ARCHIVED -  Decision CRTC 96-224

Decision

Ottawa, 13 June 1996

Decision CRTC 96-224

Terence C.Y. Hui, on behalf of a company to be incorporated

Part of Vancouver, British Columbia (Concord Pacific Place on the north shore of False Creek, as described in the application) - 952960300

New cable distribution undertaking - approved

Following a Public Hearing in Vancouver beginning on 25 March 1996, the Commission approves the application by Terence C.Y. Hui, on behalf of a company to be incorporated, for a licence to carry on a cable distribution undertaking to serve part of Vancouver.

The Commission will issue a Class 1 licence to the company to be incorporated, subject to the requirements of this decision. The licence shall expire 31 August 2000.

The operation of this undertaking will be regulated pursuant to Parts I, II and IV of the Cable Television Regulations, 1986 (the regulations), and the licence will be subject to the conditions specified in this decision and in the licence to be issued.

The licence will be issued once the Commission has received and approved a revised Agreement to Incorporate (or any other Shareholders Agreement replacing that agreement that may be entered into by the shareholders of the applicant company following its incorporation), and has received, as well, all other documents of incorporation (including by-laws, certificate and articles of incorporation).

The revised agreement must reflect the amendments required by the Commission pursuant to conditions of licence specified elsewhere in this decision.

The licence term granted herein, while less than the maximum of seven years permitted under the Broadcasting Act, will enable the Commission to consider the renewal of this licence in accordance with the Commission's regional plan and to better distribute the workload within the Commission.

Background

The applicant will be owned 20% by BC Tel Systems Support Inc. (BCTS), which is a foreign-controlled corporation by virtue of the foreign ownership of its parent company BC Telecom Inc. BC Telecom Inc. is also the parent company of BC TEL, the major provider of local and long distance telephone services in British Columbia.

Ownership of the remaining 80% of the company to be incorporated will reside with MultiActive Communications Corp. (MCC), which is, in turn, owned 100% by Vancouver resident Terence C.Y. Hui, a Canadian citizen. Mr. Hui is also the President and Chief Executive Officer (CEO) of Concord Pacific Developments Ltd. (Concord), the developer of Concord Pacific Place. This is a planned community of condominiums and apartment buildings now under construction on land that served as the site for Vancouver's World Fair Exposition in 1986. It is this community that constitutes the new cable undertaking's proposed service area.

The Commission's dealings with Concord and BCTS, as they relate to the provision of broadcasting services to residents of Concord Pacific Place, date back to January 1994. At that time, the Commission received a complaint from Rogers Cablesystems Limited (Rogers), then known as Rogers Cable T.V. Limited, that an unlicensed distribution undertaking was being carried on at the site. Concord Pacific Place falls within the territory served by a Class 1 cable television undertaking operated by Rogers.

In Public Notice CRTC 1995-156 dated 20 September 1995, which was issued following a public hearing into this matter held earlier that year, the Commission announced its determination that Pacific Place Communications Limited (PPC), a company owned jointly by Concord and BCTS, was carrying on unauthorized broadcasting undertakings at Concord Pacific Place. It issued mandatory orders to PPC, BCTS, and other related parties to cease and desist operating the unauthorized undertakings in question within 90 days of the date of the public notice. The Commission stated that the 90 days was to "...allow the parties sufficient time to take the appropriate measures to comply with the Broadcasting Act". The current application was filed with the Commission on 19 December 1995, together with a request that the 90-day time limit be extended to allow the Commission to consider the application and issue its decision.

The application generated considerable interest among residents of the Vancouver area and was the subject of numerous interventions, the majority of which were in support of the proposal. Those who opposed the application, or who intervened to express concern regarding certain of its aspects, included Rogers, other existing cable distributors, the licensees of certain programming undertakings, the Canadian Cable Television Association and the Canadian Association of Broadcasters.

