ARCHIVED -  Decision CRTC 95-99

Decision

Ottawa, 17 March 1995

Decision CRTC 95-99

Westcom TV Group Ltd.

Vancouver, Chilliwack, Bowen Island, Squamish, Courtenay, Brackendale, Wilson Creek, 100 Mile House, Williams Lake and Quesnel, British Columbia - 940711500Victoria, Sooke, River Jordan, Port Alberni, Coal Harbour and Campbell River, British Columbia- 940722200

One-year licence renewals granted for CHAN-TV Vancouver, CHEK-TV Victoria, and their respective transmitters elsewhere in British Columbia.

Following a Public Hearing beginning on 1 November 1994 in Vancouver, the Commission renews the broadcasting licences for CHAN-TV Vancouver, CHEK-TV Victoria, and their respective transmitters elsewhere in British Columbia, for a period of one year only, from 1 September 1995 to 31 August 1996. The licences will be subject to the conditions in effect under the current licences, as well as to the conditions specified in this decision and in the licences to be issued.

This one-year licence term reflects the Commission´s serious concerns regarding, most particularly, the practices followed by the licensee in the accounting of its Canadian programming expenditures. The Commission expects the licensee, by no later than 1 September 1995, to prepare and file new renewal applications for each of CHAN-TV and CHEK-TV that respond fully to this and related concerns discussed elsewhere in this decision.

Background

Westcom TV Group Ltd. (Westcom) is owned 100% by WIC Western International Communications Ltd. (WIC). Through its television stations in Vancouver and Victoria, and numerous transmitters elsewhere in the province, Westcom extends CTV network service to approximately 95% of all households in British Columbia. Over the air, the separate local television services of CHAN-TV and CHEK-TV are, themselves, both widely receivable throughout the same advertising market, that being the Vancouver Extended Market encompassing the populations of both Vancouver and Victoria.

Westcom´s common ownership of two English-language television undertakings, whose separate local services are broadly available in the same market, represents an exception to the Commission's general policy prohibition against such common ownership. In 1992, the Commission gave consideration to requiring that WIC divest itself of one of the two stations as a condition of its approval of an application by WIC to purchase CHCH-TV Hamilton. WIC had indicated in its application that, if obliged to divest itself of one of the two stations, its choice would be to sell CHEK-TV. Nevertheless, it put forward several arguments as to why it should be permitted to retain ownership of both.

In Decision CRTC 92-821, the Commission ultimately decided to allow a continuation of the policy exception on the grounds, in part, that Westcom's divestiture of CHEK-TV would have "...a measurable impact on CHAN-TV's profitability that could reduce WIC's capacity to expend on local or acquired Canadian production and its ability to maintain its system of transmitters throughout the province's interior."

Notwithstanding the Commission's concern for the impact that such divestiture might have had on CHAN-TV's profitability, it is clear that WIC's ownership of the licensee of both the Vancouver and Victoria CTV affiliates places the company in a particularly strong competitive position. In its 1992 application to acquire effective control of the Hamilton station, WIC commented on the financial advantages arising from the numerous synergies between CHAN-TV and CHEK-TV:

 Sales and programming policies are structured to maximize combined strengths and minimize individual weaknesses, while continuing to allow independent programming initiatives.... Operating efficiencies are generated through the joint use of accounting, traffic, programming and other department staffs.

Westcom's programming strategies for CHAN-TV and CHEK-TV have been successful in attaining, for each station, the largest audience share of all stations in its primary market, that being the Vancouver Central Market for CHAN-TV and the Victoria Central market for CHEK-TV. In the Vancouver Extended Market, the stations rank first and third in audience share.

Financially, the stations are also performing very well. While the margin of profit before interest and taxes (PBIT margin) for CHEK-TV stood somewhat below the national average for private English-language television stations in the 1992/93 broadcast year, the PBIT margin earned on the combined operations of the two stations was significantly greater than the national average. By itself, CHAN-TV's PBIT margin was almost twice the national average in 1992/93.

