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Order CRTC 2000-653

Ottawa, 14 July 2000
Commission denies forbearance for digital network access services
Reference: 8640-C12-04/00 and 8640-S1-06/98
The Commission denies applications by the major incumbent telephone companies for forbearance from regulation of the provision of digital network access services. While a competitive market for these services is emerging, the Commission considers that forbearance would be premature given that these services are a critical network component used by competitors.

1.

This decision disposes of two separate applications for forbearance from regulation of the provision of digital network access (DNA) in certain geographic locations, pursuant to section 34 of the Telecommunications Act. Both applications were filed on 15 December 1998.

2.

BC TEL, Bell Canada and TELUS Communications Inc. (TCI), jointly requested that the Commission refrain from exercising its powers and performing its duties under sections 24, 25, 27, 29 and 31 of the Act in relation to high capacity DNA services in certain of the companies' wire centres in Toronto, Ottawa, Montréal, Quebec City, Calgary and Vancouver. This application pertains to DNA services at DS-0, DS-1 and DS-3 bandwidths, several elements of various Special Facilities Tariffs (SFTs), and future services in the same class.

3.

NBTel Inc. and Maritime Tel & Tel Limited (MTT) requested that the Commission refrain from exercising its powers and performing its duties under sections 25, 27(1), 29 and 31 of the Act in relation to DNA provided by NBTel in its operating territory and MTT in the Halifax Regional Municipality. This application pertains to DNA services at DS-0, 128 Kbps fractional DS-1, DS-1, DS-3, 10 Mbps, 100 Mbps and 155 Mbps bandwidths, local broadcast video and future services in the same class.

4.

On 12 March 1999, the Commission issued Telecom Public Notice CRTC 99-7, Forbearance from digital network access services, setting out a procedure to consider the two applications, including steps for interrogatories, interveners' comments and reply arguments by the applicants.

Applicants claim competition in DNA services sufficient for forbearance

5.

Pursuant to the forbearance framework established in Review of regulatory framework, Telecom Decision CRTC 94-19, dated 16 September 1994, the applicants submitted the following information to demonstrate that the market for DNA services is sufficiently competitive to warrant forbearance from regulation.

Definition of the relevant product market

6.

DNA service elements are used to support a broad range of data access services, including packet switching, frame relay and local and long distance dedicated services. Speeds of 10 Mbps or greater are generally used to support asynchronous transfer mode (ATM) services. Customers that operate in more than one location use high capacity DNA to interconnect their local area networks (LAN) and wide area networks (WAN).

7.

The applicants defined DNA services, for the purposes of this application as:

Providing a subscriber with a dedicated digital point to point or multipoint transport capability of DS-0 bandwidth or greater between the subscriber's premises and a telecommunications carrier's central office (CO) or point of presence (POP) in the same wire centre, for the purposes of transmitting any form of information.

DNA services also include any channelization and/or link service elements which may be required to terminate the access transport facility at the CO or POP.

8.

The applicants stated that they are not seeking forbearance for lower capacity (analog and below DS-0 bandwidth) network access services, which are used by small businesses in industries such as telemetry and security monitoring.

9.

According to the applicants, if a DNA service is connected to a CO switch or to any other form of "exempt transmission apparatus" as defined in section 2(1) of the Act, and if this apparatus provides such functions as switching, routing, and/or packet assembly/disassembly, these functions are not defined as part of the DNA service. Capabilities, such as local exchange service, which are provided by exempt transmission apparatus at the carrier's CO or POP, do not constitute DNA services as defined in the application.

The relevant geographic market

10.

The applicants proposed that the appropriate geographic unit for forbearance from regulation of DNA services is the wire centre.

Applicants' evidence on the competitive supply of DNA services

11.

The applicants submitted that the provision of high capacity DNA services in most major urban business markets across Canada is highly competitive. They submitted detailed evidence obtained from publicly available sources. Bell Canada also filed a study entitled High Fiber Diet: A Review of Metropolitan Bandwidth Availability in Canada, by the Yankee Group, Canadian Market Strategies Report, Vol. 3, No. 21, October 1999, which outlines the extent of facilities-based competition in the centres in question west of New Brunswick.

12.

TCI provided city-by-city data that cited the rollout of high-capacity DNA service providers in each region. The data noted that at least 15 percent of buildings had access to the service in the urban areas studied. The evidence provided fibre-optic development in Vancouver, Calgary, Toronto, Ottawa-Hull and Montréal.

13.

The MTT application noted that Fundy Communications Inc. has an intra-city network capable of providing DNA services to 98 percent of business locations served by NBTel. MTT also said Fundy is capable of providing DNA services to 98 percent of the businesses in Halifax.

