Ottawa, 18 December 1997
Telecom Decision CRTC 97-20
STENTOR RESOURCE CENTRE INC. - FORBEARANCE FROM REGULATION OF INTEREXCHANGE PRIVATE LINE SERVICES
1. On 23 September 1996, Stentor Resource Centre Inc. (Stentor), on behalf of AGT Limited, now TELUS Communications Inc. (TCI), BC TEL, Bell Canada, The Island Telephone Company Limited, MTS NetCom Inc. (MTS), Maritime Tel & Tel Limited (MT&T), The New Brunswick Telephone Company, Limited (NBTel), and NewTel Communications Inc. (NewTel) (collectively, the Stentor companies) filed an application requesting that the Commission forbear unconditionally, pursuant to section 34 of the Telecommunications Act (the Act), from the regulation of Interexchange Private Line (IXPL) services provided by the Stentor companies.
2. In Stentor Resource Centre Inc. - Forbearance from Regulation of Interexchange Private Line Services, Telecom Public Notice CRTC 96-35, 18 November 1996, (corrected by Telecom Public Notice CRTC 96-35-1, dated 20 November 1996) the Commission initiated a proceeding, setting out a procedure for public comment on Stentor's application, including an interrogatory process, with provisions for requests for public disclosure and further responses, as well as a comment and reply phase. The dates in the procedure were modified in a letter dated 11 December 1996.
3. On 4 March 1997, ACC Long Distance Inc. (ACC), AT&T Canada Long Distance Services Company (AT&T Canada LDS), Call-Net Enterprises Inc. (Call-Net), fONOROLA Inc. (fONOROLA), Microcell Telecommunications Inc. (Microcell), Rogers Network Services (RNS), Shaw Communications Inc. (Shaw) and Westel Telecommunications Ltd. (Westel), collectively the Joint Comment Group (the JCG), submitted a document which they characterized as joint evidence and requested that the procedure be modified to allow parties to comment on the evidence. In reply to this request, Stentor submitted that the proposed modifications be denied, that the document be treated as the comment of these parties and that they not be allowed any further opportunity to comment. The Commission denied the JCG's request for a modified procedure on 13 March 1997 and accepted the document as comment. The Commission also stated that the parties would be allowed to file additional comments as set out in the procedure.
4. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission considered the general issue of forbearance and set out guidelines for assessing the competitiveness of a particular market. In addition, the Commission examined whether forbearance was appropriate for certain broad service categories. The Commission found that forbearance would be premature at that time for the Competitive Network (CN) category, of which IXPLs form the major component. The rationale for that determination was as follows:
"In the opinion of the Commission, the key issue to address with respect to forbearance [from regulation of services in the CN category] is the supply of transmission facilities. In the case of private lines, there are essentially only two significant national facilities-based providers, Unitel and the Stentor members. Other entrants in these markets are small regional providers. Resellers are dependent on private lines, and consequently upon Unitel and the Stentor members. Given the constraints on the supply of transmission facilities, the Commission is concerned over the potential for unjust price discrimination in this market, absent tariff regulation. The Commission notes, however, the increasing competition in this market as resellers and new IXCs construct their own facilities and the possibility that electrical utilities will expand their telecommunications facilities or resell/lease their excess capacity."
II STENTOR'S SUBMISSIONS
5. In its 23 September 1996 application, Stentor requested that the Commission grant unconditional forbearance and make a determination to refrain from exercising its powers and performing its duties under sections 24, 25, 27, 29 and 31 of the Act in relation to the IXPL services provided by the Stentor companies. Stentor provided a list of all the tariff items included in the application.
6. Stentor further requested that forbearance also be granted for any future IXPL services. Stentor stated that it was not seeking forbearance for dedicated local access services, such as Digital Network Access, local channel services or the local access component of the IXPL services.
7. Stentor stated that forbearance from regulation of IXPL services is necessary in order to meet the challenges of the highly competitive marketplace in which these services are offered. Stentor noted that forbearance for the types of services that are the subject of its application had been granted to the Stentor companies' competitors in Forbearance - Services Provided by Non-Dominant Canadian Carriers,Telecom Decision CRTC 95-19, 8 September 1995 (Decision 95-19), thus providing them with greater flexibility than the Stentor companies in service pricing and in the introduction of new features and services. Stentor further stated that the Stentor companies' ability to quickly develop and bring new products or services to market remains constrained by the need for regulatory approval and its associated delay, permitting competitors the advantage of early notice and an opportunity to delay the Stentor companies' new service initiatives and to react and ready their competitive responses.
8. Stentor submitted that the Commission has already concluded that neither the ubiquity of Stentor companies' facilities nor their integrated operations are undue advantages in a competitive interexchange market. Stentor argued that government and Commission policies regarding the resale of services, and the interworking and inter-operability among network providers, should permit the Commission to conclude that the competitors have supply alternatives available to ensure access to all regions of the country. Stentor stated that it subscribes to these policies but does not believe that they need to be mandated in a competitive marketplace.
9. Stentor submitted that the competitive IXPL environment in which the Stentor companies operate ensures that, even with forbearance, the companies cannot engage in anti-competitive behaviour which is detrimental to their customers or competitors. In Stentor's view, if market forces are not a sufficient deterrent, the authority of the Competition Act may be brought to bear.
10. Stentor argued that, with over 80% of the High Capacity IXPL service market already well served by facilities-based carriers, there should be no rationale for continued regulatory oversight of the Stentor companies' services.
11. In support of its application, Stentor applied the analytical framework for forbearance established in Decision 94-19. That analysis requires a definition of the relevant market or markets, and an assessment of whether the applicants have market power in the relevant market or markets.
1. Definition of Relevant Market
12. Stentor submitted that the only geographical market relevant for the forbearance of IXPL services is the total Canadian operating territories of the Stentor companies. Stentor stated that IXPL services all provide the same basic capability to interconnect two or more locations over dedicated facilities for the purposes of transmitting data, voice or image. While not calling them separate markets, Stentor described two sectors of this market:
(a) The High Capacity sector, which consists of the high speed digital services such as the interexchange Megaplan DS-0, DS-1 and DS-3 services. Stentor characterized this sector as highly competitive and growing rapidly, and indicated that customers are predominately large businesses and organizations.
