- Telecom Decision
CRTC 90-3
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- Ottawa, 1 March 1990
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- RESALE AND SHARING OF PRIVATE LINE SERVICES
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- Table of Contents
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- I BACKGROUND
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- II WHETHER IT IS APPROPRIATE TO MODIFY THE CURRENT RULES
GOVERNING RESALE AND SHARING
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- A. General
1. Positions of Parties
2. Conclusions
B. Market Impact
1. General
2. Bell's Model
3. B.C. Tel's Model
4. Positions of Parties
C. Conclusions
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- III REGULATORY APPROACHES
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- A. General
B. Rate Restructuring - Positions of Parties
C. Contribution Payments - Positions of Parties
D. Conclusions
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- IV OTHER ISSUES
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- A. Recovery of Costs for Competitor Access to PSTN
B. Special ResellerProvisioning Group
C. Certification ofSwitching Equipment
D. CFIB Application
E. Tariff Revisions
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- APPENDIX
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- I BACKGROUND
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- In Interexchange Competition and Related Issues, Telecom
Decision CRTC 85-19, 29 August 1985 (Decision 85-19), the Commission determined that users
would benefit in a variety of ways from resale and sharing. However, the Commission also
found that, under the rate structures in place at that time, the revenues from Message
Toll Service (MTS) and Wide Area Telephone Service (WATS) substantially exceeded their
costs. Therefore, the Commission was concerned that permitting resale and sharing to
provide MTS/WATS could result in uneconomic entry and a significant erosion of MTS/WATS
revenues. As a result, the Commission concluded that, while the resale and sharing rules
should be liberalized, on balance, resale and sharing to provide MTS/WATS was not in the
public interest at that time.
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- The Commission gave effect to its findings on resale and
sharing by developing rules, which it issued in Tariff Revisions Related to Resale and
Sharing, Telecom Decision CRTC 87-2, 12 February 1987
(Decision 87-2). These rules govern the resale and sharing of the services of Bell Canada
(Bell), British Columbia Telephone Company (B.C. Tel), Northwestel Inc. (Northwestel),
CNCP Telecommunications (CNCP) and Telesat Canada (Telesat). They permit, among other
things, resale and sharing to provide all data and non-interconnected voice services. The
rules also permit the sharing of interconnected interexchange private line voice services,
and the resale of such services when individual circuits are dedicated to the user.
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- On 11 January 1989, the Commission issued CRTC Telecom
Public Notice 1989-1 (Public Notice 1989-1).
In Public Notice 1989-1, the Commission stated that a number of circumstances had changed
since Decision 85-19 and Decision 87-2 had been issued.
The Commission noted that there had been major reductions in MTS rates since that time.
The Commission also noted that it had recently approved new volume discount subscription
services that offer subscribers further reductions on MTS charges. Moreover, in addition
to a restructuring of private line rates in 1986, the Commission had recently approved
increases in the rates for certain Bell and B.C. Tel private line services.
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- The Commission stated in Public Notice 1989-1 that the above-noted rate actions, taken
together, had significantly reduced the rate differentials between MTS/WATS and private
line services. In light of the changes in the regulatory environment, the Commission
sought public comment on whether it should modify the current rules governing the resale
and sharing of private line services and, in particular, on the advantages and
disadvantages of permitting the resale of private line services for joint use. The
Commission noted that it did not intend to review the prohibitions on the resale and
sharing of WATS to provide voice service. Bell, B.C. Tel, CNCP, Northwestel and Telesat
were joined as parties to the proceeding.
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- On 7 February 1989, the Canadian Federation of Independent
Business (CFIB) filed an application requesting that the Commission order Bell to amend
certain of its tariffs governing resale and sharing on the grounds that, contrary to
section 340(2) of the Railway Act, the existing rules discriminate unjustly against small
business subscribers and subject them to unreasonable prejudice and disadvantage relative
to their larger competitors. CFIB also requested, as an interim measure pending the final
disposition of its application and the outcome of the proceeding initiated in Public
Notice 1989-1, that the Commission order Bell to continue furnishing interconnected
private line services to the CDAR/SHARENET Telecommunications Sharing Group set up by
Call-Net Telecommunications Ltd. (Call-Net).
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- In light of the fact that CFIB's application raised issues
related to those to be considered in the proceeding already initiated by Public Notice 1989-1, the Commission determined, in a letter to
CFIB dated 15 February 1989, that CFIB's application should be dealt with in the context
of that proceeding. CFIB's request for interim relief was denied by letter dated 17
February 1989.
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- II WHETHER IT IS APPROPRIATE TO MODIFY THE CURRENT RULES
GOVERNING RESALE AND SHARING
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- A. General
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- 1. Positions of Parties
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- Parties who filed submissions in support of liberalization
of the rules governing resale and sharing include, among others: (1) resellers, namely,
Call-Net, Cam-Net Communications Inc. (Cam-Net), Powernet Communications (Powernet), and
Marathon Telecommunications Corp. (Marathon); (2) trade and business associations,
including the Association of Competitive Telecommunications Suppliers (ACTS), Canadian
Business Telecommunications Alliance (CBTA), Canadian Association of Data and Professional
Service Organizations and STM Systems Corp. (CADAPSO), CFIB, Information Technology
Association of Canada (ITAC), Canadian Bankers' Association (CBA), Canadian Manufacturers'
Association (CMA), and Canadian Radio Common Carriers Association; (3) business users,
including Canadian Tire Acceptance Limited, Hudson's Bay Company, IBM Canada Ltd., Ontario
Hydro, and numerous other businesses; (4) Director of Investigation and Research, Bureau
of Competition Policy, Consumer and Corporate Affairs Canada (the Director); and (5)
Telesat.
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- Parties who opposed further liberalization, or who
submitted that liberalization at this time would be premature, include: (1) telephone
companies, namely, Bell, B.C. Tel, Maritime Telegraph and Telephone Company, Limited
(MT&T) and Northwestel; (2) Ontario Telephone Association (OTA); (3) consumer groups,
namely, British Columbia Old Age Pensioners' Organization, Council of Senior Citizens'
Organization, West End Seniors' Network, Senior Citizens' Association, Federated
Anti-Poverty Groups of B.C., Local 1-217 IWA Seniors (BCOAPO), Consumers' Association of
Canada (CAC), and the National Anti-Poverty Organization; (4) the Governments of Ontario,
Quebec, British Columbia (BCG) and Saskatchewan, and the Council of Maritime Premiers
(CMP); (5) unions, namely, Syndicat des travailleurs et travailleuses en communication et
en électricité du Canada/Communications and Electrical Workers of Canada, and the
Telecommunications Workers Union (TWU); and (6) Ian Waddell, Communications Critic, New
Democratic Party of Canada.
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- CNCP and B.C. Rail Ltd. (B.C. Rail) supported a more
liberal resale and sharing environment, but advocated their own prior entry into the
MTS/WATS market.
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- Many parties stated that the current rules are too
restrictive and that, as a result, there are very few resellers and sharing groups. These
parties argued that the current rules, because they are too restrictive, do not afford
benefits to small users in the form of cost savings and access to enhanced services.
Instead, they only confer further advantages on large users who are already in a position
to benefit from bulk, discounted private line services available directly from the
carriers. In particular, it was argued that smaller users of telecommunications services
are at a disadvantage because resellers cannot aggregate their voice traffic and carry it
on jointly-used private lines.
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- As noted above, CFIB stated that the existing rules
unjustly discriminate against small business subscribers and subject them to unreasonable
prejudice and disadvantage relative to their larger competitors, contrary to section 340
of the Railway Act. Moreover, stated CFIB, the rationale for the restrictions is
discriminatory, since it focuses on the revenue erosion that might result from removal of
the restrictions, while ignoring the fact that similar revenue erosion has been allowed to
occur through the provision of private line services to larger businesses. CFIB argued
that, to the extent that the price of a dedicated private line is cost justified on the
basis of traffic volume, it is equally cost justified when that volume is generated by two
or more small businesses.
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- Some parties argued that, while sharing groups are
permitted to use private lines jointly for voice traffic, the attractiveness of sharing is
reduced by restrictions on the ability to hire professional agents to manage the groups
and to obtain insurance to offset the risk of liability for the bad debt of other members.
