County of Santa Cruzsccounty01.co.santa-cruz.ca.us/BDS/GovStream2/... · County of Santa Cruz...

County of Santa Cruz COUNTY ADMINISTRATIVE OFFICE

701 OCEAN STREET, SUITE 520, SANTA CRUZ. CA 95060-4073

(831) 454-2100 FAX: (831) 454-3420 TDD: (831) 454-2123

SUSAN A. MAURIELLO, J.D., COUNTY ADMINISTRATIVE OFFICER

April 22, 2003 AGENDA: April 29, 2003

BOARD OF SUPERVISORS County of Santa Cruz 701 Ocean Street Santa Cruz, California 95060

PUBLIC HEARING FOR THE PURPOSE OF CONSIDERING THE IMPOSITION OF LIQUIDATED DAMAGES FOR MATERIAL BREACHES OF A FRANCHISE TO PROVIDE CABLE TELEVISION SERVICES GRANTED TO CHARTER COMMUNICATIONS PROPERTIES, LLC

Dear Members of the Board:

On March 4, 2003 your Board considered a report of the County Administrative Officer (Attachment 1) and set a public hearing at 9 :00 AM on Tuesday, April 29, 2003 on the matters addressed in a proposed resolution of the Board of Supervisors. A copy of the proposed resolution is Attachment 2 of this letter and is entitled:

A R e s o l u t i o n of the Board of Superv i sor s of the County of Santa Cruz Finding and Determining That Charter Communications P r o p e r t i e s , LLC Has Committed Material Breaches o f Chapter 5.24 of the Santa Cruz County Code and That “Franchise t o P r o v i d e Cable Television Services Between the County of Santa Cruz, C a l i f o r n i a and Charter Communications Proper t i e s , LLC”, dated a s of May 19, 1998, Making Cer ta in Findings of Fact i n R e l a t i o n Thereto, Imposing L iqu ida ted Damages, and Reserving Cer ta in Further Remed ies .

The issue in your April 29, 2003 public hearing is to determine whether Charter Communications has:

1. committed a material breach of its Franchise Agreement with the County and the Code of the County of Santa Cruz

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BOARD OF SUPERVISORS HEARING ON LIQUIDATED DAMAGES

AGENDA: April 29, 2003

by way of its 1998 transfer of control of Charter and the Franchise to Paul G. Allen, an individual;

2. committed a material breach of the Franchise Agreement by failing to timely construct the Return Feed from the PEG Studio to Charter's headend as required by Paragraph 14 (D) ( 4 ) of the Franchise Agreement; and

3. the appropriate damages for each breach.

Staff Report

Attachment 3 of this letter is a Staff Report Relating to Alleged Violations of Chapter 5.24 of the Santa Cruz County Code and Charter's Franchise to Provide Cable Television Services dated May 19, 1998. The Staff Report which was prepared by Special Counsel for Cable Television discusses:

1. the procedural history of the several breaches now before your Board;

2. the denial resolution and the Board's December 1, 1998 findings which among other things addressed:

- debt load and the operational difficulties of merging to massive cable companies;

- the absence of a meaningful business plan for the new entity; and

- the financial instability and negative impacts upon rate and services which might result from the acquisition of Charter by Paul Allen

3. the litigation which Charter and Paul Allen initiated challenging the Board's denial;

4 . the essential elements of a breach of the code and the franchise;

5. the harsh reality subsequent to the adoption of the denial resolution which demonstrates that the transfer did in fact lead to management turnover, financial instability, curtailment of capital expenditures and

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has threatened the financial viability and continued existence of Charter Communications;

how the recent experience of the now bankrupt Adelphia Communications Corporation demonstrate that high priced acquisitions and “mega-mergersN can result in severe financial peril to subscribers, franchising authorities, creditors and shareholders.

concludes that the acquisition of Charter by Paul Allen without the consent of the Board of Supervisors was a breach of the County Code and Charter’s Franchise Agreement and that Charter has committed a material breach of Paragraph 14 (D) ( 4 ) of the Franchise by failing to construct the return feed from the PEB studio in Santa Cruz to Charter’s Headend..

Procedural Issues

Charter Communications has been advised of the April 29, 2003 public hearing through its attorney of record and has been provided with a copy of the proposed resolution and the staff report. Additionally, Charter has been advised by Special Counsel through its attorneys of record, of the procedure that will be utilized in the conduct of the hearing. (Attachment 4 )

Recommendation

At this

1.

2.

time it is RECOMMENDED that your Board:

conduct a public hearing and at the conclusion of that public hearing consider all the evidence, written, oral and otherwise; and

adopt the resolution in Attachment 2 of this letter which is entitled a Resolution of the Board of Supervisors of the County of Santa Cruz Finding and Determining That Charter Communications Properties, LLC Has Committed Material Breaches of Chapter 5.24 of the Santa Cruz County Code and That ”Franchise to Provide Cable Television Services Between the County of Santa Cruz, California and Charter Communications Properties, LLC“, dated as of May 19, 1998, Making

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Certain Findings of Fact in Relation Thereto, Imposing Liquidated Damages, and Reserving Certain Further Remedies, making any changes to the Resolution which your Board deems appropriate.

Very truly yours,

Susan A. Mauriello County Administrative Officer

Attachments

cc: Charter Communications Richard Patch Community Television

'. 1 (OMMVNITY TELEVISION OF IANTA (RVZ ( O V N N

,,j 8 April 2003

.Dear Chair Pirie and Member of the County Board of Supervisors:

As you know, Community Television of Santa Cruz County has facilitated public, educational and government (PEG) access television in what is now the Comcast cable franchise area in'northern Santa Cruz County for the past eight years. In addition to televising your Board meetings, we televise--the meetings of both the Santa Cruz and Scotts Valley city councils, the Regional Transportation Commission, and several other governmental agencies, including several involving public safety in Santa Cruz County. We also televise Cabrillo College telecourses for those students who do not have access to such courses in the classroom.

For several years, it has been a stated goal of our organization to facilitate a countywide PEG- system that would bring both our services and, more importantly, our programming to all cable subscribers in Santa Cruz County, including those in the Charter service areas in the cities of Watsonville and Capitola, and also in portions of South County. While we do have a limited agreement currently in place with Charter that allows us to televise a segmented version of Cabrillo Telecourses, there remains no "return feed" or "interconnection" between the Comcast cable system and Charter that would allow us to provide PEG access programming, including those meetings of your board, countywide.

As you know, all three of the franchise agreements recently negotiated with Charter require Charter to provide such an interconnection (see attached). Charter's failure to do so has prevented Community Television from meeting its mission of providing consolidated public, educational and governmental television programming throughout Santa Cruz County.

I strongly encourage the Board to demand that Charter fulfill its contractual obligations regarding this interconnect.

Thank you for your consideration.

Sincerely.,

Geoffrey Dunn Executive Director .

816 PACIFIC AVE * 5ANTA CRUZ * CALIFORNIA 95060 * (831) 425-8848 * FAX (831) 425-3958

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Excerpts from Franchise Agreements between Charter Communications and the Cities of Watsonville and Capitola and the County of Santa Cruz Regarding Interconnection Between Charter and Community Television

Franchise Agreement Between "Charter Communications, Inc." and the City of Watsonville

Section 11.12. Interconnection. The Grantee shall construct its System so that it is capable of interconnecting with adjacent Cable Systems at three (3) points at the extremities of the Franchise Area. The Grantee shall interconnect its Cable System with Cable Systems serving at least the cities of Santa Cruz (with the concurrence of Santa Cruz's cable operator), Santa Cruz County (unicorporated area) and North Monterey County (Pajaro Area). At minimum, the interconnection shall provide twenty (20) MHZ of bandwidth in both directions. This bandwidth shall provide the capability of both receiving and delivering transmissions of users and PEG Access programming. The Grantee shall cooperate with the City in utilizing available interconnect capacity by local and state public and non-profit organizations, including forward and reverse applications. The interconnect(s) shall be activated no later than the date of the completion of the rebuild of the Subscriber network. The Grantee shall interconnect the identified Cable Systems concurrent with the rebuild provided in Section 11.3. Grantee may elect to treat the costs of the interconnection as an "external cost" under FCC rules and regulations.

