Telecommunications Service in Canada: An Industry Overview

Section 6: The Evolution of Competition in the Canadian Telecommunications Service Market

6.4 Major CRTC Decisions

Liberalization of Long Distance Market

On June 12, 1992, the CRTC issued Telecom Decision CRTC 92-12, which removed the federally-regulated telephone companies' monopoly in the provision of public long distance voice telecommunication services. This was consistent with the policy objectives of the Telecommunications Act, the draft form of which had been introduced by the government earlier that year.

Decision 92-12 mandated trunk-side access to local exchange carrier switches, enabling local telephone subscribers to pre-select their long distance carrier and avoid having to dial extra digits to make long distance calls. The decision also established a regime to maintain and make explicit the long standing subsidy from long distance revenues used to support the provision of basic local telephone service to residential subscribers. This subsidy, called "contribution", was based on a fixed per-minute rate paid by all long-distance carriers (both the incumbents and their competitors). For the first five years after the decision, new entrants benefitted from contribution discounts designed to foster the introduction of long distance competition. Contribution rates were calculated based on the specific needs of each telephone company and thus varied from one telephone company's territory to another.

Review of Regulatory Framework

On September 16, 1994, the CRTC issued Telecom Decision CRTC 94-19, Review of Regulatory Framework. This decision established a new regulatory policy framework that would enable the Commission to streamline or eliminate regulation, to place greater reliance on market forces, to establish safeguards to protect against abuses of market power, to encourage the provision of innovative new services and to establish an alternative to rate base/rate of return regulation. In so doing, it mapped out the regulatory transition from the monopoly provision of telecommunications services to full competition. The decision reflected the policy objectives included in the 1993 Telecommunications Act and the high priority that the government has placed on the development of a competitive telecommunications environment.

Since the issuance of Decision 94-19, the CRTC has initiated a number of proceedings in order to fully implement the numerous elements of the framework it established. Implementation of some of the key elements such as forbearance, local competition and price caps are described in separate sections in this document. Another significant reform announced in the decision was a program of rate rebalancing and restructuring designed to bring local telephone rates closer to the cost of providing the service. Basic local residential service rates for the major telephone companies were subsequently increased by $2/per month in 1996 and 1997 and between $2 and $3 per month in 1998, co-incident with the implementation of price cap regulation.

Decision 94-19 also recognized that prior to the implementation of price caps, it would be necessary to make changes to the then existing rate base/rate of return regime; namely, splitting the telephone companies' rate bases into two separate segments - utility (local monopoly or near monopoly) and competitive. Having so split the rate bases in a subsequent proceeding, only the utility segment remained subject to rate of return regulation.

Local Competition

On May 1, 1997 the CRTC issued Telecom Decision CRTC 97-8, Local Competition. In its decision, the CRTC expressed the view that efficient and effective local competition would be best achieved by facilities-based service providers, and that such providers should not be simply customers of the incumbents, but co-carriers, equal in status. The CRTC concluded that facilities-based entry would be the only sustainable basis for competition in the long run.

Decision 97-8 did not attempt to fully implement a local competition regime. Rather, it established the policy framework and many of the underlying rules but left a number of the technical, operating and other details to be established through subsequent proceedings and through meetings of a committee known as the CRTC Interconnection Steering Committee (CISC). CISC is an assembly of CRTC representatives, industry players, members of the public and public interest and consumer groups brought together to deal with telecommunications matters. CISC and its working groups have been successful in resolving many complex and controversial issues, including the development of administrative and operational systems needed to implement Decision 97-8. By bringing parties together to work on resolving issues in an open forum, results such as these have been accomplished on a timely basis, largely without recourse to formal CRTC proceedings.

Major issues dealt with in Decision 97-8, through subsequent proceedings or by CISC are described briefly below.

• Unbundling: The CRTC ordered the incumbent telephone companies to unbundle the components of their local networks which have the characteristics of "essential facilities" that competitors require but cannot technically or economically duplicate themselves. In Telecom Decision CRTC 98-22, the CRTC established the rates that new entrants must pay incumbent local telephone companies for use of the unbundled components of their local networks, including local loops. The rates set by the CRTC are intended to allow telephone companies to recover their incremental costs, plus a 25% mark-up.

• Interconnection:  In order to ensure that subscriber-to-subscriber access is maintained, the CRTC required that, within each incumbent telephone company exchange, all local telephone companies must be interconnected with each other and with all long distance and wireless carriers providing service in that exchange. The CRTC also required the costs of establishing such interconnection between local telephone companies to be shared equally. With respect to compensation for call termination among local telephone companies, the CRTC adopted a "bill and keep" approach whereby, within appropriate limits, originating carriers are not required to compensate terminating carriers for the costs of completing calls from the former to locations within the same incumbent carrier exchange.

• Resale: The CRTC found that resale competition can help promote the development of a competitive market. Accordingly, the Commission concluded that the incumbents must allow for unrestricted resale by competitors of unbundled components, and for the resale of residential service. However, the Commission did not mandate wholesale discounts for the incumbents' local retail services.

• Contribution: In order to facilitate the development of local competition in all regions of Canada, the CRTC instituted a "portable subsidy" mechanism that would assist new local telephone companies in offering service in rural and remote areas where residential telephone service is offered by the incumbents at below-cost rates. Under this "portable subsidy" system, the contribution payments required to be paid by long distance service providers are remitted to a central fund administered by a third party. The fund administrator redistributes the subsidy among local service providers pursuant to a formula approved by the CRTC.

• Consumer Safeguards: The Commission determined that new entrants to the local market must adhere to a set of consumer safeguards, including: complying with regulatory requirements to protect customer privacy; the provision of 9-1-1 emergency service and message relay service; and providing customers with detailed information (e.g. billing policies, local calling area boundaries, details of service options, etc.).

• Co-location: In order for new entrants to be able to interconnect their networks with those of the incumbents without being forced to lease transmission lines from the incumbents, they must be allowed to "co-locate" their own transmission facilities within the central offices of the incumbents. Having found it appropriate to mandate co-location, the CRTC subsequently determined the rates, terms and conditions under which co-location is to be provided by the incumbent telephone companies.

• Local Number Portability:  The CRTC found that the establishment of a system to enable customers of incumbent local telephone companies to keep their existing telephone numbers when switching to a new entrant provider, was vital to facilitating a competitive market in local telecommunications. It approved a method of Local Number Portability (LNP) whereby the telephone numbers of customers located within an exchange can be transferred or "ported" to another location or to another telephone company within that exchange. Pursuant to CRTC rulings, a consortium of service providers has been established to administer a database of telephone numbers; costing issues have been resolved and appropriate rates, terms and conditions have been established. LNP is now available in most major centres in Canada and will continue to be rolled out to meet the demands of competitive local service providers.

Price Cap Regulation

With a view to reducing the regulatory burden, creating incentives for efficiency, fostering competition and providing continued price protection for consumers, the CRTC adopted a form of regulation known as "price caps".

The local services of the major incumbent telephone companies first came under price cap regulation on January 1, 1998. The plan was put in place by Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9.

Price cap regulation is less intrusive than the traditional "rate base/rate of return" regulation which sets prices by establishing a revenue requirement for a company (or a segment of a company) based on the difference between total forecast revenues and total forecast allowable expenses, including an allowable rate of return on investment. By contrast, price cap regulation ignores revenues and expenses during the multi-year price cap period and focuses instead on capping consumer price increases. It requires the company to flow through to customers specified productivity gains within a formula that also takes into account the rate of inflation.

Under the CRTC's initial price cap regime, all capped services form a single "basket" and are subject to a price cap index (PCI). The PCI constrained prices of capped services to the annual rate of inflation minus an adjustment for productivity gains of 4.5% and exogenous factors arising from certain events which are beyond the telephone companies' control. Residential rate increases were limited to the annual rate of inflation on average and increases for any individual rate were limited to 10% per year. The initial plan was in effect for a fixed four-year period.

Following an extensive year-long review of the initial 4 year price cap period, the CRTC released its second four-year price cap plan under Regulatory Framework for the Second Price Cap Period, Telecom Decision CRTC 2002-34.

Given its views that the ability of competition in the local market to discipline prices would be minimal, the CRTC tightened controls on the pricing of local residential telephone service and established measures to ensure customers continue to receive high quality service. The index of prices for basic residential services are constrained to the annual rate of inflation less a productivity flow-through of 3.5%. As well, in all areas except rural and remote high-cost serving areas, optional residential services are similarly constrained. Rates for basic residential service are permitted to increase on average only if inflation exceeds 3.5%. Consumers also benefitted from CRTC determinations to implement measures that would ensure stringent service quality and a consumer bill of rights.

Pursuant to the Commission's decision on the provision of telephone service to high-cost serving areas described below, the major incumbent telephone companies were required to file service improvement plans detailing measures to provide and upgrade service in unserved and underserved areas. With the exception of the plan filed by SaskTel, all plans were approved subject to certain adjustments.

