[Senate Hearing 106-405] [From the U.S. Government Publishing Office] S. Hrg. 106-405 THE ANTITRUST MERGER REVIEW ACT: ACCELERATING FCC REVIEW OF MERGERS ======================================================================= HEARING before the SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED SIXTH CONGRESS FIRST SESSION on S. 467 A BILL TO RESTATE AND IMPROVE SECTION 7A OF THE CLAYTON ACT, WHICH WOULD IMPOSE TIME LIMITS ON THE FEDERAL COMMUNICATIONS COMMISSION REVIEW OF MERGERS __________ APRIL 13, 1999 __________ Serial No. J-106-13 __________ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 62-593 WASHINGTON : 2000 COMMITTEE ON THE JUDICIARY ORRIN G. HATCH, Utah, Chairman STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware JON KYL, Arizona HERBERT KOHL, Wisconsin MIKE DeWINE, Ohio DIANNE FEINSTEIN, California JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York BOB SMITH, New Hampshire Manus Cooney, Chief Counsel and Staff Director Bruce A. Cohen, Minority Chief Counsel ______ Subcommittee on Antitrust, Business Rights, and Competition MIKE DeWINE, Ohio, Chairman ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont Louis Dupart, Chief Counsel and Staff Director Jon Leibowitz, Minority Chief Counsel and Staff Director (ii) C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page DeWine, Hon. Mike, U.S. Senator from the State of Ohio........... 1 Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin..... 2 Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........ 3, 45 Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 46 Thurmond, Hon. Strom, U.S. Senator from the State of South Carolina....................................................... 47 CHRONOLOGICAL LIST OF WITNESSES Panel consisting of Roy Neel, president and chief executive officer, U.S. Telephone Association, Washington DC; H. Russell Frisby, Jr., president, Competitive Telecommunications Association, Washington, DC; Richard Weening, executive chairman, Cumulus Media, Inc., Milwaukee, WI; and Ronald J. Binz, president, Competition Policy Institute, Washington, DC.. 5 ALPHABETICAL LIST AND MATERIAL SUBMITTED Binz, Ronald J.: Testimony.................................................... 23 Prepared statement........................................... 24 Frisby, H. Russell, Jr.: Testimony.................................................... 12 Prepared statement........................................... 13 Kohl, Hon. Herbert: Article from the Wall Street Journal: Broadcasters Blast New Scrutiny of Radio Deals, dated April 7, 1999............... 37 Neel, Roy: Testimony.................................................... 5 Prepared statement........................................... 7 Appendix A: USTA Chart--FCC is a Bottleneck to Merger Approvals.................................................. 11 Weening, Richard: Testimony.................................................... 16 Prepared statement........................................... 18 APPENDIX Proposed Legislation S. 467, a bill to restate and improve Section 7A of the Clayton Act, which would impose time limits on the Federal Communications Commission review of mergers.................... 49 Questions and Answers Questions of Senator Kohl to Hon. William E. Kennard, Chairman, Federal Communications Commission.............................. 65 Additional Submission for the Record New York Times Editorial: Mergers That Foster Competition, dated April 12, 1999................................................. 85 THE ANTITRUST MERGER REVIEW ACT: ACCELERATING FCC REVIEW OF MERGERS ---------- -- ---- TUESDAY, APRIL 13, 1999 U.S. Senate, Subcommittee on Antitrust, Business Rights, and Competition, Committee on the Judiciary, Washington, DC. The committee met, pursuant to notice, at 10:03 a.m., in room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine (chairman of the subcommittee) presiding. Also present: Senators Kohl and Hatch (ex officio). OPENING STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE STATE OF OHIO Senator DeWine. Good morning and welcome to the Antitrust Subcommittee hearing on S. 467, the Antitrust Merger Review Act, a bill that will impose time lines on Federal Communications Commission reviews of mergers. The reason that Senator Kohl and I have introduced this legislation is quite simple. The FCC is taking too long to review telecommunications mergers. Let me just mention one example, SBC and Ameritech. SBC and Ameritech announced their intention to merge in May of 1998 and formally filed their application in July. Two weeks ago, after 8 months of review, the FCC offered to start a ``collaborative process'' with the parties to examine five major areas of concern. Now, this process is supposed to conclude by the end of this June, more than a full year after the parties announced their merger. Quite frankly, this is just too long. Let me be very clear. We want the FCC to conduct thorough investigations of these matters. When SBC and Ameritech first announced their proposed merger, Senator Kohl and I sent a letter to the FCC to request that the FCC give special attention to the competitive implications of consolidation in the telephone industry and the impact of the proposed SBC- Ameritech merger in particular. So we think the FCC has a role to play. Furthermore, I like the idea of the ``collaborative process''. I think it is a good idea to involve the parties and to involve them in an effort to resolve competitive concerns. I am hopeful the process will be a success. But the FCC simply has to act more rapidly. In an industry that has been as active and vibrant as telecommunications, it is absolutely essential that the regulatory agencies move quickly and efficiently to resolve competitive issues. Merging parties and their competitors cannot be asked to wait in regulatory limbo month after month after month, not knowing if or when a merger will be allowed, not knowing what conditions may be attached, and not knowing how the market will be structured in the future. We are not, let me repeat, not trying to influence how the FCC decides the case, but no matter what the FCC decides on a particular issue, individual businesses need certainty. More generally, the industry needs prompt regulatory decisions so they can move more quickly towards full and vigorous competition. The FCC has to promote that competition, not stand in the way of competition by dragging its feet on review of mergers. Just as important, as I have mentioned before, we must consider the employees of the merging companies. These individuals are often thrown into complete turmoil by the prospect of a merger. They do not know what is going to happen to their company. They do not know if they are going to have to move on or if they are going to lose their jobs. We need to be sensitive to these very understandable human concerns and do everything we can to get these people quick answers so that they can plan for their futures and figure out how they are going to provide for their families. Before I turn to the ranking member of this subcommittee, Senator Kohl, let me just mention that most of you have probably noticed that S. 467 addresses more than just FCC time limits. In fact, much of the bill deals more generally with the Hart-Scott-Rodino Act. We are currently evaluating ways to amend Hart-Scott. Specifically, we are most focused on the possibility of modifying the $15 million filing threshold, which has not been changed since the law was first passed way back in 1976. Senator Kohl and I are working closely with Chairman Hatch and with the Justice Department on that aspect of the bill. So we may do some more work on the overall framework of Hart-Scott, but for today and for today's hearing, we would like to focus on the section that specifically deals with FCC time limits. I am looking forward to hearing the testimony of our panel of four witnesses and I am sure that they will provide helpful insights as we prepare for a subcommittee markup at the end of this month. Senator Kohl. STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE OF WISCONSIN Senator Kohl. Thank you, Mr. Chairman. Our bill, the Antitrust Merger Review Act, is simple, effective, and straightforward. It sets reasonable time limits for the FCC to follow when it is reviewing license transfers. In other words, our bill says to the FCC: approve the deal, reject the deal, or apply conditions, but do not just sit on it. Let me briefly explain why this measure is necessary. Companies, their employees, and their customers have all too often been at the mercy of a time-consuming merger review process in which the two lead agencies, the DOJ and the FCC, act in sequence and not in tandem, and that just does not make sense. Instead, we ought to place a reasonable limit on reviewing these deals. The DOJ and the FTC both have deadlines under the Hart- Scott-Rodino laws, and the Federal Energy Regulatory Commission imposes its own 150-day deadline on most deals, and so there is no compelling reason why the FCC should not have a deadline, as well. To my mind, there is a very good reason why we should place a shot clock on the Commission. They take too long to review these mergers, just as they often take too much time to review other matters. For example, it took the FCC 16 months to rule on Bell Atlantic/NYNEX, and even on the smaller deals, the FCC also sometimes drags its feet. Take, for example, the attempts of Cumulus Media to acquire a handful of radio stations in South Carolina. It took more than 1 year--1 year--to complete that acquisition, even though the cost was well below the $15 million Hart-Scott-Rodino threshold and nobody opposed it. That is not only wrong, it is unacceptable. Two weeks ago, the FCC proposed a collaboration with SBC and Ameritech. That is fine, and we agree with the issues the Commission has identified. But the FCC waited until 10 months after this merger was announced to take this step, hardly a self-imposed attempt to act expeditiously. To be sure, unlike many in Congress, we do not seek to substantively change the FCC's ability to review mergers with a public interest test. From both a public interest and antitrust perspective, some deals ought to be rejected, and the huge wave of telecom and internet mergers clearly creates some concern. But one thing is also true. There is across-the-board support for bringing more speed and certainty to this process, and we look forward to working with our witnesses, including my good friend, Richard Weening of Milwaukee, to do just that. Mr. Chairman, let me make just a few additional points. Clearly, it is not our intention to slow down the review of smaller mergers that do not meet the Hart-Scott-Rodino filing thresholds by applying a time line only to the larger ones that do. So my inclination is to amend our bill to ensure that it applies to all FCC mergers, both big and small. Finally, it is no secret that Congress is in the process of rethinking the Hart-Scott-Rodino thresholds. Senator DeWine and I are committed to working with other interested members, like Chairman Hatch, but we have not yet decided whether to make our measure the vehicle for doing so when we mark it up later this month. Thank you, Mr. Chairman. Senator DeWine. Senator Kohl, thank you very much. Let me turn to the chairman of the full Judiciary Committee, Senator Hatch. STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE OF UTAH The Chairman. Thank you, Senator DeWine. I would like to begin by extending my appreciation to both Senators DeWine and Kohl, the chairman and ranking member of the subcommittee, respectively, for their tremendous efforts in bringing today's hearing and making it possible and beginning a meaningful dialogue on the important issue of FCC review of mergers in the communications industry. In light of the increasingly numerous mergers in the communications industry and the ever-increasing importance of telecommunications services throughout our country and our society, whether it is telephone or internet services, I am pleased that we will have an opportunity to hear today from affected parties on some of the regulatory burdens faced by this industry. As we see more and more mergers in the communications industry wait longer and longer to obtain approval from the FCC for their mergers, we have to pause and ask what is causing this delay. Unnecessary and unwarranted delays in the approval process could mean delayed competition in certain markets, delayed deployment of new technologies, and delayed delivery of services or improved services to consumers, whether they are in my home State of Utah or Ohio, Wisconsin, Minnesota, or anywhere else. We must determine what is causing this delay and whether it is warranted and we have to address it properly. I believe that the legislation introduced by Senators DeWine and Kohl, S. 467, is an important step in the right direction in addressing some of the concerns. This legislation, based loosely on the Hart-Scott-Rodino merger review process, would impose time limits on the FCC's review of certain telecommunications transactions. Namely, it affects those transactions required to be reported under the Hart-Scott- Rodino Antitrust Improvements Act of 1976. The FCC has been increasingly ambitious in interpreting its statutory authority under sections 214 and 310 of the Telecommunications Act to assert jurisdiction over the telecommunications mergers that happen to include transfers of licenses. The Telecommunications Act provides the FCC with the authority to review applications to transfer licenses to ensure that ``the public interest, convenience, and necessity'' will be served. Now, these are important functions and the FCC's activities and expertise in this area is very important. However, the Commission's regulatory authority is limited. It does not include review of every aspect of a merger and certainly does not include the review of the merger for its potentially broader competitive impact within the industry. That is a review properly performed and reserved to the antitrust enforcers in the Department of Justice and the FTC. As Commissioner Furchtgott-Roth wrote in his recent concurrence in the AT&T/TCI matter, the FCC's work ``often duplicates that of the Department of Justice's Antitrust Division.'' I look forward to working with my colleagues in the Senate, the FCC, the Department of Justice, and those in industry to ensure a proper procedure for the review of communications industry mergers that results in a fair and workable system for all Americans. I look forward to working with Senators DeWine and Kohl in addressing some of these issues by imposing certain time limits in the FCC review of the telecommunications mergers as proposed in this bill. So I am proud of our two Senators in this area and the good work that they do on this subcommittee and the fine way that they work together in the best interest of the country and I look forward to hearing and reviewing the comments of those who are concerned here today, and I welcome all of you to the committee. Senator DeWine. Senator Hatch, thank you very much. Let me now turn to our panel. Roy Neel joined the U.S. Telephone Association as President in January 1994. He is responsible for managing all the association's legal, regulatory, legislative, and technical activity. Prior to joining USTA, Mr. Neel served as President Clinton's Deputy Chief of Staff. Russell Frisby, Junior, is the President of Competitive Telecommunications Association, CompTel. Immediately prior to joining CompTel, he was Chairman of the Maryland Public Service Commission, which exercises jurisdiction over all utilities, including telecommunications, within the State. Mr. Frisby previously practiced telecommunications law for 20 years. Richard Weening is the co-founder and Executive Chairman of Cumulus Media, Incorporated. He has founded several other firms involved in publishing, broadcasting, online services, and electronic commerce. Ronald Binz is the President and Policy Director of CPI, a consumer interest group and think tank he co-founded in March 1996. For 11 years before that, he directed the Colorado Office of Consumer Counsel. We welcome all of you. Mr. Neel, we will start with you. Let me just state for the record that all the written statements that