Franchise audits help protect vital fee revenue

Each year, utility and cable television companies pay more than $1 billion in franchise fees, utility taxes and gross receipts taxes to local governments. The establishment and proper administration of franchise compliance programs can benefit local governments, their citizens and the utility companies that provide services within the public rights-of-way.

However, franchise administration is often neglected within local governments. At, the onset of the 21st century, the explosion of technology, fiber optics, the Telecommunications Act of 1996, environmental requirements and the reduction of federal funds are just a few of the critical franchise issues governments must face.

Although most cities and counties have accounting and auditing departments, many of these departments are too small to have personnel dedicated to monitoring franchise compliance. In this situation critical franchise issues may often@ times be overlooked.

One alternative is to contract with a company that specializes in franchise administration. Another is to delegate these responsibilities to the city or county attorney or a special office within the government.

Important considerations include: 1) whether state law grants franchise authority to local governments; 2) whether the city or county charter grants powers for the execution of franchise agreements and has provisions for monitoring of franchise services; 3) the age and expiration dates of existing agreements; 4) whether the agreements have ever been audited; and 5) what provisions have been made for fiber optic, wireless cable and cellular telephone services.

The full potential of franchise management can be realized if the use of public rights-of-way is effectively monitored. Performance of a franchise compliance audit is the first step in this monitoring. The purpose of the audit is to verify that all of the payments due to local governments are being made correctly. Specific audit tasks may include. * analysis of the franchise fee revenue base that is used for calculating payments; * performance of jurisdictional boundary/customer coding tests; * identification of strengths and weaknesses of franchise agreements/ ordinances; * identification of excluded revenue and the reasons this revenue has been excluded; and * identification of opportunities for revenue enhancement and new sources of revenue.

Traditional audits tend to be confined to ensuring that acceptable accounting practices have been used. Franchise compliance audits cover more specific issues, such as the review of city annexations, new industrial developments, state and federal initiatives and other issues that may effect the amount of revenues received by the municipality.

Conducting audits every five years and shortening the term of franchise agreements to no more than 10 years are recommended. Local governments also will likely benefit from using unambiguous terms in franchise agreements, communicating with other local governments to ensure consistency among agreements and keeping abreast of current technology.

Protection of local rights-of-way is important, as franchise fees may represent up to 20 percent of a local government’s operating general fund. A sound compliance review or audit may disclose an underpayment of franchise fees.

In instances where a government has taken an aggressive lead in franchise management, significant “new money” has been discovered in the form of unpaid or underpaid fees. This money can make a positive difference in the ability of cities and counties to serve their citizens.