HomeMy WebLinkAbout6.d. Approval of Charter cable television audit settlement and franchise extension ROSEMOUNTEXECUTIVE SUMMARY
CITY COUNCIL
City Council Regular Meeting: July 15, 2014
AGENDA ITEM: Approval of Charter cable television audit AGENDA SECTION:
settlement and franchise extension
LAN�r N 7-
PREPARED BY: Alan Cox, Communications
Coordinator/Cable Commission AGENDA NO. �
Alternate
ATTACHMENTS: Proposed resolution and agreement, APPROVED BY:
auditor's summary, company's response
RECOMMENDED ACTION: Approve resolution to authorize a settlement with Charter
of claims that arose from an audit of funds collected from Rosemount subscribers
Background
The Apple Valley-Farmington-Rosemount Cable Commission hired the accounting firm Moss &Barnett in
early 2013 to review payments made by Charter Communications of funds it collected from its cable television
subscribers. The initial audit covered payments collected in 2009,2010,and 2011. The funds were to be
collected from Rosemount subscribers to Charter's video service for both the franchise fee and the PEG
(Public, Educational and Governmental programming) fees required under the franchise.
The audit summary was submitted in March,indicating Charter may owe the City of Rosemount nearly$5,000.
Charter responded in May that it was willing to pay$778. At the same time, the Commission's attorney
entered discussions with Charter's legal representative.
Last month, the attorneys presented a settlement agreement to the Commission. The agreement requires
Charter to pay the City of Rosemount$3,392.12, covering the three years of the audit plus the period from
2012 through the end of the franchise. The agreement also extends Charter's franchise until December 31,
2014,in hopes that the Commission and Charter will be able to complete negotiations for a new franchise
agreement. The Commission's attorney recommended approval of the settlement.
Because the audit was funded by the Commission,it has requested each city to forward any payments by
Charter to the Commission.
CITY OF ROSEMOUNT
DAKOTA COUNTY, MINNESOTA
RESOLUTION 2014 -
APPROVING SETTLEMENT AND RELEASE AGREEMENT FOR CHARTER
COMMUNICATIONS PAYMENTS TO CITY AND FRANCHISE EXTENSION
WHEREAS, the Apple Valley-Farmington-Rosemount Cable Commission ("Commission")
obtained an audit of franchise and programming fees owed to each city by Charter Cable Partners,
LLC,1/k/a Charter Communications ("Charter"),which operates a Cable System to provide Cable
Service within the City of Rosemount ("City") pursuant to a Franchise Agreement with the City
("Franchise");
WHEREAS, the Attorney for the Commission has reviewed the audit results and Charter's
responses, and negotiated a settlement;and
WHEREAS, the agreement covers payments for the period from 2009 through 2014, and includes
an extension through December 31,2014, of the franchise granted by the City to Charter;
THEREFORE, the City Council authorizes the Mayor and City Clerk of Rosemount to sign the
Settlement and Release Agreement
ADOPTED this 15`'' day of July by the City Council of the City of Rosemount.
William H. Droste,Mayor
ATTEST:
Clarissa Hadler, City Clerk
®®®®®
Moss & Barnett
A Professional Association
March 26, 2014
Mr. Mark T. Moore
Cable Coordinator
Apple Valley, Farmington & Rosemount Cable Commission
7100 147th Street West
St. Paul, MN 55124-7519
Re: Franchise Fee and PEG Fee Desk Report (the"Report's for the City of Rosemount,
Minnesota for the Years Ended December 31, 2009, 2010 and 2011
Our File No. 53482.1
Dear Mr. Moore:
We have completed this Franchise Fee and PEG Fee Desk Report on the Charter
Communications ("Charter's franchise fee and PEG fee revenue for the City of Rosemount,
Minnesota (the "City', for the years ended December 31, 2009, 2010 and 2011 (the"Desk
Review Period'. The objective of our Report was to analyze Charter's franchise fee gross
revenue and the franchise fees and PEG fees paid by Charter to the City as required under the
Cable Communications Ordinance by and between the City and Marcus Cable Partners, L.L.C.
(the predecessor to Charter) adopted on or about April 20, 1999 under City Ordinance No.
