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HomeMy WebLinkAbout2006-7 - Cable Television Franchise RejectionRESOLUTION NO. 2006- 7 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH, CALIFORNIA REJECTING AND DENYING WITHOUT PREJUDICE A FCC FORM 394 RELATING TO THE TRANSFER OF THE CABLE TELEVISION FRANCHISE, AND /OR CONTROL THEREOF, TO AN ENTITY CONTROLLED BY TIME WARNER INC. OR COMCAST CABLE COMMUNICATIONS, INC. WHEREAS, the City of Newport Beach (the "City ") has received a FCC Form 394 (the "Application ") requesting consent of the City Council to the assignment of the cable television franchise, or control thereof, (the "Franchise') granted to an entity currently controlled by Adelphia Communications Corporation ( "Adelphia ") [ Comcast Cable Communications, Inc. ( "Comcast")] (the "Franchisee'), to an entity (the "Proposed Transferee') ultimately controlled by Time Warner Inc. ( "TW I ") or Comcast (the 'Transfer"); WHEREAS, City has tendered numerous information requests to the parties submitting the Application (the "Applicants ") relating to, among other things, the legal, technical, and financial qualifications of the Proposed Transferee, and the potential impact on rates and services; and WHEREAS, the Applicants have failed or refused to timely provide requested information in relation to, among other things, the following issues: (1) Complete and accurate copies of the relevant transactional documents, including all exhibits and schedules thereto, which are necessary for the City to exercise its legislative authority in reviewing the Transfer; (2) The provision of financial disclosure relating specifically to that entity or entities which will possess a legally enforceable obligation to comply with franchise obligations; (3) The provision of requested information relating to how the Transfer will potentially impact cable services including, without limitation, how will the operational changes be implemented in Southern California, how call center operations will be handled, if and how local offices will be merged or reorganized, how and when will local construction and equipment needs be financed and prioritized, what will be the rollout schedule for new services, and other issues which relate directly to the day -to -day operations of the Proposed Transferee; (4) The potential impact of the Settlement Agreement between the Securities and Exchange Commission ( "SEC ") and TWI and the Deferred Prosecution Agreement between TWI and the Department of Justice (" DOX) upon Proposed Transferee's legal technical, and financial qualifications and the continued viability of TWI and /or TWC and their affiliates and subsidiaries; and WHEREAS, the Applicants unreasonably delayed or refused or failed to provide a material portion of the requested information; and WHEREAS, the City has reviewed the FCC Form 394, all supplemental information submitted in relation thereto, as well as information compiled in any compliance audit, and the various Staff reports and related documents; and WHEREAS, the following documents, without limitation, are deemed to be incorporated into the Administrative Record relating hereto: (1) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated June 29, 2005; (2) Letter of Sheila R. Willard to William M. Marticorena dated July 12, 2005; (3) Letter of Gary Matz to William M. Marticorena dated July 12, 2005; (4) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated July 29, 2005; (5) Letter of Gary Matz to William M. Marticorena dated August 12, 2005; (6) Letter of Gary Matz to William M. Marticorena dated August 19, 2005; (7) Letter of Gary Matz to William M. Marticorena dated August 19, 2005; (8) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated August 22, 2005; (9) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated August 25, 2005; (10) Letter of Gary Matz to William M. Marticorena dated September 27, 2005; (11) Letter of William M. Marticorena to Gary Matz dated September 27, 2005; (12) Letter of Sheila R. Willard to William M. Marticorena dated September 30, 2005; (13) Letter of Gary R. Matz to William M. Marticorena dated October 7, 2005; (14) Letter of William M. Marticorena to Gary Matz dated October 12, 2005; (15) Letter of Gary R. Matz to William M. Marticorena dated October 28, 2005; (16) Letter of Gary Matz to William M. Marticorena dated November 14, 2005; (17) Letter of Kristy Hennessey to Mary Morales dated November 15, 2005 (PCTA); and (18) Final Report by Front Range Consulting, Inc. and Ashpaugh & Sculco, CPAs, PLC, Regarding the Proposed Transfers of the Cable System from Adelphia Communications Corporation and Comcast Cable Communications, Inc. to Time Warner Cable; and WHEREAS, all of the information provided by the Applicants including, without limitation, the Applications, the transactional documents, numerous SEC disclosure documents, and other information provided to the City and retained in the files of the City, its attorneys and /or consultants, is hereby incorporated by reference into the Administrative Record and is available upon request; and WHEREAS, the Franchise Agreement has expired as of this date without renewal, extension, or otherwise; and WHEREAS, the expiration of the Franchise Agreement was not a result of the City stalling, frustrating, or otherwise interfering with the orderly process for renewal under Section 546 of the Cable Communications Policy Act of 1984, as amended (the "Cable Act ") to the detriment and prejudice of the Cable Operator; and WHEREAS, the Cable Operator possesses no statutory rights pursuant to Section 537 of the Cable Act, or otherwise, given the expired and extinguished nature of the Franchise Agreement ( Comcast of California I, Inc., et al. v. City of Walnut