ARCHIVED - Public Notice CRTC 1996-69

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Public Notice

Ottawa, 17 May 1996

Public Notice CRTC 1996-69

CALL FOR COMMENTS ON A PROPOSED APPROACH FOR THE REGULATION OF BROADCASTING DISTRIBUTION UNDERTAKINGS

Table of contents Pages Table des matières

I. INTRODUCTION 1 I. INTRODUCTION

II. REGULATORY FRAMEWORK 4 II. CADRE DE
RÉGLEMENTATION

1. Principles 4 1. Principes
2. Applicability of distribution 5 2. Applicabilité du
regulations règlement sur la distribution
3. Licensing Policy and Classes 3. Politique en matière of Licence 6 d'attribution
de licences et classes de licence
(a) DTH distribution undertakings 6 a) Entreprises de distribution par SRD
(b) Terrestrial distribution b) Entreprises de undertakings 7 terrestres
(c) The regional licence c) Le concept concept d'attribution de 10 licences régionales

III. SIGNAL CARRIAGE 15 III. DISTRIBUTION DES SIGNAUX

1. Priority carriage requirements 15 1. Exigences relatives à la distribution prioritaire
(a) Television service priorities 15 a) Priorités des services de télévision
(b) Radio service priorities 16 b) Priorités des services de radio
2. Optional services 17 2. Services optionnels
3. Distribution and linkage rules 20 3. Règles relatives à la distribution et
à l'assemblage
4. Access Rules 22 4. Règles relatives à l'accès
5. Buy-through of basic service 22 5. Abonnement préalable au service de base
6. Preponderance of Canadian 6. Prépondérance des services programming services 23 de programmation canadiens

IV. PROGRAMMING CONTRIBUTIONS 25 IV. CONTRIBUTIONS À LA PROGRAMMATION

1. Current situation 25 1. Situation actuelle
2. Proposed regulatory 2. Projet de cadre de
framework 26 réglementation

V. SIMULTANEOUS PROGRAM V. SUBSTITUTION SUBSTITUTION SIMULTANÉE
29 DES ÉMISSIONS

1. Current situation 29 1. Situation actuelle
2. Proposed regulatory 2. Projet de cadre de
framework 29 réglementation

VI. RATE REGULATION 31 VI. RÉGLEMENTATION TARIFAIRE

1. Current fee increaase 1. Mécanismes actuels mechanisms d'augmentations
31 tarifaires
2. Approach to rate regulation 2. Démarche relative à la issues réglementation
33 des tarifs
(a) New entrants 33 a) Nouveaux venus
(b) Existing Class 1 cable b) Télédistributeurs de
licensees 34 classe 1 en place
(c) Revisions to fee increase c) Révisions aux mécanismes
mechanisms 34 d'augmentations tarifaires

VII. TRANSFERS OF OWNERSHIP VII. TRANSFERTS DE PROPRIÉTÉ
AND CONTROL 38 ET DE CONTRÔLE

VIII. OTHER ISSUES 41 VIII. AUTRES QUESTIONS

1. Cable system interconnections 41 1. Interconnexions d'entreprises
de télédistribution
2. Ownership of equipment and 2. Propriété de l'équipement et
facilities 45 des installations
3. Obligation to serve 47 3. Obligation d'offrir le service
4. Use of restricted channels 49 4. Utilisation de canaux restreints

IX. PUBLIC PROCESS 50 IX. PROCESSUS PUBLIC

I. INTRODUCTION

The Canadian broadcasting system is undergoing fundamental technological and competitive change driven by advances in digital transmission and distribution technology. More specifically, converging technologies in the broadcasting, telephony and computer industries, the deployment of interactive, digital distribution formats and the expansion of channel capacity will enable existing and new distributors to respond to evolving demands by consumers for new types of programming, for greater control over the programming they choose to receive, and choice as to the distributor who provides it.

With regard to competition in the delivery of communications services to the home, the government announced in Order in Council P.C. 1994-1689 dated 11 October 1994 that it is government policy to:

· foster fair competition and an increased reliance on market forces in the provision of facilities, products and services;

· encourage the regrouping and interconnection of cable licensees' systems on a national basis in order to maximize their efficiency, as long as this does not impede access; and

· provide sustainable competition and a climate of certainty to stimulate investments, "as part of the evolution towards competition for the delivery of all communications services to the home".

At the same time, the government reiterated that the objectives of the Broadcasting Act (the Act) will continue to apply to a competitive model for the distribution of broadcasting services.

The Commission has also endorsed the principle of competition in the distribution of programming to Canadians. In its 19 May 1995 report "Competition and Culture on Canada's Information Highway: Managing the Realities of Transition" (the Convergence Report), the Commission indicated that it was prepared to consider, without delay, applications from parties, other than telephone companies, for licences for broadcasting distribution undertakings to compete with the established cable industry. Consistent with this approach, the Commission recently licensed new broadcasting distribution undertakings that will use direct-to-home (DTH) satellite and multipoint distribution system (MDS) technologies to provide competition to cable, as well as to provide service to currently unserved areas. Applications from other parties to carry on DTH and MDS undertakings are now being considered, and new applications proposing use of similar technologies or other forms of broadband wireless distribution systems, such as local multipoint communications systems (LMCS), are likely to be submitted in the coming months.

With regard to the licensing of telephone companies, the Commission stated in the Convergence Report that "... telephone companies should be allowed to apply for broadcasting distribution licences as soon as rules have been established to remove barriers to effective competition in the local telephone business." Proceedings to address these issues are currently underway, and should be completed by mid-1997.

Given these fundamental changes in the broadcasting system, the Commission considers that it is timely to review and update its regulatory framework for distribution undertakings to ensure that there is an orderly transition from a monopoly to a fully competitive environment, and that rules are established for the competitive environment that treat all distributors equitably and fairly.

Accordingly, the Commission hereby announces that it will conduct a public process, including an oral public hearing commencing on 7 October 1996 in the National Capital Region, for the purpose of establishing comprehensive regulations applicable to all broadband, subscription-based distribution undertakings, whether using wireline, satellite or wireless technologies.

In this notice, the Commission outlines the broad approach it intends to take with respect to the regulation of such undertakings, and invites comment from interested parties with respect to this approach. Following the oral public hearing, the Commission intends to publish for public comment draft regulations for broadcasting distribution undertakings (distribution regulations) that reflect policies adopted as a result of this process.

II. REGULATORY FRAMEWORK

1. Principles

In the Convergence Report, as well as in Public Notices CRTC 1995-128 and 1996-60 concerning access, and in its 20 December 1995 licensing decisions for DTH and MDS, the Commission articulated a number of key guidelines pertaining to the new regulatory framework. These guidelines will serve as the blueprint for the new distribution regulations. Specifically, the Commission will be guided by the following principles:

· all distributors should be subject to similar rules and obligations with respect to predominance of Canadian programming, priority carriage, linkage, and fair and equitable access for programming services;

· all licensed terrestrial distributors should generally be required to carry, as part of the basic service, the same Canadian priority services as those prescribed in the existing Cable Television Regulations, 1986 (the cable regulations). Satellite distributors should generally be required to meet carriage priorities as set out in Decisions CRTC 95-901 and 95-902 dated 20 December 1995, as corrected by Decisions CRTC 95-901-1 and 95-902-1 dated 11 January 1996 (the DTH decisions);

· all distributors of programming services should make a financial contribution to the development and production of Canadian programming, and the size of this contribution should be based on the gross annual revenues derived from their broadcasting activities;

· program rights purchased by licensees of Canadian programming undertakings should be recognized and protected;

· the regulations should be streamlined and simplified where feasible, and unnecessary requirements should be eliminated. Where possible, the number of situations where licensees must submit applications for licence amendments should be reduced; and

· an appropriate degree of flexibility and lighter regulation should be considered for small distributors, in light of their more fragile economic circumstances.

