Ownership Rules Might Vex AT&T

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Washington -- With its pending acquisition of
Tele-Communications Inc., AT&T Corp could be inheriting a regulatory headache stemming
from uncertainty about how tightly the Federal Communications Commission will enforce
cable-system-ownership rules.

Under FCC rules, a cable operator and its affiliates are
barred from reaching more than 30 percent of U.S. households, or roughly 30 million homes.

In December, TCI quietly disclosed in an FCC filing that it
now passes 39 million homes -- a figure that includes affiliates' systems in which TCI
owns equity stakes.

"They are way over the top," said William
Johnson, deputy chief of the FCC's Cable Services Bureau.

The FCC raised the ownership issue Feb. 18, in a
little-noticed footnote to its 77-page order approving AT&T's $48 billion purchase of
TCI. Yet questions regarding whether TCI is violating the FCC's horizontal-ownership rules
were not central to the agency's review of the merger.

"Nobody raised the issue," a TCI source said.

Conceivably, the day may come when the FCC will order TCI
to divest cable properties as a method of coming into compliance with its rules. Yet it is
equally conceivable that no action will be taken anytime soon, if ever.

Many factors, some of them dating back to 1993, are
complicating the situation.

First, the FCC's 30 percent rule never took effect because
a federal court held that the provision of the 1992 Cable Act that authorized the rule was
unconstitutional. The case has been on appeal for six years, and its resumption is not on
the court's docket.

Second, the FCC is considering raising the cap to 35
percent or 40 percent, at AT&T's request. It is also considering shifting the
measurement from a homes-passed test to a subscribers-served test to better reflect one
company's market power.

It's not clear whether the mathematics under a
subscribers-served test would prevent AT&T from having to divest cable properties.

Third, the FCC is considering tightening its
ownership-attribution rules -- a review that was triggered by TCI's decision to form
numerous joint ventures and partnerships with other cable operators over the past two
years.

Wes Heppler, a cable attorney based here, who helped TCI to
navigate the merger through the FCC, said the 39 million-homes-passed figure submitted by
TCI was based on the broadest reading possible of FCC ownership-and-attribution rules.

Heppler added that it was possible to interpret the rules
in such a way as to establish that TCI systems actually pass fewer than 30 percent of
households.

"TCI has literally taken the most conservative
approach," said Heppler, a partner with Cole, Raywid & Braverman.

The attribution rules are a source of concern to other
cable operators, too.

MediaOne Group Inc., for example, said the attribution
rules were unfair, citing its 25.2 percent investment in Time Warner Entertainment. Under
FCC rules, MediaOne's subscriber total must include not only the 4.9 million subscribers
that it directly serves, but also TWE's 9.6 million subscribers.

MediaOne complained that both it and Time Warner Cable
should not be treated as having full ownership and control over 14.5 million subscribers.

"As a result of these anomalous attribution rules,
MediaOne finds itself bumping up against the artificial limit of the 30 percent
horizontal-ownership cap," MediaOne said in an FCC filing in August. "Yet
MediaOne directly serves only 8 percent of the nation's cable customers."

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