X1.21 (the "Ordinance'. This information is being furnished to the City solely for the City's use
and is subject to a Non-Disclosure Agreement dated effective as of January 24, 2013 by and
between Charter Cable Partners, LLC, an indirect subsidiary of Charter Communications, Inc.,
and Moss & Barnett, P.A., as an agent for the City. This Report should not be disseminated to
anyone other than the City without Charter's consent.
The activities performed in preparation of our Report included the following:
1. Analyze and review the Ordinance.
2. Confirm the receipt of and timeliness of the franchise fee and PEG fee payments
by Charter to the City.
3. Review Charter's franchise fee and PEG fee calculation worksheets for the City for
the Desk Review Period.
4. Analyze Charter's allocations of nonsubscriber revenue to the City for the Desk
Review Period.
5. Review Charter Communications, Inc.'s Form 10-K for the period ended
December 31, 2011, which included the Charter Communications, Inc. and
Subsidiaries Consolidated Balance Sheets as of December 31, 2010 and 2011, and
4800 WELLS FARGO CFNTFR i 90 South Seventh Street Minneapolis, MN 55402-4129
P:612 II77-5000 F:612-II77-5999 W:moss-birnett.com
Mr. Mark T. Moore ®®O®®
March 26, 2014 Moss & Barnett
Page 2
the Consolidated Statements of Operations, Changes in Shareholders' Equity
(Deficit) and Cash Flows for the years ending December 31, 2011, 2010, and 2009
as filed with the Securities and Exchange Commission on February 27, 2012.
6. Correspond with Charter personnel regarding the allocations, accounting
treatment, and financial information associated with the franchise fee gross
revenues earned by Charter and the franchise fees and PEG fees remitted to the
City.
7. Review a sample of Charter's subscriber invoices for the Desk Review Period,
subject to the limitations as specifically noted herein.
The documents used in preparation of our Report were limited to the following:
1. The Ordinance.
2. Charter's franchise fee revenue worksheets titled "Franchise Fee Proforma Reports"
for the City for the Desk Review Period.
3. Charter's PEG fee worksheets titled "Franchise Grants — 2256.001"for the City for
the Desk Review Period.
4. Charter Communications, Inc.'s Form 10-K for the period ended December 31,
2011.
5. Charter's"Summary of Revenue 3"franchise fee calculation worksheets for the
Desk Review Period.
6. Charter's Franchise Fee and PEG Fee information and payment checks for the Desk
Review Period.
7. A sample of a limited number of Charter's subscriber invoices for the Desk Review
Period.
In preparation of this Report, we have not reviewed any of the accounting source documents
including billing invoices to customers, deposit slips, copies of payments, copies of credit card
payments, debit memos, credit memos specifically writing off accounts receivable,
nonsubscriber revenue source documents, or any other source documents specifically received
by or exchanged between Charter and the customers of Charter located in the City subject to
the Ordinance or other individuals or entities responsible for the generation of revenue by
Charter with respect to the franchise with the City. We acknowledge that we have relied
exclusively on the information provided by Charter and, to that extent, do not
consider this Report to rise to the level of a review or audit under generally
accepted accounting principles or any other accounting standards.
Mr. Mark T. Moore ®®®®®
March 26, 2014 Moss & Barnett
Page 3
FINDINGS
As a result of our analysis of Charter's revenue generated by the operation of the cable system
in the City and the franchise fees and PEG fees paid to the City, we have made and are
reporting the following Findings with respect to Charter under the Ordinance within the limited
scope of our analysis in this Report. Based upon the statements in the preceding paragraph
and the scope of our Report, we believe the information in this Report could be subject to
additional adjustments as discussed below in Findings #3 and #4 and may not be fully
indicative of the actual franchise fees and PEG fees payable by Charter to the City or reflect the
actual gross revenues of Charter earned by the operation of the cable system in the City in the
period covered by this Report.
1. Miscellaneous Franchise Fee Revenue. With respect to the Franchise Fee, Section 7.3(a)
of the Ordinance provides that in consideration of the grant of the franchise"During the
term of the Franchise, Grantee shall pay to the City a Franchise Fee in an annual
amount equal to five percent (5%) of its Gross Revenues."
