Jonathan Reid

The Republic | azcentral.com

The Town Council upheld a previous ruling which found that Cox underpaid Gilbert in license fees

The dispute concerns Cox disproportionately allocating discounts on services provided in bundle packages

If Cox complies with the Town Council's ruling%2C it must pay %24365%2C000 and an additional %24285%2C000 in interest

Gilbert says Cox Communications owes the town $650,000 from underpaid license fees.

The recent Town Council decision followed a town-commissioned audit in 2012. An auditor found that the Cox subsidiary in Arizona underpaid the town by disproportionately allocating discounts to services provided in its bundle packages.

Cox pays the town a percentage of its revenue on cable, but not for other Cox services such as internet and telephone. The audit found the bundling discount to customers was applied to cable, thus funneling less money to the town.

At least three other cities – Phoenix, Mesa and Chandler – have raised similar concerns in the past. To resolve the issue, Chandler updated its city code specifying how cable providers can allocate discounts on multi-service bundles. Cox accepted that policy when it renewed its license agreement with the city after the audit.

This is in contrast to Gilbert, as the town is trying to make Cox make up the alleged underpayments retroactively.

If Cox complies, the company will have to pay Gilbert $365,000 in lost revenue, plus $285,000 in interest accumulated since November 2012, when town officials sent the company a demand for payment as the result of the audit findings.

That cost would be passed onto customers, David Rosenbaum, the attorney hired by Cox, said.

Another option for Cox is to take it to court.

Cox Communication's Vice President of Public Affairs Susan Anable said the company has not yet decided its next step.

The dispute

Cable lines in Gilbert run on public land, so Cox Communications pays a 5-percent license fee on all gross revenues the provider receives from its cable services.

The license agreement was established in 1999, before Cox began offering discounts on bundle packages.

An audit found that when Cox offered discounts on bundle packages between 2009 and 2011, most of the time the discount was allocated to the cable service, while customers would pay the full amount for the other services.

This lowered the license fee revenue Gilbert received from what it would have received if the discounts were allocated proportionately to all the services in the bundle.

Town officials claim that Cox's accounting practices violate Generally Accepted Accounting Principles (GAAP), which require companies to proportionately discount all services provided in a bundle

Cox Communications argued that because GAAP was not mentioned in the license agreement or Gilbert Code (until after the audit), the company did not have to comply.

But Gilbert's Deputy Town Manager, Mark Skocypec, said GAAP compliance is implied in any license agreement.

Anable disagrees, saying that forcing Cox to comply with GAAP retroactively constitutes "rate regulation."

"Cox's fundamental position is that the town doesn't have the legal authority to set rates or regulate what we charge our customers," Anable said. "In essence they want us to price our products at specific rates so that they can ensure a level of license revenues to the town."

Deputy Gilbert Town Manager Marc Skocypec said the town is not trying to regulate rates or increase revenue, but is simply making sure Cox is paying rent to use Gilbert's land.

While the parent company, Cox Enterprises, complies with GAAP, Cox in Arizona does not.

"Cox Arizona does not prepare GAAP financial statements, never has and is not required to," Rosenbaum said.

The legalities

When Gilbert sent Cox the demand letter for payment two years ago, Cox challenged the audit and the two sides agreed to take the matter to an independent hearing officer, retired judge Christopher Skelly.

Skelly ruled in favor of the town in February. He found that "applying virtually 100 percent of the discount only to cable is artificial, arbitrary and not reflective of all three of the services provided in the 'bundle' for which the discount is given."

Cox appealed Skelly's ruling, which sent the case to the Town Council to decide in "quasi judiciary" fashion.

Leading up to the administrative hearing by the council on Oct. 30, Cox conducted an outreach campaign to residents.

In literature sent to some Gilbert customers, Cox claimed the council would be deciding on whether to approve a "tax increase," which was criticized by every council member, including Councilman Jared Taylor, who ruled in favor of Cox.

At the hearing, Mayor John Lewis said the literature was "misleading and has "confused citizens."

"Let's get this very clear, Cox determines the rates," Lewis said. "For you to say that this is a tax increase is causing great turmoil is this community."

Taylor said he ruled in favor of Cox because GAAP was not mentioned in the original license agreement.

"I don't think we should be in the business of telling them how to price their products," Taylor added.

Beyond Gilbert

Scott Lewis, of Lewis and Associates in Florida, conducted the audits for Phoenix, Mesa, Chandler and Gilbert.

Each city raised concerns regarding bundling discounts.

"The issue about bundling has been raised before in other audits by this particular auditor in Arizona and in every instance there was no agreement by Cox to that particular finding," Anable said.

Anable said Cox only paid the cities on issues where it agreed with the audit.

In October 2013, Cox paid Gilbert about $84,000 on issues where it agreed with the audit. Cox did the same for Chandler, which was paid $294,000 in 2010, and Phoenix, which was paid $2.3 million in 2008.

The issues where Cox agreed to repay the municipalities were not disclosed in the settlement agreements, but many of the concerns were the same from city to city. In Chandler and Gilbert, for example, Cox had inadvertently sent license revenues to the wrong municipality for some households near city boundaries.

The Republic filed a public records request with Mesa on Oct. 31 to obtain it's settlement with Cox, but the city has not yet responded.

Under Chandler's new renewed license agreement, Cox must proportionally allocate discounts to services in bundles or charge customers prices consistent with how the company marketed them.

A Phoenix official said that the city's current license agreement with Cox has "wording that addresses the proper allocation of bundle discounts."

After the audit, the council amended Gilbert code by requiring cable providers to proportionately allocate discounts on multi-service bundles. Cox's license with the town expires at the end of the year, so even if the company appeals the council's ruling to a court, it will have to proportionately allocate discounts on bundles in the future if it wants to do business in Gilbert.