you have submitted will be made a part of the record and that you can proceed as you wish. Mr. Neel. PANEL CONSISTING OF ROY NEEL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, U.S. TELEPHONE ASSOCIATION, WASHINGTON, DC; H. RUSSELL FRISBY, JR., PRESIDENT, COMPETITIVE TELECOMMUNICATIONS ASSOCIATION, WASHINGTON, DC; RICHARD WEENING, EXECUTIVE CHAIRMAN, CUMULUS MEDIA, INC., MILWAUKEE, WI; AND RONALD J. BINZ, PRESIDENT, COMPETITION POLICY INSTITUTE, WASHINGTON, DC STATEMENT OF ROY NEEL Mr. Neel. Thank you, Mr. Chairman, and thank you and Senator Kohl for introducing this legislation that is much needed and to Chairman Hatch for his strong supporting remarks. I represent more than 1,000 local telephone companies of all sizes, everything from very large companies like Bell Atlantic, SBC, and GTE down to some very small mom-and-pop operations. This legislation is needed for a variety of reasons and you have hit many of the topics here. We certainly favor limiting the FCC review period to 180 days or less, and frankly, I think you could make an argument for completely eliminating FCC jurisdiction in this area except for management of spectrum. Basically, what happens is the Commission uses their interpretation of their very narrow mandate in reviewing mergers to extract concessions from these companies in a number of areas, frankly, far exceeding their mandate. It is clear that for smaller companies, this review should even be less time. We think it should be applicable to pending mergers, as well, and that this time line kick in once the applications are filed. So we think you are on the right track there. Clearly, these delays are harmful. They are harmful both to the companies that are trying to join forces and compete. They hamper the roll-out of new services because you basically have to put your business on hold until the FCC takes some action. It diminishes product innovation. It creates massive instability in the financial markets associated around these companies. It basically affects their fundamental competitiveness, not only here at home, allowing, say, a company like SBC/Ameritech to compete with a monster company like AT&T and TCI or even MCI WorldCom. It restricts their ability to create jobs. It is simply not fair to the employees who have to put their lives on hold. A number of these mergers are beneficial, perhaps not all, but clearly the ones that relate to my companies, the Bell companies, the SBC/Ameritech and others, have clearly given additional resources, rolled out new services, and helped consumers, as well. Particularly, residential consumers are helped by this, consumers that are generally ignored by these new so-called competitors, as well as the AT&T/TCI, MCI WorldCom companies. They are simply left out in the cold here. It is these companies, the local telephone companies that continue to serve those customers, roll out new products and services. They keep rates low. They do not raise them capriciously. AT&T just slapped a $3 a month charge on its smallest consumers, probably to help pay for this mega-merger with TCI. So residential companies are helped by these mergers that we are referring to. They provide one-stop shopping and they basically give them the resources they need to compete globally, as well, and create new jobs. Let us just look quickly at a couple that have occurred. The Bell Atlantic/NYNEX merger added more than 4,000 service- related jobs, increased capital spending by $600 million, and will up to $6 billion. They invested more than $1 billion to open their local markets, this new joint company. They launched new social programs and improved customer care. The SBC/Pacific merger created 4,000 jobs, as well. Service installation times have improved significantly. Services such as new digital DSL services have been introduced, as well as other major community services. Let us look at one of the mergers in question here, SBC/ Ameritech. It is expected that 8,000 jobs will be created in this merger, new efficiencies. Thirty new out-of-region markets are planned to be entered. That means that this new combined company is going to go into 30 markets outside its area to compete with other Bell phone companies, as well as some of the mega-companies like AT&T, TCI, and so on. They expect to lay 2,900 miles of new fiber and 140 massive new switches and spend $25 billion in capital and operating expenses. The consumer ultimately wins. Let me quote from a letter, just to really sum up the benefits in these mergers. This is from Morty Bahr, who you all know is the President of the Communication Workers, who certainly is no spokesperson for the Bell companies per se. He is writing to Chairman Kennard and he says, It appears that the ``good guys,'' the companies that are creating thousands of jobs, are victims of the FCC's overzealous scrutiny while companies like MCI WorldCom, that are squeezing profits out of laid-off workers, are treated in a more favorable fashion. I fully understand your concern about the public interest, but where is the concern for the 200,000 employees of SBC, Ameritech, Bell Atlantic, and GTE who would like to get on with their lives in a much more secure environment? So, clearly, we encourage you to move on this legislation, get it into the law. In the FCC's arbitrary use of this very narrow definition, that, by the way, in the 1996 Telecom Act, you took away from the FCC, and they are drawing on a very narrow loophole, a vague interpretation to essentially use this to squeeze concessions out of the very companies that will create jobs, innovate, and introduce new services to your constituents and throughout the country. This is good legislation that you have. We ask you to make some minor changes and we will support you in every way we can. Thank you. Senator DeWine. Mr. Neel, thank you very much. [The prepared statement of Mr. Neel follows:] Prepared Statement of Roy Neel Mr. Chairman, Senator Kohl, and Members of the Subcommittee, thank you for having this hearing on this important topic and for the opportunity to be here today. I am President and CEO of the United States Telephone Association, which has for 102 years represented the local exchange telephone carriers. Today, USTA has over 1100 members who are extremely interested in the subject matter of this hearing and your merger legislation--S. 467. Mr. Chairman, we believe enactment of S. 467, with some slight modifications, will significantly improve the merger process at the FCC. introduction The Federal Communications Commission (FCC) merger review process takes far too long, and the roles of the FCC and the Department of Justice (DOJ) continue to be overlapping and duplicative despite the attempted legislative reform on this very point by the authors of Section 601(b) of the Telecommunications Act of 1996 (1996 Act). Mr. Chairman, as you said on the day you introduced your merger bill which calls for an ``Expedited Schedule for Review'' by the FCC: ``These mergers must be evaluated in a timely fashion so that the merging parties move forward. The longer these deals remain under review the longer the market remains in limbo and the longer it will be before we see the vigorous competition that we all want.'' USTA believes the FCC merger review process ought to be statutorily shortened dramatically or even quite possibly eliminated altogether, except for spectrum management issues. The review by the FCC has become truly duplicative of the review by the DOJ. In an era of no barriers to entry and competition, FCC review of telecommunications mergers is an anachronism more consistent with the legislation from which the Communications Act was derived--the Interstate Commerce Act written for railroads in 1887--than the 1996 Act. Moreover, the FCC's tendency to delay reviewing merger applications is shown by some examples from the chart attached to my testimony (see attached Appendix A). The chart catalogs the elapsed time periods associated with the review of several recent major telecommunications mergers. Look, for example, at a couple of the merger review periods for the FCC: the Bell Atlantic/NYNEX merger, for example, is the worst case at 16 months; the SBC/PacTel merger at 12 months; followed by the WorldCom/MCI merger at 10 months. These delays greatly hamper the competitive rollout of new services, product innovation, and, ultimately, lower prices for consumers. Moreover, as you had mentioned, Mr. Chairman, markets remain in limbo as they wait for the determination of regulators. Unfortunately, fast paced, technologically savvy, and truly global markets--such as those in the telecommunications industry--cannot wait. Quite simply, if companies cannot quickly reorganize in a manner that enhances competition, delays in approval ultimately thwart the American consumer's ability to compete successfully with the world. S. 467's legislative goal of limiting the time taken by the FCC in reviewing these mergers at a minimum is thus not only warranted, it is desperately needed. USTA favors limiting the FCC's review of telecommunications company mergers to 180 days or less from the time of filing with the FCC to the time of approval--this would include those mergers currently pending. If the FCC does not Act within 180 days of filing with the FCC, the merger should be deemed approved. For smaller telephone companies, USTA believes that the FCC should have an even more limited role with respect to these mergers. consumer and competitive benefits of telecommunications mergers Mergers benefit both residential and business consumers because the combined resources of the merged companies allow for the development of a whole new range of products and services that are delivered to the consumers more quickly and packaged or bundled to fit their needs. Further, with the increased scale and scope of a merged company, the company is in a better position to compete. This increased competition brings down prices and givers consumers better service. For business customers, mergers provide new suppliers of voice and data services that they demand. For instance, the merger of Bell Atlantic and GTE combines Bell Atlantic's market presence and GTE's long distance voice and data networking capabilities which provides customers with more choice and competition. Residential customers will also benefit from these mergers because as the scale and scope of the company increases, costs go down, thus allowing the more rapid deployment of such innovative services as broadband local-loop technologies like Digital Subscriber Line (DSL). When Bell Atlantic merged with NYNEX, the merging parties said that there would be more jobs, more infrastructure investment, better service and open markets. I believe the track record of Bell Atlantic after the merger confirms that commitment. Since the completion of the merger, Bell Atlantic has added more than 4,000 service related jobs; increased capital spending by $600 million to $6 billion; invested $1 billion to open local markets; launched new social programs; and improved customer care. I also believe that the same can be said for the SBC/PacTel merger. The President of the Communications Workers of America, Morton Bahr, in writing to President Clinton said ``in the short time that SBC has had ownership of PacTel, we have seen jobs grow in California, good high tech union jobs * * *'' Since the PacTel merger, SBC has added 4,000 new jobs; service installation and repair times have improved significantly; new services such as high-speed Internet access have been introduced; and charitable and community contributions have increased dramatically. With respect to the SBC/Ameritech merger, I believe that you can expect similar results. SBC estimates that the merged company's entry into out of region markets will alone produce more than 8,000 new jobs. Further, SBC believes that the efficiencies gained through the merger will allow for quicker rollout of new products and services such as DSL. After the merger, they intend to enter the 30 largest markets outside of their combined territory; add an additional 2,900 miles of fiber and 140 new switches; and invest more than $25 billion in capital and operating expenses over the next ten years. Ultimately, the consumer was in this scenario. The mergers will also spark competition by creating formidable domestic competitors for AT&T/Teleport/TCI and MCI/WorldCom. I might point out that Bell Atlantic, GTE, SBC, and Ameritech will continue to have business plans that include an active effort to serve residential customers with a full panopoly of services. Once merger approval is granted to these companies, and the FCC more fully opens the door for them to offer in-region, long-distance service, including advanced services such as high speed Internet access and data services, these companies will be local, interstate and international providers of services. Such an occurrence will only further compel the competitive zeal of all telecommunications providers, primarily inuring to the benefit of the consumer. telecommunications globalization The major telecommunications merges that the federal government is currently reviewing, as well as those they have considered over the past two years, are the inevitable consequence of the globalization of telecommunications. There is now a trend towards the formation of a half-dozen or so nationwide and worldwide telecommunications companies that can give customers the telecommunications and information services that they want. This explains the creation of large telecommunications providers like AT&T/Teleport/TCI/British Telecom, Sprint/Deutsche Telekon/France Telecom, WorldCom/MFS/UUNET/MCI, SBC/PacTel/SNET/ Ameritech, and Bell Atlantic/NYNEX/GTE. This globalization of telecommunications has been well publicized and has changed telecommunications markets throughout the world. The United States was one of the leaders in bringing this trend about through the passage of the 1996 Act, which opened the telecommunications service markets to competition. This U.S. action was followed quickly by the World Trade Organization Agreement on Basic Telecommunications Services which committed most of the world to open market concept embodied in the 1996 Act. The telecommunications equipment market in the U.S. had been opened to competition for decades due to the FCC's telephone equipment registration program. To play on this global level requires a massive capital base--SBC/Ameritech will have annual revenues of $40 billion, but AT&T has $51 billion and Nippon Telephone has $71 billion. If American companies are to maintain world leadership in telecommunications, merges are an important ingredient. mergers to not re-create the old bell system I have heard it claimed that these mergers will just put the old Bell system back together, or at least have an old Bell system West and an Old Bell system East. This, of course, is not true. Predivestiture AT&T (the old Bell system) had a monopoly in three areas: long distance, local telephone service, and equipment manufacturing. None of these current companies (e.g., GTE, SBC, etc.) engage in manufacturing, nor do any of the Bell operating companies provide in-region interLATA wirelines long distance service. Also, predivestiture (1984) AT&T had the protection of markets legally to competitors. The 1996 Act swept away all of those legal barriers to entry. Markets are open-- competition is thriving and will continue to do so in the future. Consumers will only benefit from merged companies that are better able to meet competition both domestically and internationally. the telecommunications act of 1996 Section 601(b) of the 1996 Act was entitled ``Antitrust Laws'' and provided as follows: (b) Antitrust Law._ (1) Savings Clause.--Except as provided in paragraphs (2) and (3), nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws. (2) Repeal._Subsection (a) of section 221 (47 U.S.C. 221(a)) is repealed.