Imagination Generation:

Introduction

Local regulatory authority over the provision of cable services changed rapidly in 2006. Numerous states have now adopted statutes which significantly modify and limit local franchising authority (“LFAs”) and enforcement of existing cable television franchises. These same state statutes often severely restrict the ability of LFAs to negotiate franchises with new competing operators on terms and conditions similar to those imposed upon the incumbent cable operator. In addition, Congress is on the verge of adopting federal legislation which may also significantly limit the authority of LFAs both with respect to enforcement of existing franchises as well as the ability to franchise new competing operators. However, until federal law is changed LFAs still have an obligation to enforce existing franchises and to address franchise renewal requests and requests for new franchises consistent with existing law.

This paper will focus on steps which LFAs can take today to ensure that all terms and provisions of existing cable television franchises are being properly enforced and to quickly and efficiently address requests for renewals or initial franchises in your communities.

Please note that this paper focuses primarily on the existing requirements of the Cable Act, as amended in 1996. It does not address specific state statutes which may further limit LFA authority under the Cable Act. LFAs are advised to carefully review applicable state statutes relevant to the issues addressed herein.

Enforcement of Existing Franchises

The job of enforcing cable television franchise can be one of the easiest or one of the most difficult depending upon a number of factors, only some of which are within your control. Your community may have the benefit of working with a cable operator and particularly a local manager, which makes your job easy. High quality service with prompt, courteous customer service and good lines of communication are ways in which cable operators can make the job of the cable administrator much simpler. However, not all LFAs are blessed with a cable operator focused on franchise compliance. In those cases diligent oversight of the franchise is of great importance.

Cable television franchises can range in length from 20 pages to 100 pages. The franchise may include a local regulatory ordinance and/or a customer service ordinance as well as a separate franchise agreement with one or more cable operators. Within these lengthy contracts there are a number of specific requirements that a cable operator must meet on a monthly, quarterly or annual basis.

1. Periodic franchise fee audits.

Virtually every franchise in the country contains a requirement that a franchise fee between 1% and 5% of gross revenues should be remitted to the LFA on a periodic basis. Many franchises will include either monthly or quarterly payments of these franchise fees by a date certain. Typically, cable operators will simply forward a check with very minimal information regarding how the franchise fee payment was calculated. A cable administrator should carefully review the amount of each check submitted and attempt to verify the accuracy of the franchise fee payment based on an estimation of total gross revenues.

Periodically, every LFA should consider the need for a franchise fee audit to ensure that the payments are being properly made. Issues which often arise in franchise fee audits include failure by the cable operator to properly include residences within the LFA’s jurisdictional boundaries for purposes of calculating the franchise fee. In addition, cable operators may exclude certain revenue such as advertising, home shopping network receipts, or revenue from other ancillary services on which the franchise may require payment.

An experienced auditor will be able to review the procedures used by the cable operator to calculate the franchise fees and determine whether such payments have been accurate. Audits generally do not need to be done on an annual basis but rather periodically over the length of the franchise particularly in the event the franchise has been transferred. In some cases, franchising authorities have seen three or more cable operators over the last ten years and there may not be consistency with respect to the manner in which franchise fee payments are calculated. See page 6 of this paper for additional information on franchise fee audits and reviews.

2. Bonds, letters of credit and security funds

It is not uncommon for a franchise to require a bond to ensure the faithful performance of the cable operator with all terms and conditions in the franchise. The cable operator will then secure the bond from a company and will submit the bond for the franchising authorities’ approval. Franchising authorities routinely accept these bonds without careful review not knowing that there may be terms within the bond that directly conflict with the terms of the franchise.

For example, bonds will often require an additional notification to the bonding company at the time an alleged breach is discovered. The franchise typically only requires notification to the cable operator in order trigger an enforcement procedure. Failure to properly notify the bonding company could result in a dispute regarding whether the bond may be drawn upon. In addition, bonds will often contain a statute of limitation regarding when the bond may be drawn upon based upon the date that the alleged breach was committed. The statute of limitations contained within a bond should be consistent with the statute of limitations prescribed under the franchise or under state law. Shortening of the statute of limitations in the bond may serve to significantly reduce the LFA’s rights of collection thereunder.

