A welcome step toward curbing ‘rent extraction’ during FCC merger reviews

The Federal Communications Commission — similar to other federal agencies such as the Federal Energy Regulatory Commission — has concurrent responsibility with the Department of Justice to review industry mergers under a “public interest” standard. While a public interest inquiry is a bit broader than an antitrust inquiry, courts have expressly held that the FCC may not “subordinate the public interest to the interest of ‘equalizing competition among competitors.’”

Despite this prohibition, over the years the FCC has routinely used merger proceedings to extract a variety of “voluntary” merger commitments — many of them wholly-unrelated to any merger-specific harm — to assuage various pet political constituencies. As a result, the typical FCC merger review is little more than a bargaining exercise between the regulated and the regulator.

Recently, in the commission’s approval of the CenturyLink/Level 3 merger, FCC Chairman Ajit Pai took a welcome first step towards curtailing such naked rent extraction and returning the FCC’s merger review process back to its proper statutory mandate.

{mosads}To do so, the commission will now apply a straightforward, sequential three-part test.

First, does a proposed transaction comply with the specific provisions of the Communications Act, other applicable statutes, and the commission’s rules? If “yes,” then stop; if no, then move to the next question.

Second, does a transaction result in public interest harms, including harms to competition?

If the answer is no, fantastic. But if the answer is “yes,” then is it possible to impose narrowly-tailored conditions to remedy such transaction-specific harm? Significantly (and appropriately) — unlike many merger reviews in the past — the commission will not impose conditions to remedy pre-existing harms or harms that are unrelated to the transaction. After all, generic industry-wide problems are better left for generic, industry-wide rulemakings.

Third, if a transaction raises no public interest harms, are there any public interest benefits?

Assuming a merger satisfies this three-part test (no statutory violation; no harm; public interest benefits), the commission will bless the transaction.

Despite Democrat protestations to the contrary, there is nothing new here. Pai is finally running FCC merger reviews in the manner prescribed by Congress and the courts.

Still, having raised regulatory extortion to an art form while in power (see, e.g., the whopping twenty-seven pages of merger conditions in the Comcast/NBCUniversal merger), the Democrat minority was none too happy about the FCC’s newfound regulatory restraint. Instead, they continued to argue that merger applicants should provide sufficient “goodies” to make sure that the benefits of a merger always outweigh the costs.

For example, FCC Commissioner Jessica Rosenworcel wrote in her dissent that abandoning the cost/benefit merger standard “is simply part of a larger effort to speed the way for the next billion dollar transaction before us.” And FCC Commissioner Mignon Clyburn was even more blunt, arguing in her dissent that it “was because of the now-former public interest balancing test, that we saw the launch of [Comcast’s] Internet Essentials program which has brought affordable broadband to millions of low-income Americans.”

But in all due respect, putting an end to such naked rent extraction is exactly the point of Pai’s order.

As reported by the Washington Post, Comcast had originally planned to launch Internet Essentials in 2009, but Comcast Senior Vice President David Cohen told his staff to wait because he believed that such a program would be a useful for bargaining with the FCC over its proposed takeover of NBCUniversal. Indeed, according to a quote attributed to Cohen, “I held back because I knew it may be the type of voluntary commitment that would be attractive to [FCC Chairman Julius Genachowski].”

Cohen was proven correct. While a commitment to increase broadband adoption clearly had no nexus to any merger-related harm involving the acquisition of a content company by a broadband service provider, not only was Comcast’s voluntary commitment to initiate its “Interest Essentials” program a cited factor in the commission’s ultimate positive disposition of its merger application, but one year later Chairman Genachowski publicly praised Internet Essentials as “the best in public-private partnerships to address … the digital divide.”

Under the plain terms of the Communications Act, the FCC is obligated to review industry mergers and acquisitions to determine whether such transactions serve the public interest. Given that the FCC is “entrusted with the responsibility to determine when and to what extent the public interest would be served by competition in the industry,” the commission’s merger review serves a useful and important function. However, the FCC’s long-standing practice of using backroom, closed-door negotiations between the regulator and prospective merging parties to extract political concessions has done much to erode the Agency’s credibility with Congress and the American people alike.

It takes tremendous courage to curb government’s proclivity to extract rents from the private sector. For that, Chairman Pai and his Republican colleagues at the FCC deserve recognition.