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Telecom Decision
CRTC 90-3

Ottawa, 1 March 1990

RESALE AND SHARING OF PRIVATE LINE SERVICES

Table of Contents

I BACKGROUND

II WHETHER IT IS APPROPRIATE TO MODIFY THE CURRENT RULES GOVERNING RESALE AND SHARING

A. General
1. Positions of Parties
2. Conclusions
B. Market Impact
1. General
2. Bell's Model
3. B.C. Tel's Model
4. Positions of Parties
C. Conclusions

III REGULATORY APPROACHES

A. General
B. Rate Restructuring - Positions of Parties
C. Contribution Payments - Positions of Parties
D. Conclusions

IV OTHER ISSUES

A. Recovery of Costs for Competitor Access to PSTN
B. Special ResellerProvisioning Group
C. Certification ofSwitching Equipment
D. CFIB Application
E. Tariff Revisions

APPENDIX

I BACKGROUND

In Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19), the Commission determined that users would benefit in a variety of ways from resale and sharing. However, the Commission also found that, under the rate structures in place at that time, the revenues from Message Toll Service (MTS) and Wide Area Telephone Service (WATS) substantially exceeded their costs. Therefore, the Commission was concerned that permitting resale and sharing to provide MTS/WATS could result in uneconomic entry and a significant erosion of MTS/WATS revenues. As a result, the Commission concluded that, while the resale and sharing rules should be liberalized, on balance, resale and sharing to provide MTS/WATS was not in the public interest at that time.

The Commission gave effect to its findings on resale and sharing by developing rules, which it issued in Tariff Revisions Related to Resale and Sharing, Telecom Decision CRTC 87-2, 12 February 1987 (Decision 87-2). These rules govern the resale and sharing of the services of Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel), Northwestel Inc. (Northwestel), CNCP Telecommunications (CNCP) and Telesat Canada (Telesat). They permit, among other things, resale and sharing to provide all data and non-interconnected voice services. The rules also permit the sharing of interconnected interexchange private line voice services, and the resale of such services when individual circuits are dedicated to the user.

On 11 January 1989, the Commission issued CRTC Telecom Public Notice 1989-1 (Public Notice 1989-1). In Public Notice 1989-1, the Commission stated that a number of circumstances had changed since Decision 85-19 and Decision 87-2 had been issued. The Commission noted that there had been major reductions in MTS rates since that time. The Commission also noted that it had recently approved new volume discount subscription services that offer subscribers further reductions on MTS charges. Moreover, in addition to a restructuring of private line rates in 1986, the Commission had recently approved increases in the rates for certain Bell and B.C. Tel private line services.

The Commission stated in Public Notice 1989-1 that the above-noted rate actions, taken together, had significantly reduced the rate differentials between MTS/WATS and private line services. In light of the changes in the regulatory environment, the Commission sought public comment on whether it should modify the current rules governing the resale and sharing of private line services and, in particular, on the advantages and disadvantages of permitting the resale of private line services for joint use. The Commission noted that it did not intend to review the prohibitions on the resale and sharing of WATS to provide voice service. Bell, B.C. Tel, CNCP, Northwestel and Telesat were joined as parties to the proceeding.

On 7 February 1989, the Canadian Federation of Independent Business (CFIB) filed an application requesting that the Commission order Bell to amend certain of its tariffs governing resale and sharing on the grounds that, contrary to section 340(2) of the Railway Act, the existing rules discriminate unjustly against small business subscribers and subject them to unreasonable prejudice and disadvantage relative to their larger competitors. CFIB also requested, as an interim measure pending the final disposition of its application and the outcome of the proceeding initiated in Public Notice 1989-1, that the Commission order Bell to continue furnishing interconnected private line services to the CDAR/SHARENET Telecommunications Sharing Group set up by Call-Net Telecommunications Ltd. (Call-Net).

In light of the fact that CFIB's application raised issues related to those to be considered in the proceeding already initiated by Public Notice 1989-1, the Commission determined, in a letter to CFIB dated 15 February 1989, that CFIB's application should be dealt with in the context of that proceeding. CFIB's request for interim relief was denied by letter dated 17 February 1989.

II WHETHER IT IS APPROPRIATE TO MODIFY THE CURRENT RULES GOVERNING RESALE AND SHARING

A. General

1. Positions of Parties

Parties who filed submissions in support of liberalization of the rules governing resale and sharing include, among others: (1) resellers, namely, Call-Net, Cam-Net Communications Inc. (Cam-Net), Powernet Communications (Powernet), and Marathon Telecommunications Corp. (Marathon); (2) trade and business associations, including the Association of Competitive Telecommunications Suppliers (ACTS), Canadian Business Telecommunications Alliance (CBTA), Canadian Association of Data and Professional Service Organizations and STM Systems Corp. (CADAPSO), CFIB, Information Technology Association of Canada (ITAC), Canadian Bankers' Association (CBA), Canadian Manufacturers' Association (CMA), and Canadian Radio Common Carriers Association; (3) business users, including Canadian Tire Acceptance Limited, Hudson's Bay Company, IBM Canada Ltd., Ontario Hydro, and numerous other businesses; (4) Director of Investigation and Research, Bureau of Competition Policy, Consumer and Corporate Affairs Canada (the Director); and (5) Telesat.

Parties who opposed further liberalization, or who submitted that liberalization at this time would be premature, include: (1) telephone companies, namely, Bell, B.C. Tel, Maritime Telegraph and Telephone Company, Limited (MT&T) and Northwestel; (2) Ontario Telephone Association (OTA); (3) consumer groups, namely, British Columbia Old Age Pensioners' Organization, Council of Senior Citizens' Organization, West End Seniors' Network, Senior Citizens' Association, Federated Anti-Poverty Groups of B.C., Local 1-217 IWA Seniors (BCOAPO), Consumers' Association of Canada (CAC), and the National Anti-Poverty Organization; (4) the Governments of Ontario, Quebec, British Columbia (BCG) and Saskatchewan, and the Council of Maritime Premiers (CMP); (5) unions, namely, Syndicat des travailleurs et travailleuses en communication et en électricité du Canada/Communications and Electrical Workers of Canada, and the Telecommunications Workers Union (TWU); and (6) Ian Waddell, Communications Critic, New Democratic Party of Canada.

CNCP and B.C. Rail Ltd. (B.C. Rail) supported a more liberal resale and sharing environment, but advocated their own prior entry into the MTS/WATS market.

Many parties stated that the current rules are too restrictive and that, as a result, there are very few resellers and sharing groups. These parties argued that the current rules, because they are too restrictive, do not afford benefits to small users in the form of cost savings and access to enhanced services. Instead, they only confer further advantages on large users who are already in a position to benefit from bulk, discounted private line services available directly from the carriers. In particular, it was argued that smaller users of telecommunications services are at a disadvantage because resellers cannot aggregate their voice traffic and carry it on jointly-used private lines.

As noted above, CFIB stated that the existing rules unjustly discriminate against small business subscribers and subject them to unreasonable prejudice and disadvantage relative to their larger competitors, contrary to section 340 of the Railway Act. Moreover, stated CFIB, the rationale for the restrictions is discriminatory, since it focuses on the revenue erosion that might result from removal of the restrictions, while ignoring the fact that similar revenue erosion has been allowed to occur through the provision of private line services to larger businesses. CFIB argued that, to the extent that the price of a dedicated private line is cost justified on the basis of traffic volume, it is equally cost justified when that volume is generated by two or more small businesses.

Some parties argued that, while sharing groups are permitted to use private lines jointly for voice traffic, the attractiveness of sharing is reduced by restrictions on the ability to hire professional agents to manage the groups and to obtain insurance to offset the risk of liability for the bad debt of other members.

