Canada Announces International Licensing Regime – The Race Begins

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.

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.

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