Creek, California, Order Denying Plaintiffs' Motion for Preliminary Injunction, p.p.s. 10 -13 (N.D.Cal., Case No. C05 -00824 (WHA) (2005)); and WHEREAS, the City has determined that it would not be in the public interest in the exercise of its legislative discretion to approve the Transfer at this point in time and has determined that it would be in the public interest to disapprove the Transfer without prejudice subject to potential future and further consideration. NOW, THEREFORE, the City Council of the City of Newport Beach does hereby resolve as follows: SECTION 1: The Application for approval of the Transfer is hereby rejected and denied without prejudice for one, or more, or all of the following reasons: A. Failure to timely provide "additional information required by the terms of the Franchise Agreement or applicable state or local law." B. Failure to timely provide other requested additional information. C. Failure on the part of the Applicant to timely cooperate with Staff, its attorneys and consultants, in performing due diligence relating to the Application, the legal, technical, and financial qualifications of the Proposed Transferee and /or the impact of the transaction upon cable television rates and /or services. D. Failure to demonstrate the legal, technical and financial qualifications of the Transferee. E. Failure to provide a written financial guarantee, acceptable as to form and substance by the City Manager, of the legal entity(s) for which financial disclosure was provided in the Application of and /or additional filings. F. Due to the specific circumstances that exist in this matter, the unconditional grant of a franchise transfer during the "renewal window ", or subsequent to the expiration of the franchise, destroys or significantly impedes the proper operation of the renewal provisions of Section 626 of the Cable Act and results in the inability of the City to consider, for the purposes of renewal, the operating history of the existing franchisee. The unconditional grant of a franchise transfer at this point in time during the "renewal window", as established by Section 626 of the Cable Act, circumvents its legislative intent, terminates the ability of the City to consider, as envisioned by the statute, the operating history of the existing franchisee, the existing franchisee's compliance or lack thereof, with applicable law, and the legal, technical and financial qualifications of the existing franchisee, which is the entity which filed the application for renewal pursuant to Section 626 and thus invoked the protections and burdens of Section 626 of the Cable Act. G. The approval of the Transfer would not be in the public interest. H. The expired and extinguished nature of the Franchise Agreement eliminates any right on the part of the Applicants to require the approval of the Transfer pursuant to Section 537 of the Cable Act, or otherwise, and the approval of a transfer of an expired and extinguished franchise at this point in time based upon the facts set forth in the record, without any commitment as to renewal, extension, or otherwise on the part of the Applicants, will create a significant risk to the City based upon the uncertain nature of the Cable Operator's continued occupancy of the public rights -of -way and operation of the cable system. (See, Comcast of California I, Inc. v. City of Walnut Creek, California, Id. at p. 14). SECTION 2. The Recitals above are hereby declared to be true, accurate, and correct. SECTION 3. The Proposed Transferee has failed to demonstrate that it is a legally, technically and financially qualified applicant for the following reasons: A. The burden of proof is upon the Proposed Transferee to demonstrate its legal, technical, and financial qualifications to assume control of the Franchise and the Franchisee. B. The Proposed Transferee has failed to present any business plan or other documents indicating its short-term and long -term intent as to how it will operate the cable television system and how it intends to achieve an acceptable and reasonable return of and on its investment. C. The City has attempted to carefully review the financial qualifications of the Proposed Transferee. In order to determine the qualifications of a buyer for a cable television system, or a series of cable television systems, it is necessary to not only review the personal wealth, or lack thereof, of the individual or entity assuming control of the franchise operations, but it is also necessary to evaluate the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser which could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. The lack of financial qualifications on the part of the Proposed Transferee can impose significant and serious financial consequences upon the City and its subscribers. The Proposed Transferee has failed to provide the necessary information to perform this critical analysis. D. The individual wealth of a Proposed Transferee, corporate or personal, is only the starting point for the financial qualification analysis. Obviously, if the Proposed Transferee does not possess sufficient cash or borrowing capacity to acquire necessary proceeds to close the transaction, financial unsuitability is established. In addition, if the Proposed Transferee does not possess sufficient financial resources, by way of cash or reasonable and customary borrowing capacity, to operate the system, meet current and long -term liabilities when due including, but not limited to, capital expenditure requirements, financial unsuitability is the logical conclusion. However, even in the case of a Proposed Transferee which possesses sufficient cash to close the transaction and operate the system consistent with franchise requirements, there are circumstances under which a buyer or Proposed Transferee may assume such financial obligations that render it financially impossible for that buyer, absent massive influxes of additional capital, to operate that cable television system in a manner which pays current and long -term liabilities, covers debt service, and provides a reasonable and adequate return of and on equity investment. E. In this particular case, all, or substantially all, of the independently- audited financial information provided by the Applicants in relation to the Transfer has been provided at the TWI level. Information relating to TWC has, in whole or at least material part, constituted allocations of parent -level information without independent verification. In addition, the Applicants have informed the City, as well as the financial community as a whole, that they intend to implement a material restructuring of TWC which will involve, based upon information provided by the Applicants, the redemption of an eighteen percent (18 %) interest held by Comcast, through an FCC - mandated trust and the creation of a new publicly- traded company in which TWI will retain an approximate 84% ownership interest and 90% of the voting interest. Little if any information has been provided regarding the financial and legal structure of TWC subsequent to its restructuring and thus significant uncertainty exists as to whether or not any disclosure provided in relation to TWC, independently audited or otherwise, will survive the restructuring. In addition, and without limitation, the Applicants have refused to guaranty post - closing, certain indices of financial health, or lack thereof, including the amount of debt, debt -to- equity ratios, and other important financial indicators and predictors of financial health. Thus, without said guarantees, information provided "as of closing," although relevant, is not necessarily indicative of long -range financial structuring, especially in light of announced changes in the ownership and financial structure of TWC. The Applicants have further failed to provide meaningful assurance to the City that the financial commitments made "as of closing" will carry forward in the future. In fact, the Applicants have even refused to guaranty that the Franchise will end up in the hands of a TWI affiliate. As a practical matter, it is relatively commonplace over the past several years for major cable operators to significantly increase their debt load or otherwise modify "at closing conditions," as times moves on. For example, and without limitation, the amount of debt ultimately incurred by Adelphia, for both legitimate and allegedly illegitimate purposes, significantly exceeded the debt as of the day of closing of the transfer of the cable system to Adelphia. F. The existence of the SEC Settlement and the Deferred Prosecution Agreement, and the circumstances surrounding its entry, create serious doubts and concerns regarding the legal, financial and technical qualifications of the Proposed Transferee, and /or TWI/TWC. First, it must be noted that the alleged commission of illegal acts, including without limitation security fraud by Adelphia cause, or materially contributed to, the Adelphia Bankruptcy and all of the negative impacts upon subscribers and local franchising authorities that flowed therefrom. The existence of the Deferred Prosecution Agreement, and the circumstances surrounding its entry, provides a strong and independent basis for rejection of the Transfer absent the provision, which provision has not been provided as of this date, of assurances that the type of acts and omissions which allegedly occurred in relation to the SEC Litigation and the Deferred Prosecution will not repeat on a going forward basis and that the SEC Settlement Agreement and the Deferred Prosecution Agreement themselves, and their implementation, will not materially hinder the operational and financial status of TWI and its subsidiaries. Any allegation that these settlements are irrelevant to this Transfer based upon the fact that entry is between TWI, the parent entity, and the SEC /DOJ is simply wrong for several reasons. First, TWI possesses a controlling interest in both TWC and the Proposed Transferee and thus its operating history, its management philosophy, its compliance, or lack thereof, with applicable law, directly speaks to its going forward control of the Proposed Transferee and this cable franchise and system. Second, the Deferred Prosecution Agreement does directly involve the operation of TWI's cable subsidiary since several of the agreements which have been earmarked for review by the Independent Monitor appointed by the DOJ involve programming agreements relating to the cable division. The fact that these programming agreements have been earmarked for further scrutiny casts doubt upon the operating history of the cable division and directly brings into analytical focus its prior compliance with applicable law and its legal, financial and technical qualifications. At a minimum, it is reasonable to defer approval of the Transfer until the Independent Monitor has concluded its examination as to whether or not TWI's cable division had committed prohibited and /or unlawful acts in relation to programming and other contracts directly related to the operation of its cable systems. G. The Applicants have failed to provide evidence denying the existence of the various risks described above or demonstrating the potential benefits to the City and subscribers which might justify the incurrence of the risks described above. H. Given the risks associated with the Transfer, as identified above, it will not be in the public interest for the City to unconditionally approve the Transfer at this time. This disapproval of the Transfer