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- CFIB noted that, unlike large businesses, small businesses
do not have the in-house telecommunications expertise or the manpower to manage a sharing
group. CFIB also argued that the Commission's rules prohibiting liability insurance are
intended to limit the size of sharing groups, but that a few small firms are unlikely to
generate sufficient traffic to make efficient use of interconnected private line
facilities. By making it unattractive for large groups of small users to share facilities,
the Commission effectively discriminates against small business users.
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- Several parties supported CFIB's application. However, CBTA
disagreed that there is discrimination between large and small businesses. It argued that
some large businesses do not have the traffic to support private lines, while some small
businesses do. CBTA contended, rather, that the current rules discriminate against
resellers and sharers. CBTA was of the opinion that section 275(1) and section 340(2) of
the Railway Act should be interpreted as requiring carriers to furnish all reasonable and
proper facilities to all customers, including those that wish to resell or share.
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- Some parties argued that further liberalization would
encourage the provision of services such as Call Detail Account Recording (CDAR) and
stimulate the development of innovative voice/data services by removing current voice
restrictions that hinder integrated voice/data applications. Some parties argued that, as
a result of shrinking price margins, resellers would be unable to compete on price alone,
but would focus instead on niche markets and the provision of value-added services.
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- CFIB stated that the Commission's rulings on CDAR, offered
by Call-Net, have impeded access to some enhanced services. CFIB argued that CDAR allows
businesses to better manage their telecommunications costs. CFIB noted that Bell does not
provide CDAR to customers with less than 160 lines, and that only Call-Net provides it in
a manner economical to small firms.
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- A number of parties contended that stimulation of a
domestic resale market is consistent with the goals of the Free Trade Agreement and of the
Type II carrier policies of the Department of Communications (DOC). The Director argued
that resale for joint use would reduce the risk of telecommunications users bypassing
Canadian providers in favour of the more open services market in the United States. CBA
warned that, unless faster growth in value-added services is encouraged in Canada,
international competitors will enter the market to supply Canadian customers. CFIB argued
that the advent of free trade will highlight any cost and efficiency disparities between
the two countries, thus adversely affecting Canadian small business.
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- Many parties opposed to further liberalization submitted
that resale of private lines for joint use would result in the provision of services in
the nature of MTS/WATS and would cause an erosion of the contribution used to keep the
rates for local service low. B.C. Tel argued that CFIB's application constitutes a request
for the competitive provision of long distance services through resale for joint use. B.C.
Tel indicated that approval of CFIB's application would result in uneconomic entry and
contribution erosion; therefore, approval is not in the public interest.
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- CNCP argued that the benefits of resale could best be
realized if, prior to allowing resale, the Commission permitted a facilities-based
MTS/WATS competitor.
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- Some parties argued that it would not be appropriate for
the Commission to make any determination on resale for joint use prior to the development
of a national telecommunications policy or prior to a proceeding to examine all issues
pertaining to MTS/WATS competition.
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- CBTA noted that TWU had argued in 1984 that the Commission
should await the development of a national telecommunications policy before examining
MTS/WATS competition. CBTA indicated that, if the Commission had delayed on such grounds,
there would not be any resale and sharing today. CBTA further stated that, given the time
involved in a proceeding to examine MTS competition, it would not be desirable to delay
until resolution of that matter.
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- BCG, Ontario, Quebec and CMP considered that the broader
issue of MTS/WATS competition must be addressed prior to any significant modification of
the rules governing resale. However, BCG, Quebec and CMP all recommended liberalizing the
sharing rules to allow increased entry of a non-commercial nature.
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- Bell also argued that a delay was unnecessary. In its
opinion, this proceeding provided ample opportunity for comment. Bell argued that any
delay in issuing a decision would create uncertainty in the existing resale and sharing
market and prolong Call-Net's provision of MTS/WATS-like services. However, Bell also
stated that there is no existing government policy favouring MTS/WATS competition and that
any decision to make fundamental changes to long distance competition policy could
prejudice the implementation of a new system of telecommunications regulation.
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- A number of parties contended that the Commission had
already addressed the resale of private lines for joint use in previous proceedings
regarding Call-Net and that the market environment has not changed since that time.
However, CBTA noted that the Call-Net proceedings were limited to determining whether
Call-Net was acting in compliance with the rules governing enhanced services and sharing,
and were never intended to examine whether the rules themselves should be altered.
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- In response to arguments that the existing resale rules are
too restrictive, Bell noted that the rules had been designed to prevent services in the
nature of MTS/WATS and must, of necessity, be restrictive. Bell argued that, despite price
reductions, the revenue/cost relationship for MTS has remained constant, resulting in a
continued threat of uneconomic entry.
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- In reply to CFIB's application, Bell and B.C. Tel argued
that volume discounts are a typical and recognized business practice and are available to
all customers who have the necessary volume of traffic. Bell stated that, under section
340(3) of the Railway Act, the Commission has determined, as a matter of fact, that
different tariffs or tolls may be charged for different kinds of traffic (as is the case,
for example, with the high capacity services required by large volume users). Both Bell
and B.C. Tel noted that, under the current rules, lower volume users can obtain private
lines from resellers at lower rates than from the telephone companies. B.C. Tel also
pointed out that the present rules permit small businesses to share a channel.
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- Northwestel stated that it does not discriminate against
resellers. It argued that its services are offered and priced on the assumption that it
leases to an end user, not to a carrier who intends to repackage or re-offer the service.
Northwestel stated that the Commission had addressed the question of whether the resale
restrictions are discriminatory in Decision 85-19, and had determined that the
reasonableness of any restrictions must be considered in light of the public interest,
broadly defined.
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- Call-Net stated that, on routes where large bulk digital
facilities are available, existing resellers of bulk facilities can provide individual
channels at a lower price. However, it contended that an individual user would require a
very high volume of traffic to justify the lease of a channel.
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- B.C. Tel stated that the only restriction on the hiring of
a professional agent to manage a sharing group is that the agent cannot be a member of the
group for the purpose of reselling services on a commercial basis. B.C. Tel also argued
that joint and several liability is related not to business size, but rather to business
relationship. B.C. Tel contended that this requirement ensures that members know their
partners and are willing to assume financial responsibility for them.
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- Parties generally agreed that greater benefits could be
derived from more liberalized resale. However, some argued that the benefits would accrue
to a small number of users at the expense of the majority of subscribers. BCG contended
that resale of private lines for joint use would primarily benefit commercial users,
equipment suppliers, manufacturers, and potential service providers. Some parties also
argued that resellers would focus on large volume users in larger centres. They submitted
that this would result, among other things, in an increase in Canada-Canada traffic
carried on U.S. networks, the diversion of Canada-overseas traffic through the U.S., the
indirect entry of carrier affiliates into the MTS/WATS market, and a loss of settled
revenues for independent telephone companies and for Telecom Canada members other than
Bell and B.C. Tel.
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- OTA expressed concern that independent company customers in
exchanges having Extended Area Service with a Bell exchange would utilize the services of
resellers operating in the Bell portions of free calling areas.
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- Northwestel argued that circumstances in its territory
differ from those in Bell and B.C. Tel territory. Northwestel noted, for example, that it
does not provide OUTWATS. It also contended that it derives a greater percentage of its
operating revenues from MTS and private line services. Northwestel submitted that many of
the changes cited in Public Notice 1989-1 had
not occurred in its territory. For example, it argued that, unlike Bell and B.C. Tel, it
has not had significant reductions in MTS rates. Northwestel also suggested that it is
unlikely that resellers could fully compensate it for the loss of contribution to the
provision of universal service. Northwestel noted that the Commission has, in the past,
recognized the unique nature of the northern operating area. It submitted that it would
not be in the public interest to relax the resale rules in its territory.
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- 2. Conclusions
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- The Commission does not agree with parties who argued that,
in previous proceedings with respect to Call-Net, it had already examined the resale of
private lines for joint use and found it not in the public interest. The initial Call-Net
proceedings involved an examination of whether Call-Net was providing an enhanced service
or was in contravention of resale and sharing rules. While the proceeding resulting in
Resale to Provide Enhanced Services, Telecom Decision CRTC 88-11,
16 August 1988 (Decision 88-11), did consider whether to change the rules governing
enhanced services, it explicitly excluded a more general review of the rules governing
resale and sharing.
