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Telecom Public Notice
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Ottawa, 9 November 1984
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Telecom Public Notice CRTC 1984-66
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STRUCTURAL SEPARATION - MULTILINE AND DATA TERMINAL EQUIPMENT
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In CRTC Telecom Public Notice 1983-73, 15 November 1983 (Public Notice 1983-73), the Commission set out a tentative agenda for the consideration of regulatory issues pertaining to enhanced services, interexchange competition, Phase III of the Cost Inquiry and structural separation. With regard to the latter, the Commission expressed its intention to initiate a proceeding in 1985 to consider the merits of structural separation generally and with regard to various specific services including enhanced, cellular radio and terminal equipment services. In this context, the Commission was referring to the general concept of separating into different corporate entities a carrier's regulated activities, especially its monopoly services, and one or more of its competitive activities. Effecting such a separation for regulatory purposes implies that certain safeguards will be established to ensure that the different entities are sufficiently separate in fact, as well as in appearance.
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The Commission stated that further details pertaining to the scheduling and scope of these proceedings would be set out in public notices relating to each proceeding. This public notice deals with the scheduling and scope of a proceeding on structural separation.
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In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission discussed the merits of structural separation in relation to carrier-provided terminal equipment. At that time, the Commission determined, given the early stage of development of the market, the lack of adequate service in many markets and the costs of setting up an affiliated company, that subscribers' interests could best be served and the development of a dynamic competitive market could best be accomplished through continued direct carrier participation in the terminal equipment market. The Commission noted, however, that it intended to review the matter of structural separation for terminal equipment following completion of Phase III of the Cost Inquiry.
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Events since the issuance of Decision 82-14 and Public Notice 1983-73 have led the Commission to reconsider the timing and scope of a proceeding on structural separation.
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In particular, the Commission notes the intention stated on 14 March 1984, by the Federal Minister of Communications, to issue a cellular radio licence to a subsidiary of Bell Canada Enterprises (BCE) other than Bell Canada (Bell). While the status of the cellular licence for the territory served by British Columbia Telephone Company (B.C. Tel) remains unclear, it does not seem necessary, at this time, to consider cellular radio within the context of a general proceeding on structural separation.
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Moreover, the Commission has now issued its decision on enhanced services. In Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984 (Decision 84-18), the Commission set out a number of regulatory safeguards pertaining to enhanced services provided by federally regulated telecommunications common carriers and further indicated those services it considers should not be provided by these carriers. Given the early stage of development of this market and the recent imposition of regulatory safeguards and restrictions on the provision by these carriers of specific information related services, the Commission does not regard it appropriate, at this time, to consider the requirement for structural separation in regard to the enhanced services provided by the federally regulated carriers.
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With regard to terminal equipment, the Commission's experience in regulating Bell and B.C. Tel has led it to make the following observations:
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(1) The terminal equipment market, especially its multiline and data terminal equipment segment,
has evolved into a highly competitive market with both carriers and other suppliers offering a
broad range of products and services.
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(2) The appropriate scope and nature of regulation in this competitive market has become
increasingly a matter of contention. In this regard, there is an increasing demand from carriers
for more flexibility to change service offerings to meet their unregulated competition and for a
reduction in the regulatory time required to deal with such offerings. On the other hand,
competitive suppliers are seeking increased scrutiny of carrier tariffs aimed at ensuring that
carrier-provided terminal equipment is not being cross-subsidized from monopoly revenues
and to ensure that the carriers are pricing their services to maximize contribution to fixed
common costs. For example, the Commission has received applications from CTG Inc. and
the Association of Competitive Telecommunications Suppliers that seek, respectively,
increased opportunity for public comment on all proposed tariff revisions relating to terminal
equipment and the release of information pertaining to the sale of carrier-provided terminal
equipment, for which the carriers make claims of confidentiality.
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(3) The Commission is expending an increasing amount of time and resources in the regulation of
carrier-provided terminal equipment, particularly multiline equipment. As a result, fewer
resources can be allocated to the regulation of other services, particularly the carriers'
monopoly services. Moreover, so long as the Commission continues to regulate the carriers'
rates for multiline terminal equipment, it runs the risk of becoming a major determinant of
behavior in this highly competitive market. Such regulatory intervention could impede the
realization of the full benefits of competition in this market, and lead to inefficiency for which
telecommunications users would ultimately pay.
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(4) Regardless of the costing method adopted by the Commission in Phase III of the Cost Inquiry,
it appears that some time would likely be required before any costing system could be in place
for regulatory rate approval purposes. Accordingly, this regulatory tool would not be available to
assist in dealing with the aforementioned concerns in the immediate future.
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(5) The main concerns expressed by the carriers and by interveners, as well as the major
regulatory activity of the Commission, with regard to the terminal equipment market pertain
overwhelmingly to carrier-provided multiline and data terminal equipment.
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(6) Both Bell and B.C. Tel presently offer some of their multiline and data terminal equipment
through separate entities. In the case of the Bell group of companies, virtually all sales of new
multiline terminal equipment are made through a separate affiliate, Bell Communications
Systems Inc. B.C. Tel both sells and leases much of its multiline and data terminal equipment
through a separate division, Business Telecommunications Equipment (BTE).
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(7) In the case of BTE, in British Columbia Telephone Company, General Increase in
Rates, Telecom Decision CRTC 83-8, 22 June 1983 (Decision
83-8), the Commission indicated that it was not satisfied that B.C. Tel
had taken the necessary steps to develop and implement all possible safeguards to prevent
possible cross-subsidy. In this regard, the Commission further notes that B.C. Tel has recently
indicated, in response to interrogatory B.C.Tel(CRTC)22May 84/221IC, that, based on its 1982
5-Way Split Study, costs of its Terminal Gear category exceeded revenues from that category
by $22.9 million. While the Commission has yet to determine an appropriate costing
methodology in Phase III of the Cost Inquiry, it notes that the 5-Way Split is B.C. Tel's preferred
methodology.
