ARCHIVED - Telecom Decision CRTC 85-19

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TELECOM DECISION

Ottawa, 29 August 1985

Telecom Decision CRTC 85-19

INTEREXCHANGE COMPETITION AND RELATED ISSUES

TABLE OF CONTENTS

I INTRODUCTION
A. General
B. Other Matters

II GENERAL CONSIDERATIONS

III CNCP'S APPLICATION FOR INTERCONNECTION TO PROVIDE LONG DISTANCE PUBLIC TELEPHONE SERVICE

A. Background

B. Legal Issues
1. Background
2. The Commission's Jurisdiction to Order Interconnection
(a) Submissions on the Interpretation of Section 265
(b) Submissions on the Interpretation of Section 320(7)
(c) Conclusions
3. Information Filed in Confidence With the Commission

C. The Application and the Public Interest
1. The Prima Facie Case in Support of the Application
2. Positions of Parties on the Application and the Public Interest
(a) Background
(b) Customer Choice and Supplier Responsiveness
(c) Quality of Service
(d) Rates for MTS/WATS, Including the Practice of Route-Averaging of Rates
(e) Innovation and Research and Development
(f) Efficiency of Suppliers of Telecommunications Services
(g) Impact on the Canadian Economy as a Whole
(h) Rates for Local Telephone Service and the Resultant Implications for the Universal Accessibility to and Affordability of Telephone Service
(i) Impact on Other Canadian Telephone Companies
3. Conclusion

IV THE LEVEL OF MTS/WATS RATES
A. Background
B. The Rate Rebalancing Proposals of Bell and B.C. Tel
C. Cost Evidence
1. The Five-Way Split Study Results
2. Recovery of Access Costs
D. The Case For and Against Rate Rebalancing
1. Bypass and Rate Rebalancing
2. Competitive Entry and Rate Rebalancing
3. The General Economic Impact of Rebalancing
4. The Impact of Rebalancing on Universal Accessibility to and Affordability of Telephone Service
5. The Impact of Rebalancing on Canadian Telephone Companies not Regulated by the CRTC
E. Conclusions

V RESALE AND SHARING
A. Background
B. Legal Issues
C. Positions of Parties
D. Conclusions
1. Entry Into the Resale and Sharing Market
2. Resale and Sharing to Provide MTS/WATS
3. Resale and Sharing to Provide Interexchange Services Other Than MTS/WATS
4. Resale and Sharing to Provide Intraexchange Services
5. Regulation
6. Directions

VI INTERCONNECTION OF INTRAEXCHANGE SYSTEMS
A. Background
B. Positions of Parties
C. Conclusions
D. Legal Issues
E. Technical Standards
F. Regulation
G. Directions

VII B.C. RAIL'S APPLICATION FOR INTERCONNECTION
A. Background
B. The Application and the Public Interest
1. The Prima Facie Case in Support of the Application
2. Positions of Parties on the Application and the Public Interest
(a) B.C. Rail Financial Plans
(b) Regulatory Treatment of B.C. Rail
(c) Impact on Other Canadian Telephone Companies
3. Conclusions
C. Commission Oversight, Reporting Requirements and Compensation
D. Order

I INTRODUCTION

For related documents see: Telecom Decisions CRTC 79-11, 81-13, 81-24, 82-14, 84-9, 84-18, 85-7 and 85-10 and CRTC Telecom Public Notices 1984-6, 1984-33 and 1984-43

A. General

At present, telephone companies are the sole providers in Canada of long distance public telephone service. Other inter exchange telecommunications services, such as private line voice and data transmission services, are provided by the telephone companies and, to a more limited extent, by CNCP Telecommunications (CNCP). Telesat Canada (Telesat) provides satellite telecommunications services to regulated Canadian common carriers and broadcasting undertakings. In addition, there are several private inter exchange telecommunications systems.

Under the terms of CNCP Telecommunications: Interconnection with Bell Canada, Telecom Decision CRTC 79-11, 17 May 1979, and CNCP Telecommunications: Interconnection with the British Columbia Telephone Company, Telecom Decision CRTC 81-24, 24 November 1981 (Decisions 79-11 and 81-24), Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel) are required to permit CNCP to interconnect with their facilities for the purpose of providing certain interconnected private line voice services and data transmission services.

On 25 October 1983, the Commission received an application from CNCP for orders requiring Bell and B.C. Tel to permit the interconnection of CNCP's telecommunications system with their public switched telephone networks to enable CNCP to provide long distance public telephone service, principally Message Toll Service (MTS) and Wide Area Telephone Service (WATS), (MTS/WATS).

On 4 November 1983, the Commission received an application from BC Rail Ltd. (B.C. Rail) for an order requiring B.C. Tel to permit B.C. Rail to interconnect its facilities to those of B.C. Tel under the same terms and conditions mutatis mutandis as those approved for CNCP's interconnection with B.C. Tel in Decision 81-24.

On 11 January 1984, the Commission issued CRTC Telecom Public Notice 1984-6 (Public Notice 1984-6) announcing a proceeding to deal with the applications of CNCP and B.C. Rail, the general question of whether further entry into inter exchange markets should be permitted, and a number of related issues. These included the appropriateness of existing carrier restrictions on the resale and sharing of carrier services, and the appropriateness of existing carrier restrictions on the interconnection with their facilities of intraexchange systems.

In Public Notice 1984-6, the Commission pointed out that its decisions arising out of this proceeding could have significant implications not only for federally-regulated carriers, but also for provincially-regulated carriers and their regulators. In light of this, the Commission invited the participation in the proceeding of the federal Department of Communications, provincial departments and agencies concerned with telecommunications regulatory policy, and provincially-regulated telecommunications common carriers. The Commission stated that the applicants, CNCP and B.C. Rail, and the respondents, Bell and B.C. Tel in respect of the CNCP application, and B.C. Tel in respect of the B.C. Rail application, would be considered parties to the proceeding. Since the issues to be addressed in the proceeding were relevant to all the federally-regulated carriers, the Commission directed that, in addition to Bell, B.C. Tel and CNCP, all other federally-regulated carriers be joined as parties to the proceeding. Finally, the Commission set out the procedure for others desiring to participate in the public hearing to be held or to submit written comments.

On 20 June 1984, in CRTC Telecom Public Notice 1984-33 (Public Notice 1984-33), the Commission took note of the number of people who had requested the opportunity to make oral presentations rather than merely submitting written comment concerning matters under consideration in the proceeding. The Commission announced that two regional hearings would be held in Vancouver, British Columbia, starting on 6 September 1984, and in Hull, Quebec, starting on 5 September 1984, to enable such people to make oral representations in a setting less formal than that of the central hearing scheduled for 2 October 1984, without requiring the submission of written evidence or availability for cross-examination. A further regional hearing was also held, in response to requests from the Minister responsible for Telecommunications in Manitoba and from others, in Winnipeg, Manitoba on 10 September 1984. The Commission stated that transcripts of these hearings would form part of the record of the proceeding.

On 31 August 1984, the Commission issued CRTC Telecom Public Notice 1984-43 which announced that a pre-hearing conference would be held and set out the issues which would be addressed as well as the procedures to be followed.

The pre-hearing conference, held in Hull, Quebec, on 12, 13 and 18 September 1984 dealt with the adequacy of responses to interrogatories, issues of confidentiality and the organization and conduct of the hearing.

At the central hearing, which commenced on 2 October 1984, the Commission announced its decision to include in the record of the proceeding all written comments received by it prior to the completion of the examination of witnesses. The Commission stated that while such comments could not be addressed in cross-examination or reply evidence under these circumstances, parties would be able to deal with them in final argument. Further, the Commission stated that it would take into account the lack of opportunity for parties to address these comments in cross-examination or reply evidence in determining the weight to be given to such comments.

The Commission contracted with Goss, Gilroy and Associates Ltd. to provide an assessment of the opportunities for resale and sharing in the territories of the federally-regulated carriers in the Canadian telecommunications market. The Commission filed the Goss, Gilroy and Associates Ltd. Report entitled "A Study of Telephone Resale and Sharing in the United States and Canada" as an exhibit. The Commission also placed on the record a copy of a study prepared by Peat, Marwick and Partners (Peat, Marwick) entitled "Impacts of Competition in Message Toll Telephone Services - A Study Carried Out for the Department of Communications and Provincial Governments."

The following parties appeared or were represented at the hearing: Alberta Government Telephones (AGT); Bell; B.C. Rail; B.C. Tel; Canadian Business Telecommunications Alliance, Association of Competitive Telecommunications Suppliers, Broadcast News Limited, Canadian Business Equipment Manufacturers Association, Canadian Petroleum Association, Canadian Press, CMQ Communications Inc., Hotel Association of Canada Incorporated, Ontario Hotel and Motel Association, Telephone Answering Association of Canada, The Canadian Bankers' Association, and The Canadian Radio Common Carriers Association (collectively referred to as, CBTA et al); Canadian Cable Television Association (CCTA); Canadian Federation of Communications Workers (CFCW); Canadian Independent Telephone Association (CITA); Cantel Cellular Radio Group Inc. (Cantel); CNCP; Communications, Electronic, Electrical, Technical and Salaried Workers of Canada (CWC); Consumers' Association of Canada (CAC); CTG Inc. (CTG); Director of Investigation and Research, Combines Investigation Act (the Director); edmonton telephones for the City of Edmonton (Edmonton); The Federated Anti-Poverty Groups of British Columbia, The British Columbia Old Age Pensioners' Organization, Kennedy House Senior Recreation Centre, Lower Mainland Alliance of Information Referral Services, Save Our Shores, Society For Promoting Environmental Conservation, The British Columbia Provincial Council of Women, United Elders' Association of British Columbia, and West End Seniors' Network (collectively referred to as FAPG et al); Government of Ontario (Ontario); Government of Quebec (Quebec); Hurontario Telephones Limited (Hurontario); Manitoba Telephone System (Manitoba Tel), Maritime Telegraph and Telephone Company, Limited, and The Island Telephone Company, Limited (collectively referred to as MT&T et al); National Anti-Poverty Organization (NAPO); Newfoundland Telephone Company Limited (Nfld. Tel); NorthwesTel Inc. (NorthwesTel); Ontario Municipal Electric Association (OMEA); Telecommunications Workers' Union (TWU); Telesat; Terra Nova Telecommunications Inc. (Terra Nova); and The New Brunswick Telephone Company, Limited (NB Tel).

The proceeding entailed 36 days of hearings including five days of regional hearings and three for the pre-hearing conference. It resulted in 7219 pages of transcript. In addition, 194 exhibits were filed in evidence comprising hundreds of pages of information. There were also approximately 1700 interrogatories and responses entered into evidence, many of which consisted of multi-part questions and answers.

The central hearing was adjourned on 16 November 1984. In accordance with the schedule set out by the Commission, CNCP and B.C. Rail filed final argument in support of their applications by 7 December 1984. All parties filed final argument respecting the issues set out in Public Notice 1984-6 by 24 December 1984. Parties other than the respondents filed final argument concerning the applications also by 24 December 1984. All parties filed reply argument respecting the issues set out in Public Notice 1984-6 by 21 January 1985. On the same date, the respondents filed final argument concerning the applications. Finally, the applicants filed reply argument in support of their applications by 11 February 1985.

The central hearing was held before Commissioners John E. Lawrence (Chairman), Andre Bureau, Monique Coupal, Paul H. Klingle and Jean-Pierre Mongeau. Commissioner Klingle's term on the Commission expired 31 March 1985 and, accordingly, this decision has been taken by Commissioners Lawrence, Bureau, Coupal and Mongeau.

B. Other Matters

On 3 October 1984, the Director, in a motion, requested that the Commission request the CWC to stop an advertising campaign which dealt with the impact of competition. The Commission invited appearing parties to make oral submissions on the motion and a number of parties did so.

On 4 October 1984, the Commission stated that it would be neither possible nor appropriate to attempt to prevent all public comment on the grounds that the issue is before the Commission for a decision. The Commission noted, however, as it had in Decision 79-11, the seriousness with which it would view partisan comments which prejudice the impartiality of the proceedings before the Commission. The Commission concluded that in the present case, "it is in the public interest that all parties exercise all reasonable restraint in making public comment on the issues before it in this proceeding."

Since the conclusion of the hearing, Bell and B.C. Tel have written to the Commission complaining that representatives of CNCP have spoken publicly and engaged in advertising campaigns relating to matters that were raised in the course of the proceeding. TWU has also written to the Commission complaining that CNCP is in contempt of the Commission and has violated the Commission's rules for public comment by virtue of a letter sent by CNCP to members of the Canadian Public Relations Society on the subject of long distance competition. In the letter, CNCP had characterized the TWU position as "deliberate distortion" and "misinformation". In answer, CNCP submitted that its letter was private, not public, comment. CNCP argued that the Commission's ruling was not intended to place restraint on private comment. In addition, CNCP submitted that its letter was aimed at the political forum and not the proceeding before the Commission. In reply, TWU argued that the CNCP letter was sufficiently public" to bring it within the scope of the Commission's ruling.

The Commission advised TWU and CNCP that it would deal with this matter in the present decision. The CNCP letter was addressed to members of the Canadian Public Relations Society who are likely, in the course of their professional responsibilities, to be involved, on a regular and ongoing basis, with members of the various media, who in turn report on the subject of long distance competition. Further, the CNCP letter goes beyond a recital of facts relating to CNCP's case to make comments on the way in which another party to a proceeding before the Commission is presenting its opposing case. In the Commission's view, the CNCP letter is fairly characterized as partisan public comment on an issue before the Commission.

CNCP's submission that its letter was aimed at the political forum and not the proceeding before the Commission raises the issue of the interplay of two distinct processes: the Commission proceeding resulting in a decision which may in turn be the subject of a review process by the Governor-in-Council pursuant to section 64(1) of the National Transportation Act. CNCP's response to the TWU complaint raises the question of whether it is appropriate for a party to the Commission proceeding to commence public efforts designed to influence the Governor-in-Council review process before the Commission has rendered its decision.

In the Commission's opinion, the process acceptable to a tribunal acting as a court of record, subject to the doctrine of official notice, and the process inherent in political decision-making are quite different. In order to safeguard the integrity and usefulness of the process appropriate to the former without at the same time interfering with the process suitable to the latter, the Commission considers that it would be desirable, in the public interest, that parties to a proceeding should not engage in partisan public comment on issues which are before the Commission for adjudication from the time of filing of an application to the date of the Commission's decision.

II GENERAL CONSIDERATIONS

The most important question before the Commission in this proceeding was whether, and if so, to what extent, the long distance telecommunications market should be opened to further competitive entry. The specific applications of CNCP to be permitted to interconnect its facilities with those of Bell and B.C. Tel to enable it to offer MTS/WATS service and of B.C. Rail to be permitted to interconnect its facilities with those of B.C. Tel to enable it to offer certain inter exchange private line voice and data transmission services were dealt with in the context of this general issue.

No more difficult question of telecommunications regulatory policy has been before the Commission. Indeed, in this proceeding, many parties urged the Commission to defer a decision until such time as federal and provincial governments collectively determined comprehensive policies governing the structure of the telecommunications industry in Canada. At the commencement of the 2 October 1984 public hearing, the Commission ruled on a specific motion to this effect put forward by TWU. The Commission ruled that it is obliged by statute to consider the applications before it in this proceeding in a timely manner. However, it also recognized as legitimate the concern that decisions arising out of this proceeding could potentially have significant effects not only for the companies regulated by the CRTC and their subscribers, but also for provincially-regulated telephone companies and their subscribers.

In this regard, the Commission notes the fact that, in announcing its ongoing telecommunications policy review on 13 January 1984, the Department of Communications indicated that the Commission's decision on the issues before it in this proceeding would be an important factor to be taken into account by it in that review. The Commission also notes that, as announced on 20 June 1985, the Federal Minister of Communications has invited his provincial counterparts to a Federal-Provincial conference on telecommunications to take place in October of this year to exchange views and move toward a consensus on the future of the Canadian telecommunications system.

The decision-making process in this proceeding has been made particularly difficult by virtue of the fact that little specific guidance as to industry structure is provided by the provisions of the governing legislation under which the Commission must consider the applications and related issues before it. The tests provided in the legislation are worded in broad, general terms which, accordingly, leave a large amount of discretion to the Commission to determine what action would be in the public interest. In particular, the legislation does not specifically endorse either the monopoly or the competitive provision of any telecommunications service. On the other hand, the Commission is of the view, for the reasons stated in Decision 79-11, that where an applicant shows on a prima facie basis that interconnection would be useful to its business, that the duplication of the facilities sought would not be desirable in the public interest, and that no unreasonable technical harm would result from the interconnection, the burden of proof shifts to those supporting the denial of such access to justify that such denial of access would be in the public interest.

In Decision 79-11, the Commission elaborated a number of factors to be considered in giving content to the public interest test. It stated as follows:

In weighing the public interest, the Commission should place the widest possible scope on this test, and consider carefully any significant benefits or disadvantages which would arise in granting the Application, including those presented by the Applicant, the Respondent, or any interveners. Without limiting the generality of the foregoing, the Commission considers that this examination should include the effect of interconnection on such matters as:

. universality of service

. consumer choice and responsiveness to consumer need

. quality of service

. the justness and reasonableness of subscriber rates (including subscribers of connecting companies)

. the requirement that rates and conditions of service not confer an undue preference or disadvantage innovation in the telecommunications industry, and

. in Canadian business generally efficiency of telecommunications systems

. optimal allocation of resources taking account of geographic differences

. the structure of rates, including route-averaged pricing, rate group structures, and rural service rates

. industry structure.

In Public Notice 1984-6, the Commission, in conformity with this approach, requested comment on the advantages and disadvantages of various types of competitive entry in terms of their impact on carrier revenues, rates, rate relationships, service quality, innovation and efficiency. It indicated that the potential loss of contribution from inter exchange services to the overall revenue requirement of the regulated telecommunications carriers would be of major concern in determining whether competitive entry should be permitted. This issue was the subject of extensive evidence and argument, both in the context of CNCP's application and in the context of illustrative rate rebalancing proposals put forward by Bell and B.C. Tel to bring the rates for both local and long distance telephone service more in line with what was viewed by those companies as the respective costs of these services.

The Commission wishes to emphasize that, under the existing legislation, it has no mandate to favour either the monopoly or the competitive supply of telecommunications services per se. In previous decisions with regard to the private line, terminal equipment, enhanced services, mobile telephone, and cellular radio-telephone markets, the Commission has permitted various types of competition to take place. Each of these decisions was based on an assessment that it would afford significant advantages to users generally in terms of price and service and that such advantages outweighed any potential disadvantages that might arise. The underlying regulatory approach was, and is, to weigh the potential advantages and disadvantages of any proposal for liberalized entry and to seek to balance fairly the often conflicting interests of all concerned, including the interests of the various groups of subscribers, the carriers and competitors in a manner that is most likely to serve the public interest broadly defined.

III CNCP'S APPLICATION FOR INTERCONNECTION TO PROVIDE LONG DISTANCE PUBLIC TELEPHONE SERVICE

A. Background

CNCP applied for orders, pursuant to section 265 of the Railway Act, requiring Bell and B.C. Tel to afford all reasonable and proper facilities for the interchange, between CNCP's telecommunications system and Bell's and B.C. Tel's public switched telephone networks, of traffic originating from or destined for any terminal connected to any such public switched telephone network, or originating from and destined for any terminal or terminals connected to any such public switched telephone network or networks. CNCP also relied on section 320 of the Railway Act to the extent that it might be required for any particular facility or facilities.

CNCP stated that it had not tried to enter the long distance public telephone MTS/WATS market before this time due to both the lack of apparent public demand for an alternative supplier and CNCP's own perception of its business as being that of a supplier of private line voice, message record and data communication services. CNCP indicated that its decision to apply for orders permitting its entry into the inter exchange telephone market was due to several relatively recent developments.

The developments noted by CNCP include:

i) growth in public demand for more extensive competition in telecommunications, particularly regarding inter exchange telephone service;

ii) the favouring by Canadian public policy of competitive supply of private and public telecommunications services;

iii) technological developments which are improving the ability of public switched telephone networks to carry data traffic formerly carried on separate networks, thus tending to obliterate distinctions between monopoly supplied public telephone markets and competitively supplied data markets; and

iv) the provision, through new technology applications, of services on public switched telephone networks as substitutes for services supplied competitively on separate networks, which causes erosion of markets for these separate networks and gives rise to inconsistency between monopoly in the public switched telephone networks market and competition in other long distance markets.

