Background

On March 3, 1999, Bell Canada reached an agreement with MCI WorldCom that provided it with Canadian rights to offer MCI WorldCom’s products and gave the US company broader access to Canada. A day later, AT&T Canada announced that it was merging with Metronet, Canada’s leading Competitive Local Exchange Carrier (CLEC). On March 24, BCE announced that it was selling a 20% stake in its telephone operating company holdings to Ameritech, the US RBOC formed from the former “Baby Bell” companies in the American rust belt states of Michigan, Illinois, Indiana, Ohio and Wisconsin. In May of 1998, Ameritech and SBC (of Texas) announced a $57B (US) merger.

Dialling for Dollars

BCE gets $3.4B (US) for the 20% stake in its telecom portfolio which includes: Bell Canada (including Nexxia, ActiMedia directories and the MTS investment), 65% of BCE Mobility (cellular), 21% of Teleglobe, and holdings in 6 regional companies (including all of the Atlantic provincial companies). Ameritech secures a foothold in Canada, the most significant trading partner for US traffic. The US and Canada exchange more minutes of traffic than any other pair of countries on the planet.Bell’s Nexxia unit already has fiber (acquired from Ledcor Industries) running through Ameritech territory, providing a southern leg to a ring connecting Canada’s west to Bell Canada’s core Ontario markets. Nexxia will be in an interesting position to provide international and inter-LATA services to Ameritech customers, allowing Ameritech a back door into the long distance business in its home territory. The US FCC restricts Ameritech from entering the long distance business in its home market until it satisfies certain requirements for emerging local competition. Indeed, the Bell brand is well known in Ameritech territory; its former telephone company business units all operated under the Bell moniker – Michigan Bell, Illinois Bell, Ohio Bell, etc. While Ameritech only acquires a small stake in Teleglobe through this transaction (indirectly less than 5%), Teleglobe could be a beneficiary of improved relations with Ameritech’s extensive investments in European carriers. The partnership needs global connectivity beyond North America – Teleglobe provides that capability, although the MCI Worldcom alliance raises possible options or conflicts in this area.

Who is next?

Canadian telecom companies are clearly in season for foreign investors. Bell’s former alliance partners in the west, BCT.Telus is already 26% owned by GTE (and Bell Atlantic). Videotron, the largest cable company in Quebec, announced on March 23 that it was seeking an investor partner to exploit its network assets. Rogers, Canada’s largest cable company has been the subject of equity investment talk over the past number of months. Four years ago, in the early days of competition in Canada, many of the telephone companies heralded their Canadian heritage against the foreign new entrants. BCE’s sale of part of Bell Canada “breaks the ice” for the remaining Canadian communications icons to go global. Ironically, among major companies, only government owned Sasktel remains 100% Canadian.

Background
On January 7, 1999, AT&T Canada announced a restructuring resulting in the creation of a trust which removed the former bank shareholders (Scotiabank, TD Bank and Royal Bank of Canada) of AT&T Canada Long Distance. At that time, AT&T Canada integrated ACC Canada into the company and announced that $800M was being allocated to enter the local telephone business. On May 20, 1998, Metronet announced an agreement to acquire Rogers Telecom, in a deal which gave Rogers Communications cash plus 12.5 million shares of Metronet and 2 of the 11 Metronet board seats. As a result of that transaction, Metronet became Canada’s leading Competitive Local Exchange Carrier (CLEC). Both Metronet and AT&T Canada focus on the business market.

A Solid National Player
The AT&T Canada – Metronet deal puts together a national powerhouse, operating coast-to-coast with local, long-distance and data facilities in virtually all of Canada’s biggest cities. AT&T Canada is a national, facilities-based long distance company, having led the regulatory battle to introduce competition in the early 1990’s, when it was operating as Unitel (owned then by Rogers and Canadian Pacific). AT&T Canada traces its roots to the railroad telegraph companies in the 1840’s. The combined company will have revenues of $1.4B, more than 4000 employees and $3.5B in assets (all figures Canadian). It is in the midst of building a new high-speed fibre network.

The merged company will be the first company operating nationally to offer local and long distance voice, data, Internet and electronic commerce services. It is interesting that the announcement also included wireless services through Cantel AT&T. To date, Cantel has been the wireless unit within the Rogers Cable empire, operating under a marketing agreement with AT&T. The recent acquisitions of major US cable companies by AT&T raises the question of whether Metronet is just one step for AT&T.

Bell Canada / MCI Worldcom
The announcement comes on the heels of yesterday’s announcement that Bell Canada has reached an agreement that provides exclusive Canadian rights to offer MCI WorldCom’s products and gives the US company broader access to Canada. That relationship replaces an agreement MCI Worldcom had with the now defunct Stentor alliance.

Summary
AT&T Canada Corp will be a serious national contender, offering a significant portfolio of services to businesses coupled with the world’s most powerful telecom brand name. As a result of this merger, it will be much more difficult for competitors to operate only regionally and compete in the lucrative business market. Further consolidation among wireline and wireless companies can be expected as former Stentor members Bell and BCT.Telus “bulk-up” for the battle in each other’s territory.

Background
On October 1, 1998, the CRTC issued Telecom Decision CRTC 98-17, outlining the process by which companies could 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 licensees were just announced. 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. Class A licensees are liable for regular reporting of traffic and remittance of contribution. There seems to be confusion about who needs each type of license and inconsistencies are emerging in the apparent interest of administrative efficiency. As will be discussed below, this could lead to holes in the contribution collection mechanism.

Who needs licenses?
It is interesting to begin with an examination of who did not obtain licenses. Many of the companies that had registered as resellers in Canada have not yet obtained licenses, in violation of the Decision. Decision 98-17 explicitly called for licensing switchless resellers, although, as the attached list indicates, many have not yet filed. There are also gaps in the licensing of international pre-paid card providers.

The CRTC has instructed paging companies and independent local telephone companies that there is no need to obtain either type of license, despite the fact that independent telcos are switch-based firms selling international long distance services to their subscribers. This is confusing in light of statements in the October 1 Decision and a previous supreme court ruling that the inter-provincial long distance service being provided by independents was sufficient justification to bring the independents under CRTC regulation. As such, why are Class B licenses not required?

SaskTel has neither applied for nor been granted either class of license, apparently believing that it remains exempt from any application of federal telecommunications law.

Metronet applied for and received a class B license, apparently indicating that it does not operate telecommunications facilities that carry any basic service over the border. This was a surprise in light of its press releases announcing existing and planned cross border fibre routes to major US business centres. This does not seem to have been raised during the CRTC review.

Conditions have changed
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.

Basic versus Enhanced Services
It is unclear about how or whether the CRTC will regulate international ATM and Frame Relay services under the licensing regime. The international licenses call for reporting of traffic in “minutes” which is a term that cannot be applied to these technologies. The Commission is also hesitant to regulate Internet Protocol (“IP”) traffic and as such, ISPs are exempt from the regime. This leaves open the possibility for a company to use a contribution-exempt data cross-border service that takes already converted packets from other service providers. Such traffic may continue to be exempt from the cross-border contribution element unless the CRTC clarifies and then enforces its rules.

Summary
Administrative ease may be at the root of the CRTC’s decision not to license local telcos and paging companies. Clarification is required for re-billers and card companies. It would appear that a more inclusive policy, coupled with clear rules would provide better understanding for all industry participants.

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.