ARCHIVED -  Public Notice CRTC 1993-74

Public Notice

Ottawa, 3 June 1993

Public Notice CRTC 1993-74

STRUCTURAL PUBLIC HEARING

Table of contents Pages Table des matières

I. INTRODUCTION 1 I. INTRODUCTION

II. OBJECTIVES 2 II. OBJECTIFS

III.THE FUTURE COMMUNICATIONS 3 III. LE MILIEU DES COMMUNICATIONS
ENVIRONMENT DE DEMAIN

IV. THE TRANSITION PERIOD 6 IV. LA PÉRIODE DE TRANSITION

V. UNIVERSAL ADDRESSABILITY 8 V. L'ADDRESSABILITÉ UNIVERSELLE
- A PUBLIC POLICY OBJECTIVE - UN OBJECTIF DE POLITIQUE
PUBLIQUE

VI. FUNDING OF CANADIAN 11 VI. FINANCEMENT DES ÉMISSIONS
TELEVISION PROGRAMMING DE TÉLÉVISION CANADIENNES

VII. FINANCING UNIVERSAL 19 VII. FINANCEMENT DE L'ADDRESSA-
ADDRESSABILITY AND ADDI- BILITÉ UNIVERSELLE ET DES
TIONAL CANADIAN PROGRAMMING ÉMISSIONS CANADIENNES
SUPPLÉMENTAIRES

a)Current Monthly Fee Mechanisms 19
b) CCTA Proposal 20
c) The Commission's Position 21
d) Modifications to Subsection 22
18(6)
e) Changes Regarding Subsections 24
18(2) and 18(8) majorations
f) Common Industry DVC Standard 25
g)Ownership of the Addressable 26
h) Privacy Issues

VIII. CABLE CARRIAGE ISSUES 27 VIII. QUESTIONS DE TÉLÉDISTRIBUTION

a) Distribution of Specialty 27 a) Distribution de services d'émis-
Programming Services sions spécialisées
b) Access 29 b) Accès
c) Distribution and Linkage 32 c) Exigences de distribution et
Requirements d'assemblage
d) Lists of Eligible Satellite 34 d) Listes des services par satel-
Services lite admissibles
e) Carriage of Distant Canadian 35 e) Distribution des signaux cana-
Signals diens éloignés
f) Distribution of U.S. Border 37 f) Distribution des stations de
Television Stations télévision frontalières améri-
caines
g) Priority of Programming 39 g) Priorité des services de
Services programmation
h) Billing Clarity 39 h) Clarté de la facturation
i) Small System Deregulation 40 i) Déréglementation des petites
entreprises
j) Program Repeat Channel for 42 j) Canal de reprise d'émissions Conventional and Specialty pour les services de télévision
Television conventionnels et spécialisés
i)Cable Distribution of 43
ii) Program Logs 44
k) Preponderance 44

IX. CANADIAN DTH SERVICES 45 IX. LES SRD CANADIENS

X. CRITERIA FOR LICENSING 46 X. CRITÈRES D'ATTRIBUTION DE
NEW SERVICES LICENCES D'EXPLOITATION DE
NOUVEAUX SERVICES

APPENDIX ANNEXE

DISSENTING OPINIONS OPINIONS MINORITAIRES

STRUCTURAL PUBLIC HEARING

I. INTRODUCTION

At a public hearing commencing 1 March 1993 in the National Capital Region, the Commission undertook a review of the evolving communications environment, and its impact on the existing and future structure of the Canadian broadcasting system. As part of this important proceeding, known as the "structural hearing", the Commission considered comments from the public on a number of issues set out in CRTC - Notice of Public Hearing 1992-13, dated 3 September 1992, and on several related matters. Issues considered by the Commission included the distribution, packaging and carriage of programming services by cable television undertakings; the role and potential impact of other distribution technologies including direct-to-home (DTH) satellite services and multipoint distribution systems (MDS); financial support for Canadian programming; criteria for licensing and authorizing new broadcasting undertakings and other video services; and cable industry proposals for changes related to the regulation of cable fees including, among other things, fee increases related to capital expenditures for the purpose of financing the implementation of digital technology and universal addressability.

The Commission received 438 and 272 submissions in phases one and two, respectively, of the written stage of this proceeding. Comments were submitted by a wide range of interested parties including: cable subscribers, subscribers to DTH satellite services; licensees of conventional, specialty, pay and pay-per-view (PPV) television programming undertakings; cable licensees; industry associations; provincial governments; telephone companies; U.S. satellite services; public interest and consumer groups; independent producers and art groups; unions; representatives of the advertising industry; and students. A total of 126 parties appeared at the public hearing to expand on their written submissions.

The Commission wishes to thank all those who took part in this proceeding. Their written and oral submissions have greatly assisted the Commission in developing the policies and the proposals for regulatory change that are set out in this public notice.

II. OBJECTIVES

In keeping with its mandate as set out in the Broadcasting Act (the Act), the Commission must be mindful of the impact of technological change on the Canadian broadcasting system, particularly with respect to distribution costs, the emergence of new services, changing patterns of consumer demand, and most importantly, the collective impact of these factors on Canadian programming. The Commission must also take into account the competitive pressure on the system resulting from non-Canadian distribution systems and programming services.

In CRTC - Notice of Public Hearing 1992-13, the Commission identified a number of objectives for the regulatory framework for the Canadian broadcasting system:

1. provide Canadians with a wide range of general interest and special interest programming to choose from that is both accessible and affordable;

2. ensure that the Canadian broadcasting system remains strong and financially viable;

3. ensure that Canadian services have fair and equitable opportunity to become established in the system, without unduly limiting access to similar or comparable non-Canadian services;

4. ensure that Canadians have access to Canadian services that may be deemed "essential" or "vital"; and

5. be streamlined and limited to those regulatory elements necessary to achieve the objectives of the Act, and be flexible and responsive to technological developments and other changes in the broadcasting environment.

III. THE FUTURE COMMUNICATIONS ENVIRONMENT

In arriving at the policies and proposed regulatory changes that follow, the Commission has been guided by a conceptual framework for the future communications environment that respects the Commission's obligations to achieve the policy objectives of the Act, reflects the Commission's objectives for the regulatory framework, and takes full account of the discussion at the structural hearing.

There was a clear consensus among participants at the public hearing that the communications environment now emerging will largely be in place by the year 2000. Movement towards this new environment is being driven primarily by three intersecting environmental forces: changing technology, increasing competition and what has been described as the "new consumer".

The most significant technological factor is the digital revolution. Digital technology has given birth to "digital video compression" (DVC), a technology that, for existting television formats, will simultaneously permit an increase in channel capacity and reduce transmission costs per channel. It will also enable the introduction of high definition television systems. Clearly, the development of DVC will fundamentally transform the operational and competitive conditions for both programmers and distributors. The changing economics of program delivery will give birth to new programming services and concepts, including niche programming services. DVC can be applied to cable, over-the-air broadcasting, satellite and MDS transmission.

For the cable industry, DVC technology has become inextricably linked to strategies for implementing addressability on a universal basis. DVC has served to promote an industry-wide technological approach that will accelerate the implementation of addressability. Both technologies will be housed in a common electronic device that will be connected to the television set. As digital technology evolves and matures, other configurations can be expected to emerge, such as television sets with built-in decompression and addressability functions. These developments should contribute to significantly reducing the costs of DVC- and addressability-related equipment.

Addressable technology will provide greater choice and customization of services to subscribers. This expansion in programming choice and packaging flexibility, the advent of new multichannel distribution systems and new services, taken in combination, are serving to produce a new consumer environment and consciousness. In effect, they will transform the captive subscriber into the discriminating consumer.

In the face of technological advances and rapid change within the communications environment, traditional forms of regulation may become increasingly ineffective in sheltering the Canadian broadcasting system from expanding competition from non-Canadian service providers. The Commission is convinced that, in the new communications environment, any attempt to impose protectionist measures as a means to safeguard the Canadian broadcasting system would only prove counterproductive and impracticable. Accordingly, the Commission's focus will be on providing aggressive encouragement to the production and distribution of more and better Canadian programming.

For cable television, the Commission's regulatory focus will be at the level of the basic cable service, in keeping with traditional and fundamental concerns for subscriber affordability and access to priority services.

The Commission expects that the following features will characterize the emerging communications environment:

* The health of the system will rely increasingly on each of its components taking measures and supporting initiatives that foster strong Canadian programming and distribution technologies;

* Regulatory requirements and obligations will be reduced for both programmers and distributors;

* Canadian programming undertakings and consumers will have increasing access to multiple distribution technologies;

* Canadian programming services and distribution systems will face increasing competition from non-Canadian services and systems;

* In an environment characterized by expanded choice, particularly in an à la carte or transactional environment, Canadian programming undertakings will increasingly rely on the strength and distinctiveness of their programming and their marketing strategies to attract audiences and thereby ensure their viability; and

* Canadian programmers and distributors will have to cooperate in arriving at mutually advantageous terms for the distribution of services, without undue reliance on regulation.

