ARCHIVED -  Telecom Order CRTC 99-592

Telecom Order CRTC 99-592

Ottawa, 25 June 1999

FORBEARANCE FROM RETAIL INTERNET SERVICES

File No.: 8640-C12-01/98

I INTRODUCTION

1. Internet Forbearance, Telecom Public Notice CRTC 98-17, 22 July 1998 (PN 98-17) invited comments on whether the Commission should forbear from regulating retail end-user Internet services (IS) provided by all Canadian carriers that are not already subject to a forbearance decision of the Commission with respect to retail IS (the remaining carriers). The Commission expressed the preliminary view that the retail IS market is generally competitive, and that pursuant to section 34 of the Telecommunications Act, (the Act) it would be appropriate to forbear from regulating IS provided by the remaining carriers. The Commission also expressed the preliminary view that, consistent with previous rulings, it would be appropriate to forbear conditionally or unconditionally, depending on whether the carrier in question has the appropriate accounting separations in place.

2. The Commission also requested that parties address in their comments any other issues that they believe should be considered in determining whether the remaining carriers should be permitted to provide IS on a forborne basis.

3. Bruce Municipal Telephone System (Bruce), CoopTel, North Renfrew Telephone Company Limited, Northern Telephone Limited (Northern), and The Corporation of the City of Thunder Bay - Telephone Division (Thunder Bay Telephone) applied for forbearance from regulation of their retail IS before PN 98-17 was issued. They, and the other remaining carriers, were made parties to this proceeding.

4. The Commission received comments or reply comments from the British Columbia Public Interest Advocacy Centre (BCOAPO et al.); Bruce; Canadian Association of Internet Providers (CAIP); Northern; O.N. Tel; the Ontario Telephone Association (OTA); Stentor Resource Centre Inc., on behalf of BC TEL, Bell Canada, Island Telecom Inc., MTS Communications Inc., and Québec-Téléphone (Stentor); Teleglobe Canada Inc. (Teleglobe); Télébec Ltée (Télébec); Thunder Bay Telephone; and TELUS Communications Inc. (TCI).

II BACKGROUND

5. The Commission notes that it has repeatedly found that the retail IS market is highly competitive and dynamic, such that forbearance was appropriate for IS provided by: TCI and NBTel Inc. (Telecom Order CRTC 97-471, 8 April 1997); TELUS Communications (Edmonton) Inc. (Telecom Order CRTC 97-928, 30 June 1997); Maritime Tel & Tel Limited, Northwestel Inc. and Sogetel inc. (Telecom Order CRTC 98-619, 23 June 1998); NewTel Communications Inc. (Telecom Order CRTC 97-1667, 14 November 1997); and certain OTA member companies (Telecom Order CRTC 97-1666, 14 November 1997). In these orders, the Commission found that the retail IS market was characterized by intense rivalry among competitors in terms of aggressive marketing techniques, innovative service offerings and price competition. The Commission also found that there were few entry barriers into retail IS markets, and that a large number of service providers, ranging in size from small local independent operators to large multinational competitors, had entered the market in a relatively short period of time. The Commission also noted that essential facilities and other underlying telecommunications transmission facilities are readily available from the telephone companies at tariffed, non-discriminatory rates, and other sources of supply of transmission facilities are emerging.

6. Where the Commission was satisfied that adequate safeguards were in place to ensure against the cross-subsidization of IS from their utility segment revenues, the Commission forbore without conditions. Such safeguard measures include implementation of the split rate base regime as set out in Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), or the adoption by the telephone company of an approved accounting framework to separate the financial results of its Internet operations from its utility operations.

7. In all of these orders the Commission continued to exercise its powers and duties under subsections 27(2), 27(3) and 27(4) of the Act, and retained certain powers under sections 24 of the Act in order to, among other things, ensure that existing conditions regarding confidential competitive information continue to apply and to retain the power to impose conditions on the offering and provision of IS as may be necessary in the future.

III POSITION OF PARTIES

8. All of the parties acknowledged that retail IS markets are competitive. Also, most parties supported the Commission’s preliminary view that the IS market is sufficiently competitive to warrant forbearance.

9. Stentor submitted that competition in retail IS markets throughout Canada continues to intensify as a result of large increases in demand, the entry of large multinational ISPs and the expansion of high-speed IS offerings by incumbent cable television companies. Stentor also submitted that since there are no significant technical, economic, or regulatory barriers to entry into the retail IS market, many ISPs have entered the Canadian market in a relatively short period of time. Stentor also noted that all the underlying telecommunications facilities required to provide IS are available as tariffed services from the Stentor member companies. Finally, Stentor submitted that all its members meet the Commission’s criterion for unconditional forbearance because adequate safeguards, such as the split rate base and a price cap regime, are in place to limit the opportunity for anticompetitive cross-subsidization.

