ARCHIVED - Broadcasting Decision CRTC 2002-299

Broadcasting Decision CRTC 2002-299

Ottawa, 9 October 2002

Vidéotron ltée, CF Cable TV Inc., Videotron (Regional) Ltd., Vidéotron (RDL) ltée, Télé-Câble Charlevoix (1977) inc.
Montréal, Quebec, Gatineau, Sherbrooke, Chicoutimi and surrounding areas, and many urban areas in Quebec

Public hearing in the National Capital Region
23 April 2002

Mandatory Order issued pursuant to subsection 12(2) of the Broadcasting Act against Vidéotron Ltée and its subsidiaries

In this decision, the Commission issues a mandatory order pursuant to subsection 12(2) of the Broadcasting Act against Vidéotron ltée and its subsidiaries (Vidéotron). The order provides that Vidéotron and its affiliates, including Câblage QMI inc. (CQMI), may not use the inside wire, ostensibly owned by CQMI, for the delivery of broadcasting services unless Vidéotron and its subsidiaries and/or CQMI offer third parties in competition with Vidéotron for such delivery the use of that wire at a monthly fee not exceeding $0.52 per subscriber per month. The mandatory order also directs that no other fee, such as a transaction fee, is to be charged. CQMI is a subsidiary of Quebecor Media Inc. and an affiliate of Vidéotron. The text of the order is found at Appendix I to this Decision.

The proceeding leading to this decision began when the Commission received complaints from Cable VDN Inc., Bell ExpressVu Limited Partnership and Look Communications Inc.

The context

1.

Vidéotron ltée and its subsidiaries, CF Cable TV Inc., Videotron (Regional) Ltd., Vidéotron (RDL) ltée and Télé-Câble Charlevoix (1977) inc. (collectively referred to as "Vidéotron and its subsidiaries", or simply "Vidéotron") operate or have operated cable distribution undertakings in Quebec. On 8 February 2002, Vidéotron entered into an agreement (the Deed of Sale) with Câblage QMI inc. (CQMI) under which Vidéotron sold to CQMI the inside wire it owned in multiple unit dwellings (MUDs) that have 20 units or more (L-MUDs), valued at $19.5 million.

2.

"Inside wire" is defined in section 1 of the Broadcasting Distribution Regulations (the Regulations), and in the Deed of Sale, as follows:

"inside wire" means the wire that is used by a distribution undertaking for the distribution of programming services that extends from the demarcation point to one or more terminal devices inside a subscriber's residence or premises. It includes the outlets, splitters and faceplates that are attached or connected to the wire but does not include a secured enclosure that is used to house the wire and that is attached to the exterior wall of a subscriber's premises, an amplifier, a channel converter, a decoder or a remote control unit.

3.

Vidéotron and CQMI also concluded two other agreements on 8 February 2002. First, they entered into a Usage Agreement under which Vidéotron would pay CQMI $5.00 per month, for each unit served by Vidéotron, for the right to use the inside wire now ostensibly owned by CQMI in L-MUDs (the Usage Agreement). Second, they entered into a non-exclusive Installation Agreement under which CQMI, as the ostensible owner of inside wire, granted to Vidéotron the task of installing inside wire in L-MUDs (the Installation Agreement). CQMI undertook to pay Vidéotron for its work according to certain agreed-upon hourly rates.

4.

On 12 February 2002, CQMI notified in writing all other broadcasting distribution undertakings (BDUs) competing with Vidéotron, and currently providing service to subscribers in Vidéotron's serving areas in Quebec, that CQMI would make its inside wire available to each of them on the same terms and conditions that it made it available to Vidéotron.

The complaints

5.

On 14 February 2002, the Commission received a complaint from Cable VDN Inc. (Cable VDN), a licensed BDU, alleging, among other things, that Vidéotron and its subsidiaries had breached sections 9 and 10 of the Regulations to which they are subject as BDUs.

6.

Cable VDN attached to its complaint a letter that it had received from CQMI. This letter, dated 12 February 2002, informed Cable VDN that Vidéotron and its subsidiaries had sold to CQMI all of their inside wire in L-MUDs in the territories that they were serving. CQMI advised Cable VDN that, as of 8 February 2002, Cable VDN would not be permitted to connect its subscribers to CQMI's inside wire in L-MUDs until it had signed a Usage Agreement with CQMI. Under this agreement, among other things, Cable VDN would be required to pay CQMI a lease fee of $5.00 per unit per month for the use of the inside wire, plus a $35 transaction fee for each request for new service or transfer of service.

7.

Cable VDN reported that it could no longer obtain access to the inside wire in L-MUDs. Although Vidéotron was still, in accordance with past practice, disconnecting customers within 24 hours of a request by Cable VDN, Vidéotron was refusing to allow Cable VDN to connect new customers to the inside wire.Cable VDN had not entered into a Usage Agreement with CQMI because it considered that the fees CQMI sought were exorbitantly high.

8.

Bell ExpressVu Limited Partnership (ExpressVu) and Look Communications Inc. (Look), also licensed BDUs, received identical letters from CQMI and filed complaints with the Commission also alleging, among other things, a breach by Vidéotron of sections 9 and 10 of the Regulations.

9.

These sections read as follows:

9. No licensee shall give an undue preference to any person, including itself, or subject any person to an undue disadvantage.

10. (1) A licensee that owns an inside wire shall, on request, permit the inside wire to be used by a subscriber, by another licensee, or by a broadcasting undertaking in respect of which an exemption has been granted, by order under subsection 9(4) of the Act, from the requirement to obtain a licence.

(2) The licensee that owns an inside wire may charge a just and reasonable fee for the use of the wire.

(3) The licensee that owns an inside wire must not remove it from a building if a request for the use of the wire has been made and is pending under subsection (1), or while the wire is being used in accordance with that subsection.

10.

Cable VDN, ExpressVu and Look (collectively, the complainants) requested that the Commission intervene and issue a mandatory order that would compel Vidéotron to comply with its regulatory obligations not to give itself an undue preference or subject its competitors to an undue disadvantage, and to provide access to the inside wire of L-MUDS at a just and reasonable fee.

Procedural background

11.

The Commission issued Broadcasting Notice of Public Hearing CRTC 2002-3, 19 March 2002 (NPH 2002-3), summoning Vidéotron to a public hearing, to inquire into, hear and determine whether a mandatory order should be issued requiring the persons summoned, or any of them, to comply with sections 9 and 10 of the Regulations. NPH 2002-3 also stated that the Commission would inquire into whether Vidéotron and its subsidiaries were operating their BDUs in compliance with condition no. 1 attached to their respective licences, which reads as follows:

Except as authorized by the Commission, the broadcasting undertaking licensed hereby shall be operated in fact by the licensee itself. The licence cannot be transferred or assigned.

12.

In NPH 2002-3, the Commission stated that it expected the officers and employees of Quebecor Media Inc. (QMI), the parent corporation of Vidéotron, and those of CQMI, also owned and controlled by QMI, to attend the hearing to address the following:

1. The matters raised in the complaints filed with the Commission by Cable VDN, ExpressVu and Look;

2. Whether, by selling the inside wire in the manner that they did, Vidéotron and its subsidiaries have avoided their regulatory responsibilities as licensees; and

3. Whether in the circumstances of the sale of the inside wire by Vidéotron and its subsidiaries, companies ultimately controlled by Quebecor Media Inc., to CQMI, a company that is also ultimately controlled by Quebecor Media Inc., Vidéotron and its subsidiaries have:

a) Given themselves an undue preference or caused an undue disadvantage to the complaining parties, contrary to section 9 of the Regulations;

b) Breached section 10 of the Regulations by not permitting other licensees to use the inside wire for a just and reasonable fee;

c) Breached the condition of licence referred to above requiring the broadcasting distribution undertaking to be operated by a licensee itself.

13.

The public hearing took place on 23 and 24 April 2002. In addition to hearing interventions from the complainants, the Commission received oral submissions from Vidéotron, QMI and CQMI, including from Mr. Pierre Karl Péladeau, President, Director and Chief Executive Officer (CEO) of QMI and Vidéotron, and its subsidiaries.

14.

Five other parties, including Star Choice Communications Inc. (Star Choice), a licensed direct-to-home (DTH) BDU operating in Vidéotron's service areas in competition with Vidéotron, and the complainants, filed written comments on the appropriateness of the Commission issuing a mandatory order.

15.

The publicly available written record of the proceeding includes exchanges of correspondence prior to the oral hearing, as well as submissions filed afterwards.

16.

Today, the Commission is also releasing its determination with respect to a claim of confidentiality by Vidéotron for certain information that it filed after the public hearing in response to undertakings given at the public hearing.

The parties

17.

QMI, controlled by the Pierre Péladeau special trust (of which the brothers Pierre Karl and Érik Péladeau are the beneficiaries), acquired control of Vidéotron from André Chagnon and family, following the release of Transfer of effective control of Vidéotron ltée to Quebecor Média Inc., Decision CRTC 2001-283, 23 May 2001 (Decision 2001-283).That transfer was part of a larger $6 billion acquisition in which Quebecor Inc. (Quebecor), through its subsidiary QMI, acquired all the outstanding shares of Le Groupe Vidéotron ltée.

18.

QMI has two shareholders, namely Quebecor, which holds a 54.72% interest, and Capital Communications CDPQ inc., the remaining 45.28%. In Decision 2001-283, the Commission found that Quebecor would exercise effective control of the companies operated by QMI.

19.

At the time of the 23 April 2002 public hearing, Vidéotron ltée owned all the shares of CF Cable TV inc., which in turn owned Videotron (Regional) Ltd. (Regional). Regional owned Vidéotron (RDL) ltée, which owned Télé-Câble Charlevoix (1977) inc. (Télé-Câble Charlevoix).

20.

With the implementation of two decisions Intracorporate reorganization - transfer of assets, Broadcasting Decision CRTC 2002-152, 12 June 2002 and Corporate reorganization - transfers of assets, Broadcasting Decision CRTC 2002-153, 12 June 2002, the Vidéotron group of companies was reorganized. Vidéotron ltée continues to own CF Cable TV Inc., which continues to own Regional. Vidéotron (RDL) ltée and Télé-Câble Charlevoix have been acquired by Regional, and all of their cable undertakings are now held by Regional.QMI, through 100% owned intermediate holding companies, owns all of the shares of Vidéotron ltée and of CQMI.

21.

In the province of Quebec, Vidéotron and its affiliates have the licensed cable BDUs with the largest geographical serving areas, and serve the greatest number of subscribers.

22.

Vidéotron is one of the largest operators of cable BDUs in Canada. Vidéotron and its subsidiaries serve a market of approximately 2.3 million potential subscribers in Quebec and have a penetration rate of about 67%. Vidéotron's approximately 1.5 million basic service subscribers represent about 78% of Quebec's cable distribution market. Vidéotron dwarfs the next largest incumbent cable BDU in Quebec, Cogeco Cable Canada Inc., which serves about 251,000 subscribers.QMI, through its subsidiaries, garners around 79% of Quebec cable distribution revenues.

23.

CQMI was incorporated as 3277241 Canada Inc. (3277241) on 26 February 1996 and its name was changed from 3277241 to CQMI on 8 February 2002. It was established as a shelf companyin case it was needed at a future date within the Quebecor group of companies.

24.

Between the date of its establishment in 1996 and 8 February 2002, CQMI's directors and officers were Chantal Proulx, Claudine Tremblay and Louis Saint-Arnaud. Claudine Tremblay holds a number of positions within the Quebecor group of companies, including Assistant Secretary of Vidéotron ltée and Director, Corporate Secretariat and Assistant Secretary, Quebecor and QMI.Mr. Saint-Arnaud, now the Secretary of CQMI, holds, or has held, other senior offices within the Quebecor group of companies, including Vice-President, Legal Affairs and Secretary, Quebecor and QMI, and Secretary of Le Groupe Vidéotron ltée.

