ARCHIVED -  Telecom Decision CRTC 91-10

Telecom Decision

Ottawa, 26 June 1991

Telecom Decision CRTC 91-10

TELEGLOBE CANADA INC. - RESALE OF TRANSBORDER SERVICES

I THE APPLICATION

On 4 April 1990, Teleglobe Canada Inc. (Teleglobe) made an application to the Commission concerning the use of Canada-U.S. transborder services offered by Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel) and Unitel Communications Inc. (Unitel) (the respondents).

Teleglobe's application relates to the diversion of Canada-overseas calling through the use of Canada-U.S. private lines leased by resellers from domestic carriers and interconnected to the overseas facilities of U.S. carriers (overseas bypass). Teleglobe requested that the general tariffs of the respondents be amended to state that resellers are prohibited from using transborder services to route interconnected voice traffic to and from overseas destinations via interconnection with the facilities of carriers in the United States.

Teleglobe stated that it has the obligation under its constituting legislation to provide public telecommunications services between Canada and places outside Canada. In support of its application,Teleglobe also cited various Commission rulings with respect to interconnection agreements between Canadian and American carriers, as well as policy statements by the Government of Canada favouring the carriage of Canadian traffic over Canadian facilities. Bell, B.C. Tel and Unitel filed answers to the application on 4 May 1990, 1 May 1990 and 4 May 1990, respectively. Teleglobe filed reply comments on 14 May 1990.

II THE PROCEEDING

On 4 September 1990, the Commission issued CRTC Telecom Public Notice 1990-79 (Public Notice 1990-79) in which it expanded the scope of the proceeding initiated by Teleglobe's application to include consideration of the carriage of Canada-Canada traffic through the United States, and other matters. Specifically, the Commission invited interested parties to comment on the application, as well as on the following issues:

(1) whether Teleglobe's arguments in support of its application apply to data traffic, non-interconnected traffic and traffic carried on private lines;

(2) whether concerns raised by Teleglobe with respect to Canada-overseas traffic carried through the United States are equally relevant to Canada-Canada traffic carried through the United States;

(3) whether restrictions on the use of Canada-U.S. private lines can be effectively and uniformlyenforced;

(4) whether the potential for the routing of Canada-overseas and Canada-Canada traffic through the United States is significant in terms of traffic volume and revenues lost to Canadian carriers; and

(5) whether there are approaches other than that requested by Teleglobe for dealing with the routing of Canada-overseas and Canada-Canada traffic through the United States.

The Commission also joined The Island Telephone Company Limited, Maritime Telegraph and Telephone Company Limited, The New Brunswick Telephone Company Limited (NBTel), Newfoundland Telephone Company Limited (Newfoundland Tel), Northwestel Inc. and Telesat Canada (Telesat) as parties to the proceeding. These companies and the respondents are referred to below as "the carriers".

The Commission received submissions from each of the carriers and from a number of interveners, including the following: Call-Net Telecommunications Ltd. (Call-Net), Cam-Net Communications Ltd. (Cam-Net), Canadian Business Telecommunications Alliance (CBTA), Communications Competition Coalition, Competitive Telecommunications Association (CTA), Comtois & Carignan, Consumers' Association of Canada (CAC), Fonorola Inc. (Fonorola), Government of Ontario (Ontario), IBM Canada Ltd. (IBM), Information Technology Association of Canada (ITAC), Telecommunications Workers' Union (TWU), The Canadian Bankers'Association (CBA), and The Royal Bank of Canada (Royal Bank).

III BACKGROUND

In its 1987 document, A Telecom- munications Policy for Canada, the Department of Communications (DOC) stated that a policy goal would be to facilitate the efficient use of the network infrastructures of existing facilities-based carriers by ensuring the carriage of Canadian telecommunications traffic on Canadian network facilities. DOC also stated, in its November 1986 Statement of Telecommunications Policy Respecting Teleglobe Canada (Teleglobe Policy Statement), that it is in the national interest that telecommunications services between locations in Canada and from Canada to other locations be provided over Canadian-owned and controlled facilities to the greatest extent feasible.

In the Teleglobe Policy Statement, DOC also indicated that it would rely on conventional regulatory mechanisms, specifically, on the Commission's authority to approve connecting agreements between carriers, to ensure that overseas services originating or terminating in Canada are routed via Teleglobe facilities, consistent with the government's long-standing policy favouring the carriage of Canadian traffic on Canadian facilities.

Provisions to restrict domestic and overseas bypass are included in interconnection agreements approved by the Commission between Telecom Canada members and AT&T, MCI and U.S. Sprint, between Unitel and various U.S. carriers, and in agreements between Telesat Canada and various American service providers.