10. A number of parties submitted that, because the independent ISPs are both customers and competitors of the telephone companies, the Commission should retain some of its powers to ensure that independent ISPs have non-discriminatory access, at tariffed rates, to the telecommunications transmission facilities needed to provide retail IS. For example, O.N. Tel and Thunder Bay Telephone submitted that the Commission should retain subsections 27(2), 27(3), and 27(4) with respect to access to underlying telecommunications transmission facilities needed to provide IS. Télébec submitted that no regulation of IS beyond subsections 27(2), 27(3), and 27(4) of the Act is necessary. Stentor did not address the issue of whether subsections 27(2), 27(3), and 27(4) should be retained.

11. While acknowledging that IS markets are competitive, BCOAPO et al. Argued that there is an on-going role for regulation to monitor market developments because competition may be lessened as many small ISPs will likely be acquired by larger service providers. BCOAPO et al. also expressed concerns that greater reliance on market forces may disadvantage certain groups in society who may not afford, or be unable to use, the required IS-related technology.

12. Northern and Thunder Bay Telephone argued that interests of disadvantaged groups would be better served by competitive markets because competition results in lower access rates, lower costs of peripherals (e.g., software and hardware) and a greater number and variety of innovative service offerings. Stentor, Northern and Thunder Bay Telephone submitted that many of the issues raised by BCOAPO et al. should more appropriately be addressed in other proceedings, such as the proceeding initiated by Service to High Cost Serving Areas, Telecom Public Notice CRTC 97-42, 18 December 1997 (PN 97-42), or the proceeding initiated by New Media - Call for Comments, Telecom Public Notice CRTC 98-20, 31 July 1998.

13. CAIP submitted that it does not oppose forbearance of IS provided by the telephone companies. However, it requested that the Commission depart from its existing IS forbearance regime and treat high-speed IS differently, in order to ensure the development of a competitive market for high speed IS. CAIP noted that the Commission’s previous IS forbearance orders were based on, among other things, the assumption that all the underlying transmission facilities were available at tariffed, non-discriminatory rates from the telephone companies, and that a supply of alternate facilities was emerging. However, CAIP submitted that high-speed IS should be treated differently because the required underlying transmission facilities are not available on an economic basis.

14. CAIP submitted that the Commission should not forbear from regulation of high-speed IS until certain conditions have been met, such as the approval of a tariff for high speed access (with at least one non-affiliated ISP subscribing to that tariff) and no proven acts of anticompetitive conduct by the carrier in question.

15. CAIP also urged the Commission to order carriers, pursuant to section 35(1) of the Act, to provide high-speed IS service on an in-house basis, rather than through unregulated affiliates, in order to ensure that rates charged for high-speed IS to end-users fully recover all underlying costs of providing the service. According to CAIP, the carrier may then provide high-speed IS on a forborne basis (provided that the conditions identified in paragraph 14 are met).

16. In reply, Stentor argued CAIP is proposing forbearance criteria for high-speed IS that are beyond the criteria already contained in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19). Stentor argued that CAIP did not provide any arguments as to why the forbearance criteria developed in Decision 94-19 are insufficient, and why the Commission should adopt the additional forbearance criteria proposed by CAIP. Stentor also argued that the forbearance criteria proposed by CAIP: (1) improperly link forbearance from regulation of retail IS with the provision of underlying tariffed services, and argued that other more direct regulatory powers exist to resolve complaints involving such services; (2) unfairly link forbearance to behaviour of third parties (i.e., telephone company affiliates) which are beyond the control of the telephone companies; and (3) impose an unfair reverse onus on the telephone companies currently forborne such that they must continually justify to the Commission why forbearance should be maintained. TCI submitted that many of the forbearance criteria proposed by CAIP are essentially already covered by the Commission’s existing rules and procedures, and that rewriting these is beyond the scope of this proceeding. Thunder Bay Telephone and Northern submitted that the additional criteria proposed by CAIP may not be appropriate for small telephone companies.

17. Stentor also submitted that many of the issues raised by CAIP are beyond the scope of PN 98-17. Stentor argued that most of CAIP's concerns addressed the market for access to underlying facilities, rather than the retail IS market which is the market under consideration in this proceeding.

18. Stentor noted that in Decision 94-19, the Commission stated that the first step and basis for the entire forbearance exercise is the determination of the relevant market, in order to, among other things, determine which services are practicable substitutes and thus compete with each other. Stentor noted that in Regulation under the Telecommunications Act of Certain Telecommunications Services Offered by "Broadcast Carriers", Telecom Decision CRTC 98-9, 9 July 1998 (Decision 98-9), when the Commission examined the IS market, it concluded that the relevant retail IS market, for the purpose of forbearance, includes all IS, irrespective of speed, on the basis that lower and higher speed IS share sufficient attributes to be considered reasonable substitutes. Stentor argued that CAIP did not provide any evidence that high-speed retail IS constitutes a separate market for the purposes of considering forbearance in this proceeding.