25.

Mr. François Garneau, a long-standing Vidéotron employee in the engineering department, became President of CQMI on or about 4 March 2002, but did not attend the public hearing. QMI filed material after the hearing indicating that QMI took steps to include Mr. Garneau within the Vidéotron pension plan after his transfer to CQMI.

26.

The office of 3277241 was at the same street address as that of Quebecor. The office of CQMI is at 300 Viger Street, Montréal, the same address as the head office of Vidéotron, at the time of the hearing. 3277241 had no employees and no revenues before 8 February 2002, and in fact was not operating any business.

27.

At the time of the public hearing, CQMI was a subsidiary of 4006305 Canada Inc. (4006305), which in turn was a wholly owned subsidiary of QMI. The Board of Directors of CQMI had an identical membership to that of 4006305, which owned all of its shares, and consisted of Messrs. Marc Doré, Marc Girard and Louis Saint-Arnaud. Mr. Doré, Chairman of the Board of CQMI, held, or had previously held, other senior offices within the QMI group of companies, including Vice-President, Taxation and Real Property Service, Quebecor and QMI. On 8 February 2002, Mr. Girard was Vice-President and Treasurer of Vidéotron ltée.

28.

Attached as Appendix II to this Decision are Organization Charts. Part A of these charts shows the Quebecor group of companies. Part B shows the Vidéotron group of companies and lists the communities in which Vidéotron and its subsidiaries provide service. Attached as Appendix III are lists of directors and officers of the Québecor group of companies, including the Vidéotron group of companies. These lists, submitted by Vidéotron during this proceeding, updated information provided to the Commission in the course of the proceeding that led to Decision 2001-238.

29.

Central to the Quebecor and Vidéotron companies is Mr. Pierre Karl Péladeau. The importance of his role was illustrated at the public hearing, when he answered questions on behalf of QMI, CQMI and Vidéotron, and by a statement in QMI's letter to the Commission dated 9 May 2002:

[Translation] Within Vidéotron, problems are generally discussed as they arise and relayed to management without delay. Any employee with an idea on how to reduce operating costs may make a suggestion. Since the acquisition of Vidéotron by Quebecor, and especially following the increase in the intensity of competition at the end of the autumn of 2001, numerous options are being discussed, in particular the transfer and sale of assets. Of course, only those suggestions that have a chance of success with respect to the business plan go forward to the Executive Committee. The Committee is able to make decisions because of the presence of the President and Chief Executive Officer. Thus, the Boards of Directors concerned are able to ratify any initiatives when necessary by passing a short resolution. By the same token, the Executive Committee of QMI reviews the totality of the projects of the companies in the group. Thus, within QMI, the texts [of company resolutions] are generally brief and concise.

30.

ExpressVu, a national DTH BDU, is the largest new entrant in Québec and is operating in competition with Vidéotron and its affiliates. Licensed in New, national, direct-to-home satellite distribution undertaking - Approved, Decision CRTC 95-901, 20 December 1995, ExpressVu has approximately 1 million subscribers nationally, including about 260,000 subscribers in Quebec.

31.

Look, a wireless multipoint BDU, was licensed in Applications by Teleglobe Inc. and others, on behalf of a company to be incorporated, for a licence to carry on a new MDS radiocommunication distribution undertaking to be known as "LOOK TÉLÉ - Approved, Decision CRTC 98-55, 20 February 1998. Look has a Class 1 distribution licence and provides service in many of the larger centres of Quebec and Ontario. Look has about 64,000 subscribers in total, including about 29,000 subscribers in Quebec.

32.

Cable VDN operates only in Montréal. It was licensed as a Class 1 cable BDU in New Cable Distribution Undertaking, Decision CRTC 97-499, 26 August 1997, and this decision noted that its initial plans were to serve only MUDs for the first several years of operation. Cable VDN stated that, as of February 2002, it was serving about 7,500 subscribers in MUDs in the Montréal area.

33.

Star Choice is a licensed national DTH BDU. It was licensed in New, national, direct-to-home satellite distribution undertaking - Approved, Decision CRTC 96-529, 26 August 1996, and has about 620,000 subscribers, including about 165,000 subscribers in Quebec.

Regulatory background

34.

The Commission's consideration of the complaints must be understood in the context of its past and current policies and proceedings with respect to the use of inside wire. It is therefore appropriate to set out that regulatory background in some detail.

Policies prior to competition

35.

The matters of ownership, control and use of inside wire of cable television undertakings are important to the regulation and supervision of the Canadian broadcasting system.

36.

Prior to 1995, a cable television undertaking was licensed to serve a defined area on an exclusive basis and, up until 1998, was required by the Commission to own, at a minimum, its local head end, amplifiers and subscribers drops.

37.

When cable television systems began expanding in the mid-1970's, the Commission placed emphasis on this ownership requirement. For instance, in Cable Television Licences for Saskatchewan, Introductory Statement to Decisions CRTC 76-432 to 76-435, 15 July 1976 in which cable television licences for Saskatchewan were approved, the Commission stated:

Parliament, in enacting the Broadcasting Act, has delegated supervisory and regulatory authority to the Commission under certain stated terms and conditions. It is a statutory requirement that the Commission exercise its licensing authority with a view to implementing important national objectives. These objectives cannot be realized if a cable licensee is not in a position to effectively ensure compliance with its regulatory responsibilities and to provide broadcasting services.

The Commission considers that ownership of the head-end, amplifiers and drops is essential to ensure that the licensee is always in a position to comply fully with national legislative broadcasting requirements for provision of those broadcasting and other entertainment services for which it has been licensed. The licensee must fully exercise control over the means of delivery of its service and should be in a position to contribute to the design of the system in order to ensure compliance with national technical standards.

Ownership is also essential to ensure that a cable licensee is directly accountable to the public and the Commission for the provision of services and for the rates charged, and is directly involved in the community for which it is licensed, to respond to subscriber needs. The licensee should not be in a position to avoid such fundamental responsibilities by pleading lack of effective control over its delivery system.

38.

In Application for Cable Television Service to Certain Areas of Manitoba, Public Notice CRTC 1976-132, 30 December 1976, the Commission listed reasons why it considered it important that cable licensees exercise effective control over their undertakings. It noted that such control was necessary to ensurecompliance with the requirements of federal statutes and regulations relating to broadcasting undertakings.It further considered that the ability of licensees to exercise control over their undertakings enabled them to respond fully to Commission policies and be accountable directly to the Commission for, among other things:

• the provision of all services authorized by the Commission to subscribers;

• the extension of service areas as required;

• the rates charged to subscribers; and

• the response and resolution of complaints by subscribers;

39.

The Commission's policy on ownership of equipment and facilities became a regulation. Section 4 of the Cable Television Regulations, 1986 reads:

Except as otherwise provided pursuant to a condition of licence, a licensee shall own and operate its local head end, amplifiers and subscriber drops.

The opening of competition

40.

In Competition and Culture on Canada's Information Highway, 19 May 1995(the Convergence Report), the Commission stated that the evidence and submissions it had received convinced it that a change was required in its long-standing policy of granting only one licence for one geographical area, effectively conferring a monopoly on each licensee. The Commission stated that it would henceforth endorse increased competition in cable's core business in order to provide consumers with increased choice among distributors of broadcasting services:

Consumers want, deserve, and will get competition in cable's core market. While recognizing that technology and market forces will shape the broad direction and timing of competition, the Commission will manage the transition with a strong bias toward ensuring the earliest possible competition. The perceived need for transitional protection of the core cable business stems essentially from concerns about the market power of the telephone companies and any head start they may obtain in packaging telephony and entertainment. However, in light of the dominance of the cable industry relative to other potential entrants, there is no need to limit competition by other entrants in the broadcasting distribution market. Further, telephone companies should be allowed to apply for broadcasting distribution licences as soon as rules have been established to remove barriers to effective competition in the local telephone business. Applications from other potential distributors should be considered without delay.Such applications could involve DTH, Microwave Distribution Systems or other distribution technologies.

41.

Further, in the Convergence Report, discussing one of the means to bring about competition within broadcasting distribution, the Commission recognized that inside wire was a type of bottleneck, i. e., an essential facility, and stated:

. the cable and telephone wires installed inside a subscriber's premises have attributes of an essential facility. In the case of a number of telephone companies, responsibility for this inside wiring has already been transferred to the telephone subscriber. The Commission proposes that measures be developed to ensure that all telephone and cable subscribers have the freedom to connect the inside wire to the systems of whichever suppliers of service they choose.

42.

The Commission took a number of steps to implement the new policy of competition within broadcasting distribution. Vidéotron or the Canadian Cable Television Association (CCTA), of which Vidéotron was a member¹, participated in the Commission's processes intended to facilitate competition.

43.

First, as mentioned above, the Commission licensed other distributors to operate in competition with licensed cable operators.

44.

Second, the Commission took steps to change the regulations governing BDUs. In Call for comments on a proposed approach for the regulation of broadcasting distribution undertakings, Public Notice CRTC 1996-69, 17 May 1996 (PN 1996-69), the Commission announced its intention to replace the existing regulations with new regulations governing all types of BDUs. It also established a public procedure for this purpose.

The 1998 ownership requirements

45.

In PN 1996-69, the Commission stated that removal of the requirement that cable television operators own the subscriber drop would be consistent with the notion that subscribers be able to connect the inside wire to the systems of whichever suppliers they choose. However, reiterating statements made some twenty years earlier, the Commission stated:

While there would no longer be any obligation to own specific portions of the equipment and facilities used by a distribution undertaking, it would remain the responsibility of each licensee to take appropriate measures to ensure that it is able to exert effective control over the operation of its undertaking in keeping with the requirements of its licence, the [Broadcasting] Act and the distribution regulations.

46.

In New Regulatory Framework for Broadcasting Distribution Undertakings, Public Notice CRTC 1997-25, 11 March 1997 (PN 1997-25), the Commission noted that the elimination of the plant ownership rule "may be seen as the first step in implementing the Commission's stated policy objective of providing subscribers with the ability to connect their inside wiring to the service provider of their choice."

47.

However, the Commission reiterated:

The Commission emphasizes that it will remain the responsibility of each licensee to take appropriate measures to ensure that it has effective control over the operation of its undertaking, in keeping with the requirements of its licence, the [Broadcasting] Act and the new regulations.

48.

In PN 1997-25, the Commission emphasized the importance of inside wire as a key element of ensuring competition and consumer choice:

In the Commission's view, cable licensee ownership of existing inside wire constitutes a major barrier to competition and consumer choice. A customer is likely to be reluctant to switch service providers if such a switch entails undergoing the inconvenience and disruption of having duplicate wiring installed in the customer's home. Accordingly, the Commission considers that, to the extent possible, customers should have the ability to connect the existing inside wire to the alternative service provider of their choice.

49.

Further, in PN 1997-25, the Commission stated that competition would be fostered if the Commission were to set up a regime for the transfer of ownership of the inside wire, from BDUs to subscribers. The "customer ownership model" was described as follows:

In the Commission's view, customer ownership of inside wiring would enhance competition and choice, and contribute to the fulfilment of the objectives set out in section 3 of the [Broadcasting] Act.

50.

In Proposed Broadcasting Distribution Regulations, Public Notice CRTC 1997-84, 2 July 1997 (PN 1997-84), the Commission published for comment proposed regulations that would apply to several distinct types of BDUs. Section 10 of the proposed regulations provided, among other things, that a BDU that owned the inside wire had to offer the wire to the customer for purchase at a price not to exceed $0.33 per metre.

51.

Following receipt of public comments, including some from Vidéotron and the CCTA, the Commission announced the enactment of the Regulations in Broadcasting Distribution Regulations, Public Notice CRTC 1997-150, 22 December 1997 (PN 1997-150). The Commission implemented a customer ownership model for inside wire, as proposed.The Regulations came into force on 1 January 1998.

The implementation of a new inside wire regime

52.

