Summary
The Commission saw three barriers to new local competitive entry: (1) certain technical restrictions; (2) a number of tariff restrictions originally designed for regulation in a monopoly environment; and (3) cross-subsidized pricing policies implemented in respect of residence exchange service rates. The May 1st Decisions were intended to remove these 3 barriers. In doing so, the Commission believes that it has cleared the way for the ILECs to be permitted into the cable business. As such, the CRTC has announced that January 1, 1998 is the start day for Stentor Cable.

There is one fundamental flaw in the CRTC’s reasoning. The Commission states that it is confident that progress will continue to create the right environment for telephony competition. It will be removing the subsidy barriers and expects to have the tariff barriers removed by January 1, 1998. In respect of technical restrictions, it is unclear that the Commission understands the difference between trial and working environments. In particular, the CRTC states that it expects to have a number portability trial by the fall of 1997 with the objective of availability in early 1998.

Yet the Commission offers unrestricted and unconditional broadcast distribution undertaking (BDU) rights to the telephone companies as of January 1, 1998. At the very least, under the headstart rules, the CRTC should only allow BDU rights in those places where number portability has been introduced. In this way, the phone companies have the correct incentive to: (1) continue to work cooperatively in the industry forums; and (2) actively encourage a speedy roll out of portability.

Absent this restriction, May 1st was a great day to be Stentor company, and a sorry day to be a prospective new entrant. Cellular and wireless companies appear to be winners, but many long distance companies were hurt by this decision, notably Sprint Canada and Fonorola. The cable companies are severely threatened with their core revenues as of January 1, 1998.

Local competition – Telecom Decision CRTC 97-8, May 1, 1997
The Commission gets it right philosophically – but will new entrants come to the table?

Introduction
The single most important philosophical statement in May 1st Decisions comes in Paragraph 7 of Decision 97-8:

In this Decision, the Commission has adopted the principle that CLECs [competitive Local Exchange Carriers] are not simply customers of ILECs [incumbent Local Exchange Carriers] but are carriers equal in stature to the ILECs in the local exchange market. In accordance with this principle, the framework for local exchange competition must allow for the transition from the single ILEC’s network to a network of fully interoperable networks permitting subscribers of any local exchange carrier (LEC), i.e., ILEC or CLEC, to complete calls with at least the same ease and efficiency as at present. Only with this degree of interoperability can there be the true local exchange competition necessary to fulfil the promise of local price and service innovation.

Background
In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94 19), the CRTC determined that there should be increased competition in the local telecommunications market, and on 11 July 1995, the Commission issued Implementation of Regulatory Framework – Local Interconnection and Network Component Unbundling, Telecom Public Notice CRTC 95 36 (PN 95 36) in order to establish principles and procedures that would permit competitive entry into the local exchange market. This Decision is the result of PN 95-36.

Historically, local exchange services have been provided on a monopoly basis by the ILECs . Changes in wireline and wireless technologies have developed to a point where interconnection of competing networks is fully feasible in a manner that is transparent to the user. In addition, the advent of broadband networks gives rise to the capability of carriage of voice, high speed data, broadcasting and video on common facilities. These developments in technological convergence have led to fundamental changes in market on competitive entry into the local market.

Local competitive entry, although limited, has already been seen to stimulate innovation in service and prices. Clearly, the Commission is confident that the May 1st Decisions will continue to stimulate competition in the local exchange market, thereby furthering service innovation and total market revenues. However, it remains to be seen whether the financial aspects of the Decisions allow for viable new entrant business cases.

Who will be the new entrants? The CRTC has set out certification requirements. As a condition of offering service, a CLEC must provide:

1. Access to other carriers and services, including wireless companies;
2. LEC-to-LEC interconnection with approved tariffs and agreements as appropriate. In addition, all LECs will be required to implement local number portability as approved by the Commission;
3. Access to 9-1-1 and Message Relay Service.
4. Privacy protection;
5. Protection of carrier information where a CLEC is affiliated with a long distance service provider;
6. Serving area maps filed with the CRTC as well as miscellaneous information as requested by the CRTC from time to time;
7. Consumer service information prior to accepting an order;
8. File an attestation with CRTC that it will abide by these rules.

