ARCHIVED -  Telecom Decision CRTC 86-5

Telecom Decision

Ottawa, 20 March 1986

Telecom Decision CRTC 86-5

PARTICIPATION OF BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY IN THE MULTILINE AND DATA TERMINAL EQUIPMENT MARKET

For related documents see: CRTC Telecom Public Notices 1984-66-and 1985-34.

I BACKGROUND

In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission considered a number of issues pertaining to the nature and extent of the federally regulated telecommunications carriers' participation in the terminal equipment market. In regard to the possible need for structural separation of the carriers' terminal equipment activities, the Commission noted that the matter of appropriate service costing methods and related information requirements for competitive services, including terminal equipment services, was under consideration in Phase III of its inquiry into telecommunications carriers' costing and accounting procedures (Phase III of the Cost Inquiry). The Commission was of the opinion that, depending on the costing methodology adopted, its decision in Phase III of the Cost Inquiry might alleviate some of the concerns relating to potential cross-subsidization of terminal equipment offerings of carriers with revenues from their monopoly operations. It further noted that the methodology resulting from Phase III of the Cost Inquiry could be relevant for the valuation of any assets to be transferred to a subsidiary. The Commission concluded in Decision 82-14 that, based on the record of that proceeding, it would not be appropriate to require the carriers to conduct their terminal equipment business through separate subsidiaries. However, the Commission stated its intention to review this matter further, following completion of Phase III of the Cost Inquiry.

In Structural Separation - Multiline and Data Terminal Equipment, CRTC Telecom Public Notice 1984-66, 9 November 1984 (Public Notice 1984-66), the Commission initiated a proceeding to examine issues related to the structural separation of the multiline and data terminal equipment businesses of Bell Canada (Bell) and the British Columbia Telephone Company (B.C. Tel).

Public Notice 1984-66 focused, at a detailed level, on the feasibility of implementing structural separation, and sought comment on approaches other than structural separation that could be employed to ensure that monopoly subscribers would not be cross-subsidizing the carriers' multiline and data terminal services, should the regulation of those services be lessened or eliminated.

Bell, B.C. Tel, CNCP Telecommunications (CNCP), NorthwesTel Inc. (NorthwesTel) and Terra Nova Telecommunications Inc. (Terra Nova) were all made parties to this proceeding by the Commission. Bell and B.C. Tel were directed to file, by 29 January 1985, detailed proposals for conducting all of their respective multiline and data terminal equipment business through a structurally separate affiliate. By the same date, CNCP, NorthwesTel and Terra Nova had the option of filing similar detailed proposals, or reasons why they should not file such proposals, together with any alternative proposals to meet the concern that their terminal equipment offerings be demonstrably free of any subsidy from other regulated services.

In addition to the federally regulated terrestrial carriers, the following also became parties to this proceeding: Alberta Government Telephones; Canadian Business Telecommunications Alliance, Association of Competitive Telecommunications Suppliers (ACTS), Canadian Association of Data and Professional Service Organizations, Canadian Bankers' Association, Canadian Business Equipment Manufacturers Association, Canadian Daily Newspaper Publishers Association, and Canadian Radio Common Carriers Association (collectively, CBTA et al); Canadian Trans-Lux Corporation, Ltd.; Canadian Federation of Communications Workers (CFCW); Communications, Electronic Electrical, Technical and Salaried Workers of Canada; Director of Investigation and Research, Combines Investigation Act (the Director); Consumers' Association of Canada (CAC); CTG Inc.; Council of Forest Industries of British Columbia and Mining Association of British Columbia; edmonton telephones ; Executone Telco Systems Limited; Government of Quebec; Government of Ontario; Maritime Telegraph & Telephone Company, Limited; National Telephone Corporation; Radio Service Engineers Ltd.; Telecommunications Terminal Systems; Telecommunications Workers Union; Telesat Canada; The Canadian Manufacturers' Association; The Manitoba Telephone System; and The New Brunswick Telephone Company, Limited.

The submissions of the carriers were filed by 29 January 1985. Parties filed comments on these submissions by 5 March 1985. The carriers filed reply comments by 12 April 1985.

