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Telecom Decision CRTC 2007-117

Ottawa, 23 November 2007

Review of general tariff bundling rules and requirements for market trials

Reference: 8663-C12-200709925

In this Decision, the Commission determines that, effective the date of this Decision, the bundling rules, including the requirement to file and obtain Commission approval for a tariff, no longer apply with respect to bundles in which the retail price at least equals the sum of the rates of all retail tariffed services included in the bundle.

In addition, the Commission determines that, effective the date of this Decision, a) the market trial requirements set out in Telecom Order 95-453 are no longer applicable, and b) pursuant to subsection 34(1) of the Telecommunications Act (the Act), sections 25, 29, and 31, and subsections 27(1), 27(2), 27(4), 27(5), and 27(6) of the Act do not apply with respect to telecommunications services provided on a market trial basis as defined in this Decision.

Introduction

1. In Telecom Public Notice 2007-12, the Commission initiated a proceeding to review the rules governing bundles comprised of tariffed and non-tariffed services offered on a general tariff basis (the bundling rules) as well as the requirements for market trials.

2. This is the first proceeding resulting from the Commission's action plan, as set out in Telecom Decision 2007-51, for reviewing existing regulatory measures in light of the Governor in Council's Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives, P.C. 2006-1534, 14 December 2006 (the Policy Direction).

3. In response to Telecom Public Notice 2007-12, the Commission received a joint submission from Bell Aliant Regional Communications, Limited Partnership, Bell Canada, Saskatchewan Telecommunications, and Télébec, Limited Partnership (collectively, Bell Canada et al.); and submissions from the Canadian Cable Systems Alliance Inc. (CCSA); MTS Allstream Inc. (MTS Allstream); Primus Telecommunications Canada Inc. (Primus); the Quebec Coalition of Internet Service Providers (QCISP); Quebecor Media Inc. (QMI); Rogers Communications Inc. (RCI); TELUS Communications Company (TCC); and l'Union des consommateurs (l'Union).

4. The record of this proceeding closed with reply comments, dated 12 September 2007. The public record of this proceeding is available on the Commission's website at www.crtc.gc.ca under "Public Proceedings."

Background

5. Section 1 of the Policy Direction sets out, among others, the following directives, which are relevant to the review of the bundling rules and the requirements for market trials (the regulatory measures):

  1. … the Commission should (i) rely on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives, and (ii) when relying on regulation, use measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives;
  2. the Commission, when relying on regulation, should use measures that satisfy the following criteria, namely, those that (i) specify the telecommunications policy objective that is advanced by those measures and demonstrate their compliance with this Order, (ii) if they are of an economic nature, neither deter economically efficient competitive entry into the market nor promote inefficient entry .

6. In Telecom Public Notice 2007-12, the Commission invited parties to comment, in light of the Policy Direction, on the continued appropriateness of the regulatory measures. For each of the measures, parties were requested to address the following criteria:

7. The Commission has identified the following issues to be addressed in its determinations:

  1. Are the Commission's criteria with respect to the application of the Policy Direction appropriate?
  2. Are the bundling rules consistent with the Policy Direction?
  3. Are the market trial requirements consistent with the Policy Direction?

I. Are the Commission's criteria with respect to the application of the Policy Direction appropriate?

8. In Telecom Public Notice 2007-12, the Commission set out criteria to be addressed by parties with respect to the application of the Policy Direction and stated that the onus was on parties who wanted to maintain the regulatory measure to justify (1) why market forces were insufficient to achieve the policy objectives, and (2) that the measures otherwise complied with the relevant criteria set out in the Policy Direction.

9. MTS Allstream proposed alternative criteria to assess regulatory measures in light of the Policy Direction. These criteria were premised on the onus being with the party advocating the elimination or the streamlining of the regulatory measure(s) in question. MTS Allstream, Primus, and l'Union submitted that the Commission's position with respect to the onus was improper because it was inconsistent with what these parties argued was a presumption of regulation found in the Telecommunications Act (the Act).

10. Further, some parties argued that if the Commission intended to apply the criteria articulated in Telecom Public Notice 2007-12 to future reviews of regulatory measures, procedural fairness required that there be an opportunity to comment on the appropriateness of such criteria before they were applied.

11. Bell Canada et al. and TCC submitted that the Commission had correctly placed the onus of proof on the party seeking to uphold the regulatory measure.

Commission's analysis and determinations

12. With respect to the matter of procedural fairness, the Commission considers that parties were able, in this proceeding, to make meaningful representations on the appropriateness of the Commission's criteria, including with respect to the issue of onus.

13. The Commission is satisfied that the criteria identified in Telecom Public Notice 2007-12, with the clarification discussed below, allow the Commission to review a particular regulatory measure in light of the Policy Direction, consistent with its statutory obligations under the Act.

