HomeMy WebLinkAboutItem 8.1 FrnchisTransfViacomToTCI (2)
,
CITY CLERK
File # [Z][Q][5]laJ-~[a]
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AGENDA STATEMENT
CITY COUNCIL MEETING DATE: NOVEMBER 28,1995
SUBJECT:
Transfer of cable television franchise from Viacom Cable to Tele-
Communications, Inc. (TCI)
Report Prepared by: Steve Honse, Administrative Assistant
EXHffiITS ATTACHED:
/1. Resolution Approving Cable Television Franchise Transfer
I 2. Change of Control Consent Agreement
/ 3. Letter from DarIa Stevens, Executive Director of crv
RECOMMENDATION:~
Approve the attached Resolution and Franchise Transfer
Agreement, approving the transfer of the City's cable television
franchise from Viacom Cable to Tele-Communication, Inc. (TCI),
subject to TCl's acceptance of the Transfer Agreement's terms.
Authorize the City Manager to execute the Franchise Transfer
Agreement included in the Resolution.
~ANCIAL STATEMENT:
Approval of the application for franchise transfer would impose no
direct costs upon the City. Viacom has agreed to reimburse the cities
for consultant costs to review the transfer application.
DESCRIPTION:
Viacom Cable, which has a non-exclusive franchise to provide cable TV services in Dublin, has agreed to
sell its cable systems to Tele-Communications, Inc. (TCI), the nation's largest cable TV operator. City
approval is required prior to the transfer. In the event that the City fails to approve or deny the request
prior to December 2, 1995, the request is deemed to be approved.
The parties refer to the transfer as a "change of control" rather than a sale since the transaction will
involve a stock swap and not a sale of assets. Nevertheless, Federal Communications Commission (FCC)
regulations require the franchisee to request approval from the franchising authority for a transfer.
The transferee has not requested any changes in the franchise terms. Therefore, FCC regulations allow the
franchisor to deny a transfer application only under the following conditions:
1. The buyer is either financially, technically, or legally unable to operate the system.
2. The current franchise holder has committed a material breach of the franchise agreement.
.------------------~-----------------------------------------------
COPIES TO:
I;EMNO.~
Wcc-forms/agdastmt.doc
The cities of Dublin, Livermore, Pleasanton, and San Ramon ("Cities") have contracted with ·
Telecommunications Management Corp. CTMC) to review Viacom's request. The TMC review concludes:
1. TCI, the largest cable TV operator in the nation, clearly has the financial and technical capability .
to operate the system.
2. The transfer could result in rate increase due to possible changes in accounting procedures,
specifically as related to goodwill.
3. A good faith argument exists that Viacom is not in compliance with the existing franchise
agreement as related to channel capacity, and the provision of public education/government
stations.
Staff has consulted with Viacom and TCI in order to resolve the following compliance issues:
Assurance that the cable system upgrade will be completed expeditiously
It is unclear whether the cities could now find Viacom in violation of the franchise agreement for failure to
upgrade the system. Under the Franchise Agreement, the City may compel the franchisee to expand the
cable system to no less than 54 channels. In order to compel the upgrade, the City is required to hold a
"System and Services Review". If the review shows that the Dublin area has fewer stations than offered in
comparison communities, the City must formally request the upgrade. Although the System and Services
Review was conducted, none of the four cities formally requested an upgrade. However, staff maintains
that the cities refrained from making a formal request in 1991 due to assurances from Viacom that the
rebuild now underway was imminent.
Regardless of the question of franchise compliance, the cities' intent is that the rebuild be completed as
soon as possible. To that end, Viacom has agreed to pay liquidated damages, per section 4.3 of the
franchise agreement, if the rebuild of all four cities is not completed by December 31, 1997. Barring .
unforeseen delays, this appears to be a realistic deadline. In any event, Dublin's system will be completed
during 1997.
Addition of an additional public/government (PEG) access channel
The Franchise Agreement requires Viacom to reserve up to 10% of its channel capacity for Public,
Educational, and Government (PEG) access. However, before the operator is required to add an additional
PEG channel, the existing channel or channels must carry 50% non-duplicated programming between 8:00
a.m. and 11:00 p.m. for 13 consecutive weeks: 'Currently, Channel 30 is the system's only PEG channel,
and there is no capacity for additional channels until the system rebuild is complete. Channel 30 does not
now meet the nonduplicative requirement.
In the Transfer Agreement, TCI has agreed to waive the nonduplicative requirement and activate a second
Tri- Valley PEG channel upon completion of the rebuild. The channel would also carry leased access
programming, but PEG programming would have scheduling priority. The cities will retain the right to
compel the addition of PEG channels (up to a, total of six PEG channels on the rebuilt system) provided
that the nonduplicative requirement is met.
