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Decision
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Ottawa, 2 December 1985
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Decision CRTC 85-1237
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Rogers Cable TV British Columbia Limited
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Vancouver, British Columbia - 843356700
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Following a Public Hearing in Vancouver on 18 June 1985, the Commission approves in part an application by Rogers Cable TV British Columbia Limited (Rogers) to amend the licence for the broadcasting receiving undertaking serving Vancouver by increasing the maximum monthly subscriber fee.
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Rogers proposed to increase its maximum monthly subscriber fee from $9.29 to $10.79. After examining the financial information provided by the licensee in its application and the evidence presented at the hearing, the Commission considers that an increase of $0.71 is justified on the basis of the Commission's current criteria for rate regulation. Accordingly, for the reasons set out in this decision, the Commission approves an increase in the maximum monthly subscriber fee to $10.00.
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Financial Considerations
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In 1982, in response to the government's price restraint program, the licensee applied for, and was authorized, increases in maximum monthly rates of 6% and 5% (Decision CRTC 82-840). Subsequently, in 1983 Rogers submitted an application for an increase in its maximum monthly subscriber fee from $7.79 to $9.29 effective 1 July 1984 and further to $10.79 effective 1 July 1985. On 18 September 1984, the Commission approved an increase of approximately 19% to $9.29, but denied the second-stage increase to $10.79 (Decision CRTC 84-805). In its decision, the Commission stated that it had considered a variety of factors, including demonstrated economic need and quality of service-related expenditures.
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In presenting its current application for a rate increase at the Vancouver hearing in June 1985, Rogers stated that its present request was a restatement of the second-stage increase it had applied for in 1983, noting that it was based on serious economic need and that, without a rate increase, it would be laced with "extreme difficulties in maintaining reasonable levels of service to the community".
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In support of this argument, the licensee provided a number of financial indicators to demonstrate the economic erosion of its system since 1980. Rogers stated that, although its revenues increased by 74% between 1980 and 1985, expenses rose by 103%; its operating margin had fallen from 46.4% in 1980 to a low of 26.5% in 1984, rising to 37.5% in 1985; and that the return on net fixed assets dropped from 24.2% in 1980 to under 2% in 1984, rising to 14.4% in 1985. Its margin and rate of return on average net fixed assets are, it said, well below industry norms and clearly unacceptable.
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Rogers also cited capital expenditures as a major factor contributing to its low rate of return on average net fixed assets. Between 1982 and 1981, capital expenditures totalled $19,636,000, with an operating income of $21,027,000, providing the licensee with "barely enough income after capital expenditures to pay some of the interest on accumulated debt".
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The licensee projects capital expenditures of $23,127,000 for the period from 1985 to 1987, and argues that it needs an improved operating margin to meet these expenditures, interest payments and provide a return to shareholders.
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Quality of Service - Implementation of Commitments (Decision CRTC 84-805)
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In Decision CRTC 84-805, consistent with Rogers' commitments, the Commission expected the licensee to carry out a number of important capital expenditures, including:
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1) an extensive apartment rewiring program throughout Vancouver, estimated to cost as much as $700,000 per year over the next three years;
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2) an ongoing drop replacement program of approximately $300,000 per year;
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3) a major upgrading of plant to 35 channel capacity, involving the replacement of amplifiers and cable, to be completed by 30 September 1985 at a total cost of $9,500,000;
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4) an upgrading of smaller sections of plant in view of environmental conditions, technical problems or changes in adjacent facilities, with costs ranging from $400,000 to $800,000 per year.
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At the June hearing, the Commission reviewed Rogers' progress in meeting these commitments and expectations. With regard to the licensee's apartwent rewiring project, Rogers advised that 40,000 to 50,000 suites still need to be rewired and that, depending on the "economic health of the company" and on reaching agreements with apartment owners, the project should take at least three or more years to be completed at an annual cost of $700,000. The licensee's drop replacement program will also continue for the next three years with an annual budget of $300,000.
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Roger's major plant rebuild of the Vancouver system is now scheduled for completion by the summer of 1986, rather than the original goal of 30 September 1985. The licensee explained that the delay was a result of its decision to expand the system to 41 channel capacity rather than 35 channels, as originally planned. It also confirmed that by the summer of 1986, 30% of the system will have 60-channel capacity.
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While recognizing the merits of the arguments put forward by the licensee, The Commission is concerned with the postponement of the system's upgrading and notes that the licensee's decision to delay implementation of its commitment in this regard was taken on its own initiative.
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Rogers also stated that more than $1 million will be spent on "forced rebuild projects which occur directly as a result of the upgrade activities of other utilities and municipalities" and said that all of these capital expenditures can only be undertaken if an appropriate return and favourable cash flow can be achieved and maintained.
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Decision CRTC 84-805 also expected Rogers to restore cuts which have been made in the community channel and to restore a full and comprehensive community programming service to Vancouver, ensure all N.T.V. (neighbourhood television) facilities remain fully operational and adhere to its commitments to re-instate programming for the hearing-impaired.
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The Commission acknowledges Roger's positive efforts in this important area and is satisfied with the measures taken by the licensee to restore a full, comprehensive service that meets the needs of this large, urban area.
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The licensee now provides approximately 123 hours per week of community programming, including some 35 hours of original production, has increased its full-time staff, and attracted more volunteers to participate in production. Staff at the N.T.V. studios in West End Vancouver, Kitsilano and Vancouver East/Strathcona has been restored to a level of two persons at each location, with a new editing system being installated at the West End Vancouver studio in early 1985.
