ARCHIVED -  Telecom Order CRTC 99-972

Telecom Order

Ottawa, 8 October 1999

Telecom Order CRTC 99-972

Affiliate Rule for Primary Local Exchange Services

File Nos.: 8622-C25-04/98 and 8643-S1-01/98

1.On 16 March 1998 Stentor Resource Centre Inc. (Stentor), on behalf of BC TEL, TELUS Communications Inc., Bell Canada (Bell), Maritime Tel & Tel Limited (MTT), MTS Communications Inc. (MTS), NBTel Inc. (NBTel), NewTel Communications Inc. (NewTel) and Island Telecom Inc. (Island Tel) (the applicants, also referred to as incumbent local exchange carriers (ILECs)), filed an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure to eliminate the affiliate rule as currently included in the tariffs of the applicants.

Background

2.The affiliate rule prohibits the applicants from leasing interexchange voice services to their affiliates for provision of interexchange, interconnected voice services (interexchange voice services), or for resale on a joint use basis or sharing to provide interexchange voice services.

3.In Affiliate Rule, Telecom Decision CRTC 94-6, 4 March 1994 (Decision 94-6), affiliate was defined to mean "any person that controls or is controlled by the company or that is controlled by the same person that controls the company, and includes a related person". A person is related to another if (1) either holds, directly or indirectly, at least a 20% interest in, or any options to acquire at least a 20% interest in, any of the capital, assets, property, profits, earnings, revenues or royalties of the other, or (2) any third party holds, directly or indirectly, at least a 20% interest in, or any options to acquire at least a 20% interest in, any of the capital, assets, property, profits, earnings, revenues or royalties of each of the persons.

4.Decision 94-6 defined "control" to include control in fact, whether through one or more persons.

5.The affiliate rule does not currently apply to Teleglobe Canada Inc. (Teleglobe).

Telecom Public Notice CRTC 99-3

6.Following the application by Stentor, and interventions by Call-Net Enterprises Inc. (Call-Net), on behalf of itself and fONOROLA Inc. (now a part of Call-Net), Microcell Telecommunications Inc. and Rogers Cantel Inc., the Commission issued Affiliate Rule, Telecom Public Notice CRTC 99-3, 19 January 1999 (PN 99-3), to invite comment on:

(1) Whether an affiliate rule prohibiting the applicants' affiliates from reselling the applicants' local services is required to ensure development of effective competition in markets for local exchange services, including comment on the effects both on the applicants and on competitors;

(2) The form such a rule should take, whether outright prohibition on resale of the applicants' local services by affiliates, or, alternatively, whether limits on the activities of the applicants' affiliates would suffice to ensure the development of competition in local services;

(3) Whether an affiliate rule for local services is required to ensure that the applicants comply with the bundling rules; and

(4) Whether an affiliate rule is required for Teleglobe, considering the regulatory framework for the company established in Regulatory Regime for the Provision of International Telecommunications Services, Telecom Decision CRTC 98-17, 1 October 1998 (Decision 98-17).

7.In PN 99-3, the Commission stated that the reasons for which the affiliate rule for interexchange voice services was established no longer exist, or have been addressed by other mechanisms established by the Commission. However, the Commission retained the affiliate rule for interexchange services on an interim basis until a decision is made on the issues raised in PN 99-3.

8.The applicants and Teleglobe were made parties to the proceeding initiated by PN 99-3.

9.The Commission received comments or reply comments from: BCT·TELUS (on behalf of BC TEL and TELUS Corporation); Bell, Island Tel, MTT, MTS, NBTel and NewTel, in a joint submission (collectively referred to as the Bell companies); AT&T Canada Corp. (AT&T Canada); Call-Net on behalf of itself and Sprint Canada Inc. (Sprint), Clearnet Communications Inc. (Clearnet), London Telecom Network Inc. (London Telecom), MaxLink Communications Inc. (MaxLink), MetroNet Communications Group Inc. (now part of AT&T Canada), (collectively referred to as the competitors); Mobility Canada on behalf of its member companies (Mobility); and the Public Interest Advocacy Centre (PIAC).

