Telecommunications: Process by Which Mergers of Local Telephone Companies
Are Reviewed (Letter Report, 08/20/1999, GAO/RCED-99-223).

Pursuant to a congressional request, GAO reviewed the: (1) standards and
processes under which mergers between local telephone companies are
evaluated and approved by governmental bodies; and (2) implementation of
this process in the Bell Atlantic-NYNEX merger, and the effects of the
merger that can be observed.

GAO noted that: (1) several governmental bodies review mergers between
local telephone companies using varied standards and processes in their
analyses; (2) at the federal level, these mergers are reviewed by the
Department of Justice (DOJ) and the Federal Communications Commission
(FCC); (3) using guidelines that have been developed to evaluate the
likely effects of a merger on market concentration and other competitive
factors, DOJ, acting as the enforcement agency to review mergers under
federal antitrust law, assesses whether a merger may substantially
lessen competition within the industry; (4) if DOJ determines that a
merger will substantially harm competition and therefore violates
antitrust laws, it can bring a court action--in which it bears the
burden of proof--to stop the merger; (5) in contrast, FCC, the federal
agency that regulates the telecommunications industry, primarily
examines whether the transfer of licenses and lines from one company to
another in a merger is in the public interest; (6) to determine if a
merger is in the public interest, FCC considers several factors, such as
the effects of a merger on: (a) competition in the industry; (b) FCC's
ability to enforce its obligations under the Communications Act; and (c)
the deployment of advanced telecommunications services; (7) state
attorneys general and some state public utility commissions also have
the authority to review mergers between local telephone companies;
(8)the Bell Atlantic-NYNEX merger took place in August 1997 after review
by several governmental bodies; (9) the merging companies' prior status
as regulated monopolies complicated the merger review process; (10)
after conducting antitrust reviews, DOJ, a task force of state attorneys
general, and individual state attorneys general did not challenge the
merger under antitrust law; (11) while FCC and all the reviewing state
utility commissions allowed the merger to go forward, FCC and 4 of the 5
reviewing state commissions imposed conditions on the merged company;
and (12) while few market effects on the merger are identifiable, Bell
Atlantic officials told GAO that the company has realized the cost
savings it expected to gain from the merger.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-223
     TITLE:  Telecommunications: Process by Which Mergers of Local
	     Telephone Companies Are Reviewed
      DATE:  08/20/1999
   SUBJECT:  Telecommunication industry
	     Telephone
	     Corporate mergers
	     Antitrust law
	     Statutory law
	     Competition

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Cover
================================================================ COVER

Report to Congressional Requesters

August 1999

TELECOMMUNICATIONS - PROCESS BY
WHICH MERGERS OF LOCAL TELEPHONE
COMPANIES ARE REVIEWED

GAO/RCED-99-223

Telephone Merger Review

(385776)

Abbreviations
=============================================================== ABBREV

  AT&T - American Telephone & Telegraph
  DOJ - Department of Justice
  FCC - Federal Communications Commission
  FTC - Federal Trade Commission
  SNET - Southern New England Telephone
  NYNEX -
  SBC -

Letter
=============================================================== LETTER

B-281828

August 20, 1999

The Honorable Mike DeWine
Chairman
The Honorable Herb Kohl
Ranking Minority Member
Subcommittee on Antitrust, Business Rights,
 and Competition
Committee on the Judiciary
United States Senate

The Honorable Luis Gutierrez
House of Representatives

One of the primary purposes of the Telecommunications Act of 1996 was
to promote competition within telecommunications markets.  Since the
law was enacted, some large local telephone companies have merged,
and other mergers are pending.  As a result of your concern that the
industry has become more consolidated, you asked us to provide
information on (1) the standards and processes under which mergers
between local telephone companies are evaluated and approved by
governmental bodies and (2) the implementation of this process in the
Bell Atlantic-NYNEX mergerthe largest local telephone merger
completed when we began our work in early 1999and the effects of the
merger that can currently be observed. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Several governmental bodies review mergers between local telephone
companies using varied standards and processes in their analyses.  At
the federal level, these mergers are reviewed by the Department of
Justice and the Federal Communications Commission.  Using guidelines
that have been developed to evaluate the likely effects of a merger
on market concentration and other competitive factors, the Department
of Justice, acting as the enforcement agency to review mergers under
federal antitrust law, assesses whether a merger may substantially
lessen competition within the industry.  If the Department
determines that a merger will substantially harm competition and
therefore violates antitrust laws, it can bring a court actionin
which it bears the burden of proofto stop the merger.  In contrast,
the Federal Communications Commission, the federal agency that
regulates the telecommunications industry, primarily examines whether
the transfer of licenses and lines from one company to another in a
merger is in the public interest. To determine if a merger is in
the public interest, the Commission considers several factors, such
as the effects of a merger on (1) competition in the industry, (2)
the Commission's ability to enforce its obligations under the
Communications Act, and (3) the deployment of advanced
telecommunications services.  If the Commission cannot determine that
a merger is in the public interest and accordingly declines to
approve a license transfer, merging parties can file a lawsuitin
which they bear the burden of proofchallenging the Commission's
decision.  State attorneys general and some state public utility
commissions also have the authority to review mergers between local
telephone companies.  Like the Department of Justice, state attorneys
general review the potential impact of a merger on competition.  Most
state utility commissions tend, like the Federal Communications
Commission, to focus their reviews on whether a merger is in the
public interest. 

The Bell Atlantic-NYNEX merger took place in August 1997 after review
by several governmental bodies.  The merging companies' prior status
as regulated monopolies complicated the merger review process.  After
conducting antitrust reviews, the Department of Justice, a task force
of state attorneys general, and individual state attorneys general
did not challenge the merger under antitrust law.  While the Federal
Communications Commission and all the reviewing state utility
commissions allowed the merger to go forward, the Federal
Communications Commission and four of the five reviewing state
commissions imposed conditions on the merged company.  Many of these
conditionswhich, for example, required Bell Atlantic to provide a
uniform way for competitors to place orders for serviceswere aimed
at inducing Bell Atlantic to rapidly open its local telephone markets
to competitors.  While few market effects of the merger are
identifiable, Bell Atlantic officials told us that the company has
realized the cost savings it expected to gain from the merger. 

