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NTIA and Department of Justice letter, Re: Roseville Cable Company, Request for Waiver of Section 652(a) of the Telecommunications Act of 1996

Docket Number
File No. CSR-4869-B
Tuesday, August 19, 1997


Ex Parte

The Honorable Reed E. Hundt
Federal Communications Commission
Room 814
1919 M Street, N.W.
Washington, D.C. 20554

Re: Roseville Cable Company, Request for Waiver of Section 652(a) of
the Telecommunications Act of 1996, File No. CSR-4869-B ("Petition")

Dear Chairman Hundt:

In the above-captioned petition currently pending before the Commission, Roseville Cable Company requests Commission authorization to acquire the cable television system assets of IDS Jones Growth Partners 87-A, Ltd. ("IDS/Jones"), which provides cable television service within the City of Roseville, California, and portions of nearby Placer county.(1) The Petition seeks a waiver of section 652(a) of the Telecommunications Act of 1996, which generally bars a local exchange carrier or its affiliate from acquiring a cable television operator that provides cable service within the local exchange carrier's telephone service area. The Department of Justice and the National Telecommunications and Information Administration jointly submit this letter on the issues of statutory interpretation and long-run competition policy raised by the Petition.

I. Background on Pending Roseville Petition

Roseville Cable, created to complete the IDS/Jones acquisition, is a wholly-owned subsidiary of Roseville Communications Company ("Roseville"). Roseville also owns 100% of Roseville Telephone Company, which furnishes local telephone service in Roseville and the surrounding areas.(2) Roseville Telephone, with over 100,000 access lines and $102.6 million in 1995 operating revenues, is the 22nd largest telephone company (out of over 1,300) in the United States.(3) The IDS/Jones cable system territory covers approximately 40% of the encompassing local exchange service area of Roseville Telephone.

Because of the territorial overlap between Roseville Telephone and IDS/Jones, the proposed acquisition implicates the section 652(a) "anti-buy out" provisions of the Telecommunications Act.(4) Roseville concedes it is ineligible for any of the explicit exemptions to section 652(a), such as the exemption for rural systems(5) or the exemption for acquisitions in competitive markets.(6) It therefore seeks a permanent waiver pursuant to section 652(d) (6), which authorizes the Commission to waive the anti-buyout restriction only if:

(A) the Commission determines that, because of the nature of the market served by the affected cable system or facilities used to provide telephone exchange service --

(B) the local franchising authority approves of such waiver.

  • (i) the affected cable operator or local exchange carrier would be subjected to undue economic distress by the enforcement of such provision[];

    (ii) the system or facilities would not be economically viable if such provision[] were enforced; or

    (iii) the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served; and

This proceeding represents the Commission's first opportunity to determine the circumstances under which interested parties will be allowed to escape the limits of section 652(a) and avoid Congress' intention to promote competition over time between telephone companies and cable systems, which currently provide the only two wires into most consumers' homes.

The Department of Justice and the NTIA actively participated in Congress' formulation of the Telecommunications Act and have substantial expertise in the underlying issues of competition policy the Act implements. Accordingly, the Department of Justice and NTIA submit this joint letter to aid the Commission in its application of section 652 by suggesting how it should approach waiver requests conceptually and what evidence and documentation it should require waiver applicants to submit. Based on these suggested criteria and the record now before the Commission, Roseville has failed to show that it is eligible for the requested waiver.

II. Section 652(d) Must Be Construed In A Manner That Carries Out Congress' Objective Of Fostering Competition Between Local Exchange Carriers And In-Region Cable Operators

The fundamental purpose of the Telecommunications Act of 1996 was to promote the growth of competition in all telecommunications markets.(7) Congress perceived, moreover, that competition could and should be fueled by the rivalry between telephone companies and cable systems operating in the same communities. Thus, Congress removed a long-standing statutory ban(8) on telephone company provision of in-region cable television services because "[t]elephone company competition with the entrenched cable operators would enable consumers to benefit from lower rates, better quality service, improved maintenance, and a larger diversity of new information services."(9)

Because of its interest in promoting such competition, Congress was particularly concerned that local exchange carriers ("LECs") and cable companies operating in the same areas would have a strong incentive to merge, squelching new competition before it could arise. As Senator Leahy explained, allowing "telephone companies to buy out cable companies -- their most likely competitor -- in the telephone companies' local service areas. . . would destroy the best hope for developing competition in both local telephone service and cable television markets."(10)

Accordingly, Congress enacted section 652(a), a flat ban on such acquisitions, subject to limited exemptions and waivers.(11) In reconciling the differing House and Senate anti-buy out provisions, "the conferees agreed, in general, to take the most restrictive provisions of both the Senate bill and the House amendment in order to maximize competition between local exchange carriers and cable operators within local markets."(12) Enactment of section 652(a) thus reflects Congress' view that cable/telephone company mergers are in most cases contrary to the public interest based on long term competition policy considerations.

This legislative history provides the backdrop against which waiver petitions such as Roseville's must be judged. In determining eligibility for waivers, the Commission must be guided by the statutory structure of section 652 and the Telecommunications Act as a whole, as well as the objectives Congress unquestionably sought to achieve.(13) Given Congress' clearly declared intent that the opportunities for competition between telephone and cable companies in the same area be maximized, the Commission should adopt the approach that exceptions to a statutory requirement are to be strictly construed,(14) and that waiver petitions bear the burden of proving by a preponderance of the evidence their eligibility for such waivers.(15) Waiver petitioners should not be permitted to rely on unsubstantiated assertions to overcome Congress' judgment that such acquisitions generally are anticompetitive and not in the public interest. In other contexts, courts have expressly approved the Commission placing "[the burden. . . on the applicant seeking waiver . . . to plead specific facts and circumstances which would make the general rule inapplicable."(16) Applying this approach to the current Petition, Roseville has failed to carry its burden of establishing the prerequisites for obtaining a waiver under any of the three provisions it invokes.(17)

III. Roseville Has Provided Insufficient Data to Support a Section 652(d)(6) Waiver

A. Roseville Has Not Established that It or IDS/Jones Will Be Subject to "Undue Economic Distress"

Section 652(d)(6)(A)(i) authorizes the Commission, in its discretion, to waive the anti-buy out restriction if the relevant providers "would be subjected to undue economic distress" by its enforcement. Although not specifically defined in the statute, undue economic distress must be construed narrowly to take into account Congress' desire to promote the development of competition between telephone companies and cable companies. The legislative history makes clear that this provision was meant to be reserved for cases of "genuine hardship."(18)

In defining "economic distress" the Commission should consider relying upon the interpretation of similar terms in other statutes. The most analogous use of "economic distress" appears in the Newspaper Preservation Act ("NPA"),(19) which permits the Attorney General to confer antitrust immunity over certain Joint Operating Agreements ("JOAs") between competing newspapers where the Attorney General finds that one of the newspapers is failing financially, and that the JOA is necessary to preserve two "editorial voices." Congress appeared to equate "economic distress" with circumstances in which, absent an otherwise anticompetitive agreement, one of the two relevant firms was not likely "to remain or become . . . financially sound,"(20) a standard construed by the courts to mean "probable failure."(21) Given Congress' intention to minimize exceptions to the anti-buyout provision in "order to maximize competition between" cable systems and telephone companies,(22) "undue economic distress" within the meaning of section 652(d) should be construed to require no less stringent a showing.

The appropriate standard of "economic distress" clearly requires a waiver petitioner to do more than merely assert that it anticipates new entry into its market and that it will experience lower revenues or less profit due to the entry of new competitors. Such an interpretation would flout the central purposes of the Telecommunications Act. Congress explicitly intended to subject local telephone companies to new and increased competition, and it hardly could have meant "undue economic distress" to include the firm's loss of its prior monopoly position to new competitors; and it certainly envisioned that waiver petitioners would provide evidentiary support for their assertion.

In order for a petitioner to meet its appropriate burden, it must come forward with credible evidence sufficient to establish by a preponderance of the evidence that without a waiver it is likely to experience undue economic distress. But in the waiver petition currently pending before the Commission, Roseville argues simply that it does and will face numerous new competitors and that some of these competitors will be offering consumers packages of both video and telephone services.(23) In evaluating these claims, the FCC should require more than mere conjectures that new entrants are currently planning to serve Roseville's area or a restatement of publicly announced plans by communications companies to provide services somewhere in the State of California. In order to fully establish its claim, the Commission should require Roseville to prove by a preponderance of the evidence (1) such new entry is likely; (2) such entry will be significant and will imperil the financial stability of Roseville; (3) Roseville could not adequately respond to such entry by competing on the merits; (4) the granting of the waiver is necessary to avoid its impending financial decline and (5) there are no other ways in which Roseville could reasonably avoid its probable failure.

Roseville's showing is thus insufficient in that it fails factually to substantiate the scenario it foresees. Roseville has simply not shown in its Petition that its local exchange service company will be unable to compete on its own merits and suffer undue economic distress absent the acquisition of IDS/Jones. Despite the broad contention that it faces significant new competition from firms that will offer both local telephone and cable/video services, Roseville has offered no credible evidence (1) that new firms are likely to enter the Roseville area in the near term (if at all) and offer such combined services; (2) that customers will demand a video/telephony service only in a package from a single provider; or (3) that there will thus be a financially imperiling exodus of Roseville's current telephony customers to the new entrants offering combined video and local telephone service. Indeed, Roseville apparently wishes the Commission to take as fact the contention that it will be unable to compete against these imagined new entrants even though Roseville is the incumbent monopoly local telephone service provider, it has a strong reputation in its territory for high quality, affordable telephony services,(24) and virtually all of its shareholders are local members of the community.(25)

B. Roseville Has Not Shown That The Acquisition Is Necessary For It To Remain "Economically Viable"

Section 652(d)(6)(A)(ii) gives the FCC discretion to grant a waiver of the cable/telco anti-buy out provisions if the Commission determines that without the waiver Roseville would no longer be "economically viable." As with the other provisions of this waiver section, the term "economically viable" should be narrowly construed. The "economically viable" standard may be viewed as invoking the standards of the traditional "failing company" defense that saves an otherwise anticompetitive acquisition in an antitrust suit. In the antitrust context, before a company is determined to be a "failing firm" it must show that (1) it is unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger and (4) absent the acquisition, the assets of the failing firm would exit the relevant market.(26)

Roseville argues that if it is not allowed to acquire IDS/Jones, the Roseville Telephone facilities will not remain "economically viable."(27) It advances here the same argument that it offered to establish undue economic distress -- the devastating impact of new entrants offering a combination of video and telephone services -- but offers no additional evidence in support.

Roseville is presently a successful and financially secure company which has consistently rewarded its shareholders with value.(28) Roseville has not shown that owning the local cable monopoly or being able to offer video services is necessary to its future success. Congress hardly contemplated that the ban it imposed on acquisitions between LECs and cable operators within the same region could be lifted based on unsubstantiated assertions that, absent the acquisition, a financially strong incumbent monopoly local exchange provider would be driven out of business by new local exchange providers.

C. Roseville Has Not Established The Prerequisites For A Waiver Pursuant to Section 652(d)(6)(A)(iii)

Roseville's final argument relies on section 652(d)(6)(A)(iii), which authorizes the Commission to waive the buyout restriction if it finds that, "because of the nature of the market served" by the relevant companies, "the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served." As with the other sections, waiver petitioners such as Roseville bear the burden of coming forward with evidence to establish that their Petition satisfies the requirements of this section. Any evidence they advance as to the lack of competitive effect must be weighed against the presumption underlying Congress' enactment of the buy-out ban, that in the long run the public interest would best be served by the prohibition of such acquisitions.

Waiver petitioners also bear the burden of establishing that any benefits they allege will result from their acquisitions are real and specifically related to the acquisition. Roseville contends that, if permitted to proceed with the transaction, it will upgrade the Jones/IDS cable plant, provide community schools with free cable connections, and "use the system as the basis for providing increased offerings with [Roseville] and eventually to unserved homes in the surrounding area."(29) Roseville provides no basis for the Commission to conclude, however, that these improvements would not be made by some other firm that might purchase IDS/Jones, or that, absent the acquisition, IDS/Jones (or its parent/affiliate, Jones Intercable) would not undertake them itself.

Absent specific facts indicating that these benefits turn on whether the acquisition proceeds, the Commission ought not conclude that these benefits count in determining "the probable effect of the transaction in meeting the convenience and needs of the community to be served." The language of section 652(d)(6)(A)(iii) is almost identical to that contained in the Bank Merger Act and associated enactments.(30) The Supreme Court long ago construed this language not to encompass an asserted benefit to the public interest unless "the merger was essential to secure [it]."(31) The Commission should interpret section 652(d)(6)(A)(iii) to carry the same meaning.(32)

IV. Conclusion

The Department of Justice and the National Telecommunications and Information Association recommend the Commission apply the criteria discussed above in evaluating requests for waivers of section 652(a).


Lawrence R. Fullerton
Deputy Assistant Attorney General
Merger Enforcement
Antitrust Division
Department of Justice


Larry Irving
Assistant Secretary for Communications
and Information
U.S. Department of Commerce


cc: Commissioner James H. Quello
Commissioner Rachelle B. Chong
Commissioner Susan Ness




1. Petition at 1-3. IDS/Jones is an affiliate of Jones Intercable, Inc., the nation's eighth largest cable multiple system operator. See National Cable Television Ass'n, Cable Television Developments 14 (Spring, 1997).

2. Petition at 1-3.

3. See Roseville Telephone Company 1995 Annual Report at 2, 9.

4. 47 U.S.C. § 572(a); see also 47 C.F.R. § 76.505(a) (1996) (implementing the statutory prohibition).

5. See 47 U.S.C. § 572(d)(1)(exempting acquisitions to the extent that (A) such system or facilities only serve . . . (i) places or territories that have fewer than 35,000 inhabitants; and (ii) are outside an urbanized area, as defined by the Bureau of the Census; and (B) in the case of a local exchange carrier, such system . . . serves less than 10 percent of the households in the telephone service area of such carrier).

6. See 47 U.S.C. § 572(d)(3)(exempting acquisitions that meet certain criteria, such as the subject cable system operates in a television market that is not in the top 25 markets, and such market has more than 1 cable system operator, and the subject cable system is not the cable system with the most subscribers in that market).

7. See e.g., H.R. Conf. Rep. No. 104-458, at 113 (1996); S. Rep. No. 104-23, at 1-2 (1995); H.R. Rep. No. 104-204, at 47-48 (1995).

8. See 47 U.S.C. § 533(b).

9. H.R. Rep. No. 104-204, at 53 (1995). See also H.R. Conf. Rep. No. 104-458, at 171-72 (1996); S. Rep. No. 104-23, at 15 (1995).

10. 141 Cong. Rec. S8,464 (June 15, 1995) (statement of Sen. Leahy). See also id. at S7,911 (June 7, 1995) (remarks of Sen. Kerrey) (allowing mergers between telephone companies and cable companies would "end[] competition [and do] precisely the opposite of what th[e] bill [is] intended to [accomplish]"); accord id. at S7,998 (June 8, 1995) (remarks of Sen. Kerrey) ("we cannot allow [telephone companies to buy a cable company] in the local area, because then you are only going to get one line to 75 percent of the homes").

11. Of course, Congress could have chosen to rely on government or private enforcement of the antitrust laws to prevent unwanted combinations of LECs and cable operators. Congress was well aware of this option, and an early version of the Senate bill did not include a ban on such mergers. However, shortly after Senators Thurmond and Leahy circulated to their colleagues a letter arguing that more than standard antitrust scrutiny would be needed to achieve the bill's aim to "promote" and "develop" competition between telephone and cable companies (141 Cong. Rec. S8,464-65 (June 15, 1995) (remarks of Sen. Leahy)), a leadership amendment added an anti-buy out provision to the Senate bill.

