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HomeMy WebLinkAbout2000-04-10 City Council (10)City of Palo Alto CRy Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:APRIL 10, 2000 CMR: 199:00 SUBJECT:UPDATE ON REQUEST FROM CABLE CO-OP TO TRANSFER CABLE TELEVISION FRANCHISE TO AT&T This is an informational report and no Council action is required. BACKGROUND n ,a olnt xercise of Powers Agreement (JPA) was entered into by Palo Alto, Menlo Park, East Palo Alto, Atherton, and portions of San Mateo and Santa Clara Counties, for the purpose of obtaining cable television service for the residents, businesses, and institutions within these jurisdictions. The JPA gives the City of Palo Alto the authority to grant and administer the cable television franchise on behalf of all the JPA member communities. In April 1999, Cable Co-op announced that its Board of Directors had approved a letter of intent to sell the cable system to AT&T Broadband and Internet Services (AT&T), formerly TCI. In September 1999, Cable Co-op and AT&T entered into an Asset Purchase Agreement for the sale of the Cable Co-op system. In January 2000, the subscribers of Cable Co-op approved the sale. In order for the cable system to be transferred from Cable Co-op to AT&T, Palo Alto, as the local franchise authority, must receive a formal transfer request on Federal Communications Commission (FCC) Form 394, along with supporting .documentation. The documentation must include sufficient detail to enable the City to evaluate the transfer and exercise its reasonable judgment with respect to the transfer. On February 14, 2000, the City received the FCC Form 394. On March 10, 2000, the City Manager sent a letter to Cable Co-op and AT&T notifying them that the Form 394 was incomplete, and that the City required additional information in order to be able to evaluate the transfer request and make a recommendation to the City Council (Attachment A). On March 24, 2000, the City Manager received a response from AT&T and Cable Co-op protesting the City’s finding that the FCC Form 394 was incomplete (Attachment B). CMR: 199:00 Page 1 of 5 DISCUSSION ~te law and the existing franchise agreement govern what can and cannot be considered by the local franchise authority when evaluating a request to transfer a cable television franchise. The current transfer request under consideration in Palo Alto is not, however, simply a request for consent to transfer a franchise. The request is also made for the City on behalf of the JPA to enter into an amended or new franchise agreement with AT&T. The reason for this is that the Asset Purchase Agreement between AT&T and Cable Co-op requires that an amended or new franchise agreement with AT&T be in place before the transaction can close. Because of Cable Co-op’s financial situation, this puts clear pressure on Cable Co-op to do all it can to help AT&T obtain a new or amended, in addition to a transferred, franchise agreement before Cable Co-op’s loans come due at the end of July. In essence, AT&T and Cable Co-op are attempting to force the City and the JPA to conduct the franchise renewal process and grant AT&T a new franchise agreement within the framework and time constraints of the franchise transfer process. The transfer process is on a much shorter timeline (120 days versus up to 36 months) and raises different kinds of issues than the franchise renewal process. Of particular concern to staff is the fact that the short timeframe of the transfer process may not afford Palo Alto the time and opportunity to fully ascertain community needs related to cable, and incorporate them into a new franchise agreement. A comparison between a traditional transfer process and the one proposed by Cable Co- op and AT&T is presented below. Traditional Transfer Process In a traditional, transtbr process, a FCC Form 394 would be filed with the City of Palo Alto. Palo Alto would then have 30 days to review the request for completeness and request additional information. Once Palo Alto had determined that the request was complete, it would then assess the buyer’s financial, legal, technical, and character qualifications, as well as its ability to provide the required-cable service. If these conditions are not satisfied, applicable law provides that the City may deny the transfer request. In a traditional transfer Palo Alto could require the buyer to abide by the terms and conditions of the current franchise agreement and to assume the obligations and liabilities of Cable Co-op. Palo Alto could also assess whether Cable Co-op is in compliance with the existing franchise, and, if not, demand cure for any non-compliance including payment of damages owed (if any) because of past non-compliance. Palo Alto could also consider additional terms and conditions as a part of the transfer. Foremost amongst these would be requesting that the buyer maintain current service CMR: 199:00 Page 2 of 5 offerings not detailed in the franchise agreement, (e.g., cable modem, FM radio service, etc.). This would be Palo Alto’s way of ensuring that the communities continue to receive the same services provided by the existing franchisee. Additional terms and conditions could include a moratorium on ~’ate increases and/or an agreement with AT&T that the transfer will not impact rates. Transfer Process Requested by