In Structural Separation - Multiline and Data Terminal Equipment, CRTC Telecom Public Notice 1985-34, 30 May 1985 (Public Notice 1985-34), the Commission determined that, based on the submissions received 29 January 1985, which showed the small size of the terminal equipment markets served by NorthwesTel and Terra Nova, no further consideration of structural separation for them was required in this proceeding. In the case of CNCP, the Commission concluded that there was limited potential for cross-subsidization of its multiline and data terminal service offerings from its other service revenues and that, therefore, no further consideration of structural separation for CNCP was needed. The Commission was of the opinion that any alternative to structural separation proposed by these three carriers should be considered in other proceedings.

Also in Public Notice 1985-34, the Commission indicated that it would consider in the proceeding a complaint from ACTS, filed 13 February 1985, alleging that Bell had accorded subscribers who obtain their terminal equipment from Bell more favourable network cut-over dates than those accorded to subscribers who obtain their terminal equipment from an interconnect supplier. Based on submissions from ACTS and Bell on this matter, the Commission determined that Bell was according itself a preference. The Commission decided that this proceeding would provide an appropriate forum to consider whether that preference was undue or unreasonable.

Public Notice 1985-34 announced that the Commission had addressed interrogatories to Bell and B.C. Tel. Parties were permitted to address interrogatories to Bell and B.C. Tel by 2 July 1985 and Bell and B.C. Tel responded to all interrogatories by 1 August 1985. Parties other than Bell and B.C. Tel filed final argument by 23 September 1985. Bell and B.C. Tel filed reply argument by 28 October 1985.

II MULTILINE AND DATA TERMINAL EQUIPMENT

In general, all parties had a common understanding of what is encompassed by the terms multiline and data terminal equipment. However, with respect to the definition of multiline terminal equipment, there was some discussion as to whether the definition should be based on the number of physical channels or the number of logical channels that can be supported by the equipment. In addition, there was some disagreement as to the definitional differences between data terminal and network equipment. Finally, there was disagreement as to how centrex services should be characterized.

The Commission notes that, in most current installations, each physical channel provides for a single logical channel. Consequently, at this time and for the purposes of this decision, the Commission has determined that the term multiline terminal equipment should be considered to refer to equipment which terminates two or more lines. The Commission recognizes that, in future, it may wish to consider including terminals using one physical channel to provide two or more logical channels in the multiline and data terminal equipment category. However, the Commission has decided that a determination in this regard is not required, at least until these devices become more prevalent and the nature of the market for them has become more clearly defined.

In regard to the distinction between data terminal equipment and network equipment, the Commission has determined that, at this time and for the purposes of this decision, the term data terminal equipment should be considered to refer to equipment at a customer's premises which is not integral to the operation of the channel provided by the carrier.

In regard to centrex services, in view of the degree of integration of the facilities associated with the provision of these services and the public switched telephone network, at this time and for the purposes of this decision, the Commission has concluded that centrex services should not be included in the multiline and data terminal equipment category.

Given these determinations, the multiline and data terminal equipment category would include key telephone systems; PBX systems; all telephone sets behind key and PBX systems; and all data terminal equipment at the customer's premises not integral to the operation of the channel provided by the carrier. The Commission recognizes that, as a result of future developments, periodic adjustments may be made to this category.

III REGULATORY OBJECTIVES AND APPROACHES

A. Regulatory Objectives

As the Commission noted in Public Notice 1984-66 initiating this proceeding, the multiline and data terminal equipment market has evolved into a highly competitive one with both Bell and B.C. Tel and many other suppliers offering a broad range of products and services. Based on the record of this proceeding and on its experience in both regulating the tolls for, and adjudicating upon complaints concerning, the provision of multiline and data terminal equipment services, the Commission is satisfied that there is sufficiently effective competition in this market that, coupled with regulatory safeguards to prevent cross-subsidization from monopoly services, market forces can be relied on to ensure that Bell's and B.C. Tel's rates for these services are just and reasonable.

The Commission is of the view that it would be desirable to adopt a regime under which it may be demonstrated from the public record that cross-subsidization of the category of multiline and data terminal equipment services is not occurring and, consistent with the approach of relying on market forces to ensure effective competition, approval of rates for the specific services in that category is not required.

The Commission considers that such a regime should transfer the risk of participation in this market to the shareholders of Bell and B.C. Tel. Accordingly, it is appropriate that, under such regime, any profits from participation in this market should be conferred on these shareholders.

