Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of: ) ) US WEST, INC. ) CSR 4788-X ) Petition for Special Relief ) Section 76.505(a) of the Commission's ) Rules ) MEMORANDUM OPINION AND ORDER Adopted: February 25, 1998 Released: February 26, 1998 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. We have before us a Petition for Special Relief, filed pursuant to Section 76.7 of the Commission's Rules by US WEST, Inc. ("US WEST") seeking a further extension of time, until July 31, 1998, to divest cable systems in and around St. Paul, Minnesota ("Minnesota systems") to comply with the Cable Services Bureau's Memorandum Opinion and Order ("MO&O") in the Matter of US WEST, Inc. and Continental Cablevision, Inc., and Section 76.505(a) of our rules. US WEST seeks the further extension in order to be able to accomplish such divestiture as part of an overall restructuring that will separate its cable business, US WEST Media Group ("USMG"), from its local exchange business, US WEST Communications ("USWC"). 2. The Petition was placed on public notice on November 21, 1997. Comments in support of the Petition were filed by a number of local franchising authorities ("LFAs") that regulate the Minnesota systems. Several other affected LFAs also filed comments that, while not taking a specific position in favor or against the Petition, provided additional information and urged the Bureau to act promptly with respect to this request. CCTC Holdings, Inc. ("Charter"), an affiliate of Charter Communications, Inc., which has contracted with US WEST to purchase the Minnesota systems, opposes the Petition. Oppositions were also filed by the Minnesota's Department of Public Service ("DPS"), the Consumer Federation of America ("CFA"), and the Consumer Project on Technology ("CPT"). In response, US WEST filed a consolidated reply. The National Telecommunications and Information Administration ("NTIA") made an ex parte filing recommending denial of the Petition and US WEST responded to that filing. 3. As discussed herein, we grant US WEST's Petition to allow US WEST to complete a corporate restructuring that satisfies the goals of Section 652 of the Communications Act of 1934, as amended (the "Communications Act"), and the Commission's implementing rules at Section 76.505 (jointly referred to as the "buyout restrictions"). Our decision is premised on US WEST's representation that its restructuring plan will become effective no later than July 31, 1998, and will result in ownership of the Minnesota systems by an entity having no affiliation with US WEST's local exchange operations, thereby allowing the policies behind the buyout restrictions to be fulfilled. II. BACKGROUND 4. Section 652 reflects amendments to the Communications Act made by the 1996 Telecommunications Act ("1996 Act"). The 1996 Act directs that advanced telecommunications services be achieved through robust competition rather than through regulatory oversight, including competition between telephone companies and cable systems serving the same communities. In implementing the 1996 Act, the Commission has pursued a competitive environment where the market, and not regulation, is the arbiter. Accordingly, Section 652 of the Communications Act prohibits a local exchange carrier ("LEC") or its affiliate from acquiring a cable company within the LEC's telephone service area, and prohibits a cable company or its affiliate from acquiring a LEC within the cable company's franchise area. The Commission adopted corresponding rules at Section 76.505 implementing the statute. The premise of Section 652 is that if the LEC and the cable operator within its local markets are not owned by one entity and are not affiliated in such a way to constitute one entity, there is a greater likelihood of competition as envisioned by the 1996 Act. 5. On February 27, 1996, US WEST and Continental Cablevision, Inc. ("Continental") entered into an agreement whereby US WEST acquired all of the outstanding stock of Continental and succeeded to all of Continental's cable television interests. The merger conflicted with the buyout restrictions because US WEST provided local exchange services in several areas where Continental owned cable systems. US WEST and Continental filed a Petition for Special Relief with the Commission requesting temporary relief from Section 652 in order to consummate the merger. The Petition sought approval of the merger subject to the subsequent divestiture of in-region systems in Idaho, Iowa, Minnesota, Utah and Arizona. The Petition was put on public notice and various comments were received. 6. On October 18, 1996, the Bureau released the MO&O granting US WEST permission to acquire and to operate the in-region systems on a limited, temporary basis. We held that the Commission has the authority to allow US WEST a post-acquisition period to divest the in-region systems to comply with the buyout restrictions and that the public interest would not be harmed if the relief were granted. We evaluated the overall impact of the merger on both in-region and out-of-region markets and determined that allowing US WEST temporary ownership of the in-region system would not deter the 1996 Act's policy to "promote the deployment of advanced telecommunication services and enhance competition with respect to such services for a large number of consumers throughout the nation." We ordered US WEST to enter into agreements to divest itself of the in-region Continental cable systems in Iowa, Idaho, and Minnesota by August 15, 1997 and of Continental's in-region Arizona and Utah cable interests by April 1, 1998. US WEST and Continental consummated their merger on November 15, 1996. US WEST represents that it has complied with the terms of the MO&O with regard to the interests in Iowa, Idaho, Arizona and Utah. In May 1997, US WEST entered into a purchase agreement to sell the in-region Minnesota cable systems to Charter. These systems are subject to US WEST's pending petition for special relief. 7. On October 25, 1997, the Board of Directors of US WEST voted to separate its cable business, USMG (to be renamed MediaOne Group), from its local exchange business, USWC, by creating two independent, publicly traded companies. US WEST states that following the restructuring, USMG will own and operate all of the cable systems formerly owned by Continental, including the Minnesota systems, as well as USMG's other cable television interests throughout the United States. USWC will continue to own and to operate its telephone, data and PCS wireless operations. US WEST also states that upon completion of its restructuring, USMG will have no affiliation with US WEST's local exchange operations. US WEST represents that neither the local exchange carrier nor cable service entities nor the current US WEST will have any interests in any of the others that would invoke the prohibitions of the buyout restrictions. III. POSITION OF PARTIES 8. US WEST filed this Petition on November 14, 1997 seeking an additional divestiture period. US WEST states its proposed restructuring creates two independent companies that will be potential competitors. It represents that the companies will have no common directors, executives or employees, nor will the companies share buildings or other facilities. US WEST maintains that the restructuring will eliminate all cross-ownership concerns. US WEST further states that the requested extension does not unduly prolong its ownership of the systems because the Charter transaction, if it proceeds, is unlikely to close prior to March, 1998. Under US WEST's schedule for completing the restructuring of USMG and USWC into separate, independent companies, the required divestiture would be completed by July 31, 1998. 9. Charter contends that the Bureau has no authority to grant the waiver under Section 76.7 of the Commission's rules or Section 652(d)(6). Charter also claims that an extension of the temporary waiver would frustrate in-region competition between telephone and cable companies contrary to Congressional intent; that US WEST's tactics constitute an abuse of the Commission's processes; that the extension for the lengthy and indefinite period sought by US WEST would conflict with Commission precedent; and that the highly conditional nature of US WEST's proposed restructuring makes the requested extension particularly ill-advised. 10. Several LFAs support granting the Petition. The Lower St. Croix Joint Cable Communications Commission ("Lower St. Croix") does not believe that a limited extension will delay provision of enhanced services or competitive services. The City of Hilltop and the Northwest Suburbs Cable Communications Commission ("Northwest Suburbs") both state that the public interest will be served by granting the extension based on the quality of service it has received from MediaOne following the merger. Other LFAs state that they do not wish to take sides in the dispute between US WEST and Charter, but nonetheless urge the Commission to act promptly with respect to the Petition. The North Suburban Cable Communications Commission and South Washington Country Cable Communications Commission (collectively, "Northern Suburban") states that the Commission has no authority to resolve a private dispute between US WEST and Charter and, therefore, seeks a prompt response to US WEST's request. Although the DPS, CFA, and CPT argue that continued ownership of both the local exchange companies and the cable operations contradict the spirit and letter of the buyout restrictions by thwarting emerging competition, they do not articulate how a temporary extension affects those goals. NTIA states that an additional divestiture period is not warranted by the current market conditions, and that US WEST's private interests and not the public interest will be served by granting the extension. IV. DISCUSSION 11. In the MO&O, we stated that neither the statute or legislative history of Section 652 restricted the practice, under the special relief provisions contained in Section 76.7 of our rules, of allowing a limited period to divest where it is appropriate to meet the exigencies of the marketplace. After reviewing the US WEST and Continental's Petition, we concluded that allowing US WEST to acquire and subsequently to divest certain cable systems of Continental operating in US WEST's telephone service areas was consistent with the pro-competitive de-regulatory national policy framework of the 1996 Act. In this regard, US WEST contends that its request for an additional extension of time to complete a corporate restructuring resulting in two separate entities is merely a request to achieve the objectives of the buyout restrictions. 12. Charter contends that the Bureau has no authority under Section 76.7 to grant the requested relief as it did in the MO&O on the premise that this authority is limited strictly to brief periods of delayed enforcement necessary to accommodate the current conditions of the marketplace. Charter argues that, unlike the situation surrounding the MO&O, US WEST's request is not dictated by any marketplace exigency because Charter is a willing and able buyer of the cable systems and fire sale circumstances do not exist. Likewise, NTIA maintains that the considerations that warranted granting US WEST's first request for relief do not now exist. NTIA states denying US WEST's Petition will not mean shutting down the Minnesota systems or requiring a hasty sale to a new buyer. 13. We disagree. Our decision in the MO&O was not premised solely on avoiding a fire sale. Rather, it was based on an overall perspective that the public interest is best served where private parties determine the most efficient strategies to pursue in order to expand the quality and number of telecommunications services offered. We also recognized that such determinations are made in the context of complex business transactions and may require flexibility due the numerous factors involved. Providing a limited time to divest particular assets in order to comply with the law was consistent with the premise behind Section 652 and the deregulatory nature of the 1996 Act. We determined that the law would not be undermined by an extension because separate ownership of the incumbent LEC and incumbent cable operator will be fulfilled. We base our review of the present petition on determining whether the request for a limited extension to July 31, 1998 undermines either the law's purpose or the Commission's process. 14. CFA disputes US WEST's representation that its corporate restructuring will create two separate, unaffiliated entities, but provides no support for its assertion. Without analysis that at least draws into question US WEST's representations, we are unwilling to conclude that US WEST's characterization of its restructuring is not to be believed. Indeed, no party presents any information challenging US WEST's representation. 15. We disagree with Charter that granting US WEST's requested extension is outside the scope of Commission precedent. If granted, US WEST's current request would provide up to a total of twenty months to divest. In the MO&O, we noted that parties have been afforded as long as 18 months following acquisition to divest cable or other properties subject to cross-ownership restrictions. The time period may vary depending on the circumstances surrounding the request. Notably, if an initial period authorized is not sufficient, the Commission has allowed extensions. No party has submitted any information of bad faith on US WEST's behalf when it entered into its purchase agreement with Charter. It has sold its Iowa and Idaho cable operations, and its cable interests in Arizona and Utah. Its restructuring involves substantial matters vastly exceeding the assets involved in the Minnesota systems. Given the size of this transaction and the complexity of the merger between US WEST and Continental, allowing additional months for US WEST to complete divestiture following consummation of the merger is consistent with Commission precedent. US WEST's current request raises no new cross-ownership concerns during the divestiture period that have not been already addressed in the MO&O. 16. Charter states that US WEST's request must be denied because it has not offered a credible public interest benefit for the extension. Charter claims that it will provide more benefits as owner of the Minnesota systems as compared to US WEST. It states that US WEST is holding back on an expansion of service offerings, while Charter would expedite introduction of new services. Charter claims it will maintain continuity of experience by maintaining existing management and employees, while US WEST has replaced many of the Continental employees with its own. Charter also asserts that the sale of the Minnesota systems to Charter satisfies Congress' buyout restrictions and the MO&O and does it more quickly and definitively. NTIA argues that since US WEST once found Charter to be a suitable buyer, allowing more time only serves US WEST's private interests. US WEST responded by highlighting its commitment and capabilities. 17. We agree with the arguments advanced by North Suburban that we have no basis to determine which of these two entities is more likely to retain local management or which entity would provide better service, would upgrade faster, or introduce more enhanced services, nor do we believe it is our role to do so in this case. Indeed, North Suburban notes that both Charter and US WEST have made representations, both written and oral, regarding system rebuild, the introduction of services and the expected enhanced performance of the systems, and that the "business plans presented and the representations made regarding system rebuild are similar." We do not have a basis to determine which provider serves the public interest, nor is such an evaluation necessary or appropriate to grant this extension. The law is intended to accelerate private sector development in communications by decreasing regulatory oversight and preventing potential competitors from combining. Therefore, we only need to determine whether the buyout restrictions will be complied with. The components of this decision are whether the length of time request is not unreasonable and whether the entities will indeed be separate and unaffiliated upon conclusion of the transaction. The MO&O provided a limited time to enable the in-region systems to be acquired by a party that would not violate the buyout restrictions. As we stated, our inquiry is limited to determining whether the extension requested undermines either the law's purposes or the Commission's processes. Based on the record and in reliance upon US WEST's representations, we believe allowing US WEST additional time to complete a divestiture will result in a separation of ownership between the incumbent LEC and the incumbent cable operator. 