Emerging competitors

14.

The Yankee Group report also noted there are other competitive suppliers of high capacity DNA services, including Bell Intrigna (a Bell Canada and MTS Communications Inc. alliance) designed to provide local/long-distance/data and Internet services in western Canada; and Bell Nexxia, which has already built a fibre network that interconnects Vancouver, Edmonton and Calgary. The report also stated that the utility companies are very attractive partners for future fibre builds, given their access to rights-of-way and facilities they have in place to service internal communications needs.

Applicants argue barriers to entry not insurmountable

15.

The applicants submitted that the growing number of facilities-based high capacity DNA competitors building networks indicates the absence of major barriers to entry. Further, various Commission decisions ensure the interconnection and interoperability of networks, non-discriminatory access to support structures of the regulated carriers, and the availability of the regulated carrier's services for resale. They also submitted that the availability of wireless 15 GHz and 38 GHz products and spectrum assignments, in many instances, enable new entrants to expand their high-capacity intra-city access facilities without having to secure rights-of-way.

Applicants submit that customers can easily change suppliers

16.

The applicants submitted that standardized network interfaces ensure sufficient compatibility and interoperability to permit a customer to change a DNA network supplier without the need to acquire new equipment and without significant downtime or cost.

17.

According to the applicants, the main cost customers incur when changing DNA service providers is the installation charge, which is insignificant in terms of the overall cost of the service and often waived by suppliers to attract customers. The applicants also argued that, while contractual obligations often involve a penalty charge for early termination of a DNA supply agreement, it is not uncommon for suppliers to absorb the customer's termination liability in order to encourage the customer to switch suppliers.

18.

The applicants also submitted that customers of DNA services are generally knowledgeable and aware of the relative rates available from the various suppliers in the market. Moreover, many large business customers choose to design and manage their own networks, rather than rely solely on the service provider's expertise.

Applicants believe that there is competitive rivalry in the market

19.

The applicants argued that the large number of major customers served by alternative DNA providers indicates a high degree of rivalry in the market. They also submitted that, according to their sales staff, competitors' prices are often 15 percent to 40 percent lower than the tariffed rates charged for similar DNA services by the applicants. Rivalrous behavior is also reflected by the bidding process now employed by many customers to select a DNA service provider.

20.

BC TEL, Bell Canada and TCI submitted that because of aggressive price competition in urban areas, they have sought to make their tariffed DNA services more competitive by filing banded rate structures for specific areas. NBTel and MTT have regularly filed to reduce or restructure tariff rates for certain DNA services to assist in making their services more attractive to customers.

Applicants' views on price cap considerations

21.

The applicants submitted that the impact of DNA forbearance on the price cap regime can be addressed satisfactorily from an operational perspective. They noted that existing DNA services are included in the "other capped services" sub-basket, as defined by Price cap regulation and related issues, Telecom Decision CRTC 97-9, dated 1 May 1997. Since Decision 97-9 did not place any forborne or competitive services in any of the capped service baskets, the applicants consider that in the event the Commission forbears from regulating DNA services, it would be appropriate to remove the forborne locations from the "other capped services" sub-basket. They submitted that where competition exists, there is clearly sufficient market discipline to render the application of price caps unnecessary to the service in question. The applicants stated that they are able to separate a single service or class of services into capped and uncapped categories based on location.

22.

Further, the applicants submitted that removing forborne DNA services from the category of capped services would ensure that no cross-subsidy could be created by simultaneously raising the prices of non-forborne DNA services while lowering the price of forborne DNA services. The price cap constraint which applies to the "other capped services" sub-basket ensures no cross-subsidy will occur.

Competitors contend that the market is not competitive

23.

Comments were filed by AT&T Canada Corp. and AT&T Canada Telecom Services (collectively AT&T Canada), Call-Net Enterprises Inc. Fundy Cable Ltd. and Shaw FiberLink Ltd. (collectively Shaw/Fundy) and Vidéotron Télécom ltée on 13 August 1999 (collectively the "interveners").

24.

Each of the interveners submitted that it would be premature to forbear from the provision of DNA services by the applicants, since competitive facilities for DNA services are only emerging.

25.

The interveners submitted that, in many instances, the applicants' DNA services constitute an essential bottleneck facility required by competitors for the provisioning of a variety of services to customers.

26.

Call-Net submitted that in the event the Commission finds that there is sufficient competition to warrant forbearance, the Commission should retain its powers pursuant to subsection 27(2) and 27(4) of the Act, with respect to undue preference and unjust discrimination, and section 24 of the Act with respect to conditions of service and the protection of customer confidentiality.

Competitors' positions on the definition of the relevant market

27.

