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Telecom Decision

Ottawa, 16 November 1994
Telecom Decision CRTC 94-23
TELESAT CANADA - FORBEARANCE FOR THE SALE AND LEASE OF EARTH STATIONS
I BACKGROUND
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), inviting comment on its proposal to refrain pursuant to section 34 of the Telecommunications Act (the Act) from the exercise of various powers and the performance of various duties in relation to the sale of new and in-place terminal equipment by Canadian carriers.
On 5 and 20 October 1993, Telesat Canada (Telesat) filed comments in response to Public Notice 93-57, submitting that earth station equipment offered for sale to the public falls within the category of terminal equipment and should be included in the proceeding. Among other things, Telesat noted that the Federal Government's liberalization of earth station ownership in 1986 opened the market to greater competition by allowing earth station vendors to operate, and to do so on an unregulated basis. Further, Telesat stated that it did not hold a dominant position in the market for the sale of earth station equipment, noting that, of the total number of earth stations licensed in Canada in 1992, it held less than 25%.
On 26 January 1994, the Commission issued Telesat Canada - Forbearance for the Sale of Earth Station Equipment, Telecom Public Notice CRTC 94-6, initiating a separate proceeding to consider the issue of forbearance for the sale of earth station equipment by Telesat. In Telesat Canada - Forbearance for the Sale and Lease of Earth Station Equipment, Telecom Public Notice CRTC 94-12, 8 March 1994 (Public Notice 94-12), the Commission extended the scope of the proceeding to include a consideration of forbearance for the lease of such equipment.
The relevant portions of section 34 of the Act state 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, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 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 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.
In Public Notice 94-12, the Commission requested comment on (1) whether it should refrain from the exercise of powers and the performance of duties in relation to the sale or lease of earth station equipment by Telesat, (2) if so, with respect to which of the powers and duties set out in section 34 of the Act should the Commission refrain, and (3) for each power or duty, whether the Commission should refrain in whole or in part, and conditionally or unconditionally.
In addition, the Commission noted that, in Telesat Canada - Changes in Earth Station Services Regulation, Telecom Decision CRTC 86-6, 24 March 1986 (Decision 86-6), it approved (under the Railway Act) an application by Telesat that would have permitted the company to charge tolls for its commercial earth station services without filing tariffs, conditional on the implementation of certain safeguards to enable the Commission to satisfy itself that monopoly space services were not cross-subsidizing earth station services. The Commission's approach to forbearance was rejected by the Federal Court of Appeal in Telecommunications Workers' Union v. CRTC and CNCP Telecommunications, [1989] 2 F.C. 280.
II TELESAT'S APPLICATION
Telesat requested that the Commission grant forbearance for the sale and lease of earth station equipment associated with the use of Canadian space segment for both domestic and transborder satellite services. Telesat submitted that this request was fully consistent with the criteria set out in section 34 of the Act, and was generally in the public interest. In support of its position, Telesat submitted the following:
(1) the market for earth stations has been competitive for some time and will remain competitive;
(2) existing regulatory safeguards with respect to its RF channel services ensure that these space segment services cannot cross-subsidize the sale or lease of earth station equipment or any other non-space segment services; and
(3) sufficient regulatory safeguards exist, and would remain in place following the granting of forbearance, to ensure that Telesat does not use its position as a monopoly space segment service provider to confer upon itself any advantage by limiting or reducing competition in the future.
III POSITIONS OF PARTIES
The Commission received comments from Canadian Business Telecommunications Alliance (CBTA), Canadian Cable Television Association (CCTA), Canadian Satellite Communications Inc. (Cancom), Canadian Satellite Users Association, Edward D. Jones & Company (Jones & Company), Rogers Cable T.V. Ltd. (RCTV) and Unitel Communications Inc.
In general, interveners supported Telesat's application in whole or in part, although none supported unconditional forbearance. CCTA, was opposed to forbearance with respect to the lease of earth station equipment, arguing (among other things), that there are aspects of the market for earth station services in which Telesat may be a dominant supplier. CCTA also considered the evidence advanced by Telesat inadequate for the Commission to conclude that there is competition sufficient to protect the interests of users or that forbearance would advance the Canadian telecommunications policy. CBTA was opposed to forbearance for the sale of earth station equipment, arguing, among other things, that Telesat would be able to cross-subsidize the cost of earth station equipment with revenues from the monopoly space segment. Jones & Company opposed forbearance with respect to the sale or lease of earth stations to be used in Canada-U.S. transborder service.