CFIB noted that, unlike large businesses, small businesses do not have the in-house telecommunications expertise or the manpower to manage a sharing group. CFIB also argued that the Commission's rules prohibiting liability insurance are intended to limit the size of sharing groups, but that a few small firms are unlikely to generate sufficient traffic to make efficient use of interconnected private line facilities. By making it unattractive for large groups of small users to share facilities, the Commission effectively discriminates against small business users.

Several parties supported CFIB's application. However, CBTA disagreed that there is discrimination between large and small businesses. It argued that some large businesses do not have the traffic to support private lines, while some small businesses do. CBTA contended, rather, that the current rules discriminate against resellers and sharers. CBTA was of the opinion that section 275(1) and section 340(2) of the Railway Act should be interpreted as requiring carriers to furnish all reasonable and proper facilities to all customers, including those that wish to resell or share.

Some parties argued that further liberalization would encourage the provision of services such as Call Detail Account Recording (CDAR) and stimulate the development of innovative voice/data services by removing current voice restrictions that hinder integrated voice/data applications. Some parties argued that, as a result of shrinking price margins, resellers would be unable to compete on price alone, but would focus instead on niche markets and the provision of value-added services.

CFIB stated that the Commission's rulings on CDAR, offered by Call-Net, have impeded access to some enhanced services. CFIB argued that CDAR allows businesses to better manage their telecommunications costs. CFIB noted that Bell does not provide CDAR to customers with less than 160 lines, and that only Call-Net provides it in a manner economical to small firms.

A number of parties contended that stimulation of a domestic resale market is consistent with the goals of the Free Trade Agreement and of the Type II carrier policies of the Department of Communications (DOC). The Director argued that resale for joint use would reduce the risk of telecommunications users bypassing Canadian providers in favour of the more open services market in the United States. CBA warned that, unless faster growth in value-added services is encouraged in Canada, international competitors will enter the market to supply Canadian customers. CFIB argued that the advent of free trade will highlight any cost and efficiency disparities between the two countries, thus adversely affecting Canadian small business.

Many parties opposed to further liberalization submitted that resale of private lines for joint use would result in the provision of services in the nature of MTS/WATS and would cause an erosion of the contribution used to keep the rates for local service low. B.C. Tel argued that CFIB's application constitutes a request for the competitive provision of long distance services through resale for joint use. B.C. Tel indicated that approval of CFIB's application would result in uneconomic entry and contribution erosion; therefore, approval is not in the public interest.

CNCP argued that the benefits of resale could best be realized if, prior to allowing resale, the Commission permitted a facilities-based MTS/WATS competitor.

Some parties argued that it would not be appropriate for the Commission to make any determination on resale for joint use prior to the development of a national telecommunications policy or prior to a proceeding to examine all issues pertaining to MTS/WATS competition.

CBTA noted that TWU had argued in 1984 that the Commission should await the development of a national telecommunications policy before examining MTS/WATS competition. CBTA indicated that, if the Commission had delayed on such grounds, there would not be any resale and sharing today. CBTA further stated that, given the time involved in a proceeding to examine MTS competition, it would not be desirable to delay until resolution of that matter.

BCG, Ontario, Quebec and CMP considered that the broader issue of MTS/WATS competition must be addressed prior to any significant modification of the rules governing resale. However, BCG, Quebec and CMP all recommended liberalizing the sharing rules to allow increased entry of a non-commercial nature.

Bell also argued that a delay was unnecessary. In its opinion, this proceeding provided ample opportunity for comment. Bell argued that any delay in issuing a decision would create uncertainty in the existing resale and sharing market and prolong Call-Net's provision of MTS/WATS-like services. However, Bell also stated that there is no existing government policy favouring MTS/WATS competition and that any decision to make fundamental changes to long distance competition policy could prejudice the implementation of a new system of telecommunications regulation.

A number of parties contended that the Commission had already addressed the resale of private lines for joint use in previous proceedings regarding Call-Net and that the market environment has not changed since that time. However, CBTA noted that the Call-Net proceedings were limited to determining whether Call-Net was acting in compliance with the rules governing enhanced services and sharing, and were never intended to examine whether the rules themselves should be altered.

In response to arguments that the existing resale rules are too restrictive, Bell noted that the rules had been designed to prevent services in the nature of MTS/WATS and must, of necessity, be restrictive. Bell argued that, despite price reductions, the revenue/cost relationship for MTS has remained constant, resulting in a continued threat of uneconomic entry.

In reply to CFIB's application, Bell and B.C. Tel argued that volume discounts are a typical and recognized business practice and are available to all customers who have the necessary volume of traffic. Bell stated that, under section 340(3) of the Railway Act, the Commission has determined, as a matter of fact, that different tariffs or tolls may be charged for different kinds of traffic (as is the case, for example, with the high capacity services required by large volume users). Both Bell and B.C. Tel noted that, under the current rules, lower volume users can obtain private lines from resellers at lower rates than from the telephone companies. B.C. Tel also pointed out that the present rules permit small businesses to share a channel.

Northwestel stated that it does not discriminate against resellers. It argued that its services are offered and priced on the assumption that it leases to an end user, not to a carrier who intends to repackage or re-offer the service. Northwestel stated that the Commission had addressed the question of whether the resale restrictions are discriminatory in Decision 85-19, and had determined that the reasonableness of any restrictions must be considered in light of the public interest, broadly defined.

Call-Net stated that, on routes where large bulk digital facilities are available, existing resellers of bulk facilities can provide individual channels at a lower price. However, it contended that an individual user would require a very high volume of traffic to justify the lease of a channel.

B.C. Tel stated that the only restriction on the hiring of a professional agent to manage a sharing group is that the agent cannot be a member of the group for the purpose of reselling services on a commercial basis. B.C. Tel also argued that joint and several liability is related not to business size, but rather to business relationship. B.C. Tel contended that this requirement ensures that members know their partners and are willing to assume financial responsibility for them.

Parties generally agreed that greater benefits could be derived from more liberalized resale. However, some argued that the benefits would accrue to a small number of users at the expense of the majority of subscribers. BCG contended that resale of private lines for joint use would primarily benefit commercial users, equipment suppliers, manufacturers, and potential service providers. Some parties also argued that resellers would focus on large volume users in larger centres. They submitted that this would result, among other things, in an increase in Canada-Canada traffic carried on U.S. networks, the diversion of Canada-overseas traffic through the U.S., the indirect entry of carrier affiliates into the MTS/WATS market, and a loss of settled revenues for independent telephone companies and for Telecom Canada members other than Bell and B.C. Tel.

OTA expressed concern that independent company customers in exchanges having Extended Area Service with a Bell exchange would utilize the services of resellers operating in the Bell portions of free calling areas.

Northwestel argued that circumstances in its territory differ from those in Bell and B.C. Tel territory. Northwestel noted, for example, that it does not provide OUTWATS. It also contended that it derives a greater percentage of its operating revenues from MTS and private line services. Northwestel submitted that many of the changes cited in Public Notice 1989-1 had not occurred in its territory. For example, it argued that, unlike Bell and B.C. Tel, it has not had significant reductions in MTS rates. Northwestel also suggested that it is unlikely that resellers could fully compensate it for the loss of contribution to the provision of universal service. Northwestel noted that the Commission has, in the past, recognized the unique nature of the northern operating area. It submitted that it would not be in the public interest to relax the resale rules in its territory.

2. Conclusions

The Commission does not agree with parties who argued that, in previous proceedings with respect to Call-Net, it had already examined the resale of private lines for joint use and found it not in the public interest. The initial Call-Net proceedings involved an examination of whether Call-Net was providing an enhanced service or was in contravention of resale and sharing rules. While the proceeding resulting in Resale to Provide Enhanced Services, Telecom Decision CRTC 88-11, 16 August 1988 (Decision 88-11), did consider whether to change the rules governing enhanced services, it explicitly excluded a more general review of the rules governing resale and sharing.

