ARCHIVED - Broadcasting Decision CRTC 2002-235

Broadcasting Decision CRTC 2002-235

Ottawa, 14 August 2002

MTS Communications Inc.
Winnipeg and surrounding areas, Manitoba

Application 2001-1097-4
Public Hearing at Winnipeg, Manitoba
4 February 2002

New cable broadcasting distribution undertaking

In this decision, the Commission approves in part an application by MTS Communications Inc. (MTS) for a regional broadcasting licence to operate a cable broadcasting distribution undertaking. The applicant had requested a regional broadcasting licence to serve the provinces of Manitoba, Saskatchewan and Alberta. The Commission has decided to license MTS to serve only the communities that it proposed to serve as part of the initial phase of its business plan, namely Winnipeg and surrounding areas.

The application

1.

The Commission received an application by MTS Communications Inc. (MTS) for a Class 1 regional broadcasting licence to operate cable broadcasting distribution undertakings (BDUs) to serve Region 2, which consists of the provinces of Manitoba, Saskatchewan and Alberta, as defined in Changes to the Commission's approach to cable undertakings, Public Notice CRTC 2001-59, 29 May 2001 (Public Notice 2001-59).

2.

MTS is a Canadian carrier within the meaning of section 2 of the Telecommunications Act and, as a telecommunications service provider (TSP), offers a range of local, long distance, wireless, data and enhanced telecommunications services to the province of Manitoba. It is effectively controlled by the Board of Directors of Manitoba Telecom Services Inc. through the latter's ownership of 100% of MTS's issued and outstanding voting shares.

3.

Although MTS requested a regional broadcasting licence to operate cable BDUs to serve all of the prairie provinces, its business plan indicated that, initially, it would offer broadcasting services only to Winnipeg and surrounding areas. The applicant stated that it would provide service to subscribers in other areas of the province of Manitoba later. It did not specify a time-frame for extending its service.

4.

MTS proposed to offer a broad range of broadcasting services over telephone lines. Among these services, the applicant requested authority to distribute, on a discretionary digital basis, any of the Canadian signals listed on the Commission's List of Part 3 eligible satellite services, asmost recently set out in Revised lists of eligible satellite services, Public Notice CRTC 2001-82, 13 July 2001. The applicant also sought authorization to carry, on a discretionary digital basis, a second set of signals that provide the programming of the four U.S. commercial networks (CBS, NBC, ABC and FOX) and the non-commercial PBS network (the U.S. 4+1 signals).

5.

MTS did not propose to offer a channel of local expression. It indicated that it would contribute 5% of its gross revenues derived from broadcasting activities to eligible Canadian funds, as outlined in Contributions to Canadian programming by broadcasting distribution undertakings, Public Notice CRTC 1997-98, 22 July 1997.

Interventions

6.

Six parties filed interventions to MTS's application. While Global Television Network (Global) and the Canadian Association of Broadcasters (CAB) did not oppose granting MTS a broadcasting licence, they expressed concern regarding specific aspects of the application. Shaw Communications Inc. (Shaw), Craig Broadcast Systems (Craig), Westman Communications Group (Westman), and the Canadian Cable Television Association (CCTA) opposed MTS's proposed cable BDUs.

Proposed service area

7.

The CAB as well as Shaw, Westman and the CCTA argued that it would be inappropriate to grant MTS a broad, regional licence to serve Region 2 when it only proposed to serve the City of Winnipeg.

8.

In response, MTS reiterated that, while its proposed BDUs would initially serve only the City of Winnipeg and surrounding areas, it does plan to extend service to other communities in the prairie provinces contingent upon market conditions and the availability of suitable facilities.

Distribution of distant signals

9.

The CAB and Craig opposed MTS's request to carry all of the Canadian signals on the Commission's list of Part 3 eligible satellite services, and a second set of U.S. 4+1 signals. The interveners considered that the distribution of these signals on MTS's proposed BDUs would erode the program rights purchased by local broadcasters and impede their ability to fulfil their programming obligations. For its part, Global contended that MTS should be required to delete all of the duplicate signals of distant signals that are already received in its proposed market as well as any signals that are not licensed to serve that market.

