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CR 2000-143 Public Hearing To Consider Applications Recived For A Cable Franchise . September 5, 2000 Council Report 2000-143 Public Hearing to Consider Applications Received for a Cable Franchise Proposed Action Staff recommends adoption of the following motion: Approve Resolutions 2000-59 and 2000-60 finding that WideOpenWest and Everest Connections Corporation possess the requisite legal, technical and financial qualifications to construct, own and operate a cable communications system. This action will continue the process of considering new cable franchises for the City of Hopkins. Overview The City has received two proposals for new cable franchises, State law requires a public hearing be held to allow for an opportunity for comment on the proposals. The City Council cannot award a franchise at this meeting. The Council must wait at least seven days after the public hearing to award a franchise. It is likely that the negotiations for new franchises will take several months. . The Southwest Suburban Cable Commission and its attorney have reviewed the proposals. The Commission met on August 9 and passed resolutions that found that Everest Connections Corporation (Everest) and WideOpenWest (WOW) possessed the requisite legal, technical and financial qualifications to construct, own, and operate a cable system. Primary Issues to Consider . Does Everest and WOW possess the requisite legal, technical and financial qualifications to construct, own, and operate a cable system? . Is granting new cable franchises in the best interest of the residents of Hopkins? . What are the next steps in the franchising process? Supportin2 Information . Analysis of the Issues . Resolution 2000-59 - Cable Television Franchise, WideOpenWest . Resolution 2000-60 - Cable Television Franchise, Everest Connections . Memorandum from Brian Grogan dated August 28, 2000. . Section 2. Statutory Requirements (for the issuance of cable franchises) . Sections 5 - 7 of Report regarding Everest Connections Corporation's Proposal for a Cable Communications Franchise . Sections 5 - 7 of Report regarding WideOpenWest Minnesota, LLC's Proposal for a Cable . Communications Franchise Council Report 2000-143 . Page 2 / /~ ~ J es Genellie ssistant City Manager Financial Impact: $ None Budgeted: Y IN Source: Related Documents (CIP, ERP, etc.): Notes: Analysis of the Issues Does Everest and WOW possess the requisite legal, technical and financial qualifications to construct, own, and operate a cable system? The Southwest Suburban Cable Commission met on August 9 and discussed whether Everest Connections and WideOpenWest possessed the requisite legal, technical and financial qualifications to construct, own, and operate a cable system. . The legal qualifications were relatively easy to determine. The technical qualifications were somewhat more difficult to judge due to the fact that neither company has built a system. The Commission's attorney, Brian Grogan, hired a consultant to review the two proposals, The consultant determined that the proposed systems were state-of-the-art and achievable with current technology. Both companies also have staffthat is technically qualified and experienced in building and operating cable and telephone systems. Determining the financial qualifications was the most difficult. There are no recognized standards for financial qualifications either in federal or state law. Neither company has the cash on hand to build in all the cities where they are seeking franchises. They intend to raise the money as they build. This is the common practice of companies seeking to build cable systems in areas already served by established cable companies. Not knowing how much money these companies will be able to raise, as construction gets under way, does make it difficult to determine whether they are qualified financially. The Commission, in the end, decided that these companies are financially qualified. However, since there is enough concern about the future financing of these companies the Commission recommended that cities require a performance bond to ensure that city right-of-way can be restored should a company go bankrupt. . Council Report 2000-143 . Page 3 Is granting new cable franchises in the best interest of the residents of Hopkins? The 1999 Federal Communication Commission's (FCC) Competition Report offered some preliminary findings concerning the benefits of competition. Benefits enjoyed by consumers as a result of the increased competition include: a. lower monthly charges for services and equipment; b. additional program offerings; c. access to alternative sources of telecommunications and Internet services; d. new digital services; and e. better customer service from the incumbent cable operator. (It should be noted that the current cable company, Time Warner, has already increased its program offerings, provided access to the Internet, introduced new digital services, and generally provided satisfactory customer service.) The FCC also noted that due to the cost of building and rmming competing cable systems, the benefit of competition is sometimes short-lived. What are the next steps in the franchising process? Should the City Council approve resolutions 2000-59 and 60, the next step would be to negotiate . franchise agreements with WOW and Everest. The SWSCC and its attorney would attempt to negotiate agreements for all five cities in the Southwest. Each City, however, would eventually have to approve its own franchises. This process is likely to take 30 to 60 days. Alternatives 1. Approve Resolutions 2000-59 and 2000-60 finding that WideOpenWest and Everest Connections Corporation possess the requisite legal, technical and financial qualifications to construct, own and operate a cable communications system in the City of Hopkins. This will continue the process of establishing new cable franchises in the City. 2. Do not approve Resolutions 2000-59 and/or 2000-60, This will end the process of awarding new franchises unless either company challenges the Council's action. 3. Continue for additional information. Staff recommends Alternative #1. . CITY OF HOPKINS . Hennepin County, Minnesota Resolution No. 2000-59 Regarding findings of fact with respect to WideOpenWest Minnesota LLCs proposal for a cable communications franchise. Recitals 1, Minnesota Statutes 9 238.08(a) mandates that the City require a franchise for any cable communication system providing service within the City. 2. Federal law at 47 U.S.C, 9541 (a) provides that a city "may not unreasonably refuse to award an additional competitive franchise." 3. The City carefully followed the franchise procedure required by Minnesota Statutes 9 238.081 by publishing once each week (June 14,2000 and June 21,2000) for two successive weeks in the Sun-Sailor, a Notice of Intent to Franchise a Cable Communications System, 4. The Notice stated all eight (8) criteria outlined in Minn. Stat. 9238.081 Subd. 2. 5. In addition to the published Notice, the City mailed copies of the Notice of Intent and the Official Application Form to WideOpenWest ("WOW'), as well as other interested parties. . 6. The City's Official Application Form required that proposals for a cable communications franchise contain responses to each of the items identified in Minnesota Statute 9 238.081 Subd.4. 7. The City's closing date for submission of applications was set at July 14, 2000 which complied with the statutory minimum of 20 days from the date of first publication. 8. The City Council called for a Public Hearing to consider the application received from WOW at its regularly scheduled August 2, 2000 meeting. A Public Hearing was held on September 5, 2000. 9. All interested parties were provided an opportunity to speak to the City Council. The City Council imposed no time limitations or other constraints on presenters, and interested parties had every opportunity to present information regarding this matter, 10. The City carefully reviewed all information and documentation presented to it regarding WOW's proposal and qualifications to construct, own and operate a cable communications system within the City. 11. The City, as a member of the Southwest Suburban Cable Commission ("Commission"), retained the law firm of Moss & Barnett, a Professional Association to assist the Commission and City in conducting the procedure required under Minnesota Statutes g238.081 and reviewing the application submitted by WOW as well as comments and information from interested parties. . 12. Based on information and documentation made available to the City, the report dated . August 3, 2000 prepared by Moss & Barnett with respect to WOW's application and the recommendation of the Commission, each of which is hereby incorporated in this Resolution by reference, the City Council has reached conclusions regarding WOW's legal, technical and financial qualifications, NOW THEREFORE, the City hereby resolves as follows: 1. The City hereby finds that WOW's application of July 14, 2000 complies with the requirements of Minnesota Statute ~ 238.081. 2. The City finds that WOW possesses the requisite legal, technical and financial qualifications to construct, own and operate a cable communications system within the City. 3. The City has determined that an ordinance awarding a franchise to WOW should be introduced to the City Council for consideration and action. 4. The contents of the franchise should be substantially the same as the franchise ordinance currently held by the City's existing cable television operator, KBIL Cablesystems of the Southwest, Inc., doing business as Time Warner Cable ("Time Warner"), throughout the existing term of Time Warner's franchise which will expire on or about December 31,2011. 5. A construction bond should be required of WOW as part of any franchise award to provide the City with security in the event damage to the City's rights-of-way should arise which WOW is unwilling or unable to cure. . 6, Subject to all applicable laws, the City shall regulate the provision of cable television services within the City in a competitively neutral manner and shall enforce the terms and conditions of all cable communications franchises in accordance with all applicable laws and regulations in a consistent manner against all franchised cable operators so that no one operator is given an unfair competitive advantage over the other. 7, The City finds that its actions are appropriate and reasonable in light of the mandates contained in Chapter 238 of Minnesota Statutes and applicable provisions of federal law including 47 U.S. C. ~ 541 (a). Adopted by the City Council of the City of Hopkins this 5t11 day of September 2000. By Gene Maxwell, Mayor ATTEST: Terry Obermaier, City Clerk . CITY OF HOPKINS . Hennepin County, Minnesota Resolution No. 2000~60 Regarding findings of fact with respect to Everest Connections Corporation's proposal for a cable communications franchise Recitals 1. Minnesota Statutes ~ 238.08(a) mandates that the City require a franchise for any cable communication system providing service within the City. 2. Federal law at 47 U.S.C. ~ 541(a) provides that a city "may not unreasonably refuse to award an additional competitive franchise." 3. The City carefully followed the franchise procedure required by Minnesota Statutes S 238.081 by publishing once each week (June 14 and June 21,2000) for two successive weeks in the Sun-Sailor a Notice of Intent to Franchise a Cable Communications System. 4. The Notice stated all eight (8) criteria outlined in Minn. Stat. ~ 238.081 Subd, 2. 5. In addition to the published Notice, the City mailed copies of the Notice of Intent and the . Official Application Form to Everest Connections Corporation ("Everest") as well as other interested parties, 6. The City's Official Application Form required that proposals for a cable communications franchise contain responses to each of the items identified in Minnesota Statute ~ 238.081 Subd.4. 7. The City's closing date for submission of applications was set at July 14, 2000 which complied with the statutory minimum of 20 days from the date of first publication, 8. The City Council called for a Public Hearing to consider the application received from WOW at its regularly scheduled August 2,2000 meeting. A Public Hearing was held on September 5, 2000. 