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There are obvious financial ramifications of proceeding to arbitration to resolve the dispute as provided for in the franchise. Public Knowledge submitted its report on March 14, 2003, disclosing that Comcast had unreported franchise-applicable revenues with the resulting effect of underpaying franchise fees to the three jurisdictions in the total amount of $112,897 for the exam period. Eugene's share of the underpayment is $66,824, and a 10% penalty. Comcast continued to refuse to recognize the payment obligation into 2003 and 2004 and staff expects that to continue, increasing the debt owed. The cost to the jurisdictions of binding arbitration is estimated at $60,000 (based upon the experience to-date of Los Angeles), to be shared by the participating jurisdictions (Eugene, Springfield, and/or Lane County). The franchise specifies that jurisdictions shall recover from Comcast the costs associated with the arbitration if the jurisdictions prevail. There is no similar provision if Comcast prevails. Council Goals This franchise fee issue falls under the 2003-2004 Council Goal of Fair, Stable, and Adequate Financial Resources, which strives to assure that Eugene is a "local government whose ongoing financial resources are based on a fair and equitable system of taxation, and other revenue sources are adequate to maintain and deliver municipal services." Other Background Information Summary of the GAAP-Related Dispute: Advertising commissions are payments made by advertisers in addition to the cost of placing advertisements. Though typically included in the total cost of advertising, these payments are not typically received by Comcast per se, but rather by a wholly owned advertising subsidiary of Comcast. Launch fees are typically paid by programmers to induce Comcast to carry their programming. These fees, according to Comcast, are used to offset expenses associated with marketing the programming in question. Comcast asserts that it is obliged, by a variety of laws and regulations, to report its financial results in accordance with GAAP. Staff agrees. Comcast asserts that when results are reported in accordance with GAAP, the advertising commissions and launch fees are properly recorded as "contra-revenue," not revenue. Staff does not feel it is necessary to comment on Comcast's assertion that this is the direction they have received from their accountants. Rather, staff asserts that it is not uncommon for contractual relationships to establish bases to calculate payment that are different from their reporting base. The critical issue is this: Comcast asserts that since it would not report these receipts in financial state- ments produced in accordance with GAAP, it is therefore required to exclude them from the revenue base used for calculating franchise fees. It is with this contention that staff of the three jurisdictions, and the retained examiner, disagree. Of importance is that the franchise language does not contain any reference to GAAP reporting in its definition of "gross revenues," as compared with franchises in other jurisdictions where there are clear and explicit references to revenues reported in accordance with GAAP. Nor did designers of our franchise (TC! Cable, then transferred to AT&T, later to Comcast at their collective requests) cite such an intention. Timing Should the City Council agree that this issue warrants initiating the binding arbitration clause of the franchise, staff will report the decision to the Metropolitan Policy Committee, acting as the cable commission, at its May 2004 meeting. Lane County Commissioner's approved a similar recommenda- L:\CMO\2004 Council Agendas\M040421\S040421A. doc