Co-op and AT&T As indicated above, rather than a traditional transfer of the existing franchise, Cable Co- op and AT&T are requesting a new or amended franchise with terms and conditions which have not yet been negotiated and for which information is still being gathered (in particular, identification of community needs). Under a traditional transfer process, AT&T would be bound by the current franchise agreement obligations. AT&T has indicated it will not accept the obligations of the existing franchise agreement, and that it will not accept responsibility for Cable Co-op’s liabilities past, continuing and future, embodied in the existing franchise agreement. This includes, but is not limited to the findings identified in the franchise fee audit conducted by KFA Services. Several of the key provisions embodied in the existing franchise agreement are outlined below, along with a discussion of what AT&T has indicated it seeks in a new or amended franchise. Also included with this report is a chart outlining some of Cable Co-op’s current obligations and service offerings compared against AT&T’s commitment (Attachment C). Responsibility for Noncompliance." The current franchise agreement requires anyone to whom the franchise agreement is transferred to assume and be bound by all applicable provisions of the franchise agreement, unless expressly excused from doing so by the City Council. AT&T has indicated it will not accept the obligations of the current franchise agreement and will not assume responsibility for any non-performance issues incurred by Cable Co-op prior to the closing of the transaction. Public, Educational and Government Access Funding and Support." The current franchise requires that Cable Co-op provide equipment, financial support, office space, and studio access to the community access organization (MPAC). AT&T seeks to transfer its responsibility for MPAC to a nonprofit organization being created as a part of the Asset Purchase Agreement, Silicon Valley Community Communications (SVCC). SVCC does not have an agreement with Palo Alto, and is currently governed by a Board primarily affiliated with Cable Co-op. Thus, AT&T is transferring its obligations to provide MPAC office space, studio space, and studio equipment to SVCC, provided that the terms are reasonably acceptable to SVCC, and in turn AT&T is offering office space, studio space, and studio equipment to SVCC for 18 months. After that SVCC, and therefore MPAC, is on its own. AT&T indicates that it will negotiate in good faith with MPAC regarding financial suppo~t if it continues to be the commur~ity access organ~ ~ion. CMR: 199:00 Page 3 of 5 Rate Regulation: Current law allows Palo Alto to regulate the lowest tier of cable rates, equipment and installation charges. AT&T seeks to have Palo Alto agree to forego rate regulation for 12 months after closing. In addition, AT&T is unwilling to inform Palo Alto of what rate adjustments will be made in that 12 month period, other than assuring the City that any rate adjustments will be consistent with applicable federal regulations. Local Customer Service Office: The current franchise agreement requires that a local customer office be maintained in the franchise area. AT&T’s commitment is that it anticipates continuing Cable Co-op’s lease of the local customer service office for the near future. Audio Services: Cable Co-op currently provides 32 channels of free commercial FM service. AT&T has made no indication of what its radio services will be. However, in other franchise areas AT&T generally does not offer FM service, but instead offers non- commercial channels as a part of digital cable service. Generally, negotiations for a renewed franchise which occur as part of a franchise renewal process and not the transfer process, take between 12 to 18 months. However, AT&T and Cable Co-op wish for the process to be completed in the transfer timeframe. Since staff is sensitive to concerns regarding Cable Co-op’s loans coming due and the risk of bankruptcy and all of the disruptions associated with it, staff has agreed to begin negotiating with AT&T regarding a new cable franchise agreement. Towards this end, staffplans to begin meeting with AT&T in mid-April. At this time, staff plans to shift its focus and efforts to the franchise renewal process. However, if the negotiations falter, or if the transfer deadline approaches and a mutually acc.eptable renewed franchise agreement has not been reached, the City should consider granting a conditional approval of only Cable Co-op’s transfer request. Some of the conditions of such a transfer would include requiring AT&T to adhere to all of the terms and conditions of the existing franchise agreement and to assume responsibility for past non-compliance of Cable Co-op. It is important to note that there are options that exist, outside of the City’s authority, which could prevent bankruptcy for Cable Co-op. For example, AT&T could agree to waive its condition that a new franchise agreement be in place before the deal can close. Cable Co-op and AT&T could work together to request an extension of the due dates on the loans. AT&T could make arrangements to satisfy the creditors until a new franchise is in place. Staff will keep Council informed regarding the negotiations as they progress. CMR: 199:00 Page 4 of 5 