|
Telecom Order
|
|
Ottawa, 8 October 1999
|
|
Telecom Order CRTC 99-972
|
|
Affiliate Rule for Primary Local Exchange Services
|
|
File Nos.: 8622-C25-04/98 and 8643-S1-01/98
|
|
1.On 16 March 1998 Stentor Resource Centre Inc. (Stentor), on
behalf of BC TEL, TELUS Communications Inc., Bell Canada (Bell),
Maritime Tel & Tel Limited (MTT), MTS Communications Inc. (MTS),
NBTel Inc. (NBTel), NewTel Communications Inc. (NewTel) and Island
Telecom Inc. (Island Tel) (the applicants, also referred to as incumbent
local exchange carriers (ILECs)), filed an application pursuant
to Part VII of the CRTC Telecommunications Rules of Procedure
to eliminate the affiliate rule as currently included in the tariffs
of the applicants.
|
|
Background
|
|
2.The affiliate rule prohibits the applicants from leasing interexchange
voice services to their affiliates for provision of interexchange,
interconnected voice services (interexchange voice services), or
for resale on a joint use basis or sharing to provide interexchange
voice services.
|
|
3.In Affiliate Rule, Telecom Decision CRTC
94-6, 4 March 1994 (Decision 94-6), affiliate was defined to
mean "any person that controls or is controlled by the company or
that is controlled by the same person that controls the company,
and includes a related person". A person is related to another if
(1) either holds, directly or indirectly, at least a 20% interest
in, or any options to acquire at least a 20% interest in, any of
the capital, assets, property, profits, earnings, revenues or royalties
of the other, or (2) any third party holds, directly or indirectly,
at least a 20% interest in, or any options to acquire at least a
20% interest in, any of the capital, assets, property, profits,
earnings, revenues or royalties of each of the persons.
|
|
4.Decision 94-6 defined "control" to include control in fact,
whether through one or more persons.
|
|
5.The affiliate rule does not currently apply to Teleglobe Canada
Inc. (Teleglobe).
|
|
Telecom Public Notice CRTC
99-3
|
|
6.Following the application by Stentor, and interventions by Call-Net
Enterprises Inc. (Call-Net), on behalf of itself and fONOROLA Inc.
(now a part of Call-Net), Microcell Telecommunications Inc. and
Rogers Cantel Inc., the Commission issued Affiliate Rule,
Telecom Public Notice CRTC
99-3, 19 January 1999 (PN 99-3), to invite comment on:
|
|
(1) Whether an affiliate rule prohibiting the applicants' affiliates
from reselling the applicants' local services is required to ensure
development of effective competition in markets for local exchange
services, including comment on the effects both on the applicants
and on competitors;
|
|
(2) The form such a rule should take, whether outright prohibition
on resale of the applicants' local services by affiliates, or, alternatively,
whether limits on the activities of the applicants' affiliates would
suffice to ensure the development of competition in local services;
|
|
(3) Whether an affiliate rule for local services is required to
ensure that the applicants comply with the bundling rules; and
|
|
(4) Whether an affiliate rule is required for Teleglobe, considering
the regulatory framework for the company established in Regulatory
Regime for the Provision of International Telecommunications Services,
Telecom Decision CRTC
98-17, 1 October 1998 (Decision 98-17).
|
|
7.In PN 99-3, the Commission stated that the reasons for which
the affiliate rule for interexchange voice services was established
no longer exist, or have been addressed by other mechanisms established
by the Commission. However, the Commission retained the affiliate
rule for interexchange services on an interim basis until a decision
is made on the issues raised in PN 99-3.
|
|
8.The applicants and Teleglobe were made parties to the proceeding
initiated by PN 99-3.
|
|
9.The Commission received comments or reply comments from: BCT·TELUS
(on behalf of BC TEL and TELUS Corporation); Bell, Island Tel, MTT,
MTS, NBTel and NewTel, in a joint submission (collectively referred
to as the Bell companies); AT&T; Canada Corp. (AT&T; Canada); Call-Net
on behalf of itself and Sprint Canada Inc. (Sprint), Clearnet Communications
Inc. (Clearnet), London Telecom Network Inc. (London Telecom), MaxLink
Communications Inc. (MaxLink), MetroNet Communications Group Inc.
