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Public Notice
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Public Notice CRTC 1997-25
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NEW REGULATORY FRAMEWORK FOR BROADCASTING DISTRIBUTION UNDERTAKINGS
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II LICENSING FRAMEWORK
A. Applicability of Regulations
B. Classes of Licence for Terrestrial Distribution Undertakings
C. The Regional Licence
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III COMPETITION ISSUES
A. Rate Regulation
a) New entrants
b) Existing cable undertakings
c) Changes to existing fee increase mechanisms
d) Anti-competitive pricing
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B. Issues Related to Acquisition of Programming
a) Access to programming
b) New entrants and confidentiality restrictions
c) Unbundling of non-common satellite costs
d) Withdrawal of programming services during mediation
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D. Impact of Competitive Licensing on Smaller Distribution Undertakings
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E. Ownership of Equipment and Facilities
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F. Customer Access to Competitive Distribution Undertakings
a) Definition of "inside wire" and of other related terms
b) Customer control of inside wiring
c) Access to competitive distribution undertakings by customers in clients multiple-unit dwellings
d) Rate adjustment for loss of multiple outlet revenues
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IV CONTENT ISSUES
A. Programming Contributions
a) Proposed regulatory framework
b) Approach to local expression
c) Funding formula
d) Community programming
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B. Signal Carriage Rules
a) Access Rules
b) Priority carriage
c) Optional services
d) Distribution of U.S. superstations
e) Preponderance
f) Buy-through of basic service
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C. Simultaneous substitution
a) Canadian pay and specialty services
b) Extra-regional stations
c) Strip program substitution
d) Extension of simultaneous substitution requirements to Class 2 undertakings
e) Extension of simultaneous substitution requirements to new entrants
f) Notification period for substitution requests
g) Requests for substitution against non-Canadian specialty services
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V OTHER ISSUES
A. Alteration and Curtailment
B. System Interconnection
C. Use of Restricted Channels
D. Transfers of Ownership and Control
E. Use of Local Advertising Availabilities
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APPENDIX - Dissenting opinions
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1. In Public Notice CRTC 1996-69 dated 17 May 1996, the Commission initiated a public process to review and update its regulatory framework for distribution undertakings in light of the competitive environment that is rapidly emerging with respect to the distribution of broadcasting services in Canada.
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2. In that notice, the Commission reviewed the fundamental technological and competitive changes occurring in the Canadian broadcasting system, and noted that both the government and the Commission had endorsed the principle of competition in the distribution to the home of communications services, including broadcasting services. The Commission also outlined a comprehensive new approach to the regulation of all broadband, subscription-based, distribution undertakings (whether using wireline, satellite or wireless technologies), that will guide the transition to a fully competitive environment and that will treat all distributors fairly and equitably. The Commission announced that it would undertake a two-phase written comment process, followed by an oral public hearing in October 1996.
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3. In the months since the Commission set out its original proposals, a number of further developments have underscored the timeliness and importance of this process. For example:
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· the Government of Canada has issued its Convergence Policy Statement in August 1996;
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· the Department of Industry has awarded licences to three companies to operate Local Multipoint Communications Systems (LCMS) in 66 larger markets across Canada, as well as in 127 rural communities;
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· a digital Multipoint Distribution System (MDS), licensed by the Commission to distribute broadcasting services to most of the residents of Manitoba, has commenced service;
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· the Commission has licensed a digital MDS service in Saskatchewan, and will shortly be considering competing applications for licences to provide MDS service to southern Ontario;
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· there are now five Direct-to-Home (DTH) satellite licensees, and it is expected that Canada-wide service from one or more of these licensees will be launched shortly; and
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· the Commission has continued to conduct a number of proceedings to resolve outstanding issues related to the removal of barriers to effective competition in the local telephone business. Following the completion of these proceedings later this year, the Commission will be in a position to consider applications by telephone companies for broadcasting distribution licences.
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4. In response to its notice, the Commission received approximately 5,800 written submissions representing all sectors of the broadcasting industry and the public. These included current licensees of distribution and programming undertakings, potential new entrants into the broadcasting distribution industry (telephone companies, wireless distributors, "private cable" operators and DTH licensees), representatives of the artistic and creative communities, representatives of the program production industry, provincial and federal government departments and agencies, public interest groups and members of the general public. Of note were the several thousand letters received from parties across the country supporting the role of the community channel in their respective communities.
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5. At the oral public hearing, held from 7 to 15 October 1996, a total of 34 parties appeared before the Commission to discuss their views on the many complex issues surrounding the Commission's proposals. Much of the discussion focused on determining how best to foster the development of effective competition in the distribution industry and, at the same time, ensure attainment of the Canadian content objectives of the Broadcasting Act (the Act). In this regard, the Commission concurs with the following view expressed by the Canadian Association of Broadcasters (CAB) in its Phase 2 written submission:
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Competition between distribution undertakings is a means to an end. Competition will provide consumers with the option to choose services from among competing distribution undertakings. This should result in better service and price competition, both of which will benefit the consumer. Competition, however, must also strengthen the Canadian broadcasting system and with it, its capacity to support competitive Canadian television programming.
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6. In the following pages of this notice, the Commission sets out its policy determinations with respect to the establishment of a regulatory framework for broadcasting distribution undertakings that will further the objectives of the Act in a competitive environment. Later this year, the Commission will issue for comment draft regulations to give effect to these policies, with the intention that these new regulations come into force on or about 1 January 1998.
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A. Applicability of Regulations
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7. In Public Notice CRTC 1996-69, the Commission stated that the distribution regulations should apply to three distinct types of distribution undertakings, namely, all cable distribution undertakings, all DTH satellite distribution undertakings and those radiocommunication distribution undertakings (herein referred to as wireless undertakings) that provide a broadband, subscription-based service comparable to that provided by cable distribution undertakings.
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8. Parties generally supported the Commission's proposal with respect to the application of the new distribution regulations, although a number of comments suggested that the distribution regulations should not apply to undertakings employing LMCS technology, at least on an interim basis, until the characteristics of such undertakings become apparent.
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9. The Commission has decided that the new distribution regulations should apply to the three distinct types of distribution undertakings proposed in Public Notice CRTC 1996-69. Nevertheless, the Commission notes that, at the time of licensing, it would retain considerable discretion to relieve a distribution undertaking from specific requirements of the regulations, by way of condition of licence.
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B. Classes of Licence for Terrestrial Distribution Undertakings
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10. In Public Notice CRTC 1996-69, the Commission proposed to establish three classes of licence for terrestrial distribution undertakings. These would equate roughly to the classes that existing cable undertakings fall under, and would be based primarily on the number of subscribers served, as follows:
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Class 1 - 6000 or more subscribers;
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Class 2 - 2000 or more, but fewer than 6000 subscribers; and
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Class 3 - fewer than 2000 subscribers and all existing Part III licensees as defined in the Cable Television Regulations, 1986 (the existing regulations), regardless of size.
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11. Additionally, new terrestrial entrants, regardless of size, would be regulated according to the class of licence held by the cable distribution undertaking already serving the market.
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12. There were a number of alternative proposals submitted for determining classes of licence that would make reference to varying subscriber level thresholds. In the Commission's view, none of the proposed alternatives have any greater merit than the Commission's proposal, which has the added benefit of generally maintaining the thresholds to which existing cable distribution undertakings are accustomed.
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13. Therefore, the Commission confirms the establishment of the three classes of licence as set out in Public Notice CRTC 1996-69, including the application of Class 3 status to existing Part III cable undertakings, regardless of the number of subscribers.
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14. The Commission also considers that a new entrant should generally be licensed according to the class of licence held by the incumbent with whom it will compete. In circumstances where the area to be served by a new entrant includes the service area of more than one existing cable licensee, and where these existing licensees are of different classes, the class of the new entrant will generally be that of the existing cable undertaking with the largest number of subscribers.
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15. In Public Notice CRTC 1996-69, the Commission asked whether it might be appropriate to issue "regional" licences, and sought views concerning the general characteristics that such licences should have. Key areas of Commission concern included how best to address distribution priorities, simultaneous substitution, local expression (community channel), licence and copyright fees, and transitional measures.
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16. In written comments and during the oral phase of the process, a number of market-based approaches were proposed to deal with the key distribution priority and substitution issues that are raised by a regional licensing approach. These made reference, variously, to Census Metropolitan Areas (CMAs), Census Agglomerations (CAs) and Extended Market Areas (EMAs). Other parties who addressed the matter of regional licences in general, principally broadcasters, presented no developed positions on the details of how such a licensing approach could or should operate, but appeared not to object to the concept of issuing licences based on a regional approach, provided that the carriage and substitution requirements, and other protections now found within the existing regulations, are maintained.
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17. The general consensus among parties commenting on this matter was that, if regional licences are issued, existing cable distribution undertakings should be able, at their option, to continue with their current licences.
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18. Licence fees, copyright payments and requirements for local expression in respect of those holding regional licences were seldom discussed during the written or oral phases of the public hearing. Generally, parties suggested that any local expression requirements for distribution undertakings issued licences on a regional basis should reflect the Commission's broader policies on local expression, including the community channel. Most parties also believed that licence fees and copyright payments should be applied at the level of such a regional licence.
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19. The Commission has taken into account the various comments on this matter, and considers that existing distributors and new entrants should have the option of submitting an application for a licence to serve a territory consisting of more than one market area. It is not the intention of the Commission to establish a separate class of licence for this purpose. Rather, an applicant will generally be issued a Class 1 licence, and any exceptions to the Class 1 regulatory requirements that may be deemed appropriate for specific markets within the regional service territory would be addressed by way of condition of licence. This will permit the Commission to ensure that holders of regional licences operate pursuant to regulatory requirements comparable to those that apply to the existing cable licensees with whom they compete.
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20. The Commission will expect applicants to address the matters of distribution priorities, signal substitution entitlements, local expression and access within the regional service territory on a market-by-market basis. It will be left to applicants to select the manner in which they will identify these markets (whether through reference to a CMA, CA, EMA or on some other basis), with any disputes concerning priority distribution or simultaneous substitution entitlement to be resolved as part of the application process.
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21. Potential applicants for such regional licences are encouraged to consult with interested parties at an early stage in preparing their applications, with a view to minimizing disputes that may arise with respect to these issues. The Commission notes in this regard the willingness expressed at the oral hearing by parties representing potential new distribution entrants and existing broadcasters to cooperate to determine signal carriage priorities on a market-by-market basis.
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22. In Public Notice CRTC 1996-69, the Commission proposed not to regulate the rates of new distribution undertakings entering into competition with existing undertakings. Having taken into account the relevant written and oral comments in this proceeding, the Commission remains of the view that it should not regulate the subscriber fees of new entrants. It considers that to do so would not be in keeping with the objectives of encouraging increased reliance on market forces in the provision of services and ensuring fair and sustainable competition in the delivery of communications services to the home.
