Decision CRTC 2001-23, released January 25, 2001, reaffirms broad constitutional authority for the CRTC to supercede municipalities in the regulation of telecommunications carriers and their access to municipal rights of way. Repeatedly in the Decision, the CRTC rejected limitations on the Commission’s jurisdiction under the Telecom Act and, in doing so, the CRTC is blocking the ability of municipalities to collect so-called “market-based” fees for access to municipal rights of way.

Background

In March of 1999, Ledcor Industries (now 360 Networks) asked the CRTC to intervene in a dispute it was having with the City of Vancouver over the ability to install, operate and maintain fiber optic cables on municipal rights of way. Vancouver had sought fees that exceeded the cost of providing access, an ongoing percentage of revenues, and a donation of four fiber strands to the City among other requirements. The regulatory proceeding grew to include other municipalities and all of Canada’s national carriers as well as building owner and manager associations believing that the Decision could have implications on other property access agreements.

Municipal Implications

The CRTC re-affirmed that carriers should be negotiating access with municipalities, while clarifying the terms that it considered to be reasonable. Among others, the CRTC will permit cost based allocations of direct costs with a factor to account for indirect costs. The CRTC rejected an allocation toward fixed costs, because of the nature of municipal governments being completely paid for by a tax base.

Building Owner Implications
In rejecting Vancouver’s “market based pricing” with recurring fees, the Commission rejected this scheme because there is no free-market for municipal land. The CRTC expressly contrasted this with private property, which seems to indicate the Commission would look more favourably upon private landlords charging market-based fees.

Summary
Certain statements in the Decision could be interpreted to imply that the Commission will not permit interference with its authority to exercise jurisdiction over telecommunications services. At the same time, the Commission stated clearly that it is not, at this time, prescribing terms and conditions related to further construction by other carriers applicable in Vancouver or elsewhere. However, the principles used are expected to be helpful in negotiating future access agreements and resolving disputes.

The Commission explicitly rejected the populist claim that taxpayers have been subsidizing carriers by providing free access to rights of way. The Commission noted that much of the value of adjacent land derives from the fact that the land is serviced by utilities such as telecommunications carriers. “The benefits of a competitive telecommunications market and greater access to modern high-speed networks… provide generalized benefits throughout the municipality, attracting industry, creating jobs [and] increasing tax revenue.” Carriers, cities and building owners alike will mutually benefit as they begin to view telecom infrastructure deployment as a partnership.

Since opening Canada’s long distance market to competition in 1992, the CRTC has held in place a system whereby long distance service providers paid a per-minute contribution (which varied by province) to subsidize local services. With precipitous drops in retail rates, competitors found that marginal costs frequently outweighed their marginal revenues for off-peak traffic. On November 30, 2000, in Decision CRTC 2000-745, the Commission determined that the market would be better served by a revenue tax to be applied across a broader range of services and service providers, most notably including cellular services companies. The new collection mechanism will be effective 1 January 2001 and will apply to companies with annual telecommunications services revenues greater than $10 million.

Background

In the proceeding leading the Decision, parties provided technology and marketing arguments questioning the sustainability of the old regime, which applied to traffic considered by the local incumbent to be long distance. This limited flexibility in defining local calling areas on the part of CLECs. From a technology perspective, telecommunications networks are no longer easily separable into local and long distance traffic segments. As a result, the ability to count and report long distance minutes is becoming increasingly difficult. In some cases, service providers may have to adopt inefficient network designs, acting as an impediment to technological advances. Other parties argued that the current per-minute mechanism could not be applied to modern converged networks, where traffic flows over packet-switched networks and cannot be measured in minutes.

After reviewing a variety of mechanisms, the Commission determined that a revenue based mechanism across a broader range of services, will be most sustainable in that it is insensitive to technology changes, removes regional differences in rates, accommodates administrative efficiency and spreads the burden of the subsidy most fairly.

Details

The new contribution imposes a 4.5% tax on total revenues from Canadian telecommunications services, less certain deductions, effective January 1, 2001. The tax applies to all telecommunications service providers, such as: ILECs, competitive IXCs, CLECs, resellers, wireless service providers, international licensees, satellite service providers, Internet service providers (if a telecommunications service is provided), payphone providers, data and private line service providers.

Deductions apply for a number of types of revenues. Retail internet and retail paging service revenues are exempt. However, any revenues generated by internet and paging service providers from the provision of any other telecommunications services will be contribution-eligible. Revenues associated with sales or rental of terminal equipment is contribution exempt. Telecommunications service providers are entitled to a deduction for contribution revenues received. If service providers bundle exempt services with contribution eligible services, the entire bundle becomes contribution eligible.

Finally, a service provider is entitled to a deduction for inter-carrier expenses incurred for those services purchased from other telecommunications service providers (for example, Centrex, private line services, settlement, switching and aggregation, transiting and unbundled local loops) to the extent that the service is used to provide contribution-eligible telecommunications services. In this way, the contribution tax applies, in effect, to the value added by the service provider. There is no deduction for contribution payments and inter-carrier expenses incurred for telecommunications services internally.