(b) The analogue and older lower capacity services that offer speeds below DS-0 bandwidth. According to Stentor, this sector is declining and consists mostly of customers who are small to medium size businesses. Demand for lower capacity services in general was stated to be declining, as this sector is subject to erosion from High Capacity services, alternate switched services, or virtual services which are available from the Stentor companies and their competitors.
2. Stentor's Market Power
Supply of Facilities
13. Stentor submitted that the supply of facilities has changed significantly since the time that the Commission made its determination in Decision 94-19. Stentor submitted that significant additional facilities have been built by and made available to competitors, creating large amounts of capacity and increasing the competitiveness of facilities supply for IXPL services. Stentor submitted that these facilities have been installed by a number of large national and currently or potentially interconnected regional service providers. Stentor stated that the marketplace could no longer be described, as it was in Decision 94-19, as consisting of two major suppliers and a number of small regional suppliers.
14. In discussing the supply situation, Stentor claimed that 81% of the Stentor companies' High Capacity market was concentrated in two regions, namely 68% in Ontario/Quebec and 13% in B.C./Alberta.
15. Stentor submitted that it is within these two regions that competitors have also concentrated their facilities. It stated that in areas outside these regions and between the key Central and Western regions, AT&T Canada LDS and the cable companies or other carriers have alternative facilities or plans to build them.
16. Stentor provided a description of the competitors' service areas, quantities of facilities put in place and the services they provide. Based on this information (much of it supported by copies of competitors' advertising material which included maps of their networks), Stentor claimed that there are multiple facility providers in the geographic areas which represent in excess of 80% of the total Canadian telecommunications market. In addition, Stentor claimed that the facilities in place are mostly fibre and that there is ample spare capacity with only a small portion of the in-place fibre actually in service.
17. Stentor submitted that a number of services are substitutes for IXPL services, such as virtual private line services and packet data services, including frame relay and X.25 packet services. These services are provided by the Stentor companies and by competitors and represent an alternative for many customers. Stentor also suggested that satellite services are an alternative, as are the cellular companies' data services.
18. Stentor submitted that the ability of competitors to resell the Stentor companies' services also represents an important source of supply of facilities.
Cost of Changing Suppliers
19. Stentor submitted, that as industry standards apply to the network interfaces, there is sufficient inter-operability and compatibility that customers can change suppliers without having to buy new equipment or incur significant down time. Stentor stated that the most significant cost component of changing suppliers is the service charges for setting up the configuration with a particular supplier. However, these costs typically are insignificant relative to the overall cost of the service. Stentor acknowledged that there may be contractual obligations which would give rise to termination penalties for a customer wanting to switch suppliers.
Knowledge and Sophistication of Customers
20. Stentor submitted that there has been a growing awareness of data communications and technologies in all business sectors. The customers of IXPLs tend to be relatively sophisticated, with many of the larger business customers designing their own networks.
21. In its application, Stentor quoted a Yankee Group study which forecast that the Stentor companies' market share of the overall IXPL market would decline from 64% to 62% from 1996 to 1998. Stentor noted that this estimate was probably high since, if the impact of the regional carriers was included, the combined share of the Stentor companies and AT&T Canada LDS would be lower.
22. Stentor indicated that the High Capacity sector of the IXPL market was the fastest growing sector and was forecast to go from 27% to 45% of the IXPL total market, from 1994 to 1998. Stentor noted that, prior to 1994, the Stentor companies had 60% to 70% of the High Capacity market while AT&T Canada LDS had most of the remaining 30% to 40%. Stentor stated that market share losses, particularly to fONOROLA, Sprint Canada Inc. (Sprint), Westel and the cable companies' affiliates such as Vidéotron Télécom ltée (Vidéotron), RNS and Fundy Cable Ltd./Ltée (Fundy) have been significant, and that the Stentor companies' market share of new business in the growing High Capacity market is now less than 50% and in decline. Stentor also stated that it believed that AT&T Canada LDS is also losing market share to the new facilities providers.
23. Stentor stated that the Stentor companies continue to hold a large market share regarding the older analogue and lower capacity services. Stentor claimed that because of the nature of these services, it is impossible for the Stentor companies to exercise market power, as any price increase would result in customers migrating to higher speed services or to packet data services of either the Stentor companies or competitors.
24. In response to comments that the Stentor companies' shares of the IXPL markets exceed by a large margin the 35% to 40% market share threshold which is generally considered to be necessary for the exercise of market power, Stentor stated that, consistent with the Competition Bureau's Merger Enforcement Guidelines, the Commission has concluded that high market share is a necessary but not conclusive indicator of market power.
Barriers to Entry
25. Stentor described factors that pointed to there being limited barriers to entry. Cost was stated not to be a significant factor, as evidenced by the growth in the number of facilities providers and builds of facilities. Competitors could enter the market by building or by leasing facilities from alternate carriers. Stentor stated that surplus capacity soon to be available, announced new builds and the availability and installation of new technologies to increase the capacity of existing facilities will expand opportunities for companies to offer IXPL services.
26. Stentor submitted that as a result of Commission decisions ensuring access to, interconnection with and inter-operability of the networks, the Stentor companies' IXPL services are available for resale and competitors have non-discrimatory access to their facilities and support structures. In Stentor's view, there are no financial, access or technological barriers to competitive entry.
27. Citing the various discounts offered by the competitors, Stentor submitted that rivalry has manifested itself in the level of discounts offered in the marketplace. However, because the market for the High Capacity services is composed of large businesses, rivalry is manifested in the bidding and not so much in advertising. Stentor submitted that it has regularly filed applications to reduce or restructure the tariffed rates for many of the IXPL services. Stentor also stated that competitors are promoting their extensive use of the newest technologies to create a perception of superior quality or reliability.
28. Stentor stated that there is no evidence on the record of this proceeding that the Stentor companies have imposed any significant price increases or maintained prices at higher than required levels on any route.
29. Stentor concluded that the Stentor companies hold no market power that could be construed as detrimental to the continued development of a competitive marketplace or to the users of the services. Stentor submitted that the market conditions of the IXPL services satisfied all the forbearance provisions of the Act and that forbearance should therefore be full and unconditional.
