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HomeMy WebLinkAbout5.F.9. Results of Comcast Franchise fee Audit Consent Business 5. F. 9. SHAKOPEE TO: Mayor and City Council Mark McNeill, City Administrator FROM: Kris Wilson, Assistant City Administrator DATE: 12/16/2014 SUBJECT: Results of Comcast Franchise Fee Audit (E) Action Sought The Council is asked to receive and file the attached review of franchise fee and PEG fee payments from Comcast. Background In June of 2013, the City's now-disbanded Telecommunications Advisory Commission directed staff to proceed with an audit of the franchise fee and PEG fee payments paid to the City by Comcast Cable. The review was to be conducted by the law firm of Moss and Barnett at a cost not to exceed $8,500. Franchise fee audits are conducted periodically to ensure that the City is receiving all payments called for under the franchise agreement. The current agreement calls for Comcast to collect and transmit 40 cents per subscriber per month in PEG fees and to pay a franchise fee of 5% of gross revenue from the Shakopee service area. The City received a total of$366,551 from Comcast in 2011 and $371,898 in 2012 (the two years covered by the review). Of these amounts, approximately 9% is PEG fees and the remaining 91%represent franchise fee payments. After several delays in obtaining information requested from Comcast, Moss and Barnett was able to complete their review in April of this year and provided the attached report to staff. Approximately one-week later the City received notice of Comcast's desire to transfer its franchise with the City to a new company. The question of how to respond to the findings of the franchise fee audit was put on hold. However, earlier this fall staff returned to the results of the franchise fee audit and, with the help of Moss and Barnett, requested a response and some follow-up information from Comcast(see attached "Sept. 2014 Letter to Comcast "). A response from Comcast was received in mid-November(see attached "Comcast Response") and sent to Moss and Barnett for review. Moss and Barnett have reported back that they find Comcast's responses to be reasonable and that no further action is necessary. (See attached " Nov 2014 Letter from Moss & Barnett.") Therefore, at this time, Council is asked to receive and file the attached Report of Franchise Fee and PEG Fees for the years ending December 31, 2011 and 2012. Further action by the City Council related to the proposed transfer of the City's franchise is expected to be brought forward in January. Budget Impact The anticipated cost of this review was originally $8,500, however additional costs were incurred when Comcast was not prompt in responding to Moss and Barnett's request for information. The final cost of the project was $11,026, which will be paid out of available funds in the Telecommunications Division budget. Relationship to Vision This is a housekeeping item. (F) Requested Action The Council is asked to receive and file the attached Review of Franchise Fee and PEG Fees Receipts for the years ending December 31, 2011 and 2012. Attachments: Report of Franchise & PEG Fees Sept 2014 Letter to Comcast Comcast Response Nov 2014 Letter from Moss & Barnett •�i•i Moss & Barnett A Professional Association April 23, 2014 PERSONAL AND CONFIDENTIAL Mr. John Peterson Telecommunications Coordinator City of Shakopee 129 South Holmes Street Shakopee, MN 55379 Re: Franchise Fee and PEG Fee Desk Report (the"Report") for the City of Shakopee, Minnesota for the Years Ended December 31, 2011 and 2012 Our File No. 53970.1 Dear Mr. Peterson: We have completed this Franchise Fee and PEG Fee Desk Report on the Comcast of Arkansas/Florida/Louisiana/Minnesota/Mississippi/Tennessee, Inc.'s ("Comcast's") franchise fee and PEG fee revenue for the City of Shakopee, Minnesota (the"City") for the years ended December 31, 2011 and 2012 (the"Desk Review Period"). The objective of our Report was to analyze the current franchise fees and PEG fees being paid by Comcast to the City as required under the City of Shakopee Cable Franchise Ordinance No. 709 adopted as of July 20, 2004 (the "Ordinance"). This information is being furnished to the City solely for the City's use and is subject to a Confidentiality Agreement dated September of 2013, executed by Moss & Barnett, P.A., as an agent and consultant for the City, and Comcast. This Report should not be disseminated to anyone other than the City without Comcast's consent. The activities performed in preparation of our Franchise Fee and PEG Fee Desk 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 Comcast to the City. 3. Review Comcast's franchise fee calculation worksheets for the City for the Desk Review Period. 4. Analyze Comcast's allocations of non-subscriber revenue to the City for the Desk Review Period. 5. Review Comcast Corporation's Form 10-K for the period ended December 31, 2012, which included the Comcast Corporation and Subsidiaries Condensed Consolidating Balance Sheets as of December 31, 2011 and 2012, and the Condensed Consolidating Statements of Income and Cash Flows for the years ending December 31, 2012, 2011, and 2010, as filed with the Securities and Exchange Commission on February 21, 2013. 