While Cancom indicated support for a greater reliance on market forces, it raised two concerns: (1) that cross-subsidization of Telesat's earth station equipment with monopoly revenues may be possible; and (2) that Telesat may exercise market power in some areas of the market.
With respect to the first concern, Cancom submitted that, although the Commission has approved Telesat's Phase III Manual, it should be cautious in relying on Phase III costing as the sole means of ensuring that no cross-subsidization occurs. In particular, Cancom noted that the Manual provides that business development expenses assigned to the sale of terminal equipment are fixed at 5% of the cost of equipment sales. Cancom submitted that, as many of Telesat's business development expenses are shared between the Space and Non-space costing categories, it is possible that Telesat's monopoly service customers would have to bear more than their proportionate share of any increase in Telesat's general business development expenses, i.e., to the extent that the business development expenses actually attributable to equipment sales exceeded the 5% limit.
With respect to its second area of concern, Cancom submitted that Telesat provided only limited information on the extent of competition in the earth station market and did not identify different types of earth stations. In Cancom's view, not all of Telesat's earth station services and facilities are subject to competition, as a result of both government policy and market circumstances. In particular, Cancom submitted that current government regulations require operators of uplinks communicating with Telesat's satellites to enter into access arrangements with Telesat, and that, accordingly, Telesat may be in a position to limit competition in the earth station market. With respect to the market for uplinks or facilities such as Telesat's Teleports, Cancom did not agree that the market was sufficiently competitive to merit forbearance.
Cancom also expressed the opinion that Telesat could use its monopoly position with respect to the space segment to gain an advantage in the earth station market by tying together or bundling regulated and unregulated equipment and services.
In order to address the concerns raised in its submission, Cancom proposed that any forbearance order with respect to the sale or lease of earth stations be limited to sections 25 and 31 and subsections 27(1) and (5) of the Act and that it be subject to the following conditions: (1) forbearance should not apply to the sale or lease of major earth stations such as uplinks and Teleports; (2) the tying of the sale or lease of earth station equipment to any service sold or provided on a regulated basis by Telesat or its affiliates should be prohibited; (3) floor prices should be established; and (4) the use of resources whose costs are allocated to the Space Segment costing category should be limited.
RCTV also raised concerns as to the potential for cross-subsidization of Telesat's competitive services from its monopoly space segment revenues. RCTV questioned the adequacy of Phase III costing as an exclusive safeguard against such behaviour. In addition, RCTV raised concerns with Telesat's affiliation with the Stentor companies. In particular, RCTV proposed that Telesat be required to file tariffs if it sells (or leases) earth stations to its Stentor shareholders.
IV CONCLUSIONS
Having considered the record of the proceeding, the Commission considers it appropriate to refrain, pursuant to section 34, from the exercise of powers and the performance of duties under sections 25, 29 and 31 and subsections 27(1), (2), (4), (5) and (6) of the Act with respect to the sale and lease by Telesat of earth stations to be used in conjunction with Canadian space segment. The Commission will not refrain with respect to section 24, as it may, in the future, wish to impose general conditions on Telesat's offering and provision of earth station services. Further, in the Commission's view, its retention of section 24 will not lessen the applicability of the Competition Act to the sale and lease of earth stations by Telesat. The Commission's specific findings as to issues raised in the proceeding are set out below.
With respect to the concerns of certain interveners as to the possibility of cross-subsidy from Telesat's monopoly space segment, the Commission notes that Telesat's Phase III Manual was approved after a lengthy public process in which it was subjected to considerable scrutiny. As stated in Telesat Canada - Forbearance for Digital Video Compression Services, Telecom Decision CRTC 94-20, 3 October 1994 (Decision 94-20), the Commission is satisfied that, in the Phase III Manual, a regulatory mechanism has been put in place that will address the issue of the potential cross-subsidization of competitive services by monopoly space segment services.
