Vol. 140, No. 50 — December 16, 2006

Order Varying Telecom Decision CRTC 2006-15

Statutory authority

Telecommunications Act

Sponsoring department

Department of Industry

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Description

The purpose of the proposed Order is to vary CRTC Telecom Decision 2006-15 (April 6, 2006), Forbearance from the regulation of retail local exchange services (the Local Forbearance Decision).

Section 34 of the Telecommunications Act (the Act) requires the Canadian Radio-television and Telecommunications Commission (CRTC) to forbear (refrain) from economic regulation where it finds that a service is or will be subject to competition sufficient to protect the interests of users. The CRTC may also refrain from economic regulation where it finds that it would be consistent with the Canadian telecommunications policy objectives set out in section 7 of the Act.

In the Local Forbearance Decision, the CRTC laid out criteria for when it would forbear from economic regulation of retail local telephone service provided by incumbent local exchange carriers (incumbents)—that is, the former monopoly telephone companies. The CRTC defined geographic market areas called local forbearance regions (LFRs) where these criteria would be applied and determined the relevant geographic market using Statistics Canada's Census Metropolitan Areas (in large urban areas) and Economic Regions (in other areas). Using this as a basis, the CRTC defined 86 LFRs for which it will track market share figures.

The CRTC's criteria for forbearance in each market included incumbent loss of 25% market share; the incumbent meeting specified quality of service standards for providing services to competitors over the 6 months preceding application for forbearance over its entire operating territory; the incumbent having in place specified tariffs for competitor services; and the incumbent's provision to competitors of access to its operational support services. If the criteria are met in a relevant market, the CRTC will refrain from retail price regulation, placing reliance on market forces. The CRTC concluded that it would maintain social obligations, such as safety, privacy, and universal service standards.

The proposed Order provides for more streamlined and flexible criteria in order to facilitate deregulation of the retail local telephone market in a more timely and efficient manner so as to ensure that regulation only applies where there is still a need to regulate and that such regulation interferes with market forces to the minimum extent necessary.

The proposed Order provides for an approach to applications for forbearance, the competitive facilities test, that is both streamlined and flexible. Under this new approach, forbearance with respect to business services can occur in a relevant market that contains two independently owned facilities-based fixed line service providers offering local telephone services throughout that market. For residential telephone services, forbearance can occur in a relevant market where there are at least three independently owned facilities-based telecommunications service providers, two of which must be fixed line providers, offering local telephone services throughout that market.

As an alternative to the competitive facilities test, either a business service provider or a residential service provider can apply for forbearance based on competition principles, as suggested in submissions made by the Competition Bureau to the CRTC in the forbearance proceeding. This test looks at the following criteria: there exist at least two independent facilities-based service providers—the incumbent and a facilities-based entrant—capable of offering local service that has been determined to fall within the relevant product market; the entrant is able to obtain and retain a customer base; the entrant's variable costs of providing local service are similar to or lower than the incumbent's variable costs of providing local service; neither the incumbent nor the entrant is capacity constrained; there is evidence of vigorous rivalry between the incumbent and the entrant in the provision of local service; and industry characteristics are such that the incumbent is unlikely to engage in anti-competitive behaviour.

Whether the competitive facilities test or the competition test is used, incumbents must also demonstrate that they meet nine quality of service standards for services that they provide to competitors before an application for forbearance is filed with the CRTC.

At the same time that these new local forbearance criteria are introduced, restrictions on "winbacks" and other promotions will be immediately ended upon coming into force of the proposed Order. The winback rule was originally introduced to prevent incumbents from targeting the customers of competitors which, in the CRTC's view, could threaten the expansion, and possibly the survival, of competition in the provision of local telephone market. In the case of promotions, the CRTC's view has been that since they may offer significant benefits to consumers, they should be allowed subject to certain safeguards established in Decision 2005-25. However, in light of the state of competition in the Canadian telecommunications market, such restrictions are no longer required.

The proposed Order does not vary social and safety obligations. Incumbents will still be obligated to provide safety requirements found in the existing local telephony regulatory regime, such as 911 emergency services. Social regulations are to remain in place for the incumbents' local telephone service after the criteria to remove retail price regulation have been met. For instance, one of the social conditions of local forbearance is maintaining a price ceiling for stand-alone residential local telephone service.

For the purposes of a forbearance application by an incumbent, either a local interconnection region (LIR), as defined in the annex to Telecom Decision CRTC 2004-46, or the local exchange may be used as the geographic component of the relevant market.

