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Ottawa, 21 October 1993
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Public Notice CRTC 1993-146
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New Assessment Guidelines for Fee Increases Under Subsection 18(8) of the Cable Television Regulations, 1986
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The Commission hereby announces the revised guidelines it will use to assess filings by cable licensees, pursuant to subsection 18(8) of the Cable Television Regulations, 1986 (the regulations), for basic monthly fee increases based on economic need.
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Background
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Under subsection 18(8) of the regulations, a cable licensee may propose to increase the base portion of its basic monthly fee for reasons of economic need. Prior to 3 June 1993, the Commission's assessment of such filings was based upon a comparison of a licensee's rate of return on the average net fixed assets (RNFA) used to provide the basic service and any discretionary services distributed in an unencrypted form (i.e. "extended basic" discretionary tiers), against a profitability benchmark of 23%. In its assessment, the Commission averaged a licensee's RNFA over a seven-year period, including the projected RNFA for the broadcast year in which the filing was received, the actual RNFA for each of the preceding five years, and the projected RNFA for the year following that in which the filing was received. Where a licensee's average RNFA was less than 23%, the Commission did not generally disallow the increase. In Public Notice CRTC 1993-74 dated 3 June 1993, the Commission announced various policy changes flowing from the Structural Public Hearing conducted in March 1993. The Commission stated, among other things, that it intended:
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... to revise the applicability of subsection 18(8) in specific cases to take into account the fact that, while revenues gained from the operation of the basic service will decline as a proportion of total revenues, future cable revenues will increasingly be derived from discretionary programming services and non-programming services, including the potential provision of data and information services. Accordingly, the Commission considers that licensees should generally need to rely less on the subsection 18(8) fee increase mechanism.
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In assessing subsection 18(8) applications, the Commission intends to make its assessment in a more prospective than retrospective manner. Moreover, the Commission considers that, in assessing subsection 18(8) fee increase applications, it will need to take into account all of the revenues and expenses related to the total operations of the undertaking. In keeping with this change, the Commission considers that the existing 23% profitability benchmark for the provision of basic cable service is no longer appropriate, and it is eliminated, effective imme-diately.
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The Commission will include addressability-related capital expenditures for the box in the basic service asset base, for the purpose of assessing applications for subsection 18(8) fee increases. At the same time, the Commission will take into account the efficiency of the licensee, and the projected results of future years rather than historical results. In developing new guidelines for its assessment of subsection 18(8) fee increases based on economic need, the Commission has been mindful of the structural changes occurring within the Canadian communications environment, and of the package of regulatory reforms described in Public Notice CRTC 1993-74. The new guidelines are specifically intended to encourage licensees to place more emphasis on increasing the proportion of revenues they derive from discretionary programming services and for non-programming services. Such an approach takes into account the incentives for implementation of universal addressability that the Commission has proposed to introduce through amendments to subsection 18(6) of the regulations (see Public Notices CRTC 1993-137 and 1993-137-1) and the greatly enhanced ability that licensees will have, through universal addressability, to provide subscribers with service package options. In addition, the new guidelines address the need to provide a more affordable and cost efficient basic service.
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New Guidelines
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Commencing with the 1996 broadcast year, where a licensee proposes to increase the base portion of its basic monthly fee for reasons of economic need, and where, in the broadcast year in which the filing is received and in each of the three following projection years, the licensee's RNFA derived only from the basic service is less than 11.5%, and where its RNFA derived from the basic service, discretionary programming services (including those distributed in an unencrypted form) and non-programming services, combined, is less than 23%, a filing related to a proposed increase in the basic monthly fee would not generally be disallowed. Subject to the Commission's general policy limiting fee increases pursuant to subsection 18(8) in a given year to 10% of the base portion of the basic monthly fee in effect at the time of filing, the maximum increase that will generally be allowed will be the amount required to raise the RNFA for the basic service in the year of filing to a benchmark of 11.5%.
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The Commission would generally disallow any fee increase based on economic need other than in cases such as those described above, or where the licensee is able to demonstrate exceptional circumstances.
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The Commission expects that the period of approximately three years leading up to 1 September 1996 will serve as a transition phase, during which time licensees will implement addressability on a universal basis, and introduce new discretionary programming services and non-programming services. These new services will only gradually move towards achieving their full revenue producing potential. Accordingly, the profitability benchmark of 11.5% RNFA for the basic service will also be reached on a gradual basis, phased in as follows:
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Year of Filing/
Année du dépôt 1993/94 1994/95 1995/96 1996/97
Profitability Benchmark
(Percentage of RNFA)/ 17.5% 15% 13.5% 11.5%
Point de référence de rentabilité (pourcentage du TRINM)
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For filings received prior to 1 September 1996, the Commission will assess a licensee's economic need based upon its RNFA for the broadcast year in which the application is filed and for the following broadcast year, as projected, against the applicable profitability benchmark.
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For example, where a filing is received by the Commission in the 1993/94 broadcast year, where the licensee's projected RNFA for the basic service is less than 17.5% in each of 1993/94 and 1994/95, and where, in each of those years, its projected RNFA for the basic service, discretionary programming services and non-programming services, combined, is less than 23%, the Commission will generally disallow any increase in excess of that amount necessary to bring the current year's basic service RNFA to 17.5%. All filings will also remain subject to the Commission's policy limiting fee increases in any year to no more than 10% of the base portion of the basic monthly fee.
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Related Documents: CRTC Public Notices 1990-53 dated 15 May 1990; 1991-29 dated 14 March 1991; 1993-74 dated 3 June 1993; 1993-137 dated 7 October 1993 and 1993-137-1 dated 15 October 1993.
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Allan J. Darling
Secretary General
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