ATTACHMENTS Attachment A: Attachment B: Attachment C: Letter to AT&T and Cable Co-op Response letter from AT&T and Cable Co-op Required or Currently Offered Co-op Services Compared to Committed AT&T Services PREPARED BY: REVIEWED BY: Melissa Cavallo, Assistant Director Shannon Gaffney, Senior Financial Analyst Grant Kolling, Senior Assistant City Attorney DEPARTMENT HEAD: CITY MANAGER APPROVAL: CARL Y~/~TS ’ Director(Administrative Services EMILY HARRISON Assistant City Manager cc:Mr. Mr. Ms. Ms. Mr. Ms. Mr. Ms. Ms. Mr. Mr. Mr. Russell Averhart, Director of Administrative Services, City of East Palo Alto Walter Callahan, Deputy Director, Public Works, San Mateo County Uma Chokkalingam, Finance Director, City of Menlo Park Jan Dolan, City Manager, City of Menlo Park Ralph Freedman, City Manager, Town of Atherton Monica Hudson, City Manager, City of East Palo Alto John Maltbie, County Executive, County of San Mateo Jan Thomson, Stanford University Salani Wendt, City Clerk, City of East Palo AltQ David Wheaton, Asst. City Manager, City of Menlo Park Richard Wittenberg, County Executive, County of Santa Clara Ron Kirkeeng, CEO & General Manager, Cable Co-op Ms. Nicolasa A. Bloom, Director of Government Affairs, AT&T Broadband & Internet Services Ms. Susan Ritchie, AT&T Broadband & Internet Services CMR:199:00 Page 5 of 5 ATTACHMENT A City of Palo Alto Office of the City Manager March i0, 2000 RETURN RECEIPT REQUESTED CERTIFIED MAIL #P-415-432-745 Mr. Ronald Kirkeeng CEO/General Manager Cable Co-op 3200 Park Boulevard Palo Alto, CA 94306 RETURN RECEIPT REQUESTED CERT~FIEDMAIL #P-415-432-746 Ms. Susan Ritchie Executive Director TCI Cablevision of California, Inco 12647 Alcosta Boulevard, Suite 200 San Ramon, CA 94583 RE: Form 394 and attachments Dear Mr. Kirkeeng and Ms. Ritchie: . On behalf of the City ~f Palo Alho and the Joint Powers, I .acknowledge receipt of your cover letter, dated February 8, 2000, and Form 394 plus other at-tachments, on February 14, 2000. In accordance with the- requirements of the franchise agreement, my office has conducted an initi~l review of Form 394, the Asset Purchase Agreement, as amended, .("Agreement" or ~APA’~) and the other attachments, for CUID 1433 through 1437 and 1523. For the reasons, stated below, I have concluded that Cable Co-op has not submitted all of the necessary information required by law for the City to act upon, and needed by me to recommend to the Council action on, Cable Co-op’s requested transfer of its cable system and the franchise to TCI Cablevision of California, Inc. dba AT&T Broadband. ("TCI"). Many aspects of the transfer application -- for example, the APA’s apparent requirement of a "New Franchise" or "Amendment," PEG access, the manner ’of financing of the proposed.transfer to TCI, a[~i rate regulation -- raise more questions than answers. 00309 syn 00.71832 RO. Box 10250 Palo Alto, CA 94303 650.329,2563 650.325.5025 fax Mr. Ronald Kirkeeng Ms. Susan Ritchie March I0, 2000 Page 2 RE: Form 394 and attachments Overall, we ire concerned whether TCI is fully committed to fulfilling the obligations of Cable Co-op under the franchise agreement, between Cable Co-op and the City.on behalf of the Joint Powers. The City of Palo Alto’s position is that the time within which the City must review the request to transfer under both the franchise agreement and federal law has not commenced. Moreover,. the application and, in particular, certain provisions of the APA, appear to request changes to, or replacement of, the current franchise agreement. Such a request is not subject to the time limits relating to franchise transfers in the franchise agreement and under.federal law. I assure Cable Co-op (and TCI) that the City intends to conduct an efficient review of Cable Co-op’s request, and to complete its review in as expeditious a manner as possible. In order to facilitate the City’s review of Cable Co-op’s transfer request, please provide written responses to the following questions and information requests: Will TCI acceptfull responsibility for and assume any and all obligations and liabilities past, continuing and future, embodied in the franchise agreement and/or incurred by Cable Co-op, including those resultingfrom Cable Co-op’s performance or non-performance under the franchise agreement? If not, provide a full explanation of what obligations and liabilities TCI. will not assume, and why this is so. Will TCI require a modification, amendment or £estatement of the franchise agreement prior to the consummation of the "transactions contemplated by the Agreement" at the "Closing", as such terms are used in the APA? We believe that this is suggested by, among others, Sections 7.5.1 and 9.2.7 of the APA. If so, what provisions of the franchise agreement, if any, will TCI refuse to accept, and why? Also, please describe in detail each and every change in the franchise agreement and associated exhibits that TCI will require in its "reasonable discretion" under Sections 7.5.1. and 9.2.7 of the APA. 00309 syn 0071832 Mr. Ronald Kirkeeng Ms. Susan Ritchie March I0, 2000 Page 3 OFC~ RE: Form 394 and attachments Section7.5.2 of the APA provides that Cable Co-op will "receive assurances reasonably satisfactory to [TCI]" from the City on behalf of the Joint Powers that: (a) TCI’s rates after t~ "Closing" are acceptable to