The varied decision also invites incumbents to file applications relating to Canada's ten largest markets, which will be considered on a priority basis. The CRTC will consider each such application on a priority basis and will undertake to complete its analysis and issue its decision with respect to the application within 120 days after the day on which it is received.

By adopting simple and streamlined criteria for deregulating the services of the incumbents, unnecessary regulatory burden that denies or delays the benefits of competitive rivalry to consumers can be avoided.

Background

According to the CRTC Telecommunications Monitoring Report dated July 2006, in 2005, the residential local telephone market in Canada generated 5.1 billion in revenues and the business local telephone market generated 3.5 billion in revenues. In terms of these revenue values, the incumbents retained a 95% market share nationally in the residential local telephone market and an 86% market share nationally in the business local telephone market.

Looking at the share of wired telephone lines rather than revenues, in the residential local telephone market, competitors' share increased on a national level from 3.3% in 2004 to 7.6% in 2005. Using the CRTC's LFR definition, competitors have captured 35% of residential wired telephone lines in the Halifax LFR, 17% in Calgary, 15% in Toronto, 13% in Montréal, and 13% in Prince Edward Island. Within the local residential market at the end of 2005, there were 11 LFRs with 10% or greater competitor market share; these LFRs represent an addressable market of 39% of all local residential lines.

For the business local telephone market, competitors' share of wired business telephone lines increased on a national level from 12.8% in 2004 to 14% in 2005. Using the CRTC's LFR definition, competitors have captured 25% of business wired telephone lines in the Edmonton LFR, 23% in Calgary, 23% in Vancouver, 21% in Toronto and 16% in Montréal. Within the local business market, there were 31 LFRs with 10% or greater competitor market share; these LFRs represent an addressable market of 68% of all business lines.

Alternatives

Rescinding the Local Forbearance Decision would have the effect of reverting to the forbearance framework established under Telecom Decision CRTC 94-19, which the CRTC has already noted would delay deregulation beyond a point that is efficient and effective. Referring the Decision back to the CRTC would force the CRTC to consider an alternative framework resulting in a new regulatory proceeding that would further delay the establishment of a new local forbearance framework. Maintaining the current local forbearance framework could result in regulation continuing to interfere with market forces beyond a point that is efficient and effective.

In September 2006, the CRTC initiated a public consultation to reconsider key aspects of its original Local Forbearance Decision: the market share loss thresholds for removal of the customer "winback" and promotion restrictions and, for forbearance, including whether wireless services should be in the same relevant product market. The CRTC is also reconsidering the quality of service standards component of its forbearance framework. Given these processes, from which decisions are expected in March 2007, the option also exists to wait until these decisions are announced and then either accept the CRTC's revisions or proceed with this proposed Order at that time. However, waiting for these processes to conclude may only further delay the establishment of a new local forbearance framework despite the evidence that many local markets are now ready for deregulation.

Benefits and costs

Consumers may benefit through lower overall prices for service and increasing competition among competitors. According to the CRTC Telecommunications Monitoring Report dated July 2006, in 2005, the residential local telephone market in Canada generated 5.1 billion in revenues and the business local telephone market generated 3.5 billion in revenues. In terms of these revenue values, the incumbents retained a 95% market share nationally in the residential local telephone market and an 86% market share nationally in the business local telephone market. Analyses show that if the revised criteria result in deregulation of retail prices for 60% of the population and 55% of businesses, for every potential 1% change in price, the impact on incumbents' retail customers in aggregate over an entire year could potentially be 29 million for incumbents' residential customers and 16 million per year for incumbents' business customers. If competitors were to respond with comparable price changes, the impact on residential and business customers would be even greater. In addition, the elimination of restrictions on "winbacks" and other promotions should enable more innovative pricing and enhance rivalry among competitor companies, thereby potentially reducing overall costs for consumers.

While it is possible that over time only a small number of competitors may offer service, this does not mean that consumers' interests will not be well served. Innovation will be encouraged resulting in more intense competition between traditional telephone companies and competitors, such as wireless, cable and Voice over Internet Protocol (VoIP) providers. Facilities-based competition is a durable form of competition that will deliver the greatest benefits to consumers, disciplines the market and strengthens investment in telecommunications infrastructure. Specific impacts on individual companies are difficult to predict.

The proposed criteria are administratively simple and will reduce overall regulatory costs and burden for both the Government and industry. The proposed Order will see deregulation in many markets take place sooner than would have been the case under the original CRTC decision, resulting in reduced administrative and regulatory costs from CRTC hearings, tariff approvals and other administrative functions. However, before deregulation occurs, compliance costs associated with the proposed Order would be similar to the CRTC's Local Forbearance Decision since the incumbents and interested parties would be required to participate in CRTC hearings until deregulation took place.

Consultation

All interested parties, including affected companies and members of the public, had opportunities in the CRTC's original proceeding to provide their views on appropriate criteria to determine when to refrain from regulating retail local telephone service provided by the incumbents. The CRTC's original proceeding included comments, interrogatories and reply comments as well as oral public hearings. Pre-publication of this proposed variance of the CRTC's Decision in the Canada Gazette for 30 days will provide an opportunity for interested parties to provide comments to the Government on this alternative approach.

Three separate petitions were received by the Governor in Council (GIC) under section 12 of the Act, which provides the GIC with the authority, by order, to vary or rescind the decision or refer it back to the Commission for reconsideration of all or a portion of it within one year of the CRTC Decision.

Upon receipt of the petitions concerning the Local Forbearance Decision, the GIC issued a call for comments in the Canada Gazette and consulted with provincial and territorial governments. The petitions, notices and submissions received in response are posted at http://strategis.ic.gc.ca/epic/internet/insmt-gst.nsf/en/h_sf08544e.html.

The Minister of Industry will notify the provinces and will provide an opportunity for consultation in accordance with section 13 of the Act.

Compliance and enforcement

The Government has complied with section 12 of the Act, which pertains to variation, rescission and referral back. Once the notification and consultation with the provinces is completed, the Government will have complied with section 13. Once the proposed Order is made and published, it will be applied and enforced by the CRTC.

Contact

Leonard St-Aubin, Director General, Telecommunications Policy, Industry Canada, 300 Slater Street, 16th Floor, Ottawa, Ontario K1A 0C8, 613-998-4241.

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to subsection 12(1) of the Telecommunications Act (see footnote a), proposes to make the annexed Order Varying Telecom Decision CRTC 2006-15.

Interested persons may make representations concerning the proposed Order within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to the Director General, Telecommunications Policy Branch, Industry Canada, 16th Floor, 300 Slater Street, Ottawa, Ontario K1A 0C8 (fax.: 613-998-1256; e-mail: telecom@ic.gc.ca). All representations will be made public, and will be available electronically, under the heading "Gazette Notices and Petitions" on the Spectrum Management and Telecommunications web site, http://strategis.gc.ca/spectrum.

Ottawa, December 7, 2006

MARY O'NEILL
Assistant Clerk of the Privy Council

ORDER VARYING TELECOM DECISION CRTC 2006-15

Whereas, on April 6, 2006, the Canadian Radio-television and Telecommunications Commission (the Commission) rendered Telecom Decision CRTC 2006-15, Forbearance from the regulation of retail local exchange services (the Decision);

Whereas the Commission determined that it was prepared to forbear from regulating retail local exchange services provided by Incumbent Local Exchange Carriers (ILECs) when the ILEC could demonstrate that, in the relevant market, rivalrous behaviour exists and that it has experienced a 25% market share loss, complied with specified competitor quality of service standards throughout the six-month period preceding its application for forbearance, implemented approved Competitor Services tariffs and provided competitors with access to its Operational Support Systems;

Whereas the Commission determined that local forbearance regions (LFRs) were the appropriate geographic component of a relevant market;

Whereas the Commission considered providing ILECs with greater regulatory flexibility prior to forbearance and the circumstances under which it might lessen or remove existing competitive safeguards for promotions, as defined in Telecom Decision CRTC 2005-25, Promotions of local wireline services, lessen or remove the local winback rule set out in Telecom Decision CRTC 2005-28, Regulatory framework for voice communication services using Internet Protocol, as amended by Telecom Decision CRTC 2005-28-1 and confirmed by Telecom Decision CRTC 2006-53, permit the ex parte filing of tariff applications for promotions, and permit the waiving of service charges for local residential winbacks;

Whereas subsection 12(1) of the Telecommunications Act (the Act) provides that, within one year after a decision by the Commission, the Governor in Council may vary the decision on petition in writing presented to the Governor in Council within 90 days after the decision;

Whereas petitions by the Government of Saskatchewan and the Coalition for Competitive Telecommunications and a joint petition by Aliant Telecom Inc., Bell Canada, Saskatchewan Telecommunications and Telus Communications Company, were presented in writing to the Governor in Council within 90 days after the Decision;

Whereas, in accordance with subsection 12(4) of the Act, notices of receipt of those petitions were published in the Canada Gazette by the Minister of Industry on June 3, 2006 and July 22, 2006, indicating that the petitions and any petition or submission made in response to them could be inspected and copied at the website strategis.gc.ca;

