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HomeMy WebLinkAboutV Cayuga Heights - Time Warner Audit 10-31-12.pdfCOMPUTEL CONSULTANTS P.O. Box 35 • Earlville, New York 13332 • (800) 724-9859 • Fax (315) 691-4311 October 31, 2012 Via Email & USPS Ms. Kate Supron Village of Cayuga Heights 836 Hanshaw Road Ithaca, New York 14850 Re: Time Warner Cable Audit Dear Mayor Supron, As you know, we've been hired by the Village to perform an audit of your cable television franchise agreement with Time Warner. On July 12, 2012, we sent a letter to Time Warner Cable, requesting financial information related to franchise fee payments made to the Village of Cayuga Heights during the past six years. We have received franchise fee payment data covering the time period from October 2006 through September 2012. We've reviewed the information from Time Warner and this letter contains a summary of our findings, consistent with our phone conversation of earlier today. First, a little background information regarding franchise fees. Under federal law, municipalities are allowed to charge franchise fees up to a maximum of 5% of gross revenues. However, just as important as the percentage is how the term "Gross Revenues" is defined. There are two basic types of revenue that are eligible for inclusion in the calculation of gross revenues — subscriber revenue and non-subscriber revenue. Subscriber revenue, as the name implies, is made up of charges that show up on subscribers' monthly bills. Non-subscriber revenue is made up of income Time Warner makes from the operation of the cable system in the Village that does not show up on subscriber bills. The two main components of this type of revenue are money made from the sale of local advertising and fees derived from sales on home shopping networks. Therefore, the maximum allowable franchise fee would be 5% of all subscriber and non- subscriber revenue made from the provision of cable television within the Village. Although there is no requirement to impose any cable franchise fee, federal law and Public Service Commission (PSC) rules address the minimum requirements if a franchise fee is imposed. Under PSC rules that covered the Village's current franchise agreement, if a franchise fee was imposed, it had to apply to at least all regular, recurring monthly charges on subscriber bills. Federal law also allows, although it does not require, cable companies to pass through franchise fees to subscribers as a separate line item on their monthly bill. For all intents and purposes, if a municipality imposes a cable franchise fee, that fee will be passed on to subscribers as a recurring monthly charge. Also, contrary to what Time Warner would like everyone to believe, franchise fees are not a tax. In the mid-1990's this exact issue was reviewed in federal court, with the court stating that franchise fees were just a cost of doing business for cable companies — rent for access to and use of municipal rights of way. This is important, because taxes cannot be included in the calculation of gross revenues. Although they could just as easily have been built into the cable rate structure, cable companies fought for, and won, the right to make franchise fees a separate line item on the bill. 2 In addition to the Time Warner data, we've reviewed a copy of the Village's franchise agreement, which was approved by the PSC May 29, 2003 and is scheduled to expire on May 29, 2013. Therefore, the entire period reviewed was governed by the current franchise agreement. Section 18 of the franchise agreement calls for quarterly payments of 3% of Gross Revenues, which Section 1(j) of the agreement defines as follows: "Gross Revenues" means all revenues net of franchise fees and PEG access monies actually received by and paid to Time Warner Cable by subscribers residing within the Municipality for Cable Television Service purchased by subscribers on a regular, recurring monthly basis. Although this definition seems fairly straightforward, the language actually excludes a significant portion of allowable revenue, without actually saying it specifically. For instance, use of the phrase "paid to Time Warner Cable by subscribers" effectively eliminates all non- subscriber revenue (advertising and home shopping fees) from gross revenues. Likewise, the phrase "purchased by subscribers on a regular, recurring monthly basis" means that revenue from installations, late fees, and pay-per-view movies and events is also excluded. Whether the Village was aware of these revenue exclusions or not, they were allowable under State and Federal regulations. However, the attempt to exclude franchise fees from gross revenues — through use of the phrase "net of franchise fees" — was against PSC rules at the time of your franchise renewal. In fact, the PSC pointed out the error to Time Warner in their Order Approving Renewal (issued 5/29/03) stating: First, the definition of "Gross Revenues" in Section 1(j) of the agreement, which defines gross revenues as "all revenues net of franchise fees," is not consistent with our rules. Section 595.1(o) of our rules requires that the revenue base not be less than the revenues received directly from subscribers for any cable services purchased on a regular, recurring monthly basis. Therefore, our approval will be expressly conditioned upon striking from the renewal agreement "net of franchise fees" in Section 1(j). In reviewing franchise fee payment information, it is clear that Time Warner ignored PSC rules and the PSC Order and excluded franchise fees collected from subscribers each month from the calculation of gross revenues. This depressed the actual value of gross revenues and resulted in an underpayment of franchise fees to the Village. Although this error has most likely caused underpayments all the way back to 2003, the statute of limitations prevents us from recouping those underpayments beyond the past six years. From October 2006 through September 2012, we would estimate the underpayment to be $4,602.35 (spreadsheet enclosed). In addition, Section 18(e) of the franchise agreement calls for Time Warner to pay interest on the underpaid amount at the rate of 9% per annum, which would add an additional $1,400+ to the amount owed. Correction of this error will result in increased franchise fee revenues of approximately $800 annually through the remaining term of your current agreement. This problem is fairly widespread amongst municipalities with Time Warner Cable franchise agreements. In fact, dozens of the municipalities we've worked with on this issue were involved in a complaint process before the PSC. In May of 2006, the PSC ruled in the municipalities' favor, stating that Time Warner did owe money for past underpayment of franchise fees in circumstances exactly like this. 3 I also want to point out that since these underpaid amounts would have been passed through to subscribers had franchise fees been handled properly in the first place, you should be aware that Time Warner's response will be to exercise their right to pass through the underpaid franchise fee amounts they now pay the Village as a result of any claim that is filed. Given that the Village had 737 subscribers (as of 9/12) we would estimate the impact of the temporary pass through to be about 52 cents