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- As noted during this proceeding, there is no stated
government policy on resale for joint use. Moreover, a deferral of this proceeding,
pending the outcome of a possible proceeding on facilities-based MTS/WATS competition,
could result in a lengthy delay, thereby prolonging the uncertainty in the resale and
sharing market caused by Orders-in-Council issued with respect to Call-Net. Therefore, the
Commission considers it appropriate to proceed to a determination in the current
proceeding and, in the process, to dispose of CFIB's application.
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- As indicated above, the Commission considered the issue of
resale and sharing in Decision 85-19. In that Decision, the Commission stated that section
340(2) (then section 321(2)) of the Railway Act provides a statutory basis for determining
the appropriateness of the restrictions on resale and sharing. The Commission noted that
section 340(3) (then section 321(3)) permits it to determine, as questions of fact,
whether in any case, there has been unjust discrimination or undue or unreasonable
preference or advantage, or prejudice or disadvantage, within the meaning of section 340.
The Commission stated that, in making factual determinations pursuant to section 340(3),
it has regard to the public interest, broadly defined.
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- In Decision 85-19, the Commission concluded that there
would be a number of benefits associated with permitting resale and sharing. However, the
Commission also concluded that it was in the public interest, broadly defined, to limit
contribution erosion and uneconomic entry by prohibiting resale and sharing to provide
MTS/WATS. Because of the difficulties associated with service-based restrictions, this
prohibition was implemented, in Decision 87-2, by means
of facilities-based restrictions. Under this approach, the resale of private lines for
joint use was not permitted for interconnected interexchange voice services.
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- In the Commission's view, the question of where the public
interest lies must again be assessed, in light of the changes cited in Public Notice 1989-1 and discussed in this proceeding, by
balancing the benefits to be derived from liberalizing the rules governing resale and
sharing against possible adverse effects such as significant contribution erosion and
uneconomic entry into the market.
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- Available evidence suggests that there are few voice
resellers and sharing groups operating in the domestic market under the current rules. In
the opinion of the Commission, resale for joint use would increase the number of suppliers
in the market and would stimulate the development of integrated voice/data and value-added
services. As an example, resale for joint use would allow smaller users to obtain CDAR, a
service that many have argued provides important benefits. It would similarly increase the
availability of services like call forwarding and voice storage and retrieval that can
combine both basic and enhanced features.
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- While the Commission is also of the view that resale for
joint use would result in the provision of some services that would be substitutes for
MTS, it can be argued that all private line voice services and WATS are to some extent,
lower priced substitutes for MTS. As such, they all have the potential to erode revenues
that would otherwise be derived from MTS.
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- On the other hand, lower priced substitutes also have the
potential to stimulate demand and, in turn, to generate new revenues and associated
contribution. Furthermore, there would be material differences, as well as similarities,
between MTS and the services that would develop as a result of resale for joint use.
Resold services would often be of a lower value to the user, due to geographic
limitations, the type of connection and need to dial extra digits, and the absence of the
lower-priced universal termination available through WATS. Moreover, to the extent that
margins between MTS and private line rates are sufficiently limited, resellers would be
unable to compete solely on the basis of price and would have to add value to their
services to compete effectively, thus further differentiating those services from
MTS/WATS.
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- Having concluded that there are important benefits to be
derived from the further liberalization of the rules governing resale and sharing, the
Commission must assess, in light of the public interest, the extent, if any, to which
liberalization would erode contribution and contribute to uneconomic entry.
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- B. Market Impact
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- 1. General
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- Both Bell and B.C. Tel provided financial models of the
market impact of permitting the resale of private lines for joint use. Bell and B.C. Tel
indicated that their analyses assumed that facilities-based carriers would participate in
the resale market through affiliates. B.C. Tel submitted that the rate relationships
between MTS and private line services would be irrelevant to the affiliate of a
facilities-based carrier since, as was also argued by Bell, it would be the combined
financial results of the affiliate and the carrier that would determine the overall
profitability of entry into the resale market. B.C. Tel further submitted that the entry
of such an affiliate would be very similar to facilities-based MTS/WATS entry.
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- 2. Bell's Model
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- Bell's market impact analysis covered the period 1990 to
1994, inclusive. Bell assumed that in the first year of the study period resellers would
be able to establish points of presence in 11 cities and would thereby be able to
originate and terminate traffic on 70 per cent of Bell's access lines. Bell estimated
that, by 1994, this would increase to 90 per cent of access lines, with 49 points of
presence. Bell stated that resellers would initially concentrate on serving larger centres
and larger users.
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- Bell assumed that resellers would not be permitted to
compete for domestic traffic terminating outside Bell or B.C. Tel territory, but that they
would provide universal termination in the United States and overseas. Bell stated that
resellers might offer discounts on overseas service as a loss-leader or at a reduced
profit. Bell also stated that relaxing the rules on resale of cross-border services would
make it difficult to prevent competition with the overseas service.
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- Bell assumed that, for a fixed monthly fee of $10,
resellers would offer switched access customers discounts of 10 to 25 per cent and would
offer a dedicated access service to business subscribers, with discounts of 10 to 30 per
cent in return for a monthly subscription fee of $110. Bell stated that the company's
estimate of resellers' discounts relative to MTS took into consideration the assumption
that resellers would use low bit rate encoding techniques wherever feasible.
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- On the basis of the above-noted discounts, Bell calculated
potential savings to resale customers. Bell estimated that the savings would never exceed
12 to 13 per cent, and would average 9 per cent.
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- Based on the above savings rates, Bell then calculated the
probability that a customer would subscribe to resold services. These calculations were
done using probability-of-subscription equations from the company's results for the
Teleplus 200 and 1022 trials. Bell adjusted its probability-of-subscription estimates by
an inertia factor to account for such non-price differences as dialing ease, provision of
universal termination, and supplier preference. Bell also applied a penetration lag factor
to the probability-of-subscription estimates to account for the fact that it would take
three years for resellers to achieve a stable market share.
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- Bell assumed that resellers would use CNCP private line
facilities exclusively, because an affiliate of CNCP would be the primary reseller and
because CNCP's prices for private lines are 5 and 10 per cent lower than Bell's. However,
Bell's analysis indicated that, even if these price differences were eliminated, there
would be little change in the market impact.
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- Bell stated that, in order to isolate the impact of
relaxing the resale rules, it assumed that it would not make a competitive price response.
Bell did submit, however, that reducing MTS/WATS rates by 10 and 20 per cent,
respectively, would not affect the resellers' market share.
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- In deriving the overall impact of a liberalization of the
resale and sharing rules, the company also took into consideration changes to access
revenues received from resellers and sharers, revenue settlements with other Telecom
Canada members and non-domestic carriers, increases in expenses due to switching costs and
decreases in expenses due to lost MTS/WATS traffic.
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- To calculate the number of switched access circuits
required by resellers, Bell assumed that resellers would carry 7500 minutes of traffic per
month per switched circuit and 3000 minutes per month per dedicated access circuit.
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- Bell stated that the company's revenue settlement
calculations did not take into account B.C. Tel's market impact analysis, and that taking
that analysis into account would increase the contribution lost by $20 million in 1992.
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- Based on the above assumptions, Bell estimated that its
originated revenue loss, before revenue settlement, would be $540 million in 1994, equal
to 10 per cent of the MTS/WATS market. Bell indicated that this revenue erosion would
reduce the contribution it derives from MTS/WATS by $200 million and that Telecom Canada
members (other than Bell) would lose $110 million in revenues through the revenue
settlement process. Bell estimated that, if the company's contribution loss had to be
recovered through local monthly rate changes, in the absence of any contribution payment
from resellers, local rates would increase by $1.80. However, if per-minute contribution
charges were applied, Bell estimated that a charge of $0.05 would reduce contribution
losses by $60 million.
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- 3. B.C. Tel's Model
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- B.C. Tel's initial market impact analysis covered the
period 1990 to 1992, inclusive. In response to a Commission interrogatory, the company
extended its analysis to include 1993 and 1994.
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- B.C. Tel assumed that resellers would originate and
terminate traffic in 27 large B.C. centres, in major centres in Bell territory, and
throughout the U.S. and overseas. B.C. Tel considered that all cross-border 800 Service
traffic would be vulnerable to reseller competition, and that resellers would resell U.S.