9. All interested parties were provided an opportunity to speak to the City Council. The City Council imposed no time limitations or other constraints on presenters, and interested parties had every opportunity to present information regarding this matter. 10. The City carefully reviewed all information and documentation presented to it regarding Everest's proposal and qualifications to construct, own and operate a cable communications system within the City. 11. The City, as a member of the Southwest Suburban Cable Commission ("Commission") retained the law firm of Moss & Barnett, a Professional Association to assist the Commission and City in conducting the procedure required under Minnesota Statutes ~238.081 and . reviewing the application submitted by Everest as well as comments and information from interested parties. 12. Based on information and documentation made available to the City, the report dated August . 3, 2000 prepared by Moss & Barnett with respect to Everest's application, and the recommendation of the Commission, each of which hereby is incorporated in this Resolution by reference, the City Council has reached conclusions regarding Everest's legal, technical and financial qualifications. NOW THEREFORE, the City hereby resolves as follows: 1. The City hereby finds that Everest's application of July 14, 2000 complies with the requirements of Minnesota Statute S 238.081. 2. The City finds that Everest possesses the requisite legal, technical and financial qualifications to construct, own and operate a cable communications system within the City. 3. The City has determined that an ordinance awarding a franchise to Everest should be introduced to the City Council for consideration and action, 4. The contents of the franchise should be substantially the same as the franchise ordinance currently held by the City's existing cable television operator, KBL Cablesystems of the Southwest, Inc., doing business as Time Warner Cable ("Time Warner'), throughout the existing term of Time Warner's franchise which will expire on or about December 31,2011. 5. A construction bond should be required of Everest as part of any franchise award to provide the City with security in the event damage to the City's rights-of-way should arise which . Everest is unwilling or unable to cure. 6. Subject to all applicable laws, the City shall regulate the provision of cable television services within the City in a competitively neutral manner and shall enforce the terms and conditions of all cable communications franchises in accordance with all applicable laws and regulations in a consistent manner against all franchised cable operators so that no one operator is given an unfair competitive advantage over the other. 7. The City finds that its actions are appropriate and reasonable in light of the mandates contained in Chapter 238 of Minnesota Statutes and applicable provisions of federal law including 47 U.S.C. S 541 (a). Adopted by the City Council of the City of Hopkins this 5th day of September 2000, By Gene Maxwell, Mayor ATTEST: ~ erry Obermaier, City Clerk AUfJ' 28-00 10; 44<lm From~MOSS & BARNETT +4900 T-9Z9 P 02/09 F.'936 . SOUTffiVEST SUBURBAN CABLE COMMISSION c/o Moss & Barnen. A Professional Association 4800 Non\'est Center, 90 South Seventh Street Minneapolis, MN 55402 Phone: (612) 347-0.340 Fax: (612) 339-6686 VL4. FACS(Mfi.,E AND U,S MAIL TO Jim Genellie, Ciry of Hopkins, Minnesota FROM Brian Grogan, Esq. DATE. August 2g, 2000 RE Competirive Cable Television Franchising Process ..... --- ~ ~ ~ . The City of Hopkins, Minnesota has been approached by tWO applicants seekrng to obtain cable televislOu franchises to compere against Time Wamef Cable, In response to these requeHS the Southwesr Suburban Cable Commission ("Commission"), of which the City of Hopkins, Mmnesota CCiry") is a member, OUTLined The process which complies WIth Minnesora Stanlte Chapter 238, In parricular, the CommiSSIOn prepared model franchising documents which included a Nmice ofInrem fa Franchise and an Official Application Form Each of The five (5) Member Cities of the Commission published lhe Notice ofImem to Franchise in their newspaper of general circulation ill compliance with Minnesora StarUtes In response to the Notice oflntent w Franchise, applicauons were received from Everest Connections Corporation ("Everest") and WideOpenWesr (""WOW"), MlIlnesora Statutc:s also requires that a franchising aLtThority must conduct a public hearing to review and conSider any applicaTions submined The purpose of the City's September )" 2000 publIc bearing is to receive input from each applIcam and from any OTher inTerested parries, In an effort to enSLlre thaI the public hearing is conducted in the mOSI efficient manner, I recommend that I be permmed to present approximately five (5) ffilUutes of introductory information to City Council Members ro explain the process and the issues before them Thereafter, presentations (between 5~ 1 0 minutes each) from Evere:::'t and WOW would be appropriate. The City may also wish to provide Time Warner Cable an oppol1unny to comment sl11ce these issues will have a dir~cI impaCt on Their operanons withm me City Following; the dose of Ihe public heanngo rhe City Council may consider approval of a . resolution wnh respect to each applicant's respenive qualifications In the event the City fmds Ihar. an applicam does nOT po~sess The reqWlsiTe quahfications, no fuI1her action is needed In the event the City determines that an applicant possesses the requisite legal, technIcal and financial -_. . /.uG'-Z8-DD lD:44am From-MOSS & BA.RNErT +4900 T-929 P 03/09 F-936 . Mr J1m Genellie August 28, 2000 Page 2 qualifications the CIty Council may then consider the grant of a cable television franchise to The appu.cam, A cable television franchise ordinance may not be introduced 10 the City Counell unril at least seven (7) days have elapsed trom the conduct of the public hearing While preliminary discussions have been held Wilh each applicant regarding the terms for such a franchise ordinance, no specific issues have been agreed upon and therefore a franchise ordinance has nor yeT been prepared for the City's review and consideration In the event the City determines that one or bOIh applicants possesses the requisite qualifications, staff will then move 10 pn:pare appropriatt;: fran~:hise documentation for the City Council's conSIderation. I h<we arrached herewith two (2) Resolutions regardmg the Commission's recommendarions to the Member Caies with respeCt To the proposals for a cable commumcalions franchise received form EvereST and WOW . 35:-:46611 . l\uff"'28-00 10:44am From-MOSS 8. BARNETT +1900 T-9,9 P 04/09 F-S36 . Southwest Suburban Cable Commission Resoluttan No. ~j 100 - ~ Regarding Recommendations with Respect to Everest Connections Corporation's Proposal for a Cable Communications Franchise Recitals 1 The Southwest Suburban Cable CommissIon ("Commission") consists of tne CIties of Edina, Eden Prairie, HopkIns, Minnetonka and RichfIeld, Minnesota ("Member Cities") 2, The Commission admInisters and enforces cable communications franchises on behalt of irs MemDer CltJ6S. 3 Everest Connections Corporation ("Everest") has approached each of the Member Cities seeking a cable communIcations franchise 4 Minnesota Statutes ~ 238.08{a) mandates that the Member Cities require a . franchise for any cable communications system providing service within the City, 5 Federal law at 47 U,S,C. S 541 (a) provides that a city "may not unreasonably refuse to award an additional competltive franchise" 3. The CommiSSIon has adVIsed each of the Member CitIes to carefully follow the franchise procedure required by Minnesota Statutes 9238.081 by publiShing once each week for two successIve weeks in the offiCial newspaper of the respective cIty a Notice of Intent to Franchise a Cable Communications System 4 The Commission's proposed Notice stated all eight (8) cnteria outlined In Minnesota Statutes 9238 081 Subd 2 5 In additIon to the published Notice, the Commission advised each Member City to mall copies of the Notice of Intent and the OffiCial Application Form to Everest as well as other interested parties, 6 Each Member Cities' OffiCIal Application Form required that proposals for a cable communications franchise contain responses to each of rhe Items Identifieq In Minnesota Statutes ~ 238,081 Subd, 4, 7. On behalf of the MemtJer Cities, me CommiSSion has carefully reviewed all information and documentation presented to each of the Member CIties . regarding Everest's proposal and qualifications w construct, own and operare a cable communications system wit.hin the Member Cities. 3~~ 1"5 Ii I Awa-28-DO 10:45am From-MOSS & BARNETT +4900 T-929 P 05/09 F-936 . 8, Tile Commission retained the law firm of Moss & Barnen, a Professional Association to assist the Commission and Member Cities In conducting the procedure required under Minnesota Statutes 9238,081 and reviewmg the application submitted by Everest as well as comments and Information from interested parties 9 Based on information and documentation made available to the Commission and Member Cities and the report dated August 3, 2000 prepared by Moss & Barnett with respect to Everest's application each of which hereby IS incorporated in thiS Resolution by reference, the Commission has reached recommendations regarding Everest's legal, technlcal and financial qualifications NOW THEREFORE, the Commission hereby resolves as follows. 1 The CommIssion hereby finds that Everest's applIcation of JUly 12, 2000 complies With the requIrements of Minnesota Statutes S 238.081, 2 The Commission finds that Everest possesses the requisite legal, technical and financial qualifications to construct, own and operate a cable communications system within the Member Cltles_ . 3 Based on the financial information provIded by Everest, the CommIssion recommends that each City conditIon any franchise awarCl on the provision of a performance bond r-..ommensurate with the damages whIch may result to City property, streets, and rights-of-way_ 4 The CommissIon recommends that each Member City conduct a public heanng regarding Everest's application as reqUIred by Minnesora Statutes Chapter 238, 5 The Commission further recommends that upon closing of the public hearing that each Member City take action to adOpt a resolution With respect to Everest's qualifIcations 6 The Commission finds that its actions are appropriate and reasonable in light of the mandates contained in Chapter 238 of Minnesota Statutes and applicable provisions of federal law including 47 US,C Si 541{a). . 353 15 l'l 2 Au~-28-0D ID:45am From-MOSS & BARNETT +4900 T-9,9 P 06/09 F-936 . PASSED AND ADOPTED this ..Jih.-- day of 4vy~t ,2000 SOUTHWEST SUBURBAN CABLE COMMISSION By -/~4~? Ron Case, Its Chairman ATTEST'~ By __, _~ n1~~~ ~.0 ff2 ' ~-( C(l~"; "';A6t~_ . . ";S3HO'l .., .J AtliH8~OO 10:45am From-MOSS & BARNETT +4900 T-929 P 07/09 F-936 . Southwest Suburban Cable Commission Resolution No, -S/J /00 -1 Regarding Recommendations with Respect to WideOpenWest Minnesota, LL.C's Proposal for a Cable Communications Franchise Recitals 1 The Southwest Suburban Cable CommissIon ("Commission") consists of the cities of Edina Eden Prairre, HopKins Mlnnetonka and Richfield, Minnesota ("Member Cities") 2 The CommissIon administers and enforces cable communrcations franchIses on behalf of its Memoer Ciues, 3 WideOpenWest Minnesota, LLC ("WOW') has approached each of the Member CIties seeking a cable communications franchise. 4 Minnesota Statutes S 238,Q8(a) mandates tr1at the Member Cities require a . franchise for any cable communications system providing service within the City 5 Federal law at 47 U S,C :::? 541(a} provides that a city "may not unreasonably refuse to award an addItIonal competitive franchIse." 6, The CommIssion has adVised each of the Member Cities to carefLJlly follow the franchise procedure required by Minnesota Statutes ~ 238.Q81 by publishing once each week for two successive weeks in the offiCIal newspaper of the respectIve cIty a NotIce of Intent to Franchise a Cable CommunicatIons System, 7. The CommIssion's proposed Notice stated all eight (8) critena outlined In Minnesota Statutes S 238 081 SU1Jd 2. 