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Telecom Decision CRTC 2002-76

Ottawa, 12 December 2002

Regulatory safeguards with respect to incumbent affiliates, bundling by Bell Canada and related matters

Reference: 8622-G7-02/02

Table of contents

Paragraph

Summary

I Introduction

1

II The nature and scope of the proceeding

6

III Issues specific to Bell Canada and Bell Nexxia

16

The location of Bell Canada's CSG

16

Commission determinations: Location of the CSG

29

The sales and marketing activities of Bell Canada and Bell Nexxia

40

Commission determinations: Bell Canada's and
Bell Nexxia's sales and marketing activities

67

Services provided to Bell Nexxia by Bell Canada

77

Commission determinations: Services provided by
Bell Canada to Bell Nexxia

84

IV The adequacy of the affiliate rule in the present environment

89

Commission determinations: Adequacy of the affiliate rule

144

Modifications to the affiliate rule

156

Regulation of Canadian carriers under common control with an ILEC

161

Further process

178

Interim regime for affiliated Canadian carriers

180

Appendix A

Appendix B

This decision disposes of an application by GT Group Telecom Services Corp. related to certain activities of Bell Canada and its affiliate, Bell Nexxia Inc. (Bell Nexxia), as well as regarding the adequacy of the affiliate rule in the current environment.

With respect to the issues specific to Bell Canada and Bell Nexxia, the Commission has concluded that:

· Bell Canada must move its Carrier Services Group (CSG) out of Bell Nexxia and back into Bell Canada.

· Bell Canada may provision forborne Bell Nexxia services via Bell Canada's CSG if it chooses to do so.

· At least 111 single source and packaged arrangements of Bell Canada and Bell Nexxia, involving Bell Canada tariffed service elements, constitute bundling within the meaning of the Commission's bundling rules. By failing to file tariffs for approval in respect of these arrangements, Bell Canada breached the Commission's bundling rules.

· In order to bring Bell Canada into compliance with the bundling rules and to permit the Commission to determine if any additional measures are necessary, Bell Canada is required to file proposed tariffs and to provide the Commission with information regarding all contracts for single source and packaged arrangements involving Bell Canada tariffed service elements together with other services, whether offered directly by Bell Canada or through Bell Nexxia or through any other Bell Canada affiliate under common control with Bell Canada.

· Certain services provided by Bell Canada to Bell Nexxia may be telecommunications services. To the extent that they are, section 25 of the Telecommunications Act (the Act) requires that they be provided pursuant to approved tariffs. In order to determine whether or not Bell Canada is compliant with the Act, the Commission has directed Bell Canada to provide it with information relating to the services in question.

The Commission is inviting the large incumbent local exchange carriers (ILECs), other than Bell Canada, to show cause why the Commission's determination regarding the location and operation of Bell Canada's CSG should not apply to them.

The Commission is also requiring the other large ILECs to provide the Commission with information comparable to that required from Bell Canada, regarding services the ILECs provide to their affiliates.

With respect to the general issue of the adequacy of the affiliate rule, the Commission has concluded that it is necessary to modify the rule. The Commission has changed the definition of "affiliate" to include only those persons that are not Canadian carriers and that control or are controlled by the ILEC or that are controlled by a person that also controls the ILEC. In all cases, control means direct or indirect control in fact.

The Commission has also changed the conditions under which an ILEC may provide tariffed services to an affiliate. Specifically, an ILEC may not provide an ILEC affiliate with non-forborne services which the affiliate uses to provide telecommunications services to the public, except pursuant to an approved tariff which identifies the rates, terms and conditions under which the relevant telecommunications services are provided by the affiliate to the public. Those rates, terms and conditions must be identical to the rates, terms and conditions which would apply if the telecommunications services in question were provided to the public by the ILEC, instead of by the affiliate.

The Commission has reviewed the application of section 34 of the Act, as well as certain of its forbearance orders in light of its findings regarding the activities of Canadian carriers under common control with an ILEC. The Commission is of the preliminary view that services provided by such a Canadian carrier should be entitled to forbearance if and only if the same services would be entitled to forbearance if they were provided by the ILEC. The Commission is also of the preliminary view that any non-forborne telecommunications services provided by such a Canadian carrier should be subject to the same rules and requirements as would apply if the services were provided by the ILEC.

The Commission is inviting the large ILECs to show cause why the Commission should not implement its preliminary view with respect to the regulation of Canadian carriers under common control with an ILEC.

Finally, as an interim measure while the Commission considers the regulation of Canadian carriers under common control with an ILEC, such Canadian carriers may not resell any tariffed service of an affiliated ILEC, except pursuant to a tariff filed by the Canadian carrier and approved by the Commission. This prohibition does not apply to the resale of tariffed asymmetric digital subscriber line access service to Internet service providers.

I Introduction

1.

On 31 January 2002, GT Group Telecom Services Corp. (Group Telecom) filed an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure (the Rules) requesting that the Commission investigate the activities of Bell Canada's wholly-owned subsidiary, BCE Nexxia Inc. (Bell Nexxia), and institute additional safeguards for the affiliates of incumbent local exchange carriers (ILECs) operating within the serving territory of the ILEC (an "in-region affiliate"). Group Telecom copied its application to all interested parties to Affiliate rule, Telecom Public Notice CRTC 99-3, 19 January 1999 (Public Notice 99-3) and Price cap review and related issues, Public Notice CRTC 2001-37, 13 March 2001 (Public Notice 2001-37).

2.

Comments in support of Group Telecom's application were filed on 8 February 2002 by Call-Net Enterprises Inc. (Call-Net) and on 21 February 2002 by the Public Interest Advocacy Centre on behalf of Action Réseau Consommateur, the Consumers' Association of Canada and Fédération des associations coopératives d'économie familiale (ARC et al.).

3.

On 15 February 2002, TELUS Communications Inc. (TELUS) filed comments opposing Group Telecom's application. TELUS argued, among other things, that the procedures established under Part VII of the Rules restricted the ability of affected parties to provide meaningful representations.

4.

By way of a letter dated 1 March 2002, the Commission amended the procedures for the process initiated by Group Telecom's application. Specifically, the Commission permitted all parties, and not solely the applicant, to file reply comments. Parties were invited to provide comments on the issues raised by Group Telecom's application by 11 March 2002, with reply comments to be filed by 21 March 2002. Parties who had already filed comments could file supplementary comments on 11 March 2002.

5.

In addition to the comments from ARC et al., Call-Net and TELUS noted above, the Commission received comments dated 11 March 2002 from Aliant Telecom Inc. (Alliant Telecom), AT&T Canada Corp. on behalf of itself and AT&T Canada Telecom Services Company (collectively, AT&T Canada), Bell Canada and Bell Nexxia (collectively, Bell), Call-Net, Group Telecom, Saskatchewan Telecommunications (SaskTel), TELUS and Vidéotron Télécom ltée (VTL). The Commission also received comments from the Independent Members of the Canadian Association of Internet Providers (IMCAIP) dated 4 March 2002. Reply comments were received on 21 March 2002 from AT&T Canada, Bell, Call-Net, Group Telecom, SaskTel and TELUS. AT&T Canada filed a supplementary letter on 25 March 2002. TELUS filed a supplementary letter on 27 March 2002.

II The nature and scope of the proceeding

6.

Group Telecom's Part VII application was based, in part, on information filed in the Public Notice 2001-37 proceeding. In that proceeding, Group Telecom and Call-Net filed evidence proposing that in-region affiliate activities be subject to additional safeguards. Bell Canada, Aliant Telecom, MTS Communications Inc. (MTS) and SaskTel objected to this evidence.

7.

In Re: Public Notice CRTC 2001-37 - Price cap review and related issues: Follow-up to Decision CRTC 2001-582 re requests for clarification of issues and determinations on deficiencies and confidentialities, Decision CRTC 2001-618, 28 September 2001 (Decision 2001-618), the Commission clarified the scope of the Public Notice 2001-37 proceeding:

The Commission confirms its determination in Decision 2001-582 that the activities of in-territory affiliates are relevant to consideration of the state of competition within markets for local services, and consequently to the pricing flexibility determinations to be made in this proceeding. Accordingly, evidence in this regard is within the scope. The Commission also confirms that the determination of new rules for affiliates is not within the scope of this proceeding, and that, accordingly, evidence proposing new rules for affiliates is not within the scope of the proceeding.

8.

In accordance with the Commission's determinations in Decision 2001-618, parties in the Public Notice 2001-37 proceeding were permitted to explore the activities of the ILECs' in-region affiliates, if any, by way of interrogatories and in cross-examination at the October 2001 oral hearing.

9.

In its Part VII application, Group Telecom submitted that, in light of the evidence related to in-region affiliates generated during the Public Notice 2001-37 proceeding, there were two issues the Commission must consider:

· whether certain activities involving Bell Canada and Bell Nexxia constituted violations of existing regulatory requirements and, if so, what remedial action should the Commission take; and

· whether additional safeguards with respect to the activities of in-region ILEC affiliates were required.

10.

The first issue identified by Group Telecom involved three elements:

· whether Bell Canada's transfer of its Carrier Services Group (CSG) to Bell Nexxia was in compliance with regulatory requirements;

· whether certain sales and marketing activities of Bell Nexxia were in breach of either the tariff requirements of section 25 of the Telecommunications Act (the Act) or the Commission's bundling rules or both; and

· whether Bell Canada's provision of certain services and facilities to Bell Nexxia raised regulatory concerns.

11.

In its 1 March 2002 letter on procedure, the Commission also asked parties to comment as to the circumstances, and under what terms and conditions, it would be appropriate that CSGs reside in both Bell Canada and an affiliate such as Bell Nexxia.

12.

In this decision, the Commission first examines the issues raised by Group Telecom which are specific to Bell Canada and Bell Nexxia. The more general issues relating to possible changes to the existing restrictions on ILEC affiliates are then addressed. By analysing the issues in this manner, the Commission has been able to first assess whether there have been any breaches of existing legal or regulatory requirements and then consider whether any changes to the regulatory regime are warranted.

13.

Prior to considering these substantive issues, however, it is necessary to address the argument of Aliant Telecom, Bell and SaskTel that Group Telecom's application should be considered an application to review and vary Affiliate rule for primary local exchange service, Telecom Order CRTC 99-972, 8 October 1999 (Order 99-972). These companies submitted that Group Telecom had not satisfied the criteria for a review and vary application set out in Guidelines for review and vary applications, Telecom Public Notice CRTC 98-6, 20 March 1998 (Public Notice 98-6). In particular, Aliant Telecom and Bell argued that Group Telecom raised no new issues which were not central to the Commission's determinations in Order 99-972. Furthermore, in their view, Group Telecom did not raise substantial doubt as to the correctness of Order 99-972.

14.

In reply, Group Telecom submitted that it was not contesting the correctness of the Commission's ruling in Order 99-972 at the time it was made. Instead, citing Public Notice 98-6, Group Telecom took the position that its application should be treated as a new application since "new facts or circumstances have arisen that render the original decision inappropriate or obsolete". Group Telecom submitted that the "new facts or circumstances" were those which came to light in the Public Notice 2001-37 proceeding regarding affiliate activities and the nature of the relationship between Bell Canada and Bell Nexxia.

15.

The Commission is of the view that circumstances have changed significantly since Order 99-972 was decided. At that time, local competition was in its initial stages and was expected to develop more quickly than has in fact been the case. In addition, at that time, there was no experience of ILEC affiliate activities in the context of local competition. Given the current state of local competition, and the record of the Public Notice 2001-37 proceeding regarding affiliate activities, the Commission considers that Group Telecom's application should be treated as a new application and not as a review and vary application.

