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Telecom Decision

Ottawa, 3 October 1994
Telecom Decision CRTC 94-20
TELESAT CANADA - FORBEARANCE FOR DIGITAL VIDEO COMPRESSION SERVICES
I BACKGROUND
On 5 October 1993, Telesat Canada (Telesat) filed an application, pursuant to section 14 of the Telesat Canada Reorganization and Divestiture Act (the Telesat Reorganization Act), seeking forbearance by the Commission with respect to the provision of Digital Video Compression (DVC) Services. Specifically, Telesat requested (1) the detariffing of its Special Assembly Tariff 8380 for DVC Services and the ability to provide similar services to other customers without filing tariffs or obtaining prior specific approval from the Commission, and (2) relief from various sections of the Railway Act requiring just and reasonable tolls, rates or charges, and prohibiting unjust discrimination or the giving of any undue or unreasonable preference or advantage.
On 25 October 1993, the Telecommunications Act (the Act) came into force. The Act repealed, among other things, section 14 of the Telesat Reorganization Act and various sections of the Railway Act. However, the Act contains requirements similar to those from which Telesat sought relief. In addition, 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.
The sections enumerated in section 34 can be summarized as follows:
(1) section 24: 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: among other things, 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 or minimum rate, or both, to be charged;
(3) section 27: among other things, every rate charged by a Canadian carrier for a telecommunications service shall be just and reasonable, and the Canadian carrier shall not unjustly discriminate or give an undue or unreasonable preference in relation to the provision of a telecommunications service or the charging of a rate for it;
(4) section 29: no Canadian carrier shall, without the prior approval of the Commission, give effect to any agreement or arrangement, whether oral or written, with another telecommunications common carrier respecting the interchange of telecommunications, the management or operation of facilities or the apportionment of rates or revenues; and
(5) section 31: 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.
On 23 December 1993, the Commission issued Telecom Public Notice CRTC 93-69 (Public Notice 93-69), in which it stated that it considered it appropriate to treat Telesat's application as a request that the Commission refrain pursuant to section 34 of the Act. The Commission sought comment on the following issues:
(1) whether the Commission should refrain from the exercise of powers or the performance of duties in connection with DVC Services provided by Telesat;
(2) if so, which of the powers and duties noted in section 34 of the Act should the Commission refrain from exercising or performing; and
(3) for each power or duty, whether the Commission should refrain in whole or in part, and conditionally or unconditionally.
II TELESAT'S APPLICATION
Telesat stated that its application is consistent with the regulatory framework set out in various past rate cases (i.e., Telecom Decision CRTC 84-9, 20 February 1984, Telecom Decision CRTC 90-28, 18 December 1990, and Telecom Decision CRTC 92-17, 28 September 1992), and with the criteria for assessing the competitiveness of a market discussed in Teleglobe Canada Inc. - Regulation After the Transitional Period, Telecom Decision CRTC 91-21, 19 December 1991. In the market analysis provided with its application, Telesat emphasized, among other things, that direct competition exists for DVC Services and that its rates are comparable to those of other service providers.
Telesat described DVC as a new technology that converts a video signal to digital form and compresses it so that it requires less bandwidth. Telesat defined the relevant product market as the transmission of video (and associated audio) signals from an origination point to one or more destinations. Telesat stated that typical users of the service would be foundation broadcasters, specialty and pay programmers, regional and national educational broadcasters and newly licensed specialty services. Telesat noted that there are several products and technologies that can provide the service, and that DVC Service was but one of the options available. Further, Telesat stated that, while satellite is the most common system in use for broadcast applications at the present time, the growth of fibre optic networks in Canada has increased the competitive threat in the broadcast signal distribution market.
Telesat noted that its DVC Services would be provided using local loops (arranged through a terrestrial carrier where necessary), encoding and compression equipment, uplinks at one of Telesat's teleports or, alternatively, on the customer's premises, and the Space Segment. Telesat noted that the markets for encoding and compression and uplink elements would be competitive. In particular, Telesat stated that it was aware of several new competitive initiatives that may decrease its share of the existing uplink business, especially as the number of signals increases.
Telesat believed that there would be several providers of DVC service in Canada within the next five years as a result of, among other things, evolution in the provision of digital services and the anticipated increase in the number of channels available. Telesat stated that it continues to face pressure to keep prices low or face a loss of business. In Telesat's opinion, this demonstrates that it does not have, nor can it exercise, market power in the video signal transmission market.