Positions of Parties

Requirement for an Affiliate Rule

10.The competitors and PIAC submitted that the applicants are expected to be dominant in the local exchange market for some time to come, and that an affiliate rule is required to ensure that the applicants do not abuse their dominance and impede the establishment of local competition.

11.The competitors and PIAC argued that without an affiliate rule for local services, the applicants could resort to reseller-affiliates to offer these services at prices below approved tariff rates, or otherwise act anti-competitively, in order to strategically slow the development of competition in markets for local services. AT&T Canada, Clearnet, MaxLink, and PIAC submitted that an applicant would focus on the combined return to the affiliate and the parent company, and not on possible losses by the affiliate.

12.Competitors argued that the imposition of an affiliate rule for local services would not harm the applicants, because none of the applicants are currently offering such local services through an unregulated affiliate, and since the applicants would still be allowed to joint market and bundle their local services with services of affiliates and unrelated companies, subject only to the imputation test and the bundling rules.

13.The applicants and Mobility argued that an affiliate rule for local services is not required to ensure that competition develops in local markets, and submitted that local competition has been developing without an affiliate rule for local services.

14.The Bell companies submitted that the substantive issue in this proceeding is how to deal with the potential for predatory pricing and other instances of anti-competitive behaviour. They submitted that a case by case approach, rather than an outright prohibition on the resale of the applicants' local services by affiliates would be a more appropriate approach for dealing with allegations of anti-competitive behaviour.

15.The Bell companies noted that when competition was introduced in the interexchange voice market, long distance rates were, as a matter of policy, considerably above costs. They stated that an affiliate rule was considered necessary to prevent contribution erosion that could have occurred if affiliates of the companies had been eligible for contribution discounts, or if the companies had sold a large portion of their long distance services through reseller-affiliates. The companies submitted that there are no similar incentives to resort to reseller-affiliates in markets for local services.

16.The Bell companies submitted that with implementation of the framework for local competition, and competitive safeguards, such as the split rate base and the price cap regime, local markets are open to competitive entry. They argued that predatory pricing is implausible, given the competitiveness of the telecommunications industry.

17.Further, the Bell companies submitted that they rely on affiliates to serve their national and international customers, in competition with international carriers like AT&T Canada and Sprint that can offer their customers one stop shopping. Imposition of an affiliate rule could deny customers the benefits of price and service competition, and impede the deployment of new technology.

18.The Bell companies argued that the issue is whether the affiliates act anti-competitively, and how to address allegations of anti-competitive behaviour, and not whether affiliates comply with the tariffs and regulations applicable to the regulated companies. The Bell companies noted that some of their affiliates are Canadian carriers under the Telecommunications Act (the Act), and submitted that the Commission could use its powers to investigate and deal with allegations of anti-competitive behaviour by such affiliates.

19.The Bell companies also argued that, if an affiliate that was not a Canadian carrier (i.e. a reseller without transmission facilities) acted anti-competitively, the Commission could then impose an affiliate rule. The Bell companies argued that an affiliate rule was a draconian regulatory instrument, that should not be imposed on the companies absent evidence of anti-competitive behaviour.

20.BCT·TELUS submitted that when the Commission first permitted competition in the interexchange market, the alliance of the Stentor companies dominated that market, and new entrants were small. BCT·TELUS submitted that the interexchange affiliate rule was intended to foster the development of competition by preventing the applicants from entering the interexchange market through affiliated resellers, or from taking advantage of contribution discounts.

21.BCT·TELUS argued that the market for telecommunications has changed. With the entry of Sprint and AT&T Canada, and the break-up of the Stentor alliance, four large integrated carriers now compete in most telecommunications markets. BCT·TELUS submitted that, in this new market, predatory activities by the applicants or their affiliates would be unlikely, since a predator would not succeed in driving AT&T Canada or Sprint from the Canadian market, and thus could not later recoup losses from predatory pricing.

22.Mobility submitted that an affiliate rule for local services could prevent the Mobility companies from reselling telephone numbers, and from using the affiliated incumbent carriers' local facilities to transport and complete wireless calls.