Similar review should be conducted with respect to any letters of credit or other security provided by the cable operator under the franchise. The basic rule is to ensure that nothing in these separate documents should in any way conflict with or reduce rights otherwise available to the LFA under the franchise.

3. Customer service standards

All franchises contain some provisions regarding customer service. In some cases, the customer service obligations may be rather minimal or worded in such a way that enforcement is difficult. Many other franchises have incorporated the FCC’s customer service obligations or have included obligations above and beyond those prescribed by the FCC. A cable administrator should carefully review the customer service obligations and ensure that the cable operator is complying with each term and condition.

If the obligations mandate that customers reach a customer service representative within 30 seconds, 90% of the time, measured on a quarterly basis, the cable administrator should ensure that reports are provided by the cable operator verifying such compliance. If the customer service obligations require that subscribers receive a busy signal less than 3% of the time, reports should also be generated verifying this standard. If the LFA is receiving verbal or written complaints regarding customer service, a detailed written log should be maintained of all subscriber complaints as this may ultimately be valuable should the cable operator fail to provide reports verifying compliance.

In the event your franchise contains substandard or inadequate customer service obligations, federal law at 47 C.F.R. § 76.309 permits a LFA to adopt a customer service ordinance. Such an ordinance can be adopted despite the fact that the franchise may not be up for renewal. Moreover, a customer service ordinance can include the FCC’s customer service obligations or can include obligations above and beyond those specified by the FCC.

Recently, LFAs have experienced enforcement issues regarding cable operators’ attempts to regionalize their customer service obligations. The creation of large regional call centers servicing multiple jurisdictions means LFAs no longer get individual customer service statistics. Cable administrators must now grapple with reports that are not specific to their system and may contain data which is not indicative of the customer service received by subscribers in that community. Cable administrators should carefully review franchise language to ensure that the operations put in place by the cable operator comply with the franchise requirements and satisfy the customer service obligations of the community.

4. Technical audits

Cable television franchises often extend for periods of 10-15 years with little or no obligation for the cable operator to upgrade the cable system during the life of the franchise. Despite the fact that your system may have been recently upgraded to 750 -860 MHz or better, there is still an oversight obligation under the franchise. As the system deteriorates good cable operators will have in place a maintenance plan which will result in ongoing maintenance and upkeep of the system to ensure it operates at a high level.

However, LFAs will often conduct technical audits during renewal proceedings and find that the system has not been maintained as promised. Some of the problems frequently discovered during a technical audit include safety code violations, failure to properly ground the system, broken and damaged pedestals and improper lashing of cable. LFAs must then address these issues during franchise renewal.

Such safety code violations should instead be addressed throughout the term of the franchise to ensure that the system is maintained in the proper manner. This will help to alleviate safety issues for the community’s residents and will also help to improve the signal quality and operation of the system. While a technical audit may be expensive, it need not be completed on an annual basis. Rather, a technical audit can be performed perhaps once or twice during the life of the franchise and can be budgeted for well in advance.

5. Basic service rate regulation

Cable operators remain subject to rate regulation, but only for the Basic Service Tier (“BST”). All other service tiers including digital and premium channels are free from rate regulation. Moreover, regulation of the BST is accomplished only through the FCC’s rate regulations established on either a benchmark or cost of service formula. While franchising authorities can only regulate rates for the BST, such regulation can still provide meaningful relief to cable subscribers for both the price of the BST as well as the equipment necessary to receive the BST.

LFAs that may not previously have been certified to regulate rates are still permitted to obtain certification and begin regulating the rates for the BST. In certain cases, operators may be forced to trace back to rates from the early 1990s to justify the current BST rates. This could result in significant refunds or reductions for BST subscribers.