2. Applicability of distribution regulations

The Commission considers that the distribution regulations to be developed in this proceeding should apply to three distinct types of distribution under-takings, namely, all DTH satellite distribution undertakings, all cable distribution undertakings, and those radiocommunication distribution undertakings (herein referred to as wireless systems) that provide a broadband, subscription-based service comparable to that provided by cable distribution undertakings. At present, wireless systems are limited to those licensed radiocommunication distribution undertakings using MDS technology; in the future, the Commission expects that other wireless technologies, such as LMCS, may be employed for the distribution of programming services.

For convenience, cable and wireless systems are collectively referred to in this notice as "terrestrial" distribution undertakings.

The Commission notes that there are a number of other types of distribution undertakings that would not be subject to the new distribution regulations, but would continue to be regulated, as they currently are, by conditions of licence specifically tailored to their operations. These include single-channel TV and radio rebroadcast transmitters, multiple channel television (MTV) rebroadcast systems and subscription television (STV) systems that use a limited number of VHF or UHF transmitters, and relay distribution undertakings. In addition, the operators of master antenna television (MATV) systems and of other exempt distribution undertakings would continue to be exempted from the requirement to hold a licence and would not be subject to the new distribution regulations, provided they adhere to the terms and conditions of the relevant exemption order.

3. Licensing Policy and Classes of Licence

(a) DTH distribution undertakings

In the DTH decisions, the Commission established a new class of licence for DTH satellite distribution undertakings. The terms and conditions governing these distribution undertakings were established by specific conditions of licence, as set out in the DTH decisions.

The Commission intends to incorporate in the new distribution regulations the general licensing requirements it has established for this class of distribution undertakings.

(b) Terrestrial distribution undertakings

At present, licensees of cable distribution undertakings are grouped under three different classes:

· Class 1 licensees, by definition, are licensed to carry on an undertaking having 6000 or more subscribers, and are subject to rate regulation, simultaneous substitution requirements and relatively stringent carriage requirements.

· Class 2 licensees, by definition, are licensed to carry on an undertaking having fewer than 6000 subscribers and are not subject to rate regulation or simultaneous substitution require-ments. Regulation of licensees in this class differs depending on whether their subscriber base is 2000 or more, or is fewer than 2000. A Class 2 licensee with 2000 or more subscribers is subject to carriage requirements similar to those applied to Class 1 systems; a smaller Class 2 licensee (i.e. one with fewer than 2000 subscribers) is regulated in a manner similar to Part III licensees.

· Part III licensees typically serve rural and remote areas, where two or fewer signals are receivable over the air. Although the undertakings they operate can be of any size, the vast majority of Part III licensees have fewer than 2000 subscribers. Because of the nature of the areas they serve and the fact that most serve relatively small numbers of subscribers, Part III licensees are subject to minimal regulation.

The current classification of cable licensees into these three groups allows for establishment of a reasonable balance between the regulatory obligations imposed on a cable distribution undertaking and the resources it needs to meet them. The Commission intends to incorporate the essentials of this classification structure in the new distribution regulations, and to apply the structure to all terrestrial distributors, whether they use wireline or wireless technology. In so doing, the Commission does not intend to distinguish between technologies used by terrestrial distributors, except where it is necessary to do so because of technical limitations.

Accordingly, the Commission intends to establish three classes of licence for terrestrial distribution undertakings, based primarily on the number of subscribers served, as outlined above, but also taking into account situations where distributors of potentially different size may be licensed to compete in the same market.

The classes of licence would be determined as follows:

Class 1 would generally consist of the licensees of all new and existing terrestrial distribution undertakings having 6000 or more subscribers. In addition, the licensee of an undertaking having fewer than 6000 subscribers would be regulated as a Class 1 licensee where the licensee:

(i) is an existing Class 1 cable licensee whose subscriber base falls below 6000 as a result of competition from one or more other distribution undertakings; or

(ii) is a new terrestrial distributor that is licensed to compete in the same market as an existing Class 1 cable licensee.

Class 2 would generally consist of the licensees of all new and existing terrestrial distribution undertakings with 2000 or more but fewer than 6000 subscribers, other than those licensees treated as Class 1 licensees as outlined above. In addition, the licensee of an undertaking having fewer than 2000 subscribers would be regulated as a Class 2 licensee where the licensee:

(i) is an existing Class 2 cable licensee whose subscriber base falls below 2000 as a result of competition from one or more other distribution undertakings; or

(ii) is a new terrestrial distributor that is licensed to compete in the same market as an existing Class 2 cable licensee.

Class 3 would consist of the licensees of new and existing terrestrial distribution undertakings having fewer than 2000 subscribers, other than those licensees treated as Class 1 or Class 2 licensees as outlined above. In addition, any existing Part III cable licensee, regardless of the number of its subscribers, would be regulated as a Class 3 licensee.

The Commission recently approved applications by Skycable Inc. for a digital MDS system whose signals will be receivable in a large area of southern Manitoba, and thus, to most of the province's population (Decision CRTC 95-910 dated 20 December 1995, as corrected by Decision CRTC 95-910-1 dated 11 January 1996). Although the applicant proposed to distribute its service from nine separate transmitters, the Commission decided to treat the proposed MDS service as a single undertaking, and therefore issued one licence. The decision noted that the area to be served by the MDS undertaking would be divided into two distinct regions (eastern and western Manitoba), with a separate signal package for each region.

The licensing approach taken by the Commission in the Skycable decision is based on a "regional licence" concept. This differs from the traditional licensing approach for cable distribution under-takings, which relies on the concept of the "local licence". Existing cable licences are issued for relatively small, precisely-defined service areas, within which the cable licensee has the autho-rity to provide cable service. Further-more, each licensee has specific obligations, which are set out in the existing cable regulations, and which are designed to protect the integrity of the local broadcasters operating in the market served by the cable operator. For example, the service area boun-daries, considered in conjunction with the location of the Grade A and Grade B contours of television stations serving the market, have been used to determine priority signal carriage requirements, including relative rankings for the signals of local and regional television stations, and the subsequent entitlement of those television stations to simultaneous substitution privileges.

The structural changes now underway throughout the cable industry, and the imminent arrival of new competitive distribution technologies, raise questions about the continued appropriateness of this local licensing regime in certain circumstances.

For example, ownership rationalization and consolidation, deployment of fibre technology and system interconnection in the cable industry are making it possible to serve a large region using a single head end and other facilities that effectively constitute a single distribution system.

