subject of various
reform efforts. It is the topic of several pending bills in the House
and Senate, and is now the focus of an FCC Team. Reforming the FCC's
role in mergers is timely, as the blinding pace of strategic
consolidations in telecommunications and media markets continues
unabated. I appreciate this opportunity to offer my views about the
fundamentals of a sound and more efficient merger review process. After
providing some background, I will discuss three broad areas where reform
should be considered: (1) the duplication of merger review between the
FCC and U.S. antitrust authorities; (2) the standards applied by the FCC
to mergers and the selection of conditions; and (3) the FCC's review
process, including its timeliness. Although I know that there is a
specific proposal that is the subject of this legislative hearing today,
my remarks will focus on these broad areas of concern and offer several
reform options for each area.

######## Background

The FCC's authority to review license transfers derives principally from
various sections of Title III of the Communications Act of 1934
(entitled "Provisions Relating to Radio") that direct the Commission to
review applications to transfer licenses and determine "whether the
public interest, convenience, and necessity will be served by the
granting of such application . . .."[^1] If the Commission so finds, it
must grant the application. Section 214 of the Act is the source of
authority for approving applications for the acquisition and transfer of
lines by common carriers.[^2] Thus, strictly speaking, the precipitating
event for our review is a request to transfer licenses and lines from
one company to another. We are not, it should be emphasized,
specifically directed by Congress to review the potential
anticompetitive effects of the underlying transaction itself.

Nonetheless, the Commission, over time, has come to interpret its
obligation to make an affirmative finding that a license transfer is in
the public interest as a fairly broad mandate to shift the public
interest burden to the applicants and to review the benefits and harms
of the transaction itself.[^3] In selected transactions, this has come
to include comprehensive merger analysis. That is, an evaluation of the
*competitive* benefits and harms of the entire transaction rather than a
more limited determination that the lines and licenses would be put to
valued public use.

It is useful to contrast FCC review with that of the federal antitrust
authorities (Department of Justice and the Federal Trade Commission).
The FCC's review is not formally rooted in the antitrust statutes and
thus is not bound by judicial precedents in that area. In fact, the
courts have held that the Commission\'s decision that a license transfer
is "in the public interest" is entitled to "substantial judicial
deference."[^4] Additionally, while the antitrust authorities must sue
companies in court to block a merger they believe is harmful, the FCC
may block a merger (technically a license transfer) on its own, with
limited, if any, judicial review. Moreover, this difference affects the
burden of proof. The antitrust authorities must prove their case by a
preponderance of the evidence to block a merger, whereas the FCC places
the burden on the applicants to affirmatively prove the transaction is
"pro-competitive," a fairly recent pronouncement.[^5]

######## II. Duplication of Merger Review Functions

Proponents of FCC review in defending the duplicative merger review
process often cite the distinctions I have just outlined. However, the
actual differences in analysis and outcome when one examines actual
cases are substantially less. In most cases, the FCC's review follows
the same line of analysis as that found in the merger guidelines
employed by the antitrust authorities. We define product and geographic
markets, we evaluate market power in those markets, we propound on the
anticompetitive effects of the combination, and we consider efficiencies
and barriers to entry to mitigate those effects. In the main, there are
no meaningful differences in the analysis among the agencies. Thus,
despite the different foundations, procedures and standards among the
respective authorities, the evaluations by the FCC and the antitrust
authorities are largely duplicative.[^6] This imposes significant costs
on a transaction. The costs to the parties include greater uncertainty
of result, increased legal costs to defend a proposed transaction before
multiple agencies, and greater uncertainty of time before closure. The
government bears a cost as well with the duplicative expenditure of
resources inherent in concurrent jurisdiction. In the FCC's case, scarce
resources are diverted from other critical activities, for example
section 271 applications.[^7]

This is not to say, however, that there is no role for the expert agency
in some transactions. There are communications policies that may be
implicated by a license transfer that are not encompassed in antitrust
statutes and, thus, given little consideration by the antitrust
authorities. The classic example is the impact on "diversity of voices,"
when media licensees merge. Congress has often chosen to protect such
values, even where a consolidation might not raise classic concentration
concerns.[^8] In these cases, the FCC's review does not duplicate that
of the antitrust authorities.