Substantial responsibilities attach to Westcom's unique circumstances as owner of two television stations serving virtually all television viewers in Canada's third-largest extended market. In the Commission's view, the profits that these stations generate for the licensee, and the prominent position within the Canadian broadcasting system held by WIC, Westcom's parent company, reinforce the licensee's obligations to contribute to the system. It was against the background described above, and with these responsibilities and obligations in mind, that the Commission assessed Westcom's performance during the licence term.

One subject of the Commission's assessment was Westcom's adherence to conditions of licence, imposed upon both CHAN-TV and CHEK-TV in their 1989 licence renewal decisions, specifying minimum annual levels for expenditures on Canadian programming. Westcom's performance in this area is discussed below. The Commission also examines the licensee's requests, considered as part of its renewal applications, for various reductions in the minimum expenditure requirements for the two stations, both in the current, and going forward into the new, licence term.

Canadian Programming Expenditures

In its 1989 decisions dealing with renewal applications by the licensees of most private, English-language television stations across Canada, the Commission imposed either a condition of licence or an expectation, depending upon each station's air time and network revenues, establishing minimum levels of expenditures on Canadian programming throughout the new licence term. In the first year, the minimum spending requirement was set at the level each licensee, in its renewal application, had projected to expend on Canadian programming for that year (the base amount). The required expenditure level was to vary in subsequent years of the licence term in accordance with a formula linked to percentage increases or decreases in station advertising revenues (the Formula).

Subsequently, in Public Notices CRTC 1993-93 and 1993-174 dated 22 June and 10 December 1993, respectively, the Commission offered clarifications regarding the items it would accept as eligible Canadian programming expenditures under the Formula, and published a definition of the term "expend on Canadian programming". The Commission also set out its determination regarding the appropriateness of certain accounting practices followed by some licensees which, the Commission stated, had resulted in an "overstating of the funds actually being expended on Canadian programming." Among the expenditures deemed by the Commission to be ineligible under the Formula were equity investments in the production of Canadian programs and the expenses related to contract work undertaken by a licensee to produce programming for a third party.

a) Production Services Sold and Traffic Expenses

As part of the present renewal applications, the Commission considered requests by Westcom for amendments that, if approved, would lower the base amounts established by the Commission for CHAN-TV and CHEK-TV in 1989/90 and which, assuming a seamless continuation of the expenditure Formula approach, would similarly alter the base amounts carried forward into the stations' new term of licence. According to Westcom, the base amounts had included projected allocations for the cost of production services sold and traffic expenses; these were either declared to be ineligible expenditures under the Commission's clarifications or fall outside of the definition of allowable program costs contained in the Commission's new television licence renewal application forms. The applicant stated that it had excluded any such expenditures from its projections for the new licence term.

In 1989, the Commission presupposed that licensees would only include, as Canadian programming expenditures, those items that are directly attributable to this category. Nevertheless, the Commission acknowledges that expenditures on the two items described above were only clearly identified as ineligible Canadian programming expenditures in its 1993 clarifications or in the current licence renewal forms. It therefore agrees that they should not be included in any base amount figures the Commission may ultimately set for the two stations in the future.

b) Equity Investments

In the case of CHAN-TV only, the applicant sought an additional amendment that would produce a further reduction in the required levels for Canadian programming expenditures in each of the last three years of the current licence term. The applicant explained that it had been able to realize cost savings due to improved efficiencies in news and other production areas. It chose to spend these savings on equity investments in Canadian programs on the understanding that such investments were eligible under the Commission's expenditure Formula.

Again, it was only in 1993 that the Commission clarified that, while the losses on such equity investments could be claimed as eligible Canadian programming expenditures, the investments themselves were ineligible. Accordingly, Westcom requested that assessment of CHAN-TV's compliance with its condition of licence in each of the last three years be based on the required figures for those years, less the amount either actually spent or, in the case of 1994/95, projected to be spent, on equity investments. In 1994/95, the projected amount of such equity investment is approximately $2.4 million. Westcom also requested that the required Formula expenditures in the new licence term be established by using, as the starting point, the required expenditure level for 1994/95, less this amount of $2.4 million.

As part of its request for this reduction in the required level of eligible Canadian programming expenditures, Westcom offered a commitment to spend $3 million in each year of the new licence term on equity investments in Canadian programs in the under-represented categories. The licensee also sought authority to transfer up to 10% of its annual expenditure requirements under the Formula to additional investments in under-represented programming, arguing that this would allow it the flexibility to find other production efficiencies without having to return the savings realized to other eligible programming expenditures.

The Commission recognizes that it would be unreasonable, given the timing of its clarifications, to base any finding of non-compliance during the current term of licence on Westcom's direction of funds to equity investments instead of to eligible Canadian program expenditures. Nevertheless, and although the Commission understands that these past investments came about as the result of savings realized through improved efficiencies in local program production, the licensee has failed to convince the Commission that, in the future, it should be permitted to invest savings of this type in anything other than eligible Canadian program expenditures under the Formula.

Specifically, the Commission has considered the licensee's request for flexibility to expend up to 10% of its annual expenditure requirements on investments, but is not prepared to depart from its policy, which stipulates that only the losses on such investments are eligible expenditures under the Formula. Apart from the potential difficulty the Commission might encounter in attempting to track these investments, it is satisfied that the averaging mechanisms available under the existing expenditure Formula provide sufficient flexibility for licensees to whom this Formula applies.

As noted above, Westcom had also requested that the required Formula expenditures in the new licence term be established by using, as the starting point, the required expenditure level for 1994/95, reduced by $2.4 million in respect of the licensee's projected 1994/95 equity investments. As discussed below, however, the Commission does not have the financial information necessary to assess the licensee's profitability or to establish what would be a reasonable and appropriate base amount in the circumstances.

c) Artray Mark-ups and Equipment Charges

In other amendments requested by the licensee, Westcom proposed that the required minimum Canadian program expenditures set for the two stations in 1989, and established by the Formula for subsequent years of the licence term, be adjusted further downward. This would reflect the removal of expenditures in respect of equipment charges and mark-ups paid by the two stations in each year to Artray. Artray, once a separate company under WIC's ownership, is now a division of Westcom and is the in-house production organization used by the licensee for all local production other than news programming.

Based on responses by Westcom to Commission questions as part of the current proceeding, the Commission understands that, over the five-year period ending 31 August 1994, the licensee has claimed, as Canadian program expenditures, the following payments by CHAN-TV and CHEK-TV to Artray:

a) payments covering all of Artray's direct production costs;

b) payments representing a mark-up on the direct production costs resulting from a); and,

c) payments in the form of equipment charges based on the initial capital cost of Artray's equipment.

Westcom explained that its requested amendments, whereby the Artray equipment charges and mark-ups would be removed from its expenditure requirements for the current licence term and onwards, were based on its conclusion that "the thrust of the Commission's clarification of eligible Canadian programming expenditure is in the opposite direction."

The Commission notes that the payments included under a) above are eligible Canadian programming expenditures provided they have been made in respect of programs that are aired on CHAN-TV and CHEK-TV. The Commission considers that payments in respect of a mark-up on direct production costs, as described under b) above, would also be eligible expenditures, provided they represent fairly the administrative costs of the production work performed under a).

The equipment charges under c), however, appear to have far exceeded Artray's depreciation costs and expenditures on new equipement over the same period, and would thus seem to include a substantial profit to Artray.

At the hearing and in subsequent correspondence with the Commission, Westcom confirmed that the equipment charges included a profit margin for Artray, but defended its past accounting practices in this regard by noting that they had been in place well before the last renewal hearing in 1989. Westcom also noted that it had identified the amount of the equipment charges in the 1989 renewal applications and that these had been discussed with the Commission at that year's renewal hearing. It is the applicant's position, based on the discussion at the 1989 hearing, that the Commission had knowledge of the equipment charges, including an understanding of the fact that they were on a basis other than cost.

It is the Commission's view, however, following its own scrutiny of the transcript of the 1989 hearing, that the description of the relationship between Artray and the two stations, as provided by WIC at that time, was of a relationship essentially based on cost, under which the equipment charges paid by CHAN-TV and CHEK-TV to Artray were spent by Artray on capital additions.

Moreover, given the discussion with the licensee at the 1989 hearing regarding the Commission's intention to apply conditions of licence stipulating minimum annual requirements for Canadian programming expenditures, and in light of the Commission's rationale for doing so, as subsequently explained in the preamble to its 1989 renewal decisions (Public Notice CRTC 1989-27), the Commission believes that it might reasonably have expected the licensee, at that time, to consult with it regarding the appropriateness of its accounting practices, rather than do so five years later in the context of its current licence renewal applications.

In the Commission's view, the licensee's accounting practices in this area have resulted in a significant overstatement of the funds actually spent on Canadian programming by the two stations and are wholly at odds, not just with the Commission's clarifications, but with the fundamental spirit and clear intent of its 1989 policy requirements governing the Canadian programming expenditures by licensees of private, English-language television stations. Moreover, these practices have had the effect of artificially deflating the figures reported to the Commission regarding the profitability of the two stations, and upon which the Commission relies to determine the adequacy of the licensee's commitments.

The Commission, for these reasons, has great difficulty in finding the licensee to have been in compliance with its conditions of licence governing the Canadian programming expenditures by CHAN-TV and CHEK-TV.

Because of the Commission's inability to assess the true profitability of CHAN-TV and CHEK-TV, or thereby to arrive at a clear determination of what would constitute an appropriate and commensurate contribution by these two stations to the broadcasting system, it has not applied any minimum expenditure requirements for the one-year licence term granted herein. However, the Commission expects the licensee, as a minimum, to ensure that its 1995/96 expenditures on Canadian programming are sufficient to maintain the overall quality of service provided by the two stations.

Moreover, the Commission expects Westcom to take the Commission's concerns fully into account in preparing its new renewal applications. Specifically, the applications and the commitments they contain must be based on an accurate accounting of the licensee's profitability, take adequate account of Westcom's obligations as licensee of two stations whose services are both available throughout Canada's third-largest market, and properly reflect the responsibilities of WIC to the Canadian broadcasting system.

With further regard to the licensee's profitability, the Commission notes that, while Westcom excluded Artray equipment charges and mark-ups from its projected Canadian programming expenditures in the 1994 renewal applications for the two stations, these costs have apparently been included under expenses charged to administration. The Commission reminds the licensee that, hereafter, the financial reports it files with the Commission should reflect no intra-company transfers of profits charged through CHAN-TV or CHEK-TV. Artray should recoup from the two stations only the actual costs that are attributable to its production work for CHAN-TV and CHEK-TV.

Other Matters

a)Local Reflection

The Commission reiterates the importance of the principle of local reflection and again reminds Westcom that it has a special responsibility to serve the public within the particular geographic areas served by CHAN-TV and CHEK-TV. In this regard, the Commission notes the commitment made by the licensee in its renewal applications to broadcast a weekly average of 20 hours 15 minutes of original, or first-play, local news programming on CHAN-TV, and an average of 13 hours 20 minutes per week of such programming on CHEK-TV. The Commission expects the licensee to adhere to these commitments, as minimums, throughout the licence term.

In addition to its news programming, which includes a three-hour program aired on Saturday mornings, CHAN-TV broadcasts such local programs as Business, a business news and information program; Performers, a weekly half-hour series profiling Canadian entertainers; Up and Coming; and Pets and People. Although the Commission acknowledges that CHAN-TV has chosen to dedicate the majority of its Canadian program expenditures to the production of high-quality news-based programming, the Commission encourages the licensee to continue to serve the local community by providing programs in a diverse range of categories.

In addition to its local news, CHEK-TV provides an average of five hours per week of other local production, including such programs as: Nanaiamo Report; CHEK Around; Out West; and Government Street. The Commission commends CHEK-TV on its performance in this area.

b)Program Development

The Commission reminds the licensee of the Commission's expectations set out in Public Notice CRTC 1989-27 dated 6 April 1989 and entitled Overview: Local Television for the 1990s regarding the important role that local television stations play in program development. In this regard, the Commission notes the licensee's commitment to continue to make annual financial contributions to script and concept development amounting to $180,000 in respect of CHAN-TV and $70,000 in respect of CHEK-TV.