III Issues specific to Bell Canada and Bell Nexxia

The location of Bell Canada's CSG

Background

16.

In Competition in the provision of public long distance voice telephone services and related resale and sharing issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12), the Commission required the ILECs subject to that decision to establish CSGs to protect against anti-competitive behaviour when an ILEC was dealing with competing carriers.

17.

In Local competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission chose not to require competitive local exchange carriers (CLECs) to establish CSGs. However, the Commission was of the view that safeguards might be required for CLECs that were affiliated with a long distance service provider. The Commission indicated that this possibility would be considered on a case-by-case basis.

18.

In the Public Notice 2001-37 proceeding, Bell Canada indicated that it had transferred its CSG to Bell Nexxia and that all competing carriers wishing to obtain services from Bell Canada must therefore go through the CSG located in Bell Nexxia. However, the evidence in the proceeding made it clear that Bell Nexxia does not route its own requests for Bell Canada services via the CSG. Instead, Bell Nexxia deals directly with Bell Canada.

Positions of parties

19.

Group Telecom submitted that Bell Canada had not received Commission approval prior to transferring its CSG to Bell Nexxia. In Group Telecom's submission, the transfer of Bell Canada's CSG to Bell Nexxia raised two regulatory concerns. First, the location of the CSG in Bell Nexxia raised concerns as to the proper handling of confidential competitor information. Second, the fact that Bell Nexxia did not have to go through the CSG when requesting services from Bell Canada raised concerns about non-discriminatory access by all service providers to Bell Canada services.

20.

With respect to the second point, Group Telecom argued that for those services subject to effective competition, there was a limited incentive for an ILEC to discriminate in favour of an affiliated carrier since unaffiliated carriers could obtain these services elsewhere, if necessary. However, in the case of tariffed services, there was little, if any, alternative supply available to unaffiliated carriers. Consequently, in Group Telecom's view, an ILEC had an incentive to give preferential treatment to its affiliates. In such cases, Group Telecom submitted there was a need for regulatory safeguards to ensure non-discriminatory access.

21.

In light of these concerns, Group Telecom submitted that ILEC tariffed services should be made available to all other service providers, including ILEC affiliates, only through a CSG residing within the ILEC. Group Telecom was of the view that forborne ILEC services could be adequately provided through a CSG in either the ILEC or an affiliate.

22.

On the basis of this analysis, Group Telecom asked the Commission to direct Bell Canada and Bell Nexxia to transfer the CSG and all of its employees back to Bell Canada, within 60 days, and to require that no employee of Bell Nexxia have any responsibility for the CSG.

23.

AT&T Canada submitted that the rules relating to the confidentiality of competitor information could apply equally whether the CSG were located in Bell Canada or Bell Nexxia and, in this regard, the location of the CSG should not matter. However, AT&T Canada also argued that the nature of Bell Canada's relationship with Bell Nexxia raised questions of discrimination and, therefore, it would be inappropriate for the CSG to continue to operate from within Bell Nexxia.

24.

Call-Net argued that the location of the CSG in Bell Nexxia created enhanced opportunities for anti-competitive behaviour. Call-Net also provided general information about situations where, in its view, Bell Nexxia was granted preferential access to Bell Canada services because it did not have to rely on the CSG to obtain those services. In particular, Call-Net submitted that in its competitive bids Bell Nexxia had quoted a mean time to repair (MTTR) of four hours for certain local exchange services, despite the fact that competitors were guaranteed an MTTR of only 24 hours by Bell Canada and, hence, could not offer a four hour MTTR to their customers. Call-Net also submitted that Bell Nexxia had offered delivery of services within eight days, when Bell Canada's tariffs required competitors to accept a much longer service delivery time.

25.

VTL argued that the location and operation of the CSG within Bell Nexxia created incentives and opportunities for abuse. VTL supported Group Telecom's request that the CSG be moved back to Bell Canada.

26.

TELUS indicated that it did not share the concerns expressed by Group Telecom regarding the operation of the CSG at Bell Canada/Bell Nexxia. TELUS argued that the purpose of a CSG was to protect confidential competitor information and, therefore, there was no reason to require Bell Nexxia to access Bell Canada services via the CSG since Bell Nexxia did not compete with Bell Canada. TELUS submitted that the Act did not prohibit discrimination, only unjust discrimination. In its view, there was nothing unjust about Bell Nexxia accessing Bell Canada's services directly. On the contrary, TELUS argued that if Bell Nexxia were required to rely on the CSG, this might slow the processing of orders for all carriers.

27.

Bell submitted that Group Telecom was incorrect in alleging that Bell Canada needed to seek the Commission's approval for the transfer of the CSG to Bell Nexxia. Bell also argued that none of the parties presented any compelling evidence of unjust discrimination or anti-competitive behaviour on the part of the CSG located in Bell Nexxia. Rather, in Bell's view, the parties relied entirely on allegations and on the potential for such abuse. Bell also argued that the fact that the CSG had been operating effectively for over two years within Bell Nexxia, while receiving no complaints regarding any improper disclosure of competitor information between the CSG and Bell Nexxia's retail operations, provided sufficient evidence that there was nothing to justify any potential concerns.Bell noted that TELUS and Bell Canada were both major carriers, operating in competition in each other's territories, yet neither had any problem dealing with their respective CSGs, regardless of where they were located in those organizations.

28.

Bell indicated that if the Commission were to determine that the CSG should be located within Bell Canada, Bell Canada and Bell Nexxia would have Bell Canada's CSG provision Bell Nexxia services to competitors, acting as an agent on behalf of its subsidiary. In this way, competitors would not be required to deal with the retail arm of Bell Nexxia and there would be no need to incur the cost of operating a separate CSG within Bell Nexxia.

Commission determinations: Location of the CSG

29.

The Commission approved a CSG agreement for Bell Canada in Unbundled rates to provide equal access, Telecom Decision CRTC 97-6, 10 April 1997 (Decision 97-6), which contemplated that the parties to the agreement would be Bell Canada and the relevant service provider. The Commission has never approved an amendment to Bell Canada's CSG agreement that would permit Bell Nexxia to provide CSG services instead of, or on behalf, of Bell Canada. Consequently, Bell Canada's transfer of its CSG to Bell Nexxia and its subsequent reliance on that CSG to provision services to competitors did not comply with Decision 97-6.

30.

The Commission notes Bell's position that the CSG functions in the same manner within Bell Nexxia as it did as a division of Bell Canada. However, in the Commission's view, an ILEC should be directly responsible for the protection of confidential information relating to the use of ILEC tariffed services by competitors. It is not appropriate for the ILEC to delegate this role to an affiliate.

31.

Furthermore, the Commission does not accept the argument of those parties who suggested that the sole purpose of the CSG is to protect confidential competitor information. In the Commission's view, the CSG is intended to protect against anti-competitive behaviour by an ILEC. The simplest way that an ILEC could engage in anti-competitive behaviour would be through the improper use of confidential competitor information. However, that is not the only possibility.

32.

An ILEC could also act in an anti-competitive manner by favouring or disadvantaging another service provider with respect to access to the ILEC's tariffed services. In this regard, the Commission notes Call-Net's comments about preferential treatment of Bell Nexxia by Bell Canada in respect of service delivery and repair timeframes. The Commission also notes that Bell did not deny that such preferential treatment had occurred.

33.

The Commission considers the type of behaviour identified by Call-Net to be a serious matter. In a competitive market, a service provider that is able to offer faster service delivery or repair will enjoy a significant competitive advantage. Consequently, the Commission does not agree with TELUS' argument that this type of preferential treatment for affiliates is acceptable.

34.

In the Commission's view, it is important to ensure that all service providers, including ILEC affiliates, are subject to the same procedures to access ILEC tariffed services. The Commission considers that this goal can best be achieved if the ILEC is the operator of the CSG. This approach would minimize the opportunity and incentive for anti-competitive behaviour, while also ensuring that the CSG is located in an entity subject to the Commission's full regulatory overview under the Act.

35.

The Commission notes Bell's proposal that if the Commission were to determine that the CSG should be located within Bell Canada, Bell Canada's CSG would provision Bell Nexxia services. The Commission agrees with those parties who argued that the provision of Bell Nexxia's forborne services via Bell Canada's CSG would not raise significant regulatory concerns. The purpose of a CSG is to provide protections with respect to tariffed services. Consequently, the possibility of a CSG also provisioning forborne services is not, in and of itself, unacceptable.

36.

Accordingly, the Commission concludes that Bell Canada's CSG may provision Bell Nexxia's forborne services, provided that no employee of Bell Nexxia has any responsibility for the CSG. In the event that Bell Canada and Bell Nexxia choose to proceed on this basis, Bell Canada must file for approval a revised CSG agreement incorporating proposed amendments establishing the terms and conditions pursuant to which Bell Canada's CSG would act on behalf of Bell Nexxia.

37.

The Commission notes that if Bell Nexxia were to provide services that the Commission determined must be offered on a tariffed basis, then any joint CSG arrangement between Bell Canada and Bell Nexxia would need to be reassessed. In such a situation, Bell Nexxia would be required to maintain its own CSG for the provisioning of its tariffed services to competitors. It is the Commission's view that, in such circumstances, Bell Nexxia forborne services should also be provisioned by Bell Nexxia, rather than by Bell Canada.

38.

In light of the above, the Commission orders that the CSG for Bell Canada's tariffed services be moved to Bell Canada by 10 February 2003, and that no employee of any of its affiliates have any responsibility for Bell Canada's CSG operations. The Commission notes that if Bell Canada chooses to provision Bell Nexxia forborne services via Bell Canada's CSG, Bell Canada must also file a revised CSG agreement for Commission approval no later than 27 January 2003.

39.

Based on the record of this proceeding, it appears that no other ILECs have transferred their CSG to an affiliate. The Commission directs Aliant Telecom, MTS, SaskTel, Société en commandite Télébec (Télébec), TELUS and TELUS Communications (Québec) Inc. (TELUS Québec) by 27 January 2003: (a) to confirm in writing whether this is the case; and (b) to show cause why the Commission's conclusions set out above should not also apply to them and their affiliates.

The sales and marketing activities of Bell Canada and Bell Nexxia

Background

Evidence from the Public Notice 2001-37 proceeding

40.

In its Part VII application, Group Telecom raised concerns about certain sales and marketing activities of Bell Canada and Bell Nexxia. As noted above, the relationship between Bell Canada and Bell Nexxia was explored in the Public Notice 2001-37 proceeding. The following evidence, based on the record of that proceeding, was relied on by parties to this proceeding.

41.

Bell Nexxia is a wholly owned subsidiary of Bell Canada and commenced operations in 1999. According to Bell Canada, Bell Nexxia was established to permit a single point of contact for providing services to customers with a national presence. Any Bell Canada business account with 20% or more of its telecommunications requirements outside of Bell Canada's traditional serving territory of Ontario and Quebec was treated as a national account and was serviced by Bell Nexxia. Bell Nexxia delivers its services through a combination of its own facilities, resale of affiliates' services, resale of the services offered by unaffiliated companies or agency arrangements with affiliated and unaffiliated companies.

42.

Bell Canada's witness in the Public Notice 2001-37 proceeding, Mr. Thomas J. Gillette (Mr. Gillette), stated that Bell Nexxia acted as the agent of Bell Canada, and not a reseller, in almost all cases involving tariffed services. Bell Canada initially identified 220 contracts where Bell Nexxia included Bell Canada tariffed services in packaged or single source arrangements. Subsequently, in The Companies Exhibit #85, Bell Canada indicated that the number of Bell Nexxia single source and packaged arrangement contracts was 203.