Whereas the Governor in Council has considered the petitions and the submissions made in response to them;

Whereas, in accordance with section 13 of the Act, the Minister of Industry has notified a minister designated by the government of each province of the Minister's intention to make a recommendation to the Governor in Council for the purposes of an order under section 12 of the Act and has provided an opportunity for each of them to consult with the Minister;

Whereas subsection 34(1) of the Act provides that the Commission may make a determination to refrain, in whole or in part and conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 of the Act in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives set out in section 7 of the Act;

Whereas the Canadian telecommunications policy objectives include rendering reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada, enhancing the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications, fostering increased reliance on market forces for the provision of telecommunications services and ensuring that regulation, where required, is efficient and effective;

Whereas subsection 34(2) of the Act provides that the Commission shall make a determination to refrain, to the extent that it considers appropriate, conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 of the Act in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that the service or class of service is or will be subject to competition sufficient to protect the interests of users;

Whereas the evolution of competitive telecommunications markets in Canada has accelerated with the deployment of Internet Protocol technology;

Whereas in light of the evolving competition, the Minister of Industry laid before each House of Parliament, on June 13, 2006, a proposed order in council that contains directions of general application to the Commission under section 8 of the Act concerning broad policy matters with respect to the Canadian telecommunications policy objectives;

Whereas the Governor in Council considers that facilities-based competition is a durable form of competition that delivers the greatest benefits to consumers, imposes competitive market discipline on incumbents and strengthens investment in telecommunications infrastructure;

Whereas the Governor in Council considers that local business markets and local residential markets should be considered separately;

Whereas the Governor in Council considers that it is important to adopt simple and streamlined criteria for de-regulating the services of incumbent telephone companies in order to avoid imposing an unnecessary regulatory burden that could deny or delay the benefits of competitive rivalry to consumers;

Whereas the Governor in Council considers that LFRs are not the appropriate geographic component of a relevant market, as they are too vast to retain administrative practicality and they do not reflect a social and economic community of interest;

Whereas the Governor in Council considers that local interconnection regions (LIRs) – as defined in the Annex to Telecom Decision CRTC 2004-46, Trunking arrangements for the interchange of traffic and the point of intersection between local exchange carriers – are an appropriate geographic component of a relevant market, as they utilize established provincial administrative boundaries, such as those of municipalities, counties and districts, and they are competitively neutral, they are clearly delineated, they often reflect a social and economic community of interest and they are administratively practical;

Whereas the Governor in Council considers that local exchanges are also an appropriate geographic component of a relevant market, as they often reflect a social and economic community of interest and are less likely than LFRs to contain pockets of uncontested customers;

Whereas the Governor in Council considers that the provision of competitor services by an ILEC, in accordance with the competitor quality of service standards, supports sustainable competition, and that it is appropriate that an ILEC demonstrate that it has, on average, met those standards prior to any granting of forbearance under section 34 of the Act;

Whereas the Governor in Council considers that the use of mobile wireless technology by consumers is increasing and will likely continue to increase, and that for many consumers the exclusive use of mobile wireless services is an increasingly cost effective alternative to wireline local exchange services;

Whereas the Governor in Council considers that the removal of marketing restrictions imposed by the Commission on ILECs will foster an increased reliance on market forces and enhance competitive market rivalry;

Whereas the Governor in Council considers that it would be consistent with Canadian telecommunications policy objectives for the Commission, in accordance with section 34 of the Act, to grant forbearance from regulating the provision of retail local exchange services when the criteria set out in this Order are satisfied;

And whereas the Governor in Council considers that retail local exchange services, for which forbearance is granted under section 34 of the Act based on the criteria set out in this Order, will be subject to competition that is sufficient to protect the interests of users and will not unduly impair the establishment or continuance of a competitive market;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of Industry, pursuant to subsection 12(1) of the Telecommunications Act (see footnote b), varies Telecom Decision CRTC 2006-15 as follows:

1. Paragraphs 141 to 168 of the Decision are replaced by the following:

2. Paragraphs 242 to 281 of the Decision are replaced by the following:

3. Paragraphs 483 to 488 of the Decision are replaced by the following:

4. The following is added after paragraph 528 of the Decision:

5. Appendix A of the Decision is repealed.

6. Appendix B of the Decision is replaced by the following:

7. The Decision shall otherwise continue to apply, but any provisions in the Decision that are inconsistent with this Order shall be interpreted in accordance with this Order to the extent of the inconsistency.

[50-1-o]

Footnote a

S.C. 1993, c. 38

Footnote b

S.C. 1993, c. 38

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