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b) Existing cable undertakings
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23. In recognition of cable's current dominant position in the provision of broadcasting services to the home, and in the interest of protecting existing cable subscribers from possible unwarranted rate increases, the Commission proposed in Public Notice CRTC 1996-69 to continue to regulate the basic monthly subscriber fees of existing Class 1 cable undertakings until competitive market forces provide an effective alternative to regulatory price controls. Accordingly, the Commission proposed to maintain rate regulation for an existing Class 1 cable undertaking until such time as the basic service package of another licensed terrestrial distributor becomes available to 10% or more of the households in the existing cable undertaking's service area.
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24. The Canadian Cable Television Association (CCTA) maintained that the licensing of DTH distributors and the growth of the grey market for direct broadcast satellite (DBS) services in Canada has already imposed a level of market discipline on the cable industry, such that the Commission could now deregulate the basic cable rates for Class 1 undertakings without fear that consumers would be treated unfairly.
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25. On the other hand, the majority of interveners not related to the cable industry argued that the Commission's proposed 10% threshold was inadequate because it could result in fee deregulation even where 90% of the households in an existing licensed area have no alternative to the service of an incumbent cable licensee. They also argued that such a threshold does not provide any indication that the services available to the 10% of households are actually competitive in price, service or product offerings. It was further suggested that the Commission's proposal failed to take account of non-terrestrial distributors, such as DTH, which may become close substitutes for cable service in the near future. These parties proposed that the Commission use a two-pronged test, consisting of availability of competition in the market and loss of market share by the incumbent, in order to determine whether or not a particular market is sufficiently competitive to justify deregulating the incumbent cable licensee's basic monthly fee.
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26. After considering all of the comments on this issue, the Commission is satisfied that the basic service package of a DTH distribution undertaking should be viewed as a competitive alternative to the basic service of existing cable undertakings, and that the loss of subscribers to DTH competitors should be taken into account when determining whether effective competition exists in any particular market. The Commission is also persuaded that a two-pronged test resting on the availability of competition and loss of market share is an appropriate test in that it ensures that, prior to deregulating the fees charged by the incumbent, at least one alternative basic service is available to a significant proportion of the incumbent's basic service subscribers. The Commission also considers that, by actually capturing a share of the incumbent's existing basic service subscribers, the new entrant is effectively providing a competitive alternative to the incumbent's basic service.
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27. Under the new regulations, the basic monthly fee of a Class 1 cable distribution undertaking would become deregulated once the undertaking provides documentary evidence that the basic service package of one or more licensed DTH or terrestrial distributors is available to 30% or more of the existing households in the undertaking's licensed service area, and that the number of its basic service subscribers has decreased by at least 5% from the date that the basic service of a licensed competitor was first introduced in the licensed area of the incumbent.
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28. A licensee would become fee deregulated 60 days following provision to the Commission of appropriate documentation verifying that the two-pronged test has been met, and that subscribers have been notified of the licensee's proposal to be deregulated. The Commission would retain the discretion to disallow or suspend such deregulation pending the receipt of additional information, the completion of a public hearing into the matter, or both if deemed necessary by the Commission.
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c) Changes to existing fee increase mechanisms
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29. Until or unless the two-pronged test described above has been met, the basic service fee of an existing Class 1 cable television licensee would continue to be regulated. In this regard, the Commission proposed in Public Notice CRTC 1996-69 to change or eliminate certain of the fee increase mechanisms contained in section 18 of the existing regulations.
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30. Specifically, with the advent of digital video compression (DVC) technology, and consistent with its concern for the affordability of the basic service, the Commission proposed to eliminate the mark-up and bonus provisions of the existing regulations related to the carriage of specialty services as part of the basic service. As most future specialty services will be licensed for carriage on a discretionary basis, the rationale was that there would no longer be any need to maintain a fee incentive to carry a specialty service as part of the basic service.
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31. Certain interveners opposed the elimination of these provisions on the grounds that a number of new specialty services were licensed in September of 1996 for carriage on a "modified dual status" basis, and that there will be costs associated with adding them to the basic service. They argued that, as the existing bonus and mark-up mechanisms do not now adequately cover these costs, they should be maintained, at least for some period of time following the launch of these latest services.
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32. On the basis of the evidence received, the Commission agrees that, by eliminating the mark-up, a cable licensee who elects to carry a particular specialty service on basic would be disadvantaged by not being able to recover any of the incremental costs incurred in its carriage. In contrast, if the service were carried on a discretionary basis, the licensee would not only be able to set the subscriber fee to recover its incremental operating costs, but would be able to make provision for a profit as well. Therefore, so as not to provide a disincentive to the carriage of a specialty service on basic, particularly where the licensee is satisfied that subscribers will best be served by such carriage, the Commission intends to maintain the mark-up provision contained in the existing regulations.
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33. As most cable licensees who would be prepared to carry specialty services on basic are already doing so, and consequently, already have the bonus included as part of their basic monthly fee, the Commission believes that the bonus provision should not be included in the new regulations. Any existing bonus would be embedded in the base portion of the licensee's basic monthly fee on a going-forward basis.
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34. As for the pass-through fee increase provisions contained in the existing regulations, the Commission proposed in Public Notice CRTC 1996-69 to retain these provisions. The Commission confirms that it intends to provide for pass-through rate increases in the new regulations.
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35. The Commission also proposed to eliminate the provisions of the existing regulations related to fee increases based on eligible capital expenditures (capex increases). Under this proposal, capital expenditures incurred after 31 August 1996 would not be eligible for recovery.
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36. The CCTA submitted that the elimination of capex increases would have a significant impact on a licensee's operations, including the ability to continue to raise funds to complete its capital projects. The CCTA argued that, as many licensees are in the middle of multi-year projects to rebuild and improve their plant so as to move toward universal addressability, the ability to implement capex increases should continue until rate deregulation occurs.
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37. The Commission acknowledges that a portion of the cable industry's capital expenditures proposed over the next three to five years will benefit the basic service subscriber. The large majority of these expenditures, however, will be for discretionary services, and for enhancements to the distribution infrastructure of individual licensees, including expenditures related to the introduction of digital capacity, which will enable these licensees to better compete with the broad service offerings of other competitive distribution undertakings. The Commission does not consider it appropriate that the basic service subscriber, by way of a regulated fee increase mechanism, be called upon to help finance the incumbent cable distributor's participation in this competitive distribution market.
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38. Accordingly, a majority of the Commission has decided that the provisions set out in the existing regulations relating to capex increases should be eliminated. A proposed amendment to the existing regulations to this effect is set out in Public Notice CRTC 1997-26 of today's date. Under this amendment, capital expenditures incurred after 31 August 1996 would not be eligible for a fee increase. Moreover, that portion of the basic monthly fee attributable to capital expenditure increases implemented prior to the coming into force of the new regulations would be embedded in the base portion of the basic monthly fee on a going-forward basis.
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39. Finally, it had been the Commission's proposal not to include in the new regulations provisions for fee increases based on economic need, which are available to cable licensees under the existing regulations. Rather, the Commission proposed a partial indexing fee increase mechanism based on the annual increase in the consumer price index (CPI), with a two percentage point productivity off-set.
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40. The cable industry's preference was that a mechanism be retained to allow for increases based on clearly demonstrated economic need. In the alternative, the industry proposed that there be a one-time, upward "exceptional circumstances" adjustment applicable to those undertakings whose basic service rates are lower than the industry average for comparably-sized systems.
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41. The majority of comments submitted by parties not related to the cable industry concurred with the proposal not to include provisions in the new regulations for fee increases based on economic need. Stentor Resource Centre Inc. (Stentor) further proposed that the Commission's partial indexing mechanism allow for the reduction of subscriber fees when the inflation rate, adjusted by the 2% productivity offset, results in a negative amount.
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42. The Commission has carefully examined all of the evidence before it in relation to this proposal, and is satisfied that a fee increase mechanism based on economic need should continue to be available to a cable distribution undertaking where there is a clearly demonstrated need for such an increase in accordance with established criteria. In light of this decision, the Commission does not intend to proceed with the partial indexing methodology originally proposed.
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d) Anti-competitive pricing
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43. At the hearing, representatives of the telephone industry raised a concern regarding the possibility that cable distributors might resort to anti-competitive pricing practices as a means to forestall the introduction of competing distribution undertakings in their markets. Other potential terrestrial and DTH distributors suggested that a cable company should not be allowed to charge any customer a rate below the authorized rate, unless the company can demonstrate that the proposed rate is above the incremental cost of providing service to that customer.
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44. The CCTA's response to this issue was that there would be no economic incentive for cable distributors to engage in such activities, noting that the cable industry does not have a protected market that would allow it to subsidize the provision of service below cost in other markets.
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45. The Director of Investigation and Research (Competition Bureau) maintained that, given the current market dominance of the cable companies, the possibility of predatory pricing behaviour cannot be totally ruled out, but the potential for such behaviour is low. The Director also cautioned that putting in place rigid price floors or other pricing rules such as those proposed by some parties, in anticipation of predatory pricing, could have the undesirable effect of dampening price competition.
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46. The Commission considers that the public interest would be harmed where an incumbent, after lowering its rates in an attempt to eliminate the competition, is subsequently able to raise them above competitive levels and, thereby, recover its previously lost revenues. This is practicable, however, only in circumstances where there are significant barriers to the ability of competitors to enter the market. The Commission's view is that new competitors, whether DTH, wireless or wireline, will be able to easily enter the market, so that, as soon as the cable operator raises its rates above competitive levels, the competitor(s) will enter (or re-enter) the market and thus pressure the cable operator to reduce its rates.
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47. Accordingly, on the basis of all of the evidence before it, the Commission is not convinced that there is any need for specific competitive pricing safeguards. In arriving at this conclusion, the Commission has taken particular note of the Director's position that rigid pricing rules could have the negative effect of dampening price competition.
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B. Issues Related to Acquisition of Programming
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48. In their written submissions, several prospective new entrants requested that the Commission prohibit incumbent distributors from acquiring exclusive rights or preferential access to Canadian and non-Canadian programming services.
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49. They argued that, in order to have fair and sustainable competition, equitable access to all programming services by new entrants must be guaranteed, especially given the Commission's general policy of licensing only one specialty or pay television programming undertaking in any given genre.
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50. In support of their request, these parties argued that operators of Canadian and non-Canadian programming services may have little incentive to affiliate with new entrants, given the latter's likely small market share and the programmers' concern about damaging relations with incumbent distributors.
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51. During the oral phase of the public hearing, it was generally acknowledged that access by distribution undertakings to the services of exempt programming undertakings would not be of concern to distributors. With regard to access to the services of licensed programming undertakings, there was also a consensus that new entrants would not likely be denied access to such services due to exclusive agreements. There was a concern, however, that affiliation agreements might be entered into whereby the incumbent distributor acquires access to Canadian or non-Canadian programming services in a manner that would constitute an undue preference toward itself, or that would subject a new entrant to an undue disadvantage (i.e. where the dominant distributor acquires access to a programming service under terms and conditions that are significantly advantageous to itself, or with a price differential that is not cost justified).
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52. Accordingly, parties suggested that the Commission deal with the issue of access to programming by including a provision in the proposed distribution regulations that would prohibit distributors from entering into affiliation agreements the terms of which would confer upon the distributor an undue preference. In addition, some prospective new entrants suggested that the Commission add a condition to the lists of eligible satellite services (the lists) whereby the authorization to carry the services on the lists would be conditional on affiliation agreements not conferring an undue preference.
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53. Parties agreed that, in relation to Canadian programming services, a strong policy statement by the Commission, together with the Commission's dispute resolution mechanisms, could adequately address the issue of access to programming. It was acknowledged, however, that the Commission's dispute resolution mechanisms could not be used effectively as an enforcement tool to ensure access to non-Canadian services, and that the Commission might find it necessary to remove from its lists non-Canadian programming services whose operators have entered into affiliation agreements that confer upon distributors undue preferences.
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54. Having considered all of the evidence, the Commission intends to include a provision in the new regulations prohibiting a distribution undertaking, in relation to the acquisition or distribution of programming services, from conferring an undue preference upon itself or another person, or from subjecting another person to an undue disadvantage. In the Commission's view, this may include situations where a distributor enters into an affiliation agreement or other contractual arrangement that has the effect of denying another competitor access to the service of a licensed programming undertaking, or where the distributor acquires a programming service under terms and conditions that are significantly advantageous to itself or its affiliate. The Commission, however, does not consider that an exclusive agreement between a distributor and the operator of an exempt programming undertaking would constitute an undue preference.
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55. In relation to authorized non-Canadian programming services, the Commission has decided to reject the suggestion by some parties that a condition concerning undue preference be added to the lists. The Commission considers that it is appropriate only to prohibit individual distributors from distributing a particular non-Canadian programming service, on a case-by-case basis, where it determines that a distributor has acquired, or is distributing, a programming service pursuant to terms that confer upon itself or another person an undue preference.
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56. Where a distributor considers that another distributor may have conferred an undue preference upon itself or another person in relation to either the acquisition or distribution of programming services, the Commission expects the party alleging an undue preference to provide advance notice to the other distributor of its intent to file a complaint with the Commission. The Commission further expects the parties to explore fully the circumstances of the alleged regulatory breach and attempt to resolve the matter prior to bringing the complaint to the Commission for determination.
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57. A determination of whether an undue preference exists will depend upon the facts of the particular case. Nevertheless, it was generally recognized by parties in this proceeding, and is accepted by the Commission, that programming could be acquired at different prices, terms and conditions that reflect actual differences in the costs of providing the programming to the distributor and that this might not constitute an undue preference. For example, the price for programming services may reflect economies of scale, cost savings, or other direct and legitimate economic benefits reasonably attributable to the number of subscribers served by the distributor.
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58. Where a complaint of undue preference in the acquisition or distribution of programming services is made, and where the Commission makes a finding that a distributor has conferred on itself or another person an undue preference, the Commission would take whatever steps it deems appropriate to enforce its regulations, including the issuance of a mandatory order in accordance with section 12 of the Act.
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b) New entrants and confidentiality restrictions
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59. Prospective new entrants suggested that the Commission impose restrictions on the sharing of competitive information obtained by a vertically-integrated programmer/distributor in the course of its provision of programming services to another distributor. Although the manner in which the Commission would apply such confidentiality restrictions was not detailed, these parties argued that measures that would prevent competitive information from being divulged to the vertically-integrated distributor should be established.
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60. The Commission is not persuaded that confidentiality restrictions should be included in the new regulations, nor does it propose to have parties develop any specific guidelines regarding this matter. The Commission, however, expects all vertically-integrated distributors, when dealing in their capacity as programmers, to ensure that any confidential information obtained from a third-party distributor is not made available to the vertically-integrated distributor.
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c) Unbundling of non-common satellite costs
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61. Both in its written submission and during the oral phase of the public hearing, ExpressVu Inc. (ExpressVu) reiterated its view that the Commission should require the unbundling of non-common satellite transport costs from common programming and other charges. At the oral public hearing, ExpressVu acknowledged that, in relation to Canadian programming services, the Commission's dispute resolution rules would be a useful tool in addressing its concerns. In relation to non-Canadian programming services, ExpressVu stated that, for the most part, it is being treated fairly by these programming service suppliers. Accordingly, ExpressVu agreed that a policy statement by the Commission expecting all distributors to be treated equitably would be sufficient.
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62. In Public Notice CRTC 1996-120, which introduced decisions licensing a number of new specialty programming undertakings, the Commission stated the expectation that, for DTH and all other competing technologies, "...the specialty service licensees will offer comparable rates to those offered to cable distributors." The Commission expects programming service suppliers to treat all distributors equitably when negotiating access to programming services.
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d) Withdrawal of programming services during mediation
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63. At the oral public hearing, ExpressVu stated that the Commission should issue a policy statement to the effect that, in circumstances where a distributor and a programmer have an ongoing dispute regarding the terms and conditions for the provision of programming, the operator of the programming service should continue to make its service available.
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64. The Commission considers that withdrawal by a programmer of access to its programming during the mediation process would be contrary to the public interest. Accordingly, the Commission expects a programmer to provide continued access to its programming service during an ongoing dispute with a distributor.
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65. A fundamental element of the Commission's proposed policy approach for the introduction of competition among broadcasting distribution undertakings was the Commission's intention not to impose any obligation to serve on new entrants. Clearly, the imposition of such an obligation on new entrants would constitute a formidable barrier to entry.
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66. The Commission further proposed that, once effective competition is present in a market, the obligation of an incumbent cable distribution undertaking to provide service, as set out in the existing regulations, would cease.
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67. A majority of the Commission considers that the record of the proceeding does not reveal any compelling reasons to depart from the proposal set out in Public Notice CRTC 1996-69. Accordingly, the Commission intends not to impose any obligation to serve on new entrants, and to relieve existing cable licensees of their current obligation, as set out in section 17 of the existing regulations, when there is effective competition in their respective markets. The test for determining when this obligation to serve ceases would be the same test as that adopted by the Commission with respect to the deregulation of rates.
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D. Impact of Competitive Licensing on Smaller Distribution Undertakings
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68. In Notice of Public Hearing CRTC 1996-11, the Commission identified for discussion at the oral public hearing the issue as to "whether the Commission should continue to assess, on a case-by-case basis, if the licensing of a competitive distributor would have an undue impact on the provision of service to the public."
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69. This question was the subject of many written comments and considerable discussion at the oral public hearing, particularly in the context of the possible issuance of regional licences and their potential impact on smaller distribution undertakings. For example, one party raised a hypothetical question concerning how the Commission would, or should, treat a proposal by an applicant to compete only in the largest community or communities served by an incumbent licensee in a predominantly rural area, but who elects not to serve the smaller, outlying communities that are also served by the incumbent. In circumstances where revenues derived by the incumbent from serving the larger communities are used to subsidize service to the smaller communities, such targeted competition could affect the incumbent's ability to continue to serve the latter.
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70. Some parties argued that smaller undertakings have significantly higher per-subscriber costs than larger undertakings, and that the demise of many existing small undertakings would not contribute to the development of sustainable competition. It was suggested that, in many cases, this could also lead to the decline of a local presence in distribution and, hence, have a negative impact on the provision of service to the public. It was, therefore, advocated that the Commission conduct a viability test for small markets prior to licensing terrestrial competitors.
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71. While the issue of "cherry-picking" in large, urban markets, in the absence of an obligation to serve, was also raised, there was little, if any, support for the view that a viability test should be conducted prior to the licensing of competitors in these circumstances.
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72. Generally, the Commission agrees that the advent of competing distributors has implications for smaller, rural markets that are not present in larger urban markets. The Commission is cognizant of the possibility that new entrants may target only the larger communities in the rural areas of Canada, and that this could imperil, over time, the continued provision by incumbents in those larger communities of their existing cable services in other smaller communities nearby. Nevertheless, the Commission considers that this risk would be largely offset by the availability of service from licensed DTH and wireless distributors.
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73. The Commission, by majority vote, has therefore determined that, in considering a licence application by a new entrant, overall service to the public should have a higher priority than the economic viability of any incumbents against whom the new entrant would compete.
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E. Ownership of Equipment and Facilities
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74. Section 4 of the existing regulations generally requires each cable licensee to own, at a minimum, its local head end, amplifiers and subscriber drops. In Public Notice CRTC 1996-69, the Commission proposed to eliminate these plant ownership requirements, noting that the future may well require new approaches and sharing arrangements with respect to cable plant and facilities. The Commission further noted that it does not intend to impose specific requirements with respect to the ownership of equipment and facilities on other types of distribution undertakings.
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75. In response to the Commission's proposal, the CCTA argued in its written submission that the plant ownership rule should be maintained to ensure that cable licensees are not vulnerable to "anti-competitive behaviour and manipulation by the telcos when leasing facilities."
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76. Most other parties strongly endorsed the Commission's proposal as furthering competition and providing much-needed flexibility to new distributors.
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77. As the Commission noted in Public Notice CRTC 1996-69, 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 distribution infrastructure. Further, the elimination of the plant ownership rule may be seen as the first step in implementing the Commission's stated policy objective of providing subscribers with the ability to connect their inside wiring to the service provider of their choice.
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78. In light of the above, the Commission confirms its intention to eliminate the current requirement that cable licensees own their local head end, amplifiers and subscriber drops. The Commission also confirms that it does not intend to impose any requirement with respect to the ownership of equipment and facilities on other types of distribution undertakings.
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79. The Commission notes that, where cable companies are unable to gain access to the support structures of telephone and other utility companies, a remedy may be available under the Telecommunications Act.
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80. The Commission emphasizes that it will remain the responsibility of each licensee to take appropriate measures to ensure that it has effective control over the operation of its undertaking, in keeping with the requirements of its licence, the Act and the new regulations.
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F. Customer Access to Competitive Distribution Undertakings
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>81. In its May 1995 Convergence Report, the Commission determined that inside wire has attributes of an essential facility. 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."
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82. More recently, the government, in its Convergence Policy Statement, concluded that, with regard to the wiring inside a consumer's premises, "...the objective should be to ensure that consumer choice is not limited but rather gives the consumer the ability to obtain services from any combination of suppliers they choose, without unnecessary inconvenience."
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83. In their written submissions, a number of parties claimed that, if competition in the distribution of programming services is to flourish, customers must be able to control coaxial inside wiring, and all distribution undertakings must have access to such wiring on a fair and equitable basis. Stentor further submitted that it is essential to address this issue as expeditiously as possible, as customers will not be able to choose an alternative supplier until the matter is resolved.
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84. The CCTA indicated in its written submissions that, assuming a satisfactory distinction can be made between a subscriber drop and a cable inside wire, it would be prepared to support a regulation requiring cable licensees to sell the existing inside wiring to a customer on request, at a cost to be determined. The CCTA emphasized that its support for granting subscribers the option of owning the inside wire was conditional on the Commission permitting a cable licensee, over a reasonable transition period, to adjust its basic rate so as to recover across its entire subscriber base, on a revenue-neutral basis, the revenues currently obtained from extra outlet charges.
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85. In the Commission's view, cable licensee ownership of existing inside wire constitutes a major barrier to competition and consumer choice. A customer is likely to be reluctant to switch service providers if such a switch entails undergoing the inconvenience and disruption of having duplicate wiring installed in the customer's home. Accordingly, the Commission considers that, to the extent possible, customers should have the ability to connect the existing inside wire to the alternative service provider of their choice.
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86. The Commission considers that the goals of competition and customer choice can best be met through the establishment of a regulatory framework that allows market forces to ensure customer choice wherever possible, and under terms and conditions that best reflect individual circumstances. Details with respect to this framework are discussed below.
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a) Definition of "inside wire" and of other related terms
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87. As a number of parties pointed out in their written submissions, "inside wire" is not currently defined separately, but rather is included as a component in the definition of "subscriber drop" in section 2 of the existing regulations. Rogers Communications Inc. (Rogers), the CCTA and Stentor all urged the Commission to formulate a separate definition for "inside wire", and to include it in the new regulations.
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88. For the purposes of the new regulations, the Commission intends to define "inside wire" to mean the wiring that is used by a broadcasting distribution undertaking for the distribution of programming services to a subscriber, and which extends from the demarcation point (as defined below) to one or more terminal devices inside that subscriber's household or premises, but excluding customer service enclosures (CSEs) that may house a portion of the wire on the exterior wall of a subscriber's premises. These devices are secure enclosures belonging to the cable company and the Commission does not propose to force the cable company to provide access to its CSE or to forfeit ownership of it.
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89. Both in written submissions and during the oral phase of the public hearing, there was extensive discussion by parties as to an appropriate demarcation point for inside wire with respect to both single-unit dwellings and multiple-unit dwellings (MUDs).
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90. With respect to single-unit dwellings, the Commission considers that establishing a demarcation point within a subscriber's premises would likely create an undue inconvenience for both subscribers and competitors, as the latter would be required to construct another entry point into the subscriber's premises. Accordingly, the Commission intends to define the demarcation point in single-unit dwellings to be the point located 30 centimetres outside the exterior wall of the subscriber's premises.
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91. The Commission recognizes that in cases where a CSE exists, a competitor may have to drill a separate hole in the wall and connect to wire located inside the subscriber's premises. The CCTA indicated at the oral hearing, however, that these devices are not widely used outside of Rogers' territory, and even there, they do not appear to be used in the majority of cases. The Commission considers that CSEs will not present a major obstacle to competitive access to inside wire on a broad scale. Even where a CSE exists, the customer will still be able to utilize the wiring inside his or her premises.
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92. In attempting to establish an appropriate demarcation point in MUDs, the Commission discussed with parties the types of cable wiring configurations that are most commonly encountered in MUDs and the most convenient and feasible points of access for competitors wishing to provide service to individual units in a building.
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93. Based on the evidence provided, the Commission has concluded that a demarcation point inside an individual subscriber's premises in a MUD would create a serious barrier to competitive entry by alternative distribution undertakings. Competitors would be required to double-wire the building right up to each individual unit. This would not be cost effective, and would likely be disruptive from the point of view of both the building owner and the subscriber. Accordingly, the Commission considers that the most appropriate demarcation point in MUDs is that point inside the building where the wire is diverted to the exclusive use and benefit of a particular subscriber in a particular unit. Potential wireline entrants indicated at the oral hearing that they are prepared to install their own wiring in a building up to this point. In most buildings, this point will be located in a utility closet or control panel inside the building, where it can generally be accessed by competitors without undue inconvenience.
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94. The Commission notes that the establishment of a demarcation point is only the first step in ensuring that customers have the ability to connect the inside wire to the provider of their choice. Several other issues must also be resolved, including the manner in which the customer obtains control of the wiring, and the ability of customers in MUDs to have access to competitive distribution undertakings.
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b) Customer control of inside wiring
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95. As noted above, the Commission considers that, in order for customers to obtain the full benefits of competition in the distribution of broadcasting services, they must be able to freely control their inside wiring. Over the course of the proceeding, three proposals were put forward to achieve this objective. The first approach, referred to as the "customer ownership" model, contemplates an actual transfer of ownership of the inside wire from the distribution undertaking to the customer. Under the second approach, referred to as the "customer responsibility" model, the distribution undertaking would continue to own existing inside wire, but responsibility for the wire would be transferred to the customer. A third approach discussed at the oral hearing is the "leased access" model, whereby a distribution undertaking would be required to lease the inside wire to a competitor at, or below, a prescribed rate.
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96. Most parties commenting on this issue supported, in principle, the notion of transferring ownership of the inside wire to subscribers. Only Stentor, during the course of the oral hearing, indicated a preference for the customer responsibility model. There was little, if any, support for the leased access model.
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97. In the Commission's view, the customer ownership model provides the best framework for ensuring that choice is available to individual customers. As long as distribution undertakings own the inside wire, it will be possible for them to frustrate the ability of customers to choose alternative service providers. Only by giving customers the option of owning the inside wire can the Commission be certain that customers are not unduly hindered in their ability to connect the wire to the service provider of choice. In the Commission's view, customer ownership of inside wiring would enhance competition and choice, and contribute to the fulfilment of the objectives set out in section 3 of the Act.
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98. To implement the customer ownership regime, the Commission intends to make a regulation requiring a broadcasting distribution undertaking that owns the inside wire to offer it to a customer, at the time the customer terminates service, at a price not to exceed $0.33 per metre. For the purpose of the regulation, the Commission intends to define "customer" as the party having legal liability for payment in respect of the services provided by the broadcasting distribution undertaking. For example, where a building owner contracts for bulk services on behalf of its residents, the building owner would be given the option of purchasing the inside wiring of each subscriber in the building.
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99. The price of $0.33 per metre reflects the CCTA's estimate of the replacement cost of inside wiring, and the Commission is satisfied that this price would provide a reasonable level of compensation to the distributor for the transfer of the inside wire to the customer. The Commission notes that, in most circumstances, the total compensation for inside wiring would probably not exceed $5.00, a nominal charge that, in the Commission's view, would present no undue hindrance to customers wishing to switch service providers. The Commission expects that, in many cases, in order to maintain good customer relations, distribution undertakings would forgo the charge and would transfer ownership of the inside wiring at no cost. Alternatively, competitive distribution undertakings may offer to pick up the cost of the wire as an incentive to customers to switch providers.
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100. The Commission reiterates that the requirement to offer to sell the inside wire to the customer would only arise at the time a customer contacts the distribution undertaking to terminate service. Although distribution undertakings could sell or give away the inside wire at any time, there would be no obligation to do so until the customer has chosen to terminate service.
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101. If the customer declines to purchase the inside wire, the distribution undertaking would have seven working days in which to remove the wire, after which time it would be prohibited from interfering with the ability of the customer or any future resident to use the wire to receive the services of a competitive distribution undertaking.
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102. The Commission considers that this approach to the issue of inside wiring is fair and reasonable to all parties. It notes that distribution undertakings would have a reasonable opportunity either to receive compensation for the wire or, if the customer declines to purchase it, to retrieve the wire from the customer's premises. Moreover, customers would not be forced to accept ownership of the wire; ownership would be at the option of the customer. The Commission expects that, in most cases, even if a customer chooses not to purchase the wire, distribution undertakings would not find it worthwhile to remove it. In this regard, the Commission notes the comment by a representative of the Canadian Cable Systems Alliance that, whether a customer is lost for a short term or a long term, "...there is an opportunity to get that customer back. I want them to feel good about coming back to us and treat them well as they leave our service for an interim period."
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c) Access to competitive distribution undertakings by customers in multiple-unit dwellings
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103. A customer ownership regime for inside wire would not, in itself, guarantee that subscribers in all cases will be able to choose a particular provider. In those buildings where it is technically feasible, and where the landlord, strata council, property manager, agent or other responsible party (herein referred to as the building owner) is amenable to competitive access, the customer ownership framework set out above would allow customers in MUDs, at the time of disconnection, to purchase the inside wire and to subsequently connect that wire to the alternative service provider of their choice.
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104. In other situations, however, the implementation of a customer ownership framework in a MUD might be more problematic. These situations include the following: (1) where technical or space constraints make the implementation of the customer ownership framework unfeasible; (2) where the building owner chooses not to provide access to the building to competitive providers; and (3) where a distribution undertaking has entered into an exclusive contract with a building owner.
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105. In the first situation identified above, even if a customer owns the inside wire and the building owner is prepared to grant access to competitive distribution undertakings, technical or space constraints might prevent a competitor from having access to an individual subscriber's demarcation point in a MUD. For example, there might be insufficient space in the risers of the building to accommodate more than one service provider. In these situations, the Commission would encourage building owners, distributors and customers to negotiate workable solutions to suit individual circumstances.
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106. The second problematic situation might occur where competitive access to individual subscribers in a MUD is technically feasible, but where the building owner chooses not to provide access to competitive distributors. Rogers proposed that, in order to deal with such situations, the Commission should make a regulation prohibiting a licensee from providing service to any MUD that does not provide fair and reasonable access to other licensees. Stentor expressed support for the principle of end-user choice, but proposed that the regulations should only preclude distributors and landlords from signing exclusive agreements. Stentor submitted that a condominium association, on the other hand, should not be prohibited from signing an exclusive agreement with a distributor if the association has the legal authority to do so and wishes to exercise that option.
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107. In the Commission's view, market forces should be relied on, wherever possible, to achieve the goal of customer choice. In this regard, the Commission notes the view of certain parties during the oral phase of the public hearing that it is in the clear interest of building owners to be receptive to the needs of their residents. Where competition can bring better prices and quality to individual tenants, the Commission expects that building owners will act in response to their residents' wishes. Accordingly, the Commission does not intend to mandate direct access to subscribers in the manner proposed by Rogers. Building owners and distributors, however, are encouraged to cooperate with a view to providing subscribers with the greatest possible degree of choice.