IV. THE TRANSITION PERIOD

In approaching the future communications environment, the Commission agrees with the view expressed by many participants at the hearing that the system is currently in a "transition" period. The transition, primarily technology-driven, will see the industry delivery of broadcast services move from an analog mode, featuring limited channel capacity and one-way transmission, to a primarily digital mode that will feature a significant expansion in channel capacity, two-way transmission, universal addressability and greater customization of service. This technology will facilitate the development of a variety of transactional services, including PPV and other à la carte services.

The Commission expects that cable systems will deploy digital technology in an evolutionary fashion, beginning with discretionary programming services and gradually applying it to basic service programming, as the necessary electronic terminal equipment is rolled out to all subscribers. This hardware will consist of an "addressable digital decoder" (the box) necessary to decode and decompress the digital signals.

Pay and PPV services are currently delivered in an encrypted form, requiring a set-top decoder device. Other discretionary services are distributed in unencrypted, analog form and marketed on a "negative option" basis. The Commission expects that, during the transition period, use of these unencrypted tiers will continue on a declining basis through to the end of the decade. The Commission is committed to ensuring that Canadians continue to have maximum access to Canadian programming services, and that they are served by the most efficient distribution technology. In this regard, the traditional delivery technologies of over-the-air broadcasting services and cable will face increasing competitive challenges from new and emerging distribution systems, including MDS, satellite services, telephone carriers and other communication services.

Under the current regulatory framework, cable penetration in Canada has grown to almost 80% of all households. For the time being, the Commission considers that cable distribution remains the most effective and efficient distribution technology. The Commission, however, recognizes the potential of these other distribution technologies to contribute to achievement of the objectives of the Act.

With respect to the delivery of broadband video services by telephone carriers, the Commission acknowledges that new distribution technologies provide a basis for such services to be delivered over their local distribution networks. Accordingly, the Commission encourages the cable and telephone carriers to explore opportunities for cooperative ventures for the shared use of network infrastructures where such ventures would increase the efficiency, reach and delivery of services to Canadians in all regions of the country.

With respect to MDS technology, the Commission considers that, in most instances, the appropriate role for MDS should be to complement cable television by providing multichannel television services over the air to areas not served by cable television. It further considers that the regulation of MDS should generally parallel the regulation of cable television, while taking the differences in the technology into account. In Public Notice CRTC 1993-76, issued today, the Commission has set out its regulatory policy for MDS systems.

With respect to foreign DBS service providers that may wish to enter the Canadian market, the Commission has determined that it would in certain circumstances have jurisdiction over them under subsection 4(2) of the Act. A DBS service provider whose signal is receivable in Canada could be found to be carrying on a broadcasting undertaking in Canada in whole or in part where, for example, it has some or all of the following characteristics:

* it acquires program rights for Canada;

* it solicits subscribers in Canada;

* it solicits advertising in Canada;

* it activates and deactivates the decoders of Canadian subscribers.

The Commission will apply the appropriate enforcement tools to assert its jurisdiction over these undertakings should they enter the Canadian market without making contributions to the Canadian system as required of all broadcasting undertakings under the Act. In the case of U.S. DBS, as discussed at page 34 of this document, the Commission has determined that where a non-Canadian satellite programming service authorized for cable distribution in Canada is also distributed in Canada by a DBS operator not authorized by the Commission, the service may be removed from the lists of Eligible Satellite Services. The enforcement actions described above are directed at the broadcasting undertakings, and not at the individual DTH subscriber. In this regard, the Commission affirms the right of individuals to receive directly satellite-delivered programming for which they have paid any required subscription fees.

V. UNIVERSAL ADDRESSABILITY - A PUBLIC POLICY OBJECTIVE

The Commission has determined that the implementation of addressability on a universal basis for the provision of broadcasting services to Canadians is a significant public policy objective.

The implementation of universal addressability will allow all cable households to be served and identified individually, and will permit greater flexibility in packaging program services, thereby providing greater choice and customization of service. It should also contribute to a more affordable basic service to the extent that it provides a greater incentive for specialty programming services with an authorized wholesale rate to migrate from basic cable service to discretionary tiers. Indeed, the Commission expects that universal addressability will make possible the wider exposure of discretionary programming services at lower prices, and will also provide greater opportunities for new niche services to develop and become financially successful.

Compared to the cost of expanding the transmission bandwidth, DVC represents a more economical method of significantly increasing the channel capacity of cable systems. Thus the Commission considers DVC to be an integral component of the cable plant for the provision of both basic and discretionary services. As noted earlier respecting the cable industry, addressability and DVC are linked since capability for both will be housed in a common set top box. DVC and addressability will thus be interdependent.

Universal addressability will also contribute to the modernization of the communications infrastructure, by providing Canadians with advanced services and contributing to our future competitiveness in the global marketplace.

Ensuring Canadian Choices

In establishing public policy for the Canadian broadcasting system,the Commission must strive for a balance between the sometimes conflicting objectives of supporting the presence of Canadian programming, and responding to the consumer's desire for choice, consistent with the prevailing social, economic and communications environment. Throughout the structural proceeding, the Commission has sought to reconcile these two legitimate concerns.

The Commission is fully aware that the expanded consumer choice inherent in the future communications environment will not be without risk to the Canadian broadcasting system. In an environment that provides and enhances consumer choice, subscribers are likely to support discretionary Canadian programming services only if those services have the marketing, budgets and, most importantly, program quality comparable to that of non-Canadian services. In the relatively limited Canadian market, both English-language and French-language programming services may suffer if this risk translates into reduced subscriber penetration. Accordingly, in this proceeding, the Commission has attempted to focus on developing policies that will support strong Canadian programming and, at the same time, ensure that the Canadian distribution system is technologically competitive.

Indeed, the Commission recognizes that the two major elements of the system - program production and program distribution - must increasingly work in tandem to maximize the strength and vitality of the Canadian broadcasting system, and to increase the attractiveness of Canadian programming to audiences, particularly in an era of increasing choice and competition. Neither of these two elements can serve the Canadian broadcasting system successfully in isolation from the other.

Accordingly, the Commission is introducing a package of policy and regulatory changes designed to bring the program production and program distribution industries into closer and more effective co-operation with each other. The package includes intended changes supported by the majority of Commissioners, to the capital expenditure cable fee increase mechanism that will provide incentives leading to the creation of a new fund for Canadian programming. The package also provides for financial support to implement universal addressability.

In addition, in this document and in other related public notices issued today, the Commission announces policy changes and intended areas of regulatory change with respect to: cable distribution and linkage of services; access of programming services to cable; the carriage of distant Canadian broadcast signals and U.S. border stations; small cable system carriage and fee deregulation, the latter of which is supported by the majority of Commissioners; program repeat channels; criteria for licensing and authorizing new services; and MDS and home satellite delivery. The Commission has also announced a call for pay, specialty and PPV applications, as set out in Public Notice CRTC 1993-77 of today's date.

The Commission will soon issue for public comment proposed amendments to the Cable Television Regulations, 1986 (the regulations) as required to bring into effect the changes discussed in this and other related notices issued today.

VI. FUNDING OF CANADIAN TELEVISION PROGRAMMING

An increasing challenge facing the Canadian broadcasting system and the Commission in an era of expanding viewer choice will be to ensure that Canadian information, ideas, values and creativity are given maximum exposure on our television screens. The Commission emphasizes that consistent with section 3 of the Act, not only must the Commission see to it that there are Canadian undertakings in operation, it must also ensure that those undertakings are distributing a diverse range of quality Canadian programming that is attractive to Canadian viewers.

It is only by providing distinctive, indigenous programming with which Canadians can identify that Canadian programming undertakings will be distinguishable amidst the vast number of programming choices that new technological developments will make possible.

At the hearing, a number of environmental and structural obstacles to the funding of Canadian program production were discussed.

Canada's small domestic market continues to make it difficult to finance the creation of competitive Canadian programs. Whereas U.S. producers can recover the majority of their production costs through domestic licence fees, the licence fees earned in Canada by most Canadian program producers represent only a fraction of their total production costs. Many Canadian producers thus rely on tax credit programs and public and private funding services to finance their productions. In most cases, however, producers are still left with funding shortfalls and must look to offshore markets to make up the difference through foreign investment and/or pre-sales. While greater access to foreign funding may result in the ability to produce more programming, it has been argued that this may also lead to increased pressure to alter the content of a program to appeal to foreign markets, while potentially rendering the programming unrecognizable as Canadian.

Most parties in this proceeding agreed that more money needs to be raised within Canada for the production of Canadian programming to serve Canadian audiences if such programming is to compete in the multi-channel universe. Two principal funding mechanisms were proposed to achieve this end. These are discussed below.

The CAB Proposal

The Canadian Association of Broadcasters (CAB) stated that the essential purpose of a regulated Canadian broadcasting system is to provide Canadians with Canadian programming, and that any new policy framework must ensure that the necessary resources are made available and directed to those who create and exhibit Canadian programming.

One of the CAB's key recommendations was that television stations should receive compensation from cable operators for the carriage of local signals.

The CAB claimed that increased revenues to broadcasters would enable licensees to strengthen their Canadian programming. A number of other parties agreed that the cable sector should support not only the distribution, but also the production of Canadian programming. There was a concern, however, as to how much money the fee-for-carriage mechanism proposed by the CAB would ultimately contribute to Canadian programming in general, and to programs in under-represented categories in particular.

