ARCHIVED - Telecom Decision CRTC 2002-61

Telecom Decision CRTC 2002-61

Ottawa, 8 October 2002

Quebecor Média inc. - Alleged anti-competitive cross-subsidization of Bell ExpressVu

Reference: 8622-Q15-01/02

In this decision, the Commission concludes that Bell Canada is not inappropriately cross-subsidizing Bell ExpressVu Limited Partnership's (ExpressVu) entry into the Quebec's broadcasting distribution market. The Commission also notes that it cannot, in this instance, make a determination regarding ExpressVu's licence renewal. The Commission will address the renewal of ExpressVu's licence in the context of a public process, to be held in spring 2003.

The application

1.

The Commission received a complaint by Quebecor Média inc. (Quebecor), dated 4 April 2002, alleging that BCE Inc. (BCE) has been using profits from Bell Canada to anti-competitively cross-subsidize the entry of Bell ExpressVu Limited Partnership (ExpressVu) into the Quebec broadcasting distribution market.

2.

Quebecor claimed that ExpressVu had received significant financial support from BCE, the company that controls ExpressVu. Quebecor submitted that BCE was able to subsidize ExpressVu because of profits earned through Bell Canada. Quebecor argued that Bell Canada was able to generate large revenues because of its monopoly of a large portion of the Canadian local telephone market.

3.

Quebecor noted that, in ExpressVu Inc., Decision CRTC 97-149, 15 April 1997 (Decision 97-149), the Commission stated that it considered that appropriate mechanisms were in place to prevent cross-subsidization by Bell Canada of ExpressVu's activities. Quebecor asked the Commission to activate those mechanisms to prevent the dominant player in local telephone service from also becoming the dominant player in broadcasting distribution.

4.

Quebecor's complaint was treated as an application filed pursuant to Part VII of the CRTC Telecommunications Rules of Procedure.

5.

On 23 April 2002, Bell Canada and ExpressVu jointly submitted comments on Quebecor's application. Quebecor submitted its reply comments on 3 May 2002.

Bell Canada and ExpressVu's response

6.

Bell Canada and ExpressVu submitted that the Commission had already implemented regulatory mechanisms and safeguards to prevent cross-subsidization of ExpressVu's operations by Bell Canada. Bell Canada and ExpressVu noted that Bell Canada must comply with Phase II and Phase III costing directives and with the price cap framework. They stated that the price cap framework ensures that the prices for Bell Canada's utility services, determined according to a pre-established formula, cannot have an anti-competitive effect on the rates of other services provided by Bell Canada or its affiliates.

7.

Bell Canada and ExpressVu argued that the investments made by Bell Canada shareholders were of no concern to the Commission, and that BCE was free to invest in a start-up company like ExpressVu. Bell Canada and ExpressVu further argued that BCE's investments in ExpressVu served the public interest by creating competition in the broadcasting distribution market.

8.

Bell Canada and ExpressVu submitted that, if the Commission were to agree with Quebecor's allegations that BCE was engaged in anti-competitive cross-subsidization, it would have to conclude that, because Shaw Communications Inc. (Shaw) is subsidizing its subsidiary Star Choice Communications Inc. with earnings generated by Shaw's dominant cable businesses, Shaw was also engaged in anti-competitive cross-subsidization. Similarly, they argued that, because Vidéotron ltée, Quebecor's subsidiary, was subsidizing its telecommunications operations with earnings from its profitable monopoly cable operations, the Commission would have to conclude that Vidéotron was also behaving in an anti-competitive manner.

Quebecor's reply comments

9.

In its reply comments, Quebecor submitted that the Commission must examine whether the existing regulatory framework promotes a competitive and stable market. Given that the existing framework did not prevent BCE from subsidizing ExpressVu's entry into the broadcasting distribution market using revenues it receives from Bell Canada, Quebecor submitted that existing mechanisms were not sufficient to prevent Bell Canada's anti-competitive cross-subsidization of ExpressVu.

10.

Quebecor argued that ExpressVu, as a result of the funds it receives from BCE, could incur enormous losses to acquire new subscribers. Quebecor noted that ExpressVu already had 35% of the Canadian digital distribution market, which is the market towards which the industry is migrating. Quebecor reiterated that the Commission should intervene to prevent the cross-subsidization of ExpressVu and thereby ensure that BCE does not dominate the broadcasting distribution market in Canada.

11.

Quebecor submitted that the Commission should initiate a public hearing process pursuant to the Telecommunications Act and the Broadcasting Act to examine competition in both industries as a whole. Quebecor further argued that the Commission should not renew ExpressVu's broadcasting licence until the findings of the proposed hearing are released, and should commission an independent study on the status of competition in Canada's broadcasting distribution market, pursuant to subsection 3(1)(d)(i) of the Broadcasting Act.

Commission analysis and determination

The legislative and regulatory framework

12.

The Commission has, in accordance with the policy objectives set out in the Telecommunications Act and Broadcasting Act, through its decisions, policies and regulations, promoted a regulatory environment that fosters greater reliance on competition to protect the interests of users and consumers.

13.

Pursuant to subsection 27(1) of the Telecommunications Act, all rates charged by Canadian carriers must be just and reasonable. The Commission may also refrain from exercising its powers in relation to services provided by telephone companies where it finds that to refrain would be consistent with the Canadian telecommunications policy objectives.

14.

The Commission will also refrain from exercising its powers pursuant to section 34 of the Telecommunications Act where it finds that the market for those services are sufficiently competitive to protect the interests of users.

15.

In Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission set out a regulatory framework with the view to replace earnings-based regulation with price regulation.

16.

In Price cap regulation and related issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), the Commission established a price cap regulation regime for incumbent local exchange carriers (ILECs), including Bell Canada. In Regulatory framework for second price cap period, Telecom Decision CRTC 2002-34, 30 May 2002 (Decision 2002-34), in which Quebecor's affiliate, Vidéotron Telecom ltée, was an interested party, the Commission reviewed the regulatory framework and imposed additional constraints to ensure that the ILECs'rates, including those of Bell Canada, continued to be just and reasonable, pursuant to the price cap regime.

17.

The need to introduce competition in the broadcasting distribution market was first addressed by the Commission in its 19 May 1995 report to the government, Competition and Culture on Canada's Information Highway. The Commission stated that, in light of the dominance of the cable industry relative to other potential entrants, there was no need to limit competition by other entrants in the broadcasting distribution market. The Commission stated that it would endorse increased competition in the cable industry's core business in order to provide consumers with increased choice among distributors of broadcasting services. The Commission recommended opening the broadcasting distribution market to telephone companies once legislative and regulatory barriers to competition in local telephone service were eliminated. The Commission also indicated that applications from other potential distributors should be considered without delay.

18.

The Commission subsequently licensed a number of distribution undertakings to operate on a competitive basis with licensed cable operators, for example:

· ExpressVu, as a national Direct-to-Home (DTH) undertaking in ExpressVu Inc., Decision CRTC 95-901, 20 December 1995;

· Star Choice Communications Inc., as a national DTH undertaking, in Star Choice Television Network Incorporated, Decision CRTC 96-529, 27 August 1996; and

· Look Communications Inc., as a multi-point distribution undertaking, with operations within many populated areas within Quebec and Ontario, in Teleglobe Inc. et al., Decision CRTC 98-55, 20 February 1998.

19.

In these licensing decisions, the Commission imposed conditions of licence to regulate the behaviour of the new distribution undertakings and require them to assume obligations that were comparable to those of other existing licensed undertakings.

20.

The Commission also took steps to change the regulations governing broadcasting distribution undertakings (BDUs) in order, amongst other things, to promote a competitive environment in broadcasting distribution. Following an extensive public process through 1996 and 1997, the Commission adopted the new Broadcasting Distribution Regulations (the Regulations), effective 1 January 1998, with a view to imposing comparable obligations that all distribution undertakings, including DTH undertakings, must meet. The Regulations include, for example, a provision prohibiting a licensee from conferring an undue preference or an undue advantage, to ensure that BDUs not engage in anti-competitive behaviour.

21.

In Applications by telephone companies to carry on broadcasting distribution undertakings, Public Notice CRTC 1997-49,1May 1997, the Commission concluded that the legislative and regulatory barriers to entry into local telephony had been or would be sufficiently addressed and that telephone companies could apply for licences to carry on BDUs.

Allegation of cross-subsidization

22.

In Decision 97-149, the Commission approved the application by BCE to acquire effective control of ExpressVu's DTH undertaking. In reaching that decision, the Commission stated that, in the context of its jurisdiction under the Telecommunications Act, appropriate mechanisms were in place to prevent cross-subsidization of ExpressVu's operations by Bell Canada.