800 Service in order to compete for cross-border 800 Service traffic. The company
estimated that, in 1992, approximately 60 per cent of MTS/WATS revenues would be
vulnerable to reseller competition.
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- B.C. Tel assumed that resellers would offer effective
discounts of 20 to 30 per cent on MTS, WATS and 800 Service, and 40 per cent on overseas
calls. B.C. Tel stated that it based these discounts on the rate margins between MTS/WATS
and private lines, and on the promotional material of an existing cross-border reseller
that advertised discounts of up to 40 per cent.
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- B.C. Tel expected that resellers would charge subscription
fees in order to discourage very low volume users, and considered traffic in the business
customer-dialed segment the most vulnerable to reseller competition. It stated that
economic incentives to compete for this traffic would be high, based on the company's
estimate that the price of private line services using 32 kbps bulk service can be 60 to
80 per cent less than that of MTS. Based on estimates of market share loss by billing
band, B.C. Tel calculated that, in 1992, the average percentage share of vulnerable market
revenues lost for WATS and business customer-dialed intra-company, TransCanada and
Canada-U.S. calls would be 20 per cent, overall. The percentage share of the vulnerable
residential market lost was set at 5 per cent.
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- B.C. Tel also assumed that it would lose 25 percent of the
market for 800 Service vulnerable to reseller competition. Based on its understanding of
the current extent of the bypass of Teleglobe services through the U.S., B.C. Tel assumed
that 15 per cent of the vulnerable overseas market would be lost.
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- B.C. Tel indicated that its assumptions as to market share
loss are supported by its experience in 1985, when it lost 15 per cent of cross-border
traffic to resellers, prior to making a price response.
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- B.C. Tel assumed that resellers would use cross-border
Canada-U.S. private lines and would route overseas traffic through the U.S. because, as
argued by B.C. Tel, overseas rates from U.S. locations are lower than Teleglobe's.
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- B.C. Tel indicated that it had considered the influence on
resale penetration of non-price factors such as the need to dial extra digits, customer
preference for one-stop shopping, the inability to terminate domestic calls outside of the
territories of Bell and B.C. Tel, and possible delays and inconveniences associated with
resale network access. B.C. Tel stated that the impact of resale could be increased if
resellers used better access arrangements, thereby reducing the dialing of extra digits.
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- B.C. Tel assumed that resellers would be free to change
prices or to offer customer-specific prices in response to market conditions. It also
assumed that larger users would receive higher discounts and that resellers would target
the highest revenue markets first. B.C. Tel indicated that it did not expect resellers to
provide value-added services, because existing arbitrage opportunities would allow
resellers to be profitable without providing special services.
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- To facilitate its analysis, it assumed that it would not
make a competitive response to expanded resale. B.C. Tel acknowledged that competitive
pricing of its MTS/WATS could significantly reduce the revenue and contribution losses
associated with allowing resale; however, a rate reduction would also have a negative
impact on the company's MTS revenues.
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- Based on these assumptions, B.C. Tel estimated that
resellers would take 7 per cent of its MTS/WATS market, resulting in a loss of $71.1
million in originated revenues in 1992. Using the 1988 Phase III cost/revenue ratio of 34
per cent, B.C. Tel calculated that the resulting loss in contribution would be $47.7
million. B.C. Tel projected that the impact in 1994 would be $86 million in lost revenues
and $57 million in lost contribution. It stated that, if $50 million in lost contribution
had to be recovered solely through local monthly rate changes, local rates would increase
by $2.20.
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- B.C. Tel estimated that a per-minute contribution charge of
$0.05 would reduce the lost contribution by $9.4 million.
|
- 4. Positions of Parties
|
- Parties who commented on the Bell and B.C. Tel models
included Call-Net, Cam-Net, CBTA, CMA, CNCP and Marathon.
|
- A number of parties questioned the carriers' assumption
that a CNCP affiliate would be the dominant player in the resale market. Call-Net stated
that this assumption eliminates any positive financial impact of resale on Bell and
increases the estimated lost market share. Marathon expressed concerns that
facilities-based carriers could directly or indirectly subsidize a resale affiliate.
Marathon submitted that the Commission should establish rules to prevent such an affiliate
from entering the resale market.
|
- In support of its assumption of entry by a facilities-based
affiliate, Bell cited CNCP's statement that it would consider becoming an alternative
supplier of MTS/WATS. It submitted that a CNCP affiliate would constitute a legitimate
business arrangement and that any attempt by the Commission to introduce pre-conditions
for entry based on corporate affiliation may not be defensible in light of Railway Act
provisions relating to unjust discrimination and undue preference.
|
- Several parties submitted that the carriers' assumptions as
to the price discounts that resellers would offer ignored such overhead costs as
marketing, facilities and equipment. CBTA stated that neither Bell nor B.C. Tel had
conducted studies to determine whether resellers could afford to offer the discounts
predicted. Some parties argued that large rate margins are not available to resellers and,
as a result, that resellers would be unable to offer the discounts assumed by the
carriers, particularly for Canada-U.S. and overseas calls.
|
- Many parties commented on the quality of service that
resellers would provide. CBTA and CNCP indicated that it may be lower because of inferior
quality of access and transmission, longer dialing sequences and the limited availability
of private lines. CNCP noted that resellers would not be able to terminate domestic calls
outside of the territories of Bell, B.C. Tel and Northwestel.
|
- Call-Net stated that the very high levels of utilization on
private line circuits assumed by Bell (7500 minutes of traffic per month per switched
circuit and 3000 minutes per month per dedicated access circuit) would result in lower
network quality and high equipment costs. It also stated that the wider the area served by
resellers, the less likely they will be to achieve the very high level of utilization on
private lines necessary to offer high price discounts.
|
- The carriers' assumptions regarding resellers' use of voice
compression and multiplexing technologies were also questioned by some parties. These
parties submitted that low bit rate encoded circuits are limited in their ability to
transmit facsimile traffic and provide a lower quality of service. Call-Net stated that
the carriers assumptions allow them to project higher discounts for resold services. CBTA
argued that multiplexing and voice compression technologies are not appropriate for resale
networks.
|
- B.C. Tel replied that resellers would use voice compression
and low bit rate encoding technologies, even though this might impair quality on multiple
tandem links and limit the trasmission of facsimile traffic. It stated that there may be
improvements in technology, that some routes may not require multiple tandem links, and
that most traffic would be voice, not facsimile. B.C. Tel stated further that resale would
be viable even if voice compression or multiplexing was not used.
|
- Call-Net and CBTA questioned the carriers' assumptions
about the market segments that would be vulnerable. They submitted that, if it is true
that resellers would serve only large volume routes and provide benefits to only a select
segment of subscribers, it cannot also be true that the market would be highly vulnerable
and that substantial contribution erosion would occur.
|
- CBTA put forward several reasons as to why it believed that
the estimates of reseller competition in the overseas market are not realistic. It also
pointed out that bypass of Canada-Canada traffic through the U.S. is not permitted under
the agreements between Canadian and U.S. carriers. B.C. Tel indicated that it did not
believe that such agreements would prevent traffic diversion.
|
- CBTA stated that connection to U.S. switches is currently
allowed and, therefore, that allowing joint use of resold circuits would likely result in
only a small increase in cross-border traffic. It also argued that approval of Advantage
Service, a form of discount Canada-U.S. MTS proposed by Bell and B.C. Tel, in January
1989, would dramatically reduce the cross-border traffic carried by resellers. B.C. Tel
was of the view, however, that the introduction of Advantage Service would not alter the
impact of resale for joint use.
|
- Several parties disagreed with the assumption by Bell and
B.C. Tel that they would provide none of the resellers' private line facilities. These
parties stated, among other things, that CNCP may not have sufficient facilities available
on the required routes. Marathon indicated that it had experienced administrative
difficulties when obtaining private lines from alternative carriers. CBTA argued that
resellers would acquire the same proportion of their private lines from Bell and B.C. Tel
as are currently purchased by all users of private lines.
|
- Bell and B.C. Tel indicated that the cost of private line
service for resellers was a much more significant component of total expenses than the
cost of private lines for business customers. Therefore, the resellers' incentives to
minimize would be greater.
