FEDERAL COMMUNICATIONS COMMISSION
In the Matter of:                  )
                                   )
ROUND TABLE ON THE ECONOMICS OF    )
MERGERS BETWEEN LARGE ILECS        ) Docket No. CC-98-141
HELD ON FEBRUARY 5, 1999           ) 
                                   )
LIVE VIDEOTAPE PROVIDED TO         )
HERITAGE REPORTING CORPORATION     )
ON FEBRUARY 8, 1999                )

                            LIVE TAPE

          The following transcript was transcribed from an audio 

cassette tape provided by the FCC from a Live Videotape provided
to

Heritage Reporting Corporation on December 8, 1998.

Pages:  1 through 150

Place:  Washington, D.C.

Date:   February 8, 1999                              Before the
                   FEDERAL COMMUNICATIONS COMMISSION
                        Washington, D.C.  20554
     
     
     In the Matter of:                     )  
                        )
     ROUND TABLE ON THE ECONOMICS OF   )
     MERGERS BETWEEN LARGE ILECS           )
     HELD ON FEBRUARY 5, 1999              ) Docket No. CC-98-141
                        )
     LIVE VIDEOTAPE PROVIDED TO            )
     HERITAGE REPORTING CORPORATION    )
     ON FEBRUARY 8, 1999                   )
     
                    
                    Federal Communication
                    Commission
                    445 12th Street, S.W.
                    Washington, D.C.
       
                    Monday,
                    February 8, 1999
     
               The parties met, pursuant to the notice.
     
     
               BEFORE:  WILLIAM ROGERSON
     
     
               ATTENDEES:
     
               WILLIAM ROGERSON, Chief Economist
     
               DENNIS CARLTON
               University of Chicago
     
               ROBERT CRANDALL
               Brookings Institute
     
               JOSEPH FARRELL
               University of California-Berkeley
     
               ROBERT GERTNER
               University of Chicago
     
               RICHARD GILBERT
               University of California-Berkeley
                    ATTENDEES:  (CONT'D)
     
               ROBERT LITAN
               Brookings Institute
     
               ROGER NOLL
               Stanford University
     
               JEFFREY SHEPERD
               University of Massachusetts
     
               MICHAEL KATZ
     
               HAROLD FURCHTGOTT-ROTH, Commissioner
               Federal Communications Commission
     
     
     
     
                                    I N D E X
     
                                                             PAGE
     
     OPENING REMARKS
     
         WILLIAM ROGERSON                                       4
     
     
     SESSION ONE:
     
         DENNIS CARLTON, UNIVERSITY OF CHICAGO                 10
     
         ROBERT GERTNER, UNIVERSITY OF CHICAGO                 14
     
         ROGER NOLL, STANFORD UNIVERSITY                       18
     
     
     SESSION TWO:
     
         JOSEPH FARRELL, UNIVERSITY OF                         31
         CALIFORNIA-BERKELEY
     
         ROBERT CRANDALL, BROOKINGS INSTITUTE                  40
     
         DENNIS CARLTON, UNIVERSITY OF CHICAGO                 42
     
     
     COMMISSIONER HAROLD FURCHTGOTT-ROTH                       77
               
     
     SESSION THREE:
     
         ROBERT LITAN, BROOKINGS INSTITUTE                     83
     
         JEFFREY SHEPERD, UNIVERSITY OF MASSACHUSETTS          84
     
         RICHARD GILBERT, UNIVERSITY OF                       101
         CALIFORNIA-BERKELEY
     
     
     SESSION FOUR:
     