the City and the Joint Powers; (b) the City will forbear from regulating TCI’s rates.for at least 12 months after the "Closing"; and (c) the City will not take action, such as a rate rollback or refund, against TCI with respect to Cable Co-op’s pre-"Cl0sing" rates. The terms in quotes are taken from the APA. Will TCI require the City on behalf of’the Joint Powers to surrender, in whole or in part,-its rate regulato[y authority under the franchise agreement and federal law? What are TCI’s post-"Closing" rates? How will the financing of the ~proposed transactions contemplated by the APA affect subscriber rates? Does TCI anticipate any change in external costs (as defined in the FCC’s rate regulation rules)as a result of the proposed ~’transactions contemplated by the Agreement"? If so, please provide an estimate of the amount of each anticipated charge and the basis for such estimate, and state which of those costs, if any, TCI either’ intends to~ and/or will pass through to subscribers?~. Sections 7~22 and 7.24 of the APA suggest that the transactions contemplated by the ~APA will not be consummated at the ~Closing," unless certain existing obligations of Cable Co-op to the community access organizatioh are modified or reduced. Will TCI expressly agree to fulfill the terms of PEG access as set forth in Section 4.3.03 of the franchise agreement? If not, does TCI anticipate that it will be relieved, in whole or in part, of the contractual obligation (and the obligation under Section ~ of the agreement between Cable Co-op and the Mid-PeniT ~la Access Corporation) toJprovide public access studi, space and equipment? . . 00309 syn 00~71832 Mr. Ronald Kirkeeng Ms. Susan Ritchie March i0, 2000 Page 4 ’RE: Form 394 and ~attachments i0. ii. 12. 13. Please. explain the degree to which cable customer facilities and operations in the franchise area will be affected by the proposed transfer. What are TCI’s plans for the cable modem Internet service currently provided by Cable Co-op? Section 4.2 of the APA and Schedule i0, Excluded Assets, suggest that TCI will not continue the current ISP contract and will not acquire Cable Co-op’s cable modems. Please confirm or deny, and furnish a complete explanation. Will TCI and its parent entities and affiliates commit to abide by all ordinances, regulations and requirements of the City andevery other Joint Powers member concerning encroachment agreements and permits and other authorizations required for placing facilities in the public rights-of-way? Will Cable Co-op and/or TCI pay for the City’s and the other Joint Powers members’ costs incurred in reviewing and acting on the transfer request? Does TCI intend to allow subscribers to. acdess unaffiliated Internet access providers on its system without requiring subscribers to first click through and/or pay for access to an Internet access provider, such as @Home, which is affiliated with TCI? Please describe the manner in which TCI intends to and/or will finance the purchase priGe. Will any loans associated with the purchas@ be specifically assigned to the cable system currently operated by Cable Co-op? Will loans be assigned to TCI? Will loans be assigned to any parent entities or affiliates of TCI, including TCI West, Inc.? Please provide consolidated annual financial statements for thecalendar year ending December 31, 1999 (audited, if available,’ but unaudited internal operating statements will be acceptable) for TCI and TCI West, Inc. Please include balance sheets, income statements, and statements of cash flows, with footnotes as may be necessary to understand the financial statements. Please provide the 00309 s}’n 0071832 Mr. Ronald Kirkeeng Ms. Susan Ritchie March I0, 2000 Page 5 RE:. Form 394 and attachmeht$. consolidated number of subscribers for TCI and TCI west, Inc. as of December 31, 1998, September 30, 1999 and December 31, 1999.. 14.Please provide an annual financial statement for Cable Co-op for the year ending December 31, 1999 (audited, if available, but unaudited internal operating~statements will be acceptable), including balance sheets, income statements, and statements of cash flows, .withfootnotes as may be necessary to understand the financia! statements submitted with Form 394. Also, please include associated operating statistics, including homes passed, number of subscribers, and number of pay units as of December 31, 1998 and December 31, 1999. 15. 16. Please provide pro forma projected financial statements for the years ending December 31, 2000 through December 31, 2004, inclusive. ’Please include balance sheets, income statements, and statements of cash flows, with footnotes as may be necessary to understand the financial statements for TCI and the cable system currently owned and operated by Cable Co-op. Please include associated operating statistic assumptions for these projections, including homes passed, number of subscribers, number of pay units, and descoperating expense, capital expenditure, and financing assumptions reflected in the projections. Your attention is called to the franchise fee audit of Cable Co-op recently performed by KFA Services and forwarded to Mr. Kirkeeng on behalf of Cable Co-op on February 22, 2000 by Grant Kolling, SeniorAssistant City Attorney. Will Cable Co-op and/or TCI pay the franchise fees owed to the City as set forth