Resale
Although the CRTC recognizes the value of resale in creating a competitive environment, it states that facilities based entry is its primary goal for the full benefits of competition to materialize. The CRTC will permit unrestricted resale of all ILEC services, except subscriber listing (excluded for consumer safeguard reasons).

The CRTC completely rejected Sprint Canada’s proposal for the development of a wholesale tariff and also Sprint’s proposal for a new entrant reseller special discount similar to that introduced in the original long distance decision. A similar request for a “quality of service“ discount was rejected. As well, the CRTC did not accept that the ILECs should be required to “brand” services for resellers.

The sole item thrown to resellers is the permission to resell residential services. Although there would be no margin it would allow integrated service provision.

Facilities Based Interconnection
The Commission is correctly requiring that so-called industry standard interfaces be used for interconnection. It is also requiring all carriers to interconnect with each other.

The Commission decided that local exchange boundaries should be maintained. Some parties thought that new entrants should be allowed to create more flexible free calling areas. However, given that local subsidies (Contribution) are based on the classic definition of local exchanges, the CRTC is requiring that these remain in place.

In respect of costs of interconnection, the CRTC is entrenching a principle of equality by an equal sharing of costs. This is a departure from the current practice of parties paying the ILECs for the privilege of connecting regardless of the direction of traffic flow. This also holds true for CCS7 signaling links. The Commission took a further positive step for competition by mandating the establishment of local tandems. In an exchange area such as Toronto, this means that one point of connection may be all that is required rather than needing to connect to almost 100 local Bell switches. It refers the determination of these tandems to committee.

The CRTC has also ordered the establishment of new signaling points of interconnection: at least one per area code in order to permit more economic entry than that dictated by the current signal interconnection points in Calgary and Toronto. It asks the technical committee to determine what messages make up the minimum set of CCS7 messages to be exchanged.

In establishing unbundled tariff components, the CRTC has directed that new entrants be shielded from discrimination on the basis of the incumbents choice of underlying technology. For example, the costs for the incumbent providing a local loop using one technology versus another technology may be included in developing a rate to be charged, but the new entrants will pay one price, regardless of the underlying technology.

Compensation for Traffic Termination
The CRTC is implementing a regime of “Bill and Keep” compensation for traffic that is “local” in the sense of the current ILEC boundaries. This regime has no exchange of money between interconnecting parties. Whoever generates the call, keeps all of the revenues. However, where a sustained imbalance is shown to exist, fees will be paid to compensate the terminating carrier. The rate of compensation will be capped at the ILEC rate. This may create an interesting opportunity for CLECs to actively pursue high volume inbound local calling customers (such as pizza order bureaus) in order to generate inbound settlement. This prospect may help discipline the initial rates to be established by Stentor.

Essential Facilities and Mandatory Unbundling
The Commission concluded that for a facility, function, or service to be considered essential, it must meet all three of the following criteria: (1) it is monopoly controlled; (2) a CLEC requires it as an input to provide services; and (3) a CLEC cannot duplicate it economically or technically. Facilities that meet this definition are subject to mandatory unbundling and mandated pricing. As well, the tariffed rates for these facilities shall be treated as costs in the imputation test. The CRTC also determined that CLEC facilities could not be considered essential (therefore, this safeguard applies only to the Stentor companies). Essential facilities are initially defined as Central Office codes (NXXs), subscriber listings and local loops. Over time (defined as five years), as supply of alternate loops emerges, the Commission expects local loops in certain areas to cease to be considered essential.

It is important that local switching is not considered to be an essential facility. This is a significant blow to the Sprint Canada proposed resale model for early entry into competitive local business.

In addition, transit service (ie. the ability for a CLEC to route calls to another CLEC via a third LEC) was determined not to be essential, but only after a five year period. The CRTC correctly expects that a competitive transit business will emerge to assist smaller CLECs which may not have interconnection with all other LECs. Similarly, a five year transition has been introduced for signaling transit service including signaling transit to interexchange carriers.