8 In addition to the pubhshed NotIce, the Commission advised each Member City to mail copIes of the Notice of lment and the Official Application Form to WOw as well as other Lnterested parties 9. Ec;jch Member Cities' Official Application Form required tnat proposals far a cable communications franchIse contain responses to each of the items identified In Minnesota Statutes ~ 238 081 Subd, 4 10 On benalf of the Member CitIes, the Commission has carefully reviewed all . Information and documentation presented to each of the Member Cities regarding WOW's proposal and qualifications to construct, own and operate a cable communications system within the Member Cities 3~3240/ l !\lJiJ"28-00 !O:45am From-MOSS & BARNETT +4900 T-929 paS/os F-936 . 11 Tne CommIssion retarned the law firm of Moss & Barnett, a ProfessIonal Association to assist the Commission and Member Cities In conductIng the procedure required under Minnesota Statutes S238.081 and reviewIng the application submitted by WOW as well 8S comments and information from interested partIes, 12, Based on mformation and documentation made available to the Commission and Member C,tIes and the repon dated August 3, 2000 prepared by Moss 8. Barnett wItH respect to WOW's applicatIon, each of which hereby IS incorporated in thIS Resolution by reference, the Commission has reached recom mendatlons regardIng WOW's legal, technical and financial qualificatIons, NOW THEREFOREJ the Commission hereby resolves as fallows: 1 ' The Commission hereby finds that \f\./OW's application of July 12, 2000 complIes with the requirements of Minnesota Statutes S 238.081 2, The Commission finds that WOW possesses the requiSite legal, techmcal and financial qualifications to construct, own and operate a cable communications system within the Member Cities . 3 Based on the financial lnformatlOn provided by WOW, the Commission recommends that each Ciry condition any franchise award on the prov;slon of a performance bond commensurate with the damages which may result to City property, streets, and rights-of-way 4 The CommiSSion recommends that each Member CIty conduCt a public hearing regarding WOW's application as reqLured by Minnesora Statutes Chapter 238. 5, The CommiSSion further recommends that upon Closing of the public hearing that each Member City take action to adopt a reSOlution with respect to WOW's qua lifications 6 The CommIssion finds that Its actions are appropnate and reasonable In light of the mandates contained In Cnapter 238 of Minnesota Statutes and applicable prOviSIons offederallaw including 47 U sc. 9541(a) . 3 53~40 I ') AJi~-28'-OD 10 :46am From~MOSS & BARNETT +4900 T-929 P 09/09 F-936 . PASSED AND ADOPTED this ~ <lay of AJo/:'1' ~, 2000, SOUTHWEST SUBURBAN CABLE COMMISS ION By. ~7'~4~A Ron Case, Its. Chairman ATTE~C:J2 .. By ,_~,-I1vv(i!--- fc0tJc WN'k C ,n "n=--,s At:rE~_ . . 3SJl51il 3 . Section 2. Statutory Requirements. A. Federal Regulatory Scheme: Competition Among Cable Television Providers and the Federal Cable Act The Cable Communications Policy Act of 1984, as amended by the Cable Consumer Protection And Competition Act of 1992 and the Telecommunications Act of 1996 (hereinafter collectively referred to as the "Cable Act") contains many provisions relevant to the application before the City, According to the Cable Act, one of its primary purposes is to promote competition in cable communications and minimize unnecessary regulation that would impose an undue economic burden on cable systems. 1 Furthermore, 47 U,S. C, S 541 (a)(1) provides that a franchising authority may award one or more franchises within its jurisdiction. To that end, the Cable Act states that a franchising authority may not grant an exclusive franchise and may not unreasonably refuse to award an additional competitive franchise. ,,2 . Any applicant whose application for a second franchise has been denied by a final decision of a franchising authority is not without recourse. The applicant may appeal an adverse decision pursuant to the provisions of S 635 of the Cable Act. The Cable Act also provides that a city may require certain assurances from the prospective franchisee. Subsection 4 of 47 U.S,C. S 541(a) provides that in awarding a franchise, the franchising authority - A. shall allow the applicant's cable system a reasonable period of time to become capable of providing cable service to all households in the franchise area; B, may require adequate assurance that the cable operator will provide adequate public, educational, and governmental access channel capacity, facifities, or financial support; and C. may require adequate assurance that the cable operator has the financial, technical, or legal qualifications to provide cable service." . 1 47 U.S,C, S 521(b). 247 U,S,C. S 541 (a)(1) (emphasis added), 353359/1 2 . When it passed the 1992 amendments to the Cable Act, Congress suggested that it favors competition in the delivery of cable communications services, The Senate report that accompanied the amendments concluded that: Based on the evidence and the record taken as a whole, it is clear that there am benefits from competition between two cable systems, Thus, the Committee believes that local franchising authorities should be encouraged to award second franchises. Accordingly, [the Cable Act as amended], prohibits local franchising authorities from unreasonably refusing to grant second franchises. 3 B. Federal Communications Commission Observations on Competition in the Cable Television Industry Five years after the Cable Consumer Protection and Competition Act of 1992, the Federal Communications Commission ("FCC") noted that "local markets for the delivery of video programming generally remain highly concentrated and continue to be characterized by some barriers to entry and expansion by potential competitors to incumbent cable systems.,,4 The FCC further found that competitive overbuilding - i.e., the process of constructing a second, competing cable system - by franchised cable operators remains "minimal but is increasing."s In the "relatively few areas" where head- to-head competition between cable providers has developed, the FCC found that "cable . operators have responded quickly with a mix of increased programming choices, lower rates, and improved customer service.,,6 The FCC outlined a number of communities where competitive overbuilding has occurred throughout the United States, In particular, the FCC stated as follows: From 1995, when overbuild activity began to increase, to June 1998, competing franchises have been awarded covering 149 communities in 21 states with the potential to pass 7. 2 mil/ion homes. However, not aI/ of the franchises awarded are currently in operation serving customers. Once a franchise is awarded, it takes a significant amount of time for the franchisee to build or gain access to a network over which to provide video service. For example, as of December 1998, Ameritech held 87 franchise awards, but of the communities included in those franchise areas, service is currently being offered in only 72 communities (i. e, parts or whole of the 87 franchise areas), Ameritech's 87 franchise awards gives it the potential to pass 1.5 million homes, and Ameritech thus far has passed 1 million of those homes with its infrastructure. As of Oecember 1998, Ameritech had 3 (emphasis added). S. Rep. NO.1 02-92, June 28, 1991, reprinted in 1992 U.S. Code Congo & Admin, News 1133,1141,1146,1151; H,Conf. Rep. No, 102-862, reprinted in 1992 U.S. Code Cong, & Admin. News 1231, 1259. . 4 In the matter of annual assessment of status of competition in markets for the delivery of video rrogramming, FCC 97-423, C.S, Docket No. 97-10 (F,C.C. December 31, 1997). Id,At10, 6 Id. At 6; see also lQ. At 107. 353359/1 3 . a total of 200,000 customers. Given these figures, it appears that Ameritech has achieved penetration rates of approximately 10% within its total of 87 franchise areas. This compares with a current national cable penetration rate of 68%. Because Ameritech has not completed construction in all 88 areas, however, its penetration rate in areas of direct competifion is significantly higher. Other local exchange carriers ("LECs') also have yet to build out their entire awarded franchise areas. Bell South offers service in parts or whole of nine of its 18 franchise areas. GTE offers service in three of its 11 franchise areas, and SNET offers service in 12 cities within its Connecticut statewide franchise area. More discussion about Ameritech video service provision and other LEC video efforts are discussed later in this Report. Among other smaller firms awarded competing franchises are RCN-BETG, McLeodUSA, Knology Holdings, Inc., Private Cable Ltd., Fiber Vision. New overbuilds since our 1997 Report include McLeodUSA's overbuild in Cedar Rapids, Iowa which competes with incumbent Tel. The competitor offers cable video and audio channels and Internet access, while the incumbent offers cable video and audio channels, with plans to offer Internet access by the end of November 1998, McLeodUSA is also expanding its fiber optic network in the area, over which it currently delivers local phone and long distance service in . the city. The company plans to target Des Moines, Iowa next. In May, 1998, Knology Holdings, Inc. was awarded a franchise for 132,000 homes passed in Charleston, South Carolina, where it has started to compete with Comcast and Time Warner. Knology already passes 68,000 homes in Columbus, Ohio; 82,000 homes in Montgomery, Alabama; and 97,000 homes in Huntsville, Alabama where it competes with TCI, Charter, Comcast, Media Communications, and Wireless One. Knology, similar to overbuilders RCN and McLeodUSA, offers its customers numerous services including video, telephony and high-speed Internet access services. 7 We have incorporated into this Report Section 4 of the 1998 FCC Competition Report. In Section 4, the FCC describes case studies where a second cable operator has been authorized to compete against incumbent cable operators and the impact on local cable subscribers. In these case studies, as well as in case studies outlined in its 1997 Report, the FCC found that incumbent cable operators, when challenged by a new MVPD [Multi]Channel Video Programming Distributor] entrant, are responding in a variety of ways. Incumbents have responded by offering better customer services, new services, new products, larger channel . 7 Id, At 25-26 paragraphs 43 and 44 (footnotes omitted), 353359/1 4 . compliments for the same price, and, in two cases, apparently cutting prices. B The FCC concludes its findings in Section 4 of the 1998 Competition Report by stating "competitive alternatives and consumer choices are still developing and potential competitors to incumbent cable operators continue to face barriers to enter into markets for the delivery of video programming." It does appear, however, the FCC is attempting to reduce these barriers to competition. In the 1998 FCC Competition Report, FCC Chairman William Kennard stated that "competition is preferable to regulation,,,g Chairman Kennard argues that Congress envisioned the removal of market entry barriers, resulting in competition that would offer additional viewing choices at reasonable prices to millions of American families across the nation,1O In analyzing the data presented in the FCC Report, Chairman Kennard indicated that "85% of all households subscribing to multi-channel video service receive that service from their local cable operator (a 2% decline from the 87% reported a year ago), With this high market share, it is not surprising that cable prices rose more than four time the rate of inflation between June 1997 and June 1998. ,,11 Chairman Kennard additionally noted that: The drop in local cable operators' dominance of this market is primarily due to the continued growth of DBS Systems, . and to a lessor degree, the launch of new open video systems and instances where incumbent cable operators have faced head-to-head competition from other cable operators. These cases are immensely important for they teach us an important lesson. That lesson is that competition brings consumer benefits. And, as we continue to move towards a competitive market, d is my hope that consumers will benefit from lower prices, improve customer service, and additional services. 