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Telecom Decision
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Ottawa, 4 March 1994
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Telecom Decision CRTC 94-6
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AFFILIATE RULE
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I BACKGROUND
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In Resale and Sharing of Private Line Services, Telecom Decision CRTC 90-3, 1 March 1993 (Decision 90-3), the Commission stated that it would not permit a facilities-based carrier to lease, directly or indirectly, interexchange services to any affiliated company it controlled for the purpose of joint-use resale or sharing, except where those services would be used exclusively to provide data services or portable communications services. The Commission was concerned that the entry of affiliates into the resale market would result in a greater level of revenue erosion than that associated with unaffiliated resellers. The Commission was of the view that to permit a facilities-based carrier to lease services to an affiliate for the purpose of sharing or reselling interconnected interexchange voice services on a joint-use basis would be analogous to permitting facilities-based competition, which was not authorized at that time.
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The resale and sharing rules, set out in the Appendix to Decision 90-3, defined "affiliate" as any person that controls or is controlled by the facilities-based carrier or that is controlled by the same person that controls the facilities-based carrier. The Commission's expectation was that this rule would prevent a facilities-based carrier, such as Unitel Communications Inc. (Unitel), from entering the Message Toll Service (MTS) or Wide Area Telephone Service (WATS) market indirectly by means of a resale affiliate.
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On 12 June 1992, the Commission issued Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12 (Decision 92-12), permitting facilities-based competition in the MTS market in the territories of BC TEL, Bell Canada (Bell), The Island Telephone Company Limited (Island Tel), Maritime Telegraph and Telephone Company Limited (MT&T), The New Brunswick Telephone Company Limited (NBTel) and Newfoundland Telephone Company Limited (Newfoundland Tel). The Commission also specifically approved Unitel's application to provide such services. In addition, it expanded resale of private lines on a joint-use basis to include the services of the Atlantic telephone companies and permitted the resale of WATS and other discounted toll services
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In Decision 92-12, the Commission established the initial line-side contribution charge for resellers at 65% of the charge to interexchange carriers (IXCs) for trunk-side access, rising to 85% by 1997. Under this transitional regime, resellers will pay less contribution than Unitel for line-side access until 1997.
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In Decision 92-12, the Commission maintained the affiliate rule for Bell, BC TEL and Unitel, and extended it to apply to the Atlantic telephone companies. However, the Commission did not apply the rule to B.C. Rail Telecommunications/Lightel Inc. (BCRL), given that BCRL's network would be primarily resale-based during its initial stages of operation
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The affiliate rule applies to AGT Limited (AGT) by virtue of AGT Limited - Interconnection of Interexchange Carriers and Related Resale and Sharing Issues, Telecom Decision CRTC 93-17, 29 October 1993, in which the Commission permitted the interconnection of IXCs to that company's public switched telephone network and the resale and sharing of its telecommunications services under terms and conditions substantially the same as those established in Decision 92-12.
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In Decision 92-12, the Commission announced its intention to review the need for the affiliate rule. On 25 November 1992, the Commission issued Review of the Affiliate Rule, Telecom Public Notice CRTC 92-70 (Public Notice 92-70), seeking comment on whether the affiliate rule should be maintained. The Commission stated that its determination in Decision 92-12 to allow IXCs to enter the long distance voice market directly reduces the incentive for such carriers to enter the market indirectly through a reseller affiliate, alleviating somewhat the concerns underlying the restrictions established in Decision 90-3. However, the Commission recognized that, during the transitional regime established in Decision 92-12, some incentive might still remain for facilities-based carriers to compete through affiliated resellers. The Commission noted that use of such an affiliate might, for example, allow an IXC to save on the difference between the line-side contribution charge for resellers and that for IXCs.
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The Commission stated that, in order to determine the point at which the contribution differential, and thus the incentive to compete through reseller affiliates would be sufficiently reduced, it would consider it necessary to take into account, among other things, the degree of control exercised over or by the affiliate. Accordingly, the Commission expressed the view that, if the affiliate rule were to be maintained, it would be useful to alter it to incorporate the concept of "related" companies and to define "related" on the basis of a threshold level of interest in, or any options to acquire an interest in, any of the capital, assets, property, profits, earnings, revenues or royalties in the company or an affiliate. The Commission considered that a threshold level of 25% or greater might be appropriate to limit the incentive referred to above.
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Finally, the Commission noted that Telesat Canada (Telesat), as a result of its privatization, is an affiliate of some telephone companies according to the definition established in Decision 90-3. The Commission stated that it might not be in the public interest to apply the affiliate rule to Telesat, since it might, in some circumstances, prevent Telesat from providing its services to the telephone companies for the purposes of resale.
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II POSITIONS OF PARTIES
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Comments were filed by AGT Limited, B.C. Rail Ltd. (BCRail), Canadian Business Telecommunications Alliance (CBTA), Competitive Telecommunications Association (CTA), Cam-Net Communications Inc. (Cam-Net), Smart Talk Network (STN), Sprint Canada Inc. (formerly Call-Net Telecommunications Ltd.), Telesat, Teleglobe Canada Inc. (Teleglobe) and Unitel. Stentor Resource Centre Inc. (Stentor) filed comments on behalf of the telephone companies.
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Unitel, resellers and other competitors supported retaining the affiliate rule, at least for the transitional period established in Decision 92-12, but had differing views as to which competitive service providers should be subject to the rule. They all agreed, however, that the rule should continue to apply to the telephone companies in order to ensure that they did not reduce competition through predatory action, increase the contribution burden on competitors through rate rebalancing or avoid regulatory requirements and oversight.
