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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) CC Docket No. 99-272 Merger of Qwest Communications ) International Inc. and ) File No. 18-EX-TC-1999 U S WEST, Inc. ) et. al. RESPONSE TO COMMENTS ON APPLICATIONS FOR TRANSFER OF CONTROL QWEST COMMUNICATIONS INTERNATIONAL INC. U S WEST, INC. Drake S. Tempest Genevieve Morelli Qwest Communications International Inc. 555 Seventeenth Street Denver, CO 80202 Mark D. Roellig Daniel L. Poole Sharon J. Devine U S WEST, Inc. 1801 California Street Denver, CO 80202 Peter A. Rohrbach Mace J. Rosenstein Hogan & Hartson L.L.P. 555 Thirteenth, N.W. Washington, D.C. 20004 Kathryn A. Zachem Carolyn W. Groves Wilkinson Barker Knauer, L.L.P. 2300 N Street, N.W. Suite 700 Washington, D.C. 20037 Counsel for Qwest Communications International Inc. William T. Lake Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037 Dated: October 18, 1999 Counsel for U S WEST, Inc. TABLE OF CONTENTS Page SUMMARY 1 I. THE MERGER IS IN THE PUBLIC INTEREST AND SHOULD BE APPROVED WITHOUT CONDITIONS. 4 A. The Standard of Review. 4 B. Opponents Cannot Squeeze This Vertical Merger Into the "ILEC- ILEC" Box. 6 C. Opponents Ignore the Merger's Affirmative Public Interest Benefits. 11 1. Faster Deployment of Advanced Services. 12 2. Stronger Competition With Larger Firms Created by Other Mergers. 15 3. Powerful New Incentives for U S WEST to Satisfy Section 271. 18 a. Incentives to eliminate out-of-region competitive b. Incentives to make full use of the Qwest network asset. 21 D. Complaints Regarding U S WEST Do Not Belong In This Proceeding. 23 II. QWEST WILL DIVEST PROHIBITED INTERLATA SERVICES AS IT COMMITTED TO DO IN THE APPLICATION. 30 A. The Commission Should Not Assume A Future Violation Of The Law. 30 B. Qwest Is Moving Forward Promptly To Prepare For Divestiture. 31 C. Commenters' Other Divestiture Arguments Are Misplaced. 33 D. Prompt Grant Of This Application Is Necessary To Help Ensure A Smooth Customer Transition. 37 conclusion 38 ATTACHMENT A: Declaration of Dennis Carlton and Hal Sider (Lexecon, Inc.) ATTACHMENT B: Declaration of Bruce Owen (Economists Inc.) ATTACHMENT C: Qwest Plan For Divestiture of InterLATA Business In The U S WEST Region (October 1999) Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) CC Docket No. 99-272 Merger of Qwest Communications ) International Inc. and ) File No. 18-EX-TC-1999 U S WEST, Inc. ) et. al. To: The Commission RESPONSE TO COMMENTS ON APPLICATIONS FOR TRANSFER OF CONTROL Qwest Communications International Inc. ("Qwest") and U S WEST, Inc. ("U S WEST"), by their attorneys, submit this joint response to the comments and petitions to deny filed in connection with the above-captioned request for consent to the transfer of control of Commission authorizations (the "Application"). SUMMARY The record in this proceeding clearly demonstrates that the merger of Qwest and U S WEST is in the public interest and should be approved without delay. Comments here fall into two basic categories. First, some parties argue that the Commission should deny the merger unless it first imposes a wide range of conditions, many of them drawn in cookie-cutter fashion from the large ILEC-ILEC transactions. However, these parties cannot establish any legal predicate for such conditions. They barely try to demonstrate any public interest harm arising from the Qwest-U S WEST merger itself. They ignore the fact that this vertical merger is completely different from other combinations involving horizontal expansion of ILEC market position. Commenters also attempt to sweep the merger's important public interest benefits under the rug. They ignore the applicants' showing that the merger will, among other benefits, promote the deployment of advanced services both within and outside the US WEST region. Commenters do not address the fact that the merger will permit the applicants to compete better with the much larger telecom companies created by mergers that already have occurred (or are in prospect). In particular, commenters disregard the important new incentives the merger will create for the combined company to satisfy Section 271 as soon as possible. Pending 271 relief, Qwest will face significant competitive disadvantages in the national interexchange market due to the hole in its service territory created by divestiture. Meanwhile, the combined company already will own a state of the art network asset it could use for in-region interLATA service, and the opportunity cost of leaving that wasting asset idle will be large. Together these business problems will significantly increase incentives for the combined company to re-enter the interLATA market in the U S WEST region. At bottom, these commenters have simply cataloged their individual complaints regarding U S WEST. But these grievances are not caused by the merger, and are not relevant here. The merger clearly meets the public interest standards of the Communications Act. Commenters should pursue their issues in the other proceedings and forums that are available to them. The second category of comments relate to Qwest's commitment to divest its in-region interLATA services prior to closing. Some parties assert that the Commission should delay action on this Application pending further scrutiny of Qwest's steps to carry out this divestiture. These arguments are nothing but unsupported allegations that Qwest will violate Section 271 by providing prohibited services after the merger closing. However, the parties have no foundation for this suggestion whatsoever. Qwest further demonstrates its commitment to comply with the Act by providing a description of its divestiture plan here. But the task for the Commission is only to review and rule on the merger application. The Commission should not accept commenters' suggestion that it also micro-manage the steps Qwest takes to divest before closing. That said, divestiture provides an important reason for prompt Commission approval of this Application. Qwest has much to do to prepare for divestiture, including negotiations with potential buyers of the services to be discontinued, operational work to make the transition trouble-free for customers, and coordination with customers themselves. In order for that process to run smoothly, Qwest and the buyers will need as much lead time as possible. However, Qwest anticipates that potential buyers may be reluctant to expend the significant resources required by this project while formal Commission approval remains pending. Given the lack of substantive issues presented by this merger, the Commission can readily serve the interests of customers by approving the Application as promptly as possible. The sooner it does so, the more smoothly the divestiture process will run for all concerned. / I. THE MERGER IS IN THE PUBLIC INTEREST AND SHOULD BE APPROVED WITHOUT CONDITIONS. A. The Standard of Review. This merger easily satisfies the public interest standards of Sections 214(a) and 310(d) of the Act. Qwest and U S WEST demonstrated in their Application that the merger will be pro-consumer and pro-competition. The merger will bring together two firms with complementary assets and skill sets, and better position them to implement their shared goal: to become a leading provider of broadband-based services as the Internet revolutionizes communications in this country and around the world. A handful of commenters nevertheless oppose the merger unless the Commission attaches conditions to its approval. These commenters (referred to here as the "Merger Opponents") consist entirely of parties with preexisting disagreements with U S WEST over issues related to the company's local exchange telephone activities. These parties urge the Commission to hold this application hostage and address their individual grievances through merger conditions. The Merger Opponents, however, ignore the relevant legal standard. The Commission is not free to attach conditions to a merger in order to enhance the array of pro-competitive benefits offered by the transaction; instead, any condition attached must address a specific anti-competitive risk or harm created by the merger itself. / Congress invested the Commission with only limited authority to attach conditions to its approval of merger transactions. / In recent merger cases, the Commission has consistently acknowledged its limited authority to impose conditions only "where necessary * * * to ensure that the public interest is served by [a] transaction." / In this case the Merger Opponents utterly fail to establish the predicate for conditions. They fail to show how the merger would in any respect harm the public interest. And they entirely discount -- or simply ignore -- the important consumer benefits that will flow from the merger. Before turning to the allegations made by the Merger Opponents, both Qwest and U S WEST wish to recognize and affirm U S WEST's continuing obligations, and the obligations of the merged company, as an incumbent local exchange carrier under both state and federal law. The applicants are committed to meeting those obligations and continuing to provide high quality, reliable service to the millions of existing U S WEST residential and business local exchange subscribers. The applicants firmly believe the merger will benefit the mass of customers who depend on telephone service for basic communications. The merger will create a stronger entity better able to meet those needs, as well as future telecommunications requirements. B. Opponents Cannot Squeeze This Vertical Merger into the "ILEC-ILEC" Box. Merger Opponents predictably take their cue from the Commission's recent consideration of other transactions where conditions were imposed, most notably the Bell Atlantic-NYNEX and SBC-Ameritech combinations. / However, the Qwest-U S WEST merger is fundamentally different from the horizontal ILEC- ILEC deals the Commission has recently confronted. This transaction is a vertical combination of (i) an ILEC and (ii) a nondominant interexchange carrier with the large majority of its operations outside the ILEC's region. This vertical merger creates none of the risks to local or long distance competition that may be presented when two major ILECs come together. More specifically, the Commission and parties opposing the recent ILEC-ILEC mergers have identified three principal anticompetitive risks potentially created by those combinations. First, ILEC-ILEC mergers may retard the development of new competition by eliminating a "significant" potential independent competitor with extensive experience in the local exchange market. In the Bell Atlantic-NYNEX proceeding, for example, the Commission noted that the merger would "eliminate any prospect of NYNEX competing with Bell Atlantic in the * * * northeast corridor." / Second, by increasing the size of one company's "footprint" of access lines, ILEC-ILEC mergers may enhance the ability and incentive of the merged entity to discriminate against CLECs. / Finally, the merger of two ILECs may impair the Commission's ability to monitor or "benchmark" ILEC performance. / None of those competitive concerns arise in connection with this transaction. These matters are discussed in more detail in the attached declaration of Dennis Carlton and Hal Sider of Lexecon, Inc. ("Carlton/Sider Declaration"), provided here as Attachment A. As they explain, Qwest is not an ILEC, and its CLEC business in U S WEST's region is trivial. Qwest has purchased conduit in a fiber ring facility under construction in Seattle that traverses both U S WEST and GTE territory. / Qwest otherwise is not a facilities-based local service provider in any market in the U S WEST region. Furthermore, Qwest had already decided to cease its local resale operations in the U S WEST region well before entering into the proposed merger. The process of exiting the local resale market is now substantially complete. / Covad's assertion that the merger will result in heightened barriers to entry in high speed access markets is also unfounded. / Qwest has begun to offer DSL service in U S WEST's region, but it does so only as a reseller of the DSL services of Rhythms and of Covad itself. / McLeod points to Qwest's partial interest in Advanced Radio Telecom (ART), a nationwide 39 GHz wireless service provider, as additional evidence of in- region Qwest CLEC activity. / However, Qwest's 19 percent, non-controlling interest in ART does not make Qwest a provider of competitive wireless services, and thus does not bear on Qwest's status as an actual or potential competitor to U S WEST. But even if ART were wholly-owned by Qwest, no competitive or other public interest issue would arise. The Commission already has determined that ILECs such as U S WEST should be allowed to hold licenses for 39 GHz spectrum within their service areas. / If U S WEST would be eligible to own these licenses outright, there should be even less concern with the merged company having a less than controlling interest in any such licensee. Likewise, the proposed transaction raises no risk of increased incentive to discriminate against CLECs. This matter is discussed in more detail in the Carlton/Sider Declaration. The simple fact is that Qwest is not an ILEC and the merger will not increase the number of access lines controlled by the merged entity. Because the transaction does not increase the "footprint" of U S WEST's access lines, it will not augment the merged entity's ability or incentive to discriminate against CLECs. / Nor will the Qwest-U S WEST combination eliminate any opportunities for monitoring ILEC performance; every "benchmark" available to federal and state regulators today will remain after the merger. Accordingly, the Commission should dismiss any suggestion by commenters that conditions deemed appropriate for the recent ILEC-ILEC mergers should apply here. Allegiance Telecom, Inc. ("Allegiance") tries to make a backdoor argument along the same vein, asserting that ILEC-ILEC merger conditions are justified by BellSouth's 9.9% equity stake in Qwest. / Congress has already determined that equity interests of 10% or less do not raise questions of common ownership, control, or affiliation. / In any event, Allegiance is confused regarding the facts. BellSouth's interest in the combined company will be less than 5% due to dilution of its interest from the merger. BellSouth is entitled to a single Board seat once it has satisfied certain Section 271 requirements itself. None of this gives BellSouth a control position in the combined company or otherwise converts the Qwest-U S WEST merger into an ILEC-ILEC combination. / BellSouth's de minimis equity stake in Qwest is of no relevance to this transaction; the merged entity and BellSouth each will retain full autonomy to pursue their respective corporate interests. / In short, opponents' attempts to squeeze this application into the "ILEC-ILEC" box disregard the facts. This vertical merger is entirely different from those horizontal combinations. No public interest problems arise here to complicate the Commission's analysis under Sections 214 and 310. C. Opponents Ignore the Merger's Affirmative Public Interest Benefits. In addition to alleging harms where none exist, Merger Opponents also disregard the merger benefits identified in the Application. / However, these pro-consumer and pro-competition benefits are far too large and important to be swept under the rug. This merger is founded on a conclusion by both Qwest and U S WEST that they must combine in order to better serve the public as technology -- and other larger mergers -- revolutionize the telecommunications landscape. Indeed, Qwest believes so strongly in this principle that it is willing to take the difficult step of divesting its in-region interLATA services now to position itself to achieve these benefits in the future. Qwest and U S WEST already have discussed these matters in their Application. / However, we will review the merger benefits of primary concern to the Commission here so that they are not lost due to the Opponents' failure to address them. / Indeed, these benefits actually argue for expedited approval of this transaction under Sections 214 and 310. The sooner the merger closes, the sooner the benefits will start to flow to the public. 