|
|
|
Ottawa, 26 May 1993
|
|
Public Notice CRTC 1993-68
|
|
Application of the Benefits Test at the Time of Transfers of Ownership or Control of Broadcasting Undertakings
|
On 15 June 1992 the Commission issued Public Notice CRTC 1992-42 entitled "Assessment of the Impact of the Benefits Test Applied at the Time of Transfers of Ownership or Control of Broadcasting Undertakings". As stated in the notice, "because the Canadian broadcasting system makes use of frequencies that are public property, the Commission has a responsibility to ensure that the best possible use is made of those frequencies at the time of licensing, licence renewal, and transfers of ownership or control".
|
|
The Commission concluded in the notice that, "for the time being, .... in the absence of a competitive process, application of the benefits test remains the best method of ensuring that applications for transfer of control or ownership are the best possible proposals under the circumstances, and are beneficial to the public served by the undertakings and to the Canadian broadcasting system as a whole".
|
|
The Commission further stated that it "...considers that some adjustments to the application of the benefits test may be appropriate. In addition, the differences between each of the broadcasting sectors, including the economic situation that has prevailed in the radio industry over the past six years ..., and in particular the downturn of the past two years, may justify a tailoring of some of the considerations to the particular situation of each sector". The Commission invited public comment on five specific questions and on other matters relating to the application of the benefits test. Twenty-eight submissions were received.
|
|
This notice presents a summary of the comments received and the Commission's determination with respect to issues concerning the application of the benefits test.
|
|
1. SUMMARY OF COMMENTS
|
|
i. Exemptions From Benefits Requirements
|
In Public Notice CRTC 1992-42, the Commission invited comments on whether it should forgo the benefits test for undertakings in financial difficulty and, secondly, whether it should establish thresholds below which it would not apply a benefits test.
|
|
Virtually all of the submissions agreed in principle that the Commission should forgo the benefits test for undertakings in financial difficulty. The majority of parties, however, advocated a case-by-case approach, on the basis that it would be difficult to develop a "one size fits all" measure of what constitutes financial difficulty.
|
|
The Canadian Association of Broadcasters (CAB) proposed that the Commission suspend any requirement for tangible benefits for radio undertakings until the industry is returned to economic health. This would apply to future transactions, as well as to radio undertakings that are currently fulfilling benefits commitments.
|
|
Most of the submissions opposed the establishment of other thresholds, such as market size or revenues, below which a benefits test would not be applied. It was argued that the profitability of an operation is not necessarily related to the size of the market or the revenues of the undertaking and that the resources of the purchaser are also a factor. It was also pointed out that a threshold would not take particular circumstances into account.
|
|
A few suggestions for thresholds were received, related to such factors as the size of the transaction, the size of the market for radio, and the level of profitability for television. The CAB proposed that the Commission apply a set of criteria for television, similar to those set out in the Radio Market Policy, to determine if a purchaser should be exempted from the need to put forward a package of tangible benefits.
|
|
Several parties also proposed that the Commission not apply a benefits test to small cable systems, such as Class 2 and Part III systems.
|
|
ii. Intangible Benefits
|
|
The Commission also invited comments on whether certain types of intangible benefits should take precedence over tangible benefits and, if so, which ones.
|
|
The majority of the submissions argued that intangible benefits are just as important, and should be given the same consideration, as tangible benefits. A number of parties commented that intangible benefits should be given more weight than tangible benefits under certain circumstances, especially where the survival of the service is at stake.
|
|
Others submitted that intangible benefits are generally more important and should take precedence over tangible benefits, especially those tangible benefits that do not directly relate to the operations of the service.
|
|
iii. Tangible Benefits
|
Another question set out in the notice was whether the Commission should add categories of tangible benefits, or provide clearer definitions of acceptable benefits, in addition to those described in Public Notice CRTC 1989-109.
|
|
Some of the submissions offered suggestions regarding new categories of tangible benefits. In particular, a number of parties proposed that research and development be accepted as a tangible benefit. It was also suggested that the Commission broaden its acceptance of proposed tangible benefits to include various operating costs, such as the costs of hiring additional staff, employee benefits and marketing initiatives, as well as investments in technologies such as addressability, digital transmission and compression, and high definition transmission. It was also proposed that the Commission accept as tangible benefits any expenditure or initiative to improve subscriber services for cable operations.
|
|
Most of the submissions supported the open-ended approach the Commission has generally taken with respect to acceptable benefits and opposed the establishment of a comprehensive list of benefits. It was argued that a comprehensive list could be limiting and may not recognize the changing nature of the broadcasting system.