43.

Attachments 1 and 2 of The Companies Exhibit #85 were provided to the Commission in confidence and, hence, parties to this proceeding did not have access to the information set out in those attachments. Attachment 1 identifies five types of arrangements whereby Bell Nexxia provided services to customers. For present purposes, all of these arrangements are called "single source and packaged arrangements", the terms used by Bell Canada at the oral hearing in the Public Notice 2001-37 proceeding.

44.

Attachment 2 of The Companies Exhibit #85 includes a table listing and describing the 203 contracts at issue. Of these 203 contracts, at least 111 included Bell Canada tariffed services which were provided to customers by Bell Nexxia, acting as Bell Canada's agent, together with other services. The table numbers identifying these 111 contracts are set out in Appendix A to this decision. The Commission notes that another 52 contracts listed in Appendix B may be similar in character. However, the ambiguity of the contract descriptions makes it impossible to determine with certainty whether Bell Canada tariffed services were involved or, if so, how they were provided to the customer. The table numbers identifying these 52 contracts are set out in Appendix B to this decision.

45.

According to Mr. Gillette, in only two of the 203 contracts did Bell Nexxia offer the Bell Canada tariffed services at below tariff rates. Mr. Gillette indicated that in those two cases, Bell Nexxia was acting as a reseller, not as an agent of Bell Canada.

46.

Bell Canada paid Bell Nexxia a commission of approximately 11% when Bell Nexxia acted as its agent. The 11% commission was applied to broad revenues derived from Bell Nexxia's activities, rather than being applied on a case-by-case basis. Consequently, the 11% commission was paid on revenues derived from all of the contracts involving tariffed services, including those where, according to Bell Canada, Bell Nexxia acted as a reseller, instead of as Bell Canada's agent.

47.

When Bell Nexxia provided Bell Canada services, it generally offered them together with services of its own. The various services were either provided to a customer at a single rate for the package or were priced individually but sold together. In the latter case, prices were generally subject to discounts to encourage a customer to buy more services or to commit to use them over a longer term. In all cases, Bell Nexxia acted as the single point of contact for the customer.

Regulatory decisions

48.

There are several Commission decisions which provide the regulatory background for an assessment of the sales and marketing activities of Bell Canada and Bell Nexxia outlined above. They relate to restrictions on resale by Bell Canada affiliates and regulatory requirements regarding bundling of service elements.

49.

In Order 99-972 the Commission decided to restrict application of the affiliate rule to primary local exchange services. Specifically, the Commission prohibited Bell Canada and other ILECs from providing to affiliates that are not Canadian carriers, local exchange services or facilities for resale to provide local exchange services in the service territory of the ILEC.

50.

The bundling rules currently applicable to the ILECs were established in a number of decisions, including: Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), Decision 97-8, Joint marketing and bundling, Telecom Decision CRTC 98-4, 24 March 1998 (Decision 98-4), Stentor Resource Centre Inc. - Forbearance from regulation of interexchange private line services, Telecom Decision CRTC 97-20, 18 December 1997 and Bundling framework developed for customer-specific arrangements, Order CRTC 2000-425, 19 May 2000 (Order 2000-425). In Section III of Decision 98-4, the Commission described bundling as follows:

... the Commission in Decision 94-19 stated that "the term bundling generally refers to a situation where one rate covers a number of service elements", and that bundling includes "situations where there may be separate rate elements for each service element, but a number of service elements are aggregated for purposes of applying volume discounts, with the result that the discount available is greater than it would be were the service elements not aggregated". In Forbearance - Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, 18 December 1997 (Decision 97-19) and Stentor Resource Centre Inc. - Forbearance From Regulation of Interexchange Private Line Services, Telecom Decision CRTC 97-20, 18 December 1997 (Decision 97-20), the Commission also described bundling as the inclusion of different services or service elements under a rate structure. The Commission noted that this rate structure may be a single rate, a set of rates for various service elements, and/or rates for one or more service elements which are dependent on the usage of other services.

Positions of parties

51.

Group Telecom submitted that Bell Canada breached section 25 of the Act in the two instances when Bell Nexxia provided services to customers at below tariffed rates. Group Telecom disagreed with Bell Canada's claim that Bell Nexxia was acting as a reseller in those cases. Group Telecom argued that Bell Nexxia was actually acting as Bell Canada's agent since Bell Canada paid Bell Nexxia a commission based on broad revenues and, therefore, Bell Nexxia received a commission in respect of the Bell Canada services provided under those two contracts. Consequently, in Group Telecom's submission, Bell Canada was in breach of section 25 because of the actions of its agent, Bell Nexxia, in offering services at below tariffed rates.

52.

Group Telecom also submitted that when Bell Nexxia packaged or sold Bell Canada services with Bell Nexxia services under a single source contract or similar arrangement, this constituted bundling under the Commission's bundling rules. Group Telecom noted that in the case of packaged arrangements, multiple service components were combined under one price or a number of aggregate prices and that the pricing was dependent upon the set of services required by the customer. Similarly, in the case of single source arrangements, the prices of individual components were dependent on the usage of other components in the arrangement. Group Telecom also noted that a variety of Bell Canada's tariffed services were covered by these arrangements and that about half of the single source and packaged arrangements contained local access services.

53.

Group Telecom argued that customer-specific arrangements could involve bundling and that bundles did not have to be aimed at a mass-market, involving a pre-determined portfolio of products or services. In this regard, Group Telecom noted Order 2000-425 in which the Commission established rules for customer-specific agreements that bundle tariffed telecommunications services with forborne telecommunications services, non-telecommunications services and/or services of affiliated and non-affiliated companies.

54.

Group Telecom submitted that bundling occurs where: (a) multiple service components are combined under one price or a number of aggregate prices; or (b) the pricing, either in aggregate or for individual components, or the availability of services is dependent upon the set of services required by the customer or the volume of usage of those services. On the basis of this definition of bundling, Group Telecom submitted that Bell Nexxia's packaged and single source arrangements constituted bundles for regulatory purposes.

55.

Group Telecom further submitted that Bell Nexxia's packaged and single source arrangements were customer-specific arrangements. Group Telecom argued that the very nature of customer-specific arrangements implied that pricing was contingent or dependent upon the set of services required by the customer or the customer's expected or actual usage of those services and, therefore, such arrangements met the Commission's definition of bundling.

56.

Group Telecom submitted that if an affiliate acts as an agent of its affiliated ILEC in respect of tariffed services and bundles those tariffed services with other services, the bundled service would be subject to the tariffing and imputation test requirements. Group Telecom submitted that Bell Canada had not filed tariffs for these bundles and, therefore, was in breach of section 25 of the Act.

57.

In light of this analysis and the evidence in the Public Notice 2001-37 proceeding, Group Telecom requested the Commission to initiate a public proceeding to investigate the activities of Bell Nexxia. If the Commission were to find that there were instances of non-compliance with section 25 of the Act, Group Telecom proposed that, at a minimum, an appropriate remedy would involve the mandated termination of any related contracts or arrangements within 90 days of any such finding.

58.

AT&T Canada supported Group Telecom's request for an investigation of Bell Nexxia but also argued that the investigation should be expanded to include all ILEC affiliates. AT&T Canada submitted that the investigation should include, but not be limited to: (a) a reconciliation of the ILEC general and special facilities tariffs and the affiliate retail service offerings, and; (b) an investigation of tariffs and other arrangements that provide services and facilities to affiliates on an exclusive/discriminatory basis.

59.

Call-Net supported Group Telecom's request that the Commission investigate the activities of Bell Nexxia with a view to determining the extent of regulatory non-compliance. Call-Net submitted that Bell Canada and Bell Nexxia were essentially one entity and possess the same market power and ability to engage in anti-competitive behavior in the local services market. Call-Net also submitted that Bell Canada used Bell Nexxia as a "fighting brand" for anti-competitive purposes.

60.

Call-Net emphasized the need for the Commission to impose an appropriate remedy if the Commission were to find that there had been regulatory non-compliance by Bell Canada. Call-Net supported Group Telecom's proposal for the mandated termination of any relevant contracts or arrangements within 90 days of any such finding.

61.

VTL argued that Bell Nexxia is an integral part of Bell Canada's retail market activities and that competitors are not competing against Bell Canada and Bell Nexxia as separate entities. VTL supported Group Telecom's request for an investigation of the activities of Bell Canada and Bell Nexxia.

62.

ARC et al. was of the view that the Commission must ensure that affiliates were not used to undermine the integrity of the regulatory framework. ARC et al. supported Group Telecom's request for an investigation into the activities of Bell Nexxia.

63.

Bell submitted that Group Telecom had not advanced any specific, significant evidence that would warrant a full investigation of Bell Nexxia. Bell submitted that there could be no doubt that if Bell Nexxia were offering a bundle of services as an agent of Bell Canada, then Bell Canada would be offering a bundle of tariffed and non-tariffed services and would be required to follow the regulatory requirements of Decisions 94-19, 97-8 and 98-4. However, Bell argued that the single source arrangements and complex deals offered by Bell Nexxia as agent of Bell Canada and on its own behalf did not constitute a "bundle" within the meaning of those decisions.

64.

Bell noted that when Bell Nexxia offered a single source arrangement, Bell Canada booked the revenue for all tariffed services at the tariffed rate; Bell Canada booked the revenue for all forborne services at the agreed upon prices; and Bell Canada paid Bell Nexxia a commission for the sales support/agency services provided. If Bell Nexxia's broadband/IP services were a component of the bid, Bell Nexxia would book the revenues for such services, as these were not Bell Canada services. In Bell's submission, this demonstrated that the single source arrangements were not bundles.

65.

Bell further submitted that depending on the specific requirements of the customer, Bell Nexxia offered legacy services as agent for Bell Canada and broadband/IP services in its own right as a Canadian carrier. All of these services were packaged together in a single contract. The resulting arrangement involved services from both companies and was therefore neither an ILEC bundle nor a customer-specific arrangement as the single source contract or complex deal was in fact a joint marketing arrangement involving a package of services provided by both companies under one contract.

66.

Bell submitted that the individual packaging of services, which was the hallmark of the single source arrangement, did not offend the bundling rules and was used by competitors in the industry to deliver one-stop shopping to large national customers. Similarly, there was no evidence that Bell Nexxia had systematically breached its own internal pricing policies or that Bell Nexxia had, in fact, engaged in below-cost selling as a "fighting brand" of Bell Canada. On the contrary, the preponderance of evidence in the Public Notice 2001-37 proceeding showed that Bell Nexxia was adhering to its own internal controls.

Commission determinations: Bell Canada's and Bell Nexxia's sales and marketing activities

67.

In the Public Notice 2001-37 proceeding, Mr. Gillette stated that in almost all of the cases involving Bell Canada tariffed services, Bell Nexxia acted as an agent for Bell Canada, rather than engaging in resale. However, he also claimed that in two cases where Bell Nexxia provided tariffed services at below tariffed rates (the two cases), it did so as a reseller and not as Bell Canada's agent. The Commission does not consider Bell Nexxia's position credible as it relates to the two cases.

68.