|
- Many parties also took issue with the assumption that the
carriers would not make any response to increased resale competition. Call-Net stated that
this assumption is inconsistent with recent trends in private line and MTS/WATS rates and
with the application for Advantage Service. It argued that the assumption results in an
overstatement of the incentives for subscribers to migrate to resellers' services.
|
- Both Call-Net and Marathon argued that Bell had
underestimated the time it would take for resellers to achieve a stable market share.
|
- Some parties submitted that the carriers' estimates of
market share loss were inconsistent with subscribers' responses to the carriers' discount
services and their inertia towards subscription to CNCP services.
|
- Call-Net argued that experience in both Canada and the U.S.
suggests a lower penetration level by resellers, possibly in the order of 2 per cent by
year five. Call-Net estimated that a 2 per cent market share loss would reduce Bell's
estimate of contribution loss by year five to $40 million, which would be offset to a
large extent by an increase in revenues associated with the lease of facilities to
resellers.
|
- Bell replied that the U.S. experience is not relevant in
assessing the reasonableness of Bell's market projections, because resellers in the U.S.
are required to compete on equal terms with established facilities-based carriers.
|
- CBTA argued that, even with projected erosion from
resellers, Bell's long distance revenues would increase by $2 billion over the next five
years, resulting in an additional contribution of $1.3 billion. Because of an anticipated
decrease in the growth of access costs, CBTA contended that several hundred million
dollars would be available for toll rate reductions, thus further reducing resale margins.
CBTA predicted a similar situation for B.C. Tel.
|
- C. Conclusions
|
- In the Commission's judgment, the scenarios set out in the
market impact models of Bell and B.C. Tel are based on overstated assumptions about the
ability of resellers to compete with the telephone companies in an environment in which
the resale of private lines for joint use is permitted. The scenarios presented by the
companies are even less realistic if carrier affiliates are not permitted to enter the
market. The discussion immediately below is posited on the assumption that carriers would
not be permitted to lease private lines to an affiliate for the purpose of resale for
joint use. The impact of entry by an affiliate is discussed later.
|
- The market share that would be lost to resellers depends
primarily on interrelated two factors: (1) the coverage that resellers would provide, (2)
the discount that resellers would offer and (3) the customer take rate that would
accompany various price discounts. The Commission believes that assumptions made by Bell
and B.C. Tel with respect to each of these factors have resulted in an overestimation of
the potential impact of permitting resale for joint use.
|
- With regard to the first of these factors, in the
Commission's view, Bell and B.C. Tel have assumed that resellers will offer service in
more locations than will, in fact, be the case. The Commission believes that there would
be little incentive for resellers to provide customers with the ability to originate and
terminate traffic in smaller centres. The costs involved in so doing would be such that
price discounts and/or service quality would need to be reduced to levels at which it
would not be possible to attract customers.
|
- With regard to the level of price discounts, the Commission
considers that neither Bell or B.C. Tel provided satisfactory evidence to support their
submissions concerning the level of discount that resellers would be able to offer. In the
Commission's judgment, even with limited coverage, it is unlikely that resellers could
offer the discounts on domestic traffic assumed by the carriers. In the Commission's
opinion, based on the record of this proceeding and its analysis of existing margins
between private line and MTS rates, an average price discount on domestic traffic would
not exceed 20 per cent. For overseas traffic, since Teleglobe's rates on many high traffic
routes are comparable to those of American Telephone and Telegraph, and in some cases are
lower, it is also unlikely that resellers could offer substantial discounts.
|
- Furthermore some Canada-U.S. MTS/WATS traffic has already
been lost to resellers using dedicated private lines to the U.S. border, thus reducing the
incremental impact of permitting expanded resale.
|
- Finally, the Commission is of the view that the carriers'
assumptions concerning the probability of subscription and the impact of inertia factors
overestimate, albeit not substantially, the extent to which customers would be attracted
to reseller services for given levels of price discount.
|
- In light of the above, the Commission concludes that the
carriers have substantially overestimated the market share that they would lose to
resellers. Based on the models developed by Bell and B.C. Tel, and making adjustments to
reflect the revised assumptions discussed above, the Commission's analysis indicates a
market share loss of approximately 2 per cent in 1994. For Bell, such a loss in market
share would entail an originated revenue loss of less than $100 million and a contribution
loss of less than $60 million. For B.C. Tel, the estimated impact would be less than $25
million in lost originated revenues, with less than $15 million in associated contribution
erosion, after revenue settlement.
|
- The Commission notes that, if Bell and B.C. Tel had no
option but to recover this loss solely through a monthly local rate increase, it would, by
1994, be no greater than $0.50 for Bell subscribers and no more than $0.55 for B.C. Tel
subscribers. Other Telecom Canada members would experience a revenue loss of less than $20
million with an associated contribution loss of less than $10 million.
|
- However, in the Commission's judgment, the level of
contribution loss estimated above may well be offset to a considerable degree by other
factors. For example, liberalized resale, and the growth in value-added services that it
may foster, might well stimulate the demand for private lines, thus increasing carrier
revenues from that source. Increased productivity and lower expenses could reduce
contribution loss even further.
|
- In light of the above, the Commission does not consider
potential contribution erosion to be of sufficient magnitude to outweigh the previously
noted advantages of permitting expanded resale, particularly in light of the fact that
liberalization would encourage the development of value-added voice and data services. In
the Commission's judgment, contribution payments, as discussed below, will serve to
further reduce the possibility of contribution erosion and of uneconomic entry into the
resale market.
|
- The Commission therefore concludes that the resale and
sharing rules should be amended to permit the resale of private lines for joint use for
voice purposes.
|
- However, in the Commission's opinion, permitting a
facilities-based carrier to lease services to an affiliate for the provision of voice
services on a joint use basis would be analogous to permitting facilities-based entry. A
reseller that was affiliated with a facilities-based carrier would not be subject to the
same economic constraints as other resellers, who would have to obtain services from an
unaffiliated supplier. It is these constraints, to which unaffiliated resellers are
subject, that help to limit uneconomic entry and contribution erosion.
|
- Specifically, in determining the combined return of a
facilities-based carrier and its resale affiliate, it would be the cost of providing
underlying facilities to the affiliate that would be important, rather than the price paid
by the affiliate to the carrier for facilities. Therefore, the margin between rates for
MTS and rates for private line services would not be a factor in the decision to enter the
resale market. Rather it would be the margin between MTS rates and the facilities-based
carrier's marginal costs for private line services. As a result, to the extent that rates
for certain private line service exceed their marginal costs, the affiliated reseller
could offer larger discounts than other resellers, thus increasing any negative impact of
more liberalized resale on Bell and B.C. Tel.
|
- Moreover, since a carrier affiliate could offer greater
discounts, it could focus directly on price competition, as opposed to competition on a
value-added basis. Facilities-based competition was not a subject of this proceeding and
the evidence is inadequate to assess its impact. Therefore, the Commission determines that
no facilities-based carrier will be permitted to lease interexchange services directly or
indirectly to an affiliated company for resale for joint use or sharing, except where
those services would be used only to provide data services or portable communications
services such as mobile satellite and cellular services. This does not, of course,
preclude a carrier affiliate from entering the resale market using the facilities of a
non-affiliated carrier.
|
- Finally, the Commission notes that no party commented on
Northwestel's position that its circumstances are materially different from those of Bell
and B.C. Tel and that, therefore, the rules should not be relaxed in its territory. Given
the differences in its circumstances, the lack of detailed information regarding the
impact on revenue and contribution erosion and the absence of demand to alter the current
rules, the Commission does not consider it appropriate at this time to alter the rules
applicable to resale and sharing in Northwestel's operating territory.
|
- III REGULATORY APPROACHES
|
- A. General
|
- In Public Notice 1989-1, the Commission asked for comment
on the question of whether any restructuring of rates for Monopoly Toll and Competitive
Network services should be undertaken before any changes are made in the rules governing
the resale and sharing of private line services. The Commission noted that it would
consider only the need to restructure interexchange service rates and that the issue of
rate rebalancing was outside the scope of the proceeding. The Commission also requested
comments on whether some form of contribution payment or other regulatory mechanism should
be applied to resale and sharing and, if so, the nature and extent of that contribution
payment or other mechanism. The various submissions with respect to these issues are
summarized below.