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Stentor proposed that the affiliate rule be eliminated and that, for the transitional period only, when a reseller affiliated with an IXC leases services from that IXC to provide jointly used interexchange voice services, it be required to pay the same contribution for line-side access as the IXC itself. A reseller affiliated with a carrier such as Telesat or a telephone company would be required to pay the same rate of contribution for line-side access as Unitel when the reseller leased services from its affiliated carrier.
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In order to ensure that contribution could not be reduced through the use of resellers in general, Stentor proposed that any participant subject to the same level of contribution required of Unitel be prevented from using the services of another participant subject to a lower contribution rate to aggregate or terminate traffic on its behalf. Several parties supported Stentor's proposal. BCRail submitted that Stentor's proposed restriction may not be necessary in the case of an IXC that both owns and leases facilities.
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Stentor, Telesat and Teleglobe submitted that Telesat and Teleglobe should be exempted from the affiliate rule. They argued that the services provided by Telesat and Teleglobe are based on interconnection agreements or interconnection tariffs, and are not related to the resale of interexchange voice services. Stentor stated that the arrangements between the telephone companies and Telesat and Teleglobe do not involve the erosion of MTS contribution in the manner that the Commission contemplated would result from resale activities.
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CBTA and CTA agreed that Telesat and Teleglobe should be exempted from the affiliate rule, but stated that the rule should apply if either company enters the resale market. STN also supported applying the rule to Telesat if it entered the interexchange voice market.
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III CONCLUSIONS
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In light of Decision 92-12, the Commission concludes that an affiliate rule is no longer required as a mechanism to prevent facilities-based entry into the public long distance voice market. However, the Commission is also of the view that, in order to continue the orderly transition to a more competitive market, it is appropriate to maintain restrictions or conditions on the resale activities of certain facilities-based carriers, specifically, in order to (1) reduce the opportunity for the telephone companies to provide long distance services on a non-regulated basis, and (2) minimize the potential for IXCs to avoid contribution.
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In Decision 92-12, the Commission determined that the telephone companies should be subject to regulatory oversight in order to ensure that they did not abuse their dominant position. The Commission is of the view that, in the absence of a mechanism such as the affiliate rule, the potential would exist for the telephone companies to escape that oversight through the use of reseller affiliates. As a consequence, the competitive market place might be harmed in that the prices of such an affiliate could be set below those of competitors, since the return earned by the reseller affiliate would be immaterial to the combined return of the telephone company and the affiliate.
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In addition to the above, the Commission notes that the issue of the appropriateness of the current regulatory regime for the telephone companies is under consideration in a more general sense as a part of the proceeding initiated by Review of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992. The Commission is of the view that, in general, it would be premature to reduce the regulatory requirements on telephone companies prior to the completion of that proceeding.
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The Commission considers that, in light of Decision 92-12, it is not necessary to apply to Unitel or other IXCs a prohibition on the lease of facilities to affiliated resellers. IXC affiliates will therefore be permitted to operate as resellers. However, in order to prevent contribution loss, any resellers affiliated with an IXC will pay the same contribution charges as the IXC for line-side access, regardless of whether the facilities in question are leased from the affiliated IXC or from the telephone companies.
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Telesat and Teleglobe, as affiliates of the telephone companies, are prohibited from competing in the MTS market as resellers of the services of the Stentor members. The Commission considers it appropriate that this restriction be maintained. However, the Commission agrees with Stentor, Telesat and Teleglobe that Telesat's and Teleglobe's current operations, which rely on interconnection agreements and tariffs, do not involve resale or sharing as contemplated in the restriction.
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The Commission notes that, under the framework established in Decision 92-12, Telesat can apply to compete directly in the MTS market as an IXC. In the event that Telesat wished to compete indirectly in the MTS/WATS market by setting up an affiliated reseller of its services, the Commission would consider a request that it alter the affiliate restriction to permit such activity.
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Those parties who commented on the issue supported the Commission's proposal to alter the definition of affiliate to incorporate the concept of "related" companies. However, various parties submitted that the threshold level of interest should be set lower than the 25% suggested in Public Notice 92-70.
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Based on the record of the proceeding, and in recognition of the maximum foreign ownership of Canadian carriers permitted under the Telecommunications Act, the Commission concludes that the definition of affiliate should be altered to incorporate the concept of "related" companies and that the threshold level should be set at 20%. As suggested by Cam-Net, the interests of Stentor members in any reseller will be considered collectively for the purposes of applying the rule.
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Accordingly, the Commission directs AGT, BC TEL, Bell, Island Tel, MT&T, NBTel, Newfoundland Tel, Telesat and Unitel to file, by 5 April 1994, revisions to their resale and sharing tariffs, and any other affected tariffs, incorporating the following definitions:
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"affiliate" means any person that controls or is controlled by the company or that is controlled by the same person that controls the company, and includes a related person.
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"control" includes control in fact, whether through one or more persons.
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a person is "related" to another if (1) either holds, either directly or indirectly, at least a 20% interest in, or any options to acquire at least a 20% interest in, any of the capital, assets, property, profits, earnings, revenues or royalties of the other, or (2) any third party holds, directly or indirectly, at least a 20% interest in, or any options to acquire at least a 20% interest in, any of the capital, assets, property, profits, earnings, revenues or royalties of each of the persons.
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Unitel is also directed to file proposed tariff revisions removing the current prohibition on the lease of its facilities to affiliated resellers, and replacing it with provisions requiring that any resale affiliate pay the same contribution charges as it does.
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In the event of any dispute as to the extent of a facilities-based carrier's interest in a reseller, the Commission will expect the carrier in question to provide the information necessary to resolve that dispute, in confidence if necessary.
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Allan J. Darling
Secretary General
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