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Challenges mount over AT&T, TCI pairing

A grass-roots political movement to regulate cable-based Net service gains steam as AT&T tries to garner support for its proposed $48 billion merger with TCI.

A grass-roots political movement to regulate cable-based Internet service at the local level continues to gain steam even as AT&T files some of the last documents necessary for approval of its proposed $48 billion merger with Tele-Communications Incorporated.

AT&T today released its plans to incorporate TCI's cable operations following the completion of the merger. The long distance giant admitted it has run into some opposition over the deal in the Securities and Exchange Commission filing.

In a resolution released today, the cable regulatory staff of the city of Oakland, California, has recommended that the city council deny the transfer of franchise licenses to AT&T. The recommendation was based on back fees and taxes TCI apparently owes the city.

However, the resolution leaves open the possibility for Oakland to deny the transfers if TCI does not open its broadband pipes to competitors--one of the key sticking points for a growing number of cities and consumer groups.

"It is also possible that the transfer can result in anti-competitive effects on the provision of Internet access, and possible changes in customer service under AT&T control," Oakland city documents state.

The decision by Oakland is only the latest in a push by consumer advocacy groups and local municipalities for "open access."

In a letter yesterday, attorneys for the city of Portland, Oregon, formally denied the transfer of local cable franchise licenses to AT&T from TCI because the companies refused to open TCI's cables to competitors.

"We're really disappointed. We want to bring competition to the area," said TCI spokeswoman Katina Vlahadamis. "We're willing to make a lot of big investments in Portland."

No decision has been made yet on whether the companies will seek litigation, Vlahadamis said.

City officials in Denver are considering a similar proposal, while officials in Los Angeles and now in Dallas, Texas, plan to address issues surrounding the merger. Consumers Union and other consumer groups protested the deal for similar reasons during a public comment session in front of the FCC late last year.

The move for so-called open access--the proposed requirement that cable operators such as TCI allow competitors to pay for the use of its network to offer services--is the first time regulators have considered regulating cable wires for anything other than multi-channel video service.

The issue is a controversial one, and now that the Justice Department has granted conditional approval to the deal, it remains to be seen whether it will play an important role in the FCC's decision. The Federal Communications Commission will, no doubt, consider the open access issue in its review of the deal; a decision is expected by mid-year.

An Internet stranglehold
Consumer groups and cities such as Portland contend that TCI, with the considerable financial and marketing backing of AT&T, will have a stranglehold on high-speed Internet services if they're not forced to open their broadband pipes to competitors.

They argue TCI, one of the biggest cable companies in the nation and the largest shareholder in cable modem service @Home Network, will force users in TCI territory to pay for and take @Home's content. Because TCI's local franchise agreements amount to miniature monopolies, other Internet service providers (ISPs) such as America Online will effectively be shut out of those markets.

Los Angeles city officials held a public hearing in December to discuss the open access issue.

"The meeting was to gather information to make the best decision for the citizens of Los Angeles," said Jesse Juarros, assistant general manager for the information technology agency of Los Angeles. "We're still in the formulation process. We've not made a formal decision."

Juarros said the issue is scheduled to go before the board of the Information Technology Commission on January 15. The city council has until mid-February to approve or deny the transfer of franchise licenses, he said.

The Dallas City Council will vote on its local transfer Wednesday. City sources said some city council members have expressed concern with competition for high-speed Internet access if they approve the transfers. Officials in Denver plan to hold a workshop to examine the controversial issue January 19.

A similar grass-roots movement is being organized in the San Francisco Bay Area, by a small group of area ISPs and content providers. The group is beginning to push for open access requirements in Oakland, San Francisco, and San Jose, California.

"Our goal is to?try and raise awareness of the issues of competition and economic development, with ISPs and local content providers being able to benefit from the provision of these services over the cable infrastructure," said Stuart Trevelyan, a Web design consultant who is leading the charge.

Build your own
AT&T and TCI are stridently opposed the requirements, and have some influential financial experts on their side. A handful of analysts recently wrote a letter to the FCC urging the federal regulatory body not to pass open access requirements.

The analysts, including Jessica Reif Cohen of Merrill Lynch, said the requirement would put a damper on investment in expensive broadband networks if companies' competitors could piggyback on them for a nominal fee.

The cable industry is a highly capital-intensive business, and operators frequently need to make significant investments up-front to upgrade their cables and equipment to provide advanced services such as Internet access, telephone service, or video conferencing.

"The government very clearly encouraged cable companies [in the Telecommunications Act of 1996] to get into other businesses. It's a very serious investment to upgrade the cable," Reif Cohen said. "I do think that [open access] would stifle any meaningful investment."

AT&T says much of the questions being raised at the local level are a result of behind-the-scenes cajoling from competitors such as US West and America Online.

Sarah Duisik, an AT&T spokeswoman, said cities such as Portland don't have the authority to make these kind of decisions and the FCC is the place to decide policies that have a national impact.

"Since we're not regulated like a common carrier...for us to open up access is giving them [competitors] a free piggyback on our investment," Duisik said.

FCC has the ball
It remains to be seen how these movements will affect the final decision of the FCC. Privately some city officials have said they wish the FCC had already ruled on the issue because "now we're caught in the middle of it," said one source.

Many experts have said the commission may not rule on open access as part of the AT&T-TCI merger, instead opting for a larger public policy debate at a later date. Some commissioners have publicly stated a reluctance to use the merger as an opportunity to air every gripe competitors and consumers may have regarding the two companies.

As for the influence of local decisions, sources said the FCC has historically been cautious not to pre-empt local laws unless the statue is very clear.

Grass-roots activists are hopeful that the recent trend in Washington to shift authority toward state and local jurisdictions bodes well for their attempts to open TCI's pipes to competitors.

"The fact that a growing amount of attention is being focused on this issue underscores several of the concerns that we raised at the FCC," said Andrew Schwartzman, an attorney at Media Access Project, a Washington-based public interest law firm that represents clients such as Consumers Union and environmental groups. "The FCC does pay attention to that."

The sweeping legislation that deregulated the telecommunications industry in 1996 gave increased authority to state and local officials, Schwartzman said.

"States and localities are expressing discomfort with the notion of Internet access service being offered without some ability to open it to others," he said. "The fact that the FCC is sensitive to these things will not be unnoticed."

If the FCC doesn't ultimately require TCI and other cable operators to open their so-called pipes to competitors, Schwartzman said "I think there's a very real possibility that we'll see legislation requiring it."