As announced in PN 1997-150, the Commission established a working group of the CRTC Interconnection Steering Committee (CISC) for the purpose of resolving issues associated with the implementation of the new transfer of ownership regime, including such matters as:

• processes for customer transfer between competitive distributors, including such things as development of service intervals, process maps, ordering and billing, and information exchange standards;

• agreement on alternative demarcation points, with particular reference to multiple-unit dwellings;

• valuation of inside wire and other related equipment in multiple-unit dwellings.

53.

The CISC working group went through an extensive discussion of the issues raised in PN 1997-150. It consisted of industry representatives, including the CCTA, of which Vidéotron was then a member, and others interested in the issues. On 19 May 1999, the CCTA wrote to the Commission, stating that there were problems with the transfer of ownership regime established by regulation in December 1997 and requesting that the Commission amend section 10 of the Regulations. In fact, no inside wire in a MUD had yet been transferred by incumbent BDUs as required by the Regulations.

54.

The CCTA proposed a "non-interference model" as a substitute. It suggested that section 10 of the Regulations be amended to remove the mandatory sale of inside wire to the customer. It requested that this provision be replaced by one which would provide (i) that a licensee not restrict or otherwise interfere with a customer's use of the inside wire, (ii) that a licensee that owns the inside wire of a single-unit dwelling not charge for use of the wire, and (iii) that a charge be determined by the Commission for use by another licensee of the inside wire in MUDs.

55.

The Commission sought comments on the CCTA's proposal in Call for comments on a proposal to amend section 10 of the Broadcasting Distribution Regulations, submitted by the Canadian Cable Television Association, Public Notice CRTC 1999-124, 29 July 1999 (PN 1999-124).

56.

In its response to PN 1999-124, the CCTA submitted that its non-interference model would eliminate the transfer of ownership issues. The CCTA stated that customers would be able to receive service from the BDU of their choice and "ownership of the inside wire would remain with a party that is regulated by the CRTC". In a separate submission, Vidéotron stated that it "[Translation] supports without reservation the CCTA's submission".

57.

In Revised policy concerning inside wire regime; Call for comments on proposed amendments to section 10 of theBroadcasting Distribution Regulations, Public Notice CRTC 2000-81, 9 June 2000 (PN 2000-81), the Commission stated:

In its approach to the issues surrounding inside wire, the Commission's intention has always been to enable customers to use the service provider of their choice. This has been a fundamental element of the Commission's efforts in both broadcasting and telecommunications and is a linchpin in its efforts to promote the competitive provision of all communications services. The Commission remains committed to end-user choice.

58.

In PN 2000-81, the Commission sought submissions on its proposed revised wording of section 10 to reflect the non-interference model proposed by the CCTA. In its call for comments, the Commission noted that the CCTA had enunciated four principles that should be used in interpreting and implementing a new regime. These were:

• where the licensee owns the inside wire, it shall retain ownership of it, i.e., there is no transfer of ownership of the inside wire;

• the licensee that owns the inside wire will be prohibited by regulation from interfering with a customer's use of it;

• there will be no charge for use by another licensee of the inside wire in single-unit dwellings; in circumstances to be identified by the CRTC through the CISC process, there will be a charge, also to be determined by the Commission, for use by another licensee of the inside wire in multiple-unit dwellings; and

• all licensees will refrain from damaging another licensee's distribution system, cable drops, customer service enclosures and panel boxes.

59.

In Amendments to section 10 of the Broadcasting DistributionRegulations for the purpose of implementing a revised policy on access to inside wire, Public Notice CRTC 2000-142, 6 October 2000 (PN 2000-142), the Commission implemented the non-interference model to govern access to inside wire, and adopted the current wording of section 10 of the Regulations.The provision came into force on 18 September 2000.

Setting an inside wire lease fee

60.

In PN 2000-81, and again in PN 2000-142, the Commission noted that the cable industry has generally advocated a charge only for wiring in MUDs and only for wiring that is less than five years old. In both public notices, the Commission requested that the Cable Wiring (CW) CISC group meet to develop an appropriate rate for such wiring, and that the rate be put in place within two months of the coming into effect of the regulatory amendment. If consensus were not reached within that period, the Commission indicated that the CW-CISC group should submit any dispute to the Commission for resolution.

61.

The CW-CISC working group convened in November and December 2000 to begin discussions on what would constitute an appropriate fee for the use of inside wire in MUDs. The CCTA, ExpressVu, Shaw Communications Inc., Rogers Communications Inc., Vidéotron and Cable VDN participated actively in these meetings. These parties requested more time to complete their discussions, and the Commission extended the deadline set out in PN 2000-81 to 7 February 2001.

62.

In November 2000, the CCTA submitted a model for determining a lease rate for the use of BDU inside wire in MUDs, for discussion at a CISC working group meeting. Vidéotron inserted its costs into the CCTA's template in order to demonstrate, by way of example, the order of magnitude and types of costs that a typical cable company would have incurred, and should be able to recover, under the lease rate regime contemplated in PN 2000-81. Using the CCTA's template and Vidéotron's costs, the CCTA proposed a monthly lease fee of $1.50 per unit per month. This amount represented an average of Vidéotron's costs to pre-wire a building ($1.28 per unit per month) and the costs to re-wire a building ($1.73 per unit per month).

63.

By February 2001, the CW-CISC working group reached consensus on some broad principles, including the need for a national lease fee and an historical cost-based approach as the appropriate methodology for establishing a lease fee. However, the working group determined that it would not be able to arrive at a consensus with respect to the level of the lease fee. Participants, including Vidéotron, agreed that it would be appropriate for the various parties to submit their proposals to the Commission for a final determination.

64.

In May 2001, the CCTA and ExpressVu filed proposals with the Commission. The CCTA's proposal reflected the notion that the fee should be based on historical costs. It proposed a single national lease fee of $2.67 per subscriber per month, payable by a competitor for the use of inside wire owned by another BDU. The CCTA proposed to add a $100 annual administrative fee payable by a competitor to the party leasing inside wire to that competitor.

65.

In its proposal, ExpressVu submitted that cable companies had already recovered most of, if not all, their costs.ExpressVu proposed that a nominal lease fee of $0.08 per unit per month be established for the use of inside wire by any BDU, based on the Commission's statement in PN 2000-81 that it considered the transfer value of $15 per unit, as proposed by the CCTA in the proceeding leading to PN 1997-150, to be a reasonable basis for commencing negotiations for an appropriate fee. This fee was derived by dividing the proposed $15 by what ExpressVu submitted was the expected useful life of the wire, namely 15 years or 180 months.

66.

In Call for comments - cable inside wire lease fee, Broadcasting Public Notice CRTC 2002-13, 8 March 2002 (PN 2002-13), the Commission called for comments on its preliminary view that a fee of $0.44 per subscriber per month would be an appropriate lease fee for inside wire in MUDs. The Commission derived this figure using an historical cost-based approach, with a series of adjustments to the methodology that the CCTA had put forward in its May 2001 proposal.

67.

In developing its preliminary view in PN 2002-13, the Commission sought to ensure that consumers enjoy the full benefits of competition in distribution, including the benefits of end-user choice, while taking into account the interests of both incumbents and new entrants. The Commission stated, among other things, that the lease fee should not constitute a barrier to entry by competitors. Thus, the Commission recognized that an excessive fee for the use of inside wire could constitute such a barrier.

68.

Many broadcasting undertakings, including cable BDUs, through their industry association, the CCTA, as well as Vidéotron, participated actively in the Commission's review of the appropriate fee. On 23 April 2002, Vidéotron filed its submission in response to PN 2002-13. Using the methodology of the replacement cost of inside wire, and a proposed return on investment rate of 14%, Vidéotron submitted that the appropriate lease fee should be set at $4.92 per subscriber per month.

69.

In Cable inside wire fee, Broadcasting Public Notice CRTC 2002-51, 3 September 2002 (PN 2002-51), the Commission established a fee of $0.52 per subscriber per month for the use of inside wire in MUDs, based on an historical cost-based approach. The Commission indicated that it considered that the replacement cost approach proposed by Vidéotron did not take into account inside wire costs that had already been recovered. The Commission further considered that Vidéotron's approach did not allow for fluctuations in costs that had occurred over time and the difference in value between new wire and older wire that was closer to the end of its useful life.

70.

The Commission reiterated in PN 2002-51 the view that the lease fee for inside wire in MUDs should not constitute a barrier to competitive entry.

Related issue: Access to customer service enclosures

71.

In the process leading to PN 2000-81, some parties, including competitors to the incumbent cable BDUs, claimed that the lack of access to the customer service enclosures (CSEs) and distribution panels owned by the incumbent distributors posed a significant barrier to entry and permitted incumbent distributors to frustrate the new entrants' effective provision of service to newly acquired customers.

72.

CSEs are locked metal boxes that are usually attached to the exterior of a single-unit dwelling and serve as the point of interconnection between the inside wire and the serving company's external distribution plant. In most MUDs, instead of a secured enclosure being located on the exterior wall of the individual apartment unit, there is at least one distribution panel box located in a common area, although, in some MUDs, the CSE may be located on the exterior wall of a subscriber's premises.In the present proceeding, the parties referred to CSEs and distribution panels interchangeably.

73.

As noted in PN 2000-81, access to these locked enclosures is a highly contentious issue and was among the matters addressed in the fourth principle enunciated by the CCTA in its proposal, namely that all licensees should refrain from damaging another licensee's distribution system, cable drops, customer service enclosures and panel boxes.The definition of "inside wire" set out in Regulations expressly excludes "a secured enclosure that is used to house the wire and that is attached to the exterior wall of a subscriber's premises". Thus, the secured enclosure referred to in the definition forms part of the remainder of the distribution equipment that is, generally, owned and operated by the incumbent cable company.This is also true of the distribution panels.

74.

The Commission stated in PN 2000-81 its understanding that, in the case of some undertakings, licensees were permitting access to their CSEs without requiring a co-ordinated visit by a member of their staff. The Commission expected licensees to ensure that this practice continued where it has been implemented. The Commission also reminded all parties that they must respect the integrity of property they neither own nor control.

75.

In paragraph 30 of PN 2000-81, in order to facilitate timely joint visits for transferring service, the Commission required all licensees to accommodate requests by other distributors for access to CSEs or distribution panels within 24 hours of receiving such a request and to provide them with a 2-hour appointment window.

Positions of the complainants

Cable VDN

76.

Cable VDN submitted that Vidéotron's sale of inside wire to an unregulated company was in violation of section 9 of the Regulations, relating to undue preference, and to section 10 of the Regulations, relating to access to inside wire. Cable VDN stated that, in PN 2000-81, the Commission relied on the CCTA's statement that "the ownership of the wire would remain with a party that is regulated by the Commission". Cable VDN stated:

the understanding that the ownership of inside wire would remain with a party that is regulated by the Commission was the lynchpin to the Commission's decision to accept the non-interference model proposed by the CCTA (of which Vidéotron was a member).

77.

Cable VDN concluded that Vidéotron had very clearly transferred its ownership of inside wire to an unregulated company for the sole purpose of evading the rules and regulations set out by the Commission.

78.

Cable VDN stated that, implicit in CQMI's demand for a payment of $5 per unit per month for Cable VDNs current use of the inside wire, was the threat that if it failed to pay that amount, Cable VDN would be in breach of its responsibilities to CQMI. The latter would then be free to disconnect all of Cable VDN's customers. It submitted that if the Commission did not take action, Cable VDN ran the risk of seeing the majority of its customers cut off from its service, and its business obliterated.

79.

Cable VDN noted that it had wired 35 buildings in the territory. Eight of the 35 buildings had been wired by both Cable VDN and Vidéotron. Cable VDN further submitted that it had invested a total of $25 million in infrastructure to provide BDU services to customers in the approximately 20,000 units where its services are available, in about 250 buildings in Montréal. It added that a significant portion of this investment has been stranded by Cable VDN's inability to gain access to the inside wire in MUDs. According to Cable VDN, Vidéotron's sale of the inside wire to CQMI could destroy competitive service providers like Cable VDN and completely frustrate the Commission's stated goal of achieving facilities-based competition in the broadcasting distribution industry.