Although a few individual broadcasters were willing to commit all the funds derived from the fee-for-carriage proposal to the production of Canadian programming, the CAB proposed only that any such fees would be included in the Commission's "formula" for Canadian program expenditures. Under the present formula, English-language television stations allocate, on average, approximately 34% of their advertising revenues to Canadian program expenditures. There are no requirements with respect to the allocation of the expenditures among the various program categories.

In its written comment submitted on 4 December 1992, the CAB argued that the payment of compensation by cable operators to television broadcasters for the retransmission of local signals would be consistent with paragraph 28.01(2)(b) of the Copyright Act and within the powers of the Commission under the Broadcasting Act.

The CAB suggested that the Commission should acknowledge the inherent signal rights of Canadian broadcasters by requiring cable operators to choose between two carriage options: priority carriage, with compensation set by the Commission, or negotiated carriage, with compensation established by the parties. The CAB stressed that, regardless of whether or not the Commission were to adopt an approach requiring cable operators to obtain retransmission consent, it is essential that a broadcaster's proprietary right in respect of its own signal be recognized.

The CAB submitted that its compensation for carriage proposal would both rebalance resources within the system and serve to achieve the policy objective in paragraph 3(1)(e) of the Act, which states that: each element of the Canadian broadcasting system shall contribute in an appropriate manner to the creation and presentation of Canadian programming.

In its 4 February 1993 submission, the CAB stated that the Commission has the jurisdiction to impose such a requirement, and that under the Act, the structure and the particular characteristics of that contribution would be within the Commission's discretion.

The CAB noted that, with respect to any regulation made by the Commission for the purpose of furthering the policy contained in subsection 3(1) of the Act, the courts have been very reluctant to substitute their view of whether the regulation achieves that purpose. The opinion also noted the fact that the Commission has required distribution undertakings to make both direct contributions (through the operation of the community channel), and indirect contributions (through such mechanisms as simultaneous program substitution and mandatory carriage) to the creation and presentation of Canadian programming. The CAB concluded that any measures adopted by the Commission toincrease the financial resources of broadcasters, whether by direct or indirect means, are within the Commission's jurisdiction and the policy of subsection 3(1) of the Act.

The CAB stated at the hearing that, while the recognition of a local signal right and a fee for carriage could be effected under the Copyright Act, it is the Commission who is responsible for implementing broadcast policy in Canada, and, as such, would be the most appropriate regulatory body to require both the consent to carriage and compensation for the carriage of local signals. The CAB also noted that section 28.01 of the Copyright Act specifically provides for the retransmission of a simultaneous local signal. It noted further that the right to retransmit signals is subject to restrictions established under a federal statute, such as the Broadcasting Act, and accordingly, that the Commission's decision to make regulatory provision for simultaneous program substitution effectively modifies copyright.

Representatives of the cable industry were unanimous in their opposition to the CAB's proposal. Shaw Cablesystems Ltd. (Shaw) stated that nowhere in the Act, or in case law interpreting the Act, is explicit authority given to the Commission to require compensation for the retransmission of local signals.

Shaw and other parties at the hearing noted that paragraph 3(1)(e) of the Act gives the Commission very broad powers, including the power to require a financial contribution for the support of programming by all elements of the Canadian broadcasting system. Moreover, Shaw challenged the CAB's rationale, in particular its proposition that broadcasters have an ownership or proprietary right in their broadcast signals that entitles them to compensation for the use of television signals. Shaw was of the opinion that there is a basic question of law as to whether a broadcast signal can be said to be owned by the licensee when it is transmitted via hertzian waves and is intended for free reception by the public at large. According to Shaw, this issue is primarily one of copyright law, and the CAB's request is an attempt to override the clear intention of the 1988 amendments to the Copyright Act which require cable companies to compensate program rights holders only in the case of the retransmission of distant signals.

CCTA Proposal

During the written phase of the proceeding, the Canadian Cable Television Association (CCTA) stated that the capacity of the cable industry to compete in the new communications environment:

 ...will not rest solely on its ability to offer Canadians a technically superior distribution system: it will also need more distinctive, quality domestic programming to distribute.

STRUCTURAL PUBLIC HEARING

The CCTA emphasized that its first commitment is to move forward with the implementation of technology that will provide the consumer with access to additional programming. It realized, however, that complementary measures will be desirable to support the development of Canadian programming.

In its 4 February 1993 written submission, the CCTA announced that those of its members having 7,500 subscribers or more would be prepared, collectively, to contribute approximately $20 million per year, for a maximum of $100 million over a 5-year period, to a fund that would support independent production of under-represented Canadian programming in the areas of drama series, documentaries and children's programs. The CCTA indicated that the cable industry's commitment to establish the fund was tied to the Commission's acceptance of certain other proposals for changes to the regulation of subscriber fees. At the hearing, it was clarified that the CCTA proposal was for a voluntary fund, and that even with full participation by all systems with 7,500 subscribers or more, the maximum annual contribution would amount to approximately $16.8 million over the five-year period, rather than the $20 million indicated in the written brief.

The CCTA proposal underwent further revisions during the course of the hearing, such that, by the end of the proceeding, the voluntary annual contributions would have represented approximately $12.4 million over an eight-year period to reach the $100 million target.

The CAB did not support the establishment of a cable-financed programming fund, primarily on the grounds that it would not address the broadcasters' call for compensation for carriage of their signals. However, reaction by most parties to the concept of a cable fund was generally favourable. The major criticisms were that the likely contribution would not be large enough to meet the need, and that the voluntary nature of the proposal does not guarantee a minimum level of funding.

The Commission's Position

The Commission has carefully considered the opinions expressed by the parties on the CAB proposal. The Commission is satisfied that its jurisdiction to require each element of the broadcasting system to contribute to Canadian programming is clear, and that the nature, extent and mechanism of that contribution is entirely within its discretion. However, the Commission is of the view that explicit recognition of a right to compensation for the retransmission of local signals is essentially a copyright issue and would most appropriately be dealt with by bodies other than itself.

The CAB and the CCTA agreed that new initiatives for funding Canadian programming are essential to ensure that Canadian programs remain available and attractive to Canadians. Although the Commission rejects the CAB compensation for carriage proposal, it considers that additional financial support for the production of Canadian programming is essential. While the CCTA proposal for a Canadian programming production fund has merit, the Commission agrees with many parties at the hearing that the cable fund proposed by the CCTA would not generate the amount of funds necessary to ensure significant support for Canadian programming.

Accordingly, the Commission, by majority vote, intends to make certain changes to its cable rate regulation mechanisms, the purpose of which is to provide significant financial support for Canadian programming. Specifically, the Commission intends to link contributions by cable licensees to a production fund to the capital expenditure (CAPEX) component of the cable fee structure.

This mechanism, described in more detail in the following section of this notice, would generate a significantly higher level of funding than the amount that would have been available under the CCTA proposal. The Commission estimates that the proposed mechanism will generate approximately $300 million over the first five years of the fund.

The Commission considers that this fund will be effective in increasing the amount of attractive Canadian programming available to Canadians. This should be particuarly beneficial to conventional broadcasters, in consideration of their major role in exhibiting Canadian programming. There are many aspects of the fund that have yet to be determined, including the nature of the organization that would oversee the new fund, access criteria, and the allocation of monies. In a public notice to be issued shortly, the Commission intends to address these matters in greater detail and seek further public comment.

VII. FINANCING UNIVERSAL ADDRESSABILITY AND ADDITIONAL CANADIAN PROGRAMMING

a) Current Monthly Fee Mechanisms

The regulations currently provide a number of mechanisms pertaining to cable television subscriber fees.

Subsection 18(2) of the regulations allows a licensee to increase the base portion of the basic monthly fee, on or after January 1 of each year, by a percentage amount not greater than the percentage increase in the Consumer Price Index (CPI) for the 12-month period ending 31 July of the previous year, less two percentage points. This fee increase provision is intended to partially compensate cable operators for cost increases due to inflation.

Subsection 18(6) of the regulations permits Class 1 and Class 2 cable undertakings to obtain fee increases for capital expenditures related to headend improvements for the provision of the basic service, community programming equipment, and direct costs associated with the upgrading and rebuilding of the distribution plant and existing subscriber drops. By this mechanism, licensees may recover up to 50% of eligible capital expenditures, at 10% per year for five years, through basic monthly fee increases, subject to an upper limit equivalent to 3% of the base portion of the authorized basic monthly fee. In addition, a "sunset" provision requires each capital expenditure fee increase to be removed five years after the date it originally went into effect. New plant construction is not an eligible capital expenditure. This fee increase mechanism recognizes the capital-intensive nature of the cable industry and the fact that ongoing upgrades are necessary in order to improve technical quality and reliability, and to expand channel capacity.

Subsection 18(8) of the regulations provides for fee increases based on the economic need of cable operators, assessed on a case-by-case basis. To assess economic need, the Commission measures the profitability of basic cable service on the basis of the rate of return on net fixed assets, before interest charges and taxes, over a seven-year period. In making its assessment, the Commission also takes into account the total revenues and expenses associated with discretionary programming services distributed in an unencrypted form.

