CenturyLink can close its deal to buy Level 3 Communication, and will probably do so tomorrow. The Federal Communications Commission gave the final green light to the deal on Sunday, without imposing any significant conditions. The FCC’s decision amounts to a manifesto that lays out how the republican majority will sharply restrict its review of future mergers and acquisitions.
The previous democratic-majority FCC took a broad look at proposed mergers, sometimes imposing conditions aimed at extracting general public benefits, but not necessarily directly related to problems caused by the transaction itself. One example was the low price Internet package AT&T was required to offer to low income households when it was allowed to buy DirecTv.
In a statement, FCC chair Ajit Pai said such conditions are a thing of the past…
This is in line with past pronouncements by the Commission that we will use conditions “only to remedy harms that arise from the transaction (i.e., transaction-specific harms)” and that are “related to the Commission’s responsibilities under the Communications Act and related statutes,” and we “will not impose conditions to remedy pre-existing harms or harms that are unrelated to the transaction.”
For the CenturyLink-Level 3 deal, the FCC found those transaction-specific harms to be virtually non-existent. The sole condition it attached to its approval was a five year price freeze on business services in 10 buildings scattered across the U.S. (but none in California), where Level 3 and CenturyLink both serve customers. That’s out of 4,600 buildings where the two companies currently compete.
The loss of an independent dark fiber competitor to a legacy telco with a monopoly-centric focus on lit services isn’t a problem, according to the FCC decision, because 1. there’s no meaningful difference between dark fiber and lit service and 2. the federal justice department took care of any imaginable problems by requiring the new company to lease out 24 dark fiber strands on 30 particular intercity routes, including five in California.
Pai and the other two republicans on the commission, Michael O’Rielly and Brendan Carr endorsed the decision; democrats Mignon Clyburn and Jessica Rosenworcel disagreed with it, to one extent or another.
If CenturyLink is allowed to buy Level 3, then California will lose a major source of dark fiber. That’s my reading of a settlement agreement between CenturyLink, Level 3 and three of the organisations that challenged the deal at the California Public Utilities Commission. The fourth challenger, the California Emerging Technology Fund, isn’t part of the agreement.
The CPUC’s office of ratepayer advocates and two consumer advocacy groups – TURN and the Greenlining Institute – agreed to drop their protest in exchange for several concessions from CenturyLink, including a pledge to “aspire” to spend some of its planned capital investment in California on network expansions and upgrades, particularly in under and unserved communities. The groups will be able to offer opinions on where new fiber routes will go, but the decision will be up to CenturyLink, albeit with an undefined and not necessarily binding review by the CPUC.
But that fiber will only be available in a way that suits CenturyLink’s monopoly-centric legacy telco business model. Which doesn’t include leasing dark fiber to potential competitors or to major customers who don’t want to buy bandwidth by the bit at retail prices, as Level 3 does now. The agreement allows CenturyLink to stop selling dark fiber after, briefly, giving notice…
For the period of time starting with the date of the closing of the transaction through December 2019, CenturyLink and the Level 3 Operating Entities will provide the Commission with 90 days-notice if a decision is made to terminate Level 3’s current practice of leasing dark fiber in California to unaffiliated wholesale and enterprise customers.
Existing dark fiber leases are only protected for two years…
For the period of time starting with the date of the closing of the transaction through December 2019, CenturyLink and all Level 3 Operating Entities shall not seek to terminate or materially revise any California enterprise or wholesale existing contract after the merger closes solely as a result of the merger.
CenturyLink would be bound by existing contracts, of course, but many contain cancellation clauses and are not always locked in for long terms.
The erstwhile protestors and the companies involved are also asking the CPUC administrative law judge managing the review to bypass the normal public, and lengthy, process and put the transaction on a fast track to approval.
Settlement agreement between CenturyLink, Level 3, CPUC office of ratepayer advocates, TURN and Greenlining, 27 June 2017 (public version)
Joint motion to approve settlement agreement, 30 June 2017 (public version)
Joint motion to shorten time for review of CenturyLink-Level 3 transaction, 30 June 2017
Joint motion to file proprietary information under seal, 30 June 2017
CenturyLink had to say something, and there probably wasn’t much else it could say, but its response to protests filed against its proposed acquisition of Level 3 does as much to encourage a rigorous review by the California Public Utilities Commission as it does to dissuade it.
The formal opposition to the transaction comes from a coalition of consumer advocacy groups – TURN, the Greenlining Institute and the CPUC’s office of ratepayer advocates – and the California Emerging Technology Fund. CenturyLink’s response correctly points out that some of the demands have a letter-to-Santa ring to them. Suggested remedies such as employment, diversity and build out obligations are nice things, but also dance around the central problem with the transaction: California’s long haul fiber market will go from three traditional phone companies – CenturyLink, AT&T and Verizon – plus one independent – Level 3 – to just three legacy carriers with similar, monopoly-centric business models.