Franchise Agreement Between "Charter Communications" and the City of Capitola

Section 111.4. Interconnection from Community Television of Santa Cruz County. The Grantee shall interconnect its Cable System with Community Television of Santa Cruz County. The Interconnect shall be constructed pursuant to the specifications contained in Section 11.1 .C(8) relating to reverse or upstream transmissions or other specifications as determined by Grantor that meet or exceed the performance standards for reverse or upstream transmissions contained in Section II.C(8) and shall be completed by no later than the completion of the rebuild as described in Section 11.3. In the alternative, and subject to prior approval of any agreement by the Grantor, the Grantee may satisfy its obligations pursuant to this Section through the execution of agreements(s) with one of more franchised cable operators serving portions of the County not served by the Grantee to interconnect their systems so that programming originated at the Studios of Community Television of Santa Cruz County can be transmitted over the Grantee's system.

The interconnection requirement of this Section is contingent upon the Grantee being able to receive the Community Television of Santa Cruz County signal. It is anticipated that reception of the signal will be accomplished either by an interconnection with the cable operator currently providing cable service in Santa Cruz County (AT&T), or by Santa Cruz County permitting Grantee to install equipment in County to accomplish the

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interconnect directly with Community Television of Santa Cruz County. The burden of proof shall be on the Grantee to demonstrate that it has made a good faith effort to achieve the interconnection. If the Grantee is unable to successfully complete the interconnection, and if Grantee can demonstrate that it has made a good faith effort to accomplish the Interconnection; then Grantee shall not be found in breach of this Agreement. In such a case, failure by the Grantee to demonstrate a good faith effort will be deemed a material breach of this Agreement.

If interconnection is not achieved initially, the Grantor reserves the right, during the term of this Agreement, to require Grantee to pursue future attempts to accomplish the interconnection.

Franchise to Provide Cable Television Services Between the County of Santa Cruz, California and Charter Communications Properties, LLC

Section 14.D(4) Return Feed. The Grantee shall provide a return transmission line from the PEG studio located at Front Street (the "Studio") to its headend for the purpose of transmitting PEG programming to be provided by the Grantor from that site (the "Return Feed"). The Return Feed shall be constructed pursuant to the specifications contained in the Franchise relating to reverse or upstream transmissions or other specifications as determined by Grantee that meet or exceed the performance standards for reverse or upstream transmissions contained in the Franchise, and shall be completed no later than the completion of the Rebuild. In the alternative, and subject to prior approval of any agreement by the Grantor, the Grantee may satisfy its obligations pursuant to this Section through the execution of agreement(s) with one of more franchised cable operators serving portions of the County not served by the Grantee to interconnect their systems so that programming originated at the Studio can be transmitted over the Grantee's system.

C O B L E N T Z , P ATCH, D U F F Y B A S S L L P

A T T O R N E Y S A T L A W 222 KEARNY STREET, 7 T H FLOOR SAN FRANCISCO, CALIFORNIA 94108 -4510

TELEPHONE: 415 -391 -4800 FACSIMILE: 415 -989 -1663 w w w . c o b l e n t z l a w . c o m

Richard R. Patch Direct Dial: 415.772.5722 [email protected]

April 24,2003

8534-024

Board of Supervisors County of Santa Cruz 701 Ocean Street Santa Cruz, California 95060

Pat Busch Assistant County Administrative Officer County of Santa Cruz 701 Ocean Street, Room 520 Santa Cruz, California 95060

Re: Statement of Charter Communications Properties, LLC in Response to Notice of April 29, 2003 Hearing to Determine Whether It Has Materially Breached the Terms of Its Franchise and Attached Staff Report

Dear Members of the Board of Supervisors and Mr. Busch:

Our office represents Charter Communications Properties, LLC ("Charter") in connection with this matter. On Charter's behalf, we respectfully submit this letter in response to the April I O , 2003 letter from William Marticorena to Charter's counsel, Richard R. Patch, and the Staff Report enclosed therewith. Mr. Marticorena's letter advised that a hearing will be conducted by the Board of Supervisors on April 29 to determine whether "Charter has committed a material breach of its Franchise Agreement with the County by way of its 1998 transfer of control of Charter and the Franchise to Paul G. Allen, an individual."

As set forth more fully below, no material breach of the Franchise has occurred. In fact, Charter has consistently and repeatedly met or exceeded its "material" obligations under the terms of its Franchise with the County. Over the past five years Charter has invested over $5.6 million to rebuild the cable system serving the Santa Cruz Area, and substantial additional capital to improve both the quality of customer care and the quality and quantity of cable-related services available to its customers

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residing within the County. The alleged breach which we understand is to be the subject of the April 29 hearing-the December 23, 1998 change of control of the stock ownership of Charter's corporate parent without the County's prior consent, which occurred on a single day more than four years ago-simply does not constitute a "material" breach of Charter's Franchise with the County.

Specifically, Charter submits that:

Service to Charter customers residing within the County has substantially improved since the transfer of control of Charter to Paul G. Allen.

Assuming that the transfer, in light of the Ninth Circuit Court of Appeal's decision, constitutes a technical violation of the Franchise, it does not constitute a material breach. The County has obtained the substantial benefits it could reasonably anticipate under the Franchise, and the "breach," if one occurred, was the result of a reasonable, good faith dispute regarding an area of the law which had not been previously resolved by the courts.

0 Action by the County with respect to events which occurred in December of 1998 are untimely.

The information set forth in the Staff Report is misdirected. Although it is a matter of common knowledge that all telecommunications companies have suffered significant adverse treatment in the financial markets, both with respect to stock price and available capital, including Charter's parent company, those facts are not causally related in any way to Paul Allen's investment in Charter. The issue is not the current stock price of Charter's parent company. The issue is Charter's performance of the material terms of its Franchise obligations.

1. FACTUAL BACKGROUND

A. Cable Service in the South County Franchise Area Prior to May 1998

Prior to May 1998, the cable franchise for the South County Franchise Area within the County of Santa Cruz was held by Sonic Cable TV ("Sonic"). The cable system serving the South County Franchise Area was antiquated and unreliable. No significant improvements had been made to it for many years. Indeed, Sonic had operated the system for more than ten years without a franchise.

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Cable service within the South County Franchise Area was limited to 40 channels of cable television programming service. Sonic's "Basic Service Tier" included only 37 channels and, as of May 1, 1998, cost subscribers $25.98 per month ( approximately 70 cents per channel). No enhanced services, such as digital cable or high speed internet services, were available to cable subscribers. No I-Net existed within the South County Franchise Area. PEG support by Sonic had been extremely limited, or non-existent. Sonic's customer service record was poor, reflecting the lack of investment by Sonic to upgrade the cable system over the years.

B. Grant of Franchise to Charter Communications Properties, LLC

Since May 1998 Charter Communication Properties, LLC ("Charter") has operated the cable television system serving the County of Santa Cruz ("County") and Charter's subscribers located within in the South County Franchise Area pursuant to the terms of the Franchise Agreement and Chapter 5.24 of the Santa Cruz County Code. As part of the grant of the franchise, the County reviewed the legal, technical and financial qualifications of Charter to own and operate the system serving the South County Franchise Area and determined that they were sufficient.

As conditions to its ultimate consent to the transfer and assignment of the cable franchise from Sonic Cable TV ("Sonic") to Charter, the County Board of Supervisors required-and Charter agreed-to three related contracts: (1) a Franchise Agreement, (2) a Rate Order, and (3) a Transfer Agreement, all of which became effective on May 19, 1998. These three agreements afforded the County with extraordinary and very specific benefits and protections over the term of the Franchise. Over the past five years, Charter Communications Properties, LLC has consistently met or exceeded its material obligations under the terms of its Franchise. Management of the cable system serving the South County Franchise Area has remained continuously under the supervision of John Adams since the Franchise was first granted to Charter.

II. CHARTER COMMUNICATIONS PROPERTIES, LLC'S COMPLIANCE WITH THE MATERIAL TERMS OF ITS FRANCHISE OBLIGATIONS

A. Rebuild of the System and Deployment of New and Enhanced Services

Under the terms of its Franchise Charter agreed to construct a two-way, state-of- the-art, cable system to service the South County Franchise Area within 24 months. Following the 1998 change of control, Charter not only completed this project, but did so 4 months ahead of schedule.

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Two hundred twenty-three (223) programming services are now offered by Charter to subscribers within the South County Franchise Area. As of May 1, 1998, Sonic offered County subscribers only forty (40) channels of services.

Effective on the following schedule, Charter began delivering the following enhanced or new services to subscribers within the South County Franchise Area over the rebuilt system:

61 channel basic service January 1,2000 Digital Cable August 2000 high speed data service April 2001 Impulse Pay-Per-View September 2001

These enhanced services, many of which are not required by the terms of the Franchise, have been met with great acceptance by Charter's customers.