|
|
iv. Local and System-Wide Benefits
|
|
The final issue on which the Commission invited comments was whether its should place more importance on system-wide benefits than on local benefits.
|
|
A number of parties commented that local benefits are more important than system-wide benefits. It was argued, for example, that benefits should strengthen the undertaking subject to the ownership transfer so that it can better serve the public it is licensed to serve.
|
|
A few submissions indicated that system-wide benefits should be given at least as much importance as local benefits, arguing that because system-wide benefits apply to the entire broadcasting system, they will also benefit the local community. The CAB argued that the Commission should support initiatives for system-wide benefits as a means of focusing resources on initiatives that are important to the long-term interests of the industry.
|
|
v.Other Concerns
|
|
Several other concerns were raised in the submissions. Most of these addressed the process by which the Commission considers applications for authority to transfer ownership or control, particularly the length of time taken to process such applications and the issue of appearance at public hearings.
|
|
The CAB also proposed that the Commission adopt a pre-hearing consultative process between the proposed purchaser and CRTC staff to clarify what might constitute an acceptable benefits package.
|
|
The Association further commented that the Commission should be flexible in entertaining amendments to a benefits package after approval, so that benefits may be made to reflect changing conditions.
|
|
The CAB also raised a concern about the requirement to carry out expenditures that are proposed, but not accepted by the Commission, as benefits. According to the CAB, this practice "... frustrates efforts to direct resources into productive channels".
|
|
2. THE COMMISSION'S DETERMINATION WITH RESPECT TO APPLICATION OF THE BENEFITS TEST
|
|
i. The Benefits Policy
|
The Commission's policy concerning benefits is set out in Public Notice CRTC 1989-109 entitled "Elements Assessed by the Commission in Considering Applications for the Transfer of Ownership or Control of Broadcasting Undertakings". Under this policy:
|
|
an applicant is expected to propose a specific package of significant and unequivocal benefits that will yield measurable improvements to the communities served by the broadcasting undertaking and to the Canadian broadcasting system. The Commission must be satisfied that the proposed benefits package is commensurate with the size and nature of the transaction and takes into account the responsibilities to be assumed, the characteristics and viability of the broadcasting undertakings in question and the scale of programming, management, financial and technical resources available to the purchaser.
|
|
The Commission assesses each application on its own merits and does not use any benchmark or formula with respect to the type or amount of benefits proposed.
|
|
Only those initiatives that would not be realized without approval of the proposed transfer are viewed as benefits. In order to be accepted as a benefit, the proposed expenditure must be incremental. Expenditures that would normally be considered ongoing normal responsibilities of the existing licensee will not be accepted as benefits unless that licensee, because of financial circumstances, could not implement the initiative or reasonably planned to delay such an improvement beyond the time frame proposed by the purchaser. Commitments by prospective purchasers to assume existing obligations of licensees are not generally accepted as benefits, except where continuation of the service itself is in doubt. Moreover, the Commission does not generally accept as a benefit any proposed initiative that is dependent upon approval of a separate application yet to be considered by the Commission.
|
|
a)Tangible Benefits
|
|
Tangible benefits generally fall into three broad categories: operating expenditures, such as in the areas of additional staff or programming improvements; capital expenditures for technical improvements; and grants and contributions to Canadian talent or program development funds.
|
|
The Commission considers that publishing a comprehensive list of acceptable benefits would be limiting, as many benefits that are accepted are tied to the particular circumstances of a transaction or a market. On the other hand, the Commission considers that it would be useful to include an updated list of the types of benefits that it generally accepts, as well as those it normally does not accept, as tangible benefits. This is provided in the appendix to this notice.
|
|
The Commission agrees with the comments regarding the importance of research and development, particularly in this time of rapid technological change. Accordingly, the Commission will generally consider research and development initiatives as acceptable tangible benefits for radio, television and cable undertakings provided that applicants demonstrate that the areas covered by such initiatives will be of benefit to the public they serve and/or to the industry or the broadcasting system as a whole. With respect to the comments regarding operating and capital expenditures, the Commission notes that, for such expenditures to be considered as tangible benefits, applicants must demonstrate that these costs would not be incurred in the ordinary course of business and that the public will benefit from their implementation. Similarly, initiatives to improve service that result in a direct benefit to cable subscribers constitute tangible benefits, provided the related expenditures are not recovered by way of increases to subscriber fees.
