Former Chief Economist Katz Sees Little Role for FCC in Merger Reviews

“At best it seems like the FCC is mimicking the DoJ, but in a less sophisticated way,” he said, saying the process is worse off for FCC’s involvement. “I don’t see the Commission really bringing something to the table,” Katz said. He also questioned whether FCC institutional knowledge of the industry and of regulation justify parallel review. “DoJ has quite broad and deep antitrust experience and it has to rely on certain specialized personnel to look at telecom. At the FCC, the situation is somewhat reversed,” Katz said.

“For every merger the FCC reviews, the DoJ is reviewing dozens and dozens,” Katz said, discounting the importance of the Commission’s industry-specific knowledge as a factor in weighing the acceptability of proposed mergers.

The FCC is less accountable than DoJ, hewing as it does to less rigorous standards, Katz said. “Things are different at the DoJ. If it wants to challenge, it goes into district court and it goes in as a plaintiff. They have to make a full blown case,” he said. DoJ merger review occurs in more timely manner, with statutory deadlines, he said: “The FCC has self-imposed deadlines, I gather 180 days, but the Adelphia merger at last count was way above that.”

DoJ has better tools for making firms open their books and provide material regulators need to conduct a review, Katz said. “We've heard lawyers say that when it comes to DoJ, they prepare serious documents. When it comes to putting in a filing at the FCC, you hit the button that automatically spews out the 30 pages that says, ‘Give us what we want.'” Unlike the FCC, which is dominated by lawyers, DoJ gives its economists a dominant voice in merger review, he said.

Other experts said mergers need more, not less, scrutiny from regulators “Beware of incrementalism,” warned Douglas Bernheim, Stanford U. prof. of economics. A series of mergers has allowed so gradual a consolidation of the telecom industry that the overall trend is easy to miss, he said.

Citing the apothegm that a frog in gradually heated water soon becomes frog soup, Bernheim said he’s heard that in reality frogs don’t sit still for boiling. “Humans, on the other hand, fall into this pattern with alarming frequency,” he said: “Through a series of small and seemingly reasonable steps we can be led from a reasonable starting point to an unthinkable ending point.”

Regulators should inquire about general industry trends, rather than review each proposed merger on a stand-alone basis, Bernheim said. “How far have we come and have we already gone far enough?” he asked. “We should always give some consideration to the cumulative effect of mergers, past, present and potential… I fear it is not done enough, leading in some instances to boiled frogs.”

FCC dissection of 4 recent mergers -- SBC-AT&T, Sprint- Nextel, Cingular-AT&T Wireless and Verizon-MCI -- shows the FCC isn’t beholden to formulas like the Herfindahl-Hirschman Index (HHI) of market concentration, said economist Debra Aron, who teaches at Northwestern U. The agency concluded in all 4 that despite problems tagged under the HHI the mergers themselves wouldn’t hurt competition, Aron said: “What the Commission did was apply competitive analysis to the market in a way that they viewed as being more forward looking and more reflective of the nature of competition.”

With the wireline mergers in particular, HHI “played no role,” Aron said: “The analysis relied on the nonstructural analysis, the analysis of how competition is going to play out going forward.” In the wireless mergers, HHI mainly helped the FCC screen out markets not needing closer scrutiny for other remedies, she said.