The Commission must also consider the appropriate regulatory framework for the entry of telephone companies and wireless service providers into the broadcasting distribution industry. Telephone companies, for example, could be licensed for an entire region or perhaps an entire province. Wireless companies, as in the case of Skycable, could be issued a single licence for a large region served by a number of interlinked transmitters. In these circumstances, the local licence approach that has been used for the cable industry could be of limited relevance. Furthermore, in a competitive environment, the use of service area boundaries now used to define the area within which a given licensee has the exclusive right to provide service, would have little regulatory purpose.

In light of these considerations, the Commission seeks comment as to whether a licensing approach based on the concept of a regional licence might be appropriate in certain circumstances or for particular types of distribution undertakings.

Under this regional licence approach, the licensee of a distribution undertaking would be authorized to provide service anywhere within a specified region, which could be an entire province or an even larger region; precise service areas where the licensee would be obliged to provide service would no longer be defined.

The regional licence approach is consistent with the Commission's policy of licensing competitive distributors, and recognizes that there would no longer be any need to confine a particular distributor to an exclusive service area. It is particularly suited to telephone companies, who could be licensed to serve an entire province without the need to define specific markets within the province, but it could also be applied to existing cable licensees.

Under the regional licence approach, the protections afforded local broadcasters, namely priority carriage and simulta-neous substitution privileges, would continue. However, there would no longer be precise service areas, which are currently used to establish priority rankings and substitution entitlements of local television stations. Thus, it would be necessary to take a different approach in the new distribution regula-tions to maintain the same degree of protection that currently exists for local broadcasters. For example, it might be possible to define priorities and substi-tution requirements by reference to the location of individual subscribers, rather than in relation to defined service areas.

Related matters would also have to be addressed. The adoption of the regional licence approach could see an increase in the licence fees paid by a multiple system operator (MSO). If, for example, ten local licences were amalgamated into one regional licence, nine basic "exemptions" could be lost when the new regional licence fee is calculated.

Furthermore, the Commission notes that current copyright fees are based, in part, on the number of subscribers. Any consolidation of numerous local licences into a single regional licence could have a significant impact on copyright liability.

In order that the Commission may fully assess the implications of adopting a regional licensing regime, but without limiting discussion on these matters, interested parties are requested to provide their views and comments on the following specific questions:

1. Is a regional licence approach, as discussed above, appropriate in the context of a competitive regime for broadcasting distribution undertak-ings? Under what specific circum-stances, and/or for which specific types of distribution undertakings, is it relevant?

2. How should priority carriage requirements be determined for the various markets served under a regional licence, assuming that precise service area boundaries would no longer be defined?

3. How should the community channel policy, with its emphasis on providing opportunities and funding for local self-expression, be applied in the context of a regional licence?

4. How should the simultaneous substitution rules be applied in the context of a regional licence? In particular, how should the relative rankings of local television stations be established for the purpose of determining substitution entitle-ments? How should the Commission identify the specific area within a particular region where a local broadcaster would be entitled to simultaneous substitution?

5. How should the potential impact of a regional licence regime on CRTC licence fees and copyright fees be addressed?

6. How would the transition from a local licence to a regional licence regime best be handled?

III. SIGNAL CARRIAGE

1. Priority carriage requirements

(a) Television service priorities

The existing cable regulations require all Class 1 cable undertakings and all Class 2 cable undertakings with 2000 or more subscribers to distribute, as a priority and as part of the basic service, the signals of all local and regional television stations, and, in certain cases, the signals of extra-regional television stations. These undertakings must also distribute the English- and French-language services of the Canadian Broadcasting Corporation (CBC) and, in the provinces where they operate, the service of the provincial educational broadcaster, received by satellite or by other means if not available locally over the air.

The Commission intends to include these priority carriage requirements in the new distribution regulations, and to extend their application to all Class 1 and Class 2 terrestrial distributors. In addition, taking into account the nature of the service provided by the Cable Parliamentary Channel (CPAC), including coverage of the proceedings of the House of Commons, the Commission considers that it is in the public interest to require all Class 1 and Class 2 terrestrial distributors to distribute the CPAC service, or a similar type of public affairs programming service, as a priority and as part of the basic service. The Commission notes in this regard the expanding channel capacity of existing cable undertakings which should enable this service to be accommodated without undue difficulty.

For Class 3 terrestrial distributors, the majority of which would have fewer than 2000 subscribers, the Commission intends to establish priority carriage rules requiring them to distribute only the signals of local television stations and unduplicated regional television stations.

With regard to the television service priority carriage rules for DTH distri-bution undertakings, the Commission intends to require such undertakings to distribute, as part of the basic service, the signals of at least one CBC English-language television station, one CBC French-language television station, and one station affiliated with each private television network that is licensed on a national basis. Such a requirement is consistent with the conditions of licence imposed in the DTH decisions. In addition, and as would be the case for Class 1 and Class 2 terrestrial distributors, the Commission intends to require DTH systems to distribute the CPAC service, or a similar type of public affairs programming service, as a priority and as part of the basic service.

(b) Radio service priorities

At present, only Class 1 cable undertakings are required to distribute a radio service to subscribers, although cable licensees of other classes may elect to do so. Where a radio service is provided by a cable licensee of any class, the priority carriage requirements include all local AM and FM stations, plus at least one CBC English- and one CBC French-language radio service, and, in provinces where they operate, the radio programming service of the provincial educational broadcaster, received by satellite or by other means if not available locally over the air.

The Commission intends to include similar provisions in the new distribution regulations. The requirement to provide a radio service would apply only to Class 1 cable distribution undertakings, but not to Class 1 wireless distribution under-takings, given the differences between cable and wireless technologies. In addition to the carriage of all local AM and FM stations, Class 1 cable dis-tribution undertakings would be required to carry all local digital radio stations that may be licensed in the future for a regular licence term. However, tran-sitional digital radio undertakings would not have to be distributed as a priority, in view of the large amount of program-ming that will be simulcast by such stations.

Given the national nature of the service provided by DTH distribution under-takings, the Commission does not intend to impose a requirement that such undertakings distribute a radio service.

2. Optional services

The existing cable regulations authorize a cable licensee to distribute a number of services, at its option, without the need to submit an application for prior Commission approval. Some of these services, such as the non-Canadian services contained in the lists of eligible satellite services, are authorized for distribution on a discretionary basis, subject to distribution and linkage rules governing the packaging of such services. Other services, such as U.S. border stations received over the air (except for duplicate network stations, stations that began operation after 1 January 1985, and stations broadcasting predominantly religious programming), and Canadian, non-priority, extra-regional television stations received over the air, may be distributed as part of the basic service, at the discretion of the cable operator.

