Telecom Decision
CRTC 98-19
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Ottawa, 9 October 1998
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Forbearance from Regulation of Mobile Wireless Services Provided by Municipally Owned Telephone Companies
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File Nos.: 96-2505, 8638-D3-01/97 and 8085-RP-004/97
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I Introduction
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1. In Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996 (Decision 96-6), the Commission directed any independent telephone company (the independents) that requests forbearance from regulation of its cellular services to demonstrate that (1) pursuant to Regulation of Wireless Services, Telecom Decision CRTC 94-15, 12 August 1994 (Decision 94-15), cellular services are being offered through a structurally-separate affiliate, or (2) it has the appropriate costing and marketing safeguards in place.
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2. Pursuant to Decision 96-6, The Corporation of the City of Thunder Bay - Telephone Division (Thunder Bay Telephone) and Dryden Municipal Telephone System (Dryden) filed proposals for forbearance from the regulation of cellular services, on 6 December 1996, and 13 January 1997, respectively.
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3. On 29 April 1997, the Commission issued Regulation of Mobile Wireless Services Provided by Municipally Owned Telephone Companies, Telecom Public Notice CRTC 97-15, (PN 97-15), to invite comments on issues relating to forbearance from regulation of mobile wireless telecommunication services (mobile wireless services) provided by the Municipally Owned Telephone Companies (MOTCs). PN 97-15 asked parties to address, in addition to any general comments, the following issues: (1) the appropriateness of the safeguards proposed by Dryden and Thunder Bay Telephone for the provision of mobile wireless services by the MOTCs, and (2) whether, given the proposed safeguards, it would be appropriate for the Commission to forbear, in whole or in part, from regulation of mobile wireless services provided by MOTCs.
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4. PN 97-15 also expressed the Commission’s preliminary view, consistent with Regulation of Mobile Wireless Telecommunications Services, Telecom Decision CRTC 96-14, 23 December 1996 (Decision 96-14), that any regulatory framework for cellular services provided by the MOTCs should also apply to all other public switched mobile wireless voice services that may be supplied by the MOTCs.
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5. Thunder Bay Telephone and Dryden (the applicants), Bruce Municipal Telephone System, Cochrane Public Utilities Commission (Cochrane), Keewatin Municipal Telephone System, Kenora Municipal Telephone System (Kenora) and Prince Rupert City Telephones (Prince Rupert) were made parties to the proceeding. The Commission issued interrogatories to the applicants and to Cochrane, and received comments from Rogers Cantel Inc. (Cantel), Kenora, Prince Rupert and Thunder Bay Telephone, and reply comments from Cantel and Thunder Bay Telephone.
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II BACKGROUND: SUMMARY OF REGULATORY REGIME FOR MOBILE WIRELESS SERVICES
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6. Pursuant to Decision 94-15 and Decision 96-14, the Commission forbore from the regulation of mobile wireless services, except where the services are provided directly by a dominant telephone company providing primary exchange service (in-house dominant service providers).
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7. As stated by the Commission in Decision 96-14, in order to ensure against cross-subsidies from monopoly local telephone revenue, the Commission, in Decision 94-15, considered that it would not be appropriate to refrain from exercising its powers and performing its duties where mobile wireless services are not provided at arm’s length, through a separate affiliate, but instead are provided within a telephone company providing primary exchange service.
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8. As an additional safeguard against cross-subsidies to mobile wireless services, where the mobile wireless services are provided by a structurally separate affiliate, the affiliate must purchase services from the affiliated telephone company at tariffed rates. Also, provisions are in place to ensure that the telephone company transfers assets between itself, a regulated company, and the affiliate at market value, (or book value if market value is not available).
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9. In Decision 94-15 and Decision 96-14, the Commission forbore from regulating the mobile wireless services provided by the federally regulated Stentor member companies that provide these services through separate affiliates. In NBTel Inc. - Forbearance from Regulating Cellular and Personal Communications Services, Telecom Decision CRTC 98-18 dated 2 October 1998, the Commission has forborne from regulation of cellular and personal communications services provided by NBTel Inc. (NBTel), noting that the company has implemented an accounting framework to report separately results of cellular operations, and that NBTel is required to assign all activities related to cellular and personal communications services to the Competitive segment of the split rate base.
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10. In Decision 96-6, the Commission directed the independents including the MOTCs, to file annual Phase III results with the Commission. As of the date of this Decision, all MOTCs except Prince Rupert and Cochrane are using approved Phase III procedures.
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11. In Decision 96-6, the independents were directed to exclude revenues, investment and expenses of cellular operations, including an attributable portion of common costs, from the contribution requirement calculation. Companies which provided cellular service as part of their operations were directed to provide details on the methodologies used to exclude cellular operations from the revenue requirement and contribution calculations at the time of their 1997 contribution filings.