in that audit report? If the transfer is consummated, will TCI agree to abide by the finding of the KFA Services audit report in calculating the franchise fees owed on a going-forward basis? .Your assistance and cooperation in providing the information and answers requested in this letter are greatly appreciated. Kindly note that the City on behalf of the Joint 00309 s),n 0071832 Mr. Ronald Kirke~ng Ms. Susan Ritchie March i0, 2000 Page 6 RE: Form 394 and attachments. Powers cannot complete its consideration of Cable Co-op’s transfer request until a full and complete response has been provided. ¯~ty ManagerJF:GK:syn cc:Palo ALto City Council Members of the Joint Powers Donna Rogers, City Clerk Emily Harrison, Assistant City Manager Carl Yeats, Director of Administrative S~rvices Ariel Pierre Calonne, City Attorney Sue Buske, The Buske Group Tillman Lay, Esq. 00309 syn 0071832 ATTACHMENT B TCI CABLEVISION OF CALIFORNIA, INC. 12647 ALCOSTA BLVD. SUITE 200 SAN RAMON, CA 94583 CABLE COMMUNICATIONS COOPERATIVE OF PALO ALTO, INCORPORATED 3200 PARK BOULEVARD PALO ALTO, CA 94306 March 24, 2000 VIA HAND DELIVERY Ms. June Fleming City Manager City of Palo Alto P.O. Box 10250 Palo Alto, CA 94303 Re: Palo Alto Form 394 Dear Ms. Fleming: We strongly disagree with your position regarding the completeness of our Form 394. Specifically, your position is inconsistent with FCC regulations and policy. As you know, the Form 394 was created to provide a franchising authority with the information necessary to determine the legal, technical and financial ability of a transferee to own and operate a franchise. We believe the Form 394 received on February 14, 2000 by the City of Palo Alto and all of the other communities that are part of the Joint Powers is complete since it provides all of the information required by form 394 and the franchise necessary to show that TCI Cablevision of California, Inc., ("TCI"), providing cable service as AT&T Broadband, is a qualified transferee. Although Cable Co-Op and TCI will provide additional information as reasonably requested by the City of Palo Alto and/or any members of the Joint Powers, we do not believe that these requests for additional information should delay the start of the consideration period for sfer to and/or amendment of the franchise. AS YOU KNOW FROM INFORMATION PROVIDED BY RON KIRKEENG OF CABLE CO-OP TO CARL YATES AND OTHER COUNCIL MEMBERS, IT IS IMPERATIVE THAT CONSIDERATION FOR THE TRANSFER OF THE FRANCHISE, AS WELL AS ANY AMENDMENTS THERETO OR RENEWALS OR EXTENSIONS THEREOF, TAKE PLACE AS QUICKLY AS POSSIBLE, SINCE CABLE CO-OP FACES AN UNCERTAIN FINANCIAL FUTURE IF THE TRANSACTION WITH TCI IS NOT CONSUMMATED BY JUNE 30, 2000. The following responses are provided to the specific requests in your March 10, 2000 letter. NOTE: For purposes of this letter, the term "APA" refers to the Asset Purchase Agreement dated as of September 7, 1999, as amended by Amendment dated as of September 7, 1999, between TCI Cablevision of California, Inc. and Cable Communications Cooperative of Palo Alto, Inc. Will TCI accept full responsibility for and assume any and all obligations and liabilities past, continuing and future, embodied in the franchise agreemen’~ ~ndior incurred by Cable Co-op, including those resulting Page 2 March 24, 2000 from Cable Co-op’s performance or non-performance under the franchise agreement? If not, provide, a full explanation of what obligations and liabilities TCI will not assume, and why this is so. RESPONSE: TCI will accept full responsibility for and assume any and all obligations embodied in the franchise agreement that is agreed to between TCI and Palo Alto (representing the communities of Atherton, Menlo Park, East Palo Alto and the counties of San Mateo and Santa Clara (the "Joint Powers"). TCI will no__~t assume responsibility for any non-performance issues incurred by Cable Co-op prior to the closing of the transaction between TCI and Cable Co-op, including, but not limited to, the audit issues currently being negotiated between Palo Alto and Cable Co-op. It is TCI’s understanding that all of these compliance issues will be resolved prior to the closing of the transaction between TCI and Cable Co-op. See also response to question no. 16 below. Will TCI require a modification, amendment or restatement of the franchise agreement prior to the consummation of the "transactions contemplated by the Agreement" at the "Closing", as such terms are used in the APA? We believe that this is suggested by, among others, Sections 7.5.1 and 9.2.7 of the APA. If so, what provisions of the franchise agreement, if any, will TCI refuse to accept, and why? Also, please describe in detail each and every change in the franchise agreement and associated exhibits that TCI will require in its "reasonable discretion" under Sections 7.5.1 and 9.2.7 of the APA. RESPONSE: Since the term of the current franchise Agreement expires on March 24, 2001, one of the conditions to the closing of the transaction between TCI and Cable Co-op is that an amended or restated franchise agreement be entered into between TCI and the Joint Powers. In addition, please note that Exhibit 4 to the Form 394 lists specifically certain of the changes to the current franchise agreement that TCI anticipates for the amended or restated franchise Agreement. Please