The Commission currently uses a profitability benchmark of 23%, using historical returns for each of the preceding five years, together with projected returns for the current year and the following year. The magnitude of the allowed fee increase will normally be sufficient to raise the seven-year average return on net fixed assets to the 23% benchmark level. The Commission will generally limit a fee increase pursuant to subsection 18(8) in a given year to 10% of the base portion of the basic monthly fee.

b) CCTA Proposal

In support of its proposal to implement universal addressability, the cable industry presented financial information to support its arguments for certain amendments to the cable subscriber fee regulations. Specifically, the industry proposed that the following modifications would be required to generate the necessary cashflow:

* removal of the five-year "sunset" provision on capital expenditure fee increases pursuant to subsection 18(6) of the regulations;

* inclusion of addressability-related capital expenditures as eligible expenditures forthe purposes of subsection 18(6) fee increases;

* removal of the 3% cap on increases to the base portion of the basic monthly fee related to subsection 18(6) capital expenditures; and

* inclusion of addressability-related capital expenditures in the basic service asset base for the purpose of subsection 18(8) fee increases.

Other amendments to the regulation of cable television subscriber fees proposed by the industry are as follows:

* inclusion of new plant construction as eligible expenditures for the purposes of subsection 18(6) fee increases;

* modification of the partial indexing fee increase mechanism pursuant to subsection 18(2), to allow licensees to increase the base portion by up to 80% of the percentage increase in the CPI; and

* deregulation of the fees of cable systems with fewer than 7,500 subscribers.

c) The Commission's Position

The Commission has carefully assessed the CCTA's proposals for regulatory change to the cable fee increase mechanisms, along with the financial information on which the proposals were based. The Commission has determined that certain regulatory changes are necessary to ensure that the cable industry is in a position to implement DVC and universal addressability in a timely fashion.

Moreover, based on the significant advantages to the system that will flow from the implementation of addressability, including a greater choice of services, new interactive services, and more affordable basic cable fees, the Commission considersit reasonable and appropriate that basic cable subscribers should bear a portion of the capital costs of implementing DVC and universal addressability.

Based upon the foregoing, and given the need to expand the financial support for Canadian programming, the Commission intends to implement for Class 1 systems, a new regulatory regime for subsections 18(2) and 18(8) and, by majority vote, 18(6) of the regulations. The required amendments to the regulations to effect this regime will be issued shortly for public comment. For information purposes, the Commission has included as an appendix to this notice a first draft of some of the proposed amendments to section 18.

d) Modifications to Subsection 18(6)

In the interests of ensuring that the benefits to the system of DVC and universal addressability are achieved in a timely fashion, and in recognition of the evolving communications environment, the Commission proposes to allow a portion of DVC and addressability-related capital expenditures to be eligible for the purposes of subsection 18(6) fee increases. Specifically, the Commission intends to amend the regulations to allow a portion of the cost of an addressable digital decoder box, up to a maximum of $150 per household, as an eligible expenditure for the purposes of calculating subsection 18(6) fee increases.

As provided for within that subsection, this would allow operators to recover a maximum of 50% of this amount, up to $75 per household, over five years.

In addition, for the purpose of subsection 18(6) rate increases, the Commission intends to amend the regulations to establish a separate 3% cap on increases to the base portion of the basic monthly fee respecting capital expenditures related to the box. In Public Notice CRTC 1990-53, the Commission determined that individual capital expenditure increases would be terminated five years after the date they were implemented. The Commission has decided to maintain this "sunset" provision in the regulations. However, in consideration of the need to provide additional funding for the production of Canadian programming, the Commission, by majority vote, intends to suspend implementation of the reductions required by the "sunset" provision for those licensees who contribute 50% of the amount by which the basic monthly fee would otherwise be reduced to a new fund for Canadian programming. Thus, for the initial five-year period, contributions to the fund will be generated by revenues currently included in the existing basic monthly fee.

As noted earlier, the Commission estimates that this proposed mechanism will provide approximately $300 million over five years for the production of new Canadian programming, as opposed to the $100 million proposed by the cable industry. This same mechanism will apply to future capital expenditures as a means to ensure that funding for Canadian programming will be ongoing, rather than for a limited number of years as proposed by the cable industry. Also, as noted earlier, a subsequent public notice will be issued, calling for comments on the operational and organizational details of the fund.

The Commission considers that this regulatory approach recognizes that strong, unique and attractive Canadian programming is essential to anchor and support the Canadian broadcasting system in an era of increasing competition, fragmentation and choice.

With respect to making new plant extensions eligible for subsection 18(6) fee increases, the Commission determined in Public Notice CRTC 1990-53 that new plant expenditures, would no longer be considered aseligible expenditures, given that new plant extensions generate new revenues. The Commission has not been persuaded that any change to this policy is required.

e) Changes Regarding Subsections 18(2) and 18(8) Increases

In light of the above proposal that a portion of the cost of the box be allowed as an eligible expenditure for the purposes of subsection 18(6) rate increases, and considering that the proposal to suspend the implementation of the sunset reductions will result in the value of the sunset continuing to form part of the basic monthly fee for those licensees who contribute to a Canadian program fund, the Commission has determined that further modifications to other subscriber fee increase mechanisms are justified.

Firstly, the Commission intends to eliminate the partial indexing provision of subsection 18(2). This decision reflects the Commission's continuing concern for ensuring subscriber affordability of the basic cable service and of the priority signals distributed on it. This change will eliminate fee increases that may not necessarily be justified by increased costs incurred by the cable operator.

Also, the Commission considers it appropriate 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.

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 immediately.

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.

The cable industry's proposal to deregulate the fees of small cable systems is addressed later in the document.

f) Common Industry DVC Standard

The Commission agrees with the views expressed by the majority of participants in this proceeding that the adoption by all Canadian programmers and distributors of a common DVC standard, including conditional access, would be beneficial to the Canadian broadcasting system.

Benefits would include lower costs of terminal equipment through economies of scale, and the seamless flow-through of compressed and encrypted programming from distributors to subscribers, thereby reducing costs to cable licensees, especially those operating smallcable systems, and ultimately reducing costs to their subscribers.

As stated earlier, the Commission intends to amend the regulations to make DVC and addressability-related expenditures for the box eligible for the purposes of subsection 18(6) fee increases. The Commission wishes to consider further whether the applicability of this mechanism should be conditional on the cable industry adopting a common DVC standard. All Canadian programmers and distributors are encouraged to participate in the process of selecting a common DVC standard.

g) Ownership of the Addressable Digital Decoder Box

Based on the objective of implementing addressability on a universal basis, the cable fee regulations would allow cable operators to recover a portion of the costs of deploying one box per household. However, consistent with the Commission's desire to make ownership of terminal equipment available to the public, the Commission considers that cable subscribers should not be precluded from purchasing or leasing additional boxes, either from the cable operator, or in the consumer electronics marketplace.

h) Privacy Issues

The universal deployment of digital terminal equipment will provide the cable industry with the ability to obtain valuable information regarding subscribers' viewing patterns, tastes and preferences. This capability gives rise to a number of issues concerning subscriber privacy.

The Commission believes strongly that addressable technology should not be used to collect, use or disclose viewing and other information in a manner that infringes on the privacy of subscribers. In this regard, the Commission notes that the Department of Communications has recently established privacy principles for the telecommunications industry, and considers that these principles are also relevant to the cable industry. The Commission invites the CCTA to assess these principles with a view to their adoption by the cable industry.

VIII. CABLE CARRIAGE ISSUES

a) Distribution of Specialty Programming Services

A major issue discussed at the hearing was whether certain existing licensed specialty services should continue to be distributed as part of the basic service or should be required to be distributed on a discretionary basis.

Currently, in Francophone markets, all French-language specialty services (Canal Famille, Météomédia, Réseau des Sports, MusiquePlus, and TV5), and in Anglophone markets, four of the English-language specialty services (CBC Newsworld, Weather Now, Vision and YTV) are authorized for cable distribution on an "optional-to-basic" basis. That is, they are not priority signals requiring mandatory carriage, but, if a cable operator elects to carry these services, they must be carried as part of the basic service. In addition, other specialty services, such as TSN and MuchMusic, have a different carriage status whereby they may be distributed, in Anglophone markets, either as part of the basic service, or with the consent of the service provider, on a discretionary basis.

The Commission considers that the dual carriage status granted to TSN and MuchMusic appears to have provided desirable marketing flexibility to both the cable industry and to the specialty service providers in Anglophone markets. These two services have generally been distributed as part of high penetration unencrypted discretionary tiers offered on a negative option basis.

The Commission has decided to authorize dual status for all existing English- and French-language specialty services that are licensed on an optional-to-basic basis. By dual status, the Commission means that, when distributed by a cable undertaking in accordance with access provisions discussed later in this notice, these services must be distributed on the basic service unless the specialty service licensee consents to distribution on a discretionary basis. Chinavision, Telelatino and Cathay, as third-language services, will continue to be distributed as discretionary services only, and will not be eligible for basic carriage.

