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ARCHIVED -  Telecom Decision CRTC 98-7

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Decision

Ottawa, 23 June 1998

Telecom Decision CRTC 98-7

Canadian Satellite Communications Inc.

Decision CRTC 98-194

The New Brunswick Telephone Company, Limited
New Brunswick - 199709375

Application for a broadcasting licence to carry on a new (cable) distribution undertaking to serve the Province of New Brunswick - Approved in part

1. Following a Public Hearing held on 30 March 1998 in Saint John, the Commission approves in part the application by The New Brunswick Telephone Company, Limited (NBTel) for a broadcasting licence to carry on a regional broadcasting distribution undertaking (cable television) to serve the Province of New Brunswick.

2. The Commission, for the reasons set out below, and subject to the requirements of this decision, will issue a Class 1 licence to NBTel, authorizing the applicant to carry on a broadcasting distribution undertaking (BDU) to serve the area within the municipal boundaries of each of Saint John and Moncton, plus those areas, if any, that are outside of, but adjacent to, these municipal boundaries and, as of this date, are passed by NBTel's existing hybrid fibre/co-axial cable (HFC) network. The licence shall come into effect no earlier than 1 September 1998, and shall expire 31 August 2005.

3. The Commission requires NBTel, within 30 days of the date of this decision, to file maps with the Commission delineating the current deployment of its HFC network infrastructure in each of the Saint John and Moncton areas.

4. The operation of this undertaking will be regulated pursuant to Parts 1 and 2 of the Broadcasting Distribution Regulations (the regulations), and the licence will be subject to the conditions specified in this decision and in the licence to be issued.

5. This authority will only be effective and the licence will only be issued at such time as the construction of the undertaking is completed and it is prepared to commence operation. If the construction is not completed within twelve months of the date of this decision or, where the applicant applies to the Commission within this period and satisfies the Commission that it cannot complete construction and commence operation before the expiry of this period and that an extension of time is in the public interest, within such further periods of time as are approved in writing by the Commission, the licence will not be issued. The applicant is required to advise the Commission (before the expiry of the twelve-month period or any extension thereof) in writing, once it has completed construction and is prepared to commence operation.

Background

6. NBTel is currently the sole facilities-based provider of local telephone service in New Brunswick. The company is effectively owned and controlled by Bruncor Inc. (Bruncor) through the latter's direct and indirect ownership of 100% of NBTel's outstanding voting shares. According to NBTel, although BCE Inc. (BCE) exercises effective control over 45% of the voting shares of this holding company, the remaining shares are widely held, and BCE nominates less than 25% of Bruncor's Board of Directors. Therefore, control of Bruncor, and by extension, of NBTel, resides with Bruncor's Board of Directors.

7. NBTel's application is the first to be filed by a member of Stentor for a licence to carry on a competitive BDU on a permanent basis, that is to say, other than as a technical or market trial. NBTel's proposal, as described in its written application, was to offer a single, regional, wireline service providing a full range of French- and English-language broadcasting and other services that would be made available, over time, throughout an entire province.

8. Canadian telephone companies have been free to apply for licences to operate BDUs since June 1997, while local telephone markets have also been opened up to new entrants, including cable companies. NBTel sought a regional licence to serve the entire province through the deployment of its VideoActive network. This HFC network is capable of distributing broadcasting services to subscribers, as well as of providing customers with fully interactive (two-way) high speed broadband access to existing and future telecommunications and multimedia services, including the Internet. NBTel's business plan is predicated on the distribution of both programming and telecommunications services. The applicant emphasized that the use of its network for the distribution of broadcasting services alone would not be economically viable. NBTel noted at the hearing that, by the end of six or seven years, the distribution of conventional cable services would generate less than 20% of the network's total revenues.

9. The infrastructure of NBTel's VideoActive network is currently established in the Saint John area and in portions of Moncton. In its written application, NBTel proposed to extend this network over time, so that it would pass approximately 60% of all residences and 90% of all business in the province by the end of a proposed seven year licence term. At the oral hearing, however, NBTel advised the Commission that, at this time, it does not intend to extend the HFC infrastructure beyond the network's present boundaries because of financial considerations.

10. NBTel indicated that it was investigating the use of other technologies, in particular digital subscriber line (DSL) technology, as possible alternatives to HFC for the distribution of broadcasting services. There are, however, technical impediments to the use of DSL for the distribution of cable services. The applicant acknowledged these impediments at the hearing, and stated that, by the end of the year, it would be able to advise the Commission regarding whether a business case exists for the extension of its proposed service, in one form or another, beyond the reach of its current HFC infrastructure.

11. The Commission has given careful consideration to approval of NBTel's application for a regional licence to serve all of New Brunswick. The Commission, however, has weighed the applicant's acknowledged inability, due to financial considerations, to expand the boundaries of its existing HFC network infrastructure outward from Saint John and Moncton at this time, and the uncertainty surrounding the availability to NBTel of a viable technical alternative for extending cable service throughout the province.

12. In light of the above, the Commission has determined that it would best serve the public interest, at this time, to authorize the provision of cable service by NBTel only to the areas that are within the municipal boundaries of Saint John and Moncton and to the areas adjacent to those boundaries that are currently passed by the applicant's existing HFC network.

13. In reaching this decision, the Commission has taken account of the fact that, under the regulations, there is no obligation imposed on new entrants to provide service. However, the Commission emphasizes that the absence of such a regulatory requirement does not relieve prospective new entrants of the obligation to present the Commission, at the time of their application, with firm commitments, viable business plans, and supporting evidence of their financial and technical ability to implement their proposals. It is for this reason that, in this case, and in all others, the authority issued to such an applicant only becomes effective, and the licence is only issued, if and when construction of the undertaking is completed and it is prepared to commence operation within a reasonable timeframe.

14. In addition to preserving the integrity of the licensing process, the Commission considers that its decision not to issue NBTel a regional licence at this time strikes an appropriate balance between the Commission's desire to promote, where appropriate, an open entry model for broadcast distribution, and encouraging vigorous and sustainable competition. Specifically, the Commission wishes to avoid creating disincentives for either incumbent distributors or prospective new licensees wishing to enter the market in New Brunswick.

15. NBTel may, of course, apply for authority to extend its service area at any time in the future.

16. In the following sections of this decision, the Commission deals with a number of remaining issues raised by NBTel's application in relation to both the Broadcasting Act and the Telecommunications Act, the responsibilities and obligations that will reside with the applicant in its dual capacity as a Canadian carrier and as a broadcast distributor, and the specific terms and conditions of the broadcasting licence that will be issued to NBTel.

HEAD START

17. In its 19 May 1995 report to the government entitled Competition and Culture on the Information Highway, the Commission endorsed competition in the cable industry's core business, stating that telephone companies should be permitted to apply for broadcasting distribution licences as soon as rules have been established to remove barriers to effective competition in the local telephone business. The Commission identified completion of the local competition process prescribed in Telecom Decision CRTC 94-19 as a "fundamental precondition to competition in all markets on the information highway." It noted in particular that, in order to stimulate effective competition in the local telephone market, issues such as interconnection, unbundling and co-location would have to be addressed and resolved.

18. Among those who filed interventions to NBTel's application were Fundy Cable Ltd./Ltée (Fundy) and the Canadian Cable Television Association (CCTA). Fundy is by far the largest cable company in New Brunswick, serving approximately 98% of all subscribers in the province; the CCTA represents a membership consisting of the licensees of approximately 625 cable distribution undertakings across Canada.

19. Fundy and the CCTA submitted that, while there has been considerable progress achieved in removing barriers to competition in the telephone industry, issues related to such matters as interconnection, unbundling and co-location have not yet been resolved. These interveners also placed particular emphasis on the fact that local number portability has not yet been implemented.

20. Local number portability is a feature that will allow customers of one local telephone company to retain their assigned telephone numbers should they choose to become customers of another such company. Although not described by the Commission in its May 1995 report as a "fundamental precondition" in or of itself, local number portability was a further matter that, the Commission stated, must be addressed and for which "solutions must be sought to facilitate competition." The Commission recognized, however, that:

 ...technical issues surrounding number portability require clarification, and that interim solutions may be necessary to facilitate an acceptable measure of portability at an early date.