note that certain of these changes are to the benefit of the Joint Powers’ cable community, including the commitment by TCI to upgrade the system to at least 750 MHz. This upgrade commitment cannot be made by Cable Co-op. Section 7.5.2 of the APA provides that Cable Co-op will "receive assurances reasonably satisfactory to [TCI]" from the City on behalf of the Joint Power that: (a) TCI’s rates after the "Closing" are acceptable to the City and the Joint Powers; (b) the City will forbear from regulating TCI’s rates for at least 12 months after the "Closing"; and (c) the City will not take action, such as a rate rollback or refund, against TCI with respect to Cable Co-op’s pre-"Closing" rates. The term in quotes is taken from the APA. Will TCI require the City on behalf of the Joint Powers to surrender, in whole or in part, its rate regulatory authority under the franchise agreement and federal law? What are TCI’s post-’~’Closing" rates? RESPONSE: TCI will not require the Joint Powers to surrender, in any permanent fashion, its rate regulatory authority .under the franchise Agreement and federal law. However, Section 7.5.2 of the Agreement sets forth certain reassurances regarding rates sought by TCI, including that the rates will not be regulated by the City for twelve months after the closing. Any future rate adjustments made by TCI will be consistent with applicable federal regulations. 4.How will the f’mancing of the proposed transactions contemplated by the APA affect subscriber rates? RESPONSE: Subscriber rates will not be affected, since TCI is not entering into any financing arrangements for the proposed transaction. See also response to no. 12 below. Does TCI anticipate any change in external costs (as def’med in the FCC’s rate regulation rules) as a result of the proposed "transactions contemplated by the Agreement"? If so, please provide an estimate of the amount of each anticipated charge and the basis for such estimate, and state which of those costs, if any, TCI either intends to and/or will pass through to subscribers? Page 3 March 24, 2000 RESPONSE: TCI does not anticipate any significant changes in external costs (as defined in the FCC;s rate regulation rules) as a result of the proposed transfer transaction. As to any new or amended franchise requirements, any changes in external costs will be fully consistent with FCC regulations. Sections 7.? and 7.24 of the APA suggest that the transactions contemplated by the APA will not be consummate~, at the "Closing", unless certain existing obligations of Cable Co-op to the community access organization are modified or reduced. Will ~CI expressly agree to fulfill the terms of PEG access as set forth in Section 4.3.03 of the franchise agreement? If not, does TCI anticipate that it will be relieved, in whole or in part, of the contractual obligation (and the obligation under Section 5 of the agreement between Cable Co-op and the Mid-Peninsula Access Corporation) to provide public access studio space and equipment? RESPONSE: Please refer to Exhibit 4 of the Form 394, which sets forth the PEG arrangements that TCI requests for the amended and/or restated franchise Agreement. Again, please note that the arrangements set forth in Exhibit 4 are to the be~efit of the Joint Powers’ cable community, including service to schools, a donation of $50,000 worth of cable modem equipment to the Palo Alto Unified School District, collaboration on advanced or experimental services to schools, and a dedicated channel to Silicon Valley Community Communications, Inc. ("SVCC"). TCI has agreed for the term of TCl’s new or amended franchise to honor Cable Co-op’s obligation to MPAC set forth in Section 6(a) of their agreement SVCCwill provide studio space and equipment to MPAC as set forth in Sections 7.22 and 7.24 of the APA. Please explain the degree to which cable customer facilities and operations in the franchise area will be affected by the proposed transfer. RESPONSE: Pursuant to Section Z24 of the APA, it is anticipated that the lease for the office, headend and studio space will be assigned to TCI. TCI is currently reviewing the lease arrangements for the office and headend space leased by Cable Co-op. TCI anticipates that it will (i) continue the lease arrangements for the office space for the near future; and (ii) arrange a long-term lease arrangement for the headend space. In addition, pursuant to Section 7.24 of the APA, TCI will sublease or license to SVCC the studio space for a period of 18 months after the closing date of the proposed transaction. See also Exhibit 4 to the Form 394 which se’ts forth the changes to the operations which TCI believes will benefit the Joint Powers’ cable community. o What are TCI’s plan~ for the cable modem Interact service currently provided by Cable Co-op? Section 4.2 of the APA and Schedule 10, Excluded Assets, suggest that TCI will not continue the current ISP contract and will not acquire Cable Co-op’s cable modems. Please confirm or deny, and furnish a complete explanation. RESPONSE: TCI will assume the current ISP contract (Media City/ISP Channel Agreement dated April 28, 1998). This contract is listed as item no. 18 of Schedule 3- System Contracts- to the Agreement. It is no__~t part of the Excluded Assets listed in Schedule 10 to the Agreement. The cable modems referenced as Excluded Assets on Schedule 10 are being transferred by Cable Co-op to Media City/ISP CHANNEL for its use in providing ISP services. Will TCI and its parent entities and affiliates commit to abide by all ordinances, regulations and requirements of the City and every other Joint Powers member concerning encroachment Agreements arid permits and other authorizations required for placing facilities in the public rights-of-way? Page 4 March 24, 2000 RESPONSE: Yes, TCI will abide by all lawful ordinances, regulations and requirements. 