Section 1.2(m) of the Ordinance defines Gross Revenues' as:
"Gross Revenues" means all revenue received directly or indirectly by the
Grantee, its affiliates, subsidiaries, parent, or person in which Grantee has
financial interest of five percent (5%) or more, from the operation of its System,
including but not limited to Cable Service fees, interest, Installation and
reconnection fees, upgrade and downgrade fees, advertising revenue, Franchise
Fee receipts, revenues generated by sales on home shopping channel(s), leased
channel fees, Converter rental fees, Lockout Device fees or fees for any other
Cable Services provided via the System. The term Gross Revenues shall not
include bad debt, or any taxes on services furnished by Grantee which are
imposed by any municipality, state, or other governmental unit and collected by
Grantee for such governmental unit.
The scope of gross revenues' is all encompassing and includes all revenue from the
cable subscribers in the City, including programming, installation, late fees and all other
such receipts, as well as revenue generated by Charter from advertising, home shopping
channels, sale-to-customer based programs, bill stuffer/insert revenue and all other
activities related to the operation of the cable system in the City. Gross Revenues
include amounts collected as franchise fees and PEG fees, and other miscellaneous
revenue derived as a result of the franchise.
In our review of Charter's `Franchise Fee Proforma Reports'that contain a list of
revenue, by account, we noted that Charter failed to report revenue from the following
accounts in its franchise fee calculation worksheets during the Desk Review Period:
• 001.4420 — Other;
Mr. Mark T. Moore ®®®®®
March 26, 2014 Moss & Barnett
Page 4
• 001.4420.0001 — Other NSF Check Charges;
• 001.4420.0002 — Other Collection Fees;
• 001.4583 — Franchise Grant Passthru Rev.; and
• 001.4583.0001 — CB Franchise Grant.
We specifically asked Charter why these accounts were not included in its franchise fee
calculation. Charter described the accounts and why these accounts were not included
in its franchise fee calculations as follows:
• Account No. 001.4420 — Other. According to Charter, "The revenue from this account is
from the sale of equipment that a subscriber can otherwise purchase. The sale of
equipment that is available for purchase at a retail outlet is not a cable service provided
over a cable system. Ownership and operation of a cable system is not a precondition
for selling equipment that is also available at retail to subscribers. Further, DBS
providers do not pay franchise fees on their provision of MVPD services or on the sale of
equipment to receive their services. Accordingly, we have excluded revenues from these
sales from our gross revenue calculations."Charter's position is that revenue from such
equipment sales is not reasonably attributable to the sale or exchange of cable services
as defined in the Ordinance. The definition of Gross Revenues in the Ordinance includes
all revenue received from the operation of the system and does not exclude cable
equipment that is otherwise available at retail. Based upon our review of the Franchise
Fee Proforma Reports, the additional revenue in this account in 2009 was $8,439.31, In
2010 was $6,138.36 and in 2011 was $3,665.35.
• Account No. 001.4420.0001 — Other NSF Check Charges. Charter states that"The
revenues from returned check fees have been excluded from franchise fee payments
because the fees merely recover the cost of a cable operator's processing of a
customer's non-payment for services. This fee is not a monthly fee and it is not derived
from the operation of the cable system in the City to provide cable services, as required
by the franchise and federal law. Banks, credit card companies and many other
merchants who do not provide cable services have similar fees to recover the cost of
non-payment."Charter collects this revenue solely as a result of its provision of cable
services and this revenue is Gross Revenues, as defined in the Ordinance. The amount
of revenue in this account in 2011 was $1,500.00.
• Account No. 001.4420.0002 — Other Collection Fees. According to Charter, "These fees
are recovered by our field technicians when a customer chooses to continue service
instead of disconnecting."Charter has acknowledged that these fees are includable in
Gross Revenues and are subject to the franchise fee. In 2011, the amount of revenue in
this account was $543.94.
• Account No. 001.4583 — Franchise Passthru Rev. and Account No. 001.4583.0001 —CB
Franchise Grant. According to Charter, these fees represent PEG fees and are not
included in the franchise fee calculation. The definition of Gross Revenues as found in
Mr. Mark T. Moore
March 26, 2014 Moss & Barnett
Page 5
the Ordinance includes all gross revenues, including 'fee' revenue, collected from
subscribers in the City. These fees are not otherwise excluded in the Ordinance
definition of Gross Revenues. Based upon our review of the Franchise Fee Proforma
Reports, the additional revenue in these accounts in 2009 was $23,891.69, in 2010 was
$24,177.05, and in 2011 was $23,679.59.