4800 WELLS FARGO CENTER I 90 South Seventh Street Minneapolis, MN 55402-4129 P:612-877-5000 F:6 1 2-877-5999 W:moss-barnett.com Mr. John Peterson April 23, 2014 Page 2 Moss & Barnett 6. Correspond with Comcast personnel regarding the allocations, accounting treatment and financial information associated with the franchise fee gross revenues earned by Comcast and the franchise fees and PEG fees paid to the City. 7. Review a sample of Comcast's subscriber invoices for the Desk Review Period. The documents used in preparation of our Report were limited to the following: 1. The Ordinance; 2. The City's franchise fee and PEG fee information and payment amounts received from Comcast for the Desk Review Period; 3. The Comcast PEG fee worksheet titled"PEG Trend Report"for the City for the Desk Review Period; 4. Comcast's franchise fee calculation worksheets referred to as"Franchise Fee Trend Reports"for the City for the Desk Review Period; 5. Comcast's advertising and non-subscriber revenue allocation worksheets for the Desk Review Period including the"Ad Sales Revenue Allocations","Shopping Other Allocations", "2012 Ad Zones", and "2012 Ad Sales"worksheets; 6. Other Comcast franchise fee worksheets including "2012 Shakopee Multi Service","Bad Debt Late Fees Allocation","318 LOB Video Jan-2011","Bundled Analysis"and"Bundled Report." 7. Comcast's Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on February 21, 2013; 8. Comcast's CPSM-318"Financial Summary Reports"for the Desk Review Period; and 9. A sample of Comcast's subscriber invoices for the Desk Review Period. In preparation of this Report, we did not and have not reviewed any of the accounting source documents including deposit slips, copies of payments, copies of credit card payments, debit memos, credit memos specifically writing off accounts receivable, non-subscriber revenue source documents, or any other source documents specifically received by or exchanged between Comcast and the customers of Comcast located in the City subject to the Ordinance or other individuals or entities responsible for the generation of revenue by Comcast with respect to the Ordinance with the City. We acknowledge that we have relied exclusively on the information provided by Comcast 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. John Peterson •••• • April 23, 2014 Page 3 Moss & Barnett Page FINDINGS As a result of our analysis of Comcast'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 Comcast 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 potential adjustments as discussed below in Findings #1 and #2 and may not be fully indicative of the actual franchise fees and PEG fees payable by Comcast to the City or reflect the actual gross revenues of Comcast earned by the operation of the cable system in the City in the Desk Review Period. 1. Non-Subscriber Revenue. Section 10.1.A of the Ordinance provides that"Grantee shall pay to the City a Franchise Fee in an amount equal to five percent (5%) of annual Gross Revenues." Section 3 of the Ordinance defines`Gross Revenues'as: "Gross Revenues"means all revenues received directly or indirectly by the Grantee, arising from or in connection with the provision of Cable Service in the City including subscriber revenues (including pay TV), franchise fees, advertising income, home shopping program revenues and rentals of subscriber equipment, accounted for as earned in accordance with generally accepted accounting principles. Grantee is not required to include revenues recorded as earned but which are deemed uncollectible, but it must include recoveries previously deemed uncollectible. This definition of gross revenues also does not include sales, excise or other taxes collected by Grantee on behalf of federal, state, county, city or other governmental unit. Funds collected by Grantee to support public, educational and governmental access programming are also excluded from the definition of gross revenues." The scope of`Gross Revenues' under the Ordinance 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 Comcast from advertising, home shopping channels, sale-to-customer based programs, bill stuffier/insert revenue and all other activities related to the operation of the cable system in the City. Gross Revenues also include amounts collected as franchise fees, but excludes taxes and PEG fees collected from subscribers in the City. After analyzing the information provided by Comcast, we have made the following findings with respect to advertising and home shopping revenue: (a) Basic Cable Subscriber Allocation - Advertising Revenue. Comcast allocates national and regional advertising revenue to the City (based upon the national and regional advertising revenue allocated to an area, which includes the City) Mr. John Peterson •••• • April 2014 Page 4 e 4 Moss & Barnett Pag by the number of subscribers in the area in which the City is located. This allocation of advertising revenue is consistent with common industry practices. (b) Average Advertising Revenue per Basic Cable Subscriber. Comcast 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 and may pass through to Comcast or its many related entities. We did not review the