   BACKGROUND
------------------------------------------------------------ Letter :2

Much of the nation's telephone infrastructure was built and owned by
American Telephone & Telegraph Company (AT&T) from the time the
company was formed in 1885 through most of the next century.  For
most of that time, AT&T was the parent company of many subsidiary
companies that provided local and long-distance telephone service
throughout the United States and also manufactured telephone
equipment.  By the early 1980s, AT&T carried roughly 80 percent of
the nation's local telephone traffic through its 22 subsidiary Bell
Operating Companies, and the remaining 20 percent of local telephone
traffic (much of which was concentrated in rural areas) was carried
by a myriad of independent telephone companies unaffiliated with
AT&T.  Because the Bell Operating Companies and the independent
companies held franchises giving them the right to serve
geographically distinct areas that did not overlap, very few
consumers had a choice of providers for local telephone service. 

As technology advanced and regulatory changes opened up
telecommunications markets to new entrants, competition began to
emerge in the long-distance telephone market.  In 1974, the
Department of Justice (DOJ) brought an antitrust suit against AT&T
alleging that the company was engaging in anticompetitive behavior to
the detriment of new competitors in the long-distance and telephone
equipment markets.  The resolution of that case unfolded in the early
1980s and brought an end to AT&T's domination of the nation's local
telephone markets on January 1, 198416 months after a court approved
the consent decree, known as the Modification of Final Judgment, that
the Department of Justice and AT&T had entered into.  Under the
consent decree, AT&T was required to divest its ownership of the 22
Bell Operating Companies to ensure that AT&T would not have an
advantage in the long-distance telephone market through its ownership
of the local telephone networks and facilities where all telephone
calls originate and terminate. 

The 22 Bell Operating Companies were reorganized into seven regional
entitiesAmeritech Corporation, Bell Atlantic Corporation, BellSouth
Corporation, NYNEX Corporation, Pacific Telesis Group (PacTel),
Southwestern Bell Corporation (now called SBC Communications Inc.),
and US WEST, Inc.that became known as the Baby Bells (see fig. 
1).  The service territories of the newly formed Baby Bells were, and
continue to be, geographically distinct; however, the recent mergers
between Bell Atlantic and NYNEX, as well as between SBC and PacTel,
have reduced the number of Baby Bells to five.\1 The AT&T consent
decree also imposed restrictions on the lines of business that Bell
Operating Companies were allowed to enter.  For example, these
companies were not allowed to enter the long-distance market or to
manufacture telephone equipment.  The AT&T consent decree did not
affect the independent local telephone companies that had not been
part of AT&T, and their service areas are still distinct and do not
overlap Bell service areas.\2

Since the AT&T consent decree was issued, advanced technologies have
altered the telecommunications market.  Recognizing the dramatic
changes in the industry, the Congress enacted the Telecommunications
Act of 1996.  This act was a major modification to the Communications
Act of 1934 and set out a framework for the development of
competition in local telephone and other telecommunications markets. 

At the time Bell Atlantic and NYNEX announced their intention to
merge in April 1996, each of the companies controlled approximately
98 percent of the local telephone market in its respective area. 
Bell Atlantic operated in Delaware, Maryland, New Jersey,
Pennsylvania, Virginia, West Virginia, and the District of Columbia,
and NYNEX operated in Maine, Massachusetts, New Hampshire, New York,
Rhode Island, Vermont, and a portion of Connecticut.  The wireless
cellular subsidiaries of the two companies had merged in 1994, and
discussions on a corporatewide merger between Bell Atlantic and NYNEX
were initiated prior to the enactment of the Telecommunications Act
of 1996. 

   Figure 1:  Service Territories
   of the Original Seven Regional
   Bell Operating Companies, With
   Subsequent Mergers Noted

   (See figure in printed
   edition.)

   Note:  SNET (a non-Bell company
   prior to its acquisition by SBC
   Communications) is the primary
   local telephone company for
   most of Connecticut.  However,
   NYNEX (now Bell Atlantic)
   operated in a small portion of
   that state.

   (See figure in printed
   edition.)

--------------------
\1 A merger between SBC and Ameritech, announced in May 1998, is
currently pending before federal and state regulatory bodies.  In
addition, Bell Atlantic announced its intention in July 1998 to merge
with GTE Corporation, a non-Bell company that provides local
telephone service in 28 states and also provides long-distance,
wireless, and Internet access services.  In both of these cases, DOJ
has tentatively approved consent decrees, and FCC is still reviewing
the mergers, although, according to FCC, Bell Atlantic and GTE asked
the Commission to defer processing their merger application until
those companies make a further submission to the Commission on
long-distance issues.  In addition, a merger between US WEST and
Qwest, a non-Bell communications provider of broadband data and voice
services, was announced on July 18, 1999.  Ten percent of Qwest's
current ownership is held by another Baby Bell company, BellSouth. 

\2 In all 48 states of the continental United States, local telephone
service is provided by either a Baby Bell company or an independent
local telephone company.  Hawaii and Alaska are served only by
independent companies. 

   GOVERNMENTAL BODIES USE VARYING
   STANDARDS AND PROCESSES TO
   REVIEW LOCAL TELEPHONE COMPANY
   MERGERS
------------------------------------------------------------ Letter :3

Federal and state governmental bodies have the authority under
different statutory provisions to review proposed mergers of local
telephone companies.  These varied reviews differ with respect to the
purposes of the merger reviews, the reasons mergers can be blocked,
the manner in which the governing bodies conduct the reviews, and how
any disputes about merger decisions are resolved.  Prior to the
passage of the 1996 Telecommunications Act, a provision of the 1934
Communications Act provided the Federal Communications Commission
(FCC) with the authority to review local telephone company mergers,
and FCC could authorize such mergers to go through without review by
federal antitrust agencies.  This provision was repealed by the 1996
act and, while FCC maintains the authority to review the transfers of
licenses that occur with mergers based on other provisions of the
Communications Act, DOJ now also reviews mergers between local
telephone companies.\3 Mergers of telephone companies announced since
the 1996 act, such as the Bell Atlantic-NYNEX merger and the
SBC-Pacific Telesis merger, have been reviewed by FCC and DOJ at the
federal level.  State attorneys general and some state utility
commissions also have the authority to review proposed mergers of
local telephone companies. 

Department of Justice.  DOJ's Antitrust Division derives its merger
review authority from both the Sherman Act of 1890 and the Clayton
Act of 1914the primary federal antitrust laws.  These laws are
generally designed to preserve competition in an industry sector. 
Section 7 of the Clayton Act incorporates the policies underlying
relevant sections of the Sherman Act and prohibits a merger if the
resulting effect may be to substantially lessen competition. The
Hart-Scott-Rodino Antitrust Improvement Act of 1976, an amendment to
the Clayton Act, requires that merging companies, in certain cases,\4
notify DOJ of their intent to merge and expands DOJ's authority to
conduct premerger investigations. 

Operating under specific time frames in conducting its review, DOJ
can request further information from the companies that have filed
premerger notifications if the Department determines that a more
extensive analysis is appropriate.  As mandated by law, information
that is gathered by DOJ is confidential and protected from public
dissemination.  To determine whether a merger violates antitrust
laws, DOJ uses well-established economic and legal principles that
are reflected in the Department's merger guidelines.\5 The merger
guidelines provide methods for several key elements of an antitrust
review:  defining the relevant markets, measuring concentration,
evaluating whether firms are likely to enter a market,\6 determining
competitive effects, and evaluating the efficiencies of a proposed
merger.  If DOJ determines that a merger will substantially harm
competition and therefore violates antitrust laws, it can bring a
court action to stop the merger.  The burden of proof in such a case
is on the government to show that the merger will be substantially
anticompetitive.  When DOJ concludes that a merger will violate
antitrust laws, it may, in some cases, negotiate a consent decree
with the merging companies.  Under a consent decreewhich is filed
with a court and is thus legally enforceablethe merging companies
agree to undertake activities that would eliminate the competitive
harm of the merger, such as divesting certain properties.  If DOJ
does not go to court to block a merger, or if it does not end its
investigation with a consent decree or otherwise resolve

competitive issues,\7 the Department will close its investigation.\8

DOJ generally provides little or no public information about its
analyses of a merger's impact on competition. 

Federal Communications Commission.  FCC's authority to review the
transfer of control of licenses in connection with a proposed merger
derives from sections 214 and 310 of the 1934 Communications Act.\9
Because mergers involve a change in the ownership or control of
companies holding licenses or lines needed to offer
telecommunications services in the United States, merging firms must
apply to FCC for approval of the transfer of those licenses or lines. 
The purpose of FCC's review is to determine that the license
transfers are in the public interest, and this review may consider
many factors, such as the competitive effects of the license
transfers, the effects on FCC's ability to enforce its obligations
under the Communications Act, and the effects on the deployment of
advanced telecommunications services.  While FCC follows, in part,
DOJ's merger guidelines in its competitive analysis of mergers, the
Commission's merger review is generally viewed as broader than DOJ's
because the public interest standard can take into account a more
diverse set of issues and therefore may cause FCC to reach a
conclusion that differs from DOJ's.  Since a primary purpose of the
Telecommunications Act of 1996 was to promote competition in the
industry, the Commission's more recent public interest reviews of
telephone companies' license transfers have focused closely on
competitive effects. 

FCC's review of telephone mergers takes place under an open process. 
All of the documents that companies file with the Commission become
part of the public record,\10 parties get a chance to respond to the
comments filed by others, and the Commission issues a final order in
which it provides a detailed account of its rationale for a decision. 
When FCC finds a merger to be in the public interest, it will approve
the transfers of licenses and lines necessary to allow the merger to
go forward.  Alternatively, if FCC cannot determine that a merger is
in the public interest, it will accordingly decline to approve a
license transfer.\11 If FCC finds the public interest harm outweighs
the public interest benefit of a transaction, it may enter into
discussions with the merging parties, and ultimately, adopt
conditionsthat is, specific activities that the merged company would
have to performthat will change the balance of the public interest
effects and thus enable the Commission to find the license transfers
to be in the public interest.\12 Whatever FCC actions are taken in a
particular case, interested parties (including, but not limited to,
the merging companies) can file a lawsuit challenging FCC's decision. 
Any party filing such a lawsuit against a Commission decision bears
the burden of proof in showing that the decision was arbitrary and
capricious or beyond the Commission's authority. 

State Attorneys General.  State attorneys general also have the
authority to block mergers under federal antitrust law.\13 Because
few mergers will affect only one state, the attorneys general have
formed a task force through the National Association of Attorneys
General to coordinate merger reviews by multiple attorneys general. 
Typically, one state will take the lead role to coordinate the merger
review.  Additionally, if the merging parties consent, filings
submitted to DOJ are shared with participating state attorneys
general for their review.\14 The National Association of Attorneys
General and DOJ have developed a protocol for how the state attorneys
general and the Department will conduct a joint investigation on the
antitrust implications of a proposed merger. 

The National Association of Attorneys General has also developed
merger guidelineswhich have some similarities to DOJ's merger
guidelinesto analyze how a merger will affect competition.  If a
single state attorney general or a group of attorneys general
determines that a merger will substantially harm competitionwhich is
the standard for a merger to be illegal under the Clayton Acta state
or a combination of states can file an action in court to stop the
merger.  They can also file comments in hearings before state utility
commissions or join in a proceeding with DOJ. 

State Public Utility Commissions.  State statutes that provide the
authority to public utility commissions (sometimes called public
service or commerce commissions) vary a great deal with regard to
their merger review authority.  According to a representative of the
National Association of Regulatory Utility Commissioners, some state
utility commissions have the authority to review mergers of the
companies that they regulate, other state utility commissions have
the authority to review only transfers of regulated companies'
assets, and still others have no role at all in reviewing or
approving mergers between telephone companies.  While most
commissions' reviews focus on whether mergers are in the public
interest, some commissions also specifically examine competition
issues. 

--------------------
\3 Generally, federal antitrust reviews are performed by either DOJ
or the Federal Trade Commission (FTC) under a cooperative system that
will eliminate duplicative merger reviews.  In the case of telephone
company mergers, DOJ is usually the reviewing agency because a merger
of two common carrierswhich local telephone companies areis outside
the statutory jurisdiction of FTC, 15 U.S.C.  18, 21, 45(a)(2). 
Since telephone company mergers are reviewed by DOJ and FCC at the
federal level, this report will focus on those agencies. 

\4 For example, if the merging parties or the transaction are of
sufficient size, a merger will pass certain thresholds that require
Hart-Scott-Rodino filings to be made. 

\5 DOJ and the FTC's merger guidelines are periodically updated.  The
most recent update was in 1997. 

\6 The evaluation of likely entry includes determining whether one of
the merging parties is likely to enter a relevant market. 

\7 In some cases, the Department may agree, informally, to a
restructuring of the transaction to eliminate competitive concerns. 
Also, in some cases, the parties may abandon their intent to merge. 

\8 DOJ's decision to not block a merger cannot be challenged in
court. 

\9 FCC also has the authority under the Clayton Act to review
mergers.  However, we were told that FCC does not generally exercise
its Clayton Act authority.  Recently, a number of bills have been
introduced to modify FCC's authority to review the transfers of
licenses occurring through mergers. 

\10 However, part of the public record may include confidential
materials to which access is limited. 

\11 Prior to a final finding that it cannot find a merger to be in
the public interest, the Commission will send the case for a hearing
before an administrative law judge.  If that judge also cannot find
the merger to be in the public interest, the case goes back to FCC
for a final ruling. 

\12 According to FCC documents, the Commission has the authority to
attach conditions to its approvals of license transfers under
sections 214(c) and 303(r) of the Communications Act. 

\13 In some cases, attorneys general may also challenge mergers under
state antimerger laws. 

\14 The Voluntary Pre-Merger Disclosure Compact, sponsored under the
auspices of the National Association of Attorneys General, creates a
contractual understanding between the compact's signatory states and
the parties concerning the sharing of information filed with DOJ and
the coordination of the investigation by the state attorneys general. 
As part of the compact, participating states agree to refrain from
filing subpoenas for additional information from the parties. 

   BELL ATLANTIC-NYNEX MERGER WENT
   FORWARD WITH CONDITIONS
------------------------------------------------------------ Letter :4

According to the merging companies, Bell Atlantic and NYNEX merged to
take advantage of a variety of expected benefits both within their
local telephone markets and in markets that the firms hoped to enter
(such as the long-distance market).  The merger review process, which
began in April 1996 when Bell Atlantic and NYNEX announced their
intention to merge, was completed when the last of all federal and
state governmental reviewing bodies approved the merger in August
1997.  The review process was lengthy in part because of the
complexity of the analyses conducted by these bodies.  At the federal
level, the merger was reviewed by DOJ under federal antitrust
statutes and by FCC under the Communications Act of 1934.  Five state
utility commissions conducted formal merger review proceedings, and a
task force of state attorneys general also reviewed the merger.\15
Neither DOJ nor any of the state attorneys general sought to block
the merger on the basis that it would violate antitrust laws.  In
addition, the merger was approved by FCC and the five state utility
commissions that formally reviewed the merger.  However, FCC and four
of the states placed specific conditions on the merging parties, many
of which were designed to help foster greater competition in the
local telephone market.  While Bell Atlantic officials told us that
the company has realized significant cost savings since the merger,
no other significant measurable market effects can be definitively
attributed to the merger at this time. 

--------------------
\15 The merging companies filed notices of the planned merger with
all 14 utility commissions in the jurisdictions in which the
companies operated.  However, license transfers took place only
within the NYNEX states, and five of these state utility commissions
issued formal orders approving the merger.  One of the state utility
commissions in the original Bell Atlantic region, the New Jersey
Public Utility Commission, also issued an order approving the merger,
although no control of licenses was transferred in the state. 
Massachusetts also issued an order, even though it had no specific
statutory authority to review or approve mergers of telephone
companies. 

      A VARIETY OF EXPECTED
      BENEFITS MOTIVATED BELL
      ATLANTIC AND NYNEX TO MERGE
---------------------------------------------------------- Letter :4.1

According to a Bell Atlantic official, the Bell Atlantic-NYNEX merger
was intended to enable the unified company to compete more
effectively in the delivery of local telephone service within the two
companies' existing service areas.  A Bell Atlantic official told us
that the merger was expected to result in cost savings from the
greater efficiencies gained by their combined operations.\16 In
addition, Bell Atlantic and NYNEX's merger application outlined the
companies' plans to adopt each other's best practices to attain
operational improvements.  Cost savings and improved business
procedures were considered by both companies to be necessary to
retain their most valued customers in the face of new entrants into
the local telephone market.  In addition, Bell Atlantic stated in its
merger applications that the merged company would be in a better
position to enter the domestic long-distance marketwhich Bell
Atlantic hoped to do soon after the merger's completionas well as
the global telecommunications market. 

--------------------
\16 Specifically, the anticipated cost savings resulted from greater
economies of scale and scope.  Economies of scale occur when larger
production output is associated with lower per unit cost of
production, and economies of scope occur when producing two or more
similar products reduces the average costs of production of those
products. 

      BELL ATLANTIC-NYNEX MERGER
      REQUIRED COMPLEX COMPETITIVE
      ANALYSIS
---------------------------------------------------------- Letter :4.2

Bell Atlantic and NYNEX announced their intention to merge on April
21, 1996, and the merger was finally completed on August 14, 1997. 
As figure 2 shows, over the course of those 16 months, various
jurisdictions approved the merger.  FCC officials told us that the
merger review process was protracted partly because of the review's
complexity.  Besides the large size of the merging companies and the
multiple reviewing bodies, the merger review was especially
complicated because the merging parties were formerly monopolistic
companies and because FCC's framework for applying its public
interest standard was evolving as a result of the passage of the
Telecommunications Act of 1996. 

   Figure 2:  Time Line of the
   Bell Atlantic-NYNEX Merger's
   Review and Approval by
   Governmental Bodies

   (See figure in printed
   edition.)