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108. With respect to the third situation referred to above, while the Commission considers that customer access to competitors in MUDs should be left largely to market forces, it recognizes that an exclusive contract entered into in a non-competitive environment may create a significant barrier to competition and the realization of the goal of customer choice. Accordingly, the Commission does not intend to permit any distribution undertaking to take measures to restrict competitive access to a building, nothwithstanding the existence of an exclusive contract, where: 1) the exclusive contract was entered into prior to the deregulation of the distribution undertaking's rates; and 2) more than five years have passed since the execution of the contract. As noted earlier in this notice, the Commission intends to incorporate in the new regulations a prohibition against any distributor conferring upon itself, or another person, an undue preference in relation to the acquisition or distribution of programming services. In the circumstances described above, the Commission will generally consider the distribution undertaking to have conferred on itself an undue preference or advantage.
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109. At the same time, the Commission considers that there should be few, if any, restrictions on a party's ability to negotiate exclusive or long-term contracts in a competitive market. In such a market, the mere exclusivity or long-term nature of a contract with a building owner will not generally be considered to constitute an undue preference or advantage.
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d) Rate adjustment for loss of multiple outlet revenues
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110. As mentioned earlier, the CCTA indicated that its support for customer ownership of inside wire was conditional on the Commission permitting a cable licensee, over a reasonable transition period, to adjust its basic rate so as to recover across its entire subscriber base, on a revenue-neutral basis, revenues currently earned from extra outlet charges. It was suggested that such an adjustment would amount to approximately $1.00 per subscriber per month.
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111. In the Commission's view, the cable industry has not demonstrated that there is a link between customer ownership of the inside wire and the ability of cable companies to charge a fee for the provision of service to extra outlets. It notes in this regard that Shaw Cable Systems Inc. indicated that it would continue to charge multiple outlet fees even after ownership of the wire was transferred to customers. Cable Atlantic Inc., on the other hand, suggested that multiple outlet fees are unlikely to survive the transition to a competitive environment. Given the evidence, and the fact that the trigger for the requirement to offer the inside wire to the customer is the termination of service, the Commission does not consider that the cable companies have made a compelling case to grant the requested adjustment to basic rates.
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112. The matter of resale of cable services, while neither proposed nor specifically mentioned by the Commission in Public Notice CRTC 1996-69, was raised by representatives of the telephone companies in their written comments. Clarifications were obtained at the oral phase of the public hearing as to how these parties would define "resale" of cable services. In response to questions addressed to it at the hearing, Stentor indicated that its interests were not directed towards the resale of distribution facilities, but towards the kind of resale that would allow telephone companies and other third parties to offer their subscribers packages of services obtained from existing cable distributors. Stentor argued that such resale would allow new entrants into markets where they have not yet built facilities.
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113. The telephone companies indicated that, as a temporary measure, they should be able to offer a bundled package of services, noting that cable companies are already free to make bundled offerings available to their subscribers by reselling existing telephone services.
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114. Cable representatives, in the course of responses to questions at the oral hearing, suggested that resale was inconsistent with the development of facilities-based competition. Rogers also argued that the telephone companies would soon be able to bundle their services with the services offered by DTH distributors. However, when asked whether the Commission should mandate, permit or prohibit resale, Rogers saw no need to prohibit it and suggested that it might be permitted.
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115. The Commission notes that its May 1995 Convergence Report and the government's Convergence Policy Statement promote facilities-based competition. In the Commission's view, requiring cable distributors to resell their services could act as a disincentive to the construction of facilities by new entrants. At the same time, the Commission is not prepared to prohibit the resale of such services. Indeed, as previously stated in Public Notice CRTC 1993-74, the Commission encourages the cable and telephone industries to explore cooperative opportunities for the shared use of network infrastructures, particularly where this may be key to building the information highway in smaller markets in Canada. It should be noted in this regard that there are no existing regulations prohibiting the resale of cable services.
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A. Programming Contributions
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a) Proposed regulatory framework
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116. Paragraph 3(1)(e) of the Act stipulates that "each element of the broadcasting system shall contribute in an appropriate manner to the creation and presentation of Canadian programming". In Public Notice CRTC 1996-69, the Commission proposed that all distributors contribute a minimum of 5% of their gross annual revenues derived from broadcasting activities to serve this objective. The Commission therefore called for comments on a proposed regulatory approach to govern such programming contributions.
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117. Under the Commission's proposal as set out in Public Notice CRTC 1996-69, all terrestrial distributors, both wireline and wireless, would be required to continue to provide opportunities for local expression. A majority of the Commission considered that this would best be accomplished by requiring all Class 1 and Class 2 terrestrial distributors to provide a community channel and to contribute at least 1.5% of their gross annual revenues derived from broadcasting activities to direct expenditures associated with community programming.
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118. The Commission further proposed that the balance of the 5% total contribution, or at least 3% of gross annual revenues derived from the broadcasting activities of Class 1 and Class 2 terrestrial distribution undertakings, be devoted to an independently-administered production fund. A majority of the Commission considered that this new source of revenue for Canadian program production should replace the voluntary contributions provided by Class 1 cable licensees to the Canada Television and Cable Production Fund (formerly the Cable Production Fund).
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119. The Commission also proposed to require DTH distributors to allocate 5% of the gross annual revenues derived from their broadcasting activities to an independently-administered production fund, but not to require them to provide opportunities for local expression.
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120. The issue of programming contributions was debated extensively in written comments and during the oral phase of the public hearing. Most comments addressed the approach to local expression and the funding formula proposed by the Commission.
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121. Having considered all of the evidence, the Commission is of the view that all distribution undertakings, with the exception of Class 3 terrestrial distribution undertakings, should be required to contribute a minimum of 5% of their gross annual revenues derived from broadcasting activities to assist in meeting the objective set out in paragraph 3(1)(e) of the Act.
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122. Based on the comments received during the written and oral phases of this process, the Commission also intends to include in the new regulations a requirement that DTH distributors allocate the entire 5% programming contribution to an independently-administered production fund.
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123. The Commission's intentions with respect to local expression and the funding formula, as they would apply to Class 1 and Class 2 terrestrial distribution undertakings, are set out below.
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b) Approach to local expression
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124. There was little support among cable distributors and potential new entrants for the proposal that all Class 1 and Class 2 terrestrial distributors be required to provide and fund a community channel. Generally, those opposed considered that the availability of more than one community channel in any market would offer little in the way of new programming benefits to the community. Moreover, some expressed concern that there may not be sufficient volunteer resources or programming opportunities in each market to sustain multiple community channels.
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125. Both the cable industry and potential new entrants also questioned whether it was fair to require new entrants, who may have limited market penetration, and thus, relatively low subscriber revenues in the first years of operation, to provide community channels that are apt to be of lesser quality than well-established cable community channels.
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126. One alternative proposed by several parties, including representatives of the cable industry, was that new entrants should not be required to provide opportunities for local expression, but should be permitted instead to direct the entire 5% programming contribution to an independently-administered production fund. Stentor argued that it was important that new entrants be given the same opportunity as incumbents to establish a community presence by providing outlets for local expression in order to compete with successful cable community programming.
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127. Several parties proposed that the Commission allow distribution undertakings the flexibility to determine how they would provide access or opportunities for local expression in a manner that would complement rather than duplicate existing services. Suggested alternatives included the carriage of the existing community channel, exploration of co-operative arrangements with other distributors, and the development of innovative approaches to community expression, such as "virtual community channels" on the Internet.
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128. The Commission considers that it would be neither beneficial nor practical to require all terrestrial distributors to provide and fund a community channel.
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129. In the Commission's view, participants raised valid concerns about the fragmentation of community resources among potentially duplicative services. More importantly, the Commission acknowledges that new entrants will need to capture a sufficient market share to generate the revenues necessary to invest in infrastructure and to provide quality services that are comparable to those offered by existing cable television undertakings. In fact, for some new entrants, it may be several years before their revenues would allow them to provide any form of community outlet. The Commission agrees that it may be more appropriate to give these distributors the option to allocate the entire 5% contribution to an independently-administered production fund.
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130. In light of the above, the Commission intends to adopt an approach to local expression that will provide distributors maximum flexibility to meet their obligations under the Act to contribute to the creation and presentation of Canadian programming in a manner and form that takes into account their respective circumstances. While the Commission remains of the view that community programming, and the broader goal of local expression, are vital components of the broadcasting system, it does not intend to require any distributor to provide an outlet for local expression under the new regulations.
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131. This policy reflects the Commission's belief that opportunities for local expression would continue to be provided in the absence of a regulatory requirement. In the Commission's view, after more than twenty-five years of operation, the community channel has achieved a level of maturity and success such that it no longer needs to be mandated. Apart from its benefits to the public through local reflection, the community channel provides cable operators with a highly effective medium to establish a local presence and to promote a positive corporate image for themselves.
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132. Based on the expression of support for the community channel by both the cable industry and members of the public throughout this process, the Commission is convinced that community channels will continue to provide a vibrant local service, particularly in those communities where there is strong public demand for the service. Moreover, the Commission's intention to permit allocation of a portion of the 5% programming contribution to local expression would provide a further incentive to distributors to continue providing this valuable community service.
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133. In the case of distributors who choose to provide outlets for community expression, the issue remaining is whether the public access concept should be retained in its current form, or whether distributors should be permitted greater flexibility in deciding how they will provide public access in the future.
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134. It was apparent from the comments submitted as part of the written process and at the oral hearing that potential new entrants would favour some form of flexibility in making contributions to local expression under the new regulatory framework. As noted above, new entrants may not have the financial resources to provide the type of community channels that subscribers have come to expect from cable undertakings. Their contribution to community expression would likely have to be on a smaller scale.
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135. Therefore, the Commission intends to give all terrestrial distributors the opportunity to present innovative proposals for providing outlets for local expression within the purview of the Act. The appropriateness of a distributor's proposal as a means of providing local expression will be assessed by the Commission at the time of a licensing or licence renewal process.
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136. While there was general agreement among the parties that all distributors should make a contribution to the creation and presentation of Canadian programming, there was no consensus as to the appropriate allocation of such a contribution between local expression and support for an independently-administered production fund. Generally, the positions adopted by participants reflected the priority they place either on the importance of local community programming or on the support of Canadian programming intended for a wider audience.
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137. The CCTA emphasized the importance of maintaining, and even increasing, the amount of funding available to the community channel in order to ensure that Canadians continue to have a television outlet that speaks to each community. In this regard, the CCTA recommended, among other things, that the Commission amend its funding proposal so as to allow distributors to devote up to 2.5% of net revenues to community expression. One specific rationale offered for this increase was that it would permit cable operators to continue to finance some indirect expenses such as utilities, office cleaning and entertainment as eligible community programming expenses.
