(Updates with professor’s comment in 12th paragraph.)
Aug. 29 (Bloomberg) -- In a test of state clout over megamergers, New York regulators are threatening to disrupt Comcast Corp.’s acquisition of Time Warner Cable Inc. unless the companies agree to costly concessions.
From Albany to Sacramento, the nation’s two biggest cable providers are trying to appease state officials reviewing the $42.5 billion deal.
While the U.S. government is reviewing the alliance on antitrust grounds, states have authority over cable service on their soil. New York regulators have additional power due to a state law passed this year that requires cable mergers to benefit the public.
If a key state such as New York rejects the acquisition, it could lead the companies to abandon the plan.
“They definitely have leverage,” said Brad Ramsay, general counsel at the National Association of Regulatory Utility Commissioners, a Washington-based group that represents state regulators. “They can definitely extract concessions.”
The deal has become part of the New York gubernatorial campaign. Governor Andrew Cuomo, who has received more than $200,000 in combined campaign contributions from the companies, hasn’t taken a stance, while a rival for the Democratic nomination says she would reject the consolidation.
The New York State Public Service Commission is scheduled to vote on Oct. 2, and its staff has recommended the acquisition be approved only if concessions are included that it says would cost Philadelphia-based Comcast $300 million. The proposals would require a post-merger Comcast to keep jobs in New York, offer faster broadband, improve customer service, expand in rural areas, and ease enrollment standards for a program that offers cheap broadband to poor families.
Some are pressing for even more. This week, Cuomo said he would make sure the state’s merger review takes into account a nationwide loss of Internet service for Time Warner customers that lasted several hours on Aug. 27.
The state can set conditions so stringent the companies would forgo the merger, said Richard Brodsky, a former state lawmaker and senior fellow at Demos, a New York-based policy group. “This is not a garden-variety PSC decision.”
Five of 12 states where the deal is under review have yet to finish their work, Comcast said in a filing Aug. 26. In addition to New York with its top media market, New York City, a decision is due in California, home to No. 2 market Los Angeles.
“Technically any state could deny a merger, although I’ve never seen that happen,” said Lindsay Brown, an attorney in the Office of Ratepayer Advocates, an independent body within California’s Public Utilities Commission. “But conditions can certainly be imposed, and have been imposed in the past. And that’s what may happen here.”
State reviews of mergers typically attract little attention beyond their borders. Comcast drew large, sophisticated bureaucracies when it proposed the Time Warner Cable deal involving two of the three most populous U.S. states.
“Yes indeed, states do have jurisdiction over cable phone services and the like,” said Rob Frieden, a professor of telecommunications and law at Penn State University.
“What the Comcasts of the world can do in these deals is quote-unquote voluntarily provide certain concessions that sweeten the deal, make it more in the public interest and more palatable to these regulatory authorities,” Frieden said.
New York state is home to about 2.5 million Time Warner customers. Comcast would gain about 7 million total video customers from the acquisition.
“We look forward to working with the mayors of New York and Los Angeles as the regulatory review process proceeds, and with the state commissions who have the jurisdiction for review in both California and New York,” said Joelle Terry, a Comcast spokeswoman based in Washington.
Comcast executives met with staff from the New York service commission three times, along with Time Warner Cable representatives, before filing for merger approval in May, according to state records. Comcast had three meetings with commission staff this month, including one attended by Audrey Zibelman, the agency’s chairman and a Cuomo appointee.
Since 2009, when Cuomo was preparing to run for governor, Comcast has donated $99,600 to him and Time Warner, based in New York City, has added $112,800, according to campaign filings. The two companies also donated a combined $500,000 to a state Democratic party account which Cuomo controls.
The contributions stopped in January. Cuomo has a history of taking large chunks of cash from a particular industry and then abstaining from accepting further donations once his office becomes involved in a decision related to it, said Bill Mahoney, who studies campaign-finance data for the New York Public Interest Research Group, a government watchdog.
In April, Cuomo signed a law that requires cable companies to show a merger would benefit the public -- a tougher standard than the old law that said a deal would pass unless state officials found it violated the public interest. Cuomo in March said he isn’t taking a position on the merger, leaving the decision up to the state commission that’s led by his appointee.
New York law allows the public service commission to block a merger outright, said Tim Wu, a Columbia Law School professor who is running for lieutenant governor in the Democratic primary against a candidate picked by Cuomo.
“The tradition has been where they use the power to block to extract a series of goodies,” Wu said in an interview in Albany.
Wu said if elected he’d urge the commission to block the deal. He estimates it could add $1.6 billion to cable bills across the state and hamstring media companies, many based in New York, as they negotiate with a combined cable giant.
Wu was endorsed by the New York Times yesterday in the primary after the newspaper chose not to back either Cuomo or Zephyr Teachout, a law professor at the top of the ticket with Wu who also opposes the merger.
Comcast, Time Warner and New York state probably will reach an agreement, said Paul Gallant, a Washington-based analyst for Guggenheim Securities.
“New York is pursuing a tougher tone than most states, but it also looks like they may be willing to work out conditions with Comcast that would avoid a challenge to the merger,” Gallant said.
Across the continent, California regulators have decided they have the right to examine the merger’s impact on broadband, or high-speed Internet service, and they promise a “rigorous” review. The California utilities commission in an Aug. 14 decision brushed aside Comcast’s contention the review should include only voice services.
The result is a “pretty aggressive” review of the merger, which would leave Comcast as a dominant provider in California, said Rachelle Chong, a San Francisco-based lawyer who has served on the U.S. Federal Communications Commission and California’s Public Utilities Commission.
California issues licenses for cable service, and because of that “the cable companies are very mindful,” she said. “They will certainly participate actively.”