1. Faster Deployment of Advanced Services. Merger Opponents first disregard the positive impact of the transaction on the provision of advanced services, both inside and outside the U S WEST region. This is a case of one plus one equaling far more than two. Each company holds broadband assets and expertise that complement those of the other. Together they will be better positioned to deploy those resources more rapidly, and to become a regional, national and global leader in the provision of advanced services and technologies. For its part, Qwest recently completed the construction of a state-of- the-art, nationwide, 18,500 mile OC-192 fiber optic, Internet protocol network. This network operates at speeds of up to 10 Gigabits per second and reaches 150 cities across the United States. The currently lit portion of the 48-fiber network has sufficient capacity today to handle all the traffic now carried by AT&T, MCI WorldCom, and Sprint combined. / In addition, Qwest's network has unused capacity to permit the addition of ten times as many more fibers. Qwest has invested heavily in broadband international facilities, / and its Internet and web hosting businesses also are global in scope. U S WEST, in turn, has led the industry in its deployment of digital subscriber line (DSL) technology in the local loop, enabling subscribers both residential and business to maximize the speeds with which they transmit data and access the Internet. U S WEST already is providing DSL service in 40 in- region cities and serves about 40 percent of all DSL customers nationwide. U S WEST has well over 100,000 Internet access subscribers, and is offering them such advanced network-based vertical services as site-blocking, virus protection, and privacy measures. U S WEST also provides an innovative one-number PCS service, and through its Yellow Pages business is building an electronic commerce platform. The merger recognizes the natural fit between these two companies. Qwest has a high speed national network but needs to offer customers broadband local connectivity to take full advantage of that asset. U S WEST is the market leader in DSL deployment. Post-merger, U S WEST's technical and market expertise immediately can be exported beyond the 14 state region, helping the combined company more rapidly offer broadband connectivity to the Qwest network. Conversely, while U S WEST has DSL expertise, it does not own (even within its own region) a long-haul network that would enable it to provide the full range of advanced services to its customers. / Once the combined company satisfies Section 271, it will be positioned to expand its in-region broadband service offerings much more rapidly using the springboard of the high speed Qwest network. / In sum, the merger will benefit the public by enabling the combined company to deploy advanced services more quickly, more broadly, and more effectively than either company could standing alone. The merger will promote the Congressional goal, embodied in Section 706 of the 1996 Telecom Act, of accelerating the deployment of advanced services to all Americans. / The beneficiaries will be consumers in the U S WEST territory and beyond. 2. Stronger Competition With Larger Firms Created by Other Mergers. Merger Opponents also fail to credit a second public interest benefit of the transaction: stronger nationwide competition. The Commission already has approved -- or is being asked to approve -- other much larger telecommunications combinations, including (a) SBC-Pacific Telesis-SNET-Ameritech, (b) Bell Atlantic- NYNEX-GTE, (c) AT&T-Teleport-TCI-MediaOne, and (d) WorldCom-MCI-MFS- Brooks-Sprint. These huge combinations have significant horizontal elements that are entirely lacking in the Qwest-U S WEST merger. The public clearly will benefit from this merger insofar as it creates a stronger competitor to these giants. / This merger, for example, will strengthen the resources and ability of the combined company to enter local markets outside the U S WEST region. The Commission recently approved the SBC-Ameritech merger, notwithstanding finding serious public interest concerns, in part because the FCC so valued SBC's commitment to enter the local market outside its territory. Indeed, the Commission established penalties if SBC does not follow through with this entry. / Yet here Qwest already is active outside the U S WEST region, and its ability to draw on U S WEST local exchange expertise will simply accelerate that process. More broadly, the Qwest-U S WEST merger will permit the combined company to compete more effectively for the "national/local customer" -- that is, the multi-location business customer that would prefer to buy all its communications services (including its local exchange services) from a single supplier. These are the customers that the FCC's conditions will encourage SBC to solicit in the U S WEST region and elsewhere, and that also will be the target of other merged ILECs with far more extensive local footprints. / For example, the recently merged SBC-Ameritech will control approximately 33 percent of the customer lines served by the nation's largest ILECs. / Post-merger, Bell Atlantic- GTE will serve approximately 37 percent of these customer lines. / In comparison, U S WEST has only 9.5% of these lines. / The combined company also will be better positioned to compete with AT&T, with its large long distance market share and its (current and proposed) control over a large percentage of the nation's cable television subscribers. If the MediaOne merger is approved, AT&T cable systems would pass approximately one-third of the nation's homes in addition to AT&T's exclusive arrangements with other operators. AT&T will have sole use of those local cable facilities to serve customers. The ability of AT&T to offer integrated packages of telephony, Internet, and video services presents a serious challenge to all its competitors, including the applicants here. The Merger Opponents apparently hope the Commission will ignore the benefits to consumers of creating stronger competition to the new telecom giants. Qwest and U S WEST, however, are confident that the Commission will not be misled. 3. Powerful New Incentives for U S WEST to Satisfy Section 271. Finally, the Merger Opponents ignore, or simply dismiss out of hand, the applicants' observation that the merger will increase incentives for U S WEST to enter the interLATA market as soon as possible. / Yet these incentives are a powerful additional reason for rapid Commission action here. This matter is discussed in more detail in the declaration of Bruce Owen of Economists, Inc., provided as Attachment B. a. Incentives to eliminate out-of-region competitive disadvantages. The first new incentive arises from the fact that, in divesting its in- region interLATA business, Qwest is taking on a significant competitive disadvantage compared with other national interexchange carriers. / The post- merger company will have a doughnut-shaped footprint with a 14-state hole. Inside the hole the company will be unable to provide originating long distance, terminating 800, private line, and other prohibited interLATA services. / As a consequence, Qwest will be seriously hampered in its ability to retain the out-of-region business of its existing customers, to compete for new customers out-of-region, and to grow its existing nationwide business. Multi- location business customers generally purchase interLATA services on a nationwide basis. They typically solicit nationwide service proposals and negotiate nationwide price discounts. They also generally prefer dealing with a single provider and having service provisioned over a single integrated network. / The interLATA prohibition, then, will have two effects. First, Qwest will not be able to win all the customer business and revenues otherwise available to it. It will lose all its in-region interLATA business, and will suffer impacts in the out-of-region market from its inability to offer "one stop shopping" for interexchange service. Second, Qwest's marketing costs will increase, especially in the national account arena. Qwest will face special challenges trying to market stand-alone out-of-region services. At the same time, Qwest's network costs will not be materially reduced by the divestiture of the "doughnut hole." Qwest still will have to maintain its nationwide network even though usage of that network will be constrained. / The costs of that network are largely fixed or sunk. In addition, many costs related to network planning, operation, maintenance and management (the cost of the Network Operations Center, for example) do not vary with the capacity utilization rate. / The variable cost of using this in-place network to provide interLATA services is therefore very small, particularly when compared to the cost of leasing or building that network from scratch. / Post-closing, the unit cost of using the Qwest network to provide service to out-of-region customers will increase because fixed costs now will be spread over less traffic. Indeed, it is highly significant that no RBOC to date has engaged in major interexchange service activity outside its region, even though such activity is permitted by the Telecom Act. This fact itself demonstrates the serious disadvantages inherent in offering interexchange services in competition with AT&T, MCI WorldCom and Sprint without a national capability. In sum, Qwest will face a significant opportunity cost for every month that it cannot use its valuable interLATA network to offer nationwide retail and wholesale products. / Qwest and U S WEST are fully aware of that cost, and partly for that reason are committed to satisfy Section 271 on an accelerated basis. b. Incentives to make full use of the Qwest network asset. As discussed in the Owen Declaration, the post-merger company also will have additional incentives to satisfy Section 271 because the company now already will own an interLATA network. / This fact is highly significant. U S WEST has no such network today, either in-region or out-of-region. / But post- merger the combined company already will have incurred most of the costs of providing interLATA service because it already will own the interLATA facilities. This fact has important consequences. First, it means that the merged company will be able to enter the interLATA market immediately upon Section 271 relief, with its own high capacity state of the art interLATA network. It will not incur the time and cost involved in constructing a facilities network on its own, nor will it have to depend on reselling the services of another carrier. / Second, and more important, the low variable cost of using the existing Qwest interLATA network will make provision of in-region interLATA services more profitable for the combined company than it would be for U S WEST alone. The merger therefore will create a stronger incentive to satisfy the Section 271 requirements. Expeditious Section 271 approval will allow the combined company to take advantage of the more profitable in-region interLATA business opportunities sooner. As discussed in the Owen declaration, the fact that the combined company already will own an interLATA network increases the return that can be expected from an investment in work to accelerate satisfaction of Section 271. / Pre-merger U S WEST would expect to incur a certain cost per unit (e.g. per- minute) of providing interLATA service (whether it purchased capacity from a different underlying carrier or built interLATA facilities itself). / Post-merger the combined company will be in a different position than U S WEST pre-merger. The unit cost of providing in-region interLATA service will be much lower, since the company already will own an operational interLATA network and the variable costs of using that network for incremental traffic is low, as discussed above. Anticipated margin and profits from interLATA entry by the combined company thus would be greater as a result of the merger, and the opportunity cost of delaying Section 271 compliance would be greater, than it would be for pre-merger U S WEST. An additional consideration adds to the incentives to obtain prompt interLATA authority. The Qwest network required a substantial capital investment by Qwest over $2 billion. That network is state-of-the-art and gives Qwest a substantial competitive advantage. Because it was built with the latest technology, the Qwest network also has a tremendous amount of excess capacity. / As time goes by and the combined company cannot make maximum use of that network due to the interLATA prohibition, it will be losing the ability to earn the highest return on its capital investment. / In this sense, the network is a "wasting asset." In sum, the Merger Opponents are wrong to dismiss the impact of the transaction on the Section 271 process. Until the merged company satisfies Section 271, it cannot reap the financial benefits of its network investment in its own region -- and its out-of-region activity will be hobbled compared to other national interexchange carriers. D. Complaints Regarding U S WEST Do Not Belong in this Proceeding. The preceding sections explain why Merger Opponents calling for conditions have failed to demonstrate a legal foundation for their request. They have failed to show that the merger of Qwest and U S WEST will cause any public interest harm. Meanwhile, they have disregarded the clear public interest benefits arising from the transaction. In fact, the Merger Opponents barely pay lip service to the legal standards governing the Commission's review of merger applications. They transparently seek to convert this proceeding into a forum for redress of their own private grievances, ranging from the scope of U S WEST's specific obligations to them under Section 251, to its billing practices, to the quality of its local service. But the Merger Opponents have failed to demonstrate that this merger proceeding is the appropriate forum for resolving such issues. Clearly, it is not. First and fundamentally the commenters entirely fail to demonstrate how grant of the Application and consummation of the merger would cause the specific harms they claim; for that reason they lack standing to raise them here. / Second, they just as clearly fail to establish that the merger would result in any harm to the public interest; they therefore have not laid the necessary predicate for the requested conditions on grant of the Application. Finally, and in any event, these commenters fail to recognize that other more appropriate forums exist for airing their issues, including interconnection negotiations and arbitrations, and state and federal regulatory commission complaint processes. Indeed, in some cases the Merger Opponents already are taking advantage of those vehicles. The complaints raised by the Merger Opponents principally fall into three categories, none of them connected to the merger: (1) state issues related to U S WEST local service quality, interconnection negotiations, and similar matters; (2) open policy issues that already are pending in Commission rulemaking or complaint proceedings (or are properly addressed in such proceedings); and (3) previously resolved issues that commenters seek to reopen collaterally in the context of this merger. Again, none of these issues arises from the Qwest-U S WEST Merger. As demonstrated below, none should be addressed in this transfer of control proceeding. The state-related objections include, for example, the contention of McLeodUSA Telecommunications, Inc. ("McLeod") that the merged entity should be required to "make the investments necessary" to improve the quality and availability of U S WEST wholesale and retail services. / McLeod's only attempt to link this concern to the merger is its speculative assertion that the merger could result in a "diversion of resources" from in-region local exchange services to efforts to compete in other telecommunications markets. / But this proceeding is clearly not the proper forum for such allegations. / Service quality issues should be resolved in appropriate state proceedings unrelated to this merger. / Other complaints regarding U S WEST service performance, / or regarding the status of state interconnection and arbitration proceedings, / are equally out of place. Similarly, the Commission should reject attempts by Merger Opponents to impose special conditions on the combined company addressing issues that properly belong in generic rulemaking proceedings -- and in some cases already are the subject of such proceedings. Rhythms, for example, proposes that the merger be conditioned on improvements in the provision of OSS for advanced services, collocation at remote locations, and work-arounds for the presence of digital loop carrier facilities. / Covad requests conditions relating to UNE loop pricing, retail/wholesale separation, and OSS for advanced services, and, as noted above, Allegiance seeks a condition that the merged company adopt a regionwide "most favored nation" policy for interconnection arrangements. / But these generic issues belong in generic proceedings. They do not arise because of the merger, and grant or denial of this Application will not resolve the Merger Opponents' complaints. / In previous merger proceedings, the Commission repeatedly refused to consider unrelated matters. / In seeking a reversal of that policy here, the commenters do not credibly suggest that the issues they pose arise out of the merger. The Commission should decline to pluck issues out of pending proceedings or address other generic issues in the limited context of this Application. Finally, some Merger Opponents have proposed conditions addressing matters already conclusively resolved by the Commission or subject to existing Commission rules. These comments are no more appropriate for this proceeding. For example, the Coalition to Ensure Responsible Billing ("CERB") argues that the merger should be conditioned on a commitment by U S WEST to allow other service providers to include their charges on its local bill. / This dispute, however, was decided thirteen years ago when the Commission deregulated billing and collection services. / CERB does not remotely justify using this proceeding to reverse that decision, let alone only for the post-merger company. For similar reasons, the Commission should reject Allegiance's plea to condition approval of the merger on compliance with the affiliate transaction and collocation rules, and the Joint Commenters' request that approval be conditioned on compliance with various local competition regulations. / Those rules are what they are and will apply to the