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HomeMy WebLinkAboutItem 7.1 TransferViacomCable-TeleCom (2) '" CITY CLERK File # [1]~~[Q]-~~ . AGENDA STATEMENT CITY COUNCIL MEETING DATE: DECEMBER 12,1995 SUBJECT: Transfer of cable television franchise from Viacom Cable to Tele- Communication, Inc. (fCIC) Report prepared by Steve Honse, Administrative Assistant EXHffiITS A IT ACHED: / 1. Resolution Approving Cable Television Franchise Transfer / 2. Change of Control Consent Agreement 3. Staff Report from City Council meeting of 11/28/95 RECOMMENDATIO~/{/~~ Approve the transfer of the City's cable television franchise from ~ \-- Viacom Cable to Tele-Communications, Inc. (fCIC) FINANCIAL 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: This item was continued from the Council meeting of November 28, 1995. At that time, TCIC had extended an offer to the cities of Dublin, Pleasanton, San Ramon and Livermore (the Cities) in which TCIC agreed to: · provide an additional Public, Education, and Government (pEG) access station, and · pay liquidated damages if the cable system upgrade in the City of Dublin was not completed by December 31, 1997, and · a reservation of the City's rights as related to franchise agreement This offer was contingent upon approval by all of the four Cities. Should anyone city fail to adopt the agreement, then the offer was withdrawn as related to the other cities. On November 27, 1995, the Pleasanton City Council failed to adopt the agreement based upon that city's desire to obtain three PEG stations instead of the two offered in the TCIC proposal. Based upon Pleasanton's action, the offer was withdrawn as related to the City of Dublin. On November 28, 1995, TCIC requested a continuance which was granted by Council at the November 28, 1995 Council meeting. In response to Pleasanton's request for a third PEG channel, TCIC has stated that they will provide a third PEG channel provided that the Cities agree to delete Section 7.3(e) of the Franchise Agreement which _requires the franchise holder to reserve up to 10% o.f its channel capacity available for PEG programming .-r------------------------------------------------------------------ :'-:.:.. COPIES TO: ITEM NO. ~ / Wcc-forms/agdastmt.doc subject to the non-duplicative trigger requirement (discussed in detail in Exhibit "3" - staff report dateB . November 28, 1995). , In place of the deleted section, TIC proposes that the following language be substituted: . Upon completion of the Dublin portion of the voluntary system upgrade currently under construction in the City of Livermore due to be completed no later than December 31, 1997, the Franchisee will provide the Grantor a total of three (3) PEG access channels, one of which will be shared with leased access users in accordance with federal law, to be used exclusively by the Grantor and shared and the cities of Livermore, Pleasanton, and San Ramon. The Grantor, in conjunction with the cities of Pleasanton, Livermore, and San Ramon shall designate one of the three PEG channels to be shared channel with leased access programming in accordance with federal law. Grantor agrees to allow Franchisee to place leased access programming on the shared channel, using any time slots not used by the cities. Under the TCIC proposal, the Cities would be entitled to three (3) PEG stations immediately following the upgrade without the burden of meeting the non-duplicative requirement. In exchange, the Cities would give up its right, subject to the non-duplicative requirement, to designate up to 10% of channel capacity for PEG programming. One channel would be made available to TCIC for leased access, provided that the time was not required by the Cities. The proposed modification to the Franchise Agreement offers significant benefits to PEG programming at no cost to the City. The City will give up its "right" to designate up to 10% of available channels for PEG programming. However, this right is of small value. In order to assert the right, the City would be required to expend resources to satisfy the nonduplicative requirement. In exchange for giving up this right, TIC will provide three PEG channels immediately following the upgrade. The TCIC proposal would provide additional stations while eliminating the requirement to produce additional programming. ...... . . The TCIC proposal is attached as Exhibit "2" - Change of Control Consent Agreement. This agreement is identical to the Change of Control Consent Agreement presented to Council at the November 28, 1995, with the exception of Section 7 related to PEG channels. The proposed agreement retains a reservation of the City's rights (Section 1) and provides for liquidated damages in the event that the Dublin upgrade is not completed by December 31, 1997 (Section 6). Staff recommends that the Council adopt the resolution approving the cable franchise transfer from Viacom Cable to Tele-Communications, Inc. (fCIC) subject to TCIC acceptance of the Transfer Agreement's terms and authorize the Mayor to execute the Franchise Transfer Agreement. . .. .