a month over a period of one year. Although they could simply apologize and waive the pass through, Time Warner's strategy has been to use the pass through as a way to discourage municipalities from enforcing their agreements and demanding that the proper amounts be paid. At this point it isn't really a matter of whether the Village wants franchise fees passed through to subscribers, once a franchise fee is included in your franchise agreement that is inevitable. However, given that the error was caused by Time Warner, you'd obviously prefer that none of these amounts be passed through at this time — a sentiment that we will make clear to Time Warner when filing the claim. Our review has also identified another issue that I want to bring to your attention. Section 18(d) of your agreement specifies that Time Warner will pay a late payment charge of 1.5% on any franchise fee payment that is not made on or before 60 days after the end of each quarter. According to Time Warner documentation, the 2' Quarter 2009 franchise fee payment, which was due on or before August 29, 2009, was not issued until September 2, 2009 and the 1st Quarter 2011 franchise fee payment, which was due on or before May 30, 2011, was not issued until August 23, 2011. The late payment charges should have been $195.08 and we'll request that Time Warner make that payment or provide proof of prior payment. I want to make clear that this enforcement action will not raise the franchise fee, it will simply require its accurate payment under the terms of your current franchise agreement as it was approved by the PSC. Likewise it will have no impact on cable rates, which are set through an entirely different process. Finally, we would advise that you consult with your municipal attorney to determine whether you even have the option of not collecting money that is contractually owed the Village. With your approval, the next step in the process would be for us to file a claim with Time Warner to recover the underpaid franchise fees and penalties. Please contact me with any questions. I'll wait to hear from you before taking any further action. Sincerely, ichael T. Caton Partner Spreadsheet Enclosed Village Of Cayuga Heights Underpaid Franchise Fees 1) Underpayment due to exclusion of franchise fees from gross revenues in violation of PSC Order Approving Renewal. Month Interest Fran Fee Payment 3% Underpay Interest Running Total Cumulative Revenue Interest Quarter January-07 9.00%$0.00 $0.00 $0.00 $0.00 $0.00 February-07 9.00%$5,812.34 $174.37 $1.31 $175.68 $1.31 4th Q 2006 March-07 9.00%$0.00 $0.00 $1.32 $177.00 $2.63 April-07 9.00%$0.00 $0.00 $1.33 $178.32 $3.95 May-07 9.00%$5,871.96 $176.16 $2.66 $357.14 $6.61 1st Q 2007 June-07 9.00%$0.00 $0.00 $2.68 $359.82 $9.29 July-07 9.00%$0.00 $0.00 $2.70 $362.52 $11.99 August-07 9.00%$6,051.35 $181.54 $4.08 $548.14 $16.07 2nd Q 2007 September-07 9.00%$0.00 $0.00 $4.11 $552.25 $20.18 October-07 9.00%$0.00 $0.00 $4.14 $556.39 $24.32 November-07 9.00%$5,929.56 $177.89 $5.51 $739.79 $29.83 3rd Q 2007 December-07 9.00%$0.00 $0.00 $5.55 $745.33 $35.38 January-08 9.00%$0.00 $0.00 $5.59 $750.92 $40.97 February-08 9.00%$6,170.98 $185.13 $7.02 $943.07 $47.99 4th Q 2007 March-08 9.00%$0.00 $0.00 $7.07 $950.15 $55.06 April-08 9.00%$0.00 $0.00 $7.13 $957.27 $62.19 May-08 9.00%$6,137.53 $184.13 $8.56 $1,149.96 $70.75 1st Q 2008 June-08 9.00%$0.00 $0.00 $8.62 $1,158.58 $79.37 July-08 9.00%$0.00 $0.00 $8.69 $1,167.27 $88.06 August-08 9.00%$6,322.34 $189.67 $10.18 $1,367.12 $98.24 2nd Q 2008 September-08 9.00%$0.00 $0.00 $10.25 $1,377.37 $108.49 October-08 9.00%$0.00 $0.00 $10.33 $1,387.70 $118.82 November-08 