XI. Market Power Standard

Market power is the primary issue in this consolidated proceeding because it is the only criteria that Pacific Bell must satisfy to justify re-classifying its Centrex, Toll-Free, and Business MTS services from Category II to Category III. By definition, a service is placed in Category III if it has satisfied one of two conditions. These conditions are that the service has been detariffed due to statutory requirements or federal preemption, or that the local exchange carrier is able to show that "it has or is expected to have insignificant market power in the provision of the service in each market it intends to service."⁸ Because the services identified in this consolidated proceeding were neither detariffed nor preempted by the Federal Communications Commission, the burden of proof is on Pacific Bell to substantiate that it has or is expected to have "insignificant market power" for the services it wants re-classified to Category III.

The critical test for determining whether Pacific Bell has insignificant market power is whether Pacific Bell could retain its market share in the wake of any attempt to raise its prices above-competitive levels.⁹ The primary determinants of market power are ease of entry and exit, demand elasticity, supply elasticity, and market share.¹⁰ A consideration of market share may prove helpful in determining market power, although this remains less critical than considerations of market entry and exit and the elasticities of supply and demand. This is because courts have often found firms with greater than a 50% share not to have market power.¹¹

A. Pacific Bell's Position

To meet the burden of proof that it has insignificant market power in the Centrex, Toll-Free, and Business MTS IntraLATA Toll services, Pacific Bell utilized the "1992 Horizontal Merger Guidelines of the U.S. Department of Justice and the Federal Trade Commission" (Merger Guidelines). The same Merger Guidelines were previously used by Pacific Bell to substantiate a need to re-categorize, among other services, its Business and Residential Inside Wire services from Category II to Category III.¹²

The Merger Guidelines framework requires an assessment to determine whether Pacific Bell has the ability to exercise unilateral market power. That is, whether Pacific Bell has the ability to increase the price for a service above the competitive level for a significant amount of time. Pacific Bell utilized four steps to make this assessment: it defined the relevant markets, assessed the ease of entry into and exit from the markets at issue, assessed the demand elasticity¹³ of substitutes for its services, and assessed the supply elasticity¹⁴ of substitutes for its services.

B. ORA's Position

ORA opposed any reliance upon the Merger Guidelines to evaluate the extent of Pacific Bell's market power because ORA believes that the Commission is not bound by the Merger Guidelines. In addition, ORA believes that Pacific Bell applied the Merger Guidelines in a selective and inconsistent manner and failed to undertake the detailed analysis required by the Merger Guidelines to assess whether Pacific Bell can exercise market power.

ORA recommended, instead, that we utilize the nine market power criteria¹⁵ that it proposed in this proceeding to assess whether Pacific Bell has

insignificant market power for the requested services in this and all future requests for Category III treatment or similar request for regulatory flexibility. ORA's recommendation is based on the market power criteria addressed in D.89-0-031¹⁶ and D.90-04-031. ORA believes that its proposed market power criteria are general enough to allow for flexibility in the evaluation of service-specific data. ORA also recommended that each of the nine criteria be evaluated with six service-specific factors.¹⁷

C. Discussion

The Commission decisions relied on by ORA did address the market power criteria. However, we concluded in D.89-10-031 that any reliance on such criteria would be very service-specific. Hence, we specifically chose not to establish definitive criteria to determine insignificant market power, and we left the responsibility of proposing criteria for assessing market power up to Pacific Bell through the application process at the time it seeks to re-categorize a service to Category III.¹⁸

In response to applications for rehearing of D.89-10-031, a process in which the Division of Ratepayer Advocates¹⁹ participated, D.90-04-031 affirmed that assessment of market power would likely continue to be a very service-specific undertaking. Hence, the market power criteria addressed in D.89-10-031 and D.90-04-031 were not required to be addressed in each and every request to place a service in Category III. However, each such request for re-categorization should address whether each of the criteria²⁰ is applicable and, if so, include the relevant information.

The burden of proof in this proceeding lies with Pacific Bell. This is not the proceeding to litigate or fine-tune the market power criteria. To now require a submission of extensive data on every single criterion as proposed by ORA would result in cumbersome and lengthy proceedings. Such an outcome would defeat one of the very goals our policies on re-categorization of services seek to meet - permitting carriers the ability to timely change prices of services offered in competitive markets in response to market conditions.

Pacific Bell addressed the D.89-10-031 and D.90-04-031 market power criteria it deemed applicable in its testimony and brief, including aspects of the Merger Guidelines. Pacific Bell also used the Merger Guidelines with market power criteria it deemed relevant to obtain Category III status for its Business and Residential Inside Wire services.²¹ To the extent that Pacific Bell concluded that certain criteria were relevant in this proceeding, it provided additional information.

D. Conclusion

Pacific Bell has complied with prior Commission decisions in regard to addressing the market power criteria it deemed relevant. To the extent that the evidence presented in this proceeding convinces us that Pacific Bell has insignificant market power as set forth in our prior discussion of the market power standard, Pacific Bell's re-categorization request should be granted. Conversely, to the extent that the evidence does not convince us that Pacific Bell has insignificant market power, its request should be denied.