Based upon the Ordinance's clear definition of Gross Revenues, the revenue in each of
these accounts is derived from the provision of cable services to subscribers in the City.
We have calculated additional franchise fees applicable to these accounts for the Desk
Review Period. In calculating the total amount of the franchise fee adjustment under
this Finding, we have based our amounts on the monthly Franchise Fee Proforma
Reports provided by Charter. Based upon this information, the additional revenue
subject to the City's franchise fee for the periods ended December 31, 2009, 2010 and
2011 were $32,331.00, $30,315.41 and $29,388.88, respectively. The exclusion of this
revenue results in an underpayment of the franchise fees payable by Charter to the City
in the amount of$1,616.55 (the five percent (5%) franchise fee rate times $32,331.00
of unreported revenue) for the year ended December 31, 2009; $1,515.77 (the five
percent (5%) franchise fee rate times $30,315.41 of unreported revenue) for the year
ended December 31, 2010; and $1,469.44 (the five percent (5%) franchise fee rate
times $29,388.88 of unreported revenue) for the year ended December 31, 2011. The
total unreported and unremitted franchise fees related to this unreported franchise fee
revenue are $4,601.76. (See attached Schedule A for the detailed calculation of these
amounts.)
2. Advertising and Home Shopping Revenue. Charter allocates advertising and home
shopping revenue to the City based upon the number of subscribers in the City as
compared to the total number of Charter subscribers in an accounting region. This
allocation method does not account for numerous assumptions or variables in the basic
cable subscriber allocation calculation, including changes in basic cable subscribers
through each period, changes in the number of basic subscribers in other franchises
throughout each period, and the impact of non-basic and extended cable services.
Charter is a national company that receives advertising revenue from many advertisers
on national, regional and local levels. This advertising revenue is difficult for the City to
trace as the revenue is derived through many outlets. The advertising and home
shopping revenue allocation method utilized by Charter appears to be reasonable and
any potential adjustments with respect to the allocation of the advertising and home
shopping revenue would likely be minimal and is outside the scope of our review.
We have specifically evaluated the advertising revenue reported by Charter based upon
the average advertising revenue per basic cable subscriber. The advertising revenue,
based upon the monthly average advertising revenue per basic cable subscriber
expected by this author based upon similar desk review reports, is within the author's
expected range. In addition, the average advertising revenue per subscriber increased
by about 11.6% between 2009 and 2010 and 5.4% between 2010 and 2011.
Mr. Mark T. Moore ®V®V*
March 26, 2014 Moss & Barnett
Page 6
We do not have a national average of home shopping channel commission revenue per
subscriber, but based upon other reports prepared by the author for other franchises,
the home shopping commissions recognized by Charter in the City is within
expectations. The home shopping revenue per basic subscriber in the City increased
between 2009 and 2010.
Since the advertising and home shopping revenues were within the average expected
ranges, we have not provided further analysis regarding the advertising and home
shopping revenue amounts.
3. Remittance/Refunds of Collected Franchise Fees. Based upon our analysis of the
franchise fees remitted to the City and the amount of franchise fees collected from
subscribers in the City, a difference between the amount of the franchise fees collected
by Charter from subscribers and the amount remitted to the City exists. For 2009,
$180,060.73 of franchise fees were collected by Charter from subscribers in the City
while only $177,275.55 of franchise fees were remitted to the City. For 2010,
$192,173.49 of franchise fees were collected by Charter from subscribers in the City
while only $189,848.97 of franchise fees were remitted to the City. For 2011,
$197,662.17 of franchise fees were collected by Charter from subscribers in the City and
only $195,298.45 of franchise fees were remitted to the City. Based upon our analysis
over the three-year Desk Review Period, Charter is over-collecting franchise fees from its
subscribers in the City. The amount of franchise fees over-collected by Charter from
subscribers in the City in the Desk Review Period was $7,473.42.