The Commission considers that extending the concept of dual carriage status to all existing English and French-language specialty services will offer cable operators and programmers greater flexibility in packaging services in ways that best suit their specific markets. The Commission notes, however, that, in the near future, dual status may not result in the same degree of discretionary distribution of specialty services in Francophone markets as it has in Anglophone markets, due to the inherent differences in those two markets, in particular, the linguistic and cultural character of the Francophone market and its more limited size. The Commission acknowledges in this regard the stated position of French-language program service providers that they would continue to opt for basic distribution.

With regard to any new Canadian English- or French-language specialty services that may be licensed in the future, the Commission will generally be prepared to accord dual carriage status to such services, unless the nature of a particular service is such that it would be more appropriately distributed on a discretionary basis only.

In the case of any single or limited point-of-view religious specialty programming services, the Commission's policy set out in Public Notice CRTC 1993-78 of today's date, and supported by the majority of Commissioners, specifies that such services may be distributed on a discretionary basis only, subject to specific restrictions with respect to packaging and linkage with other services, as described in that notice. In deciding, as a general rule, to provide dual carriage status for both existing and new Canadian specialty services, the Commission has taken into account the future communications environment discussed earlier in this document. The Commission is confident that specialty service providers will be able to negotiate satisfactory terms for carriage on a discretionary basis. The Commission encourages open and fair-minded negotiations permitting the creation of discretionary packages that take into account the revenue needs of Canadian programming services, the interests of an efficient distribution system, the interests of subscribers and, in particular, the need to maximize subscriber choice while ensuring the affordability of basic cable service.

b) Access

Access to cable distribution by Canadian programming services was a central issue at the hearing, and was raised by both service providers and cable operators. In Public Notice CRTC 1987-260 dated 30 Novvember 1987, which accompanied decisions licensing new Canadian specialty and pay services, the Commission stated:

 Since they provide in fact the primary vehicle for the exhibition of television programming in Canada, cable licensees have a responsibility to ensure that Canadian services are provided fair and equitable access to their cable systems. This responsibility is as significant in respect of cable television's ability to contribute to meeting the objectives of the Broadcasting Act as the Canadian content requirements are in respect of radio and television licensees.

Representatives of the cable industry expressed a general willingness to distribute all licensed Canadian services, subject to the CCTA's existing access guidelines, which are administered by the Cable Television Standards Council.

The existing guidelines state that, as a general principle, access by program providers to available channel capacity will be provided by the cable industry. Such access, however, depends upon the characteristics of the individual market served, particularly in the following areas:

 * the willingness of subscribers to support, and to continue to support the service(s);

 * the linguistic and ethnic characteristics of the licensed area;

 * the relevance of the service to the licensed area;

 * the terms of the contractual arrangements associated with the carriage of the service(s); and

 * the availability of the signal at the cable licensee's local headend.

The guidelines also call upon cable television licensees to make reasonable efforts to market and promote these services.

At the public hearing, the Commission asked the CCTA if it would be willing to put forward its guidelines for public comment and, ultimately, to make the guidelines subject to Commission acceptance. In answer to this question, the CCTA stated:

 ...as far as the Association is concerned, we would have no difficulty at all in having the guidelines put to the public process. Before that happens, I think they ought to be reviewed and, to the extent that there are concerns expressed, perhaps the accessguidelines should be redrafted and whatever we all agree are adequate or reasonable access guidelines would then go through the same process as the Customer Service Standards.

The Commission's Position

The Commission considers that the cable industry's general commitment to distribute all licensed Canadian services is critical to cable's central role as the primary program distributor in the Canadian broadcasting system, and is central to maintaining the Canadian character of the system. Accordingly, the Commission considers it appropriate that the CCTA, on behalf of the cable industry, initiate a public process to review the existing CCTA guidelines, and to submit them to the Commission for acceptance as soon as possible. Once accepted, the guidelines should be administered by the Cable Television Standards Council.

The Commission considers that the spirit of the guidelines should, to the maximum possible extent, respect the fact that it should be subscribers, who, by their choices, determine the popularity and success of individual programming services. The viability of a service should not be determined by the carriage decision of the cable operator. Thus, the Commission considers that the guidelines must reflect the fundamental principle that cable operators must distribute all English-language services in Anglophone markets, and all French-language services in Francophone markets. In regards to the distribution of English-language services in Francophone markets and the distribution of French-language services in Anglophone markets, the Commission has, and continues to, encourage cable licensees to distribute these services.

The Commission also requires the CCTA to ensure that the public process, and the revised guidelines that flow from it, address the following matters:

* access policies for traditional programming services (conventional, specialty, pay, and PPV) and repeat and multiplexed services;

* the priority of programming services over non-programming services;

* access to cable by providers of emerging "multi-media" and non-traditional services, including computer-generated information services and games;

* channel placement;

* tier placement and packaging; and

* resolution of disputes regarding the application or interpretation of the access guidelines.

In addition, the Commission will develop a mediation procedure to address potential disputes between programming and distribution undertakings. The Commission notes that this measure will require the enactment of a new regulation pursuant to paragraph 10(1)(h) of the Act.

c) Distribution and Linkage Requirements

The Commission's distribution and linkage requirements, currently applicable to all Class 1 and Class 2 cable licensees, are set out in Public Notice CRTC 1987-261 dated 30 November 1987 which is incorporated by reference into the regulations.

The following revisions to the distribution and linkage requirements discussed below take into consideration the best interests of the Canadian broadcasting system in the future communications environment and, in particular, seek to ensure the maximum practicable distribution of existing and new Canadian specialty services.

1. The current 2:1 linkage ratio, whereby up to two non-Canadian satellite services from Section A of the list of Part II Eligible Satellite Services may be distributed in a package with each discretionary Canadian specialty service, will be changed to a 1:1 ratio. Thatis, only one non-Canadian satellite service from the Part II list may be linked with each Canadian specialty  service distributed in the same discretionary tier or package. The Commission intends this revision to take effect no later than 1 January 1995.

STRUCTURAL PUBLIC HEARING

In conjunction with the enhanced packaging flexibility provided by extending dual carriage status to all existing specialty services, the 1:1 ratio will provide cable operators with an incentive to package existing and new Canadian specialty services on high penetration discretionary tiers, where the programming service consents to such discretionary distribution. As stated earlier, in negotiating carriage status, licensees of discretionary program services should be mindful of subscriber demands for both greater choice and affordability of services. The Commission notes that this change may increase the exposure of Canadian ethnic specialty services on cable systems, to the extent that they are distributed by cable operators as linkage partners to non-Canadian satellite services.

2. The current 8-channel limit that applies to the distribution of non-Canadian satellite services will be eliminated. The Commission considers that this limit will be unnecessary following introduction of the new 1:1 linkage ratio adopted in relation to specialty services, given the continued application of the overall preponderance rule.

 The elimination of the 8-channel limit will also enable Canadian pay television service providers to make better use of the 5:1 linkage ratio that they are currently accorded. This 5:1 linkage ratio for pay television will remain unchanged.

  The Commission intends the deletion of the 8-channel limit to take effect no later than 1 January 1995, or earlier, should the cable operator adopt the new 1:1 linkage ratio before 1 January 1995.

These revised distribution and linkage rules are set out in Public Notice CRTC 1993-75, issued today. The Commission notes that the rules for single or limited point-of-view religious services are also set out in this public notice. These rules will take effect when the regulations are amended to incorporate them by reference.

d) Lists of Eligible Satellite Services

It is the current policy of the Commission not to authorize for cable carriage non-Canadian satellite services that are deemed to be either totally or partially competitive with Canadian pay or specialty services. In cases where a Canadian service is licensed in a format competitive to that of an authorized non-Canadian satellite service, or where a non-Canadian service becomes competitive, by virtue of a change in its own format or by a change in format of a Canadian specialty or pay service, the authority for the cable carriage of the non-Canadian service could be terminated.

As a modification to this policy, the Commission has decided that, where a non-Canadian service on the Part II list becomes partially competitive with a Canadian specialty or pay service, the Commission may, on a case-by-case basis, place the service on Section "B" of the Part II list, for linkage exclusively with Canadian pay television services, rather than delete it entirely from the Part II list.

In addition, the Commission has decided, as suggested by the Canadian Association of Small CableOperators (CASCO), that where a non-Canadian satellite service is distributed by a DBS operator not authorized by the Commission, the service may be removed from the lists of Eligible Satellite Services. Furthermore, where a non-Canadian satellite service not currently on the lists of Eligible Satellite Services is distributed in Canada by a DBS operator not authorized by the Commission, that service will not be considered for inclusion on the lists.

The Commission emphasizes that in considering the possible addition of any non-Canadian service to the lists, it will expect the service provider to have obtained the necessary distribution rights for the programming it distributes in Canada. Similarly, it expects existing non-Canadian service providers to have obtained Canadian rights. The Commission may require service providers to demonstrate that they have obtained these rights.

e) Carriage of Distant Canadian Signals

The distribution of distant Canadian signals on high penetration discretionary tiers was another issue discussed at the hearing.