As noted during this proceeding, there is no stated government policy on resale for joint use. Moreover, a deferral of this proceeding, pending the outcome of a possible proceeding on facilities-based MTS/WATS competition, could result in a lengthy delay, thereby prolonging the uncertainty in the resale and sharing market caused by Orders-in-Council issued with respect to Call-Net. Therefore, the Commission considers it appropriate to proceed to a determination in the current proceeding and, in the process, to dispose of CFIB's application.

As indicated above, the Commission considered the issue of resale and sharing in Decision 85-19. In that Decision, the Commission stated that section 340(2) (then section 321(2)) of the Railway Act provides a statutory basis for determining the appropriateness of the restrictions on resale and sharing. The Commission noted that section 340(3) (then section 321(3)) permits it to determine, as questions of fact, whether in any case, there has been unjust discrimination or undue or unreasonable preference or advantage, or prejudice or disadvantage, within the meaning of section 340. The Commission stated that, in making factual determinations pursuant to section 340(3), it has regard to the public interest, broadly defined.

In Decision 85-19, the Commission concluded that there would be a number of benefits associated with permitting resale and sharing. However, the Commission also concluded that it was in the public interest, broadly defined, to limit contribution erosion and uneconomic entry by prohibiting resale and sharing to provide MTS/WATS. Because of the difficulties associated with service-based restrictions, this prohibition was implemented, in Decision 87-2, by means of facilities-based restrictions. Under this approach, the resale of private lines for joint use was not permitted for interconnected interexchange voice services.

In the Commission's view, the question of where the public interest lies must again be assessed, in light of the changes cited in Public Notice 1989-1 and discussed in this proceeding, by balancing the benefits to be derived from liberalizing the rules governing resale and sharing against possible adverse effects such as significant contribution erosion and uneconomic entry into the market.

Available evidence suggests that there are few voice resellers and sharing groups operating in the domestic market under the current rules. In the opinion of the Commission, resale for joint use would increase the number of suppliers in the market and would stimulate the development of integrated voice/data and value-added services. As an example, resale for joint use would allow smaller users to obtain CDAR, a service that many have argued provides important benefits. It would similarly increase the availability of services like call forwarding and voice storage and retrieval that can combine both basic and enhanced features.

While the Commission is also of the view that resale for joint use would result in the provision of some services that would be substitutes for MTS, it can be argued that all private line voice services and WATS are to some extent, lower priced substitutes for MTS. As such, they all have the potential to erode revenues that would otherwise be derived from MTS.

On the other hand, lower priced substitutes also have the potential to stimulate demand and, in turn, to generate new revenues and associated contribution. Furthermore, there would be material differences, as well as similarities, between MTS and the services that would develop as a result of resale for joint use. Resold services would often be of a lower value to the user, due to geographic limitations, the type of connection and need to dial extra digits, and the absence of the lower-priced universal termination available through WATS. Moreover, to the extent that margins between MTS and private line rates are sufficiently limited, resellers would be unable to compete solely on the basis of price and would have to add value to their services to compete effectively, thus further differentiating those services from MTS/WATS.

Having concluded that there are important benefits to be derived from the further liberalization of the rules governing resale and sharing, the Commission must assess, in light of the public interest, the extent, if any, to which liberalization would erode contribution and contribute to uneconomic entry.

B. Market Impact

1. General

Both Bell and B.C. Tel provided financial models of the market impact of permitting the resale of private lines for joint use. Bell and B.C. Tel indicated that their analyses assumed that facilities-based carriers would participate in the resale market through affiliates. B.C. Tel submitted that the rate relationships between MTS and private line services would be irrelevant to the affiliate of a facilities-based carrier since, as was also argued by Bell, it would be the combined financial results of the affiliate and the carrier that would determine the overall profitability of entry into the resale market. B.C. Tel further submitted that the entry of such an affiliate would be very similar to facilities-based MTS/WATS entry.

2. Bell's Model

Bell's market impact analysis covered the period 1990 to 1994, inclusive. Bell assumed that in the first year of the study period resellers would be able to establish points of presence in 11 cities and would thereby be able to originate and terminate traffic on 70 per cent of Bell's access lines. Bell estimated that, by 1994, this would increase to 90 per cent of access lines, with 49 points of presence. Bell stated that resellers would initially concentrate on serving larger centres and larger users.

Bell assumed that resellers would not be permitted to compete for domestic traffic terminating outside Bell or B.C. Tel territory, but that they would provide universal termination in the United States and overseas. Bell stated that resellers might offer discounts on overseas service as a loss-leader or at a reduced profit. Bell also stated that relaxing the rules on resale of cross-border services would make it difficult to prevent competition with the overseas service.

Bell assumed that, for a fixed monthly fee of $10, resellers would offer switched access customers discounts of 10 to 25 per cent and would offer a dedicated access service to business subscribers, with discounts of 10 to 30 per cent in return for a monthly subscription fee of $110. Bell stated that the company's estimate of resellers' discounts relative to MTS took into consideration the assumption that resellers would use low bit rate encoding techniques wherever feasible.

On the basis of the above-noted discounts, Bell calculated potential savings to resale customers. Bell estimated that the savings would never exceed 12 to 13 per cent, and would average 9 per cent.

Based on the above savings rates, Bell then calculated the probability that a customer would subscribe to resold services. These calculations were done using probability-of-subscription equations from the company's results for the Teleplus 200 and 1022 trials. Bell adjusted its probability-of-subscription estimates by an inertia factor to account for such non-price differences as dialing ease, provision of universal termination, and supplier preference. Bell also applied a penetration lag factor to the probability-of-subscription estimates to account for the fact that it would take three years for resellers to achieve a stable market share.

Bell assumed that resellers would use CNCP private line facilities exclusively, because an affiliate of CNCP would be the primary reseller and because CNCP's prices for private lines are 5 and 10 per cent lower than Bell's. However, Bell's analysis indicated that, even if these price differences were eliminated, there would be little change in the market impact.

Bell stated that, in order to isolate the impact of relaxing the resale rules, it assumed that it would not make a competitive price response. Bell did submit, however, that reducing MTS/WATS rates by 10 and 20 per cent, respectively, would not affect the resellers' market share.

In deriving the overall impact of a liberalization of the resale and sharing rules, the company also took into consideration changes to access revenues received from resellers and sharers, revenue settlements with other Telecom Canada members and non-domestic carriers, increases in expenses due to switching costs and decreases in expenses due to lost MTS/WATS traffic.

To calculate the number of switched access circuits required by resellers, Bell assumed that resellers would carry 7500 minutes of traffic per month per switched circuit and 3000 minutes per month per dedicated access circuit.

Bell stated that the company's revenue settlement calculations did not take into account B.C. Tel's market impact analysis, and that taking that analysis into account would increase the contribution lost by $20 million in 1992.

Based on the above assumptions, Bell estimated that its originated revenue loss, before revenue settlement, would be $540 million in 1994, equal to 10 per cent of the MTS/WATS market. Bell indicated that this revenue erosion would reduce the contribution it derives from MTS/WATS by $200 million and that Telecom Canada members (other than Bell) would lose $110 million in revenues through the revenue settlement process. Bell estimated that, if the company's contribution loss had to be recovered through local monthly rate changes, in the absence of any contribution payment from resellers, local rates would increase by $1.80. However, if per-minute contribution charges were applied, Bell estimated that a charge of $0.05 would reduce contribution losses by $60 million.

3. B.C. Tel's Model

B.C. Tel's initial market impact analysis covered the period 1990 to 1992, inclusive. In response to a Commission interrogatory, the company extended its analysis to include 1993 and 1994.