The "Full Basic'' Service Tier is, of course, provided to all subscribers. Although Charter was required under the terms of the Franchise and Rate Order to include only 61 channels in the Full Basic Service Tier following completion of the system rebuild, Charter now includes 80 channels. Charter's 80 channel Full Basic Service Tier is currently offered to County subscribers at the monthly cost of $36.50. While the number of channels included in the Full Basic Service Tier have more than doubled since the 1998 change of control, the cost to subscribers per channel has decreased from approximately 70 cents per channel to less than 46 cents per channel.

Digital cable and high speed data (residential and small business internet and commercial business network) services are also now available to residents of the South County Franchise Area. Over 30% of Charter's subscribers in the County have elected to take digital cable. In addition to the 80 channels included in Charter's Basic Service Tier, Charter's Digital Basic Service Tier consists of 117 additional channels: 45 channels of CD quality digital music services, 48 Pay-Per-View channels, and 24 high- quality digital programming channels. Charter also offers 26 digital premium channels such as HBO, ShowTime, Cinemax, and Stan. Impulse Pay-Per-View is also now available. This service allow subscribers to order Pay-Per-View movies from up to forty eight channels, 24 hours a day, simply by using their remote control to order off of the on-screen guide. (Under Sonic only one Pay-Per-View channel was available to subscribers utilizing a telephone order system.)

Approximately 16% of Charter's subscribers in the County have elected, thus far, to subscribe to Charter Pipeline, a high speed internet service. Charter currently offers three levels of service: Charter Pipeline Gold (1.5MB per second); Charter Pipeline Silver (768K per second); and Charter Pipeline Bronze (256K per second). Charter

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Pipeline Bronze is currently available to subscribers for only $34.95 per month. Customers can purchase any ISP service using the Charter Pipeline.

B. PEG Commitments

Charter has met or exceeded its PEG commitments to the County. Upon completion of the rebuild and adoption of the agreed upon initial basic cable service rate, Charter began making PEG payments of 64 cents per subscriber per month. The $48,000 and $10,000 equipment grants agreed to in the Franchise Agreement have been paid. Charter has paid $130.00 per meeting to the Santa Cruz Community Access Corporation, and has dedicated PEG Channels consistent with the terms of the Franchise.

C. Rates

The rates for services provided by Charter have been consistent with the terms and requirements of the Rate Order, to the extent applicable, and otherwise consistent with federal law. As agreed to in the Rate Order, Charter froze rates until completion of the rebuild, and Charter implemented a 10% discount to low income seniors and the disabled.

Although Charter has raised rates since the completion of the rebuild, all increases for those services subject to the terms of the Rate Order have been consistent with its terms. For those services beyond the scope of the Rate Order ( ie . , digital cable, premium channels, etc.), rate increases have been consistent with applicable law and implemented as necessary to enable Charter to provide these additional services to customers.

D. Additional Payments under the Transfer Agreement

Charter has paid to the County the $75,000 required under the terms of the Transfer Agreement.

E. Improved Customer Service

Until August 2001, each of Charter's system offices, including the system serving the South County Franchise Area, handled its own telephone calls from customers. The hours of operation for Santa Cruz were 8 a.m.-6 p.m. Monday-Thursday, 9 a.m.-6 p.m. on Friday and 8 a.m.-4:30 p.m. on Saturday. After hours and on Sundays, calls were answered by a third party answering service that did not have access to Charter's billing system or subscriber records. Thus, the answering service could respond to technical problems such as outages, but was unable to respond to billing questions, requests for

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changes in services, and new installations. Instead, the customer's issue was summarized and faxed to the Watsonville office to be addressed the next business day.

In order to improve customer service, Charter spent over $14 million to construct a 300 seat state-of-the-art contact center in Vancouver. The Vancouver call center opened in August 2001. Calls from customers residing in Santa Cruz County have been handled by the Vancouver call center since September 2001. The Vancouver call center is open 24 hours a day, 7 days a week and 365 days a year. In addition to providing support to video customers, the Contact Center provides Tier 1 and Tier 2 support to Charter's high speed data customers 24 hours per day. Customer Service Representatives are screened for customer service skills and experience, thoroughly trained before taking calls and equipped with state-of-the-art technology. Contact Center staff work closely with the local offices in Watsonville and Gilroy to address customer concerns and escalations promptly.

Charter continues to maintain its Capitola Customer Care Center and Watsonville Customer Care Center. These facilities are open from 8:30 - 530, Monday through Friday, and provide convenient locations where subscribers are able to make bill payments, resolve billing questions or disputes, modify their service levels, obtain and/or return equipment, sample Charter's high speed internet service, obtain current information about programming and services, etc. Charter maintains on-call technicians after hours who respond to single "no picture" service interruptions.

F. Franchise Fee Payments

Under the terms of the Franchise, Charter agreed to pay to the County a sum equal to 5% of its "Gross Annual Revenue" (as defined in the Franchise), which is the maximum amount allowed by law. Charter has honored this commitment and subsequent to the December 1998 change of control paid to the County over $400,000 in franchise fees.

111. NOTICE OF APRIL 29,2003 HEARING

On or about April IO, 2003 counsel for Charter received a letter from William Marticorena advising that the County Board of Supervisors would conduct a public hearing on April 29, 2003 to determine whether Charter has committed a material breach of its Franchise Agreement with the County and/or the County Code "by way of its 1998 transfer of control of Charter and the Franchise to Paul G. Allen." The stated

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purpose of the letter is "to advise Charter, through its attorneys of record, of the procedure that will be utilized in the conduct of said Hearing."'

Other than a determination of whether Charter is in material breach of the Franchise due to the 1998 change of control, the letter does not specify any other agenda for the hearing. Although Mr. Marticorena's April I O letter identifies only a single alleged breach to be considered at the April 29 hearing-the change of control issue, the Staff Report enclosed with the April 10 letter mentions a second alleged Franchise breach-"failure to construct a return feed from the PEG Studio." The background for each alleged breach is described briefly below:

A. Change of Control

1. Charter's request for consent and the County's denial. Section 5.24.030 of the Santa Cruz County Code requires the County's prior consent to a "change in control" of the cable franchisee, and provides that such consent shall not be "unreasonably" withheld.

Within several months of the County granting the franchise to Charter Communications Properties, LLC, Paul Allen proposed to purchase a controlling interest in the stock of Charter Communications, Inc., the ultimate corporate parent of the franchisee. A stock purchase agreement was signed in late July 1998. Although the franchisee with the County of Santa Cruz, Charter Communications Properties, LLC, would not change as a result of the proposed transaction, the County's consent was promptly requested in accordance with the terms of the Franchise.

On or about August 30, 1998 Charter submitted a completed Form 394 Application to the County, along with detailed exhibits, formally requesting the County's consent to the change in controlling stock ownership of the franchisee's ultimate corporate parent that would result from the CCllAllen transaction. Through its outside consultant, the County requested additional information from Charter. Charter responded in detail, despite the fact that much of the requested information bore no relevance to the proposed transaction.

In response, the County's outside consultant (on behalf of the County and various other local franchising authorities represented by him) demanded still further information. Charter reasonably and genuinely believed that these additional requests-both for further information and that Charter pay for the cost of an

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' Although the Mr. Marticorena's letter states that "Charter has been previously notified that said Hearing will take place at the above-specified time and location," Charter is unaware of any such notice having been provided. This is odd, in that the County and Mr. Marticorena clearly are aware of how to contact appropriate Charter representatives to advise them of such hearing.

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"independent due diligence" investigation to be conducted into wide ranging aspects of the proposed transaction, far exceeded the permissible scope of any legitimate inquiry by the County. Charter further genuinely and reasonably believed that the County's demand that Charter pay for the costs of an independent consultant violated Charter's rights under the Federal Cable Act.2 Accordingly, Charter declined to provide the further information requested, or to pay for the costs of an independent due diligence investigation.

On December 8, I998 the County Board of Supervisors adopted Resolution No. 445.98 (the "Denial Resolution"), denying consent to the request for consent to the change of control of the ultimate corporate parent of Charter Communications Properties, LLC that would result from the proposed transaction.

On December 15, 1998 the County Board of Supervisors authorized Mr. Marticorena and Pat Busch, the Assistant County Administrative Officer to approve a transfer agreement, subject to later ratification by the Board of Supervisors, if Charter agreed to a further rate freeze and paid to the County $500,000. Charter believed that both of the conditions the County was now seeking to impose for its consent to the change of control were unlawful. No transfer agreement was reached.

On December 23, 1998 the transaction by which Mr. Paul Allen acquired a controlling stock ownership interest in Charter Communications, Inc. closed. However, Charter believed that the information and other demands that the County had made in considering its requests for consent were unlawful and in violation of their rights under the First Amendment, as was the County's denial of consent.