|
- B. Rate Restructuring - Positions of Parties
|
- Generally, those parties that supported more liberalized
resale argued that it was unnecessary to restructure interexchange rates prior to
permitting the resale of private lines for joint use. ACTS argued that an elastic demand
for interexchange services, together with the deployment by the telephone companies of
cost-reducing technologies, could allow for further rate decreases without any need to
restructure.
|
- Many parties argued that the significant reductions in
MTS/WATS rates and increases in private line rates cited in Public Notice 1989-1 had
removed most opportunities for uneconomic entry. Some parties also noted that, since
Public Notice 1989-1 was issued, the Commission had again increased private line rates and
ordered further decreases in MTS rates. CBTA stated that the limited number of sharing
groups that have been formed is evidence that margins are no longer significant. Call-Net,
Cam-Net and CBA argued that any further restructuring would negate the benefits of resale.
|
- CADAPSO, B.C. Rail and CBTA argued that the restructuring
of interexchange rates has already significantly shifted the traditional cross-over points
of demand away from private lines and back to monopoly MTS/WATS. B.C. Rail estimated that,
as a result of MTS rate reductions and private line rate increases, users now require
twice the amount of traffic as formerly to justify a shift from MTS/WATS to private lines.
|
- Parties opposed to more liberalized resale generally argued
that rate restructuring should be permitted. Both Bell and B.C. Tel, while noting that
rebalancing of MTS and local rates was not an issue in this proceeding, contended that it
is the most efficient method of restructuring. B.C. Tel argued that restructuring is
necessary to reduce contribution losses from resale, to avoid uneconomic entry, to allow
telephone companies to provide services under competitive terms, and to provide
appropriate market signals.
|
- Bell contended that it would not be appropriate to increase
rates for competitive network services, since that would only result in lost business and
revenues to competitive alternatives. Bell suggested the restructuring of monopoly toll
rates by increasing volume discounts and by decreasing prices on high density routes. It
also argued that, unless rate rebalancing occurs, the lost revenues from such a
restructuring would have to be made up through rate increases on low density routes or
reductions in discount levels for off-peak periods.
|
- B.C. Tel stated that there would be less contribution
erosion if it were permitted to offer volume discounts, since it would lose fewer
customers and total demand would be stimulated. It noted that there are other means of
rate restructuring, including reducing the distance sensitivity of MTS/WATS rates,
removing message charges for call set-up, and introducing geographic or route specific
pricing. B.C. Tel argued that such repricing could reduce contribution losses and stated
that any remaining revenue shortfall could be recovered from increases in short haul toll
rates or from reductions in the level of discounts for evening, night and weekend calling.
|
- BCG stated that the most appropriate form of restructuring
would involve further competitive network rate increases and monopoly toll rate decreases,
but recognized that this would be difficult to achieve in a competitive environment and
could contribute to bypass through the U.S. However, BCG argued that the telephone
companies should not be permitted to depart from traditional pricing principles, such as
route averaging, without explicit policy direction.
|
- Both Bell and B.C. Tel argued that, if resale of private
lines for joint use is permitted, 5 and 10 per cent discounts should be eliminated when
CNCP-type services are used by resellers to provide MTS/WATS-like services. They noted
that, since resale activities would be limited to territories where CNCP has
interconnection, the geographic rationale for a discount (i.e., that there is no
interconnection in some provinces) would not apply. B.C. Tel argued that resellers are
driven to minimize costs and would therefore obtain all their underlying facilities from a
competitor rather than from the telephone company.
|
- Marathon contended that such discounts were not
significant. Its experience with discounted interexchange services had led it to
reconsider leasing facilities from a wide range of carriers, due to problems of
coordination and administration.
|
- CNCP stated that the Commission had granted it 5 and 10 per
cent discounts on the basis of material differences in the value of its services and the
telephone companies' services. CNCP noted that the Commission has found that the telephone
companies obtain a significant advantage through their MTS/WATS monopoly and CNCP believes
that this monopoly will prevail until facilities-based entry is permitted.
|
- Bell disputed CNCP's contention that it would retain an
advantage through its MTS/WATS monopoly. It argued that the removal of restrictions on
joint use would in fact result in MTS-like services.
|
- C. Contribution Payments - Positions of Parties
|
- The majority of parties supporting further liberalization
of the rules governing resale argued that there is no need for resellers to pay a
contribution charge on jointly used private lines, since the price for an interconnected
private line already includes a contribution towards access. Call-Net and Cam-Net stated
that an additional contribution charge imposed only on resellers would discriminate
against small and medium size users that cannot individually take advantage of private
line services. CBTA drew comparisons between Canadian and U.S. private line rates to
suggest that Canadian private lines already make significant contributions.
|
- Call-Net noted that, in CNCP Telecommunications,
Interconnection with Bell Canada, Telecom Decision CRTC 79-11, 17 May 1979 (Decision
79-11), the Commission indicated that a revenue loss to Bell in 1982 of $45.7 million was
acceptable, given the advantages of the interconnection of CNCP. For comparative purposes,
Call-Net noted that Bell's operating revenues in 1982 were $3 billion, as opposed to $7
billion in 1989.
|
- BCG took the position that all telephone company services
should be priced to provide a contribution to access and to common costs. While BCG did
not support resale for joint use, it did contend that contribution should be commensurate
with the service provided. It argued that, while joint use may be MTS-like, it is not the
equivalent of MTS. BCG contended that, until the Commission determines what an appropriate
contribution for a private line is, resellers should pay the same contribution as
competitors for interconnected private lines.
|
- ACTS and ITAC argued that, before contribution charges are
imposed, more efficient steps to lessen or offset revenue erosion should be undertaken,
for example, cost reductions, productivity improvements, rebalancing and targeted
subsidies.
|
- Both Bell and B.C. Tel argued that, absent rate
rebalancing, resellers, as competitors in the MTS/WATS market, should be required to pay a
contribution comparable to that required of the telephone companies. Bell argued that,
without a comparable contribution, resellers and their customers would be subsidized by
the general body of telephone subscribers. Bell and MT&T noted that the current
contribution assessed on competitors' interconnected private lines was designed to replace
lost contribution from private line services, not from MTS/WATS.
|
- B.C. Tel stated that erosion caused by the conventional use
of private lines is limited because use is restricted to those with specific volumes of
traffic. It argued that joint use of private lines would remove the restrictions that
limit erosion.
|
- Bell argued that resellers' traffic carried over jointly
used/non-dedicated facilities would be substantially different from traffic carried over
facilities dedicated to a single end-user. Bell contended that the manner in which
resellers would aggregate traffic over the local network in one city, carry that traffic
on jointly used circuits to another city, and then distribute it over the local network
indicates that a reseller's traffic would be carried under substantially similar
circumstances and conditions to comparable MTS offerings.
|
- Bell argued that, because sharing groups are non-commercial
in nature and are users rather than providers of services, it would be inappropriate to
charge them a contribution. Northwestel stated that, if resellers are required to pay
contribution and sharing groups are not, it would be necessary to discourage resellers
from acting like sharing groups. Marathon stated that, while a sharing group may function
as a non-commercial entity, the members of a sharing group are nonetheless profit-oriented
organizations that should not be exempt from contribution.
|
- Bell and B.C. Tel indicated that there are three possible
contribution mechanisms: (1) a charge per minute of reseller traffic, (2) a charge per
circuit or per channel, and (3) a charge per dollar of revenue obtained.
|
- Bell and B.C. Tel argued that a per-minute or per-channel
charge would create incentives for resellers to bypass the switched network in order to
avoid using connecting facilities on which contribution charges are assessed. B.C. Tel
also noted that per-channel charges must be based on traffic assumptions and averages, and
that resellers would attempt to engineer their systems to defeat these assumptions. B.C.
Tel noted that, while a measured per-minute charge would avoid this problem, resellers
would be limited in the type of facilities they could obtain since not all switches could
measure the traffic.
|
- Both Bell and B.C. Tel considered the percentage-of-revenue
approach a better alternative, since it would limit the avoidance of contribution.