In sum, while today's duplicative merger process within the federal
government needs to be reformed, I believe that there is room to
preserve a role for the FCC that is more complimentary or supplementary.
The Commission should be constrained to consider only issues such as
whether the merger would violate an express provision of the
Communications Act or the Commission's rules. In addition, it is
appropriate for it to consider the merger\'s impact on other
communications policies such as media diversity and universal service
that are not appropriately considered by antitrust authorities. However,
I believe that the Commission should be required to defer to the
antitrust authorities' competitive analysis and leave it up to them (and
the courts) to address specific competitive harms that they identify.

Finally, a full-blown merger review is not the only way for the FCC's
expertise to come to bear. The Commission could file comments with the
appropriate antitrust authority reviewing a merger or issue an advisory
opinion on a given merger.

*[Reform Options]{.underline}*

-   Require deference to antitrust authorities' competitive analysis.
    Permit FCC to file comments with antitrust authorities in
    communications transaction.

```{=html}
<!-- -->
```
-   Limit FCC review to questions about whether the combined company
    would be in compliance with the Communications Act, and matters that
    are not fairly encompassed in the Clayton and Sherman Acts.

######## Review Standards and Conditions

There are two areas in which standards come into play. First, there is a
serious question about what standards the Commission employs for
determining which license transfers receive extensive merger evaluation.
Commissioner Furchtgott-Roth has spoken extensively about this problem
and I will not repeat his criticism, but I do agree that the
Commission's process on this point is vulnerable to challenge as
arbitrary. The second standard issue involves the standard under which
we review mergers: the public interest standard.

The "public interest" standard has been a part of the law since the
inception of the Federal Radio Commission and, its successor, the FCC.
This standard was introduced to communications regulation in a time when
scholars and Congress believed in the supremacy of regulators in
ordering economic relationships. But we are now in an era just after the
pro-competitive, deregulatory 1996 Act in which Congress sought to
remove decisions from the \"enlightened regulator\" to the market. It is
hard to imagine a member of Congress today expressing the view
articulated by Senator Clarence Dill, in the 1927 Radio Act debates,
that the public interest standard would gain meaning by the staffing of
the Commission with \"men of big abilities and big vision.\"

I am substantially less comfortable than Senator Dill with a standard
that depends heavily on the quality and "vision" of those who happen to
occupy a Commission seat at any given time. The standard clearly lacks
guiding principles that can more predictably govern Commission
decisions. Whatever the merits of the standard in some contexts (and
there are some), I believe its application to merger analysis is flawed.
Particularly, since its has been employed as a simple "balancing
process" that weighs the potential public interest harms of the proposed
transaction against its potential public interest benefits.

########  Consistent with my long-standing concerns regarding our license transfer process, I have fundamental difficulties with the public interest standard as developed and applied in the Commission's merger reviews. Simply put, I am very uncomfortable with a standard that places harms on one side of a scale and then collects and places any hodgepodge of conditions---no matter how ill-suited to remedying the identified infirmities---on the other side of the scale. This balancing approach leads to a number of problems: [First]{.underline}, the approach creates a great temptation to load up the benefits side of the scale with a big wish list of conditions that are non-germane to the merger's harmful effects. [Second]{.underline}, the approach makes it easier for identified harms, even significant ones, to be visited upon the public in exchange for other benefits. [Third]{.underline}, the conditions that are sought are more often surrogates for policies and rules of general, rather than merger-specific, applicability, but without the extensive deliberative process and the check of judicial review normally afforded a rulemaking.[^9] 

**A. The Problem of the Mountain and the Pebble**

To conceptualize the problems with the public interest standard when
reviewing a license transfer (*i.e.,* a merger), consider a simple
balancing scale of the "see-saw" variety. On the left side of the scale
are public interest harms and, on the right, public interest benefits.
The balancing approach requires that the benefits outweigh the harms. If
the harms weigh but an ounce more than the proposed benefits, the
standard (if faithfully applied as articulated) would require us to
block the merger. This approach is troubling on one level, for if the
government were neutral with respect to the asserted benefits, it still
could be compelled to stop a merger based on essentially negligible
harms. This has led me to believe that perhaps the FCC should bear the
burden of demonstrating a basis for blocking or conditioning a merger
(much as the antirust authorities do) rather than placing an affirmative
duty on applicants to show their combination is pro-competitive.