Certain interveners raised concerns that Telesat may have the ability to exercise market power in some areas of the market for the sale and lease of earth stations. In this context, the Commission notes Telesat's submission that it does not manufacture earth station equipment, nor does it own any company that manufactures such equipment. As noted by Telesat, several manufacturers of systems and earth station components offer their products in an open and competitive environment to all potential customers, including Telesat, and Telesat has standard supplier agreements that provide it with volume discounts consistent with standard business practices. The Commission concurs with Telesat that competitors can and do enter into similar arrangements with suppliers.
Further, in the Commission's view, the existence of Telesat's Teleports do not provide it with an unfair competitive advantage. As noted in Decision 94-20, it is open to competitors to construct competing teleports in order to gain comparable economies of scale. In addition, the costs associated with Telesat's Teleports are not recovered through rates for the monopoly space segment.
As to the submission of Jones & Company, the Commission notes that Industry Canada does not allow persons other than Telesat to operate uplinks to U.S. satellites for transborder fixed satellite services. However, Telesat stated in its application that it was not seeking forbearance for the sale and lease of earth stations used to provide transborder services in conjunction with American satellites, and the Commission's decision to refrain pertains only to the sale or lease of earth stations used in conjunction with Canadian space segment.
As to the competitiveness of the market in general, the Commission notes that, even in 1986, it considered that (then) recently liberalized provisions regarding earth station ownership would give rise to effective competition. Accordingly, in Decision 86-6, the Commission was prepared to permit Telesat to charge tolls for earth station services without filing tariffs, subject to the implementation of safeguards to prevent cross-subsidization from Telesat's monopoly services. Since 1986, the Department of Communications (now Industry Canada) has further liberalized the criteria for licensing earth stations that provide private-line transborder multi-point service and there have been a number of new entrants in the earth station services market. In general, the Commission is satisfied that the market is competitive. Further, as noted above, Telesat's Phase III Manual provides the means to address the potential cross-subsidization of earth station services by monopoly space segment services.
Certain interveners expressed concern as to advantages Telesat might have as a result of its monopoly on the provision of RF channel services. Cancom also expressed the opinion that Telesat could gain an advantage in the earth station market by tying together or bundling regulated and unregulated equipment and services. A number of interveners suggested that the Commission continue to apply subsections 27(2) and (4), if it was concerned that, with unconditional forbearance, Telesat might use its position as the sole supplier of RF channel services in a discriminatory manner.
As to the bundling of services, the Commission considers the critical issue in this proceeding, as in the proceeding leading to Decision 94-20, is not whether competitive and monopoly services are bundled, but rather whether or not essential or bottleneck services and facilities underlying the bundled service are available on a non-discriminatory basis. As noted in Decision 94-20, Telesat will continue to be required to offer its space segment services on a tariffed basis. Any attempt by Telesat to limit unduly the availability and use of its space segment facilities would likely be found to be in contravention of the Act.
With respect to the requirement that an earth station licensee enter into an access agreement with Telesat, the Commission notes Telesat's submission that the access agreement is exclusively a technical agreement, and that the technical requirements for securing an access arrangement are in the public domain. Further, should Telesat attempt to discriminate through the requirement for such agreements, remedies under the Competition Act may apply.
With respect to section 29, it was argued by some interveners that, because of Telesat's affiliation with a number of Stentor companies, the requirement for prior approval of working agreements between telecommunications common carriers should be maintained. The Commission does not consider it necessary that Telesat obtain the Commission's approval prior to giving effect to agreements or arrangements relating solely to the use or provision of earth stations. However, the Commission notes that agreements or arrangements relating to the use of earth station equipment generally also pertain to matters relating to the use of the space segment and, accordingly, will continue to require the Commission's approval.
Based on the above, pursuant to subsection 34(1) of the Act, the Commission finds as a question of fact that to refrain from exercising powers and performing duties under sections 25, 29 and 31 and subsections 27(1), (2), (4), (5) and (6) with respect to the sale and lease of earth stations by Telesat for use in conjunction with Canadian space segment would be consistent with the Canadian telecommunications policy objectives. Pursuant to subsection 34(2), the Commission finds that the sale and lease of earth stations 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 the sale or lease of earth stations. 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), (2), (4), (5) and (6) do not apply to the sale or lease by Telesat of earth stations for use with the Canadian space segment.
Allan J. Darling
Secretary General
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