6. Public, educational and governmental (“PEG”) programming.

Cable franchises will often contain provisions mandating channel capacity for PEG programming. Channels are often either specifically designated for PEG use or channel capacity may be increased over the life of the franchise based on a set formula or usage criteria. Many historic franchises contain provisions which permit LFAs to seek additional PEG capacity but may require advanced written notice to trigger the obligation from the cable operator. LFAs should carefully review these provisions as many new state laws and proposals at the federal level may limit the channel capacity which the LFA can obtain from new cable operators based upon the channel capacity presently provided by the incumbent cable operator. In other words, failure to trigger PEG channel requirements in the existing franchise may limit an LFAs authority to impose channel capacity requirements on competing operators.

In addition, many franchises which contain PEG channel requirements often contain funding mechanisms to be paid throughout the life of the franchise. There is no set formula for funding of PEG channels and many franchises have periodic capital contributions required of the cable operator, some of which only must be paid upon written request of the LFA. Failure to submit the written request within a specified time period could result in the waiver of the funding obligation. Each franchise is drafted differently with respect to PEG funding and therefore it is critical to review the language within your franchise and determine if the incumbent cable operator is remitting all appropriate fees. To the extent fees are remitted on a per subscriber basis over the life of the franchise the LFA may wish to consider a review or audit of the payments to ensure all revenues are being received in support of the PEG channels. By way of example, many times cable operators may be calculating per subscriber contributions based solely on residential single family subscribers as opposed to those covered by bulk service agreements or those who reside in multiple dwelling units. This can be a particularly important issue in communities where college campuses are located or where there is a large concentration of the population in multiple dwelling units.

In certain cases LFAs have discovered that a 75¢ per subscriber, per month support fee required under the franchise has been paid by a cable operator only for single family homes but not for the local college campus which buys cable service in bulk for all of its dormitories. In that case several thousand subscribers may reside in the dormitories and yet a single 75¢ fee is remitted on a monthly basis in support of PEG programming. These matters are generally resolved based on language within the cable franchise although it is important for the LFA to raise these issues and determine if all fees are being properly remitted. In other cases, LFAs have discovered improper coding of subscribers particularly where areas have been annexed into the city. If the cable operator does not recode subscribers in the annexed are the LFA may be losing both PEG support and franchise fee income for these subscribers.

It is also important to verify that any live feeds or two-way connections required under the franchise have been built out and are functioning properly. The time to address these matters is not necessarily at renewal, but rather as an existing obligation utilizing the enforcement procedures available in the contract. Similarly, institutional network obligations outlined in the franchise should be reviewed to verify that all required capacity and functionality has been provided by the operator. Failure to meet institutional network obligations should likewise be addressed through the franchise enforcement procedures set forth in the document.

7. Free service drops

Virtually all cable television franchises in the country have a requirement that the cable operator will provide certain free service drops to city hall, police, fire, schools and associated public facilities. The level of service to be provided may vary from franchise to franchise but typically no costs are associated with either installation or monthly service. In some cases LFAs have learned that city departments have been paying for cable service when the franchise requires that it be provided free of charge. In other cases LFAs have discovered that equipment charges or line extension fees have been assessed by the cable operator despite the fact that the language in the franchise may mandate that these facilities be provided at no cost to the LFA. LFAs should carefully review free service drop provisions and other similar in-kind obligations to ensure that the operator is meeting all obligations contained within the franchise. Often times the operator presently in control of the system was not the operator which originally negotiated the franchise obligation. Thus, the existing operator may not be fully aware of all obligations in the contract particularly if there has been a change in local management of the system. While these issues may seem trivial the cost of free services to multiple facilities throughout a jurisdiction when calculated on a monthly and annual basis over the term of the franchise can be significant.