2. Subsequent litigation. Although the permissible scope and timing of requests for additional information by local franchising authorities in considering a request for a transfer of a cable television franchise or a change of control of such a franchise had never been directly addressed by any court, clear guidelines had been established by Congress and the FCC. In addition, the County of Santa Cruz Ordinance provides that the County's request for information would be "reasonable,"

With respect to the County, Charter believed that the requests were particularly inappropriate in light of the fact that: (1) the County had only months earlier completed an evaluation of the qualifications of Charter Communications Properties, LLC to act as the cable franchisee for the South County Cable Franchise Area; (2) Charter Communications Properties, LLC had just agreed to the terms of a new franchise agreement, Rate Order and transfer agreement which provided unique protections to the County and subscribers, none of which would be altered in any way by the proposed transaction; and (3) Charter Communications Properties, LLC would remain the franchisee following the close of the proposed transaction and the only anticipated impact of the transaction on the financial capabilities of it was an immediate, $34 million reduction in its existing corporate debt.

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and that its consent to requests for consent would not be "unreasonably withheld." Charter believed that the County's requests for information, and any denial of consent, had to be consistent with the requirements of the Cable Act, the FCC's implementing regulations and the First Amendment in order to be "reasonable."

In adopting the Cable Act, Congress intended to "establish a national policy concerning cable communications." 47 U.S.C. 5 521(1). The role of local franchising authorities was restricted by Congress, thereby "minimiz[ing] unnecessary regulation that would impose an undue economic burden on cable systems." 47 U.S.C. § 521(6). The Cable Act applies to both local franchising authorities and cable operators.

The FCC has established procedures for transfers of control which preclude the multiple burdensome information requests propounded by the County here. Under federal law, local franchising authorities have "120 days to act upon any request for approval" of the sale or transfer. 47 U.S.C. 5 537. The FCC also developed FCC Form 394 for cable franchisees to submit when seeking transfer approval from local franchising authorities. This form was designed to include "the information necessary to establish the legal, technical, and financial qualifications of the proposed transferee." In re Maffer of Implementation of Sections I I and 13 of the Cable Television Consumer Protection and Competition Act of 1992, 8 F.C.C.R. 682,v 85-86 (1993) (hereinafter "1993 Order"). Beyond the information included with Form 394, local franchising authorities may request only additional information that is "reasonably necessary to determine the qualifications of the proposed. . . transferee." See In re Maffer of Implementation of Sections I I and 13 of the Cable Television Consumer Protection and Competition Act of 1992, I O F.C.C.R. 4654, 50 (1995). Charter believed that the County's voluminous and irrelevant information requests were directly contrary to these procedures for transfers.

The Cable Act imposes a cap of 5% of annual gross revenues on franchise fees ''or assessments or any kind" which may be collected by a local government from a cable operator. 47 U.S.C. 5 542(b). This provision has been strictly interpreted to prevent local governments from circumventing this cap by manufacturing various "miscellaneous" costs for franchisee to pay. Charter reasonably believed that the County's demand that Charter fund a due diligence study and make a $500,000 "mitigation payment" were additional assessments against a cable operator in direct contradiction of the Cable Act.

The Cable Act further expressly prohibits franchising authorities from regulating rates in a manner which is inconsistent with its terms. 47 U.S.C. 5 543. This section sets out in detail the rules regarding regulation of cable rates, which severely restrict the ability of local government to regulate rates. 47 C.F.R. 5 76.910. Charter reasonably believed that the County's demand for a further rate freeze, as a condition for the

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County's consent to the change of control, was impermissible under applicable federal cable regulations.

The FCC has clearly stated that:

In exercising their transfer jurisdiction, franchising authorities may not seek to circumvent the commission's authority over rate regulation, franchise fees or other matters.

See 1993 Order at 39, n.38. Charter believed that the County, through its voluminous information demands, demand that Charter fund the cost of the due diligence study, demand that Charter agree to a further rate freeze and demand that Charter pay a $500,000 "mitigation fee,'' etc., tried to do exactly what footnote 38 and federal law prohibit.

Because of the direct conflict between the Federal law and the County's position on these fundamental issues, Charter, Charter Communications, Inc. and Mr. Paul Allen filed suit in the United States District Court, Northern District of California, seeking a declaration that the County's demands, and ultimately its denial of consent, were in violation of their First Amendment rights, the provisions of the Cable Act and the rights of Charter Communications Properties, LLC under its Franchise with the County.

a. District Court's Decision in Favor of Charter. At the conclusion of trial, the United States District Court held that the County's information and financial demands were clearly unlawful and/or unreasonable, as was the County's denial of consent to the change of control. The District Court concluded that the County's conduct violated the First Amendment rights of Charter, CCI and Mr. Allen, as well as the terms of Charter's Franchise. The opinion issued by the District Court in this matter constituted the first clear articulation by any court regarding the permissible scope of inquiry by a local franchising authority regarding a request for a transfer or change of control of a cable franchise, and what limits exist upon a local franchising authority's ability to deny consent to such a request.

b. Ninth Circuit's Decision in Favor of the Countv. The County, disagreeing with the District Court's determination, filed an appeal with the Ninth Circuit Court of Appeals. Because of the widespread uncertainty and disagreement surrounding the critical issues of first impression raised in this case, numerous cable operators and local franchising authorities participated in the appeal process through the submission of amicus briefs. Ultimately the Ninth Circuit reversed the District Court's decision, concluding that the trial court had not afforded sufficient deference to the County's actions and that, by agreeing to a standard of "reasonableness" in the Franchise, Charter had implicitly waived its First Amendment rights.

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C. Petition to United States Supreme Court. Because Charter believes that the Ninth Circuit's opinion is fundamentally flawed and contrary to the terms of the Cable Act and established law on the First Amendment, Charter has filed a petition for writ of certiorari with the United States Supreme Court, asking that it hear this case. The County has filed an opposition. Review by the Supreme Court is extremely rare, and may be denied even if the Supreme Court disagrees with the result reached by the appellate court. It is expected that the Supreme Court will announce whether it will hear this case on April 28, 2003.

B. PEG Return Feed

Although Mr. Marticorena's April IO, 2003 letter does not identify this item as an issue that will be considered at the Board of Supervisor's April 29 meeting, because it was referenced in the Staff Report, we address it briefly here.

Section 14(D)(4) of the Franchise provides that Charter is to "provide a return transmission line from the PEG Studio located at Front Street ("the Studio") to its headend for the purpose of transmitting PEG programming to be provided by Grantor from that site ("the Return Feed"). The Franchise specifically provides that Charter "may satisfy its obligations pursuant to this section through the execution of agreement(s) with one or more franchise cable operators serving portions of the County not served by [Charter] to interconnect their systems so that the programming originated at the Studio can be transmitted over" Charter's system.

Prior to January 1, 2000, the installation of fiber optic cable facilities was completed by Charter and United Cable Television of Santa Cruz, Inc. ("United Cable") in specific contemplation of the acquisition of Charter's Santa Cruz Cable system (which serves the South County Franchise Area) by United Cable. That transaction was not consummated. Because of the costs incurred by Charter in installing the necessary fiber optic cable facilities, United Cable agreed that Charter could have the use of those fiber optic cable facilities in order to satisfy its Franchise requirements and agreed to enter into a written fiber lease agreement memorializing the terms of their oral understanding. A copy of the final Fiber Optic Lease Agreement is attached hereto as Exhibit A.

In October 2000 the County issued a "notice of breach letter" to Charter alleging, among other things, that Charter had not complied with the above Franchise requirement. Charter responded by letter dated December 22, 2000, advising that Charter had, in fact, "completed arrangements with AT&T to make use of certain facilities" to satisfy these requirements. Until receipt of the Staff Report enclosed with Mr. Marticorena's April 10 letter, Charter had heard nothing further from the County on this issue and believed the issue had been resolved.

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The Honorable Board of Supervisors Pat Busch April 22, 2003 Page I 2

IV. OBJECTIONS TO PROPOSED HEARING PROCEDURES AND STAFF REPORT

A. Hearing Procedure

Mr. Marticorena's April 10 notice letter states that the sole purpose of the April 29 hearing is to determine whether there has been a material breach of the Franchise due to the December 1998 change of control. Accordingly, Charter understands that the Board of Supervisors will not be considering on April 29 what, if any, remedies may be available to the County in the event that a material breach is found to have occurred. Please be advised that if and when the County Board of Supervisors schedules a hearing to determine what remedies may be available to it under the terms of the Franchise and/or applicable law, Charter will and does insist upon full due process rights, including without limitation, the right to be represented by counsel, subpoena witnesses, cross-examine witnesses and present evidence and legal argument without the imposition of any (or an) arbitrary time restriction(s).