But what CenturyLink is trying to do right now is head off an intensive review by the CPUC, and avoid wrangling over side issues altogether. It has two problems, though. First, the CPUC has already rejected its bid for summary approval once – that boat has sailed. Second, elimination of a competitor in a market that’s already highly concentrated is exactly the sort of outcome that is adverse to the public interest and therefore grounds for rejecting the deal. As CenturyLink was kind enough to point out…
In reviewing these applications over the years, the Commission has repeatedly and consistently found that the “primary question” to determine in a transfer of control proceeding under [the summary approval process] is whether the transaction will be “adverse to the public interest”…
In brief, where – as is the case here – there is no interruption of service, no change of tariffs, no transfer of operating authority, no customer transfers, no elimination of providers, the transactions have unfailingly been found not to have any adverse impact on the public.
CenturyLink then slathers on the nonsense, claiming 1. since it doesn’t directly serve Californian consumers (a genuinely de minimis extension of its Oregon network into Modoc County aside) it can’t do harm – except that without an independent Level 3 around it can squeeze competitive, consumer focused ISPs mercilessly – and 2. Level 3 will still technically be an independent company. Fortunately, CenturyLink refutes its own bullshit and later claims – without irony – that the combined company will be able to “rationalize existing facilities” and otherwise act as a single, monopoly model-driven despot.
Full review or not, CenturyLink wants to get it done by the end of September. In California, that’s not the way to bet.
The proposed purchase of Level 3 by CenturyLink faces two formal protests in California. One comes from a coalition of consumer advocacy groups – TURN, the Greenlining Institute and the California Public Utilities Commission’s office of ratepayer advocates – and the other from the California Emerging Technology Fund. Both generally focus on the impact that rolling together two of California’s four major fiber companies would have on broadband availability, on both a wholesale and retail basis.
The coalition – which refers to itself as the joint consumer groups – is asking the CPUC to take a hard look at the merger…
The Commission should review the Proposed Transaction and consider its effects on safety, reliability, network infrastructure, investment, and competition. This transaction will have a direct and significant impact on the availability of backhaul and other wholesale services that are critically important to ensuring a robust marketplace for broadband services as well as many other offerings that ultimately impact all California consumers.
Several possible ways of mitigating some of the damage are suggested, including “California-specific commitments” from CenturyLink regarding network infrastructure investment, service quality and price, and employment and diversity programs. But, they say, the big problem – the deal’s effect on telecoms competition in California – needs a harder look…
By eliminating Level 3 as a potential competitor in the market for wholesale and enterprise services, the Commission may indirectly increase rates for wholesale services and place additional barriers on competitors that remain in the marketplace. [CenturyLink and Level 3] make no attempt to address how this merger will impact the long-term business plans and practices of Level 3 and CenturyLink in its competition with incumbent carriers like AT&T and Frontier. The Commission should require further assurances that Level 3 will remain an independent competitive carrier throughout California and will continue to advocate for reasonable and fair access to wholesale inputs offered by incumbent carriers.
It’s early days in the process. The two protests won’t be settled immediately – that’s likely months in the future. Instead, the next step is for the CPUC to determine what the process will be going forward, in particular what sort of information it will require CenturyLink and Level 3 to provide, both to it and the challengers.
CenturyLink and Level 3 have finally admitted that they need to do more than just throw a note through the window in order to get the California Public Utilities Commission’s approval of their pending transaction. The deal was done last October, but the two companies waited five months to formally apply for permission to transfer Level 3’s California telephone certifications to CenturyLink.
During that time, they tried to convince CPUC staff that it was a purely administrative matter that could be handled with a perfunctory paper shuffle. But both CPUC staff and consumer groups pushed back, with the result that a formal review is now required, nominally with the same level of regulatory scrutiny that was involved in Frontier Communication’s purchase of Verizon’s California telephone (and broadband) systems, and Charter’s takeover of Time Warner Cable and Bright House.
In the application, the companies dance around the central question, which is what happens to the Californian broadband market when the number of long haul fiber operators on key routes shrinks from four to three. Since CenturyLink is buying Level 3, it also means that California’s major supplier of industrial-class Internet bandwidth and dark fiber will be taken over by an old school telephone company with a retail mindset. Just like AT&T and Verizon, the other two major middle mile fiber owners in the state.
Most of the application is taken up with the usual legal recitals of ownership, interests and good intentions, but the companies managed to slip some whoppers in too. Such as claiming that “the proposed transfer will not diminish competition in the state in any way”. It will, since it will be more difficult and expensive for competitive broadband providers and other wholesale-level users to get the direct connections to Internet backbones that they need. Instead, they’ll be pushed into the incumbent telco business model of selling Internet bandwidth by the bit.
Californian review of the CenturyLink/Level 3 deal is vital, even more so since the Federal Communications Commission backed off from overseeing the wholesale telecoms segment. As the CPUC correctly ruled last year, California’s broadband market is highly concentrated – in other words, a monopoly or nearly so – and pointed to restricted middle mile access as a prime reason.
The CPUC should reject CenturyLink’s request to buy Level 3.