According to Charter, the difference between the franchise fees collected and remitted
to the City is regularly reviewed and the franchise fee rates on the subscriber invoices
are adjusted to account for any over- or under-collected franchise fees. As stated
above, Charter has over-collected franchise fees from subscribers in the City during each
year in the 3-year Desk Review Period. The City should confirm that such over-collected
franchise fees have been refunded to customers in the City through lower franchise fee
rates on its subscribers' invoices consistent with Charter's stated policy in 2012 and
2013. If Charter failed to refund such over-collected franchise fees to the subscribers in
2012 and 2013 (and potentially over-collected franchise fees in 2012 and 2013), the City
should demand that Charter immediately refund such over-collected franchise fees to
the subscribers in the City in 2014.
4. PEG Fees. With respect to the PEG fees, Section 6.4(a) of the Ordinance provides
"Grantee shall collect from Subscribers and quarterly pay to the City in support of PEG
operations the full amount of revenues generated by a $.25 per month (now$.50 per
month)per Subscriber fee beginning upon the Effective Date of this Franchise." As part
of this review, we requested that Charter provide us with subscriber invoices to review
whether Charter was invoicing and collecting the PEG fee from subscribers in the City.
Our review of the invoices provided by Charter showed that Charter failed to include a
PEG fee on some subscriber invoices, even though the subscribers received cable
Mr. Mark T. Moore ®®®®®
March 26, 2014 Moss & Barnett
Page 7
services. After reviewing the invoices, we requested that Charter provide us with an
explanation of why certain cable subscriber invoices did not include a PEG fee. In
response to our request, Charter noted that twenty percent (20%) of the provided
subscriber invoices were for a different franchise and should not have been provided. In
addition, Charter stated that PEG fees are not required to be collected from subscribers
in the City (this position is consistent with the Ordinance language). This Report does
not provide any verification that Charter has invoiced and collected the $0.50 per
subscriber per month PEG fee (to the extent that the customer subscribes for cable
services) or that all subscribers in the City have been treated equally and billed a PEG
fee.
Based upon the information provided by Charter, we have calculated the estimated PEG
fees by using the number of basic subscribers in the City multiplied by the $.50 per
month PEG fee. We note that this calculation does not consider the partial month
subscribers that started or terminated their cable services mid-month. The PEG fees
remitted to the City equaled $71,481.72, while the amount of PEG fees based upon the
number of subscribers in the City equals $72,163.00 for the Desk Review Period.
Furthermore, the amount of PEG fees collected by Charter from subscribers in the City
equaled $23,891.69 in 2009, $24,177.05 in 2010, and $23,679.59 in 2011. This number
exceeds the PEG fees remitted to the City by $266.61. At a minimum, these PEG fees
collected from subscribers in the City should be remitted to the City and not retained by
Charter.
As noted above, the information provided by Charter with respect to our review of the
PEG fees is incomplete and we provide no assurance as to whether the PEG fees
collected and remitted to the City accurately reflect the amounts due under the
Ordinance. Due to the time and effort that we have expended reviewing the PEG fees,
we are providing only the above information for the City's use as the City deems
necessary and appropriate.
5. Late Payment of Franchise Fees to the City. Section 7.3(b) of the Ordinance requires
that Charter pay the City the franchise fee quarterly . . . within sixty (60) days of the
end of each of Grantee's current fiscal quarters together with a report in form
reasonably acceptable to City and Grantee and which shows the basis for the
computation." Based upon the provided information, it appears that Charter has timely
remitted the franchise fees to the City, except as noted in Finding #1.
6. Bad Debt Expense. According to our review of the bad debt expense as shown on the
franchise fee worksheets, Charter deducted bad debt expenses from the gross revenue
amounts used to calculate the franchise fee for the City. Charter's position and
calculations are consistent with the definition of Gross Revenues as found in the
Ordinance. The Bad Debt percentage based on total revenue is less than one percent
(1%).
Mr. Mark T. Moore ®A®A®
March 26, 2014 Moss & Barnett
Page 8
7. Franchise Fee Rate Calculation. According to the subscriber invoices provided by
Charter, it appears that Charter is using a variable franchise fee rate of around 5.6%to
calculate the franchise fee amounts on its subscribers' invoices. As an industry practice
and allowed by Federal law, Charter, along with other cable operators, use a franchise
fee rate that is higher than the five percent (5%) franchise fee rate per the Ordinance
on its subscribers' invoices. This higher franchise fee rate takes into consideration the
non-subscriber revenue (such as advertising and home shopping revenue) generated by
the franchise (that is subject to the franchise fee). Based upon our analysis of the
franchise fees remitted to the City and discussed in Finding #3 above, Charter was
collecting franchise fees at a rate greater than is necessary during the entire Desk
Review Period.