\1\ --------------------------------------------------------------------------- \1\ Old Section 221(a), reading in pertinent part: ``* * * If the Commission finds that the proposed consolidation, acquisition, or control will be of advantage to the persons to whom service is to be rendered and in the public interest, it shall certify to that effect; and thereupon any Act or Acts of Congress making the proposed transaction unlawful shall not apply * * *'' --------------------------------------------------------------------------- (3) Clayton Act._Section 7 of the Claytong Act (15 U.S.C. 18) is amended in the last paragraph by striking ``Federal Communications Commission.'' Please take particular note of paragraphs ``(2) Repeal'' and ``(3) Clayton Act.'' The 1996 Actspecifically sought to limit the antitrust review and immunity of the FCC. So, the FCC's continuing uninterrupted and unchanged, but possibly an even more aggressive, role in the merger review process--even after the passage of these two cited paragraphs-- comes as somewhat of a surprise to us. If the FCC's review of mergers was not intended to be in any way altered or diminished, why were these two paragraphs enacted? Just to eliminate the FCC's ability to grant antitrust immunity? We did not think so at the time of passage. Page 201 of the Conference Report for the 1996 Act, H.R. Conf. Rep. 104-458 at 201), reveals that the purpose of these changes was as follows: The new language contains a conforming change to clarify that these mergers will now be subject to Hart-Scott-Rodino review. By returning review of mergers in a competitive industry to the DOJ, this repeal would be consistent with one of the underlying themes of the bill--to get both agencies back to their proper roles and to end government by consent decree. The Commission should be carrying out the policies of the Communications Act and the DOJ should be carrying out the policies of the antitrust laws. The repeal would not affect the Commission's ability to conduct any review of a merger for Communications Act purposes, e.g., transfer of licenses. Rather, it would simply end the Commission's ability to confer antitrust immunity. [Emphasis added] Doesn't it seem clear what congressional intent was here? Section 221(a), which was being repealed by Section 601(b)(2) of the 1996 Act, had authorized the FCC to determine whether any * * * proposed consolidation, acquisition or control will be of advantage to the person whose service is to be rendered and in the public interest * * *'' In other words from 1934 to 1996, the FCC had a clearly specified statutory role in reviewing mergers of telephone companies, but the 1996 Act repealed that authority. Section 221(a) was, in other words, the FCC's merger authority. As the Conference Report indicates, Congress intended to return ``* * * review of mergers in a * * * competitive industry in the DOJ * * *''. The FCC's role after the repeal of Section 221(a) and the Clayton Act repeal was intended--as we understood it at the time of passage and as the Conference Report seems to indicate--to reduce the FCC merger review role to a review of ``the transfer of licenses.'' The FCC's review, to which any of the companies on my attached chart can attest, surely goes well beyond the review of the ``transfer of radio licenses.'' The merger review conducted by the FCC today are not materially different than they were before the passage of the 1996 Act, with the only real substantive difference being that today the FCC does not have the authority to confer antitrust immunity as that was also an aspect of Section 221(a). Despite congressional intent to return merger review authority to the DOJ, the FCC still reviews these mergers, asserting they have jurisdiction under Section 214(a) with respect to the acquisition and operation of lines; Section 310(d) regarding the transfer of radio licenses; and Section 4(i) authorizing the FCC to ``perform any and all acts * * * as may be necessary in the exercise of its functions.'' In accord with congressional intent as witnessed in the 1996 Act, the FCC's authority to review mergers must be substantially reduced or eliminated altogether. conclusion In speeding up and consolidating the merger review process, companies, markets and consumers benefit. American industries can better respond to and meet both domestic and international competition through more efficient, innovative and cost-conscious companies. Importantly, markets are properly served, with consumers receiving the competitive benefits of increased service quality, new choices, and lower prices. Mr. Chairman, Senators, thank you for the opportunity to be here today. Should you have any questions, I'd be willing to entertain them at this point. [GRAPHIC] [TIFF OMITTED] T2593A.001 Senator DeWine. Mr. Frisby. STATEMENT OF H. RUSSELL FRISBY, JR. Mr. Frisby. Thank you very much, members of the committee. As was mentioned, I am President of the Competitive Telecommunications Association, which is also known as CompTel. CompTel is the principal national industry association representing over 330 competitive telecommunications providers and their suppliers, including large nationwide carriers, as well as scores of smaller regional carriers. Our members include competitive local exchange companies, long distance carriers, resellers, fixed wireless, information service, ISP providers, equipment manufacturers, and vendors. We serve all sizes and kinds and types of customers throughout the country and throughout the world. Thank you for giving me the opportunity to appear here today. Your longstanding commitment to examining the ramifications of mergers in this area is very much appreciated. I would like to say a few words about telecommunications legislation in general and then give CompTel's perspective on S. 467. At the outset, CompTel strongly supports the Telecommunications Act of 1996 and just as strongly opposes any efforts to reopen the Act. The Act has made the development of local exchange competition possible by breaking monopoly barriers and permitting competitive entry through a variety of business strategies. Thanks to the Act's market-opening provisions, entry by competitive local exchange carriers is increasing every day. These carriers are successfully winning new local customers and building new local exchange facilities. Unfortunately, competition has not grown as rapidly as anticipated in those areas where monopolies have failed to meet their obligations under the Act, but competition has, in fact, taken root. Given the opportunity, it will flourish. CompTel is particularly concerned about certain kinds of assaults on the Act: First, efforts to legislate a date certain for RBOC entry into long distance; second, attempts to provide premature LATA boundary relief for RBOC's for inter-LATA data services, for example; and third, proposals to carve out any aspect of the incumbent's networks from the Act's market opening provisions. It is my understanding that Chairman DeWine and Ranking Member Kohl also oppose efforts to reopen the Act and that S. 467 is intended only to provide some speed and certainty to the merger review process. Given this limited goal, which we support, great care should be taken to prevent the bill from being amended or expanded in any way that would alter the substance of the Telecom Act. With that said, I would like to share CompTel's perspective on S. 467. We understand and endorse the policy behind the legislation, to speed the FCC process for approving mergers and acquisitions. In fact, CompTel would like to see the FCC move faster in many other areas, as well. It is a fact of life in our rapidly growing and technology- driven industry that companies will merge and acquire. In the vast majority of cases, new combinations are not only pro- competitive, they are also critical to bringing the best technology and greatest efficiencies to the consumers. A few examples of competition-enhancing mergers are those of AT&T and TCI, MCI and WorldCom, Airtouch and Vodaphone, WorldCom and Brooks Fiber, Excel and Teleglobe. These mergers represent the combination of complimentary non-duplicative operations of companies to create facilities-based carriers that will compete effectively in many sectors of the economy. Given the rapid changes we are experiencing in these markets, it is critical that policy makers permit such pro- competitive industry restructuring to move forward with ease and speed. For that reason, CompTel commends your efforts and endorses the goals of S. 467. Furthermore, S. 467 properly recognizes that the FCC's merger review process is a critical safeguard of the public interest. In addition to determining whether a merger should move forward, the FCC's public interest analysis also provides an opportunity to create a more competitive environment by conditioning merger approval on market-opening actions. In the vast majority of cases, the FCC's public interest review can and should take place within the time frame set forth by your legislation. It is important, however, to recognize that the telecommunications industry is still in transition from a monopoly model to a competitive model. As a result, some mergers involving the largest monopoly providers may require more time than your bill provides. Even these mergers, however, must be reviewed with speed. Nonetheless, under certain circumstances, forcing an untimely decision could have an adverse effect. To that end, CompTel proposes a modification to S. 467 that would promote efficiency while ensuring the FCC has adequate time to evaluate new market combinations. We propose adding a mechanism whereby the FCC on a majority vote could extend the bill's 180-day time limit by 90 days. This provision would only be triggered in the rare number of circumstances where a combination is so important and raises such competitive concerns that the FCC cannot fairly consider the issues within 180 days. In closing, let me reiterate our appreciation for your efforts to stimulate competition in the telecommunications market. We are encouraged to hear that Chairman DeWine and Ranking Member Kohl are developing legislation to ensure that all telecommunications providers have equal and nondiscriminatory access to buildings. Your commitment to ensuring that new entrants have a fair shot at winning customers and buildings is much appreciated. Again, thank you for the opportunity to appear here today. Senator DeWine. Thank you very much. [The prepared statement of Mr. Frisby follows:] Prepared Statement of H. Russell Frisby, Jr. Good morning. My name is H. Russell Frisby, Jr., and I am President of the Competitive Telecommunications Association (CompTel). Thank you for giving me this opportunity to speak to you about how changes in merger review policies would affect competition in telecommunications. Your longstanding commitment to examining the ramifications of mergers in this area is much appreciated. CompTel is the principal national industry association representing over 330 competitive telecommunications providers and their suppliers, including large nationwide carriers as well as scores of smaller regional carriers. Our members include competitive local exchange carriers (CLEC's), long distance carriers and resellers, fixed wireless, information service and Internet providers, equipment manufacturers and vendors. i. outlook on prospect of legislation generally I'll say a few words about telecommunications legislation in general, then give CompTel's perspective on S. 467. At the outset, CompTel strongly supports the Telecommunications Act of 1996, and just as strongly opposes any efforts to reopen the Act. The Act has made the development of local exchange competition possible by breaking monopoly barriers and permitting competitive entry through a variety of business strategies. Thanks to the Act's market- opening provisions, entry by competitive local exchange carriers is increasing every day,and these carriers continue to be successful in winning new local customers and in building new local exchange facilities. Although competition has not grown as rapidly as anticipated in those areas where the monopolies are not living up to their obligations under the Act, competition has, in fact, taken root. Given the opportunity, it will flourish. This hearing is timely because we are at a critical juncture on the road to competition. One path leads to competition via the roadmap drawn out in the Telecom Act. The other path is an anticompetitive detour that is marked by proposals to circumvent the market-opening provisions of the Act. CompTel is pleased that the Supreme Court has upheld the FCC's local competition rules. We are hopeful that the Regional Bell Operating Companies (RBOC's) will finally commit themselves to complying with the Act and opening their local markets to competition, instead of circumventing Congress' intent through litigation and lobbying for legislation that would overturn the Act. The Act is working and it should be allowed to continue to do so. Any attempt to weaken the Act will leave local markets bottled up, destabilize competitive carriers, and deprive consumers of the benefits of local competition. CompTel is particularly concerned, for example, about any efforts to legislate a date certain for RBOC entry into long distance, to provide premature LATA boundary relief for RBOC's (e.g., for interLATA data services), or to alter the law by carving out any aspect of the incumbent networks from the Telecom Act's market-opening provisions. It is my understanding that Chairman DeWine and Ranking Member Kohl also oppose efforts to reopen the Act, and that S. 467 is only intended to provide some speed and certainty to the merger review process. Given this limited goal, great care should be taken to prevent the bill from being amended or expanded in any way that would alter the substance of the Telecom Act. ii. outlook on s. 467 With that said, I'd like to share CompTel's perspective on S. 467. We understand and endorse the policy behind this legislation--to speed the FCC process for approving mergers and acquisitions. In fact, CompTel would like to see the FCC move faster in many other areas as well. S. 467's goal is laudable: to get competitive combinations to market as soon as possible. It is a fact of life in our rapidly-growing and technology-driven industry that companies will merge and acquire. In the vast majority of cases, new combinations are not only pro- competitive but critical to bringing the best technology and greatest efficiencies to consumers. Many recent mergers have benefited consumers by bringing new services to the market, increasing the number of consumers who can access competitive services, creating new market capital, stimulating the development of new technologies, and increasing competition. Examples of such mergers include AT&T/TCI, MCI/ WorldCom, Airtouch/Vodaphone, WorldCom/Brooks Fiber, and Excel/ Teleglobe, just to name a few. Soon, the FCC will consider another pro- competitive merger, that of Frontier and Global Crossing. The combination of the complementary, non-duplicative operations of these two companies will create a facilities-based carrier that will compete effectively in many sectors of the U.S. and global telecommunications market. Given the rapid changes we are experiencing in the telecommunications market, it is critical that policy makers permit such pro-competitive industry restructuring to move forward with ease and speed. An efficient merger review process helps stabilize the market, and it allows consumers, shareholders and even employees to make adjustments and move forward with new plans. For that reason, CompTel commends your effort and endorses the goals of S. 467. Furthermore, S. 467 properly recognizes that the FCC's merger review process is a critical safeguard of the public interest. CompTel shares this view. In addition to determining whether a merger should or should not proceed, the FCC's public interest analysis provides an opportunity to create a more competitive environment by conditioning merger approval on market-opening actions. In the vast majority of cases, the FCC's public interest review can and should take place within the time frames set forth in your proposed legislation. It is important, however, to recognize that the telecommunications industry is still in transition from a monopoly model to a competitive model. As a result, some mergers involving the largest monopoly providers may require more time than is provided in your bill. Even these must be reviewed with speed and be fairly resolved. Nonetheless, under certain circumstances, forcing an untimely decision could deny the FCC