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HomeMy WebLinkAbout25F - CABLE AUDIT SRVSREQUEST FOR COUNCIL ACTION CITY COUNCIL MEETING DATE: AUGUST 1, 2011 TITLE: AGREEMENT WITH COMMUNICATIONS SUPORT GROUP FOR CABLE AUDIT SERVICES CITY MANAGER RECOMMENDED ACTION CLERK OF COUNCIL USE ONLY: APPROVED ? As Recommended ? As Amended ? Ordinance on 1St Reading ? Ordinance on 2nd Reading ? implementing Resolution ? Set Public Hearing For CONTINUED TO FILE NUMBER Authorize the City Manager and Clerk of the Council to execute the attached amendment to agreement with Communications Support Group for cable audit services in an amount not to exceed $60,000, for a total not to exceed amount of $78,000, subject to non-substantive changes approved by the City Manager and City Attorney. DISCUSSION On January 25, 2011, the City entered into an agreement with Communications support group to perform a cursory franchise fee and specialized Public, Education and Government (PEG) fee review of both Time Warner Cable (TWC) and AT&T California (ATT). This Phase 1 review was designed to better understand how both companies have been remitting franchise fees and PEG fees and determine if there was potential to recover additional unpaid fees. Phase 1 was also intended to provide information to the City that would assist in determining the costs and benefits of proceeding with a full audit. The cost for Phase 1 of the project was $18,000. On June 23, 2011 Communications Support Group submitted a preliminary procedures review that addressed the findings in Phase 1 of the project. This report lists potential unpaid franchise fee revenue of $77,000 and potential unpaid PEG revenue of $427,000. These amounts are one time monies that are in addition to the quarterly franchise fees and PEG fees that are remitted to the City. They City receives approximately $1,175,000 in franchise fee annually. In addition, as Part of Phase 1, Communications Support Group helped clarify the amount of PEG fees owed the City. The City projects approximately $232,000 in PEG fees annually. On June 24, 2011, Communications Support Group submitted a proposal for Phase 2 of the project, which includes a full three-year audit of TWC and a one-year audit of ATT. By completing Phase 2 of the project, the City will maximize its ability to recover up to $504,000 in unpaid franchise fees and PEG fees. In addition, the audit will help the City better understand TWC's and ATT's accounting practices to help ensure that the City is collecting all the quarterly franchise fees and PEG fees that it is owed. Franchise fees are fees paid into the General Fund and PEG fees are fees paid into Fund 21 and restricted for PEG capital and equipment purchases. 25F-1 Communications Support Group Agreement August 1, 2011 Page 2 FISCAL IMPACT Funds for this agreement are available in the PRCSA Administrative Services contract services account (no.01113200 62300). zl?j? Gerardo Mouet, Executive Director Parks, Recreation and Community Services Agency APPROVED AS TO FUNDS AND ACCOUNT: Francisco Gutierrez, Executive Director Finance and Management Services Agency 25F-2 FIRST AMENDMENT TO AGREEMENT THIS FIRST AMENDMENT TO AGREEMENT is entered into on August 1, 2011, by and between Communications Support Group, Inc., a California corporation ("Consultant") and the City of Santa Ana, a charter city and municipal corporation organized and existing under the Constitution and laws of the State of California ("City"). RECITALS: A. The parties entered into that certain Agreement N-2011-012, dated January 25, 2011, (hereinafter "said Agreement") by which Consultant has provided cable television/video provider franchise audit services. B. In accordance with the terms and conditions of said Agreement, the parties wish to amend the Scope of Services and increase compensation to pay for the additional services provided. WHEREFORE, in consideration of the covenants contained in said Agreement, and subject to all the terms and conditions of said Agreement, except those amended in this First Amendment to Agreement, the parties agree as follows: 1. Section 1, SCOPE OF SERVICES, shall be amended to provide that Consultant shall perform a franchise fee and PEG fee audit of both Time Warner and AT&T, as set forth in Exhibit A- 1, attached hereto and incorporated by this reference. 2. Section 2, COMPENSATION, shall be amended to increase compensation by $60,000, to pay for the additional services as follows: a. A complete agreed-upon procedures review of Time Warner franchise fee and PEG fees for a three year period for an amount not to exceed $45,000; and b. A complete agreed-upon procedures review of AT&T franchise fee and PEG fees for a one-year period for an amount not to exceed $15,000. The total amount for audit services provided under said Agreement shall not exceed $78,000.00 during the term of said Agreement. 3. Except as hereinabove amended, all terms and conditions of said Agreement shall remain in full force and effect. /// 25F-3 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Agreement on the date and year first written above. ATTEST: MARIA D. HUIZAR Clerk of the Council APPROVED AS TO FORM: JOSEPH STRAKA Interim City Attorney By: Laura Sheedy Assistant City Attorney CITY OF SANTA ANA PAUL M. WALTERS Interim City Manager COMMUNICATIONS SUPPORT GROUP, INC. JOHN RISK President 25F-4 EXHIBIT A-1 CONSULTANT'S PROPOSAL DATED JUNE 24, 2011 25F-5 COMMUNICATIONS SUPPORT GROUP INC. 1255 Somerset Lane Newport Beach, CA 92660 VOICE: (714) 788-8566 EMAIL: jrisk@csgaudits.com WEB: www.csgaudits.com June 24, 2011 Mr. Robert Carroll Senior Management Analyst Parks, Recreation, and Community Services 20 Civic Center Plaza M-75 Santa Ana, CA 92702 SUBJECT: CONSULTING PROPOSAL - PHASE 2 AT&T and TIME WARNER Dear Mr. Carroll, We are pleased to present our proposal to provide specialized, franchise fee, and PEG fee consulting services to the City of Santa Ana for the second phase of auditing associated with Time Warner Cable (TWC) and AT&T California (AT&T)'. Communications Support Group, Inc. (CSG) and its subcontractor, Diehl Evans & Co. proposes to perform a review of subscriber counts, franchise fee payments and PEG fee payments made by AT&T and Time Warner Cable. We have divided the work product as follows: 1) an agreed-upon procedures one-year review of AT&T, and 2) an agreed-upon procedures 3-year review of revenues as it pertains to franchise fee payments and PEG fee payments. To best meet the needs of the City, we have combined the resources of our firm, Communications Support Group, Inc. ("CSG"), a California-based consulting firm with extensive experience in performing franchise fee and PEG fee reviews on cable television companies, with the resources of Diehl, Evans & Company, LLP ("DE&CO"), an Irvine-based CPA firm. Our two firms have worked successfully together over the past seven years, having provided joint cable television consulting services for over thirty California cities and counties, including many AT&T and Time Warner systems. Approximately eighty-five percent of the work on this engagement will be performed by CSG, under the direction of Mr. John Risk, President of CSG. Mr. Risk holds a Bachelors Degree (with high honors) in Social Research from the University of Michigan. Mr. Risk is a former five-year Board member of the National Association of Telecommunications Officers and Advisors (NATOA). Since1979, Mr. Risk has held a variety of private and public sector management positions involving cable television franchise administration, policy, programming, production and technology. Mr. Risk has 1 CSG was retained in the first six months of 2011 to perform preliminary reviews of AT&T and Time Warner. @2011 Communications Support Group, Inc. Page 1 of 9 25F-6 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. performed compliance audits, franchise fee audits and video user tax audits for numerous California franchising authorities. Additionally, Mr. Risk has worked previously for the City of Santa Ana as a consultant and full-time employee. Approximately fifteen percent of work on this engagement will be supervised and reviewed by Mr. William S. Morgan, CPA, DE&CO's Director of Consulting Services. Mr. Morgan is a graduate of the University of Southern California and is an associate member of the Southern California and Nevada Chapter of the National Association of Telecommunications Officers and Advisors (SCAN/NATOA). Mr. Morgan has also worked previously for the City of Santa Ana as a subcontractor consultant. Over the past seven years, CSG and DE&CO have been retained by numerous cities (or groups of cities) to perform cable television consulting services. Some examples are noted below: Cities Cable Company-- Type of Service Cities of San Bernardino & Moreno Valley Adelphia and Time Warner Franchise Fee/UUT Review 12 Inland Empire Cities Adelphia Communication Franchise Fee/UUT Review 5 San Diego Co Cities Adelphia Communication Franchise Fee Review City of Los Angeles Altrio Communication "Due Diligence" Review City of Arcadia AT&T Franchise Fee/PEG Fee Review City of Berkeley AT&T Franchise Fee/UUT Review City of Santa Cruz AT&T Franchise Fee/UUT Review City of Pasadena Charter Franchise Fee/UUT Review City of Porterville Charter Franchise Fee Review City of Walnut Charter Franchise Fee/PEG Fee Review City of Oakland Comcast Franchise Fee/UUT Review Cities of Arcadia, Monrovia & Pasadena Champion Broadband "Due Diligence" Review City of Brea Time Warner Cable Franchise Fee and PEG Review City of Chino Hills Time Warner Cable Franchise Fee Review City of Diamond Bar Time Warner Cable Franchise Fee Review City of Fullerton Time Warner Cable Franchise Fee Review City of Inglewood Time Warner Cable Franchise Fee/UUT Review Cities of Hawthorne & Lawndale Time Warner Cable Franchise Fee/UUT Review City of Huntington Beach Time Warner Cable Franchise Fee and UUT Review City of La Habra Time Warner Cable Franchise Fee/UUT Review City of Redondo Beach Time Warner Cable Franchise Fee and PEG Review City of Santa Ana Time Warner Cable Franchise Fee and PEG Review ©2011 Communications Support Group, Inc. Page 2 of 9 25F-7 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. SECTION B BACKGROUND AND PROJECT SUMMARY For the first six months of this year, under a separate purchase order, CSG performed a cursory review of reported revenues and survey responses requested from AT&T and a preliminary review of Time Warner related to PEG fees and subscriber revenues which enabled the City to raise several legitimate questions for the accuracy of Time Warner's PEG grant amortization, Franchise fee payments, and PEG fee payments. From our previous report dated June 23, 2011, we determined the likelihood that significant additional PEG fees and franchise fees may be due to the City. This project intends to drill down deeper into the books of AT&T and Time Warner to determine what those fees may amount to, to collect any fees owed to the City for the three year period ending December 31, 2010, and require AT&T and Time Warner to more accurately account for and pay of these fees in the future. We will address each of the issues addressed in the findings section of our cursory report, which are enumerated below: AT&T- California (AT&T) 1. A&TT confirmed categories of revenues included in franchise fee payments but did not provide us with detailed billing support to back-up their allocations. We recommend additional review of billing system reports to confirm AT&T's calculations. 2. AT&T indicated that it currently does not claim any bad debts associated with U- verse TV. However, we recommend that this assertion be further analyzed. 3. AT&T currently only generates national advertising revenue. That revenue is allocated down to a jurisdiction level and the franchise fee liability is calculated on that amount and added to the franchise fee remittance. Further analysis of this accounting is recommended. 4. In a similar manner as above, home shopping commissions are allocated down to a jurisdiction level and tax is calculated and remitted accordingly. Further analysis of this accounting is recommended. 5. When questioned about PEG fees, AT&T indicated that: the company "currently does not collect PEG fees in Santa Ana because the company has been unable to determine whether the incumbent provider, Time Warner, has unsatisfied cash obligations under its franchise agreement with the City that would trigger payments by AT&T under Public Utilities Code § 5870 (k) and (1)." We will recalculate AT&T PEG fee liability based on a determined date of Time Warner's amortization. ©2011 Communications Support Group, Inc. Page 3 of 9 25F-8 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. Time Warner Cable (TWC): 1. Time Warner uses five accounting agents (an agent is a stand-alone accounting entity having its own billing system report and subscriber accounting). Two of these agents are very large, and three are relatively small. None-the-less, prorations of non-subscriber revenues and computation of PEG fees are performed as a function of subscriber counts. This will require further study in the next phase of the review. 2. Some of the agents were found to contain bulk subscriptions that the company appears to have not collected franchise fees and PEG fees. We recommend that this be analyzed in greater detail during the comprehensive review. 3. Significant PEG fees may be recoverable should the City determine that more subscribers were assessable than the company reported. For example, the billing system reports that we have reviewed for 2008, 2009, and some months of 2010, that more than 200 customers were provided free or complimentary service. This may include apartment house managers, employees of the company (or other cable companies on a reciprocal basis), and gratis accounts for managers of commercial accounts (hotels, restaurants, etc.). Additionally, many of these accounts could be public agencies like the school district, community college, and city offices. The City should determine whether these gratis accounts should be assessed the PEG fee, even though no other charges appear on the bills. This matter will take further study to determine the universe and magnitude of potential PEG fees at stake. 4. Time Warner calculates the fees owed on subscriber revenues using data obtained from third -party billing system reports known as CPSM 318 reports. Time Warner provided us copies of billing system reports to support the franchise fee payments. The amount of time budgeted in this cursory review did not allow sufficient time to perform a line-by-line analysis of subscriber revenues. However, we did take time to perform high-level comparisons between total video revenues and Time Warner's franchise fee worksheets. • Time Warner did not pay franchise fees on FCC regulatory fees during the entire audit period, which we recommend. Since FCC Regulatory fees are cost of doing business, and given that Time Warner, has elected to pass-these costs onto the cable subscriber as a pass-through, we conclude that the revenues associated with these are eligible for franchise fee assessment. We will perform additional review of regulatory fees, quantify these fees for all months of the review and add them as under-reported revenues. 02011 Communications Support Group, Inc. Page 4 of 9 25F-9 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. CPUC Section 5860(d) allows the company to use an accrual basis for calculating franchise fees on video service revenues. Accordingly, it was necessary to factor out the portion of bad debt associated with the non-video and non-assessable lines of business (on-line services and telephone). We performed a high-level analysis of Time Warner's bad debts for 2008 and 2009. We found that Time Warner prorated bad debt between two lines of business, video and HSD. The billing system tracks total net bad debt to the video line of business. We recommend that these differences be quantified for all three years in the next phase of auditing and franchise fees be recalculated on the more accurate bad debt amounts. Mr. Bill Morgan, of Diehl Evans & Company, LLP has begun collecting financial documents for calendar years 2008 through 2010 associated with Time Warner's advertising media division. We are of the opinion that although company officials have not yet provided any written representations that all national, regional and local ad revenues have been accurately and completely reported to the City by using our questionnaire, we have certain knowledge to make some general conclusions. However, since advertising is prorated based on subscriber counts, should it be determined that Time Warner is using a lower count of Santa Ana subscribers due to the issue of multiple agents, than advertising revenues may have been under-attributed to franchise fees owed to City. We recommend that this matter be further studied and franchise fee calculations be adjusted to account for any under reported revenues found in the analysis. • Mr. Bill Morgan, of Diehl Evans & Company, LLP will also begin collecting financial documents for calendar years 2008 through 2010 associated with Time Warner's home shopping and other non-subscriber revenues (local origination, sale of leased access time, etc.) and determine whether these revenues were properly allocated to Santa Ana. After the end of the 4th quarter 2010, Time Warner notified the City that the company would reduce the City's 4th quarter 2010 franchise fee payment by $2,720.90, due to the company's argument that the state CPUC administration fee would qualify as a franchise fee under federal law. We recommend that the City continue to assert that the Company improperly deducted $2,720.90 and require Time Warner to repay this amount plus a reasonable accrual of interest. ©2011 Communications Support Group, Inc. Page 5 of 9 25F-10 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. SECTION C METHODOLOGY 1. Nature of Engagement: This will be an agreed-upon procedures engagement conducted in accordance with the provisions of AICPA Statement on Standards for Attestation Engagements No. 10. 2. Agreed-Upon Procedures for Franchise fee and PEG fee payment Review: In connection with this engagement, we propose to review AT&T and Time Warner's books and records to assist the City in determining whether the companies have paid the City the appropriate franchise fees and PEG fees during the three year period ending December 31, 2010. We will also estimate a date of amortization forAdelphia's initial PEG grant. Our review will consist of the following procedures: Phase 1 a. Shortly after we receive a signed engagement letter or contract, we will send a document request to the City. The letter will include a request for the following documents: • Copies payments made by AT&T and Time Warner for any quarters that were not collected during the "cursory review". • Rate and Channel Information for any months and quarters that were not collected during the "cursory review". b. We will prepare and forward addenda to the general questionnaires previously sent to AT&T and Time Warner with questions related to utility taxes, franchise fees, and PEG fees paid by AT&T and Time Warner to the City for the period. c. We will further review the CPUC Codes, Cable Television Franchise Agreements, any Renewal or Transfer Agreements between City and AT&T and City and Time Warner to identify definitions of "gross revenues", late payment provisions, PEG fee terms, etc. d. We will request that copies of certain books and records of AT&T and Time Warner be forwarded to our office in Newport Beach. In connection with the review of these records: e. We will identify AT&T and Time Warner's method for backing out non-specific revenues between franchise areas (such as Home Shopping revenues). f. We will review AT&T and Time Warner's method for identifying subscribers to the proper franchise area. ©2011 Communications Support Group, Inc. Page 6 of 9 25F-11 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. g. We will test subscriber revenue by comparison with amounts recorded on reports from the Company's outside service bureau. h. We will perform an analysis of the practices of AT&T and Time Warner as to whether it has been paying franchise fees on franchise fee revenues for the period from January 1, 2008 through December 31, 2010 i. We will produce a summary of findings in email format, share and discuss with City staff. Phase 2 a. We will review AT&T and Time Warner's internal controls and systems and procedures for accounting for gross revenue and PEG fee payments. We will identify the various types of revenue recorded by AT&T and Time Warner. b. We will review the accounting records of AT&T and Time Warner for any revenue items not being reported to the City with the periodic remittances. c. We will review home shopping and other non-subscriber revenues d. We will test the mathematical accuracy of the selected remittances to the City for the period January 1, 2008 through December 31, 2010 e. We will recalculate franchise fees owed to the City f. We will recalculate PEG grant amortization based on new subscriber data obtained by the companies. g. We will recalculate PEG payments owed to the City under Exhibit F Section I.B(7)(b) for both AT&T and Time Warner through June 30, 2011. Phase 3 a. We will provide the City an electronic version of a final report in order for the City to comment prior to release of a final hard copy of the report. We will allow seven days for the City to comment. We will submit a hard copy of our final report along with necessary schedules detailing or related findings across the various revenue areas. b. We will also provide the City will electronic copies of the final report along with electronic copies of the schedules contain in, or attached to the report. ©2011 Communications Support Group, Inc. Page 7 of 9 25F-12 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. SECTION D FEE PROPOSAL CSG proposes to perform a complete agreed-upon procedures review of franchise fee and PEG fees for a three year period of Time Warner for an amount not to exceed $45,000. CSG proposes to perform a complete agreed-upon procedures review of franchise fee and PEG fees for a one-year period of Time Warner for an amount not to exceed $15,000. We propose calendar years 2008-2010 for Time Warner and calendar year 2010 for AT&T (however, the City may wish to consider making this 2009 to capture an extra year given DIVCA's three year statute of limitations, thereby, reserving a review of 2010 for next year. We agree to perform all services on an hourly basis at the rates set within our 2011 contract with the City. We will invoice the City monthly for our services. Invoices are payable on presentation. A finance charge of 1% per month will be added to fees billed but not received before the end of the month following the month of our invoice. This corresponds to an Annual Percentage Rate (APR) of 12%. No finance charge will be imposed on unpaid finance charges. Also, our fees will be payable in full regardless of findings that result from this engagement. Provisions for Adjustment in Fixed Fee Arrangement The quotes stated above for each of these phases is estimated based upon the following assumptions: AT&T and Time Warner will complete, sign and return all of our questionnaire addenda, together with all requested documents and AT&T and Time Warner prepared schedules. AT&T and Time Warner will have personnel available who are knowledgeable regarding franchise fees, PEG fees, and video users tax reporting to work with DE&CO and CSG and DE&CO.. • No travel time or expenses to either AT&T corporate offices in Texas or and Time Warner's corporate offices in Stanford, CT. Should AT&T and Time Warner not provide the requested questionnaires, information or documents, or should we need to travel to out of state, we will communicate these circumstances to the City in writing. We may request that the City approve a fee increase to cover any additional services or expenses that may be involved. We agree to not incur additional expenses without express written consent of the City. ©2011 Communications Support Group, Inc. Page 8 of 9 25F-13 Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. SECTION E PROJECT SCHEDULE AND TIMING OF WORK Our "engagement beginning date" will be the date upon which we receive an original signed engagement letter or contract amendment from the City of Santa Ana retaining our services. As for Phase 1, shortly after the engagement beginning date, we will send a document request letter to the City for receipt of additional items that were not provided earlier. Within ten (10) business days after we receive a response from the City to our document request letter, we will draft questionnaire addenda to AT&T and Time Warner requesting additional documents and information needed for our review. Within ten (10) business days after receiving a reply from AT&T and Time Warner to our questionnaires, we will commence our testing and review work. If AT&T and Time Warner employees supply our firm with all requested information, documents and schedules on a timely basis, we will complete our review work within ninety (90) business days. Within ten (10) business days after completing our review work on AT&T and Time Warner, we will deliver a "draft" report to the City via email related to Phase I. As for Phase 2, we will follow similar scheduling with a draft report delivered to the City via email within ten (10) business days after completing our final analysis of additional audit measures. As for Phase 3, following delivery of our final report, we will work at the City's directive assisting as needed up to our allowable hourly allowance (should any unexpended hours remain on the purchase order). This might include participating in phone calls with the City and the company settling amounts owed to the City. Should the funds allocated to the purchase order be fully expended by the conclusion and submittal of our report to the City, CSG remains willing to work on an add-on basis to assist the City as directed on an hourly time and materials basis. Our tax ID number remains unchanged: 33-0390724. Thank you for considering our firm. If you have any questions, please contact me at (714) 788-8566. We await your directive to proceed. Very truly yours, Communications Support Group, Inc. LA?i ohn Risk President ©2011 Communications Support Group, Inc. Page 9 of 9 25F-14