In its application, CNCP stated that if its application were approved, it intended to "expand its services provided pursuant to this application to as many local public switched telephone networks as is compatible with the economic viability of such services over-all and with the resources of the firm, with the ultimate goal of providing universal service." CNCP stated that, in this way, competitive inter exchange telephone service could be supplied without uneconomic duplication of existing local public switched telephone networks.

CNCP stated during the proceeding that it was committed to providing universal service but that the rate of expansion of its service toward that goal would depend on a number of factors including the level of contribution payments and the cost of facilities required to achieve universal service. Within the operating territories of Bell and B.C. Tel, CNCP indicated that it anticipated serving all cities with populations greater than 25,000 people by the end of its fifth year of operation and providing universal service by year ten. Further, CNCP was of the view that the Commission should enforce only CNCP's broad commitment to provide universal service rather than every detail of its proposed roll-out plan.

With regard to compensation, CNCP stated in its application its willingness to pay to Bell and B.C. Tel whatever compensation the Commission might find reasonable for the facilities required for the interchange of the traffic in question. Further, CNCP stated that, assuming Bell and B.C. Tel are required to provide services at less than cost and that granting the application would prejudice their ability to do so, it would be willing to pay any additional compensation which the Commission might determine to be reasonable. CNCP took the view that, under these conditions, the granting of the application would not affect adversely local public telephone rates or public telephone service to remote areas.

With regard to rates, CNCP indicated that in the event that the application were granted, it contemplated the maintenance of route-averaged rate structures for inter exchange telephone service on its part and that of Bell and B.C. Tel for as long as the Commission finds it to be in the public interest.

With respect to the facilities required to effect the interchange of traffic described in the application, CNCP requested connection arrangements with Bell and B.C. Tel public switched networks as follows:

i) line connection of a CNCP switch to a telephone company class 5 switch (identical to a Type 1 connection as defined in Decision 79-11);

ii) direct access line connection between a CNCP switch and a subscriber's terminal equipment or Centrex facility which is, in turn, connected to telephone company central office switching equipment or a private circuit. (The direct access line connection would be identical to a Type 2 connection as defined in Decision 79-11);

iii) trunk connection of a CNCP switch to a telephone company class 5 switch (identical to a Type1 connection as defined in Decision 79-11);

iv) connection of a CNCP switch to a telephone company local tandem switch (similar to a Type 1 connection as defined in Decision 79-11); and

v) connection of a CNCP switch directly to a telephone company toll switch.

B. Legal Issues

1. Background

The CNCP application was based primarily on two sections of the Railway Act which confer specific authority on the Commission to make orders respecting the interconnection of systems and the exchange of traffic. In Decision 79-11, the Commission discussed the application of these provisions, sections 265 and 320(7), (8) and (9) of the Railway Act and certain other general powers, to telecommunications companies and traffic.

In Decision 79-11, the Commission disposed of a number of submissions by parties regarding the Commission's jurisdiction to issue orders under sections 265 and 320 of the Railway Act. In the present case, CNCP relied upon another interpretation of the Commission's jurisdiction under section 265 and in addition argued that section 320(7) applies to only a small portion of its 1983 application.

CNCP also raised the question of whether the Commission may rely upon information filed with the Commission in confidence to dispose of its application. These submissions are dealt with in turn below.

2. The Commission's Jurisdiction to Order Interconnection

(a) Submissions on the Interpretation of Section 265

CNCP argued that when one reads together sections 265 and 320(12), an obligation to afford reasonable and proper facilities for interchange of traffic between their respective systems is imposed on telegraph or telephone companies within the legislative authority of the Parliament of Canada. CNCP argued that this obligation is not conditional upon an order of the Commission. Based on this interpretation of section 265, CNCP asked the Commission to enforce the obligation which is imposed on Bell and B.C. Tel by section 265. In CNCP's submission, section 265(1) does not require the Commission to decide whether the respondents should afford all reasonable and proper facilities for the interchange of public telephone traffic with CNCP. CNCP stated that the only issue for the Commission to decide is whether the facilities sought by CNCP are "reasonable and proper facilities" for the interchange of public telephone traffic.

A number of parties addressed CNCP's submissions concerning the scope of section 265(1). FAPG et al submitted that the wording of section 265(7) to the effect that "the Commission may order that ... any specified steps, systems or methods be taken or followed ..." incorporates into section 265 a discretion on the Commission's part to consider the merits and the public interest of the application. CAC agreed that the Commission has discretion in dealing with an application filed under section 265. FAPG et al agreed with TWU that the Commission is required to exercise its discretion in order to protect the public interest.

NAPO argued that section 265 does not give the Commission the power to grant the CNCP application. In support of this argument, NAPO submitted that section 265 can only be invoked by a telephone company faced with a bottleneck such that it is not able to interconnect its telephone system with the system of another telephone company.

AGT relied upon the legal arguments it had made in connection with the 1976 CNCP application for interconnection with Bell's network. In that case, AGT had argued that section 265 could not be considered applicable to telecommunications. AGT argued that when the terms relating to telephones and telegraphs in section 320(12) are substituted for the railway terms in section 265, certain phrases remain which are not referrable to telecommunications.

Bell submitted that CNCP's argument that section 265(1) of the Railway Act obliges Bell to provide reasonable facilities for interchange of traffic in the present application is unfounded, and that section 320(7) of the Railway Act governs the CNCP application. Bell's position is addressed below in section (b). B.C. Tel did not accept the narrow interpretation of section 265 put forth by CNCP, arguing that there is no obligation on B.C. Tel to provide facilities to CNCP unless the Commission is satisfied that CNCP has first established on a prima facie basis a case for approval and secondly, that approval is in the public interest.

In reply, CNCP submitted that the fundamental legal issue before the Commission in the present case is not whether it has the authority to order interconnection between federally-regulated carriers, but whether there are any differences between the authority conferred by sections 265 and by section 320(7).

(b) Submissions on the Interpretation of Section 320(7)

CNCP argued that only the facilities sought for the connection of its broadband exchange network fall within the scope of sections 320(7) and (9). In this regard, CNCP admitted that the Commission is charged with deciding whether connection to the local public switched telephone networks would "in all the circumstances ... seem just and reasonable."

Bell argued that section 265 cannot be relied upon by CNCP in the present application, if, and to the extent that, there is a conflict between the terms of section 320(7) and the terms of section 265. Bell submitted that in the case of such a conflict, the terms of section 320(7) must prevail. In support of this submission, Bell relied upon the rule of statutory interpretation that specific legislation overrides general legislation in the case of a conflict and specifically that earlier specific legislation overrides subsequent general legislation. In this regard, Bell noted that the predecessor to section 320(7) was enacted in 1906, while the predecessor to section 265 was made applicable to telephone and telegraph traffic in 1908. Section 320(7) is a special enactment directed only to the interconnection in certain circumstances of telephone systems or lines, while section 265 is of wider application, applying to both telephone and telegraph traffic.

Bell argued that the 1983 CNCP application falls wholly and directly within section 320(7) given that it relates to the interconnection of CNCP's telephone system or lines with the telephone system or lines of Bell. All traffic to be transmitted over the interconnected systems of CNCP and Bell as a result of interconnection would require "direct communication" between either a telephone or telephone exchange (central office) on CNCP's system and a telephone or telephone exchange (central office) on Bell's system. Bell argued that "direct communication" is not limited to "voice communication".

In reply, CNCP argued that section 320(7) does not apply to CNCP's entire application, arguing that under section 320(7) the purpose of the connection applied for must be communication between telephones or telephone exchanges, one of which is on the applicant's telephone system and the other of which is the respondent's telephone system. Insofar as long distance public telephone service is concerned, CNCP argued that the telephones are all on the telephone exchanges of Bell or B.C. Tel, and that therefore the communication which will be provided by the connections sought by CNCP does not include "communication between a telephone or telephone exchange on the applicant's system and a telephone or telephone exchange on the respondent's system". In support of this argument, CNCP relied upon the dictionary definition of "telephone exchange". In CNCP ' s view, there are no telephones or telephone exchanges on its system. In summary, CNCP submitted that section 320(7) does not apply to any part of the CNCP application save for the broadband exchange network aspect. Hence, it is not necessary, according to CNCP, to address whether or not there is a conflict between sections 320(7) and 265, or for that matter which one prevails.

In Decision 79-11, at page 93, the Commission concluded that interconnection between the systems of Bell and CNCP could be ordered under both section 320(7) and section 265. The Commission noted that the statutory tests to be applied under the respective sections are closely related and can be read together.

In the Commission's view, sections 320 and 321, which were enacted to deal specifically with the regulation of telecommunications companies and traffic, constitute the cornerstone for regulation of telecommunications activities under the Railway Act. Section 320(12) sets out the application of other provisions of the Railway Act to companies as that term is defined in section 320(1). Specifically, section 320(12) provides that certain other provisions of the Railway Act apply to telecommunications activities insofar as reasonably applicable and not inconsistent with sections 320 and 321 of the Railway Act or any Special Act. One of the provisions that Parliament has specified in section 320(12) to apply to telecommunications activities is section 265.

In the Commission's opinion, therefore, sections 320 and 321 of the Railway Act were clearly intended to supplement the power to order interconnection contained in section 265 of the Railway Act and section 265 must be read with section 320(7) when dealing with the CNCP application.

The Commission agrees with the submissions of Bell that "direct communication" need not be limited to "voice communication" and that some form of direct communication is required for the transmission of traffic as a result of the interconnection. Although the Commission agrees with the submissions by Bell to the effect that section 320(7) would prevail over section 265 in the event of such a conflict, in the Commission's view, there is no necessary conflict between these two statutory provisions. When sections 265 and 320(7) and (9) are read together, the Commission must first decide whether or not the facilities sought are "reasonable and proper". In addition, before exercising its discretion to issue an order under sections 320(7) and (9), the Commission must decide (i) whether the terms of the "use, connection or communications" applied for are "just and expedient"; (ii) whether "the interconnection can be made or exercised satisfactorily and without undue or unreasonable injury to or interference with the telephone business or the company"; and (iii) whether "in all the circumstances" it is "just and reasonable" to grant the interconnection order.

3. Information Filed in Confidence With the Commission

CNCP took the position that it is not open to the Commission to rely upon information submitted to it in confidence by the telephone companies in disposing of CNCP's application. As to whether the confidentiality provisions of section 331 of the Railway Act and section 19 of the CRTC Telecommunications Rules of Procedure (the Rules) apply to the CNCP application, CNCP argued that the common law rules of natural justice have not been abrogated by these provisions. Further, section 331 expressly states that it applies to investigations under the Railway Act. Insofar as CNCP's application is concerned, CNCP argued that the Commission is not exercising any powers of investigation conferred by the Railway Act. Rather, the Commission is exercising the authority to hear and determine a complaint which is conferred upon it by section 45 of the National Transportation Act. CNCP noted that section 17 of the National Transportation A requires that a complaint under section 45 be heard and determined in open court.

CNCP argued that, while it may be open to the Commission to decide a general rate application on the basis of confidential information as to costs, it is not open to the Commission to decide a complaint by "any party interested" under section 45 on the basis of confidential information.

In reply, Bell addressed the CNCP submission concerning the application of the rules of natural justice, to the use of information filed in confidence, by the Commission to dispose of CNCP's application. Bell suggested that the common law requirements of fairness and natural justice require a fair opportunity to contradict or respond to the case being made against the party. In Bell's view, this does not necessarily require disclosure of every detail of the record. Bell argued that section 335 of the Railway Act by virtue of subsection (2) thereof is applicable to "any inquiry that the Commission deems it expedient to make in connection with any of the matters in this section aforesaid". These matters would include the assets and liabilities of a telephone company, the cost of constructing installations, and the extent, nature, value and particulars of the property, earnings and business of a telephone company. Bell argued that although the CNCP application is brought under section 265 of the Railway Act, there is no reason to assume that sections 331 and 335 would not apply to the CNCP application.

B.C. Tel argued that the Commission has the jurisdiction to hear and consider evidence filed with it in confidence by a party to a proceeding. B.C. Tel noted that the Commission is empowered under section 65 of the National Transportation Act to create its own rules and procedures, that section 3 of the Rules makes the Rules applicable to all proceedings before the Commission, and that section 19 of the Rules is of general application to all proceedings before the Commission. Noting that natural justice is really "fair play in action", B.C. Tel submitted that the requirements of natural justice will depend on "the circumstances of the case, the nature of the enquiry, the rules under which the tribunal is acting, the subject matter that is being dealt with, and so forth". (Ridge v Baldwin [1962] 1 All E.R. 834 at 850 and Russell v Duke of Norfolk and Others [1949] 1 All E.R. log (C.A.).)

Whether or not this proceeding may be characterized as an investigation within the meaning of section 331 of the Railway Act, the Commission accepts Bell's submission that section 335 of the Railway Act is applicable to the information filed by Bell and B.C. Tel in confidence with the Commission in this proceeding. On two occasions during this proceeding, the Commission ordered Bell and B.C. Tel to disclose publicly large amounts of the information which each had initially filed with the Commission in confidence. Moreover, in reaching its decision on the CNCP application, the Commission has not relied upon any information filed with the Commission by the telephone companies for which a claim of confidentiality was upheld. In view of this, the Commission is of the opinion that the requirements of natural justice have been fully respected.

C. The Application and the Public Interest

The previous section discussed the jurisdiction of the Commission to dispose of the CNCP application. The test which the Commission has applied in considering that application is the public interest test enunciated in Decision 79-11 and discussed previously in Part II - General Considerations.

1. The Prima Facie Case in Support of the Application

None of the parties except B.C. Tel argued that CNCP had failed to make a prima facie case in support of its application. The Commission finds that CNCP has made a prima facie case that interconnection would be useful for its business, the duplication of the facilities sought would not be desirable in the public interest, and no unreasonable technical harm would result from the interconnection. Accordingly, the Commission must determine whether on balance the potential benefits of granting CNCP's application outweigh any potential disadvantages associated therewith.

2. Positions of Parties on the Application and the Public Interest

(a) Background

The Commission has assessed the potentiaL benefits and disadvantages of granting CNCP's application in terms of the following factors:

- customer choice and supplier responsiveness
- quality of service
- rates for MTS and WATS, including the practice of route-averaging of rates
- innovation and research and development
- efficiency of suppliers of telecommunications services
- impact on the Canadian economy as a whole
- rates for local telephone service and the resultant implications for the universal accessibility to and affordability of telephone service
- impact on other Canadian telephone companies

(b) Customer Choice and Supplier Responsiveness

Supported by its user witnesses and by CBTA et al and the director, CNCP argued that the availability of customer choice is a basic benefit of competition.

Bell argued that, since CNCP proposes to offer basically the same services as the telephone companies, only some customers would perceive supplier choice as a benefit. Bell stated that having to deal with multiple suppliers could be a disadvantage to customers and that therefore customer choice is not necessarily a benefit of competition.

B.C. Tel argued that, while supplier responsiveness would increase under competition, this would benefit primarily large customers possibly at the expense of smaller customers.

CFCW stated that while any type of competitive entry would increase choice, none of the evidence showed a lack of supplier responsiveness requiring competition. Finally, MT&T et al argued that customer choice would not be a critical benefit.

CNCP stated that it would provide service of equal quality to that provided by the telephone companies. It did acknowledge that there could be some initial transmission quality shortcomings as a result of the interconnection arrangements received, but said that acceptable quality could be assured through careful design. CNCP stated that it would maintain continuous surveillance of transmission quality. OMEA supported CNCP, arguing that the integrity of the public switched network could be protected by adherence to system standards.

Bell argued that service quality provided by competitors would be at best comparable to that of the telephone companies.

B.C. Tel suggested that competitors might offer a lower quality discount service as a means of varying service options. CBTA et al agreed that there would be offerings of varying quality at varying price levels but saw this as a benefit rather than a disadvantage of competition.

AGT and NB Tel argued that competitive entry has caused a general deterioration in service quality in the U.S. CFCW was convinced that overall service quality would decline in Canada.

(d) Rates for MTS/WATS, Including the Practice of Route-Averaging of Rates

CNCP indicated that the magnitude of its proposed MTS/WATS price reductions of up to 30% below Bell's and B.C. Tel's current rates is an expectation, not an undertaking.

CNCP also indicated that it would maintain route-averaged rate structures for long distance public telephone service as long as the Commission finds this to be in the public interest.

Bell and B.C. Tel did not dispute that competition in the provision of inter exchange services would result in lower long distance rates. However, they argued that rates should be rebalanced prior to further competitive entry.

AGT, CTG, the Director and NB Tel agreed that competition would reduce rates. The Director noted that no party had disagreed with this contention. The Director also argued that the significant difference between Canadian and U.S. rates could not be maintained in the long run.

With regard to CNCP's price discounts, a number of parties argued that these would not be available to customers not served by CNCP. Several parties, notably AGT, Bell, CAC and TWU, also expressed concern about whether CNCP would meet its commitment to provide universal service.

(e) Innovation and Research and Development

CNCP argued that increased competition would result in faster and more extensive diffusion of technological improvements with a resulting speed-up in the introduction of new telecommunications services and an improvement in the quality and variety of telecommunications service offerings. User witnesses supporting CNCP, such as I.P. Sharp Associates Ltd. and Tye-Sil Corporation Ltd., viewed competition as a spur to the development and introduction of innovative telecommunications services at better prices.

In terms of CNCP's past performance, CNCP referred to Mr. Sutherland's evidence that Research and Development (R&D) expenditures had not been up to expectations owing to the recession, and that CNCP had cut back on discretionary spending rather than lay off employees. CNCP expressed its intention to do more R&D in the future.

On CNCP's role in R&D, Mr. Sutherland testified that, rather than conducting basic research or hardware development, CNCP concentrated on application engineering and putting into place the ideas and hardware that had been developed by others.

CBTA et al, CTG, the Director and OMEA stated that the evidence strongly supports the view that competition spurs innovation. CBTA et al further noted that, even where competitors' technical quality of service was identical, innovation through new pricing approaches could stimulate demand.

Professor T.A. Wilson, a witness on behalf of CNCP, argued that a regulated monopoly, owing to the desire to protect its rate base, may lack the incentive to bring innovations to the market place. Professor Irwin, a witness for the Director, stated that in the United States, AT&T and the Bell Laboratories acknowledged that they had neglected R&D on local loops, local switching and transmission because they lacked competitive incentive.

Bell stated that other industry structures could produce results, in the sphere of R&D and innovation, similar to or better than those produced by competition. Bell and B.C. Tel argued that entry should not be expected to spur significantly more technological innovation but acknowledged that competition could accelerate the diffusion of new technology.

AGT, CFCW, MT&T et al, NAPO, NB Tel and Nfld. Tel stated that there was no solid evidence that competition spurs innovation. Manitoba Anti-Poverty Organization (MAPO) submitted that, while competition may lead to innovation, this may not benefit the average consumer. Several of these parties argued that CNCP's past R&D performance was contrary to its evidence concerning innovation.

(f) Efficiency of Suppliers of Telecommunications Services

A basic question raised as a result of Public Notice 1984-6 was whether the total costs of supplying telecommunications services would increase or decrease as a result of CNCP's competitive entry. This question requires an examination of three central issues: whether the inter exchange market constitutes a natural monopoly; whether increased competition would lead the telephone companies to become more efficient; and whether CNCP would be an efficient provider of MTS/WATS.

1. The Question of Natural Monopoly

The natural monopoly question asks whether a single firm can provide particular telecommunications services more efficiently than several firms. Only NAPO argued that the telephone industry is a natural monopoly, at least insofar as transmission is concerned. NAPO argued that the telephone companies can take advantage of such great economies of scale and scope that no small competitor can match their costs. Thus, NAPO argued that, failing some significant change in technology, to suggest that price competition would lead to lower consumer cost would be sheer speculation.

CNCP believed that the evidence on product-specific economies of scale and scope in long distance telephone services is inconclusive and suggested that there is some evidence that the industry is not a natural monopoly.

Both Bell and B.C. Tel conceded that their toll markets are of sufficient size to sustain an additional supplier. While acknowledging that more than one supplier could achieve economies of scale in the provision of inter exchange services, Bell argued that monopoly provision of these services might nonetheless be the best way to take advantage of available scale economies and minimize unit costs. It stated that technological trends in the industry appear to be such that the scale economies of network services are increasing. Supported by AGT, CFCW and NB Tel, Bell argued that, to the extent that competitors inhibited the ability of the telephone companies to take advantage of large scale provisioning, competition would tend to increase the cost of supply of network services. B.C. Tel added that the Canadian market is small in relation to the U.S. market, and that fragmentation of the Canadian market would increase costs of supply and be counter to Canadian interests.