23.

The Commission notes that Parliament has not provided it with the authority to regulate the investments made by the shareholders of a regulated undertaking, including Bell Canada. The Telecommunications Act does, however, under subsection 27(1), provide the Commission with the authority to ensure that rates which telephone companies, such as Bell Canada, charge for telecommunications services are just and reasonable.

24.

In the Commission's view, Quebecor's concerns about the source of funds for cross-subsidization need to be examined in light of the current regulatory environment established pursuant to the Telecommunications Act.

25.

The Commission notes that Bell Canada is subject to regulatory measures and constraints under the regulatory framework, which the Commission recently reviewed and modified in Decision 2002-34. Having taken into account the interests of the incumbent telephone companies, competitors and consumers through extensive public processes, the Commission developed those measures and constraints with a view to ensuring that regulated rates are just and reasonable.

26.

Furthermore, as required by section 34 of the Telecommunications Act, the Commission has forborne from regulating rates where it has determined that the markets were sufficiently competitive to protect the interests of users. For example, in Forbearance - Regulation of toll services provided by incumbent telephone companies, Telecom Decision CRTC 97-19, 18 December 1997, the Commission forbore from regulating toll and toll free services. The Commission has also forborne from regulating other services, such as interexchange private line services, inside wiring services and Internet services.

27.

The Commission is of the view that it has implemented appropriate measures and constraints to ensure that rates for regulated services are just and reasonable. Given the above, the Commission considers that the revenues earned by Bell Canada, and thus the dividends paid by Bell Canada to BCE, are not generated by services with artificially high prices or by rates that are unjust or unreasonable.

28.

Accordingly, the Commission remains of the view that the existing mechanisms, including those recently modified in Decision 2002-34, are appropriate and sufficient to prevent inappropriate cross-subsidization of ExpressVu by Bell Canada, at the expense of users of telecommunications services.

29.

The Commission also finds that there is insufficient evidence to substantiate Quebecor's allegation that Bell Canada's cross-subsidization of ExpressVu's activities is permitting ExpressVu to become the dominant player in broadcasting distribution. In this regard, the Commission notes that Quebecor's subsidiary, Vidéotron ltée, remains the dominant player in broadcasting distribution in the province of Quebec, with approximately 1.5 million basic service subscribers.

Need for assessment of the status of competition

30.

As part of its regulatory jurisdiction in telecommunications matters, the Commission continually examines issues related to competition in proceedings that are open to public participation. For example, in Decision 2002-34, in which Vidéotron Telecom ltée participated, the Commission examined the status of competition in order to establish the regulatory framework applicable to Bell Canada and other incumbent telephone companies for the second price cap period.

31.

The Commission reports annually to the Governor in Council on the status of competition in the telecommunications market. The Commission collects detailed information in order to prepare these reports.

32.

In its broadcasting jurisdiction, the Commission has adopted mechanisms to ensure that BDUs fulfil their mandates and achieve the objectives of the Broadcasting Act, including the efficient delivery of programming at affordable rates. The existing mechanisms include the public processes that the Commission is required to initiate to deal with applications to issue, amend or renew broadcasting licences, and the annual returns that the Regulations require BDUs to make. The Commission also publishes a broadcasting policy monitoring report that includes information about the broadcasting distribution market, including data relating to market share, growth and profitability of incumbent BDUs, and to rate deregulation and affordability. The reporting requirements play an essential role in the preparation, validation and monitoring of Commission determinations and initiatives.

33.

The Commission considers that the Commission's ongoing activities in initiating proceedings and requiring reports are sufficient to monitor the status of competition in the telecommunications and broadcasting industries. Accordingly, the Commission concludes that it is not necessary to initiate a public process or commission an independent study on the status of competition in the broadcasting distribution and the telecommunications industries, as requested by Quebecor.

Renewal of ExpressVu's licence

34.

With regard to Quebecor's request that the Commission not renew ExpressVu's licence until the findings of the process on the status of competition are released, the Commission notes that it will initiate a public process, in the spring of 2003, with respect to the renewal of ExpressVu's broadcasting licence, which expires 31 August 2003. Quebecor and its affiliates will have an opportunity to intervene in the proceeding and address the renewal of ExpressVu's licence, including the term and conditions of licence for the renewal period.

Secretary General

This document is available in alternative format upon request and may also be examined at the following Internet site: www.crtc.gc.ca