FCC Pressured to Loosen Restrictions on Cable-Telco Mergers

By Josh Long

The Federal Communications Commission is facing pressure to make it easier for cable television companies and competitive telephone providers to merge.

Earlier this summer, the National Telecommunications & Cable Association asked the FCC to find that cross-ownership prohibitions contained in the Telecommunications Act of 1996 do not apply to cable operators and competitive local exchange carriers or so-called CLECs.

NCTA, which represents the U.S. cable industry and is led by former FCC Chairman Michael Powell, also filed a separate petition that asked the agency to forbear from enforcing Section 652 of the Act to mergers, acquisitions, and other transactions between cable operators and” CLECs.

In comments filed Monday with the FCC, several organizations expressed their support for the petitions, including the American Cable Association, Citizens Against Government Waste, COMPTEL and the Taxpayers Protection Alliance.

Today was the deadline for filing comments on NCTAs petitions in Proceeding Number 11-118, and reply comments are due on Sept. 21, according to an FCC spokesperson, who gave no indication as to when the agency would rule.

The pro-competitive features of cable-CLEC combinations are as important as they are obvious,” American Cable Association President and CEO Matthew Polka said in a statement. Giving a CLEC access to a cable networks facilities can reduce the CLECs operational costs, while cable companies can benefit from access to the CLECs back-office infrastructure and established relationships with business customers.”

Section 652

Section 652 of the 1996 Telecom Act imposes cross-ownership restrictions on cable operators and so-called local exchange carriers (LECs) that provide telephone service. The federal law limits a cable companys ownership interest in a LEC within the cable companys franchise area to 10 percent, and the same restriction applies to a LECs acquisition of a cable operator within the LEC’s telephone service area.

Section 652(d)(6) gave the FCC authority to permit such mergers if it made certain findings, including that either the cable or telephone company would be subjected to undue economic distress by enforcement of the provisions,” according to comments filed Monday by the National Association of Telecommunications Officers and Advisors. However, such a waiver also requires approval of the local franchising authorities.

NCTA and others claim the ownership restrictions shouldnt apply to transactions between CLECs and cable operators.

The text, purpose, and history of Section 652 indicate that it was intended to prevent the two then-dominant incumbent service providers in each local area incumbent LECs, which owned the telephone lines, and cable operators, which owned the cable lines from merging or acquiring certain financial interests or management stakes in each other such that a single company would control both wires to a customers home or office,” NCTA noted in its petition for a declaratory ruling. Transactions between cable operators and competitive LECs do not implicate these concerns because CLECs seldom control the last mile” facilities to a customers home or office and where they do, the incumbent LEC continues to control its own wire.”

In a separate petition, the NCTA has asked that the FCC forbear from enforcing Section 652 to acquisitions, mergers and other transactions between CLECs and cable companies. Alternatively, NCTA has requested that the agency refrain from enforcing the provision related to the power of local franchising authorities to waive the prohibitions contained in Section 652.

NCTA argues that the law contains no guidelines for local franchise authorities to follow in determining whether to waive a prohibition.

This complete lack of any restraints raises the specter that any one LFA [local franchising authority] might hold up even an obviously pro-competitive transaction for any reason or for no reason at all on a timetable of its choosing,” NCTA wrote.

Deterrent to Mergers?

NCTA asserts its concerns arent just hypothetical. It cited the City of Detroits decision to veto Comcasts proposed acquisition of CIMCO, a CLEC serving business customers in Illinois and Michigan and that is now a division of Comcast Business Services.

In a 2010 order, the FCC concluded that probable, precompetitive effects of the merger clearly outweighed any anticompetitive effects and that it was therefore in the public interest,” wrote Seth Cooper, a research fellow with the Free State Foundation, a Maryland think tank, in a recent paper. But the agency concluded the waiver was contingent on the approval of 274 different local franchise authorities. The City of Detroit happened to object to the waiver, and Comcast moved forward with the CIMCO acquisition without the Detroit properties.

Despite the FCC’s conclusion in the Comcast-CIMCO order that ‘Detroit fails to provide any specific evidence to suggest why the proposed asset sale is likely to harm competition, ‘ the FCC has no procedural rules or criteria regarding LFA discretion in considering Section 652(b) waiver requests,” Cooper wrote. As a result, Comcast did not obtain a waiver with respect to the Detroit area, with the FCC merely issuing a conditional waiver, effective only if Detroit later changes its mind.”

Some organizations contend the FCCs recent decisions, including its Comcast/CIMCO order, have made it difficult to determine whether mergers apply to CLECs and cable operators.

In comments filed Monday, COMPTEL Assistant General Counsel Mary Albert wrote that such ambiguity and uncertainty needs to be resolved lest it continued to serve as a deterrent to efficient and pro-competitive business combinations.”

Objections

Not everyone supports the NCTA petitions. Public Knowledge, a public interest advocacy group in Washington, D.C., asked the FCC to deny NCTAs forbearance request if the agency declines to rule that Section 652 doesnt apply to transactions between cable operators and CLECs.  Public Knowledge indicated its opposition to NCTAs specific request that the FCC refrain from enforcing the requirement that local franchise authorities approve waivers.

Congress explicitly intended to limit the FCCs ability to remove LFAs from the process of granting a waiver to the cross-ownership restrictions, by mandating approval at the local level,” wrote Public Knowledge Staff Attorney Michael Weinberg and Law Clerk Meredith Filak in the comments filed with the FCC.

NCTAs petitions also face opposition from the National Association of Telecommunications Officers and Advisors (NATOA), a trade association that represents local government jurisdictions and consortiums.

In comments filed with the FCC, NATOA claims the plain language of Section 652 makes clear that the cross-ownership prohibitions does not exclude CLECs.

Second, had Congress intended Section 652(b) to prevent mergers and acquisitions involving only ILECs, it could have specifically stated as much,” wrote Stephen Traylor, executive director of NATOA, in the comments.

But at least one observer claims the FCC ruling in favor of NCTA wouldnt excuse cable companies and CLECS from what is generally a thorough merger review process.

Not to be forgotten, Section 652’s ban on cable operators acquiring CLECs is unnecessary and unduly burdensome in light of all the other merger review processes currently in place,” wrote Cooper of the Free State Foundation. Even if the Commission forbears from enforcing Section 652 it would leave untouched the existing system of multiple agency reviews for telecom mergers” including reviews by the FCC and U.S. Department of Justice, among others.