Did Paul Williams explain why the lost song was cut from the special?
Regarding Dog City, I don't think Hit! would have trouble releasing it on DVD. The Jim Henson Company owns the show, not Nelvana. Nelvana may have animated the show, or helped produce it, but I'm sure that Henson owns the distribution rights and that Nelvana doesn't have much controll over a DVD release (I could be wrong).
If the Dog City special ever gets released on DVD in North America, I wonder if Hit! would release an episode of the animated series as a bonus feature? If Hit! releases The Christmas Toy on DVD next year, I hope that an episode or two of The secret Life of Toys gets included as a special feature.