Telecom Decision
CRTC 98-18
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Ottawa, 2 October 1998
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NBTel Inc. - Forbearance From Regulating Cellular and Personal Communications Services
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File No.: 8640-N5-01/97
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1. Pursuant to section 34 of the Telecommunications Act (the Act), NBTel Inc. (formerly The New Brunswick Telephone Company, Limited) (NBTel) requested that the Commission forbear from regulating the company’s cellular and Personal Communications Services (PCS) services.
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2. NBTel requested that the Commission forbear from the regulation of the provision of cellular/PCS services consistent with Regulation of Wireless Services, Telecom Decision CRTC 94-15, 12 August 1994 (Decision 94-15). Specifically, NBTel requested that the Commission refrain from exercising all powers and performing all duties under sections 25, 27(1), 27(5), 27(6), 29 and 31 of the Act in relation to the company’s provision of cellular/PCS services.
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I BACKGROUND
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3. In Decision 94-15, the Commission found that the cellular market was sufficiently competitive to warrant forbearance pursuant to section 34(2) of the Act. Accordingly, the Commission forbore from regulating cellular services that were being offered through a structurally separate affiliate of a telephone company. However, the Commission did not forbear from the regulation of the provision of cellular services offered in-house by a telephone company providing primary exchange services.
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4. In the case of cellular services offered in-house by a telephone company, the Commission stated in Decision 94-15 that "conditional upon the development and implementation of the appropriate costing and marketing safeguards, it would be appropriate to forbear with respect to the provision of wireless services by the telephone companies".
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5. In Regulation of Mobile Wireless Telecommunications Services, Telecom Decision CRTC 96-14, 23 December 1996 (Decision 96-14), the Commission extended the forbearance regime in Decision 94-15 to include all mobile voice wireless telecommunications services that are connected to the public switched telephone network (e.g., cellular services, PCS, enhanced specialized mobile radio services, and satellite-based mobile services). In that Decision, the Commission also restated its conclusion in Decision 94-15 not to extend forbearance, in respect of such services provided in-house by a dominant telephone company providing primary exchange service.
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II THE APPLICATION
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A. General
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6. While NBTel noted that the Commission has already found the cellular market to be sufficiently competitive to warrant forbearance, it provided evidence pursuant to the criterion developed in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 19 September 1994 to show that the mobile voice telecommunications market in New Brunswick is sufficiently competitive to warrant forbearance.
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7. NBTel argued that although NBTel Mobility, the division through which it offers cellular services, is not a separate arm’s length legal entity (and is part of NBTel), it meets the costing and marketing safeguards prescribed by the Commission as a condition for forbearance in Decision 94-15.
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8. NBTel submitted that the Commission grant the requested forbearance on the basis that the cellular/PCS market is sufficiently competitive, and that the introduction of the split rate base and price cap regimes, along with NBTel’s confirmation that it is adhering to the costing and marketing safeguards, provide sufficient protection against the potential for anti-competitive abuses by NBTel.
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B. Costing Safeguards
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9. NBTel argued that the split rate base regulatory framework provides an effective and more than adequate costing safeguard against cross-subsidy of the company’s cellular/PCS services by its utility services. It stated that the split rate base regulatory framework, building on existing Phase III safeguards, effectively ensures that any profits or losses from competitive category services such as cellular accrue to shareholders, and not primary exchange subscribers.
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10. Further, NBTel stated that with the implementation of the price cap regime, additional protection is provided to ensure that funds from the utility segment do not subsidize competitive elements of the business.
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11. NBTel noted that the Commission granted forbearance to a number of in-house Internet operations of the telephone companies on the basis, among other things, that the underlying transmission facilities for the provision of Internet services are readily available from the telephone companies at non-discriminatory rates, as well as from alternate service providers. NBTel argued that the provision of cellular services by the telephone companies is similar to the provision of Internet services, and should therefore be forborne.