The more serious problem arises with the public interest "scale,"
however, when the Commission, rather than weighing the harms against the
*proffered* benefits, attempts to tip the balance by adding weight to
the benefits "platter" with conditions. The public interest standard, as
the Commission applies it, does not require that the conditions cure or
remedy the identified harms. The conditions need only outweigh the
harms. Thus, the Commission is free to compensate for a pebble of harm
on one side of the public interest scale by throwing a mountain of
purportedly beneficial conditions on the other side of the scale. In
other words, when conditions are not calibrated to remedy harms, there
is no constraint on how voluminous or unrelated they might be. The
consequence of this approach is that the slightest harm opens up a
quarry of "would-be-nice-to-haves" that can be piled on the scale.
Moreover, the coercive effect of having the applicants over a barrel
hoping to gain merger approval dramatically improves the chances that
the companies will "agree" to abide by the conditions. Thus, the
temptation and the enticement to stack the scale with precious gems is
irresistible to competing companies, interest groups and the Commission
itself.

**B. "Poor Joshua!"**[^10]

The second difficulty I have with the Commission's merger standard is
that in theory, it will allow a merger to go forward that it finds will
harm the public, as long as the public gets something good in return. In
the humorous extreme, one could analogize this to allowing a stranger to
beat your dog as long as he commits to giving the dog a bone and some
fun squeaky toys. No doubt, the \"ol' boy\" has been quite anxious to
get a bone and add to his saliva-laden collection of playmates, but not
at the expense of a beating. Of course, this analogy is perhaps less
humorous if one assumes that the public interest is entitled to better
treatment than your dog.

Jests aside, the point is that when merger conditions are not designed
to remedy harms, all the unrelated benefits in the world will not cure
the loss to the public. If one is convinced of the significance of a
proposed merger's harms, it is unsettling that the merger would proceed
without significantly mitigating those harmful effects with remedial
conditions.

**C. Wither Thoughtful Deliberation?**

I think it a profound mistake to use license transfer proceedings as a
way to advance policies of general applicability that are otherwise, and
more appropriately, the subject of rulemakings. My reasons are three:

[First]{.underline}, no matter how much we try to include other parties,
a merger review is primarily an intimate, bilateral dance between the
government and the applicants. The nature of this dance is one of
negotiation. Where there are some harms and the question is finding a
set of conditions that will allow the merger to proceed, the tango
proceeds until there is a meeting of the minds between the government
and its suitor. The parties inevitably go back and forth in an effort to
find a compromise where the government gets a satisfactory list of
conditions, but not so many that the applicants walk away from the deal.
Thus, the process is not sufficiently fulsome to broach broader policy
questions. The point also shows the importance of requiring conditions
to be merger specific.

[Second]{.underline}, by importing parts of rulemakings and transforming
them into merger conditions, we risk substantially confusing both the
industry and state commissions with respect to rules previously adopted.
The conditions often overlap significantly with many of our ongoing
proceedings to implement the Telecommunications Act of 1996. In tackling
these other proceedings, the Commission must consider more than the
interests of the merging parties. Relying on conditions that overlap
with more general proceedings will require us to distinguish carefully
this conditioning exercise from our broader duties under the Act.

[Third]{.underline}, I personally am uncomfortable essentially
promulgating rules without the deliberative process of notice and
comment normally afforded in a comprehensive rulemaking. Moreover, I
think it unacceptable to pursue matters as conditions where they are
insulated from judicial review. In a classic rulemaking, parties have
the right to petition for review in court. But when a merger is approved
with conditions, the applicants are unlikely to pursue a challenge to
terms that regulators will claim they acceded to "voluntarily" as the
price for gaining favorable approval.

Finally, I do not subscribe to an essential assumption of this process,
that is, the idea that a regulated entity can "voluntarily" offer and
commit to broad-ranging legal obligations and penalties. There is never
anything voluntary about the regulatory relationship. And, even if there
were, I do not believe that the guiding structures of the regulatory
process (either rulemaking or adjudication) should be supplanted by a
unilateral offer from a license transfer applicant.

*[Reform Options]{.underline}*

-   Establish standards or thresholds for determining which, if any,
    license transfers should be subject to more comprehensive review.

```{=html}
<!-- -->
```
-   Establish guiding principles to curtail the breadth of the public
    interest standard.

```{=html}
<!-- -->
```
-   Require conditions to either cure a violation of the statute, or
    remedy clearly identified public harms.

```{=html}
<!-- -->
```
-   Place the burden on the Commission to demonstrate that a license
    transfer would not be in the public interest.

######## Process

This brings me to my last area of consideration, the process of
reviewing mergers at the FCC. Chief among the concerns of parties
contemplating merger transactions is how long will it take to get
through [all]{.underline} of the regulatory hurdles. This is especially
concerning to a competitive, technology-focused industry that is now
running on Internet time. I believe that reform in the substantive areas
I have already discussed could alleviate much of the delay of major
transactions caused by monkeying with competitive issues that are not
within our core expertise, inviting and addressing all sorts of
non-germane challenges and negotiating "voluntary" conditions. But the
process itself also needs examination.

The FCC Office of General Counsel's "Transactions Team" has recently
proposed a 180-day timeline for completing our review of major
transactions. Under the staff's proposal, the clock would start at the
release of the FCC staff's "Public Notice" announcing the applications
underlying the transaction have been accepted for filing and inviting
the filing of petitions and comments. I applaud the Commission's
self-initiated efforts in this area, though much work remains to be
done.

Some of the pending legislative initiatives that have been offered,
including the measure that is the subject of this hearing today, would
require the Commission grant or deny the merger applications within a
set period (*e.g.*, 90 days) from the date the application is filed. I
believe the current statute itself offers some guidance as to how to
structure the chronology of review. I would note that section 5(d) of
the Communications Act, added by Congress in the early 50s, provides for
a non-binding "objective" of rendering a final decision (1) within three
months from the date of filing in all original application, renewal, and
transfer cases in which it will not be necessary to hold a hearing, and
(2) within six months from the final date of the hearing in all hearing
cases. In addition, Section 309 of the Act, especially subsections (d)
and (e), provide a well-understood process of handling all Title III
applications and oppositions thereto.

I believe that time constraints are wise, but must not be completely
rigid or unbending. Mergers are fact intensive reviews that are not
always easily boxed into particular time windows. Moreover, short time
frames may be fine for pro-competitive mergers, but in the face of real
public harm, it is important for the government to act thoroughly and
decisively. Short time frames may also allow the parties to game the
process to deny the Commission the information it needs to make an
informed judgment in order to run out the clock. I think the more
prudent approach is to set clear temporal benchmarks and require the
full Commission to authorize any further review, and then only for
limited blocks of time. Let me offer an example:

(1) **Filing and Quick-look:** Once an application is filed, the
    appropriate Bureau will give the application a "quick-look" to
    ensure the application is complete. If so, the application is
    accepted and placed on public notice (within 5 to 10 business days).

(2) **Comment Period:** For 30 days, parties in interest have an
    opportunity to petition to deny the application under section 309,
    and the applicant will be afforded the opportunity to file a reply.

(3) **Stage 1 Review:** After the comment period ends the bureau will
    review the application to determine if the transfer would result in
    public harms (45 to 60 days).

(4) **Commission Review:** At the end of stage 1 review, the Commission
    by formal action must either:

```{=html}
<!-- -->
```
(a) Grant the application (and denying the petitions to deny) with or
    without conditions;

(b) Authorize further investigation by the staff for a defined interval
    (*e.g.*, 60 days), triggering stage 2 review, with perhaps
    additional comment; or

(c) Designate the application for administrative hearing in accordance
    with section 309 of the Communications Act and applicable provisions
    of the Administrative Procedures Act. (Congress could authorize a
    less onerous paper hearing, than a hearing on the record.)

\(5\) **Decision:** The vast majority of cases should take no longer
than 60 to 90 days. In the most complex cases, where significant and
germane public harms have been identified in the Stage 1 review, our
final decision should be rendered within six to nine months from the
filing of the application.

######### Conclusion

I look forward to continuing to work with Members of Congress and with
my colleagues on the scores of transactions that are likely to come
before us and the initiatives to reform this process.

Thank you for your attention. I will be happy to answer any questions
you may have.

[^1]: 47 U.S.C. § 309(a); *id.* §§ 308, 310(d). Though we do have some
    express antitrust authority under the Clayton Act, to my knowledge
    the FCC has rarely (if ever) invoked such authority as the basis for
    reviewing a merger merger. *See* 15 U.S.C. § 21(a).

[^2]: *See* 47 U.S.C. § 214(a)-(d).