9.00%$6,147.95 $184.44 $11.79 $1,583.93 $130.61 3rd Q 2008 December-08 9.00%$0.00 $0.00 $11.88 $1,595.81 $142.49 January-09 9.00%$0.00 $0.00 $11.97 $1,607.78 $154.46 February-09 9.00%$6,256.81 $187.70 $13.47 $1,808.95 $167.93 4th Q 2008 March-09 9.00%$0.00 $0.00 $13.57 $1,822.52 $181.49 April-09 9.00%$0.00 $0.00 $13.67 $1,836.19 $195.16 May-09 9.00%$6,154.83 $184.64 $15.16 $2,035.99 $210.32 1st Q 2009 June-09 9.00%$0.00 $0.00 $15.27 $2,051.26 $225.59 July-09 9.00%$0.00 $0.00 $15.38 $2,066.64 $240.97 August-09 9.00%$6,393.84 $191.82 $16.94 $2,275.40 $257.91 2nd Q 2009 September-09 9.00%$0.00 $0.00 $17.07 $2,292.46 $274.98 October-09 9.00%$0.00 $0.00 $17.19 $2,309.66 $292.17 November-09 9.00%$6,311.73 $189.35 $18.74 $2,517.75 $310.91 3rd Q 2009 December-09 9.00%$0.00 $0.00 $18.88 $2,536.63 $329.80 January-10 9.00%$0.00 $0.00 $19.02 $2,555.66 $348.82 February-10 9.00%$6,436.36 $193.09 $20.62 $2,769.37 $369.44 4th Q 2009 March-10 9.00%$0.00 $0.00 $20.77 $2,790.14 $390.21 April-10 9.00%$0.00 $0.00 $20.93 $2,811.06 $411.13 May-10 9.00%$6,574.52 $197.24 $22.56 $3,030.86 $433.70 1st Q 2010 June-10 9.00%$0.00 $0.00 $22.73 $3,053.59 $456.43 July-10 9.00%$0.00 $0.00 $22.90 $3,076.49 $479.33 August-10 9.00%$6,825.07 $204.75 $24.61 $3,305.85 $503.94 2nd Q 2010 September-10 9.00%$0.00 $0.00 $24.79 $3,330.65 $528.73 October-10 9.00%$0.00 $0.00 $24.98 $3,355.63 $553.71 November-10 9.00%$6,641.18 $199.24 $26.66 $3,581.52 $580.37 3rd Q 2010 December-10 9.00%$0.00 $0.00 $26.86 $3,608.39 $607.24 Month Interest Fran Fee Payment 3% Underpay Running Cumulative Revenue Interest Total Interest Quarter January-11 9.00%$0.00 $0.00 $27.06 $3,635.45 $634.30 February-11 9.00%$6,599.22 $197.98 $28.75 $3,862.18 $663.05 4th Q 2010 March-11 9.00%$0.00 $0.00 $28.97 $3,891.14 $692.02 April-11 9.00%$0.00 $0.00 $29.18 $3,920.33 $721.20 May-11 9.00%$6,611.54 $198.35 $30.89 $4,149.56 $752.09 1st Q 2011 June-11 9.00%$0.00 $0.00 $31.12 $4,180.68 $783.21 July-11 9.00%$0.00 $0.00 $31.36 $4,212.04 $814.57 August-11 9.00%$6,665.79 $199.97 $33.09 $4,445.10 $847.66 2nd Q 2011 September-11 9.00%$0.00 $0.00 $33.34 $4,478.44 $880.99 October-11 9.00%$0.00 $0.00 $33.59 $4,512.03 $914.58 November-11 9.00%$6,564.28 $196.93 $35.32 $4,744.28 $949.90 3rd Q 2011 December-11 9.00%$0.00 $0.00 $35.58 $4,779.86 $985.48 January-12 9.00%$0.00 $0.00 $35.85 $4,815.71 $1,021.33 February-12 9.00%$6,693.73 $200.81 $37.62 $5,054.14 $1,058.95 4th Q 2011 March-12 9.00%$0.00 $0.00 $37.91 $5,092.05 $1,096.86 April-12 9.00%$0.00 $0.00 $38.19 $5,130.24 $1,135.05 May-12 9.00%$6,720.74 $201.62 $39.99 $5,371.85 $1,175.04 1st Q 2012 June-12 9.00%$0.00 $0.00 $40.29 $5,412.14 $1,215.33 July-12 9.00%$0.00 $0.00 $40.59 $5,452.73 $1,255.92 August-12 9.00%$6,771.02 $203.13 $42.42 $5,698.28 $1,298.34 2nd Q 2012 September-12 9.00%$0.00 $0.00 $42.74 $5,741.02 $1,341.08 October-12 9.00%$0.00 $0.00 $43.06 $5,784.07 $1,384.13 November-12 9.00%$6,747.01 $202.41 $44.90 $6,031.38 $1,429.03 3rd Q 2012 December-12 9.00%$0.00 $0.00 $45.24 $6,076.62 $1,474.27 Totals:$4,602.35 Underpaid Franchise Fees 10/06 to present $1,474.27 Interest $6,076.62 Total Owed Twelve Month Pass Through to Subscribers: 737 subs (as of 9/12) $0.52 per month 2) Late Payment Charges Section 18(d) of the franchise agreement specifies a 1.5% late payment charge for all franchise fee payments that are not made on or before the due date of 60 days from the end of each calendar quarter. Revenue Payment Payment Late Quarter Amount Issued Charge 2nd Q 2009 $6,393.84 9/2/2009 $95.91 1st Q 2011 $6,611.54 8/23/2011 $99.17 $195.08 Late Charges Future Impact: Correction of this error will increase future annual franchise fee revenue by $800+.