III INTERVENORS' SUBMISSIONS
30. As indicated above, the JCG filed a joint submission. Except for Shaw and Microcell, the JCG parties also filed individual comments. All these parties opposed the granting of forbearance at this time. Vidéotron, Fundy, London Telecom Network (London Telecom) and Clearnet Communications Inc. (Clearnet) also submitted comments opposing the granting of forbearance. The Canadian Business Telecommunications Alliance (CBTA) supported conditional forbearance. In addition, the Government of Quebec Minister of Culture and Communications, the Canadian Broadcasting Corporation and AT&T Canada Inc. participated in the interrogatory phase of the proceeding only.
31. The JCG raised the issue of the definition of interexchange and more particularly the treatment of interexchange channels which are in the same local calling area. In addition, the JCG raised concerns regarding the inclusion of the Megaplan Service Extension features.
32. The JCG submitted that the definition of interexchange should be as per the Carrier Access Tariff, namely:
"a service or facility configured to operate between any two exchanges for which Message Toll Service charges would apply"
as opposed to Stentor's definition which includes channels between any two exchanges. The JCG noted that its proposed definition is consistent with the definition applicable in the proceeding announced in Forbearance from Regulation of Toll Services Provided by Dominant Carriers, Telecom Public Notice CRTC 96-26, 24 July 1996 (the PN 96-26 proceeding).
33. The JCG submitted that the IXPL services markets are defined by specific routes; in effect, each route constitutes an individual market. The JCG grouped routes into two tiers: (1) a network of the large urban areas (defined by the network served by the Stentor companies' High Capacity 45 service at the time of Stentor's forbearance application); and (2) a tier of routes based on 153 locations. These locations are the Local Multipoint Communications Systems (LMCS) service areas (identified by Industry Canada as part of the licencing process for LMCS), excluding locations already designated as Tier 1 locations and locations in independent company territories, the Yukon Territory and the Northwest Territories. The Toronto-Brampton route, while included in the High Capacity 45 tariff, is excluded from the JCG proposal as it is within the Toronto local free calling area.
34. The JCG proposed separate criteria to be met prior to implementing forbearance for locations in each tier. The criteria for the first tier are the facility supply pre-conditions proposed by competitors in the PN 96-26 proceeding. They include the construction of a competitive trans-Canada fibre backbone facility.
35. The JCG proposed that forbearance for the second tier occur only when additional criteria that it provided would be met. The additional criteria include:
(a) Tier 2 locations, that is, those not on the Tier 1 "backbone" must be interconnected to the backbone Tier 1 routes;
(b) a competitive provider entering the IXPL market (entrant since Decision 94-19) on the Tier 2 route should be able to serve the entire route using its own terrestrial IX facilities; and
(c) once 90% of the Tier 2 locations have been granted forbearance, forbearance could be extended to all the Tier 2 locations.
36. Under the JCG proposal, competitors entering the market on a facilities basis since Decision 94-19 would report annually those Tier 2 locations to which their facilities have been extended. The annual reporting requirement was proposed on the basis that the annual construction season and construction lags would limit the usefulness of any more frequent reporting.
37. The JCG proposed that rates for regulated routes would continue to be required to pass the service-specific imputation test imposed on competitive network services in Decision 94-19.
38. The JCG further suggested that a number of regulatory safeguards would be required once their proposed criteria for forbearance are satisfied and forbearance is granted. It proposed that Stentor should file and publish (but not for approval by the Commission) revised rates, terms and conditions on the date they become effective. In addition, the JCG proposed that, in the event of complaints of anti-competitive pricing involving services provided on forborne routes, either separately or combined with tariffed services, the Stentor companies should be required to provide an imputation test.
39. The JCG proposed imputation test would require that the present worth of revenues exceed the sum of:
(a) the tariffed rates for any tariffed competitive services;
(b) tariffed rates for any essential, bottleneck and interconnection services, and for collection of contribution and recovery of start-up costs associated with the provision of the forborne services; and
(c) Phase II causal costs of forborne services, excluding costs for services covered in (b).
40. The JCG suggested that such a test is required not only to prevent unjust discrimination and anti-competitive pricing, but also to continue regulating the tariffs of certain services, while at the same time permitting the bundling of tariffed and forborne services.
41. The JCG commented on the supply situation, stating that, while fibre capacity exists in the Québec City-Windsor and the Vancouver-Edmonton corridors, in the remainder of the country capacity is severely constrained. The JCG submitted that only AT&T Canada LDS has trans-Canada facilities from the Prairies into Atlantic Canada. It noted that other national facilities-based carriers and resellers must utilize leased facilities to directly serve those regions, as well as to carry trans-Canada traffic. The JCG also noted that a consortium led by Ledcor Industries Ltd. (Ledcor) plans to develop a fibre backbone across the country. The JCG suggested that the Ledcor facilities would not be available until some time in 1999. The JCG stated that the AT&T Canada LDS facilities are operating at capacity and, because of the technology employed, cannot be expanded.
42. The JCG submitted that potential for the expansion of capacity in the near term is restricted to Tier 1 routes. The JCG argued that there exist certain barriers to entry and to additional supply expansion. These include:
(a) difficulties in obtaining access to rights of way;
(b) difficulties in obtaining access to financing, due to higher risk than incumbents and foreign ownership restrictions;
(c) long response time due to the need to plan, finance and construct facilities;
(d) additional risk in a forborne environment of competitive and potentially predatory pricing by competitors; and
(e) the structure of the Stentor alliance does not provide for Stentor companies competing in each others' territories thus removing potential well-financed players from the market.
43. Some members of the JCG also provided additional comments. ACC expressed concerns about the need to retain conditions related to sharing and resale, to prevent the Stentor companies from providing private line services at more favourable rates to business customers than to competitors. Regarding supply conditions, AT&T Canada LDS noted a Stentor interrogatory response indicating that 33% of the Stentor companies' revenues from High Capacity IXPL services are derived from competitors' use of their services. AT&T Canada LDS argued that competing providers of IXPL services act largely as resellers of the Stentor companies' services.
44. fONOROLA provided comments in confidence, to demonstrate that, in its view, Stentor had overstated the extent of fONOROLA's network. Similarly, RNS claimed that Stentor had overstated the magnitude of the RNS network.