12 Finally, in a separate statement, FCC Commissioner Ness observed that: "When markets are fully competitive - when people have meaningful choices - the need for government regulation abates and benefits of competition are manifest: lower prices, new and different service offerings, and better customer service. I am encouraged by the level of competition that has been achieved thus far, and I support Bid. At 120. 9 jd, . 101d. Statement of FCC Chairman William Kennard at 1, 11 Id, 12 Id.(emphasis added). 353359/1 5 ~ . efforts by industry and qovernment to attain a fully competitive market for video proqramminq distribution,,13 Recent developments: the FCC's 1999 Report Subsequent to its 1998 comments, the FCC notes additional competition in the cable television markets in its 1999 Report. In broad terms, the FCC remarked that "[n]ew municipal overbuild activity continues to grow,,,14 From 1995 to 1999, competing franchises had been awarded in 210 communities in 28 states.15 According to the FCC, incumbent franchises have responded to this competition in a variety of ways, including "lowering prices, providing additional channels at the same monthly rate, improving customer service, or adding new services including high speed Internet and telephone services,,,16 In Oakland County, Michigan, Ameritech, the competitor, offered a variety of incentives to consumers in response to the incumbent's promotions, Incentives offered by Ameritech included "free cable service for two months, $120 worth of grocery coupons, a free premium movie channel, and free installation,,,17 Despite these advances, the FCC's 1999 report stated that questions remain with regard to the increased competition. Generally, these concerns have to do with the long-term viability of the competitors, According to the FCC, "[o]verbuilding often requires 'deep pockets' to withstand competitive responses from incumbents that lower prices and increase services,,,18 Therefore, "difficulties obtaining programming and . steep discounts enjoyed by incumbent cable operators can hinder overbuilders' ability to compete effectively in the video distribution market. ,,1 9 In conclusion, the FCC's 1999 report offered some preliminary findings. First, the FCC found that subscribers have generally benefited from "head-to-head" competition. Benefits enjoyed by consumers as a result of the increased competition include: a, lower monthly charges for services and equipment; b. additional program offerings; c, access to alternative sources of telecommunicaNons and Internet services; d, new digital services; and e. better customer service from the incumbent cable operator. 20 Second, the FCC determined that incumbent operators have responded to the increased competition by using "price" rather than "non-price" competitive measures,21 13 lQ. Statement of FCC Commissioner Ness at 2 (emphasis added). 14 In the matter of annual assessment of status of competition in markets for the delivery of video rlogramming, FCC 99-418, C,S. Docket 99-230 (F.C.C. December 30, 1999). Id. at 22. 16 I'd. at 93. H- Id, at 94. 18 Id, at 67 (footnotes omitted), . 19 Id. (footnotes omitted). 20 I'd. 21 Id, ~TI~l 6 . Third, the benefits of competition do not extend beyond those communities where the competition is present. The FCC's 1999 report cites situations where competition enjoyed by customers in one municipality does not positively affect the , rates or services in a neighboring location?2 Finally, the FCC observed that the benefits , i of competition may be short-lived. Its report referenced the competition between an incumbent, Coaxial Cable, and a new entrant, Ameritech, in Columbus, Ohio. In that situtation, the incumbent was forced to sell a 75% stake in its Columbus operations due to "mounting losses and large sums required to upgrade. ,,23 c. Minnesota Statutory and Judicial Treatment of Competition in the Cable Television Industry Minnesota Statutes In addition to the requirements contained in the federal Cable Act, Minnesota has several statutory provisions that must be carefully followed by the City when considering the award of a franchise, In particular, Minnesota Statutes Chapter 238,08, titled Franchise Requirement, states that a municipality must require a franchise or extension permit of any cable communications system providing service within the municipality. Also, Minnesota Statutes S 238.081, Franchise Procedure, provides a precise procedure to be followed by a municipality when requesting applications for a . cable communications franchise. The text of S 238.08 and S 238.081 is set forth below to provide the City with the exact requirements of state law on this matter, Minnesota Statute ~ 238.08, Franchise Requirement, provides in pertinent part: Subdivision 1. (a) A municipality shall require a franchise or extension permit of any cable communications system providing service within the municipality (b) No municipality shall grant an additional franchise for cable service for an area included in an existing franchise on terms and conditions more favorable or less burdensome than those in the existing franchise pertaining to: (1) the area served,' (2) public, educational, or governmental access requirements; or (3) franchise fees. The provisions of this paragraph shall not apply when the area in which the additional franchise is being sought is not actually being served by any existing cable communications company holding a franchise for the area. Nothing in this paragraph prevents a municipality from imposing additional terms and conditions on any additional franchises, 22 ~ ("[I]n Independent, Ohio, Cablevision charges a total package price of $50,69 for a channel line-up . nearly identical too that offered by in nearby Brooklyn, Ohio, for $30,90 where it competes with Ameritech."), 23 !!t 353359/1 7 . Subd, 2. Nothing in this chapter shall be construed to prevent franchise requirements in excess of those prescribed unless such requirement is inconsistent with this chapter Subd. 3. Nothing in this chapter shall be construed to limit any municipality from the right to construct, purchase, and operate a cable communications system, Any municipal system shall be subject to this chapter to the same extent as would any nonpublic cable communications system, Subd. 4. Nothing in this chapter shall be construed to limit the power of any municipality to impose upon any cable communications company a fee, tax or charge. * * * * Minnesota Statute 9 238.081, Franchise Procedure, provides in pertinent part: Subdivision 1. Publication. The franchising authority shall have published once each week for two successive weeks in a newspaper of general circulation in each municipality within the cable service territory, a notice of intent to franchise, requesting applications for the franchise, . Subd. 2" Required information. The notice must include at least the following information: (1) the name of the municipality making the request; (2) the closing date for submission of applications; (3) a statement of the application fee, if any, and the method for its submission; (4) a statement by the franchising authority of the desired system design and selVices to be offered; (5) a statement by the franchising authority of criteria and priorities against which the applicants for the franchise must be evaluated; (6) a statement that applications for the franchise must contain at least the information required by subdivision 4; (7) the date, time, and place for the public hearing, to hear proposals from franchise applicants; (8) the name, address, and telephone number of the individuals who may be contacted for further information. Subd. 3. Other recipients of notice, In addition to the published notice, the franchising authority shall mail copies of the notice of intent to franchise to any person it has identified as being a potential candidate for the franchise, Subd. 4. Contents of franchising proposal. The franchising authority shall . require that proposals for a cable communications franchise be notarized, and contain, but not necessarily be limited to, the following information: 353359/1 8 . (1) Plans for channel capacity, including both the total number of channels capable of being energized in the system and the number of channels to be energized immediately; (2) A statement of the television and radio broadcast signals for which permission to carry will be requested from the Federal Communications Commission; (3) A description of the proposed system design and planned operation, including at least the following items: (i) the general area for location of antennae and the head end, if known; (ii) the schedule for activating two-way capacity; (iii) the type of automated services to be provided; (iv) the number of channels and services to be made available for access cable broadcasting; and (v) a schedule of charges for facilities and staff assistance for access cable broadcasting; (4) the terms and conditions under which particular service is to be provided to governmental and educational entities; (5) a schedule of proposed rates in relation to the services to be provided, and a proposed policy regarding unusual or difficult connection of services; (6) a time schedule for construction of the entire system with the time . sequence for wiring the various parts of the area requested to be served in the request for proposals; (7) a statement indicating the applicant's qualifications and experience in the cable communications field, if any; (8) an identification of the municipalities in which the applicant either owns or operates a cable communications system directly or indirectly, or has outstanding franchises for which no system has been built; (9) plans for financing the proposed system, which must indicate every significant anticipated source of capital and significant /imitations or conditions with respect to the availability of the indicated sources of capital; (10) a statement of ownership detailing the corporate organization of the applicant, if any, including the names and addresses of officers and directors and the number of shares held by each officer or director, and intracompany relationship including a parent, subsidiary or affiliated company; and (11 ) a notation and explanation of omissions or other variations with respect to the requirements of the proposal. Substantive amendments may not be made in a proposal after a proposal has been submitted to the franchising authority and before award of a franchise. . 353359/1 9 . Subd. 5. Time limits to submit applications. The franchising authority shall allow at least 20 days from the first date of pubhshed notice to the closing date for submitting applications. Subd. 6. Public hearing on franchise. A public hearing before the franchising authority affording reasonable notice and a reasonable opportunity to be heard with respect to all applications for the franchise must be completed at least seven days before the introduction of the franchise ordinance in the proceedings of the franchising authority. Subd. 7. Award of franchise. Franchises may be awarded only by ordinance. Subd. B. Costs of awarding franchise. Nothing in this section prohibits a franchising authority from recovering from a successful applicant the reasonable and necessary costs of the entire process of awarding the cable communications franchise, * * * * In addition to the above referenced state statutes, Minnesota Statutes S 238.084 identifies the required contents of a franchise ordinance, Given that the City has an existing Franchise Ordinance with Time Warne~4 (the "Time Warner Franchise") that complies with the requirements of S 238.084, the City may grant substantially the same . ordinance to Everest if the City finds that Everest is a qualified applicant. The reason for using substantially the same franchise is to ensure that any and all entities providing cable communications service within the City are treated in a competitively neutral and nondiscriminatory manner so that no one entity is given an unfair advantage over the other. While there is no statutory requirement for such uniformity, we strongly recommend equal regulatory treatment for all cable operators In the City25 Furthermore, the Time Warner Franchise at Section 12 contains a requirement for a level playing field which the City must consider when entertaining the grant of a franchise to a competitive provider, D. Judicial Treatment: The Minnesota Court of Appeals' Decision Regarding Minnesota's Cable Statutes and Competing Cable Television Franchises In its report accompanying the 1992 amendments to the federal Cable Act, the United States Senate observed that: 24 Ordinance adopted November 20, 1996, effective January 1, 1997, expiration date on or about December 31,2011, 25 Minn. Stat. S238,08(b) requires only that additional franchises cannot be granted on terms and conditions more favorable or less burdensome that those in the existing franchise pertaining to: . 