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12. NBTel noted that in Review of Intercorporate Transactions Policies, Rules and Procedures, Telecom Decision CRTC 97-5, 21 March 1997 (Decision 97-5), the Commission changed the reporting requirements for the utility segment of an incumbent wireline telephone company and its affiliated cellular operation. In its application, NBTel proposed to commence that reporting as part of its forbearance application.
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C. Joint Marketing
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13. NBTel argued that it meets the joint marketing safeguards set out 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). It stated that NBTel and NBTel Mobility conduct their sales and marketing activities separately. NBTel stated that the primary sales and distribution channel for NBTel Mobility is account managers and third-party dealers, whereas for wireline products it is NBTel’s Phonecentres and Inside Sales Offices. NBTel submitted that its staff and sales personnel are aware of the requirement for neutral customer referrals. NBTel also stated that, as required by Decision 92-13, safeguards are in place to ensure that customer information is not available or exchanged between wireline and wireless personnel. Systems and processes have been equipped with firewalls and password-type measures to ensure that each operation’s customer information is guarded. Consequently, NBTel argued that the opportunity for NBTel to grant its cellular operations an undue preference is very limited.
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D. Sufficient Competition
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14. NBTel submitted that the relevant market for considering the issue of sufficient competition is the provision of cellular and similar services, such as PCS, local multipoint communications systems (LMCS) and multipoint distribution systems (MDS).
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15. NBTel argued that this market is intensely competitive and price sensitive, and that no one company could increase prices and expect to maintain its share of the New Brunswick market. Moreover, it noted that Rogers Cantel Inc. (Cantel) is more aggressive than NBTel in terms of prices offered to customers in New Brunswick.
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16. NBTel noted that customers are generally sophisticated and well informed about the availability of alternate service providers, and that they can easily switch to these providers. It argued that there are minimal barriers to entry into the New Brunswick cellular/PCS market, and that all underlying transmission facilities are readily available from NBTel at tariffed non-discriminatory rates, as well as from other facilities-based Canadian carriers.
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III INTERVENERS’ COMMENTS
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17. Comments were received from Cantel, Clearnet Communications Inc. (Clearnet), Microcell Telecommunications Inc. (Microcell), and Mobility Canada. Mobility Canada generally supported NBTel’s application for forbearance, while the other interveners requested that the Commission deny it.
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18. Clearnet and Microcell argued that the cellular/PCS market in New Brunswick is not sufficiently competitive to warrant forbearance.
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19. Cantel and Microcell argued that there are not adequate marketing and costing safeguards in place to prevent NBTel granting itself an undue preference or pursuing an anti-competitive predatory pricing strategy in the cellular/PCS market from revenue obtained in NBTel’s wireline markets.
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20. Cantel argued that absent costing and marketing safeguards, the telephone company will be able to confer an undue advantage on its cellular division, thereby undermining the continuance of competition, contrary to section 34(3) of the Act. Cantel also stated that the issue is not the competitiveness of the cellular market and that given the lack of competition in the local telephony market, the implementation of effective costing and marketing safeguards remains essential.
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21. Cantel argued that NBTel failed to demonstrate that effective costing and joint marketing safeguards have been implemented. According to Cantel, the intercorporate transactions reporting requirements contained in Decision 97-5 do not address transactions between various divisions within the telephone company, but rather only between the company and its affiliates.
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22. Cantel argued that in the event that the Commission removed the joint marketing restrictions pursuant to Review of Joint Marketing Restrictions, Telecom Public Notice CRTC 97-14, 25 April 1997, the requirement for continued regulation of NBTel’s wireless services becomes even more critical, because it would be impossible to track information and monetary flows between the utility and cellular divisions of a telephone company absent continued regulatory supervision.
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23. Microcell argued that the lack of transparency inherent in NBTel’s in-house wireless service arrangement makes it particularly difficult to detect such potential abuses as undue shifting of marketing and facilities costs and undue preference regarding the cost and quality of interconnection services. According to Microcell, these practices provide the means by which the dominant player may pursue predatory actions to extend its dominance.
