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Proposal Letter City of Santa Ana 1-Yr. AT&T and 3-Yr.Time Warner Review Communications Support Group, Inc. CPUC Section 5860(d) allows the company to use an accrual basis for calculating franchise fees on video service revenues. Accordingly, it was necessary to factor out the portion of bad debt associated with the non-video and non-assessable lines of business (on-line services and telephone). We performed a high-level analysis of Time Warner's bad debts for 2008 and 2009. We found that Time Warner prorated bad debt between two lines of business, video and HSD. The billing system tracks total net bad debt to the video line of business. We recommend that these differences be quantified for all three years in the next phase of auditing and franchise fees be recalculated on the more accurate bad debt amounts. Mr. Bill Morgan, of Diehl Evans & Company, LLP has begun collecting financial documents for calendar years 2008 through 2010 associated with Time Warner's advertising media division. We are of the opinion that although company officials have not yet provided any written representations that all national, regional and local ad revenues have been accurately and completely reported to the City by using our questionnaire, we have certain knowledge to make some general conclusions. However, since advertising is prorated based on subscriber counts, should it be determined that Time Warner is using a lower count of Santa Ana subscribers due to the issue of multiple agents, than advertising revenues may have been under-attributed to franchise fees owed to City. We recommend that this matter be further studied and franchise fee calculations be adjusted to account for any under reported revenues found in the analysis. • Mr. Bill Morgan, of Diehl Evans & Company, LLP will also begin collecting financial documents for calendar years 2008 through 2010 associated with Time Warner's home shopping and other non-subscriber revenues (local origination, sale of leased access time, etc.) and determine whether these revenues were properly allocated to Santa Ana. After the end of the 4th quarter 2010, Time Warner notified the City that the company would reduce the City's 4th quarter 2010 franchise fee payment by $2,720.90, due to the company's argument that the state CPUC administration fee would qualify as a franchise fee under federal law. We recommend that the City continue to assert that the Company improperly deducted $2,720.90 and require Time Warner to repay this amount plus a reasonable accrual of interest. ©2011 Communications Support Group, Inc. Page 5 of 9 25F-10