The Commission intends to establish in the distribution regulations a similar authorization regime for optional programming services for all terrestrial and DTH distributors. However, the Commission considers that a number of additional optional programming services could be authorized for carriage in the distribution regulations, thereby eliminating the need for applications to carry these services. Accordingly, the Commission intends to include autho-rizations for the following additional services in the distribution regulations:

· the service of any programming undertaking whose operator is exempted by the Commission from the requirement to hold a licence;

· a programming service that promotes a Canadian pay television service, provided that it adheres to the guidelines for such services as set out in Public Notice CRTC 1995-172;

· the signal of a distant Canadian television station, provided that the distributor has obtained written confirmation: (1) from the originating station, stating that it has no objection to the proposed carriage and that it will not solicit advertising in the market served by the distributor; and, (2) from the licensees of all local television stations stating that they have no objection to the distribution of the distant station in their market. Taking into account the fact that the signal of an originating station may be distributed in a different time zone, the Commission will expect the licensees of originating stations to be sensitive to those differences when scheduling programs containing scenes of violence intended for adults;

· any video-on-demand (VOD) service of an undertaking that the Commission may license in the future;

· for terrestrial distributors: (1) a package of any three commercial stations, each affiliated with a different conventional U.S. network, and one U.S. non-commercial station, without regard to mode of reception, distributed as part of the basic service; plus another commercial station affiliated with a fourth conventional U.S. network, without regard to mode of reception, distributed on a discretionary basis; and, (2) any U.S. border stations received over-the-air, except for stations that began operation after 1 January 1985, and stations broadcasting predominantly religious programming;

· for DTH distributors, a package of any four commercial stations, each affiliated with a different conven-tional U.S. network, and one U.S. non-commercial station, distributed as part of the basic service or on a discretionary basis; and,

· for Class 3 terrestrial distributors only, the service of the provincial educational authority for the province in which the undertaking is located, as well as CPAC or a similar type of public affairs programming service.

3. Distribution and linkage rules

As noted above, the carriage of certain television programming services by existing Class 1 cable licensees, and by Class 2 cable licensees with 2000 or more subscribers, is subject to published distribution and linkage rules that specify the mode of distribution for each service and the rules governing the packaging of discretionary services. The current distribution and linkage rules are set out in Public Notice CRTC 1994-60 dated 6 June 1994.

For example, any non-Canadian service on the Part II list of eligible satellite services must be distributed on a discretionary tier, and must be linked to Canadian pay television and/or specialty services distributed as part of that same tier. In the case of a tier containing one or more Canadian specialty services, only one non-Canadian satellite service from Section A of the Part II list may be included in the tier for each Canadian specialty service in the tier. In the case of a tier containing one or more Canadian pay television services, up to five non-Canadian services from either Section A or Section B of the Part II list may be included in the tier and linked with the Canadian pay service(s).

Existing Part III cable licensees, and Class 2 licensees with fewer than 2000 subscribers, are not subject to distri-bution and linkage rules. Thus, such licensees may distribute Canadian pay and specialty services, as well as non-Canadian satellite services, as part of the basic service.

The Commission considers that the distribution and linkage rules continue to fulfil an essential role in promoting the success of Canadian pay and specialty services, while meeting the demands of subscribers for access to a broad range of domestic and non-Canadian services. Accordingly, the Commission intends to apply the current rules to all Class 1 and Class 2 terrestrial distributors under the new distribution regulations. Class 3 terrestrial distributors would not be subject to the distribution and linkage rules.

For DTH distribution undertakings, the Commission intends to incorporate distribution and linkage rules in the distribution regulations that would parallel those set out in the DTH decisions.

4. Access Rules

In Public Notice CRTC 1996-60 dated 26 April 1996, the Commission announced its policies with respect to access to distribution undertakings by licensed and exempt programming services. Consistent with the position stated in that notice, the Commission will incorporate in the new distribution regulations the access rules set out in that notice.

5. Buy-through of basic service

The existing cable regulations require subscribers to purchase the basic service before subscribing to discretionary programming services. In the DTH decisions, the Commission modified this policy by permitting DTH licensees to offer pay-per-view (PPV) services without requiring subscribers to buy the basic service.

The Commission considers that it is important to maintain the general requirement that subscribers purchase the basic service before accessing discretionary services. The services of local broadcasters are a fundamental element of the Canadian broadcasting system, and linking the purchase of the basic service to discretionary tiers containing Canadian pay and specialty services recognizes the role and importance of local services. At the same time, the Commission is of the view that all distributors in a competitive environment should be subject to similar rules with regard to any mandatory buy-through of the basic service.

The Commission intends to maintain the requirement that subscribers of all distribution undertakings, whether DTH, cable or wireless, purchase the basic service before subscribing to any discretionary tier containing Canadian specialty and/or pay television services. However, consistent with the approach taken in the DTH decisions, subscribers would not be required to purchase the basic service in order to access a pay television service offered on a PPV basis, or any future VOD service, offered by a DTH, cable or wireless distributor.

6. Preponderance of Canadian programming services

The existing cable regulations require cable licensees to devote, in total, more channels to the distribution of Canadian programming services than to non-Canadian programming services. Multiplexed programming and pro-gramming distributed on program repeat channels are not counted for the pur-poses of preponderance. Part III and small Class 2 systems that do not use any cable channel above channel 13 are not subject to the preponderance requirement.

DTH licensees, on the other hand, are required to ensure that each subscriber receives a preponderance of Canadian programming services. In the case of DTH undertakings, the Commission is able to impose a preponderance requirement at the level of the individual subscriber since the DTH receiving equipment at the subscriber's residence is addressable.

The Commission intends to modify the preponderance rule to simplify its application, while maintaining the fundamental principle that Canadian services should predominate.

Specifically, in the new distribution regulations, the Commission intends to create a rule, generally applicable to all distributors, which would require that a preponderance of channels be devoted to the distribution of Canadian services, on the basic service only. In this regard, the Commission has taken into account the restrictions on the types and numbers of non-Canadian services that may be included as part of the basic service, as well as the linkage rules that limit the number of non-Canadian services that may be packaged on discretionary tiers. The Commission considers that this preponderance requirement, combined with the new access rules, would ensure a predo-minantly Canadian presence in the total package of services received by any subscriber.

At the same time, the Commission considers that the revised preponderance rule would provide distributors with a degree of flexibility in providing an overall menu of non-Canadian services that may be offered on a discretionary basis.

Consistent with current policy, a Class 3 terrestrial undertaking would not be subject to the preponderance rule if it does not use any channel above channel 13.

IV. PROGRAMMING CONTRIBUTIONS

1. Current situation

Under the current regulatory framework, the cable industry contributes to Canadian programming through two principal mechanisms. The first is the community programming policy, whereby Class 1 systems, and Class 2 systems with 2000 or more subscribers, are required to provide and fund a community channel. The second is the voluntary contribution made by the majority of Class 1 licensees to the Cable Production Fund, an independently-administered fund that supports the creation of Canadian drama, children's programming and documentaries for exhibition by Canadian programming undertakings.

In the Convergence Report, the Commission reaffirmed that all terrestrial distribution undertakings should make comparable contributions to outlets for community expression, and that all licensed distribution undertakings, including DTH distributors, should make a financial contribution to the develop-ment and production of Canadian programming.

In the DTH decisions, the Commission determined that, since DTH undertakings offer national services, their ability to provide opportunities for local self-expression would be problematic. However, each DTH distribution undertaking is required, by condition of licence, to contribute 5% of its gross annual revenues to an independently-administered production fund for the creation of Canadian programming.

2. Proposed regulatory framework

Broadcasting distribution undertakings are important participants in the Canadian broadcasting system and play a crucial role in achieving the objectives of the Act. The Act stipulates in paragraph 3(1)(e) that "each element of the Canadian broadcasting system shall contribute in an appropriate manner to the creation and presentation of Canadian programming". The Commission has determined that all distributors should contribute a minimum of 5% of their gross annual revenues derived from broadcasting activities to achieve this fundamental objective.