c)Children's Programming

With respect to programming directed to children, the Commission notes Westcom's commitment to broadcast a weekly average of 3 hours 30 minutes of Canadian children's programming in the local broadcast hours on CHAN-TV, and to similarly schedule an average of one hour per week of such programming on CHEK-TV. The Commission notes that this programming will be augmented by one hour per week of Canadian children's programming provided by the CTV network.

d) Service to the Deaf and Hard of Hearing

At the hearing, the Commission discussed with the licensee its performance with respect to providing service to deaf and hard-of-hearing viewers. In its applications, Westcom indicated that the amount of closed captioned programming broadcast by the two stations has increased significantly over the course of the current licence term, and that prime time programming is almost entirely captioned in both cases. The licensee forecasts that, in 1995/96, the non-network schedules of CHAN-TV and CHEK-TV will include a total of 2,675 and 2,600 hours, respectively, of captioned programming.

The Commission expects Westcom to continue to expand the amounts of captioned programming broadcast by CHAN-TV and CHEK-TV, with particular regard to the provision of captions for all local news programming, including live segments, using either real-time captioning or another method capable of captioning live programming.

e) Employment Equity

In Public Notice CRTC 1992-59, the Commission announced implementation of its employment equity policy. It advised licensees that, at the time of licence renewal or upon considering applications for authority to transfer ownership or control, it would review with applicants their practices and plans to ensure equitable employment.

With regard to CHAN-TV, in addition to the training Westcom has provided management on employment equity issues, the licensee has undertaken such initiatives as establishing a job-sharing program for its staff to accommodate child care arrangements and respond to their other particular needs and circumstances as parents. The licensee, in concert with the Open Learning Institute, has also developed an internship program at the station for people with disabilities. Further, Westcom is co-operating with Northern Native Broadcasting in a program to provide training and in-field experience to aboriginal persons, with a view to expanding the licensee's access to qualified potential employees from within that designated group.

In the case of CHEK-TV, the Commission notes the licensee's sponsorship of a scholarship, which is open to students from the four designated groups enrolled in Camosun College's Applied Communications program, and which is designed to encourage entry to careers in broadcasting. The licensee is also active in the Native Mentorship Program of the Radio and Television News Directors Association. Further, it has provided a native high school student with tuition fees for a course at the Victoria College of Art and has engaged the student in a mentorship/work experience program in CHEK-TV's graphics department. As at CHAN-TV, Westcom has also facilitated job sharing arrangements for two station employees in response to family needs.

The Commission acknowledges the progress made by both stations in their hiring practices and other relationships with visible minorities, persons with disabilities and women. With regard to the fourth designated group, the Commission considers the above-noted involvement by the licensee in providing training to aboriginal persons to be appropriate steps toward increasing Westcom's access to qualified native employee candidates. The Commission encourages Westcom to continue its pursuit of these and other similar initiatives, with a view to increasing opportunities for the hiring of aboriginal persons.

The Commission acknowledges and has considered the many interventions submitted regarding the applications for the licence renewal of CHAN-TV and CHEK-TV.

Allan J. Darling
Secretary General

APPENDIX / ANNEXE

Conditions of licence for CHAN-TV Vancouver and CHEK-TV Victoria
Conditions of licence for CHAN-TV Vancouver and CHEK-TV Victoria

1. The licensee shall operate each broadcasting undertaking as part of the network operated by CTV Television Network Ltd.

2. The licensee shall adhere to the guidelines on gender portrayal set out in the Canadian Association of Broadcasters' (CAB) "Sex-Role Portrayal Code for Television and Radio Programming", as amended from time to time and accepted by the Commission. The application of the foregoing condition of licence will be suspended as long as the licensee remains a member in good standing of the Canadian Broadcast Standards Council (CBSC).

3. The licensee shall adhere to the guidelines on the depiction of violence in television programming set out in the CAB's "Voluntary Code Regarding Violence in Television Programming", as amended from time to time and accepted by the Commission. The application of the foregoing condition of licence will be suspended as long as the licensee remains a member in good standing of the CBSC.

4. The licensee shall adhere to the provisions of the CAB's "Broadcast Code for Advertising to Children", as amended from time to time and accepted by the Commission.