Franchise Fees

A franchise fee is paid by a cable operator to an LFA for the privilege of using the public rights-of-way or to compensate for the costs of regulation. It is the single most important element in any cable television franchise and has resulted in numerous disputes between LFAs, cable operators and the FCC. Absent provisions in a franchise to the contrary, nothing under federal law prohibits a LFA’s use of franchise fees for any purpose it desires. The Cable Act (47 U.S.C. § 542(i)) specifically prohibits the FCC from regulating the use of revenue derived from franchise fees. As statutes around the country are changing LFAs must pay particular attention to state law with respect to the imposition of franchise fees.

1. History

Prior to adoption of the 1984 Cable Act the FCC regulated franchise fees under rules promulgated in 1972. Under those rules the FCC limited franchise fees to no more than three percent of an operator’s gross revenues. LFAs were permitted to seek a waiver from the FCC to increase fees between three and five percent of gross revenues if the LFA could demonstrate excessive regulatory costs to be incurred. 47 C.F.R. § 76.31 (1983). With the adoption of the 1984 Cable Act franchise fees were capped at five percent of an operator’s gross revenues derived in any 12 month period. 47 U.S.C. § 542. The Cable Act also limited the authority of the FCC to regulate both the amount of franchise fees and the use of those fees by LFAs. 47 U.S.C. § 542(i).

The Cable Act defines “franchise fees” at 47 U.S.C. § 542(g) as follows:

(1) the term “franchise fee” includes any tax, fee, or assessment of any kind imposed by a LFA or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such;

(2) the term "franchise fee" does not include –

(A) any tax, fee, or assessment of general applicability (including any such tax, fee, or assessment imposed on both utilities and cable operators or their services but not including a tax, fee, or assessment which is unduly discriminatory against cable operators or cable subscribers);

(B) in the case of any franchise in effect on October 30, 1984, payments which are required by the franchise to be made by the cable operator during the term of such franchise for, or in support of the use of, public, educational, or governmental access facilities;

(C) in the case of any franchise granted after October 30, 1984, capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities;

(D) requirements or charges incidental to the awarding or enforcing of the franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages; or

(E) any fee imposed under title 17.

While the Cable Act defines “franchise fee” the Act does not provide an express definition for “gross revenues” on which the franchise fee is based. Most of the disputes regarding franchise fees involve the definition of gross revenues, particularly whether an operator can properly exclude certain revenue from the imposition of a franchise fee.

2. How should gross revenues be defined in a cable franchise?

A franchise provision establishing a fee should specify the amount of the fee, the method for calculating it, the frequency of payment, and any interest or penalties for late payments. Moreover, the cable operator should be required to furnish information to support its fee payment and the LFA should insist on the right to review and inspect the cable operator’s financial records to verify the accuracy of franchise fee payments. Of these issues the topic most frequently contested between cable operators and LFAs is the definition of “gross revenues.” Cable operators often seek to limit the scope of the definition so as to reduce the total amount of franchise fees to be remitted to the LFA. As referenced earlier, the Cable Act provides no express definition for gross revenues although historically the parties have generally agreed that any and all revenue derived from the provision of cable service within the city should be considered gross revenues.

Below is a sample definition for gross revenues which addresses many of the key revenue sources which LFAs should focus on to ensure that all revenue and consideration is included by the operator when calculating franchise fees.

“Gross Revenue” means any and all revenue billed (whether or not received) or derived directly or indirectly by Grantee, its affiliates, subsidiaries, parent, or any entity in which Grantee has a financial interest from the operation of its Cable System within the City including, but not limited to, 1) all Cable Service fees, 2) Franchise Fees, 3) late fees, returned check charges, collection agency charges, 4) Installation and reconnection fees, 5) fee payments or other consideration earned (whether or not received) by the Grantee from programmers for carriage of Cable Services or marketing support in connection with the Cable Services on the Cable System, 6) upgrade and downgrade fees, 7) advertising revenue with no deduction or offset for internal commissions earned by employees of Grantee or its affiliates, subsidiaries, parent, or any entity in which Grantee has a financial interest, and external commissions earned by advertising agencies/representation firms/brokers/etc. regardless of whether or not such commissions are withheld from remittances to the Grantee, 8) home shopping commissions, 9) Converter and remote control rental fees, 10) Lockout Device fees, 11) guides, and 12) production charges. The term Gross Revenue shall not include bad debts or any taxes on Services furnished by Grantee imposed upon Subscribers by any municipality, state, or other governmental unit and collected by Grantee for such governmental unit. City and Grantee acknowledge and agree that Grantee will maintain its books and records in accordance with generally accepted accounting principles (GAAP).

