ARCHIVÉ -  Transcription

VARIOUS BROADCASTING APPLICATIONS/

PLUSIEURS DEMANDES EN RADIODIFFUSION

NPH/AAP2004-5

CHUM Limited and Craig Media Inc.

HELD AT: TENUE À:

Conference Centre Centre de conférences

Outaouais Room Salle Outaouais

Portage IV Portage IV

140 Promenade du Portage 140, promenade du Portage

Gatineau, Quebec Gatineau (Québec)

September 9, 2004 Le 9 septembre 2004

Transcripts

In order to meet the requirements of the Official Languages

Act, transcripts of proceedings before the Commission will be

bilingual as to their covers, the listing of the CRTC members

and staff attending the public hearings, and the Table of

Contents.

However, the aforementioned publication is the recorded

verbatim transcript and, as such, is taped and transcribed in

either of the official languages, depending on the language

spoken by the participant at the public hearing.

Transcription

Afin de rencontrer les exigences de la Loi sur les langues

officielles, les procès-verbaux pour le Conseil seront

bilingues en ce qui a trait à la page couverture, la liste des

membres et du personnel du CRTC participant à l'audience

publique ainsi que la table des matières.

Toutefois, la publication susmentionnée est un compte rendu

textuel des délibérations et, en tant que tel, est enregistrée

et transcrite dans l'une ou l'autre des deux langues

officielles, compte tenu de la langue utilisée par le

participant à l'audience publique.

BEFORE / DEVANT:

Charles Dalfen Chairperson of the CRTC /

Le président du CRTC

Andrée Wylie Vice-chairperson /

Vice-présidente

David Colville Vice-chairperson /

Vice-présidente

Andrée Noël Commissioner / Conseillère

Ronald Williams Commissioner / Conseillère

ALSO PRESENT / AUSSI PRÉSENTS:

Pierre Lebel Secretary / Secrétaire

Robert Murdock Legal Counsel / Conseiller

William Howard juridiques

Robert Ramsay Hearing Manager /

Gérant de l'audience

HELD AT: TENUE À:

Conference Centre Centre de conférences

Outaouais Room Salle Outaouais

Portage IV Portage IV

140 Promenade du Portage 140, promenade du Portage

Gatineau, Quebec Gatineau (Québec)

September 9, 2004 Le 9 septembre 2004

PAGE / PARA

PHASE I

PRESENTATION BY / PRÉSENTATION PAR:

CHUM Limited on behalf of Craig Media Inc. 4 / 16

Gatineau, Quebec / Gatineau (Québec)

--- Upon Commencing on Thursday, September 9, 2004

at 1400 / L'audience débute le jeudi 9 septembre

2004 à 1400

1 THE CHAIRPERSON: A l'ordre, s'il-vous-plaît. Order, please. This is the start of our public hearing. Good afternoon, ladies and gentlemen.

2 Monsieur le Secretaire.

3 THE SECRETARY: Mr. Chairman, I think you are supposed to read your opening remarks at this point.

4 THE CHAIRPERSON: You are right. Thank you, Mr. Secretary.

5 This is the start of our public hearing. Good afternoon, ladies and gentleman. My name is Charles Dalfen, Chairman of the CRTC. I will be chairing this hearing with my colleagues Andrée Wylie, Vice-Chair Broadcasting to my right; David Colville, Vice-Chair Telecom and Regional Commissioner for the Atlantic to my left; to my extreme right, Andrée Noël, Regional Commissioner for Québec; and to my extreme left, Ronald Williams, Regional Commissioner for Alberta and the Northwest Territories.

6 The Commission team working with us is composed of Robert Ramsay, Director, Acquisitions and Ownership Policy and Hearing Manager; William Howard and James Murdoch, Legal Counsel; and Pierre LeBel, Hearing Secretary. Please, as usual, see Mr. LeBel if you have any question about hearing procedures.

7 At this hearing we will be examining the application filed by CHUM Limited to acquire effective control of Craig Media Inc. for the cost of $265 million. CHUM proposes tangible benefits of $20 million.

8 Craig's assets consist of conventional television stations in Alberta, Manitoba and Ontario, and of Category 1 and 2 digital specialty services.

9 Since the Commission's common ownership policy limits the number of television stations that a broadcaster may operate in a market, CHUM has committed to divest itself of conventional station Toronto One. Toronto One launched in September 2003. Consequently, the transaction regarding this station raises an issue of the integrity of the Commission's licensing process, as the station is being sold within the first licence term.

10 This situation also exists in the case of Category 1 and 2 digital specialty services that are in their first licence term. The Panel intends to discuss these concerns at the hearing.

11 The hearing should last approximately one day. You will be notified of any change in the schedule as soon as possible. As usual, we would ask you to turn off your cell phones and beepers while you are in the hearing room and count on your cooperation in this regard.

12 I will now invite the hearing secretary, Mr. LeBel, to outline the procedure of this hearing.

13 THE SECRETARY: Thank you, Mr. Chairman.

14 As you have indicated, there is only one appearing application on the agenda of this public hearing and we will first hearing the applicant, then we will hearing the appearing intervenors and then we will ask the applicant to respond to the interventions filed on their application.

15 The application is by CHUM Limited on behalf of Craig Media Inc. seeking authority to transfer the effective control of Craig to CHUM. Mr. Jay Switzer will be introducing his colleagues. You have 20 minutes to make your presentation.

PRESENTATION / PRÉSENTATION

16 MR. SWITZER: Thank you, Mr. Secretary.

17 Good morning, Mr. Chair, Madam Vice-Chair, Mr. Vice-Chair, Commissioners. Before we introduce our panel, we would like to take this opportunity to thank you and Commission staff for expediting the consideration of this matter by adding it to the agenda of this hearing. We very much appreciate this.

18 For the record, my name is Jay Switzer. I am President and CEO of CHUM Limited. Seated with me today, beginning on my left, your right, Marcia Martin, Vice-President Production for CHUM Television; to my immediate right, your left, Peter Miller, Vice-President Planning and Regulatory Affairs for CHUM Limited. To Peter's right, Sarah Crawford, Vice-President Public Affairs for CHUM Limited. To Sarah's right, Drew Craig, President and CEO of Craig Media.

19 Immediately behind us, starting at the far right, your left, Jennifer Strain, Vice-President Corporate and Regulatory Affairs, Craig Media. To Jennifer's left is Diane Boehme, a Director of Independent Production for CHUM Television. To Diane's left, directly behind me, is Richard Gray, Station Manager of CHUM's Victoria Station, the New VI. To Richard's left is Prem Gill, Director of Multi-cultural Programming and Public Affairs at Citytv Vancouver and host of ColourTV.

20 At the side table, on the far right, your left, is Peter Palframan, Vice-President Finance and Administration for CHUM Television. To Peter's left, David Kirkwood, Executive Vice-President Sales and Marketing, CHUM Television. To David's left, Andy Pernal, Chief Financial Officer of Craig Media.

21 In addition, I would just like to note the presence in the audience today of CHUM's Chair, Mr. Jim Watters; Vice-Chair, Ron Watters; and long-time board member Fred Sherratt.

22 We are very pleased to appear before you today to present CHUM's application for authority to acquire Craig Media. Mr. Chair, this is one of the most important applications CHUM has ever presented to the Commission. We believe that this application is not only of great importance to CHUM, but to the Canadian broadcasting system as a whole.

23 As we will explain today, we are confident that the union of these two companies will further the objectives of the Commission's television policy and promote greater diversity in the Canadian conventional television sector. We believe that approval of this application will mark the beginning of a new chapter in the history of the Canadian broadcasting system, as well as a new chapter for CHUM.

24 However, before we discuss where we are going, we would like to explain how we got to where we are.

25 MR. CRAIG: Thanks, Jay. Both the watters family, through CHUM, and the Craig family, through Craig Media, have served the Canadian broadcasting system for over half a century. This application builds on that experience.

26 As the Commission is aware, the sale of Craig Media was the furthest thing from our minds when we appeared before you a little less than three years ago to present our application for a new over-the-air television station in Toronto.

27 We had quite the opposite in mind. Our goal was to transform our western Canadian based company into the next national player in the conventional television sector.

28 Unfortunately, that goal was not realized. In the fall of 2003 we experienced a downturn in our western operations. In addition, Toronto One failed to meet revenue targets and suffered far greater losses than expected. These two events caused severe liquidity issues for our company.

29 This situation left the board of Craig Media with no choice but to sell the company in order to secure interim financing required to keep the company afloat. In the last six months Craig Media has taken significant steps to curtail expenses at our Alberta stations and at Toronto One.

30 While these stations are now on more solid footing, our operations continue to consume cash. As a consequence, we firmly believe that the swift resolution of this matter is in the best interest of all affected parties.

31 Given the similarities between our two companies, the focus and commitment to alternative broadcasting, dedication to the communities we serve and the long-standing belief in the importance of diversity, I strongly believe that this transaction is the best possible for Craig Media, its employees and the Canadian broadcast system. I am confident that the Craig channels are going into good hands.

32 MS CRAWFORD: Throughout its history CHUM has been committed to providing an alternative to what is being offered by other conventional television broadcasters. This commitment manifests itself in two ways.

33 First, our dedication to localism and the communities we serve. Second, our belief that diversity is the mainstream.

34 CHUM's commitment to local reflection and local programming has been well documented. We firmly believe that local service is a cornerstone of the Canadian broadcasting system and it is the heart and sole of CHUM Television.

35 We believe our stations consistently deliver more high quality, timely, proficient and reflective local programming than our competitors in the communities we serve. Each CHUM television station provides a local perspective that is unique to each community.

36 CHUM has also differentiated itself in the area of diversity. Our commitment to true cultural and racial diversity and accurate local reflection and representation is one of the things that sets CHUM apart from the rest and is an area in which we have long been recognized as a leader. Our ongoing commitment to the reflection and promotion of Canada's multi-cultural, multi-racial and multi-lingual reality is part of our corporate philosophy. It is entrenched in our day-to-day operation and it permeates all that we do.

37 Diversity is our brand and our distinctiveness. We have invested in it. We are wholeheartedly committed to encouraging new and innovative ways in which to promote cross-cultural dialogue and actively foster an environment designed to build bridges among and between ethno-cultural groups. In this way, we are able to promote respect, inclusion and a better understanding of the wide variety of cultural and racial groups that make up Canadian society.

38 The commitments in this application to improved service to Red Deer and Lethbridge to cross-cultural programming, to increase the presence of aboriginal Canadians in the broadcasting industry, and toward culturally diverse productions from ethnic and aboriginal producers all build on CHUM's traditional of alternative broadcasting.

39 MR. SWITZER: In its 1999 Television Policy the Commission recognized the distinctiveness of small and medium-sized conventional television groups like CHUM and Craig and encouraged them to experiment with new genres of programming and explore new ways to meet the needs of their audiences. In the last five years, the number of Canadian specialty services available to subscribers has grown from less than 50 to over 100, resulting in more choice than ever, but also more competition.

40 To balance the effects associated with the increase in the number of players in the system, conventional television broadcasters have looked for growth opportunities, either through the acquisition of existing stations or complementary businesses.

41 Global started this trend with the acquisition of WIC, Western International Communications, which created the second national private television network and gave Global a commanding presence in Canada's two largest English-language markets, Toronto-Hamilton and Vancouver-Victoria, as well as Montréal.

42 Global's parent company then purchased a number of Hollinger's metropolitan daily newspapers, yielding a significant cross-promotional benefit to its television operations.

43 BCE, Canada's largest communications company and owner of Bell ExpressVu followed a similar path. BCE purchased CTV, which operates Canada's largest private conventional television network. CTV was then grouped with the Globe and Mail to form Bell Globe Media.

44 All of these transactions have increased the distance between the largest multi-station groups and the small to medium-sized players in the conventional television sector, to a point where Global and CTV now dwarf their competition.

45 In an effort to survive as an alternative to its much larger competitors, CHUM also looked for growth opportunities. In 2000, the Commission granted CHUM a licence to operate the first new television station on Vancouver Island in over 40 years, and in 2001 CHUM acquired VKVU-TV Vancouver from Global. This allowed CHUM's reach to increase from 48 per cent to just under 70 per cent of English Canada.

46 The addition of Craig's four over-the-air television stations will result in CHUM crossing the threshold the Commission has set for the definition of a large, multi-station group. However, this acquisition will not alter CHUM's commitment to provide alternative, locally relevant television to viewers in the communities we serve. In fact, this transaction will actually strengthen that commitment.

47 We understand that in order for this application to be approved, we must satisfy the Commission that this is the best possible proposal under the circumstances and that the benefits proposed in this application are commensurate with the size and nature of the transaction. With respect, we believe we have satisfied these requirements.

48 Upon approval of this application, CHUM will reinforce Craig's long-standing commitment to the communities it serves in Alberta and Manitoba. We will ensure that Craig's over-the-air television stations offer these communities high quality, locally relevant programming.

49 The commitments we have made will also guarantee that independent producers on the prairies have access to stable funding for years to come. Most important, CHUM will ensure that Craig's conventional television stations and specialty services are on a solid financial footing for the future.

50 MS MARTIN: As summarized in the attachment to your opening statement, we have put forward a tangible benefits package totalling $21 million to be invested over seven years, which equals 10 per cent of the value of the transaction. These funds will be directed toward a number of different initiatives that are consistent with CHUM's corporate vision.

51 $10 million in new expenditures on priority programming primarily from Manitoba and Alberta independent producers, a significant amount of which will be devoted to culturally diverse projects, as well as projects with an interactive component.

52 These include an additional $1 million relating to our commitment with respect to Toronto One.

53 $1 million in new script and concept development funding;

54 $500,000 in revolving bridge financing to help small producers cover legitimate elements of a production budget that are not immediately bankable;

55 $4.2 million to improve local news and non-news programming on Craig's Alberta stations by establishing bureaus in Red Deer and Lethbridge;

56 over $2.6 million to produce a new cross-cultural program set in the prairies;

57 $230,000 to be invested in initiatives intended to increase the presence of Canada's aboriginal peoples in the broadcasting industry.

58 We are allocating $270,000 to media literacy organizations to further build on CHUM's pioneering commitment to support and promote media education.

59 $680,000 toward programs that help develop Canadian production talent, with a specific focus on ethnic and aboriginal producers; and

60 consistent with CHUM's long-standing commitment to the Canadian feature film industry, $850,000 to a number of film festivals and industry groups.

61 In addition to these initiatives, CHUM will also honour the substantial commitments toward funding priority programming that Craig made at their last licence renewal.

62 In total, the tangible and intangible benefits CHUM has committed to as part of this application approach $36 million, an amount that is commensurate with the size an nature of this transaction.

63 MR. SWITZER: This transaction represents an important milestone in CHUM Television's development and evolution into a national independent system of local television stations.

64 As we mentioned earlier, while approval of this transaction will, by definition, make us a large, multi-station group, CHUM will not be a national network, certainly compared to CTV and Global. In effect, this transaction will make us the smallest of the big and the biggest of the small.

65 It will enable us to better amortize our programming costs, run our operations more efficiently and improve our ability to invest in Canadian priority programming and local programming. It will not, however, make us a national network in the eyes of major media buyers, who will still see our conventional services as a limited regional buy as opposed to a national buy.

66 As I stated at the outset, this is not just an important transaction for CHUM but for the conventional television sector as a whole. At CHUM, we believe there is room in the Canadian system for broadcasters that provide a locally focused alternative to the large networks.

67 In approving this transaction, the Commission will be creating a stronger alternative voice, one that is committed to diversity of reflection and diversity in format. The Commission will be creating a stronger group that will be able to better meet the increasing demands for priority programming, while sending an important signal that local does matter.

68 For all of these reasons, we strongly believe this application should be approved and, in light of Craig Media's urgent financial situation, as soon as possible.

69 We thank you for your time and look forward to your questions.

70 THE CHAIRPERSON: Thank you very much, Mr. Switzer.

71 Commissioner Colville.

72 COMMISSIONER COLVILLE: Thank you, Mr. Chairman.

73 Good afternoon, Mr. Switzer, ladies and gentlemen. I have a number of questions that are really, I suppose, of a nature of clarification of some outstanding issues with respect to the application itself that are still left to be clarified even after the deficiency process. Some of them were issues that were raised by some of the intervenors that picked up, and so on.

74 I should say, Mr. Miller, that I have been admonished by my colleague at the other end of the table, who you may recall we had a little bit of an exchange at the last hearing and I have been threatened to be beaten with that cane over there if I lose it. So I will try not to.

--- Laughter / Rires

75 COMMISSIONER COLVILLE: At the outset I had a series of questions that were actually related to the TD Securities valuation. Given the list of people you have introduced, I am wondering if there is anybody who is prepared to or able to answer some of the questions that we might have with respect to that valuation report.

76 MR. SWITZER: We will of course, Vice-Chair, answer to the best of our ability. At a certain level of detail I think we are comfortable. If it gets down into some micro detail, we may have to respond as quickly as possible to you.

77 COMMISSIONER COLVILLE: Okay. Let's try that.

78 My opening question was actually going to be one that was related to a reference in the report at page 3. I am just going to start with sort of a theoretical question and then get down to some details.

79 I suppose this relates to these kinds of transactions in general as well as this one in particular. I was struck by -- a little better than half way down the page -- the definition of "fair market value". I guess I was looking for a comment on the definition here of:

"`Fair market value' is defined as the monetary consideration that in an open and unrestricted market a prudent and informed buyer would pay a prudent and informed seller, each acting at arms length with the other and under no compulsion to act." (As read)

80 I guess my question is really: Given we do not have an open and unrestricted market, we have a market that is regulated and entry is controlled, and I suppose in an indirect sense, given what we have in front of us today, exit is somehow controlled as well, and indeed, as has been noted in the presentation and as we all know, Craig in fact had, to quote the last phrase, "compulsion to act".

81 So I guess what I was trying to get a sense of from you, or I was kind of hoping a little bit from maybe representatives from TD, is: Is this a reasonable definition of fair market value in the context of the kinds of issues that we see in front of us, this one in particular but also these kinds of issues that come in front of us in general?

82 MR. MILLER: Mr. Vice-Chair, perhaps I can start. I certainly always enjoy our exchanges and look forward to this discussion today.

83 In terms of that definition, our understanding -- and others may want to comment, including Peter Palframan, our V-P Finance -- is that in respect of the "unrestricted market" that was not to suggest that this approach wasn't valid to the broadcasting sector. If you look at the report, all the valuations and the tests were made relevant to the broadcasting sector.

84 I think the "unrestricted" was really from the perspective of the purchaser and the seller. There are multiple opportunities there. That is my understanding of that aspect.

85 In terms of your "compulsion to act", again that was from the purchaser and seller perspective and certainly, from a purchaser perspective again, all of the available purchasers were under no compulsion. They are free to make choices relevant to them.

86 MR. SWITZER: Vice-Chair Colville, if I might add, the big issues for us, of course, were that it was a true arm's length transaction. There was no connection between the parties.

87 And, as you may be aware, a large financial institution organized and ran what effectively was an auction process with several bidders. You may want to ask through Craig or Jennifer about that.

88 It was as market-driven, arm's length and competitive as an auction process might be, and we would suggest that further enhances or adds to the comfort level of the process and the general overriding notion of trying to come up with fair market value.

89 COMMISSIONER COLVILLE: Mr. Craig, do you want to make a comment?

90 I am sure you would feel you had a compulsion to act.

91 MR. CRAIG: We did, and, you know, we retained a financial advisor to run a process and we ran as transparent a process as was possible.

92 We had lots of interests in the assets of Craig Media through that process.

93 COMMISSIONER COLVILLE: Yes. I guess part of what was at the root of my question -- and I accept this is a very theoretical question and it is difficult to get a precise sort of answer.

94 I cannot help but wonder whether taking away the compulsion to act whether the fair market value might have been different, but I accept that that could be speculation on your part or my part. Whether it might have been different if circumstances had have been different.

95 Getting perhaps a little more precise and looking in particular at the Toronto One and the factor of the EBITDA losses in the case of the value of Toronto One, why should EBITDA losses be a factor in this case do you think ?

96 MR. MILLER: To be precise, Mr. Vice-Chair, the way the evaluation was done for Toronto One was on the basis of a revenue multiple, not in respect of EBITDA, because of that very issue in terms of the appropriateness of how to value that asset.

97 COMMISSIONER COLVILLE: Well, even given that, I mean, would it not have been an expectation that Toronto One would be naturally going through a difficult period and probably have started to do somewhat better not too much farther down the road?

98 MR. MILLER: I think it is fair to say first of all that any evaluation is at point of time, and that also is relevant to your previous question as to the point of time of when something is bought or sold.

99 The other thing -- and I think TD Securities went to great pains to indicate that their attempt to segregate the value of the 265 by asset was done in response to a request from the Commission, because obviously you need that lovely detail.

100 But they do make it clear that this is an imperfect science, which is why they proposed we use this rather than specific numbers.

101 We then in further response to Commission request gave specific valuations for each of the assets based on what we believed to be an appropriate point within the range.

102 But it is an area where absolute precision is obviously impossible and therefore what we believe was done here is to make the best possible assessment and for both Toronto One and the digitals given that they are relatively new channels. A revenue multiple was seen as the best approach.

103 COMMISSIONER COLVILLE: Now given we have the interesting situation where we had the theoretical value for Toronto One out of the TD exercise, which came to 64 million, and then the actual sale price, which ended up being 46 million, I guess I would be interested in a comment from you as to what that says about this valuation process.

104 Does it suggest the whole value is too high? Does it suggest that the value of the rest of it should have been higher and the Toronto One value of 64 was really too high, but the total value was probably right, which means the rest was probably higher than it was ?

105 How do you comment on that difference between what the theoretical -- you go through the various analyses here, essentially the three different views, although it is acknowledge in the report that it is difficult to do when you have a money-losing operation and it is easier to do when you have four operations with consistent cash flows, but how do you comment on that difference?

106 MR. SWITZER: Mr. Colville, perhaps I can start.

107 I think you are right in that they did a great amount of detail in treating each of the assets differently in terms of an approach that was appropriate to its own maturity and treated Toronto One separately.

108 It originally started as a range between 50 and 70 million dollars, and we used that as then our benchmark when we then engaged financial advisors to help us sell that asset.

109 Of course, we had our own time pressures to deal with, and one might expect that we might not have done as well had those time pressures not been there. But we were able to reach a very acceptable conclusion.

110 The range of 50 to 70 was the range that they came up with and the numbers that passed our own comfort test, and we ended up at a number slightly less than that.

111 You might assume, of course, that from our point of view, in terms of setting up benchmarks to interested parties that again were arm's length done through an advisor in a transparent way in an auction if you will so that, you know, almost by -- I will not say definition -- but by itself adds to the comfort of that process being fair market drive is that we would, of course, for our own selfish reasons frankly, want to start with a benchmark or a flag that was a little higher than perhaps maybe where we might have ended up.

112 That doesn't affect TD's work, but that affects our work in terms of where we started with expectations.

113 So 46 to 50 is not a big difference, and it is generally within a range that is, you know -- we found acceptable, clearly the buyers of Toronto One found acceptable and our shareholders and other stakeholders apparently found acceptable.

114 So that should be the comfort that it passed, you know, our own level of test as to its comfort.

115 COMMISSIONER COLVILLE: Now, the realized value then of Toronto One ends up being the 46 million, and the difference between that and the presumed value in terms of the original application and the original analysis -- well, you talked about the range with TD had come up with, but the application was based on the 64 million, including the benefits.

116 You had originally "guaranteed that

the benefit paid would be no less than the 6.4". So we end up with a realized value of 46, which suggest that the remaining value was 18 million dollars more.

117 I guess I would have expected that we would have seen another 1.8 million dollars in benefits.

118 Then when I read your letter of response to interventions you added 1 million dollars, not 1.8, although I guess you do sort of a top-down approach by saying "well, we will add 18 million to the total value and we will do the 10 per cent of that", which takes us --

119 So, instead of 10.4 per cent of the overall --

120 I guess I was curious as to why you ended up with that approach rather than "Well, the overall is now worth 18 million dollars more. Ten per cent of that is 1.8".

121 I guess if I was "Well, I am going to have to pay the benefits", I would say "Well, let's pick whatever gives us the lowest number".

122 But I would like to hear from you why you picked that rather than add 1.8 million to the benefits package.

123 MR. SWITZER: That is a very appropriate question, Vice-Chair Colville, and, of course, when we started this process -- and we were as clear and specific as we could be -- that original package of benefits amounted to slightly over ten per cent. You are quite right. Approximately 10.4 per cent.

124 But it was done clearly with the understanding and in terms of our words in that application based on the valuation in terms of subsequent transaction.

125 So we were not able to do that and felt, of course, it was immediately appropriate to effectively top up the benefits as we had described in the original application to make sure that no less than ten per cent was paid.

126 Peter may want to add to the process of how it happened or where we are at, but we, from day one, absolutely wanted to ensure and give comfort to everyone that we would not be less than ten per cent.

127 MR. MILLER: Thank you, Jay.

128 Two aspects.

129 I think, as you may be aware, at the time of the filing of the application, we did not know exactly the timing in terms of the sale of Toronto One.

130 So it was in the event -- and our apologies if that was not clear -- in the event we were unable to sell Toronto One before you heard our application and needed some guarantee. We would make that guarantee.

131 Obviously, we were able to sell Toronto One. We therefore know the precise value and therefore we were able to assign the precise appropriate benefits package as we saw.

132 I should also just pick up on one thing, because we didn't pick the lowest possible amount.

133 Because effectively, with the lower amount we have for Toronto One, we could have allocated that 18 million across all of the remaining assets, which would have been the Category 2 services, which in our respectful submission should not be subject to benefits would have increased in value. Therefore, we could have argued in a sense that the incremental would have been even less.

134 So what we picked was what we thought would be appropriate in the circumstances, and that is how we arrived at it.

135 COMMISSIONER COLVILLE: Okay. That is fine. I mean, it is still within the ten per cent anyway. I mean, I guess it is a question of how we ended up coming at this.

136 As I say, when I originally saw the value and was reading, I said "Okay. Well, we are going to get another 18 million on the value. So that is another 1.8 million to benefits."

137 Then, when I read your reply, I thought "Well, I can see how you arrive at that, and it is still within the ten per cent in any event."

138 What you did not indicate, but I believe you have indicated today in your presentation is that this extra one million -- did I understand that goes to the priority programming?

139 MR. MILLER : That is correct, Mr. Vice-Chair.

140 COMMISSIONER COLVILLE : So that goes from 9:00 a.m. to 10:00 a.m., and it is all in that category. Okay.

141 Now I did have a few questions that were actually somewhat specific to the detailed analysis in the report, and you can either try and answer them and, if not, perhaps you can undertake to provide an answer.

142 In the case of the Brandon station, in the discounted cashflow analysis, on an estimate of the 2004, the projected EBITDA for 2005 and all -- sorry, let me back up here -- for all the mature televisions stations increased compared to 2003, except for Brandon.

143 Now, in the case of Brandon, if I look over the past history, we have for operating income at least, sort of a steady increase -- a small loss in 2000, increasing in 2001, 2002 and 2003 -- and then, in the EBITDA analysis for 2005 going forward, we end up with a somewhat decreased figure from the 2003 figure.

144 Now we have a projected figures from you for 2004, which I believe shows a fairly significant decrease from 2003.

145 So what is happening there? What is going on in Brandon? And why this decrease in this particular analysis?

146 MR. SWITZER: Vice-Chair Colville, I am happy to answer that, and I think we can, and I think either and/or Peter may want to fill in. I believe it has to do with the nature of the new CBC affiliation.

147 Craig has recently renewed a long-term CBC affiliation for Brandon that provides for more secure funding from the CBC, but less available advertising for the station to sell on its own.

148 That deal going forward was done by Craig's. We have been briefed on the details, and I believe that has to do with the shape of the curve of revenue change and earnings growth, all connected to a smaller but stable CBC affiliate understanding.

149 COMMISSIONER COLVILLE: Well, the figures that we were provided -- now this is a forecast that was done June 8 I believe -- and the EBITDA figure is -- I don't know whether these numbers are considered confidential or not.

150 But the EBITDA figure I have in front of me is negative. Is that correct?

151 That is not confidential?

152 MR. PALFRAMAN: Vice-Chair, I don't believe so.

153 COMMISSIONER COLVILLE: Mr. Counsel?

154 So it is your own negative 153,000. Is that right?

155 MR. PALFRAMAN: Is that from the projections that were filed with the application?

156 THE CHAIRPERSON: Do you want to add upon that?

157 MR. MURDOCH: They were not filed in confidence.

158 COMMISSIONER COLVILLE: Not in confidence.

159 THE CHAIRPERSON: Okay. Go ahead.

160 MR. PALFRAMAN: Vice-Chair Colville, I just wanted to confirm whether you are reading from projections that were filed with our application or whether those were projections filed by Craig Media in some other --

161 COMMISSIONER COLVILLE: It says on the bottom of the page I have in front of me Craig Media, 2004 Forecast, June 8.

162 MR. PERNAL: Mr. Vice-Chair, yes. That is correct for 2004, the number you mentioned.

163 COMMISSIONER COLVILLE: That is right.

164 Well, that is a huge change from an operating income of 171 positive for 2003. It doesn't sound like this deal with the CBC is very good.

165 MR. PALFRAMAN: Well, I think if I could just add there were a number of factors that led to that change.

166 It is a small station. There is not a lot of operating income. So a couple of hundred thousand dollars of variance means no operating income to a couple of hundred thousand.

167 So I think the reduced revenue numbers in 2004 really was the reason for that variance primarily.

168 COMMISSIONER COLVILLE: So you go from steadily increasing for four years, we go from steadily increasing for four years to, relative to the size of Brandon, a relatively significant negative figure, and then we are bouncing back, but not quite as high as 2003 all going forward.

169 So I guess I am trying to get a sense of whether this discounted cashflow analysis, insofar as the Brandon station is, is reasonable, when it looked like it was having a healthy increase and then, all of a sudden, the bottom falls out and now we are projecting it going forward at positive but lower than it had been.

170 So I guess the question is "Is that reasonable, and does that then affect the free cashflow analysis and ultimately -- I mean, it flows back through to the value of the transaction here?"

171 MR. PALFRAMAN: Vice-Chair, perhaps if I can just clarify it a little, and it ties back I think to the TD valuation report.

172 Based on the historical figures that we have, I concur with you on numbers. The EBITDA that I have for 2001 is 168, 2002 is 152, 2003 was 172. So I think you are right. It is in that kind of order.

173 COMMISSIONER COLVILLE: Right.

174 MR. PALFRAMAN: In our financial projections that we filed with the application, the EBITDA for 2005, which would be the next year to look at, is actually 48.

175 To that, you have to add back the benefits that we allocated to the Brandon station, which total 48, total 107, I am sorry. It is 89,000 in terms of programming and 18,000 for the social benefits.

176 When you add that 107 back to make it a normalized situation, because that would be not an ongoing, or beyond the seven-year licence period, wouldn't be an ongoing expense or it would be assimilated in a different way.

177 But, if you add that back, the EBITDA that we are in fact on a normalized basis comparing with 2001, 2002 and 2003 would be 155.

178 So I think it is consistent with that.

179 COMMISSIONER COLVILLE: Just don't get too far ahead of me here.

180 So if we are looking at page 9 of the report near the bottom --

181 MR. PALFRAMAN: Of the TD valuation?

182 COMMISSIONER COLVILLE: Yes.

183 And you just quoted a 155 figure?

184 MR. PALFRAMAN: Yes. Right.

185 COMMISSIONER COLVILLE: So where am I off then when I am --

186 MR. PALFRAMAN: The reason for the difference -- and in our projection we have 48 compared to the 155 that the TD have used -- is the benefits that we have allocated to the Brandon station.

187 So, of the total 20-million benefits package, there is 107,000 in that first year that is allocated to the Brandon station.

188 So, if you add back the 107,000 to the 48,000, it ties back to the 155,000 figure which TD have used, which is the correct number

189 Because where they have discounted cashflow valuation they need to use the normalized EBITDA or normalized revenues, which is a typical exercise in any valuation.

190 Because what you want to do is take out anything that is unusual or not normal to the operation, and the benefits package would not be part of the normal ongoing operations.

191 So, in fact, the number ties back exactly to the number that TD have used. I think that that is a level of comfort.

192 COMMISSIONER COLVILLE: Sorry. I apologize.

193 I guess I am getting a bit confused here. The 155 does or does not include the benefits?

194 MR. PALFRAMAN: The 155 does not include the benefits.

195 COMMISSIONER COLVILLE: Okay.

196 But it is still -- let me back up for a second.

197 Why does 2004 end up being so bad then and you end up coming back in 2005?

198 MR. PALFRAMAN: Right. Okay.

199 I think that Andy may want to comment on that, but if you look at 2004 for all of the Prairies stations they are all off dramatically from 2003.

200 In fact, they are down probably by a half, and that is primarily because of the revenue decline in the Western stations that Craig experienced and is part of what led to the cashflow issue that they were referring to earlier.

201 If you look at the overall operating margins on the EBITDA margins, they were down from a norm of about 23 or 24 per cent to 13 per cent in the 2004 year.

202 So that is absolutely consistent with what is happening in all of those stations in 2004.

203 COMMISSIONER COLVILLE: Then, what you are saying is, in the particular case of Brandon, you layer on top of that this agreement with the CBC.

204 MR. PALFRAMAN: Right. That is right.

205 COMMISSIONER COLVILLE: Which has what impact on it?

206 MR. PALFRAMAN: It has some impact on the programming costs and it has --

207 Andy, you can clarify the other changes on that.

208 COMMISSIONER COLVILLE: I believe, Mr. Switzer, you suggested it ended up in a decrease in revenue?

209 MR. SWITZER: A decrease in -- I believe, and Andy or Drew may want to clarify.

210 We have been advised a decrease in the available number of minutes of advertising available for the station to sell separately although the revenues from the CBC are more secure and structured in a different way to compensate for that.

211 So what it means is there is less upside in the future in a good advertising cycle, but your downside is protected at this one station in Brandon.

212 COMMISSIONER COLVILLE: So 2004 is an adjustment year, but you are not confident -- and TD didn't use figures that would get you back to where you were in 2003 and growing from there?

213 M. PALFRAMAN: I guess, you know, it does grow on a relatively small basis. It goes from 155 in 2005 to 158, 162, 165, 168. So it shows a reasonable increase.

214 COMMISSIONER COLVILLE: By 2009, you get about back to where you were in 2003.

215 M. PALFRAMAN: 2003.

216 Yes. I think that is right.

217 But 2003 was probably a particularly good year in Brandon for whatever reason because 2002 is 152. So it is showing a reasonable return.

218 But it takes a while too, from a sales point of view. When sales have dropped in one year, it sometimes takes a little while for them to recover.

219 MR. SWITZER: It is our expectation, Vice-Chair Colville, that this station will have less volatility into the future given the new CBC deal.

220 TD's range, which was from 2 to 5 million dollars, doing their calculations in both ways, from an EBITDA point of view and a revenue point of view, made us all feel very comfortable given the expected operating earnings and EBITDA that it clearly fell within that range.

221 COMMISSIONER COLVILLE: I guess if I was to ask you to do the analysis using actual figures for 2004, it would probably make it look even worse from a valuation point of view.

222 MR. PALFRAMAN: Yes. But I think -- and it goes to the initial discussions that we had about the valuation -- in terms of carry-on evaluation, you take many factors into account and not just historical earnings, but projected earnings forward, as you indicated in terms of the case of Toronto One.

223 It is extremely difficult in that case, and that is why revenue is more important where you have actual operating losses.

224 But you take many factors into account, including forward earnings and historical earnings, and try to get a feel for what the right level is.

225 It is also why you use revenue and EBITDA where you have got a history of EBITDA. And that is helpful and is an important part of the valuation.

226 In fact, it is probably the normal method for a valuation. So where you can use EBITDA obviously that is the right approach.

227 Brandon is an interesting situation because, as Jay said, it is a small station and has relatively low revenues and relatively low EBITDA in terms of this overall business.

228 MR. SWITZER: Vice-Chair Colville, we are pleased that -- our understanding was that the CBC relationship with the station for some years had been year to year to year, and there were some risks and some question as to what that commercial relationship was going to be.

229 That has now changed, and there is a long-term, stable, fixed deal in place for the future that will account for, you know, fixing the performance of that station. A small, but stable number that we are all comfortable with.

230 COMMISSIONER COLVILLE: I didn't mean to be critical of the CBC arrangement. It was probably a pejorative comment that I made earlier.

231 Really, what my concern was, it looked like Brandon was getting better every year.

232 So, if we are doing this EBITDA analysis to get to the valuation and all of a sudden the figures seem less than what the 2003 numbers suggested they should have been, is the value understated for Brandon and hence the value for the whole system?

233 I guess where we are at is, if you factored in the actual figure for 2004 and were working forward from there, it would probably be even worse than it is showing here.

234 MR. PALFRAMAN: Yes.

235 I think that is right and I think it speaks to the whole valuation in terms of trying to be as accurate as possible and yet as good a valuation as possible for all the components.

236 It wouldn't have made sense in the case of Brandon, when you look at the history, to base the valuation just on the 2004 year, which was the worst year.

237 And, in fact, it goes to -- they have a discussion of abnormalizing it. You wouldn't take one year like that for the valuation. That is clearly an aberration and isn't what one might expect going forward.

238 So I think that is right. I think it enables us to come up with a fairer and more accurate valuation by not just using the 2004 actuals.

239 COMMISSIONER COLVILLE: Okay.

240 All right. Thanks for that.

241 Just a couple of other questions in this area then in terms of the evaluation and analysis.

242 I think one or -- at least one of these was attempted to be somewhat clarified in the deficiency questions.

243 In the case of the weighted average cost of capital calculation, TD Securities used the statutory tax rate for CHUM in its calculation of its unlevered after-tax free cashflow.

244 I guess we are wondering why you would use the statutory tax rate instead of CHUM's effective tax rate of 40.7 per cent as calculated in your 2003 annual report.

245 Now that may be one you want --

246 MR. SWITZER: Vice-Chair Colville, we did our best to answer that series of questions in response.

247 COMMISSIONER COLVILLE: Sure.

248 MR. SWITZER: But we will have to get back to you as quickly as we can on that one.

249 COMMISSIONER COLVILLE: Okay. For the sake of getting them on the record and you being aware of them then.

250 MR. SWITZER: Do you have the final answer, Peter?

251 MR. PALFRAMAN: Yes.

252 MR. SWITZER: Please, go ahead.

253 MR. PALFRAMAN: One of the reasons why you use the statutory tax rate part in general is because actual tax rates can vary from year to year depending on how intensive your capital expenditures are or changes in tax legislation. So the more normal or just a common approach is to use the statutory rate. That is one issue that I can respond to, but I think in terms of other clarification, if we can get additional clarification from TD, that might be appropriate.

254 COMMISSIONER COLVILLE: Just on this sort of point then, was this something you discussed with TD and, based on the discussion, they used your suggestion here or was this their recommendation?

255 MR. PALFRAMAN: This was entirely their recommendation and their normal approach but it was with some discussion but certainly not at our -- now, this is in areas that we would tend not to be very involved in terms of these specific calculations.

256 COMMISSIONER COLVILLE: Okay. I have two more of this similar nature then and perhaps I will just read them into the record and that way they will be on the transcript and you can -- :

"TD Securities applied a capital structure with 30 per cent debt in its weighted average cost of capital calculation." (As read)

257 This is at page 10 in their analysis:

"The valuation indicates that this reflects an optimal capital structure. From CHUM's annual report, we determined that at the end of fiscal 2003, debt accounted for 45 per cent of its capital structure. Based on CHUM's actual capital structure and assuming all other variables remaining as it is in TD Securities' valuation, CHUM's weighted average cost to capital would consequently fall to 7 per cent and this new rate would in turn increase the value of the mature stations." (As read)

258 So could you explain why you have used an optimal capital structure instead of CHUM's own capital structure?

259 MR. SWITZER: We will inquire with TD as to why they made that assumption and get back to you.

260 COMMISSIONER COLVILLE: Okay.

261 And the final one then in this area:

"In determining the unlevered after-tax free cash flow, TD Securities used a CCA [capital cost allowance] of 16 per cent while CHUM's rate is actually 13. Again, a lower CCA would result in higher unlevered after-tax free cash flow and therefore a higher value for the mature stations." (As read)

262 So could you comment?

263 MR. SWITZER: The same answer would apply, Vice-Chair Colville.

264 COMMISSIONER COLVILLE: Okay. Thank you for that.

265 Again, related to the value of the transaction -- and I guess this comes as much from the Purchase and Share Agreement -- and I guess this issue crossed our mind and you will probably note that Mr. Miller at least, in response to deficiencies, and several of the intervenors, I think, at least one in particular, raised a couple of these issues.

266 Section 2.6 of the Share Purchase Agreement provides for:

"Craig Media's indebtedness to be repaid directly from the payment for the transaction except for the mortgage indebtedness. U.S. to make the mortgage indebtedness to be 3 million at the time of closing." (As read)

267 Now, it is our understanding that the mortgage indebtedness will be assumed by CHUM; is that correct?

268 MR. SWITZER: At closing, Vice-Chair Colville, no. We are assuming no debt. There will be adjustments. The transaction was done on the basis of $265 million with no debt to be assumed.

269 COMMISSIONER COLVILLE: Okay. And there are no other liabilities that CHUM would assume?

270 MR. SWITZER: Vice-Chair Colville, no. The only exception might be a small amount of traditional or normal working capital in terms of accounts receivable and accounts payable at the close of business but it is not anticipated that those would change from the time the transaction was done in April until when we might close in the months ahead.

271 COMMISSIONER COLVILLE: Okay. And then there is one other little sort of detail, I guess. If we look at page 13 of the Purchase Agreement -- and there's so many letters here, I'm going to sound like I'm stuttering, but it is MMMMM, five M's, towards the bottom of page 13.

272 MR. SWITZER: Please go ahead.

273 COMMISSIONER COLVILLE: It lists -- it is really the definition of working capital and it lists a number of items there, in Roman numerals, towards the bottom of the page and the top of page 14, and I guess I would just like clarification for those five items, the first, the loan receivable from Andrew Purnell to the Sony prepaid expense of approximately $2.7 million.

274 So the question is: Who will assume each of these indebtedness items and who will benefit from the business arrangements they represent, and I guess perhaps why they have been excluded from working capital?

275 MR. SWITZER: Yes, Vice-Chair Colville. We tried to deal with everything in as visible and transparent a way as possible at the time. To my understanding, the loan will have been dealt with and will not be an issue. The prepaid to Sony had to do with payments of cash and timing of money for the equipment and the build, and that issue will have been dealt with. There will be no prepaid or imbalance in terms of liability. And I think that covers it.

276 MR. PALFRAMAN: Vice-Chair Colville, if I can just add to Jay's response to that. I'm afraid this section of the hearing is going to kind of become the normalized section, but in reality what those adjustments are for are to normalize the working capital.

277 When we analyzed the working capital at the time that we negotiated the Purchase and Sale Agreement, it was clear to both parties that there were a couple of items in there that weren't part of the normal operations and wouldn't be part of the normal operations going forward.

278 That included a personal loan which the vendor indicated would be taken care of by the time we got to the close, and again, is not part of normal operations.

279 The 2.7 million for the Sony prepaid has gone already from the working capital. It no longer is part of the working capital. It was there because of a timing issue and it related to the purchase of the a lot of the equipment for Toronto One and, as I say, is no longer part of the working capital.

280 The program rights related to some specific programming that was purchased for a specific application and was not part of the normal ongoing operation.

281 COMMISSIONER COLVILLE: Why would program rights not be part of the normal operation?

282 MR. PALFRAMAN: I think that related to -- that was an expanded programming agreement that was done as a -- I think it was part of the expanded agreement that Craig had with CHUM and went beyond the normal programming agreements that they would have and was outside their normal program acquisitions and normal program rights.

283 The one other item is a deferred receivable which, in fact, was a deferred receivable to CHUM, and as part of the discussions that we had related to the purchase and sale, CHUM agreed to take that as a deferral until the closing of the transaction.

284 So those items that are reflected are adjustments that would be made in order to normalize the working capital so that it could be truly compared with the working capital that would be in place at closing.

285 So it is important but it is somewhat academic because the way that the working capital adjustment, at the end of the day, is structured is to take the difference between the working capital on closing and the working capital, the normal working capital at the time that we negotiated the Purchase and Sale Agreement.

286 So it is somewhat academic in terms of those adjustments because the real key item is what the working capital adjustment is based on the change between when we negotiated the agreement and when the transaction closes.

287 COMMISSIONER COLVILLE: I take your point and I guess this would all be academic if it weren't for benefits.

288 MR. PALFRAMAN: Yes, exactly, but that adjustment does and potentially could impact on the benefits.

289 COMMISSIONER COLVILLE: And we really just want to satisfy ourselves that there are no additional indebtedness items that CHUM is assuming that would translate into an added value to the overall value of the transaction.

290 MR. SWITZER: Vice-Chair Colville, we understand that. It is an important issue. That is why we are trying and have always been visible and transparent on all of these issues.

291 As you are well aware, at closing, there are adjustments as to regular receivables and payables and we did a little review this week to see what would that number be if we closed this week. In fact, it wouldn't be an increase in working capital, it would be a decrease in working capital of many hundreds or several hundreds of thousands of dollars, and in fact, it would be $264 million and change, but everything has been completely disclosed and we would expect a small -- depending on the month that this transaction closes, that there will a band of several hundred thousand dollars in either direction for a final pricing.

292 COMMISSIONER COLVILLE: Okay. So you would say, be thankful for what you have.

293 Moving on to another item then -- this doesn't come from -- we are done with the TD report and the Purchase and Share Agreement but another item that has seemed to become somewhat controversial, I guess, and that is -- Mr. Miller, I think you have already mentioned it -- the issue of TV Land and MTV2 and whether or not there should be benefits paid in respect of the value of those services.

294 Now, I believe you mentioned it actually in your supplementary brief and I believe you actually referred to it again in response to deficiencies that, I think -- I'm paraphrasing loosely. You said something like you could see no public policy reason as to why benefits should be paid on those services. Then in your response to interventions, you again made reference to it and even more particularly gave the rationale for why you thought benefits shouldn't be owing there and related it to the Commission's decision not to require benefits in the case of BDU transactions.

295 I guess my reaction to that is that I take your point and that one can draw a similarity but I was also struck by a comment you made in the reply to interventions with respect to another matter that was raised by the CFTPA, and at page 4 of your reply, under "General Policy Issues," you said:

"CHUM has structured this application in accordance with the existing policy framework. The dissatisfaction that certain intervenors have with the television policy is well documented. Nevertheless, suggested changes to that policy are simply not appropriate matters for this proceeding." (As read)

296 I guess my question to you would be: While your argument might be valid in terms of the Category 2s, wouldn't this same policy argument apply here?

297 MR. MILLER: Mr. Vice-Chair, that is a fair comment. We respect that. Basically, the reason we made this submission is that to the best of our knowledge, this is really the first opportunity the Commission has had to deal with a significant transaction involving Category 2s. There have been some transactions involving Category 2s at nominal value. This is the first time there is a transaction of significant value and, to the best of our knowledge, the Commission has never really opined on the issue of benefits for Category 2 services.

298 So we thought that this would be an appropriate time to raise the issue. We respect that point but we also believe, for the reasons that we have outlined -- that we would be happy to discuss -- that the reason you made the decision for BDUs applies equally here and we would respectfully suggest that the approach to Category 2s should be the same as it is to BDUs.

299 COMMISSIONER COLVILLE: So you would be arguing we should change the policy in this proceeding in this case?

300 MR. MILLER: I guess the way we would view it is it is not a change to the policy, it is an aspect that the Commission has never addressed before. So in a sense, the whole Category 2 framework superseded the TV policy. The Commission has never had a chance to address whether or not benefits should be payable on Category 2s in any substantive way. Yes, there have been nominal transactions but this is the first major one and this would be, in a sense, your first opportunity to look at that matter.

301 COMMISSIONER COLVILLE: When you say "nominal," we have addressed the sale of Category 2s, as you acknowledge, in previous transactions, just not of this size.

302 MR. MILLER: That is correct.

303 COMMISSIONER COLVILLE: Nevertheless, you have offered -- should the Commission conclude that benefits should be payable, you have offered 10 per cent of the assessed value here, which was 7.5 for one and 1.5 for the other, so a total of 9. So you have offered, should we conclude that it would be appropriate, the 900,000?

304 MR. SWITZER: Yes, Vice-Chair Colville.

305 COMMISSIONER COLVILLE: And where would you propose to put that in terms of a specific benefit? Would you also add that to priority program expenditures and licence fees?

306 MR. MILLER: Mr. Vice-Chair, we haven't actually addressed that yet. We would be happy to -- obviously, we have confirmed it would be an eligible thing. As we have noted from earlier transactions, sometimes you require certain adjustments in your decision and have licensees file a plan for any outstanding amount. So should the Commission make that decision, we would, of course, be happy to file something with you consistent with your benefits policies, but we haven't made that determination yet.

307 COMMISSIONER COLVILLE: Did you want to add anything beyond what you had filed in your reply to interventions in terms of your position on this?

308 MR. SWITZER: Vice-Chair Colville, perhaps I could start because -- I certainly hope the Commission understands it is not our intent to raise points or matters of potential disagreement or tension that are not legitimate and important. We don't do this lightly, we do it with some thought. It is done respectfully.

309 It is not our intent to create any kind of issue except to note that, for all the matters that we did suggest in our filings in terms of scarcity and free market and open access to Category 2s, all the things that we talked about, we believe it is an issue and will grow to be a bigger issue, and if we didn't raise it now in terms of these Category 2s not having protection and not having guaranteed carriage and all of the other things that go with the notion of benefits generally being seen as a way to compensate for an absence of a competitive licensing situation, that we felt obliged to raise it in as respectful a way as we could.

310 We believe firmly that these benefits should not be payable, but of course, as we did say in our filing, should the Commission decide, we will come up with an appropriate package that meets the test.

311 MR. MILLER: Mr. Vice-Chair, without going through all the arguments, perhaps I can just note the one that we found most compelling. The very reasons stated in the BDU framework for continuing to require programming undertakings to pay benefits were the very factors that no longer apply to Category 2s, and so that is why what we are respectfully suggesting is -- we are not asking for a change to policy, we are actually asking for you to address this aspect, which has never really been substantially looked at, to the best of our knowledge.

312 THE CHAIRPERSON: No, I take your point. As I said, the Commission consciously and deliberately did away with tangible benefits in the case of BDUs. Your argument is essentially the competitive landscape, the competitive framework that you put in place for Category 2s largely puts us in the same situation, and therefore, the Commission should change its policy with respect to tangible benefits in relation to program services for the same reason in the case of Category 2s because the competitive situation is the same, but I also note your point that on a different matter you suggest that we shouldn't use this proceeding to change a policy.

313 MR. MILLER: And again, the only distinction I would make is that we don't think we are asking for a change to policy, we think we are asking you to actually formalize the policy that you established for programming undertakings when you decided to continue the benefits test, because again, you specifically said you are applying it for these reasons. But anyway, I think we understand each other.

314 COMMISSIONER COLVILLE: Okay. We have your arguments and there is nothing you really wish to add to what is here, I think, since what you had said is what is in here.

315 I am just being reminded what I can't talk about here.

316 I want to switch to programming now, anyway a little bit, and perhaps just some general questions at the outset and then we can get down perhaps into some more detail.

317 In terms of the -- actually, in your opening comments this afternoon, you were fairly general, I think. I made a note of one of the references here. At the bottom of page 4:

"The addition of Craig's, over the year, four television stations will result in CHUM crossing the threshold the Commission has set for the definition of high multi-station group." (As read)

318 I don't want to get into that just yet but we will.

"However, this acquisition will not alter CHUM's commitment to provide alternative locally relevant television to viewers in the communities we serve. In fact, this transaction will actually strengthen our commitment." (As read)

319 Really, I guess, I wanted to start by getting a sense from you about what you are going to do with these four stations, how it fits sort of into the CHUM vision, the CHUM model or mould or however you want to characterize it. Are you essentially planning to convert the four stations to match, for example, City TV brand of broadcasting or the Newnet stations as in Barrie, Ottawa and Victoria? What is the kind of look and feel of these stations going to be and how does it fit with sort of the CHUM vision?

320 MR. SWITZER: Thank you, Vice-Chair Colville. There are lots of managers here that would have liked to have had specifics, I'm sure, as to what we might plan to do but you asked kind of a two-part question. You read back the section on why we would be stronger and certainly that is an important part of it in terms of what have been underperforming stations across our conventional system, both for us and recently for Craig.

321 These are innovative, creative stations -- I'm speaking now primarily of the larger stations in Winnipeg, Calgary and Edmonton -- that do a very good job serving their viewers. They are intensely local, as created and run by the Craig people. Our stations in the rest of Canada have the same approach to local television. We are intensely local. In many ways, it fits like a glove.

322 The priorities that we share in terms of serving our community at a time when the other two larger conventional networks' mandate is to primarily, not exclusively but primarily serve a national mandate, the Craig stations and the CHUM stations have always put local first, at some cost to our operating margins. So we like the creativity and approach that these stations have, and frankly, it is not our intention to do anything other than enhance them. It is not about a major change, it is about these community stations fitting in geographically, thematically, programmatically with everything else we are doing in a way that just makes great sense.

323 These Craig stations will get a stronger financial base from our financial ability to ensure that things that they have been able to do from time to time will continue at a high quality with great certainty, local independent producers in the community will have great comfort, the various communities that we serve will know that these stations are in good hands, and if I might add, the advertisers will have some comfort that the uncertainty that has been hanging over these stations has been dealt with. It has affected business. For local reasons and structural reasons to the system, it is a great fit.

324 As to what specifically we plan to do, we have outlined in some detail from a benefits point of view what we plan to add. As to what we want to do at the station level, we have not yet visited these stations for the most part. They are being run by Drew and his team and we have a lot to learn and we are looking forward to going in and meeting with the staff and managers and asking them. We know we want to enhance, we know we want to provide better and more, and frankly, we want to take the best of what they are doing in Manitoba and Alberta and make sure it is seen across the rest of our system. So it fits on many levels just perfectly.

325 COMMISSIONER COLVILLE: Yes. I was really asking the question not so much in the context of benefits but just in terms of sort of ongoing day-to-day operation, how did you see this fitting, and when you say...

326 MR. SWITZER: We want to build on their strengths and enhance the things they are doing. Some of that is stability and depth of money. Some of it is marketing power, marketing muscle. Some of it is operational savings, back office savings. If we can reduce these stations' back office costs in areas of technology, IT, sales costs and admin, it will allow for more money to end up on the screen where it should be and these stations will benefit from that but we just want to enhance what they are already doing.

327 COMMISSIONER COLVILLE: What do you consider the strength of the existing stations to be?

328 MR. SWITZER: Strong local stations in each of their market. They have been frustrated, if I may say candidly, by some of the liquidity issues or confidence issues that many stakeholders -- I mean it must be hard for them to deal with -- I am dealing with the weaknesses first, Vice-Chair, and then the strengths.

329 COMMISSIONER COLVILLE: Yes. What I want to focus is a little bit on the programming --

330 MR. SWITZER: Yes.

331 COMMISSIONER COLVILLE: -- not so much on the admin side. I do have a few questions on that though.

332 MR. SWITZER: Yes.

333 COMMISSIONER COLVILLE: I wanted to get a sense of -- CHUM has a style of television that you are well known for and I guess we want to get a sense of -- I suppose a lot of that style is personified by City TV in Toronto.

334 MR. SWITZER: We would argue it is personified by what the Craigs are doing in Calgary or Edmonton. The styles are similar. The approach to informal, interactive, connected television that gets from behind the desk into the community with more field power, we have that in common.

335 These stations in Calgary, Edmonton and Winnipeg are very much like elements of both our Newnet stations and our City TV stations. They are not part of a formal national system like a CTV that then opts out for a single newscast. These are ground up, community-driven, smart stations that need help. They need help with operations and admin and marketing and money. They fit stylistically perfectly.

336 What Drew and the team are doing in Manitoba and Alberta mirrors what the CHUM managers are doing in British Columbia and Ontario and that is also what helps make this work.

337 Does that help a little bit?

338 COMMISSIONER COLVILLE: Yes, it does. So in that sense, you don't see a big change sort of in the programming style?

339 MR. SWITZER: Correct.

340 COMMISSIONER COLVILLE: I mean your programs may differ but in terms of the overall style of programming.

341 MR. SWITZER: Both in terms of what they do locally, what they commission locally, their work with independent producers, their work with Aboriginal producers, their approach to Hollywood programming, which, like us, has not been traditional top ten network series, sitcom programming. We share our philosophy and have for many years in terms of how best we have chosen to reach our viewers.

342 COMMISSIONER COLVILLE: Okay. You mentioned about the operational functions. How will this affect the operational functions, not just of Craig but of CHUM as well, in terms of the synergies that you can bring to bear here? I would like to get some sense of specifics from you in terms of office locations, staffing levels and other sort of operational functions. What are your plans? What is going to happen here?

343 MR. SWITZER: We will give you as much precision as we can. They clearly have hundreds of people in place in Calgary, Edmonton, Winnipeg, Portage, Brandon. Craig has already gone quite a long way towards some technology and perhaps I will divide the answer into three or four areas. We can start with technology.

344 It is pretty clear Craig had some plans between their stations in Manitoba and Alberta in the near future to organize their technology plant. Some of those plans are kind of halfway developed, and based on what we know so far, we would probably continue with those plans.

345 You will see in the numbers filed in areas of technology, administration, sales, IT and so on, the costs on a per station basis for these stations going down several hundreds of thousands of dollars in those categories from their historical numbers. So from a back office point of view, those savings are in the numbers for these stations, and of course, the rest of the CHUM stations will see advantages as well. That is the first part of the answer.

346 The second part of the answer would be advertising and marketing. We are better able to provide a national wallop, a bang if you will, so that when there are common Canadian series or common Canadian movies or programs running, we can, in a more coordinated way on a national basis, do a more effective job getting the word out.

347 There are, of course, amortization issues we have addressed in terms of Canadian programming and as well as American programming. That is the number that affects the CHUM stations as much as it does the Craig stations, because up until now Craig has had to spend hard dollars, real cash on their Hollywood programs and we already own national rights to almost all of the Canadian programs that we commission from independents, as well as the Hollywood programs we purchase.

348 So one of the advantages to us is that much of the acquisition programming costs in these Craig stations, they have to be real dollars to the stations of course from a fair market value point of view, but to CHUM they are soft costs and that is a big advantage to us.

349 COMMISSIONER COLVILLE: So when you talk about saving hundreds of thousands of dollars, how is that going to translate into the day-to-day operation of the undertakings?

350 Are we going to see changes in office, head office operations, staffing levels? Where do you see the back office synergies coming from? How do you see that playing out?

351 MR. SWITZER: Although it is too early to be precise until we spend some time on site, it is not our intent to alter things in a major way. In a small way, things that are back office, it might involve traffic clerks or finance department or sales assistance, technology, IT infrastructure, and so on, those are the small areas of not only manpower but in other contracts where you can get better deals as a national group.

352 The facility in Winnipeg at The Forks is first class. The building and staff that they have and run in Calgary is extraordinary. I am speaking personally and candidly here in front of Drew, my friend. I think the Edmonton people and operation are first class. The facility is a little unusual, right downtown in the old Hudson's Bay building.

353 But we like what we see. These are innovative, creative producers and storytellers, passionate about telling stories in their cities. That is what brought us together. As has been our experience in other markets we serve, we are doing more, not less.

354 COMMISSIONER COLVILLE: Between 2003 and 2005 your projections, if you look at sales promotion and admin in general, there are probably savings in the order of $3 million for Edmonton and Calgary?

355 MR. SWITZER: I would have to go through. It sounds like the right order of magnitude, Vice-Chair. I would have to go look at it. But category-by-category, station-by-station it is in the several hundreds of thousands of dollars per station per category, so that would sound about right.

356 COMMISSIONER COLVILLE: What would be the effect of those savings? What is causing the savings? What is going to change to result in that?

357 MR. SWITZER: Oh, everything from cost -- let's talk about cost of sales for example. For their own reasons -- and I don't ever want to speak for what has happened or current Craig operations, that is their business, but they effectively set up their own national rep firm that year, last year, with significant staff to sell national advertising for those stations.

358 We are able to sell national advertising for those stations overall at a fraction of the cost, some because of our relationships with the rating services or other presentations to agencies, sales staff and assistants, Internet and on-line trafficking systems, at a very small incremental cost to us compared to their costs. On a national basis we can save a lot of money that those stations were charged in the sales area, just as one example.

359 We are able to effectively advertise those stations on some of our specialty channels that they are not now able to do. I presume in those numbers some of the advertising reductions may have been away a little bit from print and yet we are able to still support the stations in other ways with other assets that we control.

360 There are lots of advantages to make these stations stronger. Our overriding goal is to build and grow what is on the screen to make the station stronger in their connections with viewers and do whatever savings we can in terms of efficiencies behind the scenes where we believe it is less critical and much more important to be efficient.

361 COMMISSIONER COLVILLE: Would the same be true of general and admin operations like HR and accounting that CHUM largely would have the resources to be able to do?

362 MR. SWITZER: There will still be local people at each station, but not the same existing infrastructure and charges for a separate head office function that Craig has had to run up until now.

363 COMMISSIONER COLVILLE: Again, aside from the benefits that we can talk about later, and given the comments that you just made about the Craig stations, how do you propose to improve local programming in Edmonton, Calgary and in Manitoba?

364 MR. SWITZER: Perhaps I will start and I will make sure not to talk about benefits yet.

365 I think part of it has to do with the uncertainty that is just a natural result of a transition like this. Certainty -- you may say, "Well, we are not talking benefits, we are talking how will our ownership of these stations improve the existing programming?"

366 The first part of the argument would be clarity and certainty and I would say perceived strength of what we bring so that there aren't any questions, whether it is in their arts programming or music programming or news or access or producers that may want to work with them.

367 This time of transition, this difficult time that they have been having which is public and unfortunate, has hurt their relationships in each community. So clarity and specificity and timeliness of a strong, like-minded, well financed owner that can continue and build will result in better local programming across the board.

368 COMMISSIONER COLVILLE: Don't misinterpret the question.

369 MR. SWITZER: I understand.

370 COMMISSIONER COLVILLE: I'm trying to make it sound like this negative, but does this undertaking, this transaction, essentially allow the Craig stations to be what they were before the misfortune fell on them and bring it back to that, or does the CHUM taking over the Craig stations in fact allow those stations to be more than what they would have been? If that is the case, what is that more?

371 MR. SWITZER: I would say, with respect to the great work that Drew and the team have done, it will be more than it was, perhaps what Drew and the team wanted it to be.

372 COMMISSIONER COLVILLE: I guess we would like to get a sense of what that more would be.

373 MR. SWITZER: I understand.

374 MR. MILLER: Mr. Vice-Chair, if I can add, it is hard for us to answer that question the way it is posed, i.e., aside from the benefits.

375 As you know, in this process we are acquiring stations with their current conditions of licence, et cetera, et cetera. The benefits, both tangible and intangible, are the primary means where we can improve on that.

376 So we would be happy to answer that question in terms of what we are doing with the benefits, intangible and tangible, but what is difficult for us is to separate out those benefits because that is a primary instrument in terms of how we are moving forward. That is precisely what the benefits package is there for, is to allow an acquirer to do things that haven't been done before for the betterment of the broadcasting system and local communities.

377 So if you would allow us to answer that question more generally --

378 COMMISSIONER COLVILLE: Go ahead.

379 MR. MILLER: -- then that is probably the easiest way for us to do that.

380 MR. SWITZER: Let me start first and answer the Vice-Chair's question with one approach. You tell me if I'm off base, but I will be as specific and concrete as I can.

381 The Craig stations work with local independent producers, mirrors ours. Part of that equation, part of the limiting factor on their ability to pre-license Canadian films or series is access to the national funding, Téléfilm, CTF. Our ability as a larger group gets rid of the structural disadvantages that we and Craig have been facing.

382 We can come in to CTF, to an independent producer, with the same trigger licence fee, with the same $300,000 an hour or the same X hundreds of thousands of dollars for a movie, and right now the Craig stations are at a disadvantage. A producer that walks into the Craig door is not likely going to get financing from CTF. They don't have enough exposure. That is a key factor in deciding who gets the money.

383 So how will things be better? Local producers, better movies, more broad exposure and a higher likelihood of financing. The overall quality and quantity gets better because as a larger group we are now eligible for better access to CTF.

384 That is one part of the answer. That is a perfect example of how size and marketing strength will help the local community and it will be seen on air.

385 Marcia, do you want to add something?

386 MS MARTIN: Yes.

387 COMMISSIONER COLVILLE: I'm sorry. Just before you go there, would you be referring largely to what one might characterize as priority programming? You said movies for example.

388 I appreciate that answer and it is an area that is obviously very important to the Commission and the Canadian broadcasting system, but the original question was as much the local programming in those areas.

389 MR. SWITZER: I was broadly including our work with local producers as local programming.

390 COMMISSIONER COLVILLE: Now we are on the benefits and the priority stuff so I take your point.

391 MR. SWITZER: Vice-Chair Colville, we will add and talk about the new incremental things we are planning to do. I will let Marcia talk about the local news effort, all the other local things they are doing which we, frankly, have yet from site to learn about. We have been watching at a distance and we like what we see.

392 Marcia.

393 MS MARTIN: Let me see if I can help with this. Let's bring it to that local basis.

394 We have been in the business of local production for 30 years, over 30 years, and I think what we want to do and be able to do is bring that experience to these markets, work with the talented people that obviously Craig Media has, but bring that experience so they can tap into that.

395 If anybody knows how to deal with the community, we do. We would like to be in touch, let's say, more so with that community. We want to be able to visibility-wise have our cameras on the streets, have our mobiles on the streets, having a way of getting to the people perhaps in a more aggressive manner. That is what we do. That is what we know how to do. We do it with our morning shows, we do it with our news, we also do it with our locally produced relevant programming.

396 So, if anything, we want to build that strength of what we have been doing in every local market that we are in. That is how we make the programs successful, and those programs are seen across the country as well as internationally.

397 So it is really the experience and, as you mentioned, the style of how we do programming. If you add that to the talent and the people already existing in those stations, I think you have a very strong mix of programming to come.

398 MR. SWITZER: Vice-Chair Colville, there are some things -- not to suggest that Craig hasn't done the best possible job they can do -- that just come with even more experience and size and critical mass that affects local production.

399 The ability to have your best staff be mobile and grow through the company. When you have more choices you have more opportunities for growth and development. Richard Gray, the station manager in Victoria, spent seven or eight years here in Ottawa. When you have a larger group it is a real opportunity.

400 There are areas of research, research with viewers, research with advertisers, program research that we have been able to afford as a larger group in terms of testing, what our viewers want, what is working, what isn't working with news, with other community programming.

401 The ability to get better talent on the local shows because they know they are going to be seen on a national platform.

402 The magazine shows that the Craig stations are doing in Alberta and Manitoba, I might argue would have better access to talent and stories if they were able to say, "And the best of our stories are going to be seen across a national system, on other CHUM stations, perhaps on Bravo! or MuchMusic. That is happening from Vancouver, from Victoria, from Ottawa, from London. It is a real programming and production advantage we can bring to the production teams and staff in these stations.

403 I am not suggesting that -- we also perhaps don't want to, in our own way, do a better job where we think there is room for it, but first off is we have not been on-site and we have a lot to learn once we get there. The second part would be to take the best of what we see from a performance point of view and a story point of view and take it from Alberta and Manitoba to the rest of the country.

404 I think a more fulsome answer would probably have to wait until we spent more time in the stations which, as I say, we have not been to yet.

405 COMMISSIONER COLVILLE: This is not a back door way of trying to get you to commit to a condition of licence, but we would like to get a sense of: If there were no benefits and this transaction was going through, what kind of changes might we expect to see in terms of priority programming, Canadian priority programming, across the CHUM system of stations?

406 You are going to be saving money in the synergies for one thing, there is going to be extra monies there. There is --

407 MR. SWITZER: Vice-Chair Colville, my first answer would have to be that it would help improve what have been unacceptable -- it is not easy for me to say this with our Board of Directors here -- unacceptable margins in our conventional television business.

408 We have our own issues. We are not -- I am not here to complain about it, I am here to suggest that a real benefit to CHUM is to help us turn -- the Commission is very familiar with our numbers for our conventional system -- an almost non-profit into some kind of small margin, which we now do not have on our conventional stations.

409 So yes, we have the ability to bring all of these advantages in terms of in-house programming and our work with local producers and all of the other advantages that come with being a larger company but, frankly and selfishly speaking, we would like to see and need to see our own conventional television margins approach even a small level, which they are now not at. It is an important issue for our company.

410 COMMISSIONER COLVILLE: So would it be fair to say that the improvements in priority programming would largely come though the benefits? I don't mean that to be negative.

411 MR. MILLER: The other element of course is the use of the A-Channel Funds that are there and how we can utilize them. Because Jay's comment about us being able to trigger the CTF and take those funds and use them for programming that can be exhibited nationally more easily is an intangible benefit, if you will, that ability to both continue with those monies but actually, hopefully, use them to greater national effect.

412 COMMISSIONER COLVILLE: What about changes with respect to MTV2, MTV Canada, TV Land, are there synergy gains that you would expect there with your existing operations, either conventional or specialty? If so, what do you expect those to be and what changes might we see with respect to those operations?

413 MR. SWITZER: Vice-Chair Colville, we do not see any significant changes and see these stations as a natural fit to our existing bouquet of specialty services, both Category 1 and Category 2. Each of these three channels are natural extensions of the businesses we are in.

414 We don't yet have a general interest youth channel that MTV is, that Connect is.

415 MTV2 clearly fits into our family. We already have a licensed Category 2 from the Commission called Much Pop that we have not yet launched and have thought about launching. This would clearly and frankly probably have us deal with that issue.

416 Of course TV Land, in terms of its classic approach to television, would be a natural extension of our existing drive-in classics channel and would fit very well with our existing family of channels.

417 So we see strengthening, we see enhancing. We do not see any drastic changes.

418 COMMISSIONER COLVILLE: Talking about the benefits, and you noted in your reply to interventions that in regards to the $9 million, now $10 million -- it might even be a little more -- can you go through the process that might respond to some of the concerns that have been raised as to how you plan to obtain priority programming from Alberta and Manitoba independent producers?

419 MR. SWITZER: Yes. Maybe I have been speaking much too much and maybe Peter can take us through how we are planning to continue with the good work that the A-Channel Fund and people have been doing and layer on our own benefits.

420 MR. MILLER: Just a clarification, Mr. Vice-Chair. You want to understand how those monies will be allocated to independent producers in Manitoba and Alberta? Is that precisely the question?

421 COMMISSIONER COLVILLE: Well, how do you plan to obtain priority programming through the use of the benefit funds from Alberta and Manitoba? Can you take us through that?

422 MR. MILLER: Let me do just the overall framework and Diane Boehme will get into the details of how we work.

423 As we indicated in reply to the number of interventions, largely positive, we have tried to strike a balance in that priority programming benefit between local Alberta and Manitoba production, national production, drama, other categories, et cetera.

424 It is our habit in benefits packages to not set up a "typical fund" but to make an expenditure commitment. The value and benefit there is there is no administrative overhead that we charge as part of the benefit and it is linked more directly to ensuring that that programming is on our system and our airwaves. That is something that the Commission has noted for example in respect of the benefits package with CKVU.

425 So in respect of Alberta and Manitoba, one of the things we heard was the view that there needs to be a local development officer. That is something that Craig Media had in place up until recently. We will again adhere to that commitment.

426 Diane can actually tell you how she will work with that individual and how we will work with Manitoba and Alberta producers to move forward.

427 MR. SWITZER: It will follow the same practice and procedure that is in place at all of our other stations and that we find is working very effectively in terms of the cycle of contact, development, pre-licensing with a local officer.

428 Diane, do you want to?

429 MS BOEHME: Absolutely. Thank you very much.

430 It has been our standard practice, and has worked very successfully for us, to have a very open and collaborative relationship with the independent producers that are part of our communities that we serve. It has never, ever been a problem for them to be able to find great ideas that they want to propose to us and it is our responsibility, for the people who have not had an opportunity to work with us through the prairies, to help understand the kind of material that we are looking for.

431 So it is a very proactive solicitation from them, the kind of material that we look for stylistically, subject-matter-wise, thematic-wise, character-wise and then to work with them with the local development officer to help hone that to make sure that we put a package together that we believe is going to be financeable, that we believe through one system or another is going to be something that we will be able to licence and utilize on any of our services, whether it is a documentary or whether it is a drama series, a mini series, a made for television movie or a theatrical feature film.

432 COMMISSIONER COLVILLE: You have mentioned that these productions would be primarily from Alberta and Manitoba. What does "primarily" mean in this context?

433 MR. MILLER: I think we used the word "primarily" and I think in another instance we used the word "predominantly". In both of those words we mean over 50 per cent.

434 COMMISSIONER COLVILLE: And the rest of the money would be spent with independent producers but elsewhere?

435 MR. MILLER: Again, the way we structured our priority programming benefit, now $10 million, is under a number of different levels. So there is, in a sense, a separate but overlapping commitment. So a minute of 50 per cent will go to Alberta and Manitoba producers, another minimum of 50 per cent of the whole amount will go to drama, and then there were thresholds for ethnic and diversity producers and for interactive.

436 COMMISSIONER COLVILLE: Just on that point of drama, you used the phrase "drama based" in your application.

437 MR. MILLER: Nothing nefarious was intended. We mean Category 7.

438 COMMISSIONER COLVILLE: Do we understand that to mean drama? A lot of people suspect, "Well, what does this mean?"

439 MR. MILLER: We just mean Category 7 as the Commission defines "drama".

440 COMMISSIONER COLVILLE: All of the productions that we are talking about here will be aired on the CHUM and Craig stations, broadcast.

441 Is that correct?

442 MR. MILLER: Again, our commitment is to air them locally and the best of nationally. Again, the hope is that with much of the priority programming, and certainly the higher end material, that we could give it a national window.

443 COMMISSIONER COLVILLE: I guess this relates to a question I was going to ask later on but I will ask it here now anyway.

444 I guess as we struggled with, you may recall, the CTV -- the BCE benefits with CTV where the money is not going into a separate fund, how best do we satisfy ourselves that indeed this money is incremental and not simply being money that otherwise would have been spent on programming for what were the Craig or CHUM stations?

445 I guess a question I was going to put to you near the end, but maybe we can think about it now and maybe you can save your answer: What kind of reporting might we have that would demonstrate to the Commission that indeed the monies and the programming is incremental to what otherwise would have been the case?

446 MR. MILLER: A very important area. Having gone through this with staff we understand how important it is. I mean gone through it with staff in the case of the CKVU transaction.

447 Our commitment is to make sure that the dollars spent on all benefits is of course incremental. So the benefits going to priority programming would be incremental to CHUM conventional expenditures to date.

448 Our expectation will be that we will work with staff to figure out the appropriate measure of that incrementality. We have a current baseline for drama in respect of the CKVU benefits. We assume that working with staff we could calculate the appropriate broader baseline of priority programming. So that is an exercise we would assume that you would require us to go through upon and assuming approval.

449 COMMISSIONER COLVILLE: If we look at the Calgary and Edmonton stations and I look at the programming base for those stations, I guess I am having some trouble in getting my mind around how we do this and how the benefit applies.

450 If I look at the programming expenditure for Edmonton actual for 2003, and for Calgary for 2003, and then I look at the line that is characterized as "Programming Base" in your projections, unless I am mistaken I see a fairly significant decrease in the figures for those two stations for programming.

451 I look at this and see a relatively significant decrease in program expenditures and then now we are going to add benefits back in and I am having trouble getting my mind around what really is the base or what should be the base and, frankly, to be candid, I see adding the benefit back in in some cases doesn't even get us back to where we were in 2003.

452 MR. MILLER: Obviously this is a problem that I guess is difficult to resolve.

453 Our expectation, again having gone through this process in terms of our acquisition of CKVU, is that appropriate baseline will not be the historic baseline of the Craig stations but the historic CHUM baseline. In other words, the best test for incrementality for these kinds of initiatives, priority programming, drama, et cetera, is incremental to CHUM's historical expenditures, relevant expenditures in that regard.

454 That is the way we concluded our discussions with Commission staff in terms of CKVU for some similar reasons, because it was hard to determine if a baseline for CKVU was even relevant under own ownership. So our assumption has been that it would be a CHUM baseline in respect of the priority programming initiative and that again was something that we would assume that we would work with Commission staff on.

455 COMMISSIONER COLVILLE: So you acknowledge, then, that the projected figures for 2005 for Calgary and Edmonton for example, are significantly less than the actual figure for 2003?

456 MR. MILLER: I will let Mr. Palframan look at the numbers, but I can tell you that from the perspective of preparing the benefits package we didn't even look at that. We looked at it and assumed, I hope not incorrectly, that what you would want to see is incremental to what CHUM has been doing, that that would be the test that would be most important to you.

457 COMMISSIONER COLVILLE: Until we get into the numbers let's, perhaps just as you suggest, we should discuss whether or not there should be benefits in Category 2s. Maybe this is an opportunity to discuss this issue, because I guess one has to look at it from the presumption: Let's assume Craig never got into financial difficulty and had been able to continue on, what would have been the case?

458 I suppose you would argue: Well, the fact is they did and we have this in front of us.

459 But as a going concern Craig was spending a certain amount of money on programming in 2003. You come along with a projection that is significantly less as this is what would have been the case. Now, on top of that we will add benefits back in. But even when I add that back in, that still doesn't get me to where I was.

460 At a theoretical level I have difficulty getting my mind around that there is even a benefit at all here.

461 MR. SWITZER: Commissioner Colville, it is obviously an important question and you should be comforted that it is our intent to absolutely act in a full and responsible way in terms of proving incrementality and we will have to define what that is.

462 I just want to make sure that we are talking about the same area. There are some areas of Canadian programming expenditure that will go down because the station did spend some monies on non-priority Canadian programming that we are able to supply that will save the station some money.

463 In any answer that Peter may want to provide, I just want to make sure that we have narrowed it down so that we are talking about drama and drama or priority and priority or all Canadian and all Canadian, because the widest definition of that does have the station saving some money.

464 They had purchased a third-party shelf second-, third- and fourth-window Canadian programming that under our ownership they will not have to expend.

465 COMMISSIONER COLVILLE: Well, I am looking at a decrease of probably in the neighbourhood of two and a half million dollars.

466 MR. MILLER: And that is in Priority programming, is what you have.

467 COMMISSIONER COLVILLE: That is just what is characterized here as programming base.

468 MR. MILLER: Okay.

469 COMMISSIONER COLVILLE: Then, you have a line called programming benefits added back in.

470 COMMISSIONER COLVILLE: Before -- you want to go ahead?

471 MR. PALFRAMAN: Yes.

472 Well, Vice-Chair Colville -- and I will just add this just to remind us what is included in their programming line because one of the important items that are included in that programming line are the non-Canadian acquired programming costs, and those costs will go down as a result of the acquisition by CHUM of these stations. Jay I think has already alluded to that, but will add to that.

473 But, in terms of developing our projections going forward and what I think a baseline would have to be, would be to take out the non-Canadian acquired programming costs.

474 Because that is one of probably the most significant synergy area in terms of the costs side in these projections.

475 So that has to be factored in before we look at the incremental Canadian expenditures.

476 COMMISSIONER COLVILLE: Well, I take a point and I would agree with you on that, that it seems to me that, in order to demonstrate really where the benefit is, given these program number decreases, we would have to be satisfied where the cost savings are on programming to show where the real incrementality is here.

477 MR. MILLER: Again, with respect, in the premise of your question, I think you indicated the dilemma.

478 These stations aren't a growing concern. You know, part of the intangible benefit of this transaction is making them a growing concern.

479 So to assume the status quo -- especially when there was no specific commitment on the part of Craig (a requirement, I should say, on the part of Craig) in terms of baseline Priority programming spending other than the specific A-Channel funds -- is an assumption that I think, in the circumstances, might be difficult to make.

480 We, in putting together the benefits package, did not ask for any historic breakdowns in terms of Craig's spending on Priority programming. Quite frankly, we didn't think that would be relevant given the circumstances of that transaction.

481 If the Commission concludes it is relevant, we will have to look at that, and it may be that the benefits package as proposed has to be adjusted because we to obviously make some assumptions as to how you might approach incrementality.

482 Based on the circumstances of this transaction and our experience with you in respect of CKVU, we did assume the baseline would be really our spending in this area.

483 I guess I am having some difficulty relating to that we would use as a base for the benefit for the programming on the Craig stations as the base what CHUM spends on its stations.

484 I am missing a connection here. I am sorry.

485 MR. MILLER: First of all, let us be clear.

486 This benefit is -- we have deliberately looked at it as a system benefit and we divided it between local production and national production because, again, we are talking about the system benefit.

487 I guess it stems from this issue, what is the appropriate baseline? Is the current spending of stations who ran into financial difficulty the appropriate baseline?

488 I mean, obviously, it is an important question. We didn't think you would look at it that way.

489 MR. SWITZER: We had an obligation to show that we weren't in any way taking credit for anything in Priority programming we were already doing elsewhere in the system, even things that we didn't have to do, that we were doing because we wanted to do. That test of incrementality was very important to us.

490 Mr. Colville, there are two -- I mentioned one element a minute ago, and obviously we are interested in solutions here -- there were two big costs lines in the Craig operating statements in their Canadian programming line.

491 One of them -- I already mentioned -- was to third-party producers for some older second-, third- and fourth-window shelf product that won't now have to be acquired.

492 But they have historically, and for seven or eight years, been clients of CHUM. So it would be in some ways unfair for any historic spending that they might have done with us to be part of that calculation. And they have been a small, but important client for many, many years.

493 Those are two major elements, you know, in the low millions of dollars. It would be my guess that a part of their ongoing historical operation -- and so you can understand our desire to try to, in a visible and transparent way, create a model for incrementality with reporting mechanisms that was right and fair.

494 COMMISSIONER COLVILLE: Look. I don't doubt your sincerity.

495 MR. SWITZER: Yes.

496 COMMISSIONER COLVILLE: I am wanting to put the tangible benefits that is real. Ten million dollars in tangible benefits on the table here.

497 The issue really is how can we report this in a way, given what I see here in terms of a reduction in moneys that had been being spent, how can we be satisfied:

498 A) what the base is?

499 B) what is really incremental to that base?

500 Otherwise, it wouldn't have been spent.

501 MR. SWITZER: We acknowledge the importance --

502 COMMISSIONER COLVILLE: We have to have some way I think that you can satisfy us.

503 MR. SWITZER: Yes.

504 We would suggest that our recent experience with the Commission and with staff in our CKVU issue in terms of approach, reporting structure, baseline calculation and transparency would at least be a good place to start, for us to work from.

505 COMMISSIONER COLVILLE: But why don't we do that right now?

506 Let's have a break.

507 THE PRESIDENT: A break for 15 minutes.

508 Nous reprendrons dans 15 minutes.

--- Upon recessing at 1606 / Suspension à 1606

--- Upon resuming at 1644 / Reprise à 1644

509 THE PRESIDENT: Order, please.

510 À l'ordre, s'il-vous-plaît.

511 Commissioner Colville.

512 COMMISSIONER COLVILLE: Thank you, Mr. Chairman.

513 Mr. Miller, was there something you wanted to enter into with respect to your earlier question?

514 I know counsel was just talking to you about --

515 MR. MILLER: Mr. Palframan, I think, has responses to those three questions.

516 COMMISSIONER COLVILLE: These are related to that TD Securities valuation report?

517 MR. PALFRAMAN: Yes, Vice-Chair Colville.

518 Perhaps I can just address the three and talk to, after some discussion -- we have got clarification on some of those specific questions that were in the somewhat more technical areas.

519 I think the first one -- and certainly correct me if I am wrong -- but I think your first question was why TD used optimal capital structure rather than the actual capital structure.

520 COMMISSIONER COLVILLE: Right.

521 MR. PALFRAMAN: The capital asset pricing model is market value model where the capital structures can vary based on the market value of debt and equity prices on a daily basis.

522 So, to avoid making investment decisions that are based on volatile market conditions, capital asset pricing model assumes that a company operates with an optimal and target of capital so that, any time you are making any investment or acquisition decisions, it is not based on what your debt may be at any one particular point in time, because it can vary.

523 A company's debt at one point in time might be high, and six months later it could be a lot lower.

524 So rather than using the actual debt at a particular point in time, what a capital asset pricing model does is to determine what a target and optimal capital structure would be for the kind of investment that is being considered.

525 In TD's experience, a sustainable level of debt to capital in the long run is 30 per cent. So that is the background to that assumption and why they ended up at that point.

526 COMMISSIONER COLVILLE: Has CHUM's ratio changed much over time?

527 MR. PALFRAMAN: Yes, it has actually. It has changed quite substantially over the last three to five years.

528 CHUM has been in a period of zero debt to a period of in the order of 200 to 250 million in debt and then back to 150 million.

529 So, in fact, it has changed quite a lot.

530 COMMISSIONER COLVILLE: Mr. Switzer, do you want me to stop him now or --

--- Laughter / Rires

531 COMMISSIONER COLVILLE: While your shareholders or the Board is here.

532 Sorry.

--- Laughter / Rires

533 You want to move on to the next point?

534 MR. PALFRAMAN: I think that the Board is more than well aware of some of those changes, Vice-Chair Colville.

535 But thank you for calling a halt at that point.

--- Laughter / Rires

536 MR. PALFRAMAN: The issue of statutory tax rates, I think I did respond to that question and I can confirm that effectively what I responded with was, in fact, the case because effective tax rates can vary, as I said, for a whole variety of factors that don't necessarily affect a company's ability to achieve tax deductibility at the statutory rate, and so -- in fact, I think I referred to that as normalizing as well.

537 So the statutory tax rate ensures that, for valuation purposes, it is taking out any variations, just because of certain things that a company may have been involved in that would affect, either negatively or positively, what its effective tax rate might be at any point in time.

538 COMMISSIONER COLVILLE: Just to be clear, the answers you are giving, given that this was TD's report -- I am not questioning your ability to answer these. I would just like to know for the record, are these TD's answers that you are providing us or is this your answer to what you think the TD analysis was?

539 MR. SWITZER: Vice-Chair Colville, we are in the awkward position of one of the executives at TD that was part of this construction is now an employee of CHUM and here, and so we have contacted TD and reviewed with Alan Main, formerly of TD Securities --

540 COMMISSIONER COLVILLE: Okay.

541 MR. SWITZER: -- who is now with CHUM, who has provided us with comfort.

542 COMMISSIONER COLVILLE: Okay. I just wanted to clarify that since it was their report, that's all.

543 MR. SWITZER: Yes.

544 MR. PALFRAMAN: The issue of the CCA rate and depreciation of 16 per cent rather than the 13 per cent, which is CHUM's actual rate, we did actually address as a deficiency question.

545 COMMISSIONER COLVILLE: Right.

546 MR. PALFRAMAN: I think it was...

547 COMMISSIONER COLVILLE: I saw that.

548 MR. PALFRAMAN: Yes. I think it was question number 5 in the first round of deficiencies and nothing has changed from that point. In fact, I think I drafted the response to that question and the fact of the matter is that CHUM's CCA rate of 13 per cent is lower than Craig's rate primarily because we have larger investments in plant and buildings which have a much lower rate than Craig do. That is the primary reason for that rate being different.

549 Of course, rates, as I am sure you know, vary a lot depending on different asset classes, and so to assume -- when you are putting two companies together, the larger asset base will be CHUM's, which will be a lower CCA rate. So the situation that we indicated in our response to that deficiency condition is no different today.

550 COMMISSIONER COLVILLE: Okay. Thank you for that.

551 Mr. Switzer or Mr. Miller, I guess I would like to get a better sense of how we are going to deal with this issue of reporting and clearly understanding on a going-forward basis how best to measure the tangible benefits and I guess I would like to hear any suggestions you might have as to how we best we do that.

552 I must tell you that without going back and myself looking through the CKVU situation, I am not sure that we are comfortable with simply using CHUM's base as the base here. I am not sure that I am satisfied that CHUM's base is the base that would have been Craig's base, which I believe is probably the base we should be building on, is what would the Craig stations have been spending?

553 We can talk about either all programming or priority programming, whatever, but if the benefits are going to be spent on priority programming, then perhaps we can take a look at that slice of it and try and figure out what we would use as the base. You talked before the break about perhaps netting out payments to you that CHUM would have made but I guess they would have to make those to somebody.

554 So can I have your thoughts on how we can best deal with that because I think it is an important issue we are going to have to deal with if we are going to satisfy ourselves that what is committed as expenditures on benefits really are and that we can identify that.

555 MR. MILLER: A very important question, indeed, and we recognize that in this situation there is no perfect proxy for what the baseline would be and that there are difficulties with any route that you might choose. Again, I think we would want to underline that given the nature of this transaction, the reason for this transaction, it is unclear to us how relevant Craig's historic spending is. I mean it is a clear benefit to the system that a company in financial distress has been acquired and those stations are able to move forward. So I don't think one can ignore that circumstance. So that is point number one.

556 We will look at the numbers, including the most recent numbers for the year ending just most recently, for 2004. We will look at Craig's forecasts for next year and our respectful suggestion would be that, as is typical of transactions of this nature where benefits are required, that we work with staff to figure out what the most appropriate approach is for this transaction because I certainly agree that no one singular precedent is necessarily appropriate.

557 I am not suggesting the CKVU situation is analogous to this situation -- clearly, it isn't -- but what we would respectfully suggest is that this be something that the Commission require us to address with staff, as would be the typical course or at least has been our experience and the experience of other transactions of this nature.

558 We don't have all those numbers here today. It is not something that we can respond to you on today or tomorrow. We would certainly be open to getting back to you with our thoughts on this.

559 COMMISSIONER COLVILLE: Without having the numbers, have you got some ideas as to what we could do at a conceptual level?

560 MR. MILLER: Well, I think unless one looks at the numbers, one can't know how relevant or appropriate they might be because we suspect that one will see a significant decline in that baseline, even for Craig Media, in the last period and in terms of what their internal projections are for next year without this transaction being approved and we think that those recent numbers, given certainly the financial situation of the company, may be far more relevant than historic numbers. So I think one has to look at the numbers in order to understand how appropriate they might be.

561 MR. SWITZER: From a conceptual point of view, Vice-Chair Colville, because that is kind of also what you are asking, it may be hard to talk about but we want to be direct and frank about everything. We want to stand behind all of their conditions of licence, of course, and we want to enhance what the stations are doing but there are many things where, from our point of view, the stations have been spending perhaps more money than they might have and their margins have suffered and they have gotten into trouble.

562 While we are here to enhance and build and assume all of the conditions of licence, in terms of fairness and balance, with respect, it may not be appropriate for us to be asked to accept the highest point of their recent spending when there were other issues going on in terms of their own timing of commitments, where they had some back issues, where they were catching up, where there were payments to third parties, where there were payments to us. We are interested in solutions but it is not as simple as looking at one table of numbers, obviously, and...

563 COMMISSIONER COLVILLE: No, let's not -- I accept that.

564 MR. SWITZER: Yes.

565 COMMISSIONER COLVILLE: While this is a different situation from CKVU, I would argue it is also probably different from CTV in that the case at CTV was an ongoing concern. We had a baseline that was pretty steady that one could use and work from. So perhaps it is different from CTV as well.

566 That is why I am asking you if you have some -- I am not sitting here trying to stick you with an inflated 2003 number. What we need, though, to come up with is a reasonable approach to dealing with this and --

567 MR. SWITZER: We share that desire.

568 COMMISSIONER COLVILLE: -- we are going to need something concrete from you. So what is a reasonable time to get a proposal?

569 MR. MILLER: I think we could probably get something filed with the Commission within two weeks if that is appropriate.

570 COMMISSIONER COLVILLE: We will take that for now. Let me move on then.

571 I guess this is somewhat related to this issue of incrementality and I didn't really see this addressed anywhere, although I think one or two of the intervenors raised the point, but probably not in this context.

572 As a result of this transaction, CTV -- I'm sorry -- CHUM and City TV ends up being in the big league, so to speak. I forget how you phrased it in your presentation, either the smallest of the big guys or the biggest of the small guys, whichever. In any event, as I understand it, it puts CHUM in the position of being required to do eight hours of priority programming and, in particular, puts City TV in that position which it heretofore has not been in.

573 Is any of the benefit money going to fund the programming that ends up satisfying City TV's eight hours of priority programming and how would we identify the incrementality there as being separate from what would be required for that?

574 MR. MILLER: Mr. Vice-Chair, again, our understanding of the precedents is that first and foremost, the Commission looks at incremental spending. By virtue of it being incremental spending, you have incremental new original hours, so it is new from that perspective but it still will be within the eight hours.

575 So in other words, what you effectively end up with, with better programming within those eight hours, more original episodes, more distinctive Canadian programming. That is our understanding of how the Commission has looked at that in the past and that is how we were proposing to address it with our transaction as well.

576 COMMISSIONER COLVILLE: I am not sure whether you have answered my question or not and that is my liability. Let me ask the question a little more directly.

577 MR. MILLER: I think I can answer. There is a two-part answer to that as well which is with approval of this transaction, because CHUM now becomes a large multi-station group, the obligation on City for priority programming will go up.

578 COMMISSIONER COLVILLE: Right.

579 MR. MILLER: So it will go up from effectively seven this year to -- our respectful submission would be -- effective September 2005 the full eight hours. So yes, within the eight hours that will be on City TV, within the eight hours that will on any of the stations now within the CHUM conventional group, this incremental new programming would appear.

580 COMMISSIONER COLVILLE: Right. And that is a consequence of CHUM becoming the size that it becomes here in terms of its geographic coverage area and audience reach. So my question was: Does any of the benefit money pay for that programming, and if so, do you think it is appropriate that it should?

581 MR. MILLER: Again, as I think I suggested, the system benefit of the priority programming fund is incremental dollars going to priority programming, which means more original new episodes of either series or new movies or new mini-series. So it is incremental programming. That programming will form part of the eight hours on the Alberta stations of priority programming and will, if at all possible, show up in our other stations across the country, possibly City TV Toronto and City TV Vancouver, possibly other stations.

582 So we certainly consider that an appropriate benefit to the system because we are, if you will, improving the quality and the volume of programming that fulfils the overall eight-hour priority program requirement that we will now have for all of our stations.

583 MR. SWITZER: I would just like to add. Part of the answer to that, Vice-Chair Colville, is that we have a non-duplication obligation as well where we are privileged to have two stations in a market, and so the eight hours of priority that will be required, for example, on the New VI in Victoria must be distinct and separate from the eight hours that is on the City TV stick, and that is a serious obligation. The Toronto step-up is part of it but the context is eight hours twice becomes our national obligation.

584 COMMISSIONER COLVILLE: So the answer is yes and you think it is appropriate that while it is a consequence, in any event, that City would have to provide this extra programming, that the benefit money should pay for that?

585 MR. SWITZER: Yes, and we don't want to create -- we don't want to create a dysfunctional situation where there is any disincentive for some excellent programming that is created anywhere in the country to not appear elsewhere on the system. That is just -- I am a simple guy -- that doesn't kind of pass my smell test.

586 COMMISSIONER COLVILLE: No, but I guess it would raise the issue -- conversely, one could argue that City TV would have to pay more to acquire and broadcast that extra programming, in any event, and should the benefits be incremental to that?

587 MR. SWITZER: Of course, it is a reasonable question but I would want to be able to have the stations across the country contribute to making that Alberta or Manitoba program even better and not consider it as a smaller budget niche or regional only, that as some kind of "favour" gets played across the system. We want excellent innovative programs that will reach viewers to get as much money as possible into as many producers' hands for as broad a national platform as we can with a whole bunch of carrots and not sticks.

588 I am a programmer still at heart and I am interested in the best shows, the best stories getting in the best hands in as many stations as possible that connect with viewers, while still being fair to the system in terms of benefits and all the stakeholders. We think, on balance, we have done that.

589 MR. MILLER: I would add, Mr. Vice-Chair, that City TV would not otherwise, in fact, spend more, it would repeat what it has more often. So it is not that it is saving City TV, to use that example, money by being able to run this programming, it is making that programming more widely available to Canadians. So we do see that as a benefit.

590 COMMISSIONER COLVILLE: So you are arguing that if it was a requirement of City TV to broadcast eight hours of priority programming that was outside of a consequence of this deal or even inside, it is just a consequence of this, forget benefits, City TV, CHUM wouldn't spend any more money to have that eight hours? What would it cost CHUM to grow from what it is now on City TV to the eight hours of priority programming?

591 MR. SWITZER: It's a challenge, Vice-Chair Colville, in terms of most of our -- or almost all, effectively all of our Canadian priority programming not paying its way and we are frustrated and challenged by that. You know, we supplied detailed comments in June to the Commission's notice on how we solve this, asking how together, how we solve this problem.

592 So if this transaction didn't exist and we were as big as we are now, with our own nominal margins in conventional television, if forced to solve the problem, we would likely look at selectively that last hour being an encore presentation of one of our better hours to try to lose less money with the Canadian investments we are already making. It doesn't give me nay pleasure to say that but that is probably what we would do.

593 MR. MILLER: And also, not to belabour the point, it goes back to the logic of our argument that the appropriate baseline is CHUM's spend. Because, again, CHUM would spend its amount that we would commit in its baseline, these benefits would be incremental to that.

594 MR. SWITZER: You also asked what would we spend, and of course, we would rather have -- and although we will make an argument that dollars of budget don't directly relate to quality or connections with viewers, certainly, we would rather have fully reflective first-run programming as opposed to some less expensive, less reflective programming of Canada. That is very expensive. That is the difference between $25,000 or $50,000 an episode and $300,000 an episode.

595 So we would meet the test if we had to. We are trying to come up with a construction that benefits the local communities and the system.

596 COMMISSIONER COLVILLE: Okay. Moving on to some other issues just related to the benefits. Expenditures, some of the other amounts than the expenditures and licence fees for priority programming. You stated that 10 per cent or $900,000 of the priority programming commitment will go towards culturally diverse projects from ethnic and Aboriginal producers.

597 How many projects do you suppose they will produce and broadcast? Will you produce these yourselves or will you be purchasing them from other broadcasters?

598 MR. MILLER: Again, I will ask Marcie or Diane to add, but given the broad range of types of priority programming, given that this could be anything from drama to documentary, we have not attempted to determine how many projects would be licensed out of that amount.

599 Perhaps Diane has something to add.

600 MS BOEHME: I think at this point in time, the kind of flexibility that leaving a large number as opposed to imposing a certain number of hours or expenditures or how many documentaries, how many series, how many feature films that might come out of that particular portion of our commitments gives us flexibility to be able to respond to the ideas from those producers who want to work with us.

601 If we have a great documentary producer who has a fabulous idea, we want to be able to find an opportunity to support them in addition to two feature films, one half-hour anthology series. I mean we are not as exposed to that community as we would like to be yet and I think we want to be able to listen to them and see what they try to tell us.

602 COMMISSIONER COLVILLE: I think part of the problem we face with asking questions is everybody feels that we are going to trap them into some sort of a COL that is going to commit them. I just want to get a feel for what you are planning to do with this money, that's all. I am not trying to trap you.

603 MS BOEHME: Okay. Well maybe I can give you an example of some of the other work that we have done in these kinds of communities and I think I can also try and address some of the work that we have done at "CineCity."

604 "CineCity" was a program that we designed when we were originally talking about moving into the Vancouver marketplace. I went out there and we did some solicitations with the independent producers in that community and it was one of the ideas that they said, here is what we would like to see. So we designed and crafted a program specifically for them which Prem is administering.

605 Some of the other work that we have done, for instance, is we have a feature film that is shooting right now on Vancouver Island called "Johnny Too Tall," which is being directed by Shirley Chechoo, starring Adam Beach. It has been made, designed, developed, probably over the last three and a half to four years, with us and with our support, very specifically guided by the Nuchildnu (ph) Elders because it is a Nuchildnu (ph) culturally specific story.

606 So if that kind of idea comes to us, then obviously that is something that we would be very receptive to and very responsive for.

607 We have documentaries from a producer from South-Asian cultures who is very specific about the dance forms and integration of second-generation dance form that they have. As a second-generation South-Asian person, how are they translating those traditional dances into a contemporary idiom? Those sorts of things are something that we have supported in the past and have been very successful with, people like Yudu Sundi, some others that we have worked with.

608 We haven't yet supported as many of them through the Prairies as we would like to but I know that they are there. They have certainly been making overtures to us.

609 Prem, do you want to maybe talk about "CineCity" a little bit?

610 MS GILL: Sure. I can tell you a bit about "CineCity" and the example of how something that we did in Vancouver to help build the diversity in the local film and television community is actually working.

611 This project was designed with Diane and in consultation with a lot of local producers where we wanted to focus on people of visible minority and Aboriginal backgrounds to help them produce their first short film, and what that allows them to do is not only produce their first short film but learn how to work with broadcasters, how to work with the funding agencies and ultimately get their projects broadcast.

612 I am proud to tell you that it is actually working. In fact, I had a conversation about two weeks with the Vancouver Film Festival's Canadian Programmer and she said that she is noticing in her submissions an increase in diversity from across the country but particularly British Columbia in terms of the submissions she is getting for short films and feature films. So it is an example of how these focus programs actually work.

613 One of our films called "A Fortune for Dim Sum" by Ling Chu is actually in this year's Vancouver Film Festival. Another film called "Cheeka's Bird" won the award for best film at the Sprockets Festival in Toronto. So these things are working and it is quite exciting for us to see this community developing and getting the feedback from not just the filmmakers but people who buy these products and the people who are watching these products.

614 COMMISSIONER COLVILLE: So I take it from both of your comments that largely this will be worked on with the independent producers and not in-house; is that right?

615 MR. MILLER: That is the expectation.

616 COMMISSIONER COLVILLE: And similar to the larger monies that are being spent, would this be primarily on the Prairies as well?

617 MR. MILLER: In terms of that particular initiative, yes.

618 COMMISSIONER COLVILLE: And what about the particular case of the Aboriginal programming? Can you talk a little bit about what your plans are there? The first question was ethnic and Aboriginal. We are just focusing on the Aboriginal.

619 MR. MILLER: Diane has other examples of activities there as well.

620 MS BOEHME: Sure, absolutely. We have a number of other feature films that are in development with Aboriginal producers that sometimes have an Aboriginal subject, sometimes do not. That is pretty much the purview of the producer and whatever it is that is animating them, whatever is exciting them about the project. But there has been probably over the last two hours about 49 hours of programming that we have supported from various Aboriginal producers.

621 We are just getting ready to start production on season four of a show with a producer on Vancouver Island called "New Canoe." That is not her name, that is the name of the show. She is Barbara Hagar and we have had a wonderful and long-term association with her where VI is the driving force and the premier broadcaster of that show but we also repeat it nationally on Bravo.

622 Similarly, we have had a number of hours of "Ravens and Eagles" that we have done with Jeff Barroe out of Vancouver, that we have supported both in British Columbia and on Bravo.

623 We have a number of feature films in addition to "Johnny Too Tall." We also have another film called "Eagle Spirit" which we are just waiting to close the financing, and hopefully, they will do that very soon and commence principal photography over the course of the winter.

624 Similarly, we had a program that was called "Stories About Love," which we announced at Innoversity last year and it was an open national competition for an anthology from producers and filmmakers of diverse backgrounds, but not about a subject that was specifically about their experience as a person from that kind of background, and it was a universal theme and a universal story.

625 As it turns out, we probably received about 250 submissions. We narrowed it down to 13. Out of that 13, as it turns out, there were three stories from Aboriginal producers that were about that subject matter and they were scattered across the country.

626 We also have someone on board as a consultant, Jim Compton out of Winnipeg, who specifically advises us on any of the Aboriginal programming that we do to ensure that there is authenticity of voice, to ensure the integrity of the production and to help support those filmmakers where they need it and when they need it.

627 COMMISSIONER COLVILLE: Now, this programming that you expect to get, the sort of ethnic/Aboriginal programs, are those programs that you would expect to broadcast on all the CHUM stations?

628 MS BOEHME: I think that is going to depend on the nature of the show. I mean obviously, we have a number of other services, like Space, for instance, where we did a program called "Spirit Walk." It was about Aboriginal ghost stories essentially, where we did run it on Space and we ran it on the new VI. In those cases where it is appropriate, I think where we offer to do that, then there would be an additional licence fee from the specialty channel on top of the support from any of the other free TV services. That is what we have done in the past.

629 MR. SWITZER: Vice-Chair Colville, some of the programming that she is talking about has shown up on other CHUM conventional stations, on some other CHUM specialty stations and in one or two cases with APTN. Our relationship with them on many of these shows is excellent and they are airing some of them on a weekly or monthly basis.

630 COMMISSIONER COLVILLE: Now, with a lot of the priority programming that you will acquire, either as a result of the benefits monies or the normal course of business, how do you expect that you will program your stations with respect to that? I am thinking the conventional stations here. Will each station sort of have its own kind of character and signature or will a lot of these -- will we start to see some of that priority time CHUM look more like a network, so to speak?

631 MR. SWITZER: I would like to begin, Vice-Chair Colville. I think we want the best of both parts of that question. We want the strength of certainty and marketing and muscle and power that goes with being able to tell your viewers and all the stakeholders involved that you have a major Canadian event happening on X day, but at the same time, the intensely local nature of these stations, what makes them different, the rhythms and tones and cadence and flavours that makes the New VI very different from the New RO or City TV Vancouver from City TV Toronto, and we want that to be still at the core of what these stations are.

632 So essentially, the answer would be no, these stations remain reflective of their community as their first role in life, but yet, acting together as a group where it is appropriate, often. We want to be able to make a lot of noise and give a lot of promotion, and frankly, get more revenue as well and be able to help producers with larger licence fees by coordinating in prime time the best of this material.

633 COMMISSIONER COLVILLE: Earlier there was an issue raised, I think by some of the intervenors in terms of foreign program rights. I think earlier, Mr. Switzer, you made a comment how, as I understood it, the sort of programming that CHUM would be acquiring would be unique and different, such that we wouldn't see a competition for or inflation of foreign program rights, thereby leaving less money to go into Canadian programming.

634 Can you perhaps elaborate on that a little more in terms of what the foreign programming would look like on the CHUM stations?

635 MR. SWITZER: Yes, of course. Effectively nothing much changes. We are already in that business. Just to remain competitive we had to enter the national programming rights business, if you will, some years ago just to remain competitive. Of course we haven't had the same coverage and so we have been at a disadvantage, but it is a disadvantage that we have chosen up until now.

636 So effectively, because we already own national rights, we are already buying national rights and commissioning Canadian producers for national rights with great confidence and you should have great comfort when we can tell you that effectively very little changes.

637 The costs will be shared by more stations. We will be able to do more good, producers will be able to get better national CTF funds. But the businesses that we are already in don't change. We are already in those national rights businesses. We returned from Hollywood -- you specifically asked about foreign programming costs -- this year spending exactly the same amount of money we spent last year.

638 Our businesses haven't changed. This doesn't change that. We still want to be and believe it is our place -- and selfishly the best business opportunity -- to remain an alternative to what CanWest and CTV are doing and that has been our recent practice and nothing will change.

639 COMMISSIONER COLVILLE: The last area I was going to cover off was reporting, but we have already talked a lot about that.

640 Intangible benefits. You have proposed as intangible benefits to carry on the Craig commitments. I guess in Public Notice 93-68 where we talked about the application of the benefits test the Commission said:

"In order to be accepted as a benefit, the proposed expenditure must be incremental. Expenditures that would normally be considered ongoing normal responsibilities of the existing licensee will not be accepted as benefits and commitments by prospective purchasers to assume existing obligations of licensees are not generally accepted as benefits." (As read)

641 Do you want to comment on that in light of your proposal?

642 MR. SWITZER: Peter I'm sure will have a more accurate kind of description, but from my personal point of view the big issue for us, which we only listed and believe is an eligible intangible benefit, is the issue of the recent Craig promise which they made to the Commission, to the system, as part of the privilege of getting Toronto One.

643 So while what you just read back, Vice-Chair, has the adjective "generally" in front of it, we think that since we are not enjoying the benefits of the Toronto One part of that transaction, but are still fully accepting the $10 million promise that they made connected to Toronto One, that it legitimately has a place in a list of intangible benefits.

644 COMMISSIONER COLVILLE: That's interesting. I must say, I didn't make that connection. Having read through the material it was probably there and I missed it.

645 MR. MILLER: That is absolutely right.

646 The only thing I would add to that is again -- and we have talked about it already -- the notion of the circumstance of Craig Media and the reality and what has brought this transaction to light makes this a rather unique circumstance and the Commission I think has recognized always that the acquisition of a company or assets in financial difficulty, that the intangible benefit of knowing that those assets and those licences will continue to service Canadians. With that obviously is the expenditures they make.

647 COMMISSIONER COLVILLE: You propose to spend those monies as they were originally committed to be spent?

648 MR. MILLER: That is correct. Specifically there was a $10 million commitment of Craig Media that specifically in the Commission's licensing of -- actually I think it was the renewal of the Craig stations -- indicated that that was contingent on the licensing of Toronto One. So the public record is clear that that commitment made by Craig Media was contingent on the licensing of Toronto One.

649 So to Jay's point, given that we are not inheriting Toronto One, we think it is reasonable to look at us continuing with that benefit, not as a tangible benefit but as an intangible one.

650 COMMISSIONER COLVILLE: I take your point on that.

651 Is that then going to create more complication for us in terms of distinguishing the tangible benefits from the otherwise ongoing Craig expenses and these expenditures that you are agreeing to do. So it seems to me this is another thing we are going to have to factor into the reporting structure, is it not?

652 MR. MILLER: That would not be our understanding because, again, the intangible benefits that are the current commitments of Craig Media, it is clear that the "incrementality test" there is simply incremental to whatever their previous spending commitments were, which was zero. So that matter should be very clear.

653 COMMISSIONER COLVILLE: We will wait with bated breath for your proposal on how best we can satisfy ourselves on the incrementality of the benefits in terms of reporting.

654 I think those are all my questions, Mr. Chairman.

655 THE CHAIRPERSON: Thank you.

656 Counsel? Those are our questions. Thank you very much.

657 We will adjourn now and resume in the morning with the interventions.

658 Nous reprendrons à neuf heures et demi; 9:30 tomorrow morning.

--- Whereupon the hearing adjourned at 1830, to resume

on Friday, September 10, 2004 at 0930 / L'audience

est ajournée à 1830, pour reprendre le vendredi

10 septembre 2004 à 0930

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