21. The Commission established its framework for effective competition on 1 May 1997 (see Local Competition, Telecom Decision CRTC 97-8). Implementation issues have been addressed by industry participants in groups reporting to the CRTC Interconnection Steering Committee (CISC). Disputes arising in CISC working groups have been resolved by the Commission. Final rates for unbundled loops are expected in the third quarter of this year.

22. From the Commission's perspective, all significant issues concerning co-location were effectively addressed through its determinations announced on 16 June 1997 (see Co-location, Telecom Decision CRTC 97-15), and through its final approval of tariffs in November of that year. Disputes on co-location are being addressed by the Co-location Group (CLG), which consists of industry participants and Commission staff. The CLG has already resolved several disputes, while others remain outstanding. In the Commission's view, such disputes are inevitable, and it would not be in the public interest to withhold from consumers the benefits of competition until all of them are resolved.

23. As for concerns regarding local number portability, the Commission notes that the process it initiated on this subject on 19 November 1995 is ongoing (see Implementation of Regulatory Framework - Local Number Portability and Related Issues, Telecom Public Notice CRTC 95-48). There had been some initial uncertainty about how quickly telephone companies would install the necessary switch upgrades, and about when a data base solution for number portability would be available. The Commission notes in this regard NBTel's statement that its infrastructure does not require switch upgrades and is able to accommodate number portability as soon as database issues are resolved. Furthermore, the Commission considers, based on the available evidence, that a database solution should be in place by September of this year, and that interim solutions are possible. It is for this reason that NBTel requested that its authority not come into effect until 1 September 1998. The Commission notes NBTel's commitment to negotiate bilateral interim solutions concerning number portability should implementation of a database solution be delayed beyond the end of this year.

24. Based on all of the foregoing, the Commission is satisfied that the licensing of NBTel does not constitute a head start for the entry by this applicant into the cable industry's core market.

MATTERS ARISING UNDER THE TELECOMMUNICATIONS ACT

Allocation of Costs and Revenues

25. Under the Telecommunications Act, the Commission has put in place a regulatory framework which "splits the rate base" of various incumbent telephone companies, including NBTel, into Utility and Competitive segments (Implementation of Regulatory Framework-Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995). Under this framework, costs associated with deployment of broadband infrastructure, including the applicant's HFC network, must be assigned by NBTel to the Competitive segment of its split rate base. Revenues earned by NBTel through its proposed activities as a BDU licensee will also be assigned to this segment. Subscribers of NBTel's local telephone service and other services whose costs and revenues are assigned to the Utility segment of the split rate base therefore do not bear the financial risks, or receive the financial rewards, associated with the company's Competitive segment activities.

26. Under the Telecommunications Act, NBTel has assigned, and states it will continue to assign, all costs associated with the deployment of broadband-capable equipment and facilities, such as fibre optic transmission systems and coaxial cable, to the Competitive segment. The Commission notes NBTel's confirmation at the hearing that it will abide by the cost and revenue allocation requirements of the Commission's split rate base framework.

Bundled Services

27. In keeping with Joint Marketing and Bundling - Telecom Decision CRTC 98-4, 24 March 1998, the Commission considers that NBTel may offer bundled services, subject to the conditions respecting tariffing and costing set out in that decision. Such a bundled service might consist of a local exchange service and a cable television service that are offered to a subscriber at a single rate that represents a discount from the rates that would be paid for the two services, if purchased separately.

28. The Commission has procedures for assessing issues relating to split rate base methodology under the Telecommunications Act that allow it to deal with the issues relating to the allocation, between the Utility and Competitive segments, of the revenues and costs associated with various service offerings. The Commission intends to use its normal split rate base methodology procedure to address the issue of how to allocate, as between the Utility and Competitive segments, the revenues and costs associated with a bundled service containing telecommunications and non-telecommunications services.

29. The Commission addresses below, pursuant to the Broadcasting Act, issues related to calculating the applicant's gross broadcasting revenues and its required contribution to the creation and presentation of Canadian programming.

Predominantly Alphanumeric Services

30. The applicant proposed to offer a service that would be available as part of its basic cable television service for reception using a television set, and as an "Internet" service that would be accessible by the public, without charge, through personal computers. To the extent that it consists predominantly of alphanumeric text, this telecommunications service is of a type described by the Commission as "other non-programming services" when distributed to users of personal computers, and as a "full channel TV service" when distributed to cable subscribers using a full analog television channel (Regulation of Full Channel TV Services, Telecom Decision CRTC 97-2, 5 February 1997).

31. To the extent that it consists predominantly of alphanumeric text, this proposed service raises two issues under the Telecommunications Act: whether its distribution, as a full channel TV service, should be permitted on the same terms (conditional forbearance) as those which apply to incumbent BDUs; and whether NBTel, pursuant to section 36 of this Act, should be permitted an involvement in the content of the service (as such content is accessed either by use of a television set or of a personal computer).

32. In Telecom Decision CRTC 97-2, the Commission forbore from the regulation of full channel TV services, subject to the adherence by incumbent distributors to certain conditions, including one that required the priority distribution of licensed or authorized broadcasting services.

33. For reasons of regulatory parity, and to the extent set out in Telecom Decision CRTC 97-2, the Commission has decided to forbear from regulation of NBTel's proposed alphanumeric service, as well as any of the other types of full channel TV services that NBTel may distribute and are identified in that decision as being those that incumbent distributors are permitted to distribute.

34. Consistent with the further determinations reached by the Commission in Telecom Decision CRTC 97-2 and in Regulation of Certain Telecommunications Services Offered by Broadcast Carriers, Telecom Public Notice CRTC 96-36 dated 6 December 1996, the Commission, pursuant to section 36 of the Telecommunications Act, grants approval to involvement by NBTel in the content of the predominantly alphanumeric services described in its application.

35. In a later section of this decision, the Commission examines the applicant's proposal to distribute a service that, while presented by NBTel as community programming, would not constitute such programming in the Commission's estimation.

LICENSING AND OTHER BROADCASTING MATTERS

Contributions to the Creation and Presentation of Canadian Programming

Local expression

36. Under the regulations, the licensees of all terrestrial BDUs, other than those of Class 3 undertakings, are required to contribute a minimum of 5% of the annual gross revenues derived from their broadcasting activities to the creation and presentation of Canadian programming. The regulations, however, allow licensees to allocate a portion of this contribution to community programming, or to other forms of local expression that fall within the purview of the Broadcasting Act and are in accordance with Public Notice CRTC 1997-25 entitled New Regulatory Framework for Broadcasting Distribution Undertakings. The amount that a licensee may allocate to local expression and claim as part of its required contribution generally depends on the class of undertaking concerned and the number of subscribers it serves. In the case of a Class 1 undertaking having fewer than 20,000 subscribers, the licensee may claim credit for expenditures on local expression representing a maximum of 3.5% of the annual gross revenues derived from its broadcasting activities. The remainder of the 5% contribution would have to be directed to the Canadian Television and Cable Production Fund or to one or more other, qualifying production funds.

37. In its application, NBTel proposed to operate a community channel that would be available upon launch and would consist of a community bulletin board offering alphanumeric text, graphics, still images and, potentially, full motion video. As noted in an earlier section of this decision dealing with telecommunications matters, the service would have two components: one that would be accessible through an Internet web site, and another that would be distributed on a cable television channel. At the hearing, the applicant maintained that its local expression initiative would be innovative and would comply with the Commission's policy requirements for community programming.

38. The applicant proposed that its service, when not distributing video programming, would constitute programming that would fall within the scope of the Commission's Exemption Order Respecting Still Image Programming Service Undertakings (Public Notice CRTC 1993-51 dated 30 April 1993). The Commission notes that, while licensees of BDUs are permitted to offer an exempt still image programming service on the community channel, such programming does not, itself, qualify as community programming under the Commission's definition. In other words, if a licensee elects to operate and fund a community channel, it is generally required to distribute programming that qualifies as community programming, as a prerequisite, and as a priority, before it distributes a still image programming service on that channel.

39. The Commission has examined the applicant's proposals, and finds that they do not comply with its requirements or qualify for funding as part of the applicant's contribution to the presentation and creation of Canadian programming. The Commission notes in this regard that NBTel did not propose to produce any community programming itself, nor does it intend to acquire community programming material from other licensees. Instead, it planned to rely solely on material submitted by subscribers. Moreover, initially at least, only the web site component of the service would have an interactive capability, and would be accessible only by those subscribers who also have Internet access.

40. In the absence of any plans by NBTel to develop community programming of its own, and given the lack of certainty surrounding the amount or acceptability of any such programming that would be provided by subscribers or acquired from other sources, the Commission has no assurance that NBTel's community channel would be used to distribute other than a community bulletin board. In this regard, the Commission is not satisfied that the service, as proposed, is sufficiently innovative to qualify as an appropriate means of providing local expression in accordance with Public Notice CRTC 1997-25.

41. Accordingly, unless and until NBTel elects to provide an outlet for local expression that meets the Commission's established requirements, the Commission expects the applicant to allocate its entire required contribution (representing a minimum of 5% of the annual gross revenues derived from its broadcasting activities), to qualifying Canadian program production funds, in accordance with the provisions of section 29 (2) of the regulations.

Calculation of gross revenues derived from regulated broadcasting activities

42. At the hearing, interveners expressed concerns about the impact that the bundling of broadcasting with other services, at discounted, all inclusive prices, could have on the level of contributions that the applicant makes to the creation and presentation of Canadian programming. There was considerable discussion regarding the most reasonable method of determining what portion of the applicant's gross revenues earned from the sale of such packages should be deemed to have been earned through its broadcasting activities, and should thus be subject to the 5% contribution requirement.

43. Under the applicant's proposal, it would first subtract, from the gross revenues earned by a bundled package of services, the full amount of any Utility segment services included within the bundle. This would ensure that such Utility segment services do not bear any price discount. The price discount would then be pro rated across the package's remaining broadcasting and any other competitive services.

44. NBTel added, however, that bundling and discounting are activities fully in keeping with a competitive environment and can be expected to become more common as competition increases. It argued that issues associated with discounted prices for broadcasting services were industry wide in scope, and would be best considered and resolved through a public process sponsored by the Commission to canvass the views of all interested parties.

45. In their opposing interventions, Fundy and the CCTA proposed that, for the purpose of establishing the amount of gross revenues that would, in turn, be used to calculate the required contribution by NBTel to Canadian programming, the gross revenues derived from a broadcasting service distributed within a bundled package should be ascribed a value equal to that which would be earned from subscribers if the service was taken on a stand alone, list price basis. According to the CCTA, the pro rating approach proposed by NBTel would generate a lesser and inappropriate contribution to Canadian programming.

46. The Commission notes that, unless there is a corresponding increase in demand, increased competition in any market would normally be expected to exert a downward pressure on prices. Lower prices would equate, in turn, to lower revenues and, in the case of broadcasting services distributed by BDUs, lower potential contributions to Canadian programming. In a competitive market, this downward influence on revenues is apt to be felt, even in the absence of significant promotional discounting or bundling of services.

47. The Commission agrees that the practices of bundling and discounting are likely to become more common as competition increases and distinctions between the business activities of telephone companies and BDUs become less pronounced. Unclear, however, is whether it is either reasonable or necessary that the additional downward impact of these activities on gross revenues be permitted to reduce the amount of contributions that a BDU engaging in these activities would otherwise make to Canadian programming.

48. The Commission intends to issue, shortly, a call for comments on a number of questions related to how it might best ensure that contributions to Canadian programming remain at appropriate levels, and what method of calculating the basis for such contributions would be most reasonable in instances of service bundling and price discounting of broadcasting services by BDUs.

