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Broadcasting Decision CRTC 2023-308

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References: 2022-0019-5, 2022-267, 2022-267-1, 2022-267-2 and 2022-267-3

Ottawa, 5 September 2023

Bell Canada; Cogeco Communications Inc.; Bragg Communications Incorporated, carrying on business as Eastlink; and Saskatchewan Telecommunications
Across Canada

Public record: 2022-0019-5 and 1011-NOC2022-0267

Proposed increase to the maximum retail price of the basic service

Summary

The Commission denies the application by Bell Canada; Cogeco Communications Inc.; Bragg Communications Incorporated, carrying on business as Eastlink; and Saskatchewan Telecommunications to increase the maximum retail price of the basic service from $25 to $28 per month and to implement a yearly indexing mechanism for inflation.

In the Commission’s view, the applicants did not submit or provide any evidence to suggest that the current maximum rate of $25 is no longer economically viable for them as retailers. Irrespective of whether or not it is viable, the basic service is an instrument that was designed to benefit the consumer by facilitating choice and economic decisions in a marketplace where broadcasting distribution undertakings (BDUs) have multiple options to recoup their costs.

Moreover, the applicants did not provide any detailed, costed analysis that demonstrates that the cost borne by the BDU for the provision of the basic service has increased as a result of inflation or otherwise, to the extent that a permanent increase of 12% to the maximum allowable retail rate and the implementation of an annual inflationary index are warranted.

Given the strength of the BDU industry, the Commission finds that there is not a financial justification for the proposed increase that would outweigh the goal of providing Canadians with an affordable entry-level basic service.

In the Commission’s view, the applicants have not demonstrated compelling evidence justifying the proposed increase to the maximum price for the small basic service and sees no direct benefit to approving the application for Canadians. It notes that BDUs retain pricing flexibility for most of the services they offer.

Background

  1. In Broadcasting Regulatory Policy 2015-96, the Commission announced that licensed broadcasting distribution undertakings (BDUs) were required to provide customers with a small entry-level basic service, starting March 2016.
  2. As set out in sections 17.1 and 46.1 of the Broadcasting Distribution Regulations (the Regulations), a licensee shall not charge a customer more than $25 per month for the distribution of its basic service, except as otherwise provided under a condition of its licence. This basic service is comprised of the programming services that are either required or allowed to be included in the basic package pursuant to sections 17 and 46 of the Regulations,Footnote 1 including services designated by the Commission under paragraph 9.1(1)(h)Footnote 2 of the new Broadcasting ActFootnote 3 for mandatory distribution on the basic service.
  3. The Commission set a $25 monthly price cap that BDUs could charge their customers for the basic service, exclusive of equipment such as set-top boxes, in order to provide Canadians with the choice between a reasonably priced entry-level offering and the television service provider’s first-tier offering. This monthly price cap has not been updated since March 2016.
  4. At the time of the proceeding leading to Broadcasting Regulatory Policy 2015-96, several intervening BDUs submitted that the $25 maximum monthly fee should be subject to an annual adjustment for inflation. However, the Commission opted not to include an annual adjustment mechanism based on inflation and indicated that it may choose to review the amount in the future.

Application to increase the maximum retail price of the basic service

  1. In January 2022, Bell Canada; Cogeco Communications Inc.; Bragg Communications Incorporated, carrying on business as Eastlink; and Saskatchewan Telecommunications (hereafter the applicants) filed an application under Part 1 of the Canadian Radio-television and Telecommunications Commission Rules of Practice and Procedure requesting to increase the maximum retail price of the basic service from $25 to $28 per month. The applicants proposed that the $28 price cap be effective 1 April 2022.
  2. The applicants also requested that the price cap be adjusted on a yearly basis starting on 1 April 2023, based on the annual consumer price index (CPI) for the period ending 31 December of the preceding calendar year. The applicants indicated that using the CPI rather than the Gross Domestic Product Price Index (GDP-PI) would result in a more moderate retail price increase for the time being.
  3. As such, the applicants requested the imposition of the following condition of licence (now condition of service):

    As an exception to section 17.1 of the Broadcasting Distribution Regulations, effective 1 April 2022, a licensee shall not charge a subscriber more than $28 per month for the distribution of its basic service, adjusted annually for inflation effective 1 April of each year, starting in 2023, based on the annual Canadian consumer price index, as reported by Statistics Canada for the period ending 31 December of the preceding calendar year.

  4. The applicants also considered that this condition of licence should apply equally to all licensed BDUs. Therefore, they requested that the Commission amend the General Authorizations for Broadcasting Distribution Undertakings to include the condition of licence above as an authorization. The applicants submitted that this would provide the Commission with the necessary time to correspondingly amend section 17.1 of the Regulations, for which they proposed the following language:

    Except as otherwise provided under a condition of its licence, effective 1 April 2022, a licensee shall not charge a subscriber more than $28 per month for the distribution of its basic service, adjusted annually for inflation, effective 1 April of each year, starting in 2023, based on the annual Canadian consumer price index, as reported by Statistics Canada for the period ending 31 December of the preceding year.

Call for comments

  1. In light of the above, the Commission issued Broadcasting Notice of Consultation 2022-267 seeking comments on the applicants’ request to increase the maximum retail price of the small basic service and to implement a yearly indexing mechanism for inflation. More specifically, the Commission sought comments on:
    • the appropriateness of raising the price cap amount;
    • the appropriateness of implementing any kind of indexing mechanism;
      • the appropriateness of using, as proposed by the applicants, the CPI as the inflation index for the indexing mechanism, or whether another basis of calculation should be considered;
      • the idea of implementing a yearly indexing mechanism in relation to the price cap for the basic service, or to initiate proceedings to this end at set intervals, without yearly indexing;
      • the appropriateness of 1 April for the yearly adjustments or another date, such as the beginning of each calendar year (1 January), or with the beginning of each broadcast year (1 September);
    • the possibility of increasing the price cap by the dollar amount increase of the wholesale rates paid by the BDUs for the 9(1)(h) services; and
    • the option to increase the price cap to a fixed amount for a set number of years without the inclusion of a yearly indexing mechanism.
  2. In order to allow for a more complete consultative approach, including evaluating the need, effects and impacts of the changes requested by the applicants, the Commission made other BDUs currently required to submit annual aggregate returns parties to this proceeding. Those BDUs are operated by Quebecor Media Inc., Rogers Communications Inc., Shaw Communications Inc. and TELUS Communications Inc. The Commission sent three requests for information (RFIs) to the applicants and one to all the parties.
  3. The consultation was reopened or adjusted three times (see Broadcasting Notices of Consultation 2022-267-1, 2022-267-2 and 2022-267-3) as a result of procedural requests by the Public Interest Advocacy Centre (PIAC) and the Forum for Research and Policy in Communications (FRPC), so that they could respond to the information submitted in the RFIs.

Interventions

  1. The Commission received interventions in support of the application as well as interventions in opposition, to which the applicants replied.
  2. Those supporting the application included a small number of BDUs, including Access Communications Co-operative Limited (Access), and the Canadian Communication Systems Alliance (CCSA); Pelmorex Weather Networks (Television) Inc. (Pelmorex);Footnote 4 Corus Entertainment Inc. (Corus), and Rogers Communications Inc. (Rogers).
  3. Almost all the individual Canadians who commented opposed the application. Others, including public interest organizations such as the Consumer Association of Saskatchewan (CASK); the PIAC and the National Pensioners Federation (NPF), collectively, PIAC-NPF; and the FRPC; as well as the Ministère de la culture et des communications; Independent Broadcast Group/Le groupe de diffuseurs indépendants (IBG/GDI); and Anthem Sports and Entertainment (Anthem) strongly opposed the application for reasons relating to access, affordability, and lack of evidence submitted to justify the approval of the requests.
  4. The concerns of interveners are addressed throughout this decision.

Regulatory framework

  1. While the Online Streaming Act, which amended the Broadcasting Act, received royal assent after the record for this proceeding closed but before the issuance of this decision, the regulatory framework for the treatment of the application remains the same. Subparagraph 3(1)(t)(ii) of the Broadcasting Act states that distribution undertakings should provide efficient delivery of programming at affordable rates. The Commission further considers that requiring the distribution of the services that form part of the basic package contributes to the public interest and the achievement of the objective set out in subparagraph 3(1)(t)(i) of the Broadcasting Act by giving priority to the carriage of Canadian television services and in particular local Canadian stations. These services not only reflect Canadian attitudes, opinions, ideas, values and creativity but also, in the case of local stations, provide Canadians with up-to-the-minute news and information on local, regional, national and international matters.
  2. Further, paragraph 3(1)(d) of the Broadcasting Act states that the Canadian broadcasting system should

    (i) serve to safeguard, enrich and strengthen the cultural, political, social and economic fabric of Canada,

    (ii) encourage the development of Canadian expression by providing a wide range of programming that reflects Canadian attitudes, opinions, ideas, values and artistic creativity, by displaying Canadian talent in entertainment programming and by offering information and analysis concerning Canada and other countries from a Canadian point of view, and foster an environment that encourages the development and export of Canadian programs globally[.]

The Commission’s approach to examining the application

  1. After examining the record for this application in light of applicable regulations and policies, the Commission considers that it is appropriate to evaluate:
    • the number of subscribers that would be affected;
    • the impact of the proposal on Canadian consumers;
    • the economic rationale for the proposal;
    • the financial state of the BDU industry; and
    • the appropriateness of using the CPI as an adjustment index.

Number of subscribers that would be affected

  1. To better understand the implications of approving the application, the Commission sent RFIs to the applicants and other parties seeking clarification on the following points:
    • the number of subscribers that currently receive the basic package; and
    • the number of subscribers that would be affected by the proposed change in pricing.
  2. The answers relating to the first question were inconsistent. The parties revised their answers to the same question in each of the RFIs regarding the number of subscribers that currently receive the basic package. The Commission considers that the information provided by the applicants is not clear enough to allow it to make a determination on the current number of basic service subscribers who would be affected by the proposed increase.
  3. With respect to the second question, the Commission concludes, based on the information provided, that a minimum of 1,515,708 subscribers could be subjected to an increase in their monthly bill, which represents 15.3% of all BDU subscribers in Canada in 2021. The Commission notes, however, that BDUs other than the applicants have not confirmed that they would implement the increase.
  4. The Commission also requested that the applicants provide the number of basic package subscribers who bundle their television service with another non-television service (such as wireline telephone or Internet), as well as the number of subscribers who do not receive a credit of any kind to their account. The figures provided for these lines of questioning show that the vast majority of basic package subscribers bundle with another service and receive a credit to their accounts. In the end, this provides additional revenues to BDUs.
  5. This suggests that the basic package brings intangible benefits to BDUs that extend beyond the $25 rate because additional business opportunities materialize as consumers pursue the convenience of bundling their services with a single provider.

Impact of the proposal on Canadian consumers

Interventions
  1. In general, individual Canadians who opposed the application considered that basic television is an essential service that should remain accessible to as many people as possible, including those with low incomes.
  2. The FRPC and the CASK were concerned that the price increase is likely to have a disproportionately negative effect on low-income subscribers. They submitted that it would be incorrect to assume that subscribers may rely on Internet service as a substitute for lower-cost BDU service because Internet service is unreliable in many communities. The FRPC also made several recommendations, including that the Commission should:
    • deny the application or suspend the proceeding until BDUs provide clear and relevant evidence; and
    • study the concept of a free local basic service.
Commission’s analysis
  1. The Commission is concerned about the potential harm that would arise from the pricing out of vulnerable factions of the population from being able to access a service that makes such significant contributions to fulfilling the objectives set out in the Broadcasting Act, particularly in terms of ensuring access to local Canadian stations.
  2. The intent of the $25 price cap for the basic service was to provide Canadians with a smaller, more reasonably priced entry-point to the system, consistent with subparagraph 3(1)(t)(ii) of the Broadcasting Act. While the applicants proposed adjustments for inflation based on the CPI, the Commission is concerned that the need to maintain the price cap is actually greater due to the high inflation rates currently being experienced. The Commission is of the view that consumers are more likely to be adversely affected by price increases than BDUs. A reasonably priced basic service also provides Canadians with access to programming that fulfills the objectives set out in paragraph 3(1)(d) of the Broadcasting Act. These services include conventional television stations that provide local news and information, Canadian Broadcasting Corporation (CBC) services, educational services and services that the Commission has required to be distributed under paragraph 9.1(1)(h) of the Broadcasting Act.Footnote 5
  3. As cautioned by consumer groups and individual Canadians, those with lower incomes may be forced to cut the cord if an increase to the price cap were implemented. These Canadians would lose access to services that not only reflect Canadian attitudes, opinions, ideas, values and creativity but also, in the case of local stations, provide Canadians with up-to-the-minute news and information on local, regional, national and international matters. Should they wish to retain the  basic service, the most vulnerable Canadians may have to compromise on other essential goods and services. In both cases, this would result in unintended outcomes of approving the requested changes.
  4. Furthermore, allowing for an annual increase to the cost of the basic service would lessen the price gap between the basic service and first-tier offerings, which would leave consumers vulnerable to upselling and defeat the purpose of the requirement.
  5. In light of the above, the Commission considers that the applicants did not provide sufficient arguments to support how the proposed increase to the price of the basic service outweighs the potential harm to Canadians.

Economic rationale for the proposal

  1. As a rationale for the proposed regulatory request, the applicants stated that inflationary adjustment is necessary “to ensure that the permissible maximum price of this service does not decline over time, in real terms” and that “permitting such adjustments would result in a rate regulation regime for BDUs that would be consistent with that which applies to telecommunications service providers for whom inflationary adjustments of regulated prices have been, and continue to be, permitted.”

Interventions

  1. Access supported the application, submitting that the adjustments were necessary to ensure that the maximum price of the basic service does not decline over time.
  2. The CCSA stated that its exempt BDU members would be affected, indirectly and positively, by the change in competitive pressures and that its licensed members would benefit from the added flexibility that the approval of the application would afford them.
  3. Pelmorex submitted that it was important to ensure that the basic service remains comprehensive and sustainable and that if the evidence supports doing so, the Commission should increase the price cap. Corus argued that, like other businesses, BDUs should be permitted to respond to macroeconomic fluctuations through retail pricing changes. Corus encouraged the Commission to place fewer restrictions on the channels that can be carried on the basic service. It also stated that Canadian broadcasting licensees need flexibility to evolve their businesses and compete with digital players within an equitable regulatory framework.
  4. Among the opposing interveners, the FRPC and the CASK highlighted discrepancies in the figures provided by the BDUs and maintained that these BDUs have not provided the Commission with the necessary evidence needed to approve the application.
  5. Anthem cautioned that the price increase would mostly benefit vertically integrated (VI) entities. It noted that VI distributors regularly prioritize their own products and channels in the development of service packages available to consumers and that any price increase in basic services would therefore mostly benefit these VIs directly while creating a greater risk for Anthem’s channels. It proposed that the Commission reserve the right to consult and review the price cap in the future.
  6. The IBG/GDI submitted that BDUs should provide more information regarding how their underlying costs and their shared network costs are accounted for in relation to the basic service. It added that the wholesale cost of mandatory basic services remains a small fraction of the total basic rate and that parties provided no information to justify the BDUs identifying this factor as relevant to their proposal.
  7. The PIAC-NPF considered that no evidence had been disclosed by the applicants to demonstrate financial hardship, and that, in fact, BDUs have been increasing the costs of non-basic plans and their profit margins. In its view, the Commission should reject the application and require BDUs to implement cost-saving measures and lower the cost of the basic rate toward a goal of $0. The PIAC-NPF also considered that 1.5 million subscribers is a significant number of consumers who would be directly affected by the increase.

Commission’s analysis

  1. The applicants did not submit or provide any evidence to suggest that the current maximum rate of $25 is no longer economically viable for them as retailers. Irrespective of whether or not it is viable, the basic service is an instrument that was designed to benefit the consumer by facilitating choice and economic decisions in a marketplace where BDUs have multiple options to recoup their costs.
  2. Moreover, the applicants did not provide any detailed, costed analysis that demonstrates that the cost borne by the BDU for the provision of the basic service has increased as a result of inflation or otherwise, to the extent that a permanent increase of 12% to the maximum allowable retail rate and the implementation of an annual inflationary index are warranted.
  3. The applicants submitted the following quantitative evidence as part of their request which speaks to an increase in their cost in furnishing the basic service:

    Furthermore, the wholesale fees of the 9(1)(h) services were a factor that the Commission considered in setting the maximum $25 price for the small basic service in Broadcasting Regulatory Policy 2015-96. Since the time that decision was issued, the wholesale fees of these services have increased by 18.5% in the English-language market and by 13% in the French-language market (with the potential for the increase to be 21% and 18%, respectively, if CBC/SRC’s rate requests are approved).

  4. While the Commission agrees with the percentages referenced in the paragraph above, wholesale fee increases represent $0.26 for English-language markets and $0.24 for French-language markets or approximately 1% of the $25 maximum price. These increases only account for 8.7% and 8.0%, respectively, of the requested $3.00 increase. Applied to 2021 subscribers and expense figures, these increases represent 0.45% of total BDU expenditures.
  5. In light of the above, the Commission finds that the applicants provided insufficient economic justification for the request to increase the price cap for the basic service.

Financial state of the BDU industry

  1. Canadian cable, Internet Protocol TV and satellite BDUs in Canada continue to yield strong operating margins despite declines in revenues and subscriptions. From 2018 through 2021, the BDU industry showed operating margins above 14% in each broadcast year. Over the same period, expenses declined in each category except sales and promotion.
  2. The Commission considers that BDU expenses are unlikely to increase significantly over time. Apart from programming costs, the infrastructure costs for BDU services are largely fixed costs amortized over several years and over multiple services including telecom services. While it is possible that the cost of set-top box installation and maintenance has increased over the years, set-top box rental fees are not regulated by the Commission.
  3. Given the strength of the BDU industry, the Commission finds that there is not a financial justification for the proposed increase that would outweigh the goal of providing Canadians with an affordable entry-level basic service.

Appropriateness of using the CPI as an adjustment index

  1. In addition to the permanent 12% increase to the maximum allowable retail rate proposed in their submission, the applicants proposed that the amount be subject to subsequent yearly adjustments for inflation based on the CPI. The rationale for using the CPI is that it is a consumer measure, easy to understand, is published on a timely basis, and is not subject to extensive historical adjustments.
  2. The applicants further submitted that the inflation adjustments of prices are a common regulatory mechanism, which has been used by the Commission in different contexts, including the latest review of the local and community television policy with respect to the allowable contribution to local expression.
  3. The applicants further noted that the Commission applies the percentage change in inflation as a standard factor in determining permissible prices for many regulated telecommunications services for the large and small incumbent local exchange carriers. They indicated that permitting such adjustments based on inflation for the basic service price cap would result in a rate regulation regime for BDUs that would be consistent with that which applies to the telecommunications service providers.

Intervention

  1. Rogers submitted that the inflationary adjustment would enable BDUs to offset the significant operating and capital costs it incurs to maintain and deliver the basic service to consumers.