contained herein is without prejudice and may be reconsidered by the City Council when and if the Applicants are able to present evidence demonstrating the Proposed Transferee's technical and financial suitability and the lack of a negative impact on rates and /or services. The Applicants have asked the City to determine the legal, technical, and financial qualifications for the Transfer based primarily upon the legal, technical, and financial qualifications of the proposed parent entity. The Applicants have failed to present sufficient information to the City sustaining, if otherwise sustainable, a finding of legal, technical, and financial qualifications other than in relation to TWI and /or TWC. More specifically, and without limitation, absent the financial qualifications of TWI as set forth in the FCC Form 394, the Applicants could make no reasonable argument whatsoever for a finding of financial qualification. Notwithstanding the Applicants' reliance upon the financial disclosure of the parent entity, the City has been informed by authorized attorneys for the Applicants that no transfer agreement can include TWI as an obligated party thereto. A guaranty from TWC is certainly more substantial but not without its own problems as explained above. It is reasonable to conclude that the proposed parent entity is not willing to commit the assets set forth in the FCC Form 394 to franchise obligations and thus the use of the financial qualifications of the proposed parent entity is inappropriate since those assets are not pledged or otherwise made legally available for the performance of franchise obligations. Thus, based upon the express refusal of the proposed parent entity to commit the financial resources identified in the FCC Form 394, or any specific portion thereof, to performance of franchise obligations, the Proposed Transferee is hereby found not to possess the financial qualifications to control the Franchise. SECTION 4. The Franchisee, which is currently controlled by Adelphia, has filed an application for renewal pursuant to Section 626 of the Cable Act. By invoking the benefits and burdens of the renewal provisions of the Cable Act, the Franchisee has initiated a statutorily- created process whereby its operating history throughout the franchise term constitutes the relevant operating history for the purposes of consideration in the renewal process. Both the express language and legislative intent of Section 626 of the Cable Act rewards those cable operators who have, throughout their franchise term, complied with franchise requirements, complied with applicable law, and possess the legal, technical, and financial qualifications for renewal. On the other hand, the same statutory scheme potentially penalizes those franchisees who fail to meet one or more of these statutory criteria. The unconditional grant of a transfer potentially eliminates the ability of the City to consider the relevant operating history of Adelphia and thus destroys or materially impedes the proper operation of the renewal provisions of the Cable Act. The unconditional approval of the Transfer at this point in time would, in essence, make a mockery of the renewal provisions of Section 626 and encourage the going forward "laundering" of franchises and franchisees which have failed to comply with the renewal criteria set forth in the Cable Act through late -term sales. Although the Franchisee was not required to invoke the benefits and burdens of Section 626 in seeking renewal of its franchise, having made that election, the statutory scheme can only be properly implemented through a completion of that process with the existing Franchisee. SECTION S. A transfer of the Franchise, transfer of actual or managerial control of the Franchise, and /or transfer of control of the Franchisee, shall be deemed a material breach of the Franchise. SECTION 6. The decision pursuant to this Resolution shall, without further action of the City Council, constitute an act of the Franchising Authority within the meaning of 47 C.F.R. § 76.502 and a "final decision" of the City Council within the meaning of §§ 617(e) of the Cable Television Consumer Protection and Competition Act of 1992, Pub. L.No. 103 -385, 106 Stat. 1477 (1992). SECTION 7. This denial, disapproval, and rejection issued pursuant to the authority of this Resolution shall be deemed "without prejudice" to the ability of the Applicant to file another FCC Form 394 relating to the same or a different transaction. However, nothing herein shall limit the authority of the City Council, or their written designee, to reject any subsequent FCC Form 394 based upon the same grounds set forth in the written notice of denial or such other grounds as might exist in relation to said future FCC Form 394. PASSED and ADOPTED by the City Council of the City of Newport Beach, at a regular meeting held on the 24th day of January 2006. ATTEST: CFAr 1.1.E '.r Mayor ,� o- M. /4� City Clerk STATE OF CALIFORNIA } COUNTY OF ORANGE } ss. CITY OF NEWPORT BEACH } I, LaVonne M. Harkless, City Clerk of the City of Newport Beach, California, do hereby certify that the whole number of members of the City Council is six [one vacant seat]; that the foregoing resolution, being Resolution No. 2006 -7 was duly and regularly introduced before and adopted by the City Council of said City at a regular meeting of said Council, duly and regularly held on the 24th day of January 2006, and that the same was so passed and adopted by the following vote, to wit: Ayes: Selich, Rosansky, Ridgeway, Daigle, Nichols, Mayor Webb Noes: None Absent: None Abstain: None IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the official seal of said City this 25th day of January 2006. (Seal) City Clerk Newport Beach, California