Before the CALIFORNIA PUBLIC UTILITIES COMMISSION In the matter of Joint Application of Charter Communi- cations, Inc.; Charter Fiberlink CACCO, LLC (U6878C); Time Warner Cable Inc.; Time Warner Cable Information Services (California), LLC (U6874C); Advance/ Newhouse Partnership; Bright House Networks, LLC; and Bright House Networks Information Services (California), LLC (U6955C) Pursuant to California Public Application 15-07-009 Utilities Code Section 854 for Expedited Approval of the Transfer of Control of both Time Warner Cable Information Services (California), LLC (U6874C) and Bright House Networks Information Services (California), LLC (U6955C) to Charter Communications, Inc., and for Expedited Approval of a pro forma transfer of control of Charter Fiberlink CA-CCO, LLC (U6878C). Reply Testimony of LEE L. SELWYN on behalf of the Office of Ratepayer Advocates of the California Public Utilities Commission January 15, 2016 REDACTED FOR PUBLIC INSPECTION REPLY TESTIMONY OF LEE L. SELWYN TABLE OF CONTENTS EXECUTIVE SUMMARY vii I. INTRODUCTION AND SUMMARY 1 Qualifications, background and experience 1 Assignment 4 Summary and Recommendation 5 II. GENERAL DESCRIPTION OF THE TRANSACTION AND SHAREHOLDER AND CUSTOMER IMPACTS 12 The Transaction 12 The incurrence of additional debt to finance the transaction will result in a more highly leveraged post-merger entity. 13 The increased debt service payment obligations to which New Charter will be subject may actually exceed the net increase in annual Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) that the Joint Applicants attribute to the transaction. 19 One component of the increase in EBITDA that the Joint Applicants anticipate may be the result of post-merger price increases for services that confront little or no effective competition. 20 III. THE JOINT APPLICANTS’ “PUBLIC INTEREST” CLAIMS 24 The Joint Applicants seek to portray their proposed merger as producing economies of scale and other efficiency gains as a central element of the transaction’s purported “public interest” benefit. 24 New Charter’s purported increased incentive to invest in new and upgraded technology and services. 27 ii ECONOMICS AND REDACTED FOR PUBLIC INSPECTION TECHNOLOGY, INC. TABLE OF CONTENTS (continued) The possibility that increased scale “increases the incentive and ability of the firm to partner with innovators in vertically related markets,” even if true, is not necessarily a net public benefit. 44 The Joint Applicants have offered no substantive facts or analysis to support their assertions that the proposed merger will result in material decreases in the post-merger firm’s marginal costs. 53 There is compelling quantitative evidence confirming that scale-driven cost effects are not significant, and that the overall costs of operating a large geographically dispersed multi-system cable company (“MSO”) are directly proportional to the number of customers being served. 54 Reductions in per-subscriber programming costs that might be experienced by a post-merger New Charter are not beneficial on an overall basis to state and local economies or to the communities in the areas being served. 69 Empirical evidence demonstrates that New Charter will likely experience significant diseconomies of scale with respect to its other, non-programming operating costs. 72 There is no basis upon which to expect that any post-merger scale- or merger-driven efficiency gains will be flowed through to customers. 73 Contrary to the Joint Applicants’ contention, the absence of effective competition for high-speed 25/3 broadband within New Charter’s Southern California operating areas provides it with both the ability and the incentive to recover MVPD revenues losses to OVDs by increasing its broadband prices. 75 The proposed merger will produce no improvement in the availability of high-speed broadband access throughout the Joint Applicants’ California franchise areas. 92 The Joint Applicants have failed to identify any bona fide public interest benefit that can be legitimately attributed to the proposed merger. 95 IV. THE TRANSACTION’S POTENTIAL IMPACT UPON COMPETITION FOR BROADBAND AND LOCAL VOICE SERVICES 96 In the absence of effective competition or a regulatory requirement to do so, even if consequential economies of scale were present there is no basis to expect that New Charter will flow any of those savings through to its largely captive customers. 96 The post-merger New Charter operating footprint 98 iii ECONOMICS AND REDACTED FOR PUBLIC INSPECTION TECHNOLOGY, INC. TABLE OF CONTENTS (continued) The relevant geographic market applicable to this transaction consists of the ten Southern California counties that constitute the Joint Applicants’ primary service area in the state. 