There are numerous other support services that the CRTC chose not to designate as essential, even for a transition period. The CRTC could have sent a more positive competitive message had these details (such as directory services, rights of way, emergency service, message relay services, etc.) been designated as essential.

In respect of costing, the CRTC took Stentor’s side in accepting that Phase II costs plus a 25% markup is appropriate. In a fashion more characteristic of its double negative approval of Construction Program Reviews, the CRTC stated: “the Commission finds that a 25% mark-up is not excessive. Accordingly, based on the record of the proceeding, the Commission concludes that rates for essential facilities based on Phase II costs plus a 25% mark-up are appropriate.”

Rates and Costs
As to the issue of how to pay for the cost of introduction of competition, the CRTC continues to apply its new “all-carriers” cost model established in Decision 97-6, and therefore Stentor will have to impute the same costs charged to competitors in justifying its own tariff filings.

In another pro-competition move, startup costs are to be paid by each carrier on its own, including those incurred by the ILECs to enable competition.

The CRTC released its expected price cap Decision 97-9 which implements the reime set out in Decision 94-19 (16 September 1994). This decision will limit price increases to a maximum of 10% for basic residential service and business services (except in areas where local competition is expected to be flourishing). Overall baskets of services will be limited to inflationary levels of increases.

Consumers will have another monthly rate increase January 1, 1998 of up to $3, to be reduced if this would result in Contribution rates falling to less than 2 cents per minute. The Commission expects the full $3 increase to apply in most cases but there will be no further mandated rate rebalancing in the future. The CRTC appears to want to ensure that a reasonable pool of contribution is maintained to share among new entrants in high cost serving areas. This would seem to create incentives for new entrant wireless companies in remote territories.

Emergency and Message Relay Services have rates frozen.

Other Price Cap Details
With limited exceptions, the CRTC accepted most of Stentor’s proposals for the implementation of Price Cap adjustment factors. These are adjustments to the prices in order to ensure consumer dividends from ongoing productivity improvements. The Commission did not accept Stentor’s “competitive entry” reductions to the dividend. The Commission arrived at a total “X-Factor” adjustment of 4.5%.

Reduction of regulation is a key benefit of Price Caps, but it is critical that the CRTC gets the baskets of capped services right in order to safely remove their oversight from pricing cross subsidies. A large number of onerous reporting requirements are eliminated for the Stentor members including Phase III reporting , the largely ineffective Construction Program Reviews (including separate Broadband spending tracking , and financial reporting is also steamlined to a semi-annual basis (from its current quarterly requirement).

The price cap system will be in place for 4 years, to allow a period for stabilization, but still leave an opportunity to correct the process if required. The Commission noted that a longer price cap period would have provided a greater opportunity for the benefits of price cap regulation to materialize, while a shorter price cap period would reduce the cumulative effects of any error in setting the price cap parameters.

In a win for Stentor shareholders, it appears that subscribers will pay for what is termed the Depreciation Reserve Deficiency: the diference between what has already been depreciated and the remaining useful life of equipment due to technology change and other factors.

Obligation to Serve
Despite Stentor’s call for extra compensation in order to maintain its obligation to serve less desirable region, the CRTC determined that it already is compensated adequately through the costing mechanisms in place.

Contribution
The area of contribution subsidy is important to new LEC entrants and existing interexchange competitors. These decisions have fundamental shifts in the definition of the contribution requirement. The shortfall is redefined as residential local costs plus residential local optional services costs less associated revenues. This removes business service shortfalls from the pool and acknowledges the high profit margins from optional services. Costs continue to get inflated by a 25% markup (no justification other than it is not found to be excessive!). However, the CRTC rejected Stentor’s request to include costs of downsizing.

Interexchange (long distance) remains the sole source of contribution cash flow. In order to ensure that there is an adequate pool of contribution to maintain affordable service in high cost areas, the CRTC is freezing contribution at the going in rate January 1, 1998. Many LD competitors would have incorporated continuing reductions in their business planning processes. The total quantum of contribution will be paid into a fund and distributed to all LECs (existing and new entrants) by cost band based on their share of residential subscribers. In the interim, the ILECs will administer the fund, although the CRTC will seek an independent administrator.