The decision also addressed the pricing of carrier services provided by incumbent telephone companies to competitive service providers. Competitors' obligations to fund the overhead costs of the incumbents were reduced with the Commission's determination to reduce the mark-up over costs for essential and near-essential services from 25% to 15%. Furthermore, individual rates for these services are to be adjusted annually by the inflation rate less a productivity offset of 3.5%. As well, the CRTC initiated follow-up proceedings to implement cost-based rates for a number of services employed by competitors that were previously available to them at retail or other non cost-based rates.

Regulatory Regime for the Provision of International Telecommunication Services

On October 1, 1998, the CRTC issued Telecom Decision CRTC 98-17, Regulatory Regime for the Provision of International Telecommunications services. Implementation of the regime established in this decision allowed Canada to meet many of the commitments it made in the WTO Agreement on Basic Telecommunications Services. The regime includes a licensing system for providers of basic international services intended to ensure that foreign monopolies cannot use their dominance in their home markets to gain an unfair competitive advantage in the Canadian market, and to minimize barriers to entry for new service providers by enforcing provisions against anti-competitive practices. Two classes of licences were created: Class A licences, which are issued to firms that own or operate telecommunications facilities used in transporting basic telecommunications service traffic to or from Canada and thus can control the routing of that traffic; and Class B licences, which are issued to firms that provide basic telecommunications service to or from Canada but do not own or operate the associated telecommunications facilities.

The Commission also eliminated international traffic routing rules. Under Canada's previous rules, calls to overseas destinations were required to be routed through Teleglobe's facilities. The elimination of this rule allows service providers to route international calls through competing networks, including those serving the U.S. The Commission also eliminated restrictions that prevented Canada-to-Canada calls from being routed via U.S. facilities.

In Telecom Decision CRTC 99-14, the Commission forbore from regulating the Teleglobe service that allows domestic carriers to connect with Teleglobe's international network for purposes of providing outgoing direct dial telephone service. The Commission also forbore from regulating Teleglobe's international interconnection agreements.

In Order CRTC 2001-689, the Commission refrained from regulating Teleglobe's remaining tariffed services. However, the Commission will retain sufficient powers to protect the confidentiality of customer information and to impose conditions on the delivery of Teleglobe's services as may be warranted in the future.

Local Pay Telephone Service

In Telecom Decision CRTC 98-8, June 30,1998, the CRTC announced the introduction of competition in the local pay phone service market. While the CRTC will not regulate the rates charged by new entrants, it will continue to regulate the rates of existing pay telephone providers.

Access to Cable TV Network Facilities by Third Parties

In Telecom Decision CRTC 98-9, July 9, 1998, the Commission determined that it will not regulate the rates that broadcast carriers charge their customers for retail level Internet services and certain other telecommunications services (e.g. security services, telemetry, video-conferencing, Local Area Network and Wide Area Network). However, the Commission decided to mandate access to the facilities of the major incumbent cable companies to enable third party Internet Service Providers (ISPs) to offer competitive high speed Internet cable modem services.

As an interim measure, in Telecom Decision CRTC 99-11, the Commission required incumbent cable companies offering Internet cable modem services to resell those services to ISPs. The CRTC mandated resale at a discount of 25% from the lowest retail Internet service rate charged by the cable carrier to a cable customer in its service area during any one month period. The Commission stipulated that this resale would cease to be mandated once facilities-based access was available to ISPs.

In Order CRTC 2000-789, issued on August 21, 2000, the Commission approved the terms and per end-user rates to be charged to ISPs for access to cable company facilities used to provide cable modem Internet services. Service charges and conditions for co-location and interconnection of ISP facilities at specific cable company hub-sites are being determined in a separate follow-up proceeding. Unresolved technical, operational and business issues relating to the implementation of access service are being addressed within the CRTC Interconnection Steering Committee (CISC) framework.

Telephone Service to High-Cost Serving Areas

On October 19, 1999, the Commission issued Telecom Decision CRTC 99-16 regarding the provision of telephone service to high-cost serving areas (HCSAs). Decision 99-16 set three goals to be achieved over time: extend service to unserved areas; upgrade service levels in underserved areas; ensure that existing levels of service do not erode under competition. Recognizing that level of telephone service throughout Canada is very high, the Commission identified a basic level of service that all Canadians should have access to and took steps to ensure that, over time, this basic level of service would be made available to currently unserved and underserved areas. The Commission's basic service objective includes: single line touch-tone access; the capability to access the Internet at low speed without paying long distance charges; access to 9-1-1; voice relay services for the hearing impaired; directory assistance services; long distance services; and a copy of the local telephone directory.

The Commission noted in its decision that telephone service improvement plans currently being implemented by the incumbent telephone companies are improving service for approximately 90,000 Canadians. Decision 99-16 aimed to upgrade service for those not targeted by the existing plans - the roughly 13,000 residences and/or businesses that have been identified in over 700 localities that, still, do not have any access to telephone service, and the close to 7,700 customers that do not have single line service. To address the remaining unserved and underserved population in HCSAs, the incumbent telephone companies were directed to file service improvement plans. These service improvement plans have been assessed and are currently being implemented through separate decisions related to specific incumbents or groups of incumbents (principally, Regulatory Framework for the Second Price Cap Period, Telecom Decision CRTC 2002-34, previously described).

Access to Support Structures of Provincially Regulated Electric Utilities

Cable companies and competitive telecommunications carriers often rent space on poles and in underground conduit owned by telephone companies and power utilities to carry the transmission lines that they use to provide service to their customers. This allows them to provide service without installing their own poles and conduit, often called support structures.

In 1996, Barrie Public Utilities and a number of other Municipal Electrical Utility Companies (MEUs) in Ontario decided to considerably increase their support structure rates. The Canadian Cable Television Association (CCTA) applied to the CRTC seeking a ruling that the MEUs in question must provide access to their poles at the same rates prescribed by the Commission in a previous decision for access to the poles of major telephone companies. In Telecom Decision CRTC 99-13, September 28, 1999, the CRTC ruled that it had the constitutional and statutory jurisdiction under the Telecommunications Act to deal with the matters raised, and established an annual per-pole rental rate higher than requested by the CCTA, but considerably lower than that sought to be charged by the MEUs.

In response to an appeal filed by the MEUs, the Federal Court of Appeal issued a decision on July 13, 2001 in which it ruled that the CRTC's decision exceeded its jurisdiction under the Telecommunications Act. The Court concluded that the language of the relevant section of the Act was meant to grant access to support structures of the transmission lines of Canadian carriers and distribution undertakings by each other and by other persons who provide services to the public, but not access to the support structures of MEUs.

The CCTA has been granted leave to appeal the Federal Court of Appeal's decision to the Supreme Court of Canada.

DSL Access for Resellers

Digital subscriber line (DSL) service provides high-speed access to digital networks using the same copper telephone lines as are used for basic voice telephone service. In a letter decision dated September 21, 2000, the CRTC ruled that incumbent telephone companies are to provide resellers wishing to offer DSL service with co-location and unbundled loop access at the same rates and on the same terms and conditions as are required for competitive local telephone companies. DSL resellers are precluded from using these facilities to provide switched local voice services. Reasons for the CRTC's decision were provided in Order CRTC 2000-983.

Contribution Collection Mechanism

On November 30, 2000, the CRTC issued Decision CRTC 2000-745 in which it changed the way it collects the subsidy provided to maintain basic residential telephone service in high-cost serving areas at affordable rates. Effective January 1, 2001, the CRTC adopted a revenue-based mechanism, under which Canadian telecommunications service providers must pay a percentage of their gross telecommunications revenues into a national fund. This new mechanism replaces the previous regime, under which long distance service providers alone paid into regional subsidy funds. The new levy, initially set at 4.5 percent for 2001, was reduced to 1.4% on an interim basis in 2002. It will be adjusted annually thereafter. The Commission exempted providers with $10 million or less in revenues from paying contribution and ruled that revenues from retail Internet services, retail paging, and terminal equipment are not contribution-eligible.

Implementation of Long Distance Competition in Northwestel's Territory and Review of its Regulatory Framework

In Decision CRTC 2000-746, November 30, 2000, the CRTC established the terms and conditions necessary to provide northern residents with a choice in long-distance suppliers as well as long-distance rates comparable to the rest of the country. Effective January 1, 2001 the long-distance market was opened to competition in the northern portion of the country served by Northwestel (NWTel), which includes the Northwest Territories, Yukon, Nunavut and northern British Columbia.

Consistent with its previous decisions on high-cost serving areas, the CRTC approved: 

1. extending single-line service to over 500 homes currently unserved;

2. upgrading service to over 2,600 customers and eliminating mileage charges; and

3. NWTel's plan to upgrade its long-distance network to digital technology to improve the quality of both local and long-distance service.

In order to fund these service improvements and reduce long-distance rates, the Commission concluded that revenues were required from three sources: 

1. a $3 increase in the monthly telephone rates of NWTel residential customers, with a $5 increase for business customers;

2. the introduction of a carrier access fee of 7 cents per minute on originating and terminating calls for long-distance competitors entering NWTel's territory; and

3. for the year 2001, the first year of the four-year service improvement program, a subsidy of approximately $15 million from the contribution charges levied against telecommunications service providers in southern Canada. In subsequent years, the amount of the subsidy is to be reviewed and adjusted annually.

Access to Municipal Rights-of-Way

In Decision CRTC 2001-23, January 25, 2001, the CRTC ruled on a dispute between the City of Vancouver and Ledcor Industries Limited involving access to municipal rights-of-way in that city. The CRTC determined that it has full jurisdiction under the Telecommunications Act to deal with rights-of-way issues in the context of resolving disputes brought before it, subject only to the requirement that it give due regard to the use and enjoyment of those rights-of-way by others.

Under the terms and conditions established by the Commission, the City of Vancouver is entitled to recover all of the causal costs it incurs as a result of the construction, maintenance and operation of carrier transmission lines in its municipal rights-of-way. It is not, however, entitled to any compensation in the form of "market-based" or other fees charged for the use of space in rights-of-way. Among other things, the CRTC also found it inappropriate for municipalities to require carriers to construct spare capacity, or to require other carriers to use this capacity rather than construct their own. It stated, however, that it expects carriers to participate with municipalities in joint planning and co-ordination committees, and that it considers it reasonable for carriers to contribute to the costs of any such committees.

On May 14, 2001, the Federation of Canadian Municipalities and the cities of Vancouver, Calgary, Toronto, Halifax and Ottawa were granted leave to appeal the CRTC's decision to the Federal Court of Appeal. The appeal argues primarily that the CRTC lacks the jurisdiction to make the type of findings regarding municipalities such as those made in Decision 2001-23.

Restructured Rate Bands and Revised Loop Rates

In Decision CRTC 2001-238, April 27 2001, the Commission approved revised unbundled local loop rates that competitive local exchange carriers will pay for the use of the incumbent local exchange carriers (ILECs) unbundled loops. It also addressed the costs to be used as the basis for establishing the subsidy paid by the national contribution fund. This includes the adoption of a uniform approach to identifying high-cost serving areas in the territories of the major ILECs and a more consistent set of costing methodologies by which the ILECs are to determine the costs for local loop and residential primary exchange services.

Independent's Regulatory Regime

In Decision CRTC 2001-756, December 14, 2001, the CRTC released its decision finalizing the application of the new revenue based contribution mechanism for the small independent telephone companies and implementing a price cap form of regulation. This decision affects 39 companies primarily in Ontario and Quebec, serving less than 2% of the Canadian population.

The CRTC found it necessary to adopt a proxy approach to calculating the independents' subsidy requirement, in part, given their difficulties in generating the necessary cost data. Therefore, for the purposes of calculating the subsidy, the CRTC decided to employ an adjusted average of the large incumbents' costs and assume the national average local rate of $22.75. The CRTC also approved a 4 year transition period in which the subsidy would be scaled back gradually while at the same time the independents could increase rates up to the $22.75 proxy. Over the 4 years, the contribution received by small telephone companies will drop from $37.9 million to $25.8 million. Under the new contribution regime, telecommunications service providers with more than $10 million in eligible revenues are required to pay into the fund based on a pre-determined revenue percentage. All but 5 of the independents are expected to be exempted from contributing.

Effective 1 January 2002, the new framework allows for annual price increases based, primarily, on inflation. However, because some of the independent companies' local rates are much lower than the national average of $22.75, those companies will be permitted to increase rates at a maximum of $4 per year (in addition to inflationary increases) to reach the $22.75 mark, starting January 1, 2002.

Local competition in Télébec and TELUS Québec Territory

In Order CRTC 2001-761, October 3, 2001, the Commission found that competition in the local exchange and local payphone markets should be permitted in Télébec's and TELUS Québec's operating territories beginning in September 2002. The regime adopted largely parallels that were already established for local exchange and payphone competition in the territories of the other large incumbent telephone companies, previously described.

Price Regulation for Télébec and TELUS Québec

In Telecom Decision CRTC 2002-43, July 31, 2002, the CRTC established a four-year price cap regime for Télébec and TELUS Québec. The regime adopted is similar in most respects to that implemented for the second price cap period of the other large incumbent telephone companies, previously described.