B.C. Tel assumed that resellers would originate and terminate traffic in 27 large B.C. centres, in major centres in Bell territory, and throughout the U.S. and overseas. B.C. Tel considered that all cross-border 800 Service traffic would be vulnerable to reseller competition, and that resellers would resell U.S. 800 Service in order to compete for cross-border 800 Service traffic. The company estimated that, in 1992, approximately 60 per cent of MTS/WATS revenues would be vulnerable to reseller competition.

B.C. Tel assumed that resellers would offer effective discounts of 20 to 30 per cent on MTS, WATS and 800 Service, and 40 per cent on overseas calls. B.C. Tel stated that it based these discounts on the rate margins between MTS/WATS and private lines, and on the promotional material of an existing cross-border reseller that advertised discounts of up to 40 per cent.

B.C. Tel expected that resellers would charge subscription fees in order to discourage very low volume users, and considered traffic in the business customer-dialed segment the most vulnerable to reseller competition. It stated that economic incentives to compete for this traffic would be high, based on the company's estimate that the price of private line services using 32 kbps bulk service can be 60 to 80 per cent less than that of MTS. Based on estimates of market share loss by billing band, B.C. Tel calculated that, in 1992, the average percentage share of vulnerable market revenues lost for WATS and business customer-dialed intra-company, TransCanada and Canada-U.S. calls would be 20 per cent, overall. The percentage share of the vulnerable residential market lost was set at 5 per cent.

B.C. Tel also assumed that it would lose 25 percent of the market for 800 Service vulnerable to reseller competition. Based on its understanding of the current extent of the bypass of Teleglobe services through the U.S., B.C. Tel assumed that 15 per cent of the vulnerable overseas market would be lost.

B.C. Tel indicated that its assumptions as to market share loss are supported by its experience in 1985, when it lost 15 per cent of cross-border traffic to resellers, prior to making a price response.

B.C. Tel assumed that resellers would use cross-border Canada-U.S. private lines and would route overseas traffic through the U.S. because, as argued by B.C. Tel, overseas rates from U.S. locations are lower than Teleglobe's.

B.C. Tel indicated that it had considered the influence on resale penetration of non-price factors such as the need to dial extra digits, customer preference for one-stop shopping, the inability to terminate domestic calls outside of the territories of Bell and B.C. Tel, and possible delays and inconveniences associated with resale network access. B.C. Tel stated that the impact of resale could be increased if resellers used better access arrangements, thereby reducing the dialing of extra digits.

B.C. Tel assumed that resellers would be free to change prices or to offer customer-specific prices in response to market conditions. It also assumed that larger users would receive higher discounts and that resellers would target the highest revenue markets first. B.C. Tel indicated that it did not expect resellers to provide value-added services, because existing arbitrage opportunities would allow resellers to be profitable without providing special services.

To facilitate its analysis, it assumed that it would not make a competitive response to expanded resale. B.C. Tel acknowledged that competitive pricing of its MTS/WATS could significantly reduce the revenue and contribution losses associated with allowing resale; however, a rate reduction would also have a negative impact on the company's MTS revenues.

Based on these assumptions, B.C. Tel estimated that resellers would take 7 per cent of its MTS/WATS market, resulting in a loss of $71.1 million in originated revenues in 1992. Using the 1988 Phase III cost/revenue ratio of 34 per cent, B.C. Tel calculated that the resulting loss in contribution would be $47.7 million. B.C. Tel projected that the impact in 1994 would be $86 million in lost revenues and $57 million in lost contribution. It stated that, if $50 million in lost contribution had to be recovered solely through local monthly rate changes, local rates would increase by $2.20.

B.C. Tel estimated that a per-minute contribution charge of $0.05 would reduce the lost contribution by $9.4 million.

4. Positions of Parties

Parties who commented on the Bell and B.C. Tel models included Call-Net, Cam-Net, CBTA, CMA, CNCP and Marathon.

A number of parties questioned the carriers' assumption that a CNCP affiliate would be the dominant player in the resale market. Call-Net stated that this assumption eliminates any positive financial impact of resale on Bell and increases the estimated lost market share. Marathon expressed concerns that facilities-based carriers could directly or indirectly subsidize a resale affiliate. Marathon submitted that the Commission should establish rules to prevent such an affiliate from entering the resale market.

In support of its assumption of entry by a facilities-based affiliate, Bell cited CNCP's statement that it would consider becoming an alternative supplier of MTS/WATS. It submitted that a CNCP affiliate would constitute a legitimate business arrangement and that any attempt by the Commission to introduce pre-conditions for entry based on corporate affiliation may not be defensible in light of Railway Act provisions relating to unjust discrimination and undue preference.

Several parties submitted that the carriers' assumptions as to the price discounts that resellers would offer ignored such overhead costs as marketing, facilities and equipment. CBTA stated that neither Bell nor B.C. Tel had conducted studies to determine whether resellers could afford to offer the discounts predicted. Some parties argued that large rate margins are not available to resellers and, as a result, that resellers would be unable to offer the discounts assumed by the carriers, particularly for Canada-U.S. and overseas calls.

Many parties commented on the quality of service that resellers would provide. CBTA and CNCP indicated that it may be lower because of inferior quality of access and transmission, longer dialing sequences and the limited availability of private lines. CNCP noted that resellers would not be able to terminate domestic calls outside of the territories of Bell, B.C. Tel and Northwestel.

Call-Net stated that the very high levels of utilization on private line circuits assumed by Bell (7500 minutes of traffic per month per switched circuit and 3000 minutes per month per dedicated access circuit) would result in lower network quality and high equipment costs. It also stated that the wider the area served by resellers, the less likely they will be to achieve the very high level of utilization on private lines necessary to offer high price discounts.

The carriers' assumptions regarding resellers' use of voice compression and multiplexing technologies were also questioned by some parties. These parties submitted that low bit rate encoded circuits are limited in their ability to transmit facsimile traffic and provide a lower quality of service. Call-Net stated that the carriers assumptions allow them to project higher discounts for resold services. CBTA argued that multiplexing and voice compression technologies are not appropriate for resale networks.

B.C. Tel replied that resellers would use voice compression and low bit rate encoding technologies, even though this might impair quality on multiple tandem links and limit the trasmission of facsimile traffic. It stated that there may be improvements in technology, that some routes may not require multiple tandem links, and that most traffic would be voice, not facsimile. B.C. Tel stated further that resale would be viable even if voice compression or multiplexing was not used.

Call-Net and CBTA questioned the carriers' assumptions about the market segments that would be vulnerable. They submitted that, if it is true that resellers would serve only large volume routes and provide benefits to only a select segment of subscribers, it cannot also be true that the market would be highly vulnerable and that substantial contribution erosion would occur.

CBTA put forward several reasons as to why it believed that the estimates of reseller competition in the overseas market are not realistic. It also pointed out that bypass of Canada-Canada traffic through the U.S. is not permitted under the agreements between Canadian and U.S. carriers. B.C. Tel indicated that it did not believe that such agreements would prevent traffic diversion.

CBTA stated that connection to U.S. switches is currently allowed and, therefore, that allowing joint use of resold circuits would likely result in only a small increase in cross-border traffic. It also argued that approval of Advantage Service, a form of discount Canada-U.S. MTS proposed by Bell and B.C. Tel, in January 1989, would dramatically reduce the cross-border traffic carried by resellers. B.C. Tel was of the view, however, that the introduction of Advantage Service would not alter the impact of resale for joint use.

Several parties disagreed with the assumption by Bell and B.C. Tel that they would provide none of the resellers' private line facilities. These parties stated, among other things, that CNCP may not have sufficient facilities available on the required routes. Marathon indicated that it had experienced administrative difficulties when obtaining private lines from alternative carriers. CBTA argued that resellers would acquire the same proportion of their private lines from Bell and B.C. Tel as are currently purchased by all users of private lines.