|
|
The Commission notes with respect to cable that it will also accept as benefits certain "normal course" capital expenditures identified in subsection 18(5) of the Cable Television Regulations, 1986 in cases where the applicant waives its right to submit fee increase applications for these items pursuant to subsection 18(6) of the regulations. Such expenditures would also be excluded from subsection 18(8) fee increase applications.
|
|
The Commission wishes to further clarify its expectations with respect to proposed benefits relating to specific projects whose associated capital expenditures would otherwise qualify for rate increase applications under subsection 18(6). In proposing such a benefit, the applicant must clearly indicate whether the specified dollar amount is the maximum for that project or whether the proposed benefit includes a commitment on the part of the applicant to absorb any additional amount that may be required to complete the project.
|
|
b) Intangible Benefits
|
|
Intangible benefits such as the experience and resources of the purchaser, local ownership, entry of new players and the promise to maintain or improve a struggling service, may be as significant as tangible benefits and, in some cases, of primary importance, in the approval of transactions. Nevertheless, the Commission is of the view that designating certain intangible benefits that would consistently take precedence over tangible benefits may compromise its ability to assess the best possible proposal given the specific circumstances of each transfer application.
|
|
Accordingly, the Commission will maintain its case-by-case approach, assessing each application on its merits and taking into account both the tangible and intangible benefits proposed. The Commission may accept a package consisting solely of intangible benefits in cases where the survival of the service is at stake and in cases that meet other criteria set out in this notice.
|
|
c) Local and System-Wide Benefits
|
|
The Commission considers local benefits to be very important. At the same time, it recognizes the value of investing in system-wide benefits, such as research and development, particulary in light of the rapid pace of change in the broadcasting and cable environments. The Commission will therefore continue to assess proposals regarding local and system-wide benefits on a case-by-case basis, taking the particular circumstances of the application into account.
|
|
ii. Exemptions
|
|
a)Radio
|
|
The question of forgoing benefits for undertakings in financial difficulties is primarily a radio issue because of the generally poor economic situation that has prevailed in the industry in recent years. In spite of this economic situation, the Commission is of the opinion that it would be inappropriate to relieve radio licensees of current benefits commitments, as suggested by the CAB, as the decisions to approve the transactions have been based, in part, on the tangible benefits proposed. With respect to future transactions, the Commission is willing to provide more flexibility with respect to benefits requirements in view of the economic situation of the radio industry. Accordingly, the Commission will forgo benefits requirements for unprofitable radio undertakings. The Commission will measure profitability according to the average profit before interest and taxes (PBIT) of the undertaking over the three years preceding the filing date of the application. The Commission will not systematically apply this exemption to stations in the first five years of operation. In cases where an applicant is applying to acquire a group of stations, all or some of which fall below this threshold, the Commission will consider profitability on an aggregate basis.
|
|
In response to those suggestions that the Commission not apply a benefits test to radio stations in small markets, the Commission maintains its position that public benefits flowing from ownership transfers should apply equally to all communities regardless of size. It notes, however, that the criteria set out above will result in the exemption from benefits requirements of unprofitable radio stations in small markets.
|
|
b) Television
|
|
One of the submissions proposed that the Commission require benefits only for transactions involving television undertakings with a PBIT of 25% or more. The Commission notes that the majority of television undertakings have a PBIT of less than 25%, and that this proposal would therefore exclude the requirement for benefits in most transactions.
|
|
The CAB also suggested that the Commission use criteria similar to those in the Radio Market Policy to determine if a purchaser should be exempted from the need to put forward a package of tangible benefits. The Commission, however, considers that, in the case of television, it would not be appropriate to establish a threshold because of the nature, size and economic situation of the industry.
|
|
Application of the Benefits Test at the Time of Transfers of Ownership or Control of Broadcasting Undertakings
|
|
Accordingly, the Commission will continue to assess benefits for television undertakings on a case-by-case basis in relation to, among other elements, the size and nature of the transaction, the viability of the broadcasting undertaking in question and the resources of the purchaser.
|
|
c) Cable
|
|
With respect to cable transfer transactions, the Commission will adopt a threshold whereby undertakings with fewer than 2,000 subscribers will be exempted from benefits requirements. The Commission notes that such a threshold would currently apply to 368 Class 2 and 1124 Part III undertakings serving approximately 7% of all cable subscribers.
|
|
In cases where an applicant is applying to acquire a group of cable systems, all or some of which fall below this threshold, the Commission will consider the number of subscribers on an aggregate basis.