45. Westel submitted that there should be no forbearance on any route that terminates in SaskTel serving territory. Westel also submitted that local interconnection and the availability of other local facilities from alternate suppliers should be necessary pre-conditions for route-specific forbearance.
46. London Telecom and Vidéotron, while not part of the JCG, endorsed its position. London Telecom submitted that, as a condition for forbearance, not only must alternate suppliers exist, but the Commission should also be satisfied that the supplier is financially sound and that the supply will be sustained indefinitely. London Telecom submitted that once the forbearance conditions had been met on a route or nationally, an imputation test should not be required.
47. Clearnet opposed the granting of forbearance on the grounds that the Canadian private line market is not yet sufficiently rivalrous or competitive to warrant forbearance from regulation. Clearnet also claimed that the Stentor companies continue to exercise significant market power in the supply of High Capacity services, noting that the market shares of TCI, MT&T and NewTel are 77%, 69% and 100% respectively. In support of its position, Clearnet submitted that the Stentor companies remain the sole source of supply on most low density routes and that, even on routes in the major corridors (e.g. Port Hope-Cornwall), there is no viable alternative to the Stentor companies' IXPL services. Finally, Clearnet argued that, compared to the interexchange toll market, barriers to entry are higher, given the significantly greater risk and higher cost (approximately $300 million for a national network).
48. Clearnet supported a streamlined tariffing procedure, on a transitional basis, with the Stentor companies setting maximum and minimum rates. The maximum would be the existing rates and the minimum rate would be at the imputation test level. Clearnet proposed that forbearance only be granted when at least two terrestrial facilities-based competitors offer a comparable service throughout the operating territories of the telephone companies.
49. Fundy submitted that the application should be denied in its entirety. Fundy also stated that Stentor had failed to justify its claim that the current regulatory requirements are an impediment to the Stentor companies being able to compete.
50. CBTA supported forbearance, but also proposed that the Commission divide the market into two geographic areas: those where there is ample supply and those where there is not. The two areas would be subject to forbearance, but they would be differentiated by the competitive safeguards that would be applied. The safeguards for the first area would protect against predatory pricing, while in the second there would be an additional safeguard against excessive rate increases.
IV COMMISSION'S CONCLUSIONS
51. The Commission's determination in Decision 94-19 not to grant forbearance to the Competitive Network service category, and hence to IXPL services, was based on the view that at that time there were basically only two significant national facilities-based providers and that this did not provide sufficient protection to ensure that the market was sufficiently competitive to meet the forbearance criteria set out in the Act. Stentor submitted that, with the entry of fONOROLA and Sprint, and the increasing presence of facilities-based regional carriers such as Vidéotron, RNS, Shaw and Fundy, there is now sufficient facilities-based competition in a sufficiently large segment of the market that forbearance should be granted. The majority of intervenors submitted that because of the limited facilities on some portions of the trans-Canada route and in many of the smaller centres, it is still premature to forbear at this time. In the Commission's view, whether there is sufficient facilities-based competition is still the central issue to be addressed.
2. Definition of Relevant Markets
52. Stentor, in its application, defined the IXPL market as being comprised of the full range of low to high speed point to point and point to multi-point applications and, from a geographical extent, as being comprised of the operating territories of the companies. In response to interrogatory SRCI(CRTC) 9Dec96-11 IXPL, Stentor further classified the IXPL services as follows:
(a) High Capacity services, which include the Megaplan services providing for digital transmission at DS-0, DS-1 and DS-3 speeds, High Capacity 45 Service and/or equivalent services;
(b) digital data systems (DDS) which include Dataroute and/or equivalent services; and
(c) voice grade and other analogue (VGA) services.
53. In Decision 94-19, the Commission defined a relevant market as being essentially the smallest group of products and geographic area in which a firm with market power can profitably impose a sustainable price increase. In the Commission's view, there are two dimensions to examine when considering the definition of the market. One is the geographic coverage of the services, while the other is the inherent nature of the individual services under consideration.
54. In this proceeding, the definition of interexchange was raised as an issue. The JCG submitted that, consistent with the definition of interexchange in the PN 96-26 proceeding, it should only include circuits between local flat-rate calling areas. Stentor submitted that the appropriate definition of inter exchange for this proceeding is that which exists in the tariffs relating to interexchange channels and services, namely, circuits between exchanges regardless of whether toll charges apply.
55. The Commission concurs with Stentor that interexchange channels within flat-rate local calling areas are offered pursuant to the companies' tariffs for interexchange channels. Therefore, the Commission considers such channels to be within the scope of Stentor's application and that the definition of an interexchange circuit is a circuit between exchanges, regardless of whether toll charges apply.
56. The JCG noted that some of the services listed as subject to the forbearance application include access or local components. In response, Stentor indicated that in some cases the tariff for the service simply provides a reference to the appropriate local tariff. A number of services include an access component but, like the Datapac access tariffs which were forborne from in Telecom Order CRTC 96-130, 19 February 1996 (Order 96-130), this access capability is available from the General Tariff. Other services do contain an access rate in the tariff. Stentor submitted that these access components would remain tariffed if the forbearance it is seeking were granted. The Commission accepts the proposed treatment of these access components, with respect to the services to be considered for forbearance.
57. The JCG also raised as an issue the inclusion of the Megaplan Service Extension features as part of the services for which forbearance is sought. This feature allows a customer to multiplex a number of low speed services onto a higher speed Megaplan circuit. Stentor noted that, while this feature is also available for use with local channels, it is predominately used as a feature of interexchange services. On this basis, the Commission accepts the inclusion of the Megaplan extension feature in the services to be considered for forbearance.
58. With regard to Westel's submission that forbearance should not be granted on any route that terminates in SaskTel territory, the Commission considers that such channels are properly considered for forbearance in this proceeding. The Commission notes, however, that channels which originate and terminate within SaskTel's territory are not relevant to this proceeding.
59. Based on its assessment of the nature of the services included in the application, the Commission is of the view that the group of services that comprise the VGA services should be considered to constitute markets separate from the markets for High Capacity and DDS services. Based on revenue figures provided by Stentor, the size of the VGA services markets remains significant. These are older, lower capacity analogue services that have traditionally been offered only by telephone companies, CNCP (now AT&T Canada LDS) and BC Rail (now Westel).