10.Will Cable Co-op and/or TCI pay for the City’s and the other Joint Powers members’ costs incurred in reviewing and acting on the transfer request? RESPONSE: Cable Co-op agrees to pay reasonable costs associated with the transfer request, pursuant to section 10.2. 04 of the current franchise agreemgnt with the understanding that the City of Palo Alto and Joint Powers will agree to complete the transfer and any amendments/restatements to the franchise Agreement prior to the anticipated June 30 closing date between TCI and Cable Co-op. Please note that Cable Co-op may not have the funds available to pay these costs if the transaction between TCI and Cable Co-op does not close by June 30, 2000. 11. Does TCI intend to allow subscribers to access unaffiliated Intemet access providers on its system without requiring subscribers to In’st click through and/or pay for access to an Intemet access provider, such as @Home, which is affiliated with TCI? RESPONSE: As TCI’s parent company, AT&T Corp., stated to the FCC, AT&T is prepared to enter into negotiations for carriage of multiple ISPs on its cable systems upon the expiration of any current contract restrictions. 12.Please describe the mariner in which TCI intends to and/or will f’mance the purchase price. Will any loans associated with the purchase be specifically assigned to the cable system currently operated by Cable Co- op? Will loans be assigned to TCI? Will loans be assigned to any parent entities or affiliates of TCI, including TCI West, Inc.? RESPONSE: N/A, since TCI will not enter into any financing arrangements for the purchase price. The purchase price will be paid from existing working capital of TCI. 13.Please provide consolidated annual fmancial statements for the calendar year ending December 31, 1999 (audited, if available, but unandited internal operating statements will be acceptable) for TCI and TCI West, .Inc. Please include balance sheets, income statements and statements of cash flows, with footnotes as may be necessary to understand the f’mancial statements. Please provide the consolidated number of subscribers for TCI and TCI West, Inc. as of December 31, 1998, September 30, 1999 and December 31, 1999. RESPONSE: Audited financial statements of TCI Cablevision of California, Ine~ for the period ending 12/31/99 will not be available until mid-April 2000. They will be provided to you at that time. Unaudited financial statements for the period ending 12/31/99for TCI Cablevision of California, Inc. are enclosed with this letter. Subscriber numbers for the periods requested are also enclosed with this letter. 14.Please provide an annual fmancial statemer~t for Cable Co-op for the year ended December 31, 1999 (audited, if available, but unaudited internal operating statements will be acceptable), including balance sheets, income statements and statements of cash flows, with footnotes as may be necessary to understand the f’mancial statements submitted with Form 394. Also, please include associated operating statistics, including homes passed, number of subscribers, and number of pay units as of December 31, 1998 and December 31, 1999. RESPONSE: Unaudited financial statements for Cable Co-op for the year ended December 31, 1999 are enclosed with this letter. Operating statistics, including homes passed, number of subscribers, and number of pay units as of December 31, 1998 and December 31, 1999 are also enclosed with this letter. Page 5 March 24, 2000 15.Ple~se provide pro forma projected fmancial statements for the years ending December 31, 2000 through December 31, 2004, inclusive. Please include balance sheets, income statements, and statements of cash flows, with footnotes as may be necessary to understand the financial statements for TCI and the cable system currently owned and operated by Cable Co-op. Please include associated operating statistic ass~mptions for these projections, including homes passed, number of subscribers, number of pay units, and operating expense, capital expenditure, and fmancial assumptions reflected in the projections. ~;~ZSPONSE: Pro forma financial statements are not prepared in the normal course of business. 