While the principal concerns of interveners are addressed further below, the Commission notes that the licensing of two or more distribution undertakings to serve the same area is consistent with the principle of competition endorsed by the Commission in its 19 May 1995 report to the government entitled "Competition and Culture on the Information Highway: Managing the Realities of Competition" (the Convergence Report). Further, the approach taken by the Commission in its deliberations concerning many of the terms and conditions it has attached to the new licence - and having regard to such matters as the class of licence to be issued, competitive access, rates and provision of service - is in conformity with the proposed approach the Commission intends to pursue in drafting new regulations to govern cable and other types of distribution undertakings (see Public Notice CRTC 1996-69 dated 17 May 1996 and entitled "Call for Comments on a Proposed Approach for the Regulation of Broadcasting Distribution Undertakings").

The Commission is satisfied that the various terms, conditions and other safeguards outlined in this decision, including certain modifications it has required the applicant to make to its proposal, adequately address those concerns of interveners that the Commission considers to be justified, and that approval of this application is in the public interest.

Principal issues raised by the application

(a)  Ownership and control

One of the questions raised by opposing interveners is whether the company to be incorporated would be owned and controlled by Mr. Hui, as claimed by the applicant, or would be under the effective control of BCTS, a foreign-controlled company. The interveners noted that, if the latter were found to be the case, the applicant company would be ineligible to hold a broadcasting licence. They claimed that approval of the application would also be contrary to the Commission's general policy approach, set out in the Convergence Report, not to permit telephone companies to apply for broadcasting distribution licences until rules have been established to remove barriers to effective competition in the local telephone business.

As evidence in support of their argument that effective control of the applicant would, in fact, reside with BCTS, the interveners noted the terms of certain agreements between the parties regarding such matters as: the definition of a quorum at meetings of the applicant's Board of Directors; provisions concerning the conduct of business (particularly in relation to certain of those matters identified as requiring unanimous consent); other provisions that, subject to government and CRTC approval, would permit BCTS to increase its shareholdings to 50%; arrangements whereby BCTS is committed to fund all or most of the undertaking's operational requirements over the first four years; and the provision of certain services and facilities by BC TEL.

The Commission, in determining whether a company is eligible to hold a broadcasting licence, applies the Direction to the CRTC (Ineligibility of Non-Canadians) P.C. 1996-479 (the Direction). For a company to be eligible to hold a Canadian broadcasting licence, a minimum of 80% of its issued and outstanding voting shares must be owned and controlled by Canadians, and the CEO or, where there is none, the person performing similar functions, and a minimum of 80% of its directors must be Canadian. The Commission notes that the applicant meets each of these requirements.

In determining who controls a company pursuant to the Direction, the Commission also examines the personal, financial, contractual and business relationships between the parties, as well as any other relevant considerations.

Under the terms of the Agreement to Incorporate, the Director nominated by BCTS must either be present at meetings of the applicant's Board of Directors, or be represented by proxy, before a quorum is formed and business conducted. In the opinion of certain interveners, this requirement would give BCTS a form of negative control over the licensee company. They argued that BCTS, by instructing its nominee not to attend a board meeting, would be able to prevent the company's other directors from reaching decisions on any matter.

The applicant at the hearing indicated that, to resolve the concerns surrounding this particular issue, it would be willing to amend the definition of "quorum" contained in the Agreement to Incorporate in a manner that would permit the Board of Directors to conduct business in the absence of the BCTS nominee. It suggested that the definition might employ wording similar to that found in a shareholders agreement considered by the Commission in the context of a licence application for a new specialty service (The Discovery Channel) that was approved in 1994.

Accordingly, and as proposed by the applicant, it is a condition of licence that the definition of a "quorum" for the purposes of meetings of the applicant's Board of Directors be amended to read as follows, either in the Agreement to Incorporate or in any other Shareholders Agreement replacing that agreement that may be entered into following incorporation of the applicant company:

The quorum for the transaction of business at a meeting of the Board of Directors shall be the majority of the directors holding office as such, from time to time, provided that the director nominated by BCTS must be present or represented by proxy except as provided below in the case of an adjourned meeting. In the event that a quorum is not present on the date and within two hours after the time set for the meeting, all members including those absent shall make reasonable effort to agree on the date, time and place of the adjourned meeting, failing which such meeting shall stand adjourned to the fifth Business Day immediately following and at the same time and place. Upon an adjournment, notice shall be given to members. The quorum at such adjourned meeting shall be the members then present thereat. A member may participate in a meeting (or adjourned meeting) by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear one another: a member participating in such a meeting by such means is deemed to be present thereat.

With respect to the concerns raised by interveners regarding the matters stipulated in the Agreement to Incorporate as requiring the unanimous consent of the applicant's Board of Directors, most of the items falling into this category are consistent with the protections routinely afforded minority shareholders. In the Commission's view, however, the inclusion of one such item, namely decisions concerning the incorporation or acquisition of a subsidiary, could unduly affect a considerable portion of the licensee's activities and fetter the ability of the Board's majority to conduct business.

Accordingly, by condition of licence, the licensee shall modify the Agreement to Incorporate by deleting paragraph 3.1(i).

A further matter requiring the unanimous consent of the applicant's Board of Directors would be any decision concerning, among other things, the lease of the undertaking carried on by the company to be incorporated. The Commission considers that, depending on the interpretation given to the term "lease", the stipulation that such decisions must receive unanimous consent could have undesirable consequences similar to those noted above regarding the Board's ability to conduct business. Accordingly, the Commission brings to the applicant's attention that the Commission shall interpret paragraph 3.1(a) of the Agreement to Incorporate as in no way preventing a simple majority of the applicant's Board of Directors from acting on its decisions to acquire a lease or to enter into lease arrangements with third parties.

As noted earlier, the agreements between the shareholders of the company to be incorporated contain provisions that would permit BCTS, in certain circumstances, to increase its shareholdings to 50%, and also commit BCTS to fund all or most of the undertaking's operational requirements over the first four years. Certain interveners suggested that these provisions lend support to a finding that effective control would reside with BC TEL, and that approval would effectively give BC TEL a "head start" in the cable distribution business, contrary to Commission policy.

The Commission has considered this argument, but accepts as reasonable the applicant's explanation that the commitment by BCTS to provide operational funding represents fair compensation to the majority shareholder for the concession granted BCTS to acquire additional shares in the licensee company. The Commission also notes that any share acquisition by BCTS that would increase its voting interests to 30% or more of the total would be subject to the Commission's prior approval, and would also require changes to the existing limit on foreign ownership prescribed in the Direction.

Nevertheless, in order to provide further assurance that BCTS, BC TEL or their affiliates do not exercise effective control of the applicant, the Commission requires the licensee, by condition of licence, to ensure that the CEO of the company to be incorporated or, should there be none, the person performing similar functions, is not an employee of BCTS, BC TEL, or any of their affiliates.

Based on the foregoing, and with implementation of the safeguards the Commission has required the applicant to put into place through the above conditions of licence, the Commission is satisfied that ultimate ownership and effective control of the company to be incorporated will reside, not with BCTS, BC TEL or their affiliates, but with Mr. Hui at all times, and that the company is thus eligible to hold a broadcasting licence.

(b)  Access to subscribers by competing distributors

Opposing interveners, particularly those representing the interests of existing cable operators, noted that the contracts between the applicant and the various strata councils or condominium associations at Concord Pacific Place will give the applicant sole access to the individual residential units of the condominium properties, generally for a period of five years, to the exclusion of other terrestrial-based distributors such as Rogers. They argued that approval of the current proposal would thus be tantamount to replacing one monopoly cable licensee with another.

At the hearing, the applicant indicated that it fully intended to permit access to the individual buildings, by Rogers or by other terrestrial-based competitors, at the end of the contract period, which is typically five years. It described this period as the length of time it would require to recover its costs of installing the cable plant. Two representatives of strata councils also appeared at the hearing to confirm that this position was the same as that taken by the applicant in the course of negotiating contracts with their councils.

According to the developer's plans, most of the housing at Concord Pacific Place will be built and sold as condominium apartments. The Commission understands that, under the terms of agreements entered into by the owners of the individual units at the time of purchase, the elected strata council of each condominium building is assigned responsibility to act on a broad range of matters, including the selection of which broadcasting distributor is to be given access to serve the property.

The Commission wishes to emphasize that it will be proactive in its role of ensuring that Canadians have access to alternative distributors of broadcasting services. It is satisfied that its approval of the current application is fully consistent with this objective. It will enable the strata councils, representing the interests of the owners of individual condominium units, to choose between competing cable operators.

The interveners' argument that the Commission should require the strata councils to provide access to competing cable operators is similar to a proposal examined by the Commission, in 1994, in the context of its consideration of amendments to the exemption criteria for master antenna television (MATV) systems. At that time, cable interests had requested that a criterion be established requiring the operators of exempt MATV undertakings to grant cable undertakings access to their buildings. In Public Notice CRTC 1994-18 dated 2 March 1994, the Commission rejected this proposal on the basis that:

... owners of multi-unit buildings have the right to grant or to not grant access to their buildings. The Commission is not prepared to intrude upon matters pertaining to the exercise of these property rights.

In the present circumstances, the Commission considers that it would be no more appropriate of it to require the strata councils to provide access to competing distributors than it would be to require a landlord or an individual home owner to do the same.

Thus, having taken note of the applicant's comment at the hearing that, upon the expiry of the existing contracts with the individual strata councils, they would be free to negotiate with other broadcasting distributors for the provision of cable television services, the Commission is not prepared to make any specific requirements in this regard.

(c) Class of licence

The applicant proposed that it be licensed and regulated as the operator of a small Class 2 undertaking having fewer than 2000 subscribers. It noted that, according to its projections, the number of the undertaking's subscribers would not increase above 2000 until the end of the third year, and would not reach the threshold of a Class 1 system (6000) until the end of the sixth or seventh year. The applicant claimed that for it to assume obligations any greater than those imposed on the operators of small Class 2 undertakings would be unduly onerous, given the small number of subscribers it expects to attract, at least during the first few years of operation. The applicant made particular reference in this regard to the simultaneous signal substitution requirements that are imposed on Class 1 licensees under the regulations, but not on Class 2 licensees. The applicant estimated that the capital costs it would incur to implement simultaneous signal substitution would be approximately $200,000.

A number of opposing interveners, however, argued that the applicant, if licensed, should be subject to the stricter regulations applied to Class 1 licensees, on the principle that competing distribution undertakings should be placed on the same footing to ensure that such competition is fair and equitable. It was noted that, although the applicant might have relatively few subscribers initially, the disadvantages related to its small size would be offset, at least in part, by the high density of the area to be served and low per-subscriber service costs.

Further, in its written and appearing intervention, CanWest Global Systems stressed the importance to local television broadcasters of the simultaneous signal substitution requirements, and argued that the applicant should not be excused from meeting these requirements. Others at the hearing suggested that the capital costs of implementing simultaneous signal substitution would likely be in the range of $20,000 to $35,000, rather than the applicant's estimate of $200,000.

The Commission is persuaded by the arguments put forward by the interveners. Accordingly, and consistent with the Commission's intended policy approach announced in Public Notice CRTC 1996-69, it has decided to issue a Class 1 licence to the applicant. This means that the company to be incorporated will be subject to the obligations and requirements specified under the regulations with respect to simultaneous signal substitution. By this decision, the Commission emphasizes the significance it attaches to simultaneous signal substitution as a tool for maintaining the integrity of the program rights acquired by Canadian broadcasters.

The licensee will also be subject to the regulatory requirements governing the distribution and linkage of services. The Commission notes in this regard that the distribution of services proposed in the application may conflict with these requirements, since almost all services, including certain discretionary services, are shown as grouped within a single tier provided to all subscribers.

In the Commission's view, the distribution of a package of discretionary services to all subscribers, alongside a package of those priority and optional services that constitute the normal basic service offering of a cable undertaking, would only be acceptable if the discretionary services are contained in a package that all subscribers agree to accept and pay for.

The Commission's distribution and linkage requirements, and its designation of certain services as being discretionary services, are mechanisms intended to benefit subscribers by ensuring that they are not obliged to pay fees for packages of discretionary services they do not want. The Commission therefore reminds the applicant that, should a subscriber advise that he or she does not wish to receive and pay for the discretionary service package, the applicant will be required to provide the basic service to that subscriber, by itself and without any discretionary services, and will be expected to charge the subscriber an appropriately-reduced monthly fee.

Further, the applicant will be subject to the Commission's policies affecting Class 1 licensees, such as that requiring adherence to the access rules for broadcasting distribution undertakings announced in Public Notice CRTC 1996-60 dated 26 April 1996. Although the channel line-up contained in the application does not appear to reflect these policy requirements, the Commission notes the following commitment made by the applicant at the hearing:

All of the licensed Canadian channel services that we are allowed to carry and are common in our area will be carried by us.