23.Mobility also submitted that an affiliate rule would limit its access to the applicants' enhanced local services, (e.g. call forwarding and voice mail), frustrate development of integrated wireline and wireless services for its customers, and limit opportunities for the Mobility companies to become competitive local exchange carriers, thus potentially limiting competition in local markets.

Form of an Affiliate Rule

24.Most competitors submitted that the simplest form of an affiliate rule would be an outright prohibition on the resale of the applicants' local services by their affiliates.

25.London Telecom argued that it would suffice if affiliates of an applicant were prevented from reselling the applicant's local services in the applicant's operating territory. London Telecom submitted that the applicants should be permitted to establish affiliates in the operating territories of other applicants. As an alternative to this proposal, London Telecom submitted that the Commission impose a requirement that affiliates of the applicants sell local services at the same rates and terms and conditions as the applicants.

26.The Bell companies noted that since Resale to Provide Primary Exchange Voice Services, Telecom Decision CRTC 87-1, 12 February 1987, their affiliates have been permitted to resell and bundle local services. The Bell companies argued that affiliates are established for valid business reasons, for example to respond to market needs and to attain strategic business objectives, and not for the purpose of reselling services in order to avoid regulation.

Compliance with the Bundling Rules

27.Competitors submitted that absent an affiliate rule, the telephone companies could establish reseller-affiliates to circumvent the Commission's bundling rules.

28.The Bell companies noted that the Commission has never required that the regulatory regime, including the bundling rules, applicable to the regulated companies also apply to their affiliates.

29.BCT·TELUS submitted that pricing contrary to the bundling rules would entail below cost pricing, and argued that, since the company's affiliates do not have market power, they would be unable to recover losses from below cost pricing, and hence have no incentive to circumvent the bundling rules.

An Affiliate Rule for Teleglobe

30.Teleglobe submitted that an affiliate rule prohibiting the resale of its services by an affiliate is not required. It submitted that it has no incentive to engage in anti-competitive or predatory pricing, by reducing retail rates, since the company is subject to a price-cap regime that controls the company's wholesale prices. Further, Teleglobe argued that with the removal of the by-pass restrictions, it could not re-establish its monopoly and raise retail prices to recover revenues lost from predatory pricing.

31.The Bell companies, Mobility and BCT·TELUS agreed with Teleglobe. The Bell companies submitted that the Commission found in Decision 98-17 that the licensing conditions regarding anti-competitive conduct, and the Commission's powers under subsections 27(2) and 27(4) of the Act would be sufficient to safeguard against anti-competitive conduct in the international market by Teleglobe.

32.London Telecom also agreed, noting that the international market is now open to competition. London Telecom submitted that, with the elimination of the by-pass restrictions, all parties can access competitive Canadian, American or other international carriers, so that Teleglobe has little ability to prevent the development of competition in international services.

33.MaxLink argued that an affiliate rule for Teleglobe is required at this time, since it will be some time before Teleglobe will actually lose its market power following removal of the by-pass restrictions.

Conclusions

Limited Affiliate Rule for Primary Local Exchange Services

34.In Local Competition, Telecom Decision CRTC 97-8, 1 May 1997, the Commission established its framework for local exchange competition. The Commission also implemented a number of competitive safeguards, such as the imputation test and the bundling rules, to ensure, among other things, that the applicants do not engage in anti-competitive below cost pricing. In doing so, the Commission noted that the applicants' pricing, unconstrained by the imputation test, could impede development of local exchange competition.

35.In Decision 94-6 the Commission maintained the affiliate rule prohibition on the resale of interexchange voice services to, among other things, continue the orderly transition to a more competitive marketplace. In local markets, competitive entry is substantially less advanced than it was in interexchange markets when Decision 94-6 was issued. Competition is just starting to emerge in the local market, and the applicants still enjoy a virtual monopoly in the provision of local exchange services. Moreover, applicants' affiliates that are resellers are not Canadian carriers and thus operate outside the scope of the Act. They, therefore, are not subject to direct enforcement regarding the competitive safeguards established in Commission decisions affecting local markets. A reseller-affiliate could, for example, lease an applicant's services and components at tariff rates to provide local exchange services at prices that did not meet the imputation test or the bundling rules.

