PacTel, SBC Fault State’s Plan on Merger Refunds

It seems that prospective merger partners Pacific Telesis and SBC Communications and California consumer advocacy groups finally agree on something: Both camps are unhappy with the $590.5 million in refunds a state Public Utilities Commission panel proposed as a condition of the merger.

The two Baby Bells--which announced their intention to combine last April--forcefully denounced a nonbinding ruling from two PUC administrative law judges as a “crippling penalty.” They have pegged the total cost of the refunds at $750 million once inflation is taken into account.

But consumer watchdog groups said the PUC proposal doesn’t go far enough in sharing at least half of the merger-related savings with consumers, as required by state law. The refund of $590.5 million over five years would be equal to a 2.5% discount--about a nickel a month, according to PacTel executives--on a customer’s bill. TURN, the Utility Reform Network in San Francisco, is pushing for at least $1 billion in rebates, which would amount to a 4% discount.

“When you take into consideration their total overall revenues--just last year Pacific Telesis made $1 billion in profit--$600 million over five years is tokenism,” said Michael Shames, executive director of Utility Consumer Action Network in San Diego.

In the coming weeks, parties on both sides will submit written comments to the PUC and then make their cases at a public hearing scheduled for mid-March. After that, the commission will issue its final ruling, including any conditions the phone companies must meet to complete the merger. Regulators in Washington, D.C., and Nevada have already approved the deal.

Each side is using this time to lobby the PUC’s five commissioners to see things its way. The phone companies have strongly hinted that the deal could be called off if the regulators don’t soften their stance. But others say such comments are disingenuous.

“I do not believe them for a second,” said Thomas Long, a senior telecommunications analyst at TURN who calculated that the phone companies would save $3.2 billion over 20 years. “They are trying to saber-rattle and scare the [PUC] commissioners and drum up support from Wall Street.”

Most outsiders believe that the two Baby Bells will not let a few extra hundred million dollars get in the way of a $16.7-billion deal. Financial analysts expect the companies would try to renegotiate terms of the deal rather than simply walk away. After all, there aren’t many other phone companies for PacTel or SBC to combine with.

“For Pacific Telesis to let the merger fall apart . . . would drive their stock into the $20s,” said Anna-Maria Kovacs, vice president for research at Janney Montgomery Scott in Boston.

But some observers said the episode might prompt SBC to back out of the deal because the regulatory environment in California is not particularly business-friendly. For example, the administrative law judges proposed that SBC be required to reinvest Pacific Bell’s profits into Pac Bell’s operations and infrastructure for at least five years. That kind of micro-management might scare the company away, said William Deatherage, a phone company analyst with Bear Stearns in New York.

“The regulators are making management decisions,” said SBC spokesman Larry Solomon. “Certainly we’re committed to investing in the infrastructure of Pac Bell, but that’s a condition we have serious concerns with.”

History suggests that the San Antonio-based phone company isn’t bluffing when it says the deal is in jeopardy. In 1994, its Southwestern Bell unit scuttled a $4.9-billion deal to combine its cable operations with Cox Communications after the FCC imposed stiff regulations on the cable industry, causing cable stocks to plummet.

Gwen Moore, president of African Americans for Telecommunications Equity in Los Angeles, said the PUC judges applauded the phone companies for promising to create 1,000 jobs in California and extend phone service to 98% of the state as a result of the merger. But she criticized the commission for not taking those benefits into account when determining the need for refunds.

“They seem to be tying one hand of the new company behind its back by putting a lot of upfront costs on them,” said Moore, a strong supporter of the merger.

Investors seemed to share Moore’s concerns. In New York Stock Exchange trading, Pacific Telesis dropped 75 cents to close at $40 and SBC fell 50 cents to $56.25.