Hawaii Cable Franchise Fees

April, 2002: The Oceanic Cable/Sun Cablevision bill dated 11 April 2002 billing for May service includes a customer message box that says:

The FCC has ruled that cable modem service is not a cable service subject to franchise fees payable to your community. Effective with this bill, we are no longer collecting these fees. Fees previously collected and retained by Time Warner Cable, pending the FCC's decision, will be refunded to existing modem customers in the form of a one-time credit on a future bill.

This means about a $2 decrease in the cable bill. But, many things remain unclear: "Fees previously collected and retained by Time Warner Cable" - when did they start retaining them? And, what is the franchise fee that was being charged? And, why is that fee more than the amount that is actually owed by Time Warner as a fee to the State?

I've asked in the form of a certified letter (25-Mar-02), facsimile (3-Apr-02) and phone messages to Oceanic/Sun Cablevision. I've looked at the Time Warner's Franchise Agreements with the State (DCCA-CATV Decision & Order Numbers 261, 173, 185, 242, 244, 154, 156, 158, 243, 174, 241 and 245), applicable Hawaii Statute (HRS440G-15), and Administrative Rules (16-132-2) and have talked with DCCA-CATV. I've also looked at federal statutes regarding Franchise Fees. (Title 47) It doesn't add up.

Federal law prohibits franchise fees in excess of 5%. In Hawaii, the franchise agreements with Time Warner specify a 4% franchise fee, 3% of which goes to public access ('Olelo) and 1% to the Hawaii Public Broadcasting Authority (local PBS). In addition, Hawaii statutes provide for a fee, up to 1% of "...regular subscriber service..."  including installation fees and fees "...for regular cable benefits" but not to include "per-program" or "per-channel" charges "...and other income derived from the system." This fee is not to exceed the cost of running the State program (DCCA-CATV), and is further defined by the Director of DCCA, and Administrative Rules. The authority to pass through the fee to subscribers is in the federal statutes.

By e-mail to another customer, DCCA-CATV indicated the 1% fee applies only to "basic service".  My communication with DCCA-CATV indicates the 1% fee applies to basic and expanded basic service. But, instead of passing through the fee on the applicable services as permitted by federal law, Oceanic is charging a 0.64% fee on all service!

In other words: a Road Runner customer was being charged a 4.654 franchise fee when the actual fee Time Warner incurred was 4%. Customers of services subject to the 5% fee (basic service) are charged 4.64% as well - less than the actual fee Time Warner incurs.

To the extent that 64% of Oceanic's revenue comes from basic services subject to the 1% fee, collecting .64% on all charges allows the correct total amount to be collected from customers - but, to the extent enhanced services become a greater part of total revenue, there is an over-collection. In any event, the fee is not "passed through" to customers - it is averaged, and re-distributed to the benefit of some (basic-only customers) and detriment of others. (It is my understanding that DCCA-CATV has hired a consultant to review franchise fee payments and collections.)

It appears that the current franchise fee billing method (4.64% charged on all services) was put into effect on January 1, 2001. Until this date, all customers were apparently charged the same fixed dollar amount as a franchise fee pass-through without regard to what services the customer actually ordered. For customers who subscribed to the lowest basic tier of cable (like me), the fixed franchise fee resulted in being charged more than 4 times the actual taxes and fees Time Warner owed.

Feb 1998: Basic Service - $8.25   Franchise Fee - $1.77   or 21.5% !
Feb 1999: Basic Service - $8.35   Franchise Fee - $1.88   or  22.5%!
Feb 2000: Basic Service - $9.38   Franchise Fee - $1.98   or  21.1%!

An 'expanded basic' cable customer paid the same dollar amounts, but on higher charges. The fixed fee still resulted in a charge that exceeded the 5% statutory limit. (For example, in 1999 the expanded basic service was $30.73; the franchise fee $1.88 or 6.12%.

With respect to the actual fees that Time Warner pays: they are disbursed separately to the appropriate entity either annually or semi-annually, on different dates. As customers are charged on a monthly basis, Time Warner holds these monies, and on the appropriate due date remits the amount due. Despite repeated requests, Time Warner has still not indicated as of what date it began placing franchise fees on cable modem service in an escrow account; however, I have been told by the State that an annual fee (for the entire year of 2001) which was due on January 31, 2002 was paid withholding franchise fees on cable modem service.

It also appears that it was not until January 1, 2001 that franchise fees were "charged" to Road Runner customers: in the bill for January 2001, the message area is headed Price Information, and the text includes:

...and the franchise fee, which Sun CableVision pays the State of Hawaii will be 4.64% of all charges.

This situation is one big mess: instead of actually passing through the franchise fee as permitted by law, Time Warner has and continues to use methods that charge some customers more, other customers less than the actual franchise fees, with the total collected being "about" the amount they actually owe the State.

Imagine a grocery store that sells food and wine, and the law provides that wine is subject to a special 10% tax. But, when you go to buy wine, you are charged a 1% tax. The store tells you "10% of our sales are wine, 90% are food, so we charge a 1% tax on everything". You buy food, no wine, and you are charged a 1% tax. While the store collects the correct amount of tax as long as wine sales remain at exactly 10% of total sales, the tax is unfairly and illegally applied - not 'passed through'.

On April 25, more than 3 weeks after my inquiry on the franchise fee, Lorene Hough, General Manager of Time Warner's Sun Cablevision responded - 0.64% of everything Oceanic bills is approximately equal to the 1% of standard service Oceanic actually owes the state. See Ms. Hough's actual letter.