   Note:  The Bell Atlantic-NYNEX
   merger application was filed
   with FCC on July 2, 1996.

   (See figure in printed
   edition.)

The history of Bell Atlantic and NYNEX as regulated monopolies, and
the associated lack of a market history, made determining the
competitive effects of this merger difficult.  In most antitrust
merger cases, companies' previous market behaviors and strategies are
central to the review, but such information in this case was less
available and was of less use because both companies had been
constrained in many ways by previous regulation.  Despite the fact
that these companies did not compete against each other, the
competitive effects of their merger can be evaluated under the
actual potential competition doctrine of DOJ's merger guidelines. 
The actual potential competition doctrine focuses on whether, in the
absence of the merger, one of the merging companies is likely to
successfully enter the other's market, and on whether competition in
the market will be substantially lessened by the elimination of such
entry.  To show that a firm is a potential competitor, however, it is
important to have evidence that the firm was actually planning or at
least considered entering the market in question.\17 The fact that a
firm did not actually enter a market can make it difficult to prove
that entry was likely.  Additionally, while DOJ generally would not
find that a merger between a current competitor and a potential
competitor substantially lessened competition if at least three other
viable competitorscurrent or potentialwould remain after the
merger, Department officials told us that in this case, the merger
required careful scrutiny despite the existence of other potential
competitors. 

Officials at both DOJ and FCC told us that the actual potential
competition standard was more difficult to apply to nearly
monopolized markets where, until very recently, laws, regulations,
and related requirements precluded the merging partiesin this case,
Bell Atlantic and NYNEXfrom entering each other's market areas. 
Because of the complexity of applying the potential competition
doctrine in what FCC called transitional marketsthat is, markets
that are in the process of changing from a regulated monopoly to a
more competitive environmentthe Commission developed a new
framework:  the precluded competitor analysis.  FCC officials told
us that the Commission developed this framework in order to protect
the interest defined by the Communications Act.  Under this
framework, which is based on the same economic principles as those
underlying antitrust doctrines, FCC could evaluate the likelihood
that one of the merging parties (as well as others that had been
precluded) would successfully enter markets where it had been
precluded prior to the enactment and implementation of the
procompetitive aspects of the 1996 Telecommunications Act.  FCC's
framework characterizes some precluded competitors as
most-significant market participants. In particular, Commission
officials noted that a most-significant market participant would (1)
have an incentive to enter a market from which it had been
previouslybut was no longerprecluded; (2) have the resources,
experience, and ability to succeed in that market; and (3) would,
upon entering, have a significant competitive impact in that market. 
Moreover, FCC stated that for precluded competitors that are
most-significant market participants, the lack of actual entry or
clear evidence of intent to enter a market should not be a decisive
factor in evaluating a firm's likelihood of entry because entry only
recently became a possible market strategy for the firm.  Thus, in
contrast to the potential competition doctrine, harm to competition
can be found from a merger between a current and a precluded
competitor under FCC's precluded competitor framework, even if little
definitive evidence exists to show that the precluded competitor was
about to enter the market. 

In addition to the development of this new framework, FCC's
application of its public interest standard was also evolving in
other ways during its review of the Bell Atlantic-NYNEX merger.  FCC
officials told us that their merger analysis was incorporating the
competitive focus of the Telecommunications Act of 1996.  For
example, in the order approving SBC's merger with Pacific Telesis,
which occurred 11 months after the passage of the 1996 act, FCC
stated that it was not necessary for the merging parties to
demonstrate that, in the absence of any harms, this merger would
create competitive benefits (see app.  I).  Seven months later in the
Bell Atlantic-NYNEX order, however, FCC stated that any potential
competitive harm related to a merger must be offset by competitive
benefits so that the merger will be procompetitive and, therefore, in
the public interest.  Thus, FCC's application of the public interest
standard focused more closely on competitive issues in the later
merger.  FCC officials confirmed to us that competitive issues within
the public interest standard were more heavily weighted in the
Commission's review of the Bell Atlantic-NYNEX merger, in part
because of the focus of the 1996 act, in part because the specifics
of the Bell Atlantic-NYNEX merger raised more competitive issues and
in part because subsequent mergers among Regional Bell Operating
Companies and/or other large incumbent local telephone companies will
raise increasingly greater competitive concerns. 

--------------------
\17 Courts are split on the standard of evidence required to prove
that a company was likely to enter a market. 

      ALL REVIEWING BODIES ALLOWED
      THE MERGER TO GO FORWARD,
      BUT SOME IMPOSED CONDITIONS
---------------------------------------------------------- Letter :4.3

The Bell Atlantic-NYNEX merger was not challenged in court by DOJ,
the task force of state attorneys general, or any individual state
attorneys general.  DOJ officials told us that while evidence existed
to suggest that Bell Atlantic had contemplated entering the market in
the New York City metropolitan area, other information suggested that
Bell Atlantic might not enter that market.  Moreover, other potential
entrantssuch as the large long-distance companiesexisted that also
had the resources and ability to succeed in providing local telephone
service in the New York market.  Consequently, DOJ believed that
there was too much uncertainty to determine that Bell Atlantic was
uniquely situated to improve competition in this market.  Although
the task force of attorneys general had some concerns about the
competitive effects of the merger, only the New York state attorney
general, while not attempting to block the merger, formally stated
opposition to the merger in a brief submitted to the New York Public
Service Commission. 

