A New York Public Service Commission staff report concludes that allowing Verizon and MCI Communications to merge without imposing serious conditions would reduce competition in the mass market, enterprise, transport and special access markets.

Using Department of Justice standards for determining market concentration--as opposed to Federal Communications Commission standards--the NY-PSC staff concluded that Verizon already has a heavy concentration of New York telecom business and would increase that concentration to the potential detriment of New York consumers and businesses if it absorbs MCI without any restrictions. The merger of AT&T-SBC, while not affecting New York customers as seriously, does create the potential for two dominant players to collude on eliminating competitors and propping up prices, the report says.

The staff report’s conclusions are tentative and are only one step in the process for the PSC to take in approving or imposing conditions on the Verizon-MCI merger.

Among the remedies it suggests for consideration are requiring Verizon to provide “naked” DSL service to enable voice-over-IP providers to reach consumers, freezing MCI’s current service rates and conditions and requiring those to remain in force for 12 months after the merger, and seeking comments on ways to make it easier for consumers to move among different voice service providers, including DSL-based, cable-based and wireline providers.

To remedy concentration in the enterprise market segment, the staff focused on making transport services more available to potential competitors. It suggested requiring MCI to provide smaller carriers with the same rates, terms and conditions it provided before the merger, requiring Verizon to publish standard competitive rates, terms and conditions for reselling transport or requiring Verizon to divest the MCI New York transport network.

In response to the PSC Staff White Paper, Verizon issued a statement calling the report another step in the process and stating confidence that the full commission will recognize the New York market as robustly competitive.

“This report from the PSC staff about its preliminary analysis of our transaction with MCI is an important additional step in completing the merger approval process in New York,” said Thomas McCarroll, Verizon vice president for regulatory affairs in New York and Connecticut, in a prepared statement. “We are confident that a complete analysis of the robustly competitive communications marketplace in New York will bring the PSC to the conclusion that customers across all market segments will see the benefits of the combination of Verizon and MCI. The facts show that the combination of Verizon and MCI will create a strong new competitor whose customer focus and commitment will allow us to better offer innovative new services, packages and products, particularly to the major businesses now served by MCI, without negative effects on competition in any aspect of the market.”

Meanwhile, the Alliance for Competition in Telecommunications, a group of service providers, IT solutions companies and systems integrators, hailed the report and asked other states to consider its findings. In particular, the group said the NY-PSC staff paper has credibility because it relies on Herfindahl-Hirschman Indices (HHI) to determine market concentration, rather than the FCC standard of sufficient competition. The HHI indices are recommended by the DOJ and the Federal Trade Commission for evaluating horizontal mergers.

“The New York PSC staff findings are exactly in line with ACTel's own studies based on the same HHI parameters, and they lend credence to the substantial concerns consumers and business customers have with both the proposed Verizon/MCI and SBC/AT&T mergers," said Heather Gold, senior vice president of Government Relations, at XO Communications, a member of ACTel, in a prepared statement. “By rigorously analyzing and demonstrating the real competitive harms that flow from the proposed merger, the staff provides a road map for federal and other state officials reviewing these proposed mergers.”