Bell and B.C. Tel indicated that the cost of private line service for resellers was a much more significant component of total expenses than the cost of private lines for business customers. Therefore, the resellers' incentives to minimize would be greater.

Many parties also took issue with the assumption that the carriers would not make any response to increased resale competition. Call-Net stated that this assumption is inconsistent with recent trends in private line and MTS/WATS rates and with the application for Advantage Service. It argued that the assumption results in an overstatement of the incentives for subscribers to migrate to resellers' services.

Both Call-Net and Marathon argued that Bell had underestimated the time it would take for resellers to achieve a stable market share.

Some parties submitted that the carriers' estimates of market share loss were inconsistent with subscribers' responses to the carriers' discount services and their inertia towards subscription to CNCP services.

Call-Net argued that experience in both Canada and the U.S. suggests a lower penetration level by resellers, possibly in the order of 2 per cent by year five. Call-Net estimated that a 2 per cent market share loss would reduce Bell's estimate of contribution loss by year five to $40 million, which would be offset to a large extent by an increase in revenues associated with the lease of facilities to resellers.

Bell replied that the U.S. experience is not relevant in assessing the reasonableness of Bell's market projections, because resellers in the U.S. are required to compete on equal terms with established facilities-based carriers.

CBTA argued that, even with projected erosion from resellers, Bell's long distance revenues would increase by $2 billion over the next five years, resulting in an additional contribution of $1.3 billion. Because of an anticipated decrease in the growth of access costs, CBTA contended that several hundred million dollars would be available for toll rate reductions, thus further reducing resale margins. CBTA predicted a similar situation for B.C. Tel.

C. Conclusions

In the Commission's judgment, the scenarios set out in the market impact models of Bell and B.C. Tel are based on overstated assumptions about the ability of resellers to compete with the telephone companies in an environment in which the resale of private lines for joint use is permitted. The scenarios presented by the companies are even less realistic if carrier affiliates are not permitted to enter the market. The discussion immediately below is posited on the assumption that carriers would not be permitted to lease private lines to an affiliate for the purpose of resale for joint use. The impact of entry by an affiliate is discussed later.

The market share that would be lost to resellers depends primarily on interrelated two factors: (1) the coverage that resellers would provide, (2) the discount that resellers would offer and (3) the customer take rate that would accompany various price discounts. The Commission believes that assumptions made by Bell and B.C. Tel with respect to each of these factors have resulted in an overestimation of the potential impact of permitting resale for joint use.

With regard to the first of these factors, in the Commission's view, Bell and B.C. Tel have assumed that resellers will offer service in more locations than will, in fact, be the case. The Commission believes that there would be little incentive for resellers to provide customers with the ability to originate and terminate traffic in smaller centres. The costs involved in so doing would be such that price discounts and/or service quality would need to be reduced to levels at which it would not be possible to attract customers.

With regard to the level of price discounts, the Commission considers that neither Bell or B.C. Tel provided satisfactory evidence to support their submissions concerning the level of discount that resellers would be able to offer. In the Commission's judgment, even with limited coverage, it is unlikely that resellers could offer the discounts on domestic traffic assumed by the carriers. In the Commission's opinion, based on the record of this proceeding and its analysis of existing margins between private line and MTS rates, an average price discount on domestic traffic would not exceed 20 per cent. For overseas traffic, since Teleglobe's rates on many high traffic routes are comparable to those of American Telephone and Telegraph, and in some cases are lower, it is also unlikely that resellers could offer substantial discounts.

Furthermore some Canada-U.S. MTS/WATS traffic has already been lost to resellers using dedicated private lines to the U.S. border, thus reducing the incremental impact of permitting expanded resale.

Finally, the Commission is of the view that the carriers' assumptions concerning the probability of subscription and the impact of inertia factors overestimate, albeit not substantially, the extent to which customers would be attracted to reseller services for given levels of price discount.

In light of the above, the Commission concludes that the carriers have substantially overestimated the market share that they would lose to resellers. Based on the models developed by Bell and B.C. Tel, and making adjustments to reflect the revised assumptions discussed above, the Commission's analysis indicates a market share loss of approximately 2 per cent in 1994. For Bell, such a loss in market share would entail an originated revenue loss of less than $100 million and a contribution loss of less than $60 million. For B.C. Tel, the estimated impact would be less than $25 million in lost originated revenues, with less than $15 million in associated contribution erosion, after revenue settlement.

The Commission notes that, if Bell and B.C. Tel had no option but to recover this loss solely through a monthly local rate increase, it would, by 1994, be no greater than $0.50 for Bell subscribers and no more than $0.55 for B.C. Tel subscribers. Other Telecom Canada members would experience a revenue loss of less than $20 million with an associated contribution loss of less than $10 million.

However, in the Commission's judgment, the level of contribution loss estimated above may well be offset to a considerable degree by other factors. For example, liberalized resale, and the growth in value-added services that it may foster, might well stimulate the demand for private lines, thus increasing carrier revenues from that source. Increased productivity and lower expenses could reduce contribution loss even further.

In light of the above, the Commission does not consider potential contribution erosion to be of sufficient magnitude to outweigh the previously noted advantages of permitting expanded resale, particularly in light of the fact that liberalization would encourage the development of value-added voice and data services. In the Commission's judgment, contribution payments, as discussed below, will serve to further reduce the possibility of contribution erosion and of uneconomic entry into the resale market.

The Commission therefore concludes that the resale and sharing rules should be amended to permit the resale of private lines for joint use for voice purposes.

However, in the Commission's opinion, permitting a facilities-based carrier to lease services to an affiliate for the provision of voice services on a joint use basis would be analogous to permitting facilities-based entry. A reseller that was affiliated with a facilities-based carrier would not be subject to the same economic constraints as other resellers, who would have to obtain services from an unaffiliated supplier. It is these constraints, to which unaffiliated resellers are subject, that help to limit uneconomic entry and contribution erosion.

Specifically, in determining the combined return of a facilities-based carrier and its resale affiliate, it would be the cost of providing underlying facilities to the affiliate that would be important, rather than the price paid by the affiliate to the carrier for facilities. Therefore, the margin between rates for MTS and rates for private line services would not be a factor in the decision to enter the resale market. Rather it would be the margin between MTS rates and the facilities-based carrier's marginal costs for private line services. As a result, to the extent that rates for certain private line service exceed their marginal costs, the affiliated reseller could offer larger discounts than other resellers, thus increasing any negative impact of more liberalized resale on Bell and B.C. Tel.

Moreover, since a carrier affiliate could offer greater discounts, it could focus directly on price competition, as opposed to competition on a value-added basis. Facilities-based competition was not a subject of this proceeding and the evidence is inadequate to assess its impact. Therefore, the Commission determines that no facilities-based carrier will be permitted to lease interexchange services directly or indirectly to an affiliated company for resale for joint use or sharing, except where those services would be used only to provide data services or portable communications services such as mobile satellite and cellular services. This does not, of course, preclude a carrier affiliate from entering the resale market using the facilities of a non-affiliated carrier.

Finally, the Commission notes that no party commented on Northwestel's position that its circumstances are materially different from those of Bell and B.C. Tel and that, therefore, the rules should not be relaxed in its territory. Given the differences in its circumstances, the lack of detailed information regarding the impact on revenue and contribution erosion and the absence of demand to alter the current rules, the Commission does not consider it appropriate at this time to alter the rules applicable to resale and sharing in Northwestel's operating territory.

III REGULATORY APPROACHES

A. General

In Public Notice 1989-1, the Commission asked for comment on the question of whether any restructuring of rates for Monopoly Toll and Competitive Network services should be undertaken before any changes are made in the rules governing the resale and sharing of private line services. The Commission noted that it would consider only the need to restructure interexchange service rates and that the issue of rate rebalancing was outside the scope of the proceeding. The Commission also requested comments on whether some form of contribution payment or other regulatory mechanism should be applied to resale and sharing and, if so, the nature and extent of that contribution payment or other mechanism. The various submissions with respect to these issues are summarized below.