Telesat stated that it would contract for the Space Segment portion in a manner identical to that of any competitor. With respect to the issue of cross-subsidization, Telesat submitted that the Commission's approval of its Phase III Costing Manual establishes a framework preventing the cross-subsidization of competitive services by the monopoly Space Segment; thus, costs from DVC Services would not enter the monopoly rate base.
CFCF Inc. filed comments with respect to Telesat's application on 12 November 1993; Canadian Broadcasting Corporation, Canadian Cable Television Association (CCTA), Canadian Satellite Communications Inc. (Cancom), Canadian Satellite Users Association, Rogers Cable T.V. Limited (RCTV) and Unitel Communications Inc. filed comments on 20 January 1994. Telesat filed a reply on 11 February 1994.
III CONCLUSIONS
As noted by Telesat and other parties, Telesat's provision of DVC Services entails a bundling of various underlying components. Several parties to this proceeding argued that, while Telesat provided a market analysis of "DVC Services" as a whole, that analysis failed to recognize that DVC Services, in fact, consist of a number of separate services operating under different market conditions. Parties generally agreed that encoding and uplink services are subject to a meaningful degree of competition, but expressed concerns as to Telesat's ability to gain an unfair competitive advantage by virtue of its status as a monopoly supplier of Space Segment services. Accordingly, they submitted that each service component should be analyzed separately, and that the bundling of monopoly and competitive services should not be permitted.
Based on the record of the proceeding, the Commission is persuaded that it would be appropriate to refrain from the exercise of powers and the performance of duties under several of the sections enumerated in section 34 in relation to the provision of DVC Services by Telesat. In general, the Commission is satisfied that, of the service elements underlying the provision of the bundled service, all but the Space Segment are subject to competition and are available on competitive terms to any service provider wishing to enter the market to provide DVC service; further, the Commission is satisfied that the monopoly components used in Telesat's provision of DVC Services will continue to be available to competitors on an equitable basis and that Telesat will be unable to derive an unfair competitive advantage from the bundling of monopoly elements with competitive elements. Thus, the Commission is satisfied that the market is, and will continue to be, sufficiently competitive, and that barriers to entry are sufficiently low, that Telesat's provision of these services can, to a large extent, be left to the discipline of the market place. The Commission's specific findings are discussed below.
The Commission is satisfied that there is sufficient competition with respect to encoding and compression that it can forbear without concern that Telesat will derive an unfair advantage from including these elements in a bundled service. The Commission notes that Cancom, CCTA and RCTV generally agreed that the market for DVC encoding services is competitive and were not opposed to this aspect of Telesat's request for forbearance; Cancom was not opposed to forbearance with respect to both encoding and compression.
As to terrestrial facilities, parties were concerned that Telesat would be able to gain an unfair competitive advantage due to the fact that Stentor members have both a monopoly on the provision of local loops and control over Telesat through Alouette Telecommunications Inc. The Commission notes that terrestrial facilities provided by the Stentor companies are subject to regulation and can only be provided to Telesat at tariffed rates. Further, competitors can obtain the same or similar services and facilities, either from Stentor members or from other providers, under similar terms and conditions. Accordingly, the Commission is satisfied that Telesat is not in a position to gain an unfair advantage in the provision of DVC Services through its inclusion of these elements in a bundled service offering.
On a more specific level, parties argued that the Commission should not refrain with respect to section 29, given that Telesat proposes to include terrestrial transmission facilities in the services in question and that terrestrial facilities would be provided to Telesat by other carriers pursuant to agreements.
The Commission notes that Telesat's application pertains only to the provision of DVC Services. The majority of agreements relating to the matters referred to in section 29 are of a general nature, and would not typically be limited, for example, to the interchange of a particular type of telecommunications or the management or operation of facilities underlying only one service. However, should Telesat enter into an agreement or arrangement relating solely to its provision of DVC Services, the Commission does not consider it necessary that Telesat obtain the Commission's approval prior to giving effect to that agreement or arrangement.
With respect to uplinking services, CCTA and RCTV submitted that, if the market for uplinking services is sufficiently competitive, Telesat should apply for the deregulation of all such services. The Commission notes that this issue is currently before it in the proceeding initiated by Telesat Canada - Forbearance for the Sale and Lease of Earth Station Equipment, Telecom Public Notice CRTC 94-6, 8 March 1994. However, in the Commission's view, Telesat's present application raises a narrower issue, specifically, the relevance of the state of the market for uplink services to a determination on the Commission's part as to whether or not to forbear with respect to DVC Services. The Commission does not consider it necessary to rule with respect to the more general issue before making a determination with respect to Telesat's application for forbearance.