Using its newly derived precluded competitor framework, FCC concluded
that Bell Atlantic was likely to enter the market for small business
and residential telephone service in and around New York City and
that Bell Atlantic was likely to be successful in that market.  Thus,
in FCC's view, the evidence showed that the merger would
substantially retard or delay the achievement of the Communication
Act's competitive goals in the region.  FCC noted that for the merger
to be in the public interest, the potential harms of the merger would
need to be outweighed by potential benefits.  Bell Atlantic and NYNEX
were able to demonstrate to the satisfaction of FCC that commitments
made by Bell Atlantic in a letter to FCC on July 19, 1997 (and later
modified on Aug.  13, 1997), were sufficient to outweigh any
potential harm related to the merger.  FCC's approval of the merger
was conditioned on Bell Atlantic's meeting these commitmentsnow
defined as conditions under the merger approvalthroughout its entire
service region.  One of the conditions stated that all of the
conditions would expire after 4 years.\18

FCC's merger conditions included several items designed to promote
greater competition in the provision of local telephone service and
to achieve the goals of the Telecommunications Act of 1996.  It
appears that three of the conditions were most important to FCC's
determination that the potential harms of the proposed Bell
Atlantic-NYNEX merger would be outweighed by the expected benefits
that would result from implementing the conditions.  Under these
three conditions, Bell Atlantic agreed to do the following: 

  -- Provide uniform interfaces for obtaining access to the basic
     operations system support functionssuch as placing an order,
     billing, and scheduling maintenancewhich would help competing
     carriers efficiently access and purchase services from Bell
     Atlantic's network. 

  -- Set the rates for unbundled network elementspiece parts of
     Bell Atlantic's network that competitors need to purchase in
     order to provide local servicebased on forward-looking
     economic costs. An FCC official told us that under a
     forward-looking economic costing method, the prices of the
     unbundled network elements are based on the costs associated
     with the most efficient commercially available technologies,
     rather than on average historical costs of the telephone
     company's existing plant.  Because technology has advanced so
     rapidly in this industry, the price of network elements based on
     forward-looking, rather than historical, costs will be lower. 

  -- Provide detailed performance monitoring reports to FCC, state
     commissions, and competitive carriers.  These reports provide
     data depicting the quality of service Bell Atlantic provides,
     both to competitive carriers and to its own retail operations,
     thus conveying information on the network access Bell Atlantic
     affords to competing companies.  These data could help detect
     any problems that may exist in Bell Atlantic's supply of
     unbundled network elements or bundled services to be resold by
     the competitors.  In particular, these data could help determine
     whether Bell Atlantic is meetings its obligation to provide
     nondiscriminatory service to its competitors. 

Five state utility commissions in the NYNEX region held formal
proceedings and issued orders approving the Bell Atlantic-NYNEX
merger.  Four of these states imposed conditions on Bell Atlantic
that pertained to Bell Atlantic's activities within their individual
jurisdictions: 

  -- The New York commission required that the new company establish
     its headquarters in New York City.  The New York commission also
     required Bell Atlantic to (1) provide additional quality of
     service measurements; (2) hire an additional 750 to 1,000
     employees by December 31, 1997, to address problems with service
     quality; and (3) improve service by making an additional $1
     billion investment in infrastructure improvements over the next
     5 years. 

  -- The Maine commission required that by September 30, 1997, Bell
     Atlantic meet the competitive checklist enacted as part of the
     Telecommunications Act of 1996.\19 This checklist sets forth
     several requirementssuch as allowing competitors to
     interconnect to the Bell network and to purchase unbundled
     network elementsthat any Bell Operating Company must meet to be
     allowed to enter the long-distance telephone market.  The state
     also required the merged company to maintain an investment in
     the state at a level similar to NYNEX's investment in recent
     years. 

  -- Following Maine's lead, the Vermont commission required that
     Bell Atlantic meet the competitive checklist contained in the
     Telecommunications Act of 1996 by September 30, 1997.  In
     addition, Vermont required so-called intrastate long-distance
     dialing parity, under which users would be able to dial the same
     number of digits regardless of whether they used Bell Atlantic
     or any other competitive provider for long-distance calls within
     the state of Vermont.  The Vermont commission also required the
     merged company to maintain an investment level in the state
     equivalent to those of previous years. 

  -- To ensure that service quality did not decline after the merger,
     the New Hampshire commission required Bell Atlantic to adopt the
     service standards of the National Association of Regulatory
     Utility Commissioners in the state.  New Hampshire also required
     that the role of the key Bell Atlantic representative working in
     New Hampshire not significantly change or diminish after the
     merger and that the responsibility for construction,
     engineering, installation, and repair within the state rest with
     the company's representative assigned to the state rather than
     with Bell Atlantic executives elsewhere. 

FCC opened a proceeding on February 5, 1999, on Bell Atlantic's
progress in implementing FCC's merger conditions.  In a report filed
by Bell Atlantic in this proceeding\20 and in our discussions with
company officials, Bell Atlantic stated that it has met FCC's merger
conditions.  However, some of the companies that compete with Bell
Atlantic have filed complaints with FCC\21 and have filed comments in
this proceeding stating that Bell Atlantic has failed to meet some of
the conditions.  This disagreement appears to stem largely from
varying interpretations of the meaning of specific language in FCC's
merger order. 

--------------------
\18 FCC provided for the Bell Atlantic-NYNEX Merger Conditions to
sunset 48 months after the Commission approved the merger.  In an FCC
proceeding on Bell Atlantic's compliance with the merger conditions,
a number of competitive carriers submitted comments arguing that
because FCC intended the benefits of the conditions to last 4 years,
the conditions should not sunset until 4 years after Bell Atlantic
demonstrates full compliance.  FCC officials told us that the sunset
provision is among the matters currently being reviewed in this
compliance proceeding. 

\19 There are 14 points on the competitive checklist in section
271(c)(2)(B) of the Communications Act. 

\20 An FCC official told us 15 comments were filed in this
proceeding. 

\21 Four complaints filed with FCC by two companies (one of which was
filed jointly by the two companies) assert that Bell Atlantic has not
complied with the merger conditions.  The Commission is currently
considering all of these complaints. 