18. Charter further claims that an extension of the temporary waiver frustrates in-region competition between telephone and cable companies contrary to Congressional intent. Charter disparages US WEST's record of upgrades to the Minnesota systems. Charter also states that US WEST has failed to make the improvements which would enable the Minnesota systems to compete with US WEST's telephone business. In response, US WEST disputes Charter's assertions and factual characterizations. The record reflects disagreement with Charter's claim. Various LFA's of the in- region systems support US WEST's request for extension of the divestiture period. Northwest Suburb states that since the merger, MediaOne has continued successful operation of the Northwest System. The LFA further states that based upon business plans, it has no reason to believe that granting the requested extension will result in any delay in system upgrade, or the development of enhanced services or competition. Likewise, Northern Dakota supports the extension and states that its system is unique in the Twin Cities area as it is the first system to have been completely rebuilt to 750 MHz capacity and that the system was rebuilt following the merger of US WEST and Continental. In enacting Section 652, Congress told the Commission that we need not determine which of the two competing providers would provide better service. Rather, Congress only asked us to insure that telephone and cable companies not be able to acquire each other's properties in the same region. We also note that as a matter of corporate law, following a restructuring of US WEST into two separate companies their boards of directors will have a fiduciary duty to manage their companies in the best interests of their respective shareholders. In the event the directors fail to so act, they would be liable to their respective public shareholders for their breach of fiduciary duty. 19. We further do not believe the record supports Charter's claim that US WEST never intended to complete the divestiture to Charter. Neither Charter nor any other commenter has shown that US WEST provided any inaccurate information when it submitted its first Petition, or that it thereafter misled the Commission. Any other arguments of Charter regarding the consummation of its agreement with US WEST is pertinent to Charter's private, not public, claims. 20. Charter also argues that the Petition should be denied due to the highly conditional nature of US WEST's proposal. Other commenters similarly raise similar concerns that US WEST's proposed restructuring could take longer than anticipated or may not take place at all. Ramsey/Washington expresses concern that an extended delay could affect the cable system serving its area and its technical upgrades. Northern Suburban states that if the Bureau grants any extension, it must order an end date for complete divestiture. No party offers substantive support to demonstrate that US WEST will not adhere to its representations. US WEST has represented that it will complete divestiture by July 31, 1998. In granting the Petition, we will hold strictly to this deadline. US WEST must effect a separation by July 31, 1998 and also by then give us proof that the representations as to the directors, executives, employees, buildings, and other facilities have come to pass. By July 31, 1998, US WEST must demonstrate that it has completed its restructuring as it has represented, conveyed the Minnesota systems to a proper party, or independent trustee for immediate sale, or otherwise divested itself of the Minnesota systems in a manner that complies with the law. 21. Northern Suburban presupposes that the extension request could establish unwanted precedent allowing anti-competitive buyouts of in-region cable systems by other LECs. Northern Suburban envisions similar scenarios where a LEC could purchase in-region cable systems and then divest ownership to a weaker, less able to compete competitor created by the LEC. The unique facts surrounding the Petition undercut its value as precedent. US WEST acquired the in-region systems as part of a larger transaction with Continental. The Minnesota systems represented fewer than seven percent of the four million subscribers involved in that transaction. The planned divestiture and restructuring into two entities is a reorganization of a $30 billion dollar entity into two publicly traded companies where the directors and officers of each of the companies will be liable to the public shareholders if they do not act in the best interests of their respective companies, without reference to the other. We do not foresee the kinds of abuses described by Northern Suburban and, in any event, we believe the Commission could effectively preclude such abuses. 22. Because we are granting relief under our limited authority under Section 76.7 of our rules, we will not address Charter's contention that US WEST's Petition fails as a waiver request under the express waiver provisions of Section 652(d). This matter was addressed in the MO&O. 23. For the foregoing reasons, we grant US WEST an extension of time to divest the Minnesota systems until July 31, 1998. This further extension will not unduly prolong US WEST's ownership of the Minnesota systems under its current corporate structure. In the interval, US WEST will continue to operate the in-region systems separately from its LEC facilities. In addition, by July 31, 1998, US WEST must submit proof to the Commission demonstrating completion of the divestiture. Additionally, US WEST is required to submit progress reports on May 15 and June 15 indicating the status of its restructuring. V. ORDERING CLAUSE 24. Accordingly, IT IS ORDERED that the Petition of US WEST, Inc. IS GRANTED. 25. IT IS FURTHER ORDERED that progress reports indicating the status of its corporate restructuring must be filed by US WEST, Inc. on May 15, 1998 and June 15, 1998. 26. IT IS FURTHER ORDERED that no later than July 31, 1998, US WEST Inc. must show that it is in compliance with Section 652. This may be shown by proof submitted by US WEST Media Group (or the successor to its business) to the Chief of the Cable Services Bureau demonstrating the creation of two independent, unaffiliated entities, one of which holds the cable business of US WEST, Inc. and one of which holds the local exchange business of US WEST, Inc. 27. This action is taken pursuant to delegated authority under Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau