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Decision
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Ottawa, 21 December 1990
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Decision CRTC 90-1162
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Rogers Cable T.V. Ltd.
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Newmarket, Ontario - 901020800
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Pursuant to subsection 18(8) of the Cable Television Regulations, 1986 (the Regulations), Rogers Cable T.V. Ltd. (Rogers) proposed to increase its basic monthly fee by $1.25, effective 1 October 1990.
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By letter dated 12 September 1990, the Commission advised Rogers that, pursuant to subparagraph 18(9)(a)(i) of the Regulations, the implementation of the proposed subsection 18(8) economic need increase had been suspended by the Commission pending further consideration of the increase and the receipt of additional information from the licensee. The Commission received the additional information on 15 October 1990.
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The Commission has carefully examined the eight year (1983-1990) historical financial data for the Newmarket system filed by Rogers, as well as the additional information provided on 15 October at the Commission's request. In the present case, Rogers' data, as filed, indicates a 15.7% average return on net fixed assets for the Newmarket system over the period in question. Additional information regarding certain of the operating expenses reported by Rogers in support of the present filing was requested by the Commission at the time of the rate increase suspension. One such expense was an annual fee charged to the licensee by its ultimate parent company, Rogers Communications Inc. (RCI), for various management and audit services furnished to Rogers, calculated as a percentage of the licensee's annual gross revenues. The 1988 fee for management services reflects a 206% increase over the 1987 fee, and is the result of a one-time increase in the percentage of gross revenues used in the calculation of the fee, from 2% to 5%. Rogers explained that the increase to 5% was justified in view of certain additional audit and management services provided by RCI to Rogers during that year. On the basis of the evidence before it, the Commission considers that Rogers has not justified the 1988 management fee expense increase. Therefore, the Commission has adjusted, for regulatory purposes, Rogers' 1988 General and Administration - Management Services/Fees from $143,770 to $62,761. Based on this adjustment, the eight year historical average return on net fixed assets for the Newmarket system is 16%.
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The eight year historical data also reflects extensive capital expenditures made by Rogers during the years 1988 and 1989 and projected to be made in 1990, associated primarily with the replacement of the distribution plant of the Newmarket system. For each of the years in question, on average, Rogers spent or projected to spend $3,859,481 on additions to fixed assets, as compared to an average of only $843,038 for each of the years 1984 through 1987, inclusive.
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Moreover, the Commission notes that, with respect to the three-year period in question, Rogers has obtained three capital expenditure rate increases, pursuant to subsection 18(6) of the Regulations, totalling $4.28, which represents a substantial increase of 40% over the maximum monthly rate of $10.66 that was authorized for the Newmarket system prior to the implementation of the initial capital expenditure rate increase. This total capital expenditure increase represents 22% of the licensee's current authorized maximum monthly basic cable rate of $19.64, and a full 48% of the total subscriber rate increase of $8.98 over the past three years.
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In addition, the same capital expenditures already claimed by Rogers as the major underlying component of the three subsection 18(6) rate increases are also significant factors in the current subsection 18(8) economic need rate increase filing. The Commission notes that capital spending has the effect of increasing the asset base of a licensee, with a corresponding downward impact on the return on net fixed assets. Indeed, in the present case, the Commission considers that the level of Rogers' actual and projected capital spending between 1988 and 1990 in connection with its distribution plant replacement project has had a significant dampening effect on the system's return over the period, and a similar albeit lesser effect on the return over the eight year historical period.
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In the Commission's opinion, the levels of actual and projected capital spending by Rogers related to this system over the past three years are unusually high when compared with spending levels in previous years. The Commission also regards as substantial the total amount of the three subsection 18(6) rate increases that subscribers of the Newmarket system have already borne in connection with Rogers' recent capital spending. The Commission considers these circumstances to be relevant ones that must be taken into account in assessing the licensee's proposed subsection 18(8) rate increase.
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By virtue of subsection 18(9) of the Regulations, the Commission has a discretion to disallow all or part of a proposed subsection 18(8) increase. The Commission currently relies upon the policy framework established in Public Notice CRTC 1990-53, dated 15 May 1990, as the basis for the exercise of this discretion. At page 28 of the Public Notice, the Commission indicated that, for the present time, its assessment of the profitability of licensees seeking economic need increases would relate primarily to their rate of return on average net fixed assets, measured over an historical eight year period, using a benchmark of 24%. It would, of course, be open to the Commission to depart from its general policy framework; however, the Commission would only exercise its discretion in this way where unusual circumstances surrounding a particular case so warranted.
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While it is the case that the eight year historical return of the Newmarket system, as adjusted by the Commission, falls below the 24% benchmark figure, the unusual circumstances surrounding the present application have led the Commission to conclude that it would not be in the public interest at this time for subscribers to absorb a further capital expenditure-related increase. Accordingly, the Commission has decided to exercise its discretion, pursuant to paragraph 18(9)(b) of the Regulations, to disallow the implementation of the entire $1.25 proposed economic need increase at this time.
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The Commission acknowledges the comments received from subscribers regarding the proposed increase.
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Allan J. Darling
Secretary General
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