      BELL ATLANTIC REALIZES COST
      SAVINGS FROM THE MERGER, BUT
      FEW MARKET EFFECTS ARE
      IDENTIFIABLE
---------------------------------------------------------- Letter :4.4

Bell Atlantic officials told us that the company has enjoyed
considerable cost savings since the merger.  The company originally
estimated that the merger would achieve a cost savings of about $850
million to $900 million annually within 3 years, but company
representatives told us that cost savings have surpassed that level. 
Beyond these cost savings, few effects can be directly attributed to
the merger at this time, as illustrated by the following: 

  -- Service quality in New York improved at about the time of the
     merger, but regulators attribute the improvement to the
     Performance Regulatory Plan that the state of New York had
     negotiated with NYNEX in 1995.  Under the plan, NYNEX had agreed
     to pay substantial fines if it did not improve service quality
     in a number of areas.  In Massachusetts, regulators noted that
     service had declined before the merger and had improved somewhat
     since that time.  Massachusetts officials told us that the
     decline in service quality prior to the merger was most likely
     the result of a reengineering by NYNEX, which had led to
     excessive losses of knowledgeable service staff.  The increase
     in quality at about the time of the merger was likely related to
     restaffing.  In many of the other Bell Atlantic and NYNEX
     states, state regulators said they could not identify changes in
     service quality.\22

  -- Some state officials also told us that it is difficult to
     determine whether the prices that consumers are paying for local
     telephone service have been affected in any way by the merger. 
     For example, some states pointed to some recent decreases in the
     prices of local telephone service, but attributed those changes
     to price cap regulations adopted in several states. 

  -- While Bell Atlantic officials told us that the company has
     increased employment and investment levels since the merger,
     these changes are also difficult to attribute solely to the
     merger.  Two state regulators also expressed concern that Bell
     Atlantic would redirect its capital investment away from smaller
     states to the larger states that were more likely to see the
     entry of new competitors.  There is no evidence, however, that
     Bell Atlantic has undertaken such a strategy. 

--------------------
\22 Two states' officials told us that since the merger, Bell
Atlantic has been less responsive to state regulators than the
premerger companies were.  The view of these and some other state
officials was that decision-making authority was being concentrated
at Bell Atlantic headquarters in New York City. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

We provided a draft of this report to the Federal Communications
Commission and the Department of Justice for review and comment.  FCC
stated that the staff who reviewed the report were in general
agreement with its conclusions (see app.  II).  FCC staff also
provided us with technical comments, which we incorporated as
appropriate.  The Department of Justice provided some technical
comments (see app.  III), which we have addressed.  We also provided
excerpts of the draft to Bell Atlantic and SBC Communications
officials.  Both companies provided some corrections and
modifications, which we incorporated as appropriate. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To obtain information on the merger review process for telephone
companies, we reviewed the relevant legislation, current federal and
state merger guidelines, and federal and state orders approving the
mergers of Bell Atlantic and NYNEX and of other telephone companies. 
We also interviewed officials at FCC, DOJ, the office of the New York
Attorney General, the National Association of Attorneys General, and
all the state public utility commissions in the Bell Atlantic and
NYNEX states. 

To obtain information on how the merger review process was applied in
the Bell Atlantic-NYNEX merger and the extent of measurable effects
of the merger to date, we reviewed Bell Atlantic's merger application
and FCC's order approving the merger.  We also examined state utility
commission orders regarding the merger.  We interviewed officials at
FCC, DOJ, the Office of the New York State Attorney General, the
National Association of Attorneys General, and the 14 public utility
commissions in the Bell Atlantic and NYNEX service territories.  We
reviewed documents related to Bell Atlantic's compliance with FCC's
merger conditions, including complaints filed by competitors with FCC
alleging noncompliance.  Finally, we interviewed officials at Bell
Atlantic and at two national companies that have begun to compete in
the local telephone market. 

We conducted our review from December 1998 through August 1999 in
accordance with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :6.1

As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 14 days
after the date of this letter.  At that time, we will provide copies
to William E.  Kennard, Chairman, Federal Communications Commission;
Joel Klein, Assistant Attorney General, Antitrust, the Department of
Justice; and other interested parties.  We will also make copies
available to others on request. 

If you or your staffs have any questions about this report, please
contact me at (202) 512-7631.  Key contributors to this report are
listed in appendix IV. 

Judy A.  England-Joseph
Director, Telecommunications Issues

SBC'S ACQUISITIONS OF PACIFIC
TELESIS GROUP AND SOUTHERN NEW
ENGLAND TELEPHONE
=========================================================== Appendix I

In addition to the Bell Atlantic-NYNEX merger, two other large local
telephone company mergers have occurred since the Telecommunications
Act of 1996 was passed.  In April 1997, SBC Communications Inc., the
parent company of Southwestern Bell Telephone Company, which provides
local telephone service in Arkansas, Kansas, Missouri, Oklahoma, and
Texas, acquired Pacific Telesis Group (PacTel), which provided local
and wireless service through Pacific Bell and Nevada Bell in
substantial parts of California and Nevada (see fig.  1).  SBC and
PacTel were two of the smallest Baby Bells.\23 In addition, in
October 1998, SBC acquired Southern New England Telephone (SNET), an
independent telephone company, far smaller than the Baby Bells, that
provides local, wireless and long-distance telephone services in
Connecticut. 

SBC officials described the acquisitions of PacTel and SNET as a
response to increasing and changing customer demands for
telecommunications services (particularly business customers with
multistate operations) and said that through these mergers, SBC hoped
to better serve its customers, become a more effective competitor,
and enhance its potential to compete in other domestic and
international markets.  SBC officials told us that the acquisition of
PacTel was also motivated by the ending of its local telephone
franchise and the opening of the local market, with the enactment of
the 1996 act and by the inroads being made by competitive providers
in large and medium-sized cities in SBC's service areas.  In
addition, SBC's and PacTel's management teams were concerned about
improving their companies' earnings to satisfy shareholders and the
investment community at a time when growth in their local telephone
market shares was expected to be static.  Like the Bell
Atlantic-NYNEX merger, the SBC-PacTel merger was viewed by officials
of the companies as providing new and improved services, cost savings
from increased economies of scale and scope, and the application of
best practices across the combined company. 

The acquisition of SNET by SBC was also viewed as a means to grow
SBC's local telephone business and, for SNET, to improve its
attractiveness to investors in a changing local telephone market. 
Because SBC was already providing cellular telephone services in New
England, the acquisition of SNET was viewed as complementing SBC's
existing business and as enabling the company to better compete in
other areas of the northeast region. 