However, they noted that this approach would require increased regulatory scrutiny or
would have to be subject to audit.
|
- Marathon argued that a percentage-of-revenue mechanism
could create problems when a reseller offers a range of services or operates in Canada and
in the United States. Marathon predicted that such situations would lead to "creative
accounting" that would be difficult to monitor. Marathon recommended a per-minute
charge, blended with the cost of the access line, as set out in the tariffs of U.S. West.
|
- Bell noted that the U.S. West tariff fills several volumes,
and is the product of the regulatory climate in the United States. Bell submitted that
Marathon's proposal gave rise to a number of issues, such as rate rebalancing, that have
not been canvassed in this proceeding. Bell contended that it is accordingly unable to
ascertain whether the U.S. West tariffs would be appropriate in the Canadian environment.
|
- D. Conclusions
|
- As indicated in Part II of this Decision, the Commission is
of the view that the potential for uneconomic entry and for contribution erosion has been
reduced significantly by rate adjustments since Decision 85-19 and Decision 87-2.
Moreover, as noted, the Commission considers that contribution payments will serve to
reduce the possibility of contribution erosion and of uneconomic entry in the resale
market.
|
- Having examined the restructuring options, the Commission
does not consider it appropriate at this time to increase private line rates. Increasing
rates for competitive network services could, in some instances, result in a reduction
rather than an increase in revenues. The Commission also regards rate increases for short
haul and low density routes or decreases in discounts for off-peak periods as extreme
solutions.
|
- In the Commission's opinion, volume discounts, such as
those provided by Teleplus, Between Friends and Advantage Service are one approach to
reducing price differentials. The Commission will continue to evaluate proposals for
discount services on a case-by-case basis.
|
- The Commission concludes that it is not necessary to make
rate structure changes for competitive network services in order to permit resale for
joint use. The Commission concludes that, under present circumstances, the imposition of
contribution charges of an appropriate form and level will provide the necessary mechanism
for permitting resale of private lines for joint use while limiting opportunities for
uneconomic entry and contribution erosion.
|
- The Commission also concludes that the same contribution
charge assessed on resellers should be applied to sharing groups. If the distinction
between resellers and sharers was maintained, resellers could disguise themselves as
sharing groups in an attempt to avoid contribution payments.
|
- The Commission considers that any attempt to distinguish
between resellers and sharing groups would ultimately result in dispute. From an economic
perspective, sharing is clearly an attempt to save money and increase profit by
aggregating demand. A reseller aggregates traffic and sells discounted service so that it
and its customers can profit. A sharing group aggregates traffic for the same economic
reasons.
|
- While the imposition of a contribution charge may require
some sharing groups to restructure their activities, the Commission considers that any
difficulties will be limited because of the small number of sharing groups currently
operating, new opportunities for members of sharing groups to obtain services from
resellers, and the potential for administrations of sharing groups to reduce their costs
by engaging in resale.
|
- However, in order to provide parties, including sharing
groups, sufficient time to restructure their activities if they deem it necessary, the
Commission intends to allow 90 days from the date of this decision before new tariffs take
effect.
|
- With respect to the appropriate form of contribution
charges, the Commission is of the view that revenue-based charges or per-minute access
charges may have potential for the future. However, a good deal of development would be
required before they could be implemented. At this time, per-channel charges are more
appropriate. A proceeding on facilities-based entry, should one be initiated, might
provide the appropriate forum to consider other forms of contribution charges in greater
detail.
|
- While resale may result in MTS-like services on specific
routes, the economic structure underlying resale and the restrictions on the resale of
WATS limit the ability of resellers to universally originate or terminate traffic. In
addition, the geographic coverage of the domestic services in question will be restricted
to Bell and B.C. Tel territory. Extra dialing and lower quality of connections also
contribute to a lower quality of service.
|
- The Commission finds that it is not necessary in such a
resale environment for the contribution charges applicable to resale for joint use to be
designed to compensate fully for losses to the contribution derived from MTS/WATS.
However, such charges should, at a minimum, serve to limit the opportunity for uneconomic
entry, while promoting the provision of value-added services. In the Commission's
judgment, a contribution of $200 per month per interexchange channel is the appropriate
amount under current conditions.
|
- The Commission's analysis indicates that, at $200 per
interexchange channel, any increase to Bell's and B.C. Tel's local rates to offset
contribution loss would be no more than $0.35 in 1994. Because this estimate is based on
the assumption that all reseller traffic is a close substitute for MTS/WATS, it is likely
excessive to the extent that resellers provide new value-added services that result in
overall market growth. Contribution generated as a result of the development of new
value-added services could, particularly in the long run, offset any contribution erosion
that would otherwise affect local rates.
|
- In order to identify any resellers and sharing groups to
whom this charge should apply, all resellers and sharers of any private line services used
to provide jointly used interconnected voice services will be required to register with
the Commission and with the carriers from whom they will obtain their facilities. Upon
receipt of an order for private line facilities from a registered reseller, the carriers
will apply the contribution charge to all channels requested, unless a specific channel
will not be jointly used or is to be used for providing only non-interconnected,
dedicated, or data services and a reseller or sharing group provides affidavit evidence to
that effect.
|
- The contribution charge will be applied on a per-channel
basis. Where a reseller or sharer orders an interexchange channel from either Bell or B.C.
Tel, the reseller or sharing group will pay the telephone company directly. Where a
channel requiring contribution payment is leased from Telesat, CNCP or B.C. Rail, these
carriers will remit the payment to either Bell or B.C. Tel. The necessary changes to the
interconnect tariffs of Bell and B.C. Tel are prescribed in separate Orders accompanying
this decision.
|
- Finally, the Commission does not, at this time, consider it
necessary or appropriate to remove discounts available on CNCP services. In the
Commission's view, amending the rules to permit the resale of private lines for joint use
does not sufficiently alter the situation prior to this Decision to warrant a
reconsideration of the discounts allowed to CNCP.
|
- IV OTHER ISSUES
|
- A. Recovery of Costs for Competitor Access to PSTN
|
- Bell stated that resellers would be likely to interconnect
with the PSTN by Connecting Arrangements for Switched Access that would, in effect,
utilize the company's existing local switches as access tandem switches. In Bell's
opinion, this would add extra load and volatility to the local network. As a result, the
costs to control the network load and maintain the performance of the local network would
increase. Bell suggested that a new tariff would be required to recover these costs, in
addition to any contribution payment. B.C. Tel indicated that compensatory rates for
access arrangements should be applied if the resale of private lines for joint use is
permitted.
|
- CMA supported the recovery of access costs, but suggested
that the Commission initiate a proceeding to determine an appropriate charge for all
services, including charges for resellers and other competitors, for the use of access
facilities. Marathon favoured a tariff that would blend access and contribution costs into
one, but noted that it would require significantly improved access for this approach to be
viable. Other parties who favoured resale for joint use were opposed to requiring
resellers to pay any additional charges over the tariffed rates for network access.
|
- Bell did not provide estimates of the costs resulting from
additional load on the local network or increased network volatility associated with the
migration of telephone company customer traffic to a reseller. In the Commission's
opinion, these additional costs are unlikely to be significant. Furthermore, the costs
imposed on the local network by a private line customer can vary considerably depending on
how the line is used and configured. In the Commission's opinion, resellers should pay
tariffed rates for network access facilities in the same way as other private line
customers.
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- B. Special Reseller Provisioning Group
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- Call-Net proposed that each carrier establish a special
group to deal with resellers, in order to ensure that they receive high quality circuits,
a timely response to their orders for facilities, and confidential treatment of their
orders. Call-Net also proposed that, if carriers cannot fill resellers' orders on time,
resellers be permitted to resell WATS until the orders can be filled.
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- Northwestel stated that Call-Net's request contradicts
Call-Net's submission that it should be treated like any large private line customer.
Northwestel noted that the confidentiality of customer information is already ensured
under the Terms of Service and that there is a procedure culminating in recourse to the
Commission if a customer is not satisfied with the service received. Northwestel opposed
Call-Net's request that resellers be permitted to resell WATS, because that would result
in discriminatory treatment of customers and would contravene the policy of not permitting
the resale of WATS.
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- In the Commission's view, the record of this proceeding
does not support the need to establish special reseller provisioning groups. The
Commission will, however, monitor the situation and deal with any complaints it receives
from resellers with respect to the service they receive from the carriers.
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- The Commission stated in Public Notice 1989-1 that it would
not review the prohibitions on the resale and sharing of WATS to provide voice service.
The Commission therefore rejects Call-Net's suggestion that resellers be permitted to
resell WATS pending the filling of their orders for private lines.