There is nothing to distinguish the two cases from the other agency cases, except Bell Nexxia's assertion that it was acting as a reseller. Bell Canada paid an overall 11% commission to Bell Nexxia that covered the two cases on exactly the same basis as the numerous other cases where Bell Nexxia was acknowledged to be acting as Bell Canada's agent. There is no evidence to suggest that Bell Canada treated Bell Nexxia any differently, provided any less sales and marketing or engineering support to Bell Nexxia in the two cases. There is no evidence that Bell Canada took any action to indicate to customers that Bell Nexxia was not acting as its agent in the two cases. Indeed, an inference that Bell Nexxia was Bell Canada's agent would be natural and reasonable given that, according to Bell Nexxia, it was acting as Bell Canada's agent in the other cases where Bell Canada tariffed services were involved. Moreover, the Commission notes that in Attachment 2 to The Companies Exhibit #85, the contracts which appear to relate to the two cases (i.e., #47 and #155) are described as involving Bell Nexxia acting as Bell Canada's agent in Bell Canada territory. In light of all of the above, the Commission finds that Bell Nexxia was acting as Bell Canada's agent in the two cases.

69.

With respect to the Commission's bundling rules, there is no dispute among the parties that Bell Canada must comply with the Commission's bundling rules whenever Bell Nexxia offers bundles of services as Bell Canada's agent. Based on The Companies Exhibit #85, there were at least 111 instances where Bell Nexxia acted as Bell Canada's agent in the provision of tariffed services which were provided to the customer together with other services (the agency arrangements). The question is whether the agency arrangements constituted bundles for the purposes of the Commission's bundling rules.

70.

As noted above, the Commission defined bundling in Decision 98-4 as follows:

. "the term bundling generally refers to a situation where one rate covers a number of service elements", and that bundling includes "situations where there may be separate rate elements for each service element, but a number of service elements are aggregated for purposes of applying volume discounts, with the result that the discount available is greater than it would be were the service elements not aggregated". ... [B]undling [can also be described] as the inclusion of different services or service elements under a rate structure. ... [T]his rate structure may be a single rate, a set of rates for various service elements, and/or rates for one or more service elements which are dependent on the usage of other services.

71.

The Commission is of the view that each of the agency arrangements involved "the inclusion of different services or service elements under a rate structure" as described in Decision 98-4. Given that each of these arrangements included a Bell Canada tariffed service element, the Commission finds that they each qualified as a bundle. Moreover, since Bell Nexxia acted as Bell Canada's agent with respect to the provision of Bell Canada's tariffed services, the Commission finds that the inclusion of those services in the agency arrangements constituted bundling by Bell Canada. The Commission does not accept Bell's argument that these arrangements did not constitute bundling on the grounds that different service elements were provided by different entities (i.e., Bell Canada and Bell Nexxia) and because revenues for different service elements were booked separately by Bell Canada and Bell Nexxia. In the Commission's view, where an arrangement comes within the description of a bundle set out in Decision 98-4, it will qualify as a bundle whether or not a single entity provides all of the service elements or books all the revenues.

72.

The Commission notes that tariffs have not been filed by Bell Canada with respect to any of the 203 contracts that were identified by Bell Canada in the Public Notice 2001-37 proceeding. Given the Commission's determination that at least 111 of these contracts involved bundling of tariffed services by Bell Canada, including the two contracts where it was claimed that Bell Nexxia was acting as a reseller, the Commission finds that Bell Canada is non-compliant for each such bundle.

73.

The Commission also notes that in its 11 March 2002 submission in this proceeding, Bell claimed that under the Bell Nexxia Pricing Policy, "prices must exceed the sum of all incremental costs for non-tariffed products or services plus the charges for regulated services at tariff rates by a target EBITDA margin". This implies that for each of its single source and packaged arrangements, Bell Nexxia has already performed a financial analysis using elements of the imputation test required under the Commission's bundling rules. However, the Commission has not reviewed these analyses since, contrary to the bundling rules, Bell Canada did not file tariffs for these bundles.

74.

The Commission considers that Bell Canada's failure to comply with the tariffing requirements of the bundling rules requires prompt action. In order to bring Bell Canada into compliance and to permit the Commission to determine any additional measures which may be necessary, the Commission directs Bell Canada to file, by 27 January 2003, the following material:

a) for every contract identified in Appendix A that is in force on the date of this decision, either under its original term or pursuant to a renewal or modification of the contract:

· a proposed tariff, together with an imputation test analysis using the Commission's imputation test framework as set out in Order 2000-425; and

· a copy of the contract(s).

b) for every contract identified in Appendix B that is in force on the date of this decision, either under its original term or pursuant to a renewal or modification of the contract:

· a proposed tariff, together with an imputation test analysis using the Commission's imputation test framework as set out in Order 2000-425, or an explanation as to why a tariff is not required; and

· a copy of the contract(s).

c) for every single source and packaged arrangement that has been concluded since the preparation of The Companies Exhibit #85, that is in force as of the date of this decision, either under its original term or pursuant to a renewal or modification of the contract, and that involves one or more Bell Canada tariffed service elements and one or more other services, provided pursuant to a single contract or set of related contracts, and offered directly by Bell Canada or through Bell Nexxia or a successor to Bell Nexxia or any other entity that controls or is controlled by Bell Canada or is controlled by a person who controls Bell Canada (hereafter, an affiliate in this type of situation will be referred to as being subject to "common control" and, here and hereafter, control will be taken to mean control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of any body corporate or otherwise):

· a proposed tariff, together with an imputation test analysis using the Commission's imputation test framework as set out in Order 2000-425, or an explanation as to why a tariff is not required; and

· a copy of the contract(s).

75.

The Commission also directs Bell Canada to comply on a going-forward basis with all Commission decisions in respect of the bundling of tariffed services, including any bundling by Bell Nexxia acting as an agent of Bell Canada. In accordance with Decision 94-19 and Price cap regulation and related issues, Telecom Decision CRTC 97-9, 1 May 1997, the Commission is prepared to consider tariff applications on an ex parte basis. The Commission will process all such applications as expeditiously as possible, granting interim approval where appropriate.

76.

Finally, the Commission considers it important to ensure that customers be given notice of the requirement for regulatory approval of bundles. Consequently, the Commission directs Alliant Telecom, Bell Canada, MTS, SaskTel, Télébec, TELUS and TELUS Québec to ensure that all contracts for bundles include a clause specifying that the provision of the bundle is subject to prior Commission approval and the rates, terms and conditions set out in the contract are not final until given final approval by the Commission. This clause must be placed at the beginning of the contract, printed in a large font and highlighted in bold.

Services provided to Bell Nexxia by Bell Canada

Background

77.

The record of the Public Notice 2001-37 proceeding indicates that Bell Canada provides numerous non-tariffed services to Bell Nexxia. In particular, the evidence in that proceeding indicates:

· Bell Nexxia's customer support group is provided with trouble ticketing through Bell Canada's help desk in order to manage network troubles for Bell Nexxia's retail services;

· Bell Nexxia has a separate sales organization but does not own or manage the bulk of the network that it uses in Bell Canada territory;

· all of the engineering support for Bell Nexxia's services is provided by Bell Canada network operations. Among other things, Bell Canada configures the routers and manages the router interface on Bell Nexxia's broadband/IP services;

· in 2000, a large portion of Bell Nexxia's corporate group (e.g., Human Resources, Finance) was repatriated into Bell Canada and the services formerly provided by that group are now provided by Bell Canada;

· on a case-by-case basis, Bell Canada provides Bell Nexxia's operations with engineering, sales and other corporate support. In many cases this support relates to individual problems or minor projects where an invoice is not provided;

· Bell Canada works with Bell Nexxia on joint bids and provides technical assistance to Bell Nexxia in the preparation of bids involving in-region local network services; and

· Bell Nexxia is not billed for engineering support and help-desk services by Bell Canada. Instead, Bell Canada stated that its costs are recovered by means of a cost assignment to Bell Nexxia. This arrangement has not been formalized in writing between the two companies.

Positions of parties

78.

Group Telecom submitted that the integration of Bell Nexxia's operations with those of Bell Canada demonstrated that the two companies were not separate in any meaningful sense and, therefore, there was a heightened concern that Bell Nexxia was being used to circumvent regulation.

79.

ARC et al. submitted that the sharing of resources by Bell Nexxia and Bell Canada could result in the reporting of Utility Segment revenues that would be lower than should be the case. In ARC et al.'s view, this could impair the ability of the Commission to properly assess Bell Canada's costs and revenues in the future.

80.

AT&T Canada argued that the arrangements between Bell Canada and Bell Nexxia permitted Bell Nexxia to operate on a basis which did not require the recovery of costs based on tariffed rates, but instead, costs based on Bell Canada's internal costs. In AT&T Canada's submission, this provided Bell Nexxia with a competitive advantage. It also permitted Bell Canada, via Bell Nexxia, to offer tailored customer services without having to file a tariff. AT&T Canada submitted that the Commission should investigate, among other things, all tariffs and arrangements whereby an ILEC provided an in-region ILEC affiliate with services on an exclusive/discriminatory basis.

81.

Call-Net submitted that Bell Nexxia's reliance on Bell Canada for such an extensive range of services demonstrated that the two companies were not truly separate and that there were no inherent efficiencies in the affiliate structure. Instead, in Call-Net's view, Bell Nexxia was only established because of the opportunity it provides to circumvent the Commission's competitive safeguards.

82.

TELUS argued that price caps eliminated the incentive to cross-subsidize competitive services with monopoly services. Hence, in TELUS' view, concerns about Bell Canada subsidizing Bell Nexxia were misplaced.

83.

Bell submitted that various services were provided to Bell Nexxia by Bell Canada on a cost recovery basis which was acceptable for regulatory purposes. It further submitted that Bell Canada was developing improved methodologies for all affiliates that would allow the company to explicitly identify dedicated resources on Bell Canada's payroll who provide services to affiliates thereby providing an auditable tracking methodology to ensure that the costs for such employees were appropriately assigned. Bell indicated that such a system should be in place before the end of 2002. Bell argued that it would be wrong to conclude that the costs of supporting Bell Nexxia were borne in any way by Bell Canada's Utility Segment, since safeguards were in place to ensure that costs were assigned to the Utility Segment only when appropriate.

Commission determinations: Services provided by Bell Canada to Bell Nexxia

84.

In the Commission's view, the engineering and technical support, help desk and back-office services provided by Bell Canada to Bell Nexxia are provided to support the provisioning of telecommunications services and, as such, may themselves qualify as telecommunications services. In this regard, the Commission notes that services such as engineering support, project management, customer information reports, billing and collection are provided to unaffiliated persons pursuant to approved tariffs. On its face, there is no reason why Bell Nexxia should not be required to obtain these types of services on the same basis.

85.

To the extent that the services provided by Bell Canada to Bell Nexxia are telecommunications services, section 25 of the Act requires that they be provided pursuant to an approved tariff. The evidence indicates that none of these services are provided to Bell Nexxia pursuant to a tariff.

86.

In order to determine whether or not Bell Canada is compliant with the Act, the Commission directs Bell Canada to file the following by 27 January 2003:

· a list describing all the services Bell Canada provides, as of the date of this decision, to Bell Nexxia or any other Bell Canada affiliate under common control with Bell Canada, separated by affiliate and by service category (i.e., tariffed services; network services; engineering and technical support; back-office service; and other services), with each service identified, with justification, as either a telecommunications service or a non-telecommunications service;

· a list of the applicable tariff items for those services identified as a telecommunications service, or an explanation as to why Bell Canada believes a tariff is not required; and

· a proposed tariff in those cases where Bell Canada believes a tariff is required for a service but no tariff currently exists.

87.