The Commission expects the applicant to adhere to its commitment, and to advise the Commission, within three months of the date of this decision, of the steps it has taken to do so.

Other matters

The licensee, by condition of licence, is authorized to distribute, at its option, and as part of the basic service, the following services: KCTS-TV (PBS), KOMO-TV (ABC), KING-TV (NBC) Seattle and KSTW (CBS) Tacoma, all received via satellite from Cancom; the service of Television Northern Canada (TVNC); and, provided the originator of the programming service agrees in writing to such distribution, the service of Radio Québec.

Pursuant to the general condition of licence, the Commission further authorizes the distribution, at the licensee's option, and as part of the basic service, of KIRO (Ind) Seattle and KCPQ-TV (FOX) Tacoma, both received by optical fibre.

The U.S. television signals that the licensee is herein authorized to distribute as part of the basic service are the same signals that Rogers is permitted to distribute to its basic service subscribers in the Vancouver area. While the number of signals is greater than the 3+1 package of U.S. services a new licensee would normally be permitted to distribute as part of the basic service under Commission policy, the Commission is satisfied that a departure from the policy is warranted in the circumstances.

The applicant is relieved, by condition of licence, from the requirement, under section 12 of the regulations, that it distribute the signal of local station CHEK-TV on an unrestricted channel.

Because of problems it claims are associated with the off-air reception of local station CHAN-TV, the applicant has proposed to receive the signal of this station via satellite. The Commission notes in this regard the applicant's confirmation at the hearing that the signal of the local station and of the satellite feed are identical.

The Commission reminds the applicant of the requirements of section 16 of the regulations concerning the provision of audio programming services.

The applicant proposed to charge a monthly fee of $31.50. In Public Notice CRTC 1996-69, the Commission stated its intention not to regulate the fees charged by new distribution undertakings entering into competition with existing undertakings, on the grounds that competition would render such regulation unnecessary. In conformity with that approach, and pursuant to subsection 18(1.1) of the regulations, the Commission has determined that the requirements of section 18 of the regulations will not apply to the licensee.

In the same public notice, the Commission stated its intent, in drafting the new distribution regulations, not to impose obligations on new distributors with respect to the provision of service. It also stated its intention to lift the obligations to provide service currently imposed on existing Class 1 and larger Class 2 cable undertakings (based on the availability to a household of municipal water or sewer services), once the basic service package of one or more licensed competitive terrestrial distributors is available to 10% or more of the households in the service area of the existing undertaking. In the Commission's view, there was a need for such requirements in the old distribution environment of limited market entry. In the new environment, these requirements will not be needed as competing terrestrial distributors seek to attract and retain market share. Additionally, the new DTH and wireless distribution undertakings will have the capacity to provide Canadians with attractive alternatives.

In keeping with the above approach, the Commission relieves the applicant, by condition of licence, from the provision of service requirements that are contained in section 17 of the current regulations.

The Commission reaffirms the particular importance it attaches to the development of community programming and has taken note of the annual budgets that will be allocated for this purpose during the licence term. The Commission encourages the licensee to develop programs that reflect community interests and concerns.

The company to be incorporated is also reminded that the Commission is currently considering adoption of a formula whereby the licensee, and those of other Class 1 and Class 2 terrestrial distribution undertakings, would be required to spend a minimum of 5% of their gross annual revenues derived from broadcasting activities on the provision of support, both for local community programming and for the development and creation of other Canadian programming. As announced in Public Notice CRTC 1996-69, the Commission proposes to require such licensees to devote at least 1.5% of their gross annual broadcasting revenues to direct expenditures associated with community programming, and the balance of the 5%, or a least 3% of their gross annual broadcasting revenues, whichever is the greater amount, to an independently-administered production fund.

In Public Notice CRTC 1992-59 dated 1 September 1992 and entitled "Imple-mentation of an Employment Equity Policy", the Commission announced that the employment equity practices of broadcasters would be subject to examination by the Commission. It encourages the applicant to consider employment equity issues in its hiring practices and in all other aspects of its management of human resources.

This decision is to be appended to the licence.

Allan J. Darling
Secretary General