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138. Some Class 2 cable operators also argued that, given their smaller revenue base, they would have to direct all or most of the 5% contribution to the community channel if they are to maintain the existing level and quality of service. They therefore urged the Commission to provide distributors serving smaller communities with the flexibility to devote the entire 5% contribution to community expression.
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139. Representatives of the creative community favoured an increase in the required percentage allocation to a production fund to between 3.5% and 4% of gross annual revenues derived from broadcasting activities. The CAB recommended that, in most cases, all of the 5% contribution be devoted to an independently-administered production fund. In the CAB's view, directing 1.5% to the community channel would divert scarce resources away from meeting the most urgent need of the broadcasting system, that being to strengthen the presence of popular Canadian programming on television screens. The CAB, however, did agree that Class 2 undertakings serving remote and rural communities should be permitted to devote up to 2% of the total programming contribution to fund community programming.
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140. Having considered the positions of the various parties, a majority of the Commission remains of the view that a funding formula similar to that proposed in Public Notice CRTC 1996-69 represents an effective method of providing a sufficient level of support for both local expression and the development and creation of other Canadian programming. At the same time, a majority of the Commission acknowledges the need for flexibility within this formula to take into account the financial circumstances of smaller distribution undertakings. Accordingly, the Commission intends to set out in the new regulations the following requirements for contributions by Class 1 and Class 2 terrestrial distribution undertakings to Canadian programming.
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141. For the purposes of meeting the 5% total contribution requirement, all Class 1 terrestrial distribution undertakings having 60,000 or more subscribers would be permitted to allocate up to 2% of gross annual revenues derived from broadcasting activities to local expression. The balance of the 5% total contribution would have to be devoted to an independently-administered production fund.
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142. All Class 1 undertakings having fewer than 60,000 subscribers would be permitted, from the date that the new regulations come into effect until 31 August 1998, to allocate up to 3% of gross revenues earned during that period to local expression. They would be required to devote the balance of the 5% total contribution to an independently-administered production fund.
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143. In the broadcast year ending 31 August 1999, such undertakings would be permitted to allocate up to 2.5% of gross annual revenues to local expression and would have to devote the balance to an independently-administered production fund.
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144. In the broadcast year ending 31 August 2000, and in each broadcast year thereafter, these smaller Class 1 undertakings would be permitted to allocate up to 2% of gross annual revenues to local expression. They would be required to devote the balance to an independently-administered production fund.
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145. The Commission estimates that contributions to an independently-administered production fund under the above formula would generate in excess of $75 million in the third year of the new regulatory regime and annually thereafter. The Commission considers that these contributions would provide an effective and stable funding mechanism to support the production of attractive Canadian programming.
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146. With respect to Class 2 undertakings, the Commission acknowledges the arguments submitted by small cable operators that they must be permitted to allocate a relatively larger percentage of gross revenues to maintain the existing level and quality of community programming. The Commission also recognizes that it is often in small communities served by Class 2 cable undertakings that community programming has the greatest value. Therefore, the Commission has determined that Class 2 undertakings should be permitted to devote the entire 5% programming contribution to local expression. However, should a Class 2 undertaking spend less than 5% of gross annual revenues on local expression, then the balance would have to be directed to an independently-administered production fund.
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147. The Commission notes that, in Public Notice CRTC 1997-27 issued today, it has proposed to make it a requirement that contributions by distribution undertakings be directed to a single, independently-administered production fund, namely the Canada Television and Cable Production Fund.
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148. As noted above, licensees would continue to have the flexibility to fund the community channel. For the benefit of those licensees choosing to do so, the Commission will continue to allow the inclusion of both direct and indirect expenditures as eligible community programming expenses. Consistent with its policy set out in Public Notice CRTC 1991-59 dated 5 June 1991, the Commission will continue to expect licensees to dedicate the large majority of their expenditures to the direct expense category.
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149. As a related matter, the Commission notes that, under subsection 18(6) of the existing regulations, licensees have been able to claim capital expenditures on community programming equipment for the purpose of rate increases. Such expenditures, however, were specifically excluded as direct expenditures for the purpose of calculating contributions to the community channel. Because the Commission intends to eliminate the capex increase mechanism in the new regulations, the Commission considers that licensees should be able to claim, as direct expenditures, the depreciation on capital expenditures for equipment used to provide outlets for community expression.
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150. The remainder of the Commission's policies concerning the community channel, as outlined in Public Notice CRTC 1991-59 dated 5 June 1991, will remain in force, including those policies dealing with the role and objectives of the community channel, advertising, bicycling of programming, system interconnection, sharing of the community channel with complementary programming, and access.
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151. 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 undertakings. The Commission intends to incorporate in the new regulations the access policies set out in that notice and in Public Notice CRTC 1996-120 dated 4 September 1996, which introduced the decisions licensing new specialty and pay television undertakings.
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152. In Public Notice CRTC 1996-69, the Commission announced its intention to extend application of the current television priority requirements for Class 1 cable undertakings and Class 2 cable undertakings with 2,000 or more subscribers, to all Class 1 and Class 2 terrestrial distributors, as defined in Public Notice CRTC 1996-69. The Commission further proposed to apply to all Class 3 terrestrial distributors the existing priority carriage rules for Class 2 cable undertakings with fewer than 2,000 subscribers and Part III undertakings. The Commission also indicated that the current priority requirements for DTH distribution undertakings, namely the CBC English- and French-language network signals, and a CTV network signal, would continue to apply to such undertakings. The Commission confirms that it intends to incorporate these priority requirements into the new regulations.
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153. The Commission also announced a proposal to add the Cable Public Affairs Channel (CPAC) service, or a similar type of public affairs service, as a priority service for all distribution undertakings other than Class 3 terrestrial undertakings. In addition, the Commission at the oral public hearing discussed establishing mandatory carriage of services providing coverage of the proceedings of the legislature of the province in which an undertaking is located.
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154. The existing regulations allow for the carriage, on an optional basis, of any service providing coverage of the proceedings of the House of Commons or of a provincial legislature; if carried, however, such services must be distributed as part of the basic service. Because of concerns raised in relation to the ownership of the CPAC service by cable interests, and because of the fee that may be associated with the distribution of a public affairs programming service that includes the proceedings of the House of Commons or of a provincial legislature, the Commission, after further consideration, does not intend to require the distribution of CPAC or a similar type of public affairs programming service as a priority service. Rather, all distributors would be authorized to carry, on an optional basis, the programming service of any undertaking licensed to provide public affairs programming. If a Class 1 or Class 2 distributor chooses to carry a programming service that includes the proceedings of the House of Commons or of a provincial legislature, the service would have to be distributed as part of the basic service, unless the operator of the programming service agrees in writing to have the service distributed on a discretionary basis.
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155. With regard to the priority carriage of radio signals, the Commission had proposed to extend application of the current radio priorities for Class 1 cable undertakings to terrestrial wireline distributors only, and not to wireless and DTH undertakings. Having reassessed the technical capability of wireless distributors to distribute radio services, the Commission now intends to extend the current priority radio requirements to such distributors, subject to any technological constraints. The Commission does not, however, propose to extend such a requirement to DTH distributors, given the national nature of the services they provide, as well as the current transponder costs and capacity constraints.
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156. With regard to optional services, the Commission announced, in Public Notice CRTC 1996-69, that it would establish in the new regulations an authorization regime similar to that contained in section 10 of the existing regulations. This authorization regime allows cable licensees to distribute a number of services without the need to submit an application for prior Commission approval.
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157. In addition to the optional services already authorized in the existing regulations, the Commission stated its intention to authorize a number of other programming services, as listed in Public Notice CRTC 1996-69. Taking into account the submissions of parties, the Commission intends to incorporate into the new regulations authorization for the carriage of the following services:
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. the service of any programming undertaking whose operator is exempted by the Commission from the requirement to hold a licence;
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. 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;
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. 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 expects the licensees of originating stations to be sensitive to those differences when scheduling programs intended for adults and containing scenes of violence;
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. any video-on-demand (VOD) service of an undertaking that the Commission may license;
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. any U.S. border stations received over-the-air at the local head end, except for stations that began operation after 1 January 1985, and stations broadcasting predominantly religious programming;
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. for DTH distributors, a package of 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
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. for Class 3 terrestrial distributors only, the service of the provincial educational authority for the province in which the undertaking is located.
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158. With respect to the carriage of distant Canadian television signals, the Commission received several comments stating that its proposal is too restrictive in that no distributor is likely to obtain the written consent of local broadcasters to allow the importation of a distant Canadian television signal into their market.
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159. Notwithstanding the comments on this matter, the Commission considers it unnecessary to change its proposal. The Commission notes that, in the absence of written consent from local broadcasters, the distribution of a distant Canadian television signal would continue to be subject to the normal application process and existing policy requirements.
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160. In Public Notice CRTC 1996-69, the Commission did not propose to change its underlying policy governing the carriage of U.S. network signals by distribution undertakings. Under this policy, cable licensees are generally permitted to distribute the signals of three commercial stations, each affiliated with a different conventional U.S. network, and one U.S. non-commercial station, as part of the basic service. In addition, cable licensees are authorized to distribute the signal of a commercial station affiliated with a fourth conventional U.S. network, as part of a discretionary tier.
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161. In the case of DTH and digital MDS undertakings, the Commission's policy is to permit such distributors to carry a package of four commercial stations, each affiliated with a different conventional U.S. network, and one U.S. non-commercial station, as part of the basic service.
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162. In applying its policy with respect to the distribution of U.S. television network signals, the Commission currently requires a distributor to submit an application for prior approval of the specific signals to be carried. For the purpose of streamlining the process by which distributors obtain approval for the carriage of such signals, the Commission had proposed in Public Notice CRTC 1996-69 that the authorization for their carriage, in accordance with the underlying policy noted above, be included directly in the new regulations. In effect, this proposal would have allowed each distributor to determine, without the need to apply to the Commission, the specific network signals distributed on its undertaking.
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163. At the oral public hearing, the cable industry argued that the underlying policy governing the carriage of U.S. network signals should be the same for all distributors, on the basis that, in a competitive environment, all distributors should be treated equally. In particular, the cable industry proposed that, as is the case for DTH and digital MDS distributors, cable licensees should be able to distribute four commercial stations, each affiliated with a different conventional U.S. network, along with one U.S. non-commercial station, all as part of the basic service.
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164. The Commission has considered this proposal in light of the potential impact it would have on the Canadian broadcasting industry, and intends to permit all distributors to carry a "4+1" package of U.S. network signals as part of the basic service. In reaching this decision, the Commission has taken into account the fact that stations affiliated with the Fox network service, which represents the fourth U.S. network, are already available to approximately two-thirds of the total Canadian cable subscribership. With regard to concerns raised about the potential distribution of additional U.S. network services that may be established in the future, the Commission notes that, before entertaining any change to its revised "4+1" policy, it would carefully assess the impact on the Canadian broadcasting system that would result from the introduction of such additional U.S. network services.
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165. With regard to the Commission's proposal to include authorization for the carriage of the U.S. "4+1" signals in the new regulations, the broadcasting industry voiced concerns at the hearing that this proposal would allow terrestrial distributors to replace their existing U.S. signals with those originating in smaller U.S. markets or with signals from other time zones, which could have an impact on broadcasters' simultaneous substitution opportunities, and thus, on their advertising revenues.
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166. The Commission does not necessarily intend to bind competitors in a given market to the carriage of the signals of the same U.S. stations. Nevertheless, because of the concerns raised, the Commission has decided that the potential for disruptive multiple time-zone sourcing of U.S. signals warrants continued case-by-case public processes for applications proposing such distribution changes, so that interveners may make known their position. Accordingly, the Commission does not intend to implement its proposal to include authorization for the "4+1" U.S. signals in the new regulations, except in the case of DTH distributors.
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d) Distribution of U.S. superstations
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167. Under existing Commission policies, cable television licensees are permitted to distribute the signals of U.S. superstations, but only in discretionary packages that must contain at least one Canadian pay television service. In decisions licensing new DTH satellite distribution undertakings, the Commission authorized licensees to designate one of the U.S. superstations contained in Section B of the list of Part II Eligible Satellite Services and to distribute the signal of that superstation within a package that may include one or more Canadian specialty and/or pay television services. The Commission has also provided this same packaging flexibility in licensing new digital MDS distribution undertakings.
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168. In their comments at the public hearing, representatives of the cable industry suggested that cable licensees should also be allowed to link one superstation with a Canadian specialty service on a discretionary tier. Representatives of the pay television services, however, opposed this proposal, arguing that it would adversely affect the marketing of pay services on cable.
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169. The Commission notes that the rationale for permitting a linkage of one U.S. superstation with one Canadian pay or specialty television service on DTH and MDS undertakings was primarily the furtherance of the policy objective of enhancing subscriber choice, as is made possible through the addressable digital technology used by such undertakings.
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170. After considering the comments made by all parties on this issue, the Commission intends to amend its Distribution and Linkage Requirements. Specifically, the Commission intends to permit all distribution undertakings, including cable, to designate one of the U.S. superstations specified in Section B of the list of Part II Eligible Satellite Services, and to distribute the signal of that superstation within a package that may include one or more Canadian specialty and/or pay television services, provided that this superstation is distributed in a tier that is receivable by subscribers only by using an addressable digital decoder.
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171. The existing regulations generally require cable licensees to distribute a preponderance of channels containing Canadian programming services. Part III and small Class 2 undertakings that have only basic band capacity (channels 2 to 13) are not subject to the preponderance requirement.
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172. DTH licensees are treated somewhat differently in that, while they may have a menu offering less than a preponderance of Canadian services overall, they are nonetheless required, by condition of licence, to ensure that each subscriber receives a preponderance of Canadian programming services.
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173. In Public Notice CRTC 1996-69, the Commission indicated its intention to create a new rule that would generally require distribution undertakings (including DTH undertakings) to ensure that a preponderance of channels is devoted to the distribution of Canadian services, on the basic service only. Further, it proposed that a Class 3 undertaking not be subject to the preponderance rule, provided that it does not use any channel above channel 13.
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174. After considering the comments made by all parties, the Commission intends to modify its original proposal. Specifically, the Commission intends to require all distribution undertakings, other than Class 3 undertakings using only basic band channels, to ensure that each subscriber receives a preponderance of channels containing Canadian programming services. The preponderance rule would apply to the total package of services received by a subscriber.
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175. At the hearing, l'Association québecoise de l'industrie du disque, du spectacle et de la vidéo, l'Union Des artistes and l'Association des Producteurs de films et de télévision du Québec suggested that the Commission create a preponderance rule that would require the distribution of a preponderance of French-language services in Francophone markets.
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176. In this regard, a majority of the Commission is satisfied that this objective is addressed through the Access Rules and the Distribution and Linkage Requirements, which provide assurance that, in Francophone markets, all available French-language services will be offered by distribution undertakings in any case, although some might be distributed on a discretionary basis. Nevertheless, the Commission encourages all distribution undertakings operating in Francophone markets, to maximize, whenever feasible, the number of French-language services offered on the basic service. The Commission also encourages all distributors to carry services in the minority language of their markets wherever and whenever feasible.
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f) Buy-through of basic service
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177. In Public Notice CRTC 1996-69, the Commission stated that it intended 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. Consistent with the approach taken in the DTH licensing decisions, however, subscribers of any distribution undertaking would not be required to purchase the basic service of that undertaking in order to have access to a pay television service offered on a pay-per-view basis, or any VOD service.
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178. Although most parties agreed that it is important to maintain a buy-through requirement, some suggested that the proposal be changed or that it be eliminated entirely.
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179. Among the suggested changes was a proposal that there be no requirement for the buy-through of basic service in order to have access to exempt services. With such a provision in place, consumers who wish to subscribe only to a video games service, for example, could do so without having to purchase a complete package of other licensed services in which they may have no interest.
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180. Having considered the comments of all parties on this matter, the Commission intends to allow a distributor to offer subscribers pay-per-view services or VOD services without requiring subscribers to purchase the distributor's basic service.
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181. The Commission further intends to allow the direct purchase of exempt programming services without having to purchase the basic service of a distributor. As is the case with pay-per-view and VOD services, the Commission considers that allowing the direct purchase of exempt programming services without a buy-through requirement is likely to have little impact on the viewing of priority services and will provide distributors and subscribers with a measure of flexibility.
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182. The Commission also considered proposals that subscribers be able to purchase the basic service of one distributor, while purchasing a package of discretionary services from a competitor. As stated in Public Notice CRTC 1996-69, the services of local broadcasters are a fundamental element of the Canadian broadcasting system. Given the importance of the buy-through provision to ensure the continued distribution of priority services, the Commission considers that these proposals offer insufficient assurance that subscribers will purchase a basic service package from at least one distributor.
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C. Simultaneous substitution
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a) Canadian pay and specialty services
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183. In Public Notice CRTC 1996-69, the Commission proposed that the benefits of simultaneous substitution, similar to those currently enjoyed by the licensees of conventional television stations, should also be made available to licensees providing Canadian specialty and pay television services.
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184. At the oral hearing, however, representatives of the pay television industry indicated that they saw no advantage in requiring distributors to perform simultaneous substitution on behalf of licensees providing pay television services because such licensees are not dependent on advertising revenues, and competitive non-Canadian pay services are not authorized for distribution in Canada.
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185. Having considered the arguments made at the hearing and in written comments, the Commission agrees that there is no need to require distributors to perform simultaneous substitution on behalf of licensees providing pay television services, given the lack of any benefit that such licensees would derive from this measure.
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186. With respect to specialty services, the Commission recognizes that the providers of sports services would benefit from simultaneous substitution in respect of a certain number of live sports events for which they have obtained the Canadian rights. Nevertheless, it is unclear whether the providers of other specialty services would similarly benefit.
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187. The Commission considers that any regulation requiring simultaneous substitution in respect of specialty services would mean that distribution undertakings covered by the regulation would have to install switching equipment capable of handling substitution requests from all specialty services, even though such requests would be very rare in the case of most services. The Commission notes that there are now 44 licensed undertakings providing Canadian specialty services; it expects to receive applications proposing additional services on a regular basis. Installing switching equipment to handle this number of services would represent a considerable expense to distributors, especially those operating smaller undertakings that may now deal with requests from only two or three local stations.
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188. One party considered that the benefits of simultaneous substitution should also be made available to the Atlantic Satellite Network (ASN). ASN does not provide a specialty service, but rather a satellite-to-cable service offered to subscribers in the Atlantic Region and in the Eastern Arctic. The Commission considers that ASN should be able to receive benefits similar to those that would be made available to providers of specialty services with respect to simultaneous substitution.
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189. The Commission does not wish to impose on distributors the burden of mandatory substitution in respect of all specialty services, given the limited benefits for the providers of most such services. Nevertheless, the Commission considers that the current regulatory structure, which makes no provision for specialty service substitution, should be amended. It therefore intends to include in the new regulations a provision permitting distributors to fulfil simultaneous substitution requests by providers of Canadian specialty services and ASN, with the proviso that the signals of local television stations be given priority over the signals of the specialty services and of ASN for these purposes.
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190. Such licensees wishing to make simultaneous substitution requests in accordance with the above provision would have an opportunity to negotiate arrangements with distributors for substitution. In the Commission's view, however, such negotiations would not be appropriate matters for consideration under its dispute resolution process.
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b) Extra-regional stations
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191. Currently, cable undertakings must perform simultaneous substitution when requested to do so by local and regional television stations. Private broadcasters proposed that extra-regional television stations also be permitted to request distributors to perform substitution.
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192. The Commission recognizes that some limited amount of additional revenue might be earned by Canadian broadcasters if the benefits of simultaneous substitution were to be made available to extra-regional television stations. It notes, however, that broadcasters did not provide any projections concerning the amount of additional money that this proposal would generate for the television industry. It also notes that, for various reasons, the signals of extra-regional stations carried by distribution undertakings are often of inferior technical quality to other signals, and that substitutions involving these signals could cause undue annoyance to subscribers. Accordingly, and given the lack of evidence concerning the financial benefits involved, the Commission does not intend to impose simultaneous substitution requirements with respect to the signals of extra-regional television stations.
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c) Strip program substitution
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193. The term "strip program" generally refers to a syndicated program that is broadcast at the same time on a Monday-through-Friday basis. Broadcasters argued that substitution for strip programs should be allowed even when the actual episodes of programs broadcast by the priority and non-priority stations are not the same.
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194. In Public Notice CRTC 1997-7 issued on 10 January 1997 and entitled "Options for Extending Protection of Program Rights: Call for Comments", the Commission announced that it would defer consideration of strip program substitution to a public hearing to consider issues related to advanced substitution. The oral phase of this proceeding is scheduled to begin on 16 June 1997. In its January 1997 notice, the Commission also acknowledged that implementation of strip program substitution could result in a reduction in the choice of programming available at any particular time, and that the impact of any such requirement on subscribers should be more fully canvassed.