To ease the administrative burden for small carriers, the Commission will only require carriers with total Canadian services revenues in excess of $10M (before deductions) to file reports and funding to the pool.

Summary

The CRTC has clearly listened to CLECs and competitive IXCs in trying to find a mechanism to break the linkages between incumbent definitions of long distance and local services. This will lead to increased service flexibility and increases in the types of flat rate packages to be expected from national providers. For example, because the Decision eliminates traffic sensitive payments, cable companies may be expected to introduce unlimited free calling to other “on-net” telephone customers, thereby encouraging friends and families to sign-up for service en masse.

The Decision brings significant financial relief to Canada’s fragile competitive long distance industry, but it comes at the expense of the wireless industry and Bell Canada. As a result of the new national equalization pool, Bell will find itself subsidizing the rest of Canada, including its rival Telus. It is likely that the Decision will be appealed to cabinet by an interesting coalition of disgruntled new taxpayers, but it is unclear that the Cabinet will agree to intervene.

With its bold $6.6B buyout of Clearnet Communications, TELUS Communications has acquired not only a national footprint for its wireless network, gaining in the process a vehicle for improved brand recognition and an accelerated entry into the lucrative Ontario and Quebec telecommunications markets, home to 60% of Canada’s population.

Background
When the Stentor alliance of Canada’s former monopoly service providers collapsed, the incumbent local exchange carrier (ILEC) companies divided into two camps: TELUS in Western Canada (Alberta and British Columbia) and Bell Canada for the rest of the country. The two camps announced plans to enter each others’ markets: TELUS established TELUS Integrated Communications in the east and Bell Intrigna was established in Alberta and BC by Bell Canada in conjunction with MTS.

Clearnet was one of four national licensed PCS/Cellular networks, with about 10% market share. On the breakup of the Stentor alliance, their cellular affiliates, known as Mobility, broke up into two groups as well, but each group offered service in the other’s territory through resale. As a result, Canada really had three national companies and two regional operators.

Consolidation / Acceleration
The companies named the project Quantum Leap – moving TELUS faster into a national market position, helping to establish brand awareness, physical infrastructure and skilled human resources. The TELUS / Clearnet acquisition results in each of TELUS, Bell and Rogers-AT&T controlling about 30% of the market with Microcell holding about 10% of the market. Canada’s cellular penetration rates are still in the mid 20% range, lagging most of its trading partners. Most analysts agree that there is a significant growth opportunity in the overall Canadian market.

Industry Canada, the federal department responsible for allocating radio frequencies, has plans to auction spectrum later this year. Observers had felt that the auction was geared to facilitate TELUS and Bell acquiring capacity in the other’s territory. Now, TELUS has more spectrum than it requires, and indeed, in Western Canada, it will have more than permitted by Industry Canada rules. TELUS has stated that the acquisition saves it more than $1.5B in construction costs, and a further $0.5B in tax advantages. However, the acquisition will add Clearnet’s $2B debt to the total TELUS cost of the transaction – which was at a 50% premium to the closing share price.

Summary
The landscape for the Canadian wireless industry is strengthened by this merger. There are now two fewer participants in the spectrum auction, which will certainly result in lower spectrum costs for all industry players. The recently announced delay in the auction takes on new meaning as all the players, including the government, adjust their plans.

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 March 23, Rogers Communications and Shaw Communications announced that they would swap certain cable TV properties resulting in Rogers controlling most cable customers in Eastern Canada while Shaw will dominate the west. Rogers Communications Inc. announced on February 7, 2000 that it will acquire Groupe Videotron Ltée. This resulted in the creation of Canada’s largest cable company and the seventh largest in North America, with Rogers providing service in Canada’s four largest cities (Toronto, Montreal, Vancouver and Ottawa) as well as two other top ten markets (London and Quebec City). The new arrangement transfers Vancouver to Shaw while Rogers picks up the former Fundy Cable territory in New Brunswick owned by Shaw as well as Shaw’s ownership position in Cogeco (roughly 10%), allowing equity based interest for Rogers in the portions of the Toronto/Niagara region that it does not own. Shaw picks up Rogers’ stake in satellite operator CanCom. Rogers ends up with about 3.5 million customers clustered together in Canada’s two most populous provinces, all interconnected by fiber. Shaw will have close to 2 million clustered customers in Western Canada.

Feeding Internet Content
The companies are merging @Home Canada and Excite Canada to form Excite@Canada – a broadband portal for 500,000 Canadian cable modem customers. Rogers and Shaw will jointly build a national broadband internet backbone company, using Shaw’s newly acquired cross Canada dark fibers acquired and Rogers plans to share in the Shaw investment in 360 Networks.

Competing with the phone companies
The move will permit greater consistency of network offerings for the former islands of franchises. By consolidating their territories, both Rogers and Shaw will improve their ability to broadcast marketing messages over mass media. As both companies move to increase the level of bundled services – combining offerings from the various operating units (such as @Home internet, Rogers AT&T Wireless) – the geographic consolidation eases the work for both firms in reaching their core customer bases. The role of AT&T Canada in adding voice services remains the open question for analysts. We expect to see AT&T reaching out to touch Shaw in the near future.