The Commission is concerned that other ILECs may be providing telecommunication services to affiliates on a untariffed basis when those same or similar services would be provided pursuant to a tariff if provided to an unaffiliated party. The Commission therefore directs Aliant Telecom, MTS, SaskTel, Télébec, TELUS and TELUS Québec to file by 27 January 2003:

· a list describing all the services the ILEC provides, as of the date of this decision, to an affiliate under common control with the ILEC, separated by affiliate and by service category (i.e. tariffed services; network services; engineering and technical support; back-office service; and other services), with each service identified, with justification, as either a telecommunications service or a non-telecommunications service;

· a list of the applicable tariff items for those services identified as a telecommunications service, or an explanation as to why the ILEC believes a tariff is not required; and

· a proposed tariff in those cases where the ILEC believes a tariff is required for a service but no tariff currently exists.

88.

Once the Commission has received the above material from Bell Canada and the other large ILECs, it will determine what further action is required in this matter.

IV The adequacy of the affiliate rule in the present environment

Background

89.

The affiliate rule was first established in Resale and sharing of private line services, Telecom Decision CRTC 90-3, 1 March 1990, and was applicable to all facilities-based interexchange carriers. In that decision, the Commission concluded that the resale and sharing rules should be amended to permit the resale of private lines to provide joint use voice services. However, facilities-based joint use voice competition was not permitted. In order to prevent facilities-based carriers from effectively avoiding this restriction by means of affiliates, and in order to limit uneconomic entry and contribution avoidance, the Commission prohibited facilities-based carriers from leasing services to an affiliate for the provision of voice services on a joint use basis.

90.

The affiliate rule was retained, unamended, in Decision 92-12. The Commission's primary rationale for retaining the rule was to prevent facilities-based carriers from taking advantage of the lower contribution rates established for resellers in that decision, by using affiliated resellers to provide their services.

91.

In Affiliate rule, Telecom Decision CRTC 94-6, 4 March 1994 (Decision 94-6), the Commission concluded that it was no longer necessary to retain the affiliate rule in order to prevent uneconomic entry. However, the Commission decided to retain the affiliate rule in order to prevent the ILECs from using affiliates to provide long distance services on an unregulated basis and also to prevent contribution avoidance.

92.

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

93.

In Public Notice 99-3, the Commission concluded that the original reasons for the affiliate rule, as it applied to interexchange services, no longer existed or had been addressed by other mechanisms established by the Commission. However, the Commission was of the view that it required further input on whether an affiliate rule was required in local markets to ensure that the ILECs would comply with the bundling rules and competitive safeguards.

94.

In Order 99-972, the Commission decided that an affiliate rule was required in the local market and stated:

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.

...

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.

95.

In its Part VII application, Group Telecom argued that changes should be made to the affiliate rule in light of the evidence in the Public Notice 2001-37 proceeding regarding the activities of Bell Canada and Bell Nexxia.

Positions of parties

Group Telecom

96.

Group Telecom submitted that the affiliate rule appears to permit a wide range of activities on the part of in-region affiliates that would not be permitted if conducted through the ILEC. The affiliate rule places no restrictions whatsoever on in-region carrier affiliates and limits reseller affiliates only in respect of the provision of local exchange services. Group Telecom submitted that the Commission needs to be concerned regarding the potential for an ILEC to use affiliates to act in the interests of the combined overall corporate entity in ways that the ILEC itself would not be permitted to act.

97.

Group Telecom submitted that ILEC affiliates might appear to present few regulatory concerns because they might be considered "separate" from the ILEC and comparable to a new entrant that was not affiliated with the ILEC or at least in a less dominant position than the ILEC.

98.

Group Telecom submitted that the record of the Public Notice 2001-37 proceeding called into question any implicit assumption that affiliates were separate from the ILEC in any substantive sense or that they were in a position similar to that of a new entrant.

99.

Group Telecom submitted that the record of the Public Notice 2001-37 proceeding demonstrated that the current affiliate rule permits ILECs to circumvent regulatory rules such as tariffing requirements and bundling restrictions. Group Telecom argued that additional safeguards were necessary to ensure that ILECs could not operate affiliates in a manner that would threaten the integrity of the current regulatory framework and undermine the effectiveness of ILEC regulation.

100.

To address its concerns, Group Telecom proposed expanding the existing rules applicable to ILEC affiliates to add the following additional safeguards:

a) a prohibition on ILEC affiliates operating as CLECs in-region;

b) extension of the current local affiliate rule to the in-region operations of carrier affiliates, i.e., the ILECs would be prohibited from providing to any affiliates local exchange facilities, such as loops, or local exchange services for resale to provide in-region local exchange services;

c) a section 24 condition imposed on carrier affiliates to the effect that where ILEC services are resold to provide services which, if provided by the ILEC, would require a tariff, affiliate prices must exceed a floor price equal to the sum of tariffed rates for services purchased from the ILEC and all other causal costs of providing the service (including prices paid to the ILEC for non-tariffed or forborne services);

d) a rule, as a condition of access to ILEC tariffs, prohibiting resale by reseller affiliates to provide services, which if provided by the ILEC would require a tariff, at reseller prices which do not recover the sum of tariffed rates for services purchased from the ILEC and all other causal costs of providing the service;

e) a requirement that where a carrier affiliate wishes to introduce a new service (i.e., a service not currently offered by the affiliate and not comparable to any existing service provided by its affiliated ILEC) that would not be subject to an existing forbearance order if provided by its affiliated ILEC, the affiliate must file either a tariff for approval with the requisite imputation test or a forbearance application;

f) a requirement, imposed directly on carrier affiliates and as a condition of access to ILEC tariffs for reseller affiliates, that when (i) a tariffed service of the affiliated ILEC is bundled with affiliate services, (ii) the tariffed component of the bundle is neither resold by the affiliate nor marketed by the affiliate as an agent but rather is provided directly to the customer by the ILEC, and (iii) the bundling is performed by the affiliate, the bundled arrangement must pass an imputation test consistent with that required by the Decision 98-4 bundling rules and the imputation test must be filed with the Commission for information purposes; and

g) a requirement, imposed directly on carrier affiliates and as a condition of access to ILEC tariffs for reseller affiliates, that, where applicable, affiliates must adhere to the rules proposed in Group Telecom's Public Notice 2001-37 evidence regarding the use of long term contracts.

101.

Group Telecom submitted that its first two safeguards were designed to eliminate the opportunity for ILECs to provide in-region local exchange services on an unregulated basis via affiliates. Given the importance of the competitive safeguards imposed by the Commission in the local market, Group Telecom submitted that these safeguards were required, unless the Commission was prepared to subject in-region ILEC affiliates to direct regulation in a form identical to that applied to the ILEC.

102.

Group Telecom submitted that its proposed safeguards would not interfere with the ability of the ILECs to provide one-stop shopping either directly or through affiliates. For example, an affiliate could provide one-stop shopping by acting as an agent of the ILEC for any services it was unable to provide on its own (i.e., by means of self-provision or resale of ILEC tariffed services). Group Telecom noted that the proposed safeguards would not affect agency arrangements.

103.

Group Telecom indicated that its third and fourth proposed safeguards would only be invoked if the services provided by the affiliate would require a tariff if provided by the ILEC. Group Telecom noted that out-of-region services provided directly by an ILEC would not require a tariff, unless they were bundled with other tariffed services. Therefore, the third proposed safeguard would not require that out-of-region operations or services be subject to costing except in instances in which out-of-region services were bundled with in-region services that, if provided by the ILEC, would require a tariff.

104.

Group Telecom argued that it was important to note the distinction made in Order 99-972 and previous resale decisions between "resale of" and "resale to provide". According to Group Telecom, if a reseller or carrier affiliate were to resell a tariffed service of its ILEC affiliate to provide a service that would not require a tariff if provided by the ILEC, then neither safeguard would apply. Group Telecom also submitted that, as in the case of out-of-region services, forborne or non-telecommunications services would only be subject to costing if they were bundled with services which would require a tariff if provided by the ILEC.

105.

In respect of its fifth proposed safeguard, Group Telecom emphasized its view that Bell Canada and Bell Nexxia were not separate in any meaningful sense and, therefore, Bell Nexxia's market position was effectively the same as that of Bell Canada. Consequently, in Group Telecom's view, there was no basis for the regulatory flexibility currently accorded to an affiliate like Bell Nexxia. Group Telecom argued that this implied that an ILEC should not be permitted to introduce new services via an affiliate and escape a requirement for either a tariff or a forbearance application.

106.

Group Telecom also noted that the requirement under the proposed safeguard for the affiliate to file either a tariff or a forbearance application would not apply to all new affiliate services. Rather it would apply only to those that were not comparable to any existing service provided by its affiliated ILEC and would not be subject to an existing forbearance order if provided by its affiliated ILEC. Group Telecom submitted that given the evidence regarding the degree of integration between Bell Canada and Bell Nexxia, there was no sound basis for allowing an ILEC to avoid regulation for a new service simply because it chose to offer the service through the administrative fiction of a "separate" affiliate.

107.

Group Telecom submitted that its sixth safeguard was intended to capture those instances of bundling tariffed services not captured by its third and fourth proposed safeguards or by current regulatory requirements imposed on ILECs. The purpose of this requirement was to ensure that bundles involving the provision of ILEC tariffed services to the end-user directly by the ILEC would be subject to the same economic test regardless of whether the bundling was performed by the ILEC or by the affiliate. Otherwise, there would be a powerful economic incentive to have it performed by the affiliate, thereby evading the requirement for a bundled service imputation test.

108.

Group Telecom noted that the purpose of requiring the filing of the imputation test for information purposes would be to permit the Commission to verify that the imputation test had been passed. Group Telecom submitted that the imputation tests would be filed coincident with the commencement of service provision rather than on an annual basis.

109.

Finally, in respect of long term contracts, Group Telecom submitted that the overall objective of Group Telecom's application was to reduce or limit opportunities for ILECs to circumvent and undermine regulation through the use of in-region affiliates. Consistent with that objective, if, pursuant to Group Telecom's proposals in the Public Notice 2001-37 proceeding, new rules were established regarding the use by ILECs of long term contracts, then affiliates should be made subject to similar rules.

AT&T Canada

110.

AT&T Canada submitted that, in the case of Bell Nexxia, the ILEC in-region affiliate was a shell organization that operated using the ILEC network, systems support and staff. Payments that flowed between the two entities were accounting attributions not cash payments. AT&T Canada argued that the affiliate was privy to a number of preferential service and network arrangements from its ILEC affiliate and from other ILECs, none of which were available to new entrants. AT&T Canada added that, therefore, the cost structure of the affiliate was that of the ILEC which was vastly different from that of a new entrant. In other words, the in-region affiliate was not an additional competitor, it was merely the ILEC in disguise.

111.

AT&T Canada submitted that the current affiliate rule was not sufficient to safeguard against anti-competitive behaviour by an ILEC. AT&T Canada argued that, absent the imposition of a broad affiliate resale restriction, ILECs would be able to limit the pace and extent of the rollout of competition. AT&T Canada urged the Commission to change the affiliate resale restriction as follows:

· expand the affiliate resale restriction to include all regulated services both voice and data to ensure that ILECs could not abuse the advantage they have by virtue of their ubiquitous networks and regional monopolies; and

· extend this restriction to all affiliates operating within the ILECs' territory or the territory of an affiliated ILEC.

112.

AT&T Canada submitted that neither the changes proposed by AT&T Canada nor those advocated by Group Telecom required structural changes. Given that, in AT&T Canada's view, Bell Nexxia actually operated as a division of Bell Canada and that Bell Canada was able to offer the same services as Bell Nexxia on a national basis, broadening the affiliate resale restriction would not represent a structural change.

Other competitors

113.

