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Decision CRTC 2001-608
Ottawa, 26 September 2001
Reference: 8622-C25-11/01
To: Public Notice CRTC 2000-17 distribution list
Co-location working group participants' list
Dear Sir or Madam:
Subject: Request to withdraw "joint and several" liability
clause from consensus report on sub-licensing of co-location space
1. |
On 14 May 2001, Call-Net Enterprises Inc. on behalf of the
members of the Coalition for Better Co-location (the coalition)
requested the Commission to direct the incumbent local exchange
carriers (ILECs or the respondents) to withdraw or delete clause
22.06 of the CRTC Interconnection Steering Committee (CISC)
co-location working group (CLG) consensus report CLRE017 -
Sub-licensing of co-location space (the consensus report) - and the
accompanying schedule to the physical co-location agreement (COLA)
entitled "Acknowledgment and Agreement" (the schedule),
which were filed with the Commission by the CLG on 24 April
2001. The consensus report provides wording changes necessary to the
COLA to permit sub-licensing of co-location spaces by
interconnecting carriers (ICs). In a letter dated 25 June 2001,
the coalition indicated that it did not want the entire schedule
withdrawn or deleted, solely those provisions that purport to make
the prospective sub-licensee jointly and severally liable for the
IC's acts, breaches and defaults.
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2. |
The coalition submitted that the "joint and several"
liability clause should be eliminated because it:
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a) discourages co-location space sub-licensing and defeats the
very objective of the sub-licensing regime;
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b) is inconsistent with legal and commercial practices;
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c) is unfair to, and will impose undue hardship on,
sub-licensees; and
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d) is not necessary to protect the ILECs.
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Background
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3. |
On 17 July 2000, the coalition filed two Part VII applications
dealing with various co-location issues. In addition, it filed a
letter requesting that a series of CLG meetings be convened to
resolve operational issues raised at the Commission's 7-8 June
2000 workshop on the interconnection and interoperation of
telecommunications networks held in Hull, Québec.
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4. |
Among the issues referred to the CLG was the request that the
ILECs modify their COLAs to permit ICs to sub-lease floor space and
associated facilities that ICs obtained through the ILECs'
co-location tariffs. The CLG reached and approved a consensus on the
sub-licensing of co-location space in ILEC central offices (COs),
with the exception that the coalition strongly opposed the paragraph
22.06 clause that requires the IC and sub-licensee to be jointly and
severally liable to the ILEC for any and all acts, breaches or other
defaults of either the IC or the sub-licensee.
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5. |
In order to reach consensus on all of the other proposed changes,
the coalition agreed to allow the clause to remain in the consensus
report on the understanding that the coalition would subsequently
file a Part VII application requesting that the ILECs be ordered to
remove the clause. On 25 May 2001, the Commission approved the
consensus report.
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The coalition's position
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6. |
The coalition agreed that, as a matter of general law, and
pursuant to the terms and conditions of the COLA, the IC is
responsible and liable to the ILECs for the acts, breaches and
defaults of the sub-licensee. However, the coalition objected to
making the sub-licensee jointly and severally liable to the ILEC for
the acts, breaches and defaults ("violations") of the IC.
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The coalition's view on why a joint and several liability clause
is unnecessary
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7. |
According to the coalition, based on the record of the CLG
discussions, the ILECs' justification for joint and several
liability appears to be based on two main concerns which the
coalition submits are unwarranted:
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(a) to protect the ILECs against the sub-licensee's violations;
and
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(b) to ensure that ICs do not avoid their obligations under the
COLA by setting up "wholly owned" subsidiaries as
sub-licensees.
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8. |
According to the coalition, the IC is primarily responsible under
the COLA. Since this is a sub-license and not an assignment, the IC
continues to be liable to the ILEC for all and any violations of the
agreement by the sub-licensee. Furthermore, the COLA specifically
provides that notwithstanding any sub-license of any part of the
licensed area, the IC remains the customer of record and is solely
responsible for any services and facilities and for the payment of
same (article 22.07). In short, the IC is obligated to continue to
provide the ILEC with required compensation ("make the ILEC
whole") for its own violations and those by the sub-licensees
as well. Accordingly, the ILEC is as completely protected as it was
before the sub-license agreement.
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9. |
The coalition stated that the ILECs have also expressed the
concern that, if the sub-licensee is not made jointly and severally
liable for the violations of the IC, an IC can set up a wholly owned
subsidiary and sub-lease all its space to the subsidiary. If the
sub-licensee (IC subsidiary) defaults or causes any damages in
breach, the ILEC will be unable to proceed against the subsidiary
directly. The coalition submitted that, since the parent IC
continues to be legally and contractually liable for any violations
of the subsidiary sub-licensee, there is no need to make the
subsidiary jointly and severally liable. Nevertheless, the coalition
indicated that it was willing to agree to an amendment that applies
joint and several liability only to cases in which the IC
sub-licenses to its wholly owned subsidiary.