14. In determining whether a regulatory measure is or is not compliant with the Policy Direction, the Commission is required to evaluate the submissions received from all parties, apply its expertise, and make determinations that are supported by the record of the proceeding. As a practical matter, each party advocating a particular disposition, or asserting a particular claim, bears a burden of demonstrating the appropriateness of its proposed disposition or claim. Further, the practical burden may shift during the course of the proceeding, depending on the strength of the submissions made and the evidence adduced. However, the Commission considers that, ultimately, the burden of demonstrating compliance with the Policy Direction rests with the Commission itself.

II. Are the bundling rules consistent with the Policy Direction?

15. As set out in Telecom Decision 2005-27, incumbent local exchange carriers (ILECs) are subject to the following requirements with respect to general tariff bundles:

  1. ILECs can only provide general tariff bundles in accordance with rates, terms and conditions set out in a tariff filed with, and approved by, the Commission;
  2. the service bundle must satisfy a pricing rule that includes costs for any forborne services and non-telecommunications services in addition to elements involving tariffed services;
  3. competitors must be able to offer their own bundled service through the use of stand-alone tariffed bottleneck components in combination with their own competitive elements; and
  4. resale of the bundled service must be permitted.

16. Telecom Decision 2005-27 defined a tariffable bundle as

…an arrangement under which a subscriber is provided two or more service elements, at least one of which is a tariffed service element, under a single rate, a set of rates or other rate structure, and which provides a financial or other readily measurable benefit to any customer or identifiable group of customers that is contingent on the use, consumption of, or subscription to any or all service elements.

17. In order to determine whether the bundling rules continue to be appropriate, the Commission will consider the following:

18. If the Commission determines that market forces cannot be relied on to achieve the policy objectives, it will then address the following:

What is the purpose of the regulatory measure and what are the policy objectives that are relevant to this purpose?

19. Several parties submitted that the purpose of the bundling rules was to prevent predation and the leveraging of market power in regulated services into competitive markets that were not yet forborne. They also argued that the bundling rules were intended to foster an eventual reliance on market forces and enhance the competitiveness of the telecommunications market.

20. Other parties submitted that the purpose of the bundling rules was to ensure that rates were just and reasonable, that ILECs did not act anti-competitively by pricing tariffed services below cost through the use of bundles, and that the ILECs could not unjustly discriminate, give themselves an undue preference, or subject others to undue or unreasonable disadvantages.

21. Parties variously cited the objectives set out in paragraphs 7(b), (c), (f), and/or (h) of the Act as being relevant to the bundling rules.

Commission's analysis and determinations

22. The Commission considers that the bundling rules are intended to address weak competition in the market for local exchange services, the potential for unjust discrimination in the provision of tariffed service elements in a bundle, and the potential for anti-competitive behaviour.

23. The Commission agrees with parties' views that the bundling rules are intended to address the following policy objectives set out in section 7 of the Act:

(c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;

(f) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective; and

(h) to respond to the economic and social requirements of users of telecommunications services.

24. The Commission notes that some parties were also of the view that the bundling rules address the policy objective set out in paragraph 7(b) of the Act: "to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada."

25. The Commission considers that because the bundling rules set price floors, not price ceilings, the bundling rules are not intended to address the policy objective set out in paragraph 7(b)of the Act.

Can market forces be relied on to achieve the policy objectives?

26. Bell Canada et al. and TCC submitted that competitors had made significant infrastructure investments, and that the state of competition across residential and business segments was durable, vibrant, and sustainable.

27. MTS Allstream submitted, however, that the most significant development in the local market had been the inroads made by cable companies in many residential markets, but that in areas where cable had not entered the market, other wireline competitors had not progressed notably. MTS Allstream also submitted that cable companies did not have the same presence in the business sector that they had in the residential market.

28. A number of parties submitted that in non-forborne exchanges, the ILECs had a virtual monopoly on local exchange services and consumers in those exchanges had no competitive alternative to the ILECs. They argued that where no competitor was present, it was evident that market forces would not be sufficient to ensure that rates, terms, and conditions for tariffed services included in a bundle would be just and reasonable.

Commission's analysis and determinations

29. The Commission notes that services included in commonly offered bundles - such as local exchange service and associated features, long distance, wireless, and Internet access - are forborne from regulation except for local exchange service in certain geographic areas. The Commission also notes that the bundling rules apply only to bundles that include tariffed services.

30. In the Commission's view, therefore, consideration of whether market forces are sufficient to eliminate the bundling rules must focus on those markets in which local exchange services have not been forborne.