1. The area served; 2, Public, educational and governmental access requirements: or 3, Franchise fees, 353359/1 10 . In addition to mergers between an incumbent cable system and a potential competitor, incumbent cable systems often wage legal battles to prevent cities from awarding second franchises or building their own franchises, 26 In 1999, the Minnesota Court of Appeals addressed one of these "legal battles" referenced by the Senate Report, In In Re Application of Dakota Telecommunications Group, dlbla Dakota Telecom, lnc" for a Cable Television Franchise in Marshall, Minnesota (hereinafter "Dakota Telecom"), the incumbent franchise, Bresnan Communications ("Bresnan"), challenged the City of Marshall's ("Marshall,,)27 grant of a competing franchise to Dakota Telecommunications Group ("DTG"). Bresnan argued, among other things, that Marshall acted "arbitrarily and capriciously" when it granted the competing franchise and that Marshall violated Bresnan's due process rights, The Court of Appeals rejected Bresnan's arguments and generally determined that an incumbent franchisee may not challenge the general fitness of a competing franchise, In its opinion, it noted that Minnesota's cable statutes were "enacted to encourage such competition." The opinion further recognized that: Although [Minnesota's] Cable Act . , . intends to further the public's interest by only awarding franchises to responsible cable operators, it does not support an incumbent franchisee's attempt to secure a monopoly by challenging the fitness of new, competing franchises, . Also, the court determined that Marshall adhered to all procedural requirements when it considered the competing application. According to the court, Because [Marshall] properly focused on DTG's ability to construct and initially operate its proposed system, we conclude it sufficiently considered substantial evidence of DTG's financial condition. This decision from the Court of Appeals provides additional guidance for cities considering an application for a competing franchise, Generally, three lessons may be learned from the case: 1. Minnesota courts will give broad discretion to a city's decision whether to award a competing franchise as long as the city follows the applicable statutory framework; 2, Minnesota's Cable Act was designed to encourage and foster competition in the cable television industry; and 3. An incumbent franchisee may not challenge the city's decision to award a competing franchise on due process grounds, 26 S. Rep. No, 102-92, June 28,1991, reprinted in 1992 U.S. Code Cong, & Admin, News 1133.1141, . 1146,1151; H, Cont. Rep. No. 102-862, reprinted in 1992 V.S, Code Congo & Admin. News 1231,1259, 27 Moss & Barnett represented the City of Marshall in the process of awarding a franchise to Dakota Telecommunications Group, 353359/1 11 -- - - --- . '" ,:R~portt()theeity " .," ~opkins,M~rnles()ta ' " . ,. . . . . . . . . . .. " , . ... . . " . .. . . .. . " . ., . . . " .. .",..., -- - . .. . . .. . . .", .. . - - .. ,. .. . . . . . .. , ,. . '" ., ',' ' " . . .. . .. " . . . . . ,.,., , . . - - . . , '~~gct(~ingSY@~~$~~Qgtl~9tiqn~C()rPQration~s," , ,,','. ':'i>..:.". ,>,~~QPQ$id,tot,..':..,a'(:at)le<"."" ',',' , · ....... ..i..;CbmmUftiqatiPn};*rjh~~i0ii:..i ...... . 'uAqgU$t:~r29pP , .' , Prepared by: . BRIAN T. GROGAN MICHAEL R. NIXT Moss & Barnett A Professional Association 4800 Norwest Center 90 South Seventh Street Minneapolis, MN 55402~4129 Phone: (612) 347-0340 Fax: (612) 339-6686 E-mail: groganb@moss-barnett.com . . Report to the:Oity Of" " , , , ,...oJ:Jkins,Mion esota '" .". .. . . . .. , . ... . . . . . .. .. . . . - -', " . .. . . . . . . " , .., ........ . . , "'~eg, crr<:lln, .gE.v:~r,e, $,t,<,(:,.o,.,.' On,.., .,ec, ~jqn~~orporfJtiCu}~S .' ' , ,.." , ,..,',', '" ,.. .. '''u. u' "f' ". " ..""" '" ,',.....,....,',', ',',. ...,', ... . ".. .. , ... ..". '" ...... . '" '" . . .. ... . "'" ,-, . . -. --. " - . ',' ',' - - " ',' - -. - . . ,., .,..' '.'.. ". ",. .,.. " '. .,' ,.., . ". . . .. ... · ......':o~r~td=t{f~~~':~iji~e( ... . '..' . .. . ..' .'.'" ", ,", ,.,",,", ....,.. ,"" ," ,.-.-. .. - .,-,-,. -.. .-'.. ... . .. .. .. .."" ,... ., . " ,. . . '. .... '.,. . ,"' . ',' ,"' .. , ... .. . . - .-.-."., - , .. " -.-.- .--. '. - . . ... . . ... . .. , .". ",. " 'A"'..""'" "'t "3" ',', 2" '0" 0'" 0..'" , . "". " "',' ,-' ,- ., " , . ... . <"U' :U': :$',< .', :i,", ',,', '. , : ' " , ,.,.,., ',.' . " ,.... .,. .,... TABLE OF CONTENTS Section 1. Introduction, .,.,."..,..,.,.,.,..".,..,."...,.,.."".",.",.,'.......,.,....,.....,."..,...".",."., 1 Section 2, Statutory Requirements, .., .., .." ,., '... ....., .... ,... ,.. ...., ,..,." ,.." ,., ,., '.', ... .., ,.. ,., ,.,.2 Section 3. Procedure Followed by City, ..,.......................,..............,....,........,............12 Section 4, Information Reviewed. .............,......,.........................,....,..,..,......'............ 13 Section 5. Everest's Legal Qualifications, ,....................,............,......,..,...........,........14 Section 6. Everest's Technical Qualifications.....,....,....,...",.."..,........,....,......,.....,.." 16 . Sect!on 7. Evere~t's Fi na.ncial Qualifica~ions......,..........................,..............,............ 20 Section 8. Compliance With State ReqUirements. ...........................,.........................24 Section 9, Recommendations. .. ,..,.., '....'. ,.......... ...." ,.., ........ ,.........,...,.., ,.., ,....,......... 28 Exhibits: A. Notice of Intent to Franchise 8, Request for Proposal Official Form C. Letter to the City dated July 12, 2000 from Jane Bremer, Esq., of Larkin Hoffman Daly & Lindgren, Everest's legal counsel D, Proposed Resolution . 353359/1 I . Section 5. Everest's Legal Qualifications. The legal qualifications standard relates primarily to an analysis of whether Everest is duly organized and authorized to own and operate a cable communications system within the City, Everest Connections Corporation ("Everest") is a Delaware corporation and has not yet created its planned Minnesota operating subsidiary. Everest represents that it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. As outlined in the chart following this page, Everest is wholly owned by Everest Global Technologies Group, LLC ("EGTG"), The Minnesota operating subsidiary will also be wholly owned by EGTG, Everest has indicated an intent to assign any franchise granted by the City to the operating subsidiary which subsidiary will enter into a management agreement with Everest. Any franchise granted by the City to Everest should be conditioned upon the City's ability to consider requiring an appropriate corporate guarantee at the time of any proposed assignment. Based on our review of the information provided, we do not believe the City can . reasonably withhold approval of Everest's request to obtain a cable communications franchise based upon Everest's legal qualifications, . 353359/1 14 -..-- ..--------. . EVEREST UtiliCorp GLOBAL GLA United, Inc. ..... TECHNOLOGIES ~ NEW VENTURES .... GROUP, LLC ...... LLC 100% I I EVEREST CONNECTIONS Minnesota CORPORATION _ __ management agreement -...... Operating (management Subsidiary company) . I 100% r I EVEREST GLA NETWORK CONNECTIONS TECHNOLOGIES, CORPORATION INC. OF VIRGINIA . 353359/1 15 . Section 6. Everest's Technical Qualifications. The technical qualification standard relates to the technical expertise and experience of Everest with respect to cable communications, Everest is a relatively new entrant into the cable television industry and does not currently operate a cable communications system in any other city in the State of Minnesota or nationwide. Everest is in the process of constructing a cable system throughout the Kansas City metropolitan area and is seeking authorization in Fort Lauderdale, Florida and Tulsa, Oklahoma. To aid the City in an analysis of the responses provided by Everest to the technical qualifications questions contained within the application, we have retained the services of Mr, Jonathan Kramer of Kramer. Firm, Incorporated, Mr. Kramer is nationally recognized by government telecommunications administrators, cable television operators and telecommunications business leaders, as a leading communications technology advisor in the areas of broadband communications, cable communications, telephony, and wireless communications (cellular, PCS, broadcast, and satellite). He has broad practical experience, as well as comprehensive theoretical knowledge in the broadband communications field, With . undergraduate education at CSUN, UCLA, LATTC, and WLAC; AS Degree in Radio Communications (with honors), Los Angeles Trade Technical College. Mr. Kramer's analysis of Everest's application PaQe 1 of the Application Bandwidth Everest indicates that it intents to construct and operate an 860 MHz system. Such a system is able to carry about 135 uncompressed video channels in normal NTSC format. Thus, 1 would Everest employ some level of video compression at the time of system activation, with increasing use of digital compression thereafter. A system bandwidth of 860 MHz is consistent with systems being rebuilt and deployed elsewhere. Only a few systems have attempted to activate bandwidth in excess of 860 MHz due, primarily, to signal maintenance problems associated extended bandwidth, Digital Compression/Digital Music Future deployment of "more than three hundred (300) channels of video service . and forty (40) channels of digital music service" is easily accomplished using the bandwidth proposed, coupled with digital compression, 353359/1 16 . Paqe 3 of the Application Fiber-ta-Feeder Architecture; Homes per Node; Status Monitor Here, Everest expands on its technology element statement to indicate its intent to use a fiber-to-feeder architecture with each fiber node serving an average of 125 homes, Further, Everest proposes to employ "state-of-the-art electronics" and status monitoring. Each of the elements is consistent with a high quality, technically sophisticated cable system, Paqe 4 of the Application Two-Way System Design/Activation Everest proposes to immediately activate its system for two-way operations, This is consistent with comparable systems, and is required to provide data services, such as Internet and telephony, and to facilitate pay-per-view data transmissions, Paqe 7 of the Application Time to Build . An estimate of 48 to 60 months to build out a 14,800-mile plant in greater Minneapolis/St. Paul does not strike me as excessive. The issue to explore, not discussed in the Application, is the order of the areas to be built. Will the City be on the front end of the timetable?28 Paqe 17 of the Application Collocation of Facilities It is unusual to see outside plant facilities collocated, Although a desirable goal from the standpoint of reducing the impact on the right of way (especially underground), most existing underground enclosures are smaller than required to permit collocation, If the City wishes to promote future collocation, and anticipates other entrants into the market, then special construction requirements must be developed before Everest's build commences, Paqe 18 of the Application Aesthetic Interference Everest's reference to the National Electrical Code (NEC) is inappropriate as the . NEe does not deal with the aesthetics of cable construction, 28 See, also, Application paqe 15 @ l(2). 