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Based on its experience to date, the Commission considers that it would be desirable to seek means to lessen or entirely eliminate the regulation of multiline and data terminal equipment offered by Bell and B.C. Tel. This could result in benefits to these companies, users of such terminals and, assuming appropriate conditions for any such deregulation, the public interest generally. The principal objection to any such deregulation stems from the need to ensure that terminal equipment is not cross-subsidized by revenues received from the provision of monopoly services. Structural separation constitutes one method to alleviate this concern. Accordingly, the Commission has concluded that a proceeding should be initiated forthwith to consider the issue of structural separation with regard to multiline and data terminal equipment.
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In light of the above, the Commission has concluded that this proceeding should focus, at a detailed level, on the feasibility of implementing structural separation of the multiline and data terminal business of Bell and B.C. Tel. In addition, the Commission intends to examine the appropriateness of applying a similar approach to other federally regulated carriers. Accordingly, the Commission intends to follow the procedure outlined below.
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Procedure
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(1) Bell, B.C. Tel, CNCP Telecommunications, NorthwesTel Inc. and Terra Nova
Telecommunications Inc. (the regulated carriers) will be considered parties to this proceeding.
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(2) Other parties wishing to participate in this proceeding (the interveners) must notify the
Commission of their intention to do so by writing to Mr. Fernand Bélisle, Secretary General,
CRTC, Ottawa, Ontario, K1A 0N2, by 4 January 1985.
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(3) The Commission will issue a list providing the names and mailing addresses of the regulated
carriers and the interveners to all parties to this proceeding.
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(4) Bell and B.C. Tel are each directed to file with the Commission and serve on other parties, by
29 January 1985, a detailed proposal for conducting all of their respective multiline and data
terminal equipment business through a structurally separate affiliate. Each carrier's proposal
should address the items set out below providing supporting detail and reasons:
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(a) definitions of multiline and data terminal equipment;
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(b) a quantitative identification, referenced to the carrier's books of account, of all assets
encompassed by the definition;
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(c) a quantitative identification, referenced to the carrier's books of account, of all other assets
employed in the provision of multiline and data terminal equipment products and services;
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(d) a quantitative identification, referenced to the carrier's books of account, of any liabilities that
are specifically associated with the assets identified in (b) and (c) above;
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(e) a proposal as to which of the assets and liabilities identified in (b), (c) and (d) above should
be transferred to the separate affiliate;
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(f) a proposal for the valuation of assets to be transferred to the separate affiliate;
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(g) a quantitative identification of the amount of any capital gain or loss on the book investment
that would result based on the application of the valuation method proposed in (f) above or
on any alternative methods that may be proposed by the carriers;
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(h) a proposal as to the appropriate regulatory treatment of any capital gain or loss identified in
(g) above;
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(i) a quantitative identification and a proposal covering what liabilities, other than those identified
in (d) above, should be transferred to the separate affiliate;
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(j) a proposal for the capitalization of the separate affiliate;
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(k) a proposal for the financial arrangements related to the initial transfer of personnel to the
separate affiliate, and for the treatment of any subsequent personnel transfers between the
carrier and its affiliate:
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(l) a proposal concerning the sharing, if any, of personnel, assets and services, by the carrier
and its separate affiliate, that should be permitted, and the financial arrangements for such
shared activities;
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(m) a proposal for the regulatory monitoring of intercorporate transactions, including sharing
arrangements, between the carrier and its separate affiliate;
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(n) a proposal concerning any restrictions that should be implemented with regard to information
flows, particularly as regards proprietary information, between the carrier and its separate
affiliate;
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(o) a proposal concerning the regulatory monitoring of information flows as referred to in (n)
above;
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(p) a proposal regarding any additional measures considered by the carriers to be necessary to
safeguard against any possible cross-subsidy, or the granting of any undue preference, to its
separate affiliate; and
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(q) an estimate of the start-up and implementation costs that would be incurred by the carrier as
a result of the establishment of a structural separation requirement for multiline and data
terminal equipment and a proposal as to the treatment of such costs.
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(5) CNCP Telecommunciations, NorthwesTel Inc. and Terra Nova Telecommunications Inc. are
directed to file with the Commission and serve on parties of record, by 29 January 1985, either:
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(a) detailed proposals as required in paragraph (4) above from Bell and B.C. Tel; or
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(b) reasons why they should not be required to file such proposals, together with any alternative
proposal they may have to meet the concern that their terminal equipment offerings be
demonstrably free of any subsidy from monopoly and other regulated service revenues.
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(6) Together with the information required to be filed under (4) or (5) above, the regulated carriers
are requested to submit comments on:
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(a) whether there are any limitations on the Commission's jurisdiction to require that multiline
and data terminal equipment business be conducted by a structurally separate affiliate;
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(b) whether exemptions to any structural separation requirement should be established relating
to the marketing and servicing of terminal equipment by the carriers, for example, in rural
and remote areas; and
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(c) approaches other than structural separation that could be employed to ensure that
monopoly subscribers are not cross-subsidizing the carriers' multiline and data terminal
equipment business.
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(7) Any party wishing to file comments on the submissions made pursuant to paragraphs (4), (5)
or (6) must file them with the Commission, with a copy to all other parties, by 5 March 1985.
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(8) Any regulated carrier wishing to file reply comments must file them with the Commission, with a
copy to all other parties, by 2 April 1985.
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(9) Following receipt of the above submissions, the Commission will determine whether any further
public process will be necessary prior to rendering a decision on the issues raised in this
proceeding.
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Fernand Bélisle
Secretary General
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