19. Stentor also argued that CAIP has not made a case for invoking subsection 35(1). It submitted that in order for the Commission to exercise its powers under subsection 35(1) and require a carrier, rather than an affiliate, to provide a service directly the Commission must determine as a question of fact that the service is not subject to a degree of competition that is sufficient to ensure just and reasonable rates. Stentor argued that, not only is the retail IS market highly competitive, but that a finding of insufficient competition in that market would be in stark contrast to all previous Commission rulings on retail IS, and would in effect constitute a review and variance of previous Commission rulings granting forbearance to IS.

20. Stentor and TCI also argued that this proceeding is not the appropriate vehicle for dealing with difficulties that CAIP members may have in providing high-speed IS on an economic basis. They noted that the Commission has not forborne from the access market (i.e., the underlying transmission facilities), and is requiring cable television carriers to unbundle access to their facilities, and make high-speed facilities available at tariffed rates.

21. Finally, TCI stated that CAIP is incorrect in stating that no independent ISPs are offering high-speed IS in residential markets because of the high cost of high speed transmission facilities. TCI submitted that a major independent ISP in Alberta has been offering high-speed ADSL-based IS for some time.

22. Teleglobe requested forbearance from regulation of its International Globeinternet service which is a wholesale Internet access service provided to ISPs. Teleglobe also requested that the Commission forbear from regulation of any retail IS that it may offer to end-users in the future.

23. Stentor agreed that retail IS offered by Teleglobe would be subject to sufficient competition to protect the interests of users, and thus should be granted forbearance. However, Stentor submitted that no other party requested forbearance from regulation of wholesale services aimed at ISPs, and that Teleglobe’s request for forbearance from regulation of its wholesale IS is outside the scope of this proceeding.

IV CONCLUSIONS

24. The Commission has on numerous occasions found the retail IS market to be sufficiently competitive to protect the interests of users, and thus warrant forbearance pursuant to section 34 of the Act. The Commission notes that most parties in this proceeding agreed that the retail IS market is sufficiently competitive to warrant forbearance.

25. Based on the record of this proceeding, the Commission is of the view that it would be appropriate to forbear from regulating retail IS provided by the remaining carriers to the same extent that other Canadian carriers have been forborne in previous forbearance rulings.

26. In certain of the previous rulings on IS forbearance, the Commission expressed concerns about the ability of the telephone companies to cross-subsidize IS from utility revenues. Where a telephone company had implemented the Split Rate Base regime set out in Decision 95-21, the Commission forbore unconditionally. However, where the Split Rate Base regime had not been implemented, the Commission forbore from regulating retail IS on the condition that the company separate the financial results of the company’s internet operations from the company’s utility operations, through accounting separations. The Commission notes that none of the parties to this proceeding took the position that this approach is inappropriate.

27. The Commission is of the view that, consistent with previous rulings and the preliminary view expressed in PN 98-17, it would be appropriate to forbear conditionally or unconditionally, depending on whether the carrier in question has the appropriate accounting separations in place and to the same extent as in previous retail IS forbearance rulings regarding the provision of IS by the telephone companies.

28. The Commission notes that in previous IS forbearance orders, it continued to exercise its powers and duties under subsections 27(2), 27(3) and 27(4) of the Act, and retained certain of its powers under section 24 of the Act in order to, among other things, ensure that existing conditions regarding confidential competitive information continue to apply and to retain the power to impose conditions on the offering and provision of IS as may be necessary in the future. The Commission notes that none of the parties in this proceeding proposed that the Commission also forbear from these sections of the Act. The Commission considers it appropriate to retain these powers.

29. Regarding CAIP’s request that additional forbearance criteria should be applied to high-speed retail IS, the Commission considers that CAIP did not provide persuasive evidence as to why the competitive criteria developed in Decision 94-19 are not adequate. Further, the Commission notes that CAIP did not provide any evidence or rationale to show that the Commission’s determination in Decision 98-9, that high-speed retail IS is not a separate market, is incorrect. The Commission considers that CAIP’s submissions with respect to the price and availability of the underlying high-speed transmission facilities, are outside the scope of this proceeding which is confined to retail IS. In this regard, the Commission notes that it has not forborne from regulating the rates, terms and conditions of underlying access facilities of the telephone companies; and further, that the Commission has required cable carriers to provide access to their underlying telecommunications services on a tariffed basis.