Assurances that the transfer will not result in rate increases
The cable operator may set rates (subject to regulatory review) using "benchmark" formulas established by
the FCC, or through a more comprehensive "cost of service" demonstration. Most cable operators,
including Viacom's Tri- Valley system, have so far elected to use the simpler benchmark calculations, .
'r.'
although an increaSing number of operators (including Viacom's Antioch system) have performed cost of
service fiJings to justify higher rates.
Currently, FCC regulations prohibit cable operators from including the value of intangible assets (I.e.
"goodwill") to inflate valuation when "cost of service" is used to determine rates. Prior to the 1992 Cable
Act, goodwill was often used to justify large rate increases after the sale of cable systems. TCI has agreed
~ a presumption that goodwill is to be excluded from calculation of the rate base. The exclusion of
goodwill will tend to moderate price increases which have historically followed cable franchise sales.
Reservation of Rights
The attached transfer agreement includes a "reservation of rights" clause to allow the City to maintain a
cause of action against TCI for liabilities incurred by Viacom prior to the transfer. For example, the
reservation of rights assures the City that any underpayment of franchise fees prior to the transfer can be
recovered from TCI, even if the underpayment is not discovered until after the transfer.
Analysis
The on!y basis for denial of the transfer request would be if Viacom has committed a material breach of the
franchise agreement. There is a good faith argument that Viacom has breached the franchise agreement.
However, this argument is not unassailable. Rather then expend resources to arbitrate the dispute, the
Cities, Viacom, and TCI have negotiated an agreement which fully addresses all of the legitimate concerns
raised by the Cities. The agreement will: assure expeditious completion of the cable system upgrade, add
an additional PEG channel following the upgrade, prohibit unreasonable rate increases, and provide for a
reservation of rights.
The resolution, approving the transfer (Exhibit 1) approves the transfer contingent upon the execution of
ae Change of Control Consent Agreement (Exhibit 2). In the event that TCI fails to execute the
~eement by December 1, 1995, the resolution approving the transfer shall be deemed to be denied
without prejudice.
Staff and the City Council have received a letter from Daria Stevens, Executive Director of CTV. The
letter requests that the City require various concession from TCI as a condition of approving the transfer.
These concessions include a guarantee of three PEG stations, elimination of the nonduplicative
requirement, compensation for the elimination of two PEG channels previously provided, and free
advertising for CTV.
A transfer request cannot be used to renegotiate the franchise agreement. While the City can seek
compliance with the existing agreement, it may not withhold approval to gain contractual concessions. It
would be improper, and perhaps illegal, to demand free crv advertisements as a condition of approval for
the transfer request. Also, the City cannot assert a right to a second PEG channel until the nonduplicative
requirement is met. This is an essential term of the contract which Viacom and TCI are unwilling to waive.
The City cannot demand that they be relieved of this requirement as a condition of approving the transfer.
.
RESOLUTION NO. - 95
A RESOLUTION OF THE CITY COUNCIL
. OF THE CITY OF DUBLIN
.
*********
APPROVING CABLE TELEVISION
FRANCHISE TRANSFER AGREEMENT
WHEREAS, Tele-Vue Systems, Inc. d/b/a Viacom Cablevision ("Franchisee") is the duly authorized
holder of a franchise ("Franchise") authorizing the operation and maintenance .of a cable television system
("System") and authorizing Franchisee to service the City of Dublin ("Grantor") with cable television service;
and
WHEREAS, Viacom Intemational, Inc., a Delaware corporation ("Viacom"), a wholly-owned subsidiary
of Via com, Inc. ("Vf') is an indirect parent of Franchisee; and
WHEREAS, VI, Viacom, Tele-Communications, Inc., a Delaware corporation ("TCf'), and TCI
Communications, Inc., a Delaware corporation and wholly-owned subsidiary ofTCI ("TCIC") ("Transferee"),
are parties to some or all of the following; a Parents Agreement, and Implementation Agreement, and a
Subscriptions Agreement (the "Agreements"); and
WHEREAS, upon consummation of the transactions contemplated by the Agreements (the
"Transactions"), TCIC will acquire all of the outstanding common stock of Via com and become the indirect
parent of Franchisee; and
WHEREAS, both before and after the completion of the change of control described above, Franchisee
.eld and will continue to hold the Franchise, and own and operate the System servicing residents of Grantor;
and
WHEREAS, Franchisee and TCIC have requested consent by the Grantor to the Transactions.