B. Approaches

In this proceeding, the approaches available to the Commission to achieve its regulatory objectives are a structural separation approach and a costing approach. A significant variation on the structural separation approach, styled bifurcation , was introduced by CBTA et al during this proceeding. These alternative approaches are discussed below.

1. Structural Separation Approach

The Commission stated, in Public Notice 1984-66, that structural separation constituted one method to address the concern that, with any reduction in regulation, multiline and data terminal services could be subsidized from monopoly revenues. Several parties, including CBTA et al and the Director supported this view.

In Public Notice 1984-66, the Commission did not define the precise scope of structural separation of the multiline and data terminal equipment business of Bell and B.C. Tel. In the submissions filed by Bell and B.C. Tel on 25 January 1985, each presented its proposal. Rather than separating all multiline terminal equipment, Bell proposed to leave activities associated with smaller multiline terminal systems within the company and separate only the activities associated with larger multiline terminal equipment. All data terminal equipment would be assigned to the separate affiliate. If an affiliate were to be established, Bell proposed that it be a subsidiary of Bell itself.

B.C. Tel argued against a broad and rigid approach to structural separation, stating that it did not favour any arbitrary or permanent division of the terminal equipment market based on line size or equipment type. B.C. Tel did take the position, however, that certain small business and residence customers would be better served by the telephone operations group of B.C. Tel than by its Business Telecommunications Equipment Division .

Under the bifurcation approach advocated by CBTA et al, structural separation would apply to Bell and B.C. Tel but would, upon implementation, only encompass new installations of multiline and data equipment. This approach would not require the transfer of the existing base of installed terminal equipment from the regulated carrier to the affiliate. In addition, the carrier could continue to provide moves, rearrangements, minor upgrades and additions related to growth in a customer's requirements at current installations, and could furnish maintenance services, although for the installed base only.

On the other hand, under bifurcation, the carrier would not be allowed to provide new installations of terminal equipment, whether by sale or lease, replacements of the installed equipment or substantial portions thereof, major additions to existing installations, or maintenance services for other than the installed base. Under this approach, the provisioning of multiline and data terminal equipment by the carrier would gradually be phased out of existence as the embedded base is replaced with new equipment.

Bell identified a number of operational problems which would result from the bifurcation approach, including customer confusion and dissatisfaction; duplication of customer contact personnel, facilities, record keeping and billing; and ongoing difficulties in defining the boundary of the market. In particular, Bell submitted that the bifurcation approach is rife with potential definitional disputes which would require resolution by the Commission.

The Commission agrees that bifurcation would provide certain benefits, in particular avoidance, at least for the time being, of the problem of valuation of the existing base of installed terminal equipment. However, the Commission is of the view that bifurcation would result in a greater duplication of resources than full structural separation; as well, it would result in the need for significant regulatory intervention. Accordingly, the Commission has concluded that bifurcation would not constitute an acceptable structural separation approach.

2. Costing Approach

Bell submitted that, on balance, a costing approach is a cost effective and appropriate means of dealing with the issue of cross-subsidy. B.C. Tel submitted that the costing system prescribed 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) would be a viable alternative to structural separation for carriers wishing to carry on terminal activities on an integrated basis with their other operations.

CAC argued that the advantages and disadvantages of a structural separation approach must be weighed against those of a costing approach before the Commission makes a determination in this proceeding. CFCW questioned whether a structural separation approach is required and argued that a Phase III costing approach would go a long way toward solving the issue of cross-subsidization.

IV CONCLUSIONS

Based on the record of this proceeding, the Commission has concluded that, subject to certain conditions, both a structural separation approach and a costing approach could meet its objectives of establishing a regime that protects against cross-subsidy, eliminates the need for the filing of tariffs and allows any profits or losses to flow to shareholders.

The Commission has examined both approaches in terms of several further considerations set out below which it considers significant in determining which approach should be adopted for Bell and B.C. Tel. With the benefit of these considerations, the Commission has concluded that a costing approach provides an equally acceptable, more practical and less costly means of meeting its regulatory objectives at this time. Therefore, the Commission has decided that a costing approach should be adopted.