In order to remove the incentives for contribution bypass, the CRTC is changing the collection mechanism to weight more cost on the terminating end. This removes some of the incentives for dedicated line bypass. Carriers such as Fonorola and ACC which have a significant portion of their revenue based on inbound settlement from US carriers will find their costs have increased. In addition, resellers appear to lose their special discounts.

In the Price Cap Decision, Contribution will not be permitted to fall below 2 cents per minute.

Competitive Safeguards
The CRTC is requiring Equal Access to be made available by all new local competitors and further, is requiring that Stentor offers long distance services to CLEC customers. Further, all CLECs must provide for access to all wireless service providers.

The CRTC is not imposing a “fresh look” requirement on the ILECs in order to allow customers to escape from long term contracts. This is another place where the CRTC could have sent a more positive “pro-competitive” message. In a move which will discourage landlords from striking special arrangements on behalf of all tenants, the CRTC is requiring that all LECs provide for open alternate LEC access to end users.

Imputation tests will continue as a principal safeguard. The CRTC will permit a variety of bundling options subject to appropriate cost imputations.

Consumer Safeguards The CRTC will not regulate new entrants except with respect to matters of consumer safeguards and undue discriminatory practices. The CRTC is not giving new entrants the protection of limited liability to consumers that is afforded the incumbents. This could create some huge risks in the case of mishandled 9-1-1 emergency calls. This is a significant instance where the CRTC could have sent a more pro-competitive message. The CRTC is limiting liability in the case of CLEC services provided to other carriers. This again seems to weaken the “green-light” signal which the CRTC wants to herald.

Consumers will have the ability to reach all other local customers thanks to mandated interconnection between all LECs .

The Stentor companies had hoped to introduce a speedier tariff approval process by setting a maximum review period before the filing is “assumed” to be approved. The CRTC rejected this (perhaps conscious of the cable industry experience with “negative option” marketing) and will retain positive approval rights prior to tariff implementation. The CRTC has introduced more liberalized use of the ex-parte process, to include uncapped services.

Directories
ILECs will be required to provide a universal directory. CLECs are invited to begin a more competitive environment but have no obligation to do so. The CRTC foresees the ILECs continuing in their dominant role for some time to come and therefore it is reasonable that ILECs continue to be the provider of directories. However, the ILECs will not be required to provide general information about CLEC services in the front pages of their directories.

Conclusion
The Commission saw three barriers to new entry: (1) technical restrictions; (2) tariff restrictions designed for regulation in a monopoly environment; and (3) subsidized pricing policies implemented in respect of residence exchange service rates. The May 1st Decisions are intended to remove these 3 barriers. In doing so, the Commission believes that it has cleared the way for the ILECs to be permitted into the cable business. As such, the CRTC has announced that January 1, 1998 is the start day for Stentor Cable.

There is a fundamental flaw in the CRTC’s reasoning. The Commission states that it is confident that progress will continue to create the right environment for telephony competition. It will be removing the subsidy barriers and expects to have the tariff barriers removed by January 1, 1998. In respect of technical restrictions, it is unclear that the Commission understands the difference between trial and working environments. In particular, the CRTC states that it expects to have a number portability trial by the fall of 1997 with the objective of availability in early 1998.

There is considerable work that must still be undertaken in order to implement the May 1st Decisions. The CRTC’s industry technical committees have a considerable number of tasks assigned to them. There is still much definition work to be performed in the Price Cap follow-up proceeding.

Yet the Commission offers unrestricted and unconditional broadcast distribution undertaking (BDU) rights to the telephone companies as of January 1, 1998. At the very least, under the headstart rules, the CRTC should only allow BDU rights in those places where number portability has been introduced. In this way, the phone companies have the correct incentive to: (1) continue to work cooperatively in the industry forums; and (2) actively encourage a speedy roll out of portability.