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Telecom Decision
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Ottawa, 4 March 1994
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Telecom Decision CRTC 94-6
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AFFILIATE RULE
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I BACKGROUND
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In Resale and Sharing of Private Line Services,
Telecom Decision CRTC 90-3, 1 March 1993 (Decision 90-3), the Commission stated that it
would not permit a facilities-based carrier to lease, directly or indirectly,
interexchange services to any affiliated company it controlled for the purpose of
joint-use resale or sharing, except where those services would be used exclusively to
provide data services or portable communications services. The Commission was concerned
that the entry of affiliates into the resale market would result in a greater level of
revenue erosion than that associated with unaffiliated resellers. The Commission was of
the view that to permit a facilities-based carrier to lease services to an affiliate for
the purpose of sharing or reselling interconnected interexchange voice services on a
joint-use basis would be analogous to permitting facilities-based competition, which was
not authorized at that time.
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The resale and sharing rules, set out in the Appendix to
Decision 90-3, defined "affiliate" as any person that controls or is controlled
by the facilities-based carrier or that is controlled by the same person that controls the
facilities-based carrier. The Commission's expectation was that this rule would prevent a
facilities-based carrier, such as Unitel Communications Inc. (Unitel), from entering the
Message Toll Service (MTS) or Wide Area Telephone Service (WATS) market indirectly by
means of a resale affiliate.
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On 12 June 1992, the Commission issued Competition in
the Provision of Public Long Distance Voice Telephone Services and Related Resale and
Sharing Issues, Telecom Decision CRTC 92-12 (Decision 92-12), permitting
facilities-based competition in the MTS market in the territories of BC TEL, Bell Canada
(Bell), The Island Telephone Company Limited (Island Tel), Maritime Telegraph and
Telephone Company Limited (MT&T), The New Brunswick Telephone Company Limited (NBTel)
and Newfoundland Telephone Company Limited (Newfoundland Tel). The Commission also
specifically approved Unitel's application to provide such services. In addition, it
expanded resale of private lines on a joint-use basis to include the services of the
Atlantic telephone companies and permitted the resale of WATS and other discounted toll
services
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In Decision 92-12, the Commission established the initial
line-side contribution charge for resellers at 65% of the charge to interexchange carriers
(IXCs) for trunk-side access, rising to 85% by 1997. Under this transitional regime,
resellers will pay less contribution than Unitel for line-side access until 1997.
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In Decision 92-12, the Commission maintained the affiliate
rule for Bell, BC TEL and Unitel, and extended it to apply to the Atlantic telephone
companies. However, the Commission did not apply the rule to B.C. Rail
Telecommunications/Lightel Inc. (BCRL), given that BCRL's network would be primarily
resale-based during its initial stages of operation
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The affiliate rule applies to AGT Limited (AGT) by virtue
of AGT Limited - Interconnection of Interexchange Carriers and Related Resale and
Sharing Issues, Telecom Decision CRTC 93-17, 29
October 1993, in which the Commission permitted the interconnection of IXCs to that
company's public switched telephone network and the resale and sharing of its
telecommunications services under terms and conditions substantially the same as those
established in Decision 92-12.
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In Decision 92-12, the Commission announced its intention
to review the need for the affiliate rule. On 25 November 1992, the Commission issued Review
of the Affiliate Rule, Telecom Public Notice CRTC
92-70 (Public Notice 92-70), seeking comment on whether the affiliate rule should be
maintained. The Commission stated that its determination in Decision 92-12 to allow IXCs
to enter the long distance voice market directly reduces the incentive for such carriers
to enter the market indirectly through a reseller affiliate, alleviating somewhat the
concerns underlying the restrictions established in Decision 90-3. However, the Commission
recognized that, during the transitional regime established in Decision 92-12, some
incentive might still remain for facilities-based carriers to compete through affiliated
resellers. The Commission noted that use of such an affiliate might, for example, allow an
IXC to save on the difference between the line-side contribution charge for resellers and
that for IXCs.
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The Commission stated that, in order to determine the point
at which the contribution differential, and thus the incentive to compete through reseller
affiliates would be sufficiently reduced, it would consider it necessary to take into
account, among other things, the degree of control exercised over or by the affiliate.
Accordingly, the Commission expressed the view that, if the affiliate rule were to be
maintained, it would be useful to alter it to incorporate the concept of
"related" companies and to define "related" on the basis of a
threshold level of interest in, or any options to acquire an interest in, any of the
capital, assets, property, profits, earnings, revenues or royalties in the company or an
affiliate. The Commission considered that a threshold level of 25% or greater might be
appropriate to limit the incentive referred to above.
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Finally, the Commission noted that Telesat Canada
(Telesat), as a result of its privatization, is an affiliate of some telephone companies
according to the definition established in Decision 90-3. The Commission stated that it
might not be in the public interest to apply the affiliate rule to Telesat, since it
might, in some circumstances, prevent Telesat from providing its services to the telephone
companies for the purposes of resale.
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II POSITIONS OF PARTIES
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Comments were filed by AGT Limited, B.C. Rail Ltd.
(BCRail), Canadian Business Telecommunications Alliance (CBTA), Competitive
Telecommunications Association (CTA), Cam-Net Communications Inc. (Cam-Net), Smart Talk
Network (STN), Sprint Canada Inc. (formerly Call-Net Telecommunications Ltd.), Telesat,
Teleglobe Canada Inc. (Teleglobe) and Unitel. Stentor Resource Centre Inc. (Stentor) filed
comments on behalf of the telephone companies.
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Unitel, resellers and other competitors supported retaining
the affiliate rule, at least for the transitional period established in Decision 92-12,
but had differing views as to which competitive service providers should be subject to the
rule. They all agreed, however, that the rule should continue to apply to the telephone
companies in order to ensure that they did not reduce competition through predatory
action, increase the contribution burden on competitors through rate rebalancing or avoid
regulatory requirements and oversight.
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Stentor proposed that the affiliate rule be eliminated and
that, for the transitional period only, when a reseller affiliated with an IXC leases
services from that IXC to provide jointly used interexchange voice services, it be
required to pay the same contribution for line-side access as the IXC itself. A reseller
affiliated with a carrier such as Telesat or a telephone company would be required to pay
the same rate of contribution for line-side access as Unitel when the reseller leased
services from its affiliated carrier.
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In order to ensure that contribution could not be reduced
through the use of resellers in general, Stentor proposed that any participant subject to
the same level of contribution required of Unitel be prevented from using the services of
another participant subject to a lower contribution rate to aggregate or terminate traffic
on its behalf. Several parties supported Stentor's proposal. BCRail submitted that
Stentor's proposed restriction may not be necessary in the case of an IXC that both owns
and leases facilities.
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Stentor, Telesat and Teleglobe submitted that Telesat and
Teleglobe should be exempted from the affiliate rule. They argued that the services
provided by Telesat and Teleglobe are based on interconnection agreements or
interconnection tariffs, and are not related to the resale of interexchange voice
services. Stentor stated that the arrangements between the telephone companies and Telesat
and Teleglobe do not involve the erosion of MTS contribution in the manner that the
Commission contemplated would result from resale activities.
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CBTA and CTA agreed that Telesat and Teleglobe should be
exempted from the affiliate rule, but stated that the rule should apply if either company
enters the resale market. STN also supported applying the rule to Telesat if it entered
the interexchange voice market.
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III CONCLUSIONS
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In light of Decision 92-12, the Commission concludes that
an affiliate rule is no longer required as a mechanism to prevent facilities-based entry
into the public long distance voice market. However, the Commission is also of the view
that, in order to continue the orderly transition to a more competitive market, it is
appropriate to maintain restrictions or conditions on the resale activities of certain
facilities-based carriers, specifically, in order to (1) reduce the opportunity for the
telephone companies to provide long distance services on a non-regulated basis, and (2)
minimize the potential for IXCs to avoid contribution.