Consistent with the Commission's licensing approach for DTH distributors, it would remain a requirement that these undertakings allocate 5% of the gross annual revenues derived from their broadcasting activities to an independently-administered production fund. As noted earlier, DTH distributors would not be required to provide opportunities for local self-expression.

As for terrestrial distributors, both cable and wireless, the Commission considers that all such undertakings should continue to provide opportunities for local self-expression. A majority of the Commission considers that this would best be accomplished by requiring all Class 1 and Class 2 terrestrial distributors to provide and fund a community channel.

At the same time, the Commission considers it essential that terrestrial distributors provide a significant level of support for the production of Canadian programming, in addition to local community programming. A majority of the Commission considers that a new formula should be adopted whereby Class 1 and Class 2 terrestrial distributors would be required to provide a specified level of support for both local community programming and for the development and creation of other Canadian programming.

Specifically, the new distribution regulations would require the licensees of Class 1 and Class 2 terrestrial distribution undertakings to devote at least 1.5% of gross annual revenues derived from broadcasting activities to direct expenditures associated with community programming.

The Commission notes in this regard that, based on the 1995 cable television annual returns, licensees spent approximately $43 million on direct expenses for community programming during the year ended 31 August 1995. This amount represents about 1.7% of the $2.5 billion in gross annual revenues reported by the cable industry for that year.

The new distribution regulations would require that the balance of the 5% total contribution, or at least 3% of gross annual revenues, whichever is the greater amount, be devoted to an independently-administered production fund. Thus, a minimum of 3% of the gross annual revenues derived from the broadcasting activities of Class 1 and Class 2 terrestrial distribution undertakings would be dedicated to support the development and production of Canadian programming, over and above the expenditures on local community programming. A majority of the Commission intends that this new source of revenues for Canadian program production replace the voluntary contributions currently provided by Class 1 cable licensees to the Cable Production Fund.

For the purpose of the local community programming requirement, direct expenditures are those expenses solely attributable to the acquisition or production of programming. This would include, for example, salaries and benefits paid to staff who work exclusively in the programming department, non-staff talent fees, production materials including videotapes, sets, props, program related materials and supplies, as well as program vehicle operating costs. Indirect expenses, which could not be claimed under this proposed formula, would include utilities, telephone, office cleaning and entertainment, plus salaries for personnel whose activities are not fully dedicated to the acquisition or production of programming.

The remainder of the Commission's policies respecting the community channel, as outlined in Public Notice CRTC 1991-59 dated 5 June 1991, would remain intact, including those sections dealing with the role and objectives of the community channel, advertising, bicycling of programming and interconnection, sharing of the community channel with complementary programming, and access.

V. SIMULTANEOUS PROGRAM SUBSTITUTION

1. Current situation

Simultaneous program substitution requirements, which have been an integral part of the regulatory framework for cable distribution undertakings since 1976, are an effective mechanism for protecting the program rights acquired by Canadian broadcasters. The simultaneous substitution provisions, set out in section 20 of the cable regulations, require Class 1 cable licensees to substitute the signal of a local or regional television station for that of a lower priority Canadian station or a non-Canadian station when the signals contain programming that is identical. It has been estimated that the implemen-tation of simultaneous substitution activities by cable licensees has increased the revenues of Canadian conventional television undertakings by approximately $100 million annually, thereby assisting the licensees of these undertakings in fulfilling their obligations and commitments to bring high-quality Canadian programming to viewers.

The licensees of DTH distribution undertakings are required, by condition of licence, to implement simultaneous substitution and a limited form of non-simultaneous substitution upon receipt of a written request from a licensed Canadian television programming undertaking.

2. Proposed regulatory framework

The Commission considers that simultaneous substitution remains an effective tool for maintaining the integrity of the program rights acquired by Canadian broadcasters and protecting their advertising revenue base. Accordingly, it is the Commission's view that, at a minimum, the existing requirements for simultaneous substitution should be applied to all Class 1 terrestrial distribution undertakings in the new distribution regulations.

The Commission notes that there are a small number of privately-owned local television stations offering local programming that are located in communities currently served by Class 2 cable systems. Many of these local television stations would benefit from an assurance that distribution undertakings serving their communities would, upon request, implement simultaneous substitution. The Commission intends to make it a requirement that, where the main transmitter of a privately-owned television station offering local programming is located in a community served by a Class 2 distribution undertaking, the distribution undertaking must, upon request, implement simultaneous substitution on behalf of that station.

Further, the Commission considers that the principle of program rights protection should also apply to specialty and pay television services. While the opportunities for such services to benefit from simultaneous substitution would likely be few, the Commission considers that substitution privileges, similar to those that currently apply to conven-tional television stations, should be extended to Canadian specialty and pay television services. However, the Commission considers it impractical to require simultaneous substitution with regard to the services of PPV or VOD licensees.

Accordingly, it is the Commission's intention to require DTH distribution undertakings and Class 1 terrestrial distribution undertakings to implement simultaneous substitution for the services of licensed pay television and specialty programming undertakings, excluding PPV and VOD services.

VI. RATE REGULATION

1. Current fee increase mechanisms

At present, only the basic service fees of Class 1 cable distributors are regulated by the Commission.

Section 18 of the existing cable regulations provides a number of different methods by which a Class 1 licensee may increase its basic monthly fee.

The first method, under subsections 18(2.2) and 18(2.4) of the cable regulations, allows a licensee to increase the base portion of its basic monthly subscriber fee by an amount of $0.02 or $0.03 as a mark-up in respect of each specialty service that is distributed as part of the basic service, and by an amount of $0.05 as a bonus for distributing, as part of the basic service, all Canadian specialty services that the Commission has authorized and that are available for distribution.

The second method, under subsection 18(3) of the cable regulations, allows a licensee to increase its basic monthly fee by an amount equal to or less than the amount of an increase that is authorized by the Commission as a pass-through payment to a third party (the pass-through method).

Two additional methods of obtaining fee increases are provided for in subsections 18(6) and 18(8) of the cable regulations.

Under subsection 18(6), a licensee may be allowed to increase its basic monthly fee by an amount based on the level of eligible capital expenditures incurred during the previous year (the capital expenditure method). However, under subsections 18(6.1) and 18(6.2) of the cable regulations, a cable licensee that has increased its basic monthly fee pursuant to subsection 18(6) is required, after five years, to decrease its basic monthly fee by an amount equal to the increase taken. This requirement is suspended under subsection 18(6.3) of the cable regulations so long as a licensee contributes one half of the amount of the increase to the Cable Production Fund. These provisions are collectively referred to as the "sunset" provisions.

Subsection 18(8) contains a mechanism by which a licensee may be allowed to increase its monthly fee in excess of the amount otherwise permissible pursuant to the three methods previously described, on the basis of economic need, and in accordance with the guidelines set out in Public Notice CRTC 1993-146 dated 21 October 1993.