60. The High Capacity services are by definition high capacity services generally used by large businesses and organizations. These services are subject to the greatest degree of competition among the IXPL services, with a greater number of suppliers offering such services. This group of services is the sector for which the greatest growth is occurring.
61. The remaining sector of services is the DDS services. The Commission notes that, as with High Capacity services, the DDS services are digital services geared to customers who demand higher quality and speeds than are available with VGA services. The Commission considers that the High Capacity and the DDS services should be treated together for the forbearance analysis.
62. In the context of its assessment of the relevant markets, the JCG submitted that each route constituted an individual market and that forbearance, if granted, should be on a route by route basis. In this regard, the JCG noted that Stentor's competitive response to the emergence and development of increased facilities-based competition has been the introduction and increasing use of route-specific pricing for High Capacity services. By contrast, the JCG noted that toll service rates remain route-averaged. The JCG stated that IXPLs are a more route-specific product as customers order their service in advance of communications taking place. By contrast, the JCG noted that toll services are not route-specific products, providing a generalized capability for universal termination of disperse traffic.
63. Stentor and Clearnet opposed route by route progressive forbearance, arguing that such an approach is highly complex and potentially contentious.
64. Vidéotron rejected the idea that each route constitutes a different market, submitting that the IXPL market is no different from the toll services market in that some customers concentrate their demand on one specific route while others spread their traffic over the entire network.
65. Vidéotron challenged the Commission's authority to forbear on a geographic basis, submitting that the Act only empowers the Commission to forbear from a service, not portions thereof.
66. The Commission notes that IXPL services are offered and provided on a route-specific basis and customers require these services on one or more routes. The Commission agrees with the JCG that each route should be considered as a separate market for purposes of forbearance analysis. Thus, to the extent that forbearance is appropriate, the Commission considers that it should be with respect to routes for which rivalrous competition exists or will exist in the near future.
67. With regard to Vidéotron's submission that the Commission does not have the authority to forbear on a geographic basis, the Commission notes that subsection 34(2) of the Act provides that the Commission shall forbear "to the extent that it considers appropriate", predicated on there being sufficient competition. Accordingly, the Commission considers that where each route constitutes a separate market, it is within the Commission's jurisdiction and appropriate for the Commission to consider forbearance on that basis.
3. Treatment of VGA Services
68. The market share data supplied by Stentor indicates that the Stentor companies' market share for the VGA services is at the 80% level on an aggregate basis and in TCI, NBTel, MTS and NewTel territory, it is close to or over 90%. The Commission notes that the 80% market share remains virtually unchanged since Decision 94-19. The Commission further notes that competitors are primarily concentrating on the construction of digital facilities. The Commission finds that VGA services are not subject to rivalrous competition.
69. Given that digital facilities-based services have been available for some time and yet there has not been a wholesale migration out of the VGA markets, the Commission considers that customers of VGA services face barriers to change. The Commission considers that customers of these services would thus be vulnerable to upward pricing initiatives. While Stentor claims that the Stentor companies do not have dominance in the VGA service markets, and that any price increase would result in migration to alternate services of the company or of its competitors, the Commission considers that, absent regulation, the interests of customers of VGA services would not be sufficiently protected.
70. Given the above, the Commission concludes that VGA services do not satisfy the requirements of the Act for granting forbearance.
4. Market Power: High Capacity/DDS Services
Supply of Facilities
71. As noted previously, the need to establish that the alternative supply of facilities has changed significantly from that at the time of Decision 94-19 is fundamental to any granting of forbearance.
72. While recognizing that fibre capacity exists in the Québec City-Windsor and Vancouver-Edmonton corridors, the JCG held that the capacity of competitors is severely constrained elsewhere. The Commission notes Stentor's view that there are multiple facilities providers in the geographic areas which represent in excess of 80% of the total Canadian telecommunications market. Furthermore, the Commission notes from the record of this proceeding, that the Ledcor build will provide an alternative to the Stentor network on the Edmonton-Toronto corridor, which is expected to be available to provide service by 1999. Moreover, the Commission notes the planned construction of alternate facilities by facilities-based regional competitors. In the Commission's view, the routes subject to competitive supply of facilities suitable for High Capacity services now represent, or will represent in the near future, at least 80% of Stentor demand, measured on the basis of equivalent DS-0 channels.
73. On the basis of the foregoing, the Commission finds that there are, or will be in the near future, fibre-based competitor facilities on the routes covered by the Stentor companies' High Capacity 45 service at the time of the forbearance application.
74. With respect to the supply situation on the Tier 2 routes as defined by the JCG, the Commission finds that many of the Tier 2 locations are or will be served by regional competitors. While the record indicates the Tier 2 areas where facilities exist or are being constructed, the Commission is less certain of the specific routes which will be served by these facilities.
75. While Stentor argued that Telesat Canada's facilities are another source of supply, the Commission is of the view that these facilities are not a major alternate source of supply. Asynchronous transfer mode (ATM) and frame relay, and even to some extent the Internet, are increasingly being used as alternatives to dedicated private lines for data applications. However, these are not as yet effective substitutes for voice applications.
76. In its application, Stentor also based its assertion that there was adequate supply on the inclusion of the supply it provides resellers. The JCG challenged this approach, arguing that this source of supply would be in jeopardy in an unregulated market. In the Commission's view, the determination of the supply situation should be made, consistent with Decision 94-19, on the basis of alternate sources of facilities-based supply.
77. The Commission considers that there is a large and growing pool of alternate supply of facilities serving an expanding geographic area. Further, the Commission considers that on the most contested routes, competitors have the ability to expand capacity in response to any pricing increase by the dominant supplier. On the basis of the foregoing, the Commission concludes that the supply of interexchange facilities has improved significantly from that which existed at the time of Decision 94-19, and that it will continue to do so.
78. However, the Commission also finds that there are routes on which there is not now, nor will there be in the near future, alternate sources of facilities for High Capacity services.
79. As indicated above, interexchange channels within local calling areas are included in Stentor's application. One of the High Capacity 45 routes, namely, Toronto-Brampton is within the local calling area of the Toronto and Brampton exchanges. The Commission does not find the record of this proceeding sufficient to assess whether other routes associated with channels in flat-rate calling areas are subject to sufficient alternative sources of supply for the provision of High Capacity/DDS services.
