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Telecom Decision

Ottawa, 4 August 1994
Telecom Decision CRTC 94-14
FORBEARANCE - SALE OF TERMINAL EQUIPMENT BY CANADIAN CARRIERS
I BACKGROUND
In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission established the regulatory treatment for the sale of new and in-place terminal equipment by the carriers then under its jurisdiction. The regulatory regime included a requirement that sales of each model of new terminal equipment be at a price not less than a floor price filed with the Commission in confidence. This floor price had to be shown to be not less than the associated costs. The carriers were also required to file detailed semi-annual reports summarizing their sales activities.
In Floor Price Filing Requirements for the Sale of New Terminal Equipment, Telecom Decision CRTC 93-3, 7 April 1993 (Decision 93-3), the Commission relieved BC TEL, Bell Canada (Bell), Maritime Tel and Tel Limited (MT&T) and Newfoundland Telephone Company Limited (Newfoundland Tel), all of whom had an approved floor price methodology in place, of the requirement to file floor prices for new equipment and the related semi-annual reports. However, the Commission required that these companies remain in a position to generate floor prices in order to respond to any complaints that may arise as to their pricing of sales of new terminal equipment. Subsequently, the Commission made similar determinations with respect to AGT Limited (AGT), by letter dated 13 September 1993, and Manitoba Telephone System, in Telecom Order CRTC93-1158, 31 December 1993.
On 31 August 1993, the Commission issued Forbearance - Sale of Terminal Equipment by Canadian Carriers, Telecom Public Notice CRTC 93-57 (Public Notice 93-57). In that Public Notice, the Commission noted that, under the Railway Act, the price at which terminal equipment was sold was not considered a "toll" and that, accordingly, there had been no statutory requirement for the companies to obtain Commission approval for the charging of such prices. The Commission went on to state the view that, under the Telecommunications Act (the Act), to come into effect on 25 October 1993, the sale of terminal equipment by a Canadian carrier would likely constitute the provision of a "telecommunications service" and thus would require the filing of tariffs setting out the rates to be charged. The Commission noted, however, that section 34 of the Act permitted it to refrain from the exercise of certain of its powers and the performance of certain of its duties in relation to a telecommunications service or class of services provided by a Canadian carrier. Pursuant to section 34, the Commission proposed to refrain from exercising certain powers and performing certain duties with respect to the sale of terminal equipment by Canadian carriers.
Section 34 of the Act states as follows:
34.(1) The Commission may make a determination to refrain, in whole or in part and conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives.
(2) Where the Commission finds as a question of fact that a telecommunications service or class of services provided by a Canadian carrier is or will be subject to competition sufficient to protect the interests of users, the Commission shall make a determination to refrain, to the extent that it considers appropriate, conditionally or unconditionally, ... in relation to the service or class of services.
(3) The Commission shall not make a determination to refrain ... if the Commission finds as a question of fact that to refrain would be likely to impair unduly the establishment or continuance of a competitive market for that service or class of services.
Pursuant to section 34, the Commission proposed to refrain from exercising powers and performing duties as would otherwise be required by the following sections of the Act:
(1) Section 24, which specifies that the offering and provision of any telecommunications service by a Canadian carrier are subject to any conditions imposed by the Commission or included in a tariff approved by the Commission;
(2) Section 25, which specifies, among other things, that no Canadian carrier shall provide a telecommunications service except in accordance with a tariff filed with and approved by the Commission, specifying the rate or the maximum and minimum rate, or both, to be charged;
(3) Subsection 27(1), which requires that every rate charged by a Canadian carrier for a telecommunications service be just and reasonable, and related subsections 27(5) and 27(6); and
(4) Section 31, which provides that no limitation of a Canadian carrier's liability in respect of a telecommunications service is effective unless it has been authorized or prescribed by the Commission.
In Public Notice 93-57, it was the Commission's preliminary view that:
(1) a determination to refrain regarding the above powers and duties would be consistent with the Canadian telecommunications policy objectives set out in section 7 of the Act, and, in particular, with the objective "to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective";
(2) the sale of terminal equipment by Canadian carriers is subject to competition sufficient to protect the interests of users (i.e., prospective purchasers); and
(3) a determination to refrain would not be likely to impair unduly the continuance of a competitive market for that service.