Bell argued that monopoly favours efficient network planning, design and operations, and that increased competition would lead to increased uncertainty for network planners in terms of increasing the risk of stranded investment, provisioning errors and related costs. Further, Bell and B.C. Tel argued that network planning efficiency would be decreased owing to the creation of multiple networks.

Dr. Frank, testifying on behalf of CNCP, stated that it was not clear that competition would have a negative impact on the efficiency of network planning and design. According to Dr. Frank, the planning processes for any large network require a number of inputs concerning user requirements over a long period of time, and it was not clear that the process by which those inputs would be gathered would change very much with competition. Dr. Frank suggested that if CNCP, rather than end users, provided some of those inputs, the process might in fact be improved.

2. Efficiency of Telephone Companies

Professor T.A. Wilson, testifying on behalf of CNCP, stated that there is no reason to assume that a regulated monopoly has minimized its costs; indeed, under rate of return regulation, a regulated monopoly may have an incentive to expand its rate base through excessive capital investments. Professor Wilson believed that the introduction of competition into a regulated market would likely generate pressures for prices to move closer to costs. As rates decreased in response to competitive pressures, the average use of capacity would gradually increase and, hence, average unit costs would be reduced along with average prices.

The Peat, Marwick study concluded that competitive pressures would cause the telephone companies to achieve cost reductions through increased productivity and reduced investment. In support of this conclusion, the study cited examples of industries (airlines and trucking in the U.S.) in which cost reductions had actually occurred as the result of competition.

The study indicated that, with inter exchange competition, cost reductions of about 4% to 5% might be achieved and that these savings would be passed on to subscribers in the form of toll rate reductions of 3%. The study also indicated that competition could be preferable to rate rebalancing due to productivity improvements arising from the former.

Mr. Elek, of Peat, Marwick, stated that with competition a 4% or 5% productivity improvement for the telephone companies appeared reasonable, but agreed that 3% or 10% would be just as likely. Mr. Elek also stated that, with competition, cost reductions could take place in any part of the telephone company's operations and need not be limited to long distance service. In support, he stated that a lot of productivity improvements had occurred as a result of competition in the terminal field. He acknowledged, however, that competitive pressures could cause certain telephone company expenses, such as advertising, to increase.

Professor Irwin, appearing on behalf of the Director, discussed the magnitude of AT&T's cost reductions caused by competition. He pointed out, as examples, that AT&T had discontinued the Bell Journal of Management and Economics and shut down five manufacturing plants while their usefulness was being evaluated.

Bell argued that the record does not suggest that the introduction of further competition would bring about efficiency gains. Bell noted Mr. Elek evidence that much of the improvement in productivity due to the introduction of competition must already have happened as a result of the opening of the terminal market to competition.

B.C. Tel argued that efficiency would not be increased with increased inter exchange competition. B.C. Tel stated that it has an excellent record of improving its efficiency, through cost controls and the use of modern technologies. The assumption by Peat, Marwick of a 4% to 5% cost reduction with the introduction of competition was unsupported and did not recognize the high degree of existing efficiencies. B.C. Tel argued that, moreover, in a competitive environment, a number of costs, such as marketing and depreciation expenses, would increase.

3. Efficiency of CNCP

A number of parties expressed concern about CNCP's financial ability to compete in the provision of MTS/WATS services while making fully compensatory contribution payments and providing universal service. On several occasions, parties asked CNCP about its ability to earn a satisfactory rate of return, charge rates significantly below the rates charged by the telephone companies and make contribution payments at a level which ensured that there would be no impact on local subscriber rates. CNCP's response was that it would be more efficient than the telephone companies.

Mr. Sutherland, argued that CNCP has had to be more efficient because, unlike Bell, it has operated in an almost totally competitive environment. Mr. Sutherland stated that CNCP would be able to offer its MTS/WATS service at a discount from the telephone companies because it would be using the latest in technology as compared to the amalgam of technological vintages used by the telephone companies.

CNCP stated that to earn an acceptable return on its investment, a contribution charge of $200 to $250 per line per month averaged over a ten year period, would be the maximum it could afford to pay to be consistent with its business plan. In response to Bell's and B.C. Tel's assertions that such a level of contribution payments would be well below that made by the telephone companies' MTS/WATS services, said by the telephone companies to be between $1,000 and $1,500 per line per month, CNCP argued that these levels were inaccurate. CNCP argued that moreover, other factors, including CNCP's role as a newcomer in the market, the inferior connections it would receive and the limited coverage of its service, support a contribution discount.

AGT, CAC, CFCW, Hurontario, MAPO, MT&T et al, NAPO, NB Tel, Nfld. Tel, and TWU, all supported Bell and B.C. Tel in arguing that CNCP's entry into the MTS/WATS market would be uneconomic. Bell and B.C. Tel argued that CNCP's own forecasts showed it to be less efficient than the telephone companies. Bell added that CNCP's evidence showed its inability to make a fair contribution to the cost of local exchange facilities and argued that this casts considerable doubt on the efficiency gains to be expected from CNCP's entry into the MTS/WATS market. Further, Bell and B.C. Tel argued that it would be competitively inequitable to permit CNCP to have any contribution discount.

Mr. Elek, of Peat, Marwick, took issue with CNCP's evidence on its costs relative to those of the telephone companies. In CNCP Exhibit 30, CNCP marginal costs per minute, with a telephone company market share loss of 20% and 10%, were calculated to equal 22.0¢ and 23.5¢ respectively, while Bell's and B.C. Tel's equivalent costs were calculated at 23.3¢ and 29.0¢ respectively, providing CNCP with cost advantages of 1.3¢ and 5.5¢ per minute at the margin. Mr. Elek disagreed with the methodology used by CNCP in its calculations. He stated that, under his view as to the appropriate methodology, the marginal cost per minute for Bell and B.C. Tel would be approximately 15.0¢ per minute.

CNCP argued that the methodology suggested by Mr. Elek is flawed. Its basic assumption is that, regardless of the volume of traffic, the rates charged, or the level of contribution made, a competitor's cost levels will always be such that it will merely break even.

CNCP also argued that Mr. Elek should not have used its ten year expense forecast to determine its marginal costs. These forecasts represent long term estimates based on its judgement of the level of expenses necessary to become established in the long distance market. CNCP argued that its long term marginal costs cannot be determined until it realizes, through the expansion of its service, the economies of scale inherent in its Long distance network.

(g) Impact on the Canadian Economy as a Whole

CNCP argued that telecommunications is a core component of economic growth within the Canadian economy. Because telecommunications costs usually are an intermediate input into the production of other goods and services, the efficient pricing of these services makes a positive contribution to the national economy by encouraging growth in productive efficiency. CNCP believed that the dynamic growth of telecommunications is due to rapid developments in technology and is guided by the choices customers make. CNCP argued that, where competition exists, it has already spawned greater incentives and efficiencies.

The Peat, Marwick study provided an estimate of the aggregate benefits of MTS/WATS competition, measured in terms of a change in the level of consumer surplus or the difference between the value and the cost of additional telecommunications output. According to the Peat, Marwick study, there would be a net gain in consumer surplus of over $150 million dollars from such competition.

CBTA et al, the Director, the Government of British Columbia appearing at the Vancouver regional hearing, and Ontario argued that there would be aggregate economic benefits from MTS/WATS competition. Ontario was concerned that waiting to introduce competition in this field may have serious harmful effects on the telecommuniations industry and the Canadian economy. The Director, supported by CBTA et al, suggested that competition would bring new products, lower costs, more jobs, and an abundance of choice in equipment and services.

The Director argued that MTS/WATS competition would expand the market so that all carriers would increase their revenues. The Director noted that the growth rate for MTS/WATS services in Canada between 1976 and 1982 was 16%, compared with the U.S. market growth from 1981 to 1983 of 28.5%, during which time AT&T increased its revenues by 21.3% notwithstanding a loss in market share.

A number of parties including AGT, FAPG et al, MAPO, Manitoba Tel, MT&T et al, and NB Tel disagreed that there would be aggregate benefits from increased competition. Manitoba Tel and others argued that there was little evidence demonstrating benefit to Canadians generally, as opposed to CNCP and a small group of businesses with high volumes of toll usage.

On the impact of competition on employment, TWU was concerned that competition could cause the telephone companies to increase their productivity to the detriment of employees. Under cross-examination by TWU, Mr. Elek agreed that basically more work will be performed by the same number of people. Mr. Elek, however, viewed these productivity improvements as a benefit to society as a whole.

(h) Rates for Local Telephone Service and the Resultant Implications for the Universal Accessibility to and Affordability of Telephone Service

CNCP argued that competition would not increase the price of local service. In its application, CNCP stated that if the Commission requires Bell and B.C. Tel to provide telecommunications services below cost, and if granting the application would prejudice their ability to meet this requirement, CNCP would pay whatever additional compensation the Commission deemed reasonable. CNCP argued that granting the application would therefore not affect adversely rates for local service or for public telephone service to remote areas.

Many parties were concerned with the impact of MTS/WATS competition, as proposed by CNCP, on the costs and revenues of Bell and B.C. Tel, and the resultant effect upon local rates. They viewed the level of CNCP's penetration into the market as governing the extent of the financial impact.

CNCP projected a market share in 1995, the year it plans to achieve universal service, of 7.99%. This forecast was based on the assumption that CNCP would offer a 30% price discount on all routes and that the telephone companies would respond with rate discounts of 15% on calls over 100 miles in distance.

Some parties doubted the accuracy of this forecast. Bell and B.C. Tel argued that the forecast rate of market penetration is too low. CBTA et al and the Director felt that the projections were overstated; Ontario agreed in substance with the forecast.

Bell forecast that with CNCP price discounts of 20% and without a Bell price response, CNCP would capture 17% of Bell's MTS/WATS market by the year 1995. Bell forecast that with a Bell price response, CNCP would capture only 14% of the market. B.C. Tel forecast that without a B.C. Tel price response, CNCP would capture 20% of its MTS and 6% of its WATS market by 1995. Based on these assumptions, Bell and B.C. Tel each estimated the financial impact on their revenues and the resulting local rate increases that would be required to offset fully this financial impact.

The required local rate increases estimated, on a per subscriber basis after ten years, ranged from 55¢ per month to $4.90 per month, expressed in 1984 dollars, and based on CNCP making contribution payments ranging from 0 to 0.29¢ per minute.

CBTA et al and the Director disputed Bell and B.C. Tel's arguments on the size of the local rate increases associated with competition. CBTA et al argued that the telephone companies exaggerated these increases. It considered that CNCP's actual market penetration will be quite low and, coupled with the use of a contribution mechanism, will minimize the local rate impact.

The Director stated that it is inappropriate and misleading to suggest that long distance revenues subsidize local service, if such a position is based on an arbitrary assignment of access costs to local service. In the Director's submission, the available evidence suggests that local service rates would not increase in Canada should CNCP's application be granted. Furthermore, the Director submit Ed that Bell and B.C. Tel have conclusively demonstrated that additional competition, in their respective operating territories, would have no significant impact on local service rates. In any event, the Commission would be able to monitor, and ultimately, determine what increase, if any, should be permitted.

Several parties, including CAC, CFCW, FAPG et al, NAPO, Quebec and TWU argued that one of the most important issues in this proceeding is the impact of competition on the principle of universality of local telephone service. CAC, FAPG et al and TWU were not satisfied that CNCP had put forward a contribution proposal which would avoid any local rate impact and preserve universality of local telephone service.

(i) Impact on Other Canadian Telephone Companies

The financial impact of inter exchange competition on telephone companies other than Bell and B.C. Tel will be discussed under the following three headings:

- the interconnection of CNCP's Broadband Exchange Service (BES) with the telephone companies' long distance public telephone network;

-access to or from CNCP's network by subscribers of telephone companies other than Bell and B.C. Tel; and

- the change in the level of revenues available for settlement and the division of revenues under the Telecom Canada Revenue Settlement Plan (RSP).

1) Interconnection of CNCP's BES with the Long Distance Public Telephone Network

BES is a circuit switched communications service providing for direct subscriber-to-subscriber transmission of digital or analogue signals. CNCP proposed to interconnect its BES network with its long distance public telephone network (LDPTN) through which BES users would gain access to the public switched telephone network in Bell and B.C. Tel territories. BES customers in Telecom Canada members' operating territories where CNCP did not have system interconnection, could gain access to the LDPTN in either B.C. Tel or Bell territory.

CNCP has undertaken not to increase the number of BES customers or to expand the BES. Given this undertaking and the small number of BES users, CNCP considered the impact of the interconnection to its LDPTN to be negligible.

A number of parties objected, including AGT, MT&T et al, NB Tel and Nfld. Tel. They argued generally that their revenues would be eroded if BES users, situated in their territories, could gain access to CNCP's LDPTN and submitted that the Commission should not permit such access. MT&T et al went further, arguing that no private line services extending outside Bell's and B.C. Tel's territories should be interconnected to the LDPTN.

2) Access to/from Territories of Telephone Companies other than Bell and B.C. Tel

Under cross-examination by counsel for AGT, CNCP agreed to a number of restrictions to prevent access to and from the territories of other Telecom Canada members. It also agreed not to provide access from independent companies' territories.

CNCP stated, however, that it did not plan to block calls terminating in the territories of the independents because there would be no revenue impact on them.

CITA argued that, on the contrary, there would be a financial impact because terminating traffic would be using the facilities of the independents without compensation. Further, the traffic agreement between Bell and the independents does provide compensation for terminating calls with originating calls used as a proxy for calls in each direction. Ontario agreed with CITA. It argued that, consequently, there would be less overall revenue available to Bell to give to the independents for settlement purposes. It pointed out that, at the same time, the costs of facilities serving traffic from the LDPTN would not be reduced.

3) The Telecom Canada Revenue Settlement Plan

In terms of the financial impact of competition on telephone companies other than Bell and B.C. Tel, Bell Exhibit 17 provides estimates of the impact on the settled share of Telecom Canada revenues received by its members. AGT indicated that, for the Prairies as a whole, there would be a 5.2% reduction in settled revenues by 1995. NB Tel stated that if, as estimated in Bell Exhibit 17, Maritime settled revenues were reduced by 3.6%, its revenues would decrease by 2.7% or $4 million, causing a 10% increase in local rates. The comparable figures for Nfld. Tel were a $3.5 million loss of revenues causing an 18% increase in local rates. Both Nfld. Tel and NB Tel however disagreed with the assumptions underlying this exhibit. MT&T et al estimated a 3.6% increase in local rates if Maritime settled revenues were reduced by 3.6%.

The Peat, Marwick study provided another estimate of the financial impact on the Telecom Canada members other than Bell and B.C. Tel, assuming that competition would be allowed only in Bell and B.C. Tel territory respectively and that these two companies would lose 20% of their trans-Canada and intracompany basic toll traffic. It was also assumed in the study that calls originating in Bell and B.C. Tel territory could terminate in the territories of all Telecom Canada members. Under these assumptions, the study estimated the loss of settled revenues of other telephone companies and the consequent local revenue increases that would be required assuming settlement agreements were not renegotiated. The local revenue increases ranged from about 4% in the Maritimes to between 5 and 10% in the Prairies.

The Council of Maritime Premiers and the Governments of Manitoba and Saskatchewan, in presentations at regional hearings, opposed CNCP's application because of the impact on telephone companies (and subscribers) not subject to the Commission's jurisdiction. In their view, the CNCP application raised a major public policy issue: the continued availability of local telephone service at reasonable rates. They argued that such fundamental telecommunications policy issues should be decided by governments rather than the Commission.

The Government of British Columbia, while favouring competition, basically agreed with these parties as to the need for government to determine matters involving national telecommunications policy.

AGT, Manitoba Tel, MT&T et al, NB Tel and Nfld. Tel, all argued that CNCP should make contribution payments in respect of the loss of settled revenues which would be experienced by all the telephone companies with approval of the application. Such compensation would be necessary to protect the goal of universal service within their territories. Both AGT and Manitoba Tel noted that in Decision 79-11 the Commission decided against compensation for business loss, but argued that the circumstances were sufficiently different in this case to warrant it.

Ontario expressed a similar concern with regard to the independent telephone companies in Ontario.

In response to suggestions that contribution could offset this revenue loss, CNCP argued that it should make contribution payments only to telephone companies with which it had the right to interconnect to operate its LDPTN: Bell and B.C. Tel, should the current application be approved.

CNCP questioned the appropriateness of transferring contribution to telephone companies whose facilities are not used to provide the services in question. In this regard, CNCP raised the question of whether revenues generated in Bell and B.C. Tel territory should subsidize local rates in territories of other Telecom Canada members.

CNCP stated that it plans to seek interconnection with the other telephone companies and has indicated that it would make contribution payments to them once interconnection arrangements were in place. The two exceptions in this regard are Terra Nova and NorthwesTel. CNCP has indicated that by agreement between Canadian National Railways and Canadian Pacific Enterprises, CNCP territory includes all of Canada except the operating territories of NorthwesTel and Terra Nova and CNCP is precluded, therefore, from competing with them.

CBTA et al also argued that contribution payments should be based on the use of facilities. In this context, CBTA et al pointed out that the current RSP, with its common stream of revenues and costs, may be inconsistent with competition in some territories; thus it may be increasingly difficult to justify contribution to a particular region from traffic occurring entirely in a different region. It concluded that the preservation of the RSP or particular contribution flows should not be seen as an end in itself and therefore should not be considered a relevant factor in the Commission's decision.

3. Conclusions

Having reviewed the record of this proceeding with regard to the advantages and disadvantages of permitting entry by CNCP into the MTS/WATS market, the Commission has concluded that the granting of CNCP's application would not be in the public interest. Accordingly, the Commission denies CNCP's application.

The Commission has considered the evidence presented in this Proceeding with respect to potential benefits that could be expected to result from the introduction of competition into the MTS/WATS market. These include lower MTS/WATS rates, greater customer choice and supplier responsiveness and an accelerated rate of diffusion of new technology.

With regard to the potential impact of competition in the MTS/WATS market on rates, the Commission is of the view that the desire of participants in the market to respond to competitors' prices would create increased pressure to lower MTS/WATS rates towards costs. As well, such competition would likely create pressure to increase productivity and reduce costs and that these savings would likely be reflected in lower MTS/WATS rates. Lower MTS/WATS rates would, in turn, have a positive impact on the performance of the Canadian economy as a whole.

In terms of customer choice and supplier responsiveness, the Commission is of the view that competition would likely result in increased innovation and flexibility with respect to the pricing and marketing of inter exchange services. As well, it would likely result in the introduction of new services and new service features more closely tailored to meet individual customer requirements and providing a range of quality of service options at differing prices.

With regard to the rate of diffusion of new technology, the Commission notes that more rapid introduction of improved switching and transmission facilities could likely be expected in a competitive market.

While the Commission considers that these benefits would potentially arise from competition in the MTS/WATS market, the Commission is of the view that the granting of CNCP's application would not yield these anticipated benefits to a significant extent throughout the territories served by Bell and B.C. Tel. In particular, the Commission is not convinced that CNCP would be able to meet its commitment to provide universal service and to offer price discounts of the order of magnitude assumed in its business plan.

In arriving at this conclusion, the Commission has carefully assessed the evidence relating to whether CNCP is financially able to offer the proposed service while, at the same time, making contribution payments, toward the recovery of access costs, equivalent to those of Bell and B.C. Tel.

In terms of the level of contribution, Bell and B.C. Tel provided estimates, using the results of the Five-Way Split. Based on its conclusions set out in Part IV below, with respect to the Five-Way Split results, the Commission is of the view that, pending implementation of the requirements contained in Inquiry Into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), the contribution levels derived from the Five-Way Split represent approximations of the general magnitude of full contribution levels. Based on this evidence, the Commission is of the view that existing MTS/WATS rates incorporate an average contribution in the order of 30¢ per minute.

In its response to interrogatory CNCP(CRTC)05Oct84-1302, CNCP provided its ten year financial forecast for its proposed MTS/WATS service based on the following assumptions: (1) achieving a market share of approximately 8% over ten years; (2) making contribution payments equal to 11.5¢ per minute; (3) offering prices 20-30% below current telephone company prices and increasing prices at a rate slightly below that of the inflation rate. Under these assumptions, CNCP's evidence was that its net income would be negative for the first four years covered by its forecasts but that over the full ten-year period the project's internal rate of return would be 20.6%.

If these assumptions are modified such that CNCP were required to pay full contribution, and if CNCP maintained the assumed price discounts, CNCP would show a negative net income in each of the ten years covered by its forecasts. Consequently, the project's internal rate of return would fall well below what the Commission would consider a reasonable level. If, as was assumed by CNCP for telephone company price levels, contribution levels were assumed to increase over time, the financial results would he further weakened.