Commission’s analysis

  1. The Commission notes that the CPI represents changes in prices as experienced by Canadian consumers by “comparing, through time, the cost of a fixed basket of goods and services.”Footnote 6 The products that make up the basket are meant to reflect the spending patterns of average Canadians.
  2. The Commission considers that the proposal to adopt the CPI as an inflationary index for the small basic service raises two concerns.
  3. First, the CPI approaches inflation from a distinctly consumerperspective. The index is meant to reflect the spending patterns of individuals striving to achieve a set standard of living. In negotiating prices for intermediary goods and services, a BDU would have considerably more market power than an average Canadian consumer and would take advantage of volume discounts to keep prices low.
  4. The second issue is that, while certain representative goods and services that make up the CPI (such as energy and gasoline) could be reasonably argued to impact the price of furnishing BDU service, the vast majority could not. The key drivers of inflation in 2022 were energy, food and shelterFootnote 7 – the latter two of which would constitute a negligible proportion of a BDUs expenses. Should the CPI be adopted as an inflationary index for the small basic package, it would allow BDUs to increase prices based on market shocks to both related and unrelated goods and services therefore artificially increasing their prices. These increases would be borne fully by the consumers, who have already been more adversely impacted by these shocks than the BDUs themselves.
  5. The applicants submitted that adjustments for price based on inflation had been used by the Commission in the latest review of the local and community television policy with respect to the allowable contribution to local expression set out in Broadcasting Regulatory Policy 2012-154. In that policy the Commission determined that the maximum contribution to local expression by each terrestrial BDU licensee would be based on the 2010 contribution level, with the amount being subsequently adjusted yearly for inflation based on the annual CPI, as reported for the period ending 31 December of the preceding calendar year. However, when it reviewed its local and community television policy in Broadcasting Regulatory Policy 2016-224, the Commission established new priorities (i.e., the funding of local news) and changed its local expression contribution framework, which no longer includes adjustments for inflation.
  6. The applicants further argued that the Commission had used adjustments based on inflation in its regulation of telecommunications. In Telecom Regulatory Policy 2011-291, the Commission permitted the price ceiling for Incumbent Local Exchange Carriers (ILECs) to be raised each year based on the GDP-PI. However, the Commission uses a detailed cost-based methodology in Telecom because of the statutory requirement that rates be just and reasonable.Footnote 8 This has been interpreted to mean that rates must be just and reasonable at all times, meaning that if the underlying costs of providing a service increase, the companies have a right to have that reflected in their rates. In contrast, given that there is no similar statutory test in broadcasting, the Commission was primarily concerned with general affordability and the public interest when setting the basic $25 per month rate for the small basic service.
  7. In light of the above, the Commission concludes that there does not exist sufficient correlation between the CPI and BDU cost structures to warrant annual inflationary adjustments to the maximum price of the small basic package using the CPI. 

Conclusion

  1. In light of all of the above, the Commission denies the application by Bell Canada, Cogeco Communications Inc.; Bragg Communications Incorporated, carrying on business as Eastlink; and Saskatchewan Telecommunications to increase the maximum retail price of the basic service from $25 to $28 per month, and to implement a yearly indexing mechanism for inflation.
  2. In the Commission’s view, the applicants have not demonstrated compelling evidence justifying the proposed increase to the maximum price for the small basic service and sees no direct benefit to approving the application for Canadians. It notes that BDUs retain pricing flexibility for most of the services they offer.
  3. As a result, the applicants have not demonstrated that the need for such an increase outweighs the potential harm to the system that would arise from the pricing out of vulnerable factions of the population from access to a small basic service. The $25 price cap for the basic service provides Canadians with a smaller, more reasonably priced entry-point to the system, consistent with subparagraph 3(1)(t)(ii) of the Broadcasting Act. A reasonably priced basic service also provides Canadians with access to programming that fulfills the objectives set out in paragraph 3(1)(d) of the Broadcasting Act.

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