3. Can cities collect franchise fees on cable modem revenue?

Prior to March of 2002 cable operators routinely included revenue from cable modem service in franchise fee payments to municipalities. However in the spring of 2002, the FCC issued a Declaratory Ruling classifying cable modem service as an information service. As a result, cable modem service was subject solely to regulation at the federal level. Cable operators immediately stopped including cable modem revenue in franchise fee payments and several municipalities initiated litigation based on a variety of franchise requirements. These cases were largely unsuccessful and in the meantime the FCC’s Declaratory Ruling had been challenged and reviewed by the Ninth Circuit.

On June 27, 2005, the United States Supreme Court held that the Federal Communications Commission (“FCC”) was correct in classifying cable modem service as an “information service.” In a 6-3 decision, authored by Justice Thomas, the Supreme Court held that the FCC was entitled to deference and made a “reasonable policy choice” in classifying cable modem service as an information service with no cable or telecommunications component. The case, National Cable Telecommunications Association v. Brand X, 125 S. Ct. 2688 (2005) overturned the Ninth Circuit’s decision in Brand X v. FCC.

As mentioned above, the cable industry had been abiding by the FCC’s Declaratory Ruling for the past several years and therefore neither consumers nor municipalities have noticed any significant change as a result of this decision. Cable modem service remains free from state and local regulation because of its classification as solely an information service.

The case represents a victory for the FCC which originally issued a Declaratory Ruling in March of 2002 classifying cable modem service as an information service only. Prior to that time municipalities had been collecting franchise fees on cable modem service revenue and some municipalities had attempted to require cable operators to provide access to unaffiliated Internet service providers (ISPs). Following the FCC’s Declaratory Ruling several ISPs and numerous municipalities appealed the ruling which was ultimately heard by the Ninth Circuit. The Ninth Circuit concluded that cable modem service was not only an information service but included a telecommunications component. Had the Ninth Circuit decision been upheld cable operators would have been subject to common carrier regulation with respect to cable modem service.

The Supreme Court remanded the case to the Ninth Circuit and the Ninth Circuit will likely vacate its earlier decision and affirm the FCC’s Declaratory Ruling ending the litigation. The next battle regarding broadband services will occur back at the FCC where a rulemaking proceeding is underway to determine the future of universal service funding, regulatory parity between cable modem service and DSL service, as well as customer service issues.

4. Imposition of a franchise fee on franchise fee revenue

In 1995, the FCC’s Cable Services Bureau (“Bureau”) issued an important decision regarding franchise fee payments involving the City of Baltimore, Maryland. In Re United Artists Cable of Baltimore, Order DA 95-737, 10 F.C.C. Rcd. 7250 (C.S.B. 1995). In this decision the Bureau held that franchise fees were not revenues derived from the cable operator and therefore should not be included in the calculation of an operator’s gross revenues. Shortly thereafter the FCC confirmed the Bureau’s decision. See United Artists Cable, 11 F.C.C. Rcd. 18158 (1995).

The case was appealed to the Fifth Circuit and in 1997 the Fifth Circuit invalidated the FCC’s Order holding that “even if franchise fees were treated as a tax they would still be treated as a normal expense of doing business once the tax was imposed directly upon the subscriber.” The fact that cable operators have the right to identify the costs of government regulation on subscriber bills “does not, however, transform a cost imposed on cable operators into a cost imposed on cable subscribers….There is no plausible basis to conclude that cable operators are acting as collection agents on behalf of franchising authorities…Therefore, all money collected from subscribers, including funds used to pay franchise fees, must be included in a cable operator’s gross revenue.” See Dallas v. FCC, 118 F.3d 393 (1997).

While the Dallas decision was a victory for cities, implementation of the decision has been inconsistent throughout the country. In some cases, cable operators immediately changed their calculation of franchise fees to come into compliance with the Dallas decision. In other cases, cable operators sent out correspondence to LFAs seeking a waiver from compliance with the decision. In many other cases, cable operators have still not brought their billing systems into compliance.

5. Who pays franchise fee on non-subscriber revenues?

In October of 2001, the FCC issued an order (16 F.C.C. Rcd. 18192 (Oct. 4, 2001)) involving the City of Pasadena, California (“Pasadena Order”) which permitted cable operators to pass-through franchise fees to subscribers on cable television bills based on gross revenues that encompass “non-subscriber” revenue. Specifically, this non-subscriber revenue included income generated by advertising sales and home shopping commissions. As a result of the Pasadena Order many cable operators around the country increased franchise fees on subscribers’ bills by .25% or more.

A number of LFAs around the country, including a group of Texas franchising authorities and the National Association of Telecommunications Officers and Advisers petitioned the Fifth Circuit for review of the Pasadena Order. On March 27, 2003, the Fifth Circuit denied the petition for review on the grounds that the FCC had acted within its broad discretion and not in a manner that was arbitrary, capricious or manifestly contrary to the statute in question. See Texas Coalition of Cities for Utility Issues v. FCC, 324 F. 3d 802 (5th Cir. March 27, 2003).

The cities had argued that the Pasadena Order should be reversed because it conflicts with two particular provisions of the Cable Act, 47 U.S.C. §§ 542 and 543. In particular, the cities contended that where the franchise fee is based on the percentage of the cable operator’s gross revenue, only the portion of that fee attributable to revenue from the subscribers may be passed through to subscribers. The cities argued that the Pasadena Order permitted an improper shifting of costs on to subscribers and that each class of the cable operator’s customers should bear a proportionate amount of the franchise fee (i.e., the portion of the franchise fee attributable to advertising revenue should be passed through to advertisers). The Fifth Circuit concluded that whether or not the court may have interpreted the statutes differently the FCC’s decision is entitled to deference and its order is not arbitrary and capricious.

The practical result for LFAs across the country is that cable operators can pass-through as a separate line item on subscribers’ bills all franchise fees due and owing the LFA. These franchise fees may include non-subscriber revenues, including home shopping and advertising revenues. In other words, cable operators are permitted to reap the benefits of growth in non-subscription revenue while subscribers must bear the financial burden of increased franchise fees.

By way of example, if a cable operator sells $100 worth of advertising to a local business to provide commercial spots on the cable system many franchises require the cable operator to pay a five percent franchise fee on that revenue. Prior to the Pasadena Order in 2001 cable operators paid the applicable $5 franchise fee on the $100 of revenue and/or assessed the $5 fee to the advertiser. Under the Pasadena Order this $5 franchise fee is now spread over all subscribers in that jurisdiction resulting in an increase (average increase from Pasadena case is approximately .25% per month) in the total franchise fee paid by a subscriber. In essence, the more advertising a subscriber watches, the higher the franchise fee on their bill.

The Fifth Circuit decision has not resulted in any reduction in franchise fee payments to LFAs although subscribers must now bear the burden of additional franchise fee payments even as cable operators increase non-subscription revenue.

6. Can cities obtain benefits beyond the five percent franchise fee?

Many franchise agreements include additional consideration provided by cable operators in the form of in-kind payments or services. These may include providing free wiring and cable service to local schools, equipment, studios and related support for local PEG programming, institutional network connections and related consideration. The question is whether these in-kind contributions are permissible under the Cable Act’s five percent cap on franchise fees.