merged company just as to any other. / There is no cause for a condition requiring compliance for this single company. As the Commission concluded in declining to impose a condition mandating AT&T-TCI's compliance with the program access rules, because "nothing in the merger transaction would shield the merged company from the program access rules * * * [a] condition therefore is unnecessary." / The same answer applies here. * * * * * * This Application should not be controversial or difficult for the Commission to grant promptly. Contrary to the suggestions of certain commenters, the merger of Qwest and U S WEST raises no public interest concerns, and promises significant benefits to consumers and competition. It easily passes the standard for Commission approval under the Communications Act. II. QWEST WILL DIVEST PROHIBITED INTERLATA SERVICES AS IT COMMITTED TO DO IN THE APPLICATION. A. The Commission Should Not Assume A Future Violation Of The Law. The Application already includes a commitment that, in order to comply with Section 271 of the Act, Qwest will discontinue providing prohibited interLATA services in U S WEST's 14-state region as of the merger closing. / Notwithstanding, several commenters suggest that the Commission should delay approval of the merger while it scrutinizes the precise details by which Qwest will bring itself into compliance with the Act. / Essentially these commenters demand that the Commission take on the job of micro-managing Qwest's divestiture. These arguments amount to nothing more than unsupported allegations that Qwest will not satisfy its divestiture commitment. Commenters making these arguments, however, provide no evidence at all to support their suggestion that Qwest will violate Section 271. The Commission routinely rejects similar requests to deny or delay action on proposed transactions based on such unsupported allegations. / It should do so again here. / B. Qwest Is Moving Forward Promptly To Prepare For Divestiture. Notwithstanding the implications of commenters, since filing the Application Qwest already has made substantial progress in the complex administrative process of implementing its divestiture. Qwest has been engaged in a review of all retail and wholesale customer contracts to identify interLATA services that must be divested as of closing. Qwest also has been examining operational issues associated with divestiture. For the convenience of the Commission, we are submitting as Attachment C a detailed summary of Qwest's current plans for in-region interLATA divestiture (the "Qwest Divestiture Plan"). This document should further assure the parties here that Qwest will fully divest its in-region interLATA business, and that post-merger, the company will comply fully with Section 271. The Qwest Divestiture Plan embodies two over-arching principles: (1) minimize the impact of divestiture on customers, with a seamless transition and no increase in rates, and (2) comply fully with Section 271. Qwest anticipates selling its prohibited interLATA service offerings to one or more independent common carriers with Section 214 certificates and operating authority in the relevant states. Each of these purchasing carriers will be technically and operationally able to provide service over their own transmission facilities in a timely fashion without customer disruption. Qwest and the purchaser or purchasers will take the necessary steps to make the transition smooth and uneventful for customers. The purchasers will be obliged to assume all of Qwest's existing contractual obligations for the divested in-region interLATA telecommunications, and will commit not to raise rates for Qwest's tariffed customers for a certain time period. Thereafter, however, the purchasing carrier or carriers will have full rights to set their own rates for the divested services, and in every other respect will operate completely independently of Qwest. To the extent that the purchasers obtain any interconnection, access, or other telecommunications services from the U S WEST operating companies, they would do so at the same non-discriminatory rates, terms, and conditions as all other carriers. As the Qwest Divestiture Plan demonstrates, Qwest is preparing to discontinue all of its prohibited interLATA service offerings within the U S WEST region. The service offerings to be divested include all relevant voice and data services offered to residential and business customers (including both retail and wholesale services). Specifically, Qwest anticipates divesting the following services: · interLATA switched long distance service originating in the U S WEST region; · interLATA 800 services terminating in the U S WEST region; · interLATA private line voice and data services originating or terminating in the US WEST region that cross LATA boundaries; · in-region interLATA calling card, prepaid phone card, and operator- assisted services; and · the in-region interLATA transmission component of dial-up and dedicated Internet access services and Internet-based hosting services. The sale of these services will be final and irrevocable, with no right for Qwest to re-acquire the services or customers at any point. Qwest does not, however, plan to sell its existing fiber optic transmission plant. It will continue to use that plant to provide out-of-region and other telecommunications services permitted by Sections 271(b)(2) and (3) of the Act. The attached Qwest Divestiture Plan includes a detailed legal analysis of the authority for the scope of the divestiture planned by Qwest. It also describes the support functions useful in meeting customer requirements that the purchaser or purchasers of the divested services may acquire from Qwest under arm's length contracts, and explains why Qwest may provide those functions consistent with Section 271 and other governing legal authority. In sum, the Qwest Divestiture Plan constitutes strong evidence that Qwest will carry through its commitment to divest all of its in-region interLATA services prior to closing the merger. Other commenting parties have supplied no evidence to the contrary. C. Commenters' Other Divestiture Arguments Are Misplaced. AT&T, MCI WorldCom, and McLeod raise a number of misplaced contentions regarding the scope of the divestiture plan. We show below that each of these arguments is baseless, and the Commission should not allow any of them to delay its approval of the proposed transfer of control. First, the Commission should disregard AT&T's unsupported contention that, in the context of Qwest's anticipated transfer of its in-region originating switched long distance business, a waiver of the Commission's customer authorization and verification requirements would not be appropriate. / The Commission has granted numerous waivers of those requirements in comparable situations. / Such a waiver is necessary, and perfectly appropriate, to facilitate a simple and straightforward sale of a non-dominant carrier's customer base and enable the carrier to exit a market without inconveniencing customers. / Second, the Commission should not be diverted by MCI WorldCom's oft-repeated, generic argument that Section 271 precludes BOC affiliates from providing Internet access services. / As described more fully in the attached Qwest Divestiture Plan, / Qwest will structure its information service offerings to comply with the Commission's clear statement that BOC affiliates may, consistent with Section 271, provide in-region information services that do not "incorporate as a necessary, bundled element an interLATA telecommunications transmission component, provided to the customer for a single charge." / Qwest's continuing Internet access, web hosting, and other Internet-related service offerings will be structured similarly to the existing offerings of other BOCs and their affiliates. MCI WorldCom concedes that it has raised this argument many times in other contexts, / but the Commission has never conclusively addressed the issue. / There is no reason to allow this merger application proceeding to become bogged down by uncertainties that affect the entire industry. If and when the Commission adopts relevant conclusions regarding the status of particular interLATA information services in the future, the merged company will comply fully with such conclusions. Third, McLeod's argument regarding dark fiber is incorrect. / McLeod understands the distinction between the sale of dark fiber facilities and the lease of dark fiber for a term of years. However, McLeod mistakenly assumes that Qwest has leased dark fiber to Frontier, GTE, and MCI WorldCom. / To the contrary, Qwest has sold those parties indefeasible rights of use ("IRUs") in fiber facilities, conveying ownership rights in specific dark fibers for the economically useful life of the fiber. The purchasers obtained full control over use of the fiber and are the owners for tax and accounting purposes. Qwest in turn booked the associated revenue as "network construction." Qwest has no legal ability to unwind these completed sales. Moreover, McLeod provides no support for its suggestion that Qwest's provision of certain maintenance services in connection with these IRU sales somehow converts them into provision of interLATA telecommunications. / As the Commission correctly concluded in the Second Reconsideration Order, / the sale of telecommunications network facilities does not constitute "interLATA service," which the Act defines as "telecommunications between a point located in a [LATA] and a point located outside such [LATA]." / In turn, "telecommunications" is defined by the Act as "the transmission, between or among points specified by the user, of information of the user's choosing without change in the form or content of the information as sent and received." / In this case, the only activity at issue is a maintenance service provided to an unaffiliated carrier, and Qwest is not engaged in any transmission whatsoever. / D. Prompt Grant Of This Application Is Necessary To Help Ensure A Smooth Customer Transition. It is not surprising that certain Qwest competitors want the Commission to delay approval of this Application. The Qwest divestiture is a large undertaking. It will require substantial work to ensure that customers are not adversely impacted. Qwest already is taking unilateral steps to prepare for divestiture. But next it will need to deal with third party purchasers, who in turn will need to devote resources of their own to negotiate purchase agreements and then undertake their own tasks to prepare to take over the divested services. Furthermore, both Qwest and purchasers will need to address customer questions that already are arising in the market, and in some instances work directly with customers to address their specific requirements. The sooner that the Commission grants this Application, the more smoothly this divestiture process will run. The Commission will recall that when the Bell System divestiture took place, approval of the consent decree and plan of reorganization occurred well before divestiture itself. The Qwest divestiture here is much more simple, but the same general considerations apply. The sooner the Commission grants this application, adding certainty to the merger process, the easier it will be for Qwest and third parties to implement the divestiture plan in a manner with the least impact on customers. Qwest and U S WEST fully expect to close their merger in the second quarter of 2000. Prompt approval of this Application will facilitate the divestiture activity necessary before that closing, to the ultimate benefit of Qwest's customers. In contrast, any material delay in this proceeding will introduce unnecessary customer uncertainty, and may reduce the amount of time available before closing to complete the necessary transitional work. conclusion For the reasons stated above and in the initial application, Qwest and U S WEST urge the Commission to approve this merger promptly, and to do so without attaching conditions. The merger does nothing to increase the likelihood of anticompetitive or discriminatory activity by U S WEST. On the contrary, this merger brings numerous public interest benefits to consumers, including the acceleration of deployment of advanced services by the combined company. The merger will advance competition both inside and outside the U S WEST region, and will provide powerful new incentives for satisfaction of Section 271 in the U S WEST region. Respectfully submitted, QWEST COMMUNICATIONS INTERNATIONAL INC. By___________________________________ U S WEST, INC. By___________________________________ Drake S. Tempest Genevieve Morelli Qwest Communications International Inc. 555 Seventeenth Street Denver, CO 80202 Mark D. Roellig Daniel L. Poole Sharon J. Devine U S WEST, Inc. 1801 California Street Denver, CO 80202 Peter A. Rohrbach Mace J. Rosenstein Hogan & Hartson L.L.P. 555 Thirteenth, N.W. Washington, D.C. 20004 Kathryn A. Zachem Carolyn W. Groves Wilkinson Barker Knauer, L.L.P. 2300 N Street, N.W. Suite 700 Washington, D.C. 20037 Counsel for Qwest Communications International Inc. William T. Lake Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037 Counsel for U S WEST, Inc. Dated: October 18, 1999 ATTACHMENT A DECLARATION OF DENNIS W. CARLTON AND HAL S. SIDER DECLARATION OF DENNIS W. CARLTON AND HAL S. SIDER In the matter of QWEST / U S WEST MERGER APPLICATION October 18, 1999 I. QUALIFICATIONS 1. I, Dennis W. Carlton, am Professor of Business Economics at the Graduate School of Business of The University of Chicago. I received my B.A. in Applied Mathematics and Economics from Harvard University and my M.S. in Operations Research and Ph.D. in Economics from the Massachusetts Institute of Technology. I have served on the faculties of the Law School and the Department of Economics at The University of Chicago and the Department of Economics at the Massachusetts Institute of Technology. I specialize in the economics of industrial organization, which is the study of individual markets and includes the study of antitrust and regulatory issues. I am co-author of Modern Industrial Organization, a leading textbook in the field of industrial organization, and I also have published numerous articles in academic journals and books. In addition, I am Co-Editor of the Journal of Law and Economics, a leading journal that publishes research applying economic analysis to industrial organization and legal matters. I have served as an Associate Editor of the International Journal of Industrial Organization and Regional Science and Urban Studies, and have served on the Editorial Board of Intellectual Property Fraud Reporter. 2. In addition to my academic experience, I am President of Lexecon Inc., an economics consulting firm that specializes in the application of economic analysis to legal and regulatory issues. I have served as an expert witness before various state and federal courts, and I have provided expert witness testimony before the U. S. Congress and a variety of state and federal regulatory agencies, including the Federal Communications Commission (FCC). I also have served as a consultant to the Department of Justice on the Merger Guidelines of the Department of Justice and Federal Trade Commission, as a general consultant to the Department of Justice and Federal Trade Commission on antitrust matters, and as an advisor to the Bureau of the Census on the collection and interpretation of economic data. I also have provided testimony on telecommunications matters before Congress, the federal courts, and federal and state regulatory agencies and have published academic articles on telecommunications issues. A copy of my curriculum vitae is attached as Exhibit 1 to this affidavit. 3. I, Hal S. Sider, am a Senior Economist and Vice-President of Lexecon Inc. I received a B.A. in Economics from the University of Illinois in 1976 and a Ph.D. in Economics from the University of Wisconsin (Madison) in 1980. I have been with Lexecon since 1985, having previously worked in several government positions. I specialize in applied microeco- nomic analysis and have performed a wide variety of economic and econometric studies relating to industrial organization, antitrust and merger analysis. I have published a number of articles in professional economics journals on a variety of economic topics and have testified as an economic expert on matters relating to industrial organization, antitrust, labor economics and damages. In addition, I have directed several studies of competition in telecommuni- cations industries and have previously testified as an expert on telecommunications matters before the FCC and public utility commissions in New York, Colorado, West Virginia, Florida, and Montana. I have also published an academic article (with Kenneth Arrow and Dennis Carlton) on telecommunications issues. A copy of my curriculum vitae is attached as Exhibit 2 to this affidavit. 4. We have been asked to comment on certain aspects of the proposed merger of U S WEST with Qwest. We conclude that demand and supply conditions in the telecommunications industry are changing rapidly and that transactions such as the proposed merger of Qwest and U S WEST can enable firms to better respond to these changes. We also conclude that the proposed transaction does not give rise to the competitive concerns that the FCC raised in recent ILEC/ILEC mergers or that commenters have raised in this proceeding. Accordingly, there is no competitive justification for imposing conditions on approval of the proposed merger. II. MERGERS CAN BE A RESPONSE TO CHANGES IN DEMAND AND SUPPLY CONDITIONS 5. Mergers typically enable firms to realize efficiencies relative to what each could achieve independently. These efficiencies can include reduced costs of providing services and/or improving the ability of firms to introduce and deploy new products and services. In this way, mergers can enable firms to respond to changes in industry conditions more rapidly than would be possible absent a merger. 