2. Approach to rate regulation issues

The transition to competition in the distribution of broadcasting services to the home raises a number of questions with respect to basic service subscriber fees for both existing and new distributors. These questions relate to the need to regulate the rates of new entrants, the need to continue to regulate the basic service subscriber fees of existing Class 1 cable systems as competition increases, and the continued relevance and applicability of the current fee increase mechanisms.

(a) New entrants

The Commission does not intend to regulate the basic service subscriber fees of new entrants in the market. Given the current high penetration rate of the basic service in most markets, it is unlikely that a new competitive basic service entrant would be able to attract a significant number of subscribers from among the few households in an existing cabled area who do not already subscribe to the service of the existing cable operator.

Rather, the majority of a new entrant's basic service subscribers will come from the existing cable operator's subscriber base. In order to attract these sub-scribers, however, the new entrant will have to compete vigorously with the existing cable licensee on the basis of quality of service and competitive rates. This, in itself, should preclude the need to regulate a new entrant's basic subscriber fee.

(b) Existing Class 1 cable licensees

The Commission considers that the basic monthly fee of an existing Class 1 cable licensee should continue to be regulated, as outlined below, for as long as there is no other licensed terrestrial distribution undertaking operating in its market. At such time as there is an alternative basic service distribution undertaking available to subscribers in the cable licensee's service area, the basic service monthly fee would be deregulated.

Specifically, the Commission intends to deregulate the basic service fee of a Class 1 cable distribution undertaking once the basic service package of one or more other licensed competitive terrestrial distributors is available to 10% or more of the households in the existing Class 1 cable distribution undertaking's service area.

The Commission has reviewed the impact of the current fee increase mechanisms on subscribers, service suppliers, other competitive distribution undertakings and the cable industry, taking into account the recent changes that have occurred in the broadcasting distribution environment and, in particular, the movement towards competitive broadcasting distribution undertakings. Based on this review, the Commission considers that certain revisions to the fee increase mechanisms contained in section 18 of the cable regulations are warranted.

Specifically, the Commission intends to eliminate the mark-up and bonus provisions related to the carriage of specialty services on the basic service.

Given the advent of DVC technology, and consistent with its ongoing concern for affordability of the basic service, the Commission considers that the licensing of most future specialty services will be based on discretionary carriage. Accor-dingly, there would not appear to be any need for the continuation of a fee in-crease incentive to carry a specialty service as part of the basic service. Should a new service be licensed for basic carriage, however, the Commission expects that competing distribution undertakings will be bidding to carry the service. This, in itself, should remove the need for continued monetary carriage incentives.

The Commission intends to retain the pass-through method of obtaining a rate increase. There will continue to be programming services that the Commission, for policy reasons, will require cable licensees to distribute as part of the basic service, and for which pass-through fees will be payable.

With regard to fee increases based on capital expenditures, subsection 18(6) of the cable regulations was introduced as an incentive for cable licensees to rebuild and upgrade their distribution systems, improve technical quality, create additional channel capacity, increase community programming capital budgets, and roll out the DVC box, thereby attaining the Commission's public policy objective of universal addressability.

The Commission acknowledges that licensees will need to continue making capital investment in their facilities in order to enhance the quality of their service, incorporate new advances in cable television technology and roll out the DVC box. At the same time, competition in the distribution of communications services is becoming a reality, and cable will no longer be the exclusive distribution vehicle for the delivery of programming and non-programming services to the home. This being the case, the Commission does not consider that the basic service subscriber should be required, through a regulated fee increase mechanism, to help finance cable's participation in this competitive distribution market.

Accordingly, the Commission does not intend to include provisions for fee increases based on capital expenditures in the new distribution regulations. Assuming that these new regulations come into force prior to 1 January 1998, the Commission notes that eligible capital expenditures incurred after 31 August 1996 would not be recoverable through a future fee increase based on subsection 18(6) of the existing cable regulations.

Further, the Commission does not intend to include sunset provisions in the new distribution regulations. That portion of the basic monthly fee attributable to capital expenditure increases implemented prior to the coming into force of the new distribution regulations would be embedded in the base portion of the basic monthly fee on a going-forward basis.

As mentioned in section IV of this notice, a majority of the Commission intends that the option to make voluntary contributions to the Cable Production Fund pursuant to subsection 18(6.3) of the cable regulations be replaced by the requirement that all Class 1 and Class 2 terrestrial distribution undertakings contribute a minimum of 3% of the gross annual revenues derived from their broadcasting activities to an independently-administered production fund.

Finally, the Commission does not intend to include in the new distribution regulations provisions for fee increases based on economic need. Rather, these new regulations would include a partial indexing fee increase method to compensate for a portion of inflationary cost increases. The partial indexing methodology would be identical to that adopted by the Commission in Public Notice CRTC 1990-53, in that it would be based on the annual increase in the Consumer Price Index (CPI) and would incorporate a productivity offset of two percentage points. For example, if the CPI increases by 5% in a given year, a cable licensee would be able to increase its base portion by 3%.

The Commission intends to place a limit on partial indexing fee increases to ensure that the increase in a given year does not exceed an amount equivalent to 80% of the increase in the CPI. This cap would thus apply only when the rate of inflation exceeds 10%.

VII. TRANSFERS OF OWNERSHIP AND CONTROL

The Commission's current cable regulations permit a transaction resulting in a person holding less than 30% of the voting interests of a licensee company without the need to obtain prior Commission approval, provided that there is no change in effective control of the licensee. Prior approval is required for any transaction that results in an increase in a person's holdings to 30% or more of the voting interests. The Commission intends to include identical provisions in the new distribution regulations.

The Commission's prior approval will continue to be required for all tran-sactions involving a change in control of the licensee of a broadcasting distri-bution undertaking. The Commission considers that such transactions require public scrutiny and Commission approval to ensure that they are in the public interest.

In general, when considering an application involving a change in ownership or control of a broadcasting undertaking, the Commission currently requires the prospective purchaser to identify the significant and unequivocal benefits that would flow to the subscribers and/or the community served by the undertaking, and to the Canadian broadcasting system as a whole, as a direct result of the transaction (the benefits test).

Given that entry to the cable industry has been restricted to date, and in the absence of competing applications for authority to transfer the ownership or effective control of existing cable undertakings, the benefits test has served the purpose of ensuring that the Commission, in dealing with such transfers, is presented with the best possible proposal, taking into account the size and nature of the proposed transaction. However, with adoption by the Commission of a policy that removes all or most of the existing licensing restrictions on market entry and which, in fact, encourages the imminent entry of new competitors using a variety of distribution technologies, the underlying rationale for applying the benefits test in considering future applications for authority to transfer the ownership or control of distribution undertakings has essentially disappeared.

In light of the above considerations, and because the Commission has already begun to license competitors to cable using DTH and MDS technologies, the Commission has concluded that it is no longer necessary to apply the benefits test in the case of transfers of ownership or control of distribution undertakings.

Accordingly, the Commission announces that, in assessing an application for authority to transfer the ownership or effective control of a broadcasting distribution undertaking, it will no longer require prospective purchasers to identify the significant and unequivocal benefits that will result if the transaction is approved. This approach will apply to all such applications published after the date of this notice.