353359/1 17 --- --. --- --- . Application Attachment 2 HFC System Model Everest's depiction of only three fibers per node is likely understated. It is common for a minimum of four fibers per node, and I expect that Everest will deploy up to six or more fibers per node (for spare capacity purposes). The depiction of a single 90-volt standby power supply suggests (but is not conclusive) that it will employ centralized powering. Question: Does Everest propose to supplement its power supplies with any form of gas generator? Finally, the depiction of a single active element (an amplifier) served by the node is consistent with modern fiber -to-feeder 125 home plant designs. HFC Multimedia Architecture Powered Drops . The illustration of a "power passing tap" (coupled with the notation on the "HFC System Modem" page that the power supply draw will be 22.5 amps) indicates that Everest will be supplying energy to subscribers. Transmission via a cable system of more than 60 volts of energy to subscribers, as appears to be the case here, is prohibited under all versions of the National Electrical Code before the 1999 edition. If the City has not adopted the 1999 NEC Code, it should consider doing so now. The 1999 NEe added Code Section 830 governing this type of powered construction, and sets standards of underground depths, cable types, and other important safety elements. Upstream/Downstream Bandwidth The bandwidth chart on this page indicates that Everest intends to use 375-860 MHz in the downstream (to the subscriber) direction, This means that subscribers will be required to use converters in virtually all cases. This is a consideration element for basic-only subscribers, End of Mr. KramerJs analysis of Everest's applications * * * * . 35335911 18 -------- . Mr. Kramer did not express an opinion regarding the technical qualifications of Everest in as much as he was unable to review any systems which Everest has constructed. Based on our review of Everest's technical qualifications it is appears the experience of Everest's management team is quite impressive, In part Everest relies on the experience and expertise of GLA Network Technologies, lnc, ("GLA") for certain management services including network design and business development GLA is a Delaware corporation which is wholly owned by Everest. Everest together with GLA possesses significant expertise in the operation of both cable television and telephone systems. In particular, GLA has been active in the competitive local exchange market preparing business plans, network design and marketing promotion for a number of companies, GLA has also assisted in the planning and design of broadband networks for a number of cable operators throughout the country and internationally, Everest has provided the requisite information regarding its technical qualifications per Minnesota statutes. Its application adequately describes its initial service area, schedule for two-way activation, automated services, status monitoring, channel scrambling technology, emergency alert system, over-the-air broadcast signals to be delivered, and related issues, The application provides the information requested in the City's Request for Proposals Official Application Form as required by Minn, Stat. S 238.081, Everest appears to have qualified and experienced personnel which may . allow it to successfully complete the construction and operation of the system. In reviewing the technical capabilities of Everest, together with Everest representations within the materials referenced herein, we do not believe the City can reasonably withhold approval of Everest's request to obtain a cable communications franchise based upon Everest's technical qualifications. . 353359/1 19 . Section 7. Everest's Financial Qualifications. We have reviewed selected financial information provided by Everest Connections Corporation ("Everest") regarding Everest's plans to construct and operate a cable communications system ("System") serving the City of Hopkins, Minnesota ("City"), The analysis set forth in this Section presents the results of our analysis of the assumptions used by Everest in establishing financial projections for the implementation of its strategic plan for the construction, development and operation of the System, including cable systems serving other communities within Everest's overall strategic plan, which strategic plan includes the construction and operation of similar systems in urban communities including Kansas City, Missouri, Ft. Lauderdale, Florida and Tulsa, Oklahoma, in addition to the Minneapolis/St. Paul metropolitan area, A STANDARD OF REVIEW Neither federal law nor FCC regulations provide franchising authorities with any guidance concerning evaluation of the financial qualifications of an applicant for a cable franchise, It is customary to base a financial analysis, in part, on industry standards which are generally accepted and uniformly applied in making such a determination, Due to the fact that Everest does not currently own or operate any cable systems, and . Everest (through its affiliates) has only recently been granted franchises to commence the construction and operation of a cable system serving the Kansas City, Missouri metropolitan area (which construction commenced on July 19, 2000), the absence of an operating history makes the application of such standards in the present case generally moot. However, the application of such standards has been used by Everest for the purpose of substantiating the reasonable basis upon which its assumptions in its financial projections are based. As such, the financial qualifications of Everest to construct, develop and operate the System serving the City must be based solely on Everest's present financial condition, its business plan and an analysis of future prospects for additional equity and the potential for obtaining debt financing, We provide no assurance as to the likelihood that any of Everest's projected amounts or assumptions will be realized and do not provide any conclusions as to whether Everest or any of its affiliates will be successful in implementing their strategic plan of financing, constructing and operating the System and related cable system operations throughout the urban communities which it is currently targeting; the success or failure of which could have a material diverse result on the overall ability of Everest to successfully construct and operate the System. See comments in Paragraph D, B. OVERVIEW OF STRATEGY; OPERATIONAL CAPABILITIES AND NETWORK DEVELOPMENT Everest (which is a subsidiary of Everest Global Technologies Group, LLC) . desires to construct a network throughout the Minneapolis/St. Paul metropolitan area consisting of approximately fourteen thousand eight hundred (14,800) miles of aerial 353359/1 20 . and underground plant and related electronics and equipment. Everest projects that the construction and development of the network will be accomplished in approximately 48 to 60 months from inception to completion, although the timing of the completion of a particular portion of the network will vary on a community by community basis. For example, Everest has indicated that it intends to commence development, subject to obtaining all applicable consents and approvals, in Plymouth or Maple Grove areas of the Minneapolis/St. Paul metropolitan area, As a result, Everest's array of services would be made available to residents in those communities much earlier in the projected completion time-line, The total cost of constructing Everest's systems in the Kansas City, Minneapolis and Tulsa metropolitan areas is projected to cost in excess of $2.0 billion. Everest's projections for the Minneapolis/St. Paul metropolitan area network assumes an aggressive construction schedule of approximately four thousand (4,000) miles per year. Based on the general terms of a recent construction contract entered into between Par Electrical Contractors, Inc., to construct the fiber network for the Kansas City, Missouri market, the average cost per mile is approximately $36,364, compared to industry statistics which indicated that approximately $38,000 per mile is average. Although no data was provided which would substantiate the ability of Everest to generate such favorable commercial rates for the construction of its network serving the City, the existence of favorable construction rates is one means of Everest demonstrating its ability to successfully negotiate the cost-effective construction of its . network. Co FINANCING; SOURCES AND PLANS 1. Equity Financing Prospects, Everest has represented that it has entered into an agreement with UtiliCorp United, lnc" a major publicly traded utility based in Kansas City, Missouri, which will result in a $300 million equity commitment from UtiliCorp. According to information provided in Utili Corp's 10-Q filed with the Securities and Exchange Commission on March 31, 2000, UtiliCorp's commitment is subject to Everest's ability to meet various performance targets and, if required by the board of Everest's parent company (50% of which is controlled by UtiIiCorp), UtiliCorp will provide such funding. In addition, Everest has further represented that it is very close to solidifying vendor financing commitments of approximately $450 million. No description of the nature or timing of the investment or the source or sources was disclosed. As a final means of obtaining equity financing, Everest disclosed that it anticipates a second round of equity financing will be accomplished by the end of the current calendar year. Everest projects that an additional $600 million in additional equity would be available as a result of this offering. No details as to the nature of the . offering or its current status were disclosed. 353359/1 21 ~ . 2. Debt Financing; Prospects and Plans, In order to complete the construction and development of its networks in the various markets identified above, Everest has acknowledged the need to seek additional capital resources through debt financing. Although no formal plans were disclosed by Everest regarding its prospects in successfully identifying and securing required debt financing, Everest has disclosed that it believes the equity commitments and prospects described above together with its positive working relations with major lenders will support Everest's ability to secure sufficient financing to construct and operate the System. It appears that Everest's strategy with respect to debt financing is to attempt to defer any debt repayment until Everest's projections demonstrate that there will be sufficient cash flow from operations to fund the debt service payments; the effect of which is to enable Everest to obtain the use of financing to construct the system and initiate operations well in advance of any mandatory debt service payments, D. GENERAL DISCLAIMER ON FORWARD LOOKING STATEMENTS Information, including projected financial results, provided by Everest include statements regarding expected revenues are based on belief of Everest's management as well as assumptions made by and information which was stated as being currently available to Everest. Although Everest has disclosed that it believes that the expectations and assumptions used in its projections and forward looking statements contained in the application are reasonable, no assurance can be given that such . assumptions or expectations will prove to have been correct, accurate or reasonable, Such statements are subject to certain risks and uncertainties, including the ability of Everest to secure essential contracts and agreements essential to the construction of the System, as well as general risks related to the industry in which Everest operates, Should one or more of the foregoing risks materialize, actual results could vary in material respects from those projected. E. SUMMARY OF FINANCIAL