B. Staff Report and Exhibits to Staff Report

As Charter understands the proposed process for the April 29 hearing, the Staff Report and Exhibits attached thereto will first be submitted to the County Board of Supervisors. Charter objects to those portions of the Staff Report (and attached Exhibits 33-42 thereto) relating to Adelphia Communication Corp. on the grounds that such materials are wholly irrelevant to the issue of whether Charter Communications Properties, LLC has committed a "material breach" of its Franchise with the County. Likewise Charter objects to those portions of the Staff Report (and attached Exhibits 9-32, 43-45) which relate to financial or other difficulties experienced by Charter Communication, Inc., the corporate parent of franchisee Charter Communications Properties, LLC. Again, such materials are irrelevant to the issue of breach by the Franchisee.

V. THERE HAS BEEN NO "MATERIAL" BREACH OF THE FRANCHISE

A. Change of Control

Section 5.24.030.N of the County's Code requires the County's prior consent to any "change in control" of the Franchisee. Charter concedes that, if the United States Supreme Court does not grant Charter's Petition for Writ of Certiorari and ultimately reverse the decision of the Ninth Circuit Court of Appeals in this matter, the County's December 8, 1998 denial will be deemed valid and the December 23, 1998 closing of the AllenlCCl stock transaction, therefore, will have resulted in a technical breach of

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Section 5.24.030.N of the County Code. Any such breach will not, however, represent a "material" breach of Charter's Franchise with the C ~ u n t y . ~

Under California law, a material breach is "one that is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the undertaking.'' Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1530 (gth Cir. 1993) (citations and internal quotations omitted). Whether a failure to perform constitutes a "material breach" is determined by a consideration of the following factors:

(1) the extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated;

(2) the extent to which the injured party may be adequately compensated in damages for lack of complete performance;

(3) the extent to which the party failing to perform has already partly performed or made preparations for performance;

(4) the greater or less hardship on the party failing to perform in terminating the contract;

(5) the willful, negligent or innocent behavior of the party failing to perform; and

(6) the greater or less uncertainty that the party failing to perform will perform the remainder of the contract.

See Sackeft v. Spindler, 248 Cal.App.2d 220, citing Restatement of Contracts § 275, pp. 402-403; quoting Restatement (Second) of Contracts § 241 (1 981 ).

A consideration of these factors in the context of Charter's Franchise with the County of Santa Cruz clearly demonstrates that Charter's failure to obtain the County's prior consent to the change in controlling stock ownership of its ultimate corporate parent, CCI, does not constitute a "material" breach of its Franchise.

The first and third factors enumerated above clearly weigh in favor of Charter and against a finding of material breach. The County has received, and will continue to

3 Any alleged breach that may have occurred during the change of control consent application process due to Charter's decision to not pay the costs of due diligence investigation and/or to respond to the County's second set of information demands, has been cured. The County's counsel has repeatedly urged during the course of litigation that the County's desire for further information could and would have been satisfied by (1) providing the County with a copy of the NMS Due Diligence Report, (2) providing a copy of Jerald Kents' three year employment contract to the County and (3) providing the County with information regarding the efforts undertaken by Mr. Allen to ensure continuity of key members of Charter's senior management through, the provision of retention or "stay" bonuses. All of this information has been provided to the County.

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receive, the substantial benefit of its Franchise and Charter has fully performed all material obligations currently due and owing thereunder. Charter Communications Properties, LLC remains the franchisee. As noted in Section II above, Charter has invested over $5.6 million over the past five years into rebuilding the cable system, deploying new and improved services to subscribers in the South County Franchise Area, improving customer service, etc. Charter not only completed the rebuild of the system, but did so four months earlier than required. Over the past five years, Charter has paid to the County in excess of $400,000 in franchise fees, well over $120,000 in PEG payments, $58,000 in PEG grants for equipment, and $75,000 in transfer fees, etc.

The second factor articulated above also weighs against a finding that any breach by Charter due to the change in stock ownership of its corporate parent constitutes a "material" breach. Charter believes that the County has sustained no damages as a result of the 1998 change of control and that the subscribers within the County have actually and materially benefited from Mr. Allen's investment in Charter Communications, Inc.

The fourth factor, the greater or less hardship on Charter in terminating the contract, also clearly militates against a finding of materiality and termination of the Franchise. According to the County's calculations, Charter acquired the cable system serving the South County Franchise area from Sonic in 1998 at a cost of approximately $7,507,200 ($1,564 per subscriber x approximately 4800 subscribers). Over the past five years, Charter has invested over $5.6 million to upgrade and improve both the physical plant comprising the cable system and the quality and quantity of services provided to its subscribers living within the County.

The fifth factor, the "willful, negligent or innocent behavior" of Charter also weighs heavily against a determination of material breach. The alleged breach is the result of a genuine, reasonable and good faith disagreement between Charter and the County over the County's permissible scope of inquiry in considering Charter's request for a change of control and the reasonableness and lawfulness of the County's denial. The issues presented by the County's denial, and the resulting litigation, were ones as to which sharp disagreement existed within the cable community and raised issues of first impression for determination by the federal courts. The two courts which have now considered those issues-the U.S. District Court for the Northern District of California and the Ninth Circuit Court of Appeals-sharply disagreed as to whether the County's actions were lawful. Under these circumstances, any breach of the Franchise that may have resulted from the 1998 change of control, can not be fairly characterized as one caused either by Charter's "knowing" or "negligent disregard" of its contractual obligations.

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The final factor, the likelihood that Charter will perform the remainder of the Franchise, also favors Charter's position. Despite the disagreement between the County and Charter over the parties respective rights and obligations under Section 5.24.030.N of the County Code, Charter has demonstrated its firm commitment to meet or exceed its material obligations under the Franchise. Charter will continue to meet or exceed those obligations as it works to provide its subscribers within the South County Franchise Area with the finest cable service and products available. Moreover, the Franchise Agreement, Rate Order and Transfer provide the County with significant and extraordinary protections against a breach of any material provision of the Franchise, including the existence of a $500,000 letter of credit, a $1 million (dollar) performance bond.

B. Return Feed

As set forth above, Charter has complied with the requirements of Paragraph 14(D)(4) of the Franchise.

VI. ANY CLAIM BY THE COUNTY FOR REMEDIES BASED UPON THE DECEMBER 1998 CHANGE OF CONTROL IS BARRED BY LACHES, WAIVER, ESTOPPEL AND THE APPLICABLE STATUTE OF LIMITATIONS

The County's belated actions against Charter with respect to events occurring in 1998 are untimely and thus barred, under the doctrines of laches, waiver, estoppel and statute of limitations. California courts apply these doctrines to prevent the gross unfairness that would be visited upon parties such as Charter when contracting parties such as the County accept, enjoy and, indeed, demand the many benefits of contract performance for years after the alleged "breach," only to much later contend that the contract had been breached at some earlier time.

A. Laches

Laches operates as a defense to a claim in equity where the plaintiff unreasonably delays in bringing a claim to the detriment of the defendant. See, e.g., Brown v. Safe Personnel Bd. (1 985) 166 Cal.App.3d I 1 51, 1 158-59; Alexander v. Safe Capital Co. (I 937) 9 Cal.2d 304, 31 3. The defense of laches is available against a municipality or agency in an administrative proceeding, to avoid unfairness due to delay by the public entity. Founfain Valley Regional Hospital and Medical Center v. Bonta, 75 Cal.App.4th 316, 323 (1999) (the defense of laches may be brought in an administrative action); see, e.g., Gates v. Departmenf of Motor Vehicles (1979) 94 Cal.App.3d 921, 925-26 (affirming trial court's dismissal of administrative proceeding to revoke plaintiffs business license, because there was no reasonable explanation for DMV's 15 month delay between investigation regarding alleged violations and its initiation of proceedings

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to revoke plaintiffs license). The "defense of laches requires unreasonable delay plus either acquiescence in the act about which plaintiff complains or prejudice to the defendant resulting from the delay." Brown v. State Personnel Bd. (1 985) 166 Cal. App.3d 11 51, 1159.

In cases where the time period exceeds the statute of limitations for an analogous claim, the plaintiffs delay is presumed to be unreasonable and prejudice to the defendant is presumed. Fountain Valley Regional Hosp., 75 Cal.App.4th at 324. Where the statute of limitations has been exceeded, the party against whom the defense is asserted "must then (1) show that the delay involved in the case . . .was excusable, and (2) rebut the presumption that such delay resulted in prejudice to the opposing party." (Id.)