Call-Net stated that it considers the product and geographic market, as defined by the applicants, to be appropriate.

28.

Shaw/Fundy submitted that the geographic market in New Brunswick is intra-exchange, and not province-wide. Shaw/Fundy also argued that there are in effect three separate product markets for the purposes of DNA forbearance between buildings, between buildings and the CO, and between buildings and the CO for use by other carriers.

Competitors question the applicants' market share evidence

29.

The interveners submitted that the applicants failed to demonstrate that their share of the DNA services market has significantly eroded.

30.

Call-Net submitted that information provided by the applicants with respect to the size of competitors networks, measured in route miles or fibre strand miles, is of limited value because the applicants have not provided information on the relative size(s) of their own networks.

31.

AT&T Canada and Vidéotron stated that an important indicator of the applicants' market power is their access to the potential market, which is much greater than that of competitors. They note that from responses to interrogatories, most of the applicants have access to all the buildings within their respective wire centres, whereas competitors access only a small portion of buildings.

32.

The interveners submitted that the applicants have overstated the extent of price competition and have not provided any substantive evidence with respect to price discounts offered by competitors. Vidéotron stated that, contrary to Bell Canada's assertions, it is not offering DNA at prices 50 percent lower than Bell Canada's.

33.

Shaw/Fundy argued that an examination of the DNA tariffs for which the applicants are requesting forbearance does not indicate price rivalry, because in many cases there have been no rate reductions since the tariffs were initially filed. In other cases, the price reductions have been only selective.

Competitors argue that substantial barriers to entry remain

34.

The interveners argued that substantial barriers to entry remain which limit their ability to expand their facilities and access customers (i.e., access to rights-of-way, access to buildings, access to inside wire and co-location).

35.

They submitted that negotiating access to municipal rights-of-way is a major barrier to entry, and that the applicants, by virtue of their historical position, already have the necessary rights-of-way. AT&T Canada and Vidéotron also submitted that in many cases, the applicants can utilize their existing facilities to provide DS-0 and DS-1 bandwidth DNA service, whereas the competitors must construct facilities.

36.

Shaw/Fundy and Vidéotron submitted that access to support structures is a significant barrier to expanding competitive networks. Not only is it difficult for competitors to construct support structures, but they must also apply for access to the applicants' support structures, and this creates delays and affects their ability to acquire new customers.

37.

Shaw/Fundy stated that for many competitors, such as interexchange carriers (IXCs), co-location is the only alternative to DNA arrangements. However, co-location is not an effective substitute to DNA services because:
a) it is uneconomic (Shaw incurred costs of over $200,000 for a single co-location site);
b) the time frames for obtaining co-location are lengthy, and often disputes arise which add to further delays; and
c) there an absence of the ubiquitous availability of co-location, since the number of COs with co-location arrangements are few compared to the number of COs IXCs need for interconnection.

Competitors rely on applicants' DNA facilities

38.

The interveners stated that DNA is an essential input into their production process, and that in many instances they must rely heavily on DNA services provided by the applicants. They noted that, according to responses to interrogatories, Bell Canada derives about 40 percent of its DNA revenues from customers that are toll or local competitors. According to interveners, the proportion of DNA revenues derived from customers that are competitors for the other applicants is similar with MTT at 30 percent, NBTel at 11 percent, BC TEL at 39 percent, and TCI at 41 percent. Competitors rely even more heavily on the applicants' DS-3 bandwidth DNA services. According to responses to interrogatories, 87 percent of BC TEL's and 95 percent of TCI's DNA revenues in the applicable wire centres are sold to carriers, resellers and Internet service providers. Also, 100 percent of NBTel's DS-3s are provisioned to other carriers, and over 80 percent of Bell Canada's DS-3 access is sold to carriers in half the applicable wire centres.

39.

The interveners submitted that since the applicants' major DNA customers are also their competitors, forbearance would enable the applicants to charge competitors higher prices for DNA services than they would charge their own end-user commercial customers, and thus squeeze competitors out of the market.

Competitors doubt customers can easily switch suppliers

40.

The interveners submitted that, contrary to the applicants' assertions, it is relatively costly for customers to switch DNA service suppliers. In particular, they noted that the high early contract termination penalties specified in the applicants' DNA tariffs (particularly for longer term contracts) represent a significant deterrent for customers to switch DNA suppliers. Therefore, they constitute significant barriers to entry for competitors. Shaw/Fundy submitted that the penalties associated with terminating a contract with the applicants are the single largest cost of switching suppliers. Call-Net stated that the penalty charges equal one-half of the remaining monthly charges for the unexpired contract period and are due at the time the contract is terminated. Call-Net also submitted that installation charges often prevent customers from switching DNA suppliers since the costs can be significant in relation to the overall cost of the service.

