Audit Report on the Compliance of RCN Telecom Services of New York, Inc., with Its Franchise and Open Video Agreements

AUDIT REPORT IN BRIEF

The Department of Information Technology and Telecommunications (DoITT) has two agreements with RCN Telecom Services of New York, Inc. (RCN). The first agreement, a 10-year Open Video System (OVS) agreement signed on December 29, 1997, permits RCN to construct and operate OVS communication services, including the operation of its microwave-satellite system,¹ within the City. The second agreement, a 15-year franchise agreement signed on January 5, 1999, grants RCN franchise rights for the occupation of City property in connection with the provision of its telecommunication services. Under the OVS agreement, RCN is required to pay the City an OVS operator fee equal to five percent of gross revenue. Based on the franchise agreement, RCN is required to pay the City a franchise fee consisting of the greater of either $200,000 or five percent of its annual gross revenue.

The audit determined whether RCN accurately reported its total revenue, calculated and paid the appropriate fee amounts to the City, and made the required payments on time; and complied with certain non-revenue-related requirements of its agreements (i.e., maintained the required insurance and security deposits, and made the required payments to the community access organizations (CAOs).²

Audit Findings and Conclusions

RCN complied with certain non-revenue-related requirements of the agreements, such as maintaining the required $50 million property and liability insurance that named the City as an additional insured party, paying the $1 million in a security deposit, and remitting the required payments to the CAOs and to the City for education and government access and for subscriber services to government facilities.

However, RCN failed to report $26,431,624 in revenue to the City for the period January 1, 1999, to December 31, 2005; it therefore owes the City an additional $1,784,594 in fees and interest. RCN did not report to the City any of the revenue generated from its microwave-satellite operations, advertising sales commissions, resale services, and other revenue categories required to be reported to the City under the OVS and franchise agreements. In addition, RCN did not provide sufficient documentation that would allow us to ascertain whether its books and records accurately reflected the results of all its revenue activities. As noted in the scope limitation section of the report, RCN did not provide its building activity reports for calendar years 1999 and 2000. Consequently, we were not able to determine whether additional revenues should have been reported for these periods or whether additional fees are due the City.

As a result of the findings of our preliminary audit report, RCN remitted a check for $1,286,637 representing a portion of the principal amount assessed by our audit. Therefore, after adjusting for the amount paid, RCN owes the City $497,957 ($1,784,594 – $1,286,637).

Audit Recommendations

To address the issues raised by this audit, we make five recommendations to RCN, including that it:

• pays the remaining $497,957 in fees and late charges due the City, and

• reports all its revenue to the City as required in its OVS and franchise agreements.

We make five recommendations to DoITT, including that it:

• ensures that RCN pays the City $497,597 in fees and late charges,

• complies with the report’s other recommendations, and

• establishes proper guidelines to monitor RCN’s compliance with its City agreements.