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24. Microcell also noted that in the United States, the Federal Communications Commission (FCC) required incumbent local exchange carriers (LECs) to offer any Commercial Mobile Radio Services through a separate corporate affiliate. In addition, the affiliate must maintain separate books of account, must not jointly own transmission or switching facilities with the LEC that are also used for local exchange services in the same regional market, and must acquire any services from the affiliated LEC on an arm’s length basis as required by the affiliate transactions rules.
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25. Microcell argued that the absence of an arm’s length relationship presents an inherent risk of anticompetitive business practices, which the mandating of tariff filings serves to constrain. Microcell submitted that until NBTel establishes an arm’s length wireless affiliate or puts forward additional regulatory safeguards sufficient to address competitors’ concerns, the Commission should continue to require NBTel to file tariffs for wireless services.
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26. Cantel, Clearnet and Microcell also argued that NBTel’s market analysis regarding the degree of competition in the New Brunswick cellular/PCS market is misleading. Microcell noted that NBTel did not provide any provincial market share estimates, but instead provided national market share statistics. Cantel stated that in 1996, NBTel Mobility had 72% of the New Brunswick cellular market, with Cantel (the only other service provider) holding the remaining 28%.
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27. Cantel and Clearnet stated that while Microcell and Clearnet have signed roaming agreements which permit their customers to roam on analog cellular networks of NBTel and Cantel, neither company has rolled out a digital network in New Brunswick or begun to market its PCS services to New Brunswick residents. Cantel also argued that a decision to forbear would compromise the likelihood of new entry into the New Brunswick wireless market. Cantel and Clearnet also stated that they were unaware of NBTel authorizing resellers of its cellular services.
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28. Clearnet argued that LMCS and MDS cannot be considered substitutes for NBTel Mobility’s cellular services. Clearnet submitted that the technology of LMCS is unsuited to applications involving mobility, and MDS is primarily a programming distribution technology for the transmission of signals between fixed points.
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29. Mobility Canada submitted that the prerequisite of adequate safeguards to address cross-subsidy and undue preference has already been met.
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30. Mobility Canada noted that in the case of costing safeguards, the Commission has taken a number of measures since Decision 94-15, including a full review of its Phase III costing, the implementation of the Split Rate Base which removed competitive services from the regulated rate-base, and the imposition of Price Caps which removes incentives for cross-subsidy. Mobility Canada also argued that concerns about cross-subsidy are further alleviated because NBTel’s wireless business operates as a stand-alone business unit within the company.
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31. Mobility Canada submitted that the Commission’s linkage of forbearance and an arm’s length operating unit was intended to ensure a sustainable competitive environment, and that this goal has already been achieved. Moreover, Mobility Canada noted that the safeguards that were adopted to prevent cross-subsidy and undue preference will continue to apply, irrespective of whether or not rates and services are forborne. In this regard, Mobility Canada noted that in December 1997, the Commission forbore from regulating the incumbent LECs’ (including NBTel’s) toll and toll-free services, which are provided in-house by the incumbent LECs.
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IV CONCLUSIONS
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32. The Commission notes that in the proceeding that led to Decision 94-15, it found that the cellular market was sufficiently competitive to protect the interests of users, pursuant to section 34(2) of the Act. The finding of sufficient competition was based upon examination of general structural features of the cellular market, rather than upon a competitive assessment of each individual geographic market or territory of each of the cellular service providers. In particular, in considering forbearance in Decision 94-15, the Commission noted that there were two licensed providers of cellular services nationally and that four potential Public Cordless Telephone Service (PCTS) providers received licences. The Commission noted that PCTS and other new services, such as enhanced specialized mobile radio systems, would provide substitutes for cellular services in some circumstances. As noted in Decision 96-14, PCTS has been supplanted by PCS.
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33. The Commission notes that the mobile wireless market in New Brunswick, and elsewhere in Canada, has evolved considerably since Decision 94-15 was released. Competitors in NBTel’s service area have about 24% to 30% of the cellular market, and in addition, there are now four licensed providers of PCS operating in Canada. The Commission also notes that Microcell and Clearnet have signed roaming agreements with NBTel and Cantel in New Brunswick, and that they can actively market their services in New Brunswick.
