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The worldwide press has actively reported on each continuing round of the UK auction which saw total bids reach $50 Billion. The UK is auctioning five licenses, one of which, license A, is specially reserved for bidders that are not currently wireless service providers in the UK. Canadian entrepreneur Charles Sirois, through his firm Telesystem International Wireless Inc. (in partnerships with the Hutchison group of Hong Kong), won the “A” license bidding $10B (Cdn) for the right to build a third generation (3G) wireless network in the UK.

Surprisingly, there appears to be little Canadian media attention to an upcoming auction in Canada for similar 3G services. A wireless revolution is at hand yet little can be found in the press in anticipation of its impact on our everyday lives.

Background
Industry Canada plans to auction spectrum for 3G services in the fall of this year. The four incumbents have asked Industry Canada to keep their club exclusive and limit bidding to only the four of them (Clearnet, Microcell, the former Mobility Canada alliance and Rogers AT&T Wireless). Two possible new entrants, 3664341 Canada Inc. (led by Mike Kedar) and Wireless2Net.com (led by Wispra founder Joe Church) have asked for the auction to be open to newcomers and have argued that, like many countries, Canada should reserve some of the spectrum for new competitors.

Stimulating Competition = Stimulating Innovation

In their comments to Industry Canada, the newcomers encouraged the government to allocate to new entrants half of the bandwidth to be auctioned. In most other countries, policy makers have set aside spectrum for new market players, recognizing the innovation and competitive energy stimulated by fresh industry participants.

In fact, Canada has historically (in both 1983 and 1996) allocated half of the licenses for new entrants. In December 1995, 75% of the available spectrum was assigned to the new entrants, Microcell and Clearnet. At that time, Industry Canada said “Three overall objectives guide the development of Canada’s Information Highway: the creation of jobs through innovation and investment; the reinforcement of Canadian sovereignty and cultural identity; and universal access at a reasonable cost.” On April 7, 2000, Minister Manley echoed similar words: “Jobs, growth, knowledge and innovation are priorities of the Government of Canada” perhaps indicating a predisposition toward a similar encouragement of new entrants.

For internet and wireline telephony, the number of licenses is virtually unlimited and any party can enter the market to compete in accordance with the CRTC’s published regulations. For wireless services, Industry Canada manages spectrum allocations and thereby controls entry more directly than its arms’ length regulatory body. Over the next few years, we will see half of all communications carried over wireless networks. The policy for the 3G auction is therefore expected to have far reaching implications.

As we have seen in other telecommunications markets around the world and in other telecom sectors within Canada, increased competition leads to better variety and improved quality of service for consumers – at lower prices. In this way, everyone wins – consumers, service providers and investors. It is our view that only the new entrants are committed to accelerating the launch of new mobile data services and providing a showcase for Canadian applications developers. We believe that the same incentive to open wireline markets to competition should extend to the wireless sector.

With only 22% market penetration in Canada, the incumbents have plenty of room to grow within their existing spectrum allocation. The incumbents have an incentive to use the auction to hoard spectrum, block entry from new companies and then delay the investment in upgrading their networks to provide the broadband mobile data services promised by 3G technology. In the extreme case, it is clear from submissions written by Bell and Telus that their intent is to simply expand current voice services into each other’s territories. This may add a fifth choice for voice services, but does nothing to stimulate the launch of wireless, mobile internet applications.

The new data networks can be expected to complement the existing voice services and serve to stimulate the incumbents to upgrade their current capabilities to include wireless internet. In fact, 3664341 Canada has suggested that it will open its data network to other carriers in order to permit easy roaming between service providers.

Changing our lives… for the better

The future high growth technology area is the blending of wireless services with the internet. 3G blends the innovation of the World Wide Web with the mobility of personal communications to provide lower cost, always on Internet access at speeds of up to 2 Megabits per second. 3G enables Internet-on-the-go, full mobility with high speed connections. On vacation, we will be able to view local tour guides, make last-minute reservations at hotels, find and call the nearest taxi firm, or send video postcards. Cars can be equipped with map software that is always current and customized with the information needed most frequently. Business travelers can receive multi-megabit updated sales presentations while travelling to their client in the cab from the airport. Checking out could be as easy as leaving the store with a full shopping basket and confirming the charges as you load groceries into your car. While on the subway line, customers can check their stock accounts, pay a few bills and buy tickets for the movie at the theatre coming up at the next station.

If the government gets the rules right, in the next year, 3G services will enter the lives of Canadians in all sorts of ways, giving increased access to information, convenience and safety. We expect to see 3G terminals that replace the myriad of carry-along devices like phones, pagers and personal organizers. We believe 3G appliances will replace credit cards and become a kind of pocket ATM. For this reason, the early introduction of 3G is of great interest to Canadian financial institutions.

Summary

The stakes are high. Beyond the cost of the spectrum being auctioned, winners will need to spend more than a billion dollars in launching a national network. The result will be services representing the ultimate in convenience for consumers. In order to commit to such significant investments with correspondingly creation of thousands of jobs, new entrants need confirmation from the government that Canada will continue its history of encouraging competitive entry. It is our view that Canada needs to stimulate innovation in its domestic telecom services markets in order to maintain its global lead in telecommunications technology development. It is important for the government to ensure that the upcoming auction serves to stimulate competition for third generation wireless, and not serve as a barrier to entry. The best way to achieve this result is by setting aside a portion of the 3G wireless auction spectrum for new entrants.

Background
On October 1, 1998, the CRTC issued Telecom Decision CRTC 98-17, outlining the process by which companies can obtain licenses to offer international telecom services for Canada. As of January 1, 1999, all companies providing international telecom services to the public must be licensed. The first batch of licenses is expected to be announced in early January 1999. There are two classes of licenses: Class A for service providers which have leased or owned facilities that cross a border; and Class B, for service providers which hand all of their international traffic over to another licensed service provider. Decision 98-17 also describes the reporting and contribution payment regime imposed as a condition of license. The rules for contribution for the first quarter of 1999 were unclear in the Decision. As a result, a number of competitors have collaborated in proposing the following regime, expected to be announced coincident to the first wave of licenses.

Contribution
Contribution is the term used for the subsidy paid from long distance services to maintain affordable local rates. The Decision sets out a phased approach for moving to a per-minute payment scheme. Effective January 1, 1999, Class A licensees will be responsible for reporting and paying a fee based on the number of circuits which exit Canada. For traffic using Teleglobe, carriers will continue to pay contribution based on the “overseas access circuits” connecting to Teleglobe’s switches. The rates for contribution vary based on the size of the trunk group (as a proxy for traffic carrying capacity of the trunk group), and vary based on the location of licensee’s international gateway switch.

As of April 1, 1999, the per-circuit charge will transition to a per-minute fee based on the amount of traffic on the cross-border circuits. Teleglobe will begin to pay contribution explicitly at that time, and will presumably include the cost in its rates to account for the charge.

Contribution Exemptions
No contribution applies on circuits which are unused and not connected, dedicated to transit service (not connected to the Canadian PSTN), dedicated to a private line application, or dedicated to data services. Exemptions from the obligations of contribution require approval from the CRTC on a case-by-case basis.

Reporting Requirements
Licensed carriers are required to maintain records and report inbound and outbound traffic by country, using a standardized country list. For outbound traffic, this is a routine tracking process. The CRTC will expect inbound traffic to be disaggregated to the extent the carrier knows where the traffic is coming from. It is also expected that the reported traffic will exceed the levels of contribution eligible traffic.

Summary
Licensed service providers are advised to move swiftly to establish procedures for tracking circuit quantities and traffic volumes in order to permit compliance verification.

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.

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.

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.