IV POSITIONS OF PARTIES

A. Carriers' Positions - Overview

The carriers supported the policy of carrying Canadian traffic on Canadian facilities. They emphasized that the most effective long-term approach for enforcing that policy is to reduce or eliminate the incentives for bypass. In their view, the most effective means of accomplishing that end is by pricing Canadian interexchange services in line with U.S. interexchange services.

The carriers considered that, until the economic incentive to bypass is reduced, and despite enforcement difficulties, efforts should be made to discourage use of private line facilities contrary to government policy concerning the carriage of Canadian traffic on Canadian facilities. To this end, the carriers generally supported, as a short-term solution, Teleglobe's application for tariff amendments.

Bell noted that Item 3000 of its General Tariff has for many years stated that interexchange services and channels between Bell territory and the United States are "provided only for communication between one or more points in Canada and one or more points in the United States". Bell submitted that, although its tariff already prohibits bypass, it should be amended so as to leave no doubt regarding the restrictions that apply to the use of transborder services. To this end, Bell also proposed clarifying amendments to Item 3000.

Bell referred to Applications by Fonorola Inc. and ACC Long Distance Ltd., Telecom Decision CRTC 90-19, 4 September 1990 (Decision 90-19), which permitted access to Teleglobe's overseas message toll network using the private lines of the domestic carriers. Bell noted that, in that Decision, the Commission confirmed that resellers leasing services from carriers are subject to both the conditions in the carriers' tariffs and the underlying interconnection agreements between carriers. Bell also submitted that government policy clearly applies to a customer's use of the company's service.

Unitel submitted that, since Teleglobe filed its application, the Commission has made significant strides in dealing with the economic incentive for bypass (in Decision 90-19, as well as in Telecom Decision CRTC 90-22, 3 October 1990, and Telecom Letter Decision CRTC 90-15, 24 October 1990, restructuring the competitive network rates of Bell, B.C. Tel and Unitel). However, because the financial integrity of Canadian networks depends on a strong anti-bypass policy, Unitel submitted that, in addition to amending the carriers' tariffs, the Commission should amend the resale and sharing rules to preclude the use of resold facilities for bypass.

Telesat stated that Teleglobe's application is restricted to terrestrially-based services, and that Teleglobe had not asked it to amend its tariffs in order to address the question of bypass. Telesat stated that it would limit its comments to satellite-based services.

Telesat noted that transborder fixed satellite service is governed by the 1972 Exchange of Letters between the Canadian and American governments and by the 1982 Addendum to those Letters. Telesat noted that, subsequent to the 1982 Addendum, Telesat received a letter from the Minister of Communications charging it with entering into arrangements with recognized American providers of transborder services. Telesat noted that such arrangements are to ensure "equitable use" of Canadian space segment facilities (relative to American facilities), as well as "proportional revenue sharing" between Telesat and recognized American providers.

Telesat stated that the requirements for equitable use and proportionalrevenue sharing are supposed to minimize the threat of bypass. However, since 1982, market forces and technological developments have increased both the demand and the opportunity for bypass. Telesat's examples of the market forces at work included the extension of U.S.-based satellite networks in Canada and the movement of Canadian data bases to the United States.

Telesat also submitted that the 1988 Canada-U.S. Free Trade Agreement (FTA) has placed pressure on the Canadian transborder fixed satellite service policy, even though basic telecommunications services are not part of the FTA.

B. Positions of Interveners - Overview

The interveners, except ITAC and Ontario, opposed Teleglobe's application. A number of interveners, including Call-Net, CBA, IBM, and Fonorola, expressed general support for the policy of carriage of Canadian traffic on Canadian facilities, but had specific concerns relating to the application.

The interveners agreed that the most effective means of fostering the use of Teleglobe facilities is to provide users with the flexibility and the appropriate price incentives to use those facilities, whether obtained from resellers of Teleglobe facilities or from Teleglobe directly.

ITAC, like other interveners, submitted that Canadian telecommunications prices should be allowed to move towards those in international markets. However, ITAC considered that Teleglobe's application should be granted to remind customers of the intent of the federal policy. Ontario supported Teleglobe's application, but noted that any tariff prohibition of bypass may be of limited effectiveness, given economic incentives that result from rate disparities.

Resellers expressed concern that the restrictions proposed by Teleglobe focus on bypass by resellers. They submitted this would be discriminatory, and stated that there is no evidence on the record to suggest that resellers alone route Canada-overseas traffic via the United States. Call-Net submitted that all large users have the same economic incentives to route such traffic in this fashion.