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- C. Certification of Switching Equipment
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- Marathon noted that none of the major manufacturers of
central office switching equipment have obtained the CS-03 certification necessary to
permit customers to attach such equipment to the carriers' networks as customer-provided
terminal equipment. Marathon considered itself to be in a similar category as cellular
carriers, who are not required to obtain certification of their equipment. Marathon
requested that the Commission give interim approval to the installation, without
certification, of any central office switch currently installed by at least one telephone
company or reseller in North America. Marathon further requested that the Commission
determine whether resellers' central office switching equipment requires certification.
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- In response, Bell submitted that interim permission to
install uncertified central office switches would not be appropriate. Bell maintained that
equipment installed on customer premises, rather than carrier premises, currently requires
CS-03 certification, regardless of whether the company or some other party provides and
operates the equipment. Bell noted, however, that standards similar to the bilateral
technical agreements negotiated by carriers for interconnection purposes could be
developed for use with resellers.
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- In Attachment of Subscriber-Provided Terminal Equipment,
Telecom Decision CRTC 82-14, 23 November 1982, the Commission required that all terminal
equipment attached to the networks of the federally-regulated carriers be certified to
CS-03. This requirement applies equally to terminal equipment provided by the telephone
companies. While central office switches have not been characterized as a form of terminal
equipment, there is no technical impediment to applying CS-03 to such switches.
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- The Commission will request the Department of
Communications to convene an ad hoc technical committee to consider the question of the
appropriate standard for central office switching equipment and whether or not such
equipment should be subject to certification, be it to CS-03 or to some other standard.
The Commission will request that the committee take whatever action it considers
appropriate and report on its decision. The Commission will then require the telephone
companies in question to file any necessary amendments to their tariffs.
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- In the interim, pending the establishment (if necessary) of
a new standard and certification procedures, the Commission finds that resellers' central
office switches must be certified to CS-03.
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- D. CFIB Application
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- The Commission established its approach to applications
filed pursuant to section 340(2) of the Railway Act, as is CFIB's, in a series of cases
beginning with Challenge Communications Ltd. v. Bell Canada, Telecom Decision CRTC 77-16,
23 December 1977. More recently, in Paradyne Canada Ltd - Attachment of
Subscriber-Provided Terminal Equipment to Dataroute Service, Telecom Decision CRTC 89-5, 1
May 1989 (Decision 89-5), the Commission stated, after finding that a preference had been
conferred and that discrimination had occurred, that it must consider whether the record
of the proceeding established that the preference was not undue or that the discrimination
not unjust. The Commission stated further that this consideration must be made in light of
the public interest.
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- At the time that the resale and sharing restrictions were
imposed, the Commission found them necessary and in the public interest in order to reduce
the possibility of significant contribution erosion. It follows, therefore, that any of
those restrictions that may have been discriminatory, were not unjustly discriminatory.
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- The Commission had already issued Public Notice 1989-1when
it received CFIB's application. In other words, it had already determined that it was in
the public interest to review the restrictions on the resale and sharing of private lines.
The Commission has now concluded that, in the public interest, restrictions on resale for
joint use should indeed be liberalized. Since the conditions that formed the primary
grounds for CFIB's application have been altered, and the old restrictions replaced with
rules that the Commission has found to be in the public interest, the Commission considers
it unnecessary to take further action with respect to CFIB's application.
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- E. Tariff Revisions
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- To give effect to this Decision, the Commission has set out
in the Appendix the rules to be included in the tariffs of Bell, B.C. Tel, CNCP and
Telesat.
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- Bell, B.C. Tel, Telesat and CNCP are directed to issue, by
14 March 1990, revised tariff pages as specified in the Appendix to this Decision,
modified to reflect the specific services offered by each. The Commission has today issued
orders to Bell and B.C. Tel directing that they amend their interconnection tariffs in
accordance with the resale and sharing rules set out in the Appendix. In all cases, the
revised tariff pages are to have an effective date of 29 May 1990.
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- Fernand Bélisle
Secretary General
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- APPENDIX
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- RESALE AND SHARING RULES
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- 1. DEFINITIONS
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- For the purposes of this tariff item:
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- "affiliate" means any person that controls or is
controlled by the Company or that is controlled by the same person that controls the
Company;
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- "control" includes control in fact, whether or
not through one or more persons;
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- "data service" means a telecommunications service
other than a voice service;
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- "Foreign Exchange Service" is an interexchange
service;
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- "interexchange service" means a service
configured to operate between any two exchanges for which Message Toll Service charges
would apply;
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- "joint-use basis" means on a basis in which a
Company-provided channel is not dedicated to a user;
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- "resale" means the subsequent sale or lease on a
commercial basis, with or without adding value, of telecommunications services leased from
the Company;
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- "reseller" means a person engaged in resale;
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- "sharing" means the use by two or more persons,
in an arrangement not involving resale, of telecommunications services leased from the
Company;
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- "sharing group" means a group of persons engaged
in sharing;
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- "user" means a member of a sharing group or a
customer of a reseller using the Company's telecommunications services for the user's
private communications needs;
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- "voice service" means a two-way
telecommunications service involving direct real-time voice communication between two or
more natural persons, but does not include a service the voice aspect of which is limited
to the coordination or setting up of a data service.
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- 2. RESALE AND SHARING WITHOUT CONTRIBUTION
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- The Company's telecommunications services may be shared or
resold in accordance with the conditions set out below and without the requirement for
contribution payments.
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- (a) Data Services
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- The Company's services may be shared or resold to provide
data services.
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- (b) Local Voice Services
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- (i) Subject to subparagraph (ii), the Company's services
may be shared or resold to provide local voice services, with the exception that resale to
provide public pay telephone service is not permitted.
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- (ii) Resellers offering shared tenant services must provide
the Company with direct access, under reasonable terms and conditions, to tenants who
choose to receive service from the Company rather than, or in addition to, service from
the reseller.
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- (c) Non-Interconnected Interexchange Voice Services
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- The Company's services may be shared or resold to provide
interexchange voice services that do not provide access to the public switched telephone
network subject to the following. Where an interexchange voice service of this type
utilizes a company-provided channel which is not dedicated to the user and is terminated
at the user's equipment that has access to the public switched telephone network, the
system shall be configured so as not to permit bridging and the reseller or sharing group
shall file with the Company an affidavit stating that the system is and will continue to
be so configured.
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- (d) Interconnected Interexchange Voice Services
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- The Company's services may be shared or resold to provide
interexchange voice services that provide access to the public switched telephone network,
subject to the following restrictions:
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- (i) each Company-provided channel shall be dedicated to the
user;
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- (ii) one end of each Company-provided channel shall be
terminated at equipment dedicated to the user or at a Centrex facility dedicated to the
user;
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- (iii) where a Company-provided channel used by a reseller
service terminates at the Company's local central office switching equipment, the channel
shall not pass through a non-user provided switch;
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- (e) Message Toll Service
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- The Company's Message Toll Service may be shared or resold
except where otherwise prohibited in the tariffs.
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- 3. RESALE AND SHARING WITH CONTRIBUTION
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- Interconnected Interexchange Voice Services
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- The Company's interexchange private line services may be
shared or resold on a joint use basis to provide interconnected voice services in
accordance with the conditions set out below.
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- (a) Resellers and sharing groups of jointly-used
interexchange interconnected voice services are required to register with the Company and
the Commission prior to receiving service.
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- (b) Resellers and sharing groups of interexchange private
line services are required to pay to the Company a contribution charge of $200 per month
per channel, except where the Company-provided channel meets at least one of the
conditions set out in section 2 (a), (c) and (d) above and the reseller or sharing group
files with the Company an affidavit stating which condition(s) is(are) met.
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- (c) In assessing monthly contribution charges, the Company
shall apply a charge of $200 per voice grade analog channel or $200 per 64 kilobit
channel; where a T1 channel is used in whole or part on a joint-use basis for the purposes
of providing interexchange interconnected voice services, a contribution charge of $4800
shall be applied.
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- (d) Interexchange private line services shall not be
provided to an affiliate of the Company, or to a sharing group which involves one or more
persons who is an affiliate of the Company, where such services would be resold on a
joint-use basis or shared to provide interexchange interconnected voice services, except
where such services would be used only to provide portable communications services.
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