PROJECTIONS Everest has provided, under seal of confidentiality, financial projections for the Minneapolis/St. Paul network, a pro-forma balance sheet as of March 31, 2000, together with certain summary information providing a comparison of Everest's assumption to industry data (cross referenced to the 1999 Cable TV Databook regarding industry benchmarks compiled by Paul Kagan Associates, Inc,), Due to the confidential nature of the financial projections and related data, no detailed analysis is included in this report. However, we offer the following observations regarding Everest's projections, generally. In each of the categories for which Everest provided comparative information to Kagan statistical data, Everest's projections were more conservative, with the only exception being its fiber optic deployment. In all other categories listed, including (i) telephone penetration; (ij) telco revenue per line; (iii) average long distance revenue per line; (iv) business CATV penetration; (v) business CATV revenue per subscriber; (vi) high-speed modem access (as a % of HP); and (vii) . annual cable rate adjustments, Everest's projected results of operation were, in all 353359/1 22 . cases more conservative and in several categories, significantly more conservative than the industry statistical data would suggest F. SUMMARY Based upon the foregoing and limited strictly to the analysis of financial projections and other information provided by Everest submitted with its application, we believe there is a reasonable basis upon which the City could approve or deny Everest's request for a franchise based upon its financial qualifications to construct and operate the System. With respect to denial, a reasonable basis exists to support a determination by the City that Everest has failed to conclusively demonstrate that it has committed financial resources which have been identified as available to construct and operate the System serving the City. Although Everest has identified substantial funds as having been contributed or are committed for future contribution, Everest has acknowledged the need to generate substantial additional equity and/or debt financing to complete the fulfillment of its strategic plan, As Everest's success in its ability to meet its capital requirements is uncertain, this constitutes a reasonable basis for denial. However, Everest has demonstrated its ability to obtain equity financing and is in the process of moving forward with its planned construction of its franchise operations in other areas for which franchises have previously been granted, Investor confidence remains high and the current market conditions for the industry support Everest's . assertions that there is a substantial likelihood that it will in fact be successful in raising additional equity financing as well as obtaining debt financing. There is, therefore, a reasonable basis to conclude that Everest has or will be able to obtain sufficient capital to construct and operate the System serving the City. We do not provide any analysis as to the positive or negative effects of having more than one cable franchise operation serve the City, or the ability of such franchise operations to achieve or maintain short or long-term profitable operations within the City, although Everest's pro-forma financial analysis indicates that Everest has made a determination that it will ultimately be successful in achieving positive cash flow in such a competitive environment. In the event the City determines that Everest possesses the requisite financial qualifications, we recommend that the City seek methods of ensuring that Everest performs its obligations, To that end, we recommend that if the City determines to grant Everest a cable communications franchise, the City enforce a franchise requirement of a construction bond sufficient to provide the City with security in the event damage to rights-of-way or other issues arise which may require restoration at the City's expense, assuming that Everest is unwilling or unable to financially perform. While the construction bond will not provide the City with assurance of Everest's financial stability, the construction bond will provide an added layer of protection for the City, . 353359/1 23 ----- --- .-.- . . . . . ReporttQtbeCi~y , , ,HqpkinSJMlnnesota ' .. ..,.. . . .~i~~r~il!9'r:~~;~~:~~rJ~;~()ta;lt.CI$ . 'QQlJ1rn....nicatiQrii;:Prarlcl1ise ,. ," .. ",".... . ... ".. . ,. .. ......,. .. . .. . . . . , , " '" ..""" . "" o. .. . .. .,.. ,'.AUgust32000 ::',,' ' ,,'" ..,..,':',:.., ' Prepared by: . BRIAN T. GROGAN MICHAEL R. NIXT Moss & Barnett A Professional Association 4800 Norwest Center 90 South Seventh Street Minneapolis, MN 55402-4129 Phone: (612) 347-0340 Fax: (612) 339.6686 E-mail: groganb@moss-barnett.com . n. ___ __. . __. .... ._._ ..___._..._.. ._ . ,'" . . .. . . ... " , ',R.ept:lrttQth~yityof . ,',',.. "HQ~kinSr~infle~:~~~", , . . . . . . " . ' '.- . . ", - -' . . ", ,",,' ,. '.. .' . . . ., ' ,".. " .,., . , ., " - . . .. .. .. .. . - - .. , ..' .. . '. . "",' .. ..... ,". .'.'... . .... .". '.',:". .... " :-"-,'" ,-".' ,",' .,'::".. -'-, ,-. . ,",,:.,. ."'. ,. . .. ... ',' ",",", ,". '. . , ., ,-'- - - - -' "," ,', ."," ,.... . . " . . . - - -. ... ',", , . , ",. -, -,- - - ., . . . .... ,",," ".. ., - - '- - --'- -', ,""",,,' ,.', . - .. "'. . . .. '," ',," ,. . - - - .. ',,', ." ,rtf!gardih9Wi~~9~e~~~~~~Hl#~$9ta~t~C~s, " , ',' " ' "'PtbP~, s,..ltl~dt;~.,Ca,:t>,I, e,u ,.' " comroD~n, jicatlo/9~iEY,:~~"i$~ .. '..',,' " , ,..", , "0" .".' ., ,- - - . . ,'" ... ,'.".AUg~~tr3,~ZO ,."Q<<' ' TABLE OF CONTENTS Section 1. Introduction, ..,..".".".,.,."..,.....,..,.....,.".,.,......,..,...,..,.,..,.,.".,'..'..'....,.".,'.., 1 Section 2. Statutory Requirements.. ,.. .... ,.. ,... ,.,. ,.. ,... ,.. .... ,... ..., ,." ,.., ,..,.., ,.., ,., ,.., ,., ,.,..,,2 Section 3 Procedure Followed by City. ,..,....,..,..,......,...............................,.............. 12 Section 4, Information Reviewed. .........,......,......,..,..,............................,.........,....,.., 13 . Section 5, WOW's Legal Qualifications. ,..,.,.,...,.,..,..."...,.,.......,..".,.,.".,.,......,.".".",14 Section 6, WOW's Technical Qualifications, ....,.......................................................,15 Section 7. WOW's Financial Qualifications. ..........................,......,.......,..,....,..,........,19 Section 8. Compliance with State Requirements, ..,..,..............,..............,......,..,......,23 Secti on 9. Recommendations. ...'........,..............,.......................................,....,....,.... 27 Exhibits A. Notice of Intent to Franchise B, Request for Proposals Official Form C, Proposed Resolution . 353360/1 i . Section 5. WOWJs Legal Qualifications. The legal qualifications standard relates primarily to an analysis of whether WOW is duly organized and authorized to own and operate a cable communications system within the City. WOW is a Delaware limited liability company and became authorized to conduct business in Minnesota on April 4, 2000, WOW is one of several wholly owned operating subsidiaries of WOW Holdings, The chart below represents those operating subsidiaries identified in materials made available to us by WOW although may not represent all of the operating subsidiaries nor the entire corporate structure of WOW Holdings. The applicant for the cable communications franchise in the City is WOW and WOW has made no representations that the franchise will be assigned to any other operating subsidiaries or affiliates at this time, WideOpenWest Holdings, LLC . 100% I r I I WideOpenWest I WideOpenWest WideOpenWest WideOpenWest Oregon, LLC Texas, lLC MinnesotaJ Inc. ColoradoJ LLC T WideOpenWest MinnesotaJ LLC Based on our review of the information provided, we do not believe the City can reasonably withhold approval of WOW's request to obtain a cable communications franchise based upon WOW's legal qualifications, . 353360/1 -14 --- -' . Section 6. WOW's Technical Qualifications. The technical qualification standard relates to the technical expertise and experience of WOW with respect to cable communications, WOW is a new entrant into the cable television industry and does not currently operate a cable communications system in any other city in the State of Minnesota or nationwide, WOW has recently received seven (7) franchise awards from Commerce City, Loveland, Jefferson County, Greenwood Village and Aurora, Colorado, as well as Irving and Grand Prairie, Texas, Moreover, the City Councils in Denver and Boulder, Colorado have approved the award of a franchise to WOW, pending a public referendum. To aid the City in an analysis of the responses provided by WOW to the technical qualifications questions contained within the application, we have retained the services of Mr. Jonathan Kramer of Kramer,Firm, Incorporated. Mr, Kramer is nationally recognized by government telecommunications administrators, cable television operators and telecommunications business leaders, as a leading communications technology advisor in the areas of broadband communications, cable communications, telephony, and wireless communications (cellular, PCS, broadcast, and satellite). He has broad practical experience, as well as comprehensive theoretical knowledge in the broadband communications field, With . undergraduate education at CSUN, UCLA, LATTC, and WLAC; AS Degree in Radio Communications (with honors), Los Angeles Trade Technical College, Mr. Kramer's analysis of WOW's application PaQe 3 of the Application Bandwidth WOW indicates that it intents to construct and operate an 860 MHz system. WOW indicates a division of 650 MHz of analog services, internet services, and IP telephony services, An additional 210 MHz of bandwidth is to dedicated to data and digitally compressed video services. The technical proposals listed in Section A shown on page 3 are consistent with other cable systems already deployed, thus the City may expect that WOW can also accomplish the deployment of the services listed here using the system platform described in this section. A system bandwidth of 860 MHz is consistent with systems being rebuilt and deployed elsewhere. Only a few systems have attempted to activate bandwidth in excess of 860 MHz due, primarily, to signal maintenance problems associated extended . bandwidth. 353360/1 15 . PaQes 4 and 5 of the Application Proposed System Designed The first six paragraphs in Section 3 responding to the City's question consistently describe in finer detail a high-quality, high-capacity hybrid fiber cable system broadly described at Section A, discussed above, The technical elements described in the first six paragraphs are consistent with the most modern cable communications systems presently being deployed (whether by rebuild or by new overbuild). Response to Specific Questions The 60-month construction period stated in Response 2 must, by its length, apply to the proposed Minneapolis area WOW system, rather than just for the City, They City may be at the "front" of the construction window, or at the end, but not enough information is provided here to make such a determination. PaQe 7 of the Application Time Schedule For Construction of Entire System Within City . As noted just above, WOW does not state when it will complete the City's system construction within the overall scope of its Minneapolis system, This question should be clarified by the applicant in the map it proposes to submit to the City. PaQes 7 and 8 of the Application, and Exhibit A Technical Qualifications of WOW The technical qualifications of the key WOW engineering staff, Messrs. Michael H. Brody and Jack Manore, found at Exhibit A, suggest that there is a depth of experience at the senior management level commensurate with that required to construct, then operate the system described in the Application. PaQe 12 of the ApplicatiollJlnd Exhibit H Interference Landlords will Experience The presumptions and process described in Section L(1) are consistent with usual and customary construction practices for new cable systems, Exhibit H ("Construction Procedures Overview") accurately describes the general . process steps of building and activating a system such as WOW has proposed in the Application, 353360/1 16 -.