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d) Extension of simultaneous substitution requirements to Class 2 undertakings
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195. Under the existing regulations, only Class 1 cable licensees are required to perform simultaneous substitution. In Public Notice CRTC 1996-69, the Commission noted that there are a small number of privately-owned television stations offering local programming in communities currently served by Class 2 cable undertakings. Many of these local stations would benefit from a requirement that distribution undertakings serving their communities implement simultaneous substitution upon request. The Commission therefore proposed to establish such a requirement.
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196. While private broadcasters argued that the requirement to perform simultaneous substitution should be extended to all Class 2 undertakings, the Commission considers that the impact on small distribution undertakings that would have to bear the cost of implementing simultaneous substitution would outweigh the benefits.
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197. The Commission therefore intends to implement the proposal set out in Public Notice CRTC 1996-69 by including a requirement in the new regulations that, where the studio of a privately-owned 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.
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e) Extension of simultaneous substitution requirements to new entrants
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198. In Public Notice CRTC 1996-69, the Commission proposed that new terrestrial distributors licensed to compete in the same market as an existing Class 1 undertaking be regulated as a Class 1 undertaking regardless of the number of its subscribers. These competing undertakings would therefore also have to perform simultaneous substitution.
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199. One party suggested that the Commission not require competitive distribution undertakings to undertake simultaneous substitution until their level of penetration reached 10% of the market, arguing that the Commission's proposal would serve as a disincentive to new competitors wishing to enter the market.
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200. While agreeing that the establishment of competitive distributors should be encouraged, the Commission considers that simultaneous substitution is an essential means of enabling broadcasters to exploit their program rights. It also considers that the principle of similar rules for competing distributors should be maintained. It therefore intends to require new entrants competing with incumbent cable licensees that are subject to simultaneous substitution requirements to also perform simultaneous substitution, regardless of market share.
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f) Notification period for substitution requests
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201. The existing regulations require that requests by television stations to distributors to perform substitutions be made at least seven days in advance of a broadcast. Broadcasters requested that this period be reduced to three days. The cable industry generally preferred that the seven-day period be maintained, but noted that late requests are usually accommodated without difficulty.
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202. Given the technical capabilities of modern substitution equipment to accommodate requests, the Commission intends to reduce the notification period for substitution requests to four days. The Commission is satisfied that this period will give distributors adequate advance notice to respond to substitution requests from broadcasters.
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g) Requests for substitution against non-Canadian specialty services
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203. At the hearing, one party indicated that Canadian television stations should be permitted to request substitution against non-Canadian specialty services. Again, no indication of the potential financial benefits of such substitution to Canadian broadcasters was provided. The Commission also notes that opportunities for such substitution would be very limited. Such a requirement would, however, require distributors to upgrade their switching equipment to cover all non-Canadian specialty services, at significant cost.
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204. The Commission therefore does not intend to allow Canadian television stations to request substitution against non-Canadian specialty services.
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A. Alteration and Curtailment
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205. Sections 19 and 25 of the existing regulations prohibit cable licensees, except in specific defined circumstances, from altering or curtailing any programming service or radiocommunication that they distribute. This prohibition generally extends to ancillary services distributed in the Vertical Blanking Interval (VBI) of television signals, and the Subsidiary Communications Multiplex Operation (SCMO) of FM signals. The Commission intends to include a similar prohibition in the new regulations.
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206. In its written comment, the CCTA proposed that the Commission allow cable licensees to strip the VBI of television signals (except where the VBI is transmitting closed captions) and the SCMO portion of FM signals.
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207. The Commission considers that the current prohibition against the alteration or curtailment of any programming service or radiocommunication by distributors applies only to the broadcasting content of the signals that they redistribute and to certain related non-broadcasting content. Accordingly, the Commission considers that distributors are required to retransmit ancillary services that consist either of programming or of non-programming material that is integral to the programming service being broadcast, such as that contained in closed captions. Distributors are not, however, obliged to include in their retransmissions any other unrelated non-broadcasting content that may be included in the VBI of a broadcaster's signal.
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208. The Commission intends to maintain the existing exceptions to the regulatory prohibition in specific circumstances, for example, where such alteration or curtailment is otherwise required in order to comply with simultaneous substitution obligations or with the blackout provisions of the Canada Elections Act.
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B. System Interconnection
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209. In Public Notice CRTC 1996-69, the Commission proposed that, in situations involving the full interconnection of a Class 2 or Class 3 undertaking with a Class 1 undertaking owned by the same licensee, each system should be able to retain its separate licensing status. At that time, a majority of the Commission was of the view that, in such circumstances, the basic service fee of the interconnected Class 2 or Class 3 undertaking should be subject to rate regulation in the same manner as the Class 1 undertaking.
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210. This position was taken against the background of the Commission's practice at that time of expecting a licensee interconnecting a smaller undertaking with a larger undertaking to reduce the basic monthly fee charged by the smaller undertaking by an amount equivalent to the direct cost savings resulting from the interconnection, and not to charge the capital costs of the interconnection to subscribers. Subsequently, the Commission has taken a number of decisions wherein licensees have been permitted to offset the costs of the interconnection against the direct cost savings.
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211. In their written comments and during the oral hearing, a number of parties argued that certain higher costs faced by small undertakings remain unaffected by interconnection, including such costs as those incurred in wiring low density areas. On the other hand, they noted that interconnection often results in better service to subscribers of smaller undertakings and potential savings for such things as digital decoders at the head end, factors considered important or crucial to the ability of such undertakings to compete with DTH and other services. They therefore urged the Commission not to impose rate regulation on smaller undertakings, upon their interconnection with larger undertakings.
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212. The Commission considers that interconnection of small undertakings should not be discouraged, in recognition of the potential benefits to subscribers that could result from such interconnection. Given that the Commission's proposal to impose rate regulation on smaller undertakings that interconnect with rate-regulated undertakings could discourage such interconnection, the Commission does not intend to impose rate regulation on smaller undertakings in these circumstances. In arriving at this conclusion, the Commission has also taken into account the restraining influence of competition on fee increases and the fact that smaller undertakings generally face higher costs than larger undertakings.
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213. Further, the Commission has decided that it will no longer expect the cost savings of system interconnection to be passed on to subscribers by way of rate decreases. In the Commission's view, it is in the public interest that operators of such undertakings be permitted to reassign these cost savings to areas of their choosing, and to take such other steps as they consider necessary to maintain competitive operations.
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C. Use of Restricted Channels
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214. Restricted channels are basic band cable channels that use the same frequency as those of local television stations, and are thus subject to potential interference. The existing regulations prohibit their use for the distribution of priority services, including the community channel, unless an application for such use is approved by the Commission. Restricted channels, however, can sometimes be successfully used for the distribution of priority services, because impairment is negligible. Applications to carry a priority service on such a channel have been routinely approved where the affected broadcaster agrees to such carriage.
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215. In Public Notice CRTC 1996-69, the Commission proposed that, where a distributor has the agreement of the licensee of a priority television station to distribute its signal on a restricted channel, an application for approval of such distribution would no longer be required.
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216. Most parties who commented on the use of restricted channels generally supported the Commission's proposal. However, several potential exempt programming undertakings expressed concern that distribution of a priority signal on a restricted channel without prior approval would conflict with the Access Rules regarding the carriage of the services of exempt programming undertakings on restricted channels.
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217. The Commission notes that implementation of its proposal does not detract from any protection afforded exempt programming undertakings under the Access Rules because the proposal gives no programming service, priority or otherwise, a "claim" on a particular channel. Should a local broadcaster want its signal to be carried on a particular restricted channel, the distributor is unlikely to agree where the channel in question is generating revenue from the service of a third-party exempt programming undertaking. Moreover, in their contracts with distributors, the operators of such exempt programming undertakings are free to negotiate the inclusion of appropriate assurances to guarantee distribution of their service on a particular restricted channel for the term of the contract.
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218. A second concern was that non-broadcast transmitters using over-the-air frequencies in the same bands as those used by cable undertakings can cause interference to certain channels. However, the degree of susceptibility to interference and the actual channels potentially affected vary from location to location, and are often very localized, making a general prohibition against the use of such channels an excessively-rigid restriction.
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219. In light of the above, the Commission intends to allow a distribution undertaking, where it has the written agreement of the licensee of a priority television station, to carry its signal on a restricted channel without having to obtain Commission approval. The Commission intends to maintain the definition of restricted channel as it currently exists, as well as the prohibition against the distribution of community programming on such channels without prior Commission approval.
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D. Transfers of Ownership and Control
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220. The Commission's existing regulations permit a transaction to take place, without the need to obtain prior Commission approval, that results in a person holding less than 30% of the voting interests of a licensee company, 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 proposed in Public Notice CRTC 1996-69 to include these same provisions in the new regulations.
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221. In its written comments, Stentor proposed that prior approval of non-controlling acquisitions and intra-corporate transactions should not be subject to any application or approval process, even where such a non-controlling transaction would result in a person holding 30% or more of the voting interests.
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222. The Commission considers that the existing threshold for determining whether prior Commission approval is required remains appropriate. Accordingly, it intends to include in the new regulations ownership provisions similar to those that exist in the existing regulations.
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E. Use of Local Advertising Availabilities
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223. Rogers proposed in its written comments that cable licensees be allowed to use the local availabilities contained in the programming of U.S. specialty services to sell their own local advertising. This proposal was strongly opposed by the broadcasting industry. Currently, the use of such local availabilities by cable licensees is restricted to the distribution of Canadian public service announcements and the promotion of licensed services. The Commission can discern no compelling reason to alter its policy in this area, and, accordingly, does not intend to adopt the Rogers proposal.
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224. In this notice, the Commission has set out its policy determinations with respect to the establishment of a regulatory framework for broadcasting distribution undertakings. Later this year, it will issue for comment draft regulations that will give effect to these policies. It is the Commission's intention that the new regulations come into force on or about 1 January 1998.
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225. The Commission is confident that its new regulatory framework for distribution undertakings is responsive to the fundamental changes occurring in the broadcasting system, and will further the Canadian content objectives of the Act.
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226. The Commission wishes to thank all who participated in this public process for their valuable contributions and assistance in the development of the new policies that will guide the expansion of the Canadian broadcasting distribution industry in the emerging competitive communications environment.
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Allan J. Darling
Secretary General
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Dissenting opinions of Commissioners Garth Dawley and William Callahan
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Commissioner Dawley dissents from the policy decision taken by the Commission's majority that would require the incumbent licensees of Class 1 distribution undertakings to direct a minimum percentage of their gross revenues to an independently-administered production fund. In the Commissioner's view, such licensees should be allowed to allocate their total 5% contribution to community programming, if they wish to do so.
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Commissioner Callahan likewise dissents from this policy decision of the Commission's majority. In the Commissioner's view, distribution undertakings currently providing for community expression through their community channel operations should have the option to devote the total 5% programming contribution to community expression as a valid and legitimate form of Canadian programming.
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