Applicants' reply to issues raised by interveners

41.

Reply comments on issues raised by interveners were filed by Bell Canada, NBTel & MTT (collectively), and BC TEL and TCI (collectively).

42.

The applicants argued that the Shaw/Fundy position, which contends there are three relevant DNA product markets, is incorrect because:
  • there are not any differences in DNA services provided to carriers and commercial customers;
  • defining the relevant market in terms of use of the DNA facility, rather than the facility itself, would not appropriately address issues with respect to market power, since it is the control of the facility that is relevant for determining market power; and
  • "between buildings" is not a separate market, since technologically all DNA must terminate in the CO (e.g., even if a customer wishes to receive DNA between two buildings, it must obtain two DNAs, each of which ends in the CO).

43.

NBTel/MTT submitted that the scope of the relevant DNA geographic market for considering forbearance in New Brunswick is province-wide, particularly since Fundy's extensive inter-city and intra-city fibre distribution network carries the services that drive the requirements for DNA.

44.

The applicants submitted that information on market shares is simply not available. They do not have the means to estimate market shares because they do not have specific information on the activity of competitors, the market share of any particular competitor, or of the size of the total market.

45.

Further, the applicants argued that according to the forbearance criteria adopted by the Commission in Decision 94-19, high market share does not necessarily indicate market power. High market share simply means that the Commission must proceed to examine other evidence (e.g., availability of substitutes, ease of competitive entry) to determine if a market is sufficiently competitive to warrant forbearance.

46.

The applicants submitted that it is not necessary for competitors to have ubiquitous access to all DNA customers in order to provide effective competition. They noted that Decision 94-19, acknowledged that since competition occurs at the margin, it is not necessary for competitors to cover the entire market.

47.

NBTel/MTT submitted that ubiquitous alternative facilities throughout an exchange are not a reasonable expectation since DNA is a dedicated circuit and provided only on demand. There are many exchanges where NBTel/MTT do not currently provision DNA services, and thus the fact that the competitors do not have DNA facilities in advance within an area does not constitute grounds for denying forbearance.

48.

The applicants submitted that the interveners are incorrect to suggest that there has not been substantial price competition in the provision of DNA services, because the initial tariff rates for DNA were structured for the competitive environment that already existed at the time.

49.

The applicants submitted that they are not in a much better position than the competitors with respect to access to rights-of-way and inside wire. BC TEL/TCI submitted that the fact the applicants are already in most buildings providing basic exchange service does not mean that they have a blanket agreement from the landlord to install and operate other types of facilities. NBTel submitted that since the Commission's rules regarding access to support structures have been in place, competitors have readily available access to support structures.

Anti-competitive discrimination possible if forbearance granted

50.

The Commission considers that the applicants have appropriately defined the relevant product and geographic markets for assessing the degree of competition for consideration of forbearance from regulation under section 34(2) of the Act. Apart from Shaw/Fundy, no other intervener expressed concerns with respect to the applicants' definition of the relevant product market. The Commission considers that the Shaw/Fundy approach, which defines a DNA service differently depending on its use, does not adequately address the issue of market power, since market power in this case depends on the access service itself.

51.

Although it is apparent that competitive supplies of high capacity DNA are emerging, the Commission concludes that it would not be appropriate to forbear from regulating the applicants' DNA services at this time to the extent applied for, since DNA services constitute a critical input required by carriers that compete directly with the applicants in numerous end-user markets.

52.

The Commission is concerned that, if forbearance were granted for the wire centres in question, it would be difficult to develop sufficient safeguards to ensure that the applicants do not discriminate against competitors by charging competitors higher prices than their own end-user DNA customers to prevent customers from switching to a competitive supplier.

53.

The Commission notes that while retention of the Commission's powers under section 27(2) of the Act would to some extent act as a safeguard against unjustly discriminating or granting an undue preference, it would be difficult to detect instances where the applicants' end-user customer received a more favorable price or terms and conditions. Thus, the Commission considers that in this particular case, retention of powers under section 27(2) of the Act may not be sufficient to ensure against anti-competitive discrimination.

54.

The Commission considers that forbearance from regulation of DNA services would not be appropriate until further progress is made in resolving issues that impede the competitors' ability to expand their networks with respect to the provision of DNA services (i.e., access to rights-of-way, buildings and inside wire).

55.

Therefore, the Commission denies the applications for forbearance on the basis that:
a) there is not sufficient competition to protect the interests of users pursuant to section 34(2) of the Act; and
b) to refrain from regulation would likely unduly impair the establishment or continuance of a competitive market for DNA services, pursuant to section 34(3) of the Act.
Secretary General
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