B. Rate Restructuring - Positions of Parties

Generally, those parties that supported more liberalized resale argued that it was unnecessary to restructure interexchange rates prior to permitting the resale of private lines for joint use. ACTS argued that an elastic demand for interexchange services, together with the deployment by the telephone companies of cost-reducing technologies, could allow for further rate decreases without any need to restructure.

Many parties argued that the significant reductions in MTS/WATS rates and increases in private line rates cited in Public Notice 1989-1 had removed most opportunities for uneconomic entry. Some parties also noted that, since Public Notice 1989-1 was issued, the Commission had again increased private line rates and ordered further decreases in MTS rates. CBTA stated that the limited number of sharing groups that have been formed is evidence that margins are no longer significant. Call-Net, Cam-Net and CBA argued that any further restructuring would negate the benefits of resale.

CADAPSO, B.C. Rail and CBTA argued that the restructuring of interexchange rates has already significantly shifted the traditional cross-over points of demand away from private lines and back to monopoly MTS/WATS. B.C. Rail estimated that, as a result of MTS rate reductions and private line rate increases, users now require twice the amount of traffic as formerly to justify a shift from MTS/WATS to private lines.

Parties opposed to more liberalized resale generally argued that rate restructuring should be permitted. Both Bell and B.C. Tel, while noting that rebalancing of MTS and local rates was not an issue in this proceeding, contended that it is the most efficient method of restructuring. B.C. Tel argued that restructuring is necessary to reduce contribution losses from resale, to avoid uneconomic entry, to allow telephone companies to provide services under competitive terms, and to provide appropriate market signals.

Bell contended that it would not be appropriate to increase rates for competitive network services, since that would only result in lost business and revenues to competitive alternatives. Bell suggested the restructuring of monopoly toll rates by increasing volume discounts and by decreasing prices on high density routes. It also argued that, unless rate rebalancing occurs, the lost revenues from such a restructuring would have to be made up through rate increases on low density routes or reductions in discount levels for off-peak periods.

B.C. Tel stated that there would be less contribution erosion if it were permitted to offer volume discounts, since it would lose fewer customers and total demand would be stimulated. It noted that there are other means of rate restructuring, including reducing the distance sensitivity of MTS/WATS rates, removing message charges for call set-up, and introducing geographic or route specific pricing. B.C. Tel argued that such repricing could reduce contribution losses and stated that any remaining revenue shortfall could be recovered from increases in short haul toll rates or from reductions in the level of discounts for evening, night and weekend calling.

BCG stated that the most appropriate form of restructuring would involve further competitive network rate increases and monopoly toll rate decreases, but recognized that this would be difficult to achieve in a competitive environment and could contribute to bypass through the U.S. However, BCG argued that the telephone companies should not be permitted to depart from traditional pricing principles, such as route averaging, without explicit policy direction.

Both Bell and B.C. Tel argued that, if resale of private lines for joint use is permitted, 5 and 10 per cent discounts should be eliminated when CNCP-type services are used by resellers to provide MTS/WATS-like services. They noted that, since resale activities would be limited to territories where CNCP has interconnection, the geographic rationale for a discount (i.e., that there is no interconnection in some provinces) would not apply. B.C. Tel argued that resellers are driven to minimize costs and would therefore obtain all their underlying facilities from a competitor rather than from the telephone company.

Marathon contended that such discounts were not significant. Its experience with discounted interexchange services had led it to reconsider leasing facilities from a wide range of carriers, due to problems of coordination and administration.

CNCP stated that the Commission had granted it 5 and 10 per cent discounts on the basis of material differences in the value of its services and the telephone companies' services. CNCP noted that the Commission has found that the telephone companies obtain a significant advantage through their MTS/WATS monopoly and CNCP believes that this monopoly will prevail until facilities-based entry is permitted.

Bell disputed CNCP's contention that it would retain an advantage through its MTS/WATS monopoly. It argued that the removal of restrictions on joint use would in fact result in MTS-like services.

C. Contribution Payments - Positions of Parties

The majority of parties supporting further liberalization of the rules governing resale argued that there is no need for resellers to pay a contribution charge on jointly used private lines, since the price for an interconnected private line already includes a contribution towards access. Call-Net and Cam-Net stated that an additional contribution charge imposed only on resellers would discriminate against small and medium size users that cannot individually take advantage of private line services. CBTA drew comparisons between Canadian and U.S. private line rates to suggest that Canadian private lines already make significant contributions.

Call-Net noted that, in CNCP Telecommunications, Interconnection with Bell Canada, Telecom Decision CRTC 79-11, 17 May 1979 (Decision 79-11), the Commission indicated that a revenue loss to Bell in 1982 of $45.7 million was acceptable, given the advantages of the interconnection of CNCP. For comparative purposes, Call-Net noted that Bell's operating revenues in 1982 were $3 billion, as opposed to $7 billion in 1989.

BCG took the position that all telephone company services should be priced to provide a contribution to access and to common costs. While BCG did not support resale for joint use, it did contend that contribution should be commensurate with the service provided. It argued that, while joint use may be MTS-like, it is not the equivalent of MTS. BCG contended that, until the Commission determines what an appropriate contribution for a private line is, resellers should pay the same contribution as competitors for interconnected private lines.

ACTS and ITAC argued that, before contribution charges are imposed, more efficient steps to lessen or offset revenue erosion should be undertaken, for example, cost reductions, productivity improvements, rebalancing and targeted subsidies.

Both Bell and B.C. Tel argued that, absent rate rebalancing, resellers, as competitors in the MTS/WATS market, should be required to pay a contribution comparable to that required of the telephone companies. Bell argued that, without a comparable contribution, resellers and their customers would be subsidized by the general body of telephone subscribers. Bell and MT&T noted that the current contribution assessed on competitors' interconnected private lines was designed to replace lost contribution from private line services, not from MTS/WATS.

B.C. Tel stated that erosion caused by the conventional use of private lines is limited because use is restricted to those with specific volumes of traffic. It argued that joint use of private lines would remove the restrictions that limit erosion.

Bell argued that resellers' traffic carried over jointly used/non-dedicated facilities would be substantially different from traffic carried over facilities dedicated to a single end-user. Bell contended that the manner in which resellers would aggregate traffic over the local network in one city, carry that traffic on jointly used circuits to another city, and then distribute it over the local network indicates that a reseller's traffic would be carried under substantially similar circumstances and conditions to comparable MTS offerings.

Bell argued that, because sharing groups are non-commercial in nature and are users rather than providers of services, it would be inappropriate to charge them a contribution. Northwestel stated that, if resellers are required to pay contribution and sharing groups are not, it would be necessary to discourage resellers from acting like sharing groups. Marathon stated that, while a sharing group may function as a non-commercial entity, the members of a sharing group are nonetheless profit-oriented organizations that should not be exempt from contribution.

Bell and B.C. Tel indicated that there are three possible contribution mechanisms: (1) a charge per minute of reseller traffic, (2) a charge per circuit or per channel, and (3) a charge per dollar of revenue obtained.

Bell and B.C. Tel argued that a per-minute or per-channel charge would create incentives for resellers to bypass the switched network in order to avoid using connecting facilities on which contribution charges are assessed. B.C. Tel also noted that per-channel charges must be based on traffic assumptions and averages, and that resellers would attempt to engineer their systems to defeat these assumptions. B.C. Tel noted that, while a measured per-minute charge would avoid this problem, resellers would be limited in the type of facilities they could obtain since not all switches could measure the traffic.

Both Bell and B.C. Tel considered the percentage-of-revenue approach a better alternative, since it would limit the avoidance of contribution. However, they noted that this approach would require increased regulatory scrutiny or would have to be subject to audit.