By way of example, franchise negotiations often focus on the appropriate level of support to be provided for PEG programming. The Cable Act provides that for franchises in effect prior to 1984 LFAs may continue to enforce obligations for both capital and operational support of PEG access channels over and above the five percent cap on franchise fees. However, for franchises granted after 1984 the Cable Act limits LFA’s ability to seek additional in-kind support. In particular, in order to receive consideration over and above the five percent cap on franchise fees a LFA must ensure that in-kind benefits are not considered a “franchise fee” as defined in 47 U.S.C. § 542(g). One of the exceptions noted in 542 (g) relates to “capital costs which are required by the franchise to be incurred by the cable operator for public, educational or governmental access facilities.” LFAs have generally interpreted this to mean equipment and facilities related to the provision of PEG programming. The cable industry has often argued that it is narrower and relates solely to the capital costs related to the construction of a studio facility.

In 1999, the FCC’s Cable Bureau responded to a letter from the City of Bowie, Maryland regarding franchise fee calculations and PEG access channel costs. (14 F.C.C. Rcd. 7674 (May 18, 1999)). At issue was whether PEG access equipment costs, salaries and training costs were subject to the five percent franchise fee cap. The Cable Bureau responded that only capital costs for construction of PEG access facilities should be excluded from the five percent cap. After pressure from LFAs the Cable Bureau issued a clarification stating that the legislative history of the Cable Act referred to franchise fees only as “monetary payments” that do not include any “franchise requirements for the provision of services, facilities or equipment.” However, at least one court has held that a cable operator cannot be required to waive the five percent cap on franchise fees required under the Cable Act. See Cable TV Fund 14-1 Ltd. v. City of Naperville, No. 96 C 5962, 1997 U.S. Dist. LEXIS 11511(N.D. Ill. July 29, 1997).

7. What should a LFA do to verify the accuracy of franchise fee payments?

A franchise fee payment audit or review may be necessary to ensure that the cable operator’s past performance under the existing franchise has been satisfactory and to uncover any underpayments that may have occurred over the years.

An audit or review is performed by analyzing information obtained from a LFA and its cable operator. During an audit/review the following tasks are completed:

· Verification of revenues.

· Variance analysis.

· Verify mathematical accuracy.

· Review excluded revenues.

· Customer coding verification.

· Method of verification.

· Computing any applicable underpayment.

· Analyzing new sources of revenue.

The following is an initial list of documents generally requested of a cable operator necessary to conduct a review of the cable operator’s financial records:

· Detailed list of revenues, by month, collected from subscribers during the desk review period.

· Schedule(s) of the calculation of the subscriber franchise fees as used to determine the amounts remitted to the municipality during the desk review period.

· Schedule(s) of the calculation of and documentation for any non-subscriber franchise fees incurred during the desk review period.

· Copies of financial statements or general ledger, preferably audited, for the desk review period.

· Schedule(s) showing detailed descriptions of Other Revenues on the general ledger or financial statements and the calculation of franchise fees, if any, related thereto during the desk review period.

· Schedule(s) detailing bad debt expense and write-offs related to franchise fees and subscriber revenue during the desk review period.

· Schedule(s) detailing franchise fee remittances to the municipality during the desk review period.

The above list is an initial request for information with respect to the franchise fee arrangement between the cable operator and a community. Additional information is often requested from a cable operator upon review of the initial response.

Renewal

With few exceptions, the cable television franchise renewal process has remained unchanged since it was enacted into law twenty years ago. The renewal process under the Cable Act (47 U.S.C. § 546) provides cable operators with a high presumption in favor of renewal. Franchising authorities, in particular elected officials, often have difficulty understanding why negotiations regarding franchise renewal are so different than other contract negotiations which cities conduct each day. This paper will address: 1) some of the most frequently asked questions regarding franchise renewal in hopes of clarifying some misunderstandings regarding the renewal process; and 2) the top issues which dominate renewal negotiations.

1. Why can’t we put the franchise up for competitive bid and award a new franchise to the highest bidder?

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