Table of Contents I Introduction 126 II. The Law and Economics of State Merger Enforcement 127 A. Merger Enforcement, Consumer Welfare, and the Public Interest 128 B. State Interventions in Merger Enforcement 132 III. PUC Interventions in Communications Mergers 138 A. Extent of State Intervention in Communications Mergers 138 B. Procedural Costs, Incremental Delays, and Extraneous Conditions 141 IV. SUMMARY AND CONCLUSIONS 153 I. INTRODUCTION
This study presents an empirical analysis of the effects of public utility commission ("PUC") oversight of mergers involving communications carriers. The analysis is based on a data set covering major communications sector transactions from January 1, 2010 through June 30, 2017. Specifically, we gathered and analyzed data on all 40 major transactions approved by the Federal Communications Commission ("FCC") during this period to: (a) determine the extent of PUC involvement in these transactions; and (b) for the transactions in which PUCs were actively engaged, to assess both the procedural and substantive effects of their interventions. (1)
The appropriate role of state governments in the merger review process has been the subject of vigorous debate among academics and policymakers. Supporters of state involvement argue that states may have unique local knowledge of competitive conditions or other comparative advantages that allow them to add value to the enforcement efforts of federal antitrust watchdogs at the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). (2) Critics question the benefits of state intervention and also point to the costs, arguing that state reviews are duplicative, costly, and involve unnecessary delays. (3) Critics also note that state enforcers face incentives to place parochial political interests ahead of overall consumer welfare or the broader public interest and thus to impose merger conditions that benefit narrower constituencies to the detriment of the public at large. (4) As we explain below, our data suggest that these concerns are especially apposite to PUC reviews of communications mergers.
In particular, we explain that PUCs typically operate--like the FCC--under a broad and nebulous "public interest" standard, where the burden of proof is with the merging parties, unlike in antitrust review, where the burden is on the government. (5) Also like the FCC, PUCs' decisions not to approve mergers are, for procedural reasons, almost impossible to challenge in court. (6) Thus, PUCs have a high degree of hold-up power over transactions, which allows them to extract "voluntary" concessions with little oversight. (7) Further, unlike the FCC--which assesses the public interest from a national perspective--PUC interventions under the public interest mantle are often motivated by parochial concerns and local political interest. (8) Thus, perversely, the merger conditions imposed by PUCs frequently come at the direct expense of other states and undermine the achievement of national merger efficiencies. (9)
Our analysis of the frequency and characteristics of PUC interventions in communications mergers provides new evidence that states impose significant and unnecessary costs in the form of procedural burdens and delays and that the concessions they extract tend to serve narrow interests rather than the overall public interest. Because mergers are a key mechanism for reallocating resources to their highest valued economic uses, the costs and delays imposed by PUCs ultimately harm overall consumer welfare and economic performance. Accordingly, policymakers at both the federal and state level should consider reforms that would significantly constrain the ability of PUCs to intervene in communications mergers.
The remainder of this paper is organized as follows. Section II discusses the law and economics of merger enforcement, focusing on both the substantive and procedural factors that bear on the appropriate role of state regulatory bodies in the review process. Section III presents our empirical findings regarding the extent and nature of PUC interventions in communications mergers. Section IV presents a brief summary of our findings.
THE LAW AND ECONOMICS OF STATE MERGER ENFORCEMENT
This Section discusses the analytical framework that motivates our empirical analysis. It begins with a discussion of the goals of merger enforcement policy--in broad terms, to maximize the net benefits of mergers by prohibiting transactions that are harmful to competition and consumer welfare without deterring those that are beneficial. Next, we provide a brief overview of the merger review process at the federal level, including the roles of the economy-wide enforcement agencies, the DOJ and FTC and, with respect to communications mergers, the FCC. Finally, we turn to role of state merger enforcement and provide a law-and-economics-based framework for evaluating the benefits and costs of state merger enforcement.
Our discussion focuses on two sets of incentive issues that are present in merger enforcement, and that we refer to as (a) hold-up power and (b) the externality problem. Hold-up power refers to the ability of merger enforcers to use the threat of blocking a transaction to extract conditions from the merging parties that they could not lawfully impose absent the transaction. While all merger enforcers have some degree of hold-up power, we argue that the broad authority and practical impunity from appeal enjoyed by the FCC and PUCs enhances their hold-up power relative to antitrust enforcers. The externality problem refers to the fact that state enforcers are likely influenced by the ability to impose conditions whose benefits are concentrated in their home states while the costs are borne more widely.
Merger Enforcement, Consumer Welfare, and the Public Interest
All U.S. mergers that involve a substantial volume of interstate commerce are subject to federal review under the Clayton Act. (10) Mergers are reviewed by either the DOJ or the FTC, with the assignment of responsibility typically going to the agency with the most prior experience in the industry involved; mergers involving communications providers typically fall under the purview of the DOJ. (11) For industries subject to sector-specific regulation, transactions are also reviewed by the relevant sector-specific regulator, such as the FCC for communications mergers or the Federal Energy Regulatory Commission for oil and gas pipelines. (12)
The process for review by the antitrust agencies is governed by the Hart-Scott- Rodino ("HSR") Act, (13) which requires parties engaging in transactions above an annually-adjusted monetary threshold to notify the government at least 30 days prior to consummating the transaction (15 days in the case of a cash tender offer or a bankruptcy). (14) If the agency reviewing the merger grants an early termination of the waiting period or allows the initial waiting period to expire, the parties are free to proceed. (15) Alternatively, the reviewing agency may issue a Request for Additional Information (a "Second Request"), which extends the waiting period until the parties attest that they have "substantially complied" with the Second Request. (16) At that point, the reviewing agency has 30 days (10 days in the case of a cash tender offer or bankruptcy) to decide whether it will (1) allow the transaction to proceed, (2) enter into a consent agreement that seeks to remedy potential competitive harms through the imposition of conditions, or (3) file for an injunction to block the merger. (17)
The substantive standard for merger review by the antitrust agencies is embodied in Section 7 of the Clayton Act, which prohibits mergers for which the effect "may be substantially to lessen competition, or to tend to create a monopoly." (18) To successfully block a merger in court, the government must demonstrate by a preponderance of the evidence that it would be likely to result in "a substantial lessening of competition." (19) There is broad agreement among policy makers and scholars that merger enforcement should be based exclusively on competition concerns. For example, the U.S. explained in a recent submission to an Organization for Economic Co-operation and Development working party that "U.S. antitrust law and policy, including merger review, are implemented based on the belief, borne out by our economic history, that the public interest is best served by focusing exclusively on competition considerations." (20) Or, as former FTC Chairwoman Edith Ramirez recently commented, a "core feature that we [the FTC] have learned leads to sound competition enforcement is a focus on competition factors alone, rather than on consideration of other economic and social policies." (21)
In this context, both the antitrust agencies and the reviewing courts are heavily influenced by economic analysis, as codified in the DOJ/FTC Horizontal Merger Guidelines (Guidelines) and embodied in decades of antitrust jurisprudence. (22)
The Guidelines provide that "mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise," meaning that mergers will be challenged if they are "likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives." (23) The Guidelines also recognize that mergers create substantial benefits by reallocating scarce resources to higher valued uses, thereby enhancing consumer welfare and promoting economic growth. (24)
Thus, antitrust policy seeks to strike a balance, permitting mergers that enhance consumer welfare while prohibiting those that reduce it. (25) The agencies often seek to achieve this balance by imposing remedies that aim to eliminate or ameliorate potential anticompetitive effects, such as requirements to divest assets or refrain from specific business practices. (26)...