Further, in the Commission's view, CNCP's evidence indicated that, even if its prices matched telephone company prices exactly, it would still be unable to generate an internal rate of return which the Commission would consider reasonable, while making contribution payments equal to those made by Bell and B.C. Tel and assumed to be rising at a rate similar to that assumed for Bell's and B.C. Tel's MTS/WATS prices.

If the Commission granted CNCP's application and required it to make contribution payments equal to those made by Bell and B.C. Tel, CNCP would be financially restricted to offering very limited price discounts and serving a limited number of routes. This would have the effect that a number of the benefits of competition noted earlier would be substantially reduced.

For example, the Commission considers that the benefits of customer choice and supplier responsiveness would, both in the short term and the long term, accrue only to a small number of primarily high volume toll users or those in the limited number of serving areas selected by CNCP for entry.

In terms of the provision of a range of quality of service options, the Commission similarly considers that the benefit that might arise from CNCP's competitive entry would be seriously reduced by virtue of the limited number of customers CNCP would be financially able to serve. Further, if service quality standards were not imposed upon CNCP, it must be anticipated that Bell and B.C. Tel would seek to have the same flexibility with regard to service quality. In such a case, the Commission is concerned that, while the telephone companies would maintain an acceptable quality of service on long distance routes subject to competition, they would be likely to seek to be permitted to provide a lower quality of service on routes not subject to competition.

Alternatively, if the Commission were to subject CNCP to the same quality of service standards as apply to the telephone companies, the competitive benefits associated with the availability of a range of quality of service options would be further limited.

Similarly, the Commission considers that the price benefits to be derived from competition would be severely curtailed in light of CNCP's limited ability to offer significant price discounts to customers throughout the territories served by Bell and B.C. Tel. This would have the effect of reducing the positive impact on the Canadian economy that would otherwise be foreseen to result from competition in the MTS/WATS market. In addition, as discussed in Part IV below, the Commission considers that any advantages of lowering MTS/WATS rates considered necessary or desirable could be achieved without competitive entry.

With regard to route-averaged prices, if CNCP were financially unable to meet its commitment to provide service throughout the territories served by Bell and B.C. Tel, the Commission is concerned that the telephone companies might seek to implement a competitive price response on routes selected for entry by CNCP. While the Commission could require the telephone companies to maintain route-averaged prices, to do so in these circumstances would confer an artificial pricing advantage on CNCP. In these circumstances, the Commission sees a gradual but likely irreversible trend away from the principle that, in general, telephone subscribers should pay comparable rates for MTS calls over comparable distances.

The extent of the benefits to be derived from competition could be substantially extended if CNCP's application were approved with a sufficient contribution discount to make its proposed MTS/WATS service more profitable. However, if the Commission were to approve CNCP's application with such a contribution discount, it sees a substantial risk of permitting uneconomic entry into the MTS/WATS market with a resultant increase in the costs of service supply. However, while the evidence calls into question whether or not entry by CNCP would be economic, the Commission has not reached any conclusion as to whether or not the MTS/WATS market is a natural monopoly.

The Commission also considers that if CNCP were granted a sufficient contribution discount to make its MTS/WATS service profitable, the overall contribution from the MTS/WATS market to the provision of local service by Bell and B.C. Tel would be reduced. In approving CNCP's application on such terms, the Commission would therefore be according benefits to CNCP subscribers at the expense of existing telephone subscribers in the form of higher local rates.

Were the Commission to approve CNCP's application without a contribution discount, the Commission foresees, based on the evidence as to CNCP's financial ability, that CNCP would, within the near future, seek Commission approval for a substantial contribution discount. In such a circumstance, the Commission is concerned that its options for regulatory action to protect the interests of the general body of telephone subscribers would be limited, CNCP already being in the market. The Commission is strongly of the view that such a limitation should not be placed on its ability to ensure that the price structure for toll and local service balances fairly the need for lower tolL rates against the need for affordable local rates.

The Commission notes a related concern, namely the need for substantially increased regulatory intervention if CNCP's application were granted. One of the anticipated benefits of competition is the ability to rely increasingly on market forces rather than the regulator to determine a just and reasonable basis for the provision of service to consumers. However, CNCP's inability to pay full contribution for at least ten years suggests that market forces could not be relied on during that period; rather, the Commission would be placed in the ongoing role of scrutinizing the appropriate level of any contribution discount, as well as both the quality of, and the prices to be paid for, service provided by CNCP and the telephone companies. Even if CNCP's application were approved with no contribution discount, notwithstanding the comments above, the Commission would be required to be involved actively in the regulation of this market for in excess of ten years.

Finally, in terms of the potential impact of entry by CNCP on non federally-regulated telephone companies, the Commission considers that any direct impact could be avoided by restricting CNCP to originating and terminating its traffic in the territories of Bell and B.C. Tel. Nevertheless, there would be an indirect impact on these other telephone companies unless the Telecom Canada RSP and other settlement agreements were modified. If CNCP were required to pay full contribution, the evidence does not suggest such an impact would be large, because CNCP would obtain only a limited market share. If a contribution discount was permitted, the impact would be correspondingly increased. In any event, there would be a negative impact which could be eliminated only by modifiying revenue settlement agreements or by requiring CNCP to make contribution payments to telephone companies other than Bell and B.C. Tel. The latter alternative would further jeopardize the financial ability of CNCP to offer its proposed MTS/WATS service. The former would place further upward pressure on the rates paid by subscribers of Bell and B.C. Tel.

IV THE LEVEL OF MTS/WATS RATES

A. Background

In their evidence of April 1984, both Bell and B.C. Tel argued that pressures exist to move telecommunications services rates closer to their associated costs. These pressures were said to include the threat of bypass and increased competition and the needs of customers for lower priced long distance services. They argued further that the pressures for lower MTS/WATS rates would be increased by a decision to allow increased competition.

The nature of these pressures was discussed extensively during the proceeding. In response to Commission interrogatories, both Bell and B.C. Tel filed detailed illustrative proposals for rate rebalancing. The term rate rebalancing is used by Bell and B.C. Tel to describe the process of moving their rates towards costs, while maintaining their net revenues at existing levels. The principal element of the proposed rebalancing involved decreases in MTS/WATS rates of up to 70% and increases of as much as 150% in average rates for primary local service. Changes to other rates, such as those for competitive network services, were also envisaged as part of the rebalancing process.

B. The Rate Rebalancing Proposals of Bell and B.C. Tel

During the course of the proceeding, there was considerable discussion of Bell's and B.C. Tel's rebalancing proposals and the nature of the decision that the Commission was being requested to make. Responding to a motion by CAC, the Commission stated that neither Bell nor B.C. Tel had requested approval of specific rate changes and no such decision would be taken in this proceeding. The Commission also stated, however, that the issue of the relationship between local and long distance rates was properly before it in this proceeding.

Bell argued that the Commission should endorse the principle of rate rebalancing and thereby signal its intention to correct the current imbalance between rates and costs. Bell stated during cross-examination that this endorsement would not need to include any statement on the speed or extent of rebalancing but should include an invitation to Bell to proceed with the first year of rebalancing in accordance with its proposal. Bell noted that as rebalancing proceeded, adjustments to its speed and extent could be made based on experience to that time and that any specific rate changes would require Commission approval involving a public process. B.C. Tel stated that it would be desirable, in the decision, to specify the start date, the duration and the extent of rebalancing. In light of the complexity of the issue, however, B.C. Tel acknowledged that it might not be possible for the Commission to go further than endorsement in principle. B.C. Tel argued that, once the Commission endorsed the principle, a public process should follow, with periodic reviews to develop the details of the program.

AGT and NB Tel agreed that the principle of rebalancing should be approved. AGT added that the Commission should set out the necessary framework to implement rate rebalancing for Bell and B.C. Tel over a reasonable period of time and with appropriate safeguards to protect universality of service.

CAC, CBTA et al, CFCW, FAPG et al, NAPO, Ontario, Quebec and TWU opposed Bell's and B.C. Tel's rate rebalancing proposals. MT&T et al stated that the CRTC should not decide this matter until it had received government direction. MAPO and Murontario argued, respectively, that social policy requires toll service to make a larger contribution than local service to fixed costs and that a majority of subscribers favour continuing subsidization of local service by toll. The vast majority of comments received in the proceeding also argued against changes to existing rate structures.

CAC stated that there was little subscriber support for rebalancing, despite assertions by Bell of subscriber pressure for lower toll rates. Nevertheless, if rebalancing were to be considered, there should be a full public process, to consider both the principle of rate rebalancing and its implementation, with an onus placed on Bell and B.C. Tel to justify their position. It further stated that subscribers were not adequately notified of the application and would be prejudiced by any decision to increase rates. CFCW and FAPG et al objected to the absence of any subscriber notification. CFCW opposed rebalancing as violating established principles of cross-subsidization and route- averaging. FAPG et al and Quebec argued that a decision by government was required on an issue of this importance. Quebec stated that the Commission should confine itself to determining the questions that were raised by rebalancing, and argued that in any event, local rate increases of the magnitude proposed would be unacceptable. Ontario argued that, if rate rebalancing were approved in principle, it should be implemented only after a full public process and subscriber notification. The Director stated that the issue of rate rebalancing need not be resolved in the current proceeding.

B.C. Rail, CNCP and CTG stated that the rebalancing issue was not relevant to their applications or, in the case of CTG, to the resale and sharing issue. Nfld. Tel stated that, if rebalancing is to be approved, any process should be gradual and the Commission's decision should only address the principle. Terra Nova stated that rebalancing is inevitable with or without competition.

C. Cost Evidence

With regard to rate rebalancing, Bell and B.C. Tel stated that a principal objective is to bring the revenues for individual categories of service more in line with their costs. Bell and B.C. Tel consider that the principal element of rate rebalancing should be the recovery of all access costs from either local service revenues or a separate access revenue category, with an offsetting reduction of costs recovered from message toll revenues.

1. The Five-Way Split Study Results

In presenting their rate rebalancing proposals, Bell and B.C. Tel relied largely on the Five-Way Split Study results modified to include a separate access category. The results for each of them are summarized below:

Bell 1983 Five-Way Split Results
($ millions)

Local Toll Access
Revenues 1,389 1,988 0
Costs 868 626 1,762
Difference 521 1,362 (1,762)

Competitive Network Competitive Terminal
Revenues 386 878
Costs 317 834
Difference 69 44

Common
Revenues 99
Costs 333
Difference (234)

B.C. Tel 1982 Five-Way Split Results
($ millions)

Local Toll Access
Revenues 249.4 474.2 0
Costs 174.2 169.6 353.8
Difference 75.2 304.6 (353.8)

Competitive Network Competitive Terminal
Revenues 95.6 142.5
Costs 45.9 165.4
Difference 49.7 (22.9)

Common
Revenues 47.7
Costs 100.5
Difference (52.8)

In conformity with Bell's approach and Decision 85-10, the results provided for B.C. Tel have been adjusted by the Commission to include in the access cost category, certain non-traffic sensitive central office costs that B.C. Tel had included in the local category.

A number of parties, including CAC, Ontario and Quebec, stated that pending completion of Phase III of the Cost Inquiry, rate rebalancing would be inappropriate. They argued that results arising from Decision 85-10 are needed to determine the existing alignment of rates and costs. Further, CBTA et al argued that there are a number of deficiencies in the Five-Way Split method which preclude its use. Bell and B.C. Tel disagreed. They argued that the modified RSP costing methodology, adopted by the Commission in Decision 85-10, would yield results very similar to those of the Five-Way Split.

In reviewing the evidence, the Commission has concluded that there may be important differences between the cost results from a modified RSP approach and those from the Five-Way Split approach. However, the Commission is of the view that the Five-Way Split results may be relied upon to support the findings that, at this time, neither the competitive network nor the competitive terminal category make any substantial contribution to the recovery of access category costs, that, for the local and toll categories, revenues are in excess of costs and that the surplus of toll revenues over costs is the major contributor to the recovery of access costs.

2. Recovery of Access Costs

Bell and B.C. Tel asserted that access costs should be recovered from local service charges. They reasoned that access costs are not usage sensitive and do not vary with either toll or local usage, but only according to the number of subscribers on the telephone network, and that customers should be charged rates that recover directly the costs of the service provided.

There were two arguments raised against Bell's and B.C. Tel's position. First, Dr. J.W. Wilson, witness for the Director, expressed the view that access costs are in fact largely traffic sensitive and therefore cost-based recovery should be based on usage sensitive rates. Dr. Wilson suggested that the portion of access costs which is non-traffic sensitive could be split between toll and local service

CAC argued that, prior to completion of Phase III, it would be inappropriate to deal with issues related to cost recovery.

Consistent with Decision 85-10, the Commission has concluded that access costs generally are not usage sensitive but rather do vary directly with the number of subscribers having access to the network. Therefore, if rates were to be fully cost-based, access costs would be recovered through flat rates imposed on all subscribers obtaining network access. While such flat rates could be identified separately from existing monthly local rates, the imposition of these new rates would, for customers of ordinary local exchange service, amount to an increase in existing local rates. Should a fully cost-based rating approach be adopted, the evidence before the Commission at this time indicates that this would entail more than a doubling of ordinary local exchange rates. MTS/WATS rates, by contrast, would decline by in excess of 50%.

D. The Case For and Against Rate Rebalancing

The evidence described above suggests that cost-based rates would mean much higher primary local exchange rates and much lower MTS/WATS rates. The question remains of whether it is necessary or desirable to move towards cost-based rates, as contemplated in the rebalancing proposals of Bell and B.C. Tel, and, if so, to what extent.

1. Bypass and Rate Rebalancing

In support of their rebalancing proposals, Bell and B.C. Tel stated that moving their rates closer to costs would reduce existing opportunities and incentives for bypass. Bell stated in evidence that:

Bypass refers to a situation where a customer elects to use telecommunications facilities in lieu of facilities provided by a common carrier. Bypass can be classified as either economic or uneconomic. Economic bypass occurs when bypass costs are less than the telephone company's costs of providing a similar service. Uneconomic bypass occurs when service and equipment, that has a higher cost than a common carrier's cost, are employed because carrier rates are held artificially high.

Bell and B.C. Tel were of the view that existing rates, for long distance service especially, are sufficiently in excess of costs to create a strong incentive for uneconomic bypass, particularly by large users. They argued that such bypass results in a loss of contribution from bypassed services and places upward pressure on telephone company rates. Higher rates in turn, increase the incentive for bypass and, as users leave the telephone network, telephone company investment may become stranded. In their view, once bypass occurs it is largely irreversible as by passers will at that time have made substantial fixed investments in their own facilities.

Bell and B.C. Tel argued that bypass eventually will force a rebalancing of rates due to the effects of reductions in contribution from bypassed services. Further, they argued that, without rebalancing, the stranded telephone company investment resulting from the diversion of traffic from telephone company networks will require rates higher than they would need to be if bypass were prevented by rebalanced rates. In short, Bell and B.C. Tel view rebalancing as not only inevitable but also beneficial in containing rates.

AGT endorsed Bell's and B.C. Tel's position. CAC, the Director, FAPG et al, Ontario, Quebec and TWU rejected it on several grounds. First, no evidence had been presented that bypass is a serious threat. Second, Bell's and B.C. Tel's evidence on bypass was overly reliant on the U.S. experience. Third, the bypass incentive could not be demonstrated without full cost information. Fourth, to the extent that a bypass threat exists, the telephone companies have been able to respond adequately to it. Finally, action to limit bypass, particularly through the U.S., would be required with or without rebalancing.

The Commission is of the view that a program of rate rebalancing would reduce the incentive for bypass. However, it considers for the following reasons, that Bell and B.C. Tel have overstated the current extent of the threat of bypass of telephone company facilities within Canada.

First, the Commission notes that, to the extent that MTS/WATS rates significantly exceed costs and thus create an incentive for users to seek alternatives, such users have for some time had the option of leasing alternative services, such as inter exchange private lines, at rates much lower than those of MTS/WATS. Bypass of MTS/WATS will thus, in general, only occur where it can be done at a cost below the rates for these telephone company alternative services. The Commission notes that the evidence in this proceeding did not suggest that there is any significant disparity between rates and costs for these alternative services.

Second, several factors now exist, including spectrum licensing requirements of the Department of Communications and the limited availability of physical rights of way, to limit or exclude bypass opportunities.

With regard to bypass through the U.S., little evidence was presented to suggest how widespread such a problem is. The Commission notes however that, partly in response to increased bypass of B.C. Tel's long haul Canada/U.S. MTS service. the Commission recently found it desirable to permit the restructuring of B.C. Tel's Canada/U.S. MTS rates (see British Columbia Telephone Company Applications Regarding Access to U.S. Discount Long Distance Telephone services and Rate Restructuring, Telecom Decision CRTC 85-7, 4 April 1985). Instances also came to light, in the current proceeding, of telephone company customers employing private line connections to the U.S. to hook into U.S. MTS networks thereby bypassing Canadian MTS services.

In these circumstances, the Commission is of the view that in the immediate future the occurrence of bypass within Canada will not be so extensive as to require a full rebalancing of rates. It does consider, however, that bypass opportunities, both within Canada and through the U.S., will create pressure for a lowering of MTS/WATS rates and that this pressure may increase in the longer term.

2. Competitive Entry and Rate Rebalancing

While bypass, according to the Bell definition, refers to a situation in which customers use telecommunications facilities not provided by a telecommunications carrier, competitive entry refers to the provision of telecommunications services by new carriers or by existing carriers in new markets.

Bell and B.C. Tel argued that as long as rates depart substantially from cost, there will be an incentive for competitive entry by parties whose costs are higher than telephone company costs but who are able to take advantage of artificial margins between telephone company rates and costs. Bell and B.C. Tel then contended that, as with bypass, increased competition would inevitably result in uncontrolled rate rebalancing. Further, the uneconomic nature of such entry would raise the total costs of supplying telecommunications services. They argued that controlled rate rebalancing is required to deter uneconomic entry and to provide a more orderly and less costly means of achieving the same end as increased competition. Finally, Bell and B.C. Tel asserted that the benefits of rebalancing would be more evenly distributed than those associated with a competitive lowering of rates.

AGT, Manitoba Tel, MT&T et al, NB Tel and Nfdl. Tel, all agreed that competitive entry would create pressures for changes to telephone company rate structures. They viewed contribution payments as being a means of reducing this pressure. Several parties, including CAC, FAPG et al, Quebec and TWU, however, noted a number of difficulties associated with establishing a proper level for contribution payments.

CFCW, Hurontario and NAPO also argued that competition would lead to significant local rate increases.

CTG and Ontario argued that contribution charges could offset any competitive pressures for rebalancing. CBTA et al added that toll market stimulation would also assist in this regard. The Director asserted that the financial evidence presented in the proceeding failed to show that competition would have any substantial impact on local rates or that entry would be uneconomic.

As a general proposition, the Commission agrees that allowing competitive entry into markets where rates are in excess of costs is likely to create pressures to move rates towards costs in these and other markets. As well, to the extent that rates do not reflect costs, there would be incentives for uneconomic entry. While a system of contribution charges ideally might prevent uneconomic entry and serve to mitigate any upward pressure on local rates, the Commission has noted elsewhere in this decision, a number of practical limitations on their ability to do so. In consequence, in determining whether competition should be permitted in particular markets, the Commission has considered, among other factors, whether or not new entry would be uneconomic and what the rate impact of such entry might be. In the Commission's view, where liberalized entry has been permitted in this decision, it will not serve to create opportunities for uneconomic entry or place any significant upward pressure on local rates.

3. The General Economic Impact of Rebalancing

Both Bell and B.C. Tel argued that rate rebalancing would yield a number of general economic benefits. They asserted that reducing current MTS/WATS rates which are in excess of U.S. rates would place Canadian industries, using telecommunications services, in an improved competitive position and promote continued, healthy development of the Canadian telecommunications infrastructure. More generally, they argued that cost-based pricing is economically most efficient and that this factor takes on particular importance as the information sector becomes a more important element in the economy.

In this regard, both Bell and B.C. Tel cited a study, prepared by Infometrica for Bell and filed in the proceeding as Bell exhibit 30, which argued that if full rate rebalancing were completed by all Canadian telephone carriers, this would result in a $2 billion expansion of Canada's GNP and a drop of 11% in the average price of telecommunications services. Bell noted that a $2 billion increase in GNP would result in a government deficit reduction of $850 million and that about 70% of these gains would accrue if rebalancing were confined to Bell and B.C. Tel. B.C. Tel also cited a study prepared by Wharton Econometric Forecasting Associates which obtained broadly comparable results for the U.S.