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In Decision 92-12, the Commission determined that the
telephone companies should be subject to regulatory oversight in order to ensure that they
did not abuse their dominant position. The Commission is of the view that, in the absence
of a mechanism such as the affiliate rule, the potential would exist for the telephone
companies to escape that oversight through the use of reseller affiliates. As a
consequence, the competitive market place might be harmed in that the prices of such an
affiliate could be set below those of competitors, since the return earned by the reseller
affiliate would be immaterial to the combined return of the telephone company and the
affiliate.
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In addition to the above, the Commission notes that the
issue of the appropriateness of the current regulatory regime for the telephone companies
is under consideration in a more general sense as a part of the proceeding initiated by Review
of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992. The Commission is
of the view that, in general, it would be premature to reduce the regulatory requirements
on telephone companies prior to the completion of that proceeding.
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The Commission considers that, in light of Decision 92-12,
it is not necessary to apply to Unitel or other IXCs a prohibition on the lease of
facilities to affiliated resellers. IXC affiliates will therefore be permitted to operate
as resellers. However, in order to prevent contribution loss, any resellers affiliated
with an IXC will pay the same contribution charges as the IXC for line-side access,
regardless of whether the facilities in question are leased from the affiliated IXC or
from the telephone companies.
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Telesat and Teleglobe, as affiliates of the telephone
companies, are prohibited from competing in the MTS market as resellers of the services of
the Stentor members. The Commission considers it appropriate that this restriction be
maintained. However, the Commission agrees with Stentor, Telesat and Teleglobe that
Telesat's and Teleglobe's current operations, which rely on interconnection agreements and
tariffs, do not involve resale or sharing as contemplated in the restriction.
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The Commission notes that, under the framework established
in Decision 92-12, Telesat can apply to compete directly in the MTS market as an IXC. In
the event that Telesat wished to compete indirectly in the MTS/WATS market by setting up
an affiliated reseller of its services, the Commission would consider a request that it
alter the affiliate restriction to permit such activity.
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Those parties who commented on the issue supported the
Commission's proposal to alter the definition of affiliate to incorporate the concept of
"related" companies. However, various parties submitted that the threshold level
of interest should be set lower than the 25% suggested in Public Notice 92-70.
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Based on the record of the proceeding, and in recognition
of the maximum foreign ownership of Canadian carriers permitted under the Telecommunications
Act, the Commission concludes that the definition of affiliate should be altered to
incorporate the concept of "related" companies and that the threshold level
should be set at 20%. As suggested by Cam-Net, the interests of Stentor members in any
reseller will be considered collectively for the purposes of applying the rule.
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Accordingly, the Commission directs AGT, BC TEL, Bell,
Island Tel, MT&T, NBTel, Newfoundland Tel, Telesat and Unitel to file, by 5 April
1994, revisions to their resale and sharing tariffs, and any other affected tariffs,
incorporating the following definitions:
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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, and includes a related person.
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"control" includes control in fact, whether
through one or more persons.
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a person is "related" to another if (1) either
holds, either directly or indirectly, at least a 20% interest in, or any options to
acquire at least a 20% interest in, any of the capital, assets, property, profits,
earnings, revenues or royalties of the other, or (2) any third party holds, directly or
indirectly, at least a 20% interest in, or any options to acquire at least a 20% interest
in, any of the capital, assets, property, profits, earnings, revenues or royalties of each
of the persons.
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Unitel is also directed to file proposed tariff revisions
removing the current prohibition on the lease of its facilities to affiliated resellers,
and replacing it with provisions requiring that any resale affiliate pay the same
contribution charges as it does.
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In the event of any dispute as to the extent of a
facilities-based carrier's interest in a reseller, the Commission will expect the carrier
in question to provide the information necessary to resolve that dispute, in confidence if
necessary.
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Allan J. Darling
Secretary General
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