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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 2 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 3