Locals Gird for Bankruptcy
Local cable regulators are digging out copies of their franchise agreements with Adelphia Communications Corp. — and boning up on bankruptcy laws — to shield themselves from the MSO's financial troubles.
They're also burning up the phone lines, calling attorneys for advice on everything from who might be legally liable for wires left dangling from phone poles to the finer points of contract law.
"We're getting questions from the very basic to the extreme," said Ken Brunetti, an attorney with Miller & Van Eaton in San Francisco.
City officials rarely have to deal with bankruptcy concerns, and some don't know the difference between Chapter 11, under which a business continues to operate under trustee management, and Chapter 7, under which a U.S. Bankruptcy Court orders that assets be sold.
The regulators are in a bind: They want to protect local consumers and their localities, but they don't want to do anything that would jeopardize the continuity of cable service.
They also want to ensure that the revenues keep flowing, though, and Adelphia has fallen behind on its franchise fee payments to many localities.
Los Angeles has taken perhaps the most aggressive step. In a June 19 letter, city attorney Rocky Delgadillo told Adelphia he would advise Los Angeles to revoke the MSO's five franchises there — and deny pending renewals — if Adelphia fails to pay franchise fees and maintain its current level of service.
In mid-June, Adelphia paid Los Angeles its first quarterly franchise-fee payment of $1.7 million, which was due in March. Its second payment is due shortly.
The safety of residents is also a concern. A month ago, Adelphia stopped work on its upgrades and rebuilds, firing its contractors midstream.
Local regulators across the U.S. said they're dealing with temporarily affixed line placements, sometimes done with rope or string. The permanent placements now might not come for months.
Consultant Johnathan Kramer of Kramer.Firm said he has more work than he can handle from cities seeking emergency infrastructure inspections.
Towns have been left holding the bag before, noted Kramer, citing the example of Pacific Bell. SBC Communications Inc.'s West Coast telco strung miles of fiber in California's Orange and Los Angeles counties as part of an aborted leap into cable.
"We have a 1,000-mile laboratory," Kramer said. "PacBell's plant came off their poles when they walked away."
Pac Bell sold its San Jose, Calif., plant to AT&T Broadband, but in Southern California, it only removed parts of the infrastructure when it dropped its cable plans.
"Adelphia was in various states of construction throughout Southern California when they walked away," he said. An example of the danger was found just one-half block from his office, he said. A wire that had been held up by rope fell down and was draped across a driveway. After seven days, it was fixed.
Moreno Valley, Calif., officials were concerned enough to order an emergency inspection of the city's Adelphia system. Afterwards, the MSO received a 15-day notice to cure.
Attorneys have advised other localities to serve official notice of any safety violations prior to a bankruptcy filing, if possible.
Whether or not Adelphia is in bankruptcy, cities retain their police powers over the cable system, attorneys said. However, the courts may curb their ability to act.
Franchises often require bonding or other financial instruments, to be used by the city to fix problems if an operator defaults on obligations.
Bankruptcy attorney David Kupetz said a Chapter 11 filing would not affect a letter of credit from the operator. But a city might have to get permission from the bankruptcy court to act on a performance bond or a security deposit. The latter would probably be considered property of the estate, he said.
Sacramento has already dealt with a cable-system bankruptcy and is finding the holes in its policy. Overbuilder Western Integrated Networks LLC (WINfirst) is now restructuring, following a March bankruptcy filing.
"Performance bonds are useless," said Sacramento Metropolitan Cable Commission director Rich Esposto. "If I had it to do all over again, I'd get letters of credit.
"My fellow bureaucrats will learn that bankruptcy is a whole other world unto itself," he said.
Many regulatory issues — such as whether a city can revoke the franchise of a bankrupt operator for failure to complete an upgrade or make payments, or whether a new owner, including a trustee, can take over Adelphia without the transfer approval of local authorities — are in grey areas, attorneys said.
Lawyers for some municipalities that transferred their cable franchises to Adelphia within the past two years are determining whether the financial irregularities that occurred during this period are a basis to revoke those transfers.
Adelphia's financial misstatements affected the financial reviews conducted during those proceedings, the attorneys claim.
But even a Federal Communications Commission action to revoke the license of a bankrupt company based on nonpayment has been overturned in court, Brunetti noted.
The FCC attempted to revoke bankrupt NextWave's rights to a chunk of wireless spectrum and resell the bandwidth at auction. But the U.S. District Court for the District of Columbia overturned that move last June.
The agency has appealed that verdict, arguing that the revocation is within its police powers, even within a bankruptcy proceeding.
In Brunetti's opinion, a community would have a stronger claim if it based its revocation on failure to provide service, or on road-restoration grounds rather than "just to collect money." He also doesn't think a city can decline to renew a franchise just because an operator has declared bankruptcy, "but they can use all other standards under cable law," he said.
Kupetz, who spoke at a June 20 regional meeting of California governments about the Adelphia situation, outlined several scenarios that could play out if the Coudersport, Pa.-based MSO declares bankruptcy.
Adelphia might assume its contracts as they stand and pay them, he said. It could also reject those contracts and get out — or at least out of unprofitable systems. A third option could see Adelphia assign its contracts to another provider under the same standards of performance.
Bankruptcy law allows for the transfer of contracts such as cable franchises, so the court can pass a franchise along to a new operator, attorneys said. But a city can demand that the new franchisee cure past defaults, such as plant deficiencies, attorneys said.
One thing appears sure: As unsecured creditors, municipalities will not be at the front of the line when payment is sought. Lenders, which have blanket liens on Adelphia property, will get first dips, Kupetz said.
Some regulators will explore pooling their resources and clout, should Adelphia file bankruptcy.
For example, the regulators who met last week — representing localities from California to Colorado — make up a bloc of 1.6 million cable customers. If they act jointly, officials from those towns said they believe they'd stand a better chance of taking a leadership role among the unsecured creditors, according to meeting attendees.
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