Merger of SBC, PacTel Approved by State Panel

Clearing the way for a massive merger that will ultimately touch almost every resident of California, the state Public Utilities Commission on Monday gave final approval to SBC Communications’ $16.5-billion acquisition of Pacific Telesis Group.

In a 4-1 vote, the panel blessed the deal on the condition that the combined company refund $214 million to consumers and set aside $50 million over five years to bring new technology to underserved communities. The payouts were far less than consumer advocates had sought, amounting to about $3 per customer annually for the next five years.

The decision is also much more generous to the companies than a proposal made in February by a pair of utility panel judges. That plan called for $590 million in refunds and a host of regulatory mandates.

Directors of San Francisco-based PacTel, parent company of Pacific Bell, and San Antonio-based SBC, formerly Southwestern Bell, must now vote to accept the deal. But observers--including the five utility panel commissioners--consider that a foregone conclusion. A formal announcement from the companies is expected this morning.

Announced one year ago today, the SBC-PacTel merger is the first in a wave of combinations that are reshaping the telecommunications industry in the wake of a landmark deregulation law passed early last year. The law was designed to foster competition by breaking down the barriers separating local, long-distance and cable services.

Companies are now scrambling to get bigger so they can offer a broader range of services. And the Baby Bell companies, including SBC and PacTel, that were created by the 1984 breakup of AT & T also see mergers as a way to gain advantage when they are permitted to enter the long-distance business--probably sometime later this year.

Other telecom mega-deals that are still awaiting regulatory approval include the merger of Bell Atlantic and Nynex, and British Telecommunications and MCI Communications.

Utility panel Commissioner Josiah Neeper said Californians would benefit from the PacTel-SBC deal because it would create a strong phone company unencumbered by regulation that can operate effectively in the newly competitive environment.

“We think the benefits of the merger will flow through in greater quality, greater variety and lower prices,” Neeper said.

But critics of the telecommunications industry consolidation fear that the promises of greater competition and lower prices will be realized only in the long term, if at all--and in the meantime, consumers will in fact be subject to higher rates and fewer choices.

As expected, consumer advocates in California decried Monday’s decision, saying it did not provide a large enough refund to consumers. They also worry that Texas-based SBC will not invest sufficiently in Pacific Bell’s local telephone infrastructure, which serves 77% of the state’s population.

“It’s the equivalent of an obscene phone call,” said Charles Carbone, telecommunications policy specialist with the Utility Consumer Action Network in San Diego. The group is considering an appeal to the California Supreme Court--the only body that can overturn a utility panel decision.

The Utility Reform Network, a consumer advocacy group in San Francisco that had lobbied for $1 billion in refunds, was also disappointed with the decision.

“Historically, the ratepayers have built this whole monopoly. We invested in it, we paid for it, and to the extent that there are merger benefits, we ought to share in them,” said Nettie Hoge, the group’s executive director.

Consumer advocates had an ally in utility panel President Gregory Conlon, who proposed that the companies pay $316 million in refunds and contribute $85 million to the community partnership agreement. He cast the lone dissenting vote among the five commissioners.

“I just felt the ratepayers should get a little more, and I felt strongly enough about it to vote against it,” Conlon said.

More than 100 grass-roots organizations lobbied on behalf of Pacific Telesis and SBC because the companies pledged to spend $50 million over five years to bring telephone service to 98% of the state’s residents--up from the current 95%--and ensure that the benefits of the merger reach poor, minority and non-English-speaking communities.

“We’re certainly glad that they approved the community partnership agreement and recognized how important it is to all of the ratepayers of California that these kinds of economic development and community building programs be included in mergers,” said Mark Savage, managing attorney for Public Advocates, which represented several of those groups.

In addition to the community partnership agreement, PacTel and SBC tried to win support for their merger by promising to create 1,000 additional jobs in California and to establish four new headquarters operations for the combined company in the state. That would produce a $100-million annual benefit to the California economy, they said.

Approval from the state utility panel was the last of a series of regulatory hurdles PacTel and SBC needed to clear in order to complete their deal. The U.S. Department of Justice cleared the merger in November, and the Nevada Public Service Commission followed suit in December. In January, the Federal Communications Commission approved the transfer of PacTel’s licenses to SBC.

Shareholders of both companies--who approved the merger in July--saw an immediate if small benefit Monday. Pacific Telesis’ stock rose 25 cents to close at $37.75, and SBC’s shares rose 75 cents to $52.50 in New York Stock Exchange trading on a day when the Dow Jones industrial average fell 157 points.

On the other side of the country, Bell Atlantic and Nynex on Monday agreed to accept conditions required by the New York state Public Service Commission to get the go-ahead for their $22-billion merger. Those companies will be required to create at least 750 jobs, improve customer service and invest $1 billion in infrastructure over the next five years.