6. In this section, we first present a brief overview of the rapid changes in demand and supply conditions now facing the telecommunications industry. We then briefly review how recent telecommunications mergers, including the proposed merger of Qwest and U S WEST, are attempts to respond to these changes. A. OVERVIEW OF CHANGES IN DEMAND AND SUPPLY CONDITIONS 1. Increased demand for data services 7. The demand for data services has grown dramatically in recent years, and this trend is expected to continue. Salomon Smith Barney, for example, projects that over the next several years, revenue from circuit switched services (i.e., traditional long distance voice services) will grow by three to five percent annually; data services revenue will grow 20 to 25 percent annually, and Internet revenue will grow 40 to 45 percent annually. Between 1993 and today, the number of computers with Internet access grew from 1.3 million to more than 80 million. 2. New technologies 8. Closely related to the growing demand for data services is the rapid deployment of high-capacity packet-switched fiber optic networks in recent years. These technologies reflect a fundamental change in the structure of telecommunication networks: The way that communications networks were designed and deployed in the past is under review because of the Internet and, in part, because of substantial improvements in digital processing. Instead of routing data over the voice network [...] some players plan to route voice on networks designed to handle data. The new networks use packet-switched technology rather than circuit switching technology used in the voice network ... 9. Packet switched technology is rapidly displacing circuit switched technology. AT&T, for example, has announced that it intends to stop buying traditional telephone switches by the end of 1999 and instead will exclusively deploy other technologies including packet switches and routers. Sprint and MCI WorldCom are also deploying packet-based capacity in their networks. Packet-based long distance networks are being deployed, or have been deployed, by Qwest, Williams, Level 3, and Frontier. 10. Digital subscriber line (DSL) technology is also being deployed in order to increase the capacity of existing copper networks, enabling residential customers to obtain broadband Internet services. This technology also enables businesses to use existing phone lines to connect remote locations to private data networks as well as the Internet. AT&T and other cable television companies are also upgrading their cable television systems in order to deploy broadband Internet services to residential customers. 3. Increased demand for bundled services 11. There is also increased demand for bundled services among residential and small business customers. For example, companies such as SNET and GTE that have been permitted to provide long distance service have been successful in providing bundled local and long distance service. Between 1994 and 1998, SNET gained approximately 900,000 long distance subscribers, roughly 40 percent of the local lines it serves. GTE has gained more than 3 million long distance subscribers since it began offering services roughly three years ago. Customer satisfaction with bundled services is also reflected in the J.D. Power and Associates 1999 Residential Long-Distance Customer Satisfaction Study, which states that "[a]nother major finding from the study reflects the positive impact bundling [of local and long distance service] can have in meeting customer expectations in the telecommunications industry." 4. Increased demand for multilocation services among business customers 12. Among business customers, the growing diversity and complexity of telecommunications services has generated demand for telecommunications firms to provide "one-stop shopping" for a bundle of services. There is also increased demand for firms to provide an "end-to-end" service and a "single point of contact" to multiple location customers. Analysts have stressed that local exchange carriers that fail to provide such services will be at a significant competitive disadvantage relative to those that do. B. TELECOMMUNICATIONS MERGERS, INCLUDING THE PROPOSED TRANSACTION, REFLECT ATTEMPTS TO RESPOND TO CHANGES IN INDUSTRY CONDITIONS 1. Motivations for recent mergers 13. Recent mergers in the telecommunications industries reflect various responses to changes in demand and supply conditions. While telecommunications mergers of recent years reflect diverse strategies, they generally reflect attempts by firms to provide a more diverse range of products over a broader geographic area. 14. For example, WorldCom's acquisitions of MFS, UUNet, and MCI and its proposed merger with Sprint, as well as AT&T's acquisitions of McCaw, Teleport, and TCI and its proposed merger with MediaOne, reflect the firms' view that these transactions will enable them to provide a broad portfolio of services over a wide geographic area. Similarly, ILEC/ILEC mergers, such as SBC's acquisitions of Pacific Telesis, SNET, and Ameritech and Bell Atlantic's acquisition of NYNEX and its proposed merger with GTE, reflect movements away from limitations on the geographic scope of RBOC activities established at the time of the AT&T divestiture. The ILEC/ILEC mergers also reflect the recognition that many customers prefer a single provider of both "local" and "long distance" services over a wide geographic area. 15. Mergers among telecommunications firms in recent years indicate that it is not always possible to use contractual relationships to take advantage of synergies or integration opportunities between suppliers of various telecommunications services. The mergers indicate that it often is more efficient for a single firm to exploit these opportunities. Telecommunications firms, for example, may be reluctant to share technology through contract and/or joint ventures with other firms, since this information may fall into rivals' hands if the partner is acquired by another firm. 16. Mergers may hold the promise of combining the complementary managerial skills of two firms. It may be difficult for firms to share the human capital that managers possess through contract and firms also may be reluctant to share this information in joint ventures due to the difficulty of conflicting objectives and/or risks of losing proprietary information. Mergers can help avoid these concerns. 17. Mergers also may enable firms to integrate networks, improve performance and achieve efficiencies. For example, integration of network monitoring functions may improve the reliability of end-to-end service for multilocation customers and thus help assure customers of the value of a single point of contact. Mergers may also improve efficiency by eliminating or avoiding the need for redundant facilities or functions. 2. Qwest / U S WEST merger plans 18. Qwest and U S WEST expect that their merger will enable them to realize significant savings in operating and capital costs from coordinating their operations and also will enable them to facilitate the deployment of a variety of services that will benefit both in- region and out-of-region consumers. 19. Qwest and U S WEST expect to realize significant cost savings by consolidating a variety of functions including, for example, network engineering operations, procurement, and managerial functions. The parties anticipate that by 2002 they will realize annual capital cost savings of $450-500 million and operating cost savings of $700-800 million. 20. The companies plan immediately to market Qwest's Internet-based application services, including e-commerce, web-hosting, and other services, to U S WEST's large base of in-region customers. Qwest and U S WEST also plan to offer bundled long distance and local telephone services to in-region customers following 271 approvals. 21. In addition, Qwest and U S WEST have announced plans to offer a variety of out-of-region services to an array of customers following their merger, including Competitive Local Exchange Carrier (CLEC) services and DSL services. Qwest's out-of-region CLEC activities will include offerings to business customers with demand at both in-region and out-of- region locations. Qwest and U S WEST also have announced plans for the merged company to deploy facilities-based DSL services in 25 cities outside of U S WEST's territory that will be marketed initially to small and medium size business customers. 3. Potential Efficiencies 22. The transaction provides the opportunity for the merged company to realize a variety of efficiencies that will benefit both in-region and out-of-region customers. Although the companies have not yet fully determined exactly how such opportunities are to be pursued, the transaction creates possibilities for efficiencies that otherwise would not exist. 23. These potential efficiencies are the consequence of combining the complementary attributes of the two firms. 24. First, the merger combines firms with complementary managerial skills. Qwest's management understands how to succeed in a rapidly changing industry, having recently completed its national fiber optic network on time and under budget. Qwest, which only became a public company in 1997, now has a market value in excess of $25 billion. U S WEST, on the other hand, has extensive experience in managing telecommunications networks that serve a mass market consisting of millions of customers. Combination of these management assets holds the potential for the rapid deployment of innovative services to a large base of in-region and out-of-region customers. 25. Second, the merger combines firms with complementary physical assets. Qwest has a 18,500 mile, high-capacity fiber optic network in the United States as well as networks in Mexico and Europe and is deploying (or has completed) high capacity local fiber optic networks in 19 U. S. cities. U S WEST, on the other hand, has extensive experience as a provider of local services and has deployed DSL services in more than 40 cities throughout its region. Combination of these network assets creates the opportunity for the combined firm to provide a broad range of products using an integrated network under the control of a single firm. This holds the promise of enabling the merged firm to better assure customers of network reliability and to provide customers a single point of contact for service issues. This benefit would be realized by in-region customers after U S WEST gains interLATA authority under Section 271 and by out-of-region customers upon the transaction's closing. 26. Third, the merger creates the opportunity for the combined firm to improve the planning and deployment of new network facilities in-region and out-of-region and to enable services to be deployed more rapidly across a wide range of locations. We understand that the parties believe that the transaction will enable them to deploy DSL and CLEC services more rapidly than would have been possible by either firm absent the merger. The merged company's plans to deploy these services outside of U S WEST's region reflect an attempt to realize these potential efficiencies, as well as the potential for the merged firm to offer an integrated bundle of services. This and other efficiencies would enable Qwest / U S WEST to compete more effectively against AT&T, MCI WorldCom, SBC, Bell Atlantic and other firms offering a broad range of services. The deployment of these services and facilities would be likely to benefit in-region (as well as out-of-region) customers by creating a more effective provider of bundled services across a broad geographic area. 27. Fourth, the transaction also holds the potential for enabling Qwest to take advantage of U S WEST's large in-region customer base to more rapidly deploy its "Cybersolutions" market applications services. Qwest Cybersolutions provides Internet based applications services such as customer relationship management, production planning, electronic purchasing, and e-commerce. These benefits would be realized by in-region customers immediately because provision of these services would not require that U S WEST receive approval to provide long distance service under Section 271 of the Telecommunications Act. III. THE PROPOSED TRANSACTION DOES NOT GIVE RISE TO COMPETITIVE CONCERNS A. COMPETITIVE CONCERNS RAISED BY ILEC/ILEC MERGERS PROVIDE NO RATIONALE FOR IMPOSING CONDITIONS IN THIS TRANSACTION 28. In its recent SBC/Ameritech Opinion, the FCC expressed concerns about the effect of ILEC/ILEC mergers on competition. More specifically, the FCC expressed concerns that the transaction may harm competition due to: (i) increased risk of discrimination by ILECs against CLECs due to increases in the size of an ILEC's "footprint"; (ii) reduction in the number of ILEC benchmarks available to regulators and thus a reduction in the effectiveness of such benchmarks in evaluating local market conditions; and (iii) elimination of a significant potential competitor for the merging parties. The FCC imposed a variety of conditions on the SBC/Ameritech transaction responding specifically to each of these concerns. 29. The merger-related concerns giving rise to these conditions do not arise as a result of the merger of Qwest and U S WEST. The reason is the simple fact that the Qwest and U S WEST merger is not an ILEC/ILEC merger. As a result: · The merger does not increase in any material way U S WEST's ILEC "footprint" and thus does not create increased risk of discrimination according to the FCC's theory; · The merger does not reduce the number of ILEC benchmarks available to regulators; · As discussed in more detail below, the merger does not eliminate a significant potential competitor from U S WEST's territory. 30. Thus, the competitive concerns raised by the FCC regarding ILEC/ILEC mergers are not present here and therefore provide no justification for imposing similar conditions on the proposed merger of Qwest and U S WEST. B. COMPETITIVE CONCERNS RAISED BY COMMENTERS PROVIDE NO RATIONALE FOR IMPOSING CONDITIONS 31. Several parties have submitted comments to the FCC requesting imposition of conditions similar to many of those fashioned by the FCC in ILEC/ILEC mergers. For example: · McLeod suggests that the FCC impose conditions to require Qwest to "bring U S WEST's wholesale service to an acceptable level of availability and quality" and "submit performance reports ... [that] reflect the availability, cost and quality of specific wholesale services..." · NextLink suggests that the FCC impose conditions to impose "complete structural separation of wholesale and retail activities into two separate operations," to "commit to independent third party testing of [OSS]", and "commit to report and meet a comprehensive set of performance measures and standards subject to substantial remedies." · Covad Communications suggests that the FCC impose "structural separation of wholesale ILEC assets from all retail operations of the merged entity, [o]rder · improvements to US WEST OSS for advanced services; [o]rder and implement immediate revisions to U S WEST's unbundled loop prices . . ; [o]rder region-wide uniform installation intervals and incident-based liquidated damages for non- performance." 32. None of the commenters, however, has shown that the proposed merger would result in any adverse effect on competition. Therefore, there is no basis for imposing the requested conditions. 1. Comments regarding discrimination 33. As a preliminary matter, some commenters fail to link the requested conditions to the proposed transaction. Rhythms Netconnections, for example, states that "[s]ince U S WEST is the dominant incumbent local exchange provider, only when there is full and irreversible competition in the market for advanced services should the applicants be allowed to merge without such pre-conditions.", However, in the absence of any claim that the transaction increases U S WEST's incentive to discriminate, there is no rationale for dealing with such complaints in the context of the merger proceedings. 34. A number of other commenters attempt to argue that the proposed transaction would increase U S WEST's incentive and/or ability to discriminate against CLEC rivals. But the real focus of these petitioners is on U S WEST's supposed existing incentives to discriminate against rivals, and none presents any plausible evidence that the merger heightens this incentive. For example: · McLeod Telecommunications claims that the merger of U S WEST with an in-region CLEC increases U S WEST's incentive to discriminate "because such action will benefit not only the ILEC, but also the commonly-owned in-region CLEC services." · Nextlink, et al. claim that "the elimination of Qwest as an independent actor from those markets will give a combined Qwest/USWC an even more dominant position from which to discriminate against rivals ..." 