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The Commission commends Rogers on the high quality of its community programming, noting that the talented staff and volunteers in the Rogers' systems have won a number of awards for their efforts. It also notes the licensee's statement that this level of service will be maintained regardless of the Commission's decision on its rate increase application. Rogers also confirmed at the hearing that it would continue to allocate $100,000 per year for the operation of its ethnic programming service and that it is now distributing "The Deaf Program", a weekly 30-minute program.
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With respect to Rogers' 1980 commitment of 2 1/2% of regulated revenues to research and development (R and D), the Commission notes the licensee's statement that:
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Basically, our commitment of five years is up on August 31st of this year ...it is not being charged this year, because we overspent in the previous years ... it is not in the expenses, and it is not in the projections.
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The Commission will wish to discuss the overall issue of R and D expenditures by cable television operators at Rogers' licence renewal time.
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The Commission also notes the licensee's continuing annual contribution of 1 % of its gross revenues to the "Something for Something" Canadian program production fund, initiated in 1978 by Canadian Cablesystems Limited (CCL - Rogers' parent company). Since that time, $5 million has been invested in this fund, of which some $4 million was spent on such quality programming as the "Galaxie" childrens' service. The licensee said, however, that it was unable to finalize arrangements with British Columbia broadcasters for the production of Canadian programming. While the Commission acknowledges that this fund will continue, it will wish to discuss its use at Rogers' licence renewal, particularly the extent to which British Columbia producers have benefitted from the projects assisted by the fund.
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The Commission's Decision
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After a thorough examination of all of the information submitted by the applicant and the interveners, the evidence at the hearing, and the special characteristics of this complex cable systems which serves approximately 250,000 subscribers, the Commission is satisfied that the licensee has justified a fee increase from $9.29 to $10.00, based on the Commission's current criteria for rate regulation.
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After analysing Rogers' historical and projected operating and capital expenditures for its Vancouver system, the Commission has not been convinced that the full requested fee increase to $10.79 is warranted.
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In arriving at this decision, the Commission has also compared the overall operation of this system with that of a number of other large-scale cable systems in Canada. Even after taking into account the special characteristics of this complex cable system, the Commission has determined that the licensee's operating and capital expenditures are significantly higher for the provision of a commensurate high quality basic service than those of a majority of the other systems it has examined. While it is satisfied that these costs were, in fact, incurred in relation to the operation and upgrading of the basic service, the Commission is nevertheless concerned with the general level of such expenses, particularly those resulting from discretionary management initiatives. The Commission is concerned that these expenses may be placing an unnecessary burden on Roger's subscribers, many of whom are already faced with the difficulties arising from the economic climate in British Columbia.
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On the basis of its analysis and the considerations outlined above, the Commission is satisfied that the maximum monthly subscriber fee of $10.00 is sufficient to enable the licensee to achieve and maintain an appropriate rate of return and a favourable cash flow, to implement its capital projects and maintain a full community programming service, in order to continue to provide its subscribers in Vancouver with the same level of high quality service.
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Interventions
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In considering this application, the Commission has taken into account the intervention presented at the hearing by Mr. R.J. Gathercole on behalf of the following public service groups: the Federated Anti-Poverty Groups of British Columbia, the British Columbia Old Age Pensioners' Organization and the Consumers Association of Canada. The intervener opposed the rate increase on a variety of grounds, including: the inclusion of interest expense in the rate base; the subsidization of discretionary services by basic channel revenues; the delay in the completion of certain capital projects; and the difficulties which would be encountered by low-income Vancouver residents, especially senior citizens, if they have to pay higher rates for cable service.
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In its response, Rogers indicated that interest is not part of the rate-setting process and that it has actually had difficulty in meeting interest expenses in view of low profitability.
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With respect to the relationship between basic and discretionary costs, Rogers emphasized that, in fact, its basic service is subsidized by revenues generated from its discretionary services, noting:
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the basic service receives a ten cent per pay-subscriber and per converter-subscriber per month revenue, for the use of those additional facilities that are not already recovered in the segregation of the direct and indirect costs.
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In its presentation, Rogers indicated that the reason it had delayed implementation of certain capital projects was to take advantage of improved technology.
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With regard to the affordability of cable service for persons on fixed incomes, Rogers said that it would continue, wherever feasible, to provide reduced, bulk rates for senior citizens' boxes and hospitals.
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The Commission also received an intervention from the British Columbia F.M. Communications Association opposing the rate increase on the grounds that the licenseee, despite a previous intervention in 1984, has not yet corrected signal leakage problems throughout its system. As a representative of many amateur radio operators in the Vancouver area, the intervener said it was extremely concerned with these radiation problems which interfere with the radio transmissions of its members.
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In response to a request from the Commission, the Department of Communications (DOC) undertook an investigation of Roger's Vancouver system on 11 and 12 June 1985, and determined that radiation complaints are valid. The DOC stated:
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In the last 15 months the cable company has located and corrected thousands of radiation sources. However, the two-day survey showed that there are still a large number of them in the cable system. Due to the size, age and complexity of the cable system new sources of radiation come up constantly. In order to reduce the number of radiation sources, more resources have to be allocated by the cable company for the detection and correction of these sources.
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At the hearing, the licensee assured the Commission that it is making every effort to control signal leakage and that, in the course of the system rebuild, it is replacing thousands of connectors with integral sleeve connectors which are specifically designed to curb radiation. Rogers again stated its willingness to meet with the amateur radio groups, and the Commission encourages both parties to co-operate with a view to reducing such problems to a minimum. This matter will be reviewed further at licence renewal time.
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Fernand Bélisle
Secretary General
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