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12. The Commission acknowledged in Decision 96-6 that MOTCs may not be in a position to establish structurally separate affiliates to supply cellular services, but noted that they are monopoly providers of local service, and competitive safeguards are needed.
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13. The joint marketing safeguards established in Cellular Radio-Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987 (Decision 87-13) and Rogers Cantel Inc. v. Bell Canada - Marketing of Cellular Service, Telecom Decision CRTC 92-13, 29 June 1992 (Decision 92-13), recently were examined in the proceeding pursuant to Review of Joint Marketing Restrictions, Telecom Public Notice CRTC 97-14, 25 April 1997 and Review of Bundling and Joint Marketing Restrictions, Telecom Public Notice CRTC 97-21, 6 June 1997. In Joint Marketing and Bundling, Telecom Decision CRTC 98-4, 24 March 1998, the Commission concluded that the safeguards are no longer necessary for the Stentor member companies and the independents.
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III THE FORBEARANCE PROPOSALS BY THUNDER BAY TELEPHONE AND DRYDEN
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14. Thunder Bay Telephone and Dryden sought forbearance with respect to the regulation of cellular services from the application of sections 25, 29 and 31, and subsections 27(1), 27(5) and 27(6) of the Telecommunications Act (the Act).
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15. Thunder Bay Telephone and Dryden stated that they plan to supply cellular services through a separate division, and implement costing safeguards, comprising the use of the Phase III costing methodology, as directed by the Commission in Decision 96-6, and the Segregated Plan of Accounts for the Cellular Division (SPACD).
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16. Thunder Bay Telephone stated that its SPACD was approved by the Commission in 1994. Thunder Bay Telephone submitted that the SPACD methodology shows revenues, costs and expenses of the company’s cellular services, as if the cellular division operates at arm’s length from the telephone company. Thunder Bay Telephone stated that revenues from cellular operations include, among others, revenues from contract charges, charges for air time, and long distance charges. Thunder Bay Telephone indicated that expenses include all expenses incurred by the cellular division, and that the cellular division is charged both tariffed rates for its purchases of tariffed services, and direct costs, and allocated overhead and employee benefits, for purchases of non-tariffed services.
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17. Thunder Bay Telephone also stated that the company reports interdivisional and intercorporate transactions to the Commission, and that assets are transferred at cost, in accordance with approved Phase III procedures and the Uniform System of Accounts.
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18. Thunder Bay Telephone has implemented the SPACD, and Dryden has stated that it will implement it if its forbearance application is approved.
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19. Thunder Bay Telephone stated that there is little likelihood of cross-subsidies to cellular services, because of continued use of rate of return regulation, and because elected city officials would ensure that each division is self-financing. Thunder Bay Telephone also stated that its former regulator, the Ontario Telephone Service Commission, had required that any losses from cellular operations be financed with tax revenues, and not with revenues from wireline operations. Thunder Bay Telephone suggested that the annual Phase III filings could be expanded to include reports on interdivisional and intercorporate transactions, and could also include a check on the marketing and other competitive safeguards.
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20. Thunder Bay Telephone argued that with the implementation of Phase III and the SPACD, the necessary safeguards are in place to ensure that cellular operations are not cross-subsidized from monopoly service revenues.
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21. Thunder Bay Telephone and Dryden stated that they would ensure that their staff comply with the joint marketing safeguards. Dryden suggested that staff could sign affidavits attesting to compliance with the Commission’s safeguards.
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22. Thunder Bay Telephone stated that the inability to incorporate affiliates should not result in denial of regulatory forbearance with respect to the provision of cellular and similar mobile wireless services, especially with the existence of adequate safeguards and competition.
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23. Thunder Bay Telephone and Dryden stated that if the Commission were to retain its powers under subsections 27(2) to 27(4), then Cantel or other competitors would continue to have the ability to bring complaints about business practices of the telephone companies’ mobile wireless operations to the Commission. Thunder Bay Telephone noted that the burden of proof in case of a complaint would rest with the telephone company.
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IV COMMENTS OF INTERVENERS
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24. Prince Rupert supported the applications by Thunder Bay Telephone and Dryden, and stated that it has already implemented many of the proposed safeguards, and that it will implement the balance, in the event the Commission approves the applications. Kenora stated that it has set up separate accounts for cellular services within the Town of Kenora’s financial statements. MTS Mobility administers activations, billings, and dealer settlement for Kenora.
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25. Cantel submitted that the Commission should not forbear from the regulation of mobile wireless services provided by the applicants. It stated that market forces would not prevent rate increases for cellular services by Dryden and Thunder Bay Mobility (TBM), because Dryden is the sole supplier of mobile wireless services in its territory and TBM serves the majority of cellular subscribers in Thunder Bay Telephone’s operating territory.
