ARCHIVED -  Decision CRTC 99-454

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    Ottawa, 4 October 1999
    Decision CRTC 99-454
    HGTV Canada Inc.
    Across Canada - 199813035
    Application processed by
    Public Notice CRTC 1999-67
    dated 21 April 1999
    Wholesale basic service rate approved for Home and Garden Television
    1.  In Public Notice CRTC 1999-67, the Commission announced the receipt of an application by HGTV Canada Inc. to amend the licence for the English-language national specialty television programming service known as Home and Garden Television (HGTV). The licensee requested authority to charge a wholesale rate of $0.19 per subscriber per month, when HGTV is carried as part of the basic service of a broadcasting distribution undertaking.
    2.  When HGTV was licensed in 1996 (Decision CRTC 96-607), the licensee projected that the service would be distributed solely as a discretionary service, did not forecast any basic service subscriber revenue and therefore did not propose a wholesale rate.
    3.  In the intervening years, however, a number of distribution undertakings have added HGTV to their basic service. Without an authorized wholesale rate for HGTV, those distributors are unable to recover the costs to them of providing HGTV, as they may from all other specialty services carried on the basic service that have a Commission-authorized wholesale rate.
    4.  The Commission considers that, when a specialty television service is carried as part of the basic service, the distributor should generally be able to recover the costs of such distribution. Because wholesale costs are paid to the specialty service, it is important to establish an appropriate rate for that service. In this case, based on the financial documentation provided by the licensee, the Commission is not convinced that a wholesale rate of $0.19 for HGTV is justified.
    5.  In support of its application, HGTV updated and revised its projected growth in subscribers and in subscription revenues over a seven-year period. HGTV's revised projections indicate that its total subscribers would, at the end of the seventh year, increase by about 1.1 million over the projections provided as part of its original licensing application. This increase results from the addition of those subscribers who do not currently subscribe to HGTV as a discretionary service, but who would now receive it as part of the basic service.
    6.  HGTV's revised and original financial projections, while earnings neutral, are not revenue neutral. Compared to the original 1996 financial projections, the revised projections indicate that subscription revenues would be lower by about $0.7 million. On the other hand, advertising revenues would increase significantly, by $11.8 million. As a result of being more widely distributed on the basic service, HGTV would have a larger audience base and would therefore be able to sell more advertising. Overall, total revenues would increase by $11.1 million over the original projections. According to HGTV, these additional revenues would be used to offset increases in programming, sales and administration expenses.
    7.  The Commission has always considered the wider market access and distribution of Canadian specialty services to be beneficial. It also considers that the basic monthly fee should be as affordable as possible.
    8.  With these objectives in mind, the Commission has assessed the applicant's financial projections using the "revenue requirement" technique with total operating expenses and operating margins more or less identical to the original projections. Revenue neutrality is assured, with all additional advertising revenues applied, to keep the basic service monthly rate as low as possible.
    9.  The result is a net "revenue requirement" of $6.3 million over seven years, representing about 36.24% of the projected basic subscriber revenues of $17.5 million calculated at $0.19. On this basis, the basic service monthly rate could be set at $0.07 (that is, 36.24% of $0.19). This revenue neutral rate would help to keep the basic service as affordable as possible.
    10.  The Commission is satisfied that, in order to maintain the level of revenues originally projected for HGTV, a monthly wholesale rate of $0.07 per subscriber is sufficient.
    11.  Accordingly, the Commission approves in part, by majority vote, the application by HGTV Canada Inc., by authorizing the licensee to charge a wholesale rate of $0.07 per subscriber per month. This rate will be considered a "pass-through portion", as defined in section 45 of the Broadcasting Distribution Regulations (the regulations).
    12.  Under the circumstances provided for in the regulations and in Public Notice CRTC 1999-108 dated 7 July 1999 Amendments to the Broadcasting Distribution Regulations regarding basic service fees, approval of this application will allow distributors to make the appropriate filings in order to recover from subscribers the cost of providing the service only where HGTV is carried on the basic service.
    13.  The Commission notes the intervention submitted in opposition to this application, and is satisfied with the licensee's response thereto.
    This decision is to be appended to the licence. It is available in alternative format upon request, and may also be viewed at the following Internet site:
    Secretary General
    Dissenting opinion of Commissioner Stuart Langford
    I disagree with the majority decision and would have granted HGTV Canada Inc. the authority requested to charge a wholesale rate of $0.19 per subscriber, per month when Home and Garden Television (HGTV) is carried as part of the basic service of a broadcast distribution undertaking (BDU).
    HGTV was licensed on September 4, 1996 for carriage on a modified dual status basis, meaning that with the consent of both the distributor and the programmer it could be included as part of a BDU's basic package of services. On the same day, a number of other speciality services were licensed on the same modified dual status basis. Unlike HGTV, most of the other licensing orders authorized a maximum, monthly, per-subscriber wholesale rate for the new service.
    The following is a representative sample of the speciality services licensed and the rates authorized: CTV N1 Headline News, 8.5 cents; S3 Regional Sports Service, 78 cents; TreeHouse TV, 20 cents; Prime TV, 25 cents; Space, The Imagination Station, 29 cents; Outdoor Life, 10 cents; Pulse 24, 30 cents; MuchMoreMusic, 3 cents. Decision CRTC 96-607 (96-607), approving HGTV, contains no mention of a wholesale rate for carriage on basic. An explanation for the fact that HGTV did not propose a rate is provided in paragraph 2 of the majority decision. The Commission did not insist that HGTV propose a rate. Had it done so, this application would, of course, have been unnecessary.
    Had the application resulting in 96-607 proposed the 19 cent wholesale rate requested in this application, the likelihood is strong that it would have been accepted. Certainly, its appropriateness would not have been subject to the scrutiny HGTV's 19 cent request underwent in this application. Judging by the rates approved in the other decisions referred to above, there is every reason to believe that had HGTV requested a 19 cent wholesale rate for carriage on basic back in 1996, the Commission would have approved it. By not approving it now, the Commission may be treating HGTV unfairly.
    Fairness is not always easy to define. For instance, it does not necessarily mean equal treatment. But it can mean that and the Commission has in the recent past given it precisely such an interpretation. In Public Notice CRTC 1999-126, dealing with the regulatory obligations of Class 1 cable distribution undertakings, for example, the Commission discussed the issue of equitable carriage arrangements and the difficulties faced by those services distributed on a scrambled analog basis. At paragraph 25 it said:
    "In view of these concerns, the Commission may consider that distribution on a scrambled analog basis is, in itself, not fair to a given programming undertaking, in circumstances where more favourable carriage arrangements have been concluded with other speciality services that were licensed at the same time. In particular, the Commission is of the view that the carriage of one of these services on a purely discretionary, scrambled, stand-alone basis would be inconsistent with fair and equitable treatment."
    Just as surely, to subject HGTV's application for a wholesale rate to a completely different test of appropriateness from that used in considering the other 1996 applicants can be seen as, "inconsistent with fair and equitable treatment." Yet, that is precisely what has happened in this instance.
    Paragraph 8 of the majority decision states that: "( the Commission has assessed the applicant's financial projections using the "revenue requirement" technique( Revenue neutrality is assured(" That technique, however, is used by the Commission, not when assessing proposed wholesale rates contained in new speciality service applications but when assessing requests for rate increases. That is not what the Commission was asked to do in this application. It was asked to establish a post-licensing basic service fee because such a fee had not been set earlier.
    In 1996, when the speciality service applications (HGTV included) were considered, the Commission granted the other successful applicants the rates requested. The decisions do not reveal why the Commission did so. Neither does the record indicate that the net revenue test was employed, though it does demonstrate that the question of impact on the affordability of a BDU's basic service was examined. As the process was public, ample opportunity was granted to distributors and others to object to proposed rates; so, acceptability was also measured.
    As HGTV did not suggest a rate and as the Commission did not demand one, the 19 cent figure proposed in this application was never subjected either to affordability or acceptability tests. The other rates in the other applications, however, were. As the sample above demonstrates, they ranged from a low of 3 cents to a high of 78 cents with four of the services carrying rates in the 20 to 30 cent range, suggesting that whatever affordability test the Commission applied in 1996 would have been met by a 19 cent figure.
    The second 1996 test, acceptability to distributors, cannot be applied retroactively. It is simply impossible to ask distributors to cast their minds back three years and ask themselves what their subscribers might have been prepared to pay for the privilege of receiving HGTV as part of their basic package. The record in this application, however, clearly demonstrates that several cable systems are prepared to pay a fee not unadjacent to the amount HGTV has requested.
    In December 1998, the Commission received basic service rate increase filings from Aurora Cable and Cogeco BDUs requesting authority to charge 17 cents for providing HGTV on basic service. As the other rates set in 1996 were described in the decisions authorizing them as "maximum wholesale" rates, the 19 cents proposed by HGTV seems very much in line with what the market will bear. Accordingly, the tests applied to the other requests made at the same time as HGTV was originally licensed having been satisfied in this application, I would have approved it.
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