30. Regarding CAIP’s position that the Commission exercise its powers under subsection 35(1) of the Act and order that high-speed IS be provided only by telephone companies, and not by their affiliates, the Commission notes that subsection 35(1) states:

"Where the Commission determines as a question of fact that a telecommunications service or class of services provided by an affiliate of a Canadian carrier is not subject to a degree of competition that is sufficient to ensure just and reasonable rates and prevent unjust discrimination and undue or unreasonable preference or disadvantage, the Commission may require the Canadian carrier to provide the service or class of services in any manner, to any extent and subject to any conditions determined by the Commission, if it is satisfied that it would be an effective and practical means of achieving the purposes of section 27 with respect to the service or class."

31. Based on the record of this proceeding, the Commission is not persuaded that it would be appropriate to exercise its powers under subsection 35(1) to require the telephone companies to provide high-speed retail IS on an in-house basis.

32. While the Commission acknowledges that some telephone company affiliates have charged retail IS prices that are below tariff rates for underlying high-speed access services, the Commission considers that such practices are not necessarily predatory.

33. Moreover, the Commission considers that below cost pricing (in the short-run) is not necessarily inconsistent with highly competitive markets, particularly if it is in response to competitive pressures and pricing initiatives by more established firms in the market.

34. Given the large number of ISPs (some of which are large multi-national firms) and the low barriers to entry into retail IS, the Commission considers that a strategy of predatory pricing would not be workable. In the Commission's view, it is unlikely that major ISPs could be driven out of the retail market in sufficient numbers to justify the costs of predation.

35. In Telecom Order 99-591 of today’s date, the Commission denied CAIP’s request for similar relief with respect to the provision of high-speed IS by Bell’s affiliates.

36. With respect to Teleglobe’s request for forbearance of its International Globeinternet service, the Commission notes that PN 98-17 did not include consideration of forbearance for wholesale Internet access services such as Globeinternet service. Moreover, the Commission notes that in Regulatory Regime for the Provision of International Telecommunications Services, Telecom Decision CRTC 98-17, 1 October 1998, the Commission found that Teleglobe did not provide evidence sufficient to support forbearance from regulation of most of Teleglobe’s access services including Globeinternet service. In the circumstances, the Commission has not dealt with Teleglobe’s forbearance request for Globeinternet service in this proceeding. However, the Commission notes that this decision will apply to the provision of retail IS by Teleglobe.

37. Pursuant to subsection 34(1) of the Act, the Commission finds as a question of fact, that to refrain from exercising its powers and duties under sections 25, 29, and 31, and subsections 27(1), 27(5) and 27(6) of the Act, and under section 24 of the Act (to the extent set out in this decision) with respect to retail IS would be consistent with the Canadian telecommunications policy objectives.

38. Pursuant to subsection 34(2) of the Act, the Commission finds as a question of fact that the provision of retail IS is subject to sufficient competition to protect the interests of users.

39. 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 the establishment or continuance of a competitive market for these services.

40. In light of the foregoing and consistent with its previous IS forbearance rulings, the Commission will, in the case of carriers that have Utility segment operations and have implemented the Split Rate Base regime, unconditionally:

- refrain from exercising its powers under sections 25, 29, and 31, and subsections 27(1), 27(5) and 27(6) of the Act in respect of retail IS provided by the remaining carriers;

- retain part of its powers under section 24 of the Act in order to ensure that existing conditions regarding confidential information continue to apply and to retain the power to impose conditions on the offering and provision of retail IS as may be necessary in the future;

- retain its powers under subsections 27(2), 27(3) (except to the extent that that provision refers to powers that are forborne), and 27(4) of the Act to provide an additional safeguard against carriers granting any undue preference.

41. For carriers without a Split Rate Base, forbearance to the extent described above will be effective conditional on each such carrier’s implementation of a Commission approved accounting framework to separate the financial results of its Internet operations from its total regulated operations.

42. It is hereby declared that:

Pursuant to subsection 34(4) of the Act, 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 in respect of retail IS provided by the remaining carriers to the extent that they are inconsistent with the Commission's determinations herein effective:

(a) the date of this Order, to carriers that have Utility segment operations and have implemented the Split Rate Base regime or have Commission approved accounting separations in place. These companies are directed to issue tariff pages, within 15 days of the date of this Order, withdrawing tariffs for their retail IS services.

(b) upon approval by the Commission of a filing by a company that, as of the date of this decision, does not have the appropriate accounting separations in place, confirming that it has complied with the requirement to separate competitive IS assets, revenues and expenses from its rate base and shortfall determination. Each such company is directed, upon approval by the Commission of the filing, to issue tariff pages withdrawing the tariffs for its retail IS.

Secretary General

This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca