Broadband Cable Association of Pennsylvania

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November 27, 2013

Pennsylvania residents could see major changes to their wireline services in the state if the Legislature votes for a bill that would eliminate carrier of last resort obligations (COLR) for local exchange carriers in competitive areas and limit the USF, said industry, two Pennsylvania Public Utility commissioners, the state's consumer advocate and other interested parties at a House Consumer Affairs Committee hearing Thursday. House Bill 1608, sponsored by Rep. Warren Kampf (R), would remove the PUC's oversight of ILECs, and it would allows ILECs to self-declare whole exchanges as competitive. The bill would end the state's USF on Jan. 1, 2019, and prevent the PUC from raising the amount of money contributed to the fund each year.

The local exchange carriers are still "being subjected to an archaic regulatory framework" that's partly rooted in "law that dates back almost a century," said Frank Buzydlowski, Verizon Pennsylvania director-state government relations, in his testimony. The regulated providers do not have to comply with filing and reporting requirements to the PUC, and they are not subject to PUC supervision, said Buzydlowski. "Outdated overregulation discourages investment in our state, limits customer choice, stifles innovation and increases costs," he said. The "monopoly era" of the landline telephone is in the past, and the laws written for a "bygone era no longer serves the public interest," said Paul Vasington, Verizon director-state public policy. At the end of 2012, more than 38 percent of U.S. households were wireless only, and an additional 16 percent of households consider a cellphone to be their primary line, said Vasington.

The FCC reported in 2012 that Pennsylvania CLECs and VoIP providers served 42 percent of landlines. The state's ILECs serve only 21 percent the state's lines combined, said Vasington. The "sky-is-falling" opposition that portrays HB 1608 as a bill that does away with all regulation and cuts the PUC out of any role in telecom is "plain wrong," said Carl Erhart, Verizon regional director-state government affairs. "HB 1608 does not eliminate the PUC review of telecom mergers or eliminate oversight of rates, service quality and complaints in areas "where customers have fewer competitive options," said Erhart. The incumbent telephone companies must offer basic voice service to their customers in competitive areas until 2018 "no matter how many competitive alternatives are available," said Erhart. "At any time, even after 2018, a residential customer may petition the PUC to require the incumbent telephone company to provide voice service if service is not available from any other provider," said Erhart.

PUC Chairman Robert Powelson and Commissioner James Cawley disagreed in their testimonies on whether the bill would be good for customers and providers in the state. The dual regulatory regime created by HB 1608 would "level the playing field" for local exchange carriers by allowing them to "compete with fewer regulatory burdens' in geographic areas where customers "already have an array of choices," said Powelson. "The PUC believes that increased competition in the telecommunications market will benefit customers by potentially keeping prices low and spurring innovation, as evidenced by the numerous product offerings and consumer savings present in Pennsylvania's competitive electricity market," he said.

Cawley recommended that the committee table the bill, and order the PUC to do a in-depth study of the state of telecom competition in Pennsylvania rather than "enacting this bill without objective data to make a public interest policy choice." The true level of competition in the state is "unknown to all but the competitors themselves," and therefore it is "impossible to intelligently or responsibility accept the carrier's arguments that robust competitive forces compel a level playing field unencumbered with consumer protections and regulatory oversight," said Cawley. The USF would also be capped at 2012 relief levels, which "effectively terminates" the fund at the end of 2018, said Cawley, state chairman of the Federal-State Joint Board for Universal Service. The disputed FCC order to transform the FCC USF, argued in the 10th U.S. Circuit Court of Appeals Tuesday (CD Nov 20 p2), will "adversely affect the financial viability and operational survival of numerous rural ILECs" in Pennsylvania and across the U.S., said Cawley. "Because of the FCC's ill-advised actions, the Pennsylvania USF assumes critical importance for maintenance and enhancement of universally available wireline voice and broadband access services in rural Pennsylvania for residential and business customers," said Cawley. The PUC should be permitted to restructure and the state USF with input from interested stakeholders, he said.

The HB 1608 regulatory changes would permit ILECs to compete with all other providers on the same basis for five years prior to 2019 while the state USF continues "unabated," said Dan Tunnell, Broadband Cable Association of Pennsylvania president, in his testimony. The current USF program draws more than $32 million from competitors, including cable companies, and distributes the money to all ILECs with the exception of Verizon, said Tunnell. If the bill passes, ILECs will be "free to move in and out of our marketplace and we will continue to subsidize them," said Tunnell. "Aside from this being patently discriminatory, this scheme does not differentiate between the small rural carriers and their national counterparts."

This bill could lead to higher rates and reduced service quality for telephone service for Pennsylvania residents, said Tanya McCloskey, the state's acting consumer advocate, in her testimony. Under HB 1608, the PUC "might have no authority to consider the ramifications of the abandonment of the wireline network since the Commission would lose authority over the abandonment of such services immediately in non-rural areas and by 2016 in rural areas when service in those areas could be deemed competitive," said McCloskey. Eliminating COLR obligations could harm customers who need telephone services the most, said Elizabeth Marx, staff attorney at the Pennsylvania Coalition Against Domestic Violence. Telephone services enable victims of abuse to access emergency assistance, secure employment and childcare and connect with support networks, said Marx. "Individuals in these limited or fixed income circumstances cannot always afford more than a basic, telephone-only telecommunications service," said Marx.

