ARCHIVED -  Public Notice CRTC 1997-35

Public Notice

Ottawa, 2 April 1997

Public Notice CRTC 1997-35

Access Rate for Exempt Programming Undertakings

In Public Notice CRTC 1996-132 dated 2 October 1996 and entitled Call for Comments on a Proposed Access Rate for Exempt Programming Undertakings, the Commission outlined a proposed methodology for the determination of appropriate access rates for the provision of channel capacity by cable distribution undertakings to exempt programming undertakings.

In that notice, the Commission requested comments from interested parties with respect to the following three aspects of its proposed methodology.

1.  The costs attributable to the provision of analog and digital channel capacity to an exempt programming service would include the following: any incremental costs specifically related to the carriage of the exempt service; all common facilities operating costs; and the annual depreciation expense related to the distribution plant, subscriber drops and, where required for subscribers to receive the exempt service(s), decoders. Further, an amount equal to 23% of the cable undertaking's net year-end fixed asset investment in distribution plant, subscriber drops and decoders would be permitted so as to allow the undertaking a reasonable return on capital, interest and taxes.

2.  Based on the highest calculated access rate for six groupings of Class 1 distribution undertakings, as set out in the Appendix to Public Notice CRTC 1996-132, a combined analog and digital access rate of $0.152 per subscriber per month would be applicable to the entire industry for the 1996, 1997 and 1998 broadcast years. For subsequent years, the most recent annual return data would be reviewed and the rate adjusted as necessary.

3.  In order that market forces be permitted to influence the rate as much as possible, the calculated rate would be established as a cap, and parties would be permitted to negotiate actual contract rates up to the maximum calculated level.

In response to its call for comments, the Commission received submissions from nine interested parties, including representatives of the telecommunications, cable, infomercial, direct marketing and daily newspaper industries. The Commission wishes to thank all those who submitted comments, as their contributions have greatly assisted the Commission in reaching its conclusions on the matters under consideration.

In its comments, the Canadian Cable Television Association (CCTA) maintained that, as there will be many alternative distribution media for digital channels, it will be unnecessary for the Commission to regulate digital carriage service rates. The CCTA added, however, that should the Commission decide to regulate digital rates, digital carriage is sufficiently different from analog carriage that there should be separate access rates for each. The CCTA further argued that the proposed rate of $0.152 is too low because it does not take into account such costs as programming contributions and licence fees, and it excludes a mark-up on the recovery of joint and common costs.

The prospective operators of exempt programming undertakings maintained that the proposed rate of $0.152 is too high. These parties submitted that, unless the rate is lowered to reflect only the cable undertaking's incremental cost plus a reasonable allowance for profit, it may very well be impossible for any third-party exempt programming undertaking to become financially viable and competitive.

These parties also submitted that cable undertakings might not negotiate fairly with regard to such matters as discounts for channel placement. Instead, these parties were concerned that the proposed cap of $0.152, rather than any lesser amount, would become the norm, with or without justification.

The Commission concurs with the CCTA that, given a sufficient number of competitive distribution alternatives, an exempt programming undertaking could reasonably expect to be carried at a rate that would allow it to be viable, thus making a regulated access rate unnecessary. It is not clear, however, how quickly competition will emerge in any given market or what level of competition among distributors would be sufficient to ensure access by exempt programming undertakings to a potential subscriber base large enough to render these undertakings viable. This is particularly the case in circumstances where the incumbent cable distributor has an interest in one or more exempt programming undertakings operating in competition with those of third parties. Accordingly, for the time being, the Commission intends to regulate the access rate for both digital and analog carriage without regard to whether a particular exempt programming undertaking is operating in a competitive or non-competitive market. This does not, however, preclude re-evaluation of of this matter in the future to determine whether continuing need for such regulation exists.

With regard to the CCTA's proposal that separate access rates be established for each of analog and digital carriage, the Commission has decided not to accept this suggestion since all of the costs related to access, both analog and digital, will be accrued in the common expenses and plant. The combined access rate formula will pick up these specific costs at the end of each
three-year period, at which time the rates will be reviewed and adjusted as necessary.

The Commission has also decided to reject the CCTA's proposal to include in the access rate a 10% mark-up on the recovery of joint and common costs. The Commission notes in this regard that there is no evidence that the costs to be recovered by such a mark-up are causal to the provision of channel capacity. Moreover, the CCTA did not consider it necessary to include a mark-up of this nature in its original proposal for a cost separation methodology, which the Commission has subsequently adopted. The Commission is not convinced that it is appropriate to include such a mark-up at this time.

The Commission considers that an appropriate access rate should reflect, as closely as possible, the real cost of providing a channel. In this regard the Commission notes that, while the potential operators of exempt programming undertakings argued that the proposed rate was too high, they provided very little specific or detailed financial information to support this position. For example, Torstar Corporation merely asserted that a 23% rate of return on assets is too high for a monopoly carrier. It claimed that, within the Greater Toronto area, access to cable distribution by the Toronto Star's service would cost more than $2.5 million, based on an estimated subscriber base of 1.4 million cabled households in that market. Northern Response (Canada) Ltd. contended only that the proposed rate is unreasonably high compared to the amount that cable-owned exempt programming undertakings, such as The Home Shopping Channel, have reputedly been paying for distribution on cable.

Based on the absence of any clear evidence to the contrary, the Commission is not pursuaded by the comments of any of these parties that the operating and capital costs on which the proposed rate is based are unreasonable.

The Commission agrees with the CCTA, however, that those portions of a cable licensee's 5% programming contribution and 1.8% CRTC licence fee that are related to the revenues earned from the distribution of the service of an exempt programming undertaking are legitimate expenses to be incurred as a result of providing channel capacity to a third-party exempt programming undertaking. Accordingly, an additional $0.01 will be added to the proposed calculated rate to reflect the inclusion of these expenses.

With regard to the concern that cable distribution undertakings will not negotiate access rates in good faith, the Commission notes that in Public Notice CRTC 1996-60, entitled Access Rules for Broadcasting Distribution Undertakings, the Commission indicated its intention to extend the availability of its dispute resolution provisions to exempt programming undertakings. The Commission further notes that in Public Notice CRTC 1997-25, the Commission indicated its intention to introduce a regulation that would prohibit 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. Thus, an exempt programming undertaking that is not treated fairly in its negotiations with a distribution undertaking would be able to seek a remedy under the proposed distribution regulations. As noted in Public Notice CRTC 1997-25, the Commission expects to publish these proposed regulations for comment later this year.

Accordingly, based on the evidence before it, the Commission has decided to adopt a single rate of $0.162 per subscriber per month for access by exempt programming undertakings to the analog or digital channel capacity of incumbent cable distribution undertakings. The Commission intends to maintain this rate for the 1996, 1997 and 1998 broadcast years, after which time it will be reviewed and adjusted as necessary. The Commission confirms that this rate represents a maximum rate, and that parties are free to negotiate contract rates anywhere below this cap.

As noted in Public Notice CRTC 1996-60, a determination regarding
access rates for distribution undertakings other than cable will be made when and as required.

Allan J. Darling
Secretary General