At present, distribution on a discretionary basis is permitted without the need for prior Commission authorization. The intent of the existing distant signals policy, as set out in Public Notice CRTC 1985-61, is to promote the increased availability of Canadian programming, but only to the extent that the ability of local broadcasters to attract revenues and maintain local programming commitments are not unduly affected. Significant changes have occurred in the Canadian broadcasting system since the introduction of that policy statement in 1985, including the appearance of high penetration discretionary tiers following the widespread introduction of negative option marketing techniques.

The Commission has determined that, henceforth, the distribution of distant Canadian signals by Class 1 licensees, and by Class 2 licenseeswith 2,000 or more subscribers, will require an application by the cable licensee for prior Commission approval in all cases. This change will provide local broadcasters and other interested parties with an opportunity to intervene prior to the addition of new distant Canadian signals on cable distribution systems.

Part III licensees, and Class 2 licensees with fewer than 2,000 subscribers, will be permitted to distribute distant Canadian signals contained on the list of Part III Eligible Satellite Services without the need to obtain prior Commission approval.

In assessing applications for the cable distribution of distant Canadian signals, whether on basic service or on a discretionary basis, the Commission will be guided by the following criteria as originally set forth in Public Notice CRTC 1985-61:

(a) there should be no objection on the part of the originating station whose signal is being extended;

(b) the originating station whose signal enters a distant market should not accept local advertising from such a market;

(c) the originating station should continue to adhere to the local programming commitments of its licensing decision;

(d) the distant station should enhance the diversity of Canadian programming in the market.

Additionally, the Commission examines:

(e) the number of local television services in existence or likely to be licensed in the distant market; and

(f) the degree of the distant signal's potential impact on the revenue base of the local broadcasters and on theirability to meet their programming commitments. The Commission intends to undertake in the near future the necessary process to amend the regulations to require applications for prior approval of the carriage of distant Canadian signals. In addition, the Commission will soon amend the list of Part II Eligible Satellite Services to delete the distant Canadian television signals currently on that list. Until this process is completed, the Commission expects cable operators to refrain from adding new distant Canadian signals without making application to the Commission and without having obtained the Commission's prior approval.

f) Distribution of U.S. Border Television Stations

The regulations permit cable systems to distribute all U.S. television signals generally available over the air to the majority of the population in the franchise area, with the exception of signals that are duplicates of U.S. network services already being distributed.

In addition, the regulations specifically restrict the distribution of non-Canadian over-the-air television stations that began operation after 1 January 1985. In Public Notice CRTC 1986-182 dated 1 August 1986, the Commission stated that licensees wishing to distribute such signals must apply for authorization on a case-by-case basis. The restriction was introduced in order to address the concerns of Canadian broadcasters regarding the potential financial harm caused by new U.S. television stations located near the Canadian border, where it was apparent that their target audience included viewers in nearby Canadian cities.

With respect to network duplicates, the Commission's general practice has been to authorize additional commercial and non-commercial network duplicates, either for basic or discretionary carriage, only where there was no net increase in the number of U.S. signals distributedon cable. With respect to post-1985 U.S. stations, the Commission has authorized carriage where it has determined that the station would not materially compete with Canadian stations for revenues or otherwise affect existing broadcasters in the area.

The Commission has noted a demand by subscribers across the country for cable distribution of certain border stations. After discussing this issue with interested parties at the hearing, the Commission has decided to revise its policy with respect to those post-1985 independent stations, and duplicate PBS network stations that are receivable over the air at a cable operator's local headend.

With regard to post-1985 independent stations, the Commission will generally authorize the distribution in encrypted form on discretionary pay television tiers (subject to the 5:1 linkage rule), the signals of post-1985 independent stations received over the air at the local headend. Applications for the distribution of such stations as part of the basic service, or on a high penetration, unencrypted discretionary tier will only be approved if the Commission determines that the U.S. station does not materially compete for Canadian advertising dollars.

With regard to the distribution of PBS duplicates received over the air at the local headend, the Commission will generally be prepared to authorize distribution of such stations, either on basic service or as part of discretionary tiers, in provinces where there is no provincial educational broadcaster. In provinces served by a provincial educational broadcaster, the Commission will generally be prepared to authorize such carriage on a discretionary basis only. However, where there is no net increase in the number of U.S. signals distributed on basic service (i.e., where carriage of an existing U.S. signal is dropped) the Commission will generally give favourable consideration to thedistribution of a PBS duplicate as part of the basic service. It should be noted that cable licensees will still be required, in all cases, to submit applications for the carriage of any additional U.S. border station, and all such applications will be subject to a public process. The Commission notes that these measures will require an amendment to the regulations.

g) Priority of Programming Services

The Commission intends to amend the regulations to include its long-standing policy requirement that cable operators give priority to the distribution of programming services over non-programming services.

h) Billing Clarity

The matter of billing clarity respecting the marketing of discretionary services, particularly services marketed through negative option techniques, was the subject of some discussion at the hearing. Discussion centred on the difficulty experienced by many subscribers in comprehending their options with respect to receiving certain discretionary programming services as part of their cable service.

As discussed at the hearing, the Commission insists that cable operators ensure through appropriate notification procedures that their subscribers are made aware of all service options available to them, the costs of each service or segment of service, and the actions that they must take to make their choices known to the cable operator.

The Commission, therefore, requires that cable licensees clearly identify, in plain and easily-understood language, those services that are part of the basic service and those that are discretionary services, the fee for each service or package of services, and the actions a subscriber need take to subscribe to or discontinue the services. This information should be provided to all subscribers, once yearly, at a minimum, using billing inserts or appropriate notification practices. For those subscribers who pay for their subscriptions through automatic bank withdrawals, or in advance, the Commission expects operators to establish appropriate notification practices to inform subscribers of their options. In providing this information, cable operators should avoid the use of marketing terms such as "Full Cable Service", "Extended Basic Service" and "Extended Basic Tier", as such terms are easily confused with the basic service, and may leave subscribers unaware that these are discretionary services that they need not take.

In this regard, the Commission has reviewed the CCTA's "Guidelines Respecting the Marketing of the Extended Tier". It notes that this document, in describing subscriber notice requirements, uses such wording as "suggested" or "should". The Commission expects the CCTA to revise this and similar guidelines by removing such voluntary wording and by replacing such terms with imperative terminology, such as "must" or "required", to ensure that cable subscribers are clearly informed of all options available to them. Moreover, the Commission considers it appropriate that the CCTA, on behalf of the cable industry, incorporate the revised guidelines into its existing Customer Service Standards, and submit the proposed revisions to the same public process and procedures as for the CCTA access guidelines, as discussed earlier.

i) Small System Deregulation

Following Public Notice CRTC 1990-53 dated 15 May 1990, the Commission amended the regulations to deregulate the fees of all Class 2 systems serving fewer than 2,000 subscribers. This decision was intended to decrease the costs to small cable operators associated with rate regulation, as such costs are ultimately borne by subscribers. At the hearing, the CCTA proposed that fee deregulation be extended to all cable systems with fewer than 7,500 subscribers. In addition, CASCO proposed that small cable systems be categorized as "small systems" (fewer than 6,000 subscribers) or "very small systems" (fewer than 1,000 subscribers), with separate carriage and fee regulatory frameworks for each category.

The Commission notes that there have been very few complaints from subscribers of systems already fee deregulated, and considers that it is timely and appropriate to extend fee deregulation to additional small systems. Therefore, the Commission, by majority vote, intends to deregulate the fees of Class 2 systems serving between 2,000 and 5,999 subscribers.

At the same time, in order to provide a mechanism to safeguard the interests of subscribers, the Commission, by majority vote, intends to amend the regulations to allow for the review and possible variance by the Commission of changes to the basic monthly fee of such systems upon receipt of written complaints from 10% or more of subscribers. For information purposes, a proposed amendment, in draft form, to subsection 18(1) to implement this mechanism is included in the appendix to this notice.

The Commission expects licensees of fee deregulated systems to clearly inform their subscribers of this new approach.

With respect to the distribution of programming services, the Commission has decided to streamline and simplify its regulatory requirements for small Class 2 systems with fewer than 2,000 subscribers by making them subject to carriage rules largely similar to those for Part III licensees. In particular, the distribution rules will not apply to such systems. However, a requirement to adhere to section 23 of the regulations, which currently applies to Part III licensees only, will not be imposed on Class 2 systems with fewer than 2,000 subscribers.

j) Program Repeat Channel for Conventional and Specialty Television

A number of parties addressed the issue of multiplexing and repeat channels. For example, the CCTA in its second round submission, suggested that DVC would enable cable operators to expand their channel capacity, thereby creating opportunities for distribution of alternative programming schedules.

At the hearing, the Commission discussed this matter with the CAB, the Canadian Broadcasting Corporation (CBC), private television broadcasters and representatives of producers' associations. Télé-Métropole Inc. (TM) was also questioned about its multichannel interactive programming experiment, known as TVA+, which Vidéotron Ltée has offered to Videoway subscribers since November 1992. Several Quebec radio and television licensees raised their concerns regarding this issue, primarily because of the potential impact on their revenue bases.

The Commission has assessed the various points of view on the desirability of repeat channels, and has decided to permit the creation and distribution of program repeat channels by broadcasters, subject to the following requirements.