In this case, the County claims that Charter has materially breached the terms of its Franchise. As set forth below, a four year statute of limitations applies to any claim for breach of the franchise. Because more than four years have passed since the County became aware of a potential claim, the statute of limitations for any such claim of breach has run.

As a result, the County bears the burden to show that its delay in seeking to terminate the Franchise Agreement is excusable and that it did not prejudice Charter. The County cannot meet this burden. First, there is no excuse for the County's delay. Moreover, the delay prejudiced Charter in several ways. Notably, Charter has continued to invest millions of dollars into both rebuilding its cable system and improving its customer service operations during the more than four years of the County's delay. Termination of the Franchise Agreement now would deprive Charter of a means for recovering its investment. The passage of time has also prejudiced Charter's ability to defend against the alleged breach, due to personnel changes and fading memories.

9. Waiver

The County's claim of breach is also barred by the doctrine of waiver. Under California law, continued acceptance of performance after the alleged breach constitutes a waiver of the breach. See, e.g., Whitney lnvestment Co. v. Westview Development Co. (1969) 273 Cal.App.2d 594, 603 ("[wlhen the injured party with knowledge of the breach continues to accept performance from the guilty party, such conduct may constitute a waiver of the breach"). In this vein, the California Supreme Court has explained that a party benefited by a non-assignment clause in a contract may waive his right to terminate the contract for violation of the clause by dealing with

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the assignee with regard to the contract despite knowledge of the assignment. Trubowitch v. Riverbank Canning Co. (1947) 30 Cal.2d 335, 342.4

Because the County did not act timely to enforce its right regarding the alleged breach, and because the County has continued not only to accept performance under the Franchise Agreement, but also to demand full performance under the Franchise for more than four years-by, for example, collecting hundreds of thousands of dollars in franchise fees and PEG payments and requiring completion of a multi-million dollar rebuild-the County has waived any breach Charter may have committed as a result of the 1998 change of control.

C. Estoppel

For similar reasons, the County also is estopped from terminating the Franchise. Estoppel arises when there is a statement or concealment of material fact made with knowledge of the actual fact, and with the intention of having the party act on it, to a party ignorant of the truth and who is induced to act on the statement or concealment. See 11 Witkin, Summary of California Law (9th ed. 1990), Equity 5 177, and 2001 Supp. at § 177, and cases cited therein. Here, the County has, for over four years, continued to accept Charter's performance under the Franchise with the intent of having Charter continue to provide cable services under it. Charter has relied on the existence of the Franchise, and both the County's acceptance of hundreds of thousands of dollars in franchise and PEG fees, as well as the County's demand for completion of the $5.6 million rebuild of the cable system under the Franchise, in providing cable services to the residents of the South County area. As such, the County is estopped from asserting that Charter has breached the Franchise.

D. Statute of Limitations

Finally, the statute of limitations on any claim arising from the 1998 change of control has lapsed. A franchise agreement between a County and a cable operator is enforceable as a contract. See, e.g., Cox Cable San Diego, lnc. v. City of San Diego, 188 Cal.App.3d 952, 966 (1987) (the grant of a cable television franchise "established a contractual relationship between the City and COX").^ Under California law, any action for breach of written contract must be commenced within four years of breach. Cal. Code Civ. Proc. 5 337. Here, the alleged breach took place more than four years ago,

4 Similarly, a plaintiff waives the right to terminate a lease for violation of an anti-transfer provision by accepting rent from the assignee. Martin v. Auerbach (1 949) 94 Cal.App.2d 222.

See also Orange County Cable Communications Co., 59 Cal.App.3d at 171-72 ("the only possible relationship of the parties [the County and cable operator] is one based on contract"); 8 Witkin, Sum. Cal. Law Const. Law 9 1076 (9th Ed. 1999) ("an accepted franchise, or any other grant, is a contract").

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Le., on December 23, 1998 when the transfer of control to Mr. Allen occurred. The County is thus barred from commencing any action arising from the alleged breach because it failed to enforce its rights before December 23, 2002, ie., within the four year period. Since it failed to do so, the County cannot now, after the statute has lapsed, terminate the contract.

In sum, the equities in this case all point in favor of Charter and in favor of the Board finding that the County's claim for remedies is untimely. The County's delay in responding to the 1998 change of control occurring more than four years ago is unreasonable. If the County believed that Charter had materially "breached" the franchise, the County could have, and should have, conducted its hearing within a reasonable time after the alleged breach. Certainly, the County could have filed a compulsory cross-claim alleging breach of contract against Charter, in response to Charter's filing of its lawsuit in federal court in 1999. Instead, the County chose to acquiesce to Charter's alleged breach and to require completion of a $5.6 million state- of-the-art cable system rebuild, many and significant steps to dramatically improve customer service, and payment of over $500,000 in franchise fees and PEG payments to the County in the intervening years. Given the County's delay and the great prejudice to Charter by the County's tardy actions now, this Board should find that the County's claim of material breach against Charter is barred.

VII. CHARTER'S FAILURE TO OBTAIN THE COUNTY'S PRIOR CONSENT TO THE 1998 CHANGE OF CONTROL IS NOT A VALID GROUND FOR REVOCATION OF THE FRANCHISE

The notice provided to Charter, through its counsel, advising it of the time, place and subject of this hearing specifically limits the scope of the issues to be addressed at this time to a determination of whether Charter has materially breached its franchise obligations as a result of the 1998 change of control. Charier understands that no other topics are to be addressed at the April 29 hearing and would, in fact, object to any expansion of the issues to be addressed at that time. However, because the County has, at various times, articulated the belief that Charter's failure to obtain the County's prior consent to the change of control constitutes grounds for revocation or forfeiture of the Franchise, we respond briefly to that issue here.

The County cannot revoke the franchise due to Charter's failure to obtain the County's prior consent to the 1998 change of control. Forfeiture provisions are strictly interpreted against the party for whose benefit they have been drafted (Civil Code § 1442). Whenever two or more interpretations of a forfeiture provision are possible, the interpretation that avoids forfeiture will be applied (Flagg v. Andrew Williams Stores, Inc. (I 954) 127 Cal.App.2d 165). Because forfeitures are not favored under California law, any act that is inconsistent with forfeiture by a party claiming

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forfeiture generally will be regarded as a waiver (Bank ofAmerica National Trusf & Savings Ass'n v. Cransfon (1967) 252 Cal.App.2d 208). Moreover, any overbroad interpretation or enforcement of a forfeiture provision in a cable franchise likely violates the First Amendment. A forfeiture will only be enforced if the County carries the burden of showing that the forfeiture serves a compelling government interest and that the remedy, forfeiture, is sufficiently narrowly tailored to protect that interest. Finally, consistent with California's anti-forfeiture policies, a party will generally be relieved from forfeiture upon making full compensation for any breach (Civil Code § 3275).

The grounds for revocation of the Franchise are set forth at Section 5.24.1 30.A of the County Code and require that, in order to constitute a basis for revocations, a breach must be: (I ) repeated or willful; (2) of a material provision of the Franchise;

Franchise. County Code Section 5.24.130.A.I. Here, the alleged breach was none of these things.

- and (3) "due to [Charter's] unreasonable disregard of its obligations" under the

The breach was neither willful by Charter Communications Properties, LLC nor repeated. Moreover, as explained in Section V above, any breach that may have resulted from the change of control was not a "material" breach of Charter's franchise obligations.

Clearly the alleged breach was not a result of Charter's "unreasonable disregard'' of its obligations under the Franchise. As noted above, Charter genuinely and reasonably believed that the County's demands were unlawful. The scope of permissible review by the County of Charter's request for consent to a proposed change of control of its corporation parent, and the limitations, if any, upon the County's ability to deny consent to such a request, were unknown and raised matters of first impression for the federal courts. The two courts which examined the terms of Charter's Franchise, and the parties' actions in requesting and providing information, and requesting and denying consent, reached dramatically different conclusions about the lawfulness of the County's actions. Under these facts, it cannot be said that Charter acted in "unreasonable" disregard of its franchise obligations.

CONCLUSION

As set forth above, Charter respectfully submits that no "material" breach of its Franchise has occurred. The County has obtained the substantial benefits it could reasonably anticipate under the Franchise. Although the alleged breach occurred more than four years ago-the County has not taken timely action to enforce its rights regarding the alleged breach. Rather, the County elected to accept the full benefits of the Franchise and insisted upon Charter's continued, and full, performance of its

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obligations thereunder. Accordingly, any proceeding by the County to implement remedies against Charter for the 1998 change of control is untimely.