The federal and state reviews of SBC's acquisitions of PacTel and
SNET appear to have been similar to those described in the Bell
Atlantic-NYNEX case.  These acquisitions, like the Bell
Atlantic-NYNEX merger, were reviewed by the Federal Communications
Commission (FCC) and the Department of Justice (DOJ) and by all of
the public utility commissions and attorneys general in the relevant
states in which the transfer of licenses would occur. 

The SBC-PacTel merger was approved by all relevant federal and state
governmental bodies.  At the federal level, the merger was not
challenged under the federal antitrust laws by DOJ.  FCC issued an
order approving the transfer of licenses from PacTel to SBC on
January 31, 1997, 9 months after the companies announced their
intention to merge.  The Commission did not need to apply formally
the standard that it used later in its August 1997 order approving
the Bell Atlantic-NYNEX merger:  that the benefits of the merger
must, on balance, outweigh the potential harm.  Instead, FCC
concluded that the SBC-PacTel merger would not lead to a reduction of
competition and that it might result in some modest improvements to
the competitiveness and performance of some markets; hence, there was
no need to engage in a balancing process.\24

At the state level, the California Attorney General issued an
advisory opinion after review stating that the SBC-PacTel merger
would not adversely affect competition.  However, to ensure approval
of the merger, SBC made certain commitments to both the California
and Nevada state commissions.  In December 1996, the Nevada Public
Service Commission approved the merger.  However, the Nevada
commission required SBC to provide at least $4 million in credits to
Nevada Bell customers, in part, because SBC had offered to provide
credits to California customers and had made a promise to establish
four new headquarters in California.  In an order issued in March
1997, the California commission concluded that the merger would
benefit shareholders, the financial condition and management of
PacTel, and the California economy and was unlikely to adversely
affect competition.  However, the California commission imposed
conditions requiring SBC to provide credits to ratepayers of more
than $200 million over 5 years to reflect the short- and long-term
economic benefits of the merger; implement a 10-year program to fund
$50 million in consumer education efforts and $32 million for other
activities to ensure service to underserved communities; show
compliance with certain service quality standards; and, in the event
that SBC proposed to acquire another local telephone company within 5
years after the merger, to notify the commission and explain how it
would affect the SBC-PacTel merger and the company's response to the
state's imposed conditions. 

SBC's acquisition of SNET was also approved by all relevant federal
and state reviewing authorities.  The acquisition was not challenged
as a violation of antitrust laws by either DOJ or Connecticut's
Attorney General.\25 The Connecticut Department of Public Utility
Control approved the merger and accepted a set of commitments by SBC
that included maintaining SNET's headquarters in Connecticut,
continuing SNET's charitable contributions and contributing $1
million to institutions of higher learning in the state, conducting a
trial of high-speed data service over SNET's existing infrastructure,
and planning operations support systems to be used by competitors to
order facilities and services.  The department also conditioned its
approval on SBC's continued compliance with the terms and conditions
of SNET's cable television subsidiary for 2 years.  The SBC-SNET
merger was reviewed by FCC under the framework first developed in the
Bell Atlantic-NYNEX merger review.  FCC found that SBC's acquisition
of SNET was not likely to harm the public interest and was likely to
produce some tangible benefits.\26 Among other conditions for
approval, FCC required the companies to complete and continue
fulfilling measures designed to ensure the merger does not result in
SBC providing long-distance services in its region in violation of
the Communications Act and to continue the restructuring of local
telephone operations in Connecticut in accordance with requirements
of the state commission.\27

According to SBC, since the merger of SBC-PacTel closed in April
1997, approximately 4,500 new jobs have been created in California as
of June 1999, including positions for technicians to build network
facilities and install and maintain telephone lines and for service
representatives.  SBC also claims that the total capital budget for
Pacific Bell, PacTel's local telephone subsidiary in California, has
increased 11 percent since the merger closed, with 20 percent more
being spent to expand the Pacific Bell network, improve service
quality, and make new lines available to consumers.  Service orders
for telephone installations are processed more quickly, customer
trouble reports have declined, and the speed of repairs for service
disruptions has accelerated.  Finally, SBC states that the price of
Pacific Bell's basic local telephone service has not changed since
the completion of the merger. 

(See figure in printed edition.)Appendix II

--------------------
\23 According to 1995 and 1996 data from the Federal Communications
Commission, SBC and PacTel were among the smallest of the Baby Bells
in terms of number of employees, revenues, and customer lines. 

\24 FCC's order approving the SBC-PacTel merger states that a
demonstration that benefits will arise from the merger is not a
prerequisite for approval, provided that no foreseeable adverse
consequences will result. 

\25 The Connecticut Office of the Attorney General did raise concerns
in the proceeding of the Connecticut Department of Public Utility
Control on the merger regarding SBC's marketing practices in
California and the suitability of SBC as the owner of SNET's
statewide cable television subsidiary. 

\26 In its order approving the merger, FCC described its duty to
weigh the potential harm to the public interest against the potential
benefits to ensure that, on balance, the merger served the public
interest, which, at a minimum, requires that it does not interfere
with the objectives of the Communications Act. 

\27 Upon closing an investigation into whether, after the merger with
SNET, SBC may have been in violation of the law in the provision of
long-distance information services (secs.  271-272 of the
Communications Act) and related FCC regulations, FCC entered into a
consent decree with SBC in June 1999 to ensure future compliance. 
Although no wrongdoing was admitted by SBC, the company agreed to
change its internal operations to ensure compliance and to make a
voluntary $1.3 million payment to the U.S.  Treasury. 

COMMENTS FROM THE FEDERAL
COMMUNICATIONS COMMISSION
=========================================================== Appendix I

(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
JUSTICE
=========================================================== Appendix I

GAO COMMENTS

1.  We made the Department of Justice's suggested wording change. 

2.  We deleted the phrase a different conclusion from that of DOJ.

GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
========================================================== Appendix IV

GAO CONTACTS

Judy England-Joseph, (202) 512-7631
Stanley Czerwinski, (202) 512-7631
Amy Abramowitz, (202) 512-4936

ACKNOWLEDGMENTS

In addition to those named above, Dennis Amari, Nancy Barry, Thomas
Farrell, Fran Featherston, and Mindi Weisenbloom made key
contributions to this report. 

*** End of document. ***