the proper opportunity to weigh all relevant factors, and to tailor a decision based on the individual merits of the merger request. To that end, CompTel proposes a modification to S. 467 that would promote efficiency while ensuring that the FCC has the time it legitimately needs to evaluate the ramifications of approving a new market combination. We propose adding to the bill a mechanism whereby the FCC, on a majority vote, could extend the bill's 180-day time limit by 90 days. This provision would be triggered in the rare number of circumstances where a combination is so important and raises such competitive concerns that the FCC cannot fairly air the issues within the proposed 180-day limit. Creating such a release valve would accomplish the administrative efficiency goals of the bill, while still protecting the public interest. Let me give you a few examples that demonstrate why such an amendment may be necessary. The proposed Bell Atlantic/GTE merger is one that presents serious, complex issues for the FCC to resolve through its public interest analysis. This merger almost certainly would impede, and potentially even eliminate, competition in the markets for local exchange, exchange access, long distance and Internet access services, for many reasons. First, by proposing to merge, Bell Atlantic and GTE have effectively agreed not to compete against each other and, as a result, their merger will severely diminish the potential for local competition in their respective territories. Second, the merger raises serious issues of compliance with section 271, the market-opening provision of the Telecom Act, because GTE provides interLATA services in Bell Atlantic's region. Bell Atlantic does not have section 271 approval to provide in-region, interLATA services in any state, and combining with GTE should not serve to relieve Bell Atlantic of any of its market-opening obligations. Third, even assuming that Bell Atlantic receives section 271 authority in even part of its region, the danger that the new entity would increase the cost of access in order to disadvantageits competitors is significant. Finally, CompTel has argued that the Bell Atlantic/GTE merger should be denied because of Bell Atlantic's lack of compliance with the conditions imposed in the Bell Atlantic/NYNEX Order. Another example of a large RBOC that may raise public interest issues requiring more than 180 days to resolve is the proposed SBC/ Ameritech merger. In this case, merger conditions can be a critical tool for precipitating competition--particularly local competition in those RBOCs' territories. RBOC's in general have been reticent to comply with the market-opening conditions of the Telecom Act--some more so than others. Where a more cooperative RBOC, such as Ameritech, attempts to merge with a less cooperative RBOC, such as SBC, much can be gained through conditions that prevent obstructionist behavior from contaminating the entire new enterprise. SBC has been particularly slow to appreciate the need to open its local market to competition. An SBC/Ameritech merger could have an anticompetitive effect by spreading SBC's litigious corporate culture to Ameritech. Instead of working to comply with the market-opening elements of the Telecom Act in order to gain entry into the long distance market, SBC has challenged the very constitutionality of those provisions and others in court. SBC's antagonism toward the Act has been well noted. Last year, in response to an SBC request regarding its entry into long distance, a Texas PUC commissioner remarked that evidence demonstrated numerous instances of SBC's ``lack of cooperation with [CLEC] customers and evidence of behavior which obstructs competitive entry.'' A second commissioner said that SBC needed to ``change its attitude'' and suggested that it drop some of its numerous lawsuits challenging its interconnection with competitors. Furthermore, when SBC took over PacTel, PacTel's competitive record changed for the worse. The prospect of SBC's management dominating the combined company, and bringing with it a hardened attitude toward competition in the region, is daunting. In such a case, the FCC should be able to use its public interest authority to seek greater compliance with the Telecom Act in order to provide some assurance that competition--not concentration--is the result of the combination. If this can be worked out within the time frames of S. 467, all the better. But given the complexity and what is at stake, we would like to see the FCC given the flexibility of our proposal. It has been suggested that the FCC needs little time to consider mergers because the bulk of the work is done at the Department of Justice. DOJ's analysis and its role in approving mergers, however, differs from the FCC's and thus one cannot substitute for the other. DOJ's role is primarily one of assessing antitrust concerns, while the FCC should make a broader public interest determination, generally considering the pro-competitive and deregulatory goals of the Telecom Act. Among other things, the FCC must consider whether a proposed transaction will open all telecommunications markets to competition and enhance access to advanced telecommunications and information services in all regions of the nation. Also, the FCC must consider whether the merger will affect the quality of telecommunications services provided to consumers or will result in the provision of new or additional services to consumers. The legislation you are considering today correctly gives weight to the FCC's important and legitimate role to conduct merger reviews under the public interest standard. It is also important, however, to recognize that this mandate is broad and complex, and the FCC's ability to fulfill it should not be short- circuited. In closing, let me reiterate our appreciation for your efforts to stimulate competition in telecommunications markets. We are encouraged to hear that Chairman DeWine and Ranking Member Kohl are developing legislation to ensure that all telecommunications providers have equal and non-discriminatory access to buildings. it goes without saying that competition cannot exist where only one market player can reach the consumer. In most cases, only the incumbent telephone companies are allowed access to consumers in apartment and office buildings at no charge. Building owners often demand steep fees from competitors for the same access. While we are committed to preserving building owners' rights to protect the integrity of their structures, granting preferential access to incumbents seriously impedes the ability of new market entrants to win customers. Negotiating access in a building-by- building fashion is costly and time consuming, and at best it leaves the new entrant at a competitive disadvantage vis-a-vis the incumbent. Thus, a national solution is needed to speed competition to these market segments. Your commitment to ensuring that new entrants have a ``fair shot'' at winning customers in buildings is much appreciated. Again, thank you for the opportunity to appear here today. Senator DeWine. Mr. Weening. STATEMENT OF RICHARD WEENING Mr. Weening. Good morning. Mr. Chairman, my own Senator Kohl, thanks very much for inviting me. I am here this morning to represent the views of Cumulus Media, upon which my testimony is based, and also the views of the National Association of Broadcasters. If I may, I would like to take the committee into the world of broadcasting and out of the world of telecom for just a moment because it is a little different for reasons that we will discuss. First of all, let me say that Cumulus's mission really is to restore live, local, relevant, successful broadcasting in mid-size and smaller cities throughout the United States. We are, at the moment, the third largest radio broadcasting company in terms of number of stations owned. We serve 44 smaller cities across the country. We like to think of ourselves as the poster child for the Telecommunications Act and the pro-competitive benefits that were promised by it. Our process is to acquire largely independent radio stations which in smaller markets have historically struggled to be relevant to their community for economic reasons. We assemble them into a shared infrastructure. We brand them as independent entities and develop them into vital parts of their community. Over the year and a half to 2 years now that we have been acquiring radio stations in these markets, the FCC has processed for us over 60 transactions, and by and large, very efficiently. So I am not here to criticize the mass media bureau. The delays started, really, a year ago when a couple of commissioners began to develop or express concern over the potential impact of consolidation generally, and as a consequence began to look for ways that the Commission could scrutinize more deeply or delay or possibly suspend approval of broadcast license transfers. The beginning of the process was simple delay, and Senator Kohl has cited one of our more dramatic examples in South Carolina. I will give you another. In Grand Junction, CO, over a year ago, we filed for the one FM station, one small FM station and two AM stations to add to our existing cluster in Grand Junction of three radio stations. That application is still pending at the FCC and there is a collateral Department of Justice investigation going on. Senator DeWine. Excuse me. You filed it how long ago? Mr. Weening. In February of 1998, over a year ago. Radio stations are delicate entities. Once the staff of a radio station understands that it is not going to be working for the seller, and FCC rules prohibit pre-control, so the buyer cannot go in and really control it or change the staff or make any determinations that are final with regard to staff, their heads turn elsewhere. It must be like the process that goes on in a lame duck Senator or Congressman's office. The work of that office turns to determining the next step in the staff's career, and it happens with radio stations, as well. It is very hard on the sellers because the value of their station deteriorates over this time and the buyers in these transactions often want to go in and renegotiate the transaction because the station has lost value during the delay period. So it wreaks a terrible hardship. The question is, what is the source of the problem, and in broadcasting, possibly unlike telecommunications, the Congress very specifically laid out in section 202(b) of the Telecommunications Act how many radio stations an operator can own in a particular market, and it is based upon the number of signals that serve that market. The FCC's role under the Act is not to diminish it but it is largely ministerial. So we have concerns about whether or not the FCC even has the authority to do something here. We have further concerns over the duplication of effort between the Commission and the Department of Justice. The Commission, as you know, is an administrative agency, and as such, it has unique processes, including the fact that if there is an in-market objection to a license transfer, the proceeding becomes restricted, meaning that members of theCommission cannot speak to the parties involved or to each other without very elaborate, difficult to follow notice requirements. So it is really impossible for them to investigate a transaction. So we would say that if commissioners have a concern over the impact of consolidation, the most efficient and effective way for that investigation to take place is with the Department of Justice, which is staffed with very talented young lawyers who are capable of completing this investigation, although that really turns me to the third problem. You have addressed it in part and have hinted that you may address it further with S. 467, and that is the fact that the process as I have described it really turns the Hart-Scott- Rodino Act on its head because Hart-Scott-Rodino intended to take small transactions that did not meet certain thresholds and did not really have an antitrust impact of significance and let them go through. What happens here is because our transactions are smaller than the Hart-Scott-Rodino threshold, there is no time deadline for the Department of Justice, and yet on the other hand, the FCC will not approve a transaction until Justice has cleared it. That is their policy. So, in effect, the agencies are interlocked in this effort. The bottom line is that in the absence of a clear deadline, the well-meaning, sincere staffers at the Department of Justice, who all have too much work to do, will continue with their process for very long periods of time and the FCC says, well, we are not going to act until then. We would strongly endorse the spirit behind S. 467. We would ask you to amend it or clarify it in two ways. The clarification, we believe, should be that section 202(b) of the Telecommunications Act makes it very clear that the FCC's role here is to count stations and administer the work of the Act. In fact, their role in reviewing mergers was specifically removed from the conference version of the Telecommunications Act, so the clear will of Congress is known here. So in making any change, we certainly do not want you to signal to the FCC that somehow the Telecommunications Act is changed and they now have an opportunity to review mergers in radio and television broadcasting. We do not believe that they do and we think that the Congress's work is pretty clear on that. We would also ask you to do what I believe you intend to do, and that is to ensure that even small transactions are subject to the same time deadlines as the larger Hart-Scott- Rodino qualified transactions. Thank you very much for hearing me out this morning. Senator DeWine. Mr. Weening, thank you very much. [The prepared statement of Mr. Weening follows:] Prepared Statement of Richard Weening Good Morning, Mr. Chairman and Members of the Subcommittee. I am Richard Weening, Executive Chairman of Cumulus Media Inc. of Milwaukee, Wisconsin. Thank you for inviting my testimony. In addition to Cumulus whose experience forms the basis of my testimony, I am also here to represent the views of the National Association of Broadcasters which is also interested in the overall matters addressed by S. 467, the ``Antitrust Merger Review Act'', and the subject of today's hearing concerning the review of acquisitions and the transfer of licenses subject to Federal Communications Commission (``FCC'') approval. Cumulus Media Inc. is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-sized U.S. cities. Arbitron ranks markets by size from 1 to 275. We generally focus on markets ranked 75 or smaller. Including acquisitions somewhere in the FCC approval and DOJ review process, we own 232 radio stations serving 44 cities across the United States. By number of stations, Cumulus is now the third largest radio station owner in the U.S. This morning I would like to describe for the Subcommittee the experiences of my own Company and how those experiences illustrate the need for the type of legislative action you are considering. the telecommunications act of 1996 and its results In Section 202(b) of the Telecommunications Act of 1996, Congress changed the rules as to the number of radio stations that one person or company could own or control in a city of a given size. The two-station ``duopoly'' limit was replaced with a new rule that allows ownership of 5 to 8 stations depending on the total number of stations providing service to the city. In making the new rules, Congress attempted to balance the urgent economic and competitive realities that dictated multiple-station ownership with the avoidance of undue concentration of control. To achieve this balance, the revised ownership limits were designed to help owners create ``clusters'' of multiple radio stations that could operate for less while delivering more to listeners and advertisers within their service areas and at the same time become or remain viable businesses. Subsequent experience has shown that five or more stations operated as a cluster is not only critical to achieving operating economies of scale but essential to making radio competitive with other media. These multiple radio station clusters can afford to operate live and local programming on each station while sharing facilities and