12. H.R. Conf. Rep. No. 104-458, at 174 (emphasis added)

13. See, e.g., John Hancock Mut. Life Ins. Co. v. Harris Trust & Savs. Bank, 114 S. Ct. 517, 523 (1993) ("we examine first the language of the governing statute, guided not by a single sentence or member of a sentence, but looking to the provisions of the whole law, and to its object and policy." (internal quotations omitted)); United States Nat'l Bank of Oregon v. Independent Ins. Agents of Am., Inc., 508 U.S. 439, 454-55 (1993) (same).

14. See e.g., A.H. Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945); United States v. Columbus Country Club, 915 F.2d 877, 883 (3d Cir. 1990).

15. See United States v. First City National Bank, 386 U.S. 361, 366 (1967) (party claiming the benefit of a statutory exception bears the burden of establishing that he or she comes within its terms); Sea Island Broadcasting Corp. v. FCC, 627 F.2d 240, 243 (D.C. Cir. 1980) ("use of the 'preponderance of the evidence' standard is the traditional standard in civil and administrative proceedings").

16. Columbia Communications Corp. v. FCC, 832 F.2d 189, 192 (D.C. Cir. 1987) (quoting Tucson Radio, Inc. v. FCC, 452 F.2d 1380, 1382 (D.C. Cir. 1971).

17. Because Roseville has not established its eligibility for a waiver of section 652(d) (6), the Commission need not determine how it should exercise its discretion to issue a waiver were the statutory prerequisites satisfied.

18. H.R. Rep. No. 104-204, at 104 (1995)("the Committee intends this provision to be limited to genuine hardship cases.") .

19. 15 U.S.C. §§1801-1804.

20. Compare 15 U.S.C. § 1801 (characterizing certain appropriate JOAs to be those "entered into because of economic distress") with id. § 1803(a) (immunizing certain JOAs in which "not more than one of the newspaper publications involved in the [JOA] was likely to remain or become a financially sound publication").

21. Committee for an Independent P-I v. The Hearst Corp., 704 F.2d 467, 479 (9th Cir. 1983). Applying this "probable failure" definition of economic distress would not force the Commission to equate it with the "not economically viable" waiver provision. As discussed in Section III.B., the "failing firm" analysis found in traditional antitrust law, which essentially requires that the company already be unable to meet its financial obligations in the near future and have no prospect of reorganization, is notably stricter than the "probable failure" standard as defined in the JOA context.

22. H.R. Conf. Rep. No. 104-458, at 174 (1996).

23. See Petition at 16-19.

24. See Petition at 7-8 (discussing Roseville's reputation for quality and service, as well as the fact that Roseville has requested only one rate increase in the past 12 years).

25. Id.

26. See Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission, Issued April 2, 1992; Revised: April 8, 1997, Sec. 5.1. See also Citizen Publishing Co. v. United States, 394 U.S. 131, 136-37 (1969).

27. Petition at 18.

28. See Petition at 3, 7-8. See also, Section III.A., supra. In fact, Roseville's recent first quarter ("1Q") 1997 financial reports indicate that its operating revenues for 1Q97 are up 8.6% compared to last year (1Q96), and its net income is up over 42% compared to 1Q96. See Roseville Communications Co., SEC Form 10-Q for fiscal quarter ending March 31, 1997, at 2 (filed May 15, 1997) (available in SEC EDGAR database).

29. Petition at 20.

30. See 12 U.S.C. § 1828(c)(5) (B) (Bank Merger Act) (explaining that the "responsible agency shall not approve" certain anticompetitive acquisitions unless "it finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served"); see also 12 U.S.C. § 1842(c)(2) (Bank Holding Company Act) (same).

31. United States v. Third Nat'l Bank, 390 U.S. 171, 189 (1968); see also Mid-Nebraska Bancshares, Inc. v. Board of Govs., 627 F.2d 266, 271 (D.C. Cir. 1980).

32. The recently revised Horizontal Merger Guidelines likewise require efficiencies to be "merger-specific" (i.e., unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects.) See Horizontal Merger Guidelines at Sec. 4.