The Commission did not propose to refrain from the exercise of any power or the performance of any duty under subsections 27(2) and 27(4), which relate to unjust discrimination and undue or unreasonable preference or disadvantage. Accordingly, the existing regulatory regime governing the sale of terminal equipment, as established in Decision 82-14 and modified by Decision 93-3, would continue to apply.
In Public Notice 93-57, the Commission invited interested parties to comment on its view that the sale of terminal equipment by a Canadian carrier would constitute the provision of a telecommunications service within the meaning of the Act and on any aspect of its proposal to refrain.
On 5 October 1993, the Commission received comments from the following parties: AGT; Association of Competitive Telecommunications Suppliers (ACTS); Canadian Business Telecommunications Alliance (CBTA); Director of Investigation and Research, Bureau of Competition Policy (the Director); Northwestel Inc. (Northwestel); Smiston Communications Ltd. (Smiston); Stentor Resource Centre Inc. (Stentor), on behalf of AGT, BC TEL, Bell, The Island Telephone Company Limited (Island Tel), MT&T, The New Brunswick Telephone Company Limited (NBTel) and Newfoundland Tel; Telesat Canada (Telesat) and Unitel Communications Inc. (Unitel). On 19 October 1993, the Director, Northwestel, Stentor, Telesat and Unitel filed reply comments.
II POSITIONS OF PARTIES
The Commission's proposal to forbear, as set out in Public Notice 93-57, was supported by AGT, the Director, Northwestel, Stentor and Telesat, and opposed by ACTS, CBTA, Smiston and Unitel.
ACTS stated that, while forbearance would be consistent with the objectives of the Act, as required by subsection 34(1), it was a consideration of the criteria in subsections 34(2) and (3) that would determine if forbearance was in the public interest. ACTS cited the Commission's findings in Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993, and in Decision 93-3, as well as evidence filed in the proceeding initiated by Review of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992 (the Regulatory Framework proceeding), in support of its view that carriers remain dominant in the market and that there are valid concerns that they have the ability to engage in predatory pricing. ACTS submitted that, while there is sufficient competition to protect users in the short run, in the long run, users would be subject to monopoly abuse once the carriers recaptured the market.
CBTA was also not convinced that there is sufficient competition in the terminal equipment market. CBTA was concerned that there would be cross-subsidization from monopoly service revenues. CBTA also expressed doubts as to the effectiveness of Phase III results as a basis for corrective action regarding unfair competition, noting that Phase III results are retrospective by design and that any such action would be taken well after the fact.
Unitel submitted that, in order to fulfil its obligation and ensure that any forbearance is consistent with the intention of the Act, the Commission should base a decision to forbear on a defensible competitiveness test. Unitel stated that this test should include a set of explicit criteria that would allow the Commission and interested parties to determine the relative competitiveness of a given market. Unitel argued that the Commission would be in a better position to implement such criteria after its decision in the Regulatory Framework proceeding.
In reply, the Director stated that the Commission is seeking to avoid introducing regulation where it did not previously exist. The Director noted that, if the stated objective of the Canadian telecommunications policy in the Act is to foster increased reliance on market forces for the provision of telecommunications services, it would be contrary to the intent of the Act for the Commission to increase the burden of regulation due only to the expanded definition of "telecommunications service". With respect to criteria as to competitiveness, the Director anticipated that such criteria would evolve in due course through the Regulatory Framework proceeding and from the Commission's future experience. Further, the Director stated that the Commission has had an opportunity in other proceedings, including the Regulatory Framework proceeding, to inform itself as to the state of competition in the equipment sale market. The Director submitted that, in the circumstances, the Commission should not delay its determination to forbear from regulation in the limited manner proposed in Public Notice 93-57.
In reply, Stentor submitted that the most relevant method to judge the competitiveness of a market is to examine its performance over a period of time. Stentor stated that the outright sale market has operated for eleven years with only a floor price requirement without a demonstrable reduction in competition. Stentor noted that the Commission has received relatively few complaints regarding the conduct of the companies or the operation of this market. Further, in Decision 93-3, the Commission eliminated the requirement to file floor prices on a regular basis without demonstrable adverse effects.