Marathon argued that a percentage-of-revenue mechanism could create problems when a reseller offers a range of services or operates in Canada and in the United States. Marathon predicted that such situations would lead to "creative accounting" that would be difficult to monitor. Marathon recommended a per-minute charge, blended with the cost of the access line, as set out in the tariffs of U.S. West.

Bell noted that the U.S. West tariff fills several volumes, and is the product of the regulatory climate in the United States. Bell submitted that Marathon's proposal gave rise to a number of issues, such as rate rebalancing, that have not been canvassed in this proceeding. Bell contended that it is accordingly unable to ascertain whether the U.S. West tariffs would be appropriate in the Canadian environment.

D. Conclusions

As indicated in Part II of this Decision, the Commission is of the view that the potential for uneconomic entry and for contribution erosion has been reduced significantly by rate adjustments since Decision 85-19 and Decision 87-2. Moreover, as noted, the Commission considers that contribution payments will serve to reduce the possibility of contribution erosion and of uneconomic entry in the resale market.

Having examined the restructuring options, the Commission does not consider it appropriate at this time to increase private line rates. Increasing rates for competitive network services could, in some instances, result in a reduction rather than an increase in revenues. The Commission also regards rate increases for short haul and low density routes or decreases in discounts for off-peak periods as extreme solutions.

In the Commission's opinion, volume discounts, such as those provided by Teleplus, Between Friends and Advantage Service are one approach to reducing price differentials. The Commission will continue to evaluate proposals for discount services on a case-by-case basis.

The Commission concludes that it is not necessary to make rate structure changes for competitive network services in order to permit resale for joint use. The Commission concludes that, under present circumstances, the imposition of contribution charges of an appropriate form and level will provide the necessary mechanism for permitting resale of private lines for joint use while limiting opportunities for uneconomic entry and contribution erosion.

The Commission also concludes that the same contribution charge assessed on resellers should be applied to sharing groups. If the distinction between resellers and sharers was maintained, resellers could disguise themselves as sharing groups in an attempt to avoid contribution payments.

The Commission considers that any attempt to distinguish between resellers and sharing groups would ultimately result in dispute. From an economic perspective, sharing is clearly an attempt to save money and increase profit by aggregating demand. A reseller aggregates traffic and sells discounted service so that it and its customers can profit. A sharing group aggregates traffic for the same economic reasons.

While the imposition of a contribution charge may require some sharing groups to restructure their activities, the Commission considers that any difficulties will be limited because of the small number of sharing groups currently operating, new opportunities for members of sharing groups to obtain services from resellers, and the potential for administrations of sharing groups to reduce their costs by engaging in resale.

However, in order to provide parties, including sharing groups, sufficient time to restructure their activities if they deem it necessary, the Commission intends to allow 90 days from the date of this decision before new tariffs take effect.

With respect to the appropriate form of contribution charges, the Commission is of the view that revenue-based charges or per-minute access charges may have potential for the future. However, a good deal of development would be required before they could be implemented. At this time, per-channel charges are more appropriate. A proceeding on facilities-based entry, should one be initiated, might provide the appropriate forum to consider other forms of contribution charges in greater detail.

While resale may result in MTS-like services on specific routes, the economic structure underlying resale and the restrictions on the resale of WATS limit the ability of resellers to universally originate or terminate traffic. In addition, the geographic coverage of the domestic services in question will be restricted to Bell and B.C. Tel territory. Extra dialing and lower quality of connections also contribute to a lower quality of service.

The Commission finds that it is not necessary in such a resale environment for the contribution charges applicable to resale for joint use to be designed to compensate fully for losses to the contribution derived from MTS/WATS. However, such charges should, at a minimum, serve to limit the opportunity for uneconomic entry, while promoting the provision of value-added services. In the Commission's judgment, a contribution of $200 per month per interexchange channel is the appropriate amount under current conditions.

The Commission's analysis indicates that, at $200 per interexchange channel, any increase to Bell's and B.C. Tel's local rates to offset contribution loss would be no more than $0.35 in 1994. Because this estimate is based on the assumption that all reseller traffic is a close substitute for MTS/WATS, it is likely excessive to the extent that resellers provide new value-added services that result in overall market growth. Contribution generated as a result of the development of new value-added services could, particularly in the long run, offset any contribution erosion that would otherwise affect local rates.

In order to identify any resellers and sharing groups to whom this charge should apply, all resellers and sharers of any private line services used to provide jointly used interconnected voice services will be required to register with the Commission and with the carriers from whom they will obtain their facilities. Upon receipt of an order for private line facilities from a registered reseller, the carriers will apply the contribution charge to all channels requested, unless a specific channel will not be jointly used or is to be used for providing only non-interconnected, dedicated, or data services and a reseller or sharing group provides affidavit evidence to that effect.

The contribution charge will be applied on a per-channel basis. Where a reseller or sharer orders an interexchange channel from either Bell or B.C. Tel, the reseller or sharing group will pay the telephone company directly. Where a channel requiring contribution payment is leased from Telesat, CNCP or B.C. Rail, these carriers will remit the payment to either Bell or B.C. Tel. The necessary changes to the interconnect tariffs of Bell and B.C. Tel are prescribed in separate Orders accompanying this decision.

Finally, the Commission does not, at this time, consider it necessary or appropriate to remove discounts available on CNCP services. In the Commission's view, amending the rules to permit the resale of private lines for joint use does not sufficiently alter the situation prior to this Decision to warrant a reconsideration of the discounts allowed to CNCP.

IV OTHER ISSUES

A. Recovery of Costs for Competitor Access to PSTN

Bell stated that resellers would be likely to interconnect with the PSTN by Connecting Arrangements for Switched Access that would, in effect, utilize the company's existing local switches as access tandem switches. In Bell's opinion, this would add extra load and volatility to the local network. As a result, the costs to control the network load and maintain the performance of the local network would increase. Bell suggested that a new tariff would be required to recover these costs, in addition to any contribution payment. B.C. Tel indicated that compensatory rates for access arrangements should be applied if the resale of private lines for joint use is permitted.

CMA supported the recovery of access costs, but suggested that the Commission initiate a proceeding to determine an appropriate charge for all services, including charges for resellers and other competitors, for the use of access facilities. Marathon favoured a tariff that would blend access and contribution costs into one, but noted that it would require significantly improved access for this approach to be viable. Other parties who favoured resale for joint use were opposed to requiring resellers to pay any additional charges over the tariffed rates for network access.

Bell did not provide estimates of the costs resulting from additional load on the local network or increased network volatility associated with the migration of telephone company customer traffic to a reseller. In the Commission's opinion, these additional costs are unlikely to be significant. Furthermore, the costs imposed on the local network by a private line customer can vary considerably depending on how the line is used and configured. In the Commission's opinion, resellers should pay tariffed rates for network access facilities in the same way as other private line customers.

B. Special Reseller Provisioning Group

Call-Net proposed that each carrier establish a special group to deal with resellers, in order to ensure that they receive high quality circuits, a timely response to their orders for facilities, and confidential treatment of their orders. Call-Net also proposed that, if carriers cannot fill resellers' orders on time, resellers be permitted to resell WATS until the orders can be filled.

Northwestel stated that Call-Net's request contradicts Call-Net's submission that it should be treated like any large private line customer. Northwestel noted that the confidentiality of customer information is already ensured under the Terms of Service and that there is a procedure culminating in recourse to the Commission if a customer is not satisfied with the service received. Northwestel opposed Call-Net's request that resellers be permitted to resell WATS, because that would result in discriminatory treatment of customers and would contravene the policy of not permitting the resale of WATS.

In the Commission's view, the record of this proceeding does not support the need to establish special reseller provisioning groups. The Commission will, however, monitor the situation and deal with any complaints it receives from resellers with respect to the service they receive from the carriers.

