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Public Notice
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Ottawa, 12 June 1984
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Public Notice CRTC 1984-143
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Cable Television Undertakings - Class "A" and "C" Licensees
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Issues Related to the Regulation of Cable Rates
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In recent years, cable television licensees have witnessed a rapid evolution of the environment in which they operate. This environment has been characterized by new and emerging technologies which make possible the delivery of a widening range of services to cable subscribers, including the package of Canadian and U.S. signals delivered by the Canadian Satellite Communications Inc. (CANCOM) network, discretionary services such as pay television, the new specialty programming services, and various experimental non-programming services.
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Such developments, together with the introduction of cable service tiering and other related policies adopted by the Commission, have had a considerable effect on the operations of cable television licensees, resulting in the need for a public review of the Commission's general policies and practices related to rate regulation.
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As an early step in this review, the Commission has already proposed new licensing procedures governing rate applications from Class B cable television licensees (those serving less than 3,000 subscribers) which, subject to the appropriate amendments to the Cable Television Regulations, would permit the deletion of the conditions of licence specifying their authorized maximum installation and monthly subscriber fees (Public Notice CRTC 1984-125 dated 28 May 1984).
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Under these more streamlined procedures, Class B licensees would not have to obtain the Commission's approval prior to charging installation fees. In addition, these licensees could implement increases in monthly subscriber fees without the need for either a public notice by the Commission or a public hearing, subject to certain requirements of public notification. The Commission, however, would retain the right to require further information and/or a public procedure, and could disallow or suspend all or part of any fee increase if, for example, the increase were deemed to be contentious.
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The Commission considers that more streamlined procedures, particularly as they relate to the maximum installation fee, could also be applicable to Class A licensees (6,000 subscribers or more) and Class C licensees (between 3,000 and 6,000 subscribers). As noted in Public Notice CRTC 1984-125, installation fee revenues currently account for only a very small portion of the total revenues of established cable television systems, and are normally priced at less than cost so as not to constitute a disincentive to subscribe to the service.
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Accordingly, the Commission's proposed new cable television regulations, which should be issued shortly, will no longer require that installation rates charged by a cable licensee, including those Class A and C licensees, be authorized by the Commission. Once enacted, licensees would be invited to apply for deletion of their condition of licence governing their existing maximum installation rate.
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In order to fully assess the implications of any further changes with respect to its general policies and practices related to rate regulation, the Commission now invites interested parties to comment on a number of issues and specific questions outlined in sections I and II of this notice regarding the procedures for considering fee increase applications and the criteria used by the Commission to assess such applications.
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As a related matter, in Public Notice CRTC 1983-156 dated 21 July 1983, the Commission called for public comment on a proposal for financial disclosure for fee increase applications. In response to certain of the submissions and suggestions received, the Commission considers it appropriate at this time to renew its call for further public comment. Suggested revisions to the proposals contained in Public Notice CRTC 1983-156 and various issues and questions related thereto, are outlined in section IV of this notice.
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I. PROCEDURES
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Under its statutory mandate, the Commission has adopted a set of procedures for considering fee increase applications which reflect the importance of fees both to the subscribers who pay them, and the licensees who receive them. However, some licensees have complained of regulatory lag in the time taken to process these applications. The Commission therefore, invites comments on the following:
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1) Should the Commission consider the adoption of some form of automatic fee adjustment formula, without application, as a means of speeding up the regulatory process while still protecting the rights of subscribers?
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- If so, what would be the basis for such a formula (for example, the Consumer Price Index)?
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- If based on a percentage of the CPI, what should the percentage be and why?
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- How frequently should such a formula be applied? Should it be applied annually on a common or all licensees or monthly, dependent on the date of implementation of the most recent fee increase?
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- If a process such as this were in fact adopted, how would the rights of subscribers be assured of continued protection?
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2(a) Conversely, if it is argued that the Commission should not consider some form of automatic fee adjustment formula, should the Commission at least consider changing its rules and procedures for Class "A" and "C" licensees, so that some or all applications for fee increases may be processed without Public Notice or Public Hearing?
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If so:
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- What types of fee applications should be subject to these new procedures and what should the procedures be?
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- What procedures would ensure that subscribers are adequately notified beforehand, of the nature and magnitude of any proposed fee increase and of their rights to intervene?
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- Should licensees or the Commission bear the responsibility informing subscribers of the proposed changes? How should this be done?
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- In the case of any such streamlined procedure, what information should be required to be placed on the public file in order to allow access to sufficient information by the public to make meaningful interventions?
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2b) Should the Commission consider adopting an interrogatory process similar to the one currently in use in the telecommunications proceedings?
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- If so, how would this be accomplished and what would be the perceived advantages/disadvantages to all concerned?
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II. CRITERIA
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In its Public Announcement dated 18 September 1974, the Commission initially set out the principal criteria to be taken into account in considering applications by cable television licensees for fee increases. Basically, the Commission's criteria deal with the following considerations:
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a) the quality of service presently provided by the licensee, with particular reference to compliance by the applicant with Commission policy requirements;
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b) proposed additions to or improvements in service, including, without limitation:
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(i) the introduction of additional channels in accordance with CRTC policy requirements;
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(ii) the introduction or improvement of community programming;
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(iii) the introduction of new forms of local origination services;
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(iv) the improvement of the technical quality of the service provided beyond minimum requirements;
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(v) the introduction of converter service; and
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(vi) the role of the licensee in the development and strengthening of the broadcasting system in its area;
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c) the variance of the fees proposed from those generally in effect in the regions;
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d) the desirability of reasonable cost sharing to finance the expansion of cable television service within the region in which the licensee's system is located;
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e) economic need taking into account such factors as:
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(i) the efficiency of the management of the system;
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(ii) the financial projections filed with the initial or renewal applications;
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(iii) the factors which have led to the variance from such projections; and
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(iv) any other factors which have led to the alleged economic need; and
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f) other criteria having particular reference or concern to the licensee and to the area and the subscribers served by it.
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ISSUES
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1) Are the current criteria, in whole or in part, still appropriate to the circumstances now prevailing in the cable television industry?
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- if not, what revised or additional factors should the Commission take into account in considering fee increase applications?
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- How should these factors be quantitatively and/or qualitatively measured?
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- What analytical techniques should be used for this purpose?
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2) With respect to the criterion for economic need:
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a) How should it be measured? Are profitability margins and rate of return on net fixed assets suitable measurements by themselves or should other measurements such as cash flow or investment in plant and risk be taken into account?
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b) Should the efficiency of the management of a cable television system be taken into account in the fee setting process?
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If so, how should such efficiency be measured, and how should it be taken into account?
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c) Should the effects of inflation and current cost accounting be taken into account in determining economic need? If so, how?
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d) Since cable television licensees employ a wide variety of approaches to debt and equity financing, is it appropriate to consider financing costs as a factor in evaluating economic need?
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If so, how could systems with different financial structures be compared in a fair and meaningful manner?
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e) In evaluating economic need, should profitability and rate of return of the discretionary services also be taken into account? If so, why?
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III. COST SEPARATION
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In Public Notice CRTC 1983-245, dated 25 October 1983, entitled Cable Television Tiering and Universal Pay Television Service, the Commission stated, in part, that it "will not at this time regulate the retail rate for the discretionary tiers" and "will continue, at this time, to regulate the rate for the basic tier as it has in the past and will also be concerned that the basic tier rate not subsidize, either directly or indirectly, the discretionary tier services."
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With the introduction of new pay television and specialty and other services on discretionary tiers, the Commission now wishes to ensure that it continues to have a proper accounting of the financial results of the rate-regulated basic tier services.
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The Commission is currently reviewing the difficulties and complexities related to a cost separation process and expects to issue shortly, for public comment, a separate Public Notice on this matter. The Commission, therefore, considers it premature to request comments on this issue at this particular time.
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IV. RELATED MATTERS
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- PROPOSAL FOR FINANCIAL DISCLOSURE FOR FEE INCREASE APPLICATIONS: ORIGINALLY OUTLINED IN PUBLIC NOTICE CRTC 1983-156 DATED 21 JULY 1983
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Notwithstanding the issues and questions raised in sections I and II of this Public Notice, further comments are now being requested on the following:
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a) Audited Financial Statements and Other Financial Information
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It has been suggested in the comments received that the following documentation could be made part of the material accompanying fee increase applications. This documentation specified in each of (i) to (iv) - below would all be subject to a "Review Engagement", as described in the Canadian Institute of Chartered Accountant's (C.I.C.A.) Handbook, and would be performed by the company's auditor:la compagnie:
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i) licensees, whose normal fiscal year is not August 31, would provide unaudited interim financial statements as of August 31, as well as audited financial statements for the latest year of the licensee.
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This suggestion is opposed to the earlier proposal, that audited financial statements be provided as of August 31;
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ii) It has been suggested that the information in the schedules referred to in Public Notice CRTC 1983-156 that was proposed to be included as part of the audited financial statements, should now be prepared separately and not form part of the audited financial statements;
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iii) other information would be supplied to the level of detail provided by the licensee's accounting system. This information would relate to details of related party transactions at the system level including management's estimate of any significant profit in the transactions and reconciliations of the foregoing with the audited or interim financial statements where applicable;
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iv) if parties related to the licensee carry on any of the non-rate-regulated business usual to cable television undertaking, then a schedule would be filed naming the related parties and providing the information on their behalf.