S. Quarterly Reports. Section 7.5(a) of the Ordinance provides "Grantee shall file with the
City, at the time of payment of the Franchise Fee, a report of all Gross Revenues
certified by an officer of the Grantee." In reviewing the information provided by
Charter, it appears that Charter is providing the quarterly reports without the officer
certification as required under Section 7.5(a) of the Ordinance.
9. Other Franchise Fee Revenue. The Ordinance provides for the imposition of the
franchise fee on all revenue earned by Charter and any of its affiliates under the terms
of the Ordinance. Based upon Charter's failure to report and pay franchise fees on the
revenue items as noted above, the potential exists that Charter is not paying franchise
fees on all Gross Revenues as required under the Ordinance. Charter stated that no
affiliated or related entity generates revenue from the cable services provided to the
City. Charter claims that all other franchise fee revenue subject to the Ordinance is
being reported to the City.
10. Review Fees and Interest. The Ordinance does not include a provision for the
reimbursement of the City's costs incurred as a result of a review of the cable provider's
franchise fee and PEG fee payments and gross subscriber revenues calculations. Many
franchises provide that if a review or audit determines that the cable provider has
underpaid its franchise fees and/or PEG fees by a certain percentage, typically five
percent (5%), the cable provider has to assume and reimburse the City for all
reasonable costs and expenses related to the franchise fee and PEG fee review or audit.
In addition, many Ordinances impose interest on the late payment of the franchise fee
and PEG fee by the cable provider. A late payment effectively allows the cable provider
to defer payment of the franchise fees and PEG fees until the City demands payment for
the additional payment without any cost. This results in the loss of the time value of
money related to the franchise fees and PEG fees retained by the cable provider and not
remitted to the City on a timely basis. As part of a franchise renewal process, the City
may want to consider including these provisions in its Ordinance.
Mr. Mark T. Moore ®®®®®
March 26, 2014 Moss & Barnett
Page 9
RECOMMENDATIONS
Based upon the above Findings, we make the following recommendations:
1. Demand from Charter a payment of franchise fees as discussed in Finding #1 above in
the total amount of$4,601.76.
2. Confirm that Charter has adjusted its franchise fee collection rate on its subscriber
invoices to account for the over-collected franchise fees during the Desk Review Period.
As noted in Finding #3, Charter over-collected $7,473.42 of franchise fees from
subscribers in the Desk Review Period. This amount should have been refunded to
subscribers in 2012 and 2013 though lower franchise fee rates on its subscriber invoices.
If Charter failed to refund such over-collected franchise fees to the subscribers in 2012
and 2013 (and potentially over-collected more franchise fees in 2012 and 2013), the City
should demand that Charter immediately refund such over-collected franchise fees to
the subscribers in the City in 2014.
3. Obtain, on a quarterly basis from Charter as required in the Ordinance, a copy of
Charter's calculation of the City's franchise fees and franchise fee revenue as set forth in
Finding #8 signed by an officer of Charter.
4. Demand from Charter a payment of PEG fees for the Desk Review Period of$266.61 as
discussed in Finding #4 and seek further assurance that the proper amount of PEG fees
have been collected and remitted to the City as the City deems appropriate.
5. For the 2012 and 2013 periods, demand that Charter recalculate and remit the
appropriate amount of franchise fees and PEG fees related to Recommendations #1 and
#4. As shown in this Report, Charter is not paying franchise fees applicable to
multiple items shown on its financial information and failed to remit collected
PEG fees, which based upon this Report could represent another
approximately $3,200 of franchise fees and PEG fees payable to the City.