31. The Commission considers that in markets in which local exchange services have not been forborne, there is either a limited level of competition or the incumbent has not met the competitor quality of service levels, or both. In view of these conditions, the Commission cannot rely on market forces to achieve the objectives of the Act. Accordingly, it is necessary to assess the bundling rules in light of the other criteria specified in the Policy Direction.

Is the regulatory measure efficient and proportionate to its purpose?

Does it interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives?

Does it deter economically efficient competitive entry into the market or promote economically inefficient entry?

32. Bell Canada et al., QMI, RCI, and TCC suggested that the requirement for ILECs to file and obtain Commission approval for tariff applications for general tariff bundles should be eliminated, as long as the retail price for a bundle at least equalled the sum of the rates of all retail tariffed services.

33. MTS Allstream, Primus, and l'Union submitted that eliminating the bundling rules would allow ILECs to engage in anti-competitive and discriminatory behaviour, which would hinder the emergence and development of sustainable competition.

34. MTS Allstream also submitted that eliminating the bundling rules would provide ILECs with the opportunity to raise their competitors' costs and squeeze, if not eliminate, their margins; to aggressively undercut competitors' prices in a targeted manner in markets where they faced competition; and to engage in exclusionary practices centred around tying services together through bundles.

35. MTS Allstream and Primus submitted that the bundling rules were efficient and proportionate to their purpose and that they interfered with competitive market forces to the minimum extent necessary to meet the policy objectives. MTS Allstream also submitted that the bundling rules promoted efficient entry into the market because they prevented the ILECs from conferring upon themselves an undue preference and subjecting competitors to undue and unreasonable disadvantage. Primus submitted that keeping the bundling rules in place would not encourage inefficient competitive entry into the market.

36. The CCSA submitted that competitors in small rural markets would not be able to sustain the network investment necessary to offer local telephony in the face of predatory pricing by the ILECs.

37. L'Union submitted that without the bundling rules, it was likely that competitors would leave some markets and be discouraged from developing in other markets.

38. MTS Allstream submitted that the bundling rules might affect consumers in the short term by causing them to pay marginally higher prices than they would have to pay if the ILECs did not have to satisfy the bundling rules, but that this would promote competition and long-term affordability. MTS Allstream also submitted that elimination of regulation must only be done when the Commission was persuaded that market forces were strong enough to offer the benefits of genuine competition to end-users over the long term.

39. The CCSA submitted that recent significant regulatory changes had granted the ILECs extensive pricing flexibility, which had substantially expanded their ability to respond to competitive market forces efficiently and effectively. It also submitted that the regulatory provisions that remained were the minimum necessary to achieve the objectives of the Act.

Commission's analysis and determinations

40. The Commission notes that all parties that supported retaining the bundling rules argued that eliminating the rules would allow ILECs to engage in anti-competitive behaviour. Examples of anti-competitive behaviour provided by these parties included below-cost pricing, tied selling, margin squeezing, and targeted pricing. Additionally, MTS Allstream argued that the rules should be retained in order to foster competition in the longer term.

41. The Commission notes that since it issued Telecom Decision 2005-27, a significant number of local exchange service markets have been forborne. The residential and business local service markets that continue to be regulated are generally located in less densely populated areas and, hence, the general tariff bundling rules apply to a relatively small proportion of the ILECs' customer bases.

42. With respect to those markets that continue to be regulated, the Commission considers that the ILECs would not have an incentive to engage in sustained below-cost pricing. In this respect, the Commission notes that the rate increases required to recover the losses associated with such pricing decisions would be subject to Commission approval in the case of tariffed services and would be subject to the discipline of the market in the case of forborne services.

43. With respect to parties' comments regarding the ILECs' exclusionary practices around tying services together through bundles, the Commission considers that this is not a concern regarding the provision of tariffed services offered in bundles because ILECs must make tariffed services available on a stand-alone basis.

44. With respect to parties' concerns that eliminating the bundling rules would provide ILECs with the opportunity to raise competitors' costs and squeeze their margins, the Commission notes that the bundling rules are not intended to address the ILECs' pricing of Competitor Services. Accordingly, the Commission considers that parties' arguments regarding this matter are not relevant to this proceeding.

45. With respect to parties' comments regarding the ILECs' ability to price in a targeted manner, the Commission notes that the prohibition on de-averaging rates for tariffed local services was removed in Telecom Decision 2005-27 for residential services and in Telecom Decision 2007-106 for business services. These changes permit targeted pricing within price floors and ceilings approved by the Commission. The Commission does not regard targeted pricing in and of itself as necessarily anti-competitive or unjustly discriminatory.