Very truly yours,

Co lentz, Patch, Duffy & Bass, LLP LL-QeeL Richard R. Patch

91

RRP/AE Jlkl Attachment

08534.024.0007.b 20

~~

. . . .

. .-

AGREEMENT

a. . Charter awns and operates a cable relwisioa systwm wbich serves customers in portions of Sanb Cnu. Countys and in Capiroia and Wztmnville, Califarnia, unda h c h i s z s h m the County of Santa CSUZ, ~e City of Capitala, and the City of Wa~onvillc, respectively; and

b. AT&T o m and operate; a able television system which SUTYOS curtonocrs ia Sara Cruz County, CalifiXnia, under a hnchise 5 o m the COUVY; and

c. The parties t o clarify and documenr the ownomhip of, and & a p e d u2on leasehold ri&m associated vi& various fiber-opric imnsmission lines during rhe conkc t ion of which the patics woperaxcd.

1. b3cfiniti.oct.s u€Af€ected Fiber R m . T b e fiber-optic transmission cablc mns &ed by t h i s Agrement apz desaibcd es follows and further idantifid by refasnce to Exhibit A. attached hcrao:

1.1

1.2

1.3

1.4

Fiber #1 is an existing fbrty-eighc (48) caunt fiber sheath wnmg cnnrinuously'from Connection Point # 1 located at Cb&s headend facility io the Watsonville systan ro t h e nortlwcst hm.nckay of Charter's Wmonvlfle h c h i s e service area f iathiso whcre ir t e n h a t e s at Connection Point #2 near the intersection of Valancia Road and Frcedom BouIevard and io lo& in or on si-s or ovarbcdl! fk i l i t i ies owned or leased by Chnrtsr.

Fiber ff2 is an &sting twelve (12) count fiber 9bcat.b running continuously fcorn Conncction Poiat #1 loocated'at Charta's headend facility in t h o WatsonvIlIe sy-srzm to the northwest boundary of Chartds Warsonvillc franchise s e r v i c e area h c b i s e whara it t-inatter at Comedon Point #2 near dm i n r a s d o n of Valmcia Road and Frecdom Boulevard and is locstcd in or on mbsrmctures or overhead facilities owned or leased by Charter.

Jiber 93 is an existing fortysight (48) count fiber sh& waning continuously ham Connection Point St2 t o Connection Point at3 located at the AT&Thub fadiv 3t 66 Rancho del Mar, Aptos, California, and is located in or on substructures or ovethead kilities owned or lensed by AT&T.

Fibcr # is an existing flffy-two (52) fiber sheath running continuou~ly from Connection Point #3 tD Cannccdon Point near 920 &pitoh Avenue, Capitols, California, and is located in or on SubstTUctrpcs or ovabead facilities owned or Ieasad by AT&T.

1

1.5 Fiber#S is a w c l v e (12) coullt fiber s h e w i n g fiom Conn=tioa Paint #4 ro Connection Point #5 ac the Sanm Cnrz O f f a of Education building in CapjtoJa, C a 1 i f b m . i ~ bur which has not been placed into s z i c c and is losled in or on substructures or overbead fscilities owned or lcascd by Charter.

2. Ownershie, Ownership of tb cable television distriiution plant af€ected bythis Agrcerncnt is as follows:

2.1 Cbartcr is the owner of Fibers #I, 2, and 5, wirh title fret and clear of my encumbrances other than those p I a d &~?wn by its own BCCE or omissions or those of parties o h m than '

AT&T and/or its filiares. - 22 ATstT is the owner o f Fibers 3 and 6 with title frze and clcar of any cncurnbmces 0th~

than those plnced thereom by its own acts or missions or those of parties orber tha4 Charter and/or its d3iiiater

2.3 Upon completion of construtio~ any additimd facilities h a t are placed in or an one patty's substrumre or overhead facilitics will be owned by that p q with *?e fmz and c l m of any encumbmces ocher than those placed thereon by i t s own ncts or omissions or th~se of parties other than fhe ocher party hereto and/or irs afiiliatas.

2.4 To the extent that acts or omissions of eithor party prior ro the effective &KC of this Ageeutenr may cause the other to h v e Less thsa the o m h i p interest referred to above, OIC psrry whose RCS or omissions cawed tha cloud upon title shnll -trike such cornmcrcially reasonable zcticns as ere necessary to rcsolvc rbc imc and clear thc tirlc. . -

2A. paymcnr. Chaner shall pay to AT&T ths amount ofS200,OOO upon the execrrtioa ofthis . Agreement (in 2002) by wire mnsfer to such account as Af&T may speify- Said p a p c a t shall

'L-0

Agreement by Charccr-d upon such failure AT&T Broadband may immediarrly terminate xhis Ageement andfor pursue any remedies for breach, notwithstanding sections 7.3 and 7.2 hereto. -

3, Lcasc of F i b e r e t i c Circuits. The panjes p t to csch other fie following "Leasehold Rights'' in cable television distribution plant

3.1 Charm grants to A T W a fully prcpaid lease to use 2 dcsignatcd fibor5 in Fiber #1 or Fiber #2 (or 1 fiber in each ofzhern), until midnight on December 3 1,2008.

3.2 Upon receipt of the p a y m a r specified in 2 4 , AT&T pant5 to Charter a fully prepaid lease to use the 48 fibers in Fiber X3, until midnight on December 31,2008.

3.3 Upon receipt of *c paymmr specified in U4 AT&T grant5 to CharrCr B filly Prgaid lcase to w e the 52 fibers in Fiber W, mril midnight on December 3 I, 200s.

3.4 Charror grams 10 AT&T 8 5111~ prepaid lease to use 2 designaIed fibers in Fiber #5, until midnieht on December 3 1,2008.

2

. .

' P I - .

4. Mainhanm md Usp - o f P C u;kd Cublz Tele&on Distribution Plant.

.4.1 ' Ewh party shd discharge all rcsponsrbilities of ownership associated w k tbe Fiber Sheaths which it owns, including, wY;thout limitsh'on thoreto, maintonme, ~ p e , undtrg-o~dhg, paymmt of govcmmentnIly irnposcd taxes and fees jssoci#cd with r e d or personn 1 property, payme? of pole attachment fees, md payment of conduit use fees, except as follows: (a) ifany portian of Fibers 3 end 4 thzu are inicizlly louted above ground ae required to be placed mdergound, or odmvise required t o be relocared at aoy timc during tbe lease heared hereby, Cbaner shall bear the cogt of labor and maEerials associated with the oonduit installed thak is used or reserved for use by Charter and shall bear a pro ran share of the mnching costs and any o thk casts of such relocario~~, based upon t he proportion of the conduit installed tld is used ar rcscrvcd for use by Ch-, or, slmmtively, may such time renounce and forfeit all further.fighb to fhc use of such Fibers (for purposes of the Eoregoing conduir is "used" by Charter ifit is occvpiai by ficiliucs usod by Chatter and is "mewed for use" by Charta I f Chanu

AT&T shall maintain l f ie Fibers leased to Chm and repair my isolated damaga t o such Fiber;, and in r a m , Chm shall reimburse AT&T for its actual cost;, including ovcrhed, for such maintenance and repair, and (c) Charmr shall pay t o AT&T 50% of all pole rental corn related tu Fibers 3 and 4 and all conduit reural charges that are relatad to Fibem 3 and 4 (uhich shall include the f u l l rental charge for conduit that is not alia utlltzed byATgc(T for puposez orher than the placcmcnt, rcplacemeat, or maintcnancr of Fibers 3 and 4 and a proram &arc of the renal charge for conduit that is utilized by AT&T f i r other purposes). Vu'athing in r h i s section shall prevent &a partlos from cntorlag - into some ather mutually acouptable'agreements for the maintenance of m e mother's . Wties,Norwirhsrznding the foregoing, if a substan& p;ut of aay Fibor is dsmaged by earthquake or other farce majeore, neitbtr perty shall bnve any obligation t o the other to X& such fsillties, but each shaU discuss recovery plans with the othcr to ths oxtint . reasonably possibIe i n order that any rpcovuy cfforts tbat are undertaken m3y be coordinated and cosre ~ h m d on such besis as the parties then detrrmine to be resron3ble.