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b) Confidentiality
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The Commission's current position is that the financial statements of a cable television system, whether private or public, are the basis of any fee increase application and if kept confidential, the ability of interested parties to participate in the public process would be seriously jeopardized.
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It has, however, now been suggested that private company's audited financial statements which accompany fee increase applications should be kept confidential and not put on the public file, on the basis that public disclosure of these statements may be detrimental to the licensee and/or disclosure of them may not be in the public interest.
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How could the Commission keep the audited financial statements confidential without restricting the ability of interested parties to make meaningful interventions?
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c) Multi-system Operators
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The Commission's current policy for fee increases requires that a separate application, complete with the system's audited financial statement, be filed for each licensed system in order that each may be considered on its own particular circumstances.
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It has now been suggested that for fee-setting purposes, licensees which hold more than one licence (multi-system operators) should be able to file a single rate application, accompanied by audited financial statements for the company as a whole, for all the licensed systems where a high degree of operational integration exists between these systems, even though the systems are in separate markets, were licensed under different circumstances and different rates may or may not apply to each of the systems.
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How could this suggestion be implemented while still enabling the Commission to consider each licensed system on its own particular circumstances?
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On the other hand, should the Commission continue its current policy of requiring a separate application and separate audited financial statements for each licensed system requesting a fee increase?
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d) Standards of Disclosure
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Public Notice CRTC 1983-156 also proposed that the audited financial statements of licensees be prepared in accordance with the standards of disclosure recommended by the C.I.C.A. except where directed otherwise by the Commission. This has raised certain concerns that the standards of disclosure in the audited financial statements may, in some cases, be required by the Commission to be different from those recommended by the C.I.C.A. and these Commission standards may not be in accordance with generally accepted accounting principles (G.A.A.P.).
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An example could be the case where the Commission required purchasers of the assets of a system to show the fixed assets in their financial statements at the values that would have been shown by the vendor, in its annual return, had the sale not occurred. These financial statements may then not be prepared in accordance with G.A.A.P.
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If the financial statements were to be prepared in accordance with G.A.A.P., then the fixed assets of the system would be shown at the purchase price paid to the vendor. To the extent that the portion of the total purchase price of the system allocated to the fixed assets exceeded the values of these assets shown in the annual return of the vendor, the purchaser may claim that a fee increase is justified on the basis of a low return on an increased level of investment in fixed assets.
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The Commission's current position in this regard is that as the basis for the filing of annual returns and the preparation of rate increase applications, the applicant is required to use the historical cost of fixed assets and standardized accumulated depreciation of the vendor as calculated immediately before the transfer of assets. This position is based on the theory that a fee increase should not be justified solely on the fact that the ownership or control of the cable television system has changed.
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For the purpose of the Commission's information requirements and fee regulation then:
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- Should the Commission change its position and take into account only information prepared and filed in accordance with G.A.A.P? If so, why?
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- If the Commission should continue to require licensees to file information which may not be in accordance with G.A.A.P., should it form part of the audited financial statements or be in the form of a separate schedule which has been reconciled to the audited financial statements?
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OTHER DISCLOSURE ISSUES
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i) The Commission is concerned that in some cases insufficient detail and extent of information has been provided by applicants to allow for proper analysis of an application. In such cases it has been the practice to request additional information deemed necessary and suspend further processing of the application until the information is received. The issue is then:
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- How should the level of detail and extent of information that the Commission requires communicated to applicants?
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- Should it be through use of a standardized application form?
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- Should such detail be required to be submitted as part of the application or should it be requested subsequently on an as-needed basis?
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ii) Almost all licensed cable undertakings now provide both rate-regulated and non-rate-regulated services. As the Commission is concerned "that the basic tier rate not subsidize, either directly or indirectly, the discretionary tier services":
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- Should the information required to be submitted in a fee increase application be limited to items directly related to the services for which the fees are regulated or should information concerning other non-rate-regulated business, usual to a cable television undertaking, be submitted as well?
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- If information related to non-rate-regulated activities is required to be submitted, should this information be placed on the public file and why?
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iii) It should also be recognized that the extent of information needed may vary from application to application:
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- Should the standards be set for the maximum that is likely to be needed so that requests for additional information, which contributes to regulatory delay, will be minimized?
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- On the other hand, should a lesser information requirement be provided for recognizing that requests for further information may be made, if needed?
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It should be noted that a public notice may not be appropriate for communicating information requirements to applicants.
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Comments on all of the issues raised in this notice, with the exception of the section on cost separation, should be filed with the Secretary General of the Commission (C.R.T.C. Ottawa, Ontario, K1A 0N2) on or before 1 August 1984.
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Fernand Bélisle Secretary General
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