Audit Report on the Compliance of Time Warner Cable of New York City, Southern Manhattan Division, With Its Franchise Agreement

EXECUTIVE SUMMARY

In September 1998, the City, through the Department of Information Technology and Tele-communications (DOITT), and Time Warner Cable of New York City, Southern Manhattan Division (Time Warner) agreed to a renewed franchise agreement for 10 years. Section 9 of the renewed agreement requires that Time Warner pay the City five percent of its gross revenue, less the mandatory payments made to the New York State Public Service Commission (NYSPSC).In addition, Time Warner is required to: carry a $50 million combined insurance policy for property damage and bodily injury, naming the City as an additional insured; maintain a security fund deposit of $3.5 million; and provide specified annual payments, payable quarterly, to the NYSPSC and the Community Access Organization (CAO).

This audit determined whether Time Warner maintained adequate internal controls over the recording and the reporting of its gross revenues; reported accurately its gross revenue, and calculated and paid the appropriate franchise fees due, paying those franchise fees on time; and complied with certain other non-revenue related requirements of its franchise agreement (i.e., maintained the required liability insurance and security fund, and made the required payments to the NYSPSC and CAO).

For the audit period October 1, 1998, through December 31, 2001, Time Warner reported gross revenues totaling $628 million. Time Warner paid the City $39.3 million in franchise fees. In addition, Time Warner paid the NYSPSC $725,586. (See Appendix I.) Of the franchise fees, $30.6 million pertained to the Southern Manhattan Division and $8.7 million related to franchise fees from advertising revenues that included all Time Warner City Divisions for its CityCable Advertising Division. CityCable’s advertising revenues and franchise fees for the period January 1, 1996, to December 31, 1999, were covered in a separate audit––FN00-098A, issued on May 11, 2000.

For the audit period October 1, 1998, through December 31, 2001, Time Warner reported gross revenues totaling $628 million. Time Warner paid the City $39.3 million in franchise fees. In addition, Time Warner paid the NYSPSC $725,586.Time Warner had an adequate system of internal controls over its revenue collection process. However, Time Warner under-reported its gross revenue by $26,894,861 for the period October 1, 1998, to December 31, 2001. This resulted in Time Warner’s owing the City $1,493,954 in additional franchise fees and calculated interest as of December 31, 2001.

Commencing February 1998, Time Warner separately identified the cost of franchise fees in its bills to subscribers, but improperly excluded the franchise fee portion of the billed amount in its gross revenues reported to the City. Prior to February 1998, Time Warner reported the total amount collected from subscribers (including franchise fees collected from subscribers) on its gross revenue statements and paid the pertinent fees on these amounts. Also, Time Warner did not report $75,046 in revenue from Non-Sufficient Fund check charges––a fee charged to each customer for each check returned by the bank as uncollectible––on its gross revenue statements to the City from October 1, 1998, to December 30, 2001.

The preliminary draft of this report recommended that Time Warner pay the City $1,493,954 for additional franchise fees and interest due, and include on its quarterly gross revenue statements to the City all franchise fees collected from subscribers and Non-Sufficient Fund check charges.

However, as a result of this audit and two other audits of Time Warner cable franchise agreements—Time Warner Northern Manhattan Division and Queens Inner Unity Cable System––Time Warner, through an agreement with the City, paid the City $7,677,521 on May 31, 2002. This payment covered franchise fees that were excluded from gross revenue calculations to May 31, 2002, and owed under the seven Time Warner cable franchise agreements with the City. (Of the total amount paid, $1,776,532 pertained to the Southern Manhattan Division.) Therefore, this report now recommends that Time Warner pay the City $4,460 in franchise fees and interest owed under its franchise agreement for the Southern Manhattan Division for excluding Non-Sufficient Fund check charges on its gross revenue statements from October 1, 1998, through December 31, 2001.

Time Warner officials responded that "We disagree with your characterization of our not including the amount of franchise fees in our computation of gross revenues as an ‘underreporting’ and an ‘improper exclusion’. As you are aware, there was a difference of opinion between the City and Time Warner with regard to this fee on fee issue. It was Time Warner’s position that franchise fees should not be included as part of gross revenues while it was the City’s position that they should. Subsequently, as you discuss in the Report, an Agreement settling this matter was reached, although it should be pointed out that neither party conceded their position. Further, although the audit periods vary, it should be made clear in each Report that the $7,677,521 payment covered the period from February 1, 1998 through May 31, 2002, in each case a period beyond the Audit period."

DOITT officials responded that "the financial issues brought forward during the audit have been addressed and are now correctly being reported as gross revenue [by Time Warner]. The appropriate franchise fees will be paid quarterly. Franchise fee payments will continue to be reviewed and monitored by this agency accordingly."

Neither Time Warner nor DOITT responded to the audit’s findings pertaining to the exclusion of Non-Sufficient Fund check charges.