support personnel to reduce operating costs up to 20 percent. More importantly, multiple radio clusters can offer advertisers a range of choice and flexibility in demographic targeting which was previously only available from newspaper and television. Competing with newspaper and television is a major change for radio. Here's why. Radio has always had a disproportionately small, 10 percent share of the total advertising pie. I say ``disproportionately'' because radio actually commands over 40 percent of the total time consumers spend with media. The conventional wisdom is that this anomaly is due in part to the fact that any single radio station format is targeted to reach only a single demographic target, while the sections of a newspaper and different television programs offer advertisers the choice of many targets. In short, for many advertisers television and newspaper offered more flexibility and was simply easier to buy. The multiple-station clusters can offer different stations like the sections of a newspaper, putting radio on a level playing field with entrenched newspaper monopolies and broadcast television. And to the extent that these new multiple-station clusters can access a share of the relatively much larger budgets historically allocated to newspaper and television, the radio business model becomes viable and everyone wins. The advertiser gets a real alternative to newspaper and TV. The listener gets a better programming product with live and local on-air personalities. the community gets a viable business. In the mid-size markets we serve, the economic problems of radio are more severe and the positive impact of the Telecommunications Act is even more plainly evident. In the mid-size markets, multiple-station ownership is driving a renaissance for local radio giving small communities greater choice and diversity in music and sources of information. Local advertisers also stand to benefit from the diverse formats and broad reach of the stations, and the ability to negotiate competitively priced advertising buys. I did a little research into whether the members of Congress who framed the Telecommunications Act understood the unique economics of radio in the mid-size and smaller markets. In fact, they did. They appreciated the special challenges facing radio in the smaller markets and created tiers in the statutory ownership limits to permitconsolidation of station ownership in both smaller and larger markets. As Senator Burns observed when considering that legislation, radio ownership restrictions in mid-size and smaller markets ``handcuff broadcasters and prevent them from providing the best possible service to listeners in all of our States.'' 144 Cong. Rec. 92, S7904 (June 7, 1995). Similarly, Senator Pressler noted that, following earlier FCC liberalization of radio ownership restrictions, ``economies of scale kicked in, stations gained financial strength in consolidation and competition for advertising improved.'' 141 Cong. Rec. 94, S.8076 (June 9, 1995). The legislation's proponents accurately foresaw an ``immense resurgence and burst of energy from new companies'' following the further ownership deregulation in the Telecommunications Act. 141 Cong. Rec. 95, S.8198 (June 12, 1995) (statement of Senator Pressler). The Telecommunications Act has had exactly the effect intended by Congress. In all markets, but particularly where help is needed the most--the smaller markets--radio is undergoing a renaissance characterized by more live and local programming, more advertisers, more revenue and more service to the community. This has resulted in intense new competition for newspaper and television. Our Company, Cumulus Media Inc., is the poster child for the procompetitive benefits of the Telecommunications Act. Our rapid development of radio station clusters in 44 mid-sized markets over the past two years aptly illustrates the ``immense resurgence'' and ``burst of energy'' envisioned by that Act. The Cumulus strategy is exactly with the Act envisions. We acquire independently owned radio stations and combine them into a cluster to share infrastructure resources like engineering, accounting, physical facilities and the like. This allows us to cut operating costs anywhere from 10 percent to 20 percent. We then shift a significant portion of the cost savings into improving programming with live on-air talent and substantially upgrading and expanding the sales organization. We employ sophisticated research techniques to ensure that each station is delivering the product the listeners want. We brand each station as a separate entity. Each station has its own programming director to manage the product and its own sales manager to coordinate the sales team. Because of economies of scale, we have the ability to access the public capital markets to pay for these improvements. The result is a revitalized group of stations capable of increasing market share against newspaper, television and other media by delivering more choice to advertisers and a better product to listeners. We also know that, contrary to the understandable fears and expectations expressed by some FCC Commissioners, consolidation in radio means more, not less, localism and more, not less, diversity in programming. I am pleased to say that we are making this happen every day in 44 cities across the nation. the fcc and doj regulatory review process In the initial period following passage of the Telecom Act, most radio consolidation activity was occurring in the larger markets, and the FCC did not play a significant role in reviewing market concentration. The Department of Justice (``DOJ'') reviewed many of these transactions under the Hart-Scott-Rodino (``HSR'') Act because they were generally large mergers involving multiple markets that met the HSR size thresholds. The HSR statute required advance notice to the DOJ, but also required the DOJ to conduct its review promptly, within the specified statutory time periods. In a number of these larger merger cases where DOJ had competitive concerns, the parties agreed to spin-off several stations in one or more cities to satisfy those concerns. At the same time, the FCC would generally grant the license transfer applications in a timely manner. As the Telecom Act moved into its second and third years (1997 and 1998), radio consolidation moved to mid-size markets, with Cumulus and several other companies leading the way. Cumulus began making its acquisitions in mid-1997, and we accelerated our activity rapidly over the next year. Initially, the DOJ was not active in investigating mid-size market transactions, as most were not reportable under the HSR Act. The FCC also was acting fairly promptly on license transfer applications. In fact, Cumulus alone has completed over 62 radio acquisition transactions, and by and large the FCC's Mass Media Bureau staff has processed these very efficiently and promptly. I believe the FCC staff should be commended for its diligent efforts to keep up with a sharply increased workload in this area. However, beginning about a year ago, FCC applications for a number of transactions, including some filed by Cumulus, began to slow down considerably due to some internal debate regarding the proper role of the FCC in reviewing these transactions for market concentration concerns. The Mass Media Bureau Staff and the FCC Commissioners appeared to be considering adoption of policies or processing guidelinesbased on levels of radio advertising revenue shares--even where the license transfer applications fully complied with the numerical station limits set forth in the Telecom Act. What eventually developed is the current FCC practice of issuing ``special'' public notices regarding license transfer applications. As we understand it, these notices invite public comment on market concentration issues whenever a license transfer application would result in the buyer's acquiring 50 percent or more, or the buyer and another radio owner acquiring 70 percent or more, of the radio advertising revenues in a local Arbitron Metro (as measured by the standard industry revenue estimates compiled by BIA Research, Inc.). To date, however, the FCC has not issued any rule or formal policy statement on this practice, and the FCC has not articulated exactly what policy objective it is trying to achieve. At the same time, the DOJ has become much more active in investigating radio acquisitions in the mid-size and smaller markets. Cumulus alone has pending acquisitions in at least five markets currently under review by the DOJ. None of these transactions was reportable under the HSR Act, and some of these transactions involve purchases as small as $1.5 million in radio advertising markets as small as $5 million in total revenues. We understand that, in general, it is the FCC's policy not to act on license transfer applications while a DOJ investigation is pending. The DOJ also files comments in response to some of the FCC's ``special'' public notices, while continuing to investigate the same transactions. The current administrative process thus effectively postpones action on any license transfer application until the DOJ completes its review, and the DOJ is able to proceed at its own pace since HSR timetables generally do not apply. the problems with the process Cumulus has three primary concerns with the way in which our and others' applications for transfer of licenses are currently being handled by regulatory authorities. First, we and other firms believe that the Act already specifies the number of radio stations that could be owned in any one market, and thus that the FCC does not have a proper role to play in formulating a different policy. When the FCC begins to decide, on a case-by-case basis, that particular applications will not be approved on the grounds that the number of stations results in too much market concentration, the FCC is second guessing the policy judgment that Congress has already made. We do not think the FCC's authority to implement the ``public interest'' standard allows the Commission to substitute its judgment for that of Congress on a subject specifically dealt with in the statute. Nor has the Commission offered any criteria for deciding how, when or under what circumstances the public interest should dictate that approval for a particular acquisition should not be granted because of undue market concentration, even if it is within the numerical limits specified by Congress. Second, it is simply not a sensible use of government resources for the FCC to review acquisitions based on the same market concentration and antitrust concerns that the DOJ already considers. As an administrative agency, the FCC has unique procedures which are not designed to accommodate the give-and-take nature of the factual investigation and discussion which characterize an antitrust investigation and which the DOJ typically undertakes. For example, if a petition to deny has been filed against a transfer application before the FCC, the action becomes a restricted proceeding. No one connected with the case can discuss it with the FCC staff or the Commissioners, and the Commissioners cannot discuss it with the affected parties or among themselves without complying with burdensome notice requirements. There is no opportunity, as there is with the DOJ, to provide the FCC with pertinent information, to interpret it for the staff and to debate with the staff the issues relevant to the acquisition. The only way to circumvent these restrictions is either for the Commission to deny the petition outright or for the Commission to designate the matter for hearing, a costly proceeding which will almost invariably result in a scuttling of the transaction to be investigated. Third, the unusual combination of the small size of the typical Cumulus acquisition and the need to obtain FCC approval for the acquisition means that the Hart-Scott-Rodino Act has been turned on its head: not only does the government now investigate small radio acquisitions, but it faces no time deadline in doing so. Let me explain what I mean. The Hart-Scott-Rodino Act suggested that acquisitions below the ``radar screen'' of the statute, by virtue of their size, were not of sufficient antitrust concern to warrant pre-merger notification. The HSR Act imposes time limits for large acquisitions by which the DOJ or the FTC must take certain steps or request additional information if either agency intends to challenge a merger before it is consummated. But no acquisition of a radio station, no matter how small, can be consummated without the approval of the FCC. And no time limits constrain the DOJ in radio acquisitions that arenot subject to the HSR limits. The peculiar arrangement between the FCC and DOJ that I outlined above means that either agency can take as long as it chooses to investigate whatever it wants regarding a pending transaction. The result is that the parties to these relatively small transactions often must endure very lengthy and costly regulatory reviews that are not applicable to much larger transactions, without clear standards or certainty of outcome. Cumulus strongly believes that service to radio listeners--which should be the primary concern of the FCC--is adversely affected by the blocking or delay of efficient consolidation transactions. the cumulus experience A few examples of Cumulus transactions that have been caught up in this uncertain regulatory process for over a year may help illustrate the problem to this Subcommittee. One case involved the consolidation of several radio stations in Florence, South Carolina and surrounding areas which has not been viable on their own. Cumulus filed license transfer applications with the FCC beginning in February 1998 to require the stations. None of these applications were contested before the FCC by any listener, advertiser, or competing station, and the grant of these applications did not require a waiver of any rule or published policy of the FCC. Nevertheless, the FCC staff informed us that action upon the license transfer applications was being deferred due to potential concerns relating to the percentage of radio advertising revenues involved, and because the DOJ had opened an investigation into the proposed acquisitions. Persistent efforts to obtain FCC action on the applications were unsuccessful. We were not contacted by the DOJ until July 1998. At that time we voluntarily provided various requested information to assist the DOJ in reviewing the transactions. Several months later in October 1998, the DOJ subsequently issued civil investigative demands to Cumulus and the various sellers seeking additional information. During this period, in response to repeated requests by the applicants and even by a member of this Subcommittee, the FCC Staff indicated that it would continue to defer action on the license transfer applications pending completion of the DOJ's investigation. While working hard with the sellers to keep these deals together, we continued to cooperate with the DOJ in its review, submitting considerable information and documents and meeting with the DOJ Staff. After approximately seven months of inquiry, the DOJ closed its investigation and informed the FCC that it had done so in February 1999. Approximately six weeks later, on March 24, 1999, the FCC finally granted the license transfer applications. This was over 13 months after the first application had been filed (on February 26, 1998), and nearly ten months after the last of the three applications had been filed (on June 2, 1998). In another case, Cumulus is proposing to acquire one small FM station and two small AM stations to combine with its existing group of three stations in the city. The FCC license transfer application was filed in February 1998 and remains pending. The DOJ first asked the parties for information about the transaction in September 1998, six months after the application was filed. The DOJ investigation remains open, while FCC action on the license transfer application is deferred. There appears to be no clear end in sight, some 14 months after the parties agreed to this transaction. More recently, the FCC has flagged the acquisition of a small AM station with negligible revenues, merely because the revenue shares (as reported by BIA Research Inc.) cross a certain