36.In this connection, the Commission notes that the applicants must price local exchange services, with the exception of residential exchange services, to cover loop costs set at Phase II costs plus a twenty five per cent mark-up where loops are essential. In these circumstances the applicants' reseller-affiliates could price services below imputation test levels, and still provide a positive total return for the applicant and the affiliate taken together. Moreover, if an applicant's reseller-affiliate were to lease loops which are not essential, the applicant's reseller-affiliates could choose to offer services below imputation test levels, which if offered by the applicant, must meet the imputation test.

37.The Commission considers that, at this time, the development of local competition requires continued enforcement of the various competitive safeguards, including the imputation test and the bundling rules. However, the Commission agrees with the applicants that a comprehensive, across-the-board affiliate rule prohibiting resale of the applicants' services by all of their affiliates is not necessary to meet the Commission's requirements.

38.The Commission considers that it is not necessary to prohibit affiliates that are Canadian carriers pursuant to the Act from reselling the applicants' local services. While the Commission has forborne from exercising some of its powers with respect to some of these affiliated Canadian carriers, it has retained sufficient powers to impose conditions on the provisioning of services by these carriers.

39.This will enable the Commission to ensure, if and where necessary, that these affiliated Canadian carriers comply with the competitive safeguards.

40.Some competitors suggested that reseller-affiliates be permitted to resell the applicants' services, but also be required to offer these services at the same rates, terms and conditions at which the applicants offer them. The Commission is of the view that this proposal is overly broad, and that the narrower regulatory approach as set out below has the advantage of maintaining competitive safeguards, while also permitting greater competitive benefits for consumers.

41.The applicants submitted that an affiliate rule is not needed because, should there be evidence that a reseller-affiliate acted anti-competitively, the Commission could investigate at that time. The Commission, however, is of the view that the scope for corrective action in such circumstances would be limited to initiating a proceeding to establish an affiliate rule, and that accordingly, it is preferable to establish a limited form of an affiliate rule for local exchange services.

42.The Commission notes that there is competition in the provision of optional local services, such as voice mail. Accordingly, in the Commission's view, it is appropriate to restrict application of the affiliate rule to primary local exchange services.

43.In light of the foregoing, the Commission finds it appropriate to establish a rule that prohibits the ILECs from providing to affiliates that are not Canadian carriers local exchange facilities, such as loops, or local exchange services for resale to provide local exchange services.

44.However, the affiliate rule will only prohibit resale of primary local exchange services by affiliates that are not Canadian carriers in the service territory of an affiliated ILEC. The Commission agrees with London Telecom that this approach will allow ILECs to compete in each other's markets on the same basis as other competitors, while not impeding competition in their own operating markets.

45.The Commission notes that it will continue to define affiliates in accordance with Decision 94-6.

Teleglobe

46.The Commission considers that the recent changes in the regulatory framework governing Teleglobe have lessened Teleglobe's market power.

47.The Commission notes further that, pursuant to the licensing framework for international telecommunications service providers set out in Decision 98-17, it is a condition of licence that the licensee shall not engage in anti-competitive conduct in relation to the provision of international telecommunications service or services. For the purposes of this condition, anti-competitive conduct includes entering into or participating in an arrangement that has or is likely to have the effect of preventing or lessening competition unduly in Canada. The Commission is of the view that this condition is sufficient to address any concerns in relation to Teleglobe and its affiliates that might otherwise be addressed by an affiliate rule.

48.Accordingly, the Commission finds that applying an affiliate rule to Teleglobe is neither necessary nor appropriate.

Affiliate Rule for Interexchange Voice Services

49.The Commission notes that, in accordance with PN 99-3, the affiliate rule for interexchange voice services no longer applies.

Tariff Revisions

50.In light of the above, the Commission directs the applicants to file for approval, within 14 days of the date of this Order, revisions to their tariffs reflecting this Order.

Secretary General

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