80. The information available in this proceeding concerning market share is largely based on a Yankee Group study submitted by Stentor. In response to interrogatories, Stentor provided market shares for High Capacity and DDS services for the Stentor companies, AT&T Canada LDS, Sprint, ACC, fONOROLA and other suppliers for each of the years 1994 to 1998.
81. For High Capacity services, the Stentor companies' market share is projected to drop from 57% to 47% between 1994 and 1998. Over this same period the market share of AT&T Canada LDS is projected to drop from 27% to 20%. The market share for the Other category is projected to increase from 13% to 22%. For DDS services the Stentor companies' market share is projected to increase from 45% to 52%.
82. AT&T Canada LDS and fONOROLA questioned the validity of the market share estimates, particularly with respect to the Other category. Stentor acknowledged that there are certain imperfections in the procedures used to estimate market shares. Stentor suggested that there neither are, nor should there be, market share boundaries for forbearance; rather the important matter to be addressed is whether market forces are sufficient to protect the interests of users. Stentor also noted that the Commission proposed in New Regulatory Framework for Broadcasting Distribution Undertakings, Public Notice CRTC 1997-25, 11 March 1997, that rate deregulation for Class 1 cable systems would be appropriate should the incumbent cable company lose only 5% of its subscribers.
83. The Commission considers that there is some uncertainty as to what the Other category market share represents in the Yankee Group study data summarized by Stentor. For example, Stentor included ACC separately in its table of market shares and also included ACC in the Other category. In response to comments, Stentor acknowledged that ACC should not have been included in the Other category. The Commission further notes that ACC is not a facilities-based carrier and thus, to the extent that it participates in the High Capacity/DDS market, it does so through leasing interexchange facilities from facilities-based carriers.
84. Similarly, the Commission notes that Sprint and fONOROLA rely extensively on other companies' facilities in providing service to their customers. With the inclusion of resold facilities, the Commission has concerns regarding the use of the market share data as providing reliable estimates of High Capacity market shares for the facilities-based carriers.
85. However, as noted by Stentor, it appears that with respect to High Capacity services, the Stentor companies and AT&T Canada LDS are losing market share to the new entrants in the IXPL market.
Barriers to Entry
86. The JCG listed a number of barriers to entry such as the ability to obtain financing and access to right-of-ways. Stentor estimated that the cost of building a national fibre-based network to be in the order of $300 million. The Commission notes that barriers to entry have not proven insurmountable, as witnessed by the fact that Ledcor is embarking on the construction of an extensive network.
87. As noted by Stentor, most of the demand for IXPL services is concentrated in certain corridors. The Commission considers that the practice of gradually building up facilities in these corridors, rather than building a Canada-wide network, considerably reduces the initial cost and also reduces the risk.
88. In the Commission's view, there are not undue barriers to entry with respect to High Capacity/DDS services, particularly in the high demand corridors.
89. The Commission considers that a measure of the degree of rivalrous competition is the frequency of price changes. Stentor stated that the companies have regularly filed to reduce or restructure the tariffed rates for many of the IXPL services. In response to an interrogatory, Stentor identified all the IXPL filings since January 1994. The Commission notes that there have been significant price decreases to DS-0 rates over the last six years. The Commission further notes the introduction of the High Capacity 45 service providing for route-specific rates for unchannelized DS-3 service. In addition, route-specific pricing was later introduced for some of the same routes for the Stentor companies' Megaroute services, which include DS-0, DS-1 and DS-3 channels. The Commission considers that routes for which the companies have introduced route-specific pricing provide an indicator of the geographic areas in which the greatest degree of competition is occurring or can be expected to occur.
90. Since industry standards apply to most of the terminal equipment owned by customers, the Commission considers that the flexibility exists to easily change suppliers of High Capacity/DDS services. There is some concern, however, that changing suppliers may require the payment of termination liabilities to cancel long term contracts. Long term contracts are an option available to customers that can provide significant savings over non-contracted rates. Stentor argued that long term contracts between Stentor companies and resellers have contributed to the development of a competitive market, as resellers have been able to acquire service under these contracts at discounted rates. The Commission agrees that such contracts have contributed to the development of toll competition. However, to the extent that customers including resellers are under contractual commitments, the Commission considers that contract termination penalties are an impediment to rivalrous competition. Nonetheless, the Commission considers that, on balance, they remain appropriate given that the lower rates are justified on the basis of the long term commitment.
91. Aside from the matter of contractual commitments, the Commission considers that High Capacity/DDS customers are readily able to reconfigure their networks and make use of alternate suppliers where suppliers of comparable services are available.
Market Power: Conclusions
92. With regard to the most important factor, namely, the supply of competitive facilities, the Commission considers that alternative facilities-based supply currently exists and can be expected to exist such that, while recognizing the impediment identified regarding contract termination penalties, in the near future rivalrous competition can be expected on all the routes covered by the Stentor companies' High Capacity 45 service at the time of the forbearance application. The Commission is of the view that for these routes, the Stentor companies will not have a degree of market power that would be detrimental to the interests of users.
93. However, the Commission has concerns regarding the extent to which customers will be protected in those areas where competitor facilities are not sufficiently available to provide an alternative supply of High Capacity/DDS services. Stentor argued that customers in such sectors can be assured of reasonable rates since they can lever their demand on the competitive routes against any pricing action on the less competitive routes. The Commission notes, however, that such leverage would not be available to customers on the less competitive routes who are not also customers on the competitive routes. Accordingly, in the Commission's view, the Stentor companies would have considerable market power on the less competitive routes.
5. Forbearance Determination: High Capacity/DDS Services
94. Based on the record, the Commission finds that, for the routes served by the Stentor companies' High Capacity 45 service at the time of its forbearance application, the High Capacity/DDS services satisfy the criteria under section 34 of the Act for a forbearance determination. These routes are identified in Appendix 2.