35. These commenters offer no convincing argument that any claimed incentive of U S WEST to discriminate would be enhanced by the proposed merger. First, as discussed in more detail below, Qwest cannot be considered an actual or significant potential entrant as a CLEC in U S WEST's territory. Thus, any incremental incentive of the type claimed by these commenters would be de minimis. In any event, no party even suggests that regulators' ability to detect discrimination would be adversely affected by the proposed transaction. 36. Similarly, the Coalition to Ensure Responsible Billing (CERB), a group of firms that has contracts with U S WEST and others to charge for the telecommunications services of third parties on the bill U S WEST sends to its customers, also claims that the transaction "generates heightened concerns about U S WEST's efforts to discriminate against competitive providers" by "denying nondiscriminatory access to the local end user bill." They claim that "[f]ollowing the merger, U S WEST would suddenly have a vested interest in the success of an increased volume of ancillary (non-local) services." 37. CERB, however, ignores the fact that billing services have been deregulated and that U S WEST is under no obligation to provide such services to unrelated providers of telecommunications services. Thus, CERB's claim in fact reflects a call for imposition of regulation that is unrelated to the proposed transaction. 38. Allegiance Telecom, alone among the commenters, argues that the proposed transaction should raise the same concerns as ILEC/ILEC mergers due to BellSouth's investment in Qwest. We understand that BellSouth will own less than five percent of the shares of the combined Qwest / U S WEST. There is no reason to treat this transaction as an ILEC/ILEC merger because of BellSouth's relationship with Qwest. It is highly unlikely that the small ownership interest could enable BellSouth to direct the business decisions undertaken by Qwest / U S WEST or that Qwest could direct the business decisions of BellSouth. This level of ownership should not give rise to the incentives to increase discrimination that concerned the FCC in the SBC/Ameritech Opinion. 2. Comments regarding potential competition 39. Covad claims that the proposed transaction will harm competition by eliminating actual and potential competition. The proposed merger of Qwest and U S WEST raises no realistic concerns that competition in the provision of any service will be adversely affected by the merger. 40. For services and geographic areas for which U S WEST and Qwest are actual or potential competitors, there are typically several firms that are at least as significant as Qwest that provide comparable services. Thus, it is highly unlikely that the elimination of Qwest as an actual or potential competitor in U S WEST's territory would adversely affect competition. The fact that no consumers or consumer groups have filed petitions with the FCC opposing this transaction provides support for this proposition. 41. The following section briefly reviews services for which Qwest and U S WEST are actual or potential competitors. a. Local exchange services 42. As discussed in Section I above, Qwest either has deployed or is in the process of deploying local fiber optic facilities in roughly 20 metropolitan areas throughout the United States. Seattle is the only one of those areas in which U S WEST is the incumbent local exchange carrier. In Seattle, we understand that Qwest is not yet providing service to any customers over these facilities. We also understand that Qwest's local service resale activities in U S WEST's region have been substantially eliminated, pursuant to a decision made before the merger agreement. Qwest does not have any local switches in the U S WEST region. 43. Qwest cannot be considered a significant potential competitor in the provision of CLEC services whose elimination would adversely affect competition in Seattle, or elsewhere in U S WEST's territory. · First, a variety of CLECs already offer local exchange services in U S WEST's region. For example, data from the UNE Fact Report indicate that as of March 1999, 9 CLECs operated switches in the Seattle MSA; 9 CLECs had switches in Denver; 8 CLECs operated switches in Phoenix; 9 had switches in Minneapolis and 7 had switches in Portland. As noted above, Qwest operates no local switches in U S WEST's territory. · Second, data collected and published by the FCC indicate that Qwest does not hold numbering codes in any LATA served by U S WEST, which is a prerequisite to offering facilities-based services as a CLEC. In contrast, many other firms hold such codes. The FCC data for the second quarter of 1999 indicate that 12 firms held numbering codes in Seattle, 11 held codes in Denver, eight firms held codes in Phoenix; 7 firms held codes in Minneapolis, and 9 held codes in Portland. 44. Thus, if Qwest is considered a significant potential provider of CLEC services, then it faces competition from a large number of other actual and potential CLECs, each of which appears to be further along than Qwest in terms of providing local exchange services. b. IntraLATA toll 45. Qwest provides intraLATA toll services in U S WEST territory as a facilities-based carrier and a reseller. There have been significant inroads by competitors to U S WEST in the provision of intraLATA toll services in recent years. We understand that Qwest accounts for roughly one percent of the presubscribed intraLATA toll lines across the U S WEST region. Thus, Qwest cannot be considered a significant competitor. In contrast, we understand that AT&T, MCI WorldCom, Sprint and others together have captured roughly one-third of the intraLATA toll business in U S WEST's territory. c. DSL 46. As discussed above, U S WEST has deployed DSL facilities and services in more than 40 in-region cities. In August, Qwest launched DSL services in 13 areas nationwide with plans to offer service in 30 areas by the end of 1999. These areas include six cities in U S WEST's region: Seattle, Denver, Minneapolis, Phoenix, Portland, and Salt Lake City. Qwest now provides DSL in the U S WEST region only by reselling services provided by Covad Communications and Rhythms NetConnection. 47. There are several facilities-based providers of DSL services in U S WEST's territory in addition to U S WEST, including Covad, Rhythms, Northpoint and JATO. In addition to Qwest, there are many resellers of these services. Each of the five major cities in U S WEST's territory is served by 4 or more facilities-based DSL providers (including U S WEST) and 9 or more resellers. It is highly unlikely that a reduction by one in the number of resellers of DSL services would adversely affect competition under these circumstances. d. ISP Services / Web Hosting 48. Both U S WEST and Qwest provide Internet services and web hosting services within U S WEST's territory. Both, however, are among a large number of firms providing such services in U S WEST territory. Data from Boardwatch Magazine's 1999 Directory of Internet Service Providers indicate that there are more than 50 ISPs serving each of the five largest cities in U S WEST's territory, and more than 40 firms offering web hosting facilities. Given the number of firms offering such services, the elimination of Qwest as an actual or potential competitor would not be expected to adversely affect competition. CONCLUSION 49. Recent mergers in the telecommunications industry reflect attempts to respond to rapid changes in demand and supply conditions in the industry. These transactions, including the proposed merger of Qwest and U S WEST, generally reflect attempts by firms to provide a more diverse range of products over a broad geographic area. 50. The proposed transaction provides the opportunity for the merged company to accomplish this goal. The merger combines firms with complementary assets and skills. These include U S WEST's expertise in providing DSL services; U S West's large base of customers that have headquarters inside its region and significant out-of-region operations; and U S WEST's experience providing a wide range of local exchange and other services to millions of customers. Qwest has a national high-capacity fiber optic network as well as metropolitan area networks now under construction. In addition, Qwest's management has been highly successful in anticipating and rapidly responding to changes in industry conditions. 51. The proposed transaction raises none of the competitive concerns identified by the FCC in the context of ILEC/ILEC mergers. The merger does not increase U S WEST's footprint as an ILEC. In addition, the transaction does not reduce the number of benchmarks available to regulators. Finally, the merger does not result in the elimination of a significant actual or potential entrant in U S WEST's home territory. 52. Nor has any of the commenters shown that the proposed merger would adversely affect competition. 53. Thus, the proposed transaction does not give rise to competitive concerns. Imposition of conditions on the transaction therefore is not justified. ATTACHMENT B DECLARATION OF BRUCE M. OWEN Economic Consequences of the Hole in the Doughnut Declaration of Bruce M. Owen Summary Qwest Communications International, Inc. (Qwest) and U S WEST, Inc. (U S WEST) have applied for authority to merge. I have been asked to consider the effect of such a merger on the economic incentive of the combined company to satisfy the conditions set out in Section 271 of the 1996 Telecommunications Act. Once an RBOC such as U S WEST has satisfied Section 271, it is permitted to enter the long distance business within its region. Qwest contends that the merged company will have stronger incentives to satisfy Section 271 quickly, stronger incentives than U S WEST alone would have. I agree with this assessment. What is needed in order to analyze the effect of the merger on incentives is a comparison of the profit opportunities facing the combined company after the merger with the profit opportunities that would have faced U S WEST alone, absent the merger. Issues related to current or potential competition between Qwest and U S WEST and the business rationale for the deal are addressed by others. Of course, U S WEST is required by law to satisfy many of the Section 271 conditions, and would have some economic incentives to obtain Section 271 authority in any case. For purposes of my analysis, I assume that U S WEST has, within the law, discretion as to the pace at which it seeks approval to provide in- region interLATA service. After all, the Commission and the courts have not yet, or at best only recently, defined the conditions fully and no RBOC has yet obtained such authority. Once the conditions are clearly defined, moreover, satisfaction of them requires the expenditure of hundreds of millions of dollars on systems and equipment, along with negotiations with carriers and regulators, testing, audits, and so on. This process doubtless could be accelerated by spending more money, or at a faster rate, than whatever is reasonably required merely to comply with Section 251. For example, Bell Atlantic, which claims to have satisfied the Section 271 conditions in New York, reports having spent $1 billion on its effort. If Bell Atlantic had spent somewhat less, or at a slower rate, presumably it would not be in a position to claim satisfaction of the requirements until some number of months later than it has. Pre-merger incentive structure I assume that the costs and benefits of satisfying Section 271 requirements will affect the timing of an RBOC's satisfaction of Section 271. The primary benefit is the anticipated profit from entering into the provision of interLATA long distance service to in-region customers. In order to compete effectively against inter-exchange carriers with nationwide service areas, an RBOC also will have an incentive to provide out-of-region interLATA service for its in-region customers with multi-region locations. This out-of-region business would be incremental to the RBOC's in-region business. Furthermore, an RBOC with such a national presence is likely to find it profitable to begin offering interLATA service to customers located primarily out-of-region. There are two categories of cost. First, there is the cost associated with direct investment in equipment, systems and personnel necessary to satisfy Section 271. Second, an RBOC will also factor in the cost, measured in lost profits, from any reduction in its local exchange market share due to increased CLEC entry that is directly attributable to satisfaction of Section 271. If the costs, including the opportunity costs, of being barred from in-region interLATA markets increase, on account of the merger, then the incentives to satisfy Section 271 will become more powerful. Post merger incentive structure There are several reasons why the combined company can expect to earn greater net profits from entering the long distance business than U S WEST alone could expect. First, unlike many RBOCs, U S WEST currently owns virtually none of its interLATA "official services" network and it owns no interLATA switches. For this reason, U S WEST entering on its own would have to construct or lease nationwide interexchange network capacity at prevailing market prices, whereas the combined company would already own capacity on its interLATA network whose cost is sunk. Second, unlike U S WEST alone, the combined company will already have an established national marketing identity, customer base and specialized products out-of-region. However, the combined company will have a fourteen-state hole in its footprint. Demand from present and potential out-of-region long distance customers will be enhanced by the combined firm's ability once again to offer nationwide service. Further, the incremental revenues and profits available to the combined company after 271 approval, building on Qwest's established brand identity, customer base and existing interconnection arrangements, would exceed the initial revenues and profits available to U S WEST as a new entrant into out-of- region long distance markets. Thus, the present value of long distance revenues and profits arising out-of-region would be greater for the combined company than for U S WEST alone. Third, many potential in-region long distance customers of U S WEST will prefer to be served by a national facilities-based carrier. As a result, the combined company will have an initial advantage in selling to such customers compared to U S WEST alone, which would be unable immediately to offer an established nationwide facilities-based service. Thus, the present value of long distance revenues and profits arising in-region would be greater for the combined company than for U S WEST alone. The direction of the net effects of the incentives described above on the combined company is indisputable it is to make in-region entry, and thus satisfaction of Section 271, more profitable than before the merger. The merger causes no incentives working in the other direction. As Dennis Carlton and Hal Sider point out in their paper, the merger also creates no new incentives to restrict competition. The merger's only effect relevant to economic policy is its clear tendency to accelerate satisfaction of Section 271 in the fourteen-state U S WEST region. The Comments Commenting parties do not dispute the points made in the merger application about the combined company's incentives to obtain Section 271 authority. Several of the commenters nevertheless attempt to show that incentives to discriminate post-merger will actually increase. However, the commenting parties fail to articulate a sound economic basis for their positions on Qwest's post-merger incentives. First, some commenters state that U S WEST has the incentive to discriminate against its local exchange competitors and claim that U S WEST has, in fact discriminated in the past. Whether true or not, this argument is not relevant to the issue of whether the merger is in the public interest. It does not address the combined firm's incentives to satisfy Section 271 or any other effect of the merger itself. The issue is whether a post-merger Qwest has a greater incentive to satisfy Section 271 than U S WEST would have as a separate entity. It is the change in this incentive due to merger that is the key point and a point that commenters fail to acknowledge. Second, some commenters claim that the merger will increase the incentive of the merged entity to discriminate against local exchange competitors, based on Qwest's current CLEC activities in the U S WEST region. However, these activities are trivial and will have no meaningful impact on Qwest's post-merger incentives to satisfy Section 271 conditions. Third, two commenters speculate that a post-merger Qwest will divert dividends from shareholders to out-of-region investment opportunities and will generally direct investment funds out-of-region to the detriment of in-region service. So far as dividends are concerned, this is a non-sequitur. If dividends are reduced on account of the merger, more rather than less funds will be available for investment both in-region and out-of-region. More generally, out- of-region investment is no less likely to be procompetitive than in-region investment. Finally, the commenters ignore the combined firm's increased incentive to satisfy Section 271, and thereby to increase its focus on in-region investment. I. Qualifications I am an economist, president of Economists Incorporated, and