CTA stated that some of its members provide Canada-overseas traffic via U.S. gateways as a minor supplement to their Canada-U.S. business. Traffic is routed in this manner due to customer demand for less costly overseas rates.

IBM discussed the design of international private networks, focusing on the practice whereby traffic to lower-volume locations is aggregated through one or more nodes in other countries. IBM stated thatthe carriers have traditionally considered the circuit to terminate at the first store-and-forward node. IBM urged the Commission to reaffirm the carriers' existing policies regarding enhanced, store-and-forward networks so that traffic to low-volume locations can continue to be routed through other countries.

Royal Bank argued that the existing legal, regulatory and policy framework (including Bell General Tariff Item 3000) does not prevent carriers' customers, including resellers, from accessing overseas services through U.S. facilities, and that the existing tariff should not be amended to include such a restriction. It submitted that Bell's Item 3000 and the anti-bypass provisions of various interconnecting agreements are intended to ensure that the respondents themselves do not bypass Teleglobe or use American facilities for Canada-Canada traffic, rather than investing in Teleglobe's, or their own, network infrastructures. Royal Bank submitted that there is no evidence that the tariff was designed to apply to customers' use of Bell's network or to overseas access.

Royal Bank submitted that the government permitted Teleglobe a limited monopoly, restricted geographically (to Canadian operators), by time (at least five years) and facilities (those requiring radio and cable licenses). Royal Bank argued that, because the overseas access to which Teleglobe objects is neither furnished inCanada nor provided using Canadian facilities (the link being made in the United States using American facilities), Teleglobe is pursuing a change in government policy.

Royal Bank, supported by Call-Net, also submitted that the Commission does not have jurisdiction to prohibit resale of overseas access via U.S. carriers because customers, including resellers, are not "companies" under the Railway Act. Royal Bank further submitted that Teleglobe has not provided evidence of revenue erosion and that, notwithstanding the question of the Commission's jurisdiction in this matter, the Commission should not act without such evidence. CBTA agreed with this submission.

TWU submitted that resellers are by law required to file tariffs of tolls and that, if they did so, the Commission could effectively implement the federal government's policy regarding bypass.

A number of parties to this proceeding noted that the FTA permits the transmission of Canadian-originated data traffic to the United States for processing or enhancement before it is delivered to an overseas destination or back to Canada.

C. Issues Identified in Public Notice 1990-79

1. Non-public Voice and DataTraffic

The carriers and most interveners generally agreed that Teleglobe's arguments in support of its application apply to data traffic, non-interconnected traffic, and traffic carried on private networks. Several carriers noted that, given the increasing use of digital services, remedies that distinguish between voice and data may not be meaningful in the long term.

IBM and CAC believed that restrictive rules are not required for data, non-interconnected and private network traffic because the price incentives and limited potential customer base are far less attractive to resellers in these areas than they are for interconnected voice traffic. Bell disagreed, noting that large Canada-U.S. price differences still exist and that, in any event, the level of price incentive has no bearing on the appropriateness of government policy and the relevant agreements and tariffs.

2. Canada-Canada Bypass

The carriers were in agreement that the concerns raised by Teleglobe regarding Canada-overseas traffic carried through the United States are equally relevant to Canada-Canada traffic carried through the United States (Canada-Canada bypass).

Call-Net and Cam-Net opposed the extension of Teleglobe's proposal to Canada-Canada traffic. Call-Netsubmitted that, until resellers are positioned to serve all regions of Canada using Canadian facilities, a restriction on the use of American facilities is unfair. Bell submitted that the issue is not the ability to terminate, since resellers can terminate such traffic using message toll service (MTS), but rather price. Bell further submitted that this limitation was reflected in Resale and Sharing of Private Line Services, Telecom Decision CRTC 90-3, 1 March 1990, wherein, stated the company, the Commission granted resellers a contribution discount on interexchange private lines used to provide MTS-like services.

CTA stated that the record of this proceeding contains no evidence of resellers engaging in Canada-Canada bypass. CTA submitted that it would be discriminatory to deny resellers options similar to those available to the carriers, options that permit bypass for reasons of operational flexibility. Bell disagreed with CTA, submitting that there are many statements noting the strong incentives for bypass and implying that it is occurring. Bell also referred to the proceeding announced in CRTC Telecom Public Notice 1990-73, 3 August 1990, to consider the applications of Unitel and of B.C. Rail Telecommunications/Lightel Inc. (BCRL) to provide public long distance voice services. Bell submitted that BCRL stated in that proceeding that Lightel and Call-Net (a member of CTA) engage in both Canada-Canada and Canada-overseas bypass. Bell further opposed CTA'ssubmission that resellers should have the same options as the carriers to use U.S. facilities for operational flexibility, noting that options for diversity and survivability are available to resellers from Canadian carriers.