' has the right t~ plmc Iacilitia to be used by ChYtcr in such conduit in rhe future); @)

4.2 Each partr shall be responsibla for the purcbese, maintenance and rep& d any and all ele&fcs associated wirh use of its b e h o l d Righrr in the cable tole~isiaa . didbutim plant o f b e other. All such equipmmt shall conforlB t o Usual and acctprcd equipment m d s r d s and cnginccringpractices in the cable television induw.

4.3 The p d e s shall designatc and mark &c f b a s affected bythe Laehold frights in any muruaJjy accepted manner, which conform to usual a d m e p t e d en,ginming pnctico in the'cable television industry.

4.4 lnreroonnection andor splicing of fiber aikcted by the harehold Ri&s rhdl be dono by . rhe paties in a mutually acceptable manner, whIch conforms to usual and actepted

enejnccrinp pnctica in tkc cable teelrvision induray, and/or by a mutually au;eprablc wntractarthaf shall bc held to those same Btandards.

4.5 Each party ohall ;m&tain in good r q a i r the fiber-optjc circuits leased ta t h e other In accordance with: (1) all appriaable pvomncntally imposed standards; (2) all applicablr requirements af the owner of aU s u p p o a pol& and/or conduir; and (3) the same srandards (incbding'without Limitation thereto, standards of rcspome h e , temporvy

. and pmanmt repair) IU it applies to its own cable television distribution p h t which is active md serving customers in California. Tba parties shall moperate in

5 . Cabltcsrtinr of ABC7.

5.1 For 30 long as AT&T provides cablccssts, presently known as ABC7, o f b c . Fogramming distrjbutcd by the AE3C rclovisiou vetwork within its b c h i s e d areas '

locbtsd within the Moutmey County D M 4 and thae is no broadcast rclcvlsion -on affihted with ABC that is broad- m thoso fkshisod EUC+ Charter agrees to include, in its cablezasts distributed to areas ynred out of rrS W&onville hub ske, &e

' signal prmvidzd 'by AT&T that inoludes such pgmnming. as well as other conrnnt and commercials inserted by ATQT in complimct with its ag?c&neat with ABC, C h a r m ' s obligation to include such programming shall be conditioned an (a) A'I-&T% ability to deliver such sjgpal TO suoh 1ocation.i as male it reasonably tccbnically feasible far Charrrr to mdude the progcammini in its cablbcasts, and @) for so long as N& carriage is com@ent with Federal Communloatipns Commission rules, regulldoas and ardcp,. Charter shall coopaatc with AT&T and make a good faith a&rt to include such programming wherever possibIe within other a r e s located within tha Montemy DMA.

. . 6. Lbi.tatioos on Leatohold R i e h r ~ .

6.1 Except as pmvidcd below, neifher party sbdl mske aay use of the Leasehold Rights grmted to it under this Agreement other than for the pmvision of services uader Title VI

communications services. I ' .sf the Communimions Act of 1934, as amended. commonly r e f m d to as cable

6.2 Prior to making any use of t h e Leasehold Rights grankd to it under this AmeInent . whlcb dcxs not fall under the provisions of Title VI of the Cor~munIcations Act of 1934, as mended, a shall o h i n an opinion of quallfled legal cowsel that such use will - not provldc goad fiilh cause for.

6.2.1 Any federal, State, or load goverumental agcucy to consider the othar r;ytY fa this Agreement t o ba a public utility subject x, i s jurlsdictioa;

6.2.2 Any fedcral, me, or local governmentaJ agency to consfdm thc crther party 20 -

thir AgreernerR to bc a cornon carrier subjcot b Its jurisdicfion;

6.2.3 T h e California Public Udity Commission to consider the o t h a party to rhiF Ageemnu to be a replated telephone company subject to its jurisdiction,

6.2.4 The California Board of Equalidon to consider any of the cable television distribution plant which is the subject of this A_emenr to be property owned OT used by J. Egdatcd telephone company and thus mbject to its jurisdicuoa, .%such determinsdon would adversely affect the other party; or

6.2.5 ' ~ n y applicable looel fiaochising authority ID consider thc othcr party to this . Ageemant to be our. of complbnca with its gowmixg f r a n c h i s e agreement-or relatcd enabling ordiinnncc.

6.3.1 Immcdiaely consult with cach other and with their resp&ve legal come1 undar E ja& d&rr agreemenq and

63 .2 Take such steps BS may be necessay to minimize the possibility of any of tbe claimad judsdictional aurborities stated in pmgapbs.6.2.1 thruugb 6.2.4 b e k suwe-~sfulty asstrted, or of a party CO this A m e n t b e found to be om of cumpliancc with its governing ffandrise agmxnent (rr the related enabling ordinance. Esuch steps are u~z~uccas.sful in avoiding one or more of t h e consequences onurnerntad in 6.2,above; then the use of the Leasehold Ri@bts that has given dse to such coosequences must: coasi.

7.2 Lf either party believos the other KO be in breach ofthis Agreement and such breach o q o t ba rrsolved informally, the aggzievod pany shall pswidc notice to the other p w , in the m m c r required by paragaph 11, of tbr naturc afrhe alleged breach. If the

.alleged breach has not bem cured or otherwise resdvad within t h i r t y days of thc presumed receipt of such natica, than tbc ag$tved party may proceed a5 provided below.

naney damages may include incidental damages if and as proved, but not consequential damages. In m y such action the succcssful party sbalf be catitled fn =cover from the other ~ P a r c y expcascs and reasonable m m e y s ’ fses incurred in connection with such ection

7.4 Neither pany shall bs liable to tbo other for consegumtiaI damages, including without Iimicarion damxges for 10s of USB of the leased Fiber.

7.5 The arc no intcTIdcd third party beaeficixies afthk Aptcmcnt, and thc tcrms ofthis Agrctment m2y mt be enforced by anyone othcr thao the parties to it

8-1 Tkis apeement may not be assigned, rights arising undm this Agrement may not bc a s s i g n e d , and duties arisingunderrfiis Agmznent m y not be delegated except as providod below, and my attempted assignment ar delegation in violation ofthe provisions below shall be void

8.2 AT&T may assign, as it sees fiq the right to receive the payment required KO be made by Chsrter under the provisions of w p h 4, and shall promptly provide ra Charter notice in accordance with paragraph 1 1 of any such rsssigmmt.

8.4 Either party shall bc obligated to apee to e nomtion requested by the other if the new ’ .

party to be substituted: (1) is M entity cantrolled by or in c ~ ~ t r o l of the requesting p q , z- pz (2) is an entity which is directly or indifialy under commoD ownership arid cantroI

t ho requesting party which are klatcd to w i n g thc geographic are- afYected by the requesting party’s rights and obligdons -der this Agreement; (4) is an cntiv which holds (or which upon camplction of oontemponrneous related transadous will hotd) a valid cablc tclcvision fnuzetrise to Serve the geographic areas afcctd by the requesting p e ’ s nghts and obliptions undcr this Agrccmcnt

e.. with-th~aqusst ingp~,s_r (3).i5 -- a n e a d ~ ~ ~ ~ n f f a l ~ o a ~ ~ ~ ~ ~ f ~ ~ ~ s ~ ~ f *

9. mi Agretmenr may be ameaded only by ewriting signed and dated by duly authorized representatives of both parties.

10. ~ J Q Waiycr. The f,+Iure of either of tbc partics to this A~eement To insist upon saict perfokmance of any of the provisions of this Aprnent shall not be c o r n e d 85 a waiver of any subsequent breach of the same or similar nature.

1 1. Notices. All notices required by this Agement must be in writing dolivcrcd by U.S. P o d scrvice, ponage prepaid rtod return dpt rcqucstcd, of by a national reoopized overnight delivery senice. Notice s h a l l bc prcsumed received as of the date of delivery as evidenced by the return receipr or delivery service records. Notices sml be addrcssed as follows, which addresses may be changed by the receiving p q by notice as pmvidcd rtbow.

charter ColTm~Cat ions 8120 Camino Airoyp . QiLoy, CA 95020 A m t i o n : Gmeml Mana.ger

W& a copy 10: Steve Holmes 203 SEParkPlazaDdve Vancouver, WA 98684

AT&? Broadband Am- Dimmr, Technical Opcmtlms 1900 S. 10' Street San JoQ~, CA 95112

With a copy to:

Legal Deparrment P:O. Bax 5147 (far U.S. Postal Service) 12647 PJcosu Blvd., Suite 200 (for ovcmight delivery)

' San Ramm, GA 94.583

12. G ~ v ~ . This AgcemmtskalI be e n f o r d under and consrmad in accordancewith t h e

laws ofthe SUE of California.

United Cabla Tdcvl9lon af S h t e C r p h c . h

By:

,

. .. Y)

. .

By:

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