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26. Cantel stated that the MOTCs are monopoly providers of local telephone services in their respective territories and will continue to be dominant providers of these services for the foreseeable future. According to Cantel, the MOTCs have the ability and incentive to confer an anti-competitive advantage on their mobile wireless operations, absent application of effective costing and marketing safeguards.
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27. Cantel submitted that the safeguards proposed by both Thunder Bay Telephone and Dryden were not as strong as those that apply to the provision of cellular services by the Stentor member companies. Cantel argued that annual reporting of Phase III results is not sufficient to enforce the costing safeguards, since cross-subsidies that are undetected even for a year cause substantial and irreparable damage to competitors. Cantel recommended quarterly reports, to permit earlier detection of cross-subsidies and reduce possible harm to competitors. Cantel also noted that Dryden has not provided any information on how it would allocate operating expenses between cellular and wireline operations; that Thunder Bay Telephone’s labour cost allocation does not include the 25% mark-up suggested by the Commission; and that neither applicant has discussed how costs of shared personnel will be allocated. Cantel stated that in the absence of specific proposals it is not possible to determine whether cross-subsidization of mobile wireless services would be prevented.
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28. Cantel argued that the MOTCs would have more opportunities to cross-subsidize than the Stentor member companies, since the MOTCs would continue to be rate base/rate of return regulated; they would not have a split rate base; and often they have not been required to support tariff filings with economic studies. Cantel also argued that the presence of elected officials does not provide an effective safeguard against cross-subsidies.
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29. With respect to Thunder Bay Telephone’s and Dryden’s promise to comply with the joint marketing safeguards set out in Decision 87-13 and Decision 92-13, Cantel submitted that it was not clear how Thunder Bay Telephone will comply with these safeguards, since the same employees may market wireless and wireline services at a single location.
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30. Cantel stated that Thunder Bay Telephone provided no detail as to how Thunder Bay Telephone will ensure that its cellular division, TBM, does not have access to wireline competitive and monopoly information. However, Cantel supported Dryden’s proposal to require affidavits attesting to employees’ compliance with the safeguards.
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31. Cantel argued that the regulatory regime for the MOTCs should be the same as the regulatory regime for other telephone companies, and that the Commission should not forbear if a telephone company is unable or unwilling to separate wireline and mobile wireless operations, since, in Cantel’s opinion, regulation of mobile wireless services is not burdensome.
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32. However, Cantel recognized that there may be legal or administrative reasons that prevent the MOTCs from establishing separate affiliates or from complying with the same costing and marketing safeguards as the Stentor member companies. Cantel stated that if the Commission were to forbear without requiring structural separation, then rigorous safeguards should be in place to prevent the conferring of a subsidy or marketing advantage to the MOTCs’ mobile wireless operations.
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33. Cochrane stated that it created Cochrane Cellular Mobility (CCM) to service the residents of Cochrane. CCM pays various fees to NorTel Mobility (NTM), for accessing NTM’s switch, for cell site monitoring, for processing activations and for billing and administration. CCM also reimburses NTM for activations and commissions. CCM’s revenue from cellular operations is the difference between customer payments and the various fees and charges paid to NTM.
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V CONCLUSION
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34. At issue is whether forbearance from regulation of mobile wireless services provided by the MOTCs, with costing and accounting safeguards taking the place of structural separation would serve the public interest.
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35. The Commission is of the view that the safeguards proposed by the applicants are sufficient to minimize the opportunity for and to permit the detection of anti-competitive cross-subsidies from regulated services to mobile wireless services.
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36. The Commission notes that it approved, in Decision 96-6, Phase III costing procedures for all independents, including all MOTCs (except Prince Rupert and Cochrane). That Decision requires all independents, including the MOTCs, to exclude results of cellular operations from their rate base and contribution determinations.
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37. Thunder Bay Telephone’s SPACD was approved in a Commission letter dated 3 November 1994. The Commission’s view is that the SPACD methodology ensures that the appropriate costs are charged to the MOTCs’ mobile wireless operations. The Commission notes, for example, that the cellular division purchases interconnection and other tariffed services at the applicable tariffed rates. The cellular division purchases non-tariffed services at a charge equal to the direct costs incurred by the MOTC, plus allocated overhead, including employee benefits. In this regard, the Commission notes that a wireless carrier competing with an MOTC’s mobile wireless services would incur the same costs for tariffed services purchased from the MOTC.
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38. With respect to Cantel’s observation that the SPACD labour cost allocations should include a mark-up, the Commission is of the view that a mark-up on allocated labour costs is not necessary, because employee benefits are charged directly to the cellular division.