Both Bell and B.C. Tel referred also to an additional measure of the economic benefits of rebalancing cited in the Peat, Marwick study. That study attempted to measure the consumer surplus gains from rebalancing, where consumer surplus refers to the difference between the value and the cost of additional telecommunications output resulting from rebalancing. Using Bell's and B.C. Tel's definition of rebalancing, the Peat, Marwick study estimated the consumer surplus gains from rebalancing across Canada to be well in excess of $500 million annually.

CBTA et al and CNCP, while not supporting rate rebalancing, did cite extensive evidence on the importance of lower MTS/WATS rates to Canadian business and their international competitiveness. Some of this evidence was provided by CNCP's user witnesses, whose support for CNCP's application was in part based on their desire for lower MTS/WATS rates.

The Director stated that, in the long run, a differential between Canadian and U.S. rates cannot be maintained and, together with a number of other parties, cited the consumer surplus gains from rebalancing that were projected by the Peat, Marwick study. CAC argued, however, that the evidence was insufficient to establish the extent of any economic gains from rebalancing.

Based on the record of this proceeding, the Commission considers that rebalancing could yield important economic benefits at the macro level. While the quantitative results in the Peat, Marwick study and the Bell study on the generalized economic benefits of rebalancing were not extensively canvassed in the proceeding, the Commission considers they are indicative of the general economic gains to society which could be expected to result from rebalancing.

4. The Impact of Rebalancing on Universal Accessibility to and Affordability of Telephone Service

The principal objection of opponents of rate rebalancing is its potential for increasing the telephone bills of the majority of subscribers and causing large numbers of subscribers to drop off the telephone network. These parties contend that the restraint of local rates serves an important social purpose in ensuring widespread access to telephone service and thus increases the value of service to all subscribers. In their view, rate rebalancing would not only threaten the principle of universality of service but also reduce the value of the telephone system as a whole.

In this regard, Bell provided extensive evidence on the effect of its rebalancing proposal. Bell stated that, at the end of the five year process to implement its proposal, monthly telephone bills would have increased for 85% of residence subscribers and for 58% of business subscribers, based on existing calling patterns. Bell estimated that monthly increases for median residence customers would be $10 to $15 and for median business customers, $0 to $5. Bell estimated further that, as a result, based on an assumed demand elasticity for local service of -0.032, 160,000 Bell residence subscribers and 20,000 Bell business subscribers would cease to subscribe to telephone service (drop off). In response to questions put by CAC, Bell also acknowledged that, if 160,000 residence subscribers dropped off the Bell network, this would correspond to approximately 400,000 individuals losing direct telephone access and that low income subscribers would be disproportionately represented among such individuals. Bell stated, however, that two-party service availability could lower these estimates.

B.C. Tel did not provide comparable estimates. Nevertheless, it did state that, if Bell's assumptions were correct, then as many as 30,000 B.C. Tel residence subscribers would leave its network. It also stated that its rebalancing program would result in 70% of the population paying higher bills with the median residence customer paying $4.80 more per month.

The Peat, Marwick study contained evidence on the impact of rate rebalancing on subscriber drop offs which leads to different conclusions. According to data in that study, local rate increases of 66.5% in Ontario and Quebec and 56.8% in British Columbia would lead to a reduction of 20,000 to 25,000 subscribers in Bell's and B.C. Tel's territories combined. While the assumed local rate increases were much smaller than those assumed by Bell and B.C. Tel, even when this difference is allowed for, the drop offs predicted by the Peat, Marwick model are less than one fourth of those projected by Bell and B.C. Tel.

On the principle of universality, Bell argued that it was only in the later stages of a rebalancing program that a problem might arise and in that event, various alternatives, such as targeted government subsidies, could be employed. Bell also argued that rebalancing would still permit some rate averaging and value of service pricing. It referred to a number of mechanisms which could ease the impact of rebalancing, including the provision of two-party service and the charging of lower rates to needy individuals. Regarding subsidy financing, Bell noted that government revenue stimulation due to rebalancing would be much greater than any required subsidies, and suggested the possibility of subsidy financing through surcharges on other services.

While its position was similar, B.C. Tel argued that the implementation of a rate rebalancing program should be contingent on the adoption of a program of targeted subsidies. According to B.C. Tel, a 2% surcharge on local rates or a l¢ per minute surcharge on MTS/WATS rates would yield sufficient revenues to finance a targeted subsidy program that would provide reduced local rates for more than twice the number of potential drop offs in its territory. B.C. Tel noted that this calculation assumed the restraint of local rates to existing levels for individuals below the poverty line, as defined by Statistics Canada. B.C. Tel also noted that, if it were to administer the subsidy program, a certification procedure based on an individual's entitlement under existing welfare or related government programs could be used to assess subsidy eligibility.

AGT acknowledged the need for a subsidy program. TWU argued that the evidence presented on alternative subsidy mechanisms was insufficient in light of the importance of the issue, and questioned the Commission's power to require implementation of a subsidy program. CBTA et al also discussed a number of safety net mechanisms including local budget services, such as two-party service, and local measured service which it believed could protect universality in the rebalancing context.

In the Commission's view, the universal accessibility of service is, and will remain, of fundamental importance both to protect subscribers and to maintain the value of the telephone network. In consequence, it is important to consider the extent to which rebalancing could be in conflict with this principle.

In this regard, the Commission considers that Bell's estimates overstate the impact that adoption of its rebalancing proposal would have on subscriber drop offs. First, Bell's estimates, unlike those of Peat, Marwick, do not take into account the possibility of subscribers moving to two-party service rather than dropping off the network. Second, Bell's estimates, like those of Peat, Marwick, do not take into account the reduced toll rates that would accompany local rate increases under rebalancing, and provide a partial rate offset. Third, the Bell estimates were developed from data incorporating a limited range of prices and therefore may provide less reliable estimates of drop offs resulting from price changes of the magnitude envisaged in Bell's rate rebalancing proposal.

The Commission has concluded that while Bell's estimates are overstated, the extent is unknown. Further, the evidence does not establish that the estimates of Peat, Marwick are any more reliable. Nevertheless, despite the absence of specific data, the Commission is of the view that there is sufficient evidence to show that, without the adoption of countervailing measures, full implementation of rebalancing could have a serious adverse effect on the universal accessibility of service.

The Commission recognizes that a more limited program of lowering MTS/WATS rates could still result in an adverse effect, although correspondingly reduced. The Commission considers that, if necessary, it would be possible to develop a program of carrier administered targeted subsidies that would even further reduce these effects. The Commission also considers that by limiting any increases applicable to two-party and four-party service rates, it could ensure that a low cost option remained for subscribers who might otherwise be forced off the network. The record indicates, however, that adoption of this latter approach would imply a lowering of service quality which many would find unacceptable.

The Commission is aware that, even with the use of a mechanism to prevent subscriber drop offs due to economic necessity, full rebalancing or a general move to lower MTS/WATS rates would still increase the telephone bills of a majority of subscribers while lowering the bills of only a minority. Such effects must be fully considered in weighing the relative advantages and disadvantages of any program of rebalancing or MTS/WATS rate adjustment. At the same time, it must be recognized that, in general, those who would pay increased bills as a result of such a program are currently paying rates for telephone service which do not recover all of the associated costs of providing it. Those who would pay reduced bills are paying amounts in excess of the associated costs of serving them.

5. The Impact of Rebalancing on Canadian Telephone Companies not Regulated by the CRTC

An important aspect of any program rate rebalancing concerns its impact on the rates and revenues of Canadian telephone companies not regulated by the CRTC. Such impacts could arise from (i) Bell and B.C. Tel rate changes for services the revenues from which are subject to settlement agreements, (ii) Bell and B.C. Tel rate changes causing traffic pattern shifts that could affect the allocation of revenues subject to settlement agreements, (iii) changes to the rates of other telephone companies in response to Bell and B.C. Tel rate changes and (iv) changes to settlement agreements caused by Bell and B.C. Tel rate changes.

In this regard, the Commission notes that it is required by statute to regulate the rates of federally-regulated carriers and that this requires it to make determinations which can affect the revenues of telephone companies which it does not regulate. At the same time, the revenues of carriers regulated by the Commission are affected by the rates charged by carriers not regulated by it. No quantitative evidence was presented in this proceeding as to the impact of rebalancing on non federally-regulated telephone companies. The Commission is of the view that an assessment of such impacts would form an essential part of the consideration of any program of rebalancing or MTS/WATS rate adjustment.

E. Conclusions

In the Commission's view, rate rebalancing as exemplified by Bell's and B.C. Tel's illustrative rate rebalancing proposals, would result in increased telephone costs to the majority of their subscribers. While toll calling would be significantly expanded, a number of subscribers could find that, without the development of a subsidy program, ordinary telephone service would be unaffordable. Given the potential magnitude and national scope of these impacts, and taking into account the denial of competitive entry into the MTS/WATS market, the Commission has not been persuaded that full rebalancing is either necessary or desirable in the public interest at this time.

At the same time, the Commission has been persuaded by the evidence presented in this proceeding that a number of economic and societal benefits would flow from a reduction in Bell's and B.C. Tel's MTS/WATS rates.

In particular, the Commission considers that a lowering of MTS/WATS rates is necessary at this time to reduce the communications costs experienced by Canadian businesses. In addition, a reduction of such rates will lessen the potential for future diversion of traffic, from Canadian telecommunications carrier networks, within Canada and through the U.S. and will reduce the incentive to divert investment and jobs to areas outside Canada where there is a lesser discrepancy between the costs and rates for MTS/WATS service. A lowering of MTS/WATS rates will thereby strengthen Canada's economy and its ability to play a leading role in the emerging global information economy.

In the Commission's view, a lowering of MTS/WATS rates would serve an important social purpose in addition to providing economic benefits. In particular, it would serve to increase national communication and understanding by facilitating communication between people, both within and among the various regions of Canada, and especially for those residing in sparsely settled and remote regions of the country.

Finally, a lowering of MTS/WATS rates would reduce incentives for uneconomic entry and create an environment better suited for competitive entry in the MTS/WATS market should that, in the future, appear desirable.

Other issues remain to be determined, including the appropriate amount of reduction in MTS/WATS rates required, the method for achieving that reduction, the time period over which it should be introduced and the methods that should be employed to ensure that universal accessibility to telephone service is maintained at an affordable price. The Commission is of the view that these are issues on which an opportunity for public comment should be afforded. The details of the public process to consider these matters will be announced in the near future.

In addition, the Commission is prepared to initiate or participate in consultative process with appropriate federal and provincial representatives with a view to ensuring that the implications, for all jurisdictions, of the decisions with respect to the above-mentioned issues are taken into account.

The Commission is of the view that these outstanding issues must be resolved with as little delay as possible. As well, the Commission is of the view that action must be taken to ensure that the present situation with regard to MTS/WATS rates does not worsen while the outstanding issues are being resolved.

The Commission is therefore, at this time, adopting the principle that, for Bell and B.C. Tel, the existing total dollar contribution derived from MTS/WATS rates should, at a minimum, not be permitted to increase. Implementation of this principle will require data from telephone companies as set out in Decision 85-10. As an interim measure, therefore, the Commission intends to freeze the aggregate level of Bell's and B.C. Tel's MTS/WATS rates subject only to allowing changes to the structure of such rates that will have no effect, in the aggregate, on the net revenue obtained from this service category. The Commission notes that adoption of this interim measure will result in real MTS/WATS rates for Bell and B.C. Tel falling at approximately the rate of inflation. Given the current low level of inflation, the Commission considers the adoption of this program will not, in the short term, result in increases to ordinary local exchange rates of a magnitude that would jeopardize the principle of universal accessibility of service at affordable rates. At the same time, the Commission is of the view that, while this interim measure will prevent any exacerbation of the current problems associated with MTS/WATS pricing, further reductions to MTS/WATS rates will be required.

V. RESALE AND SHARING

A. Background

At present, the General Regulations of the federally-regulated carriers prohibit the resale and sharing of their services except by special agreement. Although the carriers have allowed a limited number of resale and sharing arrangements, in general they do not. Several exceptions to the general prohibitions on the resale and sharing of carrier services also exist. For example, in Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984 (Decision 84-18), the Commission required all federally-regulated carriers to permit resale and sharing for the purpose of providing enhanced services. In Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirements, Telecom Decision CRTC 84-9, 20 February 1984, the Commission required that Telesat permit licensed broadcasting undertakings to resell excess capacity to other such undertakings for broadcast programming purposes.

In this proceeding, the Commission invited comments on whether or not existing restrictions on resale and sharing of carrier services should be removed. For the purpose of this decision, the Commission has adopted the following definitions:

Resale is the subsequent sale or lease on a commercial basis, with or without adding value, of communications services or facilities leased from a carrier.

Sharing is the use by two or more persons, in an arrangement not involving resale, of communications services or facilities leased from a carrier.

A typical resale opportunity would involve the lease of bulk-rated services to be reoffered in smaller quantities at a discount relative to the telephone companys' unit rates. Bell provided examples of market entry by resellers providing both MTS/WATS and non MTS/WATS equivalent services. Examples of the latter are resale of Telpak to provide smaller Telpak arrangements or interconnected private line services or resale of Dataroute in combination with multiplexing to provide equivalents to Dataroute service. Examples of the former are resale of WATS to provide an equivalent of MTS or resale of Telpak or interconnected private line service to provide MTS/WATS equivalents.

Similar opportunities would exist for sharers. For example, users having similar traffic distribution patterns, instead of individually leasing interexchange voice grade circuits, could jointly lease Telpak services to take advantage of Telpak's lower rates.

B. Legal Issues

In discussing the removal of restrictions on resale and sharing of telecommunications services and facilities, CBTA et al, CNCP and the Director addressed the issue of the Commission's jurisdiction.

The Director argued that the existing restrictions on resale and sharing constitute a preference or advantage pursuant to section 321(2) of the Railway Act. The Director took the position that the burden imposed on the carrier to justify such a preference or advantage had not been discharged by the telephone companies. CBTA et al agreed that section 321(2) is the legal basis for liberalizing resale and sharing. In addition, CBTA et al argued that section 265(1) of the Railway Act is applicable to the issue of the Commission's power to deal with the current restrictions.

CNCP suggested that there are no specific statutory provisions relating to resale and cited the full discretion contained in section 321(5) of the Railway Act as the source of the Commission's power. CNCP submitted that section 265 does not require carriers to furnish facilities for the delivery of traffic from resellers. NAPO was of the view that section 265(1) limits the potential beneficiaries of the section to entities which can themselves actually provide the traffic which is to be received, forwarded and delivered.

In replying to the CNCP and NAPO submissions regarding the interpretation of section 265, CBTA et al argued that the Commission has found, in Decision 79-11 and in Bell Canada, British Columbia Telephone Company and Telesat Canada: Increases and Decreases in Rates for Services and Facilities Furnished on a Canada-Wide Basis by Members of the TransCanada Telephone System, and Related Matters, Telecom Decision CRTC 81-13, 7 July 1981 (Decision 81-13), that section 265 is intended to benefit customers, as well as carriers involved in the interchange of traffic. CBTA et al suggested that the intent of section 265 is most clearly seen in the railway field where freight forwarders use their own private rail sidings to receive and send carloads of consolidated shipments. By analogy to the telecommunications field, this forwarding function is performed by resellers operating private branch exchanges which interface with the network facilities of a telecommunications carrier. CBTA et al argued that the resellers's PBX is included in "property connected with the telephone system" under the definition of "railways" in section 320(12).

CNCP replied to the suggestion by CBTA et al that section 265(1) provides the basis for liberalized resale and sharing, arguing that the restrictions on resale do not constitute a contravention of the obligation to provide all reasonable and proper facilities. In CNCP's view, these restrictions merely preclude subscribers who have been provided with facilities from using those facilities to provide the carriers' service to a third party for a fee.

The Commission agrees with the Director and CBTA et al that section 321(2) provides a statutory basis for determining the appropriateness of the restrictions on resale and sharing contained in the carriers' General Regulations. Section 321(3) of the Railway Act reads as follows:

The Commission may determine, as questions of fact, whether or not traffic is or has been carried under substantially similar circumstances and conditions, and whether there has, in any case, been unjust discrimination, or undue or unreasonable preference or advantage, or prejudice or disadvantage, within the meaning of this section, or whether in any case the company has or has not complied with the provisions of this section or section 320.

In making the factual determinations contemplated by section 321(3) as to whether there may be undue or unreasonable preference or advantage in the continuation of these restrictions applicable to particular telecommunications services, the Commission has had regard to the public interest broadly defined and, in particular, has taken into account the factors set out in Part II of this decision.

C. Positions of Parties

CBTA et al, CTG and the Director favoured immediate removal of the restrictions on resale and sharing. The Director argued that this should include the restrictions on customer owned PBX's imposed in Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14). The Director believed that such action would spread the benefits of competition to all Canadians, especially small and medium sized business and residential subscribers. ResaLe and sharing, through arbitrage, would result in a closer match between the service supplied and the service desired. The Director argued that the current prohibitions have removed, to a significant degree, the incentive of suppliers to meet fully user needs.

The Director cited a number of benefits of resale and sharing: improved market efficiency, stimulation of competition and acceleration of the process of moving rates to costs. Regarding market efficiency, the Director argued that intermediaries are able to collect and consolidate the needs of small users so that they can benefit from the lower prices associated with bulk purchases. In the Director's view, resale would stimulate the utilization of excess capacity; further, resale and sharing would reduce the barriers to entry into these markets by lowering the capital investment required of new market entrants as compared to a situation in which only facilities-based competitors may enter the market. Thus, the Director argued, competition would be stimulated by the opportunity for fast, inexpensive entry. The moving of rates towards costs resulting from resale would, in the Director's view, benefit users and consumers of products that use telecommunications as an input and would reduce the potential for uneconomic bypass.

With specific regard to sharing, the Director stated that unrestricted sharing would permit many smaller users to split communications costs in order to avail themselves of generally attractive service offerings. In addition, sharing could result in more efficient use of both carrier and customer owned transmission and switching facilities. The Director argued that, therefore, sharing could result in improved productivity without any resultant harm to the telephone companies.

CTG also argued for the immediate removal of resale and sharing restrictions. In CTG's view, resale and sharing would encourage the development of innovative services and pricing options in a manner similar to that experienced in the terminal equipment market. CTG agreed with the Director that resale and sharing would, by reducing the barriers to entry, increase the speed with which the market becomes work ably competitive. The benefits of competition would be realized more quickly and by a larger segment of the market than they would if the only competitive entrant was CNCP. CTG also argued that, with more competitors in the market, the development of new services would proceed more quickly.

CBTA et al agreed with the Director and CTG on the benefits of resale and sharing. CBTA et al argued that there is an increasing demand for further resale and sharing as indicated by the following: representatives of the hotel industry have urged the Commission to liberalize the current restrictions on resale; members of the book publishing and distribution industry have stated that they cannot compete with U.S. suppliers without the ability to share bulk facilities to reduce costs; universities have stated their interest in marketing, to students for evening use, FX and WATS facilities used for administrative purposes during the day; and a number of groups have expressed interest to Bell in sharing telecommunications network facilities and services.

CBTA et al argued that, if the Commission is not prepared to remove all restrictions immediately, it should permit limited resale and sharing now, or at least sharing, to meet the critical need of small business in the distribution and information related sectors of the economy. In addition, CBTA et al argued that the Commission should have less hesitation in approving resale of data services as opposed to voice. CBTA et al noted that Decision 79-11 allowed CNCP to use shared inter city facilities to provide service intended for data traffic as opposed to voice. CBTA et al argued there is no evidence that this has caused any erosion of conventional voice traffic; in fact, it has contributed to the phenomenal growth of data traffic.

Ontario argued that resale and sharing restrictions should be relaxed but noted that no specific application was before the Commission in the proceeding. Ontario questioned whether allowing resale would be in the public interest if the rates for bulk facilities are non compensatory. Ontario argued, therefore, that there is no immediate need for the Commission to relax these prohibitions and that resale and sharing should not be permitted until the Commission can be satisfied that underlying tariffs are cost justified.

CFCW and TWU opposed any relaxing of resale and sharing restrictions. AGT, Bell, B.C. Tel, CNCP, NB Tel and Nfld. Tel argued that resale should not be permitted at this time owing to the present opportunities for uneconomic entry afforded by the large rate differentials embodied in the current rate structure.