95. In particular, the Commission finds that a determination to forbear from regulation of the High Capacity/DDS services listed in Appendix 1, for the routes in Appendix 2 (the forborne services), would, under subsection 34(1) of the Act, be consistent with the Canadian telecommunications policy objectives set out in section 7, including paragraph 7(c) (to enhance the efficiency and competitiveness of Canadian telecommunications) and paragraph 7(f) (to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective). In addition, the Commission finds that it would be appropriate to forbear under subsection 34(2) of the Act on the basis that the forborne services are or will be subject to a level of competition sufficient to protect the interests of users of these services. Finally, the Commission finds that to forbear would not impair unduly the establishment or continuance of a competitive market for the forborne services.
96. In addition to the routes listed in Appendix 2, there are likely additional routes for which there is sufficient facilities-based competition to satisfy the criteria under section 34 of the Act for a forbearance determination. The Commission is of the preliminary view that the scope of forbearance set out in this Decision would also be appropriate for additional routes. The Commission considers it appropriate that forbearance determinations for additional routes be made on an ongoing basis, based on their having fulfilled a specific criterion. To this end, the Commission proposes the following criterion for comment, and invites parties to propose any other criteria they consider appropriate. In addition, parties are invited to comment on any information that should be required to be filed by facilities-based competitors. In this regard, the Commission notes the JCG proposal that competitors report annually locations to which their facilities have been extended. Parties can also comment on the Commission's preliminary views set out above. Comments and/or alternative proposals are to be submitted by 30 January 1998 with any reply comments to be submitted by 20 February 1998. The proposed criterion is as follows:
Stentor companies' High Capacity/DDS services not already forborne from will be granted forbearance on a particular route upon the Commission being satisfied that one or more competitors of the Stentor companies are offering or providing, on that route, the equivalent of DS-3 bandwidth (or greater) on a private line basis to at least one customer, using terrestrial facilities from a company other than a Stentor company or an affiliate of such a company.
6. Scope of Forbearance: High Capacity/DDS Services
97. The Commission notes that section 34 of the Act empowers the Commission to forbear 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. The scope of the Commission's forbearance determination applicable to the forborne services, and which the Commission considers on a prima facie basis should apply to any additional routes that satisfy the criterion for forbearance, is detailed in the following paragraphs.
Section 25 - Tariff Filings
98. The Commission notes that, in Decision 95-19, it determined to forbear from the exercise of its powers under section 25 (filing and prior Commission approval of tariffs specifying rates) in respect of the non-dominant carriers. The Commission finds that it would be appropriate to do likewise in respect of the forborne services in this Decision for the Stentor companies.
99. To otherwise continue to subject the Stentor companies to the requirement of obtaining prior Commission approval of High Capacity/DDS tariffs would, in the Commission's view, place the Stentor companies at an unfair competitive disadvantage relative to their competitors.
Section 24 - Conditions
100. The conditions that the Commission finds appropriate with respect to the forborne services of the Stentor companies are as follows:
(a) Customer Confidential Information
101. Consistent with its determination in Decision 95-19 applicable to the non-dominant carriers, the Commission finds it appropriate, in respect of the Stentor companies, to retain existing conditions protecting customer confidential information on a going forward basis. The Commission considers that, in the absence of such a condition, commitments to protect confidential information would be voluntary and may not be sufficient to adequately protect such information. Accordingly, on a going-forward basis, the existing conditions concerning customer confidentiality are to be included, where appropriate, in all contracts or other arrangements with customers for the provision of the forborne services in this Decision.
(b) Bypass of Canadian
102. Consistent with its determination in Decision 95-19 applicable to the non-dominant carriers, the Commission finds it appropriate that the Stentor companies retain the existing restrictions against the bypass of Canadian telecommunications services and facilities. Accordingly, on a going-forward basis, the existing conditions concerning bypass are to be included, where appropriate, in all contracts or other arrangements with customers for the provision of the forborne services.
103. The Commission considers that there may exist incentives in a competitive environment for the bypass of Canadian facilities and services. The Commission notes that these restrictions are under consideration in Competition in the Provision of International Telecommunications Services, Telecom Public Notice CRTC 97-34, 2 October 1997.
(c) Future Conditions
104. Consistent with the approach in Decision 95-19, the Commission finds it appropriate to retain section 24 powers to impose future conditions upon the forborne services provided by the Stentor companies, where circumstances so warrant.
105. The JCG proposed that, pursuant to a section 24 condition, the Stentor companies be required to file and publish revised rates, terms and conditions on the date they become effective. In the Commission's view, there is or will be sufficient competition on the forborne routes to obviate the need for such a condition.
Section 27 - Just and Reasonable Rates/No Unjust Discrimination or Undue Preference
106. In Decision 95-19, the Commission forbore from the regulation of the non-dominant carriers in respect of the subsection 27(1) requirement that rates shall be just and reasonable. The Commission also forbore from regulation under subsection 27(2) (unjust discrimination and undue preference), except in respect of issues related to access to the networks of non-dominant carriers and the resale and sharing of their services.
107. The Commission finds that there is or will be sufficient competition on the forborne routes to ensure that Stentor companies' rates for these routes are just and reasonable. Accordingly, the Commission forbears from the exercise of its subsection 27(1) powers.
108. With respect to subsection 27(2), the Commission finds that, as a consequence of the degree of competition, it is appropriate to forbear from all its subsection 27(2) powers for the forborne services. Consistent with this determination, the Commission will not require that the forborne rates meet the imputation test.
109. The Commission considers it necessary to retain subsection 27(3) to the extent that it does not refer to compliance with powers and duties not forborne from in this Decision.
Section 29 - Agreements
110. In Decision 95-19, the Commission forbore from the exercise of its section 29 powers (prior approval of certain inter-carrier agreements and arrangements) in respect of agreements and arrangements between domestic non-dominant carriers. Based on concerns related to bypass, the Commission continued to require non-dominant carriers to file for Commission approval section 29 agreements or arrangements with foreign carriers.
111. The Commission is of the view that for the purposes of section 29 agreements and arrangements, the circumstances of the non-dominant Canadian carriers differ from those of the Stentor companies.
112. The Commission notes that, unlike the non-dominant carriers, the Stentor companies have section 29 agreements and arrangements to act in concert as a national entity. These agreements and arrangements address the settlement of jointly earned revenues. The Commission considers the settlement of jointly earned revenues, including whether such settlement arrangements are equitable, is a matter which should remain subject to the Commission's oversight.