|
|
The Commission notes the suggestion received that the size of the transaction be used as a threshold for radio, television and cable undertakings. Although the value of a transaction generally reflects the financial condition of the undertaking, the Commission considers that other indicators, such as the profitability of the undertaking in the case of radio and the number of subscribers in the case of cable, are more appropriate criteria for the purpose of establishing thresholds. Moreover, it may be difficult to break down the total value of a transaction involving more than one undertaking in order to determine a separate value for each undertaking involved. iii. Other Concerns
|
|
a) Licensing Process
|
|
As noted above, a number of submissions raised concerns regarding the length of time taken to process applications for transfer of control or ownership.
|
The Commission has already implemented procedures to accelerate the process for dealing with applications for authority to transfer the ownership or control of radio undertakings. Moreover, as outlined in Public Notice CRTC 1992-72, entitled "A Review of the CRTC's Regulations and Policies for Radio", the Commission has taken measures to streamline further the process to deal with share transfer applications. The Commission has recently implemented similar measures to streamline procedures for share transfer applications involving cable undertakings.
|
|
Specifically, the Commission will generally use the administrative process to deal with applications for authority to transfer control of radio and cable undertakings through share transfers in the following cases:
|
|
* in the case of radio, where the application entails no unresolved areas of concern, includes no matters in need of further discussion, and involves a purchase price per radio station or network of under $7 million.
|
|
* in the case of cable, where the application entails no unresolved areas of concern, includes no matters in need of further discussion, and involves the transfer of control of a single system serving less than 6,000 subscribers or the transfer of control of a group of systems serving less than 15,000 subscribers in total. In the case of such transfers of control, the Commission will inform the public of its administrative approval by issuing a public notice. The Commission notes that transfers of control of undertakings through purchases of assets entail the issuance of new licences. The Broadcasting Act requires that applications for new licences be considered at public hearings. Those applications for authority to transfer control through the transfer of shares do not necessitate the issuance of new licences.
|
|
b) Pre-hearing Consultation
|
|
With respect to the CAB's proposal that the Commission adopt a pre-hearing consultative process, the Commission notes that a prospective purchaser may meet with staff before an application is gazetted to discuss its application in the context of the Commission's general requirements and expectations. However, any discussion about the perceived acceptability of a specific proposed benefits package would be inappropriate.
|
|
c) Amendments to a Benefits Package
|
|
With respect to the CAB's comments that the Commission should be flexible in entertaining amendments to a benefits package after approval, the Commission notes that it has, in the past, accepted proposals to redirect and reschedule benefits in cases where unforeseen circumstances prevented a benefit from being carried out as planned. The Commission will continue to consider such requests on a case-by-case basis.
|
|
d) Requirements Regarding Proposed Initiatives Not Accepted as Benefits
|
|
The CAB also raised a concern about the requirement to carry out expenditures that are proposed, but not accepted by the Commission, as benefits.
|
|
Some of the initiatives proposed by an applicant as benefits may be rejected because they are considered a cost of doing business or because they are not incremental to the commitments of the existing licensee. Other initiatives may not qualify because they are of limited benefit to the broadcasting system or the public. Nevertheless, the Commission has generally required that such initiatives be implemented because they constitute part of the transfer application considered via a public process.
|
|
On the other hand, the Commission recognizes that resources an applicant has proposed to allocate to a particular benefit that is subsequently rejected may, in many instances, be more productive if directed elsewhere, such as towards strengthening the operation in question. Accordingly, with respect to proposed expenditures that are not accepted by the Commission as tangible benefits, the Commission will require that expenditures be carried out only in relation to initiatives that are not accepted as benefits because they are a cost of doing business or are not incremental to commitments of the existing licensee. These will be identified in the decisions issued.
|
|
e) Unfulfilled Benefits
|
|
The Commission currently expects the purchaser of an undertaking to fulfil any benefits commitments that the current licensee of the undertaking has not fulfilled. The Commission considers that benefits commitments are part of the obligations of a licensee and should be implemented regardless of ownership changes. The Commission will therefore maintain its practice of questioning the prospective purchaser in a transaction on its intentions with respect to the seller's unfulfilled benefits commitments. The Commission notes that commitments to carry out such unfulfilled benefits are not considered to be benefits on the part of the purchaser.