80.

To illustrate the effects of the 8 February transactions on its operations, Cable VDN cited the problems it had encountered in introducing its service to a condominium complex in Montréal called Le Sanctuaire du Mont Royal (Le Sanctuaire). Cable VDN indicated that, after spending just over $250,000 connecting its network to Le Sanctuaire, it was set to launch its service to subscribers in the complex on 13 February 2002.

81.

Cable VDN received CQMI's letter on 12 February 2002 and, since it no longer had access to the inside wire in Le Sanctuaire, it indicated it was not possible for it to implement its service as planned. Cable VDN stated that "the CQMI letter appeared to be timed to coincide with the very day Cable VDN was ready to commence serving customers at Le Sanctuaire."

82.

Cable VDN indicated that a number of customers at Le Sanctuaire had had their service disconnected by Vidéotron before Cable VDN was made aware that it would not have access to the inside wire. Cable VDN stated that, as a result, several customers were left without cable service for several days, and had no other alternative but to resume service from Vidéotron.Cable VDN submitted that it had urged Vidéotron not to charge reconnection fees for these customers, as it was not the customer's fault that such fees were being levied.

83.

Cable VDN submitted that, as a result of CQMI's actions, hundreds of customers had been deprived of their choice of service provider and that Cable VDN's investment in providing service to Le Sanctuaire remained unused. Cable VDN further stated that Vidéotron had been remarketing Le Sanctuaire by offering existing customers high discount prices that would lock them into Vidéotron service for at least a year.

84.

Cable VDN also submitted that hundreds of residents in other buildings connected to Cable VDN's network had asked for its service, but could not be connected due to the current dispute. It further stated that other buildings had signed contracts with its company, but that it had been forced to postpone or cancel these contracts since it could not obtain access to the inside wire.

85.

Cable VDN stated that, since 12 February 2002, it had been barred from providing service to a single new customer in any of the buildings where the inside wire was subject to Quebecor control. It submitted that, as a result, millions of dollars of its investment had been stranded, its business had been largely shut down, and a number of its employees had been laid off. Cable VDN submitted that, while all this was occurring, Vidéotron had been aggressively trying to win back VDN customers in other buildings with heavily discounted packages not available to other Vidéotron customers.

86.

Cable VDN, as did the other complainants, expressed concern that Vidéotron/CQMI's actions would result in long-term damage to its business reputation and loss of consumer confidence in its ability to provide a service in competition with Vidéotron. It stated that "future customers will think twice about switching services if it becomes aware to them that their choice can be taken away at any moment". It added that this would be a fatal blow to competition in MUDs, not just in Quebec, but throughout Canada, and:

A lot of the damage in this case is just to our reputation. We show up at these buildings. We tell them that we can provide them with service. We go to the meeting and tell them service will commence on the 12^th of February. We sign them up. We tell them to be ready for it. Then the day comes and we can't provide. This was completely out of our control.

87.

Cable VDN took issue with the terms and conditions of the Deed of Sale and stated:

To an outside observer it would appear as if Vidéotron has made a terrible deal and that they will be paying approximately 20 million dollars per year plus maintenance, repair and replacement costs to CQMI. This will surely have a negative impact on Vidéotron's business since prior to the QMI sale, Vidéotron was still responsible for the maintenance, repair and replacement of the inside wire, they just did not have to pay an additional $5.00 per month.

We've already shown that the $19.5 million price for the wire will be paid back after only one year of $5.00 per month fees and that after that point CQMI will be reaping profit off the arrangement. CQMI is not responsible for the maintenance, repair or replacement of the wire, nor does it indicate that they will be paying for its installation. In fact we still have no idea what CQMI would be doing in return for the $5.00 per month lease rate and we see no sign that the $5.00 per month rate is reasonable or equitable.

88.

Cable VDN submitted that, on the surface, Vidéotron apparently bargained against its own interests. For example, in the Usage Agreement,

· Clauses 7.2 and 8.3 provide that Vidéotron will install subscriber drop equipment and additions and alterations, but that such equipment and additions then become the property of CQMI;

· Vidéotron has not protected itself against future price increases;

· according to Cable VDN's calculations, Vidéotron has obliged itself to pay to CQMI a lease income of over $17 million per year (over $85 million over five years), in exchange for a sale price of only $19.5 million;

· there is no provision ensuring that Vidéotron will remain able to carry out its regulatory obligations; and

· there is no provision, such as a mediation clause, to ensure that disputes between Vidéotron and CQMI can be resolved.

89.

Cable VDN concluded that the only explanation for Vidéotron making such a bad business deal was that it is a non-arm's length transaction, under which Vidéotron will suffer no negative consequence.

ExpressVu

90.

ExpressVu submitted that Vidéotron, through the transactions with CQMI, has given an undue preference to itself, and subjected ExpressVu to an undue disadvantage, contrary to section 9 of the Regulations.

91.

ExpressVu argued that:

the preference to itself [Vidéotron] is manifested in the fact that Vidéotron would appear to have continued unrestricted access to the inside wire to provide its subscribers service. ... The preference is undue because it gives Vidéotron an advantage in speed and ease of access to serve subscribers relative to ExpressVu that is not warranted.

92.

ExpressVu added that, while CQMI's demands for a lease fee and a transaction fee impose real costs on the use of the inside wire of other BDUs, such charges amount to nothing more than a "wash" for Vidéotron, which would only be paying what appears to be a wholly-owned subsidiary, conveniently co-located with Vidéotron itself.

93.

ExpressVu submitted that the harm to it and its subscribers is immediate and serious, since subscribers were effectively being denied their choice of service providers. According to ExpressVu, Vidéotron and CQMI were denying BDU service to any resident that did not choose Vidéotron. ExpressVu was also of the view that the actions by Vidéotron have raised doubt, in potential subscribers' minds, about the ability of ExpressVu to provide service, to its continuing detriment.

94.

ExpressVu noted that, like Cable VDN, it had been unable to connect any new subscribers in L-MUDs where Vidéotron has ostensibly sold the inside wire to CQMI. First, in buildings where it has built facilities, ExpressVu noted that it was being denied access to any additional inside wire, and could therefore not connect any new customers. Second, it was forced to halt expansion of its operations to other L-MUDs in Vidéotron territory.

95.

ExpressVu also noted that it had not wired any buildings in Quebec. Consequently, it depends exclusively on the use of inside wire of other BDUs, notably, Vidéotron, in order to gain access to buildings. The $5 per month fee for use of the inside wire would, in its view, render its business in L-MUDs unworkable, and it would be forced to vacate the market in such areas.

96.

ExpressVu provided additional information which indicated that approximately $40,000 per month in marketing expenditures were cancelled as a result of Vidéotron/CQMI's refusal to allow ExpressVu to use the inside wire in L-MUDs on reasonable terms.

97.

ExpressVu was also concerned about the long-term impact of Vidéotron's and CQMI's actions. In its view:

The harm caused by Vidéotron goes beyond the short term. Each additional day that passes while the current situation is allowed to continue compounds the competitive advantage Vidéotron has garnered for itself and adds to the cost and effort we face to regain the confidence of building managers and consumers.

98.

ExpressVu also rejected Vidéotron's argument that the sale of its wire to CQMI was a legitimate arm's length transaction. ExpressVu stated that the mere fact that CQMI and Vidéotron are not independent calls into question the valuation of the transaction.

99.

ExpressVu stated that, at the fee proposed by CQMI, the financial viability of ExpressVu's existing MUD service agreements would be placed in jeopardy. Its opportunity to expand in the market and to reach out to the great majority of the population that still has no choice of service providers would be eliminated. According to ExpressVu, the transaction between Vidéotron and CQMI significantly limits the possibility that the Commission's competitive policy in distribution would ever be implemented.

100.

ExpressVu characterized the sale of the inside wire transaction as a deliberate attempt to circumvent the Commission's upcoming determination of a regulated lease fee, and the requirements of section 10, by moving the inside wire from the regulated BDU owned by Quebecor to another subsidiary of Quebecor in order to escape the consequences of a Commission decision.

101.

ExpressVu stated that Vidéotron's evidence indicated that it has about 180,000 subscribers in L-MUDs. ExpressVu and all the other competitors together would appear to have fewer than 8,000 such subscribers. Thus, according to ExpressVu, Vidéotron was still supplying service to more than 95% of the subscribers in L-MUDs and it would appear that more than 98% of L-MUDs in Vidéotron territory still did not have a choice of service providers. Hence, according to ExpressVu, for the overwhelming majority of L-MUD residents in Quebec, competition has yet to be introduced.

Look

102.

Look, in its complaint, argued that Vidéotron's actions place it in breach of section 10 of the Regulations and submitted that Vidéotron conferred on itself an undue advantage, contrary to section 9 of the Regulations. Look also alleged that Vidéotron, in effect, did not respect the process established in PN 2000-81 with respect to competitors' ability to use the inside wire owned by BDUs.

103.

Look submitted that the monthly fee of $5 per unit was excessive and anti-competitive and that the impact of Vidéotron's actions was all the more severe on a small provider, such as Look, which was targeting the market in question. It noted that, under its business strategy, it was looking for growth opportunities, especially in MUDs, and has invested approximately $10 million in infrastructure to serve MUDs in Vidéotron's territory. Look stated that it has installed Look equipment into more than 5,000 MUDs containing more than 200,000 units and now had almost 60,000 subscribers in Quebec and Ontario to its digital distribution service.

104.

Look added that, at $5 per subscriber per month for inside wire, it would register a loss. Look further submitted that the duplication of wiring already existing in MUDs, as an alternative, would entail significant capital expenditures and make any business case impossible.

105.

Look submitted that the purported "sale transaction" between Vidéotron and CQMI has all the hallmarks of a mere sham and the Commission should not hesitate to pierce the corporate veil being used by Vidéotron in a transparent attempt to avoid its regulatory obligations. In its view, because CQMI is merely the alter ego of Vidéotron, CQMI's insistence on being paid $5 per unit per month and a transfer fee of $35 per order in fact constitutes a breach by Vidéotron of section 10 of the Regulations.

106.

Look, referring to British Columbia Telephone Company v. Shaw Cable Systems (B.C.) Ltd., [1995] 2 S.C.R. 739, (British Columbia Telephone Company), also suggested that any argument by Vidéotron that it is not in breach of section 10 of the Regulations because it no longer owns the inside wire, runs counter to the legal principle that parties cannot, through agreements, avoid, or contract out of, their regulatory obligations.

107.

Look urged the Commission to require Vidéotron, by way of a mandatory order pursuant to section 12 of Broadcasting Act (the Act), to provide access to the inside wire in MUDs directly to competitors. In the alternative, Look added that CQMI appears to be carrying on a broadcasting undertaking and, as such, would itself be subject to licencing by the Commission's pursuant to the Act.

Vidéotron's position

108.

On 15 February 2002, Commission staff sent the original complaint from Cable VDN to Vidéotron for response, and requested that Vidéotron grant access to its inside wire to Cable VDN until the Commission completed its inquiry.

109.

In an initial response dated 18 February 2002, Vidéotron replied:

[Translation] As Vidéotron and its subsidiaries are no longer the owners of the inside wire since 8 February 2002, you will easily understand that Vidéotron and its subsidiaries are unable to give effect to this request. Please be advised that Câblage QMI inc. is not a subsidiary of Vidéotron.

Therefore, Vidéotron has no authority over Câblage QMI inc.

110.

In letters dated 21 and 26 February 2002, Vidéotron replied in greater detail to the complaints. Vidéotron denied breaching sections 9 and 10 of the Regulations. In its view, the Usage Agreement between CQMI and Vidéotron demonstrated that the procedures for access to inside wire are respected by CQMI. Vidéotron further submitted that it was in compliance with all of its regulatory obligations, including its conditions of licence.

111.

Vidéotron submitted that, in a very competitive environment, it had to concentrate a greater level of its financial resources on the costs of acquiring customers and on the introduction of digital and interactive distribution, rather than on infrastructure such as inside wire in buildings. Since, in its view, the wiring of new buildings and the rewiring of existing buildings are not strategic activities, Vidéotron decided to sell its inside wire to a third party.

112.

Vidéotron suggested that its decision does not change in any way the contribution that its BDUs make towards the achievement of the Commission's policies of giving subscribers the ultimate choice of their supplier of services, and of favouring competition within the broadcasting distribution industry.

113.

Vidéotron further stated that, during its discussions with CQMI, it was assured that CQMI would offer access to the inside wire, upon receipt of a just and reasonable fee.In its view, the Usage Agreement entered into between CQMI and Vidéotron confirmed the essence of these discussions and would ensure that the subscriber who chose a distributor of services other than Vidéotron would benefit from exactly the same terms and conditions as those who chose Vidéotron with regard to the use of inside wire.

114.

CQMI confirmed that it had purchased the inside wire of Vidéotron and its subsidiaries in L-MUDs. It submitted that it was not a licensee and therefore was not subject to the Commission's jurisdiction. Thus, CQMI would not follow a Commission staff request that CQMI grant access to inside wire in L-MUDs to competitors pending the Commission's decision on the complaints. CQMI stated that it was established as a corporation in order to operate, on a commercial basis, the inside wire of buildings and to obtain a just remuneration for the use that is made of it by Vidéotron and by all its competitors.

115.

Finally, counsel to Vidéotron at the public hearing submitted that there appeared to be general agreement between the complainants and Vidéotron on the facts surrounding the distpute:

Based on my reading of the public file, there does not appear to be much in dispute amongst the parties as to the material regulatory facts. [.]

One: on February 8, 2002 Vidéotron entered into an agreement with Câblage QMI Inc. -- which I will refer to as CQMI -- for the sale of the inside wire owned by Vidéotron in multiple dwelling unit buildings that have 20 units or more.

Two: "inside wire" is defined in the BDU Regulations, and is a defined term in essentially the same form in the contract of purchase and sale between Vidéotron and CQMI of February 8, 2002.

Three: Vidéotron is a wholly-owned subsidiary of Le Groupe Vidéotron Ltée, which is itself a wholly-owned subsidiary of Quebecor Media Inc. (QMI).

Four: CQMI is wholly-owned subsidiary of 4006305 Canada Inc. and, that company is itself a wholly-owned subsidiary of QMI.

Five: Vidéotron and CQMI entered into an agreement on February 8, 2002, which specifies the terms and conditions of use by Vidéotron of the inside wire owned by CQMI.

Six: the amount that Vidéotron has agreed to pay CQMI for the right to use its inside wire in MDU buildings with 20 units or more, is $5.00 per month, per unit served by Vidéotron.

Seven: CQMI has notified in writing each BDU that currently provides service to subscribers in Quebec, that CQMI will make such inside wire available to each of them on the same term and conditions as it makes it available to Vidéotron.

The situation before and after 8 February 2002

116.

As of 8 February 2002, the relationship between Vidéotron and the competitive BDUs has therefore changed significantly. After that date, the competitive entrants would not be permitted to connect customers to the inside wire in L-MUDs, unless they signed a Usage Agreement with CQMI, although there is nothing in writing between Vidéotron and CQMI to that effect. In order to understand the relationships between the parties, the Commission must examine the situation before that date, the transactions that were entered into on that date, and what has happened since then.

Situation prior to 8 February 2002

117.

Vidéotron and its subsidiaries owned the inside wire in most of the buildings in their service areas prior to 8 February 2002. Within Vidéotron's serving areas, pending the outcome of the CW-CISC process, and then the PN 2002-13, process to establish an appropriate lease fee, competitive BDUs had made a number of arrangements with Vidéotron in order to gain access to the inside wire in MUDs. Vidéotron and its subsidiaries permitted access to competitve BDUs, free of charge,pending the outcome of the CW-CISC and PN 2002-13 processes.

118.

At the public hearing, Vidéotron confirmed that, prior to the 8 February 2002 transactions, it dealt with transfer requests in compliance with the Commission's expectations set out in PN 2000-81. Vidéotron explained that, prior to 8 February, it accommodated requests by other BDUs for access to distribution panel boxes within 24 hours of receiving such requests. Vidéotron stated that, upon receipt of a request by a competitive entrant to disconnect a cable subscriber in a MUD, a Vidéotron technician would go to the building and remove the end of the inside wire from the distribution panel box.Vidéotron would then leave the end of the wire free outside the distribution panel box so that it could be reconnected by the entrant to the entrant's own distribution system.

119.

Vidéotron further permitted competitive BDUs to have access to Vidéotron's distribution panel boxes to carry out some transfer requests. These were not locked, or a key to the CSE was provided to the competitive BDU, so that it could open the distribution panel box and extract the wire, without a premise visit by Vidéotron.

The 8 February 2002 transactionsand their effects

120.

On 8 February 2002, Vidéotron and CQMI entered into a series of transactions:

· pursuant to the Deed of Sale, Vidéotron ostensibly sold all the inside wire in L-MUDs to CQMI;

· in payment for the inside wire, CQMI issued preferred shares to Vidéotron and its subsidiaries, some of which were redeemed;

· the Usage Agreement between Vidéotron and CQMI set out the terms and conditions under which Vidéotron would have access to CQMI's inside wire; and

· in the Installation Agreement between Vidéotron and CQMI, Vidéotron undertook to install inside wire in L-MUDs where the wire was being installed for the first time, or where rewiring was required.

121.

Vidéotron was asked public hearing about the genesis of the idea of selling the inside wire in L-MUDs to another company within the QMI group of companies. In response, Mr. Péladeau stated that the idea to sell Vidéotron's inside wire was developed within the upper management of Quebecor and QMI. Vidéotron also agreed, at the public hearing, that inside wire is a type of bottleneck facility.

122.

Following the public hearing, and pursuant to an undertaking, Vidéotron and QMI filed copies of internal documents that set out financial projections for CQMI and an executive summary of the strategic considerations behind the idea of selling the inside wire. These were:

· The CRTC's new rules permit access to the inside wire for all BDUs, at a just and reasonable fee;

· A significant number of residential units are obsolete and must be replaced. All the units will be obsolete in the short term;

· The poor quality and the age of the inside wire are causing customer dissatisfaction and the loss of a part of Vidéotron's customer base;

· Uncertainty persists as to the just and reasonable value to be determined for the inside wire;and

· The conversion of its client base to digital technology creates, for Vidéotron, a significant need for funds.

The Deed of Sale

123.

The Deed of Sale of the inside wire from Vidéotron to CQMI that Vidéotron filed with the Commission prior to the public hearing stated that the sale price was for $1 and other good and valuable considerations. The transfer related to the inside wire located within 7,662 buildings within Vidéotron and its subsidiaries' service areas involving some 167,782 subscribers and a total number of units of potential subscribers of 383,088.

124.

Despite the $1 value contained in the original Deed of Sale, Vidéotron stated that the actual value of the transaction was $19.5 million. Following the public hearing, in response to an undertaking, Vidéotron filed a copy of an additional Deed of Sale, also dated 8 February 2002, that set out a $19.5 million sale price. The additional Deed of Sale referred to a non-arm's length relationship between Vidéotron and its subsidiaries and CQMI. Vidéotron explained that the $19.5 million was calculated as the fair market value of the assets that CQMI acquired, using the depreciated replacement cost of the assets, given the lack of similar transactions on the market which could serve as a point of reference. No independent valuation of the assets sold had been conducted.

125.

At the public hearing, Vidéotron was asked how it and CQMI had been able to establish a sale price for the inside wire, and for a breakdown of the assets according to the age of the wire. Vidéotron stated that its engineering department kept records of building projects realized over the last 15 years. Based on Vidéotron's records, it took a sampling of the age of the wire in order to set the price.

126.

Asked whether there was ever any thought given to selling the inside wire to any other person, or issuing a call for tenders, Mr. Péladeau responded that Vidéotron/QMI did not do so, as there was no other company in the business of leasing inside wire facilities to cable companies in Canada.

127.

At the public hearing, Mr. Péladeau was asked what approvals were necessary in order for Vidéotron and its subsidiaries and 3277241, eventually CQMI, to enter into the agreement for the purchase and sale of the inside wire. Mr. Péladeau responded that the approvals of QMI's and of Vidéotron's lenders were necessary. QMI's corporate minutes of 14 February 2002, 6 days after the transaction, contain a mention of a report made by Mr. Péladeau on the creation of CQMI, to which Vidéotron ostensibly transferred the inside wire in L-MUDs.

128.

The assent of the lenders was sought through a letter dated 8 February 2002 from Mr. Marc Girard of Vidéotron to the Royal Bank of Canada. The letter explained that Vidéotron intended to proceed with the transactions that were being completed on that date which would have the effect of adding to the revenues of Le Groupe Vidéotron ltée while preserving all the rights of the lenders. Mr. Girard explained that CQMI, a new subsidiary of Vidéotron, would execute a guarantee and a deed of hypothec in favour of the lenders and, accordingly, would become a guarantor and a member of the Vidéotron Group under the credit agreement.

129.

In final reply comments, QMI explained that CQMI was made, for a short instant, a subsidiary of Vidéotron. However, QMI added that CQMI was first incorporated as a subsidiary of QMI, and it was only made a subsidiary of Vidéotron in order to respect certain provisions of Vidéotron's credit agreement with respect to the disposal of assets charged with security interests in favour of the lenders. QMI stated that, although there were other possible methods of allowing Vidéotron to dispose of its assets pursuant to its credit agreement, the one chosen was the simplest. QMI asserted that, without these elements of an administrative nature, CQMI would have remained a subsidiary of QMI.

130.

CQMI paid for the wire by issuing redeemable non-voting preferred shares valued at $19.5 million. The Deed of Sale filed after the Public Hearing reflects this statement:

· CQMI paid $12.7 million to Vidéotron ltée, by issuing 12,700 preferred shares to Vidéotron ltée;

· CQMI paid $5.525 million to CF Cable TV Inc, by issuing 5,525 preferred shares to the latter;

· CQMI paid $0.812 million to Regional, by issuing 812 preferred shares to the latter;

· CQMI paid $0.478 million to Vidéotron (RDL) ltée, by issuing 478 preferred shares to the latter;and

· CQMI paid $0.005 million to Télé-Câble Charlevoix, by issuing 5 preferred shares to the latter.

131.

CQMI then redeemed the preferred shares of all of Vidéotron ltée's subsidiaries, leaving outstanding the preferred shares that CQMI had issued to Vidéotron ltée. The holder of CQMI preferred shares, i.e., Vidéotron ltée, may require CQMI to purchase or redeem these shares, on one day's notice. Asked how it had acquired the funds to redeem the shares from four of Vidéotron's subsidiaries, CQMI replied that the funds came from a portion of the proceeds of a direct loan that a related company, QMI, had taken from its commercial lender.

The Usage Agreement

132.

The Usage Agreement provided for CQMI granting to Vidéotron the right to use the inside wire, in exchange for Vidéotron paying a monthly fee of $5 per subscriber per month, plus a $35 administrative fee, payable upon presentation of each transfer request.

133.

In its letter dated 21 February 2002, Vidéotron stated that it could not provide information on how the monthly fee of $5 per subscriber per month was established. Vidéotron stated that CQMI would be in a better position to reply to this question.However, at the public hearing, Mr. Péladeau stated that the $5 monthly fee and the $35 transfer fee were negotiated between Vidéotron and CQMI, who mutually accepted these amounts, and agreed that these fees were just and reasonable.

134.

Vidéotron indicated that these negotiations took place between Mr. Gingras, Vice-President, Finance, of Vidéotron, and Mr. Doré, Vice-President, Taxation and Real Property Service of QMI. Vidéotron stated that the amounts of $5 per month and $35 per transfer request were based on the depreciated replacement value, calculated from Vidéotron data, and were "acceptable to Vidéotron, to allow it to carry on its affairs".

135.

Mr. Péladeau also confirmed that, in February 2002, when Vidéotron sold the inside wire to CQMI, Vidéotron and QMI were aware that the Commission was in the process of determining what the appropriate lease fee for inside wire in MUDs would be. At the hearing, Mr. Péladeau stated that he was aware that the Commission would probably set the lease fee at a level between the $0.08 proposed by ExpressVu and the $2.67 proposed by the CCTA. Mr. Péladeau also confirmed that Vidéotron and QMI were aware of the process initiated by PN 2002-13, and that Vidéotron would be filing a submission in response to that notice.

136.

Given that the $5 per subscriber per month was calculated on the basis of data available only to Vidéotron and not discussed with competitors, it is clear that only Vidéotron was intimately involved in the sale of the assets with QMI, and in particular in setting the conditions at which CQMI would give access to inside wire to BDUs, including Vidéotron.

137.

The Usage Agreement forwarded to the competitors is identical to that entered into between Vidéotron and CQMI. Thus, not only would a competitive BDU have to agree to pay the $5 per month fee and the $35 transfer fee, but it would also have to agree to other provisions, such as Clauses 7.2, 8.3 and 9.1.

138.

Under Clause 7.2 of the Usage Agreement between Vidéotron and CQMI, Vidéotron must install subscriber drop equipment, at its own cost, but any new equipment so installed becomes the property of CQMI.

139.

Under Clause 8.3 of the Usage Agreement, Vidéotron may make alterations and additions to the inside wire with CQMI's permission but, once made, the alterations and additions become the property of CQMI.

140.

Under Clause 9.1 of the Usage Agreement, even though Vidéotron has sold the inside wire to CQMI, Vidéotron must continue to do all repair and maintenance work, at its own cost.

The Installation Agreement

141.

Under the Installation Agreement, CQMI, as owner of the inside wire, granted to Vidéotron, on a non-exclusive basis, the task of installing inside wire in L-MUDs. CQMI undertook to pay Vidéotron for its work according to certain agreed-upon hourly rates. The work must conform to certain codes and standards, and in particular to the "[Translation] Câblage QMI inc.'s installation standards for inside wire". Mr. Péladeau agreed at the hearing that these standards were those of Vidéotron, applicable since 1993.

142.

However, neither the Usage Agreement nor the Installation Agreement addresses certain questions, such as what would happen if there were a disagreement between CQMI and Vidéotron concerning, for example, whether aging inside wire needs replacement or repair. Under the Usage Agreement, Vidéotron must incur the costs if the inside wire needs repair. However, if it is decided that the inside wire is to be replaced, under the Installation Agreement, CQMI will hire Vidéotron, or another party, to perform the installation work, and will pay for it.

143.

Asked what would happen if a disagreement arose between CQMI and Vidéotron, Mr. Péladeau stated that the companies would have to come to an agreement on how to solve their difference. He stated that a company that has the same parent company as another company "[Translation] could well sue to enforce its rights, although this is an incongruous situation that would not likely happen." Mr. Péladeau acknowledged that the companies within the QMI group of companies have never sued each other and have always worked out any differences internally.

144.

There is no provision expressly set out in the Deed of Sale, the Usage Agreement or the Installation Agreement to ensure that Vidéotron would be able to continue to respect its regulatory obligations. Vidéotron stated that it is operating its licensed BDU in accordance with the Regulations.

145.

Vidéotron was asked if it was paying the $5 per subscriber per month fee that it undertook to pay to CQMI under the Usage Agreement. Vidéotron confirmed that it was paying this sum, by cheque, each month.

Situation after the 8 February 2002 transactions

As Vidéotron was a signatory to the transactions, there was no need for CQMI to advise Vidéotron of the sale of the inside wire, and Vidéotron continued to provide service to its subscribers without interruption. Vidéotron also stated that it did not need to raise the basic monthly fee charged to subscribers in order to cover the additional costs it had assumed as a result of the 8 February transactions.

Vidéotron confirmed that, since the 8 February transactions, it was locking the end of the inside wire belonging to CQMI within Vidéotron distribution panel boxes in L-MUDs. Vidéotron also confirmed that it would send an employee to unlock its distribution panel box and extract the end of the inside wire only when a competitive BDU has signed a Usage Agreement with CQMI, under the same terms as the agreement that it signed with CQMI. Vidéotron added that it has started to upgrade the security and locks of its distribution panel boxes throughout its service area.

QMI stated that, in buildings with fewer than 20 residential units, where Vidéotron has remained the owner of inside wire, connections and disconnections of subscribers are still occurring in the same manner as they had before the 8 February 2002 transactions.

QMI confirmed at the public hearing that CQMI did not advise competitive BDUs that it had purchased the inside wire in L-MUDs until 12 February 2002, and that on 15 February 2002, CQMI provided ExpressVu with a copy of the Usage Agreement that it required ExpressVu to sign.

Cable VDN, ExpressVu and Look stated that, once they became aware of the actions that Vidéotron was taking, they ceased to make any further transfer requests to Vidéotron. They stated that they knew that Vidéotron would disconnect subscribers, but not allow reconnection to another BDU. The complainants added that Vidéotron was claiming a $100 reconnection fee from subscribers, and the complainants wished to spare subscribers this charge.

The Commission's analysis and determinations

Vidéotron's condition of licence no. 1 - Operation of the undertaking

152.

Vidéotron's condition of licence no.1 provides:

Except as authorized by the Commission, the broadcasting undertaking licensed hereby shall be operated in fact by the licensee itself. The licence cannot be transferred or assigned.

153.

Although this condition does not require that a licensee own every part of a BDU, it does require that Vidéotron exercise effective control over it. As the Commission noted in PN 1997-25, the condition of licence does not preclude a transfer of ownership of some assets, as long as effective control over the entire broadcasting undertaking remains with the licensee, Vidéotron, so that it is in a position to meet the requirements of its licence, the Act and the Regulations.

154.

In its initial response to the complaints, Vidéotron indicated that it could not grant access to the inside wire to competing BDUs, pending resolution of the complaints, since CQMI now owned the inside wire. Since Vidéotron's response was that it no longer had the power to grant access to competing BDUs, the Commission pursued the issue of Vidéotron's compliance with condition of licence no. 1 at the public hearing.

155.

The issue for the Commission's consideration is whether, in contracting to sell all of its inside wire in L-MUDs to CQMI, Vidéotron remains in control of its broadcasting undertaking as required pursuant to condition no. 1 and in compliance with the the Act and the Regulations. As an example, control of the inside wire is necessary to comply with section 6(2) of the Regulations which provides that a licensee shall ensure that a majority of the video and audio channels received by a subscriber are devoted to the distribution of Canadian programming services.

156.

With the sale of the inside wire to CQMI, there are only two means by which Vidéotron can ensure that it is in a position to meet its regulatory obligations with respect to each and every subscriber that resides in an L-MUD:

(a) the agreements that it has entered into with CQMI expressly ensure that it is in a position to meet the regulatory obligations at all times, or

(b) the relationship Vidéotron has with CQMI, aside from the contractual one, is such as to ensure that it will be in a position to meet its regulatory obligations at all times.

157.

At the public hearing, Vidéotron acknowledged that there was no provision expressly set out in the Deed of Sale, Usage Agreement, Installation Agreement, or anywhere else, to ensure that Vidéotron would be able to continue to respect its regulatory obligations. The Commission finds that, on the facts of this case, Vidéotron can only meet its regulatory obligations because of its close corporate relationship with CQMI. These facts include the following:

· Vidéotron is in a non-arm's length relationship with CQMI and the common parent company, QMI, exercises control over both parties.This is illustrated by Appendix II.

· CQMI, QMI and Vidéotron have common directors and officers, as illustrated by Appendix III.

· Vidéotron stated at the hearing that the $5 fee was set at an amount that "was acceptable to Vidéotron, to allow it to carry on its affairs".

· The "negotiations" to set the fee occurred between Mr. Gingras, a Vidéotron employee, and Mr. Doré, a QMI employee. In fact, therefore, Vidéotron effectively set the fee at which it, and competitive BDUs that would sign the Usage Agreement, would use the inside wire. It is clear from the evidentiary record that this was not an arm's length negotiated price, but a single corporate determination, directed by the parent company, as to what should be the price.

· Mr. Louis Saint-Arnaud signed as the legally authorized signing officer of Télé-Câble Charlevoix, vendor, and of CQMI, purchaser, in the case of the Deed of Sale dated 8 February 2002 filed before the hearing, showing a $1 purchase price, and the additional Deed of Sale, filed after the hearing showing a $19.5 million purchase price. At the time, Mr. Saint-Arnaud was the Vice-President of Legal Affairs of QMI and of Quebecor.

· The evidence at the hearing establishes that CQMI can do little or nothing in respect of its only asset, the inside wire, which it ostensibly owns, without the approval of Vidéotron. CQMI can only deal with the inside wire with Vidéotron's permission, since the ends of the inside wire are locked in Vidéotron's distribution panel boxes. Vidéotron has unconditional access to the panel boxes, and thus to the inside wire.

· In all important aspects, despite the ostensible sale of wire to CQMI, Vidéotron continues to possess and exercise the most important incidents of ownership of CQMI's most important asset, the inside wire. Under the Usage Agreement and Installation Agreement, Vidéotron or its agents continue to carry out all the work involved in the maintenance, installation, and replacement of the inside wire, in accordance with its own standards, as though it were the owner.

· It is clear that CQMI has no staff to carry on the business of CQMI, except an ex-employee of Vidéotron, Mr. Garneau, who works from Vidéotron premises, and whose role appears to be restricted to sending invoices, directing installations, receiving payments and initiating litigation.

· The common parent QMI has control, through 4006305, of CQMI, and Vidéotron has a significant financial interest in CQMI. Vidéotron holds $12.7 million of CQMI's preferred shares, which Vidéotron may require CQMI to redeem, on one day's notice.

158.

Given these facts, and the intertwined corporate relationship between Vidéotron and CQMI, the Commission finds that Vidéotron has retained control of the inside wire assets, even though these may be ostensibly owned by CQMI, which is acting as Vidéotron's alter ego.

159.

Consequently, the Commission concludes that Vidéotron remains in control of, and operates in fact, its own licensed undertakings. Accordingly, Vidéotron is not in breach of condition no. 1 of its licence.

Videotron's obligations under section 10 of the Regulations

160.

Section 10 of the Regulations provides, among other things, that a licensee that owns inside wire must give others access to the inside wire on request, and may charge a just and reasonable fee for the use of the wire.

161.

Vidéotron contended that, since it has sold its inside wire to CQMI, which is not a licensee, neither Vidéotron nor CQMI can be compelled, pursuant to section 10 of the Regulations, to provide competitors with access to inside wire at a just and reasonable fee. It argued that it is not in breach of section 10 of the Regulations because it no longer legally owns the inside wire.

162.

The issue therefore arises as to whether or not the series of transactions between Vidéotron and CQMI results in a transfer which effectively withdraws the inside wire from the scope of the regulatory obligations found in section 10. The issue can be examined from two perspectives. First, whether Vidéotron's position runs counter to the legal principle that parties cannot, through agreements, avoid their regulatory obligations.Second, whether the transfer is a colourable device intended to avoid a regulation that would otherwise be applicable.

163.

In British Columbia Telephone Company, the Supreme Court of Canada, at page 773, stated that a private party "should not be permitted, whether intentionally or innocently, to bypass, by means of a contract or a collective agreement, regulatory requirements imposed on it in the public interest." In arriving at its conclusion, the Court found the public policy role of an administrative tribunal to be a critical contextual factor.

164.

The Federal Court of Appeal arrived at a similar conclusion in Wight v. Canadian Egg Marketing Agency [1978] 2 F.C. 260 (C. A.). An attempt was made by the applicants in that case to avoid the obligations imposed upon them by the Canadian Egg Marketing Agency (the Agency). The applicants purported to sell the part of their business that was involved in the interprovincial buying and selling of eggs. The Agency refused to grant the applicants a licence on the grounds that the application was not made in good faith, but rather to enable persons who do not hold licences issued by the Agency to perform functions that are normally subject to Agency licensing. The Court agreed, concluding that the sale of the regulated part of its business was plainly a colourable device to circumvent regulation and, as a result, the agreement of sale was not a bona fide sale of a business.

165.

In Villetrard's Eggs Ltd. v. Canada (Egg Marketing Agency) [1995] 2 F.C. 581 (C.A.), the Federal Court of Appeal indicated that, not only was it proper for a tribunal to consider the interrelationship between the parties involved but, also, "had the Agency failed to take that interrelationship into account, that failure might well have constituted a reversible error." The Court stated, at page 592:

Whether we characterize it as a case of non-application of, or exception to, the doctrine of corporate veil, what the Agency did in the instant case, i.e. enquire into the relationship of an applicant with a third party for the purpose of determining whether the application in the circumstances constituted an attempt to circumvent the regulations, was permissible.

166.

Consistent with that approach, in the appropriate circumstances, the Commission must consider the actual relationship between the parties and examine whether or not devices have been created in order to circumvent regulation.

167.

This was illustrated in In the Matter of Unitel's Eligibility to Operate in Canada as a Telecommunications Common Carrier Pursuant to Section 16 of the Telecommunications Act, Letter Decision dated 16 October 1996, where the Commission stated:

The Commission is of the view that under the [telecommunications ownership and control] Regime, quite apart from the issue of control in fact, the use of a holding company in a corporate structure involving a telecommunications common carrier must not be an artifice. In the Commission's view, the mere fact that a corporation is described as a "holding company" is not conclusive of whether or not it is operating as a telecommunications common carrier.

168.

Similarly, in order to ensure that it grants broadcasting licences only to parties that are owned and effectively controlled by Canadians, as required by the Direction to the CRTC (Ineligibility of Non-Canadians), the Commission examines where control of a party is held and, in so doing, reviews the true nature of parent-subsidiary corporate relationships.

169.

The view that the Commission should consider the true nature of corporate relationships is also consistent with article 317 of the Quebec Civil Code, which provides that:

In no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order².

170.

There can be no doubt that section 10 of the Regulations is, as in British Columbia Telephone Company, a regulatory requirement imposed in the public interest, and, as in article 317 of the Quebec Civil Code, a rule of public order. It was made by the Commission whose mandate, under the Act, is to regulate broadcasting in the public interest. As described under the heading "Regulatory Background", the rule at issue is designed to benefit consumers and the public at large. In fact, the practical effect of allowing Vidéotron, by private contract, to circumvent section 10 of the Regulations would be to defeat a very important public policy of fair and open competition. As a result, consumers would be denied a realistic opportunity to choose between competitive service providers, and effectively forced to obtain their broadcasting services from the incumbent BDU.Both the Commission, in the Convergence Report, and Mr. Péladeau, at the hearing, recognized that inside wire is an essential or bottleneck facility of strategic importance for competitive entry.

171.

The evidence shows that at least one of the considerations motivating the February transactions was that Vidéotron and its parent QMI were seeking to avoid Vidéotron's regulatory obligation to give access to its inside wire to its competitors at a fee determined to be just and reasonable by the Commission. Included in the strategic factors Vidéotron took into account during discussion and negotiation of the 8 February transactions was its concern that the Commission's new rules permitted access to the inside wire for all BDUs at a just and reasonable fee yet to be determined. Mr. Péladeau acknowledged that he was aware that the Commission would probably set the lease fee at a level that would be between the $0.08 proposed by ExpressVu and the $2.67 proposed by CCTA.

172.

Vidéotron maintained that the rationale for the 8 February 2002 transactions was that it wanted to concentrate on its core business and cease its involvement in an ancillary activity. Yet, as illustrated by the Usage Agreement and the Installation Agreement, Vidéotron's involvement in the inside wire business has remained, in every material aspect, including maintenance and installation, the same as it was before it contracted to sell the inside wire to CQMI. Moreover, it sold only the inside wire within L-MUDs to CQMI and it kept for itself the inside wire in buildings having fewer than 20 units, and stated that it intended to charge the lease fee that the Commission would set as just and reasonable for those units.

173.

The transparency of, and the extent to which the device used by Vidéotron and its parent, QMI is colourable, are further illustrated by the fact that the president of Vidéotron and QMI, Pierre Karl Péladeau, repeatedly and indiscriminately answered the Commission's questions at the hearing on behalf of Vidéotron, QMI and CQMI. He did so as though they were all a single entity for the matters at hand, even though Mr Péladeau is ostensibly neither an officer nor a director of CQMI.

174.

The Commission considers that the 8 February 2002 transactions between Vidéotron and CQMI cannot enable Vidéotron to avoid its regulatory obligations and, whatever their other intended legal effects, do not allow Vidéotron to escape them, specifically section 10 of the Regulations. It follows, therefore, that Vidéotron and its alter ego, CQMI, are obligated to charge a just and reasonable fee determined and reviewable by the Commission for the use of inside wire in L-MUDs.

175.

In PN 2002-51, the Commission stated that it considered that a fee of $0.52 per subscriber per month for the use of inside wire in MUDs constitutes a just and reasonable fee pursuant to section 10(2) of the Regulations. Public Notice 2002-51 did notcontemplate a transaction fee. The Commission added that for a licensee to charge a higher fee than $0.52 per subscriber per month would generally constitute a breach of section 10(2) of the Regulations.

176.

Accordingly, the Commission concludes that Vidéotron is in violation of its obligations under section 10 of the Regulations when it, or CQMI, requires any fee including a transaction fee, in excess of that set by the Commission as just and reasonable in PN 2002-51 for the use of inside wire in MUDs.

Vidéotron's obligations under section 9 of the Regulations

177.

Section 9 provides as follows:

No licensee shall give an undue preference to any person, including itself, or subject any person to an undue disadvantage.

178.

This concept of undue preference or disadvantage applicable to all broadcasting activities of BDUs, including matters related to inside wire, was introduced into the Regulations in PN 1997-150.

179.

In PN 1997-150, the Commission set out examples that, in its view, could constitute instances of undue preference or disadvantage under section 9. Some of these examples were informed by the Commission's stated policy of furthering end-user choice. For example, the list included "the provision of service by a licensee to a multiple-unit dwelling pursuant to a contract that gives the licensee the exclusive ability to distribute programming services to that dwelling, where it is technically feasible for the licensee of another distribution undertaking to offer its service on a competitive basis to end-users."

The Commission's approach

180.

Although section 9 first came into effect only in January 1998, the Commission has had considerable experience in applying similar undue preference/undue disadvantage provisions found in the Telecommunications Act and its predecessor, the Railway Act. The Commission relied on the undue preference/unjust discrimination provisions of the Railway Act to make its decision in Challenge Communications Ltd. v. Bell Canada, Telecom Decision CRTC 77-16, 23 December 1977 (Decision 77-16). In that case and subsequent cases, it has recognized that each case must be assessed on its particular facts.

181.

In examining allegations of undue preference, unjust discrimination or undue disadvantage, the Commission's practice has been to examine whether the transaction in question creates a preference for, a discrimination against, or a disadvantage to, any party and then to consider whether that preference, discrimination or disadvantage is unjust or undue. The Commission's approach has been upheld by the Courts.³

182.

There is no conclusive definition of "undue" in the case law. Rather, it has been considered a flexible and relative concept. The Supreme Court of Canada in cases such as R. v. Aetna Insurance Company [1978] 1 S.C.R. 731 found that "unduly" is a relative term and that it must be interpreted contextually and in light of the public interest being protected. The Supreme Court of Canada considered the meaning of "unduly" in R. v. Nova Scotia Pharmaceutical Society [1992] 2 S.C.R. 606. In doing so, it conducted a contextual analysis, which included a review of the objectives of the Act in which the term appeared and its relationship to Canadian public policy. At pages 646-647, the Court adopted the view of the Trial Judge, who stated:

While the word unduly is not defined by statute and defies precise measurement, it is a word of common usage which denotes to all of us in one way or another a sense of seriousness. Something affected unduly is not affected to a minimal degree but to a significant degree.

183.

The Commission's assessment of whether or not a preference is undue or a discrimination unjust has always been made in light of the public interest. The Commission has generally not considered it necessary to examine the intention of the parties in order to determine whether the preference or disadvantage is undue, but rather has considered the consequences of the conduct in question, in light of the Act and associated regulations and policies.

184.

Since making the Regulations, the Commission has rendered several determinations of complaints between competitive BDUs or between BDUs and programming suppliers that entailed the application of section 9⁴. In making these determinations, the Commission has adopted an approach similar to that applied in Decision 77-16.

Analysis

185.

Consistent with the foregoing, in the present case, the Commission must consider:

(a) whether the transactions of 8 February 2002 and related conduct by Vidéotron gave a preference to Vidéotron or any other person, or subjected any person to a disadvantage; and

(b) whether any such preference or disadvantage is undue by virtue of having material or significant consequences that are contrary to the public interest.

Is there a preference or a disadvantage?

186.

The Commission has found that Vidéotron and CQMI, although separate corporate entities, are in fact acting as one entity with respect to inside wire in L-MUDs, by virtue among other things, of the control exercised over them by their mutual parent company. Further, by virtue of QMI's 100% indirect ownership of Vidéotron and CQMI, any advantage that may accrue to Vidéotron or CQMI as a result of the transactions of 8 February 2002, and/or related conduct by Vidéotron, must ultimately accrue to QMI. The transactions have effectively been structured in such a way as to provide CQMI with a guaranteed rate of return on the replacement value of the assets. However, to the extent that this rate of return would accrue to CQMI through fees paid by Vidéotron, it is the combined profitability of Vidéotron and CQMI that is relevant from QMI's perspective.

187.

Thus, while Vidéotron's payment of $5 per subscriber per month could reduce the profitability of Vidéotron's cable operations, any loss of profitability would be offset by a corresponding increase in the profits of CQMI. Accordingly, from QMI's perspective, it is not material that Vidéotron must pay CQMI for the use of the inside wire and the level of any fee paid by Vidéotron to CQMI is also not material.

188.

Similarly, with respect to competitors' use of the inside wire, it is immaterial from QMI's perspective whether fees are paid to Vidéotron or to its affiliate, CQMI. In this context, however, the level of the fee has material consequences from QMI's perspective, in that a high fee paid by competitors would increase the profitability of the combined entities, Vidéotron and CQMI and, in many cases, impedes competitive entry altogether, also to the advantage of Vidéotron.

189.

As noted above, Vidéotron is the dominant BDU in the Quebec market. As the incumbent BDU in this market, it owned and continues to exercise control over inside wire in the majority of L-MUDs. Thus, by virtue of its position as the incumbent service provider, it is in a position, absent regulation to the contrary, to limit access by competitors to subscribers in L-MUDs.

190.

Based on the record of this proceeding, and in light of the Commission's findings in PN 2002-13 and PN 2002-51, it is clear that a $5 monthly fee would constitute a significant barrier to entry by competitors. This would result in an advantage for Vidéotron contrary to the principle of fair competition and end-user choice, whether the fee is paid directly to a cable company or to an affiliate of the cable company.

191.

