In a brief amendment to the Notice of Consultation that initiated the upcoming vertical integration hearing, the CRTC has quietly added to the issues for discussion the possibility that benefits payments may be required in future applications for authority to transfer the ownership or control of broadcasting distribution undertakings (BDUs), but the low-key nature of the announcement belies the potentially significant impact of such a change in policy.

The re-imposition of the benefits test on BDU transactions could result in significant new costs to those acquiring distributors, potentially creating a chilling effect on such transactions, driving down prices or even acquisitions altogether. On the other hand, the revived stream of financial contributions could have material benefits for other aspects of the broadcasting system, including programmers, program producers and viewers.

The various sector-specific regulations enacted under the Broadcasting Act require CRTC approval of a change in ownership and control of a company holding a broadcasting licence. Since the Commission does not solicit competing bids for the transfer of control of a licensee, the Commission has for many years taken the view that the onus is on the applicant to demonstrate that the application filed is the best possible in the circumstances, and that approval of the transfer of control would result in “significant and unequivocal benefits” to the Canadian broadcasting system and its various stakeholders, including viewers.

Over the years, the CRTC began to require applicants for transfers of control to commit to a tangible benefits package commensurate with the size and nature of the transaction, directing significant sums of money toward a variety of incremental activities that advance the objectives of the Broadcasting Act, such as enhanced programming, Canadian talent development initiatives and improved technical facilities. Over time, this “benefits test” became benchmarked at approximately 10% of the value of the proposed transaction, later reduced to 6% for radio undertakings.

The Commission ruled in 1996 that the benefits test would no longer be applicable to transactions involving a change in control of BDUs, since the Commission and the government had recently adopted policies encouraging competition in the broadcasting distribution sector by allowing for virtually open entry. Such competition, it was felt, obviated the need for the Commission to ensure that proposals for a transfer of control for any particular distribution undertaking were the best possible in the circumstances, as market forces would compel distributors to make many of the technical upgrades that had historically formed the largest component of benefits expenditures by companies acquiring cable licensees. In addition, the Commission noted that any reduction in programming production funding that would result from the elimination of the benefits test with respect to BDUs would be offset by a new levy on BDUs to contribute to a programming production fund.

The benefits test (and the percentage benchmarks) remains in place with respect to applications for approval of changes in control for broadcasting programming undertakings, although many of these, too, are facing virtually open entry, such as Category B specialty services.

In its most recent notice, the CRTC provided little in the way of reasons for placing the imposition of benefits payments for BDU transactions back on the table, noting simply that the trend of industry consolidation and vertical integration may call into question its earlier determination respecting the application of the benefits test to BDU acquisitions.

Any comments on the issue are due by April 27, 2011. The associated public hearing is scheduled to commence on May 9, 2011.