With respect to the Commission's proposal not to forbear from subsections 27(2) and (4), Telesat stated that the Commission's statutory power to refrain "in whole or in part" would only permit it to refrain from exercising powers or performing duties under the whole of any of the sections cited in subsection 34(1), i.e., the Commission does not have the power to refrain with respect to particular subsections.
Stentor submitted that, in order to permit Canadian carriers to compete in a meaningful and effective manner, it would be appropriate for the Commission to also refrain from the exercise of any power and the performance of any duty under subsections 27(2) and (4) of the Act. Stentor stated that the Commission's ability to observe and address the conduct of the telephone companies in the outright sale segment of the terminal equipment market would not be reduced by the inclusion of these subsections in a forbearance order; rather, the jurisdiction of the Commission would remain identical, tied to the justness and reasonableness of those rates that are tariffed.
III CONCLUSIONS
In Public Notice 93-57, the Commission stated its preliminary view that the sale of terminal equipment by a Canadian carrier would constitute a telecommunications service within the meaning of the Act. None of the parties disputed this view. The Commission finds that such sale would indeed constitute a telecommunications service.
Regarding Unitel's argument concerning the need for a competitiveness test, the Commission notes that subsections 34(1), (2) and (3) of the Act set out the conditions governing a determination on its part to refrain from exercising powers or performing duties under the Act. These sections refer only to the Commission making certain findings of fact; thus, the Act does not require it to develop and apply a particular test or a particular set of criteria in order to refrain. Rather, the Act requires an assessment of the facts and circumstances of each case. While criteria relevant to an assessment of market competitiveness are under consideration in the Regulatory Framework proceeding, the Commission does not consider it necessary to attempt to delineate, in advance, particular criteria by which to assess the competitiveness of the market under consideration in this proceeding.
As noted earlier, the Commission was of the view when it issued Public Notice 93-57 that forbearance with respect to the sale of terminal equipment by Canadian carriers would be consistent with the Canadian telecommunications policy objectives set out in section 7 of the Act, particularly the objective "to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective." The Commission notes
that there was general agreement among the parties with this view.
In this proceeding, ACTS referred to the Commission's findings in Decision 93-3 that the telephone companies remained dominant in the market and that there are valid concerns that the carriers have the ability to engage in predatory pricing. ACTS also noted that Bell's Competitive Terminal - Multi-line and Data [CT(MD)] category has recently shown shortfalls, and attributed this to the impact of terminal sales.
The Commission notes that Bell's 1992 Phase III results, filed 30 September 1993, show a surplus of $53.4 million for the CT(MD) category, and that updated forecast results filed on 13 May 1994 project surpluses for 1993 and 1994. Furthermore, in the proceeding leading to Decision 93-3, it was established that Bell's outright sales of terminal equipment constitute only a small proportion of this category (less than 10%). Thus, sales activity has a small impact on the overall performance of the category.
In Decision 93-3, the Commission noted that Phase III results can reveal a shortfall in a competitive category, and thus the presence of a cross-subsidy, in any given year. However, the Commission also stated that, while Phase III results provide information about possible cross-subsidies from monopoly services, they do not address the potential for anti-competitive, below-cost pricing within a category. The Commission considered that valid concerns had been raised regarding the ability of telephone companies, who continue to be dominant suppliers of terminal equipment, to engage in below-cost pricing for certain items or in certain geographical markets, while nonetheless avoiding shortfalls in the Competitive Terminal categories.
On the basis of the above, the Commission found that eliminating a minimum pricing requirement would entail a risk of predatory pricing on the part of the telephone companies, with the attendant impact that this would have on competitors and on the overall level of competition in the terminal equipment market. However, the Commission was not persuaded in Decision 93-3 that the removal of the requirement that floor prices be filed would increase the likelihood that the telephone companies would engage in selling below cost. Accordingly, the Commission determined that it was no longer necessary to require the regular filing of floor prices or semi-annual reports by the carriers with approved floor price methodologies. The Commission found that the complaints process (by which it deals with instances of below-cost pricing), could continue to function properly, provided that the telephone companies in question remained in a position to provide floor prices, based on their approved methodologies, in order to respond to any complaints that might arise.