99 Competition for broadband services exists in only a small portion of the combined post- merger New Charter California operating areas. 109 The Joint Applicants face no competition at the 25 Mbps speed level in the majority of the areas they serve. 116 V. THE POST-MERGER SOUTHERN CALIFORNIA BROADBAND MARKET STRUCTURE 125 A post-merger New Charter will exercise overwhelming dominance of the relevant Southern California high-speed residential broadband access market. 125 Even in those areas in which New Charter will confront a single (ILEC) broadband competitor, there is no reason to expect that a broadband market limited to two service providers will function in a manner that produces a competitive outcome for consumers. 130 Charter’s practice of providing putatively “free” cable modems to its broadband customers is anticompetitive and reduces consumer choice. 149 The presence of mandatory arbitration/class action waiver provisions in the Joint Applicants' existing consumer contracts is yet another indication of the lack of competition in the marketplace for cable TV, broadband Internet access, and voice telephone services. 155 VI. CONCLUSION 162 The Joint Applicants have failed to identify any substantive public benefits that would result from their proposed merger, and such minimal benefits as might result are overwhelmed by the increase in overall concentration and the diminution of competition in the relevant Southern California market. 162 VERIFICATION 168 Attachments 1 Statement of Qualifications iv ECONOMICS AND TECHNOLOGY, INC. TABLE OF CONTENTS (continued) 2 “Arbitration Everywhere, Stacking the Deck of Justice,” The New York Times, October 31, 2015; “In Arbitration, a Privatization of the Justice System,” The New York Times, November 1, 2015. 3 Glossary of Acronyms Used in this Report Tables and Figures Table 1: Effect of the Proposed Transaction upon New Charter’s Leverage Financing 14 Table 2: Effect of the Proposed Transaction upon TWC’s Leverage Financing 15 Table 3: Total Pre-merger vs. Post-merger Debt 16 Table 4: Components of the $1.7-billion Projected Increase in EBITDA 22 Table 5: Analysis of Pre- and Post-merger “Spectrum Guide” Investment 30 Table 6: Annual Companywide Spending on Research and Development 38 Table 7: Sample OVD Services and Monthly Subscription Prices 81 Table 8: Example of a Tiered Usage Block Broadband Pricing Structure – Rogers Cable (Canada) 86 Table 9: Current Average Revenue per Unit (“ARPU”) for Each Service Category 90 Table 10 Households in Joint Applicants’ Franchise Areas Where 25/3 Broadband Is Currently Available 93 Table 11: Time Warner Cable Los Angeles Area Broadband Prices – 2009-2015 98 Table 12: Estimate of New Charter Broadband Market Share in Los Angeles and Nationwide 103 Table 13: Percentage of Southern California Households with Access to Broadband Passed by Joint Applicants 108 Table 14: Census Blocks Passed by Pre-transaction TWC, Charter and Bright House at Each Download Speed – Southern California 117 v ECONOMICS AND REDACTED FOR PUBLIC INSPECTION TECHNOLOGY, INC. TABLE OF CONTENTS (continued) Table 15: Census Blocks and Households Passed by Pre-transaction TWC and by Post-transaction New Charter at Each Download Speed – Southern California 118 Table 16: Census Blocks and Households Passed by Pre-transaction TWC and by at Least One Competing Provider at Each Download Speed – Southern California 119 Table 17: Census Blocks and Households Passed by Pre-transaction Charter and by at Least One Competing Provider at Each Download Speed – Southern California 121 Table 18: Census Blocks and Households Passed by Pre-transaction Bright House and by at Least One Competing Provider at Each Download Speed – Southern California 122 Table 19: Census Blocks and Households Passed by Post-merger New Charter and by at Least One Competing Provider at Each Download Speed – Southern California 123 Table 20: Competitive Choices Available to Households Passed by Post-merger New Charter at 10/1 and 25/3 Broadband Speed Tiers – Southern California 125 Table 21: Competitive Broadband Services Available from California ILECs at 10 and 25 Mbps Download Speeds 127 Table 22: Wireless HHIs for California Economic Areas – 2011-2013 136 Table 18: Weighted Average Herfindahl-hirschman Index (HHI) for the 25 Mbps Download/3 Mpbs Upload Broadband Access Market Within the Southern California Service Areas 142 Table 24: Weighted Average Herfindahl-hirschman Index (HHI) for the 10 Mbps Download/1 Mpbs Upload Broadband Access Market Within the Southern California Service Areas 142 Table 25: Sample Cable Modem and Wireless Gateway Purchase Prices 150 Figure 1: Scatter Plot and Regression Trend Line: Cable MSO Employees vs. Primary Service Units 60 vi ECONOMICS AND REDACTED FOR PUBLIC