RCTV, while of the opinion that there is competition in the provision of uplink services, expressed concern that Telesat could gain market power through its operation of large teleports, from which it derives economies of scale and other benefits. Cancom submitted that uplinks communicating with non-Canadian satellites should be expressly excluded from a forbearance order, since they are provided by Telesat on a monopoly basis.
In general, the Commission is persuaded that, subject to the condition noted below, the market for uplink services is competitive. Further, the Commission notes that the costs associated with operating the teleports are not recovered through rates for the monopoly Space Segment. Thus, in the Commission's view, any advantage that Telesat may obtain from its operation of teleports does not amount to an unfair advantage; further, it is open to competitors to construct competing teleports in order to gain similar economies of scale.
As to Cancom's submission, the Commission notes that Industry Canada allows persons other than Telesat to operate uplinks to U.S. satellites for satellite news gathering, VSAT systems and mobile services, but not for transborder fixed satellite services between Canada and the U.S. Thus, the Commission considers it appropriate to limit its determination to refrain to the provision of DVC Services using Canadian Space Segment facilities where the signal both originates and terminates in Canada. Further, the Commission will not forbear with regard to its powers and duties under section 24, in order to be able to place general conditions on Telesat's provision of DVC Services, should it prove appropriate to do so.
With respect to the Space Segment, parties argued that Telesat could obtain an unfair advantage in the provision of DVC Services through its monopoly control of the bottleneck facility, i.e., the RF channel, and that there is the potential for cross-subsidization from the monopoly satellite service to the competitive services associated with the provision of DVC Services. Parties argued that, if the Commission were to grant Telesat's application for forbearance, the bundling of monopoly satellite services and competitive services should not be permitted.
The Commission recognizes that Telesat may gain increased flexibility and may be able to price its DVC Services more competitively by providing a bundled service. However, as indicated above, this does not necessarily imply that the bundling of the service confers an unfair competitive advantage on Telesat. In the Commission's view, the issue is not whether or not competitive and monopoly services are bundled, but rather whether or not essential or bottleneck services and facilities underlying the bundled service are available to competitors on a non-discriminatory basis.
In this context, the Commission is concerned that it would be possible for Telesat, as the sole supplier of the RF channel, to unjustly discriminate against competitors (or confer an undue preference on itself) with regard to the use of ordering information, the selection of transponder space or technical requirements for interfacing with the RF channel. Accordingly, the Commission will not refrain with respect to subsections 27(2) and (4) of the Act.
As to the other concerns expressed by parties, the Commission notes that, under Telesat's proposal, its DVC Services would, for the purposes of the regulation of RF channel services, be treated under the same approach used for all of Telesat's bundled services. Thus, revenues for the RF channel services used to provide DVC Services will be imputed to the Phase III Space Segment category, based on tariffed rates. To determine the revenues imputed, forecasted demand for DVC Services will be translated into demand for the underlying RF channels. Consistent with the treatment of Telesat's other bundled services, profits or losses associated with the provision of DVC Services will flow through directly to shareholders, since the revenues and costs will be assigned to the Other (i.e., competitive) category. The Commission is satisfied that, under this approach, Telesat will not gain an unfair competitive advantage vis-à-vis its competitors.
Further, the Commission considers that the concerns expressed by interveners about the potential cross-subsidization of DVC Services by the Space Segment portion of Telesat's business are overstated, in light of the fact that Telesat's Phase III Costing Manual, prescribing the appropriate procedures for the costing of the Space Segment, has now received the Commission's approval. As noted by Telesat, its Phase III Costing Manual was subject to extensive and rigorous scrutiny in a public forum. The Commission is satisfied that, in the Phase III Manual, a regulatory mechanism has been put in place that will prevent the cross-subsidization of competitive service by monopoly Space Segment services.
Based on the above, pursuant to subsection 34(1) of the Act, the Commission finds as a fact that to refrain, to the extent set out above, from exercising powers and performing duties under sections 25, 29 and 31 and subsections 27(1), (5) and (6) with respect to Telesat's provision of DVC Services would be consistent with the Canadian telecommunications policy objectives. Pursuant to subsection 34(2), the Commission finds that the provision of DVC Services is subject to sufficient competition 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 establishment or continuance of a competitive market for these services. Pursuant to subsection 34(4), effective the date of this Decision and to an extent consistent with the Commission's specific findings herein, sections 25, 29 and 31 and subsections 27(1), (5) and (6) do not apply to the provision of DVC Services by Telesat.
Allan J. Darling
Secretary General
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