In this proceeding, parties made reference to information concerning the terminal equipment market filed in the Regulatory Framework proceeding. The data in question shows, among other things, that the number of terminal equipment suppliers has varied through the years. In the Commission's view, this is reflective of a market with strong competition and with relatively few barriers to entry.
Information as to market share filed in the Regulatory Framework proceeding shows no sign that competition in the terminal equipment market is diminishing, or that there is a danger that the market will be re-monopolized. Further, should the market share of the telephone companies increase to a level where they could attempt to raise prices, there would be incentives for new competitors to enter the market and counter any such move. In this context, the Commission notes that AGT has found the terminal equipment supply market to be developed to such an extent in its territory that it has withdrawn from the market.
In Public Notice 93-57, the Commission proposed, in essence, to continue the regime that has applied to the sale of terminal equipment since Decision 82-14, the only modification being that approved in Decision 93-3. As pointed out by Stentor, and as indicated by the information filed in the Regulatory Framework proceeding, the terminal equipment market has become and remained competitive under that regime. In the Commission's view, the continuing existence of the terminal equipment supply business for that length of time indicates that this market is competitive and will likely remain so.
In Public Notice 93-57, the Commission stated that it was not proposing to refrain from the exercise of any power or the performance of any duty under subsections 27(2) and 27(4), which relate to unjust discrimination and undue or unreasonable preference or disadvantage. With regard to Telesat's position that forbearance with respect to only certain subsections would be inconsistent with the wording of section 34, the Commission notes that subsections 34(1), (2) and (4) of the Act authorize the Commission to refrain, "in whole or in part" from "any power" or the performance of "any duty" under sections 24, 25, 27, 29 and 31 "to the extent that it considers appropriate", and to declare that those sections are inapplicable "to the extent" of their inconsistency with a determination by the Commission to so refrain. In the Commission's view, this wording clearly grants it the authority to refrain with respect to individual subsections.
Stentor submitted that it is not necessary for the Commission to retain the use of subsections 27(2) and (4) in order to prevent cross-subsidization. Stentor based this view on what it argues to be the Commission's broad power to prevent discrimination against monopoly subscribers inherent in its regulation of monopoly services.
The Commission considers it inappropriate to refrain from exercising its powers or performing its duties under subsections 27(2) and (4) since, under the current regulatory regime, valid concerns remain regarding the incentives for the telephone companies to engage in below-cost pricing for certain items or in certain geographical markets. Since, in the Commission's view, it is subsections 27(2) and (4) that permit it to deal with any such instances through the complaints process, to refrain under these subsections, absent other regulatory initiatives, would undermine the Commission's ability to maintain the health of the terminal equipment market place.
In addition, the Commission considers it appropriate to retain section 24 for the purpose of placing general conditions on the sale of terminal equipment by Canadian carriers, should it prove appropriate to do so in the future.
Based on the above, pursuant to subsection 34(1), the Commission finds as a question of fact that to refrain from exercising powers and performing duties under sections 25 and 31 and subsections 27(1), (5) and (6) with respect to the sale of terminal equipment by Canadian carriers would be consistent with the Canadian telecommunications policy objectives. Pursuant to subsection 34(2), the Commission finds that the sale of terminal equipment is subject to competition sufficient to protect the interests of users, so that it is appropriate to so refrain; further, with reference to subsection 34(3), the Commission finds that to so refrain would not be likely to impair unduly the continuance of a competitive market. Pursuant to subsection 34(4), effective the date of this Decision, sections 25 and 31 and subsections 27(1), (5) and (6) of the Act do not apply to the sale of terminal equipment by Canadian carriers.
The Commission notes that the question of forbearance with respect to terminal equipment is under consideration in the Regulatory Framework proceeding, along with many other proposals for regulatory reform. Based on determinations in that proceeding, the Commission may find it appropriate to forbear further with respect to the sale of terminal equipment.
Allan J. Darling
Secretary General
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