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Love’s Gone in Sacramento

1/16/2005 7:00 PM Eastern

A dispute over a franchise-fee audit in California’s state capital has mutated into a breach of contract lawsuit between the Sacramento Metropolitan Cable Television Commission and Comcast Corp.

The regulators filed suit against Comcast on Jan. 4 after the two sides failed to come to terms on an agreement as to whether fees should be paid on such items as ad sales commissions on national accounts. Negotiations had lasted six months.

The commission conducted a routine audit in 2003, examining the fees paid by past operators Tele-Communications Inc. and AT&T Broadband from 1999 to 2002.

$400K IN DISPUTE

County auditors determined the local system had shorted the county by about $800,000. For instance, the cable system hadn’t paid franchise fees on cable revenue for customers on a local Air Force base once the property was decommissioned.

When Comcast took control of the local operation, executives agreed to half of the discovered shortfall and handed regulators a check for about $400,000.

The parties have been arguing ever since about whether Comcast should pay the balance.

Rich Esposto, the executive director of the county commission, also claims Comcast has closed its books to county auditors since 2002.

“They told us, 'We’re not going to agree with what you find, so we won’t give you the books,’ ” Esposto said.

The dispute comes down to “different interpretations of some complicated franchise language,” said Comcast area spokeswoman Susan Gonzales.

Outside of the fee dispute, Comcast has a good relationship with the local government. “We look forward to that continuing,” she said.

Gonzales did not mention the possibility of a countersuit, but a letter sent from regional vice president of government affairs Karen Munro in early December said Comcast would countersue on the national advertising-sales issue.

In her letter, Munro said franchise fees are expressly excluded when generated by affiliates and subsidiaries and linked to national ad sales.

“Our understanding is that Comcast affiliates have been paying franchise fees on national advertising sales in error over the past few years. As a result, Comcast will be demanding a refund of all prior payments made in error, and will no longer willingly submit such payments to the commission,” she said in the letter.

Comcast continues to pay franchise fees on national advertising sales, but under protest, the letter concluded.

According to the county, the franchise includes language which states that gross revenue comprises all cash, credits, property of any kind or nature or other consideration derived directly or indirectly by the franchise. Operators in the county only paid 2.65% in franchise fees until 2001, when the county raised it to federal cap of 5%.

In their suit, Sacramento officials assert that the contract language means the county can capture fees on ad sales made by advertising brokerage companies in which Comcast has a financial or ownership interest, plus launch fees and co-op fees.

GAAP PRECEDENT

Failure to pay fees on that revenue could conservatively cost the county $1 million to $2 million over the term of the franchise, Esposto said. Comcast’s current agreement runs through 2023.

A broader issue raised in the suit will be watched by other cities. Sacramento asserts that Comcast has unilaterally decided that gross revenue should be redefined in accordance with Generally Accepted Accounting Principles (GAAP), not local franchise language.

Such a shift has popped up in refranchise talks around the country, according to discussions at the most recent National Association of Telecommunications Officers and Advisors convention.

Many city officials feel GAAP accounting can be used to report performance to Wall Street, but local authorities want reporting that adheres to local rules unless the parties mutually agree to switch to GAAP.

 

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