visiting professor of economics at Stanford University's Stanford-in-Washington internship program. Previously, I served as chief economist of the Antitrust Division of the U. S. Department of Justice, and the White House Office of Telecommunications Policy. I testified on behalf of the United States in the case that led to the dissolution of AT&T. I have consulted for and filed testimony on behalf of various telecommunications firms, including AT&T, MCI and Sprint. I have written a number of articles and books on topics related to antitrust and to telecommunications policy. In particular, I co-authored with Roger Noll two articles explaining the economic theory of the lawsuit that led to the breakup of AT&T and the basis for the prophylactic restrictions placed on the RBOCs by the Modification of Final Judgment. A copy of my curriculum vit‘ is attached to this paper. II. Premerger incentives The basic incentive structure facing an RBOC with respect to Section 271 is not complicated. There are costs and benefits, and each will differ, depending on the timing of authorization and other factors. The benefits are the potential profits to be earned from entering the long distance business. As discussed above, an RBOC will have the incentive to provide not only in-region interLATA services to local customers but also out-of-region services. The cost of satisfying Section 271 has two parts. The first is the direct investment in systems and facilities required by the Section 271 conditions. The second is the loss of profits associated with a lower market share of and competitive entry into the local exchange business. Each of these costs and benefits is a flow which can be expected to change over time as market shares, costs and prices respond to changing market conditions. In other words, an RBOC's market shares in long distance and in local exchange markets are not likely to be the same immediately after Section 271 authority is obtained as they will be two or three years later. In addition, there are market risks that affect the rates at which future costs and revenues must be discounted to present value. If we regard the amount and timing of expenditure on obtaining Section 271 authority as the policy variables, an RBOC will rationally within relevant legal constraints try to schedule that expenditure so as to maximize the discounted expected value of net profits resulting from these streams of costs and benefits. III. Postmerger incentives The Qwest/U S WEST combined company will of course inherit U S WEST's current incentive structure. I assume that the management of the combined company will be at least as efficient as that of U S WEST at present. But ILEC business opportunities will no longer be the only factor influencing the combined company's incentives. I understand that currently US WEST leases in excess of 98 percent of its interLATA "official services" network from other carriers and that U S WEST owns no interLATA switches. By contrast, the combined company will own a nationwide long distance business and a national fiber optic network with substantial excess capacity. However, unlike other national long distance competitors, such as AT&T, MCI, and Sprint, the combined company will be handicapped by a service area that is "doughnut- shaped." That is, so long as its ILEC business fails to satisfy Section 271, the combined company will be unable to provide long distance service originating in a fourteen-state region of the country. If the combined company could serve the "hole" in the doughnut it would have greater revenues and lower costs. Its revenues would be greater because of direct sales opportunities in the fourteen-state region and because it could offer a more attractive nationwide service to customers in all parts of the country. In particular, it would be better able to compete for the business of customers that require service at both in-region and out-of-region locations and the business of wholesale customers seeking regional or nationwide network capacity. Its unit costs would be lower because of higher utilization of its newly- constructed network, the cost of which is sunk. The combined company's potential profit from entering the long distance business in the fourteen-state U S WEST region therefore will be greater than U S WEST's current potential profit from satisfying Section 271. It is this difference in the potential profitability of supplying long distance service that bears on the combined company's incentive to achieve Section 271 authority more rapidly. The combined company can expect greater net profits from satisfying Section 271 than U S WEST alone could expect for three reasons: First, and probably most important, the combined company will already have a nationwide network with substantial capacity, while U S WEST entering on its own would have to obtain national network capacity at prevailing market prices or through new construction. The combined company will own Qwest's new Macro Capacitysm Fiber Network. This network connects approximately 150 metropolitan areas, areas that originate over 95% of all telephone calls made in the United States. The network has a speed of up to 10 gigabits per second; can carry voice, video, and data; and can support any Internet-enabled services, including Internet protocol voice transmissions. U S WEST, on the other hand, as noted above, does not own a national network or even an in- region official services network that might be adaptable to provide interLATA services. The combined company's inheritance of a nationwide network significantly increases its incentives to compete for long distance traffic, relative to those of U S WEST. The combined company will want to attract long distance traffic to fill its network capacity and ensure that it can profit on its investment in a nationwide network. In considering the profitability of attracting long distance traffic, the combined company would not take into account the cost of the capacity, because that cost is already sunk. Further, the combined company will not take into account operating costs that might vary with network capacity or route distance, but which do not vary with capacity utilization rates, because these also are costs that will be incurred regardless of whether the combined company has in-region traffic. Even apart from the loss of revenue that will result from the applicable interLATA restrictions after the merger, the Qwest network will have substantial excess capacity, including the enormous capacity associated with dark fiber. The current capacity of Qwest's network exceeds the combined capacities of AT&T, MCI WorldCom, and Sprint. The new company will have a strong incentive to satisfy Section 271 as quickly as possible to begin utilizing the capacity already available on the Qwest network. Put differently, as long as the combined company fails to satisfy Section 271, it will incur an opportunity cost for the portion of the network that Section 271 compliance would permit it to fill, because the stream of services that could be supported by the idle capacity is perfectly perishable it cannot be stored for later use. In contrast, U S WEST on its own would have to obtain capacity to carry long distance traffic either by building or leasing facilities or acting as a reseller on others' networks. As a result, U S WEST would have to take into account the cost of new capacity it would have to obtain in evaluating the profitability of entering into the long distance business. Second, the combined company would earn greater profits from long distance service outside the U S WEST region if it were able to offer interLATA service within the U S WEST region. After Section 271 authority is obtained, demand from present and potential out-of-region long distance customers will be enhanced by the combined firm's ability once again to offer service on a national network. In the meantime, until Section 271 is satisfied, Qwest's out-of-region business will suffer because of Qwest's inability to offer national service. Many customers, including multi-location businesses and long distance wholesale customers, insist on dealing with a long distance provider that can offer ubiquitous service. Other customers may want to reduce their transactions costs by purchasing long distance service from a single long distance carrier even though the carrier may lease some of its network from other carriers. There are various reasons why many customers, including multi-location businesses, prefer to deal with a single long distance provider that can offer national service on an integrated basis. According to AT&T President John Zeglis, "Customers are looking for one source to provide seamless voice and data service." Single source procurement of telecommunications services offers a number of advantages for large companies and other entities. For example, high volume business customers often prefer single contracts with one telecommunications supplier because all of their traffic volume can be combined to achieve better volume discounts. When AT&T acquired Teleport Communications Group in 1998, AT&T reported that it would " [O]ffer single points of contact for local and long-distance services and customer care, enterprise solutions for businesses with multiple locations, volume discounts across services and an integrated bill for customers who want it." Third, Section 271 satisfaction should be more attractive to the combined company than it would be to U S WEST alone because the combined company, with its existing national network and customer base, would have both a demand-side and a supply-side head start and thus be able to develop the business much faster than U S WEST alone. The incremental revenues and profits available to the combined company after satisfying Section 271, building on Qwest's national network, established brand identity, specialized products, customer base and existing interconnection arrangements, would exceed the initial revenues and profits available to U S WEST as a new entrant to long distance service. Thus, the present value of long distance revenues and profits arising out-of-region would be greater for the combined company than for U S WEST alone, both for the reason just discussed and because Section 271 authority will be obtained sooner with the merger than without. IV. The Comments The commenting parties do not dispute the points made in the merger application about the combined company's incentives to satisfy Section 271. Several of the commenters nevertheless attempt to show that incentives to discriminate post-merger will actually increase. However, the commenting parties fail to articulate a sound economic basis for their position on Qwest's post-merger Section 271 incentives. These commenters make three basic points. First, they contend that U S WEST, as an incumbent local exchange carrier, has the ability and incentive to discriminate against CLEC competitors who require access to U S WEST's local exchange facilities. Second, they claim that Qwest now offers CLEC services in U S WEST territory, directly or through affiliates, and that this fact increases the incentive and ability of the combined firm to discriminate against other CLECs and in favor of affiliated CLECs. Third, they claim that the merged entity will direct U S WEST profits away from shareholder dividends and in- region service improvements toward out-of-region projects. None of these arguments refutes the point that the combined firm will have a greater incentive to satisfy Section 271 requirements than does U S WEST alone, and that this is procompetitive. For example, it is not U S WEST's former incentive or ability to discriminate against local exchange competitors that matters, but the change in that incentive arising from the merger. As long as the combined company's incentive to facilitate competition is enhanced because its desire to achieve Section 271 authority is greater than U S WEST's alone, consumers will benefit. The greater the increase in this incentive, the greater the benefit to consumers, but even a small increase will benefit consumers. Similarly, even assuming for the sake of argument that RBOCs who also operate in-region CLECs may have some special discrimination or evasion of regulation opportunities, there is nothing about the Qwest/U S WEST transaction to exacerbate this situation. Qwest simply does not have significant in-region CLEC facilities today. More important, Qwest brings nothing to U S WEST in this regard that U S WEST could not readily, and much more easily than through this transaction, arrange for itself. U S WEST does not need to merge with Qwest in order to create in-region CLEC businesses on the trivial scale of Qwest's current interests. Finally, commenters' arguments about diversion of funds, including shareholder dividends, away from in-region investments such as improvements in service quality to out-of-region investment projects are entirely speculative. With regard to the argument about stockholder dividends, if stockholder dividends are instead reinvested in the business, those additional funds would become available for all investment purposes; it makes little sense to argue that an increase in internally generated investment funds would reduce investment. U S WEST today makes investment and dividend payout decisions on the basis of whatever incentives and opportunities its management perceives. U S WEST does not need to merge with Qwest in order to make out-of-region investments, including at least some of those contemplated by the merger parties. The merged company also will have some new investment opportunities arising from the combination itself. As I have demonstrated above, one of the new in-region opportunities will be the increased profitability of gaining Section 271 authority. More generally, out-of-region investment is no less likely to be procompetitive than in-region investment. Capital markets, generally regarded as efficient, would facilitate such investments whether or not dividends were reduced. The commenters have not offered any reason to doubt that investment resources will be allocated in an economically efficient manner among the opportunities facing the combined firm, or to doubt that the incentive to achieve Section 271 approval will be enhanced by the merger. In conclusion, there is no logical policy basis for the imposition of merger- related conditions on Qwest, not only because (as Dennis Carlton and Hal Sider point out) there are no merger-related anticompetitive incentives or opportunities, but also because the merger's only effect on in-region competition is to promote it. V. Conclusion The direction of the net effects of the incentives described above on the combined company is indisputable. The combination tends to make achieving Section 271 authority more profitable than before the merger. The merger causes no incentives working in the other direction, and more generally, creates no new incentives to restrict competition. The merger's only effect relevant to economic policy is its clear tendency to accelerate satisfaction of the Section 271 conditions in the fourteen-state U S WEST region. The foregoing is true and complete to the best of my knowledge and belief. October 18, 1999 Bruce M. Owen ATTACHMENT C QWEST PLAN FOR DIVESTITURE OF INTERLATA BUSINESS IN THE U S WEST REGION QWEST PLAN FOR DIVESTITURE OF INTERLATA BUSINESS IN THE U S WEST REGION October 1999 TABLE OF CONTENTS Page Introduction and Overview 1 I. Originating InterLATA Long Distance and Terminating 800 Services 2 A. Description of Divestiture Plan 2 B. Legal Analysis 3 II. Private Line VOICE and Data Services 4 A. Description of Divestiture Plan 4 B. Legal Analysis 5 C. Support Functions 6 1. Switch ports. 7 2. Billing and collection. 8 3. Customer care and provisioning. 8 4. Monitoring, trouble-shooting, maintenance, and repair. 