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ILECS want to minimize risk with joint and several liability
clause
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10. |
The ILECs expressed concern that there are no restrictions in the
consensus report on the amount of space an IC can sub-license to a
third party, be it an affiliate or otherwise. Furthermore, the ILECs
are concerned that the Commission recently directed Bell Canada to
allow a Type 1 co-locator which has exhausted the 20 square metre
maximum space allotment to acquire additional Type 1 space, where
available, in increments of one square metre. As a result, the ILECs
find themselves in a situation where an IC may be in a position to
acquire co-location space beyond the 20 square metre maximum, and
then subsequently sub-license out some portion, or substantially
all, of such space, to a sub-licensee. According to the ILECs, they
have absolutely no control over the types of arrangements between an
IC and one or more prospective sub-licensees, or how the operations
and activities of the respective parties may or may not interrelate.
The ILECs stated that their ability to protect themselves against
risk should not be left to the mercy of arrangements between an IC
and its sub-licensees over whom the ILEC has no control whatsoever.
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11. |
Given the lack of any limitation on the amount of co-location
space that may be sub-licensed by the IC, the ILECs are concerned
that the level of activities undertaken by sub-licensees in the
sub-licensed co-location space could be significant. The ILECs
submitted that it is possible that the sub-licensing of co-location
space by an IC might take place in conjunction with a company in a
declining financial/asset position. In such a case without joint and
several liability, the ILEC would be in a potentially higher risk
position; the IC would be the party the ILECs would look to for
redress in relation to not only the operations of the IC but also
the new sub-licensee(s).
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12. |
The ILECs pointed out that the ability to sub-license without
joint and several liability would provide carriers with the ability
to minimize risk by establishing arrangements whereby the IC
operates as a form of shell company with few assets; a sub-licensee
would have total operational control of the co-location arrangement.
The ILECs want the protection of joint and several liability to
ensure that they can continue assuming manageable risks.
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13. |
The ILECs stated that it is not their intent to create undue
hardship on the part of prospective sub-licensees of co-location
space. According to the ILECs, the undertaking in relation to joint
and several liability is prospective only, and does not apply to any
defaults of any IC prior to the effective date of a sub-license.
Furthermore, the IC and its sub-licensee can readily allocate any
potential liability and possibly appropriate indemnification
provisions between themselves pursuant to their contractual
arrangements in relation to the sub-license of space. In the ILECs'
view, if a sub-licensee of the IC considers that relying on such
contractual provisions between itself and the IC will create undue
hardship or lead to unnecessary financial risks, then asking the
ILEC to rely only on the IC as the party with primary responsibility
would have a similar impact on the ILEC.
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14. |
According to the ILECs, if a prospective sub-licensee is not
comfortable entering into a sub-license arrangement with the IC on
the basis that it may be jointly and severally liable with the IC,
then the sub-licensee can make its own co-location arrangements
directly with the ILEC.
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15. |
Finally, the ILECs stated that the sub-licensing arrangements set
out in the consensus report will permit the IC and its sub-licensee
to concurrently share and use the particular space. It is not
unreasonable for the ILEC to consider either or both of them to be
liable or have certain obligations under the co-location
arrangement.
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16. |
In reply, the coalition stated that the allegations with respect
to increased level of risk are unfounded and grossly misleading. The
allegations totally ignore all the other onerous pre-conditions that
the respondents have placed on ICs and prospective sub-licensees
under the new regime in order to eliminate any risks associated with
sub-licensing. These pre-conditions ensure that the respondents have
total control of the sub-licensing of their CO space, including:
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(a) the respondents' prior written approval of the sub-licensee
is an absolute requirement (22.04);
(b) corporate and operational information of the sub-licensee
is required to be submitted in writing to the respondents before
sub-license can take place (22.04);
(c) details of the sub-license arrangement, including amount of
space, is to be supplied in writing to the respondents (22.04);
(d) the respondents reserve the right to demand additional
information regarding the sub-licensee and the proposed
arrangement (22.04);
(e) any sub-licensee must be a party otherwise entitled to
obtain co-location as of right (22.05);
(f) the IC must provide written assurances that the equipment
to be co-located by the sub-licensee complies with the COLA and
tariff (22.05);
(g) it is the obligation of the IC to ensure that the
sub-licensee complies and continues to comply with the provisions
of the co-location tariff and the COLA (22.06);
(h) the IC remains the customer of record and remains solely
responsible for payment for all services and facilities provided
(22.07);
(i) the IC shall not charge rates in excess of which the IC is
charged under the COLA or tariff for the co-location services
(22.08); and
(j) termination of the IC's COLA, for any reasons whatsoever,
also results in automatic termination of the sub-license
arrangement, without recourse whatsoever (22.09).
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17. |
According to the coalition, the respondents are more than
protected by the provisions of the COLA and the amendments in the
consensus report, against the risks, if any, that may arise as a
result of a sub-license arrangement between an IC and a third party.
The measures summarized in (a), (b), (c), (d), (e) and (f) above
effectively provide the respondents with pre-approved means to
eliminate or reject a risky sub-license proposal. The pre-conditions
summarized in (g), (h), (i) and (j), as well as the comprehensive
liability provisions of the COLA, effectively ensure that the
respondents receive the required compensation from ("are made
whole by") the IC if a risk does indeed materialize as a
consequence of the sub-license arrangement.
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18. |
The coalition submitted that the respondents are attempting to
create additional insurance for their own normal business risks by
forcing sub-licensees to guarantee the breaches and defaults of the
IC. The coalition provided the following as an illustration: assume
that, rather than sinking capital into brand new co-location spaces,
Call-Net (or any of AT&T Canada, GT Group Telecom Services Corp.
or Eastlink Limited) had decided to expand its local network
footprint by negotiating to sub-license space in a couple of COs
from, say, Riptide Networks Inc., AXXENT Corp. or C1.com, prior to
the insolvency of these competitive local exchange carriers (CLECs).
Call-Net would have had to convince its shareholders to underwrite
the entire default risk of Riptide, AXXENT or C1.com for all their
co-location arrangements with the respondents. In essence, the
respondents want to be able to look to Call-Net, AT&T Canada,
Group Telecom or Eastlink for redress regarding to the operations of
Riptide, AXXENT or C1.com, simply because they have sub-licensed
space from those companies. This, in the coalition's view, makes no
commercial sense.
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19. |
In the coalition's view, the respondents are trying to insure or
shift to prospective sub-licensees a risk that they would have had
to bear even in the absence of a sub-license arrangement. The risk
exposure from the IC's default is not related in any way to, nor
increased by, the sub-license arrangement and would have occurred
without the sub-license arrangement. Any rates charged by C1.com
would have been a straight flow-through to the respondents as C1.com
would have been prohibited by article 22.08 of the amended COLA from
charging the sub-licensee rates in excess of what C1.com was paying
the respondents. As such, the sub-license arrangement does not
expose the respondents to any greater financial or receivable
exposure. As far as the respondents' risk exposure is concerned, the
sum of the receivables from C1.com and the sub-licensee is exactly
the same as the sum of the receivables from C1.com alone.
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20. |
With respect to the respondents' contention that it is possible,
in theory, for an IC to sub-license virtually the entire co-location
space in a CO to a third party, the coalition stated that it is
unlikely that the IC will use sub-licensing to achieve divestiture
in practice. According to the coalition, an IC will most likely
engage in divestiture of its co-location assets only if it is
withdrawing totally or partially from the market, in which case it
would be better off to make an outright assignment of the undesired
co-location assets to the third-party and thereby totally absolve
itself of its obligations under the COLA and the tariffs. If the IC
sub-licenses 90% of the space, it remains obligated to the
respondents for the entire space. On the contrary, in an outright
assignment, the IC is completely absolved of future liability and
the assignee becomes responsible.
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Commission determination
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21. |
The industry established sub-leasing co-location space as an
efficient and financially viable means for competitors to co-locate
without the need to use up additional central office space. An IC
can recoup some of the costs associated with co-location.
Sub-leasing allows service providers who are otherwise eligible but
cannot afford the capital cost to co-locate. Service providers are
also able to obtain co-location spaces in a CO where space is not
available. Given current capital market conditions, many CLECs have
had to retrench their network expansion plans and one of the few
viable avenues to expand is to sub-lease space from an existing
co-locator.
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22. |
The ILECs do not dispute the fact that in certain situations, the
ability to sub-license co-location space will have advantages such
as those outlined in paragraph 21. However, they submit that
restricting the ILECs' ability to recover costs (or damages) in the
event of breach or default from only the IC, when the IC and its
sub-licensees have derived commercial benefits from the
sub-licensing arrangements is unfair.
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23. |
In the Commission's view, the following concerns have been raised
by the ILECs:
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· where an IC wishes to sub-license its co-location space to
third parties, the ILECs should be entitled to look to the IC and
its sub-licensee in relation to the obligations and liabilities
under the COLA and related tariffs;
· the ILEC is not in a position to know the particulars of any
arrangements that have been made between the IC and sub-licensee;
and
· the ILEC is unable to readily determine the origin of
certain acts, or defaults, which may occur in relation to the
co-location space in question.