EXECUTIVE SUMMARY OF RECOMMENDATIONS
In summary, our recommendations are to demand that Charter (i) remit $4,601.76 of franchise
fees and any unpaid fees related to the miscellaneous franchise fee revenues in 2012 and 2013
as noted above to the City immediately; (ii) confirm that the over-collected franchise fees in the
Desk Review Period have been refunded to subscribers in 2012 and 2013 (and if such franchise
fees have not been refunded, demand an immediate refund of the over-collected franchise fees
to the subscribers in the City); and (iii) remit $266.61 of PEG fees to the City and take such
other action as the City deems appropriate to address the information in Finding #4.
Mr. Mark T. Moore ®®®®®
March 26, 2014 Moss & Barnett
Page 10
The analysis in this Franchise Fee Desk Report was performed on a limited scope and, as such,
we provide no confirmation as to any amounts, payments or the collection of any revenue or
fees made by, to, or for Charter with respect to the Ordinance. The enforcement of the
Ordinance is solely the responsibility of the City and, as such, the use of any Findings or
Recommendations in this Report is the sole responsibility of the City, and we do not and have
not sought to rectify any Findings or act on any Recommendations provided in this Report. We
do not suggest that our Report includes all information regarding the revenues earned by
Charter under the Ordinance.
This Report has been provided at the request of the City and we do not express any opinions
with respect to the information within this Report, and we are not liable for any damages for
any reason to the City, Charter or any other party with respect to this Report.
If you have any questions or would like to discuss the contents of this Report further, please do
not hesitate to contact our office.
Very truly yo
Yuri . Bernd
Attorney At Law
(612 877-5267
Ber6dtY @moss-barnett.com
YBB/mmm
Attachments
cc: Brian T. Grogan, Esq.
2472389vi
i
Schedule A
City of Rosemount
Franchise Fee Desk Report
2009 Miscellaneous Revenue
Unreported Revenue $32,331.00
Franchise Fee Rate-5%(per Ordinance) 5.00%
Unreported and Unremitted Franchise Fees $1,616.55
2010 Miscellaneous Revenue
Unreported Revenue $30,315.41
Franchise Fee Rate-5%(per Ordinance) 5.00%
Unreported and Unremitted Franchise Fees $1,515.77
2011 Miscellaneous Revenue
Unreported Revenue $29,388.88
Franchise Fee Rate-5% (per Ordinance) 5.00%
Unreported and Unremitted Franchise Fees $1,469.44
TOTAL FRANCHISE FEES $4,601.76
Charter
May 21, 2014
Via US Mail and E-Mail
Mr. Yuri B. Berndt
Moss &Barnett
4800 Wells Fargo Center
90 South Seventh Street
Minneapolis MN 55401-4129
Re: Charter Communications Franchise Fee Audit- Rosemount,Minn.
Dear Mr. Berndt:
I am in receipt of your Franchise Fee and PEG Fee Desk Report ("Desk Report")on the
franchise fees paid by Charter Cable Partners, LLC ("Charter")to the City of Rosemount
("City") for the period from January 1, 2009, to December 31, 2011 ("Audit Period"). "). I am
pleased to see that we are very close and only have a few open items to discuss, which are
addressed below and in the order presented in the Desk Report.
Miscellaneous Franchise Fee Revenue
1. Account 4420--Other. During the Audit Period, this account included revenue from
three different items -NSF check charges, the sale of equipment and fees collected by
technicians when a customer decided to reconnect services. Charter agrees that it
owes the City franchise fees on this collection revenue. Of the$18,243 of revenue in
this account, $9,681 is related to collection revenue.The remaining amounts relate to
NSF charges, addressed below, and the sale of equipment. As you know, and as we
informed you in our response dated September 18, 2013, Charter has consistently
taken the position that revenue from the sale of equipment is not derived from the
operation of the cable system. Charter agrees that it owes franchise fees of$484 for
collection fees on this account. During the Audit Period, Charter broke out NSF
charges and collection fees from the 4420 account and moved them to the accounts
indicated below.
2. Account 4420.0001 NSF Check Charges. As your Desk Report notes and our
September response explained, we disagree that NSF charges are included in the
gross revenue definition of the franchise. NSF check charges are not fees for cable
services provided on the cable system, but merely recover the cost of non-payment of
checks. This position is consistent with our other audits with you.
1
Mr. Yuri B. Berndt
City of Rosemount, MN
May 21, 2014
3. Account 4420.002. Other Collection Fees. Charter agrees with your calculation of
$543 of collection fee revenue and owes franchise fees of$27 on this account.
