N.Y. State Report Finds Verizon-MCI Market Power Concerns

The staff report, to be presented to the full commission, urges fairly stringent conditions to guard consumers. They include requiring Verizon to offer naked DSL -- DSL connections without having to subscribe to a corresponding analog local phone line.

Sources said Fri. the report likely reflects concerns of Chmn. William Flynn, and other commissioners’ perspectives remain to be seen. The report is likely to be read carefully at the FCC and Justice Dept., plus other states reviewing the merger.

“The states are going to be the biggest issue for both SBC and Verizon,” UBS analyst John Hodulik told us. “I don’t think the FCC or the DoJ are going to be big issues.” Hodulik pointed to Cal. as a state that may have similar concerns.

“The report is significant, since N.Y. is a big state and it raises the same market concentration issues that federal regulators are looking at in their reviews,” said one industry source: “Whether it will have a huge effect remains to be seen.”

“I think the N.Y. PSC chairman would agree with the staff report, but don’t really have any idea about the other commissioners,” said a regulatory source. “Other states that are in the middle of their reviews and the FCC will both be reading this report closely I'm sure -- and yes it could impact their thinking.”

Staff did a Herfindahl-Hirschman Indices (HHI) analysis of market power in the state, using the same tool federal regulators do. Under DoJ guidelines, staff noted, if a market’s HHI already exceeds 1,800 and a proposed merger increases the HHI by more than 100 points, the “rebuttable presumption” is an increase in market power. Under the N.Y. analysis, staff found, for the wireline voice residential and small business market the HHI would rise 903, to 4,815. The numbers were even starker for the 200 kbps market for midsized and large business customers. Staff found the HHI would grow 1,689 to 6,553.

Some merger conditions may be required, the report said. “To offset what appears to be reduction in choice, there are potential remedies available, for example, requiring that Verizon offer ‘naked DSL’ wherever it offers DSL services to its own customers. This would allow customers to use DSL to take advantage of the burgeoning VoIP market without also subscribing to Verizon’s telephone service.” Another “potential remedy,” the report said, would be to order MCI to keep offering its retail residential service for a year after the merger is approved.

Verizon said in a statement it remains confident a “complete analysis of the robustly competitive communications marketplace” in N.Y. “will bring the PSC to the conclusion that customers across all market segments will see the benefits of the combination of Verizon and MCI.”

But merger critics were quick to claim the conclusions underline concerns they've been raising since the deal was announced. The Alliance for Competition in Telecom (ACTel), which wants regulators to reject both major wireline mergers, said the report’s HHI numbers back up its data.

“The other states are in the early stages of evaluating the merger and this will demonstrate to them that if they also do similar economic analysis they will come to the same conclusion, that these mergers are harmful to the wholesale market and harmful to end users,” Douglas Kinkoph, vp-regulatory affairs at ACTel member XO Communications, told us.

“This is an analysis by a well-respected commission’s staff,” Kinkoph said. “New Yrk is arguably the most competitive market in the country. If you are seeing numbers of this magnitude there [the analysis] will clearly show equal levels of concentration in many of the other states.”