49. For the period of time that NBTel's BDU undertaking might be in operation before the Commission completes this public process and issues its findings, the Commission expects the applicant to calculate its required contribution to Canadian programming based on the gross revenues derived from its broadcasting activities, by ascribing, to the portion of these gross revenues that consists of payment for a broadcasting service distributed within a bundled package, a dollar value equal to that which would be earned from subscribers if the service was taken on a stand alone, list price basis. The licensee shall accord similar treatment in respect of broadcasting services offered on a free or discounted basis, and whether bundled or not.

50. The Commission is satisfied that this approach affords an opportunity to consult quickly with all parties potentially affected by the outcome of the public process, including existing industry participants, prospective new entrants, fund administrators and funding recipients, while minimimizing the extent and duration of any potential disadvantage to NBTel. It will also enable the Commission to identify the most equitable means to ensure that appropriate contributions to Canadian programming are made by the applicant, and by all other BDUs who, in future, may distribute broadcasting services at price discounts or free of charge, and whether or not as part of bundled packages.

Signal Distribution

51. In addition to the services required or authorized to be distributed pursuant to the regulations, the licensee is authorized, by condition of licence to distribute, at its option, the signals of CIVM-TV Montréal (Télé-Québec) and TVOntario (TFO), as part of the basic service. The licensee is also authorized, by condition of licence, to distribute the programming service of the Atlantic Satellite Network (ASN), provided that it is distributed on an unrestricted channel of the basic service. The Commission notes that the licensee intends to receive these signals via satellite.

52. By further condition of licence, the licensee is authorized to distribute, at its option, as part of the basic service, the distant Canadian signals of CFJP-TV (TQS) and CFTM-TV (TVA) Montréal. The licensee intends to receive these signals via satellite.

53. NBTel also proposed to distribute, as part of the basic service, the signal of one U.S. television station affiliated with each of the following networks: ABC, CBS, NBC, FOX and PBS. The Commission notes that, at the time of the hearing, NBTel's plans were uncertain as to whether it would obtain U.S. signals over the air, or via satellite from a licensed or exempted BDU authorized to provide signals to other BDUs such as NBTel. Accordingly, NBTel is required to submit an application, providing the Commission with a list of the specific U.S. signals it proposes to distribute on its undertaking, and their method of reception.

54. The licensee is authorized, by condition of licence, to insert, at its option, certain promotional material as a substitute for the "local availabilities" (i.e. non-Canadian advertising material) of non-Canadian satellite services, subject to the requirement that at least 75% of these local availabilities be made available for use by licensed Canadian programming services for the promotion of their respective services, for the promotion of any future community channel that the licensee might operate, and for unpaid Canadian public service announcements. A maximum of 25% of the commercial availabilities may be made available for the promotion of discretionary programming services and packages, cable subscriber service information, channel realignments, FM service and additional outlets.

55. NBTel proposes to make use of a cable television channel to distribute an electronic program guide. The programming on the channel will be distributed without advertising material, and will enable subscribers to preview the various programming services that the licensee will make available. The Commission notes that the distribution of such a promotional programming service would be consistent with the authority contained in section 19(n) of the regulations, provided that it adheres to the criteria set out in Public Notice CRTC 1995-172.

56. NBTel also requested a condition of licence that would authorize it to delay the distribution of any priority radio signal that is not receivable at the master head end, until the cable system is deployed and is serving a subscriber whose residence is within 32 kilometres of the transmitter of the station in question, if it is an AM station, or is located within the 500 uV/m official contour of the station, if it is an FM station. In the circumstances, and in the case of each of Saint John and Moncton, the Commission considers that the signals of all local radio stations should be distributed at the time the undertaking commences operations. NBTel's request is therefore denied.

57. The Commission notes that this licensee is subject to the Employment Equity Act that came into effect on 24 October 1996 (1996 EEA), and therefore files reports concerning employment equity with Human Resources Development Canada. As a result of a consequential amendment to the Broadcasting Act, the Commission no longer has the authority to apply its employment equity policy to any undertaking that is subject to the 1996 EEA.

58. The Commission acknowledges the many interventions submitted in support of NBTel's application.

This decision is to be appended to the licence issued to NBTel.

Laura M. Talbot-Allan
Secretary General

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