Call-Net submitted that the proposed safeguards in Group Telecom's application should be applied to all in-region affiliates, whether such affiliate was an agent or a reseller of the ILEC parent. Call-Net also suggested that the Commission establish a new reporting procedure requiring an ILEC's in-region affiliate to file, in confidence, all of their contracts with the Commission on a going-forward basis. The Commission could then conduct a periodic review of the terms and conditions at which the affiliates were obtaining services from their ILEC affiliates.

114.

Call-Net emphasized that the modifications proposed by Group Telecom would not prevent the ILECs from offering one-stop shopping. Instead, the additional safeguards would, in Call-Net's submission, merely ensure that one-stop shopping took place in a manner which complied with the existing pricing and bundling safeguards.

115.

Call-Net identified six complaints by competitors in the past two years regarding activities of ILEC affiliates. In Call-Net's submission, these complaints demonstrated that the current affiliate rule was undermining the Commission's regulatory regime for local competition.

116.

IMCAIP supported Group Telecom's request that the Commission impose restrictions on ILEC affiliates to ensure the integrity of the Commission's regulatory framework. IMCAIP did not address any of the specific proposals advanced by Group Telecom other than to comment that the Commission should consider the conduct of affiliates and their impact on competition and the health of competitors.

117.

VTL generally supported Group Telecom's proposed changes to the affiliate rule and specifically urged the Commission to impose imputation test and bundling restrictions on ILEC affiliates. VTL argued that these safeguards should apply to all in-region affiliates whether such an affiliate was an agent or a reseller of the ILEC.

ARC et al.

118.

ARC et al. supported Group Telecom's application for additional safeguards on the grounds that in-region affiliates provided a means for ILECs to circumvent the Commission's regulatory rules.

TELUS

119.

TELUS submitted that the Commission should not grant any of the general relief requested by Group Telecom as the application disclosed no basis that would justify a review of the existing regulatory framework. On the contrary, in TELUS' view, the application confirmed the utility, relevance and power of that framework. TELUS argued that the application was precisely the type of case-by-case investigation and enforcement action contemplated by Order 99-972 and, accordingly, the mere fact of alleged affiliate non-compliance or anti-competitive abuses was not a reason to institute additional industry-wide safeguards.

120.

TELUS emphasized its view that much of the relief requested in the application was not supported by any evidence. In this regard, TELUS submitted that there was no evidence in the application concerning long-term contracts, yet the application requested the imposition of new rules on ILEC affiliates concerning the use of long term contracts. TELUS also submitted that there was no evidence concerning problems with new services, yet the application requested the imposition of imputation test and tariff filing requirements on ILEC carrier affiliates in respect of all new services. TELUS also argued that there was no evidence in the application concerning abuses by reseller affiliates, yet the application advocated the imposition of onerous restrictions on ILEC reseller affiliates.

121.

TELUS argued that a number of the affiliate safeguards proposed by Group Telecom attempted to extend the Commission's jurisdiction over resellers beyond what was provided for under the Act. For example, TELUS noted that several of the proposed safeguards would require the implementation of Phase II costing processes at resellers affiliated to ILECs. TELUS submitted that these proposals could not be directly implemented by the Commission, given its jurisdictional limitations.

122.

TELUS argued that the Group Telecom proposal was, in substance, a demand for direct, vigorous and extremely intrusive supervision of ILEC reseller affiliates. TELUS submitted that the Commission should not be misled by attempts to "package" the proposal as a form of indirect regulation that was within its powers.

123.

TELUS submitted that Group Telecom's proposed ban on ILEC affiliates acting as in-region CLECs would interfere with the ability of ILEC affiliates to provide national customers with a "one-stop" shopping solution.

124.

TELUS argued that an outright ban on the provision to ILEC affiliates of local exchange facilities or local exchange services for resale to provide in-region local exchange services could not be reconciled with the Commission's mandatory policy objectives. TELUS argued that this was a heavy-handed proposal that would stifle innovation, put in place inefficient regulation, and undermine competitiveness.

125.

TELUS submitted that Group Telecom's third proposed safeguard would also disadvantage ILEC affiliates that operated nationally, by subjecting the affiliate's out-of-region operations to Phase II costing requirements.

126.

With respect to Group Telecom's fourth proposed safeguard, TELUS submitted that it would require a reseller affiliate providing consulting, network management and hosting services (which happened to incorporate even a single tariffed service element from the ILEC - like a non-forborne private line for example) to subject its entire organization to Phase II costing. This obligation to undertake regulatory cost studies would exist despite the fact that: (a) the reseller participated in intensely competitive markets; (b) the reseller was not subject to direct oversight by the Commission; and (c) the Phase II methodology would have to be deployed in respect of services and operations never before subject to regulatory costing requirements.

Aliant Telecom and SaskTel

127.

Aliant Telecom and SaskTel both opposed Group Telecom's suggested changes and argued that Group Telecom had not provided any evidence that would support a wholesale review of the regulatory regime established by the Commission in Order 99-972.

Bell

128.

Bell submitted that in Order 99-972, the Commission correctly concluded that any restrictions on the activities of ILEC affiliates in the local market should not be so pervasive as to insulate CLECs from competition. Bell argued that the Commission limited the affiliate rule to in-region reseller affiliates since, under the Act, the Commission had no direct regulatory jurisdiction over reseller activities. In Bell's view, the Commission's decision also recognised that carriers offer a wider range of technologies and innovative products than resellers, who mainly focus on price discounts.

129.

Bell noted that the Commission had not generally used structural restrictions as a means of regulation. In contrast with the United States, where structural separation and divestiture had been imposed, the Commission had, in Bell's view, avoided many of the negative aspects of structural changes by instead monitoring behaviour on a case-by-case basis.

130.

Bell submitted that broadening affiliate restrictions, as requested by Group Telecom, would curtail rather than stimulate competition. Moreover, in Bell's view, structural changes could have disruptive effects in the marketplace, as customers would be forced to move their business from an ILEC affiliate to another source or consider taking certain services from the ILEC and others from the affiliate, thereby defeating one of the important advantages that large sophisticated customers seek from one-stop shopping. Bell also submitted that the Commission had appropriately avoided arbitrary rules which would have the tendency to restrict the number of players, thereby limiting the benefits of innovation and choice.

131.

Bell also submitted that since the time that the Commission issued Order 99-972, competition in the business urban market for local exchange services had been accelerating. Not only was competition growing, according to Bell, but affiliated carriers such as Bell Nexxia had provided national customers with competitive choice in the provision of one-stop shopping for all of their telecommunications needs. Given these achievements, Bell questioned why the Commission would now take the regressive step of further restricting entry into the local exchange market.

132.

Bell submitted that restrictions on affiliate activities could have other negative consequences as well. Most structural restrictions were, by their nature, of time limited value. In other words, in Bell's view, they were more of a "stop gap" measure than a permanent structural change to market conditions. Bell argued that, as competition evolved, however, there was often debate as to when such restrictions should be removed. This, in turn, led to unnecessary and protracted regulatory proceedings and the continuation of structural restrictions for much longer periods than originally intended.

133.

Bell urged the Commission not to regard a broadening of the affiliate rule as a costless exercise, as it would delay the rollout of new services and result in less pricing flexibility and responsiveness to customers' needs. Moreover, in Bell's view, history had demonstrated that structural changes could become difficult to remove in a timely manner, thereby creating artificial impediments to free and open competition. Bell submitted that theoretical possibilities should never be used as justification for limiting competition.

134.

Bell submitted that Bell Canada and Bell Nexxia had demonstrated a willingness and ability to rectify any situations that the Commission deemed unacceptable without the need for widespread structural limitations. Therefore, in Bell's view, widespread changes to the affiliate rule were not warranted even if the Commission found that there were issues which needed to be addressed.

135.

Bell submitted that Group Telecom had provided no evidence to support an outright ban on ILEC affiliates acting as in-region CLECs. Bell noted that, given that none of the ILECs currently had an affiliated CLEC operating in-region, Group Telecom could not have made out a case for such a restriction.

136.

Similarly, Bell argued that Group Telecom had provided no justification as to why an additional restriction should be implemented to prohibit ILECs from providing to any affiliates local exchange facilities, such as loops, or local exchange services for resale to provide in-region local exchange services. Bell submitted that such a restriction would deny customer access to Bell Nexxia's unique set of services and would result in a loss of efficiencies associated with "one-stop" shopping for all of the customer's needs.

137.

With respect to Group Telecom's third and fourth proposed safeguards, Bell noted that in the case of Bell Nexxia, such requirements were unnecessary particularly in light of the principles set out in Bell Nexxia's internal pricing policy. According to Bell, the requirements proposed by Group Telecom essentially mirrored the essence of this pricing policy, which itself was an essential part of Bell Nexxia's sales governance program.

138.

Bell argued that Group Telecom's fifth proposed safeguard would require the affiliated carrier to submit the in-region portions of a national services contract for tariff approval or split the customer's national services contract into regulated and unregulated services contracts. Bell added that all of these measures were very negative for the customer and unnecessary since the Commission had the ability to require the ILEC to offer any new service which it did not offer, but which was offered by an affiliate, without resorting to regulation of the non-dominant carrier affiliate.

139.

Bell opposed Group Telecom's suggestion that the results of an imputation test should be filed by the ILEC affiliate with the Commission for information purposes. In Bell's submission, it was not clear what purpose such a filing would serve, as the contract and the service would already have been implemented with the customer. Moreover, in Bell's view, this could result in the annual filing, in confidence with the Commission, of hundreds of single source contracts for information purposes.

140.

With respect to AT&T Canada's proposals, Bell submitted that they were an attempt to either close down or severely restrict the activities of all in-region affiliates. Bell argued that AT&T Canada's proposal was, in this respect, similar to the more detailed proposals of Group Telecom.

141.

Bell submitted that AT&T Canada's suggested changes were designed to remove Bell Nexxia as a single point of contact for customer needs. Bell argued that a customer would be forced to deal with another service provider for the access components of the service and, therefore, would require separate contracts at separate prices for the access and interexchange portions of various services.

142.

Bell expressed concern that AT&T Canada proposed an affiliate resale restriction on all "regulated" services without defining what that term means. Bell noted that all telecommunication services that Bell Canada offers, both tariffed and forborne, are "regulated" to some degree. Assuming that AT&T Canada meant "tariffed" services, Bell argued that this interpretation would preclude the ILECs from providing many services to in-region affiliates which have little to do with local competition. Bell also submitted that it would prevent Bell Nexxia from obtaining Bell Canada's wholesale Internet service, effectively precluding Bell Nexxia from offering its wholesale Internet service to smaller, independent Internet service providers (ISPs) not having sufficient volume requirements to deal directly with Bell Canada.

143.

Bell submitted that Call-Net's proposal that all affiliate contracts be filed with the Commission was onerous and entirely unwarranted based on the evidence presented. In Bell's view, such a process would increase the regulatory burden on Bell Nexxia and the Commission and would open the door to regulatory gaming by competitors. Bell argued that the Commission had the power to review Bell Nexxia's contracts, either in detail or in summary form, whenever it wished to do so and that there was no need to implement the sweeping changes advocated by Call-Net, Group Telecom, or AT&T Canada.

Commission determinations: Adequacy of the affiliate rule

144.

Since its inception, the affiliate rule has been intended to prevent regulated carriers from avoiding one or more aspects of the regulatory regime by using affiliates that may not have been regulated to provide services. In its current form, the affiliate rule is focused solely on the local market. The Commission has established a regulatory framework designed to facilitate the transition to a competitive market for local services. It is essential that this framework not be undermined by means of contractual or corporate arrangements between ILECs and their affiliates.

145.