threshold for the entire cluster, giving no regard to the fact that the flagged acquisition has no impact on the share of the cluster in the market. This station is very poorly operated, out of dilapidated facilities and is fought with technical problems, including a collapsed tower. By preventing Cumulus from using its resources to upgrade, promote and effectively program the station, the Commission is going against its objective of enhancing service to listeners by leading the station to further deterioration. Delays of this sort inevitably disrupt these transactions and cause serious financial hardship to the parties, especially to the small independent operators who are trying to sell their stations and realize a return on their many years of hard work and investment. In addition, the delays often end up causing further deterioration of the radio stations due to the extended period of uncertainty regarding who will own the stations and employ the professionals working in these stations, and due to FCC rules prohibiting buyers from prematurely acquiring control of the stations. Radio stations are delicate businesses that must be very carefully managed if they are to be completely viable and provide the services that listeners and advertisers demand. This cannot be accomplished where ownership changes are accompanied by long and uncertain regulatory delays. s. 467 and its objectives S. 467 appears to be designed to correct these problems by constructing an orderly administrative process and timetable. However, as presently written, it does not appear to address Cumulus' particular situation since our relatively small transactions fall outside the HSR process. Neither the HSR Act nor the Telecom Act requires that the FCC or the DOJ act in any particular timeframe in reviewing and approving these transactions. Further, the Telecom Act already places limits on the number of stations a person or company can own in a particular market, yet the FCC continues to adopt an unwritten, informal policy of its own of blocking acquisitions for market concentration issues. The result is a process that appears to frustrate the overall goal of enabling radio broadcasting in mid-size and smaller markets to consolidate and become more competitively viable. In solving the problem by mandating use of an orderly process with a timetable, we hope the Committee will avoid signaling the FCC that it has the authority to duplicate the role of the DOJ in conducting reviews of market concentration. This would further frustrate the intent of the Telecommunications Act by giving to the FCC an authority that Congress very specifically decided not to grant. Some FCC Commissioners believe that the FCC has an obligation to review concentration pursuant to its mandate to ensure license transfers are in the public interest. Since the DOJ and not the FCC possesses the professional skills, experience and process necessary to conduct a full investigation of market concentration, it is only appropriate for the DOJ to conduct such reviews. I therefore urge the Subcommittee to consider appropriate modifications to the bill to include smaller transactions and to write the bill to ensure that the FCC does not continue to duplicate the proper role of the DOJ. As the process currently operates, it is not ``good government'' and threatens to undermine what the Congress wanted to achieve in the Telecommunications Act of 1996. I thank you again for the opportunity to testify at today's hearing. Senator DeWine. Mr. Binz. STATEMENT OF RONALD J. BINZ Mr. Binz. Thank you, Mr. Chairman. Mr. Chairman, members of the committee, my name is Ron Binz. I am President of the Competition Policy Institute. We are a nonprofit organization that advocates State and Federal regulatory policies to bring competition to consumers in energy and telecommunication markets. We are funded by grants from a variety of telecommunications providers, mainly new entrants, and advised by a board of consumer advocates from across the country. I would like to begin by thanking the chairman for holding this hearing to examine the process by which the FCC considers mergers of telecommunications providers. This is a most important topic. In my written testimony, I describe how significant mergers between telecommunications companies may affect the health of local exchange competition. Our conclusion is that mergers can either hold great promise for consumers or threaten great harm to their interest. On the one hand, some mergers can actually assist competition by putting together industry players with complimentary resources needed to break into markets dominated by an incumbent or by a small group of service providers. On the other hand, some mergers can hurt consumers by retarding the development of competition in telecommunications markets. This happens when mergers strengthen the existing fortresses of some dominant incumbent providers and remove would-be competitors from the field. It is no exaggeration to say that the FCC's decisions about mergers will determine whether consumers see the promise of the Telecommunications Act of 1996. But whether the FCC approves or denies a merger, we must agree that both consumers and the companies proposing to merge deserve an answer, and hopefully the correct answer, in a timely fashion from the FCC. State and Federal telecommunications regulations must change to accommodate a dynamic marketplace that no longer resembles the industry organization that existed when these agencies were created. But let me be clear. I am not advocating less FCC scrutiny of mergers, only that the agency focus on getting the job done quickly and efficiently. The result of this legislation should not be that the standards for merger review are lowered. Indeed, we are deeply concerned about the rapid consolidation of major players in the telecommunications marketplace. We strongly support the FCC's continued public interest review of telecommunications mergers. In cases where a merger will hinder the development of competition, we hope passage of this legislation will mean that the FCC says no quickly to such mergers. The FCC's jurisdiction in mergers is distinct from the Department of Justice, both in the standards they apply and in the authority that they have. There is a rich history of court decisions interpreting the public interest test and we believe that the FCC properly should continue that review. With regard to the legislation, we have made three points in the testimony. First, that it is reasonable to apply workable time lines on the FCC's review. Second, that the legislation should preserve the flexibility needed by the FCC to conduct thorough merger reviews. And third, by modifying the process by which mergers are reviewed by the FCC, the legislation should not have the unintended effect of limiting the FCC's ability to obtain information necessary to render its public interest determination. In my written testimony, I suggest areas in which the bill could be improved to accommodate these three points. Of course, this discussion about the FCC's merger review authority and the appropriateness of time frames does not occur in the abstract. In particular, there are pending applications before the FCC right now between large incumbent local exchange companies that cause us some concerns. We have filed comments at the FCC to the effect that the mergers in some cases eliminate potential competitors, and in the case of SBC/ Ameritech, an actual competitor in each of their regions. We are concerned that those proposed mergers will strengthen the ability and the incentives of the incumbents to drag their feet in opening up their markets. They also will reduce the number of companies that can be used for benchmarks to compare companies against each other. To conclude, Mr. Chairman, regulatory delay is a blunt instrument. While it might, arguably, sometimes delay the effect of bad things, it also delays the implementation of beneficial effects and creates uncertainty in markets. Ultimately, it is difficult for regulators to be creative by using regulatory delay. It is far preferable for consumers and telecommunications providers alike if regulators make the hard choices and make them expeditiously. We appreciate the opportunity to testify today in support of S. 467. We believe that it is good regulatory practice and good law for regulators to perform their functions as quickly and efficiently as possible. While this has always been true, it is especially true now as we move from an era of regulated industries into one in which market forces will be relied upon to constrain prices and provide consumers with choice. We hope our suggestions for improving S. 467 are helpful to the committee and look forward to working with you and your staff as this legislation moves forward. [The prepared statement of Mr. Binz follows:] Prepared Statement of Ronald J. Binz Mr. Chairman and Members of the Committee, my name is Ronald Binz. I am President of the Competition Policy Institute (CPI). CPI is a non- profit organization that advocates state and federal policies to bring competition to telecommunications and energy markets in ways that benefit consumers. CPI was created in 1996 and participates in numerous matters before the Federal Communications Commission (FCC), state regulatory commissions and the courts. In our first three years, we have made nearly one hundred filings at the FCC in sixty different cases. For eleven years until 1995, I was the state utility consumer advocate in Colorado, representing consumers before state regulators and the courts. I have served on the Northwest Reliability Council to the FCC and I currently serve as co-chair of the North American Numbering Council, which advises the Commission on telephone numbering policies. With this background, I am very familiar with regulatory processes and how they affect consumers and the competitive marketplace. Thank you for the opportunity to testify today on S. 467, The Antitrust Merger Review Act. i. introduction I wish to begin by congratulating the Committee for holding this hearing to examine the process by which the FCC considers mergers of telecommunications providers. This is a most important issue. In this testimony I describe the state of local telephone competition and explain how significant mergers between telecommunications companies may affect the health of local competition. Our conclusion is that such mergers can either hold great promise for consumers or threaten great harm to their interest. On the one hand, some mergers can actually assist competition by putting together industry players with the complementary resources needed to break into markets dominated by an incumbent or small group of service providers. Some mergers can also benefit consumers if companies are able to spread fixed costs over more unit sales, reducing costs to consumers. Such cost advantages are the root of competitive pressure on prices. On the other hand, some mergers can hurt consumers by retarding the development of competition in telecommunication markets. This happens when mergers strengthen the existing fortresses of some dominant incumbent providers and remove would-be competitors from the field. It is no exaggeration to say that the FCC's decisions about mergers will determine whether consumers see the promise of the Telecommunications Act of 1996. But whether the FCC approves or denies a merger, we must agree that both consumers and the companies proposing to merge deserve an answer (and hopefully the correct answer) in a timely fashion from the FCC. As I will discuss later, state and federal telecommunications regulation must change to accommodate a dynamic marketplace that no longer resembles the industry organization that existed when these regulatory agencies were created. In short, regulators must put themselves under pressure to speed up the decision process so that it assists and does not hinder, the progress of competition. But let me be clear: I am not advocating less FCC scrutiny of mergers, only that the agency focus on getting the job done quickly and efficiently. The result of this legislation should not be that the standards for merger review are lowered. Indeed, we are deeply concerned aboutthe rapid consolidation of major players in the telecommunications marketplace and strongly support the FCC's continued ``public interest'' review of telecommunications mergers. In cases where a merger will hinder the development of competition, we hope passage of this legislation will mean that the FCC says ``no'' quickly to such mergers. With this important caveat, CPI supports the thrust of this legislation. It is appropriate to ask the FCC to act on mergers within reasonable time frames. Ultimately this will benefit both the industry and its consumers. In his statement when introducing S. 467, Chairman DeWine recognized the importance of the FCC's role in evaluating mergers and stated that this bill does not limit the scope of FCC review. He also made the point that the FCC's review of mergers should be timely and cited the significant effect that mergers can have on competition. In his statement at bill introduction, Senator Kohl made the point that the FCC's review is distinct from the review of the Department of Justice and cited the positive effects on competition that can be achieved under the FCC's ``public interest'' review. We agree with these sentiments of both of the bill's sponsors. My testimony begins with a review of the state of local exchange competition and the effect that mergers might have on that progress. Next, I will make three points about S. 467:It is reasonable to create workable time lines to ensure prompt consideration and resolution of merger applications by the FCC. This legislation should preserve the flexibility needed by the FCC to conduct thorough merger reviews and to adopt conditions that serve the public interest. By modifying the process through which mergers are reviewed by the FCC, the legislation should not have the unintended effect of limiting the Commission's ability to request and receive information necessary to render its public interest determination. Next, I suggest some ways in which the legislation can be improved. Finally, I comment on the competitive and consumer issues raised by the two pending mergers of large local exchange companies, SBC/Ameritech and Bell Atlantic/GTE. ii. the status of local telecommunications competition Before turning to the legislation, I would like to review the status of development of local exchange competition. Our review of the marketplace demonstrates that local telephone competition is growing steadily, and will continue to expand in the next few years. This means that the local competition goals of the Telecommunications Act of 1996 are beginning to be met, albeit slowly. Number of CLEC's: The number of CLEC's entering the market has also grown significantly since passage of the 1996 Act. As an example, the FCC reports that there are now 146 CLEC's holding telephone numbering codes, compared with only 13 at the end of 1995. Access Lines Served by CLEC's: Merrill Lynch estimates that the number of access lines served by CLEC's has grown from 2.1 million at the end of 1997 to 4.7 million at the end of 1998. The FCC's industry analysis estimates CLEC's serve between 4 and 5 million switched access lines, or about 3 percent of nationwide switched access lines. A recent report by Solomon Smith Barney Holdings Inc. (New York) notes that competitive service providers have surpassed the Bell Companies in growth of business access lines. The report notes the Bell Companies added 461,000 new lines in the first quarter of 1998, while competitors gained 498,000. The competitors' gains were more than triple the number of business lines they added in the first quarter of 1997. CLEC Revenues: The CLEC's took in approximately $5.4 billion (annualized) revenue in the 4th quarter of 1998, compared to $2.8 billion in the 4th quarter of 1997.\1\ This information is confirmed by a recent report issued by the FCC that estimates the revenues of the CLEC's doubled from 1996 to 1997 to about $3 billion. --------------------------------------------------------------------------- \1\ Merrill Lynch In-Depth Report, Telecom Services--Local, Nov. 18, 1998. --------------------------------------------------------------------------- Capital Investment by CLEC's: As reported in a telecommunications trade magazine, local competitors attracted more than $8 billion in high-yield and equity financing, according to brokerage house Bear, Stearns & Co. Inc. (New York) in 1997 alone. That is almost a sixfold increase from the CLEC capital raised in 1995 and nearly a 30 percent jump from 1996's level.\2\ --------------------------------------------------------------------------- \2\ ``Local Wheels of Fortune: New competitors are winning some hefty backing from investors'', Gail Lawyer, Teledotcom Magazine, January, 1998. --------------------------------------------------------------------------- Despite these encouraging statistics, it will be several years before the local telephone market can be said to be competitive: collectively the CLEC's still serve a small percentage of the local telephone market, primarily business customers. Local competition has a long way to go. One way to illustrate the pace of its development is to consider how many access lines competitors will have to gain in order to make significant inroads into the incumbents' market share. CPI estimates that CLEC's will need to win 42,000 new customer lines every business day for the next five years simply to capture just 30 percent of the nation's access lines. This is a tall order. According to Merrill Lynch, CLEC's gained an estimated 670,000 lines in the third quarter of 1998, or about 10,300 lines per business day. This means the CLEC's are far behind the 42,000/day pace needed to secure just 30 percent of the local market within five years. iii. the fcc's role in promoting local competition For the most part, the FCC has maintained a pro-consumer and pro- competition approach when implementing the Telecommunications Act of 1996. Although CPI disagrees with some of the agency's decisions, we think the Commission has attempted faithfully to implement Congress's vision of a competitive telecommunications industry. I would like to review the FCC's actions in three areas: local competition rules, section 271 compliance and merger consideration. Local competition rules Of the regulatory initiatives that have stimulated local exchange competition, the importance of the FCC's Local Competition Order issued on August 8, 1996 cannot be overstated. This landmark decision interpreted sections 251 and 252 and established the basic ground rules for opening up the local telephone network to competition. Of course, the appeals brought by state regulators and incumbent local exchange companies and the decision of the Eighth Circuit Court of Appeals delayed implementation of the FCC's rules, but the Supreme Court's recent decision puts much of that back on track. In the meantime, the FCC's decision effectively provided the blueprint that was used by many states to implement the local competition provisions of the 1996 Act. Of the numerous provisions in the Local Competition Order, here are some of most critical elements of the order: a. That the incumbent local exchange company must make its operations support system available to competitors for nondiscriminatory access to its network; b. That competitors should be able to purchase and assemble network elements without providing their own facilities; c. That network elements should be priced at their forward- looking economic costs; d. That competitors should be able to ``pick and choose'' among elements of an arbitrated agreement. The 1996 Act and the Local Competition Order allows new competitors to experiment with a variety of different business models for entering the local market. As a result, some new entrants are providing service by resale, others by assembling unbundled network elements, and others by constructing their own facilities and interconnecting with the ILEC network. Some CLEC's are deploying switches and reselling the ILEC loop, others are deploying fixed wireless services and interconnecting with the ILEC network to terminate calls, while others seek to lease the ILEC loop solely to provide competitive data services. In other words, the FCC's order has spawned exactly the kind of diversity and entrepreneurship as should be found in a competitive market. It is not clear at this time which of these various business and technological approaches to competitive entry will prove most successful in the marketplace. The ultimate victors will be decided by the marketplace, not by regulators trying to predetermine winners and losers. This diversity and competition among technologies would not have been possible without the FCC's Local Competition Order. Section 271 compliance Another area in which the FCC has served consumers well by promoting competition is the agency's commitment to enforcing its interconnection and unbundling rules when considering the BOC's applications to enter the long distance market under section 271 of the Act. In fashioning the 1996 Act, Congress sought to provide the BOC's with an incentive to open their local networks fully to competition: section 271 allows the Bell Operating Companies to enter the long distance market, but only after fully implementing the terms of the 14- point checklist and only after the FCC has found that such entry is in the public interest. The requirements of section 271 are almost identical to the requirements of sections 251 and 252. Thus, if the FCC weakens the section 271 requirements and allows the BOC's to enter the interLATA market under section 271 prematurely, the BOC's may never fully implement the market-opening requirements of section 251 and 252. Although the FCC has denied each of the section 271 applications filed to date, the agency is on firm grounds for its denial in each case. CPI agrees that the applicants have not met the checklist requirements, although substantial progress has been made in some states. Theefforts of some of the BOC's to work through state commission requirements on network-opening requirements, such as non- discriminatory access to operating support systems, shows that the proper enforcement of section 271 can be effective in promoting full compliance with the Act. The ability of the BOC's to enter the long distance market in competition with companies who do not possess a local exchange monopoly is properly conditioned on fully opening local networks to competition. It is critical that the FCC maintain this balance by insisting on full compliance with the checklist before this important incentive to open local markets is relieved. Mergers of large ILEC's The statistics quoted earlier paint a picture of nascent competition in the local telecommunications market. At this early stage, competition in the local market is still relatively fragile and depends upon the actions of regulators to keep markets open. New entrants must grow in order to survive and they must have continued non-discriminatory access to many features of the incumbents' network in order to attract customers. But mergers among large incumbent telecommunications carriers can affect the ability and the incentive of merged companies to discriminate against their new competitors. Further, mergers affect the ability of state and local regulators to effectively enforce market- opening conditions. For these reasons, such mergers must be closely examined to determine their effect on the growth of telecommunications competition. It is entirely appropriate that the FCC and state commissions use the occasion of a proposed merger to ensure that the competitive conditions are strengthened, and not threatened, by a merger of incumbent carriers. Since passage of the 1996 Act, the FCC has been presented with four major mergers among large incumbent local telecommunications providers: SBC/Pacific Telesis, Bell Atlantic/NYNEX, SBC/Ameritech and Bell Atlantic/GTE. The last two mergers are now pending; the FCC approved the first two mergers with only a few conditions attached. There is now considerable controversy whether the merger partners have met the conditions attached to their merger approval. CPI and others disagreed with the FCC's decision to approve the earlier large ILEC mergers without attaching more substantive conditions. In particular, CPI asked the Commission to approve the mergers only after the merger partners had complied with the market- opening requirements of the 1996 Act: CPI suggests that imposing conditions to require the opening of the companies' local exchange networks as a pre-condition to the mergers will act to mitigate, to some extent, the threat to competition posed by the increase in scale and scope of these companies. In particular, CPI believes that approval of the mergers should be conditioned upon, at a minimum, the companies' compliance with the ``competitive checklist'' requirements of Section 271 of the Communications Act of 1934 in every state in which they are the incumbent provider of local exchange service. Requiring the carriers to satisfy the unbundling and interconnection requirements of Section 271 in every state, requirements that the carriers have already indicated they would implement, would give competitors the opportunity to compete in much of the region served by the RBOC. While this condition does not guarantee that competition will develop for local telephone service in every state, it does help to reduce the risks posed by the mergers by making it less likely that the RBOC's could act to delay competition in one market while continuing to take advantage of its monopoly status in other markets.\3\ --------------------------------------------------------------------------- \3\ Petition to Impose Conditions, filed by the Competition Policy Institute, September 23, 1996, FCC Tracking No. 960221. Unfortunately for consumers, the FCC chose not to require this suggested pre-condition to approval of the Bell Atlantic/NYNEX and SBC/ Pacific Telesis mergers. In our view, the Commission missed a substantial opportunity to pry open local markets, bringing more competitive choices to consumers. In a different context, the efforts of the New York Public Service Commission to achieve market-opening results with Bell Atlantic in New York illustrates how regulatory leverage can be applied. As I discuss later, the two pending mergers again offer the FCC the ability to require full compliance with the 1996 Act. iv. the antitrust merger review act As stated earlier, CPI supports the thrust of S. 467. The changing telecommunications marketplace argues strongly for regulation that is as efficient and effective as possible. Here are three observations about the proposed legislation, followed by recommendations for amendments to improve the legislation. 1. It is reasonable to create workable time lines to ensure prompt consideration and resolution of merger applications by the FCC For the first time, S. 467 creates time lines within which the FCC must act to approve or reject the transfer of licenses necessary to complete a merger. The legislation sets up a process somewhat similar to that required of the Department of Justice and the Federal Trade Commission is conducting their merger reviews. Under the bill's scheme, the FCC will perform an initial review of a merger application in which it decides whether to seek more information from the companies proposing to merge. If more information is requested, the clock stops until the applicants certify that they have substantially complied with the requests for information. At that point the clock restarts, leaving the agency 180 days in which to make its decision whether to approve, approve with conditions, or reject the merger. If disputes arise about the sufficiency of the response to the request for information, the FCC or the applicants may appeal to the courts to resolve the dispute. Importantly, the clock stops during such appeals. State regulatory agencies typically operate under similar time lines for cases that approach or exceed the complexity of large telecommunications merger cases. Although state commissions now consider cost-of-service cases less frequently than before, it is common to find requirements that they act in such cases within fixed time lines. For example, the Colorado Public Utilities Commission is permitted 210 days to conduct investigative hearings on a utility's request to change rates. While I have not conducted a recent study, I know that similar requirements apply to many state regulatory commissions. In multi-party litigation before state PUCs, these time lines have the effect of sharply focusing the parties' attention on the rate application, shortening discovery timeframes, making hearings very efficient and requiring counsel to file briefs on expedited schedules. In general, I do not think that such timeframes have prejudiced either applicants or respondents. After making any necessary adjustments for any special requirements of the FCC, I think the same will be true here. While many state regulators conduct some of their processes under time lines, competition requires state regulators to move even more quickly to resolve issues that are central to the development of telecommunications competition. In many cases, the old deadlines are not sufficient for the realities of the competitive marketplace. Competition can be damaged substantially, for example, if new competitors must wait extended periods of time for resolution of complaints alleging discrimination in access to essential systems. Recently the Telecommunications Committee of the National Association of Regulatory Utility Commissions solicited recommendations for regulatory ``best practices.'' CPI submitted the following recommendation: The role of telecommunications regulators is changing from an arbiter of rates to that of an umpire on the field of competition. Because successful inter-carrier transactions are so important to competition, regulators should modify their practices of handling complaints among telecommunications providers. Communications should modify traditional procedures to try to limit litigation and produce a decision in such cases much more rapidly. This suggestion entails several possible elements, including: (1) a ``quick look'' process in which a complainant and respondent are revised by a settlement judge of the unlikely outcome of their case; (2) sharply expedited procedures to arrive at a decision; (3) mandatory mediation for complaints; (4) the ability of a commission to award litigation costs to a prevailing party; and (5) the ability of a commission to sanction parties if it determines that a complaint or response constitutes harassment. The basic suggestion is that commissions ``think different'' about their process of these complaints. While regulatory lag might have provided some correct incentives during cost-of- service regulation of a monopoly, it is injurious to competition. Incumbents and new entrants alike prefer the certainty of a quick decision, since competitive market conditions change rapidly. The practice would likely unburden state commissions' dockets, speed up the resolution of certain carrier-to-carrier complaints, reduce legal costs and sharpen the incentives of regulated companies to comply with contracts arbitrated agreements, and commission rules. Most importantly, it would provide competing companies with a timely outcome of a complaint, reducing risk and uncertainty for carriers and their customers.\4\ --------------------------------------------------------------------------- \4\ Presentation of Ronald Binz to the Telecommunications Committee of the National Association of Regulatory Utility Commissioners, Washington, D.C., February 23, 1999. (Emphasis supplied.) Regulatory delay is a blunt instrument. While it might arguably sometimes delay the effect of bad things, it also delays the implementation of beneficial effects and creates uncertainty in markets. Ultimately, it is difficult for regulators to be creative by using regulatory delay. It is far preferable for consumers and telecommunications providers alike if regulators make the hard choices and make them expeditiously. 