- - ... . RESOLUTION NO. - 95 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN ********* WHEREAS, Tele- Vue Systems, Inc. d/b/a Viacom Cablevision ("Grantee") is the duly authorized holder of a franchise ("Franchise") authorizing the operation and maintenance of a cable television system ("System") and authorizing Grantee to service the City of Dublin ("Grantor") with cable television service; and WHEREAS, Viacom International, Inc., a Delaware corporation ("Viacom"), a wholly-owned subsidiary of Viacom, Inc. ("VI") is an indirect parent of Franchisee; and WHEREAS, VI, Viacom, Tele-Communications, Inc., a Delaware corporation ("TCI"), and TCI Communications, Inc., a Delaware corporation and wholly-owned subsidiary of TCI ("TCIC"), are parties to some or all of the following; a Parents Agreement, an Implementation Agreement, and a Subscription 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 Viacom and become the indirect parent of Grantee; and WHEREAS, both before and after the completion of the change of control described above, Grantee held and will continue to hold the Franchise, and own and operate the System servicing residents of Grantor; and WHEREAS, Grantee and TCIC have requested consent by the Grantor to the Transactions; NOW, THEREFORE, BE IT RESOLVED Section 1: The City Council of the City of Dublin hereby consents to and approves the change of control of the Franchise from Viacom to TCIC. Section 2: Said transfer is conditioned upon the terms and conditions set forth in the attached "Exhibit 2, Change of Control Consent Agreement." Section 3: Unless TCIC and Grantor execute the said Change of Control Consent Agreement by December 15, 1995, this resolution shall be deemed to have been denied without prejudice. Section 3: This resolution shall become effective immediately upon its passage and adoption. PASSED, APPROVED AND ADOPTED this _ day of , 1995. EXHIBIT "1" AYES: NOES: ABSENT: ABSTAIN : A TrEST: City Clerk H/cc- forms/reso.doc Mayor .-:--. -- - . - .- .-: . Exhibit 1 Change of Control Consent Agreement This Consent Agreement, dated December 11, 1995, is entered into between TCI Communications, Inc. ("TCIC" ) and the City of Dublin ("Grantor"). RECITALS A. Tele-Vue Systems, Inc. dIb/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, Franchisee 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 TCtC 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, as collateral for - a loan. EXHIBIT "2" Section 6 TCIC agrees that it will cause the Franchisee to complete the Dublin portion of the voluntary system upgrade . currently under construction in the City of Livermore, and shall offer expanded programming on the Dublin 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 Section 7.3(e) of the Franchise Agreement is deleted and the following language is substituted: Upon completion of the Dublin portion of the voluntary system upgrade currently under construction in the City of Livermore due to be completed no later than December 31, 1997, the Franchisee will provide the Grantor a total of three (3) PEG access channels, one of which will be snared with leased access users in accordance with federal law, to be used exclusively by the Grantor and shared and the cities of Livermore, Pleasanton, and San Ramon. The Grantor, in conjunction with the cities of Pleasanton, Livermore, and San Ramon shall designate one of the three PEG channels to be shared channel with leased access programming in accordance with federal law. Grantor agrees to allow Franchisee to place leased access programming on the shared channel, using any time slots not used by the cities. 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 of 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: CITY CLERK File # [2][Q]l1Jla]-[3J1tI] e.. AGENDA STATEMENT CITY COUNCIL MEETING DATE: NOVEMBER 28, 1995 SUBJECT: Transfer of cable television franchise from Viacom Cable to Tele- Communications, Inc. (fCI) _ Report Prepared by: Steve Honse, Administrative Assistant EXHffiITS ATTACHED: 1. Resolution Approving Cable Television Franchise Transfer 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. (fCI), subject to TCI's acceptance of the Transfer Agreement's terms. Authorize the City Manager to execute the Franchise Transfer Agreement included in the Resolution. .FINANCIAL ST~TEMENT: 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: ITEM NO. 4L EXHIBIT "3" W cc-formslagdastm t.doc The cities of Dublin, Livennore, Pleasanton, and San Ramon ("Cities") have contracted with Telecommunications Management Corp. (TMC) 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 fOlmally 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, . ~. # ~ltqough an increasing number of operators (including Yiacom's Antioch system) have performed cost of , iietvice filings 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 ..ct, goodwill was often used to justify large rate increases after the sale of cable systems. TCI has agreed to 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 Yiacom 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 only 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 I) approves the transfer contingent upon the execution of . - e Change of Control Consent Agreement (Exhibit 2). In the event that TCI fails to execute the agreement by December I, 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 crY. 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 cry 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. .