The Commission considers that the Phase III costing methodology will provide a satisfactory basis for establishing a costing approach. The Commission recognizes, however, that development of modified Phase III procedures will be required to identify a separate revenue/cost category for multiline and data terminal equipment services.

In order to meet the Commission's regulatory objectives, this category will be expected to recover its total causal costs, including an appropriate cost of capital, and to make a contribution to fixed common costs. The Commission has decided that the level of such contribution shall be determined by multiplying the total fixed common costs of the company by the ratio of the total causal costs of the category to the sum of the total causal costs of each category. Any excess or shortfall after the contribution to common costs will accrue to, or be borne by, the shareholders.

Following the implementation of the modified Phase III procedures, the Commission intends to eliminate the requirement for filing tariffs for services in the multiline and data terminal equipment category. While this will give Bell and B.C. Tel pricing flexibility for marketing these services, the Commission has nonetheless decided to oblige the companies to continue to make these services available throughout their operating territories.

The further considerations referred to above are as follows:

1. Implementation Time

Bell estimated that a 24 to 30 month lead time would be needed to establish a separate affiliate which could operate its own manpower and payroll activities as well as its own material management and investment and costs systems.

The Commission would want to ensure that the assets and resources to be transferred to a separate affiliate are properly identified and valued and that it had established the ability to monitor any subsequent intercorporate transactions. Based on the record of this proceeding, the Commission accepts the submission of Bell that at least two years would be required.

Under a costing approach, the appropriate assets and resources would have to be identified and costed for inclusion in a distinct revenue/cost category for all multiline and data terminal services. As the Commission noted in Public Notice 1984-66, it would be some time before Phase III results would be available for these regulatory purposes. Based upon progress to date in the implementation of Phase III procedures, the Commission has concluded that 18 to 24 months from the date of this decision will likely be required before a costing approach would be available to permit the Commission's regulatory goals to be met. There is therefore no apparent advantage to either approach in terms of implementation time.

2. Start-up Costs

Bell estimated that the costs of establishing a separate affiliate would be $45 million. B.C. Tel estimated the costs to establish its Business Telecommunications Equipment Division as a separate affiliate to be $3.1 million. While CAC, CBTA et al and CNCP considered these estimates to be exaggerated, no evidence was adduced to demonstrate that the carriers' estimates are unreasonable.

The start-up costs associated with a costing approach would relate primarily to the development of costing procedures to assign appropriate revenues and costs to a distinct Phase III revenue/cost category for all multiline and data terminal services. In the Commission's view, informed by the record of Decision 85-10, such start-up costs would be considerably lower than those which could be expected under a structural separation approach.

3. Ongoing Costs

With regard to a structural separation approach, Bell estimated that it would incur additional costs of $16 million in the first year following implementation, increasing to $21 million in the third year as a result of the duplicate activities related to the creation of a separate affiliate. By contrast, since no duplication of activities would be required, the Commission is of the view that the additional ongoing costs of a costing approach would be comparatively much less.

4. Contribution

The creation of a separate affiliate under a structural separation approach would mean that there would no longer be resources common to the provision of monopoly services and multiline and data terminal services. As a result, there would be no contribution to common costs from multiline and data terminal service revenues.

Under a costing approach, however, the Commission considers that multiline and data terminal equipment services should be required to make a contribution to common costs. Any excess or shortfall after the contribution to common costs should accrue to, or be borne by, the carrier shareholders.

5. Customer Impact

Bell noted that adoption of a structural separation approach would cause customers to lose Bell as a single point of contact for terminal and network services and require them to adapt to new distribution sources.

Submitting that Bell's concerns over the loss of customer benefits are not well founded, the Director noted that numerous interconnect suppliers are at present providing a full range of products, services, planning and support functions both directly and, as required, by dealing with the carrier on the customer's behalf to acquire needed carrier services. The Director argued that, as such, these suppliers are providing a service which amounts to the "total system solution" alluded to by Bell.

The Commission agrees that some terminal service vendors offer a "total system solution" at the point of sale. Nevertheless, the Commission is of the view that there are customers who would like to be able to receive competitive bids from the telephone company, and to have the option of obtaining from a single point of contact the supply and maintenance of both network and terminal services.