NOW, THEREFORE, BE IT RESOLVED that
1. The City Council of the City of Dublin hereby consents to and approves the Franchise Transfer
to Transferee.
2. Said transfer is conditioned upon the terms and conditions set forth in the attached "Exhibit A,
Franchise Transfer Agreement." Transferee's failure to execute the Franchise Transfer Agreement
by December 1, 1995 shall mean that the franchise transfer is denied without prejudice.
3. This resolution shall become effective immediately upon its passage and adoption.
PASSED, APPROVED AND ADOPTED this 28th day of November, 1995.
AYES:
NOES:
ABSENT:
Mayor
eITEST:
City Clerk
K2/11-28-95/reso-tv.doc
EXHIBlIT 1
Exhibit 1
Change of Control Consent Agreement
This Consent Agreement, dated November 21, 1995, is entered into between TCI Communications, Inc. ("TCIC" ) .
and the City of Dublin ("Grantor").
RECITALS
A. Tele-Vue Systems, Inc. dlb/aNiacom Cable ("Franchisee") is the duly authorized holder of a franchise (the
"Franchise") authorizing operation of a cable television system (the "System") servicing the residents of
the Grantor.
B. Franchisee and TCIC have requested that the Grantor consent to the change of control of Franchisee from
Viacom Inc. to TCIC all as more fully described the FCC Form 394, filed with the Grantor in this regard.
C. Grantor is willing to consent to the change of control of Franchisee, upon the condition that TCIC execute
this Agreement.
D. TCIC is willing to execute this Agreement in connection with obtaining Grantor's consent, with the
understanding that this Agreement will become effective upon consummation of the change of control of
Franchisee from Viacom, Inc. to TCIC.
IN CONSIDERATION OF THE FOREGOING, and of the obligations contained below, Grantor and TCIC agree as
follows:
Section 1
The consents of the Grantor to the Change of control of Franchisee do not constitute and shall not be construed to
constitute a waiver of any obligations of Franchisee or any of its successors in interest under the Franchise or the .
Cable Television Franchise Ordinance (Chapter 3.20, Dublin Municipal Code.)
Section 2
The Grantor and TCIC on behalf of the Franchisee agree that, as of the date of this Resolution: a) the Franchise
was properly granted to the Franchisee, is valid, remains in full force and effect, and expires on December 31,
2000, subject to options, if any, to extend the term; b) the Franchise supersedes all other agreements between the
Franchisee and the Grantor and represents the entire understanding of the parities. The Grantor will accept a
guarantee of TCI Pacific, Inc. in lieu of TCIC becoming a signatory to the Franchise Agreement as set forth in the
Cable Television Franchise Ordinance, Dublin Municipal Code Section 3.20.190 (F).
Section 3
TCIC acknowledges and agrees that, notwithstanding the change of control, Franchise remains legally responsible
for any default under the Franchise not currently known to Grantor, including, but not limited to, any franchise fees
which may be due to the Grantor.
Section 4
Any interest in the System and the Franchise or the control related thereto, may be transferred to any entity wholly
owned by TCIC or under common control with TCIC upon notice to the Grantor.
Section 5
The Grantor hereby consents to and approves the assignment, mortgage, pledge, or other encumbrance, if any, of
the Franchise, System or assets relating thereto, or of the interests in the permitted holder thereof, of collateral for .
a loan.
EXHIBIT 2
Section 6
.CIC agrees that is will cause the Franchisee to complete the Dublin portion of the voluntary system upgrade
urrently under construction in the City of Livermore, and shall offer expanded programming on the Pleasanton
system no later than December 31, 1997. If the Dublin portion of the voluntary system upgrade is not completed
by January 1, 1998, TCIC will cause the Franchisee to pay to Grantor liquidated damages as described in Section
4.3 of the Franchise Agreement, subject to the Force Majeure conditions described in Section 12.1 of the
Franchise Agreement.
Section 7
Notwithstanding conditions set forth in Section 3(e) (second paragraph) of the Franchise Agreement, upon
completion of the voluntary system upgrade, TCIC shall cause Franchisee to make available to the Grantor a
second Public, Education and Government access (PEG) channel. Grantor acknowledges that the second PEG
channel may also carry leased access programming. Franchisee shall give Grantor priority over leased access
when scheduling programming on the second PEG channel.
Section 8
As a part of the transfer, TCIC, on behalf of the Franchisee, agrees and acknowledges that: a) this approving
agreement is not a new franchise agreement, the granting of a franchise, or the renewal of the existing franchise,
but rather is exclusively an agreement to the change of control of the Franchisee, and neither affects nor
prejudices in any way the Grantor's rights thereunder; and b) that compliance with the Franchise, as of the date of
the closing of the Transactions, is neither commercially impracticable as the term is used in Section 625 (f) of the
Cable Communications Policy Act of 1984 and/or the Cable Television Consumer Protection and Competition Act
of 1992 (collectively the "Cable Act") nor economically infeasible upon the closing of the change of control based
on (1) any and all debt service incurred, or to be incurred, to directly or indirectly finance the change of control, or
(2) any return on equity made, or to be made, based upon the equity portion of the financing relating to the change
.f control.
Section 9
TCIC agrees that the Grantor's approval of the change of control is not to be construed by TCIC as a rebuttal of
the presumption that goodwill should be disallowed from the rate base for the purpose of any proceeding to
calculate or determine any regulated rate subject to Grantor's jurisdiction.
Section 10
This Agreement shall become effective on the date that control of the Franchisee is transferred from Viacom Inc.
to TCIC.
AGREED BY:
City of Dublin
TCI Communications, Inc.
Signature:
Signature:
Name:
Name:
Title:
Title:
Date:
Date:
.Ocladminsvcs/cablagmt
11/14/1995 12:11 5104621540 ~A~c ~l
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DEAR BOARD MEMBERS: (ee Mayers, City councllmember8, City cable etaff)
-
As you know from our last Board Meeting; ~ime is of
deadline approaches----beyond ~hich the Franchisors
Non-Compliance and ask tor Compensation.
the ...ence as tho
cannot file a letter r~
.
NK2D COMM:tTM2NT TO RESTORE COMMUNITY CHARNElS
It is important that the Pranchisor. roceive a hardened oommitment from the
Franchisee to restore the thr.. channel. dedicated to community that ware
in pla.ce until. quite recently. It i. extremely important that this be a
oo..i~an~, and ~ha~ thia be eonaidered ~. FORMAL REQUEST .~rom the
Franchisors that will be fulfilled early in each rebuild; and further, that
this would not be an agreement in the abstract, which would mean that
future OhannelS COUld only be gained by the "trigger" boiler-plate language
con~ained in ~e Franchise con~rac~.
It is also important that the Franchisee not place restrictions on the
Pranchisors (cities) in CTV'. manaqement input regardinq the.. community
ohannel resources. Cable~s responsibilities tor P.E.G.; Local
Origination/Communi~y Service television, as well aa LA8SAd Access will be
reviewed by the Franchisors in a decision-makinq process reqardinq
community channels.
COMPJ;:NS"'-TION
. LOSS OF CHANNELS resulting in less choice for viewers, and loss of
communi~y channels for the aqencies, orqanizations, and governments that
woula have used the airtime, is an issue ror compensation. This loss or
channels refers both te the twe oommunity Qhannels that were dele~ed when
all community channels were combined into one, and the channels that never
materialized for general viewinq. Forty channels were required, but only
37 were aelivered since the contract was signed in 1986. .
. OPERATIONs BY CTV: (Compensation tor those operations that diree~ly
benefit cable, and save it exp.ndi~ures.) CTV does a major portion of
production, post-production, and playback of tapes on the air for Channel
30 as a mandate from the Franchisor./ci~ie.; and CTV will continue to do
playback ~unctions as well as its other operations. Pl.ayback especially
~.n~tits the cable company and literally saVGS i~ .oney. Cable can
ereatively implement ways for CTV to earn revenues, which in turn will go
to support more equipment, labor and playback, benefitting everyone
concerned including cable.
CONTINUED NON-MONETARY SUPPORT FOR CTV FROM'. CABLE
Written asssurances from cable that will transcend the transfer to Tel
regarding these current established ways in which cable supports CTV's
ability to earn revenues: .
a) continuA permanent :30 spotg in~Qrtiens fer CTV on cable's major
channels for a fixed total of 10% ot c8b1.'s 20\ ot local avails.
b) twice per year "stuffer" support in cable billings for CTV to ask for
donationG/membership from the public
e) tape sales: if/whon CTV be9ins to ~urther promote sales o~ its tapes,
cable will continue to refer and promote such sales
d) Cable to continue to refer in its brochures to community service
programming by CTV (language refering to support ror CTV rrom the
ci~ies should be coopera~ively explore4).
PRINCIPLES CARRIED FORWARD
~. Because these cities agree to work together, creating a convenience in
1'- the transfer for the cable company, the cities expect that services and
system desi9n/enginearing, (past or future), provided in' anyone city,.
shall be provided upon request in any other city.
~ . Basic Service Tier shall continue, and shall include community channels.
~
EXHIBIT 3