4. Account 4583. PEG Fees. Section 6.4(a)of the franchise requires Charter to now
collect$0.50 per month from each customer in the City for PEG. The franchise
further provides that these PEG payments are separate from and in addition to the
franchise fee. Section 2(k)of the Franchise specifically excludes PEG payments from
the definition of"franchise fee."The PEG fees are not received by Charter as cable
service revenue. They are collected by Charter on behalf of the City and flow
through directly to the City. Charter does not include these PEG fees in its franchise
fee calculations, per the franchise, as they are separate from and excluded from
franchise fees. Further, Charter is only permitted to collect$0.50 each month from
customers for this fee.Requiring customers to pay franchise fees on this monthly
PEG amount would result in a higher PEG fee than was negotiated in the franchise
and that Charter is authorized to collect from customers under the franchise.
Remittance/Refunds of Collected Franchise Fees.
Charter has not over collected franchise fees during the Audit Period. It has merely recouped
from customers amounts that had already been paid to the City for franchise fees in years prior to
the Audit Period. The FTA reports that we sent to you separately identify franchise fee
collections for the current year from franchise fee collections that represent a recoupment from
prior years when Charter paid more in franchise fees to the City than it collected from customers.
Current collections are in account 001.4581 on the FTA Report and are labeled Franchise Fee
Revenue. Amounts collected from customers for recoupments from prior years are in account
001.4581.0001 on the FTA Report and are labeled Franchise Fee Recoup PY. Differences
between collections and payments of franchise fees relate to advertising and home shopping or
"non-subscriber"revenue. Since non-subscriber revenue is estimated, variations in actual
revenue received from home shopping and advertising sales often occur, as you know. When
advertising revenue increases, for example, during an election year, operators include that
increased revenue on a quarterly basis in its franchise fee payments to municipalities but do not
adjust collections on the same quarterly basis given the disruptive effect on customers. The true-
up of these differences can occur over several years, as occurred with the customers in the City.
Our customer service agreement clearly outlines Charter's true-up process and provides:
"You [the subscriber] are also responsible for paying any government imposed fees
and taxes, including franchise fees. Charter will review on a quarterly and annual
basis the amount it collects in franchise fees and taxes and start refunding to current
subscribers franchise fees and taxes it may have collected in excess of sums due to
governmental authorities within 15 months of the end of each calendar year. In some
cases, you may be billed for franchise fees that relate to time periods before you
began receiving service. Charter will not bill you for these past franchise fees more
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Mr. Yuri B. Berndt
City of Rosemount, MN
May 21, 2014
than 4 years after the year they are incurred by Charter. Franchise fees resulting from
an audit by your franchising authority are incurred at the time those fees are
assessed."
The customer service agreement that Charter provides to its customers is listed on its website at
https://www.charter.com/browse/content/residential-video
If you would like more information about the recoupment amount that you identified in the Desk
Report, please let me know. Charter paid the City approximately$562,423 in franchise fees
during the Audit Period. The recoupment amount represents just 1.3%of the franchise fees paid
to the City during the same period.
PEG Fees
Charter agrees with the Desk Report calculation of underpayment of PEG fees of$267 during
the Audit Period.
Quarterly Reports
The Desk Report recommends that the quarterly reports that accompany our franchise fee
payments be signed by an officer of the company, as required by Section 7.5 (a)of the franchise.
Section 7.3 (b) of the franchise, however, permits Charter to file a"report in a form reasonably
acceptable to City and Grantee and which shows the basis for the computation." Charter's quarterly
reports to the City that accompany our franchise fee payments show the basis for computation and
have been signed for a number of years by Mr. Steve Lottmann, Senior Director of Accounting for
Charter. It is our understanding that this has been acceptable to the City.
Although Charter is not in complete agreement with the Desk Report, we believe moving
forward and concluding the Audit makes sense for both of us. Charter is planning to send a
check to the City in the amount of$778.00 as outlined above in settlement of the Audit within 10
business days. I hope you will feel free to contact me directly if you have any comments or
concerns. My direct number is 314-543-2281. Charter looks forward to concluding the Audit
with the City.
Yours very truly,
John Hylla, Director of Accounting
Charter Communications
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