11 III. Calling Card, Prepaid card, And Operator Services 12 A. Description of Divestiture Plan 12 B. Legal Analysis 13 IV. interLATA Information Services 15 A. Description of Divestiture Plan 15 B. Legal Analysis 15 CONCLUSION 16 QWEST PLAN FOR DIVESTITURE OF INTERLATA BUSINESS IN THE U S WEST REGION Introduction and Overview Qwest is currently providing interLATA interexchange services throughout the country, including in the U S WEST region. Qwest does not anticipate that U S WEST will have received interLATA relief before the pending merger of the two companies closes in the second quarter of 2000. As a result, prior to closing Qwest will take all steps necessary to discontinue providing interLATA services in the U S WEST region, and assign all existing service obligations to one or more independent interexchange carriers. Qwest has adopted two over-arching principles for divestiture: (1) minimize impact on customers, with seamless transition and no increase in rates; and (2) fully comply with the requirements of Section 271 of the Telecommunications Act of 1996. To that end, Qwest is currently engaged in the complex administrative process of implementing its divestiture. Qwest is completing the work of reviewing all customer contracts to identify interLATA services that must be divested as of closing. This has been a large undertaking, covering both retail and wholesale accounts. Simultaneously, Qwest has been addressing the operational issues associated with divesting services. The divestiture plan set forth here is the product of this activity. Next Qwest will begin to meet with potential buyers of the services to be divested. For simplicity, this plan generally refers to a singular "Buyer," but in fact Qwest may divest different services to different carriers, and the plan should be understood as referring to any Buyer unless otherwise noted. In each case Qwest's divestiture of services will be final and irrevocable, with no right for Qwest to reacquire the customers at a later point. Buyer will be independent of Qwest. It will be expected to hold FCC Section 214 authority and certificates in the relevant states, and to be technically and operationally able to take on service obligations in a timely fashion without customer disruption. It should be emphasized that Qwest does not plan to sell its existing fiber optic transmission plant. Qwest will continue to use that plant to provide telecommunications services originating outside the U S WEST region, or incidental interLATA services, as permitted by Section 271 of the Act. To the extent that Buyer needs to supplement its existing transmission network in order to meet the interLATA service obligations it assumes, it will have to obtain wholesale transmission services from a different carrier. Qwest may be a vendor to the Buyer of certain support functions such as billing and collection, but Qwest is cognizant that it may not provide wholesale interLATA telecommunications services as defined by the Act. As a condition of acquiring Qwest's in-region service business, Buyer will be obliged to assume all of Qwest's existing contractual obligations and agree not to raise rates for Qwest-tariffed services for a specified interval. Qwest and Buyer will provide advance notification of the change in service provider, and take other actions to make the transition smooth and uneventful for customers. Set forth below is a detailed description of how Qwest intends to divest each of its in-region interLATA service categories. This memorandum also provides a summary of how the divestiture plan meets the statutory requirements of Section 271. Again, Qwest's objective is to satisfy the Telecom Act without adverse impact on customers as they are assigned to a new carrier. Qwest may continue to adjust the plan in minor respects as it negotiates with potential buyers, pursues operational issues, and meets with its customers. However, Qwest is confident that its divestiture process will move forward expeditiously so as to permit a closing in the second quarter of 2000. I. Originating InterLATA Long Distance and Terminating 800 Services A. Description of Divestiture Plan Qwest will irrevocably transfer its in-region interLATA originating switched long distance business, and in-region interLATA terminating 800 business, to a certificated carrier as of closing. The cutover to the new carrier will be done on a seamless and transparent basis, just as customers change long distance service providers routinely today. Customers located wholly outside the 14 U S WEST states will not be affected by divestiture. Qwest will continue to provide out-of-region long distance and terminating 800 service. Where Qwest currently is providing service to large business accounts with locations both inside and outside the U S WEST region, Qwest will divest the in-region interLATA services to Buyer under the same processes discussed here. This divestiture will not result in rate increases to consumers. The new carrier will agree, as a condition of buying the divested business, not to increase rates to customers taking service under tariff for a fixed period still to be determined. / Any rate changes made by the Buyer thereafter will be subject to the regulatory policies of the FCC and state public utility commissions. Customers will receive advance notice of the change in their long distance carrier, including a reminder that they have the ability to take their business to another IXC. Insofar as customers take service under contracts, the new carrier will assume responsibility for meeting all terms of those contracts (including price and service quality conditions) related to the in-region interLATA services. When the contract expires, the customer may negotiate new interLATA arrangements with any carrier it wants, but not Qwest prior to Section 271 relief. The Buyer will be independent of Qwest, and will provide service to customers over its own transmission network and local access. Qwest will not provide the new carrier with any prohibited in-region wholesale interLATA transmission services. Buyer may contract with Qwest for certain support functions that do not constitute the provision of "telecommunications" under the Act, especially where doing so will minimize impact on customers. For example, Buyer may lease the use of ports on Qwest interexchange voice switches, and/or request specific billing and collection or customer care support. However, it is premature to determine the Buyer's need for these functions. B. Legal Analysis This divestiture plan will completely remove Qwest from the in-region interLATA services market with respect to originating long distance and terminating 800 service, as required by Section 271. Qwest is allowed to provide out-of-region and incidental interLATA services pursuant to Section 271(b)(2) and (3) of the Act. Purely as an implementation measure, Qwest and Buyer would jointly seek a waiver of 47 C.F.R.  64.1100 et seq. in order to assign tariff-based customers from Qwest to Buyer without obtaining individual Letters of Authorization and verification from each end user. The Bureau has granted numerous such LOA waivers recently in similar circumstances. / Qwest and Buyer will design the divestiture transition to meet the conditions identified in previous LOA waivers. As noted above, Qwest will ensure that customers taking service under tariff are fairly protected through commitments by Buyer to provide service to these customers at the same or more favorable rates for a certain period of time. Qwest and Buyer also will provide customers with information about their right to move to a different IXC. No LOA waiver is required in the case of business customers who have signed contracts consenting in advance to assignment to another service provider. However, Qwest and Buyer will contact those customers, notify them of the assignment, assure them that Buyer will meet the contract terms, and answer any questions. Qwest expects the support functions to be provided in connection with these switched services to be limited. These matters are addressed in detail in Section II.C below, and that legal analysis is incorporated here. II. Private Line VOICE and Data Services A. Description of Divestiture Plan Qwest will irrevocably assign a new carrier (or carriers) all retail and wholesale private line voice and data services where a circuit provided to a customer crosses a U S WEST LATA boundary. The Buyer will assume all Qwest tariff and contract commitments to customers, including those related to price and service quality. Qwest and the Buyer will communicate with customers in advance of the cutover to explain the change in service provider and address any customer questions. As permitted by the Telecom Act, Qwest will continue to provide private line voice and data services outside the U S WEST region. Where a customer network has locations both inside and outside U S WEST LATAs, Qwest only will provision out-of-region circuits, and will interconnect with the Buyer at a location outside the U S WEST region. The Buyer will become the customer's carrier of record for circuits crossing U S WEST LATA boundaries and assume all responsibility for providing that service. The Buyer will be required to provision any Qwest-prohibited interLATA circuit over a transmission network that it owns or controls. Qwest will not provide such wholesale transmission service. Buyer may contract to lease the use of ports on Qwest data switches, connecting non-Qwest interexchange and access transmission circuits to those switches. Buyer may also contract with Qwest for other support functions useful in meeting customer requirements. This support may include some combination of billing and collection, customer care and provisioning, and/or monitoring, troubleshooting and related repair activities. Any such support would be provided pursuant to arm's length contracts, under the direction and control of Buyer, and consistently with the Telecom Act. Qwest provides dark fiber under term leases in a few instances where the fiber path crosses U S WEST LATA boundaries. Qwest will discontinue or divest these arrangements. By contrast, Qwest also has sold IRUs in its network outright. These sales conveyed ownership rights in specific dark fibers for the economically useful life of the fiber. The purchaser obtained control over the fiber, and is treated as the owner for tax and accounting purposes. Qwest has no legal ability to unwind these completed sales. / In some instances Qwest separately receives recurring revenue for work to maintain the IRU fibers and buildings where the IRU owner has installed regeneration or amplifier equipment, or related monitoring and repair activity. Qwest will continue to provide these functions. B. Legal Analysis Divestiture of all dedicated voice and data interLATA services in the U S WEST service area that cross LATA boundaries completely satisfies the requirements of Section 271. Qwest may continue to provide out-of-region and incidental services pursuant to Sections 271(b)(2) and (3) of the Act. No issue arises from the fact that other parties previously have purchased ownership rights through IRUs in fiber facilities that Qwest has constructed. Section 271 prohibits BOCs from prematurely providing "interLATA service," which Section 3(21) defines as "telecommunications between a point located in a [LATA] and a point located outside such [LATA]." In turn, "telecommunications" is defined by the Act as "the transmission, between or among points specified by the user, of information of the user's choosing without change in the form or content of the information as sent and received." 47 U.S.C. (3)(43). In this case, Qwest is not engaged in any transmission whatsoever. Qwest is aware of the Commission's dictum that a BOC may violate Section 271 if it owns a fiber and "merely leases it to the customer for a term of years." / This statement appears to rest on pre-Act law. / Nevertheless, in the interest of expediting the merger closing, Qwest is undertaking to divest itself of dark fiber leases where the fiber in question crosses U S WEST LATA boundaries. However, the sale of dark fiber facilities is different from a term lease. The Commission itself has contrasted such a lease with the sale of a facility used in a network: "The one-time transfer of ownership and control of an interLATA network is not an interLATA service, which means it falls entirely outside the section 271/272 framework that governs interLATA services." / Qwest's IRU sales are in this category. Ownership and control has passed to the IRU buyers, and those completed transactions cannot be unwound. C. Support Functions Buyer may enter into arm's length commercial contracts with Qwest for one or more support functions. Such functions may reduce the impact of divestiture on customers, improve the quality or efficiency with which Buyer meets its interLATA service obligations, or reduce Buyer's costs. It is important to emphasize that none of these support functions would be provided by the U S WEST local exchange company (with the possible exception of billing and collection). Rather, the support would come from the Qwest out-of-region interexchange affiliate. In that sense, the arrangements would be akin to the assistance that non- dominant IXCs routinely contract to provide one another in the industry. Because this support activity does not constitute "telecommunications," Qwest may provide such assistance to Buyer without violating the Act. / The legal status of specific support functions is discussed below. 1. Switch ports. First, Buyer may contract for the ability to lease ports on Qwest data switches. This accommodation would permit Qwest customers to be transitioned to Buyer without reprovisioning of their access connections, thereby eliminating the possibility of access-related outages or other disruptions. Use of Qwest switch ports by Buyer also can simplify network routing activity. Qwest would assign Buyer its rights to any ILEC- or CLEC- provided local access used to reach the customer locations Qwest no longer can serve. / Buyer would leave that access physically in place, leasing the associated ports on the Qwest-owned switches. Qwest would permit Buyer to collocate at its data switch premises and connect non-Qwest interexchange transmission to the Buyer-leased ports. All Qwest-prohibited services would be transmitted by Buyer over Buyer's own interLATA circuits. Going forward, Buyer would supplement its network as necessary to serve the growth requirements for the in-region interLATA business it has assumed. Qwest would agree to lease additional ports as necessary to support new Buyer access and interexchange facilities. The lease of a switch port is not the provision of "telecommunications," let alone interLATA service. Rather, the switch port is "telecommunications equipment", defined in Section 3(45) of the Act as "equipment * * * used by a carrier to provide telecommunications services." The switch port also can be seen as a "network element," that is, "a facility or equipment used in the provision of a telecommunications service" under Section 3(29) of the Act. The Commission has specifically held that "[a] 'network element' is not a 'telecommunications service.'" / The Commission similarly has found in other situations that a party is not engaged in "telecommunications" when it supplies equipment used for transmitting information, but is not itself the transmitter. / 2. Billing and collection. Buyer also may contract with Qwest for billing and collection services. This function would permit customers to continue to receive a single bill for their in-region and out-of-region interexchange services. To avoid customer confusion, any bill would make clear that Buyer alone is the provider of the in-region interLATA services. As noted above, Qwest would have no role in setting or influencing the prices charged by the Buyer (except insofar as Buyer assumes Qwest's pre-existing contractual obligations for the balance of the contract term). Nor would Qwest share in the revenues received by the Buyer. Billing and collection is an unregulated, non-common carrier service / that BOCs (including U S WEST) have been providing for unaffiliated IXCs operating in their regions since the AT&T divestiture. It is not a "telecommunications" service as defined by the Act. There is clearly no Section 271 impediment to Qwest's provision of billing and collection to the Buyer in this context. 