Former Commissioner Questions FCC’s Desire for RLEC Mergers
Tuesday, September 27, 2011 at 9:34AM
Cassandra Heyne in FCC, FCC Filings, Harold Furchtgott-Roth, NTCA, OPASTCO, Regulatory Update, USF Reform, WTA

FCC has no Authority to Encourage Consolidation, Says Harold Furchtgott-Roth

On September 23, NTCA, OPASTCO and WTA (the Rural Associations) filed an ex parte notice in the USF reform proceeding which included a paper written by former FCC commissioner Harold Furchtgott-Roth entitled “Why the FCC Should Not Hold a Position with Respect to Consolidation Within the Rural Telephone Industry.” This paper addressed a critical issue that has largely been passed over in the most recent round of comments on USF/ICC reform, but is still very much a hot topic within the rural telecom industry: RLEC consolidation. The FCC raised the issue in the February 2011 USF reform NPRM, and Furchtgott-Roth “found troubling the apparent unprecedented discussion of ‘consolidation’ of small telephone companies in the NPRM.”

In his paper, Furchtgott-Roth generally avoids taking a specific position for or against RLEC consolidation (at least organically-grown consolidation); rather he challenges the fact that the FCC is trying to encourage consolidation in the first place. He refers to the following passage, paragraph 217 of the NPRM, as particularly troubling:

“Our current universal service rules may have the unintended consequence of discouraging beneficial consolidation of small carriers by subsidizing inefficient operating structures and limiting the ability of small companies to acquire and upgrade lines from other providers that have little interest in the rural market…. Although we recognize the benefits of local firms serving local markets, it may not serve the public interest for consumers across the country to subsidize the cost of operations for so many very small companies, when those companies could realize cost savings through implementation of efficiencies of scale in corporate operations that would have little impact on the customer experience.”

Furchtgott-Roth explains that this section of the NPRM conveys that the FCC thinks it has authority “to hold a view and perhaps even promulgate regulation” regarding consolidation; signals that the FCC believes small companies are less efficient than large companies and have “insufficient operating structures;” implies that there are too many small companies; and suggests that consolidation would be beneficial. He interprets that, “The FCC believes that the American consumer is punished by the very existence of at least some of the small rural telephone companies.”

Furchtgott-Roth provides nine main arguments about why the FCC should not attempt to take a pro-consolidation position regarding the RLEC industry. Most convincing is that the FCC has no evidence by way of economic studies covering the entire RLEC industry that consolidation would result in economies of scale and scope “for every possible combination of telecommunications companies across every geographic market.” Furthermore, “The FCC does not explain a compelling need to address consolidation in the rural telephone industry;” and, “Other than vague assertions that the operation of small companies is insufficient, the FCC offers no reason for its involvement. Nor does the FCC offer, as an example, evidence of even one rural telephone company where a possible merger would be efficient, let alone for each of the hundreds of small rural companies in existence.”

In addition to a lack of evidence concluding that consolidation would be the best outcome for most RLECs; the FCC has no authority to specify what size company should be.  Taking a pro-merger position also contradicts FCC precedents and the overall Federal government’s attitude towards small businesses. Furchtgott-Roth asserts, “There are no statutory thresholds of what constitutes a telecommunications company that is too large or one that is too small; no statutory thresholds determine what constitutes too few telecommunications companies or too many. “He argues that any decisions to consolidate and the size of companies “will be determined by market forces, not government diktat.”

The conversation about RLEC industry consolidation is scary, controversial, emotional…and yes, necessary to have right now as the industry faces some of its greatest challenges ever. It may very well be the case that USF/ICC reform will naturally nudge some companies towards consolidation if they indeed find it an attractive option after thorough, meticulous market studies and planning. However, Furchtgott-Roth warns that a specific  pro-consolidation tone the final rules could have unintended negative consequences: “If rules reduce cost recovery, there will be less incentive for consolidation ‘as such companies become less profitable and less attractive acquisition targets.’” Additionally, “Government encouragement of consolidation could lead to a misallocation of resources as businesses make investments in consolidation artificially to meet government expectations.” Basically, decisions to consolidate should be for the right reasons, and the right reasons are market and competitive forces and real, proven economic efficiencies.

No matter how you feel personally about RLEC industry consolidation, this paper is an excellent description of why it is not the FCC’s place to say that small telephone companies should consolidate. If widespread consolidation is to occur in the rural telephone industry as a result of USF/ICC reform, it should be organic and a result of recognizable market efficiencies –not a result of FCC pressure or vague rules that attempt to encourage it. I think it is possible that FCC encouragement of consolidation could even produce some ill-matched mergers hastily thrown together for the wrong reasons.

What do you think—should the FCC take a position on RLEC consolidation or should consolidation come purely from market forces?  How would a specific pro-consolidation position by the FCC impact the decision-making process when small companies study merger or acquisition possibilities?

Furchtgott-Roth’s paper is available to read here.

Article originally appeared on JSI Capital Advisors (http://jsicapitaladvisors.com/).
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