Canada Announces International Licensing Regime – The Race Begins

Background
Almost a year ago, on October 2, 1997, the Canadian Radio-television and Telecommunications Commission (“CRTC”) issued Telecom Public Notice 97-34 (“PN97-34”) in order to examine the means by which competition would be introduced in the provision of international telecommunications services. International services represent the last segment of the industry to be opened to competition in Canada. Telecom Decision 97-10, reissued on December 19, 1997 witnessed the introduction of international competition on a resale basis. Today’s decision, Decision 98-17, sets in place the licensing and regulatory regimes for facilities based competition with Teleglobe. This Decision follows through on commitments made by Canada under the February 15, 1997 General Agreement on Trade in Services (GATS) covering basic telecommunications negotiated under the World Trade Organization.

In PN97-34, the CRTC requested proposals and comments on the regulatory regime, addressing issues such as: Canadian telecommunications policy objectives set out in section 7 of Canada’s Telecommunications Act (including those relating to the efficiency and competitiveness of Canadian national and international telecommunications (subsection 7(c)), to the promotion of Canadian transmission facilities (subsection 7(e)), and to fostering increased reliance on market forces and ensuring that regulation, where required, is efficient and effective (subsection 7(f)).

Application of the Telecom Act
Decision 98-17 has determined that ownership of an Indefeasible Right of Use (“IRU”) is not, by itself, sufficient to change a reseller into a common carrier, for the purposes of the Telecommunications Act, since the service providers would only be operating “exempt” transmission apparatus. This means that acquiring an IRU will not subject a reseller to restrictions on Canadian carriers, including foreign ownership, contained in the Act. Specifically, the CRTC found that the following “would not be Canadian carriers: (a) a Telecommunications Common Carrier (“TCC”) that owns or operates facilities in Canada but does not provide services to the public in Canada for compensation; or (b) a TCC that only owns or operates transmission facilities located outside Canada.”

As a result, an IRU on the “dry” portion of an international cable will not be subjected to ownership restrictions. This fine point greatly improves the ability of foreign carriers to enter Canada and may increase the ways that foreign entities can circumvent some of the ownership criteria for carriers operating in Canada.

Licensing Regime
As of January 1, 1999, most long distance service providers will be subjected to a new licensing regime. In the decision, the CRTC stated that a purpose of a licensing regime is to “ensure that foreign monopolies cannot use their dominance in their home markets to gain an unfair competitive advantage in the Canadian market.” The license will include a condition that requires that service providers not engage in anti-competitive conduct, which will permit the CRTC to lift the license from those carriers which violate this condition. The CRTC has specifically defined “anti-competitive conduct” as including “entering into or continuing to participate in an agreement or an arrangement that has, or is likely to have, the effect of preventing or lessening competition unduly in Canada, or otherwise providing telecommunications services in a manner that has, or is likely to have, the effect of preventing or lessening competition unduly in Canada.”

The CRTC is requiring that, with the exception of hotels and motels, and most internet service providers, “most telecommunications service providers who provide international telecommunications services be subject to licensing” effective January 1, 1999. This is a substantial change from the former “registration” process for resellers. Existing service providers which are registered resellers will have to apply for and obtain a new license, if international or cross border services are provided to the public.

There will be two classes of licenses: Class A includes “those who operate telecommunications facilities, whether owned by them or leased from a separate facilities provider, used in transporting basic telecommunications service traffic between Canada and another country.” Class B includes “service providers who only resell the switched services of other service providers or who hand off all of their international traffic to another service provider in Canada for termination in another country.”

Licenses will generally be issued in 3 weeks according to the Commission, following the filing of application information on the public record. Initial licenses will be for five years.

Routing Restrictions
Effective immediately, the CRTC has lifted all restrictions on routing of calls. Calls from Canada to Canadian destinations or to overseas locations may now be freely routed through the United States. This important change raises questions about the value of new trans-Canadian fibre routes, given the ability for traffic to be routed through the US. With the majority of Canadians located within 100 miles of the US border, it is certainly easier to drop links from major Canadian centres to the nearest US city, than to connect Canadian cities to each other directly. This may affect the valuation of the Sprint – Ledcor fibre project.

Forbearance of Teleglobe
Teleglobe will continue to have its rates for calls to overseas destinations approved by the CRTC. The Commission determined that Teleglobe can be forborne from regulation in the Canada-Canada and Canada-US markets. In addition, Teleglobe continues to be obligated to interconnect with its competitors and permit open resale of its services. Teleglobe has been ordered to establish a “Carrier Services Group” within 30 days to safeguard information about Teleglobe’s wholesale clients from its retail sales channels.

While the Commission was not convinced that there was appropriate evidence of competition for Teleglobe’s international services, it is hard to imagine how long this situation will exist, given the freedom for carriers to use US facilities. The CRTC has invited Teleglobe to present evidence which will permit further de-regulation. Teleglobe was ordered to file all of its agreements with foreign carriers, even verbal agreements, in order to permit the CRTC to determine whether language in these agreements could lessen competition from new entrants. The CRTC indicated that it would likely support Teleglobe filing accounting rate information in these agreements in confidence.

The Commission will also continue to regulate Stentor’s agreements with foreign carriers until such time as forbearance is granted to Teleglobe.

Contribution
The CRTC rejected calls to eliminate contribution on cross border and international calls. Instead, the CRTC has moved to a “per-minute” charge imposed when the traffic leaves Canada, effective April 1, 1999. This replaces a “per-circuit” mechanism and will result in slightly increased costs for the non-Stentor companies, which will be greatly off-set by the expected reductions in international terminating costs due to the new competitive environment. Teleglobe will pay contribution for the first time.

Proportionate Return and Settlement Issues
Consistent with trends toward more open and flexible global markets for traffic, the CRTC is not requiring that correspondent relations be established in order to terminate traffic. It is also not requiring parallel accounting rules nor proportionate return of traffic to or from settled jurisdictions, in the absence of evidence of discriminatory practices. In a move which will increase Teleglobe’s flexibility, the CRTC also determined that accounting benchmarks, such as those being imposed by the FCC in the US, are not necessary in an environment of increased competition.

Reporting Requirements
The CRTC will require, as a condition of licence, confidential filings of quarterly reports on inbound and outbound traffic, by country of origin/destination, by service providers which actually transport calls in and out of Canada. The Commission will compile aggregated information for placement on the public record. The first reports are to be filed by May 17, 1999, to cover the first calendar quarter of 1999.

Licensees will also be required to publicly disclose a list of all agreements entered into with foreign service providers.

Retail Market Access
The CRTC rejected proposals by Teleglobe to allow consumers to select a different international carrier distinct from their regular long distance provider. The Commission also rejected Geo-Reach’s request to keep Stentor from directly entering the international services market and to keep Teleglobe from entering the domestic retail market.

Winners and Losers
Canadian consumers are the biggest winners in today’s decision. The CRTC has created one of the most liberal markets for international telecommunications. Prices for international calls will certainly fall as carrier costs come down. Watch for the UK to become the next flat rate country.

The relaxation of routing restrictions is particularly timely for Stentor members concerned about the Bell Canada national initiative. This may provide new opportunities for lower cost advanced services to be offered across Canada, using existing excess fibre bandwidth in the United States. AT&T Canada is well positioned to leverage its relationship with AT&T in the US for this capability.

CRTC Approves Payphone Competition

In Telecom Decision CRTC 98-8, dated June 30, 1998, the CRTC approved the establishment of alternate payphone providers, subject to a variety of consumer protection safeguards. While payphone operators will not be regulated (although the operators must register with the CRTC), the CRTC will govern payphone providers by imposing rules on the companies that provide the access lines. In the case of access from Stentor companies, payphone operators will need to abide by rules to be set out in new tariffs, which will be filed by August 15, 1998. CLECs providing payphone operators with access lines must include the consumer safeguards in their access line contracts.

The CRTC has order Stentor to provide details of any existing payphone agreements with more than five years remaining on the contract. In addition, Stentor must identify where it currently has payphones and annually identify reasons why payphones were removed. These provisions are meant to prevent non-desirable areas from being abandoned by the phone companies.

The Commission will not regulate local call charges from competitive providers, although it will continue to regulate Stentor payphone prices. The Commission plans to implement per-call compensation for toll-free access from payphones but will wait for a Stentor proposal in late 1998.

The CRTC has defined a prescribed process for new payphone providers to follow prior to launching service. In addition, the CRTC has defined the following safeguards: (a) Provision free access to 9-1-1, or operator handled emergency by dialing 0 without a coin or card; (b) Provision of Message Relay Service; (c) Provision a number for reporting telephone trouble; (d) Provision of access to all alternate long distance carriers; (e) Posting the company name, address and toll free number where complaints are addressed; (f) Posting the Commission’s address and toll-free number (1-877-249-CRTC) on all pay telephone equipment; (g) Operator services, if provided, that are in compliance with CRTC Orders; (h) Prominent display, of rates of local calls, the name of the default long distance provider; and any surcharges not included in the price of the call; (i) No charges for uncompleted calls; (j) Standard arrangement of letters and numbers on the dial; (k) Telephones are to meet CSA and the Terminal Attachment Program Advisory Committee standards; (l) Telephones are to be accessible to the physically disabled, in accordance with earlier Orders; and (m) Adherence to Commission rules concerning protection of customer privacy.

The Commission plans to review this Decision within three years to see if the market is behaving in a manner which provides the benefits of alternate providers without the consumer complaints initially experienced in the US market.

Bundled Unbundling: A tale of two minds

In Telecom Order CRTC 98-497, dated May 22, 1998, the CRTC permitted Bell to go ahead with its Internet Call Display, while generally creating a greater level of unbundling of the network elements used by Bell to offer the service. Internet Call Display allows a subscribing customer, when their line is busy because of dialing into their internet service, to receive notice of an incoming call by means of a “pop-up” window on through their internet connection. For InfoInterActive Inc. (“IIA”) to offer a competing service, Bell offered the ability to route Call Forward on Busy to a different number from that programmed for Call Forward – No Answer. Until this time, competitive providers of voice mail services had the ability to request a combined Call Forward on Busy/No Answer to route to a common number. By unbundling the Busy and No Answer routing, Bell has created more opportunities for competitors to develop creative enhancements to internet-based incoming call management. At the same time, IIA had sought the ability to provide their portfolio of services to Bell Canada’s Call Answer customers. The CRTC accepted Bell’s arguments which prevent subscribers to Bell Canada’s own voice mail service from trying out a competing internet call management service provider.

In another Order issued on June 8, Telecom Order CRTC 98-558 denied Bell’s request to aggregate digital tie trunk access for centrex into bundles of 24. The CRTC found that the rating principles used by Bell were inappropriate in that charges would be too high for digital trunk groups that did not require the full 24 circuits. At the same time, the CRTC indicated in its Order that it would be prepared to approve a tariff structure composed of two elements: a digital termination charge (in bundles of 24) and a per channel charge for the remaining cost elements. While the Commission agreed with some of the cost comparisons made by intervenors, it failed to fully assess whether the charge for the remaining cost elements is reasonable, Further, the Commission denied the request of the intervenors to more fully examine the basis of these charges.

These two Orders are indicating some of the thinking that the CRTC is having toward total services competition. On one hand, the CRTC is encouraging greater levels of unbundling to permit competitors to offer a similar portfolio of services. On the other hand, the Commission is not prepared to hand over the telcos customer base to service providers looking to easily skim off the cream. Consistent with its May 1, 1997 Local Competition Decisions, the CRTC seems to be looking for lasting, sustained competition.

CRTC Issues Details on Local Competition

In Telecom Order CRTC 98-486, dated May 19, 1998, the CRTC clarified the rules for transit traffic for Competitive Local Exchange Carriers (CLECs). In Decision 97-8 (May 1, 1997), the CRTC defined transit traffic as traffic received from one carrier and then switched to another. The Commission had left it to the Interconnection Steering Committees (CISC) to make recommendations on appropriate arrangements should be put in place. As a result of an impasse at the CISC level, the issue was sent to the CRTC and Order 98-486 was the outcome of the Commission’s deliberations.

Transit traffic had been viewed as an opportunity for CLECs to arbitrage Stentor switching and aggregation rates and thereby serve as a way to discipline the Stentor local access rates. Among the significant clarifications that emerged in Order 98-486 was a definition of “Bill-and-Keep” traffic to include only traffic which originates and terminates within the same exchange. Transit traffic is specifically excluded from this definition.

In addition, the competitive industry had proposed that long distance carriers should be able to interconnect with a transit CLEC in order to reduce their switching and aggregation charges. The CRTC ruled that the company whose customer either originates or receives the long distance call is entitled to receive the switching and aggregation charge. This portion of the ruling will detract from the cost advantages that integrated CLEC – Interexchange carriers, such as Sprint, may have expected.

With respect to transit as a means to expedite CLEC entry into a market, the CRTC also clarified that regardless of transit being used as the means of interconnection, each CLEC must enter into specific interconnection agreements with every other CLEC – in order to arrange the manner of exchanging traffic, whether directly or by transit. This will have the impact of adding layers of complexity to newer entrants and give and advantage to first players such as Metronet and the incumbents.

The 14 page order seems to continue to favour construction of facilities and direct connectivity between CLECs – although the CRTC has appeared to miss an opportunity to have arbitrage of rates serve to discipline the market place rather than regulation. By artificially distinguishing between sources of traffic, the CRTC is leaving itself open to difficult policing and more complex rate structures.

CRTC Re-affirms Status of Internet Telephony

In Telecom Order CRTC 98-28, dated January 23, 1998, the CRTC confirmed that long distance providers which use the internet as a backbone are still required to register and have to pay “contribution” on their traffic.

ShadowTel had argued that its innovative voice long distance service, using a data service backbone based on frame relay and internet, should be exempt from paying the subsidy toward affordable local rates known as Contribution. “[T]he Commission considers that ShadowTel is providing public switched interexchange voice services, albeit over the Internet and that, consistent with Order 97-590, ShadowTel is clearly required to register as a reseller and pay contribution.”

In Order 97-590, the Commission stated that, for the time being, internet data services do not yet attract contribution, but voice services using the Internet would not qualify for an exemption.

Telecom Order CRTC 98-28, reaffirms the position and clarifies the differentiation between Internet Service Providers and long distance using internet protocol: “The Commission notes that while they ride on the same Internet protocol, the services offered by ISPs are very different from the services provided by ShadowTel.”

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