The Commission stated in Public Notice 1989-1 that it would not review the prohibitions on the resale and sharing of WATS to provide voice service. The Commission therefore rejects Call-Net's suggestion that resellers be permitted to resell WATS pending the filling of their orders for private lines.

C. Certification of Switching Equipment

Marathon noted that none of the major manufacturers of central office switching equipment have obtained the CS-03 certification necessary to permit customers to attach such equipment to the carriers' networks as customer-provided terminal equipment. Marathon considered itself to be in a similar category as cellular carriers, who are not required to obtain certification of their equipment. Marathon requested that the Commission give interim approval to the installation, without certification, of any central office switch currently installed by at least one telephone company or reseller in North America. Marathon further requested that the Commission determine whether resellers' central office switching equipment requires certification.

In response, Bell submitted that interim permission to install uncertified central office switches would not be appropriate. Bell maintained that equipment installed on customer premises, rather than carrier premises, currently requires CS-03 certification, regardless of whether the company or some other party provides and operates the equipment. Bell noted, however, that standards similar to the bilateral technical agreements negotiated by carriers for interconnection purposes could be developed for use with resellers.

In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982, the Commission required that all terminal equipment attached to the networks of the federally-regulated carriers be certified to CS-03. This requirement applies equally to terminal equipment provided by the telephone companies. While central office switches have not been characterized as a form of terminal equipment, there is no technical impediment to applying CS-03 to such switches.

The Commission will request the Department of Communications to convene an ad hoc technical committee to consider the question of the appropriate standard for central office switching equipment and whether or not such equipment should be subject to certification, be it to CS-03 or to some other standard. The Commission will request that the committee take whatever action it considers appropriate and report on its decision. The Commission will then require the telephone companies in question to file any necessary amendments to their tariffs.

In the interim, pending the establishment (if necessary) of a new standard and certification procedures, the Commission finds that resellers' central office switches must be certified to CS-03.

D. CFIB Application

The Commission established its approach to applications filed pursuant to section 340(2) of the Railway Act, as is CFIB's, in a series of cases beginning with Challenge Communications Ltd. v. Bell Canada, Telecom Decision CRTC 77-16, 23 December 1977. More recently, in Paradyne Canada Ltd - Attachment of Subscriber-Provided Terminal Equipment to Dataroute Service, Telecom Decision CRTC 89-5, 1 May 1989 (Decision 89-5), the Commission stated, after finding that a preference had been conferred and that discrimination had occurred, that it must consider whether the record of the proceeding established that the preference was not undue or that the discrimination not unjust. The Commission stated further that this consideration must be made in light of the public interest.

At the time that the resale and sharing restrictions were imposed, the Commission found them necessary and in the public interest in order to reduce the possibility of significant contribution erosion. It follows, therefore, that any of those restrictions that may have been discriminatory, were not unjustly discriminatory.

The Commission had already issued Public Notice 1989-1when it received CFIB's application. In other words, it had already determined that it was in the public interest to review the restrictions on the resale and sharing of private lines. The Commission has now concluded that, in the public interest, restrictions on resale for joint use should indeed be liberalized. Since the conditions that formed the primary grounds for CFIB's application have been altered, and the old restrictions replaced with rules that the Commission has found to be in the public interest, the Commission considers it unnecessary to take further action with respect to CFIB's application.

E. Tariff Revisions

To give effect to this Decision, the Commission has set out in the Appendix the rules to be included in the tariffs of Bell, B.C. Tel, CNCP and Telesat.

Bell, B.C. Tel, Telesat and CNCP are directed to issue, by 14 March 1990, revised tariff pages as specified in the Appendix to this Decision, modified to reflect the specific services offered by each. The Commission has today issued orders to Bell and B.C. Tel directing that they amend their interconnection tariffs in accordance with the resale and sharing rules set out in the Appendix. In all cases, the revised tariff pages are to have an effective date of 29 May 1990.

Fernand Bélisle
Secretary General

APPENDIX

RESALE AND SHARING RULES

1. DEFINITIONS

For the purposes of this tariff item:

"affiliate" means any person that controls or is controlled by the Company or that is controlled by the same person that controls the Company;

"control" includes control in fact, whether or not through one or more persons;

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

"Foreign Exchange Service" is an interexchange service;

"interexchange service" means a service configured to operate between any two exchanges for which Message Toll Service charges would apply;

"joint-use basis" means on a basis in which a Company-provided channel is not dedicated to a user;

"resale" means the subsequent sale or lease on a commercial basis, with or without adding value, of telecommunications services leased from the Company;

"reseller" means a person engaged in resale;

"sharing" means the use by two or more persons, in an arrangement not involving resale, of telecommunications services leased from the Company;

"sharing group" means a group of persons engaged in sharing;

"user" means a member of a sharing group or a customer of a reseller using the Company's telecommunications services for the user's private communications needs;

"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 voice aspect of which is limited to the coordination or setting up of a data service.

2. RESALE AND SHARING WITHOUT CONTRIBUTION

The Company's telecommunications services may be shared or resold in accordance with the conditions set out below and without the requirement for contribution payments.

(a) Data Services

The Company's services may be shared or resold to provide data services.

(b) Local Voice Services

(i) Subject to subparagraph (ii), the Company's services may be shared or resold to provide local voice services, with the exception that resale to provide public pay telephone service is not permitted.

(ii) Resellers offering shared tenant services must provide the Company with direct access, under reasonable terms and conditions, to tenants who choose to receive service from the Company rather than, or in addition to, service from the reseller.

The Company's services may be shared or resold to provide interexchange voice services that do not provide access to the public switched telephone network subject to the following. Where an interexchange voice service of this type utilizes a company-provided channel which is not dedicated to the user and is terminated at the user's equipment that has access to the public switched telephone network, the system shall be configured so as not to permit bridging and the reseller or sharing group shall file with the Company an affidavit stating that the system is and will continue to be so configured.

(d) Interconnected Interexchange Voice Services

The Company's services may be shared or resold to provide interexchange voice services that provide access to the public switched telephone network, subject to the following restrictions:

(i) each Company-provided channel shall be dedicated to the user;

(ii) one end of each Company-provided channel shall be terminated at equipment dedicated to the user or at a Centrex facility dedicated to the user;

(iii) where a Company-provided channel used by a reseller service terminates at the Company's local central office switching equipment, the channel shall not pass through a non-user provided switch;

(e) Message Toll Service

The Company's Message Toll Service may be shared or resold except where otherwise prohibited in the tariffs.

3. RESALE AND SHARING WITH CONTRIBUTION

Interconnected Interexchange Voice Services

The Company's interexchange private line services may be shared or resold on a joint use basis to provide interconnected voice services in accordance with the conditions set out below.

(a) Resellers and sharing groups of jointly-used interexchange interconnected voice services are required to register with the Company and the Commission prior to receiving service.

(b) Resellers and sharing groups of interexchange private line services are required to pay to the Company a contribution charge of $200 per month per channel, except where the Company-provided channel meets at least one of the conditions set out in section 2 (a), (c) and (d) above and the reseller or sharing group files with the Company an affidavit stating which condition(s) is(are) met.

(c) In assessing monthly contribution charges, the Company shall apply a charge of $200 per voice grade analog channel or $200 per 64 kilobit channel; where a T1 channel is used in whole or part on a joint-use basis for the purposes of providing interexchange interconnected voice services, a contribution charge of $4800 shall be applied.

(d) Interexchange private line services shall not be provided to an affiliate of the Company, or to a sharing group which involves one or more persons who is an affiliate of the Company, where such services would be resold on a joint-use basis or shared to provide interexchange interconnected voice services, except where such services would be used only to provide portable communications services.

Date modified:: 1990-03-01

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