The Commission considers that the submissions of the complainants on this point are worthy of note, and notes that they and were never questioned by Vidéotron or CQMI. Specifically, Look argued that, at $5 per subscriber per month, it would register a loss, and further, that the duplication of existing wiring in MUDs, as an alternative, would entail significant capital expenditures and make any business case impossible. ExpressVu submitted that the $5 per month for use of the inside wire would, in its view, render its business in L-MUDs unworkable, and it would be forced to vacate the market in such areas. Cable VDN submitted that the overall situation, if permitted to continue, would have catastrophic consequences for Cable VDN and would do fundamental damage to the competitive distribution industry.

192.

Gaining access to subscribers in L-MUDs is critical to new entrants in general, in that these buildings can provide access to concentrated groups of subscribers at relatively low cost, thus providing an initial foothold in the competitive market. Access to subscribers in L-MUDs in Vidéotron's territory is thus essential to the business plans of all of the complainants and they depend on Vidéotron for such access. Cable VDN would appear to have been particularly affected by having such access curtailed since, while national licensees such as ExpressVu and Star Choice operate in other parts of the country, Cable VDN's licensed serving area is located wholly within Vidéotron territory. Look, which operates only in Ontario and Quebec, has also been particularly affected by the conduct of Vidéotron and its affiliate, CQMI, because of its niche market strategy, targeting L-MUDs.

193.

The Commission finds that, in entering into transactions that resulted in a fee of $5 per subscriber per month for the use of inside wire in L-MUDs, Vidéotron has conferred a preference on itself and on CQMI and the QMI group of companies. They have benefited from the transactions, either by the increase in revenues they receive as a result of the monthly amounts that competitors must pay for access to inside wire, or because competitors do not enter into the business of providing service to L-MUDs, with the result that Vidéotron gains or preserves market share. Conversely, Vidéotron has subjected the complainants and any competitive BDU to a disadvantage.

194.

The Commission finds that Vidéotron has conferred on itself, CQMI, and the QMI group of companies further preferences, and subjected the complainants to further disadvantages by the following:

· The transaction fee of $35 for each request for new service or the transfer of service constitutes a barrier for competitors. This fee paid by Vidéotron to an affiliate does not represent a barrier for Vidéotron since it is the combined profitability of Vidéotron and CQMI that is relevant, and not the profitability of the entities considered individually.

· Vidéotron did not purport to transfer ownership of distribution panels in L-MUDs to CQMI. Vidéotron's practice prior to 8 February 2002 was to provide access by competitive BDUs to the inside wire contained in these panels which is necessary to provide service to customers. Vidéotron has now locked these panels and will unlock a panel and extract the end of the inside wire for a competitive BDU only when the competitive BDU signs a Usage Agreement with CQMI. By contrast, Vidéotron has full access to the distribution panel boxes and the inside wire within them.

In barring access to its distribution panels in L-MUDs, Vidéotron has precluded competitors from acquiring new customers in this market segment, while its own activities in this regard remain unaffected. Again, the result is to protect Vidéotron's market share at the expense of competitors. Moreover, competitors are unable to provide maintenance service to their existing clients when this depends on gaining access to the distribution panel boxes. At the same time, Vidéotron uses its control over the distribution panels to police CQMI's ostensible interest in the inside wire.

· The Usage Agreement contains other clauses that would be disadvantageous for competitors, but are acceptable to Vidéotron because of its corporate relationship with CQMI. For example, under clauses 7.2 and 8.3, certain equipment installed by the competitor would become the property of CQMI, and would have to be left in place after the expiry of the Usage Agreement.

· CQMI did not provide notice to competitors of the transactions between Vidéotron and CQMI until several days after they occurred, and the transactions interrupted competitors' marketing plans. Accordingly, even had competitors wished to enter into a Usage agreement with CQMI, they would not have been able to do so in time to avoid delays in their provision of service to new customers. Vidéotron, on the other hand, was subjected to no delay or interruption in its provision of service to customers.

Are the preferences or the disadvantages undue?

195.

Since the 1995 Convergence Report, the Commission has consistently found competition in the distribution of programming services to be in the public interest. The Commission has found such competition to be the most effective means of attaining a number of objectives set out in the Act. Among other things, by reducing subscription rates, competition contributes to the affordability of service, consistent with section 3(1)(t)(ii) of the Act. In addition, it provides incentives for BDUs to reduce costs, thereby contributing to the efficient delivery of services, consistent with that same section. Competition can also provide an incentive for technological innovation, as competitors seek more efficient delivery methods. Thus, it is consistent with section 3(1)(d)(iv) of the Act, which states that the Canadian broadcasting system should be readily adaptable to scientific and technological change. Finally, competition can spur service providers to offer greater choice in programming services and service packages, thus contributing to the provision of a wide range of programming, consistent with section 3(1)(d) (ii) of the Act.

196.

In the Convergence Report, the Commission recognized that the use of inside wire by competitive BDUs was essential in order to bring about competition in broadcasting distribution. The Commission's policy with respect to inside wire has, since 1995, sought to ensure that competitors can fairly obtain the use of that wire so as to provide end-user choice.

197.

The Commission has found that, in entering into the transactions of 8 February 2002, and by conduct related to those transactions, Vidéotron has conferred a preference on itself and related companies, and has subjected competing BDUs to a disadvantage with regard to inside wire in L-MUDs. By making it difficult, if not impossible, for new entrants to make use of existing inside wire in L-MUDs, Vidéotron has sought to preserve its own dominant position in the market and has significantly curtailed, if not effectively eliminated, the ability of new entrants to compete for subscribers and the availability of end-user choice in this market segment.

198.

The viability of individual competitors will suffer to varying degrees, depending on their reliance on the L-MUD market segment in Vidéotron's territories. As noted earlier, Cable VDN has been particularly affected by Vidéotron's conduct but access to subscribers in this market segment is important to the business plans of all new entrants, including national licensees such as ExpressVu and Star Choice and regional licensees such as Look. In the Commission's view, the inability of such licensees to compete in the L-MUD market segment in Vidéotron's territories would have a material adverse impact on their ability to compete in Vidéotron's market as well as in the broader market.

199.

The Commission finds that, in erecting significant barriers to entry in the L-MUD market segment in its territories, Vidéotron has seriously reduced the level of competition in the distribution market, and its associated public interest benefits. The Commission therefore finds that the preferences that Vidéotron has conferred on itself and its subsidiaries and affiliates are undue. Similarly, the Commission finds that the disadvantages to which Vidéotron has subjected its competitors, Cable VDN, ExpressVu, Star Choice and Look, are undue.

Mandatory Order

200.

In accordance with the provisions of sections 12 and 18 of the Broadcasting Act, the Commission hereby finds that Vidéotron and its subsidiaries have breached sections 9 and 10 of the Broadcasting Distribution Regulations.

201.

Accordingly, the Commission hereby issues the mandatory order that is set out in the attached Appendix I.

202.

The measures mentioned in the mandatory order are remedial, imposed in order to prevent the continuance of the conduct that the Commission has found to be in breach of sections 9 and 10 of the Regulations.

203.

The Commission will register this order in the appropriate court in accordance with the provisions of section 13 of the Act.

Secretary General

 This decision is to be appended to the licence. It is available in alternative format upon request, and may also be examined at the following Internet site: www.crtc.gc.ca

Appendix I

The Mandatory Order

The Commission, having found that Vidéotron and its subsidiaries have breached both section 9 and section 10 of the Broadcasting Distribution Regulations, therefore orders Vidéotron and its subsidiaries:

1) not to use the inside wire ostensibly owned by CQMI for the purpose of providing broadcasting services until such time as Vidéotron and its subsidiaries and/or its affiliates, including CQMI, offer third parties providing such services in competition with Vidéotron and its subsidiaries, including, but not limited to, Look Communications Inc. (Look), Cable VDN Inc. (Cable VDN), Bell ExpressVu Limited Partnership (ExpressVu) and Star Choice Communications Inc. (Star Choice), the use of that wire at a monthly fee that is just and reasonable and causes them no undue disadvantage as regards Vidéotron and its subsidiaries, that is, a monthly fee that is not in excess of $0.52 per subscriber per month;

2) not to use the inside wire ostensibly owned by CQMI for the purpose of providing broadcasting services until such time as Vidéotron and its subsidiaries and/or its affiliates, including CQMI, allow that wire to be used by third parties for such purposes in competition with Vidéotron and its subsidiaries, including but not limited to, Look, Cable VDN, ExpressVu and Star Choice, without payment of any fee of any sort over and above the monthly fee set out above and without the imposition of any restriction or requirement which would confer an undue preference on Vidéotron and its subsidiaries or an undue disadvantage on their competitors, for example, requirements such as those found in the Usage Agreement which provide that newly installed or repaired inside wire will become the property of CQMI and not remain the property of the installer; and

3) to make their distribution panel boxes available to parties in competition with Vidéotron and its subsidiaries, in particular Look, Cable VDN, ExpressVu and Star Choice, where that availability is necessary for them to have access to the inside wire, and to do so in accordance with the provisions set out at paragraph 30 of Revised policy concerning inside wire regime; Call for comments on proposed amendments to section 10 of the Broadcasting Distribution Regulations, Public Notice CRTC 2000-81, 9 June 2000, which requires that all broadcasting distribution undertakings (BDUs) accommodate requests by other BDUs for access to customer service enclosures or distribution panels within 24 hours of receiving such a request and to provide them with a 2-hour appointment window.

The terms of this order shall remain in effect until such time as the Commission varies or rescinds them.

In this order:

"CQMI" means Câblage QMI inc. and any of its subsidiary bodies corporate, affiliated bodies corporate or holding bodies corporate as defined in the Canada Business Corporations Act;

"Inside wire" and "subscriber" have the same meaning as found in the Broadcasting Distribution Regulations.

"Vidéotron and its subsidiaries" means Vidéotron ltée and its subsidiaries, CF Cable TV Inc. and Videotron (Regional) Ltd.

Appendix II

Part A
Organization Chart - Quebecor inc.

Part B
Organization Chart - Vidéotron ltée

CRTC 2002-152 - Approval of the transfer to Videotron (Regional) Ltd. of the assets of the cable distribution undertakings held by Vidéotron (RDL) ltée;

CRTC 2002-153 - Approval, in two stages, of the transfer of the assets of the cable distribution undertakings held by Télé-Câble Charlevoix (1977) inc. to Videotron (Regional) Ltd.

Appendix III

List of directors and officers

Câblage QMI inc.
(According to information provided within the proceeding to review Câblage QMI inc.)

Le Groupe Vidéotron ltée
(According to information provided within the proceeding to review Câblage QMI inc.)

Vidéotron ltée
(According to information provided within the proceeding to review Câblage QMI inc.)

Quebecor Media Inc.
(According to information dated 1 May 2002 provided by Quebecor Media Inc. within the proceeding to review Câblage QMI Inc.)

Quebecor Inc.
(According to information dated 21 February 2002 provided by Vidéotron ltée within the proceeding to review Câblage QMI inc.)

² With respect to the notion that a party cannot defeat regulatory obligations by private contract, the Commentary of the Quebec Minister of Justice, with respect to article 317 of the Civil Code, should be noted:

[Translation] The article covers two categories of acts: frauds and the abuse of a right that generally cause damage to private interests, and acts that breach a rule of public order, such as regulatory breaches in the area of the environment, public security, communications or public utility services.

³ For example, see Re Bell Canada and Challenge Communications (1978) 86 D.L.R. (3d) 351 (F.C.A.); leave denied: (1978) 23 N.R. 358 (S.C.C.)

⁴ See, for example, ExpressVu v. Rogers Communications Inc., 18 September 1998, Look Communications Inc. v. Rogers Cable Inc., 7 April 2000, and, more recently, Complaint by Netstar Communications Inc. and its subsidiary Le Réseau des sports (RDS) inc. alleging that Vidéotron ltée. contravened section 9 of the Broadcasting Distribution Regulations, Broadcasting Decision CRTC 2002-255, 29 August 2002.