The Commission will continue to assess these applications to ensure that the prospective purchaser is qualified and that approval is in the public interest, taking into account any concerns related to service to subscribers, media cross-ownership, concentration of ownership to the extent that it lessens competition in a market, or other issues that may be raised in the context of a particular application.

In reaching its determination to eliminate application of the benefits test in the case of transfers of ownership or control involving broadcasting distribution undertakings, the Commission has taken into account the fact that, in the past, accepted benefits have largely related to technical upgrades to a cable licensee's infrastructure, or to financial contri-butions to various programming ini-tiatives, including a number of pro-duction funds. With respect to technical upgrades, the Commission considers that the need to prepare for a competitive environment will provide an effective incentive to all distributors to make the necessary investments to ensure that their infrastructures are technically advanced, while maintaining affordable rates for their subscribers. With regard to concerns about a possible reduction in funding for program production resulting from the elimination of the benefits test, any such impact would be offset by the increased level of support for program production resulting from the new requirement, outlined in section IV of this notice, that all distributors contribute a minimum of 3% of their gross annual revenues derived from broadcasting activities to an independently-administered production fund.

Although the benefits test will no longer apply in the case of applications for authority to transfer the ownership or control of distribution undertakings that are published after the date of this notice, benefits that have been proposed in the context of such applications published prior to the date of this notice, and that have been or are subsequently accepted by the Commission, must be fulfilled.

For various reasons, including the capacity of a given market to support new programming services and, in the case of radio and television undertak-ings, the limited availability of fre-quencies, there will continue to be a need for restrictions on the entry into the market of new programming undertak-ings. Given these circumstances, and in the absence of competing applications for authority to transfer ownership or control of programming undertakings or networks, the benefits test will continue to be a central element of the assessment of such applications.

VIII. OTHER ISSUES

1. Cable system interconnections

In recent years, the Commission has received a number of applications proposing the interconnection of two or more separately-licensed cable systems.

System interconnections occur for a variety of reasons, but are primarily for the purpose of achieving economies of scale and reducing operating costs. Interconnections can also take a variety of forms; for example, the sharing of signals from a distant head end, the relay of one or two regional signals, cooperative pooling of community channel facilities, provision of signal substitution services and the use of joint backup facilities. The types of inter-connection that can raise important policy issues, however, are those involving the effective amalgamation of two or more systems, where the result of the interconnection is a single head end feeding essentially the same signal package to two or more separately-licensed cable systems.

Policy issues arise primarily where it is proposed to interconnect two or more systems of different classes. For example, in a typical situation, the licensee of a Part III or of a Class 2 undertaking may wish to connect its system to a nearby Class 1 system as a means of expanding the range of services provided to the subscribers of the smaller system, while achieving significant savings in signal delivery costs. While the interconnection and the provision of additional services benefit subscribers of the smaller system, its licensee can also benefit because of the reduced signal delivery costs.

The Commission's practice in assessing such applications has been to expect the licensee of the smaller system to reduce its monthly fee for the basic service by an amount equivalent to the direct cost savings, and not to charge the capital costs of the interconnection to the subscribers. Since Part III and Class 2 systems are not rate regulated, however, the licensee has an opportunity to recover costs through subsequent rate increases without Commission scrutiny.

The other question often raised by an interconnection application of this type is whether the smaller system should retain its status or become subject to the same rules as the larger system with respect to priority signals, distribution and linkage requirements, rate regulation and simultaneous substitution. If both systems are owned by the same licensee, the question is whether the two licences should in fact be amalgamated into a single licence.

To date, the Commission has not generally required licence amalgamation when approving the interconnection of two or more systems owned by the same licensee, but has focused on the rate implications as discussed above.

The number of interconnection appli-cations received by the Commission has been increasing over the past few years, and this trend can be expected to con-tinue as the cable industry consolidates its operations. The Commission recog-nizes the advantages of such consolida-tion, and thus does not wish to dis-courage system interconnections that improve service to subscribers, create efficiencies and enable licensees to improve their competitive position. At the same time, the Commission con-siders it essential that the subscribers of interconnected systems share in the benefits of such interconnections, particularly where significant direct cost savings result. Accordingly, as part of its overall review of the regulatory framework for broadcasting distribution undertakings, the Commission has examined whether its current approach to the assessment of interconnection applications continues to be appropriate, or whether certain adjustments should be made at this time.

For interconnection applications involving systems owned by different licensees, the Commission considers that its current practice remains appropriate. Each system would be permitted to retain its original licensing status after the interconnection, but the Commission would continue to assess the direct cost savings, if any, and would expect any such savings to be passed on to subscribers.

In situations involving the full intercon-nection of two or more systems owned by the same licensee, the Commission is of the view that each system should be able to retain its separate licensing status after the interconnection, as at present. A majority of the Commission, however, considers that the basic service fee of the interconnected Class 2 or Class 3 system should be subject to rate regulation in the same manner as the Class 1 system.

Therefore, consistent with the rate regulation regime outlined in section VI of this notice, the monthly fee charged to subscribers of such Class 2 or Class 3 systems for the basic service would be subject to regulation after the interconnection. The initially authorized monthly fee for basic service after the interconnection would be the basic service fee charged to the subscribers of the Class 2 or Class 3 system imme-diately prior to the interconnection, with a downward adjustment, if applicable, to reflect any direct savings in signal costs resulting from the interconnection. Subsequent increases in the monthly fee for basic service would be subject to the partial indexing provisions set out in section VI of this notice.

Rate regulation of the interconnected Class 2 or Class 3 system would be discontinued when the basic service fee of the associated Class 1 system is deregulated, in accordance with the provisions outlined earlier in section VI.

2. Ownership of equipment and facilities

The existing cable regulations generally require each cable licensee to own, at a minimum, its local head end, amplifiers and subscriber drops. The emphasis placed by the Commission on the plant ownership rule has been for the purpose of ensuring that licensees retain a tangible stake in their undertakings, and are able to exert effective control over the operation of their undertakings in order to meet their regulatory obliga-tions. However, the ownership of the cable industry is being consolidated. MSOs are tying their systems together with province-wide fibre loops. These interconnections often result in appli-cations for relief from the requirement to own and operate a local head end.

In recognition of the very different characteristics of the emerging broadcasting distribution industry, the 1992 Report of the Local Networks Convergence Committee recommended that the requirement for cable licensees to own their amplifiers be deleted in order to facilitate proposals for the joint use and sharing of infrastructure.

Moreover, in the Convergence Report, the Commission proposed that "measures be developed to ensure that all telephone and cable subscribers have the freedom to connect the inside wire to the systems of whichever suppliers of service they choose." The Commission notes that removal of the requirement that cable operators own the subscriber drop would be consistent with the above proposal.

In the Commission's view, the current plant ownership rules have played an important role in helping to establish a strong, independent cable distribution industry. However, as outlined above, the future may well require new approaches and sharing arrangements. Providing flexibility with respect to the ownership of facilities should enable distributors to pursue such initiatives and should benefit the broadcasting system as a whole.

The Commission therefore intends to eliminate the current requirement that cable licensees own their head end, amplifiers and subscriber drops. Further, the Commission does not intend to impose specific requirements with respect to the ownership of equipment and facilities on other types of distribution undertakings.