B.C. Tel asserted that resellers would be opportunists who would target profitable market segments and largely ignore small communities, remote areas and low volume MTS customers. The transfer of traffic from highly profitable services to bulk-rated services, leased by the resellers, would reduce telephone company revenues from inter exchange services, thereby reducing the contribution from these services to the support of local rates. Thus, in B.C. Tel's view, as long as the current rate structure remains in effect, resale would do more to further the interests of resellers and a few users than to serve the public interest at large.

CNCP suggested that a reseller could combine the requirements of a number of users who, individually, have insufficient communications needs to qualify for bulk facilities rates. The reseller would subscribe to the carriers' bulk offering and resell individual channels at rates below the carriers' individual channel rate but, collectively, above the bulk rates. CNCP pointed out that a similar opportunity exists to resell derived channels owing to the margin between the carriers' rates for wide band data channels and the rates for narrow band channels. CNCP noted yet a further opportunity for resale of a subscription service, such as Telex, where users do not have traffic volumes sufficient to warrant the cost of their own subscription. The only economic opportunity for resale that, in CNCP's view, is not artificial, is the provision of "value added" services: services or service features not available from the carriers which can be added, by resellers, to basic services leased from carriers.

CNCP was particularly concerned about its own competitive position in a resale and sharing environment under current rating conditions. If the bulk-rated facilities offered by the telephone companies are not compensatory, resellers may be able to acquire facilities and resell them at a price below CNCP's cost. CNCP argued that, therefore, without prior restructuring of non MTS/WATS rates, reselling would compound the harm to its competitive position caused by non compensatory telephone company rates and would also encourage uneconomic entry.

To prevent uneconomic entry, the telephone companies also argued that rate rebalancing should occur prior to permitting resale and sharing.

In particular, B.C. Tel argued that permitting resale prior to, or concurrent with, rebalancing would cause confusion and instability in the market due to the rapid entry and exit of resellers. Resellers would enter the market, take a profit and exit as soon as resale opportunities were reduced through declining carrier rates. Minimal investment in switches and short-term leased facilities would facilitate such entry and exit.

CNCP argued that most resellers would be forced out of the market once the artificial conditions associated with the rate differentials in current rate structures were eliminated. It was. therefore. of the view that allowing resale under the existing rates would be unfair not only to the resellers but also to subscribers who might be disadvantaged or inconvenienced if their service provider ceased to exist.

CNCP stated that, in addition to rate restructuring as a prerequisite to resale and sharing, a healthy resale and sharing industry would depend on strong competition among the common carriers and, therefore, CNCP should be a full service provider on a national basis before the restrictions on resale and sharing are removed.

The Director disagreed with the view that rate rebalancing is necessary prior to permitting resale and sharing. In the Director's view, rate rebalancing would not affect rate structures within service categories and therefore would not affect the economic prospects for this market.

In addition, the Director put forward several arguments in support of his position that the removal of artificial opportunities for entry through rate restructuring need not precede approval of resale and sharing. First, there may be economic reasons for the continued existence of some margins. Second, if a reseller offers some special services, such as software, that appeal to a specific market segment, then it probably will be able to withstand the elimination of margins on some other services. Third, even after non cost-based prices or undesirable service designs have been eliminated and resellers have exited from broke ring such services, the low cost of reseller re-entry can serve as an effective control against a return by the carrier to such practices. In addition, the Director argued that the possible finite duration of any particular resale activity was not a reason to oppose resale.

Regarding CNCP's concern about harm to its competitive position from resale of services tariffed below cost, the Director argued that the proper solution is to implement cost-based rates. The elimination of the restrictions on resale and sharing would create incentives toward this solution.

CTG took issue with the carriers' assertions that many resale opportunities are economically artificial and would be eliminated by a realignment of rates. CTG argued that the provision of value added services, including the packaging of services to suit individual needs, would be the greatest opportunity created by resale and sharing. This could include services which are not available from the carriers. CTG argued that, with resale and sharing, interexchange rates would move closer to costs faster than they would with rate restructuring. In this context, CTG argued that rate rebalancing is not relevant to the issue of resale and sharing. As long as all underlying services are making a contribution on the same basis, resale can be permitted before rate rebalancing.

Few parties tried to estimate the market share which resellers might gain or the magnitude of telephone company revenue erosion which could result from resale and sharing competition. Bell, however, using information from the American market, arrived at an estimate of revenue erosion due to resale to provide MTS/WATS of $15M in 1990 and $60M in 1995. Bell also stated that, in its opinion, proportionate revenue erosion would be experienced in the private line market.

These estimates assumed no rate rebalancing and CNCP's presence in the MTS/WATS market. Bell said that if CNCP were not in the market, the revenue impact of resale and sharing to provide MTS/WATS might approach the revenue impact estimated to result from CNCP's competitive entry.

The Goss, Gilroy Report assessed the impact of resale and sharing, assuming existing rate structures, and attempted to analyze the potential business opportunities for resellers in the provision of message toll service. The estimate of the net revenue impact, on the telephone companies, provided in the Report is 3% - 5% of telephone company revenue, assuming only resellers are in the market.

While the authors indicated that the quantitative results are highly speculative, several qualitative conclusions were stated:

1. With CNCP in the market, there would be substantially less opportunity for resellers.

2. The effect of any significant degree of rate rebalancing would be to eliminate much of the potential resale market.

3. The only serious threat to Canadian carriers is resale through U.S. based companies using U.S. facilities.

B.C. Tel was of the opinion that the Goss, Gilroy Report underestimates the revenue loss due to resale by approximately 50% and stated that the potential impact on local rates could be about 6%.

Terra Nova and NorthwesTel argued that the markets which they serve are very vulnerable to certain types of competitive entry because a large part of the contribution used to support local services comes from a few relatively large customers. Therefore, while both supported competition in general, they believed that entry should be restricted to registered common carriers which would be subject to the same regulatory rules as they are. They argued that the Commission should await the receipt of a specific application before considering further competition in their areas of operation.

With respect to regulation of the resale and sharing market, most parties took the position that, in general, the regulation of resellers and sharers in a competitive market is unnecessary and inappropriate. Further, a number of parties stated that it would be almost impossible to control the number of entrants in the resale and sharing market. Some parties, however, stated that a degree of regulation would be required in the early phases of competition.

With respect to resale to provide MTS/WATS services, Bell stated that, as long as there are contribution flows from toll services to local services, regulation would be required to ensure that, until rebalancing was completed, other participants in the market also made such contribution payments.

AGT agreed with this position adding that a degree of regulation of the carriers and resellers alike would be necessary during the transitional period when rate rebalancing is taking place.

The Director argued that regulatory restrictions on reseller entry would serve no purpose other than to hamper the effectiveness of resale as competitive force. The Director added that protection against unfair competitive practices by underlying carriers could be afforded by the current regulatory environment.

CBTA et al, CTG and the Director stated that since resale and sharing would encourage the carriers to base their rates more on underlying costs, there would be less need for detailed regulatory supervision of services which have relatively close competitive substitutes.

A number of parties also commented specifically on resale and sharing of satellite transmission services offered by Telesat and upon resale and sharing to provide intraexchange services.

Telesat noted that the only resale of satellite service by its customers which is not occurring now is that by broadcasters to others for non-broadcasting purposes. While Telesat argued that no changes to the present restrictions on resale and sharing are needed or required, it was prepared to support resale and sharing of satellite services, provided that its partial and occasional use rates were deregulated. To facilitate this deregulation, Telesat proposed a system of service categorization and separation whereby its competitive arm would purchase underlying services at tariffed rates. An aggregate burden test would be applied to prevent cross-subsidization between service categories.

CTG argued that existing restrictions on resale of satellite services should be removed and did not oppose the deregulation of Telesat's partial channel and occasional use services provided that Telesat's competitive arm purchased underlying transmission services at tariffed rates and was structurally separate from the carrier.

With regard to intraexchange services, Bell argued that resale and sharing might involve either its primary exchange services such as individual business lines (IBL's), residence lines and PBX trunks or its dedicated local voice grade channels. With regard to resale and sharing to provide primary exchange services, tenants in a multi-tenant building would be able to share, or a service provider to resell, non-partitioned access to the local network over a group of PBX trunks. Such projects, termed shared tenant real estate, involve the aggregation of the traffic requirements of tenants in single buildings or multiple locations. With resale of dedicated local voice grade channels, service providers or users would be able to resell or share volume discounted local channels to provide equivalents to individual local channel services provided now by Bell.

Bell and B.C. Tel argued that resale and sharing of PBX trunks or WATS lines in a shared tenant project might cause local and toll revenue erosion. Bell argued that resale of its central office trunks might require a restructuring of its PBX and IBL rates but indicated that such ventures were not causing much concern at this time. Finally, Bell indicated that it encouraged the provision of shared video-conferencing facilities by shared tenant real estate projects.

D. Conclusions

1. Entry into the Resale and Sharing Market

The Commission considers that, with respect to resale and sharing, users would benefit from an increase in the number of suppliers through improvements in supplier responsiveness and a stimulation of service innovation. Resale and sharing would spread the benefits of competition through the market more quickly than would facilities based competition and, initially at least, these benefits would be available to a larger number of smaller users. Further, permitting expanded resale and sharing would remove some of the uncertainty in the provision of enhanced services in those cases where it may be difficult to determine the primary function of an enhanced service. Expanded resale and sharing would also create pressure for the reduction of certain rates and for increased flexibility in rating structures. In addition, where carrier services provide capacity in excess of user requirements, resale and sharing can lead to more efficient capacity utilisation.

While accepting that resale and sharing would in general be beneficial, the Commission is concerned that, in certain situations, there could be significant disadvantages.

For resellers to be viable, they must be able to provide services at a lower rate than the common carriers or provide services which are not offered by the carriers. Where they compete on rate advantages, resellers will take advantage of the volume discounts contained in the present tariff structures. These discounts are often large enough that resellers could lease volume discounted services, such as Telpak, from the carriers, and reoffer low volume services, such as individual circuits, at a rate lower than the carriers' unit rates while still producing a profit. Sharers would be able to take advantage of the same tariff structures but realize cost savings as opposed to profit.

The rate differential between services, rather than the absolute level of rates, is an important factor in determining when resale and sharing opportunities will exist. If the level of the rate differentials between services were based on cost differentials, then resellers and sharers would enter the market only if they were more efficient than the carriers or provided alternative services or service quality. However, under conditions in which rate differentials substantially exceed cost differentials, resellers and sharers could enter the market on an uneconomic basis. Such entry would then lead to an increase in the cost of supplying telecommunications services.

It is clear that to permit resale and sharing in such a context would also place the carriers at a competitive disadvantage. Traffic would be diverted from carrier services, such as MTS, to discounted carrier services leased by resellers or sharers, causing erosion of carrier revenues. Competitors would also focus their activities on the more profitable routes and, therefore, there would be pressure for the carriers to seek approval to reduce rates for their services on highly competitive routes and raise rates in areas where there is little competition.

Two mechanisms were addressed in this proceeding to resolve the problems of uneconomic entry and erosion of carrier revenues: rate adjustments and contribution charges. The feasibility of rate adjustments is addressed, with respect to specific markets in the following sections. The Commission believes that contribution charges would have to be applied with specific regard to the activity involved. Resale and sharing would involve a variety of activities; therefore, the Commission would be required to establish different contribution charges based on the services provided and the underlying carrier services involved. Due to the extent of these activities, the Commission has concluded that it would be impractical to administer such a system.

In its consideration of resale and sharing in specific market segments in the following sections, the Commission has weighed the advantages and disadvantages described above.

2. Resale and Sharing to Provide MTS/WATS

The Commission determined previously in this decision, that the rates for MTS/WATS are substantially above cost and include a substantial contribution to the recovery of access costs. Any contribution from competitive network services is significantly smaller. Resellers and sharers would in part provide MTS/WATS through the use of carriers' underlying competitive network services. Permitting resale and sharing to provide MTS/WATS, therefore, would encourage uneconomic entry and place the telephone companies at an unfair competitive disadvantage.

In addition, resale and sharing in the MTS/WATS market would erode telephone company MTS/WATS revenues and put upward pressure on local rates. While resale and sharing could stimulate demand for the carriers' underlying services, primarily private line and WATS, the Commission is of the view that any resulting increased carrier revenues would not be sufficient to offset the MTS revenue loss at this time.

The Commission has already concluded that contribution payments levied on resellers or sharers would not be a practical solution to resolving the problems associated with resale and sharing in a market where rate differentials substantially exceed cost differentials. With regard to the rate adjustment approach, the other solution under consideration, rate rebalancing as proposed by Bell and B.C. Tel would largely resolve the problem. Contribution flowing from MTS would be significantly reduced by moving MTS rates closer to their associated costs. As indicated previously, however, the Commission has decided against full rate rebalancing at this time.

The Commission has weighed the advantages and disadvantages of allowing resale and sharing to provide MTS and WATS and, on balance, has concluded that it is not in the public interest at this time. However, the Commission considers that the disadvantages described above do not apply to the sharing of MTS to provide MTS since this activity would not affect the aggregate level of contribution derived from MTS. The Commission has decided, therefore, not to change the existing carrier prohibitions with respect to resale and sharing to provide MTS and WATS except to permit the sharing of MTS to provide MTS.

3. Resale and Sharing to Provide Interexchange Services Other Than MTS/WATS

The discrepancy between rates and costs for non MTS/WATS interexchange services is not, in the aggregate, as significant as for MTS/WATS. This is true not only for the telephone companies, but also for CNCP and Telesat. As a result, many of the disadvantages of resale and sharing mentioned above are not of major concern in the non MTS/WATS inter exchange market. Unlike the situation with regard to MTS/WATS, uneconomic entry would not be encouraged at the aggregate level and carrier revenues, therefore, would not be prone to significant erosion.

That being the case, and taking into account the potential benefits of resale and sharing previously described, the Commission has concluded that removal of existing restrictions on resale and sharing for the provision of non MTS/WATS inter exchange services is in the public interest.

Although, in aggregate, the rates for non MTS/WATS inter exchange services are close to their costs, the Commission is concerned that the present rate differentials for individual services within the non MTS/WATS category in many instances may not be sufficiently close to the associated service cost differentials. Further, as noted by CNCP, resale and sharing in this context could have a potentially more significant impact on CNCP than on the telephone companies, given current rate structures. The Commission is concerned that resale and sharing in such a context would encourage uneconomic entry into the market and place the carriers at a competitive disadvantage. In view of its conclusions on the impracticality of establishing a system of contribution payments for resale and sharing, the Commission has decided to allow the carriers an opportunity to restructure the rates for non MTS/WATS inter exchange services prior to permitting resale and sharing in this market.

4. Resale and Sharing to Provide Intraexchange Services

The evidence indicates that there are few volume discount offerings for intraexchange services. There was no evidence to suggest that specific discounts which are offered are not cost-based. As a result, uneconomic entry is not a major concern in this market. Also, the Commission views resale and sharing in this market as being unlikely to result in any significant loss in telephone company net revenues. The Commission has concluded, therefore, that no restructuring of rates need precede resale and sharing to provide intraexchange services.

While no party specifically raised strong objections to resale and sharing in the intraexchange market, the Commission is concerned that a number of issues concerning resale to provide primary exchange voice services including individual line and party-line business and residential service, PBX trunk service, Centrex service, public telephone service, and exchange wide dial PBX service were not addressed in this proceeding. These issues include:

i) the impact on the telephone companies' obligation to serve;

ii) the right of access to the telephone company for tenants in shared tenant real estate developments;

iii) the responsibility to provide emergency or back-up service;

iv) the level of rates for basic voice service charged by competitors; and

v) access to and standards for pay telephones.

The Commission considers that further discussion is required prior to permitting resale to provide primary exchange voice services. The Commission also believes that the issues identified above pertain only to resale to provide primary exchange voice services and not to sharing to provide these services.

Accordingly, the Commission has concluded that removing existing restrictions on resale and sharing to provide all intraexchange services except resale to provide primary exchange voice services, would be in the public interest. To address the issues indicated above with respect to resale to provide primary exchange voice services, the Commission will commence a follow-up proceeding as described below.

5. Regulation

With regard to the issue of the Commission's legal duty to regulate resellers and sharers, the Commission notes that its jurisdiction is limited to "companies" as defined in section 320(1) of the Railway Act. In Decision 84-18, the Commission addressed the issue of its legal authority or duty to regulate the provision of enhanced services by parties other than the federally-regulated telephone and telegraph companies. The Commission concluded that its jurisdiction extends only to "those companies within federal jurisdiction that may be considered to be operating a telephone or telegraph system." Based on this interpretation, the Commission concluded that enhanced service providers who made use of underlying basic telecommunications services for the provision of their service offerings are not "companies".

The Commission considers that the resale and sharing market is similar in many respects to the enhanced services market and that the conclusions reached in Decision 84-18 are also appropriate here. In this regard, the Commission considers that the benefits to be derived from competition, especially innovation, market flexibility, competitive pricing and user choice would more likely result from an environment governed by market forces than by regulation. The Commission has concluded that, despite suggestions to the contrary by Telesat and others, underlying carrier services or facilities that may be provided to resellers and sharers should not be deregulated at this time. Given the dependence of resellers and sharers on underlying carrier services or facilities, the Commission is of the view that the absence of regulation of resellers and sharers will not confer an undue competitive advantage on them, and consequently has decided that the regulation of resale and sharing activity permitted by this decision is not required.

6. Directions

Bell, B.C. Tel, CNCP, NorthwesTel, Telesat and Terra Nova are directed to file, by 26 November 1985, tariff revisions allowing sharing to provide primary exchange voice service, sharing of MTS service to provide MTS service, and resale and sharing to provide all services other than MTS/WATS and primary exchange voice service. The carriers are also invited, within the same time period, to file any tariff revisions for inter exchange services, other than MTS/WATS, which they believe are necessary prior to allowing resale and sharing in that market. The tariff revisions shall be designed to result in no changes to the net revenue of the competitive network category. Further, the carriers shall be required to provide estimates of demand and revenues under the present and proposed rates.

With regard to resale to provide primary exchange voice services, Bell, B.C. Tel, NorthwesTel and Terra Nova are directed to file their comments, on the issues identified at page 88 above, by 26 November 1985. Following receipt of their comments, the Commission will issue a public notice specifying further procedures for the consideration of these issues.

VI INTERCONNECTION OF INTRAEXCHANGE SYSTEMS

A. Background

In response to Public Notice 1984-6, a number of parties addressed the question of whether the interconnection, with carrier facilities or services, of non-carrier provided intraexchange systems used to provide interexchange and intraexchange services should be permitted.

For the purposes of this decision, the Commission has defined an intraexchange system as one which is configured to operate within an exchange or any two-way extended area service (EAS) associated with that exchange. Under this definition where an exchange has EAS with two or more exchanges, and these latter exchanges do not have EAS with each other, a system carrying traffic between these latter exchanges would not be an intraexchange system.

Intraexchange systems can be either public or private. They can utilize a number of technologies including microwave, fiber optics and coaxial cable, to carry voice, data or video traffic. Private intraexchange systems are those which are dedicated to the exclusive use of a single user or shared by two or more users for their exclusive use. Private intraexchange systems are not provided for the use of the general public. Such systems can provide users with alternatives to telephone company dedicated local channels for the carriage of voice, data or video traffic (e.g. a private local area network [LAN] for the carriage of a customer's computer communications traffic) as well as access to the carrier's network services.

Public intraexchange systems are systems other than private intraexchange systems and include both voice and non-voice systems which offer their services to the public. Such systems could provide voice services such as primary exchange voice equivalents and non-voice services such as local data communications services as well as access to carrier network data communications services.

In regard to the interconnection of intraexchange systems, there are several instances where interconnection is permitted. Included are the interconnection of:

i) radio paging systems (one way from the public switched telephone network only);

ii) radio common carriers (RCC's) and cellular telephone systems (to provide a variety of voice and data communications in intraexchange and interexchange markets); and

iii) systems to provide enhanced services.

In regard to private system interconnection, on 6 June 1984, the Commission received an application from the Sudbury Hydro Electric Commission (Sudbury Hydro), regarding a dispute with Bell concerning the connection of its facilities to the public switched telephone network. In the spring of 1983, Sudbury Hydro had connected 38 of its telephones, at a new location, to a PBX in its main office some two kilo metres away. A cable which Sudbury Hydro had purchased connected the 38 telephones to the main PBX. Bell had warned Sudbury Hydro that the connection contravened both its General Regulations and the terms of Decision 82-14. Bell threatened to disconnect service partially unless Sudbury Hydro disconnected its cable, and offered instead to lease to Sudbury Hydro the dedicated local channels required to connect the two locations.