10.

In response, MTS submitted that the principle of competitive equity requires that it be allowed to carry the same services as those that are currently authorized for distribution by the incumbent cable and satellite direct-to-home (DTH) BDUs serving the Winnipeg market and that those services include all of the distant Canadian and U.S. services requested in the application.

Potential for cross-subsidization

11.

The CCTA submitted that, since MTS has earnings in excess of 16% on its utility segment revenues that could provide the resources to subsidize its entry into the BDU market, the Commission should not approve the application unless sufficient safeguards are followed to ensure that MTS does not engage in anti-competitive behaviour arising from cross-subsidization.

12.

Westman stated that, because MTS proposed to use the same network to provide both broadcasting and telecommunications services, its broadcasting services could be subsidized by telecommunications revenues. The intervener argued that MTS should confirm that it would adopt the costing treatment for broadband initiatives to be assigned to the competitive segment as detailed in Implementation of regulatory framework - Splitting of the rate base and related issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21). In addition, Westman submitted that MTS should clarify whether any costs associated with its broadband initiative would be included in unbundled local loop rates.

13.

Westman pointed out that, since MTS's serving territory includes high cost serving areas, it is entitled to receive subsidy payments from TSPs across Canada to provide telecommunications services to residential customers in the high cost areas. The intervener contended that MTS should be required to ensure that none of the costs of its broadband initiative would be included in the subsidy requirement.

14.

Westman further noted that Local Number Portability (LNP) has not been implemented outside the City of Winnipeg. Since the implementation of LNP is a requirement of local voice competition, Westman concluded that MTS would not face competition for local voice services anywhere in Manitoba, except Winnipeg.

15.

For its part, Shaw expressed concern that MTS's broadband services might be cross-subsidized by revenues from telecommunications services through the use of Digital Subscriber Line (DSL) technology carrying both services. Shaw also noted that MTS did not indicate how its split rate base methodology and the requirements of Decision 95-21 would be used to prevent cross-subsidization between its utility segment and broadcast services.

16.

Shaw also discussed issues associated with Asynchronous DSL (ADSL) access services. It stated that MTS has an approved tariff permitting Internet Service Providers (ISPs) access to its individual lines for the purpose of providing Internet access services. Shaw noted that, in 1997, MTS modified the rates associated with ADSL access services to reflect the anticipated traffic patterns of end users accessing the Internet via an ISP. The intervener asked the Commission to require MTS to file new demand and cost studies for those rates to better reflect the impact that its new digital services would have on ISPs and the demand for ADSL access by those ISPs.

17.

In addition, Shaw argued that MTS should clarify certain aspects of its application related to ADSL access services. Specifically, Shaw stated that MTS should indicate how third party ADSL access service would be accommodated when MTS provided broadcast services over the same local loop. Shaw also considered that MTS should describe how two ADSL modems would be able to work on the same copper loop, if an ISP were to supply the ADSL modem in the customer premise when the ISP-leased ADSL access services and MTS were using the same loop for its service. Finally, Shaw submitted that MTS should address the issue of service quality in the event that a second loop were required to a customer premise for a second DSL service as well as the issue of additional costs associated with providing or upgrading premise wiring for the second loop.

18.

In response, MTS stated that it has implemented all of the Commission's determinations set out in Decision 95-21 and in subsequent orders flowing from that decision. MTS maintained that, since it files its split rate base results with the CRTC every six months, the Commission would have the means to ensure that the applicant does not cross-subsidize its broadband expenditures inappropriately from utility segment revenues. Furthermore, MTS confirmed that its cable BDU service would be just another competitive service and that any utility segment facilities used to deliver cable BDU service would be assigned to the appropriate cost categories in accordance with its procedures for its existing competitive services.

19.

MTS stated that the calculation of the subsidy requirement for service in high cost serving areas in Manitoba is based on the cost of providing primary exchange service to residential customers. The costs included in establishing the subsidy are only the costs of those facilities actually used to provide local access services. The subsidy does not include the costs of facilities used to provide competitive services such as long distance, Internet access or broadcast services. MTS further confirmed that unbundled loops are priced, based only on the cost of elements needed to provide the loops and that none of its costs for broadband initiatives would be included in the price of unbundled local loops.

20.

In addition, MTS submitted that, given that there are no barriers to the entry of competitors into the local telephony market, both Westman and Shaw have the opportunity to deliver local telecommunications services in competition with MTS, but have chosen not to do so at this time. For this reason, LNP has not been implemented outside Winnipeg. MTS stated that LNP would be available in Brandon, where Westman is operating, when there is a demand for that facility.

21.

MTS noted that it does have a tariffed service offering that would allow ISPs to access its lines for the purpose of providing Internet access to customers. The applicant considered that the delivery of broadband service would not affect demand for Internet access by ISPs. It stated that only ISPs using DSL to provide high-speed service to customers would use the service. The applicant further indicated that it has never had an ISP or DSL service provider that wanted to share a loop on which MTS was providing voice service and noted that DSL service providers can co-locate and purchase unbundled loops from MTS to provide their own services. MTS stated that, in cases where it was delivering DSL-based high-speed Internet service over a customer's line, a second ISP could not add its own DSL service to that line. The applicant indicated that the ISP has the option of obtaining a second loop to provide its services and that a copper loop does not have the bandwidth to allow a double DSL configuration.

The Commission's policies

Matters arising under the Broadcasting Act

22.

In Public Notice 2001-59, the Commission announced that it would implement a system of regional licensing for cable BDUs. The Commission identified five regions across Canada for licensing purposes. A single cable operator in each region may hold a maximum of three licences: one to cover all its Class 1 systems, the second to cover all its Class 2 systems, and the third to cover all its Class 3 systems in that region.

Matters arising under the Telecommunications Act

23.

The Commission set out its policy on the timing of entry of telephone companies into the broadcast marketplace in Applications by telephone companies to carry on broadcasting distribution undertakings, Public Notice CRTC 1997-49, 1 May 1997 (Public Notice 1997-49) and in Local competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8). In summary, the Commission's policy stipulated that applications by TSPs to enter the core business of BDUs should not be entertained until rules removing regulatory barriers to effective competition in local telephony had been established. The Commission determined that, by 1 January 1998, barriers to entry into local telephony would have been addressed to the extent that TSPs would be permitted to carry on BDUs as of that date.

Previous Commission determinations

24.

Since then, the Commission has licensed three telephone companies to operate BDUs: The New Brunswick Telephone Company, Limited (New Brunswick Telephone) in Application for a broadcasting licence to carry on a new (cable) distribution undertaking to serve the Province of New Brunswick, Broadcasting Decision CRTC 98-194 and Telecom Decision CRTC 98-7, 23 June 1998, Maritime Tel & Tel Limited (Maritime) in New cable distribution undertaking, Decision CRTC 2000-332, 16 August 2000, and Saskatchewan Telecommunications in New cable distribution undertaking in Saskatchewan, Decision CRTC 2001-171, 12 March 2001. In addition, in separate decisions entitled Applications under the Broadcasting Act and the Telecommunications Act for authority to conduct technical and market trials - Approved, Broadcasting Decision CRTC 97-192 and Telecom Decision CRTC 97-11, Broadcasting Decision CRTC 97-193 and Telecom Decision CRTC 97-12, 8 May 1997, the Commission authorized Bell Canada and TELUS Cable Holdings Inc., respectively, to operate BDUs for the purpose of conducting technical and market trials.

25.

In order that there be adequate safeguards to ensure that TSPs compete fairly, the Commission relies on the framework established in Decision 95-21 and also on Decision 97-8, which prescribed an imputation test to determine if rates are compensatory. In Decision 95-21, the Commission determined that the most appropriate treatment for broadband initiatives was to require TSPs to assign to the competitive segment all new investments and related expenses incurred after 31 December 1994. In Telecom Order CRTC 97-144, 31 January 1997 (Order 97-144), the Commission approved, for the years 1995 and 1996, a procedure for assigning costs associated with fibre cable placement and support structure equipment and facilities. Subsequently, in Telecom Order CRTC 99-475, 31 May 1999, the Commission approved the same procedures for 1997.

26.

In Forbearance from retail Internet services, Telecom Order CRTC 99-592, 25 June 1999, the Commission granted TSPs forbearance from the regulation of retail Internet services.

27.

In Telecom Order CRTC 99-940, 30 September 1999, the Commission stated that the incentives to cross-subsidize between competitive and utility segments are minimal under price caps. Accordingly, the Commission determined that the assignment methodology prescribed in Decision 95-21 and Order 97-144 was no longer necessary to protect utility segment subscribers from bearing the risk associated with any new broadband investment by a TSP. The Commission concluded that, consistent with general Phase III/SRB principles of cost causality, the assignment of all costs associated with the deployment of broadband-capable equipment and facilities to the utility and competitive segments on the basis of relative usage represented a more appropriate and practical methodology.

The Commission's analysis

28.

The Commission has given careful consideration to MTS's request for a regional broadcasting licence to operate cable BDUs to serve all of Region 2, the prairie provinces, and its proposal to initially offer broadcasting services only to the City of Winnipeg and surrounding areas. The Commission's practice over the years has been to license new entrants to offer broadcasting distribution services only in those areas where they intend to provide service within a reasonable period. In the Commission's view, this approach maintains the integrity of the licensing process and ensures administrative efficiency.

29.

With regard to the concerns raised by some interveners that MTS might cross-subsidize its broadcasting operations with revenues derived from its telecommunications services, the Commission notes that MTS is subject to the determinations made by the Commission in Decision 95-21 and subsequent Telecom Orders in 1997 and 1999 and has filed its split rate base results on a regular basis in accordance with those determinations. Accordingly, the Commission is satisfied that the split rate base framework under which MTS has been operating for several years is a sufficient safeguard to ensure that the applicant does not apply inappropriate subsidies to the competitive segment of its services from the utility segment.

30.

The Commission notes MTS's statement that it might bundle the broadcast services it wished to offer with other services such as high-speed Internet access. Both of these services are competitive with high-speed Internet services that have been forborne from regulation since 1999. The Commission notes that, in the event MTS chooses to bundle broadcast services with tariffed telecommunications services, it would be subject to the imputation test required by Joint Marketing and Bundling, Telecom Decision CRTC 98-4, 24 March 1998. The Commission is satisfied that the requirement of an imputation test would prevent anti-competitive pricing. Furthermore, the Commission notes that it has not imposed any restriction with respect to bundling on other TSPs that wish to cross-subsidize broadcast services with other competitive services.

31.

With respect to the issue of subsidies in high cost areas and the potential for MTS's broadband initiative to be included in whole or in part in its calculation, the Commission established the rules governing the calculations in Restructured bands, revised loop rates and related issues, Decision CRTC 2001-238, 27 April 2001. Accordingly, only the costs of those local facilities used to provide local access services would be included in the subsidy calculation. Similarly, with respect to unbundled loops, only the specific costs of providing those loops to competitors would be included in the calculation of the price.

32.

The Commission notes that MTS would not permit an ISP or DSL service provider to have access to the local loop at the same time that MTS is providing high-speed Internet services to a customer over that same local loop. In such a case, an ISP or DSL service provider would have the option of acquiring a separate unbundled loop for provision of service to the same customer at the rates approved by the Commission for MTS. In addition, the Commission notes that the CRTC Interconnection Steering Committee is presently reviewing service quality and other issues when competitive DSL-based Internet services are offered in close proximity to other DSL-based services.

The Commission's conclusion

33.

In the circumstances, the Commission finds that it would be appropriate to license MTS to offer broadcasting services only to the communities that it proposed to serve as part of the initial phase of its business plan, namely the City of Winnipeg and surrounding areas. Accordingly, the Commission approves in part the application by MTS for a  regional broadcasting licence by authorizing it to operate a cable BDU to serve Winnipeg and surrounding communities, as described in the initial phase of its business plan. Once MTS is prepared to introduce service to other communities in Region 2, it may apply to the Commission for authorization to do so.

34.

The Commission shares the concerns raised by some of the interveners that MTS's proposal to offer a second set of U.S. 4+1 signals as well as a wide range of Canadian distant signals on a digital discretionary basis has the potential to erode the program rights purchased by local broadcasters and impinge on their ability to fulfil their programming obligations and responsibilities. Accordingly, as set out in later in this decision, the Commission has authorized the distribution of these signals so long as MTS adheres to the requirements regarding non-simultaneous program deletion set out in section 43 of the Broadcasting Distribution Regulations (the Distribution Regulations). This approach is consistent with the Commission's determination in Carriage of Canadian and U.S. 4+1 signals on a digital basis, Decision CRTC 2000-437, 8 November 2000.

35.

The Commission is satisfied that there are sufficient safeguards and procedures already in place to address the concerns expressed by the CCTA, Westman and Shaw regarding the potential for cross-subsidization between MTS's telecommunications services and its new cable BDU.

Issuance of the licence

36.

Subject to the requirements of this decision, the Commission will issue a Class 1 regional broadcasting licence to MTS to operate a BDU to serve Winnipeg and surrounding communities. The operation of this undertaking will be regulated pursuant to the Distribution Regulationsand the licence will be subject to the conditions set out in the appendix to this decision as well as in the licence to be issued. The licence will expire 31 August 2008.

37.

Furthermore, the licence for this undertaking will be issued once the licensee has informed the Commission in writing that it is prepared to commence operations. The undertaking must be operational at the earliest possible date and in event later than 24 months from the date of this decision, unless a request for an extension of time is approved by the Commission before 14 August 2004. In order to ensure that such a request is processed in a timely manner, it should be submitted at least 60 days before this date.

Authorizations

38.

The signals that the licensee is authorized to distribute may be received by direct reception, or from any Canadian broadcasting distribution undertaking, licensed or exempted, which is authorized to provide signals to other distributors.

39.

The licensee is authorized to distribute, at its option, as part of its digital, discretionary service:

· any Canadian signal listed on the List of Part 3 eligible satellite services (the List); and

· a second set of signals that provides the programming of the four U.S. commercial networks (CBS, NBC, ABC, FOX) and the non-commercial PBS network (the U.S. 4+1 signals).

40.

The distribution on a discretionary basis on the licensee's digital service of a second set of U.S. 4+1 signals, in addition to the set of such signals already carried by the system, and of Canadian distant signals contained in the List, is subject to the provision that, with respect to such signals, the licensee adhere to the requirements regarding non-simultaneous program deletion set out in section 43 of the Distribution Regulations. The Commission may suspend the application of this provision upon its approval of an executed agreement between the licensee and broadcasters. Such an agreement must deal with issues related to the protection of program rights arising in connection with the discretionary carriage of a second set of U.S. 4+1 signals and Canadian distant signals solely on the applicant's digital service, as approved in this decision.

41.

The licensee is further authorized to distribute, at its option, without advertising material, the special programming service of the Manitoba Jockey Club Inc. as part of the basic service.

Contributions to Canadian programming

42.

Under the Distribution Regulations, licensees of all terrestrial broadcasting distribution undertakings, other than Class 3 systems, must contribute at least 5% of annual gross revenues derived from their broadcasting activities to the creation and presentation of Canadian programming. The fact that the licensee intends to offer its broadcasting services bundled with other services raises the issue of what method should be used to calculate gross revenues for the purposes of determining the 5% contribution.

43.

The Commission expects the licensee 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 for broadcasting services offered on a free or discounted basis, whether bundled or not.

Employment equity

44.

Because this licensee is subject to the Employment Equity Act and files reports with Human Resources Development Canada, its employment equity practices are not examined by the Commission. 

Secretary General

Appendix to Broadcasting Decision CRTC 2002-235

New cable broadcasting distribution undertaking in Winnipeg

Conditions of licence