While there would no longer be any obligation to own specific portions of the equipment and facilities used by a distri-bution undertaking, it would remain the responsibility of each licensee to take appropriate measures to ensure that it is able to exert effective control over the operation of its undertaking in keeping with the requirements of its licence, the Act and the distribution regulations.

3. Obligation to serve

Class 1 licensees, and Class 2 licensees with 2000 or more subscribers, are currently required to provide service to individual households in residential areas within their service area that have municipal sewer or water service. Beyond this minimum requirement, they are expected to provide service to other areas within their licensed territory where financially feasible. There is no such specific obligation to provide service applied to small Class 2 and Part III systems, although there is an expectation that they do so, where feasible, throughout their service areas.

This approach, based on a combination of regulation and policy, has worked well in a monopoly environment, helping to ensure that cable service is made generally available throughout licensed territories, and not just to lucrative, high-density areas.

In a competitive environment, the task of determining what requirements should be imposed with respect to provision of service becomes more complex. New distributors using wireline technology, especially upon commencing operations, may prefer to serve high-density areas where potential subscribers are concentrated and where profitability is more likely, and to delay implementation of service for some time in scattered communities, where profitability may be more problematic. If their competitive business plans are premised upon providing service to a licensed territory that is any less extensive than that of the existing cable licensee in the area, such undertakings may enjoy economies that are not available to the existing cable licensee. On the other hand, new distributors will no doubt have to struggle to take market share away from entrenched players.

With respect to existing cable licensees, the underlying assumption of monopoly markets which has, to date, justified the obligation to provide service, now requires re-examination. The emerging industry structure promises to be highly competitive. Monopoly profits, and opportunities to use revenues from high- density areas to offset the higher costs of serving low-density areas, will cease to be available to incumbent distributors. Determining the continuing requirements, if any, that should be applied to all cable distribution licensees to provide service in specified circumstances must therefore be addressed.

The Commission is of the view that there should be no obligation placed on new entrants to provide service. For existing Class 1 and larger Class 2 cable licensees, however, the Commission intends to retain the requirement that they provide service within their service areas where either municipal water or sewer service is present, until such time as there is an alternative distribution undertaking whose basic service is available to subscribers in the cable licensee's service area. Specifically, the Commission intends to terminate the obligation to provide service imposed on an existing Class 1 or larger Class 2 distribution undertaking, once the basic service package of one or more other licensed competitive terrestrial distributors is available to 10% or more of the households in the service area of the existing undertaking.

The Commission recognizes that the removal of the obligation to serve could entail a certain risk. For example, some subscribers could lose service if an existing licensee elects to cease serving parts of its territory in order to improve its competitive position. On balance, however, the Commission considers that existing cable licensees will generally attempt to maintain their subscriber bases in the presence of new compe-titors. Further, the introduction of DTH and wireless distribution undertakings should provide Canadians virtually everywhere with attractive alternatives.

4. Use of restricted channels

Restricted channels are basic band cable channels that are the same as those used by local television stations, and are thus subject to potential interference. The existing cable regulations prohibit their use for the distribution of priority services, including the community channel, in order to ensure that such services will not be subject to any technical degradation or impairment when received by subscribers. This rule has served the broadcasting industry and the public well, and the Commission intends to maintain this general prohibition in the new distribution regulations.

On the other hand, because the defini-tion of a restricted channel is a conservative one, there are situations where restricted channels can be successfully used because any real impairment is negligible. In fact, the Commission has approved numerous applications for a condition of licence permitting a cable operator to use a restricted channel for the distribution of a priority television service.

Accordingly, given that the parties themselves are generally in the best position to evaluate the potential for impairment, the Commission believes it should not be necessary to require an application for such a condition of licence where the cable operator has the prior agreement of the licensee of the priority television station to be distributed on a restricted channel. However, a cable operator wishing to distribute community programming on a restricted channel would continue to require the prior approval of the Commission.

IX. PUBLIC PROCESS

The Commission will hold a two-stage written comment process prior to the 7 October 1996 oral public hearing. Details of the public hearing will be announced at a later date.

During this first stage, the Commission invites comments on its proposed approach to the regulation of broadcasting distribution undertakings, as outlined in this notice, as well as any other relevant matters. The deadline for the submission of written comments during the first stage is Tuesday, 16 July 1996.

These initial comments will be made available for examination by the public as soon as possible following the deadline, in the Commission's offices at the addresses provided later in this notice.

Interested parties, including those who may not have participated in the first stage of the process, will then have an opportunity to submit written comments in the second stage regarding any issue raised in the first round of comments.

The deadline for written comments submitted as part of this second stage is Thursday, 15 August 1996.

The Commission considers that this process should provide interested parties a full opportunity to make their views known during the written phase of this proceeding. In the interest of focusing and streamlining the oral phase of the proceeding, the Commission will not generally be prepared to entertain discussion on issues other than those raised by interested parties in the written comments.

The Commission will only accept submissions that are received in the Commission on or before the prescribed dates noted above.

The Commission offers the following additional information respecting procedural requirements:

1. Interested parties wishing to appear at the public hearing must have participated in the first or second stage of the written process.

2. Submissions filed in response to this notice should be complete and focused. Each submission should also include a short executive summary.

3. Any party requesting to appear must provide reasons, on the first page of its submission, as to why its written submission is not sufficient and why an appearance is necessary. The Commission will inform each party whether its request to appear is granted.

4. In the second stage of the written process, comments should be limited to issues raised in the submissions received during the first stage of the process. Any interested party who submits comments during the second stage of the written process must identify, on the first page of its submission, the first-stage submissions that its comments address.

5. To ensure effective use of time at the public hearing, the Commission may use a written question process to obtain additional information from those who have filed submissions, after either the first or second stage of the written process.

6. In light of the nature of this proceeding, the Commission expects that all information provided in this process will form part of the public record of the proceeding without further notification to those filing comments.

7. Comments filed in response to this notice must be addressed to the Secretary General, CRTC, Ottawa, Ontario K1A 0N2, and must be filed in hard copy form.

EXAMINATION OF RELATED DOCUMENTS AND PUBLIC COMMENTS AT THE FOLLOWING COMMISSION OFFICES, DURING NORMAL OFFICE HOURS

Central Building
Les Terrasses de la Chaudière
1 Promenade du Portage, Room 201
Hull, Quebec K1A 0N2
Tel.: (819) 997-2429
TDD : (819) 994-0423
Telecopier (819) 994-0218;

Bank of Commerce Building
Suite 1007
1809 Barrington Street
Halifax, Nova Scotia B3J 3K8
Tel.: (902) 426-7997
TDD : (902) 426-6997
Telecopier (902) 426-2721

Place Montréal Trust
1800 McGill College Avenue
Suite 1920
Montréal, Quebec H3A 3J6
Tel.: (514) 283-6607
TDD : (514) 283-8316
Telecopier (514) 283-3689;

Kensington Building
Suite 1810
275 Portage Avenue
Winnipeg, Manitoba R3B 2B3
Tel.: (204) 983-6306
TDD : (204) 983-8274
Telecopier (204) 983-6317

Suite 1380
800 Burrard Street
Vancouver, British Columbia
V6Z 2G7
Tel.: (604) 666-2111
TDD : (604) 666-0778
Telecopier (604) 666-8322

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