In Decision 82-14, the Commission permitted the attachment of customer-provided terminal equipment to the public switched telephone network but considered that the interconnection of communications systems should be considered separately. Recognizing, however, that an area of uncertainty existed in distinguishing between configurations of terminal equipment and communications Systems. the Commission defined terminal equipment as follows:

... in order for a given configuration of equipment to be considered as terminal equipment, it must be restricted to operate within a single building, or the portion thereof owned or leased by the subscriber, or between buildings or the portions thereof which are owned or leased by the subscriber provided these buildings are on continuous property as defined in Item 20 of Bell's General Tariff and are within the same exchange.

Given that the Sudbury Hydro system does not meet the definition of terminal equipment, the Commission joined the matter to the present proceeding on 28 August 1984.

B. Positions of Parties

The federally-regulated telephone companies contended that intraexchange systems interconnection would result in a number of private and public systems utilizing a variety of technologies. According to Bell, such interconnection could result in the alternative provision of public voice, data and dedicated local channel services. B.C. Tel suggested that new companies providing such services would target large business customers.

Both Bell and B.C. Tel argued that to limit the number of these systems would not be feasible in the long run. Further, they argued that it would be difficult to limit the operations of such systems within particular exchange boundaries.

NorthwesTel contended that the issue of intraexchange system interconnection should be addressed in a separate proceeding. Terra Nova argued that such interconnection should not be permitted where it would result in the duplication of facilities to provide similar services within a given geographic area.

In regard to the potential revenue impact of intraexchange system interconnection, all federally-regulated telephone companies agreed that, at present, the local exchange component of their networks is generally the least susceptible to uneconomic entry. Both Bell and B.C. Tel suggested, however, that certain local services may be susceptible at current rates, and Bell contended that local system interconnection could create problems in local services rating methods. In this regard, Bell stated that a reduction in the number of central office trunks supplied could cause it to restructure PBX and IBL rates.

NorthwesTel and Terra Nova indicated that they would suffer minimal effect due to the size of the communities they serve. B.C. Tel considered that the effectiveness of the present restrictions on interconnection would decline over time due to customer control of interconnection at the terminal equipment level.

Bell argued that CBTA et al's and OMEA's examples of local system interconnection underlined the desire of large users to employ bypass technologies to minimize costs. All these telephone companies indicated that increases in local rates or interconnection or both could result in increased pressure to bypass.

All telephone companies agreed that, in the event that long distance competition were permitted, intraexchange systems could be used to connect directly to interexchange carriers. Thus, users could bypass the public switched telephone network and avoid contribution charges for local access. B.C. Tel suggested that some inter exchange carriers would carry all of a user local traffic on their alternative intraexchange networks in addition to the bypass traffic routed to inter exchange networks.

In assessing the impact of various types of systems, Bell stated that with interconnection, the number of LANs would increase and, as well as serving traffic within buildings, would link multiple locations. Nevertheless, Bell did not expect the revenue impact to be significant.

Both Bell and B.C. Tel indicated that specialized intraexchange services like intraexchange digital microwave systems would compete with the companies' dedicated local channel services. However, under cross-examination, both companies conceded that their local channels are probably making no contribution to other services. In fact, both Bell and B.C. Tel agreed that there are no public policy reasons against competition in the local channel market provided that: local channels need not make a contribution; the telephone companies can also provide alternative types of local channels such as digital microwave systems; and a determination is reached on competition in general.

Both Bell and B.C. Tel expressed concern over the entry of licensed cable television systems (cable systems) into telecommunications markets. Providing examples of two-way cable systems presently offering leased data service and traffic light control systems, Bell said that it expected the provision of leased data services and interactive computer services, routed on cable systems, to increase. B.C. Tel noted that the City of New York presently buys cable lines from a local cable system and intends to set up eventually a private communications network to link all city offices using these lines. Bell and B.C. Tel indicated that cable systems have the potential to interconnect with long distance networks in addition to their ability to provide a range of traditional telephone services. B.C. Tel contended moreover, that the emergence of two-way cable systems could lead to the interconnection of computer service bureaux with both cable networks and the public switched telephone network resulting in the de facto interconnection of both networks.

While Bell considered that the use of two-way cable for dedicated applications could cause revenue erosion, it indicated that cable systems would have to expend capital to provision these services. Moreover, while it judged that the technology existed to allow cable systems to provide switched services and compete with telephone company basic local service, Bell concluded that such a scenario was not imminent.

NorthwesTel and Terra Nova attempted to provide quantitative information on the potential revenue erosion that might be caused by alternative systems, particularly two-way cable systems, LANs and intraexchange microwave in the local market. While expressing specific concern over the adverse effect of cable systems on their revenues, they conceded that the overall revenue impact of intraexchange systems in general would not be significant due to the size of the communities they serve.

Both NorthwesTel and Terra Nova indicated that rules prohibiting their ownership of cable systems may be preventing the provision of cable systems in remote communities. Moreover, telephone companies and cable systems should be permitted to compete on an equal footing in the provision of services like remote meter reading and automatic alarm systems.

CBTA et al defined local system interconnection as the ability of a subscriber to link multiple sites within an exchange using a customer-provided communications system and to carry traffic which passes over that system into the local public switched telephone network. It supported the removal of all restrictions on local system interconnection. CBTA et al contended that since telephone companies do not permit local system interconnection, subscribers are forced to obtain dedicated local channels from the telephone companies even though these may not be the most efficient facilities to connect a customer's local system. It argued that, alternatively, the subscriber could attempt to persuade the telephone company to provide a special facility such as a microwave or fibre optic link. CBTA et al suggested, however, that this could cause a disadvantage for the subscriber since provisioning, response time and price are at the discretion of the telephone company. To illustrate disadvantages under the present system, CBTA et al cited Rolm Canada's (Rolm) submission on this subject.

CBTA et al noted that in cross-examination, both Bell and B.C. Tel had agreed that there was no public policy reason to prohibit local system interconnection and it argued that there would be minimal local channel revenue erosion. Further, it argued that Bell and B.C. Tel had admitted that local channel rates are probably not compensatory. CBTA et al concluded that based on the record, the Commission should have no hesitation in ordering the complete liberalization of local system interconnection.

CBTA et al, the Director and OMEA suggested that increased intraexchange systems interconnection would contribute to more innovation and productivity. CBTA et al argued that, in the monopoly environment, the carriers have no incentive to furnish the high quality circuits which certain subscribers require. Only the existence of alternative suppliers in the intraexchange market would spur the carriers to be more responsive; at the same time, subscribers could have a choice of suppliers for local channels.

Rolm provided examples of problems faced by a hospital, financial institution, university and government agency in acquiring suitable high capacity channels to connect these users' locations. Rolm suggested that the lack of readily available high capacity channels, slow response times in providing quotes for special facilities, and high prices cause disadvantage to, and discrimination against, customers and equipment suppliers. In particular, Rolm argued that present carrier practices could cause a customer to forego the choice of the inherent efficiencies of PBXs connected to high capacity circuits and instead choose readily available Centrex service from the telephone companies. Rolm argued that, moreover, even where telephone company dedicated local channels were adequate for a user's needs, these facilities could, in some circumstances, be more expensive than customer-provided circuits.

OMEA stated its primary concern to be the timely introduction of and access to technological innovations and applications in a way that most benefits the public. OMEA expressed concern that where there is a single supplier of a service, that supplier is able to impose its view of the economic feasibility of an innovative service, often to the detriment of the public.

More specifically, OMEA argued for the freedom to connect local systems. Access of utility networks to the public switched telephone network would increase options available to these utilities and, thus, it would enable electrical utilities to exchange information with their customers more cost effectively.

OMEA said that data retrieval and transmission would be an obvious application of interconnection. For example, remote meter reading by electrical utilities would provide fully automated and instant access to customer information. In addition, interconnection could facilitate various other utility operational and administrative functions. Further, it could reduce costs presently invested in dedicated facilities leased by the utilities. In addition, OMEA submitted that rules for interconnection should allow electrical utilities to provide the public with direct telecommunications access to the utilities where necessary for their business.

OMEA supported the need for systems standards to protect the integrity of the public switched telephone network and expressed confidence that, as in the case of terminal attachment, standards would be developed.

Dr. M. Irwin, a witness for the Director, suggested that intraexchange competition has spurred innovation in plant investment in the United States. He asserted that, in the competitive U.S. environment, telephone companies are literally bypassing themselves to serve their customers with fibre optics, digital microwave, cellular radio and new digital switching techniques. Moreover, telephone companies are forming joint ventures to construct intelligent buildings which provide a variety of information transmission services to the occupants. These consortia are also introducing LANs, a variety of PBXs and new local loop facilities.

The Director, commenting on the issues of competition in a more general sense, noted that information technology is eroding traditional industry boundaries with substantial impact on users. Potential competitors, therefore, wish to enter carrier markets especially since carriers can enter theirs. The Director argued that Bell's submission to the Royal Commission on Economic Union and Development Prospects for Canada recognized this trend and, in support, cited Part of Bell's submission:

... Today, telecommunications and computer products provide many of the same basic capabilities. Telephone and telegraph companies, computer service organizations and the costal service provide alternative ways to send text messages. Using different distribution systems, telephone and cable T.V. companies are able to provide carriage for a number of potential residential services such as alarm systems, energy management, and access to information and data-based services.

The Director also noted Bell's position that policies should be developed which avoid setting up rigid industry boundaries or structures intended to control the entry of suppliers into certain markets.

C. Conclusions

The Commission has concluded that, in the absence of any detailed record on the matter and in light of the potential duplication of facilities involved, the removal of present restrictions on intraexchange systems interconnection to provide primary exchange voice service would not be in the public interest at this time.

However, the Commission has concluded that it is in the public interest to permit the interconnection of non-carrier provided private intraexchange systems and non-carrier provided public non-voice intraexchange systems to the facilities or services of the federally-regulated carriers.

The Commission notes the concern of all federally-regulated telephone companies that the introduction of contribution charges for local access to inter exchange networks would increase the incidence of bypass of telephone companies' local facilities to escape contribution charges. The Commission considers that its decision not to permit competition in the provision of MTS/WATS removes the primary incentive and potential for such bypass.

The Commission realizes that incentives may exist for operators of private inter exchange networks, using private microwave or satellite facilities, to "leak" interexchange traffic through a PBX connected to an intraexchange system and, via this system, to the public switched telephone network. However, the Commission considers that this incentive exists whether or not the owner of the PBX has a local network. To the extent that leaky PBXs become a serious problem, the Commission considers that rate restructuring rather than restrictions on local networks would provide a more appropriate solution.

In regard to Bell's and B.C. Tel's concern over limiting the operation of intraexchange networks to the confines of particular free calling areas, the Commission does not consider this to be a serious problem. Further, no evidence was presented to indicate that most users would not obey restrictions on the manner in which they may configure their systems. Finally, the Commission notes that, where carriers find infractions of their tariffs, they may terminate service pursuant to the relevant provision of their General Regulations.

With respect to all private intraexchange systems and public non-voice intraexchange systems, the Commission is of the view that the liberalization of interconnection restrictions in the local exchange will not have any significant revenue impact on the carriers. In addition, the Commission considers that lifting these restrictions, especially in the case of the non-voice market, will facilitate the development of a responsive and innovative computer communications infrastructure and of opportunities in emerging high technology markets. The Commission does not consider that this particular market should be the exclusive domain of any particular industry especially in view of the convergence of the traditional industries of data processing, cable and telecommunications and the range of alternative suppliers which stand ready to compete in this market. Moreover, such interconnection is consistent with the Commission's previous Decisions 79-11, 81-24 and 84-18 which allowed limited interconnection to provide data communications and enhanced services respectively.

Regarding specifically the further liberalization from that allowed for users in Decision 82-14 to allow the interconnection of private user systems on non-continuous property, the Commission considers that the record supports the removal of this restriction for private (including shared) intraexchange systems. The Commission considers that such a decision would provide users greater flexibility and choice in the way they configure and operate customer provided systems and allow the users greater efficiencies, such as a reduction in the number of central office trunks required to serve the system. Moreover, it would result in a more responsive supply of dedicated local channels. Finally, users would benefit from greater choice as between Centrex service and competitively provided PBXs.

D. Legal Issues

A further matter that remains to be disposed of is the question of the Commission's jurisdiction to order the carriers to permit interconnection of local non-voice systems with the public switched telephone network.

In final argument, CBTA et al argued that the Commission should have no hesitation in ordering the complete liberalization of local system interconnection. OMEA also supported removal of all restrictions on the interconnection of local systems with the public switched telephone network.

In reply, Bell submitted that to the extent that any application for local system interconnection involves a request for interconnection for both inter exchange calling as well as local conversations, the Commission lacks jurisdiction to issue such an order under section 320(8) of the Railway Act.

Section 320(8) reads as follows:
320.(8) No order made under subsection (7) applies to the interchange of local conversations between persons using the telephones of two competing systems or lines where such systems or lines terminate upon switch-boards located within the municipal limits of the same city, town or village, except in the case of rural party-line telephones in non-competitive areas and then only when the Commission deems such interchange to be desirable and practicable.

In Decision 79-11, the Commission considered the scope of the limitation expressed in section 320(8). At page 94, the Commission concluded that the limitation was intended to apply only to the transmission of speech between natural persons located within the municipal limits of the same city and would not apply to the transmission of written or coded data, or to interactions between a person and a computer.

After careful study of the submissions in this proceeding by Bell, CBTA et al and OMEA, the Commission has concluded that the law is correctly set out in Decision 79-11, namely, that interconnection between the systems of Bell and B.C. Tel and local non-voice systems may be ordered by the Commission under section 320(7).

The Sudbury Hydro application raises a second issue concerning the proper interpretation of section 320(8). In this case the requested interconnection involves voice applications.

However, this request is for interconnection of a private intraexchange system which is not used to offer service to the general public. In the Commission's view, the constraint of section 320(8) relates to interconnection of two telephone systems which are used to offer telephone service to the general public in the same municipality. The Commission has concluded that the Sudbury Hydro system is not a "competing system" within the meaning of section 320(8), given that it is not used to offer telephone service to the general public. Accordingly, the Commission has concluded that it is not precluded from ordering the interconnection of such systems.

E. Technical Standards

The Commission is of the view that certain technical standards will be required to facilitate the interconnection of intraexchange systems. However, there is insufficient evidence on the record of this proceeding to determine what specific standards are required. Accordingly, the Commission will request that the Terminal Attachment Program Advisory Committee (TAPAC) develop such standards for the interconnection of systems as may be necessary to maintain network integrity. In the interim, the Commission directs the carriers to negotiate reasonable interim technical agreements with any person seeking such interconnection.

F. Regulation

In regard to services provided by public non-voice intraexchange systems, as is the case with enhanced service providers, resellers and sharers, the Commission has concluded that the benefits to be derived from competition, especially innovation, market flexibility, competitive pricing and user choice, would be more likely to result from an environment governed, to the maximum extent possible, by market forces rather than by regulation. Therefore, the Commission does not intend to regulate the rates for services offered by service providers other than the federally-regulated carriers. That being the case, the Commission is of the view that it is not necessary in this decision to make a determination as to whether such systems are companies within the meaning of section 320(1) of the Railway Act.

G. Directions

The federally-regulated carriers are directed to file with the Commission, by 28 October 1985, the necessary tariff revisions to give effect to the decisions herein with regard to the interconnection of intraexchange systems.

VII B.C. RAIL'S APPLICATION FOR INTERCONNECTION

A. Background

B.C. Rail's application sought an order requiring B.C. Tel to furnish B.C. Rail with the necessary interconnection facilities to permit B.C. Rail to offer private line voice and data services on the same terms and conditions, mutatis mutandis, as those approved for CNCP's interconnection with B.C. Tel in Decision 81-24.

As regards the services involved in the application, B.C. Rail sought interconnection with B.C. Tel for the purposes of, and limited to, the provision of private line foreign exchange (FX), tie trunk (TT) and off-premises extension (OPX) services.

Assuming approval of the application, B.C. Rail expected that its rates would be set at 85% to 90% of B.C. Tel's rates for equivalent services.

B.C. Rail based its application on the following:

(i) It has the authority to construct and operate railway and telecommunications facilities within the Province of British Columbia.

(ii) It offers and furnishes telecommunications service in British Columia.

(iii) Interconnection of its telecommunications facilities with those of B.C. Tel is presently afforded by means of special agreements and arrangements between itself and B.C. Tel.

(iv) Pursuant to Decision 81-24, B.C. Tel was directed by the Commission to furnish certain connections to CNCP for the purpose of providing data service, voice service, or both, subject to specified terms and conditions, and to file a tariff in respect of same.

B. The Application and the Public Interest

The B.C. Rail application was based on sections 265, 320(7) and 321 of the Railway Act. The Commission has concluded that the position it took with reference to its jurisdiction to grant such interconnection under sections 265 and 320 in Decision 79-11 is applicable to the present case. In exercising this jurisdiction, the Commission has followed the public interest test enunciated in Decision 79-11 and discussed previously in Part II - General Considerations.

1. The Prima Facie Case in Support of the Application

In its application, B.C. Rail submitted that the interconnection sought would be useful, beneficial and in its interest to expand the range of telecommunications services which might be offered to present and potential customers. The scope of interconnection sought would enable such expansion to take place while ensuring that B.C. Tel would be justly and expediently compensated for the use of any facilities. Moreover, B.C. Rail stated that the existence of interconnection and traffic provisioning arrangements under special agreements between B.C. Rail and B.C. Tel is prima facie evidence that no unreasonable technical harm would result from the interconnection sought in this case.

None of the parties except B.C. Tel and NB Tel argued that B.C. Rail had failed to make a prima facie case in support of its application. The Commission is of the view that B.C. Rail has made a prima facie case that the interconnection for which it has applied would be useful for its business, the duplication of the facilities sought would not be desirable in the public interest, and no unreasonable technical harm would result from the interconnection. Accordingly, the Commission must determine whether on balance the potential benefits of granting the application outweigh any potential disadvantages associated therewith.

2. Positions of Parties on the Application and the Public Interest

No party disputed B.C. Rail's view that benefits, such as increasing consumer choice and supplier responsiveness, improved service availability and quality and increased incentives for innovation, were likely benefits to arise as a result of the granting of its application.

In addition, no party was of the view that approval of the application at the proposed rate levels would have an adverse impact on the rate levels for other services. In particular, no party argued that B.C. Rail's application would adversely affect the universality of basic telephone service. Further, B.C. Tel did not present evidence to indicate that it would suffer economic harm should B.C. Rail's application be approved.

The Director supported B.C. Rail's application while FAPG et al, AGT and Manitoba Tel took no position either for or against. B.C. Tel, CFCW, Nfld. Tel, NB Tel and TWU were opposed.

NB Tel submitted that the folding of B.C. Rail's application into the inter exchange proceeding has not enabled the Commission to examine thoroughly and test the B.C. Rail proposal. NB Tel submitted that B.C. Rail's application must be considered only after rate rebalancing has occurred; accordingly, it should be denied.

The concerns as to the potential disadvantages of B.C. Rail's application raised by various opposing parties addressed three general matters: the efficacy of B.C. Rail's financial plans, the appropriate regulatory treatment of B.C. Rail and, finally, the potential negative impact on other provincially-regulated telephone companies and their subscribers.

(a) B.C. Rail Financial Plans

B.C. Rail's forecast showed operating revenues from the interconnected private line market of $0.8 million in 1985 rising to $6.3 million in 1989, assuming approval of its application. These amounts represent 2% and 10% respectively of B.C. Rail's estimates of the B.C. Tel interconnected private line market in those years. In that same period, incremental operating expenses would be expected to rise from $0.25 million to $1.905 million, resulting in incremental revenues, net of expenses, of $0.55 million to $4.395 million. The incremental net income was estimated at $0.442 million in 1985, rising to $2.332 million in 1989.

While B.C. Tel stated that, under certain assumptions, the revenue projection provided by B.C. Rail are not unreasonable, B.C. Tel called into question the efficacy of B.C. Rail's financial plans in several respects. First, it argued that B.C. Rail has adduced no evidence of any market need for the services it intends to provide. Second, it argued that the long-term financial viability of B.C. Rail's Communications Department is uncertain because the projections in the evidence are artificial and unreliable. B.C. Tel submitted that there is no evidence to show that direct or indirect subsidies will not be required. Third, it argued that B.C. Rail failed to provide a viable strategic plan in support of the application.