|
The Commission acknowledges the comments received in response to Public Notice CRTC 1992-42 and wishes to express its appreciation to all those who participated in this review. Related Documents: Public Notices CRTC 1992-42 dated 15 June 1992, entitled "Assessment of the Impact of the Benefits Test Applied at the Time of Transfers of Ownership or Control of Broadcasting Undertakings"; and 1989-109 dated 28 September 1989, entitled "Elements Assessed by the Commission in Considering Applications for the Transfer of Ownership or Control of Broadcasting Undertakings".
|
|
Allan J. Darling
Secretary General
|
|
APPENDIX
|
|
INITIATIVES GENERALLY ACCEPTED AS TANGIBLE BENEFITS
|
|
Following are some of the types of initiatives that the Commission generally accepts as tangible benefits. It should be noted that the initiatives described are provided as examples, and are not intended to be binding or exhaustive.
|
|
a) Operating Expenditures
|
|
*Staff and Administration
|
|
The Commission accepts the hiring of additional staff as a tangible benefit in cases where such hiring directly relates to a specific incremental enhancement of a radio, television or cable broadcasting operation, such as the production of new programming.
|
|
The Commission also generally accepts expenditures related to achieving standards for cable operations exceeding those expressed in the Cable Television Customer Service Standards.
|
|
*Programming
|
|
The Commission accepts programming expenditures for radio, television and cable as long as the programming is new or enhances that offered by the existing licensee. Examples of such initiatives include:
|
|
- the production and development of new programming for television, particularly in "under-represented" categories; and productions involving the independent production sector
|
|
- co-operative television productions
|
|
- new or improved news and public affairs radio and television programming
|
|
- the production of specific, new, locally-produced radio and television programs
|
|
- the development of pilots for television
|
- the production of community programming, where the expenditure is clearly identifiable as incremental to the 5% spending benchmark for cable as set out in Public Notice CRTC 1991-59, entitled "Community Channel Policy"
|
|
- contributions to program development funds and program production funds for television.
|
|
b) Canadian Talent Development
|
The Commission generally accepts as a tangible benefit for radio undertakings any direct Canadian talent development initiative as listed in Public Notice CRTC 1990-111, entitled "An FM Policy for the Nineties", as amended from time to time by the Commission.
|
|
c) Grants and Contributions
|
|
The Commission generally accepts as a tangible benefit, contributions to organizations involved in the production of Canadian programming or the promotion and development of Canadian talent. Examples of such organizations include MusicAction, FACTOR, the Alberta Music Project and the Alberta Recording Industry Association for radio; fellowships for independent producers to attend the Banff Television Festival, the Canadian Centre for Advanced Film Studies, the Performing Arts Fund for Television, and the Alliance for Children and Television (formerly Children's Broadcast Institute) for television. Scholarships in broadcasting or broadcast-related fields also constitute tangible benefits. Examples of grants that are acceptable as tangible benefits would include grants to local artistic organizations whose works are related to the broadcasting system, as well as contributions, over and above annual membership fees, to organizations such as Canadian Women in Radio and Television (CWRT).
|
|
d) Research and Development
|
|
The Commission considers research and development projects as acceptable tangible benefits for radio, television and cable undertakings if applicants demonstrate that the areas covered by such projects will be of benefit to the public they serve and/or to the industry or the broadcasting system as a whole.
|
|
e) Capital Expenditures
|
|
The Commission accepts as tangible benefits capital expenditures for technical improvements, provided they are incremental (that is, over and above normal capital expenditures).
|
|
Examples of capital expenditures that the Commission generally accepts as tangible benefits include those for:
|
|
- purchase, lease or upgrade of items such as satellite, microwave or captioning equipment for television; and news mobiles for radio and television;
|
|
- additional production or broadcast studios directly related to new or enhanced programs for radio and television
|
|
- technical upgrades when not part of a separate approval process for radio and television.
|
|
INITIATIVES NOT ACCEPTED AS TANGIBLE BENEFITS
|
|
Examples of initiatives and expenditures that the Commission does not normally accept as tangible benefits include:
|
|
- costs related to employment practices that are not directly related to increased or improved programming, such as training programs and employee benefits plans
|
|
- hiring of additional staff not related to additional or enhanced programming
|
|
- memberships in industry associations
|
|
- maintenance of existing Canadian talent development commitments
|
|
- purchase of compact disks, cassettes, etc.
|
|
- acquisition of syndicated programs for radio
|
|
- marketing and audience surveys
|
|
- expenditures related to meeting standards expressed in the Cable Television Customer Service Standards
|
|
- free air-time for the promotion of Canadian talent on radio.
|
|
|