16.Your attention is called to the franchise fee audit of Cable Co-op recently performed by KFA Services and forwarded to Mr. Kirkeeng on behalf of Cable Co-op on February 22, 2000 by Grant Kolling, Senior Assistant City Attorney. Will Cable Co-op and/or TCI pay the franchise fees owed to the City as set forth in that audit report? If the transfer is consummated, will TCI agree to abide by the finding of the KFA Services audit report in calculating the franchise fees owed on a going-forward basis? RESPONSE: Cable Co-op is currently working with the City of Palo Alto regarding the franchise fee audit performed by KFA Services and will finalize these audit issues as soon as possible. Because TCI is not a party to the franchise fee audit between Cable Co-op and KFA Services, it will not agree to be bound by the findings of the KFA Services report. Notwithstanding the foregoing, TCI will agree to pay franchise fees pursuant to the terms of the franchise agreement negotiated between TCI and the Joint Powers. Thank you for your attention to this matter. both of the undersigned. Please provide any requests for any additional information to Sincerely, CABLE COMMUNICATIONS COOPERATIVE By: TCI CABLEVISION OF CALIFORNIA By: Susan Ritchie Executive Director of Franchising and Government Affairs CC:Palo Alto City Council Members of the Joint Powers Authority Donna Rogers, City Clerk Emily Harrison, Assistant City Manager Carl Yeats, Director of Administrative Services Ariel Pierre Calonne, City Attomey Sue Buske, The Buske Group Tillman Lay, Esq. ATTACHMENT C Required or Currently Offered Co-op Services Compared to ~ Committed AT&T Services Co-op Service/Franchise ObligationIssue Franchise Obligations in General Franchise Fees Public, Education and Government (PEG) Access/Programming Access Studio/Offices Rate Regulation Cable Co-op is required to abide by all provisions in the Franchise Agreement (Franchise). Under the Franchise, Cable Co-op isresponsible for paying disputed franchise fees found in a recent review of payment calculations (KFA Audit). The Franchise requires Cable Co-op to provide the community with: o 3 Public and Educational Channels o 2 Government Access Channels ~5 additional channels as needed $60,000 annually for operating funding ~$30,000 annually for equipment ~$20,000 annually for production costs ¯$ 5,000 annually for maintenance ¯$20,000 in matching funding The Franchise requires Cable Co-op to provide PEG access office space and a studio for the production of programming. The Franchise provides the City and Joint Powers the ability to regulate rates to the extent possible under federal law. Commitment by AT&T AT&T has not guaranteed its performance under the Franchise. AT&T will accept responsibility for obligations embodied in a franchise agreement that is agreed to by Palo Alto and AT&T (i.e., a new agreement). Asset Purchase Agreement (APA) §§7. 5.1, 9.2.7 March 24, 2000 Letter to June Fleming, response to question 1. AT&T will not assume responsibility for any non-performance issues incurred by Cable Co- op prior to the close of the transaction. March 24 Letter, response to question 1. AT&T has not provided details regarding its commitment to PEG access and programming; it has indicated it will provide one dedicated channel to SVCC and $50,000 worth of cable modem equipment to local schools. No other details are provided. AT&T has said it will negotiate with MPAC directly regarding financial support if they . continue to the community access organization. APA §§7.5.3, 7.22, 7.24 Letter to June Fleming, response to question 6. AT&T has transfe[red its responsibility regarding office and studio space to SVCC. It is providing space to SVCC for 18 months. APA §§7.22, 7.24 AT&T has requested that Palo Alto forego its right to regulate rates for one year, without indicating what the rates will be. APA §7.5.2. Letter to June Fleming, response to question 3. The sale price of the system is somewhat conditioned on maintaining "pre-closing" rates. APA §3.3.4. Page 1 Local Subscriber Contact - Office/Customer Service High-speed lnternet Service Audio Services Institutional Network Rights of Way Use & Permits Cable Co-op has a local office for subscriber drop-in bill payment and equipment ~xchange. Cable Co-op offers three levels of increasingly high-speed Internet access. Upstream transfer rates range from 100 kbps to 200 kbps. Cable Co-op offers "World Class" brand audio programming (9 channels including BBC World Service, Radio France International and distant FM stations). Cable Co-op offers 32 channels of free commercial FM service. Cable Co-op is required to provide two-way, interactive services capable of voice, video and data transfers among Joint Powers, government and educational facilities. The Franchise obligates Cable Co-op to ¯ take out permits when it excavates or uses the Public Rights of Way, ¯ place its facilities underground where other utilities are underground, and ~restore property to prior condition when disturbed by construction. AT&T has not committed to provide a local office; it has indicated that it expects to continue the lease of the local customer service office for the "near future." Letter to June Fleming, response to question 7. AT&T will assume the current ISP contract that Cable Co-op has. Letter to June Fleming, response to question 8. AT&T generally offers "Excite @Home" brand cable modem service. This service is not expected until the cable system is rebuilt. One level is available to all users - all with advertised 128kbps upstream transfer rates. AT&T has not committed to provide any audio service. AT&T generally offers "DMX" braid audio programming (10 non-commercial channels) on its "digital cable" service. AT&T generally does not offer a FM service. AT&T has not committed to provide Institutional Network capacity. AT&T has agreed to abide by all lawful ordinances, regulations, and requirements. March 24 letter, response to question Page 2