The Commission has decided that a program repeat channel may be comprised of repeats of programs already aired on a licensed programming undertaking within the previous seven (7) days. Control over the programming must remain at all times with the programming undertaking. The advertising segments should be those contained in the programs originally telecast on the main service, or if not appropriate, may be deleted or replaced by promotions of Canadian programs or by unpaidpublic service announcements. The Canadian content of program repeat channels must meet the requirement imposed on the main service. The general nature of the programming format used on repeat channels and on the main service must be the same.

The Commission will require the filing of licence amendment applications by licensees of local television stations and specialty services that intend to provide programming for repeat channels as defined above, so that interested parties may have an opportunity to intervene. Decisions will be rendered on a case-by case basis.

Insofar as the potential impact of repeat channels has not been measured at this stage, the Commission will proceed with a public process to consider applications by licensees to employ such channels.

Any undertaking that does not adhere to this framework will be considered to be a separate programming undertaking for which a licence is required.

In the case of TVA+, should TM continue its interactive television experiment after 31 August 1993, the Commission expects that TM would adhere to the framework set out above.

i) Cable Distribution of Repeat Channels

The Commission intends to amend subsection 10(1) of the regulations to permit cable licensees to distribute programming authorized for distribution on repeat channels.

Regarding the multiplexing of pay television services, the Commission has decided that no special authorizations to do so need be obtained by licensees of such services, so long as the original conditions of the licence are being met.

Program repeat channels and multiplex services may not be used for the purposes of linkage. Program repeat channels and multiplex services can be tiered up (from basic to discretionary or from a high penetration, unencrypted discretionary tier to a lower penetration, encrypted discretionary tier), but can never be tiered down. For example, a multiplexed channel of a discretionary movie service may not be distributed on the basic service. When distributed on a discretionary tier, program repeat channels and multiplex channels may not be used for linkage with foreign satellite services.

ii) Program Logs

The Commission will require that program repeat channels and the multiplexing of pay television services maintain programming logs. Specific requirements concerning the content, filing, and format of these logs will be decided on a case-by-case basis.

k) Preponderance

The existing preponderance rule, which requires all Class 1 and Class 2 licensees to offer a greater number of channels devoted to Canadian programming services than to non-Canadian programming services, will be expanded in its application to encompass all cable licensees except those Part III licensees that utilize 12 channels or fewer for the distribution of programming services. As is currently the case, the preponderance rule will apply at the overall system level, and will take into account those programming services offered as part of discretionary tiers.

Special programming channels will continue to be counted for preponderance purposes. Multiplex programming channels, repeat channels and non programming services will not be counted. Each licensed PPV service will be counted as a single channel.

A regulatory amendment will be proposed shortly by the Commission which would give effect to theserevisions to the preponderance requirement.

IX. CANADIAN DTH SERVICES

As the use of satellite technology increases, particularly through the application of digital technology, the Commission considers that DTH delivery of programming services will play a greater role in the Canadian broadcasting system.

At the public hearing, the Commission discussed with various parties a number of ideas and developments that could work to alleviate certain concerns and structural impediments regarding distribution and reception of Canadian programming by means of DTH technology.

The most important development was the commitment of industry players, including programming service providers, to work towards adopting a common Canadian DVC standard that would include a conditional access standard.

As discussed earlier, the Commission strongly supports the industry-wide adoption of a DVC standard that would include a conditional access standard for authorizing reception by individual subscribers. This would facilitate the widest availability of Canadian programming to Canadian households by overcoming the technological incompatibility that currently exists between the types of encryption technology employed by certain Canadian programming services.

In particular, the Commission notes the content of a joint policy statement by Canadian Satellite Communications Inc. (CANCOM), Astral Communications, JLL Broadcast Group and Allarcom Pay TV which was tabled at the hearing by CANCOM. Among other things, the statement endorses the idea of a common DVC standard as a means to strengthen the Canadian broadcasting industry, and indicated the intention of the parties "to design the best possible Canadian package, one which uses a Canadian satellite". For its part, Telesat Canada discussed the concept of parties cooperating to develop a new Canadian DTH service it called "Select Canada". This service would utilize the Ku-band capability of the Canadian Anik E series satellites.

The Commission is encouraged that both programmers and distributors have demonstrated a renewed interest in providing Canadian services to the Canadian DTH marketplace. The Commission supports this renewed interest, and emphasizes that it considers DTH delivery of Canadian services to be an important vehicle for providing programming services to Canadians. The Commission considers that the emergence of a strong Canadian DTH industry may provide a degree of price competition to services delivered within Canada by other distribution technologies, and will form an effective part of the overall response by the Canadian broadcasting system to non-Canadian DBS services.

X. CRITERIA FOR LICENSING NEW SERVICES

In Public Notice CRTC 1993-77, the Commission has issued a call for applications for licences to carry on new Canadian specialty, pay television and PPV programming undertakings, and has set out the specific criteria under which such new undertakings will be licensed.

Related Documents: Public Notices CRTC 1985-61 dated 22 March 1985, CRTC 1986-182 dated 1 August 1986, CRTC 1987-27 dated 30 January 1987, CRTC 1987-177 dated 28 July 1987, CRTC 1987-254 dated 26 November 1987, CRTC 1987-260 and 1987-261 dated 30 November 1987, CRTC 1988-57 dated 13 April 1988, CRTC 1988-72 dated 29 April 1988, CRTC 1990-53 dated 15 May 1990, CRTC 1990-66 dated 5 July 1990, CRTC 1991-12 dated 24 January 1991, CRTC 1991-23 dated 18 February 1991, CRTC 1991-72 dated 17 July 1991, CRTC 1991-104 dated 8 October 1991, and CRTC 1993-75, 1993-76, 1993-77 and 1993-78 dated 3 June 1993; Decision CRTC 92-369 dated 18 June 1992; and CRTC Notice of Public Hearing 1992-13 dated 3 September 1992.

Allan J. Darling
Secretary General

APPENDIX

In line with changes to Commission policy concerning the regulation of the fees for basic cable service announced in this public notice, this Appendix sets out, for information purposes only, a first draft of some of the proposed amendments to section 18 of the Cable Television Regulations, 1986 (the regulations).

After the proposed amendments have been reviewed by the Department of Justice, Privy Council Office Section, as required by the Statutory Instruments Act, they will be published in their present or modified form in the Canada Gazette Part I, together with other proposed amendments to the regulations, and interested parties will be afforded an opportunity to comment.

Fee Deregulation of Small Systems

 (1.1) Subject to subsection (1.2), this section does not apply to a licensee that has fewer than 6,000 subscribers on the later of 31 August 1993 or the day on which the Commission first issued a license to carry on the undertaking.

 (1.2) Increases in the basic monthly fee of a licensee having 2,000 or more but fewer than 6,000 subscribers may be reviewed by the Commission where, within 60 days of receipt of notification of an increase, 10% or more of the licensee's subscribers file written complaints regarding the increase with the Secretary General of the Commission. The Commission, in reviewing the increase, may,

  (a) request additional information; or

  (b) conduct a public process into the increase; or

  (c) disallow all or part of the increase from the date of the disallowance.

Financing of Production Fund

 (6.1) Except as otherwise provided in subsection (6.3), where 60 months have elapsed following an increase pursuant to subsection (6) or that subsection as it read immediately prior to the coming into force of this subsection, which took effect on 15 May 1990 or later, a licensee shall decrease its basic monthly fee by an amount equal to that increase.

 (6.2) Except as otherwise provided in subsection (6.3), on or before 1 January 1995, a licensee shall decrease its basic monthly fee by an amount equal to the total of all increases pursuant to subsection (6) as it read immediately prior to the coming into force of this subsection, which took effect during the period beginning on 1 August 1986 and ending on 14 May 1990.

 (6.3) The requirement to decrease the basic monthly fee pursuant to subsections (6.1) or (6.2) is suspended where a licensee contributes one half of the amount referred to in subsections (6.1) and (6.2) to a fund for the production of Canadian programming, in accordance with Public Notice CRTC ______.1

1 As stated in the body of this notice, details regarding the operation of the fund will be announced following a public process to be initiated in the near future.

STRUCTURAL PUBLIC HEARING

Dissenting Opinion of Commissioners David Colville, Beverley Oda and Rob Gordon

SUNSET PROVISION

1.We are opposed to the majority decision to allow for the elimination of the subscriber rate reduction (sunset) provisions for capital expenditures (CAPEX). We cannot accept breaking a commitment made to subscribers that the capital expenditure component of their rates would decrease after five years. The value of these rate reductions would have been up to $85 million beginning in 1995, totalling approximately $600 million for the period 1995-1999. These funds, which were intended to be returned to subscribers as rate reductions, will flow instead half to cable operators and half to Canadian program production.