In reply, B.C. Rail argued that first, B.C. Tel's confirmation of B.C. Rail's revenue projections demonstrates the market need for the proposed services. Second, it argued that there is no evidence questioning the long term financial viability of B.C. Rail. Third, it argued that B.C. Tel's suggestions of artificial projections in the forecast are groundless and inconsistent with the evidence. B.C. Rail expressed the view that B.C. Tel's position in this regard indicated its confusion between B.C. Rail's service extension studies and B.C. Rail's financial projections. Fourth, B.C. Rail rejected the suggestion that to gain approval, B.C. Rail be required to compile and submit a strategic plan in support of its application. At the same time, B.C. Rail rejected any assertion that it does not have a viable strategic plan, noting that its submissions with respect to its financial projections reflect the overall corporate planning of B.C. Rail. It submitted that the evidence confirms that B.C. Rail has met or exceeded any such planning requirement.

(b) Regulatory Treatment of B.C. Rail

With respect to the regulation of B.C. Rail, B.C. Tel submitted that B.C. Rail is a company within the meaning of section 320(1) of the Railway Act. In support of this argument, B.C. Tel relied on B.C. Rail's present and future business to suggest that the operations of the company across provincial borders make B.C. Rail an inter provincial undertaking subject to federal jurisdiction and, in particular, to CRTC jurisdiction. As a "company", B.C. Tel argued that B.C. Rail must file its tolls with the Commission for approval. Since B.C. Rail would also be subject to a provincial regulator, B.C. Tel argued that approval of B.C. Rail's application would result in "regulatory chaos".

B.C. Tel submitted that unless B.C. Rail were subject to the same regulatory supervision as B.C. Tel, the Commission would not be in a position to ensure fair competition. B.C. Tel submitted that regulating B.C. Rail by incorporating regulatory requirements as conditions of approval would be too simplistic, the non-statutory remedies available to the Commission are limited, and the termination of interconnection would be fraught with social, political and intergovernmental difficulties. B.C. Tel concluded that approval of the B.C. Rail application would be contrary to the public interest and should therefore be denied. B.C. Tel suggested that B.C. Rail be given the opportunity to refile at some future time, should it be prepared to acknowledge the jurisdiction of the Commission.

CFCW considered that the arguments against further competition in Canada apply to B.C. Rail. It questioned the commitment of B.C. Rail not to invade the MTS/WATS market and wondered whether it was possible to have fair competition between two companies governed by different regulators. It also questioned the value of B.C. Rail's promise to submit to regulatory scrutiny. For these reasons, CFCW opposed the application and urged the Commission to reject it.

AGT stated that it takes no position on whether B.C. Rail's application should be approved. However, if it were approved, AGT submitted that there should be the same degree of regulatory control as is imposed on B.C. Rail's competitors; that there should be safeguards to prevent improper cross-subsidization; that the parameters within which B.C. Rail would operate and the services it would provide should be clearly defined; and that the commitments on the part of B.C. Rail should be incorporated as specific restrictions in any order granted by the Commission. AGT further submitted that, in addition to these restrictions, all restrictions placed upon CNCP in Decisions 79-11 and 81-24 should also apply, mutatis mutandis, to B.C. Rail.

In reply, B.C. Rail disputed B.C. Tel's assertion that the operations of B.C. Rail extend beyond the provincial boundary of British Columbia. B.C. Rail stated that each instance of interconnection between its facilities and those of other telecommunications and rail carriers occurs within the boundaries of the province of British Columbia. Further, B.C. Rail provides no telecommunications services to points outside British Columbia. Based on these facts, B.C. Rail argued that it is not an inter provincial undertaking and that its "intended operations" are a matter of speculation, not fact, and cannot be relied upon to subject B.C. Rail to federal regulatory jurisdiction.

However, B.C. Rail argued that while it is not subject to the same degree of regulatory supervision as B.C. Tel, the type of interconnection sought is subject to the exercise of full Commission authority. B.C. Rail pointed out that the Commission's remedies are complete and absolute, and would not be slow or cumbersome to enforce. Moreover, if B.C. Tel were directed to file a specific tariff governing interconnection with B.C. Rail, any breach of the provisions of that tariff would render the interconnection subject to suspension or termination by B.C. Tel under Rule 35 of its General Regulations.

With respect to the social, political and intergovernmental difficulties that termination might involve, B.C. Rail noted the absence of any examples. It drew attention to the fact that similar difficulties would be experienced by CNCP in the event of a breach of a term or condition of CNCP's interconnection under Decision 81-24. It was B.C. Rail's view that, in any event, dissatisfied subscribers could look to B.C. Tel or an alternative supplier for the continued provision of service. B.C. Rail argued further that, contrary to B.C. Tel's position, the Commission need not exercise "equal regulatory scrutiny" and have "equal remedial authority" over B.C. Tel and B.C. Rail for competition to be fair and equitable; rather, the degree of regulation between competitors need only be adequate in the circumstances.

Nfdl. Tel requested that the Commission deny B.C. Rail's application on the grounds that approval would affect all provincially regulated telephone companies and their subscribers. Manitoba Tel, on the other hand, noted the absence of impact on its operation, and therefore adopted a position of neutrality.

3. Conclusions

The Commission has concluded that B.C. Rail has the facilities and capability of offering interconnected private line services to the public. The offering of these services, in competition with similar services supplied by B.C. Tel and CNCP, would provide benefits which the Commission previously identified in Decision 79-11. There has been no evidence to show that the quality of these services would be other than satisfactory. Nor was there any evidence that the offering of these services by B.C. Rail would have an adverse impact on the quality of B.C. Tel's equivalent services.

The Commission finds that the forecast provided by B.C. Rail is a reasonable estimate of its medium term potential assuming approval of its application. The forecast also reflects sufficient evidence of market need and planning to meet that need.

The issue of possible economic harm to B.C. Tel did not arise in this proceeding. The Commission is of the view that there would be no adverse economic impact on B.C. Tel with approval of the application. Moreover, there was no indication that approval of the application would have any adverse impact on rates for local telephone service. In addition, the Commission has concluded, based on the evidence, that there would be no significant impact on the subscribers of other telephone companies.

Based on the record of this proceeding, the Commission has concluded that at this time, B.C. Rail is not an inter-provincial undertaking. B.C. Rail's point-to-point microwave facilities are located solely within the boundaries of the province of British Columbia and B.C. Rail does not propose to offer service to points outside the province. That being the case, the Commission has concluded that, at this time, B.C. Rail is not a company within the meaning of section 320(1) of the Railway Act. However, the provisions of section 320(7) apply with respect to the interconnection requested. Pursuant to that section, the Commission is requiring B.C. Rail to provide the information described below.

With regard to concerns expressed by AGT and B.C. Tel concerning the Commission's ability to ensure fair competition, a number of sanctions are also open to the Commission with respect to B.C. Rail: first, the Commission could order B.C. Tel to refrain from interconnecting any additional B.C. Rail customers; second, it could adjust the charges levied for providing interconnection; and third, it could, as a last resort, cancel the order approving B.C. Rail's interconnection with B.C. Tel. Variations or combinations of these sanctions are also feasible.

For these reasons, the Commission concludes that the advantages associated with B.C. Rail's application outweigh any potential disadvantages associated therewith. Accordingly, the Commission approves B.C. Rail's application in accordance with the terms contained in the Order below.

C. Commission Oversight, Reporting Requirements and Compensation

As a result of the Commission's approval of the application, there will be three carriers authorized to provide interconnected private line services in British Columbia. In order to monitor developments arising from new entry in this market, the Commission has decided to accept B.C. Rail's undertakings to file with the Commission, for the public record, the initial B.C. Rail rate schedule and revisions, and a detailed annual financial report pertaining to B.C. Rail's Communications Department.

If necessary, the Commission may take up in the future the following undertakings given by B.C. Rail:

° an annual audit by the Commission of B.C. Rail's Communications' Department;

° the setting of a floor price at a specific maximum discount from the tariffed rates charged by B.C. Tel for equivalent services;

° the imposition of a Commission-prescribed costing methodology; and

° the Provision of such other reports as the Commission may require.

Further, the Commission has decided to require B.C. Rail to file certain semi-annual reports, as required in Decisions 79-11 and 81-24, enumerated in section 10 of the Commission's Order, below.

Based on the evidence, the Commission sees no reason at this time to change the current levels of contribution rates that were established with respect to CNCP in Decision 81-24. Consequently, the Order requires the application of the appropriate ISAL or PBX trunk rate, plus a contribution of 25% towards the costs of local exchange facilities.

D. Order

Based on the findings and conclusions set out above, the Commission issues the following order, effective forthwith:

Definitions

1. In this order,

"B.C. Rail" means BC Rail Ltd.;

"B.C. Tel" means the British Columbia Telephone Company:

"circuit" means one or more facilities which, connected in tandem, provide a single electrical transmission path between two or more points;

"data service" means a telecommunications service other than a voice service;

"Type 1 connection" means the connection of a circuit, owned or leased by B.C. Rail, to B.C. Tel local central office switching equipment through a circuit owned by B.C. Tel;

"Type 2 connection" means the connection of a circuit, owned or leased by B.C. Rail, to equipment or a facility located in a subscriber's premises or subscriber's centrex facility which in turn is connected to B.C. Tel central office switching equipment or to a B.C. Tel private circuit;

"voice service" means a two-way telecommunications service involving direct real-time voice communication between two or more natural persons, but does not include a service the purpose of which is limited to the coordination or setting up of a data service.

Requirement to Furnish Connection

2. (1) Following the expiry of 90 days from the date of this order, B.C. Rail may request B.C. Tel to furnish a Type 1 or Type 2 connection to B.C. Rail or its subscriber for the purpose of providing data service, voice service, or both.

(2) Upon receiving a request from B.C. Rail pursuant to subsection (1), B.C. Tel shall, where the request sufficiently specifies the location and technical requirements of the requested connection, provide for, furnish and permit such connection.

Restrictions upon Use

3. Where a Type 1 or Type 2 connection is intended or used for the purpose of providing voice service, the following restrictions shall apply, in addition to any other terms or conditions imposed by B.C. Rail with the approval of the Commission:

(a) the service utilizing such connection shall be limited to the subscriber's private communications needs, except where B.C. Rail's subscriber is providing an enhanced service as defined in B.C. Tel Tariff CRTC 1005, Definitions;

(b) one end of the transmission circuit provided by B.C. Rail which is used by the service utilizing such connection must be terminated at the subscriber's premises or at a centrex facility dedicated to his use;

(c) the transmission circuit provided by B.C. Rail which is used by the service utilizing such connection shall be dedicated to the subscriber's private use, except where CNCP's subscriber is providing an enhanced service as defined in B.C. Tel Tariff CRTC 1005, Definitions; and

(d) in respect of a Type 1 connection only, the transmission circuit provided by B.C. Rail which is used by the service utilizing such connection may not pass through a B.C. Rail-provided voice grade analogue switch between such connection and the subscriber's premises.

4. (1) Where a Type 1 or Type 2 connection is intended or used for the purpose of providing data service, the restrictions in section 3 shall be applicable, provided that B.C. Rail may apply to the Commission for an order removing such restrictions on a case by case basis where B.C. Rail provides evidence satisfactory to the Commission that:

(a) by reason of the technical, economic or operational characteristics of the service, it is unlikely that the connection will be used significantly for voice service, or that if so used, it is likely that the voice service will be subject to the restrictions in section 3;

(b) B.C. Rail will take such measures as the Commission may deem appropriate from time to time to ascertain whether or not the connections are being used significantly for voice service, other than as restricted by the terms of section 3; and

(c) in the event that the connections are being used significanlty for voice service other than as restricted by the terms of section 3, the restrictions in section 3 will be reimposed in respect of data service.

(2) In considering an application under this section, the Commission may take into account the nature and extent of any restrictions imposed on similar data services offered by B.C. Tel in assessing the adequacy of the evidence provided by B.C. Rail that the considerations enumerated under subsection (1) will be met.

(3) An application may be made under this section in respect of a particular subscriber or a class of subscribers, in respect of a particular class of service, and a copy of such application together with any supporting material shall be furnished forthwith to B.C. Tel.

(4) B.C. Tel may file an intervention in respect of any application made by B.C. Rail under this section within thirty days of the filing date together with any supporting material, and a copy thereof shall be furnished forthwith to B.C. Rail.

(5) B.C. Rail may file a reply within ten days of the receipt of an intervention made by B.C. Tel under subsection (4).

(6) The Commission may consider an application under this section on the written documentation before it, or may

(a) require further information to be furnished by one or more of the parties; or

(b) issue directions on procedure if an oral hearing or other form of proceeding is warranted.

(7) The Commission may determine an application under this section by issuing an order

(a) finding that the evidence provided by B.C. Rail has satisfied it that the considerations enumerated under subsection (1) will be met, and approving the removal of some or all of the restrictions in section 3, subject to such conditions as the Commission may deem appropriate; or

(b) finding that the evidence provided by B.C. Rail has not satisfied it that the considerations enumerated under subsection (1) will be met, and denying the application.

Technical Protection

5. (1) Where a connection is furnished by B.C. Tel to B.C. Rail pursuant to the terms of this order, the following conditions shall apply:

(a) the operating characteristics of any equipment or communication system provided by B.C. Rail or by its customer shall be such as not to interfere with any of the services offered by B.C. Tel;

(b) the equipment or system provided by B.C. Rail or by its customer shall not endanger the safety of B.C. Tel employees or the public; shall not damage or interfere with the proper functioning of B.C. Tel's equipment or facilities; and shall not impair the operation of B.C. Tells facilities or otherwise injure the public in its use of the B.C. Tel services; and

(c) upon notice from B.C. Tel that the equipment or system provided by B.C. Rail or by its customer is causing or is likely to cause such hazard or interference, B.C. Rail shall take such steps as shall be necessary to remove or prevent such hazard or interference.

(2) In order to resolve any technical or operational problems arising from the connections ordered, B.C. Rail and B.C. Tel are directed to create a joint technical committee to meet on a regular basis, to which such problems shall be referred.

(3) Minutes of the meetings of such committee shall be provided to the Commission upon its request to either party.

(4) Where any dispute arises over technical or operational problems which the parties are unable to resolve, the matter shall be resolved by an arbitration procedure under the Commission's direction.

(5) For this purpose, each party shall appoint a person to act as an arbitrator and the Commission upon request shall appoint a third or deciding arbitrator.

(6) The costs of such arbitration shall be borne equally by the parties and either party may request the Commission to issue directions as to procedures to be followed in such arbitration.

Compensation

6. (1) Where a connection is furnished by B.C. Tel to B.C. Rail pursuant to the terms of this order, the following compensation shall be payable to B.C. Tel:

(a) in respect to a Type 1 connection,

(i) such non-recurring charges in respect of the installation of the connection by B.C. Tel as would be charged under existing B.C. Tel tariffs to B.C. Tel customers on a non-discriminatory basis for the performance of like work:

(ii) for data connections, the monthly rate which is applicable for information-system access line (ISAL) under Item 32 of the B.C. Tel General Tariff for the particular rate group applicable to the B.C. Tel central office at which the connection has been made;

(iii) for voice connections, the monthly rate which is applicable for two-way PBX trunks under Item 32 of the B.C. Tel General Tariff for the particular rate group applicable to the B.C. Tel central office at which the connection has been made; and

(iv) where the connection is used for voice or data service which originates or terminates outside the local service area specified in the appropriate B.C. Tel Base Rate Area Tariff within which the connection is located, a monthly inter-exchange access charge consisting of 25% of the rate applicable under clauses (ii) and (iii) above.

(b) in respect to a Type 2 connection,

(ii) the monthly rates which are applicable to local channels as would be charged under existing B.C. Tel tariffs to B.C. Tel customers;

(iii) where the connection is used for voice or data service which originates or terminates outside the local service area specified in the appropriate B.C. Tel Base Rate Area Tariff within which the connection is located, and the equipment or facility with which the Type 2 connection is connected is not arranged so as to preclude such service from travelling through the equipment and facility on the customers's premises to B.C. Tel central office switching equipment, a monthly inter-exchange access charge as calculated under paragraph (a) (iv) above.

(2) The compensation referred to in subsection (1) shall be payable by either B.C. Rail or its customer to B.C. Tel, as may be determined by B.C. Rail, provided that, where B.C. Rail elects to have all or any part of such payment made in the first instance by its customer to B.C. Tel, B.C. Rail shall remain ultimately responsible for such payments.

B.C. Tel Tariffs

7. (1) Subject to subsection (2), B.C. Tel is directed to file by 27 September 1985 a proposed tariff to be effective 26 November 1985 offering to B.C. Rail the use or connection ordered to be provided hereunder.

(2) Such tariff shall prescribe the terms and conditions relating to such use or connection by B.C. Rail and its customer, including the restrictions, protections and terms of compensation prescribed in this order and such other provisions as are not inconsistent with this order and which in B.C. Tel's view would be appropriate for the purpose of clarity and administration.

(3) The tariff filing will be available for examination at any of B.C. Tel's business offices or at the offices of the CRTC, Room 561, Central Building, Les Terrasses de la Chaudiere, 1 Promenade du Portage, Hull, Quebec or 700 West Georgia Street, Suite 1130, Vancouver, British Columbia. A copy of the tariff filing may also be obtained by writing to Mr. K.D.A. Morrison, Secretary, British Columbia Telephone Company, 3777 Kingsway, Burnaby, British Columbia, V5H 3Z7.

(4) Where a tariff is approved under this section, such tariff shall effectively govern the terms and conditions to which the connections obtained hereunder will be subject, provided that where there is a conflict between this order and such tariff, this order will govern.

B.C. Rail Rate Schedule

8. (1) Subject to subsection (2), B.C. Rail is directed to file an initial rate schedule, 30 days prior to the date on which such schedule is due to become effective, governing all services or facilities offered to its customers which involve a Type 1 or Type 2 connection.

(2) Such rate schedule shall prescribe the terms and conditions relating to such offering, including the restrictions in sections 3, 4 and 5 hereof, the rates applicable thereto, and such other provisions as are not inconsistent with this Order and which in B.C. Rail's view would be appropriate for the purpose of clarity and administration.

(3) B.C. Rail is directed to file revised rate schedules prior to the date on which such revised rate schedules are due to become effective.

Reporting

9. B.C. Rail is directed to file a report semi-annually with the Commission, on 30 April and 31 October of each year containing the following particulars in respect to the six month period ending two months prior to the date of the report:

(a) the number of connections requested and obtained from B.C. Tel pursuant to this order;

(b) the amounts payable by B.C. Rail to B.C. Tel thereunder, broken into the elements of compensation specified in section 6;

(c) the revenue obtained by B.C. Rail from the inter exchange services offered to its customers which involve a Type 1 or Type 2 connection, broken down by service category and type of connection;

(d) the revenue obtained by B.C. Rail from private line voice and data communications services, offered to its customers in the B.C. Tel operating territory, which do not involve a Type 1 or Type 2 connection, broken down by service category;

(e) a report setting out B.C. Rail's estimate of the relative usage of the connections obtained hereunder for voice communications and data communications respectively, based on such sampling measures, customer questionnaires or other techniques as B.C. Rail may deem appropriate;

(f) a report on the availability of the services offered to its customers which involve a Type 1 or Type 2 connection in the B.C. Tel operating territory and elsewhere, and any requests for service which have not been met within a reasonable time, together with the reasons there for;

(g) such other matters as the Commission may require in connection with the effect of the present order.

10. B.C. Rail is directed to file a report annually with the Commission, on 31 October (or 30 April) of each year containing a detailed description of the financial results of B.C. Rail's Communications Department in respect of the 12 month period ending 2 months prior to the date of the report.

11. B.C. Tel is directed to file a report semi-annually with the Commission, on 30 April and 31 October of each year, containing the following particulars in respect to the six month period ending two months prior to the date of the report:

(a) the number of connections requested and obtained by B.C. Rail pursuant to this order;

(b) the amounts payable by B.C. Rail to B.C. Tel thereunder, broken into the elements of compensation specified in section 6;

(c) the revenue obtained from B.C. Rail in respect of local channels obtained under items 400 and A of the B.C. Tel General Tariff other than as included under (b);

(d) the revenue obtained by B.C. Tel from MTS, WATS, private line voice, and data communications services broken down by service category;

(e) a report setting out B.C. Tel's estimate of the relative usage of the inter exchange services specififed under (d) for voice communications and data communications respectively, based on such sampling measures, customer questionnaires or other techniques as B.C. Tel may deem appropriate; and

(f) such other matters as the Commission may require in connection with the effects of the present order.

12. Any claims for confidentiality with respect to the reports required to be filed with the Commission under sections 10, 11 and 12 shall be dealt with in accordance with the terms of section 19 of the CRTC Telecommunications Rules of Procedure.

Fernand Bélisle
Secretary General

Date modified:: 1985-08-29

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