3. Customer care and provisioning. Buyer also may contract with Qwest for other customer care and provisioning functions. Any such functions would be performed on behalf of, and under the direction of, the Buyer. This activity may be particularly useful to support a smooth transition of in-region customers to Buyer, and to support customers who continue to receive out-of-region services from Qwest post- divestiture. In all cases the Buyer will be clearly identified to customers as the provider of the in-region interLATA services. The scope of customer care support required by the Buyer remains to be determined. However, in principle, Buyer customers could call a customer service representative employed by Qwest to place service orders, discuss their bills or make payment arrangements, obtain other information about the services available, or report technical trouble with their service. Buyer would be identified as the interLATA service provider in all such customer contacts. Similarly, Buyer could contract with Qwest for assistance in provisioning activity. Qwest might act as Buyer's agent to arrange local access, interface with national 800 numbering organizations, physically install circuit connections to leased ports in the Qwest premise, or handle similar back-office functions. None of these activities constitute the provision of "telecommunications" as defined by the Act. None of them are regulated common carrier services. BOCs, including U S WEST, provide these functions today. Qwest may similarly provide them to the Buyer of its divested services. / Qwest recognizes that, in the Teaming Order, the Commission expressed concern regarding customer care provided by BOCs on behalf of an in-region IXC. / The Commission concluded that Section 271 issues arise where "a BOC's involvement in the long distance market enables it to obtain competitive advantages, thereby reducing its incentive to cooperate in opening its local market to competition." / This situation, however, is entirely different. As noted above, it is relevant that customer care support would be offered by the Qwest out-of-region IXC affiliate, and not the U S WEST ILEC. Nothing in the Telecom Act prevents an out-of-region RBOC affiliate from providing support services to another IXC, even when, as here, the two carriers would be serving the same customer. / In any event, the Teaming Order is distinguishable on its own terms. First, neither Qwest nor U S WEST would obtain "material benefits * * * uniquely associated with the ability to include a long distance component in a combined service offering." / The customer care functions contemplated here do not involve "one-stop shopping" or "full service" combined local/long-distance offerings (with which the Commission was concerned in the Teaming Order). / Second, the BOC would not be "effectively holding itself out as a provider of long distance service" within its region, / because Qwest and the Buyer will make it clear that long distance service in the U S WEST region is to be provided by the Buyer. Qwest's customer care role would not "permit [a BOC] to use [its] local- market dominance in support of [its] offering in a manner that other carriers seeking to offer a similar combined service could not do." / Finally, the customer care functions that Qwest might perform would not include activities that are central to the legal or contractual responsibilities of an interLATA service provider. Most critically, Qwest would have no involvement in setting the prices that the Buyer will charge to end users. / The Commission has previously stated that customer care functions "would be analogous to billing and collection arrangements and would be permissible under section 271" in these circumstances. / 4. Monitoring, trouble-shooting, maintenance, and repair. Because Qwest will continue to operate as an out-of-region facilities based IXC, it will continue to engage in various monitoring, trouble-shooting, maintenance and repair activities. Qwest anticipates that some potential buyers may want to contract with Qwest for it to provide similar functions on their behalf. Qwest already provides these kind of support functions, and is prepared to offer them to the Buyer here under arm's length contracts. For example, Qwest has the capability to monitor circuits and make predetermined routing changes at its switch ports leased by Buyer in the event of faults (based on Buyer's advance instructions, and assuming Buyer has arranged to have alternate facilities in place). Qwest also could begin fault isolation on Buyer's behalf; effect repairs to the switch if the problem is in a Buyer-leased port; or open trouble tickets with other carriers as Buyer's agent to obtain repair activity by them. Importantly, in all circumstances Qwest would provide these support functions under the absolute control and direction of its customer, the Buyer. The Buyer would bear all responsibility for directing Qwest employees regarding actions that might affect Buyer's interLATA services. Buyer would designate policies and standards, and make all material decisions, related to operation of the particular network elements. Buyer will contract for such support activities to the extent that they permit Buyer to offer customers better service quality more efficiently and at lower cost. These support functions may be particularly useful as Buyer assumes the service quality and other obligations present under existing Qwest customer contracts. Qwest is sensitive to ensuring customers that the divestiture process will be as transparent to them as possible. If by providing these support functions Qwest can contribute to limiting the impact on customers of the assignment to a new carrier, the public interest is clearly served. None of these support functions itself constitutes the provision of "interLATA telecommunications" because in no case will Qwest be engaged in the transmission of information. / Nor will Qwest be holding itself out as an interLATA service provider. Thus, this activity does not violate Section 271. III. Calling Card, Prepaid card, And Operator Services A. Description of Divestiture Plan Qwest plans to discontinue the in-region interLATA components of its current calling card and operator service-related offerings, including: (1) calling cards, (2) prepaid phone cards, and (3) operator-assisted long-distance services using 0+, 0 , 101-XXXX, and similar dialing patterns. Calling Cards. Qwest will divest its in-region calling card service to another certificated carrier and discontinue providing this service to card customers. Cardholders will continue to receive service as before, without interruption, from the new carrier over that carrier's network. The new carrier will commit not to increase customer rates for a specified period after the cutover, and thereafter will modify rates only pursuant to applicable regulatory rules. Where calling card services also are provided under contract, the buyer will assume the applicable contract obligations. Qwest will not provide Buyer any wholesale in-region interLATA telecommunications services. Buyer may contract with Qwest to license use of Qwest's proprietary calling card platform and to receive customer care and billing support functions from Qwest. The Qwest platforms are located outside the U S WEST region in Dublin, Ohio and San Antonio, Texas. Buyer would obtain its own transport to and from the platform for purposes of transmitting customer traffic. All Qwest support would be provided under the control and direction of Buyer. All interfaces with customers will make clear that telecommunications services are provided by Buyer. Qwest also expects to market calling card services as an agent of Buyer. Again, however, Buyer will establish all prices and be identified clearly to customers as the service provider. Qwest will not share any revenues from the provision of in-region interLATA services provided by Buyer. Prepaid Cards. Qwest will divest its prepaid long distance card business to another interexchange carrier. That carrier will assume all responsibility for provisioning the prepaid service. Service to customers will not be interrupted. Cards will work as normal, with traffic routed to Buyer for delivery. Buyer will commit to continue to serve customers at the applicable rates promised for cards circulating in the marketplace at divestiture. When customers contact the customer service number on the cards, they will be informed that Buyer is now the provider of interLATA services. After the merger closing Qwest will market new prepaid cards, but only as the agent of the Buyer. The Buyer will establish all service rates and continue as the identified carrier. Qwest will not share in in-region interLATA service revenues. Operator Services. Qwest will discontinue handling operator-assisted in- region interLATA calls using 0+, 0 , 101-XXXX, and similar dialing patterns. Any contractual commitments to provide operator services on behalf of hospitality, COCOT or other aggregators will be assigned to a new carrier who will abide by the contract terms, but otherwise will be free to establish its own rates, terms, and conditions going forward. This new carrier will be responsible for obtaining its own telecommunications network facilities to handle these calls. B. Legal Analysis Qwest has structured its divestiture plan to fully exit the provision of in- region interLATA card and operator services consistently with the terms of the Telecom Act. Qwest will discontinue providing either retail or wholesale in-region interLATA telecommunications services used with these products. Qwest's residual marketing activity in this area will conform to prior precedent. For example, ever since the AT&T divestiture BOCs have offered their customers calling cards that enable customers to place interLATA calls, using the telecommunications services of other authorized carriers. / Since the enactment of the Telecom Act, U S WEST and other RBOCs have continued to provide such calling card offerings pursuant to Section 271(f), which permits RBOCs and their affiliates to continue providing previously authorized services. In this regard, Qwest is patterning its continuing in-region calling card services on the existing offerings of U S WEST and other RBOCs and their affiliates. / Like those companies, Qwest will inform consumers that a different carrier will handle in- region originating interLATA calls. Qwest's provision of calling card platform and customer care support would not change this analysis. As discussed in the preceding section, such support functions do not constitute the provision of "telecommunications" services, and hence are permitted by the Act. Similarly, Qwest's marketing of prepaid cards would not violate the Act. Qwest will conform its operations to accord with the structure recently approved by the Common Carrier Bureau in the context of BellSouth's prepaid activities. The Bureau held that BellSouth's prepaid card was distinguishable from unlawful teaming arrangements because it did not "capitalize on, or directly utilize, the company's local market base," nor did it "entrench[ ] its local market share or effectively pre-position[ ] itself in the long-distance market." / The Bureau also found that even though BellSouth's brand appears on the card, BellSouth "does not hold itself out as providing long-distance service" through the card offering. / For these reasons, and because BellSouth did not control the price, format, or other aspects of the long distance service and the prepaid card did not raise other competitive concerns, / the Bureau held that the prepaid card was consistent with Section 271. The same will be true with respect to Qwest's activities. / IV. interLATA Information Services A. Description of Divestiture Plan Qwest will discontinue the interLATA information services, as well as the interLATA telecommunications services used in connection with other providers' information services, that it currently provides in the U S WEST region. It will continue to provide such services outside the U S WEST region, and as well as in- region information services that do not "incorporate as a necessary, bundled element an interLATA telecommunications transmission component, provided to the customer for a single charge." / This change will affect two categories of Qwest offerings: (i) web hosting services for e-commerce and other Internet-based applications; and (ii) dial-up and dedicated Internet access services. Where customers currently connect to Qwest information services across U S WEST LATA boundaries, Qwest will ensure that those customers obtain transport service from another carrier. Similarly, where Qwest provides Internet access or information services that incorporate interLATA transport in the U S WEST region, it will restructure those services to separate the interLATA transport component. Insofar as Qwest has preexisting contractual commitments to provide interLATA transport or Internet access in the U S WEST region, it will divest those transport commitments to another carrier who will assume responsibility for providing the services on the same terms and conditions. B. Legal Analysis The Commission has held that prior to receiving Section 271 clearance, BOCs and their affiliates may offer an information service, even if an interLATA transmission service is necessary for a customer to obtain access to such a service, as long as the interLATA transmission component is separately provided by another carrier and is neither provided nor resold by the BOC. / Qwest will take the necessary measures to structure its information service offerings in a manner that does not incorporate, as a necessary, bundled element, in-region interLATA transmission. It also will ensure that all prohibited interLATA transmissions in the U S WEST region are provided by a third-party carrier or carriers, who will have the direct contractual relationship for the provision of such services to customers who subscribe to Qwest's information services. Qwest recognizes that a number of proceedings now before the Commission raise questions about whether, and to what extent, Internet-related information service offerings constitute interLATA information services. In the context of certain Internet-related offerings, the line separating information services from telecommunications services is not entirely clear. / The issues raised in these proceedings are generic to the entire industry. To the extent the Commission resolves questions regarding the status of particular interLATA information services in the future, post-merger Qwest will comply fully with such conclusions. CONCLUSION Qwest has designed its divestiture plan to comply fully with Section 271 of the Telecommunications Act. The plan also will permit the divestiture of its existing in-region interLATA business with the least possible impact on customers. Qwest is proceeding promptly to implement this plan so that its merger with U S WEST can close as soon as possible. Qwest looks forward to the day when it will be able to reenter the in- region interLATA market following successful implementation of the Section 271 process in the U S WEST region. Qwest is committed to working actively toward that end once the merger is closed. We have noted elsewhere how the merger will increase the incentives of U S WEST to satisfy the requirements of Section 271. The sooner the merger closes, the sooner those incentives can take effect. CERTIFICATE OF SERVICE I, Barbara E. Clocker, hereby certify that on this 18th day of October, 1999, copies of the foregoing "Response to Comments on Applications for Control" were served by hand delivery or by overnight delivery (where indicated) to the following: Michael G. Jones Willkie Farr & Gallagher (Attorneys for McLeod USA Telecommunications Services) 1155 21st Street, NW Suite 600 Washington, DC 20036 Ruth Milkman Lawler, Metzger & Milkman (Attorneys for Allegiance Telecom, Inc.) 1909 K Street, NW Suite 820 Washington, DC 20006 Robert W. McCausland, Vice President* Regulatory and Interconnection Allegiance Telecom, Inc. 1950 Stemmons Freeway, Suite 3026 Dallas, TX 75207-3118 Daniel M. Waggoner Gregory J. Kopta Robert S. Tanner Davis Wright Tremaine (Attorneys for Nextlink, ATGI, GST and Firstworld) 1500 K Street., NW Suite 450 Washington, DC 20005 R. Gerard Salemme Daniel Gonzalez Alaine Miller NEXTLINK 1730 Rhode Island Ave., NW, Suite 1000 Washington, DC 20036 Kath Thomas* Advanced Telecom Group, Inc. 100 Stony Point Road, Suite 130 Santa Rosa, CA 95401 Brian D. Thomas* Gary Yaquinto GST Telecommunications, Inc. 4001 Main Street Vancouver, WA 98663 Victoria T. Aguilar* First World Communications Inc. 8390 E. Crescent Parkway, Suite 300 Greenwood Village, CO 80111 Gary Slaiman Kristine Debry Swidler Berlin Shereff & Friedman (Attorneys for Ensure Responsible Billing) 3000 K Street, NW Suite 300 Washington, DC 20007 James R. Scheltema Blumenfeld & Cohen (Attorneys for Rhythms Netconnections, Inc.) 1625 Massachusetts Ave., NW Suite 300 Washington, DC 20036 Jeffrey Blumenfeld* Chief Legal Officer General Counsel 5933 S. Revere Parkway Englewood, CO 80112 Richard S. Becker James S. Finerfrock Richard S. Becker & Associates (Attorneys for TSR Wireless LLC) 1915 Eye Street, Suite 800 Washington, DC 20006 J. Carl Wilson Lisa B. Smith MCI WorldCom, Inc. 1801 Pennsylvania Ave. Washington, DC 20006 Mark Rosenblum* Roy Hoffinger Aryeh S. Friedman AT&T 295 N. Maple Ave. Basking Ridge, NJ 07920 Thomas M. Koutsky Jason Oxman Covad Communications Company 600 14th Street, NW, Suite 750 Washington, DC 20005 Clay Deanhardt* Covad Communications Company 2330 Central Expressway, Building B Santa Clara, CA 05050 J. Richard Smith* Craft Fridkin & Rhyne 1100 One Main Plaza 4435 Main Street Kansas City, MO 64111 Peter Froning, Executive Director* New Mexico Rural Dev. Response Council Alvarado Square, Mail Stop 0402 Albuquerque, NM 87158 John W. Mooty* Gray, Plant, Mooty, Mooty & Bennett (Attorneys U S WEST Retiree Assoc.) 3400 City Center 33 South Sixth Street Minneapolis, MN 55402 Kathryn Brown Chief of Staff Federal Communications Commission 445 Twelfth Street, SW, Room 8-B201E Washington, DC 20554 Thomas Power Legal Advisor to Chairman Kennard Federal Communications Commission 445 Twelfth Street, SW, Room 8-B201L Washington, DC 20554 Linda Kinney Legal Advisor to Commissioner Ness Federal Communications Commission 445 Twelfth Street, SW, Room 8-B115D Washington, DC 20554 William Bailey Legal Advisor to Commissioner Furchtgott-Roth Federal Communications Commission 445 Twelfth Street, SW, Room 8-A302E Washington, DC 20554 Kyle Dixon Legal Advisor to Commissioner Powell Federal Communications Commission 445 Twelfth Street, SW, Room 8-A204E Washington, DC 20554 Kathryn Brown Chief of Staff Federal Communications Commission 445 Twelfth Street, SW, Room 8-B201E Washington, DC 20554 Adam Krinsky Legal Advisor to Commissioner Tristani Federal Communications Commission 445 Twelfth Street, SW, Room 8-C302B Washington, DC 20554 Lawrence Strickling, Chief Common Carrier Bureau Federal Communications Commission 445 Twelfth Street, SW, Room 5-C450 Washington, DC 20554 Robert Atkinson Deputy Chief Common Carrier Bureau Federal Communications Commission 445 Twelfth Street, SW, Room 5-C356 Washington, DC 20554 Carol Mattey, Chief Policy and Program Planning Division Common Carrier Bureau Federal Communications Commission 445 Twelfth Street, SW, Room 5-B125 Washington, DC 20554 ITS 1231 20th Street Washington, DC 20554 Office of Public Affairs 445 12th Street, SW, Room CY-C314 Washington, DC 20554 Margaret Egler Common Carrier Bureau 445 12th Street, SW, Room 5-C100 Washington, DC 20554 Lauren Kravetz Wireless Telecommunications Bureau 445 12th Street, SW Room 4-A163 Washington, DC 20554 Joanna Lowry International Bureau 445 12th Street, SW, Room 6-A831 Washington, DC 20554 CeCi Stephens Policy & Program Planning Divison Common Carrier Bureau Federal Communications Commission 445 12th Street, SW, Room 5-C140 Washington, DC 20554 Barbara E. Clocker