3. Enforcement of Bypass Restrictions

As noted above, the carriers were in general agreement that the most effective long-term remedy for bypass is the establishment, to the greatest extent possible, of parity between Canadian and American interexchange rates. Interveners generally agreed with this proposition. No party submitted that restrictions on bypass could be completely effective.

Bell submitted that, because there are reasons other than price for bypass, a combination of approaches, together with appropriate pricing, should result in reasonably effective and uniform prevention of bypass. Bell stated that it is investigating technological solutions, directed at routing information, to monitor cross-border circuits.

The carriers generally considered the use of customer affidavits and periodic monitoring of services to be inappropriate. NBTel submitted that the Commission should rely on the integrity of customers to complywith the tariff restrictions, and that it should deal with any non-compliance as it is identified. B.C. Tel considered that anti-bypass provisions in interconnecting agreements are of doubtful effectiveness.

Bell submitted that restrictions exist to give effect to government policy, and that cost or difficulty of enforcement do not determine this basic policy. Bell submitted, however, that it is appropriate to take into account cost and effectiveness in identifying specific procedures for implementing such a policy. Bell noted that most legislative or regulatory enforcement programs do not expect to prevent all violations. However, Bell suggested that a reasonable level of enforcement is necessary, and supported, in principle, the view expressed by Newfoundland Tel that "the fundamental policy objective ... is sufficiently important on a national basis to warrant adoption of any reasonable policing procedures needed to ensure its attainment."

Interveners generally agreed that it would be very difficult to enforce effectively and uniformly restric- tions on the use of Canada-U.S. private lines.

Cam-Net expressed concern that the proposed restrictions are likely to give rise to selective enforcement against resellers. Fonorola submitted that, as evidenced by material submitted by Unitel with respect to AT&T's Megacom service, carriers have been unable to enforceinterconnection agreements presently in place.

4. Significance of Bypass

Many carriers and interveners commented on the difficulty of quantifying the extent of bypass. The carriers generally believed that the potential for bypass has increased in the last few years and will continue to increase. Many interveners, noting that the carriers had not provided figures to suggest the volume of traffic and revenue now or potentially lost to bypass, took the position that the carriers had failed to establish that any significant amount of bypass is occurring.

The carriers stated that there are increased incentives and opportunities to bypass, including a stronger Canadian dollar, the active presence of resellers in the Canadian market, the ability of service providers and others to build fibre optic networks for which there are no licensing constraints, and the extension into Canada of U.S.-based carriers such as AT&T. Bell and Teleglobe suggested that the entry of American facilities-based carriers through affiliated Canadian resellers could have a significant impact on the volume of bypass. Teleglobe commented that, unlike such resellers, Teleglobe must set rates to cover all long-run causal costs, including an appropriate contribution to common costs.

Certain carriers noted that, regardless of rate incentives for bypass, it may be operationally more efficient for resellers or private users to have all traffic routed through the United States. IBM considered that such incentives to bypass apply equally to the routing of American traffic through Canada.

Bell submitted that the potential for routing Canada-overseas traffic through the United States would appear to be significant, since the entire demand projected by Teleglobe for its proposed Globedirect service appears to be based on winning back traffic now bypassing Teleglobe through the United States.

Newfoundland Tel was of the view that, while the financial impact of bypass is a consideration, the basis for the government's policy is more closely associated with issues of national sovereignty.

CBTA noted that, while the disparity between Canadian and American rates could give a significant cost advantage to those with access to U.S. facilities at U.S. rates, there are also considerable disincentives to route traffic over U.S. networks (for example, the cost of access to the U.S. border and the lack of contact with U.S. carriers to remedy network failure). In CBTA's view, users are aware of and generally comply with the existing prohibitions on routing traffic through the United States.

Contrary to the position of several carriers, some interveners suggested that bypass will become less rather than more attractive. They based this view on the consideration that the new Canada-Canada resale market will provide users with low cost alternatives for Canada-Canada traffic, and that reasonable access to Teleglobe as a result of Decision 90-19 will permit expanded opportunities for Canada-overseas traffic. ITAC submitted that the bypass phenomenon is simply not sufficiently large, now or potentially, to do more than serve as a signal to the Commission that Canadian pricing is out of line with alternatives readily available elsewhere.

5. Alternative Approaches

There was general consensus among both carriers and interveners that rate action is the most effective, albeit long-term, remedy for bypass.

