Franchise Fee Audits and Cable Compliance Reviews

Franchise Fee Audits

A franchise fee audit is the best method for a municipality to hold a cable operator accountable for past franchise fee payments and to ensure that the municipality receives the future franchise fee revenues to which it is entitled. Section 622 of the federal Cable Act authorizes municipalities to assess up to five percent (5%) of the cable operator’s “gross revenues.”  The amount of franchise fee revenue paid to the municipalities depends on the definition of “gross revenues” in the cable franchise agreement and whether the cable operator is paying the municipality consistent with that definition.

“Gross revenues” consists of approximately 25 separate revenue sources, including both subscriber and non-subscriber revenues.  The cable operator’s interpretation of “gross revenues” is often limited in scope and therefore may be biased in favor of the cable operator.  As a result, the municipality may not receive the full franchise fee revenue to which it is entitled. This discrepancy often is not be apparent until a franchise fee audit is performed.

Other common franchise fee errors on the part of cable operators include, but are not limited to:

  • Failure to apply all revenue sources to the franchise fee and/or allocate the correct proportion of revenue to cable service as opposed to internet and telephone services.
  • Cable operator “miscoding” of streets to the incorrect municipality such that franchise fee revenue associated with the residents on those streets is remitted to the “wrong” municipality. This is common given that cable systems are not built along municipal boundaries.
  • Changes in accounting methodologies or hiring new accounting staff by the cable operator, resulting in inaccurate revenue figures recorded for a municipality.

Through a franchise fee audit, any such mistakes on the part of the cable operator are identified and corrected. A franchise fee audit includes a comprehensive and detailed investigation and analysis of all of the cable operator’s financial records pertaining to the municipality. It also includes multiple follow up sessions with the cable operator after the financial records have been reviewed.

CLG works aggressively to find underpayments on the part of the cable operator and has found underpayments in over 60 percent of the franchise fee audits we have performed. We then collect these underpayments from the cable operators. Even in instances where an audit does not reveal underpayments, a franchise fee audit sends a strong message to the cable operator that the municipality is being vigilant in holding the cable operator accountable.

 

Cable Compliance Reviews

Cable franchise agreements contain numerous financial, legal, and technical obligations on the part of the cable operators and vest municipalities with the power to enforce these obligations. Some of the major obligations may include, but are not limited to, the following:

  • Accurate payment of franchise fees[1]
  • Provision of free internet and cable services to municipal buildings
  • Upgrade of the cable system to certain technical standards
  • Build-out of the cable system to serve all areas of the municipality subject to density requirements
  • Compliance with a wide array of customer service standards
  • Insurance and bonding requirements
  • Public, educational and governmental (“PEG”) channel requirements

Through a cable compliance review, a municipality can determine whether the cable operator is adhering to the requirements in the agreement.  If not, CLG will take action to correct past violations and to ensure that the cable operator complies in the future.  Finally, a compliance review also allows the municipality to perform its federally mandated role as “cable compliance officer.”

 


[1] The services performed in the franchise fee portion of the cable compliance review are the same as those described in the franchise fee audit above.

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