national advertising revenue earned by Comcast. We have evaluated the advertising revenue reported by Comcast based upon the average advertising revenue per basic cable subscriber as described below. The advertising revenue allocated by Comcast to the City averaged $6.73 per basic cable subscriber a month in 2011 ($565,110.76 of allocated advertising revenue for 2011 divided by twelve (12) months and divided by 6,997 basic cable subscribers, the City's monthly average for 2011); and $5.35 per basic cable subscriber a month in 2012 ($462,966.74 of allocated advertising revenue for 2012 divided by twelve (12) months and divided by 7,209 basic cable subscribers, the City's monthly average for 2012). In 2011, the advertising revenue allocated by Comcast to the City was within the author's expected range. However, we note that the average advertising revenue per subscriber decreased by over twenty-five percent (25%) from 2011 to 2012. We specifically asked Comcast to comment on this significant decrease. Comcast replied"We are currently researching will provide a response under separate cover." We never received a clear explanation regarding this significant decrease in the advertising revenue, but note that Comcast changed its methodology of allocating advertising revenue to the City in 2012. We understand that the variance (decrease) in the City's average advertising revenue per basic cable subscriber between the years in the Desk Review Period could be for a variety of reasons, including changes in the advertising market in which the City is located. However, the 2012 Comcast Form 10-K, on page 50, reported that Comcast's Cable Communications Segment- Advertising Revenue increased 14.1% while the number of subscribers decreased by 1.5% in 2012. Based upon Comcast's number of subscribers and advertising revenue as reported on its 2012 Form 10-K, the average monthly advertising revenue per subscriber is $8.66 ($2,287,000,000 of advertising revenue divided by 21,995,000 video subscribers divided by 12 months). The decrease in advertising revenue allocated to the City between 2011 and 2012, even though Comcast's overall advertising revenue per video subscribers increased significantly in this period, could potentially be related to Comcast's failure to report all of its advertising gross revenue earned by Comcast and its related affiliates in the City in its franchise fee calculations. Mr. John Peterson •••• • April 2014 5 Page 5 Moss & Barnett With respect to any affiliated entity revenue, we inquired whether any related entity or affiliate of Comcast generated revenue from the cable services provided to the City. Comcast stated that"I am not aware of affiliate or entity that generates any revenues." Under the Ordinance, revenue generated by Comcast's affiliates as a result of its activities in the City is subject to the City's franchise fee. Comcast's position is that all franchise fees have been paid to the City. Since the amount of advertising revenue per subscriber in the City decreased significantly and is forty percent (40%) less than the advertising revenue per subscriber as reported in its Form 10-K, further review and explanation for this item is necessary. (c) Home Shopping Commission Revenue. Shopping channel commissions are reported by the shopping channel providers, such as the Home Shopping Network, based upon the geographic area where their products or services were sent or provided. It is my understanding that Comcast allocates all Home Shopping commission revenue in the same manner as Comcast allocates advertising revenue (by subscribers within an area). The amount of home shopping revenue per subscriber increased by twelve percent (12%) from 2011 to 2012. We do not have a national average of home shopping channel commission revenue per subscriber; however, based upon other reports prepared by the author for other franchises, the home shopping commissions recognized by Comcast in the City appear reasonable when analyzed on an average commission amount per subscriber basis. 2. Franchise Fees on Miscellaneous Revenue. In our review of Comcast's"Financial Summary Reports"that contain a list of revenue, by account, we noted that Comcast appeared to fail to report the franchise fee revenue classified as'LOB: Neutral — CAT:VIDSVC'which appears to include revenue that is subject to the City's franchise fee. The accounts included in this classification include Early Termination Fees, HDDVR, SPP w/Video, HD-DVR 3.0, IHW MAINT and various other categories that appear to be video related. Comcast's response to our inquiry regarding this classification was"These are terms that don't fall into a specific Line of Business of which we pay on the video portion of the revenue." Upon further request, we did receive additional information regarding other types of revenue as noted above, but the amounts and allocations were inconsistent with the actual revenue in the accounts per the Financial Summary Reports that Comcast provided. In light of the above, we have calculated a franchise fee adjustment under this Finding, based upon the amounts on the monthly Financial Summary Reports provided by Comcast. We note that a portion of this miscellaneous