The carriers identified and discussed several approaches, including technological and pricing solutions, tariff restrictions and interconnection agreements, the prohibition of any cross-border circuits that have access to the public switched telephone network, affidavits provided by carriers' customers (including resellers) and DOC's microwave licensing policy.

Certain interveners submitted that technological approaches involvingthe monitoring of customers are inappropriate and undermine customer privacy. Support was specifically expressed for NBTel's position that the Commission should rely on the integrity of the customer to comply with the tariff restrictions, and that it should deal with any non-compliance as it is identified.

D. Teleglobe's Reply

Teleglobe agreed with Bell that the restrictions on the use of Canada-U.S. private lines exist to give effect to government policy. Teleglobe proposed that the carriers institute a system of random auditing, similar to those in place for the certification of customer-owned equipment and the administration of contribution charges related to resale and sharing. Teleglobe requested that the carriers be required to file procedures for enforcing its requested tariff restrictions.

In response to resellers' concerns regarding selective enforcement, Teleglobe submitted that its proposal could be applied without discrimination, but that advertising by resellers of the availability of Canada-overseas service via the United States would make bypass activity readily apparent and would necessarily attract carrier response to ensure tariff compliance.

Teleglobe stated that many of the comments filed in this proceeding confirm the practical impact of fundamental differences between Canada and the United States interms of public policy and regulatory and fiscal approaches. Teleglobe added that there are a number of factors outside its direct control that mitigate against its ability to restrain bypass.

E. Further Comment

In a further comment dated 5 February 1991, Bell took issue with Teleglobe's submission that carriers should be required to file procedures for enforcing bypass prohibitions. Bell noted that this was not part of Teleglobe's original application, and stated that it is Bell's responsibility to ensure compliance with its tariffs. Accordingly, Bell submitted that Teleglobe's submission on this matter should not be considered in the disposition of the application.

V CONCLUSIONS

The carriers and many of the interveners in this proceeding expressed support for the view that traffic originating or terminating in Canada should make maximum use of the facilities of Canadian carriers. The Commission agrees with this view. Furthermore, the Commission considers this view equally applicable to data traffic, non-interconnected traffic and to traffic carried on private lines. Finally, the Commission considers that the concerns raised by Teleglobe with respect to Canada-overseas traffic carried through the United States are equally relevant to Canada-Canada traffic carried through the United States.

Many carriers and interveners commented on the difficulty of quantifying the traffic and revenue that Canadian carriers lose because of bypass. The Commission recognizes the difficulty of quantifying the extent of the bypass problem. However, the Commission considers it apparent that incentives to bypass Canadian facilities currently exist, and that avenues for responding to those incentives are increasingly available to users of telecommunications services.

A number of parties referred to the FTA, and submitted that it permits the transmission of data traffic to the United States for processing or enhancement before being delivered either to an overseas destination or back into Canada. However, the FTA expressly permits both Canada and the United States to maintain or introduce measures intended to maximize the carriage of basic traffic on their respective national telecommunications networks, when that traffic originates or terminates within their own national boundaries.

Concerns were expressed in this proceeding regarding the enforcement of tariff provisions prohibiting bypass. Virtually all who commented submitted that the most effective long-term solution for the reduction of bypass is the lowering of Canadian rates. The Commission endorses this view. However, the Commission is also of the view that adding specific prohibitions to the carriers' tariffs would assist them in ensuring that basic traffic originating or terminating in Canada makes maximum use of Canadiancarriers' facilities.

On the basis of the foregoing, the Commission concludes that the carriers' tariffs should be amended to prohibit the routing by customers of basic service traffic by way of the United States, when that traffic originates or terminates in Canada. Further, the Commission considers that the task of enforcement would be assisted if all applicable form contracts and future customer-specific contracts contained the express wording of the tariff prohibition. The inclusion of the prohibition in the carriers' contracts would ensure that customers have full knowledge of it.

Finally, the Commission does not consider it appropriate that the carriers be required, as proposed by Teleglobe, to file procedures for enforcing the tariff prohibitions. The Commission agrees with Bell that, in the first instance, it is the responsibility of the carriers to ensure compliance with their tariffs.

Based on the foregoing, the Commission directs each of the carriers:

(1) to file, by 26 July 1991, proposed tariff revisions reflecting the above;

(2) to file for approval, within thirty days of approval of such tariff provisions, revised versions of all applicable form contracts; and

(3) to include such tariff provisions, forthwith upon their approval, in all relevant customer-specific contracts.

Allan J. Darling
Secretary General