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39. Regarding Cantel’s position that the results should be reported more frequently than on an annual basis, the Commission notes that Phase III results and reports that depend on Phase III results, such as the SPACD, are available only on an annual basis. The Commission is of the view that annual SPACD results will provide sufficient information to determine whether mobile wireless services are being cross-subsidized.
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40. Further, the Commission’s retention of powers and duties pursuant to subsection 27(2) of the Act, would permit competing carriers to file complaints with the Commission. Moreover, the filing of SPACD results with the Commission would give the Commission the data to investigate complaints of anti-competitive below cost pricing of mobile wireless services.
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41. As noted above, in Decision 96-6, the Commission has already directed the independents, including the MOTCs, to use accounting separations to exclude the results of cellular operations for purpose of rate base/rate of return regulation.
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42. Also noted above is the Commission’s view that the exclusion of results of mobile wireless operations from revenue requirement calculations will safeguard against the cross-subsidization of mobile wireless operations by the remaining services regulated on a rate of return basis.
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43. As a result, the Commission is of the view that it is not necessary to require structural separation prior to forbearance.
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44. The Commission notes that the MOTCs serve limited geographic markets, while Cantel and other wireless carriers serve much larger areas and have larger customer bases. This fact, together with the Commission’s directions on costing separations, make it very unlikely that the MOTCs would engage in predatory pricing. Further, the threat of potential entry by other carriers would protect subscribers against unnecessary rate increases for mobile wireless services.
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45. Pursuant to subsection 34(1) of the Act, the Commission may forbear if it finds that forbearance is consistent with the Canadian telecommunications policy objectives, and pursuant to subsection 34(2) of the Act, the Commission shall forbear if it finds that competition is sufficient to protect the interests of users. However, pursuant to subsection 34(3), the Commission shall not forbear if it finds that forbearance would unduly impede the establishment of a competitive market.
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46. The Commission finds as a matter of fact that forbearance, from sections 24 (in part), 25, 29, 31 and subsections 27(1), 27(5) and 27(6) of the Act, with the safeguards set out below, in respect of the regulation of mobile wireless services provided by MOTCs is consistent with the Canadian telecommunications policy objectives outlined in section 7 of the Act, as it would foster increased reliance on market forces. Forbearance would also ensure that remaining regulation is efficient and effective. The Commission also finds that such forbearance would not impair unduly the continuation or establishment of a competitive market for the forborne services. Pursuant to section 34 of the Act, the Commission refrains from exercising its powers and performing its duties pursuant to sections 24 (in part), 25, 29, 31 and subsections 27(1), 27(5) and 27(6) of the Act in respect of mobile wireless services provided by MOTCs, subject to the conditions set out below. Sections 24, 25, 27, 29 and 31 do not apply to MOTCs to the extent that they are inconsistent with the determinations in this Decision.
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47. Accordingly, the Commission forbears from the regulation of mobile wireless services provided by an MOTC, conditional upon the MOTC demonstrating that it complies with the safeguards set out below.
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48. More specifically, the Commission’s forbearance is conditional upon demonstration to the Commission that the following conditions have been met: (1) filing of Phase III results based on approved Phase III procedures (Phase III results), with annual filings of Phase III results thereafter; (2) filing of a Statement of Revenue Surplus/Shortfall applicable to mobile wireless services, with annual filings thereafter; (3) exclusion of mobile wireless services from revenue requirement and contribution calculations; and (4) a separate division for provision of mobile wireless services, or provision of mobile wireless services by an independent third party (an MOTC could demonstrate the latter, for example, by providing the Commission with a copy of its agreement with the independent third party).
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49. The Commission will retain in part its powers under section 24 to ensure that the existing conditions regarding disclosure of confidential information to third parties continue to apply, and to retain the power to impose conditions as needed in the future. 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.
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50. The Commission will also retain its powers under subsections 27(2) and 27(4) with respect to the forborne services in this Decision.
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51. The Commission considers it necessary to retain subsection 27(3) to the extent that it does not refer to compliance with any of the powers and duties forborne from in this Decision.
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52. Based on the record of this proceeding, the Commission is satisfied that Thunder Bay Telephone has fulfilled the conditions set out above and accordingly, Thunder Bay Telephone’s mobile wireless services are forborne from, effective 30 days from the date of this Decision. Thunder Bay Telephone is directed to issue revised tariff pages.
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53. For the remaining MOTCs, including Dryden, forbearance from mobile wireless services will be effective 30 days after the MOTC in question demonstrates to the Commission that the conditions set out above have been fulfilled.
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54. The Commission notes that Cochrane through CCM is offering cellular services in the Town of Cochrane. Pursuant to section 29 of the Act, Cochrane is directed to file within 30 days with the Commission for approval the agreement or agreements with NTM.
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Secretary General
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This document is available in alternative format upon request.
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