------ . Paqe 14 of the Application Coflocation of Facilities It is unusual to see outside plant facilities collocated, Although a desirable goal from the standpoint of reducing the impact on the right of way (especially underground), most existing underground enclosures are smaller than required to permit collocation, If the City wishes to promote future collocation, and anticipates other entrants into the market, then special construction requirements must be developed before WOWs build commences, Paqe 15 of the Application Aesthetic Interference WOWs reference to the National Electrical Safety Code (NESC) is inappropriate as the NESC does not directly deal with the aesthetics of cable construction, but merely the workmanship required to construct the system. End of Mr. Kramer's analysis of WOW's application . * * * * Mr, Kramer did not express an opinion regarding the technical qualifications of WOW in as much as he was unable to review any systems which WOW has constructed, Based on our review of WOW's technical qualifications it is appears the experience of WOW's management team is quite impressive. In part WOW relies on the experience and expertise of its senior management team, many of whom previously work for RCN Corporation, a large publicly traded multiple system operator, RCN is one of the country's first competitive cable television operators. RCN constructed systems on the east coast from Washington, D.C. to Boston and the WOW management team was heavily involved in those operations. WOW has provided the requisite information regarding its technical qualifications per Minnesota statutes. Its application adequately describes its initial service area, schedule for two-way activation, automated services, status monitoring, channel scrambling technology, emergency alert system, over-the-air broadcast signals to be delivered, and related issues, The application provides the information requested in the City's Request for Proposals Official Application Form as required by Minn. Stat. S 238,081. WOW appears to have qualified and experienced personnel which may . allow it to successfully complete the construction and operation of the system. 353360/1 17 . In reviewing the technical capabilities of WOW, together with WOW representations within the materials referenced herein, we do not believe the City can reasonably withhold approval of WOW's request to obtain a cable communications franchise based upon WOW's technical qualifications. . . 353360/1 18 . Section 7. WOW's Financial Qualifications. We have reviewed selected financial Information provided by WOW regarding the WOW's plans to construct and operate a cable communications system ("System") serving the City of Hopkins, Minnesota ("City"). The analysis set forth in this Section presents the results of our analysis of the assumptions used by the WOW in establishing financial projections for the implementation of its strategic plan for the construction, development and operation of the System, including cable systems serving other communities within the overall strategic plan of WOW Holdings, which strategic plan includes the construction and operation of similar systems in urban communities in Texas, Colorado, Oregon and Missouri in addition to Minnesota. A, Standard of Review Neither federal law nor FCC regulations provide franchising authorities with any guidance concerning evaluation of the financial qualifications of an applicant for a cable franchise, It is customary to base a financial analysis, in part, on industry standards which are generally accepted and uniformly applied in making such a determination. Due to the fact that the WOW does not currently own or operate any cable systems, and affiliates of the WOW have only recently been granted franchises to commence the construction and operation of cable systems, the absence of an operating history makes . the application of such standards in the present case generally moot. As such, the financial qualifications of WOW to construct, develop and operate the System serving the City must be based solely on WOW's present financial condition, its business plan and an analysis of future prospects for additional equity and the potential for obtaining debt financing, We provide no assurance as to the likelihood that any of WOW's projected amounts or assumptions will be realized and do not provide any conclusions as to whether WOW or any of its affiliates will be successful in implementing their strategic plan of financing, constructing and operating the System and related cable system operations throughout the urban communities which it is currently targeting; the success or failure of which could have a material diverse result on the overall ability of WOW to successfully construct and operate the System, B. Overview of Strategy and Operational Capabilities WOW Holdings is seeking to differentiate itself from incumbent cable system operators in the communities in which it is seeking a franchise by focusing on the its strategy of building a new high capacity residential fiber optic network that is "open" for use on a fair, non-discriminatory basis by any number of competing ISP's; noting that the principal advantages of open access is the creation of rural marketplace competition for high-speed Internet users. WOW Holding's open policy is in contrast to the "closed" . access policy of most incumbent cable operators, whose predominant policy is to require high-speed Internet users to first purchase the incumbent cable company brand 353360/1 19 . of Internet service in order to obtain high-speed Internet access. In addition to providing internet access, WOW Holdings will also provide residents with up to 300 channels of digital cable television programming, video-on-demand and low cost telephone services (in certain markets), Based on information from dbusiness.com, WOW Holdings plans to build fiber optic systems in urban areas of Minnesota, Texas, Oregon, Missouri and Colorado, with the Colorado system being likely the first to become operational. WOW Holdings is in the process of trying to raise $150,000,000 with which to begin construction of its respective systems of which WOW Holdings anticipates requiring approximately $1 billion to pay for the various projects.28 The anticipated closing of the first significant capital raising efforts is anticipated to occur sometime late in the third quarter of the current calendar year, WOW Holdings plans to fund its cable system developments through a combination of initial member contributions, equity and debt financing, C. Financing; Sources and Plans 1, Equity Financing Prospects. WOW has represented that it has obtained $53.5 million in equity contributions from members and management of WOW Holdings. Although the application indicates that all $53,5 million is available to WOW, review of . confidential documents provided by WOW do not support such a conclusion. In addition, the WOW has further indicated that as part of its strategic business plan WOW (more likely WOW Holdings) is in the process of its second round of equity financing, which is anticipated to close by the end of the third quarter (September 2000), According to information provided on WOW Holdings's web page, www.wideopenwest.com, this round of equity financing is estimated at approximately $150 million. WOW (through WOW Holdings) will also be a participant in a third round of equity financing which is anticipated to occur in early 2001. No information was available regarding the projected size of the third round of equity financing, 2. Debt Financing; Prospects and Plans. Following the third round of equity financing, WOW (again, most likely through WOW Holdings) intends to commence debt financing, which will consist of up to five separate rounds, As a result of its debt financing, indebtedness incurred is projected to create a debt to equity ratio of approximately 6.0: 1, which ratio, according to industry benchmarks compiled by Paul Kagan Associates, Inc, ("Kagan") is within the range customary for the industry, WOW provided a letter from Lehman Brothers establishing a high degree of confidence on the part of Lehman Brothers ability to raise either a senior credit facility or place senior subordinated debt in order to satisfy the future financing needs of WOW and WOW Holdings, The ability to raise such financing is largely dependent upon the present market conditions and the success of WOW's business plan and strategies leading up to obtaining such financing, This letter is not a commitment to fund and should not be . construed as such, 28 dbusiness.com July 6, 2000 article from Algeo, 353360/1 20 . D. System Construction WOW is projecting that the construction of the System will take approximately 24 months to complete. Based on financial projections provided by WOW, WOW Holdings anticipates a construction period for the buildout of systems within its strategic plan of approximately 7 years, at which time operating cash flow is projected to be approximately 34%, which projection is below industry averages and supports a conclusion that WOW's projections do not overstate the potential results of operations. However, as with past results, projections can not be construed as an indication of future performance. E. Summary Based upon the foregoing and limited strictly to the analysis of financial projections and other information provided by WOW submitted with its application, we believe there is a reasonable basis upon which the City could approve or deny WOW's request for a franchise based upon its financial qualifications, With respect to denial, a reasonable basis exists to support a determination by the City that WOW has failed to conclusively demonstrate that it has committed financial resources which have been identified as available to construct and operate the System serving the City. Although WOW has identified substantial funds as having been contributed or are committed for . future contribution, WOW has acknowledged the need to generate substantial additional equity and/or debt financing to complete the fulfillment of its strategic plan. As WOW's success in its ability to meet its capital requirements is uncertain, this constitutes a reasonable basis for denial. However, WOW has demonstrated its ability to obtain equity financing and is in the process of moving forward with its planned construction of its franchise operations in other areas for which franchises have previously been granted, Investor confidence remains high and the current market conditions for the industry support WOW's assertions that there is a substantial likelihood that it will in fact be successful in raising additional equity financing as well as obtaining debt financing, There is, therefore, a reasonable basis to conclude that WOW has or will be able to obtain sufficient capital to construct and operate the System serving the City. We do not provide any analysis as to the positive or negative effects of having more than one cable franchise operation serve the City, or the ability of such franchise operations to achieve or maintain short or long-term profitable operations within the City, although WOW's pro-forma financial analysis indicates that WOW has made a determination that it will ultimately be successful in achieving positive cash flow in such a competitive environment. In the event the City determines that WOW possesses the requisite financial . qualifications, we recommend that the City seek methods of ensuring that WOW performs its obligations. To that end, we recommend that if the City determines to grant 353360/1 21 . WOW a cable communications franchise, the City enforce a franchise requirement of a construction bond sufficient to provide the City with security in the event damage to rights-of-way or other issues arise which may require restoration at the City's expense, assuming that WOW is unwilling or unable to financially perform, While the construction bond will not provide the City with assurance of WOW's financial stability, the construction bond will provide an added layer of protection for the City, . . 353360/1 22 - - - -----