2.If the majority decision is implemented by a change to the regulations, other reasons for our opposition are:

- the balance between the interests of the subscriber (affordability) and the cable operator (capital requirements) which was achieved in the existing capital expenditure rate mechanism (CAPEX) is lost;

- the possible elimination of "sunset" is not needed to fund the technical upgrades identified by the cable industry;

- the amendment to "sunset" provisions enables the cable operator to retain 50% of the intendedsubscriber rate reduction, a source of revenue not based on economic need or tied to a minimum level of profitability;

- a subscriber's contribution to the program fund relative to the contribution by subscribers of other systems will be disproportionate since it is based on a cable operator's historic level of capital investment;

- the voluntary nature of the new mechanism does not ensure the level of funding for Canadian programming anticipated in today's decision;

- the public interest objective to ensure adequate funding for Canadian programming should be addressed equitably across the broadcasting system, not charged to only some cable subscribers.

3.The proceeding leading to this public notice raised many issues related to cable and broadcast television services and the Canadian production industry. Two major issues were the cable industry's need for digital video compression and addressability in its networks including options to fund this capital project and secondly the need for additional funding for the domestic program production industry.

4.The Canadian Cable Television Association and most of its members linked these two issues of rate regulation and program funding. The Association requested a number of rate regulation modifications. These included allowing the addressable decoder as a capital expenditure under subsection 18(6) and removing the five-year sunset provision. Most of the major cable licensees proposed to voluntarily contribute to a program production fund if the Commission agreed to adopt these changes.

5.Before detailing our position on the "sunset" issue, we wish to state that we support the adoption of universal addressability by the cable industry and agree to rate regulation amendments necessary for the industry to finance its capital program. These amendments should be equitable and consistent with the objectives of the CAPEX regulations.

6.In addition we are prepared to recognize the cable industry's voluntary offer to provide funding for Canadian program production. In accepting this latter point, we note the Commission has not determined that the cable industry has any inherent responsibility to provide direct support for the production industry. The cable industry directly supports Canadian programming through community programming channels and individual, privately established funds or more indirectly through their participation in other broadcasting services.

7.The Commission adopted the capital expenditure provisions for all Class 1 and 2 systems in 1986 [S. 18(6)]. These provisions allow annual rate increases, which would recover up to 50% of the capital expenditures allocated for the improvement of basic cable service, amortized over a five-year period. The CAPEX provisions were not intended as a cost recovery mechanism and eligibility is not tied to any economic need or minimum profitability level.

8.As stated in Public Notice CRTC 1986-182, this measure was adopted as an incentive:

  ... to encourage licensees to rebuild and improve old plant and equipment, to increase channel capacity and to improve the technical capabilities of their systems so that the delivery of services to subscribers will be facilitated and their quality improved.

9.During its 1990 review of the cable television rate regulations, the Commission considered eliminating the CAPEX provisions. However the cable industry argued strongly that the CAPEX fee increase mechanism should be retained to encourage the continued improvement of technical quality and reliability and the further expansion of channel capacity.

10.Based on arguments heard at the l990 public hearing, the CAPEX provisions were maintained with a few modifications. These included an annual 3% upper limit on each licensee's 18(6) rate increase and a confirmation of the "sunset" proposal applicable to all 18(6) increases implemented before the date of the public notice (15 May 1990), and to future capital expenditure rate increases.

11.In arriving at this decision the Commission sought to balance the needs of the cable licensee to invest in capital improvements with the interests of the subscriber in maintaining reasonable rates. In Public Notice CRTC 1990-53, the Commission stated:

 Cable subscribers should benefit from the revised capital expenditure provisions in a number of ways. Specific system improvements would be carried out before the associated fee goes into effect. Concerns about continued affordability of monthly fees would be addressed by means of the annual limit and the five-year sunset provision.

  Further, the Commission notes that, after five years, the capital expenditure components of the basic monthly fee would in fact decrease unless a licensee continues capital spending on system improvements at close to historic levels.

12. Thus, the Commission made a commitment to cable subscribers in 1990 that the CAPEX components of rates for any given year would sunset five years later and rates would decrease accordingly. The first round of these rate reductions was due to take place in 1995. The majority decision of the Commission allows for the elimination of this 1990 commitment and the corresponding rate reductions in 1995. We cannot support this decision.

13. Amendments to the sunset provisions might be considered on a going-forward basis, after fulfilling the 1990 commitment, if it were conclusively demonstrated the cable industry needed such a change to finance digital video compression and addressability. However, analysis of the available data suggests that the cable industry could have adequately financed the technical upgrades with only those regulatory changes needed to recognize the cost of the addressable decoder - without amending the sunset provisions. Among the regulatory amendments proposed today, a portion of the cost of the addressable decoder is permitted to qualify for CAPEX rate increases and a separate annual upper limit on rate increases for these devices has been set. These amendments alone would have provided the needed resources.

14.The proposed amendments which provide for a suspension of the sunset provision tie these sunset provisions to a contribution to the program production fund. Those cable operators who wish to take advantage of the amendment will retain half of that portion of the cable rate that otherwise would have gone to rate decreases for subscribers. The other half will go to the program production fund. In l995, of the intended approximately $85 million rate reduction, up to $42.5 million will fund Canadian programming while an equal amount will be kept by the cable operators. In addition, the voluntary nature of the new mechanism does not ensure the level of funding for Canadian programming anticipated in today's decision.

15.Since contributions to the program fund are linked to the elimination of sunset on a system-by-system basis, only subscribers to certain cable systems will contribute to the fund. Cable subscribers will be disproportionately made to pay depending on the historic capital investment undertaken by each cable licensee.

16.Once it has been determined that increased funding is required for Canadian program production, this public interest issue should be addressed reasonably and equitably on a national or system-wide basis. All Canadian television viewers should share in both the costs and the benefits of quality Canadian programming.

17.We have considerable difficulty with the notion of changing rate regulation provisions just before the rate reductions associated with those provisions come into effect, thus disadvantaging the cable subscriber. In this case, funds related to capital expenditures are redirected to program production. Cable rates should be justified on their own merits, not used as a lever to extract revenues for other purposes.

Dissenting Opinion of Commissioner David Colville

CLASS 2 DEREGULATION

1. I am opposed to the policy of deregulating the rates for Class 2 cable systems between 2,000 and 6,000 subscribers.

2.For regulatory purposes the Commission has established four categories of licensee:

 Class 1 - cable systems larger than 6,000 subscribers;

 Class 2 - cable systems less than 6,000 subscribers (for several regulatory purposes, this class is subdivided into those above and below 2,000 subscribers);

 Part III - systems generally with two or fewer locally available off-air signals.

3.In 1986 the Commission decided not to regulate the rates for Part III systems essentially because these systems generally operated in an environment characterized by low household density and thus a considerable high cost per subscriber. It was felt that the rates resulting from the constraints of this environment were at the threshold of market tolerance and thus did not require regulation. Lower rates would not recover system costs and higher rates would result in significant decreases in subscriber penetration. Recognizing the market and technical constraints on small rural systems, the Commission also does not impose the same carriage and linkage requirements on these systems as it does with Class 1 and 2 systems.

4.In 1991 (Public Notice CRTC 1991-12), recognizing that in many respects small Class 2 systems (those with less than 2,000 subscribers) operate in an environment similar to Part III sytems, the Commission decided to rate deregulate those systems. In this current decision the Commission is further recognizing the market similarity between these small systems and is proposing to place small Class 2 systems and Part III systems on a similar footing with respect to carriage requirements.

5.I agree with this conclusion based on the assumption that these two classes of system essentially operate in the same market environment.

6.However, this public notice proposes to extend rate deregulation to all Class 2 systems, i.e. all systems up to 6,000 subscribers. Only Class 1 systems, those having 6,000 or more subscribers, would continue to be rate regulated.

7.I do not support this policy because I feel that from the subscriber perspective there is no difference between a Class 1 and a Class 2 system. To the extent the cable distribution systems operate in a monopoly-like environment, the subscriber to a Class 1 or a Class 2 system is a "captive" of the same sort of monopoly. It is of little consequence to the subscriber of a Class 2 system who is concerned about cable rates, that the Commission will continue to regulate the rates of Class 1 systems. Conversely the regulation of Class 1 rates will do nothing to protect the interests of Class 2 subscribers.

8.If the Commission has decided that rate deregulation combined with a complaints process is appropriate for Class 2 systems then it should be equally appropriate for Class 1 systems. However, the Commission has not decided to totally rate deregulate the cable industry, fundamentally because it has not studied the advantages and disadvantages of taking such action. In this regard I note the FCC has moved to reregulate the cable industry in the United States and I also note that the single largest category of public complaints and comments received by the CRTC is that related to cable rates.

9.The case has not been made in the context of this proceeding that cable rates should be deregulated particularly as they relate to Class 1 and large Class 2 systems. In fact while much of the proceeding concentrated on proposals from the Canadian Cable Television Association and large cable operators to amend a number of the rate regulation rules, none of the large operators requested or discussed rate deregulation.

10. Therefore in view of the fact the Commission continues to see a requirement for regulation of Class 1 systems and in view of the fact that from the subscriber point of view there is little difference between a Class 1 monopoly and a Class 2 monopoly, I can not support the rate deregulation of Class 2 systems. I believe subscribers to Class 2 systems deserve the same regulatory protection afforded to subscribers of Class 1 systems until such time as the Commission concludes that Cable rate deregulation is in the public interest.