In the Commission's view, the evidence in this proceeding demonstrates that, while ILEC affiliates may exist for legitimate business reasons, an ILEC could use - and at least one ILEC has used - an affiliate to evade regulatory rules designed to promote competition. In particular, the activities of Bell Canada and Bell Nexxia have raised several serious regulatory concerns which have been addressed, in part, above. However, the Commission considers it important to also examine the more general issue raised by Group Telecom's Part VII application; namely, whether the affiliate rule in its present form is adequate to address situations arising in the current environment.

146.

While the Commission's determinations in this decision with respect to the agency relationship of Bell Canada and Bell Nexxia address one form of abuse, the Commission is concerned that, via resale or other arrangements, an ILEC may still be able to provide tariffed services through an in-region affiliate at rates, terms and conditions that differ from those approved by the Commission. This would, in effect, enable an ILEC to offer tariffed services as if they were forborne, without having to apply for and obtain forbearance from the Commission. This is clearly unacceptable.

147.

The Commission is also of the view that, in its current form, the affiliate rule does not ensure that the regulatory safeguards associated with the bundling of tariffed services achieve their intended purpose. The Commission considers it essential that these safeguards be given full effect in order to protect the integrity of the Commission's framework for competition.

148.

The Commission notes TELUS' submission that the current affiliate rule and the findings in Order 99-972 provide sufficient regulatory oversight on affiliates and that Group Telecom's application is the type of case-by-case investigation and enforcement action contemplated by Order 99-972 and is evidence that the current framework is working. The Commission considers that the case-by-case approach advocated by TELUS may be suitable to address certain individual acts of non-compliance, but that it does not adequately deal with the potential cumulative anti-competitive impact of those acts. Consequently, it does not adequately safeguard against ongoing anti-competitive behaviour by the ILECs and their affiliates. Moreover, an after the fact complaint process cannot provide an adequate remedy for certain types of harm which may result from either isolated or multiple acts of non-compliance (e.g. loss of business, loss of reputation, loss of financial viability).

149.

The Commission also notes Bell's suggestion that it would be inappropriate for the Commission to extend the affiliate rule, given that the Commission has the authority under section 35 of the Act to require that services be offered directly by an ILEC, instead of by its affiliate. The Commission considers it unnecessary to exercise its powers under section 35, at this time. However, the Commission notes that should the regulatory changes proposed below be considered inappropriate or prove insufficiently effective, the Commission may conclude that it has no choice but to impose more stringent measures either pursuant to section 35 or by restricting access to tariffed services by ILEC affiliates.

150.

With respect to the individual safeguards proposed in this proceeding, the Commission does not consider any single proposal appropriate. In the Commission's view, Call-Net's suggestion that all affiliate contracts be filed with the Commission would not adequately address the overriding regulatory concern that an ILEC could, through an affiliate, engage in a course of anti-competitive behaviour which would otherwise be prohibited by the Commission's rules. In particular, the process proposed by Call-Net would examine contracts after the fact, and, therefore, suffers from the same deficiencies as the case-by-case approach advocated by TELUS.

151.

On the other hand, the Commission considers AT&T Canada's proposal unduly restrictive. AT&T Canada's proposed safeguards would prevent an in-region affiliate from providing, in its own right, any tariffed services or any service that includes a tariffed service element. The affiliate could only act as the ILEC's agent in respect of tariffed services. In the Commission's view, such an approach would restrict the structural flexibility of an ILEC's corporate family in a manner that would not appear to be necessary at this time.

152.

The Commission considers Group Telecom's proposed safeguards less restrictive than AT&T Canada's, at least as they relate to the activities of carrier affiliates when providing forborne services that include an underlying tariffed service element. For example, under Group Telecom's approach, Bell Nexxia would still be able to provide its own wholesale Internet service to smaller independent ISPs. However, Group Telecom's proposal entails multiple restrictions which, in the Commission's view, are detailed and complex without being fully effective. In particular, several of Group Telecom's proposed safeguards would operate on an after the fact basis and, hence, suffer from the same defect identified in connection with Call-Net's proposal.

153.

In the Commission's view, the primary opportunity for abusive behaviour in the provision of ILEC tariffed services arises when an entity is subject to common control with an ILEC. The record of this proceeding demonstrates that, from a regulatory perspective, in situations of common control there is no meaningful distinction between the actions of the affiliate and the actions of the ILEC since the actions of both entities are ultimately subject to control by a single person.

154.

It is important to emphasize that this conclusion holds irrespective of whether, in any particular instance, the activity in question involves an agency relationship, a resale situation, a case of joint marketing, joint venture or other co-ordinated activity. In the Commission's view, it would be artificial to attempt to apply different rules to these superficially distinct situations when the underlying reality remains the same. If the affiliate and the ILEC are subject to common control, the activities of the affiliate are, from a regulatory perspective, equivalent to activities of the ILEC. Consequently, the affiliate's activities should be subject to the same rules as are applicable to activities of the ILEC.

155.

The Commission notes that ILEC affiliates may be either resellers or Canadian carriers and that, in the latter case, they fall within the scope of section 25 of the Act. Given this fact, the Commission is of the view that the most direct way to ensure that, in cases of common control, the activities of ILEC affiliates are subject to the same rules as are applicable to an ILEC, is by means of a modification of the affiliate rule, together with a review of the Commission's approach to the regulation of Canadian carrier affiliates under the Act.

Modifications to the affiliate rule

156.

Under the Act, resellers are not subject to direct regulation, except in certain limited circumstances related to the provision of international services. However, the Commission does have the authority pursuant to section 24 of the Act to impose conditions on the provision of ILEC tariffed services to resellers. The Commission has exercised this authority on numerous occasions in the past in order to implement specific policy objectives. In some cases, the Commission has imposed an outright prohibition on resale. In other cases, resale has been permitted, conditional on the reseller complying with certain requirements.

157.

For example, in order to permit a limited form of local competition the Commission decided in Resale to provide primary exchange voice services, Telecom Decision CRTC 87-1, 12 February 1987, to allow the resale of local exchange services in multi-unit buildings, conditional on the reseller ensuring that the ILEC had reasonable access to individual tenants. On the other hand, in Decision 94-6 the Commission imposed a complete prohibition on the resale of certain services by ILEC affiliates in order to ensure the integrity of its regulatory regime for interexchange competition. Similarly, in Order 99-972 the Commission established a prohibition on resale of local exchange services by ILEC affiliates who are not Canadian carriers in order to prevent ILECs from circumventing the regulation of their local services by offering these same services via a reseller affiliate.

158.

Based on the record of this proceeding, the Commission has concluded that it is appropriate to remove the prohibition on the resale of ILEC local exchange services by ILEC affiliates who are not Canadian carriers. In place of this outright prohibition, the Commission is imposing conditions on access to all ILEC tariffed services by ILEC affiliates who are not Canadian carriers and who are under common control with the ILEC. The Commission is therefore modifying the affiliate rule as follows:

· The definition of "affiliate" is revised to eliminate the reference to "related persons". Instead, an affiliate is defined as a person who is not a Canadian carrier and who controls or is controlled by the ILEC or who is controlled by a person who also controls the ILEC. In all cases, control means control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, agreement or arrangement, the ownership of any body corporate or otherwise.

· All existing rules regarding the provision of tariffed services to affiliates are replaced with the following: The provision of a non-forborne service by an ILEC to an affiliate which the affiliate uses to provide telecommunications services to the public is conditional on the ILEC obtaining prior Commission approval of a tariff which specifies the rates, terms and conditions under which the relevant telecommunications services are provided by the affiliate to the public. Those rates, terms and conditions must be identical to the rates, terms and conditions which would apply if the telecommunications services in question were provided to the public by the ILEC, instead of by the affiliate. If the Commission has forborne from regulating the telecommunications services in question when provided by the ILEC, then the above condition does not apply.

159.

The Commission notes that this change does not preclude ILECs from providing one-stop shopping and total telecommunications solutions, either directly or via affiliates. It merely ensures that, in such cases, ILEC tariffed services are provided to the public in a manner that is in full compliance with the Commission's regulatory rules, including with respect to bundling and the application of imputation tests.

160.

The Commission notes that the ILECs must file tariffs for Commission approval in order to implement these modifications to the affiliate rule. The Commission directs Aliant Telecom, Bell Canada, MTS, SaskTel, Télébec, TELUS and TELUS Québec to file by 27 January 2003, proposed revisions to their tariffs specifying the revised affiliate rule. The Commission further directs these same ILECs to file by 12 March 2003, any other proposed tariffs as may be required to ensure full compliance with the revised affiliate rule. Finally, the Commission notes that some ILECs may have an affiliate (as defined in the revised affiliate rule) which resells the ILEC's asymmetric digital subscriber line (ADSL) access service to competing ISPs. With respect to such resale activity, the Commission suspends the requirement that the rates, terms and conditions of the affiliates service be identical to the rates, terms and conditions that would apply if the service were offered by the ILEC.

Regulation of Canadian carriers under common control with an ILEC

161.

In order to determine the appropriate way to deal with Canadian carriers who are under common control with an ILEC, it is necessary to first consider their obligations under the Act. The starting point for this inquiry is section 25 of the Actwhich prohibits a Canadian carrier from providing a telecommunications service except in accordance with a tariff filed with and approved by the Commission. This obligation applies to every telecommunications service provided by every Canadian carrier, including a Canadian carrier that is affiliated with an ILEC, unless: (a) the Canadian carrier is within a class of carriers that has been exempted from the application of the Act pursuant to section 9 of the Act; or (b) the Commission has made a determination pursuant to section 34 of the Act to refrain from exercising its powers under section 25 in respect of the relevant telecommunications service and Canadian carrier.

162.

The Commission has not exempted any class of Canadian carriers from the application of the Act. In addition, the Commission has never made an express determination to forbear with respect to a telecommunications service offered by a Canadian carrier under common control with an ILEC, other than certain wireless services. However, the Commission has issued several forbearance decisions which have been interpreted as applying to a Canadian carrier under common control with an ILEC. In order to assess which, if any, of these decisions should apply to these Canadian carriers, and under what circumstances, it is necessary to examine the wording of section 34 of the Act, as well as the decisions in question.

163.

Section 34 provides as follows:

(1) The Commission may make a determination to refrain, in whole or in part and conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives.

(2) Where the Commission finds as a question of fact that a telecommunications service or class of services provided by a Canadian carrier is or will be subject to competition sufficient to protect the interests of users, the Commission shall make a determination to refrain, to the extent that it considers appropriate, conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 in relation to the service or class of services.

(3) The Commission shall not make a determination to refrain under this section in relation to a telecommunications service or class of services if the Commission finds as a question of fact that to refrain would be likely to impair unduly the establishment or continuance of a competitive market for that service or class of services.

(4) The Commission shall declare that sections 24, 25, 27, 29 and 31 do not apply to a Canadian carrier to the extent that those sections are inconsistent with a determination of the Commission under this section.

164.

Section 34 permits the Commission to forbear from regulating one or more telecommunications services of a Canadian carrier on either of the two grounds identified in subsections 34(1) and (2), respectively. In both cases, subsection 34(3) precludes the Commission from forbearing if, to do so, would, as a question of fact, be likely to impair unduly the establishment or continuance of a competitive market.

165.

In order to forbear under subsection 34(1), the Commission must first make a finding of fact that to so refrain would be consistent with the Canadian telecommunications policy objectives. Given the Commission's finding that, from a regulatory perspective, there is no meaningful distinction between the activities of an ILEC and a Canadian carrier under common control, it is the Commission's view that forbearance under subsection 34(1) would be justified for a telecommunications service of a Canadian carrier subject to common control with an ILEC, if and only if, it would also be justified if the service were provided by the ILEC.