(now part of AT&T; Canada), (collectively referred to as the competitors);
Mobility Canada on behalf of its member companies (Mobility); and
the Public Interest Advocacy Centre (PIAC).
|
|
Positions of Parties
|
|
Requirement for an Affiliate Rule
|
|
10.The competitors and PIAC submitted that the applicants are
expected to be dominant in the local exchange market for some time
to come, and that an affiliate rule is required to ensure that the
applicants do not abuse their dominance and impede the establishment
of local competition.
|
|
11.The competitors and PIAC argued that without an affiliate rule
for local services, the applicants could resort to reseller-affiliates
to offer these services at prices below approved tariff rates, or
otherwise act anti-competitively, in order to strategically slow
the development of competition in markets for local services. AT&T;
Canada, Clearnet, MaxLink, and PIAC submitted that an applicant
would focus on the combined return to the affiliate and the parent
company, and not on possible losses by the affiliate.
|
|
12.Competitors argued that the imposition of an affiliate rule
for local services would not harm the applicants, because none of
the applicants are currently offering such local services through
an unregulated affiliate, and since the applicants would still be
allowed to joint market and bundle their local services with services
of affiliates and unrelated companies, subject only to the imputation
test and the bundling rules.
|
|
13.The applicants and Mobility argued that an affiliate rule for
local services is not required to ensure that competition develops
in local markets, and submitted that local competition has been
developing without an affiliate rule for local services.
|
|
14.The Bell companies submitted that the substantive issue in
this proceeding is how to deal with the potential for predatory
pricing and other instances of anti-competitive behaviour. They
submitted that a case by case approach, rather than an outright
prohibition on the resale of the applicants' local services by affiliates
would be a more appropriate approach for dealing with allegations
of anti-competitive behaviour.
|
|
15.The Bell companies noted that when competition was introduced
in the interexchange voice market, long distance rates were, as
a matter of policy, considerably above costs. They stated that an
affiliate rule was considered necessary to prevent contribution
erosion that could have occurred if affiliates of the companies
had been eligible for contribution discounts, or if the companies
had sold a large portion of their long distance services through
reseller-affiliates. The companies submitted that there are no similar
incentives to resort to reseller-affiliates in markets for local
services.
|
|
16.The Bell companies submitted that with implementation of the
framework for local competition, and competitive safeguards, such
as the split rate base and the price cap regime, local markets are
open to competitive entry. They argued that predatory pricing is
implausible, given the competitiveness of the telecommunications
industry.
|
|
17.Further, the Bell companies submitted that they rely on affiliates
to serve their national and international customers, in competition
with international carriers like AT&T; Canada and Sprint that can
offer their customers one stop shopping. Imposition of an affiliate
rule could deny customers the benefits of price and service competition,
and impede the deployment of new technology.
|
|
18.The Bell companies argued that the issue is whether the affiliates
act anti-competitively, and how to address allegations of anti-competitive
behaviour, and not whether affiliates comply with the tariffs and
regulations applicable to the regulated companies. The Bell companies
noted that some of their affiliates are Canadian carriers under
the Telecommunications Act (the Act), and submitted that
the Commission could use its powers to investigate and deal with
allegations of anti-competitive behaviour by such affiliates.
|
|
19.The Bell companies also argued that, if an affiliate that was
not a Canadian carrier (i.e. a reseller without transmission facilities)
acted anti-competitively, the Commission could then impose an affiliate
rule. The Bell companies argued that an affiliate rule was a draconian
regulatory instrument, that should not be imposed on the companies
absent evidence of anti-competitive behaviour.
|
|
20.BCT·TELUS submitted that when the Commission first permitted
competition in the interexchange market, the alliance of the Stentor
companies dominated that market, and new entrants were small. BCT·TELUS
submitted that the interexchange affiliate rule was intended to
foster the development of competition by preventing the applicants
from entering the interexchange market through affiliated resellers,
or from taking advantage of contribution discounts.
|
|
21.BCT·TELUS argued that the market for telecommunications has
changed. With the entry of Sprint and AT&T; Canada, and the break-up
of the Stentor alliance, four large integrated carriers now compete
in most telecommunications markets. BCT·TELUS submitted that, in
this new market, predatory activities by the applicants or their
affiliates would be unlikely, since a predator would not succeed
in driving AT&T; Canada or Sprint from the Canadian market, and thus
could not later recoup losses from predatory pricing.
|
|
22.Mobility submitted that an affiliate rule for local services
could prevent the Mobility companies from reselling telephone numbers,
and from using the affiliated incumbent carriers' local facilities
to transport and complete wireless calls.
|
|
23.Mobility also submitted that an affiliate rule would limit
its access to the applicants' enhanced local services, (e.g. call
forwarding and voice mail), frustrate development of integrated
wireline and wireless services for its customers, and limit opportunities
for the Mobility companies to become competitive local exchange
carriers, thus potentially limiting competition in local markets.
|
|
Form of an Affiliate Rule
|
|
24.Most competitors submitted that the simplest form of an affiliate
rule would be an outright prohibition on the resale of the applicants'
local services by their affiliates.
|
|
25.London Telecom argued that it would suffice if affiliates of
an applicant were prevented from reselling the applicant's local
services in the applicant's operating territory. London Telecom
submitted that the applicants should be permitted to establish affiliates
in the operating territories of other applicants. As an alternative
to this proposal, London Telecom submitted that the Commission impose
a requirement that affiliates of the applicants sell local services
at the same rates and terms and conditions as the applicants.
|
|
26.The Bell companies noted that since Resale to Provide Primary
Exchange Voice Services, Telecom Decision CRTC
87-1, 12 February 1987, their affiliates have been permitted
to resell and bundle local services. The Bell companies argued that
affiliates are established for valid business reasons, for example
to respond to market needs and to attain strategic business objectives,
and not for the purpose of reselling services in order to avoid
regulation.
|
|
Compliance with the Bundling Rules
|
|
27.Competitors submitted that absent an affiliate rule, the telephone
companies could establish reseller-affiliates to circumvent the
Commission's bundling rules.
|
|
28.The Bell companies noted that the Commission has never required
that the regulatory regime, including the bundling rules, applicable
to the regulated companies also apply to their affiliates.
|
|
29.BCT·TELUS submitted that pricing contrary to the bundling rules
would entail below cost pricing, and argued that, since the company's
affiliates do not have market power, they would be unable to recover
losses from below cost pricing, and hence have no incentive to circumvent
the bundling rules.
|
|
An Affiliate Rule for Teleglobe
|
|
30.Teleglobe submitted that an affiliate rule prohibiting the
resale of its services by an affiliate is not required. It submitted
that it has no incentive to engage in anti-competitive or predatory
pricing, by reducing retail rates, since the company is subject
to a price-cap regime that controls the company's wholesale prices.
Further, Teleglobe argued that with the removal of the by-pass restrictions,
it could not re-establish its monopoly and raise retail prices to
recover revenues lost from predatory pricing.
|
|
31.The Bell companies, Mobility and BCT·TELUS agreed with Teleglobe.
The Bell companies submitted that the Commission found in Decision
98-17 that the licensing conditions regarding anti-competitive conduct,
and the Commission's powers under subsections 27(2) and 27(4) of
the Act would be sufficient to safeguard against anti-competitive
conduct in the international market by Teleglobe.
|
|
32.London Telecom also agreed, noting that the international market
is now open to competition. London Telecom submitted that, with
the elimination of the by-pass restrictions, all parties can access
competitive Canadian, American or other international carriers,
so that Teleglobe has little ability to prevent the development
of competition in international services.
|
|
33.MaxLink argued that an affiliate rule for Teleglobe is required
at this time, since it will be some time before Teleglobe will actually
lose its market power following removal of the by-pass restrictions.
|
|
Conclusions
|
|
Limited Affiliate Rule for Primary Local Exchange Services
|
|
34.In Local Competition, Telecom Decision CRTC
97-8, 1 May 1997, the Commission established its framework for
local exchange competition. The Commission also implemented a number
of competitive safeguards, such as the imputation test and the bundling
rules, to ensure, among other things, that the applicants do not
engage in anti-competitive below cost pricing. In doing so, the
Commission noted that the applicants' pricing, unconstrained by
the imputation test, could impede development of local exchange
competition.
|
|
35.In Decision 94-6 the Commission maintained the affiliate rule
prohibition on the resale of interexchange voice services to, among
other things, continue the orderly transition to a more competitive
marketplace. In local markets, competitive entry is substantially
less advanced than it was in interexchange markets when Decision
94-6 was issued. Competition is just starting to emerge in the local
market, and the applicants still enjoy a virtual monopoly in the
provision of local exchange services. Moreover, applicants' affiliates
that are resellers are not Canadian carriers and thus operate outside
the scope of the Act. They, therefore, are not subject to direct
enforcement regarding the competitive safeguards established in
Commission decisions affecting local markets. A reseller-affiliate
could, for example, lease an applicant's services and components
at tariff rates to provide local exchange services at prices that
did not meet the imputation test or the bundling rules.