Nothing in the bill is good for Pennsylvania consumers, workers, businesses or communities, said Edward Mooney, Communications Workers of America vice president. CWA represents more than 18,500 employees in the state, said Mooney. "The provisions of HB 1608 will lead to higher telephone rates, lower service quality, eliminate critical consumer protections, allow telecommunications companies to abandon rural communities, and leave millions of Pennsylvania families and small businesses on the wrong side of the digital divide," said Mooney. Sprint, T-Mobile and TechAmerica all submitted written testimony for the record on HB 1608 at the hearing in addition to several chambers of commerce in the state, said Rep. Robert Godshall, Consumer Affair Committee Chairman. The committee is scheduled to have a second hearing on HB 1608 on Dec. 12. Communications Daily Reprinted with permission of Warren Communications News Inc. - 800-771-9202 or www.warren-news.com

Cox Communications is considering jumping into the bidding for Time Warner Cable Inc., according to people familiar with the situation, the latest twist in a fast-evolving takeover battle for the second-largest U.S. cable operator. Atlanta-based Cox is the nation's third-biggest cable operator, with about 4.5 million TV subscribers, ranking slightly ahead of Charter Communications, which was the first company to begin circling Time Warner Cable earlier this year. Charter is backed by John Malone's Liberty Media Corp. Comcast Corp. , the largest cable operator, also is contemplating a Time Warner Cable bid, either on its own or by backing a bid by Charter, people familiar with the situation have said.

The frenzy of deal interest comes as cable companies are trying to get bigger to deal with the industry's challenges, which include the rising costs of TV programming supplied by cable and broadcast networks. Mr. Malone, for instance, has suggested that a smaller group of big industry players could collaborate better to tackle common problems, like developing a better online-video strategy than the scattershot approach cable operators are taking now. In the past, Cox, a unit of closely held media company Cox Enterprises, was viewed as a potential acquisition candidate. But the company has made plain it isn't for sale. Instead, it is looking for growth opportunities, said a person familiar with the situation. It isn't clear whether there have been any talks so far.

Time Warner Cable has been cool to Charter's advances. But it has approached Comcast about a deal, in hopes of heading off Charter, and would be likely receptive to a Cox overture as well, said a person familiar with the matter. Analysts said Cox, which has a stronger balance sheet than Charter, may be in a good position to pursue a deal. "In some ways they make perfect sense as a white knight," said Craig Moffett, an analyst at MoffettNathanson, said. Cox has maintained "conservative credit metrics" in recent years, including a ratio of debt to earnings before interest, taxes, depreciation and amortization of about 2.7, according to Moody's Investor Services, compared with 3.2 for Time Warner Cable and 5.5 for Charter.

In a July report, Moody's analyst Neil Begley suggested a combination of Cox and Time Warner Cable would be a "winning scenario for both companies" and bondholders of Time Warner Cable. The two companies could do a stock-swap merger, in which the family that controls Cox would emerge with about a third of the combined enterprise. Within a few years, assuming Time Warner Cable maintains its current pace of stock buybacks, the family could raise their ownership stake to a majority, Mr. Begley said. One potential complication for buyers is that Time Warner Cable is looking for a premium to its share price, which has jumped more than 35% since June, when reports first surfaced that it was a takeover target. Time Warner Cable shares were up 4% in 4 p.m. trading Tuesday after The Wall Street Journal reported Cox's interest. "You're talking about a very rich price based on the assumption that you can simply run Time Warner Cable better than current management," Mr. Moffett said.

A person familiar with the situation said Comcast still has the "flexibility to do nothing," and said no "specific transaction" is under discussion. Comcast's board generally believes consolidation would be good for the industry, whether or not Comcast participates in it, the person said. Comcast board members may get an update when they meet the second week of December, their first formal session this fall, the person said. One option Comcast has contemplated is backing a Charter bid. A person familiar with the situation said Charter and Liberty were willing to explore any option to work with Comcast, which would otherwise be a rival to their ambitions. Still, a joint bid could be cumbersome, another person familiar with the situation said. One possibility is for Comcast to contribute money to a Charter bid at a level that is small enough to avoid regulatory scrutiny.

If potential buyers aren't able to persuade Time Warner Cable's management to sell, there is the possibility that some of the cable company's investors could agitate for a deal and mount a proxy fight to replace the board. There's been no such activism yet. If it materializes, such a campaign would likely ramp up in February, when nominations need to be submitted election to the board at the annual meeting in the spring, people familiar with the situation said. A few investors that have taken activist stances in the past have been buying shares in Time Warner Cable, but none have indicated their intentions or called on management to take any action. Hedge fund Paulson & Co. has acquired four million shares of the cable company, building a stake of 1.4% as of Sept. 30, according to a securities filing. News of Paulson's investment was reported earlier by The Street.com.

The hedge fund is led by John Paulson, who has long invested in situations in which a deal is either already signed or regularly speculated about, a practice known as merger arbitrage. He built his stake in Time Warner Cable during a period when reports were surfacing of Charter's interest in a deal. While Mr. Paulson isn't a typical activist investor, he has agitated on some deals. Earlier this year he said he would vote against the acquisition of MetroPCS Communications Inc. by Deutsche Telekom AG 's T-Mobile US Inc. T-Mobile eventually restructured the deal, and Mr. Paulson backed it. A Paulson & Co. spokeswoman declined to comment. Glenview Capital Management LLC and Highfields Capital Management LP are other investment funds among the 25 biggest Time Warner Cable shareholders that have in the past selectively picked activist fights, though they aren't considered particularly active investors. Both funds declined to comment. Wall Street Journal

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