2. This legislation should preserve the flexibility needed by the FCC to conduct thorough merger reviews and to adopt conditions that serve the public interest To protect consumers and competition, time frames on the FCC merger review process must not have the theoretic or practical effect of lessening the FCC's ability to scrutinize mergers. The sponsors are correct to include language reserving the Commission's existing authority to review mergers for their effect on the public interest. It is also clear from reading the legislation that the sponsors have attempted to strike a balance, providing the FCC with leverage to compel the applicants to cooperate with the agency's analysis, while maintaining time frames that require the FCC to complete its review in a reasonable time. Even so, no set of timetables can anticipate every eventuality. We urge the Committee to continue to examine the legislation for instances in which the bill's mechanics might affect substance. In other words, we agree with Senator Kohl's statement that the legislation should be considered a ``work in progress.'' FCC Chairman Kennard recently announced his intention to conduct a public discussion about the conditions that should be considered for the SBC/Ameritech merger to ensure that the merger serves the public interest. The Chairman has indicated his intention to complete this discussion and negotiation process by late June. If we assume FCC action on the merger would follow within a month of the end of discussions, it will have taken almost 15 months for the FCC to act on this merger. This is considerably longer than the timeframe for FCC action envisioned in the legislation. It is not clear at this point how productive this new process outlined by Chairman Kennard will be and whether it will be applicable to other mergers.\5\ Similarly, it is not clear whether this ``negotiation'' (together with the FCC's standard merger review process) could be completed within the time frames in the legislation. However, it is clear that the Committee should factor such questions into its analysis. Later in the testimony, we suggest a modification to the bill that addresses this issue. --------------------------------------------------------------------------- \5\ CPI has recommended that the FCC deny the SBC/Ameritech merger until the merging companies have opened their networks to competition by complying fully with sections 251 and 252 of the Communications Act. CPI believes that such a requirement should precede approval and not be attached as a post-approval condition. --------------------------------------------------------------------------- 3. By modifying the process through which mergers are reviewed, the legislation should not have the unintended effect of limiting the Commission's ability to request and receive information necessary to render its public interest determination We suspect this legislation will be supported by any telecommunications company that thinks it may come before the FCC for merger approval. Congress must ensure that these companies support the legislation for the right reason: the bill should speed up actions on mergers, not make approval more likely or give applicants the ability to escape careful scrutiny. One of the keys to effective merger review is that companies are motivated to answer the questions posed by the regulators. This legislation takes away the FCC's ability to delay action on the merger until the applicant produces requested information. Instead, the legislation arms the Commission with the ability to go to court over its information requests. In order for this new mechanism to produce the right incentives for applicants, they must know that the courts will accord the FCC substantial discretion about its need for information. The broad authority to request and receive needed information should be underscored in the legislation. 4. Amendments should be considered to improve S. 467 in several areas As this legislation progresses, we recommend that the Committee consider certain changes to the bill language designed to improve the legislation. First, the legislation should permit the FCC and the applicants jointly to agree to modest extension of the deadline for action on a merger to conduct a negotiation process similar to that recently announced by Chairman Kennard in the SBC/Ameritech merger. Such a provision would provide both the Commission and the applicants with desired flexibility without sacrificing the essential structure of the legislation. Second, the legislation should state explicitly that it does not limit the ability of the FCC to request and receive information necessary to conduct its analysis of a merger. The process proposed in this legislation may alter the relative power of the Commission to obtain information and, because of the deadlines, raise the stakes if a carrier delays in its response. If the legislation states clearly that this amendment does not limit the FCC's access to such information, Congress will have sent a message to the courts that the FCC's direction is to be considered in case the FCC must apply to the courts to obtain requested information. Third, CPI recommends an amendment to paragraph (k)(5)(A) of the Act. This paragraph provides that, in cases where the Commission has not requested additional information from the applicants, it must act on an application within 30 days of receiving and application. We suggest, instead that the FCC be given a reasonable amount of time of act on the merger following its decision not to require additional information. Since the Commission has 30 days to decide whether to ask for information, our suggestion would mean that the Commission would have, for example, a total of sixty days to approve or deny an application for which it has not required additional information. Without this modification, the legislation may give the Commission the wrong incentive: to seek information from the merging companies merely to extend the time in which the Commission must act. v. concerns about pending ilec mergers Of course, this discussion about the FCC's merger review authority and the appropriateness of time frames does not occur in the abstract. There are two pending applications before the Commission that propose mergers between large incumbent local exchange companies: SBC/Ameritech and Bell Atlantic/GTE. For reasons discussed below, CPI believes these two mergers will not, on balance, benefit consumers because of the harm to the course of competition in local telecommunications markets. CPI has asked the FCC to deny these two mergers until the applicants have fully complied with the market opening conditions set by Congress in sections 251 and 252 of the Telecommunications Act of the 1996. Before turning to the evidence specific to these mergers, we should recognize that these mergers occur against the backdrop of significant legislation and a fundamental shift in the nation's telecommunications policy. While Congress did not specifically indicate that mergers such as the pending ILEC mergers were contrary to its intent, it is clear that the pending mergers upset the careful balance Congress fashioned in passing the Act. In particular, Congress assumed that the BOC's would remain independent competitors.\6\ --------------------------------------------------------------------------- \6\ See, for example, section 273(a) of the 1996 Act relating to Joint ventures among Bell companies for manufacturing telecommunications equipment: ``A Bell operating company may manufacture and provide telecommunications equipment, * * * except that neither a Bell operating company nor any of its affiliates may engage in such manufacturing in conjunction with a Bell operating company not so affiliated or any of its affiliates.'' --------------------------------------------------------------------------- Unfortunately, the mergers of several key industry players has upset this balance to the detriment of competition and consumers. Since passage of the Telecommunications Act, the concentration of ownership in the communications industry has developed much faster than the growth of local exchange competition. If this industry consolidation continues unchecked, the pro-competitive goals that Congress endorsed in the 1996 Act may be impossible to achieve, with the result that consumers end up paying higher rates for lower quality service. For this reason alone, the FCC should deny the mergers of large incumbent local exchange carriers until competitors have had an opportunity to obtain a significant presence in the marketplace. We recognize that, at this stage, the Commission cannot ``unring the bell'' by undoing its prior merger approvals. It can, however, keep the balance from becoming further out of kilter by denying the pending applications until such time as these large incumbent local exchange companies make significant progress in opening their networks to competitors. Besides this general concern about the effect of concentration on the development of competition, there are several reasons why these two mergers are likely to harm the public interest. These factors include: The proposed mergers will eliminate significant potential competitors and, in the case of the SBC/Ameritech merger, an actual competitor in the SBC and Ameritech regions. The proposed mergers will strengthen the incumbents' ability to thwart the growth of local competition. The proposed mergers will reduce the number of companies whose performance can be used to benchmark or compare one company against another. The proposed mergers will increase the opportunity for the merged companies to leverage their market power into other markets. The applicants claim that these mergers will result in substantial efficiency gains. Even if we assume this claim is accurate, the important question for policymakers is not whether the mergers will benefit the companies, but whether the mergers will benefit consumers. In CPI's view, it is doubtful that these efficiency gains will be passed through to consumers under current marketplace conditions. The applicants face very limited competition today; they have little marketplace incentive to reduce rates, improve service quality, or otherwise flow the rewards of their merger to consumers. For the most part, these companies are regulated under price cap, price freeze, or other similar regulatory schemes that will not require them to reduce rates as a result of their lower costs. Thus, the applicants may keep these efficiency gains for themselves. At most, the applicants argue that the mergers will put them in a stronger financial position as they face increasing competition. But this is actually little comfort to consumers and, in some sense, validates the concerns about the effect of these mergers on the development of competition. Even if this effect is counted as a benefit of the merger, CPI does not believe that this benefit alone can compensate for the risks of harm to competition detailed above. Although the applicants maintain that they face significant competition in their home markets, it is impossible to predict today that sufficient competition will develop in the near future to counterbalance the influence the merged companies will have over telecommunications markets. To date, competition for local telephone services has not yet developed anywhere near the levels that can serve as a competitive restraint on the dominance of the incumbent local exchange carriers. As I described above, the competitive local exchange carriers (CLEC's) have captured less than 5 percent of local telephone revenues and less than 3 percent of the nation's access lines. For these reasons, CPI suggests that the FCC say ``no'' to the proposed mergers unless and until the merging companies have complied fully with the requirements of the Telecommunications Act of 1996 to open their network to competition. Over three years ago, Congress directed all large incumbent local exchange carriers to provide interconnection on a nondiscriminatory basis to other competing LEC's. To our knowledge, none of the merger partners has successfully complied with these requirements in a single state. Under these circumstances, CPI recommends that the FCC decline to approve the merger with ``post- approval'' conditions attached. Instead, we think the FCC should deny the mergers with clear language setting out the terms under which approval might be considered: i.e., after all necessary market-opening steps have been taken. Many of the problems associated with the mergers could be significantly ameliorated if the applicants complied with the 1996 Act's requirements to open their networks to competition. There are two reasons why the FCC should link the proposed mergers with companies' compliance with these market-opening requirements. First, the proposed mergers diminish the prospects for vibrant local telephone competition. These mergers will strengthen companies with significant market power over local exchange service, enhancing their ability to compete unfairly against new entrants in the local telephone market. Requiring the companies to open their networks before allowing them to merge will make it less likely that the merged company could engage in discriminatory and anticompetitive behavior against new entrants. These market-opening requirements are essential to the prospects that new entrants will become viable local competitors. Once the new entrants become a fixture in the competitive landscape, their presence in the marketplace will go a long way towards mitigating the potential economic and political power of a merged company. Second, denial of the proposed mergers will give the companies a greater incentive toopen their markets to competition. The theory of the 1996 Act was that interLATA relief would be the ``carrot'' that would induce the RBOC's to open their markets to competition. After three years in which the BOC's have made limited progress toward this goal, it now appears that the prospect of long distance entry may not be a strong enough motive for the BOC's to open their markets. If withholding long distance entry is not enough to induce them to open their networks, perhaps denying their mergers will be. Several parties commenting in the FCC proceeding have alleged that the applicants are deliberately slow-rolling the process of opening their markets to competition. We do not think the FCC has to decide whether these companies are acting in bad faith; the Commission need only focus on the actual experience of competitors in the marketplace and decide how the mergers will affect the process of opening markets fully to competition. Not a single ILEC has implemented a non- discriminatory operations support system and demonstrated that its network is fully open to competitors. Without a doubt, opening the local network to competitors is not easy and demonstrably takes a lot of time. But the complexity of this task is exactly why the FCC should keep the pressure on the ILEC's to comply with the Act's requirements. Policy makers can be certain that the BOC's will reduce their level of commitment to this task as soon as they receive the regulatory relief that they are seeking. We are also convinced that the mergers will increase the incentives and abilities of the merged companies to resist the process of opening markets. For these reasons, we have asked the FCC to find that the proposed mergers of SBC/Ameritech and Bell Atlantic/GTE are contrary to the public interest. vi. conclusion CPI appreciates the opportunity to testify in support of S. 467. We believe that it is good regulatory practice and good law for regulators to perform their functions as quickly and as efficiently as possible. While this has always been true, it is especially important now, as we move from an era of regulated industries into one in which market forces will be relied upon to constrain prices and provide consumers with choice. We hope our suggestions for improving S. 467 are helpful to the Committee and look forward to working with you and your staff as this legislation moves forward. Senator DeWine. Let me thank all the members of the panel. Your testimony has been very helpful as we move towards a markup on this piece of legislation. What we were trying to do today with this panel, I think we have already accomplished, and that is to get specific suggestions as far as the specific piece of legislation that is in front of us. I just have a couple questions before I turn to Senator Kohl. Mr. Ne