113. The Commission therefore finds it appropriate to continue to exercise its section 29 powers in respect of the Stentor companies.
Section 31 - Limitations of Liability
114. In Decision 95-19, the Commission determined to forbear completely and unconditionally from its powers to prescribe limitations of liability for the non-dominant carriers. Commission-approved limitations of liability were continued in existing contracts or arrangements for the balance of their unexpired terms. The Commission's determination was based in part on the view that there was sufficient competition to protect the interests of users.
115. In view of the competitive nature of the markets as noted above, the Commission finds it appropriate to forbear to the same extent for the Stentor companies in this proceeding as it did in Decision 95-19 for the non-dominant carriers. Any provision limiting liability in existing contracts or arrangements will continue to remain in force until their expiry. A contract or arrangement will be deemed to terminate on the date or in the manner provided therein as of the date of this Decision, notwithstanding extensions provided for therein.
7. Other Matters
Treatment of Multicom and DataLink Services
116. Stentor included two services in its application, namely, Multicom and DataLink, which Fundy argued should not be considered for forbearance on the grounds that Stentor did not file any evidence to support their forbearance.
117. In response, Stentor argued that although these services utilize the public switched network, they are effectively IXPL services. Stentor also noted that for many of the Stentor companies, these services are not available to new customers.
118. The Commission finds that a determination to forbear from regulation for these two services satisfies the section 34 criteria. Given the nature of these services, the Commission finds that the same degree of forbearance applicable to the High Capacity/DDS services is appropriate.
Treatment of Higher Speed IXPL Services and ATM-Based Services
119. In response to Call-Net's submission that forbearance should not be considered for higher speed services such as OC-3, OC-12, OC-24 and OC-48 services, Stentor stated that the OC-3 to OC-48 services are simply higher capacity private line services. As such, the Commission finds the same degree of forbearance applicable to High Capacity/DDS services to be appropriate.
120. Call-Net also argued that, consistent with the Commission's determination in Order 96-130, forbearance should not be granted to ATM-based services. In Order 96-130, the Commission declined to forbear from regulating future ATM-based packet data services. The Commission expressed concern that, given the much greater scope and capability of ATM technology, it would not be appropriate to forbear from regulation of ATM-based services without examining evidence on the market characteristics and capabilities of these services. In response to Call-Net, Stentor stated that ATM is an enabling technology and is not an interexchange service. Stentor further stated that forbearance should not be specific to the particular enabling technology.
121. The Commission considers that the record of this proceeding has not adequately addressed its concern expressed in Order 96-130. Accordingly, the Commission does not find it appropriate to grant forbearance to ATM-based services in this Decision.
122. Pursuant to Affiliate Rule, Telecom Decision CRTC 94-6, 4 March 1994, the Affiliate Rule restricts the Stentor companies' affiliate firms from providing switched toll services or from engaging in joint-use resale of the companies' IXPL services.
123. fONOROLA proposed in the context of this proceeding that the Commission retain the provisions of the Affiliate Rule. The Commission notes that its forbearance decision in this proceeding does not affect the Affiliate Rule.
124. Bundling refers to the inclusion of different services or service elements under a rate structure. For example, this rate structure may be a single rate, a set of rates for various service elements, and/or rates for one or more service elements which are dependent on the usage of other services.
125. As set out in paragraph 38, the JCG proposed an imputation test applicable to the bundling of tariffed and forborne services. This imputation test costs the use of tariffed services at their tariffed rates on the grounds that the Stentor companies would otherwise be able to grant themselves an undue preference.
126. Stentor objected to an imputation test for forborne services and noted that the JCG proposal draws upon the Commission's determinations in Decision 94-19 which did not address bundling involving forborne services. Stentor further noted that its competitors are under no constraints with respect to how they might package or bundle IXPL services.
127. Stentor argued that the imposition of the imputation test, as proposed by the JCG, would have the effect of re-regulating the forborne telecommunications service elements within the service bundle, and/or extending the Commission's authority to regulate the prices charged for services beyond the scope of the Commission's authority as established within the Act.
128. The Commission notes that, shortly before the conclusion of this proceeding, it established a framework for the bundling of tariffed and forborne services in Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (the Local Competition Decision). In that decision, the Commission ruled that where a forborne service is included in a new bundled service, the rates for the bundled service are to be filed for approval and Phase II costs for the forborne service must be included as part of the imputation test. The Commission also indicated that wherever below-cost single-line residence service is included in the bundle, this element should be costed at the applicable tariffed rates.
129. Consistent with the Local Competition Decision, the Commission finds that, should Stentor companies desire to bundle tariffed IXPL services with forborne services, the rates, terms and conditions for the bundled service must receive prior Commission approval. The Phase II costs of the forborne service elements are to be filed as part of the imputation test, and tariffed rates are to be used to cost the tariffed IXPL service element as well as any interconnection or contribution elements. The Commission considers these requirements to be necessary to ensure that there is no undue preference with respect to the charging for tariffed service elements.
130. In Decision 94-19, the Commission established a policy prohibiting the bundling of terminal and network service elements on the grounds that there are likely to be relatively few network providers for the foreseeable future and that bundling might limit distribution channels for terminal equipment. ACC noted that if this prohibition is to be maintained, it must form the basis for a condition imposed pursuant to section 24.
131. Given the evolution of competition in the terminal market, and with the increase in the number of network providers, the Commission finds it appropriate to remove the restriction prohibiting the bundling of terminal and network service elements.
V TIMING OF FORBEARANCE
132. The Stentor companies are directed to issue, 90 days from the date of this Decision, tariff pages removing the tariffs for the services in Appendix 1 for the routes in Appendix 2, to be effective on that date. Pursuant to subsection 34(4) of the Act, on that date sections 25 and 31 and subsections 27(1), 27(2), 27(4), 27(5), and 27(6) and (in part) section 24 and subsection 27(3) will no longer apply to the Stentor companies' High Capacity/DDS and Multicom and Datalink services set out in Appendix 1 for the routes in Appendix 2, to the extent that they are inconsistent with the Commission's determinations herein.
Laura M. Talbot-Allan
This document is available in alternative format upon request.
IXPL Services Forborne
Stentor National Services Tariff Items