revenue may be reported elsewhere in Comcast's calculations, but Comcast needs to provide specific detail on how the revenue in the'LOB:Neutral-CAT:VIDSVC'classification is reported in the franchise fee calculation or why these accounts"don't fall into a specific Line of Business of which we (Comcast) pay on the video portion of the revenue"as noted above. Based upon this information, the additional revenue in the'LOB:Neutral-CAT:VIDSVC'account Mr. John Peterson •�••• Page April 6 2014 Moss &• Barnett Page that appears to be subject to the City's franchise fee for the periods ended December 31, 2011 and 2012 were $67,084.71 and $86,276.55, respectively. The exclusion of this revenue results in an underpayment of the franchise fees payable by Comcast to the of 3 354 .24 (the five percent(5%) franchise fee rate times in the amount ( ) City ( P $67,084.71 of unreported revenue) for the year ended December 31, 2011; and $4,313.83 (the five percent(5%) franchise fee rate times $86,276.55 of unreported revenue) for the year ended December 31, 2012. The total unreported and unremitted franchise fees related to this potential unreported franchise fee revenue are $7,668.07. In addition to the franchise fees as noted above, the Ordinance provides in Section 10.1.F: "In the event any payment is not made on the due date, interest on the amount due shall accrue from such date at the annual rate of 12%." In addition to the unpaid franchise fees, an additional interest charge in the amount of $1,126.80 for 2011 and $831.71 for 2012 is payable as a result of the potential nonpayment of the franchise fees. The total franchise fees with interest potentially payable by Comcast to the City for the Desk Review Period are $9,626.58. (See attached Schedule A for a detailed calculation of the additional franchise fees and interest.) 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 Comcast from subscribers and the amount remitted to the City exists. For 2011, $331,502.47 of franchise fees were collected by Comcast from subscribers in the City and $333,911.64 were remitted to the City. For 2012, $359,152.30 of franchise fees were collected by Comcast from subscribers in the City and $339,532.12 were remitted to the City. Based upon our analysis, Comcast is over-collected franchise fees from its subscribers in the City in 2012. The amount of franchise fees over-collected by Comcast from subscribers in the City was $17,211.01 during the Desk Review Period. In response to our inquiry regarding the over-collected franchise fees, Comcast responded that"Since the City is required to receive franchise fees on Non-Subscriber revenues (i.e. Home Shopping and Advertising) these sources are not a billed revenue item on the customer's statement. An annual over/under collect true up is done to the franchise fee charged the customer."During the Desk Review Period, Comcast has over- collected franchise fees from subscribers in the City. We specifically asked Comcast to provide us with specific evidence on how the over-collected franchise fees in the Desk Review Period were returned to the customers in the City (i.e., show the amount of franchise fees collected in 2013 is less than the amount of franchise fees paid to the City). Comcast did not provide any specific information on this item. The City should confirm that such over-collected franchise fees have been refunded to customers in the City through lower franchise fee rates on its subscribers'invoices consistent with Comcast's response as stated above. 4. PEG Fees. With respect to the PEG fees, Section 7.2.A of the Ordinance provides: Mr. John Peterson ,•••• April 2014 Page 7 e 7 Moss & Barnett Pag "Grantee shall collect Forty cents ($.40) per Subscriber, per month and shall remit said amounts collected to the City on a quarterly basis to be used solely for PEG Access. Such amounts are separate from and in addition to Franchise Fees. Grantee shall have no additional obligation for PEG Access equipment maintenance or studio support, including rent reimbursement." As part of this review, Comcast provided us with subscriber invoices to review whether Comcast was invoicing and collecting the PEG fee from subscribers in the City. Our review of the invoices provided by Comcast showed that Comcast included a $0.55 PEG fee on a subscriber invoice, even though the applicable rate is $0.40, as noted above. After reviewing the invoices, we requested that Comcast provide us with an explanation of why the certain cable subscriber invoice included an incorrect PEG fee. In response to our request, Comcast noted "Our only explanation for the $.55 charged to the account mentioned above is that the customer moved into the City right at the end of a billing cycle from another municipality which has a rate of$.55."This Report does not provide any verification that Comcast has accurately invoiced and collected the $0.40 per subscriber per month PEG fee or that all subscribers in the City have been treated equally and billed the required PEG fee. Based upon the information provided by Comcast, we have calculated the estimated PEG fees by using the number of basic subscribers in the City multiplied by the $0.40 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 $65,006.26, while the amount of PEG fees based upon the number of subscribers in the City equals $68,983.60 for the Desk Review Period. As noted above, this difference of$3,977.34 could be for a variety of reasons, including subscribers connecting and disconnecting service during a month. Based upon the number of subscribers.in the City, this difference appears to be reasonable and we have not further reviewed such calculations. 