|
|
36.In this connection, the Commission notes that the applicants
must price local exchange services, with the exception of residential
exchange services, to cover loop costs set at Phase II costs plus
a twenty five per cent mark-up where loops are essential. In these
circumstances the applicants' reseller-affiliates could price services
below imputation test levels, and still provide a positive total
return for the applicant and the affiliate taken together. Moreover,
if an applicant's reseller-affiliate were to lease loops which are
not essential, the applicant's reseller-affiliates could choose
to offer services below imputation test levels, which if offered
by the applicant, must meet the imputation test.
|
|
37.The Commission considers that, at this time, the development
of local competition requires continued enforcement of the various
competitive safeguards, including the imputation test and the bundling
rules. However, the Commission agrees with the applicants that a
comprehensive, across-the-board affiliate rule prohibiting resale
of the applicants' services by all of their affiliates is not necessary
to meet the Commission's requirements.
|
|
38.The Commission considers that it is not necessary to prohibit
affiliates that are Canadian carriers pursuant to the Act from reselling
the applicants' local services. While the Commission has forborne
from exercising some of its powers with respect to some of these
affiliated Canadian carriers, it has retained sufficient powers
to impose conditions on the provisioning of services by these carriers.
|
|
39.This will enable the Commission to ensure, if and where necessary,
that these affiliated Canadian carriers comply with the competitive
safeguards.
|
|
40.Some competitors suggested that reseller-affiliates be permitted
to resell the applicants' services, but also be required to offer
these services at the same rates, terms and conditions at which
the applicants offer them. The Commission is of the view that this
proposal is overly broad, and that the narrower regulatory approach
as set out below has the advantage of maintaining competitive safeguards,
while also permitting greater competitive benefits for consumers.
|
|
41.The applicants submitted that an affiliate rule is not needed
because, should there be evidence that a reseller-affiliate acted
anti-competitively, the Commission could investigate at that time.
The Commission, however, is of the view that the scope for corrective
action in such circumstances would be limited to initiating a proceeding
to establish an affiliate rule, and that accordingly, it is preferable
to establish a limited form of an affiliate rule for local exchange
services.
|
|
42.The Commission notes that there is competition in the provision
of optional local services, such as voice mail. Accordingly, in
the Commission's view, it is appropriate to restrict application
of the affiliate rule to primary local exchange services.
|
|
43.In light of the foregoing, the Commission finds it appropriate
to establish a rule that prohibits the ILECs from providing to affiliates
that are not Canadian carriers local exchange facilities, such as
loops, or local exchange services for resale to provide local exchange
services.
|
|
44.However, the affiliate rule will only prohibit resale of primary
local exchange services by affiliates that are not Canadian carriers
in the service territory of an affiliated ILEC. The Commission agrees
with London Telecom that this approach will allow ILECs to compete
in each other's markets on the same basis as other competitors,
while not impeding competition in their own operating markets.
|
|
45.The Commission notes that it will continue to define affiliates
in accordance with Decision 94-6.
|
|
Teleglobe
|
|
46.The Commission considers that the recent changes in the regulatory
framework governing Teleglobe have lessened Teleglobe's market power.
|
|
47.The Commission notes further that, pursuant to the licensing
framework for international telecommunications service providers
set out in Decision 98-17, it is a condition of licence that the
licensee shall not engage in anti-competitive conduct in relation
to the provision of international telecommunications service or
services. For the purposes of this condition, anti-competitive conduct
includes entering into or participating in an arrangement that has
or is likely to have the effect of preventing or lessening competition
unduly in Canada. The Commission is of the view that this condition
is sufficient to address any concerns in relation to Teleglobe and
its affiliates that might otherwise be addressed by an affiliate
rule.
|
|
48.Accordingly, the Commission finds that applying an affiliate
rule to Teleglobe is neither necessary nor appropriate.
|
|
Affiliate Rule for Interexchange Voice Services
|
|
49.The Commission notes that, in accordance with PN 99-3, the
affiliate rule for interexchange voice services no longer applies.
|
|
Tariff Revisions
|
|
50.In light of the above, the Commission directs the applicants
to file for approval, within 14 days of the date of this Order,
revisions to their tariffs reflecting this Order.
|
|
Secretary General
|
|
This document is available in alternative format upon request
and may also be viewed at the following Internet site: http://www.crtc.gc.ca
|
|
|