PUC's Approval of Telephone Merger On Basis of Affirmative Public Benefits Upheld on Appeal

Rejecting a claim by Pennsylvania's  Small Business Advocate  that the PUC must treat every competitive effect of a merger "good, bad, or indifferent" as a negative to be weighed against demonstrated "affirmative public benefits," Commonwealth Court affirmed the PUC's approval of a merger that indirectly transferred control of Embarq Pennsylvania (an ILEC) and Embarq Communications (an interexchange toll reseller) to CenturyTel. Lloyd v. Pa. Pub. Utility Comm'n, __A. 3d __2011) (496 CD 2010, filed March 1, 2011) (Brobson, J.).

In approving the merger, the PUC adopted the reasoning of the Administrative Law Judge that the financial benefits (e.g., higher credit and investment grade rating, better access to capital, increased financial strength) and the synergy savings that could be anticipated from the merger resulted in a positive benefit to PA customers because the resulting utility could better compete in the new intermodal marketplace.  Among other things, the PUC determined the merged company would be better able to provide advanced services and new technologies to its customers; could pool the employees, expertise and systems of the two companies to improve service and better address the customers' needs; and could increase diversification and lower operational risks.

The SBA argued on appeal that the PUC improperly determined that the  merged companies' enhanced ability to compete represented an affirmative public benefit that must be demonstrated in order for the PUC to grant the requested certificate of public convenience.  The SBA reasoned that the PUC is required in every case (but did not in this case) balance the affirmative public benefits resulting from a proposed merger against every competitive effect the merger would cause - be it "good, bad, or indifferent."  Relying on the Pennsylvania Supreme Court's decision in Popowsky v. Public Utility Commission, 937 A.2d 1040 (Pa 2007), the Commonwealth Court disagreed.  Interpreting Popowsky, the Court noted that the PUC's role in all merger cases is to (1) examine the competitive effects of the merger and, only if that examination finds the effects to be anti-competitive, then (2) consider whether the negative effects outweigh the affirmative public benefits that will result.  If the PUC finds, based on such an examination, that the negative effects outweigh the positive benefits, it should not approve the merger.

With regard to the approved transfer of control to CenturyTel, the SBA argued that the PUC should have weighed the competitive effects of the merger as a negative factor (e.g., the financial strengthening of the ILEC would act as a bar to the CLECs' abilities to compete, the ability of the merged company to lower the cost of its competitive services will drive other providers from the market) against the affirmative public benefits that would result.  In rejecting the SBA's arguments, the  Court relied on the PUC's determination that the merged company's greater financial strength acted as a "catalyst" to create affirmative public benefits in that it allowed the company to better compete in the current market through, among other things, the improvement and growth of its existing infrastructure, services and operating efficiencies.  The PUC held the result of this competition was advantageous for consumers because it forces companies to seek new and different strategies in order to remain viable and can act to control rates while advancing services.