T-Mobile, Sprint took a risk by finishing merger without Calif. approval

California state regulators are trying to hold up the T-Mobile/Sprint merger, saying the companies don't yet have approval to combine their operations in the state.

T-Mobile and Sprint announced yesterday that the merger is a done deal and that the two companies are now one. But while the companies had almost all approvals from government authorities, they have not yet gotten the expected approval from the California Public Utilities Commission (CPUC). The CPUC is scheduled to vote on the merger approval and related conditions on April 16.

In response to yesterday's T-Mobile/Sprint announcement, the CPUC issued a ruling that says the companies "shall not begin merger of their California operations until after the CPUC issues a final decision on the pending applications."

We contacted T-Mobile today about yesterday's CPUC ruling and will update this article if we get a response.

The state Public Utilities Code prevents companies from merging their California operations without approval, the CPUC order said. "Both Joint Applicants, T-Mobile and Sprint, have California subsidiaries that are public utility telephone corporations under state law, and subject to the jurisdiction of this agency. The merger of the companies' operations in California is therefore subject to CPUC approval," the order said.

But T-Mobile and Sprint argue that the CPUC does not have jurisdiction over wireless transactions and that the merger can be completed without the agency's approval. T-Mobile and Sprint previously received approval from the Federal Communications Commission and Department of Justice, and they defeated a lawsuit filed by California and other states that were trying to block the deal.

Regardless of the outcome at CPUC, the merger is happening. But the dispute between the companies and the Golden State could result in litigation and affect whether the state is able to impose conditions on the deal. T-Mobile claimed that some of CPUC's planned conditions are "practically impossible" and "unfair and discriminatory to T-Mobile vs our competitors."

T-Mobile warned investors that there is a "risk of litigation or regulatory actions" arising "from T-Mobile's consummation of the business combination during the pendency of the California Public Utility Commission's review of the business combination."

The legal arguments

Steve Blum of Tellus Venture Associates has been tracking the dispute, explaining that "T-Mobile and Sprint asked to withdraw their application for California Public Utilities Commission approval of the wireline elements of their merger agreement." Sprint told the state regulator that it "is no longer providing services in California as a regulated public utility" because it completed a years-long process of transitioning old phone systems to Voice over Internet Protocol, which isn't regulated in the same way. Sprint said it is thus relinquishing the Certificate of Public Convenience and Necessity that it previously received from CPUC.

Sprint's wireline services are exclusively for enterprise and carrier customers, and not for residential users.

The California utility regulator's jurisdiction over the transfer of wireline operations is clear, but "the CPUC's authority over a mobile carrier is murky at best," as "mobile licenses are issued by the Federal Communications Commission, which approved the transfer," Blum wrote.

To support its jurisdiction, the CPUC says that "wireless carriers are 'telephone corporations' and therefore public utilities under Public Utilities Code Sections 216, 233 and 234." Although the CPUC acknowledges that states cannot regulate wireless rates, it says that states "retain jurisdiction over 'other terms and conditions' of wireless service."

Back and forth

T-Mobile told the CPUC in a letter Tuesday that the agency "lacks jurisdiction over this transaction." T-Mobile and Sprint also said they can't wait any longer because the pandemic "has created unprecedented uncertainty and risk in the financial markets," and "there are no assurances that the banks will continue to be able to fund the transaction if the closing is delayed any further."

T-Mobile and Sprint expanded on their objections to the CPUC's jurisdiction and proposed conditions in a longer filing. The CPUC's proposed 5G build-out requirements go beyond FCC conditions, the companies said. Another CPUC-proposed requirement that the companies "shall offer in-home broadband service wherever 5G service is available" is "incompatible" with T-Mobile's "un-refuted testimony that in-home broadband would be provided only where there is sufficient network capacity (sometimes referred to as 'excess' capacity)," the filing said.

T-Mobile and Sprint also objected to proposed requirements that it "maintain LTE speeds and coverage areas in California" until the 4G LTE network is decommissioned, and to proposed 72-hour backup power requirements. They also objected to requirements to add 1,000 full-time jobs in California and to expand discount-service availability for low-income people.

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