         MICHAEL KATZ                                         118
     
         DENNIS CARLTON, UNIVERSITY OF CHICAGO                127
                              P R O C E E D I N G S
                   MR. ROGERSON:  Good morning, and welcome to the
     FCC round table on the economics of mergers between large
     incumbent local exchange carriers.
                   In 1996 when the Telecom Act was passed, there
     were eight large regional telephone companies providing
     local telephone service, seven Baby Bells and GTE.  Since
     this time the FCC has approved two mergers between these
     firms, reducing the numbers to six, and right now the FCC is
     faced with proposals for two more mergers that would further
     reduce the numbers down to four; specifically Bell Atlantic
     is proposing to merge with GTE, and SBC is proposing to
     merge with Ameritech.
                   Well, the two companies resulting from these
     mergers would control two-thirds of the local telephone
     lines in the United States.  Furthermore, the arguments that
     proponents of these mergers are making to support them are
     the type of arguments that if the FCC accepted them might
     well also cause the FCC to accept further consolidation
     among the remaining four, perhaps to bring us down to two
     some people have suggested.
                   Therefore, I think that the FCC really is at a
     defining moment for telecommunications policy and that the
     decisions that the FCC is going to make about these mergers
     could well affect the structure of the telecom industry for
     years to come.
                   The issues that we have to evaluate, and I was
     actually getting very close to the climax here, Mike.  I
     promised them all that you would show up at about this
     point.
                   The issues that the FCC has to evaluate really are
     very complicated, the FCC has discovered going through all
     of these.  Critics of the mergers have told us at the start
     well, it is not all that complicated at all.  You used to
     have eight, and you are on your way to two.  That is on the
     face of it anti-competitive.
                   The proponents of the mergers have come back to us
     and told us well, these six current ILECs basically do not
     compete with each other at all.  They are each in their own
     region and serving their own people, and there is very
     little competition between them.  They have shown very
     little interest in competing out of region, and even when
     they have shown interests in competing out of region they
     have shown very little aptitude.
                   To the extent that there has been competition in
     local telephone markets, proponents of the mergers tell us
     that it has basically just been supplied by long distance
     companies trying to become local companies as well and by
     start up companies.
                   Proponents of the mergers have argued to us that
     most competition in local telephone markets is being
     provided by long distance companies and by independent start
     up companies.  They argue that plenty of competition is
     being provided by these types of firms, and, in any event,
     whether Baby Bells merge or not is irrelevant to the issue
     of competition in local markets because they do not compete
     with each other.
                   In fact, they make a stronger argument than this. 
     They claim that although these Baby Bells have been too
     small and anemic to compete out of region thus far, if only
     they were allowed to bulk up a little more, in fact, they
     might become very dynamic competitors out of region and
     actually increase competition if we allow these mergers.
                   Well, critics of the mergers do not take this
     lying down.  They say yes, it is true that in fact the Bells
     may not compete with each other that much right now, but
     there is every indication that they would have begun to
     compete with each other tomorrow or six months from now or
     surely by next year.
                   The problem with these mergers, critics say, is
     not that they are going to destroy competition that is
     occurring today, but they are going to destroy competition
     that surely would have occurred but for these mergers. 
     Well, proponents come back and say this is highly
     speculative, and they do not think it is true.  Then we will
     see what the critics say to that.  I think they say they
     think it is true.  We will find out.
                   The issues do not stop here.  It turns out there
     are a number of other distinct possible benefits and harms
     of these mergers that economists and other interested
     parties have raised.  What I have tried to do today is to
     organize the round table that we are going to have into
     sessions that will kind of go systematically through the
     arguments that have been presented as the FCC sees them and
     expose each one to the full light of day and have some
     vigorous argument and debate about each of them.
                   We have a very distinguished panel of economists
     who are joining us today to help us go through these
     arguments, and I now would like to take a moment to
     introduce them.
                   I am Bill Rogerson, and I am the chief economist. 
     Starting to my right is Dennis Carlton from the University
     of Chicago.  He has submitted an affidavit on behalf of
     SBC-Ameritech in favor of the merger.  Robert Crandall from
     the Brookings Institute submitted an affidavit on behalf of
     BA-GTE, and he was in favor of that merger.
                   Joe Farrell from UC-Berkeley submitted an
     affidavit on behalf of Sprint in opposition to the mergers. 
     Rob Gertner from the University of Chicago submitted an
     affidavit on behalf of BA-GTE.  Rich Gilbert from
     UC-Berkeley submitted an affidavit on behalf of
     SBC-Ameritech.  Michael Katz from UC-Berkeley submitted an
     affidavit on behalf of Sprint.
                   Bob Litan from the Brookings Institute and Roger
     Noll from Stanford, these guys apparently could not find
     anyone to get them to pay them to write a paper, but they
     went ahead and wrote a paper anyhow, so they have published
     a Brookings research paper jointly co-authored that is
     critical of the mergers.
                   Finally, Jeff Sheperd from the University of
     Massachusetts has submitted an affidavit in support of a
     consumer group on behalf of a consumer group called the
     Texas Office of the Public Utility Council that is generally
     critical of the mergers.
                   The agenda for today.  Do people have copies of
     it?  Were they available?  This has been a deep secret. 
     None of our panelists do either.  Apparently I can change
     this as I go along.
                   What the agenda in front of me says is we have
     divided the round table into four equally long sessions. 
     Really what I have tried to do is focus on what seemed to be
     the four big issues that there has been a lot of debate
     about.  We are going to consider them each one at a time.
                   The first issues are what are the potential
     benefits of these mergers, and how big are they?  The
     second, third and fourth sessions are going to each focus on
     separate theories of harm the different parties have
     advanced that are critical of these mergers, so there are
     three quite distinct different theories of harms that have
     been put forward to the FCC that we have to evaluate and
     deal with.
                   Session Two will be devoted to the issue of
     whether or not these mergers will affect the FCC's ability
     to do benchmarking.  Then we will have a break.  Session
     Three will be devoted to whether or not these mergers will
     have effects on actual or potential competition.
                   Finally, Session Four will be devoted to whether
     or not these mergers will increase either the incentive or
     the ability of the large ILECs to act anti-competitively
     against their rivals.  Then we will have a very brief
     concluding session where we can wrap up.
                   The way I am going to run each session is I have
     asked two to three people to each take five minutes at the
     start of each session to basically set out the framework of
     issues for us to give us a basic pro, what the argument is
     being made, and the basic con, what the structure on the
     other side is.
                   After we have had each of these people give us a
     basic framework for what the issue is, I am going to turn it
     loose to the entire panel, and I hope they will all question
     each other vigorously and so on.
                   If they are not questioning each other vigorously
     enough, I am going to turn it loose to the audience.  In
     fact, I am going to turn it loose to the audience even if
     you are questioning each other vigorously, so I should admit
     that now.  Probably about five or ten minutes before the end
     of each session I am going to turn to the audience and ask
     the audience if they have any questions that they would like
     to address to our panelists.
                   Let's get started then.  The first session is on
     potential benefits of the mergers.  Do these mergers have
     benefits?  If so, how big are they, and why do we know they
     exist?  I have asked Dennis Carlton, Robert Gertner and
     Roger Noll to each make five minutes of opening remarks.
                   What I will do is when you have one minute left,
     Dennis, I will tell you you only have 30 seconds left, okay? 
     Go ahead, Dennis, if you would like to start.
                   MR. CARLTON:  Thank you.  It is a pleasure to be
     here.
                   The merger of SBC and Ameritech will create a
     national competitor that can quickly provide a broad range
     of services for both residential and business customers. 
     The benefits of stimulating competition in the provision of
     these services are undeniable and large.  SBC plans to offer
     a wide variety of services, including local, long distance,
     Internet and customized data services for both residential
     and business customers in a one stop shopping environment.
                   The national/local plan is SBC's response to the
     rapid changes in demand and supply for telecommunications
     services.  As far as I am aware, no one has seriously
     disputed that the national/local plan is a sound business
     strategy whose implementation will significantly increase
     competition.
                   The validity of the national/local plan is
     confirmed by the fact that the other major providers of
     telecommunications services are heading in precisely the
     same direction, the most prominent being the three major
     interexchange carriers, MCI WorldCom, AT&T and Sprint.  It
     is no surprise that the objections to this transaction
     principally are being made by the very firms that SBC plans
     to challenge in the marketplace.
                   Opponents claim that the national/local plan
     should not be considered a merger specific efficiency.  They
     have made two basic arguments which are glaringly
     inconsistent.  On the one hand, they claim that SBC will not
     really carry out the plan.  MCI WorldCom goes so far as to
     call the plan a rouse.  On the other hand, opponents also
     claim that the plan is not merger specific because either
     SBC or Ameritech would carry out similar plans absent the
     merger.
                   Opponents are wrong.  The claim that SBC's
     commitment is not credible can be easily dismissed.  There
     is simply no reason to believe that SBC would willfully risk
     misrepresenting itself before consumers, investors, Congress
     and the FCC.  Just yesterday on the front page of the Boston
     Globe there was an announcement of how SBC would offer new
     local service in Boston.
                   The claim that SBC or Ameritech would carry out
     the plan in the absence of the merger is simply unsupported
     speculation.  The issue is not whether SBC could finance the
     plan by itself.  The issue instead is whether in the absence
     of the merger SBC would have the necessary economic
     incentive to undertake such an aggressive plan in such a
     short time.
                   There is no evidence whatsoever to support the
     position that it would be profitable for SBC to undertake
     the national/local plan absent the merger.  Acting alone,
     SBC would face higher costs and greater risk of failure in
     pursuing the national/local plan than under the merger.
                   For example, either firm would need to deploy more
     managers proportionately, more engineers.  In the absence of
     the merger, they could not carry through with their follow
     to headquarters, follow to a home customer plan, as easily
     as they could after the merger.  In the absence of the
     merger, the plan would be less attractive financially, and
     it would be perfectly rational for SBC or Ameritech to
     decide not to pursue this risky strategy.
                   Given the race now underway to offer packages of
     services on a nationwide basis, delays in establishing a
     national footprint translate into a reduced likelihood of a
     project success and, therefore, the reduced likelihood that
     a project of this scope and speed would be undertaken.  The
     fact that mergers can create a national footprint should be
     no surprise.  WorldCom's acquisition of MCI and AT&T's
     acquisition of TCG had similar motivations to accelerate the
     deployment of packages nationally of end to end service.
                   Furthermore, in addition to the national/local
     plan, the merger is expected to bring additional
     efficiencies.  SBC expects to realize significant savings
     from the Ameritech transaction, including more than $1
     billion in annual cost savings by 2003.
                   SBC has a proven track record in achieving
     projected cost savings.  In the Pac Tel merger, they are
     ahead of schedule in achieving more than $1 billion in
     annual cost savings by the year 2000.
                   In sum, the substantial benefits from this merger
     are indisputable.
                   MR. ROGERSON:  Dennis, you have 30 seconds.
                   MR. CARLTON:  Okay.
                   MR. ROGERSON:  I am not joking.
                   MR. CARLTON:  In sum, the substantial benefits
     from this merger are indisputable.  The merger creates a
     more potent national service provider for business and
     residential customers.  The notion that this merger should
     be stopped because someone hopes that each company would on
     its own embark on a similar plan is faulty.  Consumers
     should not be deprived of the benefits of this transaction
     on the basis of unfounded speculation.
                   Thank you.
                   MR. ROGERSON:  Thanks, Dennis.
                   Now Rob Gertner from the University of Chicago.
                   MR. GERTNER:  Thank you, Bill, for the opportunity
     to participate in today's round table.  I look forward to
     discussing the economic impact of these mergers.  In my
     remarks, I will address the pro-competitive benefits of the
     mergers, focusing on the Bell Atlantic-GTE merger.
                   The telecommunications market is changing rapidly. 
     Deregulation and new technology are transforming the
     industry.  Not surprisingly, other industries facing such
     fundamental shifts have seen major changes in the identity,
     scope and scale of competitors.
                   These changes are characteristics of deregulated
     industries, such as airlines, trucking and energy, as well
     as technologically dynamic industries such as computer
     software and hardware and telecommunications equipment.
                   Many of these changes include significant
     consolidation through mergers and acquisitions.  Competitive
     adaptation to such a change in environment is fundamental
     for achieving economic efficiency.  This is especially true
     in industries such as local telecommunications where the
     geographical and product scope of the companies has been
     determined by regulation rather than market forces.
                   Certainly proposed mergers must be analyzed
     carefully by regulatory authorities for potential
     anti-competitive effects, but regulators should be mindful
     of the value of competitive responses to a changing
     environment.
                   These mergers are between large companies. 
     Although this may make some people worry, it is widely
     accepted that big is bad is a flawed way to think about
     mergers.  Instead, we must evaluate carefully the likely
     impact of the mergers on competition and consumers.
                   Opponents of the mergers present a variety of
     objections to both proposed transactions, but their economic
     arguments lack empirical support.  A careful analysis of the
     institutional and competitive environments in which these
     firms compete show that the opponents' concerns are not
     economically significant.
                   On the other hand, the pro-competitive strategic
     rationales for the mergers are strong.  The most significant
     benefit from the Bell Atlantic-GTE merger follows from two
     simple premises that are widely accepted by all parties,
     including regulators and companies opposing these mergers.
                   The first premise is that the ability to provide
     facilities based bundle services on a wide geographic scale
     is an important strategic asset for telecommunications
     providers.  Indeed, the major opponents of these
     transactions are pursuing similar strategies in similar ways
     by acquiring firms that are allowing them to offer
     portfolios of telecommunications services on a national or
     near national basis.
                   For example, AT&T has recently completed several
     major acquisitions and announced a new business strategy
     based on offering bundled telecommunications services.  The
     FCC, in proceedings on these mergers, has acknowledged the
     importance of bundle services, and the pleadings include
     statements from many business customers that they value such
     services.
                   The second premise is that existing customer
     relationships provide an important competitive advantage in
     the evolving market.  Wide ranging evidence supports this
     view.  The evidence includes the cost incurred by
     interexchange carriers and wireless carriers to induce
     customers to switch service, the difficulty GTE has had in
     selling services out of its local exchange region, consumer
     surveys and the strategies adopted by numerous companies to
     sell new services to their existing customers or to make
     acquisitions to gain access to an expanded customer base.
                   The Commission also agrees with this premise.  For
     example, in the Bell Atlantic-Ninex Order, the Commission
     argued that the major interexchange carriers are among the
     most important potential competitors in local markets
     because of their existing customer bases and brand
     recognition.
                   The merger of Bell Atlantic and GTE will have
     significant pro-competitive benefits.  GTE's GNI and
     Internet backbone and Bell Atlantic's customer base are
     strongly complimentary assets.  The combination of these two
     assets will create a strong facilities based bundle services
     competitor.  Furthermore, the merged firm will use GTE's
     existing presence in or near many geographical dispersed
     markets to facilitate timely and efficient entry.
                   The benefits to consumers will include the
     presence of another national or near national provider of
     bundled telecommunications services.  This increased
     competition should result in lower prices and greater
     consumer choice.
                   Businesses will be able to receive the same set of
     advanced services at all locations.  They will be able to
     coordinate upgrades and service throughout their
     organizations with a single provider that understands their
     telecommunications needs.  Consumers will be able to reduce
     transaction costs and coordination costs by having a single
     provider.
                   MR. ROGERSON:  You have 30 seconds left, Rob.
                   MR. GERTNER:  In addition to these benefits, the
     merger will result in significant cost savings.  Bell
     Atlantic and GTE estimate that the merger will lead to $2
     billion annual cost savings within three years of the
     merger.
                   There is an important reason to not be skeptical
     about these benefits, given the experience that they have
     had in their previous mergers in meeting these targets.  The
     pro-competitive benefits of the merger is clear.  It would
     be unwise to forego these benefits because of potential
     harms that are unlikely and for which there is no empirical
     support.
                   Thank you.
                   MR. ROGERSON:  Thanks, Rob.
                   Roger Noll from Stanford University.
                   MR. NOLL:  I am still in awe of the new building. 
     What did you guys have to do?  Usually in the Silicon Valley
     when you walk into a new building like this you know that
     the company is successful and about to have an IPO, and can
     I buy stock.
                   I do not have a prepared statement because I did
     not have to clear it with any lawyers.  That is actually one
     of the advantages of not coming here representing somebody. 
     What I want to do is step back and say how should we think
     in general about merger policy in the context of the past 15
     years of history in the telecommunications industry and then
     put these things in perspective, the arguments about
     benefits.
                   It seems to me that the entering premises here
     have to be two.  The first premise has to be in the best of
     all possible worlds, if a firm believes it has a superior
     business strategy and wants to undertake a series of
     agglomerations, whether horizontal, vertical or adjacent, to
     achieve that business strategy we would normally just get
     out of the way and let them sink or swim on placing their
     own bets.  That is the whole point of having a decentralized
     market based system.
                   Then we ask the question what is there about the
     history of telecommunications that might cause us to say
     this is not the right way necessarily to think about the
     problem?  That is to say that we might want to look beyond
     the kinds of statements we have just heard about the largely
     firm specific benefits that would arise from this activity.
                   Now, of course, that is not necessarily bad
     because the premise is the first specific benefits arise
     because they are somehow more able to please consumers. 
     Therefore, they make more money by doing good, as well as by
     doing well.
                   The answer here is quite simple, and that is that
     we have a history of precisely these arguments defending the
     presence of ubiquitous monopoly in the industry not only in
     the U.S., but everywhere in the world.
                   That is to say that the history of this industry
     is one in which we have been told throughout the lives of
     everyone in this room that the nature of this industry is
     you are better off if there is just one guy out there who
     does everything, and you just sit back and do not worry your
     pretty little head about which particular alternative is
     offering better services, that it is just something that you
     should not worry about.
                   We know what you want, and it is to get the
     complete bundle of telecommunications services from a single
     ubiquitous provider, which is a different argument than the
     national monopoly argument.  It is an argument about
     complexity, information impactedness and, on the supply
     side, the integratedness of the whole telecommunications
     enterprise.
                   We have a long history of looking back at things
     like the introduction of competition in the U.S. and other
     countries, things like the divestiture which created seven
     RBOCs instead of one, all of which prior to the act being
     taken were predicted to impose substantial cost.
                   The flip side of the argument about benefits is
     that the introduction of competition and the introduction of
     divested RBOCs in multitudinous numbers was that there was
     going to be a big, positive cost impact.  Indeed, the
     majority of state regulators at the time immediately
     following divestiture gave emergency rate relief to the
     RBOCs on the grounds that the act of undertaking divestiture
     was going to make them less efficient.  These then emergency
     rate reliefs, within a matter of about 18 months, were all
     rescinded because they were unnecessary.
                   The is the first important background point.  As a
     subsidiary of this, the only point that I think one needs to
     keep your eye on all throughout this argument --
                   MR. ROGERSON:  Roger, in 30 seconds --
                   MR. NOLL:  Right.
                   MR. ROGERSON:  -- I am going to tell you that you
     have 30 seconds.
                   MR. NOLL:  Okay.
                   MR. ROGERSON:  I think you needed this extra
     warning.
                   MR. NOLL:  Bill, I can still rescind that Ph.D.
                   Now that I thoroughly lost my train of thought,
     the right level of analysis is the industry, not the firm. 
     That is extremely important to bear in mind.  The issue is
     what is happening to consumers in all markets, those who
     want to bundle their own packages, as well as those who get
     them by themselves.
                   What is happening to the cost of the firms that
     have not merged, as contrasted with the firms that have?  We
     know that the long run cost trend in local carriers is in
     fact that real costs are declining.  To say that the merged
     entities have had lower costs since the merger is not to say
     very much in an industry where costs are falling.  I am not
     saying it is not true.  I am just saying the right level of
     analysis is not the firm.  It is the industry.
                   Finally, one more point before Bill gets here,
     which is think about this in the context of the
     Telecommunications Act.  If it is the case that the vision
     of the Telecommunications Act of having ubiquitous,
     vertically integrated competition is true, then within a few
     years we are not going to care about these mergers.  Within
     a few years, if these benefits are real, the companies that
     will succeed will be the vertically integrated ones, and we
     will not care if mergers take place.
                   If the vision of the Act is not true, then we are
     going to care a great deal if we in fact de facto recreate
     the old AT&T and undo all the competition and all the
     benefits from the competition that we have observed in the
     last 15 years.
                   MR. ROGERSON:  Thanks, Roger.
                   Okay, guys.  Let me turn you loose.  Rich, go
     ahead.
                   MR. GILBERT:  I just want to respond to Roger, if
     I may.
                   This is not about creating a monopoly.  This is
     about creating firms that can compete on a national and on a
     global scale with other integrated telecommunications
     providers, such as AT&T-TCI-Time Warner, Alliance and MCI
     and Sprint, and the global players as well, the French
     Telecom and British Telecom and NTT and such.  This is the
     playing field that we are dealing with.  This is not about
     creating a monopoly.
                   On the merger benefits side, I just want to focus
     on the in region benefits, since others have talked about
     the national/local strategy out of region benefits to say
     that this is not a speculative analysis.  This is based on
     evidence, and the evidence is that we have a track record
     now from the acquisition of Pacific Telephone, Pacific
     Telesys, by SBC, and we have for this merger we have $1.4
     billion annually in projected cost savings.
                   At SBC-Pac Tel we had something similar, about $2
     billion, and the evidence right now is that those
     efficiencies are right on track.  We have $50 million in
     annual cost savings on tandem and trunk design.  We have $88
     million in operator services, $134 million in directory
     publishing.  These are coming in proven, demonstrated
     efficiencies in region, so we do not have to speculate. 
     This is fact.
                   MR. ROGERSON:  Okay.  Rich has said that if you
     have two comptrollers you can fire one, etc., and there is
     real efficiencies then to having two firms combine into one,
     right; just plain, old horizontal efficiencies because there
     are all sorts of things you do not have to do twice.
                   Is that true?  Is there evidence to support it? 
     Is that a significant reason for allowing this merger?
                   Bob?
                   MR. CRANDALL:  I think I agree with Roger that you
     cannot find evidence of the technical economies of scale in
     something like that that would drive these mergers; that in
     fact there has to be something else.
                   I think what is driving it is a desire to reach
     out and become a national presence and compete against the
     Sprints and AT&Ts of this world, but we should not
     underestimate the impact of these mergers in creating
     efficiencies; that is, shaking out inefficiencies.
                   Right within this room there are people who have
     been estimating cost models that show that forward looking
     cost models give you much lower cost than the embedded costs
     of these companies.  There is a reason for that.  These
     companies have been subject to numbing regulation for
     decades, and that is part of the problem.
                   In every industry that I know of that has gone
     through a major change of the increase in competition,
     whether it be from foreign trade or from deregulation, there
     has been a huge shake out of management.  I remember in the
     airlines we had to retire Frank Bohrman to sell used cars in
     Arizona.
                   In the case of the steel industry, the only large
     steel companies that have survived and will survive are the
     ones who brought in new management.  You need to shake up
     these organizations.  You get enormous efficiency gains from
     doing it, and one of the ways you do it is through merger.
                   Even in this industry, AT&T has not really gotten
     its act together until it brought in a CEO from outside.  I
     think you really need to allow these firms to sort things
     out.  You need to allow these mergers in order to get these
     efficiencies.  You have gotten a lot of them so far, and I
     think you can get a lot more.
                   MR. ROGERSON:  Bob?
                   MR. LITAN:  Is this on?  Can people hear me?  Yes? 
     Okay.  On efficiencies, and then I want to go back to
     potential competition in the national plan.
                   You can get a change in management without a
     merger, so I do not see how the merger is a condition for
     achieving these efficiencies.  We will still have numbing
     state regulation even after these mergers if that is causing
     inefficiencies.
                   I am going to go back to the local plan and
     address several points that Dennis raised.  First, he said
     that the firms I guess in the case of both of them, that
     they will both have enhanced incentives by merging the two
     of them to enter out of region.  To me, that is not
     self-evident.
                   I would like to see that explained, especially in
     light of my second point, which is you would presume that
     those incentives were operational after SBC bought Pac Bell,
     and I did not see the combined SBC-Pac Bell running around
     with a national plan.  Why is it that they need another RBOC
     to make the national plan a reality?
                   The third point that Dennis raised is well, why
     would SBC misrepresent itself about this plan?  I do not
     think anyone has to accuse them of misrepresenting.  The
     fact is that plans change all the time in this industry. 
     AT&T rolled out a resale plan, only to basically rescind it
     and switch strategy to go to the cable strategy, realizing
     that resale at least was not going to work.
                   The point is that the FCC in advance has no way of
     knowing how credible any particular promise is.  The promise
     may be credible at the time.  It may be advanced in full
     faith, but it may change because business strategies change. 
     After all, in the wake of these mergers SBC may say look, we
     want to spend all of our attention concentrating on in
     region, and we will get to outer region later.  They could
     do that maybe four or five months after the merger, which
     leads to the final point, and that is I was trying to think
     creatively.
                   The FCC could take SBC at its word and say all
     right, if you are going to promise 30 new cities, we will
     make that a condition of the merger.  All right.  I mean,
     SBC in a way is taking an enormous risk by making this plan
     and inviting the FCC to attach this condition.
                   In my outline that I have handed out and I will
     address later, I point out that there are problems in
     imposing such a condition, and that is it is hard to
     operationalize.  SBC could enter and then withdraw six
     months later and say well, we tried; it did not work, so
     there would be no way to enforce it.
                   Alternatively, you could impose a hold separate
     Order on the companies and then say well, you can basically
     merge after you go ahead and enter, but holding separate for
     several years may eliminate the efficiencies and probably
     eliminate the appetite of the management for doing the deal.
                   All of this is to say that the FCC should not
     dismiss, though, out of hand the notion that you attach this
     as a condition if in fact SBC is really serious about this,
     but I question the premise to begin with.
                   MR. CARLTON:  May I respond?
                   MR. ROGERSON:  Yes.  Right.  Jeff Sheperd wants to
     take a shot at you, too, but first I would like to have you
     specifically respond to the question why is it that
     SBC-Ameritech will have an increased incentive to enter and
     pursue a national strategy after this merger?
                   MR. CARLTON:  Okay.  I would like to actually
     respond also to something related that Roger said.  I would
     like to make three points.
                   First, there is a distinction between ubiquitous
     monopoly and one stop shopping.  If you have many people
     providing a bundle of products, you do not call that
     ubiquitous monopoly.  I would call that competition among
     many people to provide a bundled product that is desirable,
     and that is what seems to be going on in people's pursuit of
     a national strategy.
                   Second, a merger like SBC's that is promising
     competition out of region strikes me as the antithesis of a
     merger creating a monopoly.
                   Now, to go directly to Bob's two points, what are
     the increased incentives --
                   MR. ROGERSON:  Get to Bill's one question, too, at
     some point.
                   MR. CARLTON:  Well, the first point was yours,
     Bill.
                   What are the increased incentives as a result of
     this merger?  I think there are two or three points here. 
     First, there is absolutely no evidence that absent the
     merger, either company on its own would undertake the same
     investments, the same project.
                   Now, what are the increased incentives?  The
     national/local plan is based on the premise that following
     your customer gives you an advantage.  What does following
     your customer mean?  You have customers with headquarters in
     your territory.  You have relations with them.  You can then
     follow them.  If you are merged, you have more customers in
     your territory that you can then follow.  Therefore, you
     have more customer contacts.  That is the first point.
                   It is a slightly different strategy than what the
     other say three large IXCs are following.  It is a different
     strategy, and it would be materially affected if there were
     not a merger.
                   Second, and in fact I have a table in my report
     that shows precisely that if each company tried to do it on
     their own, say if Ameritech tried to expand into 15 extra
     cities, it would only cover what they believe is around 31
     percent of their in region customers, while with a merger if
     they could merge and then expand into the national/local
     plan they will cover 80 to 81 percent of the right coverage
     for their in region customers, which then makes it easy for
     them to expand out of region.  That is the first point.
                   The second point.  Why is it easier?  If you look
     at what happens when a smaller company has to expand rapidly
     compared to a larger company, if you require a
     proportionately larger increase, which you would if SBC on
     its own had to undertake the same national/local strategy of
     going into 30 cities, that is a much larger proportional
     increase.  You would have to expand more managers, more
     engineers.  It is more costly.
                   We know adjustment costs rise with the speed of
     expansion.  What does that mean?  That means that the speed
     with which this strategy will be deployed is certainly going
     to be much slower if you require the companies to do it on
     their own.
                   What does a slower strategy mean in a race to
     capture customers with switching costs?  It means the
     strategy will be likely less successful, so you have lowered
     the profitability of the strategy, and you have reduced the
     speed of the policy.  Both of those are reasons why the
     incentive is greater and would bring benefit immediately to
     consumers.
                   This is precisely why you saw the large IXCs or
     one reason why you saw the large IXCs while they are
     involved in mergers and acquisitions in order to build up
     not de novo, but take existing assets, put them together
     quickly in order that they can get a national footprint.
                   You could have made the same argument with respect
     to those acquisitions.  The point is when you start with an
     inefficient industrial structure dictated by regulation, not
     by marketplace efficiencies, you don't have the efficiently
     sized firms, and acquisitions can get you to that place
     quicker.
                   MR. ROGERSON:  Okay.  Wait one second.  I just
     want to summarize in 30 seconds what I believe the answer
     was.
                   If SBC merges with Ameritech, the business plan
     for entering out of region will be more profitable than if
     SBC did it by itself.
                   Now the question I want to ask all of these
     panelists is will the business plan for SBC to enter out of
     region be profitable; maybe not as profitable, but still
     profitable?
                   MR. CARLTON:  At the same speed?  At the same
     speed?
                   MR. ROGERSON:  Joe, go ahead.
                   MR. FARRELL:  Good morning, everybody.  We are
     present today at a historic occasion because --
                   MR. ROGERSON:  I think you are not answering my
     question, Joe.
                   MR. FARRELL:  I am.  I am.  We are present at a
     historic occasion because Dennis has just revolutionized
     merger policy by giving arguments which prove very generally
     that creating larger firms always enhances competition
     because it is easier and more profitable for a larger firm
     to expand and take more customers than it would be for the
     component smaller firms to do so.  The argument seems to
     prove a bit too much.
                   Now, one way of thinking of all this is to step
     back and say what is the right geographic market definition
     for analyzing this kind of merger?  Clearly I think as far
     as most customers numerically are concerned, the big issue,
     of course, is the last mile bottleneck, and that is an issue
     that is defined in the customer's own local market.
                   The claims about the national/local strategy and
     wanting to become a national, if not international,
     competitor are really a statement that it is important also,
     or perhaps even instead, to analyze a market for customers
     who have multiple locations and so the question then becomes
     phrased in that way, and this is just a rephrasing, but I
     hope it is a useful one.
                   If you take that seriously, and obviously you have
     to also remember the other customers, but if you take that
     seriously should we say because the geographic market scope
     is now national, if not international, rather than local,
     should we say that means that it is tremendously important
     to allow this company or this pair of companies to become
     better at serving that market?  Obviously, yes.
                   Should we say, on the other hand, that it is
     really important not to allow all of the potential entrants
     into that national market because there is nobody serving
     that national market yet, to remain potential entrants into
     it?
                   We have a situation where there are zero companies
     currently who are in this alleged geographic market.  You
     have a number of potential entrants, namely those who are in
     the smaller geographic markets and could expand.  The
     question is how do you think about a merger as a step
     towards having somebody in that market, which at the same
     time reduces the number of firms that could come into that
     market?
                   MR. SHEPERD:  Since I was promised or mentioned 
     at some point --
                   MR. ROGERSON:  Right.  Okay.  Go ahead.
                   MR. SHEPERD:  I am Jeffrey Sheperd.  I am much the
     oldest person on this panel.  I have seen regulation working
     for so many decades.
                   I would like to speak as a colleague, not as
     another advocate among this group.  The economists use
     usually much the same logic, all of us.  It is just the
     judgements of amounts that differ more or less.  That is why
     we get into these traps of advocacy arguments, speculation
     against speculation.  I would like to suggest instead that
     we think of a different concept or, as Roger suggests, get a
     bigger perspective on these issues.
                   The points I would like to stress at this point
     are two.  One, the sector is in a very unstable period right
     now, and companies rightly have a sense of risk that they
     are about to be blindsided by somebody else's merger if they
     do not do theirs.  That is really the FCC's economic
     problem.  They are facing a cascade of mergers, some of
     which I think are plainly irrational, but driven by fear,
     driven in an arms race.
                   There is actually a literature on arms races which
     would help understand why we are here and why, as you say,
     this is a critical moment.  If the FCC draws the line now
     and says let's hold back, we will not let anybody merge at
     least if they dominate their markets for awhile until
     competition is established on the strength of these powerful
     companies, then, as has been said, it will not matter once
     competition is going, mergers.  We can let them rip.
                   I am afraid if we spend instead the time today
     debating this specific merger or any of them, of course we
     will match two sided speculation against each other, and we
     will not get anywhere.  I think we all know most of the
     details of both of these plans.  Instead, the FCC needs some
     more collegial economic guidance on how to sort things out.
                   MR. ROGERSON:  Richard?
                   MR. GILBERT:  My first suggestion is that we
     should put these things up if we do not want to speak.
                   (Laughter.)
                   MR. GILBERT:  It would be more efficient.  Just a
     standard of convention.
                   I actually just have a brief comment, which is on
     what happened after the SBC-Pac Tel, why, you know, did we
     not stay out of region entry there.  The fact is that SBC
     did have a plan around that time, and their plan was to use 
     the wireless platform of their out of region wireless
     services as a platform to enter into local service.
                   They tried that in Rochester, and it was extremely
     unprofitable.  It did not work at all.  I think you can see
     that that is a need for change, a need for revaluing how
     they are going to deal with a national entry strategy.
                   MR. LITAN:  But does that not discount then any
     promises now?
                   MR. GILBERT:  Well, it is true that there is
     change.  Of course there is change, but --
                   MR. LITAN:  It just says that the FCC should not
     give a lot of weight to that.
                   MR. GILBERT:  -- they tried it, and it did not
     work.
                   MR. LITAN:  I mean, that point says if I was the
     FCC, I would not give a lot of weight to that.
                   MR. GILBERT:  You have to evaluate each proposal. 
     What it is saying is that what we thought might work, which
     would have been an easier strategy with need for less
     capital, less scale, did not work.  You have to go to the
     next step.
                   MR. ROGERSON:  Michael?
                   MR. KATZ:  Now I feel like I should go out in the
     audience and do a bad TV talk show.  Maybe that is what this
     is turning into.  Jerry Springer will be for the afternoon
     session.  We will get to see the real action.
                   I just want to comment on a few things that have
     been said before.  When Bob Crandall talked about looking at
     the internal efficiencies or shaking out the inefficiencies,
     and he talked about shaking it up through merger as Bob
     Litan addressed, he also mentioned in passing saying that
     competition is a great way to shake things up, and I agree
     with that.
                   I think that experience in a variety of different
     industries shows that, which I think, though, is not
     something that argues in favor of these mergers, but it is a
     source of concern.  I would just note for now it is
     something we should come back to.
                   When we discuss the loss of benchmarks, I think
     the focus in that session will be on the loss of regulatory
     benchmarks, but there is also the loss of benchmarks, this
     is competitive benchmarks, used by industry.  I think when
     we are going to talk about internal efficiencies we need to
     think about it there.  Similarly, when we get to the session 
     on the issue of local competition, we are going to have this
     same issue.
                   I do not want to go into it now.  Some people have
     already started the later sessions.  That is something that
     we need to note, and it is by no means clear that this is an
     argument in favor of the mergers.  We will hear more about
     that later.
                   I want to build on something that Joe Farrell said
     about arguments in favor of these mergers being too strong. 
     I think the question maybe to ask everybody, particularly
     the proponents, though, is do they advocate having a single
     ILEC for the country?  Do they think it would be fine to put
     the Bell system back together, and we can debate the part
     about long distance, but at least at the local exchange
     level?
                   It seems to me there are two reasons to ask that
     question.  One is I think it brings out the positions more
     sharply.  Second, it may be a relevant question for the
     Commission.  I think there is going to be the question of
     after these mergers, if they are allowed, then the next
     merger will come along, and the argument will certainly be
     made well, it is not that big a deal, given the mergers that
     have taken place.
                   In fact, if nothing else, they should break up the
     remaining ILECs into little pieces and just merge one little
     piece at a time, each one being not that big a deal.  In the
     end, of course, it is going to be a huge deal.  It seems to
     me that is something that needs to be thought about.
                   Finally, I just wanted to mention something else. 
     Joe was talking about local markets and the focus on
     customers and to what extent there were national customers. 
     I think it is important to recognize.  He was talking about
     end user customers, but also what is going on is there are a
     lot of carriers that are customers.
                   We keep hearing about how Sprint and AT&T and MCI
     are the rivals of the ILECs that are proposing to merge,
     but, of course, the other thing that needs to be taken into
     account is they are big customers of them.  They are quite
     concerned about buying access services at a national level.
                   Now, obviously they cannot do that from any one
     ILEC at this point, but there is a relevant national market
     there, or at least it is something that needs to be taken
     into account at the national level, and that is true even if
     the individual customers are not national.
                   MR. ROGERSON:  Okay.  This is the moment we have
     all been waiting for.  Questions from the audience?  Would
     anyone from the audience like to ask any of our panelists a
     pointed, witty, thoughtful question?  Okay.  How about other
     questions?
                   I think there is someone at the back.  Stan Newman
     from the FCC?
                   MR. NEWMAN:  Yes.  Could the panelists who are
     representing the merging companies explain how much cap X
     you plan to spend out of region and how many subscribers you
     think that cap X will capture for you?
                   MR. ROGERSON:  Who would like to handle that? 
     Okay.  None of them will.  Roger?
                   MR. CARLTON:  Well, I can say that those figures
     are in the testimony, the exact numbers.  The plans have
     been filed.
                   My understanding is the initial investment that
     they are talking about is something around in SBC's case
     something like $3 billion plus all the expenditures on
     managers and engineers and the like, and also that does not
     include all the expenditures that have been made to date.
                   My understanding of the penetration they hope to
     achieve, which was your question, in those cities that they
     are in, you know, they do have projections over time.  The
     exact numbers I cannot recite off the top of my head.  I
     think they are somewhere between penetration rates of ten
     and 15 percent in those cities.
                   MR. GILBERT:  I mean, the numbers I have seen are
     $23.5 billion in operating costs over ten years, I think $2
     billion in up front expenditures, 80 switches in 30 cities,
     not counting 14 foreign locations and 2,900 miles of fiber
     internally in the U.S.
                   MR. CRANDALL:  Let me just make one point.  We are
     here to discuss the economic issues in this case.  We are
     not here with fiduciary responsibilities to the stockholders
     of these companies.  Therefore, we do not know precisely
     what the capital expenditure plans would be, nor can we
     attest to them over a long period of time.
                   MR. ROGERSON:  Okay.  Are there more questions? 
     Pat DeGrabi?
                   MR. DEGRABI:  Thanks.  Here is an economics
     question about the national/local strategy.
                   The theory of the national/local strategy is
     basically one of incumbency advantage.  Following the
     customer out of region means because I serve the customer in
     region, say Dallas, I am more likely to serve them in
     Atlanta for whatever reason it is that you want to announce. 
     The question here is how big is that incumbency advantage?
                   The argument was made earlier that we ought to
     think about ways of measuring some of the variables involved
     here, and I would argue that we have a potential test of how
     big incumbency advantage is, and that is all of the RBOCs
     are incumbents, and they are all competing against entering
     CLECs.
                   Ameritech has been very proud of the fact that it
     has actually lost a measurable number of its access lines to
     CLECs, announcing that there is in fact competition, and
     this in fact suggests that the incumbency advantage in
     region is not big enough and that CLECs are competing on a
     level ground.
                   How can I square the notion that to go out of
     region I need to have an incumbency advantage by serving one
     building of that potential customer in region when in fact I
     see that I cannot even hold that customer in region because
     CLECs can come in and compete?
                   MR. ROGERSON:  Okay.  Rich Gilbert would like to
     explain, as I understand it, why it is that CLECs did not
     need a whole bunch of existing customers to chase, yet have
     been doing quite well.
                   MR. GILBERT:  Pat, this is not about incumbency
     advantage.  This is about a network advantage.  In fact, the
     concern that the ILECs have is that the interexchange
     carriers have these relationships, and they have the
     relationships on a national level and are promoting the
     ability to provide this end to end competition.
                   They are quite concerned about being able to
     compete for all their customers.  To do that, you have to
     have a similar presence, so I think it is not about
     incumbency at all.
                   MR. CARLTON:  Can I just add one thing to that? 
     The fact that one person believes that there is some
     advantage to incumbency while other firms, MCI, AT&T, may
     have other strategies does not mean that any one of these
     advantages is absolute.  It means that one firm thinks it
     has an advantage over another firm on some dimensions. 
     Maybe on other dimensions it does not.
                   Therefore, my view is you should let them exploit
     what they think is their desirable business strategy.  Your
     question is will it be a success?  My view is I would let
     the marketplace determine whether it will be a success.  SBC
     has put in an enormous effort to this national/local plan.
                   MR. ROGERSON:  I cannot resist but to ask the
     question that Bob Litan asked in his remarks to the
     panelists.
                   Suppose we approve these mergers, and then suppose
     next year we are here at a panel, and there are two more
     proposed mergers before us.  Bell Atlantic wants to buy Bell
     South, and SBC wants to buy U.S. West, and they tell us that
     Bell South and U.S. West are not providing much competition
     anyhow.  They are too little.
                   There would be efficiencies if the mergers
     occurred, and in fact they could do a more dynamic national
     competition strategy if we allowed those mergers.  Would
     those be good mergers?  More to the point, would the
     arguments you are making today apply equally well to those
     mergers?
                   MR. CARLTON:  I think the answer is simple.
                   MR. ROGERSON:  Yes.
                   MR. CARLTON:  I think the answer is you can ask
     abstract questions, but you would obviously have to evaluate
     it at the time the merger occurs, and you would have to look
     at the circumstances at that time.
                   MR. ROGERSON:  Yes.
                   MR. CARLTON:  I think it is quite clear that right
     now there is a very clear answer to the question you and
     Michael asked.  Would a merger of all the RBOCs be good? 
     The answer from these two mergers that are proposed is quite
     clear that these guys are going to each pursue some out of
     region policy.  It is clear it is horizontal, in my view,
     and --
                   MR. ROGERSON:  Right, but I am not --
                   MR. CARLTON:  -- we would allow it.
                   MR. ROGERSON:  -- asking would a merger between
     SBC and Bell Atlantic be thinkable.  I am willing to believe
     that the arguments that the proponents are making today
     indicate that that would be a bad idea because you are both
     claiming you are going to compete against each other.
                   What I am asking you is are the arguments you are
     making today consistent with making an argument next year
     that Bell Atlantic should be allowed to buy Bell South and
     that SBC should be allowed to buy U.S. West?
                   MR. CARLTON:  I would say it is not inconsistent
     and may be consistent.  It depends on the circumstances at
     the time.
                   MR. LITAN:  Bill?  Bill, can I just add?  I just
     want to go to the moving your customer point.
                   MR. ROGERSON:  Okay.
                   MR. LITAN:  I just want to make one 30 second
     intervention.  All right.  I can understand how SBC wants to
     follow its Dallas customer that moves out of region.  All
     right.  Ditto with Ameritech having an incentive to follow a
     Chicago customer who goes out of region.  They each have
     incentive to follow.
                   Now, the thing that I do not understand is that
     when you put them together, the combined entity now has more
     of an incentive than each one of them separately had to
     begin with.  I do not understand that.
                   MR. ROGERSON:  Okay.  Roger?
                   MR. NOLL:  They do have an incentive because
     contrary to the assertions that have been made, competition
     in access is more prospective than it is real.  It is more
     profitable to be a monopoly.
                   Most of the arguments we are hearing are it is
     more profitable and cheaper to form the ubiquitous
     interconnected network that will track all the customers if
     there is only one wire line base carrier than if there are
     two.  That is the essence of the argument.
                   The point that we should bear in mind is that as
     analysts, we should not care who the first ubiquitous
     national network is, and it is intriguing and it is probably
     true that if all the ILECs merged together they could
     ubiquitously be one, and they are saying but we need to be
     allowed to do that because if you do not, AT&T will be there
     first with its cable companies.
                   Our view about that should be A, AT&T and the TCI
     thing is prospective, not real.  It is about the nineteenth
     idea in the last ten years about how to create the
     ubiquitous firm.  None of them have worked yet, and because
     there are downside risks to creating the single ubiquitous
     wire line carrier, we should not do it until we know that is
     in fact how the market is going to work.
                   MR. ROGERSON:  Okay.  I am going to cut the
     discussion off here and move us to our next session.  Our
     next session is asking the question will these mergers have
     an effect on the FCC's ability to benchmark across firms?
                   I have asked Joe Farrell to speak for five minutes
     to explain what this possible harm is, and then I have asked
     Robert Crandall and Dennis Carlton both to critique Joe's
     presentation.
                   Joe, go ahead.
                   MR. FARRELL:  Thanks, Bill.
                   Regulation inherently involves holding a regulated
     firm to some kind of performance standard or pricing
     standard that the regulated firm has not freely chosen. 
     That raises some risks obviously.  The goal is to make this
     performance standard or pricing standard or whatever it is
     efficiently challenging for the firm, but feasible.
                   If the regulator does not know what is feasible,
     then the results are likely to be bad in a variety of ways. 
     Either the demands on the firm will be infeasible, or the
     firm will be cut too much slack and prices will be allowed
     to go too high, or bad incentives will be created one way or
     another.  We are familiar with all this kind of stuff.
                   As regulation moves, we hope, yet slowly and
     gradually away from kind of traditional rate regulation or
     more clearly moves into new areas such as interconnection,
     the prospect of regulators having a hard time knowing enough
     to do the regulation they need to do seems to be more and
     more of an issue.  How do regulators find out what is
     feasible?  How can regulators find out what is feasible?
                   It seems to me like there are three generic
     methods.  Maybe there are more.  I do not know, but here are
     three.  One is what could politely be described as making an
     independent assessment or rudely described as trying to run
     a shadow business, so trying to know the technology, trying
     to know the structure of demand, trying to do what you would
     do if you were a conscientious member of the board of
     directors.
                   That is pretty hard to do well, and it is pretty
     hard especially to do well if you are dealing with thinking
     about imposing an interconnection duty, let's say, that has
     never been imposed before in that form.
                   The second thing that a regulator can do, which is
     the traditional thing that regulators do, is to use
     information from the firm's past to get an estimate of what
     the firm can do in the future.  That is the traditional
     approach.  In some sense it works, but in some sense it
     works rather badly.
                   We are very familiar with some of the bad
     incentive effects that are created and notice that this,
     too, does not do you really a bit of good when you are
     trying to figure out whether sub-loop unbundling in three
     days at a reasonable price is feasible or not.
                   The third thing you can do is to use information
     from other firms.  Notice that this is fundamentally how
     competitive markets do it.  That is to say the standards to
     which a competitive firm are held are the standards given by
     the performance of the most successful other firms in the
     market, and that should clue us in to the idea that this
     probably has some pretty good features.
                   Well, it does have some pretty good features.  It
     also has some defects and it has some problems, but those
     defects and problems surely are not perfectly correlated
     with the defects and problems of the other methods that
     regulators can use to figure out what is feasible.
                   What I mean by that is even though benchmarking
     relative performance evaluation has its problems, it is
     surely true that the arsenal or tool kit of information
     tools that regulators have with it is a heck of a lot better
     than the arsenal or tool kit that they have without it.
                   Now notice, and actually Michael made this point a
     little earlier.  Even private firm managers who surely have
     a much better chance with knowing the technology, knowing
     the market, independent assessment approach, and who have a
     much better chance with using good information from the
     firm's past than do regulators, the FCC, even private
     managers often use what is called benchmarking.
                   It is the hot thing of the late 1990s in business
     management is to go off and find out what your competitors
     are doing by way of responding to customer complaints or
     whatever it is.  This really suggests that relative
     performance evaluation of various kinds is a very useful
     tool in finding out what is feasible.  As I suggested at the
     beginning, that is in some sense the key problem of trying
     to do efficient regulation.
                   Now, as some of you know and others of you
     probably are not going to bother to find out, but maybe some
     will, Bridger Mitchell and I submitted a paper, and there
     was also an attachment to the paper written by Wilkey Farr. 
     In this paper, we gave lots and lots of examples where the
     FCC has explicitly used performance comparisons and
     benchmarking, and we somewhat arbitrarily talked about
     average practice benchmarking, as in setting a uniform X
     factor for price caps, best practice benchmarking as in
     various interconnections --
                   MR. ROGERSON:  Joe, if you had 30 seconds left,
     what would you say?
                   MR. FARRELL:  Okay.  Benchmarking of regulated
     firms, therefore, really is a used and useful technique for
     relatively efficient regulation.
                   So what is the effect of mergers on all of this? 
     First of all, a number of people have made the point, so I
     will forestall them before they make it again.  As usual,
     not much effect if there are plenty of firms left to
     benchmark against.  For some purposes, that probably will be
     true.  I do not think it is really likely to be true for all
     purposes, especially if economies of scale are significant
     in this new national market.  The comparisons with small
     ILECs and with CLECs may not do you a lot of good.
                   There is a loss of pure diversity and a loss of
     information even if behavior does not change.  This point
     raises some real subtleties, and I think it may be a mistake
     to spend too long on the subtleties because the real point
     is --
                   MR. ROGERSON:  It would be at this point, yes.
                   MR. FARRELL:  -- incentives do change.  Just as
     with product market competition, there are a lot of
     decisions that a firm can make that have opposite side
     effects on other firms and on consumers.  If this firm
     merges with one of those other firms, then those cross
     effects on the other firm are going to be internalized, and
     consumers will lose.
                   MR. ROGERSON:  Okay.  Joe has said multiple ILECs
     mean you can have competition within regulation, and that is
     useful to the regulator.
                   Robert Crandall will now tell us why that is not
     so.
                   MR. CRANDALL:  I am not going to tell you
     necessarily that benchmarks are not useful to the regulator,
     but I am also not going to read a prepared statement because
     Roger has scared me into thinking that that looks like
     something the lawyers went over.  
              Given that I have already compared the people that have
     hired Rob and me to Eastern Airlines and Bethlehem Steel, I
     guess there is not much risk.
                   First of all, it seems to me that you have to keep
     in mind that what we are involved with here is a transition
     away from regulation to a situation which market forces and 
     competition between CLECs and ILECs is supposed to dominate
     the landscape, not regulation from Washington.  Even after
     your victory in the Supreme Court, I mean you only provide
     guidelines to the states, and even that should wither away
     over time.
                   One should not think that benchmarking off a set
     of firms who grew up in a regulated environment provides you
     necessarily with efficient benchmarking.  Otherwise the GOS
     plan might have argued you should not privatize Russian
     steel companies or, you know, at the CAB they might have
     held on not allowing Slow Hawk and Agony to merge into U.S.
     Air and drive an airline which today is offering service at
     one-half the price of the domestic passenger fare
     investigation standard, which is based on benchmarks.
                   Secondly, there is nothing in the record here, and
     I have seen nothing from Joe or Bridger, about how much
     benefit these benchmarks provide.  We have some estimates of
     what the potential benefits from the mergers are.  If we
     stop the mergers in order to maintain a couple of
     inefficient benchmarks, how much benefit will that provide,
     and will it offset the benefits from the mergers?
                   Third, the mergers themselves, if they work, will
     generate more CLEC activity out of region and provide more
     CLEC/ILEC sort of benchmarks.  Over time, presumably there
     is going to be more efficient benchmarks as CLECs and ILECs
     negotiate with each other over the terms of interconnection. 
     It might be terms of interconnections and networks that do
     not now exist at the ILECs.  It might be packets which
     networks of the sort that AT&T-TCI claim they are going to
     build now that they have apparently abandoned Project Angel.
                   Finally, as we move towards a more competitive
     environment, the whole 271 process has to come to an end at
     some time soon.  Paul Macaboyd claimed it would take ten
     years for RBOCs to get 271 permission, but it looks as if
     this process is beginning to move, particularly in New York
     state, and should spread fairly rapidly after that, at which
     point the benchmarks necessary for implementing 271 and OSS
     seem to me to go away.
                   In addition, looking just parochially at the
     GTE-Bell Atlantic merger, it is hard to consider GTE as an
     appropriate benchmark for Bell Atlantic or some of the other
     RBOCs.  They are not involved in the 271 process.  Their
     entire structure, the dispersed operating systems around the
     country, are really very different from the RBOCs, and it is
     hard to argue you are losing a very important benchmark
     there.
                   Finally, Joe's point on benchmarks for the X
     factor, the productivity factor, which is more in your
     filing than in your oral comments today, suggested you run
     the risk of internalizing the efficiency gains, which would
     then have this ratchet effect on providing disincentives for
     pursuing productivity enhancing investments at the ILECs.
                   Two things need to be said about that.  First of
     all, there are lots of benchmarks for that around the world. 
     We should not just be looking at U.S. ILECs.  Secondly, the
     Commission has never used the same approach twice, so it
     would be very hard for an ILEC to try to predict how the X
     factor is going to be adjusted in the future, given what
     they have done in the past.
                   Third, chances are the entire benchmarking thing
     for X factors should look at a longer period of time because
     as has been shown in the case of British Telecom and the
     case of the railroads, productivity gains initially are very
     rapid when you begin to unleash the regulatory restraints
     because of the efficiency gains moving off an inefficient
     production technology towards a more efficient one.
                   If you look at deregulated industries in this
     country, the railroads probably have the greatest rate of
     productivity gain, hardly not because of enormous
     technological change, but because they simply are able to
     move from inefficient operations.  I would not put much
     stock in the notion that you need to preserve independent
     large ILECs in order to reset the X factor.
                   MR. ROGERSON:  I would like to commend you on
     getting done before my 30 second warning, Bob.  Thank you.
                   MR. CRANDALL:  I am so scared of your tyrannical
     approach.
                   MR. ROGERSON:  Dennis Carlton?
                   MR. CARLTON:  Thank you.
                   The relevant question in considering the effect of
     these mergers on benchmarking is whether the mergers will so
     significantly impede the ability of regulators to do their
     job that it will overwhelm the substantial benefits from
     these mergers.
                   The question is not whether there is going to be
     one or two fewer data points for some hypothetical
     comparison.  There is no empirical evidence to support the
     claim that these proposed consolidations are going to make
     regulations significantly more difficult.
                   There is no evidence, for example, that the
     previous RBOC mergers resulted in significant impediments to
     regulators' ability to do their job.  The critics of these
     mergers who are relying on benchmarking are ignoring ways in
     which trends in the industry are themselves right now
     creating more and more benchmarks.
                   One of the key concerns of regulators today is how
     an ILEC is going to interact with a CLEC.  The most useful
     tool in evaluating such potential discrimination is to
     compare the service that ILECs provide to themselves as
     compared to CLECs in the territory.  That is, the ILECs
     provide an internal benchmark to measure their own
     performance, and this key benchmark will certainly remain
     after these mergers.
                   Moreover, there are new benchmarks constantly
     emerging in this industry.  Just look at what this
     transaction is going to do.  A benchmark is not valuable if
     everybody is similarly situated.  Benchmarks get more and
     more valuable as people are pursuing different strategies.
                   SBC is moving out of region.  SBC will be
     interacting with an ILEC out of region.  SBC will now have
     very different incentives than other people in making sure
     that connections with its out of region ILEC are proper. 
     That, of course, will mean it is pursuing a different
     strategy.  That is when benchmarks start getting more and
     more informative.
                   If you look, for example, about a concern, which
     are benchmarks concerning how new technologies will be
     hooked up, well, now you have the possibility that we have
     vertically integrated firms.  You can look at how Sprint as
     an ILEC treats itself as a CLEC.
                   What you are having in this new environment are
     smart CLECs able to monitor ILEC performance.  You have
     CLECs that are ILECs in other regions, and you have
     vertically integrated firms.  All of those are new
     benchmarks that are becoming available.
                   In Joe's statement, he mentioned that there would
     be a reduced incentive to engage in productivity enhancing
     investments because of what he called the rachet effect;
     that is, because regulators are going to respond in the
     future and may lower your prices.  In the future, you will
     have a lower incentive to respond.
                   That, of course, ignores an opposite incentive,
     which is there may very well be economies of scale in
     investment.  If that is the case and efficiencies result,
     you are going to get more, not less investment.
                   Finally, let me just point out that if the
     concerns about benchmarking are accurate, SBC has embarked
     on a strategy in which you would say it is subjecting itself
     to this cost of benchmarking that Joe was describing.  That
     does not strike me as a reasonable business strategy to be
     engaged in if you really think it is a serious problem.
                   In sum, there is no evidence suggesting that past
     reductions in the number of ILEC benchmarks have had a
     significant adverse effect on the ability of regulators to
     regulate.  Given the industry trends and the new information
     generated not only by this merger, but also by trends in the
     telecommunications industry, the concern about reducing the
     number of data points by one or two seem over exaggerated to
     me.  Consumers should not be denied the tangible benefits of
     these mergers based on unsupported speculation about
     theoretical harms.
                   MR. ROGERSON:  Okay.  First, Roger, does that
     really mean you want to speak?
                   MR. NOLL:  Yes, I want to speak.
                   MR. ROGERSON:  Okay.  Go ahead.
                   MR. NOLL:  I have distinctly mixed feelings about
     benchmarking, so I will sort of give a critique of
     everything I have heard.
                   The first obvious point to say is, Dennis, the
     value of benchmarking in the competitive industry is zero
     for the reason that Bob said.  Benchmarking is interesting
     only if you have regulated monopoly.  It is not interesting
     if you have competition.
                   If the basic premise of the proposals for the
     merger is true, then it is pro-competitive because it
     introduces substantially more competition in long distance
     services and advanced telecommunications services.  Then
     there is no value to the benchmarking that will arise from
     the vertically integrated firms because of the fact that we
     will want to regulate it.
                   Bob's basic point that you want to think in the
     long run about what is going to be regulated and what not
     and evaluate benchmarking on those terms is exactly right. 
     Now, the place that I think that Bob is wrong is that indeed
     there is a lot of regulation out there; not only regulation
     by states, but regulations by the FCC of interconnection, so
     the idea that there are people out there with serious market
     power in some aspects of this industry is something that in
     the short run at least we have to bear in mind.
                   The logic then of Joe's argument about
     benchmarking as a useful potential tool is completely valid. 
     The only trouble is regulators in the past, notwithstanding
     Joe's examples, have not really taken advantage of the
     opportunities for benchmarking, and that is my main concern
     with the benchmarking argument.
                   Notice that the FCC in the late 1980s and early
     1990s went through this strategy of trying actually to
     enforce the concept of uniform accounting principles across
     ILECs and having them all produce quarterly accounting cost
     estimates that segregated their costs into that which is in
     the FCC's jurisdiction, that which is in the state's
     jurisdiction and that which is unregulated.
                   It is the case the FCC did on occasion use that
     information to in fact pull out some numbers from the rate
     bases for interstate rate setting purposes of local exchange
     carriers of the interconnection part of the basis of this
     benchmark information, so it was used.
                   The flip side was the resources of the FCC to
     actually make use of this information were infinitesimal
     compared to what they would have had to have been to use it
     completely.  That was the subject of not one, not two, but
     three GAO reports which said how can you possibly have the
     FCC make use of this information, go to this enormous
     expense to collect it, when there is no staff to analyze it.
                   Now we are talking about the FCC here, which is
     the singularly most sophisticated regulator.  North Dakota's
     regulators are going to make use of this?  Uh-uh.  I think
     that is the problem.
                   Now, there is one point in which I think Joe's
     argument is absolutely solid, which is not the accounting
     cost efficiency policing/non-discrimination policing part,
     but it is in the technical part.  That is to say when
     Company A says it is technically impossible to do X, but
     Company B is doing it, then the presence of benchmarking is
     absolutely essential.
                   In terms of interconnection, a lot of the issue is
     about technology.  It is about the feasibility of number
     portability, the feasibility of certain kinds of unbundling,
     the feasibility of having access to software inside
     switches.
                   These are not issues that require enormous staff
     time to do accounting.  These are issues is it true, or is
     it not.  It seems to me there the advantages of multiple
     local exchange carrier providers are really great, and I
     think the argument has the most force there.
                   MR. ROGERSON:  I actually gave a much less
     eloquent version of the last few minutes of your speech at a
     breakfast meeting the other day.
                   Allan Campasero, who is actually here in the
     audience, stood up from GTE and said Bill, that is really a
     lovely theory.  Why do you not give me 15 examples?  Why not
     give me two or three good examples at least, right?  Since
     this is such an important theory, certainly this has been
     happening in the last while, and you could give me some.
                   I want to turn Allan's question over to anyone on
     this panel who would like to deal with it.
                   MR. FARRELL:  Well, there is a voluminous document
     full of examples.  Let me just mention a couple that I
     remember.  The LRN number portability issue, which Bridger
     and I discussed in some detail, where a number of large
     ILECs claimed that LRN was not reasonably implementable in
     the foreseeable future.  I forget the claims, but Ameritech
     said oh, no problem.  We can just do it.
                   There was, on the other hand, just to say that
     this is not about Ameritech being particularly special, in a
     shared transport proceeding Ameritech claimed that it was
     impossible to do the bookkeeping and billing.  Bell
     Atlantic, on the other hand, was just doing it.
                   There are a couple of examples.  If you want me to
     pull out my document and leaf through and read some more, I
     can do that.
                   MR. ROGERSON:  Well, I do not know.  Is that
     enough to convince you, Dennis, or do we need more?  I mean,
     are those good examples?
                   MR. CARLTON:  You know, I think there are two
     things you can say.  You can look at the details of those
     examples and ask what would have happened but for, okay. 
     That is an interesting experiment about what has happened in
     the past.
                   I think there are two responses, though, you
     should be keeping in mind, two concerns.  The first is
     things are changing.  We are getting more competition.  We
     are getting more CLECs.  We are getting more ILECs out of
     region.  That is going to give you more information.
                   Second, if you self-select just one or two bad
     examples, even if they turned out to be true, and I am not
     suggesting they necessarily are, but even if they were you
     have ignored the other side of the coin.  What about all the
     benefits?
                   What about the increased information you are
     getting from benchmarking because now you have SBC
     negotiating with an ILEC out of its territory saying I want
     you to do this, and I know you can do this because I do it. 
     I do it in my territory, so do not give me any baloney that
     you cannot do it.  I am going to tell the regulator you can
     do it.  That seems like an enormous amount of information.
                   In fact, the FCC in the Bell Atlantic-Ninex
     decision has exactly such a statement that they understand
     the benefit that comes about when one ILEC in one region is
     a CLEC in another.
                   Pursuing different strategies is giving you new
     information and giving you new incentives.  That is when you
     are getting information from benchmarking.  If everybody
     stuck in their own territory doing all the same thing, you
     are going to get very similar responses.  It is when you
     start mixing them up, have some ILECs competing outside
     their territory against and being a CLEC outside of their
     territory competing against ILECs.  That is when you start
     getting lots of information, so that would be my response.
                   Let me just end by saying if you were asked in an
     anti-trust case to ask if prices are going to go up as a
     result of a merger, I do not think you would find one
     customer or two customers who said yes, my price is going
     up.  You would ask on average if price is going to go up. 
     On average, are prices going to go up in a new environment?
                   I think that is the danger that you fall into if
     you rely on one or two examples, the danger being that you
     reach a conclusion about average overcomes, the overall
     outcome to the consumer, based on one or two anecdotes.
                   MR. ROGERSON:  Michael?
                   MR. KATZ:  Well, Roger, I think you got your wish. 
     I do not think that Dennis cleared that last remark with his
     lawyers because my understanding has always been that the
     RBOCs have argued vigorously that they are not particularly
     good at negotiating interconnection agreements out of
     region, and that is why you should not consider them
     potential competitors of each other.  That is just a
     statement about their lawyers, not about Dennis.
                   I do want to address some of the points that
     Dennis raised and that Bob Crandall raised.  Just a couple
     things on that.  One is this issue of well, are there really
     going to be a lot more benchmarks?  I think Bob hit it on
     the head with exactly what the problem is going to be.
                   He said well, GTE is not a very good benchmark. 
     They are too much different.  Well, how is some little CLEC
     that is going to be a hundredth the size and in a very
     different market position and certainly not under the
     strictures of 271 then going to be a good benchmark?
                   We talked about having a lot of CLECs that will
     monitor.  I think CLECs do monitor today, and they complain
     vigorously to the states and the FCC.  The question is how
     do you tell which one is right?
                   I am sure there would be a lot of people in the
     industry who would be happy if the RBOCs would delegate all
     the authority to make these decisions to COVAD.  However,
     COVAD said we are an intelligent CLEC.  We figured out you
     are doing something bad.  Fix it.  If you want to stipulate
     to that, I think it will be fine.  It may also bring the
     industry to a crashing halt, but that is another issue.
                   Similar to that is this question of internal
     benchmarks of the LECs serving themselves.  The problem
     there again is I cannot believe the ILECs would want to be
     held to the standard that says the same service you provide
     yourself is what you provide to everybody else.  I just do
     not see how they actually believe them when they would say
     they cannot make their OSS system, make order entry, work
     the same today for someone outside of the organization as
     for inside.
                   I certainly have not seen any willingness that
     they would grant the same access to the central offices or
     the same access to the software and the switches.  I do not
     think in fact it is probably reasonable in some of those
     cases to demand the same access, so I do not see how again
     you can say that these internal benchmarks are going to be a
     powerful force because I think there are legitimate
     differences.
                   I think some of those differences have been
     overstated, but I think fundamentally there are legitimate
     differences and so these are not going to be benchmarks that
     are going to be these great substitutes for having separate
     RBOCs and separate ILECs.
                   MR. ROGERSON:  Jeff?
                   MR. SHEPERD:  Very briefly.  In the literature
     back in the 1930s, this was all tried in electric industry
     indirect competition between public and other enterprises. 
     Here, as there, it is not so much what the regulators know
     that they can order.  It is rather what is being done in a
     diverse way as the theory of innovation teaches us, a
     variety of things being tried which then not only teach each
     other, but bring pressure upon each other to try them also.
                   That is what this merger is likely to stamp out. 
     Therefore, in general do not forget the basis on which we
     need to think.
                   MR. ROGERSON:  Rob Gertner?
                   MR. GERTNER:  I think it is useful when focusing
     on benchmarks to actually think fairly specifically.  It
     seems essential to think about how the mergers affect the
     amount of information that is out there.  It varies a lot
     from all across the different things people talk about using
     benchmarks for.  I mean, you really cannot ignore doing sort
     of the analysis of thinking what are the sources of
     variation?  Why is there different information out there?
                   Technical feasibility, for example.  You want to
     think carefully about why does one firm think something is
     technically feasible and others do not?  Is it because they
     had incentives to invest more in R&D that makes it learn
     that way, or is it because they have a diversity of
     interests and, therefore, some firms might therefore notice
     the feasibility in a different way or push towards the
     feasibility?
                   If it is diversity of interest, then mergers which
     lead to greater diversity, like these mergers do, can
     actually increase the amount of information.
                   The other thing that is really relevant for all
     this is the way in which this all feeds back into the
     incentives of the firms.  Again, I think you need to look
     very carefully across the specific ways in which benchmarks
     are being used.
                   In X factor type analysis, mergers that enhance
     efficiencies, those effects will swamp the rachet effect
     that exists there.  Again, it becomes very important to
     think carefully through about how the benchmarks actually
     impact the incentives.
                   MR. ROGERSON:  Joe?
                   MR. FARRELL:  Thank you.  I hardly know where to
     start.  Let me just take a couple of these points.
                   First on the creation of new benchmarks and the
     use of internal benchmarks.  I think Michael is right that
     in many cases the ILECs will argue, and sometimes rightly,
     that the strict version of this equal provision standard is
     not reasonable, and that raises the whole question of
     whether you can reasonably do it.  That is something that
     again regulators need to have more information to do.
                   Let me also point out that even if you can and do
     do it, it is not enough.  The equal provision standard
     solves a static version of a certain leveraging problem.  It
     does not solve the dynamic version of leveraging problems,
     so suppose that an ILEC is providing input, A, and ILECs and
     others are providing in a complementary business B, and
     suppose that somebody other than the ILEC wants to innovate
     in B and needs cooperation from the ILEC's provision of A,
     for example, as with long distance and with access service.
                   Then the ILEC can stymie that competitive
     innovation without violating the equal provision standard
     because it does not need to provide this cooperation to
     itself because it does not have that innovation.  By
     imposing the equal treatment standard, not only are you
     providing only low powered incentives at best for the ILEC's
     provision of this monopoly service, but you are also
     allowing it to monopolize innovation in the competitive
     segment.
                   Secondly, if you say that the ILEC has to equally
     provide A to itself and to others, you have done absolutely
     nothing to get efficient provision of A.  You may have
     solved some leverage problem into B, or you may not, but you
     have done nothing for the provision of the monopoly input,
     A, and that is exactly, of course, where you may need
     regulation and where you may need benchmarking to provide
     good information so you can do not too bad regulation.
                   Let me also come back to a point Bob made about
     the so-called unpredictable adjustment of the X factor.  I
     think it is true that the way the Commission has behaved and
     the way other people have behaved elsewhere and just
     thinking about the political economy, nobody can really know
     for sure how the X factor will be adjusted and when.  It is
     absolutely not true that that implies that each ILEC is
     going to assume that the X factor is completely exogenous to
     its actions.
                   Just to give you an example, back in 1997 when
     there was the access reform proceeding, there were parties
     who argued that there should be company by company level
     re-initialization.  In other words, take away any so-called
     excess profits company by company.  That did not happen.  I
     am glad it did not happen, but it obviously was not common
     knowledge that it would not happen.
                   Yes, there is uncertainty about how X factors get
     adjusted, but, no, that does not imply that everybody,
     therefore, makes decisions as if the X factor is going to be
     completely exogenous to their technical process.
                   MR. ROGERSON:  Have I reached that point where I
     should turn the audience loose?
                   Rich?  Rich Gilbert?
                   MR. GILBERT:  I want to say one thing, which is it
     seems that what you said about the dynamic access story is
     also a reason in favor of the merger as a better benchmark. 
     Let me explain.
                   If ILECs are confined to essentially their local
     focused strategy focused on their own territories paired to
     a national local strategy where you are anticipating
     providing integrated services, primarily a bigger package of
     services and direct competition with the IXEs, you have an
     incentive to do more things and to offer more services and
     to, therefore, provide those services nationwide that you
     might not be providing with a different strategy.
                   It really also speaks to this point that it is
     different behaviors, it is different business strategies,
     that can produce different benchmarks.
                   MR. ROGERSON:  Joe, do you want to directly
     respond to that?
                   MR. FARRELL:  Yes, that is what I want to do. 
     Look, if you really believe that these mergers are both
     necessary and sufficient conditions for a really vigorous
     out of region entry, then I think they should go ahead, and
     the sooner the better.
                   MR. GILBERT:  We do.
                   MR. FARRELL:  But I think there is a lot of
     skepticism and there is substantial grounds for skepticism
     about perhaps whether and certainly how much of that there
     really is.  Then you have to start focusing on well, what if
     not?
                   MR. CARLTON:  Do you agree, Joe, that these
     mergers will accelerate out of region entry and, therefore,
     the benefits to consumers from new products, as well as more
     competition, will come faster?
                   If it is a benefit and we know the benefits from
     new products are tremendous, is that not a fact that should
     weigh in your thinking as you think about stopping the
     mergers to preserve benchmarks, as well as the fact that in
     the future there are going to be more competition and more
     vertical integration?
                   MR. FARRELL:  Yes.  I think that is exactly the
     question that I just answered.
                   If you believe that these mergers are both a
     necessary condition and a sufficient condition for these
     LECs plunging wholeheartedly into out of region facilities
     based competition, then I think that is great.  If you are
     not convinced of that, then you obviously have to discount
     your consideration.
                   MR. CARLTON:  But does that mean you would stop a
     merger in a non-regulated context on the same grounds,
     hoping that the companies would do whatever it is they are
     going to do together on their own? 
                   In other words, what you have here when you have a
     merger is you have a business plan.  You have investments in
     a business plan, statements to their investors, a lot of
     money spent already on these plans.  I do not understand how
     you can not say that that means they are prepared to go
     faster than if I say no, you cannot do the merger.  You
     figure out what you want to do.  Go back to the drawing
     board.
                   MR. LITAN:  Dennis, even if what you say is true
     discounted with some probability, it is still something that
     you put on the scales, and you compare it to the other
     potential harms that we are going to talk about, and then
     you decide, you know, where the overall balance is.
                   MR. CARLTON:  I agree.  I am just saying --
                   MR. LITAN:  We are debating how heavy we want to
     put the scale of the pro-competitive arguments.  It is
     certainly a relevant factor.
                   MR. CARLTON:  Right.  That is the point I wanted
     to make.
                   MR. CRANDALL:  Can I just make one point in
     response to Joe, and that is I do not know how much we are
     going to lose in the way of benchmarks even over the
     traditional issues that Joe raises, and he raises a couple
     of examples.
                   He did not mention the British Water and Sewerage
     Administration example, which I do not think will bear much
     on our problem here today, but the fact is that a lot of
     these issues are arbitrated between parties at the state by
     state level.  These mergers may not reduce benchmarks at all
     in that regard, number one.
                   Number two, this issue of the fact that we are
     going to have more efficient, different technology companies
     entering out of region, for instance, Bell Atlantic and GTE,
     with an Internet backbone, with a much more complete array
     of services, something which nobody has responded to in
     Rob's presentation.
                   It seems to me you are likely to get some better
     benchmarks, and you are not going to lose that much in the
     way of benchmarks from the traditional negotiations anyway,
     given the state by state regulation.
                   MR. ROGERSON:  Joe?
                   MR. FARRELL:  Okay.  Let me say for the third time
     if serious, vigorous, effective out of region entry, that
     would be a great thing.  If the mergers are both a necessary
     condition and a sufficient condition for that, then that may
     well dominate any other considerations.
                   Now back to your other point about the state
     level, the state level analysis.  This gets a little bit to
     the subtleties that we talked about before.  Do you really
     get the same information?  I think again the main point
     there is you get different incentives, so the state level
     analysis says, of course, if you have mergers of holding
     companies that does not change the operating company level
     behavior, then you get no direct impact on the information
     flow, but because there is a change in incentives you will
     get a change in the information flow and a change in the
     efficiency of behavior as a result of that.  I think that is
     really the robust point to focus on.
                   MR. ROGERSON:  Okay.  We have time for one or two
     questions from the audience.  This time I will not insist
     that they be thoughtful or witty.
                   Allan Campasero?  Okay, Allan.
                   MR. CAMPASERO:  I had to take this chance.  This
     is a very interesting general discussion of benchmarks.  Of
     course, for us it is a specific deal that is at stake here.
                   I cannot think of and I wonder if anybody can
     think of an instance where GTE has been used as a benchmark
     for the RBOCs?
                   MR. ROGERSON:  These are the same kind of
     questions he was asking me at breakfast the other day, guys. 
     Who would like to take a shot at that?  Anyone?
                   MR. NOLL:  There actually is one example.  The
     cost study that was done in California about ten years by
     Bridger Mitchell --
                   MR. ROGERSON:  Roger, we cannot hear you.
                   MR. NOLL:  Okay.  The cost study that was done
     about ten years ago for the California Public Utilities
     Commission on the extent of what actually is local access
     cost and at what size of an exchange do you exhaust the
     economies of scale was actually based upon both GTE and Pac
     Bell cost studies.
                   In fact, most of the information about the smaller
     cities came from GTE, and it was used by the California
     Public Utilities Commission for a generic regulatory
     proceeding that affected both of them.
                   To think of it the other way, of course, is that
     GTE, and I do not know where the biggest GTE investment in
     the whole world is, but certainly Los Angeles has got to be
     right up there, so GTE in California is more like an RBOC
     than it is like a little, tiny guy, which it is in lots of
     other places.
                   MR. ROGERSON:  Mario Schwartz?
                   MR. SCHWARTZ:  Yes.  Just a quick clarifying
     remark.  Even if GTE was not used as a benchmark against the
     RBOCs, as long as the RBOCs were used as a benchmark against
     GTE you would still expect the merger to make a difference
     in the parties' incentives and, therefore, get less
     benchmarking.
                   MR. ROGERSON:  There is a question over there. 
     Would you mind telling us your name and your affiliation
     before you ask your question?
                   MR. CLARK:  I am Rich Clark with AT&T, and I guess
     I would like to address about three or four years ago there
     was a proposal by Pacific Bell that it was going to replace
     its copper pair network with a hybrid fiber co-ax network. 
     These plans were cancelled after SBC took over Pacific Bell,
     and I guess we are now waiting to see if AT&T and TCI can
     make that work.
                   I would suggest that there are situations where,
     you know, these mergers have already had the effect of
     eliminating diversity or possibility for benchmarks of
     different technologies.
                   MR. ROGERSON:  Rich Gilbert, do you want to
     respond?
                   MR. GILBERT:  I would just like to respond that
     the merger with Telesys refocused their efforts on new
     services, and they have had a really accelerated roll out of
     high band with DSL services.
                   MR. ROGERSON:  Bob Crandall?
                   MR. CRANDALL:  It seems to me that the fact that
     SBC re-evaluated their architecture and decided not to go
     ahead with that is not any more damaging to the notion that
     now they are going to try another strategy to enter out of
     region than perhaps denying your merger with TCI because you
     never really got fixed wireless going very well.
                   MR. ROGERSON:  Okay.  We have one more question
     from the back, and then we will break.  We will take our
     break.
                   MS. BLOOMENFELD:  Sue Bloomenfeld with Wilkey
     Farr.  I just wanted to fill out I think Rich's question,
     which is the point was that in seeking merger approval, SBC
     and Pac Tel promised the Commission that that video
     experiment and build out would continue post merger, and
     then the plans were changed.  I think maybe that may be
     relevant here.
                   MR. ROGERSON:  Okay.  Who would like to give me an
     economic analysis of that question?
                   MR. GILBERT:  I would still like to respond by
     saying from a consumer's point of view, the concern is what
     is the availability of high band services.  On that measure,
     the merger has done very well.  There is no question that
     now SBC with Telesys has the highest DSL roll out I think of
     any ILEC.
                   MR. ROGERSON:  Great.  Okay.  We will take a 15
     minute break, and we will resume at 11:00 a.m. with Session
     Three.
                   (Whereupon, a short recess was taken.)
                   MR. ROGERSON:  No FCC round table involving
     economic analysis would be complete without us parading out
     our own Commissioner, who is in fact an economist,
     Commissioner Furchgoti-Roth.  He has kindly agreed to make a
     few remarks to us all prior to starting our third session.
                   Commissioner Furchgoti-Roth, please go ahead.
                   MR. FURCHTGOTT-ROTH:  Thank you, Bill.
                   I first want to thank all the panelists for taking
     time out of their busy schedules to come here to the
     Commission.  We are very honored to have you here today.  It
     is a rare privilege to have such eminent economists all come
     together at one time, and I think it is a great tribute to
     you, Bill, for having organized this and having very
     thoughtfully brought together all these wonderful people.  I
     am sure we are all learning a great deal about the proposed
     mergers.
                   As in a lot of topics here at the Commission, I
     come at this with a slightly different perspective than some
     other folks at the Commission.  I have no idea whether these
     proposed mergers or any of the dozens of other proposed
     mergers that might be here at the Commission present any
     anti-competitive problems, and I am sure that the panelists
     here have some very strong view of it and many of you in the
     audience as well.
                   I am very interested in finding out what the
     proper role of the FCC as an institution is in reviewing
     these mergers or really any other mergers.  I very much look
     forward to reading the transcripts or seeing the videotapes
     of these proceedings.  They may not be quite as interesting
     as Monica Lewinsky, but I think there may be something here
     to be learned.
                   As many of you know, the FCC's authority to review
     mergers comes in two areas.  One is directly out of the
     Clayton Act, and I am not quite sure if the Commission has
     ever used that.  Secondly is through the licensing process
     through Sections 208 through 210 or 214, and that is how the
     Commission has chosen to review mergers and is reviewing
     these.
                   The difficulty we have, as far as I can tell, and
     I have requested and have yet to find them, is the specific
     rules by which the Commission reviews these mergers.  We
     certainly have some case history that we do not have
     specific written rules.
                   I would be very interested if any of you have seen
     any such thing or, to the extent you have not, if you could
     give us any guidance as to what such rules might look like
     under 208 through 210 and 214 and in particular how those
     would differ from the DOJ/FTC merger guidelines.
                   All of you on this panel I suspect have had some
     interest in these mergers and have made presentations either
     to DOJ or possibly to state regulators, and I am curious if
     the issues that you think the FCC should consider are in any
     way materially different from the issues that the Department
     of Justice should consider in its merger reviews and if the
     standards that the FCC should apply are in any way different
     from those that the Department of Justice would apply.  If
     they are different, should they be written down, codified,
     memorialized in some way that would set some clear guidance
     to the public about how this Commission will review mergers.
                   I think we can get very quickly to the issue of
     whether there is anything in the presentations that you have
     made here today that are different from the information that
     you have already presented to the Department of Justice and,
     if so, what triggered that.  Why is that different?  How
     have you come to that conclusion?
                   I do not know what the right answers are to any of
     these questions, but I have been asking these questions now
     for the past few months.  I have been asking a lot of
     lawyers and have not been getting any answers.  The nice
     thing about economists is economists will actually tell you
     something and not worry about who it offends.
                   VOICE 1:  Whether it is legal.
                   MR. FURCHTGOTT-ROTH:  Right.
                   MR. ROGERSON:  We will test this, Commissioner, if
     you would like.
                   MR. FURCHTGOTT-ROTH:  Thank you.
                   MR. ROGERSON:  Joe Farrell is dying to answer.
                   You know, I think you have raised very interesting
     questions, and I would love to spend five minutes turning
     the panel loose on it if it is all right with you.
                   MR. FURCHTGOTT-ROTH:  Please.
                   MR. ROGERSON:  Joe, go ahead.
                   MR. FARRELL:  Okay.  Thank you.  To answer your
     questions, or try to, I think the issues are overlapping,
     and the standards should potentially be different.  Let me
     try to explain that.
                   My understanding is the Commission is supposed to
     consider a fairly broad public interest test of whether
     mergers are a good thing or a bad thing.  That is not
     necessarily the same question as DOJ/FTC are supposed to
     consider, which is whether they substantially reduce
     competition.
                   I think the differences are in two areas.  One is
     the FCC is trying to help along a process of increasing
     competition rather than just preventing it from being
     diminished, and that raises, of course, the whole issue of
     potential competition, how it is dealt with, what the
     evidentiary standards are in the Courts at the DOJ and FTC
     and whether those are the right standards for an industry
     where competition in some segments has been illegal until
     relatively recently and is still not going very far.
                   Then, of course, you will not be surprised to hear
     I think the benchmarking type issues, which I talked about
     this morning, are probably of more direct concern to the
     Commission than they would be to DOJ or other anti-trust
     agencies.
                   MR. FURCHTGOTT-ROTH:  If I could just very quickly
     make a comment, Joe?
                   It is true that the Commission has some public
     interest obligations under 208 through 210 -- actually, we
     have public convenience and necessity under 214, but not a
     public interest obligation -- but those are for the transfer
     of licenses, not for mergers.
                   This agency handles over 10,000 license transfers
     every year, the vast, vast majority of which, more than
     10,000 license transfers a year, which are never subjected
     to any kind of public interest test.
                   We have no written rules about how we decide which
     license transfers are going to be subjected to a greater
     degree of scrutiny than some other license transfers.  At
     least the Department of Justice has specific rules about
     which mergers it is going to review and by statute which
     will trigger a process and which do not.
                   We at the Commission do not have that sort of
     clear, written guidance.  It is a little loose right now, I
     think.
                   MR. ROGERSON:  You know, we are very fortunate to
     have two former chief economists from the Department of
     Justice with us today.  I certainly would love to hear what
     both of them have to say about this.
                   Rich Gilbert, why do you not go first?
                   MR. GILBERT:  The Department of Justice has
     guidelines for the review of mergers, but does not really
     have what I would call rules.
                   Each merger evaluation is a very fact specific
     exercise, and the ultimate question is in my view really a
     public interest test, although the analysis says first is
     there a threat to competition, is there a risk of harm to
     competition, and then if there is then do the benefits and
     efficiencies outweigh that risk of harm to competition.
                   I think the issues before the Commission should be
     very similar.  There may be some regulatory issues as well. 
     In principle, you could actually say that that is also
     relevant to a DOJ analysis as well to the extent that the
     change in competition, if there is some, affects regulation,
     but I think that there should be a substantial convergence
     in the two standards, even if they may not be identically
     the same.
                   MR. ROGERSON:  Bob Litan?
                   MR. LITAN:  Actually, this was the very first
     thing that I was going to address in my presentation, and so
     I am going to carve it out from my presentation and preserve
     my time.
                   MR. ROGERSON:  No, no.  You are too quick for me.
                   MR. LITAN:  Look, I had presumed that the FCC
     operated under a public interest standard because if it did
     not, there would be no role for the FCC.  I mean, why even
     have the FCC rule on mergers?
                   My all around presumption is that is public
     interest, and I wrote down on my outline, which is out there
     for people to look at, at least three alternative tests that
     have never been made explicit, by the way.
                   In fact, in answer to your question, you are in
     the process or you can make case law in this area.  I do not
     know the case law on the definition of public interest, but
     you can have three alternatives.
                   One is you could set the bar at a reasonable
     likelihood that the merger will just lessen competition, as
     opposed to substantially lessen competition, which is the
     Clayton 7 standard.  That will be a slightly different
     standard that will be a little more strict than the DOJ
     standard.
                   You could then make it even tougher by saying that
     you had to find that the mergers may be pro-competitive, or
     you could go even further and try to find that the mergers
     are actually likely to be pro-competitive.
                   I think, frankly, when I discuss the outcome of
     potential competition analysis, the outcome depends heavily
     on which of these standards you actually apply, but I think
     you are in the process of writing the rules.
                   MR. ROGERSON:  You know, I mis-spoke myself.  I am
     betraying my great youth, I guess.  A little middle aged
     joke there.
                   We have, I believe, a third former chief economist
     of DOJ in the room, which is, of course, Jeff Sheperd. I
     certainly want to hear from him as well.
                   MR. SHEPERD:  I will be very brief.  Collective
     memory is so short.  In 1967-1968, I was the third of Don
     Turner's special economic assistants, so I am only half of
     the chief economist, but I was there when this all started,
     and I helped draft the guidelines on the mergers that he put
     out in 1968.
                   I would only say in this matter that I think after
     some careful reflection that whatever anti-trust does is a
     help, but it should not set the parameters for what the
     Commission does.
                   MR. ROGERSON:  I have asked all of the chiefs
     except one more chief economist, Michael Katz.  Go ahead.
                   MR. KATZ:  Actually, I want to address this
     problem from a slightly different angle, which people have
     been talking about should the standards be different between
     the Department of Justice and the Commission.
                   I think there is another difference because I
     think the standards should largely be the same.  I think
     there is scope for some difference, but largely they should
     be the same.  The analysis should largely be the same.
                   I think there is a big difference between the two
     agencies in terms of their ability to impose and to
     implement remedies.  The Department of Justice rightly is
     loathe to get into regulatory solutions, and so when the
     Department of Justice evaluates -- you think it is not
     right, or you think they got into them?
                   MR. LITAN:  We got into them all the time.  I
     spent a year and a half negotiating them from deal to deal.
     That is what I did.
                   MR. KATZ:  Fortunately, the people I deal with are
     trying to stay out of them.  In any case, it would not be
     right for them to try because they are not an expert agency.
                   I mean, there are some industries they obviously
     are involved in quite a bit, but their role is very
     different than that of the Commission and so I think that is
     what I see as I think the biggest difference is the sorts of
     remedies that are available and proper for the Commission
     are I think much more intrusive and expansive.
                   I know those are bad words these days in
     regulation, but I think the fact is that regulation is going
     to be around for awhile and I think that that is
     appropriate, although I share everybody's hopes that --
     well, everybody hopes that regulation will go away.  I think
     we differ on why, whether we hope there is also competition
     as the driver of it going away.
                   Let me also mention one other thing, and I know
     you are not supposed to be rude to your host, but I know a
     lot of things that I then do not listen to, and that is I
     think that the information that goes to the Commission is
     different than what goes to the DOJ because I think that
     unfortunately the Commission it is much more cumbersome to
     provide confidential information and for the Commission to
     act on it.
                   I do not know what the solution to that is, but I
     think it is something that I saw when I was chief economist
     and I see now that I think does hinder the Commission's
     ability to analyze some of these things because these issues
     that we are discussing today, and Bob Crandall brought this
     up when people start asking about the business plans.
                   First off, we are the wrong set of people to ask
     about the details of it because we are not the business
     people, but also this is the wrong place to discuss it. 
     These are very sensitive issues.  It is sensitive for the
     merging parties.  It is a sensitive issue for the parties
     that are concerned that they will be denied access, and that
     will force them to alter their plans.
                   I think, Commissioner, I am glad you are looking
     into this, and I think it is an excellent thing to do.  I
     would add that to part of what you look at is how to deal
     with confidential information in a more streamlined or more
     effective way.
                   MR. ROGERSON:  Okay.  Now that we have heard from
     all of the chiefs --
                   MR. NOLL:  Let me be an Indian.  I just want to
     make the obvious comment.  A group of economists is not the
     right group for Harold to ask the question simply because no
     matter how we slice it, we are always going to come down to
     the same set of criteria, right?  We are trying to do things
     efficiently.
                   Both agencies offer in a political and legal
     environment.  That means the constraints, what they can do. 
     Neither agency maximizes economic efficiency.  All right. 
     There are other constraints operating upon what they do from
     the legal environment in which they have been created and
     from the political environment in which they have to get
     their budgets and their staffing increase requests and all
     the rest.
                   Just the obvious point is the point about the way
     potential competition is taken into a place, the way the FCC
     worries about universal service, which is not a concern of
     the Department of Justice.
                   As economists, we have a hard time cognizing
     exactly how we are going to take into account these
     constraints, but it seems to me the real reason why the FCC
     has a separate and independent authority to review mergers
     is in fact a public interest issue that in part goes beyond
     the economic efficiency criteria.
                   It means two things.  It means that we as
     economists are not going to write all the rules, but,
     secondly, it means that within the domain of efficiency
     maximization there are going to be actions and strategies
     and decision rules available to the FCC that are not
     available to Justice and vice versa, and so I think part of
     what should be going on here is taking into account the
     feasible set of policies and rules, as opposed to the best
     of all possible worlds set, which I agree are largely the
     same in the two environments.
                   MR. ROGERSON:  Bob Crandall?
                   MR. CRANDALL:  One brief point that is kind of
     ironic.  Rich talked about enforcing the Clayton Act at
     Justice.
                   In fact, fortunately, Justice does take into
     account efficiency gains from a merger for two reasons.  One
     is to balance it against any potential cost, and, secondly,
     it wants to see if this is really the reason why firms are
     merging or might it be an attempt to monopolize.
                   In fact, under the Act such a balancing is not
     permitted.  The Act says any lessening of competition that
     tends to create a monopoly in any line of commerce has to be
     stopped.  That means you do not bring some cases you could
     win.
                   When Jeff worked for Don Turner, Don Turner was
     accused of treating the Supreme Court like a bunch of C
     students in his course, but the irony here is that you can
     take benefits into account, whereas formally in a Court of
     law it is more difficult for Justice to do it.
                   To the extent that you can take them into account,
     it is hard to imagine benefits being negative.  This would
     suggest that you are more likely to approve a merger than
     DOJ is.
                   MR. ROGERSON:  Dennis?
                   MR. CARLTON:  I will be very, very brief.  I have
     never been a chief economist at the Department of Justice,
     although I worked there a little bit.  If I did fractions, I
     would be below a half.  I did help write the recent merger
     guidelines, though, so maybe I am epsilon above zero.
                   I guess I agree with a lot of what Michael Katz
     said.  I think I disagree a bit with what Joe Farrell said
     and Bob Litan.  I think it would be a mistake if the FCC
     adopted different standards for potential competition or for
     benchmarking.
                   The Department of Justice should be concerned if a
     merger will cause a harm in an industry by impairing
     regulators and that will adversely affect competition.  That
     strikes me as something that should be taken into account.
                   I am glad I am seeing someone from the Department
     of Justice shaking their head and agreeing.  I think that
     the standard that the Department of Justice uses in
     evaluating mergers is the correct one.  Exactly how the
     Courts interpret it or not, I think the way it has been
     implemented, how the Courts would interpret it, the way it
     has been implemented at the Department of Justice, my
     understanding is, they do take account of total benefits and
     total cost.
                   I think it would be a mistake to have a different
     standard at the FCC.  However, I think there may be special
     categories of customers, such as those you want to protect
     through universal service, that raise special issues that
     the Department of Justice would find outside their realm of
     expertise and may not pay attention to.  That is something
     the FCC should be concerned with.
                   I do not see that arising in any of our
     discussions this morning, but if there were such a group of
     individuals that the FCC is charged with making sure they
     are protected in some way, that would be a special
     difference.
                   The other difference is you have special expertise
     that gives you the ability perhaps to analyze things either
     differently, not with a different goal, but just to come to
     different conclusions because of your past experience or, as
     Michael said, the reluctance to impose regulatory solutions,
     complicated regulatory solutions.  They may not seem so
     complicated to you guys as to the Department of Justice.
                   I think those are the differences, but in terms of
     fundamental goals under anti-trust, the standards I think
     should really be the same.
                   MR. ROGERSON:  Rob, I have to call on you.
                   MR. GERTNER:  Just to complete the picture.
                   MR. ROGERSON:  Right.
                   MR. GERTNER:  I think that I basically agree with
     what Dennis just said.
                   When you think about the public interest standard,
     you know, the guidelines and the way the Justice Department
     analyzes mergers has seemed to be and have turned out to be
     a very effective way I think of promoting the public
     interest in merger analysis, the notion that, you know,
     absent evidence of substantial anti-competitive harm, we
     want to allow mergers to go through.
                   That is a standard that works well because in fact
     it does promote the public interest in general, so I think
     that by and large I agree with what Dennis said.
                   MR. ROGERSON:  Commissioner, would you like to
     raise any final issues?
                   MR. FURCHTGOTT-ROTH:  I thank all of you for your
     comments.  They are all very thoughtful.  I have learned a
     lot and will try to take those into account as we move
     forward in reviewing these.  I am glad you are here on a
     telecom matter.  We are not here on Exxon Mobil or Amoco BP.
                   I still have a lot of questions and look forward
     to reviewing the entire session.  Thank you very much.
                   (Applause.)
                   MR. ROGERSON:  All that repressed, you have only
     30 seconds I am going to take out on Bob Litan now.
                   So now back to business.  No more running on.  We
     are going to turn to the issue of effects of actual and
     potential competition of this merger.  Bob Litan is going to
     begin, then Jeff Sheperd will make remarks, and finally Rich
     Gilbert will make remarks, and then we will turn it loose.
                   Go ahead.
                   MR. LITAN:  Okay.  Just one last word on the
     standard because it is a lead in to my discussion.  The
     question is should the standard of the FCC be that you have
     to have a winnable Clayton 7 case in order to stop a merger
     on competitive grounds, or should you be able to stop a
     merger on something short of a Clayton 7 standard?
                   All I am going to say is that my analysis or the
     outcome of the analysis rests heavily on which of those two
     things you believe.  All right.
                   Now, on actual competition my belief is, subject
     to being corrected, that there is very little actual
     competition between any of these parties except perhaps in
     some regions in wireless.  Where that is true and where that
     is a potential problem it is easily fixed with divestitures,
     so I do not think it is a big deal.
                   The only thing that I think is interesting here is
     potential competition.  Now, the Justice Department, to my
     knowledge, has never won a case on potential competition. 
     On the other hand, they have never had a monopoly situation
     where potential competition should matter more.  You should
     care more about the presence of contestability where you
     have a monopoly to begin with.
                   Therefore, you want to look at the number of
     potential entrants that are out there before the merger,
     after the merger and whether the merging parties, any of
     them, are the most likely successful potential entrants. 
     Those are the things you want to look at.
                   What I did in my piece is I prepared a little
     chart for the three different markets, telephones, TV and
     advanced services, and I tried to tabulate who were the
     potential competitors there.
                   The bottom line of that complicated chart is this. 
     I had assumed that except for the merging parties that there
     are no other RBOCs that are likely potential entrants in
     these markets.  I do not believe that they are significantly
     likely entrants, so you have one other potential RBOC plus
     three main long distance companies is what it comes down to
     in telephones.
                   I know you have the CLECs.  I know the arguments
     about electricity and cable and all that.  I view all that
     down the road, and the CLECs are minnows.  All right.
                   So really in the telephone market you are talking
     about going from basically four to three is what it comes
     down to.  Would that be a Justice Department case?  No.  I
     do not think Justice could win on that.  Could it be a case
     here?  That is an open question.  It depends on what your
     standard is.
                   The second market, TV.  There you have fewer
     potential competitors.  My argument there is you have AT&T. 
     They are marrying with TCI and Time Warner.  It is not clear
     how any other long distance guys are doing it.
                   We have wireless companies' satellites already in
     this, but they are inhibited because they cannot show local
     broadcast, although the FCC could change that rule and make
     them into real competitors, which, frankly, they should.  A
     side commercial.
                   In any event, in the absence of that, there are
     fewer potential competitors in TV, and there appears to be
     some evidence Ameritech is already in TV in its local area. 
     I have not seen the corporate documents, but if there are
     corporate documents that show that Ameritech was planning to
     get into TV outside a region, that could be more
     significant.  All I am telling you is there are fewer
     potential competitors in TV.  There is more likely to be a
     problem under any standard you look at.
                   Finally, in advanced services it is anybody's
     guess.  I have basically a lot of unknowns, a lot of
     questions, and I am really not going to make much of a call
     in that area.
                   The final point I will raise is that if you
     believe there is a problem, conditions can fix problems. 
     One condition that the FCC could seriously consider is what
     they did in Bell Atlantic-Ninex.  Remember, they originally
     had their unbundling rule, their uni unbundling rule.  It
     was challenged in the Courts.  We all know what happened
     eventually in the Supreme Court, but the FCC went ahead
     despite the challenge and imposed its original rule in Bell
     Atlantic-Ninex.
                   So what the FCC could do now in the wake of the
     Supreme Court decision, which, as I understand it, basically
     said that it was okay for the FCC to have a rule on one uni
     platform, but on multiple uni platforms they had to go back
     and do their homework, so theoretically the FCC could just
     go ahead and impose their original multi multiple uni
     platform rule as a condition for both mergers.
                   Open question though as to how much additional
     pro-competitive effect you get relative to offering just one
     uni platform.  I do not know what the answer to that is, but
     all I know is that if I was the FCC, I would be seriously
     considering adding that as a condition if I was going to go
     ahead and approve the mergers.
                   MR. ROGERSON:  I have now got to tell you you only
     have 30 seconds left.
                   MR. LITAN:  I talk fast.
                   MR. ROGERSON:  What I would like to do is give you
     30 seconds to tell us what a multi uni platform versus a
     single uni platform is.
                   MR. LITAN:  Well, this opinion was a mess, as far
     as I was concerned.  The way I interpret it is the Supreme
     Court said that the Bells had to offer at least one platform
     or one combination of unbundled network elements at
     essentially incremental costs, long run incremental costs,
     but that the Supreme Court questioned.
                   That is the way I read the opinion, and I could be
     wrong.  It questioned whether or not the FCC could force the
     RBOCs to offer multiple platforms so that other people could
     pick and choose in effect which pieces they wanted and that
     the FCC had to go back and do its homework.
                   Now, I could be wrong about that interpretation,
     but I am still quite confused about what the Supreme Court
     said.  I may not be the only person in the room about that. 
     A lot of people were confused.
                   MR. ROGERSON:  Thanks, Bob.
                   Jeff?
                   MR. SHEPERD:  Thank you.  I am here as an
     economics colleague of people at the table and some of you. 
     I have an outline of two pages of my main points.  The
     copies are probably gone, but I could try to give it to you
     if you asked me later.
                   In general, I do not think regulation is so bad. 
     The compulsion to get rid of it should not be so strong.  I
     do not think anti-trust is so good, particularly on mergers. 
     I am not impressed with the concepts that are cobbled
     together in the merger guidelines now, and I think the
     division on the whole has weak enforcement of those rules. 
     I think the research basis about mergers, both in business
     and economic research, is that most of them do not work out
     even for their shareholders, as well as for the public.
                   Earlier I said that this is a difficult and an
     unstable period in which managers of telecom firms may well
     feel compelled to merge in a self-protective way.  Solving
     this arms race is a major problem for the FCC.
                   In fact, I think of this merger, both of them in
     fact, as trial balloons.  They sent them up thinking well,
     let's try it and see if it works.  We do not really expect
     them to sail through, but the other feature perhaps is that
     these mergers would tend to nullify the basis the FCC put
     forth for approving the Bell Atlantic-Ninex merger.  That
     is, they counted on conditions which now would no longer be
     true if these mergers go through.
                   However, rather than focus on these two mergers, I
     would like to just remind us of basic economic points that
     are relevant.  First, this is not just a matter of static
     efficiency.  Society wishes for innovation and other good
     things from mergers, not just a narrow price equals margin
     of cost consumer surplus maximizing result.
                   Second, effective competition requires three main
     things.  One, you need five, or maybe more or maybe one
     less, actual comparable competitors, not just two or three. 
     If you want a horse race, you have to have horses.
                   Also, dominance tends to suppress or distort
     competition, and also you need easy entry, so the basic
     target and the basis, I suppose, on which 271 might be
     decided is are there enough competitors so that they will
     not collude?  Is there dominance, which does not permit
     effective competition, and is entry really easy?
                   I would stress dominance really matters.  It is
     not just a neutral condition, and deregulation has tended
     and does tend to get detoured into a dominance trap.  The
     monopolist learns to live with ten, 15, maybe 20 percent of
     the market as competitors, but then says no and from then on
     expects to live with most of the market.  In fact, that is
     my reading of the business press.  The Baby Bells expect to
     keep 80 percent of the market right on into the future.
                   I do not think that is good enough for the FCC or
     for anti-trust, for that matter, and in the process towards
     effective competition mergers are the main danger.  They are
     the thing by which companies can directly stop the progress
     toward effective competition.
                   Now, whether these mergers are that way is open to
     debate.  Everything among economists is a two sided issue. 
     There is a balance to be struck, and it may tend one side or
     the other.  Of course, we can differ on these, but to say
     everything is all one way or the other is lawyer talk, not
     economics talk.
                   As for barriers, there are many sources of
     barriers.  I usually discuss 18 or 20 of them.  It is not a
     matter of just --
                   MR. ROGERSON:  In 30 seconds, though.
                   MR. SHEPERD:  -- a few.  I will be very quick. 
     Among them are not just the exogenous conditions of size and
     money needed to enter and so forth, but endogenous
     strategies and tactics that companies can play to defeat
     entrants.
                   In general, the burden of proof should lie very
     strongly against self-interested claims about the balance of
     the goods and the bads, and that is very important for the
     FCC that it not just treat everything as kind of everybody
     has the same amount of credibility.
                   Finally, any gains must be net; not just something
     you can show, but it would have to be strictly net.  Now,
     finally in my outline I go through the reasons why
     competition would on balance, I think, be hurt by these
     mergers, but that is what I was hoping to gather, the data
     on these things, not just announcements of positions.
                   MR. ROGERSON:  Rich Gilbert?
                   MR. GILBERT:  There is no potential competition
     case here period.  Now, I still have five minutes, right?
                   MR. ROGERSON:  Well, four and 50 about.
                   MR. GILBERT:  Okay.  Let me show a list of the
     existing competitors in St. Louis.  You are not going to be
     able to read from this, so I will read from it.
                   Facilities based.  MCI WorldCom is in St. Louis,
     and this is one of the key issues, I think, on a potential
     competition analysis.  Are we talking about possibility of
     Ameritech moving into St. Louis?  AT&T through TCG Teleport,
     Intermedia, Digital Teleport, Frontier, Birch Telecom,
     Winstar, Sprint has announced its Ion entry, Telegent has
     announced that it will enter, and we have AT&T-TCI,
     resellers.  There are a couple of resellers as well.  The
     list that I mentioned is facilities based.
                   If you look into Chicago, that issue has been
     raised.  The list is probably twice as long in Chicago.  If
     we are talking about what I call conventional CLEC style
     entry, which for an RBOC or any ILEC would mean somebody
     going out of region, setting up as a standard CLEC, there
     are lots of folks who can do that.  There are a lot of folks
     who have been doing that.  If that is the issue, there
     simply is not a potential competition case here.
                   What do you have to show for potential
     competition?  You have to show that you have a firm that is
     a likely potential entrant.  You have to be able to say that
     someone actually is going to enter, as opposed to well,
     maybe somehow somewhere someone could enter.  If that is the
     standard, everybody is a potential entrant.
                   You have to show that if entry occurred, there
     would be a substantial deconcentrating effect, which
     translates into an effect on prices and the market, and you
     have to show that the potential entrant is one of a few
     because if there were many potential entrants, then taking
     one of them out really does not do anything.
                   The issues that have been raised in terms of what
     types of potential entry would be eliminated -- could be
     eliminated -- in this transaction are Ameritech's entry into
     St. Louis and a possibility of SBC into Chicago.
                   I mentioned before the issue about SBC in Chicago
     was under the old plan of a possible wireless platform based
     entry.  SBC tried that in Rochester.  It was very
     unsuccessful.  They abandoned it and decided that that is
     just not a good way to go.
                   Ameritech into St. Louis.  The history, the
     documents show, and I think these are public documents.  I
     want anyone to stop me if I am divulging confidential
     information.  The documents show that there was a
     contemplation of offering resold SBC local service.
                   It would be advertised -- this is SBC local
     service, along with Ameritech's wireless service in St.
     Louis -- as a defensive measure because Ameritech was
     concerned that they were going to lose wireless customers to
     other wireless providers, PCS and cellular providers, who
     were about to provide bundled services.
                   There was an experimental entry.  It had not
     happened.  The merger came along.  It is off the table.  Any
     contemplation of entry in St. Louis is as a reseller to the
     extent that there is any entry at all.  There are plenty of
     people who can do resale.
                   There was no intention of doing any facilities
     based entry, and it was not an attempt to get into the local
     exchange business.  It was an attempt to protect the
     wireless customers.  For that matter, if these assets are
     divested as they would have to be --
                   MR. ROGERSON:  Rich, I was so swept away by this. 
     You only have 20 seconds left.
                   MR. GILBERT:  All right.  I got carried away too.
                   Someone else can take over these assets and do the
     same thing.  The bottom line, and I am going to finish,
     there is not a potential entry issue in this merger.
                   MR. ROGERSON:  Robert Crandall, is that vertical
     name plate meant to be?
                   MR. GILBERT:  I am talking, by the way, about
     SBC-Ameritech obviously.
                   MR. CRANDALL:  I think the reason why the Courts
     have been reluctant to accept potential competition
     arguments is they are, of course, speculative.  The notion
     that even though the Commission is a specialized Commission
     with expertise in telecommunications, the notion that any of
     us in this room today can predict how competition is going
     to unfold in this industry is, it seems to me, presumptuous.
                   I think those who are in the process of writing
     opinions, which unfortunately will not disappear in the next
     few years and will have to be revisited, might be in an
     embarrassing position if they tell us that the list of
     potential competitors is limited only, as Bob said, to four
     or five.
                   The last time around in Bell Atlantic-Ninex, we
     were told that the potential competitors were only the two
     relevant ILECs plus the three interexchange companies. 
     Cable companies were excluded, yet since that time it turns
     out that AT&T, in order to compete apparently, has to have
     the largest cable company in the country and sign up
     agreements with other cable companies.  It seems to me that
     tells us that the cable companies, at least by AT&T's
     admission, and they may be wrong again, are in the market
     for potential competition.
                   It may also be true that other media; for
     instance, I brought this along not because I plan to annoy
     you and use it in the room today while we are talking, but I
     bought this service when the cost had fallen to ten cents a
     minute.  Since I bought it three months ago or two months
     ago, the cost of my service has fallen to 8.3 cents a
     minute.
                   By the time this case is on appeal, if somehow
     these mergers are reversed, I will be perfectly willing to
     explain to you why it is that I have torn out my copper
     wires at home because the futures price of copper has gone
     up a bit, and I just melted it down, and I am using this
     alone.
                   It seems to me that we are getting to the point
     where the bottleneck is contestable from wireless at a
     rapidly accelerating rate.  It does not have to be Project
     Angel.  It does not have to be any other fixed wireless
     companies.  It just is this little handset, which I can buy
     for $100 and can change my service on a moment's notice.
                   I think it is a very dangerous proposition to try
     to limit the number of potential competitors and base on
     opinion on that.  Even if it gets through the Courts, you
     are going to be embarrassed by it in the future.
                   MR. ROGERSON:  Joseph Farrell?
                   MR. FARRELL:  Thanks.
                   Well, actually I agree with quite a lot of what
     Bob Crandall just said; not all of it.  I think it is
     obviously true in this industry that predicting the course
     of competition is pretty tough, and I think the question
     that that should lead to is what should you do about the
     fact that there is so much uncertainty?
                   It seems to me one almost immediate reaction that
     an economist should have is you want to behave in such a way
     as to sustain the existence of as many options as possible,
     and it seems to me that does have an implication for what we
     are talking about here because it is likely to be much
     easier to allow these mergers after a year or two if it
     turns out that wireless really does bypass the local
     bottleneck than it would be to undo them if the opposite
     state of the world turned out to be true and if it turned
     out that there were bad consequences from the mergers
     conditional on the continuing local bottleneck.
                   I would also like to just offer one comment on the
     way that people list potential competitors and treat the
     number of entries in the list as the relevant thing.  That
     is not really quite right.  What we should be looking at is
     whether there is a substantial probability that the merging
     party who is not currently in the market would turn out to
     make a big difference to the state of competition in the
     market.
                   You could have an adjacent ILEC who is a potential
     competitor and 963 other potential entrants, but a situation
     in which the entry probabilities are not all that well
     correlated, and still have a substantial probability that
     the adjacent ILEC would make a big difference to the state
     of competition.
                   I do not know enough to say that that is the case,
     but if you think that, for example, the argument that other
     ILECs, perhaps particularly adjacent ILECs, have particular
     expertise in negotiating interconnection or have particular
     forms of brand image or something, if those arguments are at
     all plausible then pari passu the argument is plausible that
     this precluded potential entrant would make a big
     difference.
                   It does not matter how many other potential
     entrants there are who would be a competitive force in the
     other state of the world where those particular assets turn
     out not to be the key thing.  I think I agree with Bob.  We
     cannot really predict very well which of those states of the
     world is the case, so I think we need to think about how to
     make decisions, taking into account the uncertainty.
                   It is unfortunate, I think, that the Commission
     seems to believe it is required -- whether it is or not, I
     do not know -- to write its decisions in a way that suggests
     we understand everything, and we know that this is the right
     decision.
                   I think it would be a lot better in many cases,
     and this may be one of them, if the Commission were more
     comfortable with saying there is an awful lot we do not
     know.  This seems like the prudent thing to do at this
     point, given that fact.
                   MR. ROGERSON:  Okay.  I thought that was a good
     question.  Joe said he is not sure that the ILECs are
     necessarily the only potential significant competitors, but
     it could turn out that way and so why do we not wait a few
     years and see at a minimum, right?  Go ahead.
                   MR. FARRELL:  Wait and see also whether the
     existing local bottleneck continues to be a local
     bottleneck.
                   MR. ROGERSON:  Yes.
                   MR. FARRELL:  That is also relevant.
                   MR. ROGERSON:  Okay.
                   MR. GERTNER:  I think that that would be the wrong
     way to look at it.  I think the reason why the Justice
     Department is wary about using potential competition is
     because when you are uncertain about the effects that
     whether or not the potential entrant will actually come in,
     then you tend towards allowing markets to operate.
                   Now Joe wants to add another layer of uncertainty
     here, which is the layer we do not really know what
     characteristics of potential competitors are actually going
     to be the relevant ones that are going to determine who is
     going to be successful competing in these markets. 
     Therefore, what we are going to do is we are not going to
     allow companies to do what they think in fact is in their
     interest and, therefore, most likely absent tangible
     anti-competitive effects to be in consumers' interests as
     well to go forward.
                   I think if you look at it, you have to say what is
     it that are the unique characteristics of the merging
     parties that give them some potential benefits I think when
     you go down that list.  The fact that they are an ILEC;
     well, there are lots of other ILECs, and in fact others
     trying to enter this market are doing it by buying CLECs
     rather than buying ILECs, so that does not seem to be it.
                   Is it proximity?  Well, there are lots of
     companies that are nearby, lots of other competitors nearby. 
     Why does proximity matter anyway?  You say maybe it has to
     do something with brand name.  You have to ask how important
     is that, given that they are not actually serving the
     customers.  In fact, it is knowledge or having existing
     customers that is most likely to be the source of an
     advantage.
                   I think when you look at it and you try to
     identify the unique characteristics of merging parties
     outside of their region, there really are not any that would
     make you conclude that it is likely that they have some
     unique position to have an impact.
                   MR. ROGERSON:  Okay.  I want to pursue this just
     for one more minute.  I think Rob has said it is not very
     likely at all that ILECs are likely to be one of a small
     number of significant potential competitors.  He cannot
     think of too many things that they have that are likely to
     really matter.
                   Could I give Joe a chance to respond to that?
                   MR. FARRELL:  Well, I would come back to my
     confidence statement that we do not know.  I think, you
     know, the statements that have been made from both sides of
     this debate that large ILECs can be more efficient in
     various ways than small ILECs have some implications for
     whether little CLECs are going to be a full replacement for
     the kinds of things that a large ILEC might decide to do in
     some national/local strategy.
                   I think Dennis has harped on -- let me take that
     back.  Dennis has stressed a view of the national/local
     strategy that says there is no evidence that the firms would
     undertake it individually, and then he has given some
     arguments why that might be less plausible, but I think the
     bottom line from that is not we should assume it will not
     happen, but we do not know whether it will happen.
                   Again, I think, you know, I have not looked into
     this particular question deeply, so I cannot really give you
     a bottom line, but I think the right thing to do is to
     investigate with a very strong consciousness of how much is
     unknown not whether it is more plausible or not or not
     whether it is convincing or whether we should assume, but
     whether there is a sufficiently big chance that it would be
     imprudent to ignore that any particular potential entrant
     will turn out to be important.
                   I think that is the right way to frame the
     question.  I do not know what the answer is, but I think
     that is what the staff and the Commission and, for that
     matter, the Department of Justice probably should be doing.
                   MR. ROGERSON:  Okay.  My neck is getting sore
     turning this way, so I am going to now turn to Robert Litan
     for a moment, who has been patiently waiting over here for
     his turn.
                   MR. LITAN:  Yes.  Thank you.
                   You do not know whether an ILEC is likely to enter
     until you look at the documents, all right, at least when we
     are looking at adjacent ILECs because I do agree that if you
     are not adjacent I do not see any evidence at all from the
     last two years that non-adjacent ILECs are interested in
     entering.
                   We come down to documents.  We know in the case of
     Ameritech there was documented interest in crossing
     boundaries and going into SBC's territory.  We know that.  I
     do not know the record in Bell Atlantic-GTE as well, but at
     least on the surface it seems to me they have less of a
     problem than certainly Ameritech would because GTE is
     dispersed all over the country, and it seems to me less
     likely that Bell Atlantic would be interested in going into
     little pieces of GTE's territory.  In any event, this comes
     down to documents.  That is point one.
                   Point two is in a way that is all irrelevant
     because I do agree with Rich that if you count the three big
     interexchange carriers, you have that plus the adjacent
     RBOC.  You have four already, and that is going to at least
     eliminate any Clayton 7 standard right there, a Clayton 7
     challenge, and it is going to be hard to make the argument
     that the FCC but for one fact, which is the third point.
                   That is we talked about it earlier.  What happens
     when we get down to one RBOC, all right, or one ILEC?  I
     mean, the thing that still would trouble me very much if I
     were sitting at the FCC is these mergers go through.  What
     rationale would the FCC then use to stop the next mergers?
                   If there is no such rationale, then why not go the
     limit and go all the way to one?  If that is where we are
     going, then it seems to me Joe was asking exactly the right
     question, that knowing that it is legitimate, it seems to
     me, for the FCC to take into account the uncertainty about
     all this, and you really then have to believe that there is
     a very strong likelihood of a pro-competitive effect.
                   You have to believe Dennis' story that they are
     going to go into 30 other cities in order for you to
     overcome this nervousness you have about collapsing to one
     ILEC.  I mean, I have been persuaded that that is the case,
     but if I were in the Commission that is the balance that I
     would have on my head because the end game here, it seems to
     me, cannot be ignored.
                   MR. ROGERSON:  I am going to Dennis Carlton and
     then to Roger and then to Rich.
                   MR. CARLTON:  I have three quick points.  The
     doctrine of potential competition has fared poorly because
     it is very hard to predict the future.  To give up certain
     benefits for something that might occur in the future just
     turns out to be very difficult.
                   Now, I would like you to especially recognize that
     in a rapidly changing industry predicting who is going to
     even be the leader in that industry is not so easy, let
     alone who is going to be the participants.
                   I once had occasion to work on a merger that was
     unsuccessfully stopped in part on the grounds that the two
     companies would engage in new innovations and compete harder
     against each other than if they were merged.  That was five
     or six years ago, and I am still waiting for those new
     innovations to occur.  I will not embarrass the person at
     the Department of Justice at the time who I told this to.
                   When you go through rapidly changing industries
     and try and predict, just go through five years ago and look
     at the list of people who are in telecommunications today
     and ask yourself would you have predicted some of these
     names?  I think the answer is it is pretty speculative.  It
     is pretty hard.
                   Second, I think it is easy to say let's be
     careful.  Let's wait.  That sounds like you are being
     careful, and there is no cause.  You have to recognize that
     by being careful and waiting, what you are really doing is
     making life easy for a regulator.  You are not making life
     good for consumers.
                   My interest is in making life good for consumers,
     which may require regulators to make difficult decisions. 
     It is an easy decision to say wait, let's see in the future. 
     What you are depriving consumers of, though, in the meantime
     could be significant, very significant, benefit.
                   Finally, to get to Bob's question about one, I
     think the answer is one.  I believe what these companies are
     saying.  These two companies that are merging are going to
     be horizontal competitors.  I would say no to that.  I mean,
     I do not know.  It may get me in trouble in the future. 
     They may not hire me, but that is life, you know.  One is
     too few.  They are horizontal competitors right now.
                   MR. NOLL:  The lawyers did not read that one.
                   MR. ROGERSON:  Roger Noll?
                   MR. NOLL:  I actually just want to ask some
     questions because it seems to me that by revealed preference
     we know that Ameritech wants to be in St. Louis and
     Southwest Bell wants to be in Chicago, or they would not be
     proposing to merge.
                   Number one, if that is true then each one wants to
     merge in the profit maximizing way, wants to enter in the
     profit maximizing way.  Combining and having roughly 80
     percent of the customers be monopolized is going to be
     better for them than going in and sharing those 80 percent
     in two 40 percent hubs, assuming that were feasible.
                   So, it seems to me that we know that they want to
     be in other territories by virtue of the fact everybody
     wants to merge with everybody.  Secondly, we know that by
     far from the company point of view, the most attractive way
     to be in other places is to actually acquire someone who is
     there.
                   The absence of direct entry by RBOCs into other
     RBOCs' turf strikes me as fairly understandable from our
     normal strategic theories that they think that it is very
     possible that in the long run they will be able to go to the
     two or three ubiquitous ILECs, each of which in its own
     service area has 80 percent of the market, and that as long
     as that strategic possibility is available they do not want
     to do anything that makes it less likely to happen.
                   If the FCC were to say for certain we are done
     with large ILEC mergers, there will never be another one as
     long as we live, then conceivably Ameritech's attitude about
     acquiring one of the 973 CLECs in St. Louis, that that
     calculus would change.
                   In particular, the question that I have is if
     there is this natural efficiency advantage of a large ILEC
     providing service in St. Louis by merging with Southwest
     Bell, say Ameritech, why is there not also the same
     efficiency advantage for them buying one of these 973 guys
     who are already there and having the integration, the
     technical sophistication and the original advantages that
     the proponents of the merger say apply to a much littler
     company where they might in fact be substantially greater?
                   It strikes me that what is really the reason that
     Ameritech does not want to acquire one of these little, tiny
     guys in all the big cities in Southwest Bell turf is not
     because of some relative efficiency advantage.  It is
     because they would prefer to have a monopoly position
     throughout both territories than to be a competitor, a
     large, significant competitor in those territories.  They
     are not going to do the competitive strategy unless the
     monopoly strategy is foreclosed.
                   MR. ROGERSON:  Rich Gilbert?
                   MR. GILBERT:  Saying no is not without cost.  What
     are the costs?  The costs are that you give up the range of
     services that could be provided under this national/local
     strategy that SBC-Ameritech have and a version of that that
     Bell Atlantic has as well, so you give up those benefits.
                   Also, there are other costs as well, which is you
     do not have a good horse race when you let three horses out
     of the gate first and then you tell the rest of the pack to
     wait and see what happens.  It would be best to have
     competition and end to end services occur simultaneously
     with everybody throwing as much at it as they can.
                   Now, it is important in my view, very important,
     to distinguish what I call conventional CLEC style entry
     from the national/local strategy.  I think this is a key
     issue in the merger.  If you look at conventional CLEC style
     entry, that just means somebody goes into an area, tries to
     capture some profitable customers, may put in a switch, may
     put in a few switches.  There are lots of folks that can do
     that.
                   There is no evidence that I see that adjacency is
     particularly important for that because none of the RBOCs
     have ever said that they would go into these adjacent
     territories because they have excess capacity in their
     networks and they are adjacent networks and they have,
     therefore, low costs, incremental costs of going into new
     areas.
                   The fact is they do not.  If they went in, they
     would either go in as resellers, or they would go in with
     new facilities and usually without much brand name
     recognition in any case.
                   What you really have to contrast here is the
     benefits of a national/local strategy type entry against
     what are probably insignificant issues in terms of
     conventional CLEC opportunities without the merger.  That
     would be just essentially no effect on the conventional CLEC
     competition that would occur without this merger.
                   MR. ROGERSON:  I am going to take two short
     comments from Michael Katz and Rob Gertner, and then we will
     take a couple questions from the audience.
                   MR. KATZ:  I agree with people who are saying that
     potential competition analysis is difficult.  There were two
     points they were making about that.  One, that plans can
     change.  It is impossible to predict the plans of even a
     single carrier.
                   The other is that there in fact could end up being
     a lot of rivals in the future.  The only point I want to
     make here is it seems to me that that applies then with
     equal force to the earlier arguments we heard this morning
     about the benefits of the national/local strategies and the
     expansion.
                   Even if we take it as given that the mergers are
     necessary and sufficient to get that expansion, it seems to
     me the arguments being raised here then have to be raised
     there as well of wait a minute, is it not possible there are
     going to be all sorts of rivals coming in so in fact that
     these parties are just a little blip on the radar screen of
     no real significance and so we should not give very much
     weight at all to the fact that they will be able to do this?
     It seems to me that is just a mirror image of saying taking
     them out, even if it were true, would not matter.
                   I am not saying that I have analyzed that issue. 
     As I said, I agree that potential competition analysis is
     difficult, but it means we have to do the full analysis, and
     those questions have to be addressed.
                   MR. ROGERSON:  Rob?
                   MR. GERTNER:  I just wanted to make a quick
     comment about some aspects that are specific to the Bell
     Atlantic-GTE merger.
                   It is important to remember it is not just an ILEC
     buying an ILEC, but in fact a large part of the benefits
     from the merger come from the complementary assets of GTE's
     GNI fiber optic network and their Internet backbone, which
     is an important part of their entering into local markets.
                   To some extent responding to what Roger Noll said,
     I mean to some extent GTE represents a relatively small
     presence in a wide geographic variety of markets, which is
     sort of getting closer towards his alternative entry
     strategy that he was suggesting.
                   MR. ROGERSON:  Okay.  Are there any questions from
     the audience?  Quinn Trong?
                   MS. TRONG:  I would just like to hear some
     comments on what appears to be some inconsistencies between
     the different positions taken by the applicants.
                   On the issue of benchmarking, applicants say that
     the entry out of territory by these BOCs and by GTE allow
     increases in approaches because they are particularly well
     qualified to negotiate better interconnection agreements,
     and then with regard to public benefits in general there is
     a claim that having this base of anchor customers will
     facilitate the CLEC strategy and also particularly with
     regard to GTE that they are well equipped to expand into
     adjacent areas.
                   Now, these and other claims from the applicants
     would seem to indicate that they are particularly well
     qualified, uniquely well qualified competitors as compared
     to other companies, other CLECs, so how does that cut to the
     position on this issue where they say, you know, there is no
     worry about eliminating these potential competitors?
                   MR. ROGERSON:  Okay.  Rich?
                   MR. GILBERT:  I cannot speak for GTE, of course. 
     I can tell you that I have not seen any evidence that, for
     example, Ameritech moving into SBC's territory or vice versa
     would result in extraordinary advantages for that entrant.
                   Neither Ameritech nor SBC would, if they did that,
     serve those areas with facilities that they have in region. 
     It would be either reselling existing services or setting up
     a new plant entirely.
                   Neither one has a particularly good brand name. 
     It is still the case.  It is still the case that most people
     think that AT&T is their local exchange provider, and so the
     IXCs have, if anything, better brand name recognition.
                   At the very least, if that is your view that there
     is an advantage there in the SBC-Ameritech case, you have to
     consider all RBOCs, all local exchange carriers, as
     potential entrants into those markets.
                   MR. ROGERSON:  Okay.  We are going to wrap up that
     session and move on to Session Four then.  Session Four is
     will these mergers have any effect on the ability or
     incentive of ILECs to raise rivals' costs.
                   I have asked Michael Katz to first explain what
     these mysterious code words mean, raise rivals' costs, and
     then Dennis Carlton will comment on Mike.
                   MR. KATZ:  Thank you, Bob.
                   I want to be clear about one thing because we are
     talking about raising rivals' costs, and the rivals part I
     hope is clear, but I think there will be agreement here that
     the important point is not actually are the firms, the
     competing carriers themselves, better or worse off. 
     Obviously the carriers care about that quite a bit.
                   The issue that the Commission should concern
     itself with is not the harm to competitors.  I think we all
     agree it should be whether there is harm to competition
     because that is what is going to end up harming consumers. 
     I hope that that is not a point of debate.
                   What I would like to do is go very briefly to the
     factual and logical analysis underlying the conclusion that
     these mergers do pose a threat, and we expect it to lead to
     a harm to competition.  As I go through it, I want to
     address a couple of things I think are counter arguments
     that really are misunderstandings of some of the claims.
                   Let me, as I said, walk through the steps.  I
     think step one is that incumbent LECs possess significant
     market power in the provision of access services to actual
     and potential rivals.  I want to be clear that in talking
     about access, I mean that broadly.  I mean things like
     interconnecting the networks, but also making the OSS work a
     cross system, various forms of originating and terminating
     access, unbundled network elements.
                   The fact is the networks have to work together.  I
     think it is also a fact that they do have market power
     unless they are worried maybe that that Linex guy is a
     threat to them, too.  He is apparently very powerful,
     despite being very small.  Maybe he is actually a CLEC in
     disguise.
                   The other thing I want to point out, because I
     think there has been some confusion on this, is there are
     two ways this could happen when they exercise market power. 
     One is by raising prices, and then, of course, you run into
     the issue of well, is most of this stuff not regulated?  I
     think that is right.
                   The other is by either denying or delaying or
     degrading access, and that is the part I think there has
     been some confusion about because at least personally I am
     not that worried about access arrangements suddenly getting
     much worse than they have been.
                   I think the concern is really what happens going
     forward with whether new forms of access are made available
     as quickly as they should or at the quality levels they
     should, so I think the things to think about really are
     something like say XDSL and the whole question of the
     problems with roll out.  Are some of these problems
     strategic rather than inherent in the technology?
                   Okay.  It is not about, which I think has been
     accused of claiming, that as a result of the merger they are
     suddenly going to get, you know, white noise generators and
     start attaching them to people's lines because I think a lot
     of that would just be too obvious.
                   The second leg in the argument is I think that
     regulation is an imperfect check on the exercise of ILEC
     market power.  I actually had not expected that one to be
     controversial, but it has.
                   I want to address again I think something that
     really is a misunderstanding or just as illogical.  The
     following claim has been put forth by several parties.  They
     said wait a minute.  The way this would have to work is the
     consumers and rivals would see service quality worse than it
     should be.  Wait a minute.  If that is true, if everybody in
     the world can see it, even the lowly end user consumer, then
     surely the regulators could see it.
                   What is fundamentally wrong about that argument is
     it misses the point.  Everyone would be able to see poor
     performance.  I think everybody today who looks into it can
     see the problems with CLEC/ILEC OSS interfaces, or people
     can see the problems with rolling out XDSL, but that is not
     the issue from the regulators' point of view.  That is what
     consumers care about.  They just said wait a minute.  It
     does not work very well.  That is going to affect our
     choices.
                   What regulators have to concern themselves with is
     why is it happening, and that is not something consumers
     care about.  No one is going to go to Sprint or AT&T or MCI
     and say, you know, your service is really terrible, but
     since you have explained to me that you believe it is
     actually Bell Atlantic's fault, we will stick with you.
                   Okay.  It is not going to work that way, but that
     is the kind of thing that regulators have to look at that,
     and I think that is the really hard problem that is inherent
     in this and that makes it difficult and in fact impossible
     for regulation to fully constrain ILEC market power.  I
     think really this is just a corollary to the existence of
     market power.
                   The next step that can be exercised I think is to
     significantly weaken competition.  Local and long distance
     carriers and carriers providing bundles of services are
     going to be dependent on ILECs for significant portions of
     their access and that they will be weakened as rivals if
     that access provided by ILECs is degraded.
                   Now, you ask what does any of this have to do with
     the merger, which is certainly a fair question and one I am
     sure we will be debating for awhile in this session.  The
     reason it has something to do with the merger is there are
     significant competitive spill overs across ILEC regions.
                   Now, a couple things that need to go into that. 
     One is that national rivals are important.  In fact, we have
     been hearing that from the proponents of the merger, and I
     think there is probably agreement on that that national
     rivals are the strongest competitive threat to everybody in
     the market.
                   I think there also would be agreement that there
     are significant benefits to national scope.  Those benefits
     come in because there are network effects at the subscriber
     level.  There are network effects in terms of third party
     application vendors.  They want to see a broad network with
     a broad potential market.
                   It is harder to put one's finger on, but there are
     also word of mouth networks that people in marketing will
     certainly talk to you about.  Lastly, there are economies of
     scale and scope that arise both in development of systems,
     in development of marketing programs and being able to take
     advantage of national advertising.
                   For all of those reasons, you have that
     competitors want to compete at a national scale, the really
     significant ones, the other ones that are important, so what
     that means is that if you are weakened --
                   MR. ROGERSON:  You are going to have to wrap up --
                   MR. KATZ:  Okay.
                   MR. ROGERSON:  -- in 30 seconds.
                   MR. KATZ:  I have one point left.  What it means,
     though, is if you are going to be harmed in one region, that
     is going to weaken your ability in the other.
                   That actually brings up another criticism that has
     been made of the model or the logic, which is to say well,
     wait a minute.  If you harm someone in one region, will they
     not just run over?  Will that not speed them up in other
     regions?
                   I call that sort of the have switch will travel
     model, which is sort of the little CLEC that in the back of
     a van or whatever they have their switch.  If it does not
     work one place, it goes to another.
                   Now, the fact is that is a legitimate, logical
     argument.  It is something that needs to be addressed.  I
     think the answer to that is, though, that the big
     competitors want to go in nationally.  They feel they need
     to as a viable business, so it really is if they are
     weakened in one place it is slowing them down and weakening
     them overall.
                   Finally, just the last step in this is you do have
     these competitive spill overs.  What the mergers do is they
     help internalize those.  They allow greater coordination
     among the parties, and that is the mechanism to which you
     see the harm coming.
                   MR. ROGERSON:  Dennis?
                   MR. CARLTON:  Thank you.
                   I think Michael has laid out the issues fairly
     clearly, so let me try and respond to several of them.
                   There is just no reason, in my view, that the fear
     that this discriminatory behavior arising should stop the
     SBC-Ameritech merger.  The claims that significant
     discrimination will arise, exists now or will arise, as a
     result of the merger just have no factual support.  I would
     like to explain that.
                   I would like to at the outset, though, state quite
     clearly that the issue is not whether regulation can fully
     constrain all possible instances of discrimination  This is
     a merger case.  The question is whether this merger will
     raise the incentive to discriminate.
                   The whole question of discrimination that Michael
     raised is something that has nothing to do in particular
     with this merger or the other one under discussion.  It is
     argument about really whether you think the
     Telecommunications Act of 1996 was a good idea or a bad
     idea.
                   In my view, I think the decision was made
     correctly that appropriate regulatory safeguards exist not
     to prevent all possibilities of discrimination, but
     sufficient safeguards exist so that on net RBOC entry into
     other services can be expected to benefit consumers.  Again,
     I want to stress the purpose of this proceeding or any
     decision is not to make life easy for regulators.  It is to
     benefit consumers.
                   Really the primary objection that Michael raised
     about this merger raising concerns about discrimination is,
     as he articulated it, that as an ILEC's area gets larger it
     will have a greater incentive to discriminate.  I would like
     to submit to you that there is absolutely no evidence
     presented in either his opening remarks or his testimony
     with Professor Salup to support that theory.
                   First, let me just return to a point he made.  I
     think it is a correct point.  The problem with a lot of
     arguments about discrimination is that they are detectible. 
     If consumers know they are being taken advantage of, they
     can certainly report it to the regulators.
                   Now, I agree that means the regulators have to
     investigate it, but that is a much different problem than
     having something secretly occur in the switches that
     disadvantages one person relative to another.  I think it is
     clear, and I am glad, you know, it is now clear, that that
     is not the concern.  The concern is a detectible harm to a
     customer, and now a regulator must investigate.
                   Second, let me turn to evidence for a second.  If
     you look at the evidence about discrimination, what you see
     is massive entry of CLECs and IXCs.  That strikes me as a
     vote that they are willing to bet on the regulators to
     protect them from discrimination, that it is not that
     serious a problem.
                   If you look at an area where the Katz-Salup theory
     should apply in which you should see discrimination, say
     intralata toll, you do not find it.  If you look at another
     area where you should see the Katz-Salup theory apply,
     cellular, again you do not find it.  The FCC is on record as
     saying they find the business split about equally between
     wire line and non-wire line carriers.
                   Specifically the Katz-Salup theory says after a
     merger there should be an increased incentive to prevent
     entry.  Well, we have had some mergers.  Has anyone
     investigated whether that has occurred?  I do not see any
     empirical analysis in the Katz-Salup affidavit.
                   I have done some preliminary work analyzing
     precisely that question, and the answer is strikingly clear. 
     The answer is no.  A statistical study that I have done
     shows that the amount of entry you see of CLECs, the number
     of CLECs, is no different than what you would otherwise have
     expected.
                   The bottom line is there is no support at all for
     the theory that as an ILEC gets larger it will discriminate
     more, just no support at all for that.  As far as the theory
     that new technologies have to be hooked up and that is where
     questions will arise, I believe correctly, as Michael has
     pointed out, that is something you have to be concerned
     about.
                   The best example I know of that is the Sprint Ion
     case.  That actual example I think belies the concern.  It
     is my understanding that Sprint has announced that they are
     signed up to go forward with Ion.  They are not concerned
     about relying on third parties, and, therefore, I do not see
     this as a serious concern.
                   Finally, let me make one point.  The national/
     local plan that SBC has embarked on requires SBC to provide
     in region long distance service.  That means it will have to
     satisfy the 271 checklist.
                   If SBC is found to have discriminated, what a
     penalty it will have to suffer.  It will not be able to
     provide in region service.  That will be a disaster to SBC's
     national/local plan.  SBC, therefore, will have a lower
     incentive to discriminate, not a higher incentive, as a
     result of this transaction.
                   I guess simply put --
                   MR. ROGERSON:  When you said finally, then I did
     not say 30 seconds.
                   MR. CARLTON:  Okay.  This will be 30 seconds. 
     Okay.
                   MR. ROGERSON:  You want to simply put one thing?
                   MR. CARLTON:  Yes.  Simply put, the goal of
     regulation is not to make life easy for regulators.  It is
     to benefit consumers.  The goal is not to eliminate all
     theoretical possibilities of discrimination, no matter how
     insignificant, without regard to the benefits of the
     transaction.
                   There is simply no evidence whatsoever here that
     this merger, the mergers, will raise the incentive to
     discriminate against rivals.
                   MR. ROGERSON:  Roger Noll?
                   MR. NOLL:  Let me just briefly say that I want to
     make two points.
                   First of all, the Telecommunications Act of 1996
     does have a 14 point checklist and, in addition to that, a
     public interest standard.  It is by no means clear the
     Telecommunications Act is all about the RBOCs expanding into
     other things.  I think it is mainly about introducing
     competition into the local service or else the checklist and
     the public interest standard would not be there.
                   It strikes me this is a beautiful example of a
     difference in policy perspective that the FCC might have
     than the Justice Department would have.  The Justice
     Department would never ever in a million years put an
     anti-trust case about well, if we prevent somebody from
     being in Market A it makes it more likely they will be in
     Market B.  The best you can hope to in a potential
     competition argument is to talk about the same market, not a
     completely different market.
                   In the case of the FCC, the strategy here is more
     I think having competition in local service than it is
     having additional competition in long distance and enhanced
     services.
                   Then when you get to what Michael's point is all
     about, Michael's point is really not, Dennis, about does the
     incentive of Ameritech to discriminate against CLECs in
     Chicago increase if Southwest Bell is part of the same
     company.  I cannot imagine.  Maybe it is true there is an
     effect, but that is not what people are worried about.
                   What people are worried about is in fact the
     increased ability and incentive to engage in discrimination
     if you are in the enhanced services long distance business
     and you are both the originating and terminating carrier. 
     We do not have any examples of that because we do not have
     the RBOCs in the long distance based enhanced service area
     and so there obviously is not going to be any evidence one
     way or the other.
                   That means this is another important point.  Who
     bears the burden of proof here determines the outcome.  If
     the burden of proof is on those who oppose the mergers to
     demonstrate the existence of long distance discrimination
     being enhanced by the mergers, they are going to be unable
     to prove it because the opportunities for that
     discrimination in principle do not exist because the RBOCs
     are not in that business.
                   If the burden of proof is on the RBOCs to prove
     that indeed they have competed successfully in long distance
     without discriminating against AT&T and MCI and everybody
     else, then they are going to fail that burden to prove, so
     you cannot really put the question that way.
                   You have to put it, I think, the way that Michael
     has put it.  I think his way of analyzing it is absolutely
     right, and it comes down to the case that there is this one
     important fact.  It does enhance the incentive to engage in
     discriminatory behavior in a dynamic sense, the one that
     Michael described, if you are both the originating and
     terminating carrier and if you are in the long distance
     business, so you can in fact be the person doing the
     interconnection.
                   That is a world we are not in yet and so we have
     to base it largely on theoretical, as opposed to
     experiential, bases.
                   MR. ROGERSON:  Jeff?
                   MR. SHEPERD:  Very briefly.  Two short points.
                   One, I heard a lot of nos and none whatevers just
     now from the other end of the table.  With all respect, let
     me say I am the editor of a journal in this field in which
     we look for evidence and factual testing of hypotheses. 
     When I hear no and none I think well, that is theory.  That
     is not economic testing based on evidence.
                   MR. NOLL:  I was referring to my empirical study.
                   MR. SHEPERD:  Well, I will stick with what I said.
                   The other point is that price discrimination,
     whenever it occurs, and done by a dominant firm does tend to
     be anti-competitive.  It may be detectible, but after some
     lag.  It may not be easy to cure it, but in general it tends
     to be anti-competitive.
                   MR. GILBERT:  If I could respond?
                   MR. ROGERSON:  Yes.  Rich Gilbert?
                   MR. GILBERT:  Roger said that we have no
     experience with RBOCs on the origination and terminating end
     of long distance calls.  I think that is wrong.  We have
     lots of experience.  They are called intralata toll calls. 
     That is the case where the RBOC is both on the origination
     end and on the termination end.
                   The experience that I am aware of, for example, in
     the Pac Bell region the Pac Bell share of the intralata
     business toll market is under 50 percent, and Ameritech, I
     understand their share of the entire intralata toll market
     is around 65 percent.  In Pac Bell, I say business because
     we do not have pre-selection for residential yet.  That is I
     think a regulatory issue.
                   I think that is very, very strong evidence that
     there is not a problem.  That is where you would expect it
     to occur.  There have been no complaints in that area.
                   Another thing I would like to mention is that
     Sprint has recently announced that they have secured access
     for their broad band metropolitan access networks in a
     number of states, including SBC states.  They seem to be
     quite happy with it.
                   For what it is worth, I think it is worth noting
     that the Texas Public Utility Commission has announced that
     SBC has satisfied ten of its 14 checklist items.  I am not
     sure that is directly related to this discrimination issue,
     but I think it would be very hard to look for any evidence
     here.
                   MR. ROGERSON:  Okay.  I cannot resist giving Roger
     a chance to respond to the point that there is evidence in
     the intralata market, interstate intralata markets.  In
     particular, the evidence is that 50 percent of the market
     goes to someone else.
                   MR. NOLL:  It is obviously true that the fraction
     of the market accounted for by the interexchange carriers
     intralata has grown substantially, particularly since the
     passage of the Telecommunications Act of 1996.
                   Rich, it is just completely false to say there has
     never been a controversy about intralata access.  I mean, I
     do not know how to evaluate it.  I do not play the game of
     advocating one side or another.
                   I do know that in almost every state there has
     been constant battles for ten years on this issue.  It is
     also the case that the local exchange carriers have had to
     be forced through long-term regulatory proceedings to do
     anything to accommodate intralata competition.
                   I mean, it is one thing to say, and I agree with
     you completely, has it been possible through a guerrilla war
     that has lasted for 30 years for the interexchange carriers
     to get a significant fraction of the intralata market,
     especially in some states that have relatively large and
     sophisticated regulatory commissions.  The answer is yes.
                   Is it true that this all just sort of happened
     easily and ubiquitously without a fight and that the ILECs
     and the RBOCs in particular were just real, real happy to
     accommodate this and do whatever the IXCs liked?  That is
     completely fatuous.  No one could possibly believe that is
     true.
                   MR. GILBERT:  That is not the point.  The issue is
     does the merger contribute to a regulatory problem?  Does
     the merger make it worse?
                   I think if you look at intralata toll, for
     example, I would be very, very surprised if you saw any
     correlation between the size of the intralata toll calling
     that is controlled or on which there is control of
     origination and termination by an ILEC and any pattern of
     disputes over the terms.
                   MR. LITAN:  Could I just interject?  We have a
     battle of speculations here.  We started out this morning
     with the claim that with a nationwide footprint there were
     enhanced incentives without evidence that there would be a
     pro-competitive effect.
                   We are now ending the discussion with an argument
     that there are enhanced incentives with an argument about
     evidence that you will have the opposite effect.
                   I suggest at a minimum they cancel each other out
     and that right now where we are left with is no shred of
     evidence that this merger will be pro-competitive.  Then the
     question is is that enough to get you through, and that
     becomes a legal question.
                   MR. CARLTON:  Could I just say something?  Can I
     just address that?
                   I would like to actually agree with something that
     Jeff said.  When he was saying no, no, no, it is speculation
     on both sides, I think he was referring to you just do not
     want to have a battle of theory saying on the one hand, on
     the other hand.
                   The point I was trying to make, and maybe I was
     not clear, is that if you look at the evidence, if you do
     the evidence and look at the prediction of the Katz-Salup
     theory based on the mergers that have occurred in the past,
     I can say there is no evidence.  I underline no.
                   I was not saying based on theory on the one hand,
     on the other hand.  I think there is evidence.  I think
     intralata toll provides evidence.  I think cellular provides
     a counter example that discrimination is not to sever as to
     impede.
                   There is no allegation I think by anyone here -- I
     do not know; I will speak just for myself -- that regulators
     should go home.  No one is saying that regulation is not
     important still in these areas.  That is not the issue.
                   The issue is does this merger raise the likelihood
     of discrimination, and is there any evidence to support it. 
     The evidence I have looked at, which I think is exactly the
     relevant evidence to look at, says no.
                   MR. ROGERSON:  Right.  Okay.  Michael Katz, what
     about that?
                   MR. KATZ:  I actually want, and I have been
     waiting a long time, to just address a bunch of the things
     that Dennis said, some of them very quickly.
                   The point about this is harm that people are going
     to see again I think comes back to people will see the poor
     performance.  How are they going to know?  How are people
     going to know what are the problems with OSS making it work? 
     How are people going to know the problems with XDSL?
                   Now, on a couple of these things, the intralata
     toll, the cellular and the points about Ion, I am tempted to
     say especially to Rich, since we are both from Berkeley,
     that is your reality.
                   (Laughter.)
                   MR. KATZ:  I will talk about mine.  Apparently
     Dennis talks to different Sprint people than I do.  I
     thought I probably talked to more of them since they paid me
     to come here.  One of the reasons they paid me to come here
     is in fact they are worried about making sure that they get
     good access.
                   Rich talked about signing up agreements for the
     BMANs.  I think that is not so surprising.  I think there is
     more competition if you are talking about that kind of
     access.  I think the big issue, though, is XDSL, and I want
     to point out that XDSL is not just about saying that that is
     small customers and it does not apply to large customers
     because in fact what we are talking about here is national
     entry, and a lot of large enterprises, a lot of large
     customers, have a lot of small sites so access services like
     XDSL are relevant for those markets as well.
                   I will not go into the details of Sprint's
     concerns about these things.  I mean, the appropriate way to
     address that, it seems to me, is for the Commission to meet
     with Sprint executives and, as I mentioned earlier, figure
     out a way to talk to them about it that is also kept
     confidential since it obviously involves sensitive strategic
     things.
                   The point about intralata toll and cellular.  I
     disagree with Roger.  It certainly has not been an
     uncontroversial issue.  Certainly our example I think of
     problems with cellular interconnection and certainly with
     intralata toll, I mean, Rich has labeled some of it as just
     a regulatory issue, but you could say that about all of
     these threats.  They are just a regulatory issue.  The fact
     is the ILECs have not embraced intralata toll competition
     with open arms.
                   In terms of Dennis' point about massive entry, the
     fact is there may be a bunch of them, depending on how you
     count the numbers, but it has still been on a small scale.
                   Dennis made the point about that they do appear to
     be betting on regulators.  In my notes I make a point the
     other way, that the ILECs also seem to be betting on
     regulators because in numerous instances they have tried
     various forms of discrimination and gotten caught where they
     have settled the cases, so apparently they are also betting
     they can fool them.
                   The 271 checklist.  I actually think that is an
     example.  The other way the argument has been made, why
     would the ILECs dare do bad things and keep out of
     interexchange?  Well, apparently they have not been too
     tempted so far.  None of them have satisfied the checklist.
                   I think it is not so surprising; at least the data
     I have looked at have shown that the margins are much bigger
     if you can stay in local and avoid competition than if you
     get into long distance, but have to give that up.
                   Now the really big issue.  Actually, one thing
     before I get to that so this way Bill cannot shut me up.  On
     the balancing point, I actually think that Bob is wrong in
     one sense.  If you are going to talk about stopping the
     merger or letting it go through and those are the only
     choices, then it is absolutely right.
                   I think everybody here agrees you have to balance
     all the effects, and you have to weigh which ones you find
     plausible, but that is not the only option open to the
     Commission.
                   VOICE 2:  No.  There are conditions.
                   MR. KATZ:  There are the conditions, which then
     can address things without balancing them.  You have to do a
     balancing sort of within it to make sure the conditions do
     not cause their own problem, but it is a narrower inquiry.
                   As to the stuff about the evidence, I want to
     raise a bunch of points, and then I will stop.  First off, I
     would point out that we have been asking for evidence. 
     Well, is it really true that these mergers are going to
     allow you to go national?  Everybody has said no, no.  The
     previous mergers were too small.  Well, they make just the
     same argument here.
                   If you look, the number of access lines controlled
     by one party, just to throw a couple numbers in SBC's case,
     it is going from 19 to 30 percent, Bell Atlantic from 22 to
     33.  There is significant increases, and people are debating
     what constitutes significant, in the amount of traffic that
     will terminate in region if these new expanded regions go
     through.
                   I would point out that, you know, the mergers have
     been comparatively recent.  It makes time series difficult
     just because you have limited data.  It is also difficult
     because to do it right you need to take into account
     industry trends.
                   Rich Gilbert and Bob Harris had a filing that said
     look.  If I got it right, it said the number of co-location
     agreements has gone way up post merger.  That is true, but
     it has also been going up in the rest of the industry.  What
     one needs to do is correct for industry trend.
                   Now, I have looked at some stuff very
     preliminarily, and to try and get around this problem of
     having a short time frame we have looked at some cross
     sectional comparisons to ask well, do small ILECs seem to
     perform better or worse than large ones?  Is there evidence?
                   I will tell you the studies are preliminary and
     some of the results are mixed, but it has also been coming
     out that by some rather imperfect measures the small ILECs,
     for instance, net before the merger of Cincinnati Bell, have
     had more entry on adjusting for market size.
                   I think that doing the empirical work here is very
     difficult, but I think it is wrong to say oh, this all
     supports the merger and shows it is fine.  I think in fact
     there is evidence there.
                   I think there is reason to believe that these
     mergers really are different from what we have seen in the
     past because they are getting so much larger, and that
     matters both because of the internalization and also because
     of the concerns the rivals face because the national rival
     needs to be able to cover a given percentage of the market.
                   I think it is hard to predict these effects.  I
     agree with that.  It makes it a difficult task for
     regulators, but I do not think that means you can avoid
     doing that and forming the theory and I think then testing
     every part of it you can.
                   I think the other way to do that is to ask each of
     the steps in the logic.  Is that right?  Do they have market
     power or not?  Talk about the forms of access where they do. 
     Is national entry important?  How worried are the
     competitors?
                   Those are all things that are being done, and the
     FCC can do more of talking to people in the industry.
                   MR. ROGERSON:  Bob Crandall?
                   MR. CRANDALL:  First of all, the intralata debate. 
     It seems to me it is obvious that all of the LECs would like
     to keep their intralata monopolies as long as they could
     and, therefore, are opposed to one plus equal access.  The
     question really is once you have one plus equal access, is
     there any evidence that subtly discriminatory policies allow
     them to obtain a disproportionate share?
                   Secondly, Roger, why is the wireless example, the
     cellular example, not dispositive evidence or at least good
     evidence that even when they originate and terminate the
     calls they are unable to engage in subtle discrimination
     that, for instance, in the most recent Spectrum cap filing I
     just looked at the other day one of the advocates pointed
     out that Ameritech, after all these years, is number two in
     cellular in Chicago?
                   You would think that given the number of people it
     has working in Chicago, just their own subscriptions would
     put them over the top there, but they are still number two. 
     Why is that not evidence that they are not engaging in
     subtle discrimination?
                   MR. NOLL:  Okay.  With regard to the subtle
     discrimination point, the obvious point is sort of just like
     Michael said.  To do this thing right, you have to take into
     account everything it affects, market shares and prices of
     the firm.
                   You know, actually I think it is the FCC's staff
     that is the only hope here because they have all the data. 
     They have a lot of resources, and they do not have to be
     advocates.
                   Here is sort of what we know.  Number one, we --
                   MR. CRANDALL:  You have graduates students,
     though, Roger.
                   MR. NOLL:  Yes, but I have to pay them, and that
     is harder.
                   Number one, let's look at long distance per se. 
     The argument in favor of allowing the RBOCs into long
     distance is that in an industry in which the former
     monopolist has approximately half of the market and a couple
     of other large competitors have about 40 percent of the rest
     and there is a bunch of little, tiny guys that account for
     the rest, it still is the case we do not have real
     competitive pricing.
                   It still is the case that about a third of the
     customers accounting for something on the order of five to
     ten percent of the calling pay the high book price instead
     of the actual price you can get from minimal effort of
     calling around for competitors.
                   The argument of the RBOCs, which is correct, is
     that probably if two or three RBOCs were also in the long
     distance business as facilities based carriers or as really
     aggressive resellers that there would be more efficiency.
                   Yes, competition has had benefits for consumers in
     long distance, but the market structure is not sufficiently
     competitive that it has driven the price down to something
     like a competitive price.
                   Then we say okay, what is going on in intralata
     toll?  Well, in intralata toll the best we can find, the
     very best we can find, is something that looks sort of like
     long distance.  That is to say the incumbent local exchange
     carrier has half.  In the vast majority of the country, it
     is much more than that.
                   Secondly, on a mileage based basis price cost
     margins are higher for intralata toll than they are for long
     distance, so if anything that market is less competitive
     than a long distance one.
                   Now we ask the magic question why?  Well, it could
     be that it is just a superior and wonderful efficiency,
     right, of the local exchange carriers.  That is possible. 
     What we need to do is actually figure it out if they really
     do have some gain here, but the reality is the prices are
     higher, not lower.  If they really did have superior
     efficiency, we would expect the intralata toll prices on a
     mileage based basis to be lower, not higher, than long
     distance.
                   Finally, with regard to the cellular story, the
     crucial fact here is yes, it is the case.  You can find
     examples of specific RBOCs that in specific cities are not
     the dominant cellular carrier, but in most cases it goes the
     other way.  The vast majority of cases it goes the other
     way.
                   It is in fact the local exchange, the large local
     exchange carrier cellular company that has the largest
     amount of market share and that makes the most profits.
                   MR. ROGERSON:  Rich Gilbert?
                   MR. GILBERT:  Just briefly.  I do not see, Roger,
     why intralata toll or any telecommunications service should
     be priced by the mile.  The wires are there.  Electrons
     move.  They do not --
                   MR. NOLL:  The reason I said per mile is
     because --
                   MR. GILBERT:  -- consume a lot of gas.
                   MR. NOLL:  -- it actually favors the RBOCs to make
     it on a mileage based basis.  If I do it on a total call
     base basis, then the difference is even larger.
                   MR. ROGERSON:  Okay.  I am beginning to get
     worried that if we wait any longer we will be debating to an
     empty room.  We have reached nearly 12:45 p.m., and I think
     the discussion has been extremely productive.  We have all
     learned a lot.
                   I would like to thank all of the panelists for
     their really insightful comments and I think for really
     objective comments, too.  I think there was a lot of
     agreement among all sides here on all sorts of issues, and
     it really clarified, you know, what it is we have to
     investigate.
                   Finally, before we close I want to particularly
     thank two of our senior staff economists who are working
     full-time on these ILEC mergers, Pam Magna and Marilyn
     Simmon, who are at the front here who very graciously took a
     number of days out of their schedule analyzing these mergers
     to help me organize the round table.  They did just a first
     rate job, and I really appreciate it, so thank you very
     much.
                   Thank you all for coming.
                   (Applause.)
                   (Whereupon, the round table was concluded.)
     //
     //
     //
     //
     //
     //                     CERTIFICATE OF TRANSCRIPTION
     
     
         I do hereby certify that the foregoing transcript was
     typed by __Karen Stryker______ from a tape recording
     furnished by the FCC, and that said transcript is an
     accurate record of the tape recording provided by CACI to
     the best of my ability.
     
                        Date:  February 8, 1999
     
                          Karen Stryker     
                        Transcriber
                        Heritage Reporting Corporation
                        Suite 600
                        1220 L Street, N. W.
                        Washington, D. C.  20005