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34. The Commission concurs with the views expressed by NBTel and Mobility Canada that since the Commission has already found the cellular/PCS market to be sufficiently competitive, the fundamental issue in this particular case is whether there are sufficient safeguards in place to warrant forbearance.
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35. The Commission notes that the joint marketing restrictions on wireline and cellular/PCS services, contained in Decisions 87-13 and 92-13, were removed in Joint Marketing and Bundling, Telecom Decision CRTC 98-4, 24 March 1998. In that Decision, the Commission noted that the mobile voice wireless services market has grown considerably during the past 10 years, and that it is dynamic and competitive, and becoming more competitive as new competing services such as PCS and enhanced specialized mobile radio are being rolled out. The Commission further noted that there is significant rivalry among competitors as demonstrated by media advertizing campaigns and price rivalry, and that consumers are aware of alternate wireless service providers.
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36. In the Commission’s view, the remaining issue is whether there are effective costing safeguards in place to limit anticompetitive cross-subsidies. Since Decision 94-15, the Commission has imposed additional measures, such as the split rate base and the price cap regime, to limit the likelihood and incentive of cross-subsidization from utility to competitive segments and thus reduce NBTel’s ability to pursue an anti-competitive cross-subsidy strategy.
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37. The Commission notes that in NBTel - Marketing of Cellular Service, Telecom Letter Decision CRTC 94-1, 16 February 1994, the Commission directed NBTel to file separate Phase III results detailing investments, revenues and all operating and other expenses pertaining to cellular services. These procedures were maintained in Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995, which also requires that all cellular (and PCS) related activities are to be assigned to the Competitive segment.
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38. In light of the above, and based on the record of this proceeding, the Commission finds that it would be appropriate to forbear from the provision of cellular/PCS services by NBTel, consistent with the degree of forbearance granted to the provision of public switched mobile voice services in Decision 96-14. In particular, the Commission will refrain from exercising its powers and duties under sections 24 (in part), 25, 29, 31 and subsections 27(1), 27(5) and 27(6) of the Act.
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39. The Commission finds it appropriate to retain its powers and duties under section 24 (in part) and subsections 27(2), 27(3) and 27(4) of the Act.
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40. The Commission considers that, consistent with Decision 96-14, it is necessary to retain certain of its powers with respect to section 24 of the Act in order to maintain conditions to safeguard the confidentiality of customer information, and to impose conditions that may be necessary 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 services forborne in this Decision.
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41. The Commission is of the view that, consistent with Decision 96-14, it is important to retain subsections 27(2), 27(3) and 27(4) in order to, for example, ensure that NBTel does not unjustly discriminate against other service providers or customers, or confer an undue or unreasonable preference with respect to access to their networks. 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 in this Decision.
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42. Based on the above, pursuant to subsection 34(1) of the Act, the Commission finds as a matter of fact that to refrain from exercising powers and performing duties under sections 25, 29 and 31 and subsections 27(1), 27(5) and 27(6), and under section 24 and subsection 27(3) of the Act to the extent set out in this Decision, with respect to NBTel’s cellular/PCS services is consistent with the Canadian telecommunications policy objectives. Pursuant to subsection 34(2) of the Act, the Commission finds as a question of fact that the provision of these services is subject to sufficient competition to protect the interests of users. Pursuant to subsection 34(3) of the Act, the Commission finds that to refrain from exercising the powers and performing the duties to the extent set out in this Decision would not likely impair unduly the continuance of a competitive market for these services.
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43. In light of the foregoing, the Commission directs that pursuant to subsection 34(4) of the Act, effective the date of this Decision, sections 24 (in part), 25, 29 and 31 as well as subsections 27(1), 27(3) (in part), 27(5) and 27(6) of the Act do not apply to NBTel’s cellular/PCS services, to the extent that they are inconsistent with the Commission’s determinations herein. NBTel is directed to issue tariff pages within 15 days of the date of this Decision withdrawing the tariffs for these services.
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Secretary General
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This document is available in alternative format upon request.
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