6. Obligation to Serve

CBTA et al expressed the view that geographic coverage today, as provided by a number of interconnect companies, is reasonably extensive. However, in the Commission's view, there are still customers or locations which will be adequately served only if the telephone companies are obligated to provide these customers with multiline and data terminal services. The Commission considers, therefore, that it would be desirable to continue that obligation to serve on the part of the telephone companies, recognizing, however, that under a costing approach they would have the flexibility to charge different rates in different locations.

7. Anti-Competitive Activity

CBTA et al argued that the competitive environment in Bell's territory is less vigorous than it could be despite more than five years of liberalized terminal attachment, and that a structural separation approach is the required remedy. In particular, CBTA et al stated that, as demonstrated by the ACTS complaint of 13 February 1985, the telephone companies' control over local access facilities can be an important means for them to grant themselves preferences which serve to thwart the development of full and fair competition in the terminal equipment marketplace.

The Commission agrees that the telephone companies' control over local access facilities creates the potential for them to give themselves a preference in the marketing of multiline and data terminal equipment. However, the Commission considers that the mere existence of separate corporate charters, under a structural separation approach, would not diminish the incentive and ability of the telephone companies to provide such a preference. The Commission is persuaded, therefore, that the same degree of regulatory scrutiny of potential anticompetitive activity of the telephone companies would be required under either approach to ensure that undue preferences are not Accorded .

V IMPLEMENTATION

The modifications to Decision 85-10 and to the Phase III costing procedures required to establish a separate category for multiline and data terminal services will be made at the time the Commission issues its orders directing Bell and B.C. Tel on the contents and date of filing of their Phase III manuals. In this respect, as a supplement to their reports of 25 October 1985 required by Decision 85-10, Bell and B.C. Tel are each directed to file, by 21 April 1986, a report on its approach to identify revenue and cost information associated with the provision of competitive terminals into two distinct Phase III categories, one entitled "Competitive Terminal-Multiline and Data" and a second entitled "Competitive Terminal-Other".

With respect to costing procedures to be prescribed in the Phase III manuals for the Competitive Terminal-Multiline and Data category, the Commission considers that, to the extent feasible, cost information should be derived directly from the companies' accounts. Accordingly, Bell and B.C. Tel are each directed to file, by 21 April 1986, a report on its approach to establishing separate accounts for the assets, revenues and expenses to be associated with this category.

The Commission gives notice that there will be a periodic audit requirement with respect to this category.

As stated in Part IV above, the Commission intends to eliminate the requirement for filing tariffs for services in the multiline and data terminal equipment category following the implementation of Phase III. At that time, it will be prepared to consider applications from Bell and B.C. Tel to remove these services from their General Tariffs.

VI ACTS V. BELL

As set out above, the Commission, in Public Notice 1985-34, determined that the structural separation proceeding would provide an appropriate forum to consider whether the preference Bell accords its customers in respect to network cutover time is undue or unreasonable.

In reply argument, Bell referred to a description, filed in response to BELL(CBTA)02Ju185-126STR, of the sequence of steps required for Bell's Customer Provided Equipment Group (CPEG) to obtain information from, and transmit information to, the appropriate business office when processing an order generated by an interconnect supplier, or by a customer, planning to install an interconnect-supplied telephone system. Bell submitted that the additional steps, and consequently the difference in ordering intervals for customer-provided equipment, can be explained in part by the fact that the company established the CPEG organization in order to ensure that competitors are dealt with fairly and that customer information is protected. In support of its submission that the difference between standard ordering intervals for Bell equipment and customer-provided equipment is neither undue nor unreasonable, Bell submitted that a difference of five business days in the ordering interval for network service for customer-provided installations is not significant in terms of the overall system installation time. Bell contended that the large majority of customers provide it with enough advance notice of their requirements that the ordering interval is not usually a critical factor. Moreover, where an interconnect supplier indicates to CPEG that time is a critical factor, a shorter ordering interval is usually arranged.

In the Commission's view, a difference in the ordering interval for network service between Bell terminal equipment customers and those of alternative terminal equipment suppliers flows necessarily from the special CPEG organization set up by Bell to ensure the fair treatment of competitors and the protection of customer information. In light of this, and taking into account the relatively small number of days at issue and the fact that a shortened ordering interval may be arranged, the Commission concludes that the preference Bell accords to itself is neither undue nor unreasonable.

Fernand Bélisle
Secretary General