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In addition, in the Commission's view, these concerns are
addressed by the conditions in the consensus report, and the terms
and conditions of the COLA. These conditions ensure that the ILECs
have total control of the sub-licensing of their CO space. For
example, the ILEC can withhold consent of a sub-license arrangement
until it receives a written agreement from the sub-licensee to
adhere to and comply with all of the provisions of the existing COLA
between the IC and the ILEC, as well as the related tariff. The
conditions also provide the ILECs with a mechanism to obtain related
details of sub-license arrangements.
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24. |
The Commission notes the ILECs' concerns that an IC could pass
the bulk of its co-location space onto the sub-licensee before it
went into default. In such a case, the ILEC may not be able to
recover the debt from the IC. However, with the demise of the IC,
the sub-licensee who has acquired control of the co-location space
would likely seek its own co-location arrangement. Thus, the
sub-license would provide the ILEC with an advantage: the
sub-licensee would likely assume a portion of the IC's co-location
space, and therefore continue paying for co-location space that may
have otherwise been lost. On the other hand, if the sub-licensee
chose not to obtain its own co-location space, terminating its
sub-license arrangement, the ILECs would again be in no worse a
position than prior to the sub-lease. The IC was and continues to be
primarily responsible to the ILEC for the co-location space
regardless of a sub-lease arrangement and, accordingly, the ILEC is
as completely protected as it was prior to the sub-license.
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25. |
The Commission considers that the risk exposure resulting from
the IC's default is not related in any way whatsoever to, nor
increased by, the sub-license arrangement and would have occurred if
there was no sub-license arrangement. The sub-licensee, the space to
be sub-licensed, the rates charged and the equipment to be placed in
the sub-licensed area will have been pre-approved by the
respondents.
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26. |
In the Commission's view, it is unlikely that ICs will seek to
expand their co-location space beyond their needs for the simple
purpose of sub-leasing to third parties, as there would be no
financial gain in doing so. Specifically, the terms and conditions
of sub-leasing co-location space prohibits the IC from charging the
sub-licensee any rates and charges in excess of those to which the
IC is subject to. In addition, should an IC propose to sub-license
out an amount of space that the ILECs deem so large as to constitute
a sham, there are sufficient provisions in the COLA amendments to
enable the ILECs to deny approval of the proposed sub-license
arrangement.
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27. |
The Commission acknowledges the ILECs' concerns with the risk of
having an IC set up a wholly owned subsidiary, then having that IC
sub-lease all its spaces to the subsidiary. The Commission is of the
view that since the parent IC continues to be legally and
contractually liable, there is no need to make the subsidiary
jointly and severally liable. However, the Commission notes that the
coalition has indicated its willingness, on the record of this
proceeding, to agree to an amendment that applies joint and several
liability solely to cases in which the IC sub-licenses to its wholly
owned subsidiary. Although the Commission considers that such an
amendment is unnecessary, it has no strong objection to
incorporating the amendment given that it satisfies one of the ILECs'
main concerns and that the coalition is willing to abide by it.
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28. |
The Commission is of the opinion that sufficient mechanisms
already exist in the sub-license obligations to protect ILECs
against a sub-licensee's breaches and defaults. The IC is the
primary customer of record under the COLA, thus making the IC liable
to the ILEC for all and any acts, breaches or defaults of the
sub-licensee.
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29. |
Given the above, the Commission considers that making
sub-licensees jointly and severally liable for the IC's acts,
breaches and defaults will create undue hardship and expose
sub-licensees to unnecessary financial risks. For example, an arm's
length sub-licensee who is leasing a few racks in the IC's
co-location space for a fee of $2,000.00 per month could be liable
in millions of dollars if the IC is in breach of the terms and
conditions of the COLA. In actual fact, the sub-licensee would be
forced to bear a higher financial risk than it would bear if it
chose to apply, in its own right, for co-location. An assumption can
be made that the financial risk would most certainly outweigh the
benefits of sub-licensing and would defeat the very objectives of
the sub-licensing regime agreed to by consensus in the CLG.
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30. |
The Commission is of the view that joint and several liability
will discourage sub-licensing and make access to co-location and
competitive entry more difficult. CLECs and other prospective
sub-licensees will be discouraged from sub-licensing space. At best,
they will have to use more costly and less efficient alternatives
such as physical or virtual co-location, and at worst, they will
simply abandon the plan to enter or expand, as the case may be. In
addition, the potential liability of the prospective CLEC
sub-licensee for a third-party's unforeseeable financial obligations
can only further diminish its attractiveness to investors in the
capital market.
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31. |
In light of the above, the Commission directs that:
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· paragraph 22.06 of the
consensus report be replaced with wording to the effect that joint
and several liability will apply only to cases in which the IC
sub-licenses to its wholly-owned subsidiary; and
· the attached Acknowledgment and Agreement schedule be amended
accordingly. |
Yours sincerely,
Ursula Menke
Secretary General
c.c. J. Paré, (819) 953-2337
B. Jolicoeur, (819) 997-4571
Date Modified: 2001-09-26
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