Application of CenturyLink and Level 3 for CPUC approval
Exhibits to the application, unfortunately with all the good stuff blacked out
Damage – serious market damage – will result from CenturyLink’s proposed acquisition of Level 3. The two companies argue that the new, combined operation will be a fiercer, more able combatant in the battle for business services accounts, and that might be true up to a point. But along key corridors in California and elsewhere the long haul fiber market will take a giant step toward monopoly.
A quick glance at the national footprint of the new CenturyLink tells the story. The lines are artfully drawn to make it look as if the blue Level 3 network kinda goes the same places as the yellow CenturyLink routes, but the two don’t really overlap.
On the key U.S. 101 and Interstate 80 corridors in California, CenturyLink and Level 3 run down the same railroad right of ways. If you do a short (and cautious) walk at any point you choose along either, you will see fiber markers belonging mostly to four companies: CenturyLink (usually still identified as Qwest), Level 3 (sometimes with old WilTel posts), Verizon (often labeled as MCI) and AT&T. There are other companies in spots – Zayo and Sunesys/Crown Castle come to mind, and there are more – but not consistently. The long haul, intercity fiber market in California is dominated by those four companies.
Three companies. If the merger is allowed to happen exactly as proposed.
It gets worse. The problem is compounded by the deal’s structure. Level 3 is the Big Kahuna of independent middle mile fiber companies and does business with companies of all kinds on whatever basis is necessary. Including dark fiber.
CenturyLink, despite its hardscrabble roots and odd assortment of acquisitions, is now overwhelmingly a legacy Bell operating company, with a legacy Bell attitude toward iron control of assets and wringing the last nickel out of customers by refusing to sell anything but high margin managed services. Unless a regulatory gun is held to its corporate head.
Giving CenturyLink more heft in the business services sector would be a good thing in some circumstances. But not at the cost of condemning low revenue rural areas to perpetually slow and expensive bandwidth, and preventing small, flexible competitors from entering urban markets.
Click for the investor presentation.
CenturyLink announced an agreement to acquire Level 3 yesterday. Valued at $34 billion – a combination of cash and stock – the deal would combine two of the biggest wholesale bandwidth providers in the U.S. According to Bloomberg, Level 3 is the second biggest, behind AT&T, and CenturyLink ranks fifth.
Both companies have extensive long haul and metro fiber networks. CenturyLink, which has the legacy Bell systems previously owned by Qwest, has more business locations, but Level 3 has more fiber: 200,000 miles of it. The objective of the deal, according to a joint statement, is to improve the combined company’s competitive position in the business services market….
The combined company will have the ability to offer CenturyLink’s larger enterprise customer base the benefits of Level 3’s global footprint with a combined presence in more than 60 countries. In addition, the combined company will be positioned to further invest in the reach and speeds of its broadband infrastructure for small businesses and consumers.
As might be expected, executives from both companies expressed confidence that the deal would be approved, not only by their respective shareholders but also by regulators. Unlike AT&T’s acquisition of Time Warner, the CenturyLink/Level 3 marriage will be combed over by the Federal Communications Commission and state regulators, including the California Public Utilities Commission, in addition to going through the federal justice department’s standard anti-trust review.
Another difference between the two mega-deals is that combining AT&T and Time Warner is a vertical integration move – AT&T is buying one of its key suppliers – while CenturyLink’s acquisition of Level 3 would be a horizontal merger. Both companies have similar, and sometimes overlapping, business lines and assets. It’s true that CenturyLink would be in a stronger competitive position relative to AT&T and Verizon, but it would also mean that the wholesale bandwidth market would be concentrated into fewer hands.
Regulatory reviews are expected to take about a year to complete.
No one picked up the phone until a bullet hit a PG&E transformer.
More than ten months on, the motive and people behind fiber cuts and gun shots south of San Jose last year are still a mystery, according to a briefing given to the California Public Utilities Commission yesterday. The incident happened on 16 April 2013, knocking out Internet service to thousands of AT&T customers. A PG&E substation was also damaged, although no power outages resulted.
Ray Fugere, from the CPUC’s safety and enforcement division, described the timeline of the attack. It began at 12:58 a.m., when an AT&T fiber line that runs along the railroad tracks that pass by the substation was cut. Nine minutes later at 1:07 a.m., a second line belonging to Level 3 was also severed. Fugere gave few details about those cuts, except that at the time, neither AT&T or Level 3 knew exactly where or what the problem was. All they could tell was that they had lost connectivity, so they didn’t call the cops or let anyone else know that something was wrong.
Half an hour later, though, someone started shooting at PG&E’s Metcalf substation, setting off a fence alarm and puncturing an oil-filled transformer. PG&E staff called 911, and ten minutes later a unit from the Santa Clara County sheriff’s office arrived on the scene. The fiber cuts and the shooting are believed to be related and the FBI is continuing to investigate.
Most of the presentation and subsequent discussion concerned how to improve security at critical energy facilities, but the telecoms companies involved were chided for their silence. Commissioner Katherine Sandoval pointed to a general “failure of imagination” and lack of coordination by utility companies as something that needs to be pursued, a conversation, she said, she’s looking forward to having.