166.

Subsection 34(2) provides that the Commission shall forbear with respect to a telecommunications service provided by a Canadian carrier if the Commission finds, as a question of fact, that the service, as provided by that Canadian carrier, is or will be subject to a degree of competition sufficient to protect the interests of users. The mandatory nature of subsection 34(2) is, of course, subject to the exception established by subsection 34(3).

167.

The record of this proceeding indicates that Bell Canada and Bell Nexxia do not compete against each other. In the Commission's view, there would appear to be no business or economic reason for any other ILEC to compete with an affiliated Canadian carrier under common control. Accordingly, the Commission is of the preliminary view that, if a service offered by an ILEC were not entitled to forbearance under subsection 34(2), then the same service offered by a Canadian carrier under common control with the ILEC would not be entitled to forbearance under subsection 34(2). This follows from the fact that the services in question would be subject to the same degree of competition since the ILEC and the Canadian carrier would not compete against each other.

168.

This type of reasoning also applies to the reverse situation (i.e., where an ILEC is entitled to forbearance). If a service offered by an ILEC were subject to sufficient competition to justify forbearance for the ILEC, then forbearance would also be justified in respect of the same service offered by a Canadian carrier under common control with the ILEC. Once again, this follows from the fact that the Canadian carrier and the ILEC would not compete with each other and would face the same degree of competition from other carriers.

169.

The Commission notes that these preliminary conclusions regarding the application of subsection 34(2) are consistent with the Commission's conclusion regarding the application of subsection 34(1). In both cases, a service provided by a Canadian carrier under common control with an ILEC would be entitled to forbearance if and only if forbearance would be appropriate in respect of the same service offered by the ILEC.

170.

It is now appropriate to look at the Commission's past forbearance decisions in light of the record of this proceeding and keeping in mind the conclusions derived above regarding the application of subsections 34(1) and (2).

171.

Any Commission decisions that forbear with respect to services provided by an ILEC do not, on their face, apply to Canadian carriers affiliated with the ILEC, even if they are under common control. However, the record of this proceeding suggests that an ILEC and a Canadian carrier under common control do not compete with each other and that there is no meaningful distinction between their activities, from a regulatory perspective. Consequently, consistent with the above interpretation of subsections 34(1) and (2), the Commission is of the preliminary view that where a Canadian carrier is subject to common control with an ILEC, that Canadian carrier should be granted forbearance in respect of the same services and on the same conditions as have been applied to the ILEC in past Commission decisions. In addition to the forbearance decisions applicable to ILECs, there are three forbearance decisions relating to Canadian carriers, other than the ILECs, that also require examination in order to complete this analysis.

172.

In Forbearance - Services provided by non-dominant Canadian carriers, Telecom Decision CRTC 95-19, 8 September 1995 (Decision 95-19), the Commission forbore from the exercise of certain of its powers under the Act in respect of certain services provided by Canadian carriers who were entering the market as competitors to the incumbents. The Commission identified the relevant carriers in the following terms:

The Commission does not share the view that the current circumstances warrant that it apply the same regulatory treatment to all Canadian carriers providing similar services. In the opinion of the Commission, Canadian carriers that provide, or that traditionally have provided, public switched local telephone service on a monopoly basis (hereafter referred to as the telephone companies) are in a position to exercise a significant degree of market power. With regard to the Stentor companies in particular, Stentor has not, in the Commission's view, demonstrated that a review of the Commission's findings in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), is necessary or appropriate at this time. Specifically, the Commission finds that a degree of forbearance for the Stentor companies greater than that contemplated in Decision 94-19 would be likely, at this time, to impair unduly the continuance of a competitive market.

.

 

Other Canadian carriers are entering the market and competing with the telephone companies as a result of various Commission rulings, in particular, Decision 92-12. Such carriers include, among others, fONOROLA, Rogers Network Services (a division of RCTV), Sprint, Unitel, VTL and Westel Network Services Ltd. The Commission finds no evidence that any advantages that such carriers may currently have, relating either to existing affiliations or to market position, are sufficient to permit them to sustain predatory prices or, with limited exceptions (addressed below), to deny access to bottleneck facilities or to otherwise exercise market power. In particular, the Commission rejects Westel's argument that Unitel can exercise market power in some private line or data markets. Accordingly, the Commission finds it appropriate to forbear from regulating the bulk of the services provided by Canadian carriers other than the telephone companies, Teleglobe and Telesat (referred to hereafter as competing carriers).

173.

In the Commission's view, the discussion and determinations cited above from Decision 95-19, including the reference to carriers who are "entering the market and competing with the telephone companies", as well as the use of the term "competing carriers" to characterize the relevant carriers, indicate that Decision 95-19 should apply to services provided by certain Canadian carriers who compete with an incumbent carrier in the markets it serves. In this regard, a Canadian carrier under common control with an ILEC would likely qualify as a competing carrier when it provides services in the territory of an unaffiliated ILEC. However, as noted above, the record of this proceeding suggests that such a Canadian carrier does not compete with its affiliated ILEC in the territory served by that ILEC. Consequently, the Commission is of the preliminary view that a Canadian carrier that is subject to common control with an ILEC, should not come within the scope of Decision 95-19 with respect to services provided by the Canadian carrier in the territory of the ILEC.

174.

Similarly, in Decision 97-8, the Commission concluded that it was appropriate to refrain from exercising some of its powers in respect of certain services offered by CLECs. The context of that decision and, in particular, the use of the word "competitive" in the term "competitive local exchange carrier", indicates that the Commission's decision to forbear should apply to services provided by Canadian carriers competing with an ILEC in the serving territory of that ILEC. However, if a Canadian carrier is not competing with the ILEC, but instead is operating in co-operation with the ILEC, then that Canadian carrier should not be entitled to forbearance under Decision 97-8 in respect of services offered in the territory of that ILEC.

175.

In light of the record of this proceeding, the Commission is of the preliminary view that a Canadian carrier that is subject to common control with an ILEC would likely come within the scope of the forbearance order in Decision 97-8 with respect to services provided by the Canadian carrier in the territory of an unaffiliated ILEC. However, it is the Commission's preliminary view that such a Canadian carrier should not come within the scope of the forbearance order in Decision 97-8 with respect to services provided by the Canadian carrier in the territory of an affiliated ILEC.

176.

Finally, in Local pay telephone competition, Telecom Decision CRTC 98-8, 30 June 1998 (Decision 98-8), the Commission forbore from regulating the rates of pay telephone services provided by CLECs since they would face sufficient competition from the local ILEC to protect the interests of users. However, the Commission did not forbear from regulating these services when provided by an ILEC within its own serving territory. Consequently, the Commission is of the view that the same reasoning as set out above in respect of Decision 97-8 should apply. That is, the Commission is of the preliminary view that a Canadian carrier that is subject to common control with an ILEC should likely come within the scope of the forbearance order in Decision 98-8 when offering pay telephone services in the territory of an unaffiliated ILEC. However, such a Canadian carrier should not come within the scope of the forbearance order in Decision 98-8 with respect to pay telephone services provided by the Canadian carrier in the territory of an affiliated ILEC.

177.

The Commission notes that its preliminary views regarding Decisions 95-19, 97-8 and 98-8 are in harmony with the analysis set out above regarding the application of section 34 to a Canadian carrier under common control with an ILEC. In summary, based on the record of this proceeding, the Commission's analysis of the application of section 34 and its analysis of its previous forbearance decisions, the Commission is of the preliminary view that a Canadian carrier subject to common control with an ILEC should be required to comply with section 25 and other applicable provisions of the Act whenever the affiliated ILEC would be required to do so. In accordance with this preliminary view and consistent with its revisions to the affiliate rule, the Commission would apply the same criteria when examining a proposed tariff filed by such a Canadian carrier as it would apply if the tariff were filed by the affiliated ILEC. In particular, proposed tariffs would be required to comply with the Commission's bundling rules and imputation test requirements.

Further process

178.

The Commission directs Aliant Telecom, Bell Canada, MTS, SaskTel, Télébec, TELUS and TELUS Québec by 27 January 2003, to:

a) identify any and all Canadian carriers with which they are under common control; and

b) show cause why the Commission's proposed approach to the regulation of such Canadian carriers should not be implemented.

179.

The ILECs' submissions should be filed with the Commission and copies served on interested parties to this proceeding by the date specified. Interested parties may file comments on the ILECs' submissions by 10 February 2003, serving copies on the ILECs and all other interested parties. The ILECs may file reply comments by 17 February 2003, serving copies on all interested parties who filed comments. All submissions are to be received, not merely sent, by the dates indicated.

Interim regime for affiliated Canadian carriers

180.

In light of the concerns discussed above, the Commission considers it necessary to implement an interim regime with respect to Canadian carriers who are subject to common control with an ILEC. The Commission has already indicated that it considers AT&T Canada's proposal that all ILEC affiliates be prohibited from reselling ILEC regulated services to be unduly restrictive and unnecessary at this time. However, as an interim measure until the Commission renders a decision in the follow-up process identified in the preceding paragraphs, a Canadian carrier that is subject to common control with an ILEC may not resell any tariffed service offered by that ILEC, except pursuant to a tariff filed by the Canadian carrier and approved by the Commission. The Commission notes that this prohibition does not prevent such a Canadian carrier from acting as the agent of the ILEC in respect of the ILEC's tariffed services.

181.

The Commission notes that Bell Nexxia currently resells Bell Canada's ADSL service (Bell Canada General Tariff item 5400) to competing ISPs. The Commission hereby suspends the prohibition set out in the preceding paragraph in respect of this resale activity by Bell Nexxia, as well as in respect of any comparable resale activity by any other Canadian carrier under common control with an ILEC. Any such Canadian carrier, other than Bell Nexxia, providing such services to ISPs is directed to notify the Commission of this fact by 19 December 2002.

Secretary General

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

 

Appendix A

 

Contracts identified in Attachment 2 to The Companies Exhibit #85 where Bell Nexxia acts as Bell Canada's agent when providing a customer with Bell Canada tariffed services together with other services:

 

#1

#2

#3

#5

#8

#9

#11

#12

#13

#14

 

#15

#16

#20

#21

#23

#24

#25

#26

#27

#29

 

#30

#31

#32

#33

#34

#35

#36

#37

#47

#49

 

#50

#51

#52

#53

#54

#55

#57

#58

#59

#60

 

#61

#64

#65

#66

#67

#70

#74

#75

#79

#80

 

#81

#84

#90

#91

#99

#100

#103

#108

#109

#110

 

#111

#112

#113

#115

#117

#119

#121

#125

#126

#128

 

#129

#130

#131

#134

#137

#138

#139

#140

#143

#144

 

#148

#149

#150

#151

#152

#154

#155

#156

#157

#158

 

#160

#172

#173

#174

#175

#178

#179

#180

#181

#183

 

#191

#193

#194

#195

#196

#197

#198

#199

#200

#201

 

#203

                 

Appendix B

 

Contracts identified in Attachment 2 to The Companies Exhibit #85 where Bell Nexxia may be acting as Bell Canada's agent in the provision to a customer of Bell Canada tariffed services together with other services:

 

#6

#17

#18

#19

#22

#28

#38

#39

#41

#42

 

#44

#62

#63

#68

#71

#72

#73

#76

#77

#78

 

#82

#83

#86

#88

#89

#92

#93

#95

#97

#98

 

#102

#105

#120

#122

#124

#135

#141

#145

#147

#161

 

#163

#165

#166

#167

#169

#170

#171

#176

#184

#185

 

#186

#192

               

Date Modified: 2002-12-12

Date modified: