NERA Economists Examine Effects of State PUC Merger Reviews

The Situation

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 which allow them to add value to the enforcement efforts of federal antitrust watchdogs at the Department of Justice (DOJ), the Federal Trade Commission (FTC), and the Federal Communications Commission (FCC). Critics question the benefits of state intervention, and also point to the costs, arguing that state reviews are duplicative, costly, and involve unnecessary delays. 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. NERA has analyzed data that suggest these concerns are especially apposite to public utility commission (PUC) reviews of communications mergers. 

NERA's Role

Verizon retained NERA to write a study that presents an empirical analysis of the effects of state PUC oversight of mergers involving communications carriers. NERA Managing Director Dr. Jeffrey A. Eisenach and Senior Consultant Dr. Robert Kulick 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. Also like the FCC, PUCs’ decisions not to approve mergers are, for procedural reasons, almost impossible to challenge in court. Thus, PUCs have a high degree of hold-up power over transactions, which allows them to extract “voluntary” concessions with little oversight. 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 interests. 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.

The study goes on to discuss 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 and to present evidence based on a review of 40 major communications sector mergers from 2010-2017. Based on this review, Dr. Eisenach and Dr. Kulick present their empirical findings regarding the extent and nature of PUC interventions in communications mergers. They conclude with a brief summary of the findings.

The Result

Dr. Eisenach and Dr. Kulick’s 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.

The findings provide empirical support for concerns raised by academics and policymakers about the effects of state intervention in merger reviews, especially when interventions are undertaken by PUCs under a public interest standard in which the merging parties bear the burden of proof. PUC interventions in communications mergers impose significant direct and indirect costs on the merging parties. 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. The use of merger reviews by PUCs to impose conditions on firms offering IP-based services (including conditions specifically relating to broadband) is increasingly at odds with federal policy, which preempts such services from state oversight in favor of a uniform national approach. 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.