[^3]: *See, e.g* Applications of Ameritech Corp., Transferor, and SBC
    Communications, Inc., Transferee, For Consent to Transfer Control of
    Corporations Holding Commission Licenses and Lines Pursuant to
    Sections 214 and 310(d) of the Communications Act and Parts 5, 22,
    24, 25, 63, 90, 95, and 101 of the Commission\'s Rules, CC Docket
    98-141, *Memorandum Opinion and Order*, 14 FCC Rcd 14712 (1999);
    Applications For Consent to the Transfer of Control of Licenses and
    Section 214 Authorizations from Tele‑Communications, Inc.,
    Transferor to AT&T Corp., Transferee, CS Docket No. 98‑178,
    *Memorandum Opinion and Order*, 14 FCC Rcd 3160 (1999); Application
    of WorldCom, Inc. and MCI Communications Corporation for Transfer of
    Control of MCI Communications Corporation to WorldCom, Inc., CC
    Docket No. 97-211*, Memorandum Opinion and Order*, 13 FCC Rcd 18025
    (1998); Applications of NYNEX Corporation Transferor, and Bell
    Atlantic Corporation Transferee, For Consent to Transfer Control of
    NYNEX Corporation and Its Subsidiaries, File No. NSD-L-96-10,
    *Memorandum Opinion and Order*, 12 FCC Rcd 19985 (1997).

[^4]: *SBC Communications, Inc. v. FCC*, 56 F.3d 1484, 1490 (D.C. Cir.
    1995), quoting *FCC v. WNCN Listeners Guild*, 450 U.S. 582, 596
    (1981).

[^5]: *See* Applications of NYNEX Corporation, Transferor, and Bell
    Atlantic Corporation, Transferee, for Consent to Transfer Control of
    NYNEX Corporation and its Subsidiaries, File No. NSD-L-96-10,
    *Memorandum Opinion and Order*, 12 FCC Rcd 19985, 19994, 20061, ¶
    16, 153 (1997). *But see also* Applications of Pacific Telesis
    Group, Transferor, and SBC Communications, Inc., Transferee, for
    Consent to Transfer Control of Pacific Telesis Group and its
    Subsidiaries, Report No. LB-96-32, *Memorandum Opinion and Order*,
    12 FCC Rcd 2624 (1997). Eight months before the Bell Atlantic/Nynex
    decision, the Commission concluded in the SBC/PacTel proceeding that
    "the proposed transfer will result in pro‑competitive effects,
    efficiencies, and other public interest benefits that could be real
    but, if they occur, will not likely be dramatic. *We emphasize that
    it is not these benefits of the proposed transfer, but rather its
    lack of any significant and foreseeable anti‑competitive effects,
    that has led us to approve it*." *Id.* at 2661 ¶ 84 (emphasis
    added).

[^6]: I would call the Committee's attention to a recent report issued
    by the Department of Justice's International Competition Policy
    Advisory Committee, which specifically addresses the overlapping
    merger-related functions of the U.S. antitrust authorities, sectoral
    regulators like the FCC, and the states. *See* Final Report,
    Justice's International Competition Policy Advisory Committee to the
    Attorney General and Assistant Attorney General for Antitrust at
    142-154 and Annex 3-B.

[^7]: It is important to note that the FCC has substantially fewer
    people trained in competitive analysis to review mergers than does
    DOJ or the FTC.

[^8]: *See*, *e.g.,* 47 U.S.C. § 533 (Cable Television Ownership
    Restrictions) and Pub. L. No. 104-104, § 202 (Broadcast Ownership).

[^9]: A fuller recitation of my critique of standards and conditions can
    be found in my separate statement, dissenting in part, in the
    SBC/Ameritech merger Order.

[^10]: This famous refrain is drawn from *DeShaney v. Winnebago County
    Dept. of Social Services,* 489 U.S. 189 (1989) (J. Blackmun,
    dissenting) (holding that state had no constitutional duty to
    protect Joshua, a child, from his father after receiving reports of
    possible abuse). In *DeShaney,* Justice Blackmun wrote: "Poor
    Joshua! Victim of repeated attacks by an irresponsible, bullying,
    cowardly, and intemperate father, and abandoned by respondents who
    placed him in a dangerous predicament and who knew or learned what
    was going on, and yet did essentially nothing except . . . dutifully
    record\[ \] these incidents in \[their\] files." *Id.* at 213.