5. Payment of Franchise Fees. As part of our review process, we analyze whether the cable provider has timely remitted its franchise fees to the City. Under Section 10.1.0 of Ordinance, Comcast is required to remit its quarterly franchise fee payments"not later than 60 days from the last day of the quarter." Based upon the provided information, it appears that Comcast has timely remitted the franchise fees to the City in 2011 and 2012, except as otherwise noted herein. 6. Bad Debt Expense. According to our review of the bad debt expense as shown on the franchise fee worksheets, Comcast deducted bad debt expense from the gross revenue amounts used to calculate the franchise fees for the City. Since the gross revenue amounts reported by Comcast are based upon service fees billed, the reduction for bad debt expenses adjusts the franchise fee gross revenue to equal the amount of revenue Comcast actually receives. Comcast's position and calculations are consistent with the definition of'Gross Revenues'as found in the Ordinance. The Bad Debt percentage to • Mr. John Peterson •••• • April 2014 Page 8 e 8 Moss & Barnett Pag total revenue was less than one percent (1.0%) and is consistent with or better than the bad debt expense ratio of other cable operators. 7. Franchise Fee Rate Calculation. According to the subscriber invoices provided by Comcast, it appears that Comcast is using a variable franchise fee rate of around 5.7% on its subscriber invoices. As an industry practice and allowed by Federal law, Comcast, 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 as discussed in Finding #3 above, Comcast was over-collecting franchise fees during 2012. 8. Quarterly and Annual Reports. Based upon my review of the information provided by Comcast and the Ordinance, Comcast is only required to provide a brief report showing the basis for the franchise fee calculation. Based upon the provided information, Comcast appears to have provided the information required per the Ordinance. Many franchises require detailed quarterly and annual reports regarding the franchise fee calculation signed by an officer of the cable provider. The City may want to consider modifying its Ordinance to incorporate these items in the future so that the City can better monitor the franchise fee gross revenue categories and amounts. 9. Other Revenue. The Ordinance provides for the imposition of the franchise fee on all revenue earned by Comcast and any of its affiliates under the terms of the Ordinance. Based upon Comcast's potential failure to report and pay franchise fees on the revenue items as noted above, the potential exists that Comcast is not paying franchise fees on all Gross Revenues as required under the Ordinance. Comcast claims that all other franchise fee revenue subject to the Ordinance is being reported to the City. 10. Review Fees. The Ordinance provides in Section 10.1E that"All amounts paid shall be subject to audit and recomputation by the City. For purposes of conducting such an audit, the City or its agents may inspect Grantee's books or records relating to calculation of Gross Revenues and Franchise Fees upon ten (10) days written notice." The Ordinance does not include a provision for the reimbursement of the City's costs incurred in reviewing the cable provider's franchise fee and PEG fee payments and gross revenue 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. RECOMMENDATIONS Based upon the above Findings, we make the following recommendations: Mr. John Peterson .•••• April 2014 Page 9 e 9 Moss & Barnett Pag 1. Demand that Comcast remit $9,626.58 to the City as discussed in Finding #2 or provide additional information to clarify how the'LOB:Neutral—CAT:VIDSVC' revenue as reported in the Comcast Financial Summary Reports is properly excludible from the franchise fee calculation or has otherwise been included in the franchise fee calculation. 2. Demand a detailed explanation for why the advertising revenue allocated to the City in 2012 decreased sharply and monitor Comcast's advertising revenue in 2013 and thereafter to determine if the downward trend in advertising revenue is continuing as noted in Finding #1(b). If such explanation is not reasonable or if the downward trend is continuing, consider a further review of Comcast's advertising revenue. 3. Confirm that Comcast 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, Comcast over-collected $17,211.01 of franchise fees from subscribers in the Desk Review Period. This amount should have been refunded to subscribers in 2013 through lower franchise fee rates on its subscriber invoices. If Comcast failed to refund such over-collected franchise fees to the subscribers in 2013 (and potentially over-collected more franchise fees in 2013), the City should demand that Comcast immediately refund such over-collected franchise fees to the subscribers in the City in 2014. 4. Consider modifications to the Ordinance to address the provision of quarterly and annual franchise fee reports, and reimbursement of franchise fee review and audit fees as discussed in Findings #8 and #10. 5. For the 2009, 2010, and 2013 periods, demand that Comcast recalculate and remit the appropriate amount of franchise fees related to Recommendation #1 for certain miscellaneous franchise fee revenue. As shown in this Report, Comcast is potentially not paying franchise fees on this revenue which based upon this Report could represent another approximately$8,000 of franchise fees payable to the City. The analysis in this 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 Comcast 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. 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, Comcast or any other party with respect to this Report. Mr. John Peterson ••••• April 23, 2014 Page 10 0 Moss & Barnett Page If you have any questions or would like to discuss the contents of this Report further, please do not hesitate to contact our office. Ve truly ;•urs, .�e dt sow •Y Att. ney At Law (6 2) 877-5267 B:rndtY @moss-barnett.com YBB/mmm Enclosures cc: Brian T. Grogan, Esq. 2477037x1 Schedule A City Shakopee Shako ee Franchise Fee Desk Report 2011 Miscellaneous Revenue Unreported Revenue-Billing Report-LOB:Neutral-CAT:VIDSC $67,084.71 Franchise Fee Rate-5%(Ordinance) 5.00% Unreported and Unremitted Franchise Fees $3,354.24 Interest on Late Payment of Franchise Fees* 10/14/11-4/30/14** $1,126.80 Total Franchise Fees and Interest $4,481.04 *-Assumes entire underreported amount was due on October 14, 2011(Mid-point for 2011 Payments). **-Compounded annually based upon the interest rate as set forth in the Ordinance. 2012 Miscellaneous Revenue Unreported Revenue-Billing Report-LOB:Neutral-CAT:VIDSC $86,276.55 Franchise Fee Rate-5%(Ordinance) 5.00% Unreported and Unremitted Franchise Fees $4,313.83 Interest on Late Payment of Franchise Fees* 10/14/12-4/30/14** $831.71 Total Franchise Fees and Interest $5,145.54 * -Assumes entire underreported amount was due on October 14, 2012 (Mid-point for 2012 Payments). **-Compounded annually based upon the interest rate as set forth in the Ordinance. TOTAL FRANCHISE FEES AND INTEREST $9,626.58 September 26, 2014 Mr. Marc Lockard Comcast Corporation 200 Cresson Boulevard Oaks, PA 19456 Re: Desk Review of Franchise Fee Payments—City of Shakopee, Minnesota Dear Mr. Lockard: As you know, the City of Shakopee, Minnesota ("City") retained Moss & Barnett to conduct a desk review of Comcast of Arkansas/Florida/Louisiana/Minnesota/Mississippi/Tennessee, Inc.'s ("Comcast's") financial records in order to determine the accuracy of the franchise fees and PEG fees incurred, collected, and remitted to the City under Franchise Ordinance No. 709 ("Franchise"). Enclosed herewith please find a copy of Moss &Barnett's April 23, 2014 Franchise Fee Desk Report for the City of Shakopee, Minnesota for the Years Ended December 31, 2011 and 2012 ("Report"). Based on the findings and recommendations in the Report, the City hereby requests that Comcast provide a written response to the below findings on or before October 26, 2014. Failure to provide such response may result in the City commencing a violation proceeding against Comcast pursuant to Section 10.3 of the Franchise. In particular, Comcast should provide specific responses to the following issues raised in the Report: 1. The Report concluded that Comcast remit$9,626.58 to the City as discussed in Findings #2. 2. The Report concluded that Comcast provide a detailed explanation why the advertising revenue allocated to the City in 2012 decreased sharply as noted in Finding #1(b). 3. The Report concluded that Comcast confirm it has adjusted its franchise fee collection rate on its subscriber invoices to account for the over-collected franchise fees for the years ended December 31, 2011 and 2012. As noted in Finding #3 of the Report, Comcast over-collected $17,211.01 of franchise fees from subscribers during 2011 and 2012. 4. The Report concluded that Comcast recalculate and remit the appropriate amount of franchise fees related to #1 above for certain miscellaneous franchise fee revenue for the 2009, 2010 and 2013 periods. If you have any questions please direct them in writing to my attention. Sincerely, Mark McNeill City Administrator Enclosure cc: Brian T. Grogan, Moss &Barnett (via email) Yuri Berndt, Moss &Barnett (via email) 12/11/2014 City of Shakopee Mail-Fwd:Comcast Franctise Fee Audit Response-Shakopee 1111110. Kris Wilson <kwilson @ci.shakopee.mn.us> SHAKOPEE Fwd: Comcast Franchise Fee Audit Response - Shakopee 1 message Kris Wilson <kwilson @shakopeemn.gov> Thu, Dec 11, 2014 at 11:19 AM To: Kris Wilson <KWilson @ci.shakopee.mn.us> ----Forwarded message--- From: Lockard, Marc<Marc_Lockard @cable.comcast.com> Date: Wed, Nov 12, 2014 at 3:31 PM Subject: Comcast Franchise Fee Audit Response-Shakopee To: "mmcneill @ShakopeeMN.gov" <mmcneill @shakopeemn.gov> Cc: "Baraga, Karly" <Karly_Baraga @cable.comcast.com> Mr. McNeill, Please find attached Comcast's response to Desk Review of the franchise fee payments made to Shakopee for the period 2011 and 2012. Please contact me if you have any questions. Thanks 3 attachments rc Item 1_2011 Neutral Revenue—City of Shakopee.xlsx 873K a) Item 1_Dec -12 Shakopee 318_EXCEL_NEUTRAL.xlsx 256K Shakopee_Finding Response.docx 16K https://mail.google.com/mail/u/0/?ui=2&ik=515a5f05fc&view=pt&search=inbox&th=14a3a5d48c57687e&sim1=14a3a5d48c57687e 1/1 Comcast's Response to Desk Review for the Period January 1,2011 to December 30,2012 1. The Report concluded that Comcast remit$9,626.58 to the City as discussed in Findings#2. Comcast disagrees that the revenues classified as"LOB:Neutral-CAT:VIDSVC"was not reported as franchise fee revenue. In the attached file"Item 1—Dec 12 Shakopee 318 EXCEL_NEUTRAL"the first tab named"318-Revenue Portion Only"is the 318 in excel format. I have filtered on SPP in col.I which is the LOB for NEUTRAL,this ties to service code OB014 of the"300806 Rate Code Details"tab which is the revenue by rate code of the 318 report,which in turn ties to the"REVISED 2012 Multi-service"tab report. A review of the Multi-service allocation report initially sent had an error in the information provided. These files can be unfiltered and used to compare to the 318 reports previously provided. File"Item 1_2011 Neutral Revenue City of Shakopee",the tab"2011 Revenue by Rate Code"lists all neutral revenue for 2011,the"Pivot"tab summarizes the revenue by month with the total tying to the"2011 Late Fee_Bad Debt"tab which was initially sent. 2. The Report concluded that Comcast provide a detailed explanation why the advertising revenue allocated to the City in 2012 decreased sharply as noted in Finding#1(b). In 2012 Comcast started to use a new database to automate the calculation of franchise fees. At that time it was determined that the franchises in the Minneapolis/St Paul area should be allocated advertising revenues from ad zones 8,9,10. In 2011 and prior,Shakopee as well as more limited number of other franchises was allocated advertising revenue from only ad zone 10. This change in allocation method contributed to the decreased advertising revenues reported to Shakopee. 3. The report concluded that Comcast confirm it has adjusted its franchise fee collection rate on its subscriber invoices to account for the over-collected franchise fees for the years ended December 31,2011 and 2012. As noted in Finding#3 of the Report,Comcast collected $17,211.01 of franchise fees from customers during 2011 and 2012. Comcast adjusts its franchise fee percentages periodically to account for under/over collected franchise fees as well as changes in non-subscriber revenues such as ad sales. Comcast confirms that we have adjusted the franchise fee percentage to account for any over collections that would have occurred during 2011 and 2012. 4. The Report concluded that Comcast recalculate and remit the appropriate amount of franchise fees related to#1 above for certain miscellaneous franchise fee revenue for the 2009,2010 and 2013 periods. No recalculation is require since no amounts are due relating to#1. ••. . Moss & Barnett November 20, 2014 PERSONAL AND CONFIDENTIAL Mr. John Peterson Telecommunications Coordinator City of Shakopee 129 South Holmes Street Shakopee, MN 55379 Re: Franchise Fee and PEG Fee Desk Report(the"Report") for the City of Shakopee, Minnesota for the Years Ended December 31, 2011 and 2012 Our File No. 53970.1 Dear John: We received Kris'email with Comcast's response to our April 23, 2014 Report (see copy enclosed). Based upon their response and the newly provided information, we have the following comments based upon our Recommendations in the Report as enumerated below: 1. Recommendation in Report - Demand that Comcast remit $9,626.58 to the City as discussed in Finding #2 or provide additional information to clarify how the 'LOB:Neutral—CAT:VIDSVC' revenue as reported in the Comcast Financial Summary Reports is properly excludible from the franchise fee calculation or has otherwise been included in the franchise fee calculation. Per Comcast's response,the information initially provided by Comcast contained an "error"in its secondary information. Assuming the newly provided information is correct, there are now no franchise fees due and owing for this item. 2. Recommendation in Report - Demand a detailed explanation for why the advertising revenue allocated to the City in 2012 decreased sharply and monitor Comcast's advertising revenue in 2013 and thereafter to determine if the downward trend in advertising revenue is continuing as noted in Finding #1(b). If such explanation is not reasonable or if the downward trend is continuing, consider a further review of Comcast's advertising revenue. Per Comcast's response, the decrease in advertising revenue was caused by a change in the method of allocating advertising revenue as noted in Comcast's response. It appears that Comcast increased the size of the advertising area that included the City which effectively diluted the advertising revenue allocated to the City. If Comcast is using a reasonable method to allocate the advertising revenue to the region, there probably isn't much that can be done on this item. However, if this was a method to move advertising revenue to areas where the franchises don't include advertising revenue in the franchise fee calculations and the method is not reasonable from a business perspective,then the City may have a claim to additional franchise fees. Since Comcast has latitude on how to do this allocation, there is likely not much that can be done with this item. 150 South Fifth Street I Suite 1200 I Minneapolis, MN 55402 P: 612-877-5000 F: 612-877-5999 W. LawMoss.com Mr. John Peterson November 20, 2014 e2 Pa 9 Moss & Barnett 3. Recommendation in Report - Confirm that Comcast 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, Comcast over-collected $17,211.01 of franchise fees from subscribers in the Desk Review Period. This amount should have been refunded to subscribers in 2013 through lower franchise fee rates on its subscriber invoices. If Comcast failed to refund such over-collected franchise fees to the subscribers in 2013 (and potentially over-collected more franchise fees in 2013), the City should demand that Comcast immediately refund such over-collected franchise fees to the subscribers in the.City in 2014. Per Comcast's response, Comcast claims to have changed its franchise fee rate on its bills, but did not provide any concrete evidence to support its claim. Any refund would be payable to the subscribers in the City—not the City. 4. Recommendation in Report - Consider modifications to the Ordinance to address the provision of quarterly and annual franchise fee reports, and reimbursement of franchise fee review and audit fees as discussed in Findings #8 and #10. This Recommendation relates to future considerations for the City. 5. Recommendation in Report- For the 2009, 2010, and 2013 periods, demand that Comcast recalculate and remit the appropriate amount of franchise fees related to Recommendation #1 for certain miscellaneous franchise fee revenue. As shown in this Report, Comcast is potentially not paying franchise fees on this revenue which based upon this Report could represent another approximately$8,000 of franchise fees payable to the City. As a result of the change discussed in Item #1 above, this Recommendation no longer applies. If you have any questions or would like to discuss this information further, please do not hesitate to con)ct Bria i ogan •r me. Very truly yo rs, dr Aglit -/ Yu r . erndt Attorn At Law (612) 77-5267 Ber tY @moss-barnett.com YBB/mmm Enclosure cc: Brian T. Grogan, Esq. (via e-mail) 2604380v1 Comcast's Response to Desk Review for the Period January 1,2011 to December 30,2012 1. The Report concluded that Comcast remit$9,626.58 to the City as discussed in Findings#2. Comcast disagrees that the revenues classified as"LOB:Neutral-CAT:VIDSVC"was not reported as franchise fee revenue. In the attached file"Item 1—Dec 12 Shakopee 318 EXCEL NEUTRAL"the first tab named"318-Revenue Portion Only"is the 318 in excel format. I have filtered on SPP in col.I which is the LOB for NEUTRAL,this ties to service code 08014 of the"300806 Rate Code Details"tab which is the revenue by rate code of the 318 report,which in turn ties to the"REVISED 2012 Multi-service"tab report. A review of the Multi-service allocation report initially sent had an error in the information provided. These files can be unfiltered and used to compare to the 318 reports previously provided. File"Item 1_2011 Neutral Revenue City of Shakopee",the tab"2011 Revenue by Rate Code" lists all neutral "Pivot" e the revenue by month with the total tying to revenue for 2011,the Pivot tab summarizes y Y g the"2011 Late Fee Bad Debt"tab which was initially sent. 2. The Report concluded that Comcast provide a detailed explanation why the advertising revenue allocated to the City in 2012 decreased sharply as noted in Finding#1(b). In 2012 Comcast started to use a new database to automate the calculation of franchise fees. At that time it was determined that the franchises in the Minneapolis/St Paul area should be allocated advertising revenues from ad zones 8,9, 10. In 2011 and prior,Shakopee as well as in revenue from only ad zone more limited number of other franchises was allocated advertising y 10. This change in allocation method contributed to the decreased advertising revenues reported to Shakopee. 3. The report concluded that Comcast confirm it has adjusted its franchise fee collection rate on its subscriber invoices to account for the over-collected franchise fees for the years ended December 31, 2011 and 2012. As noted in Finding#3 of the Report,Comcast collected $17,211.01 of franchise fees from customers during 2011 and 2012. Comcast adjusts its franchise fee percentages periodically to account for under/over collected franchise fees as well as changes in non-subscriber revenues such as ad sales. Comcast confirms that we have adjusted the franchise fee percentage to account for any over collections that would have occurred during 2011 and 2012. 4. The Report concluded that Comcast recalculate and remit the appropriate amount of franchise fees related to#1 above for certain miscellaneous franchise fee revenue for the 2009,2010 and 2013 periods. No recalculation is require since no amounts are due relating to#1.