46. With respect to the assertion that retaining bundling rules will foster competition, the Commission notes that since it issued Telecom Decision 2005-27, it has granted the ILECs increased pricing flexibility in non-forborne areas through tariff mechanisms such as rate ranges and rate de-averaging. The Commission further notes that the Governor in Council's Order Varying Telecom Decision CRTC 2006-15 P.C. 2007-532, 4 April 2007 (the Order in Council) directed the removal of various rules pertaining to winbacks and promotions associated with local services. In addition, the Commission notes that it has recently relaxed the entry requirements for smaller competitive local exchange carriers to meet their obligations to enter a specific local market. In light of these regulatory developments and the diminished impact of the bundling rules discussed above, the Commission is not persuaded that the bundling rules would have a material impact on a competitor's decision to enter or to remain in a market.

47. Further, the Commission notes that once a competitor enters an exchange and is capable of serving at least 75 percent of that exchange, ILEC local services in that exchange could soon be forborne and the bundling rules would no longer apply.1

48. In view of the foregoing, the Commission considers that the bundling rules are no longer needed to address the potential for unjust discrimination and anti-competitive behaviour in the provision of tariffed service elements when provided in a bundle.

49. The Commission notes that the filing and approval processes associated with the bundling rules impose administrative costs on ILECs and on the Commission - for example, with respect to the preparation and analysis of economic studies. Further, the Commission considers that relaxing the bundling rules would provide customers in non-forborne areas with the opportunity to benefit from new and innovative bundles on a more timely basis.

50. The Commission therefore considers that, with respect to bundles in which the retail price at least equals the sum of the rates of all retail tariffed services (qualifying bundles), the bundling rules are neither efficient and proportionate to their purpose, nor do they interfere with competitive market forces to the minimum extent necessary to meet the policy objectives in paragraphs 7(c), 7(f), and 7(h) of the Act. Accordingly, the Commission finds that with respect to qualifying bundles, the bundling rules are not compliant with the Policy Direction.

Conclusion

51. In light of the above, the Commission determines that, effective the date of this Decision, the bundling rules, including the requirement to file and obtain Commission approval for a tariff, no longer apply with respect to qualifying bundles.

52. The Commission notes that eliminating the bundling rules for qualifying bundles does not alter the ILECs' obligation to provide tariffed services in accordance with the approved tariffs, regardless of whether such services are provided within a bundle.

III. Are the market trial requirements consistent with the Policy Direction?

53. Pursuant to the Act, ILECs can only provide telecommunications services on a market trial basis in accordance with rates, terms, and conditions set out in a tariff filed with, and approved by, the Commission.

54. In Telecom Order 95-453, the Commission directed ILECs, for the purposes of future market trial filings, to

  1. indicate the number of customers eligible for the trial;
  2. indicate the forecast number of customers for the trial;
  3. provide the justification for the forecast in ii) in light of i);
  4. provide justification for the number of customers and scope of the market trial, in light of the objectives of the market trial;
  5. describe the objectives of the market trial; and
  6. provide justification for the company's view that a trial is necessary to achieve the objectives of the trial and the company's views as to whether the objectives could be satisfied without a trial.

55. In Telecom Decisions 94-13 and 97-8, the Commission exempted market trials from the imputation test, on the condition that sufficient information was provided by the ILECs to demonstrate that the offering was a legitimate market trial of limited duration.

56. In order to determine whether the existing requirements for market trials continue to be appropriate, the Commission will consider the following:

57. If the Commission determines that market forces cannot be relied on to achieve the policy objectives, it will then address the following:

What is the purpose of the regulatory measure and what are the policy objectives that are relevant to this purpose?

58. Bell Canada et al. submitted that the purpose of the market trial requirements appeared to be to prevent market trials from becoming vehicles for tariff circumvention. TCC submitted that the purpose of the market trial requirements was presumably to prevent an ILEC from behaving anti-competitively.

59. No party identified objectives set out in section 7 of the Act with respect to the market trial requirements.

Commission's analysis and determinations

60. The Commission notes that the market trial requirements apply only to non-forborne services. The Commission considers that the market trial requirements are intended to address the potential for unjust discrimination and the potential for anti-competitive behaviour.

61. The Commission also considers that the market trial requirements address the same policy objectives as the bundling rules - that is, those set out in paragraphs 7(c), 7(f), and 7(h) of the Act.

Can market forces be relied on to achieve the policy objectives?

62. Bell Canada et al. submitted that inasmuch as market trials were limited to short periods of time, a pre-defined geographic area, or a subset of qualifying customers, their possible negative impact on market dynamics was minimal.

63. TCC submitted that the subjects of market trials were, by definition, new services. TCC also submitted that market trials were a normal feature of competitive markets and that the scope for their abuse by an ILEC by means of them was so small as to justify eliminating the market trial requirements.

64. MTS Allstream submitted that since the impact of eliminating the market trial requirements was likely to be minimal on market forces, eliminating them served the purposes of the Act and the Policy Direction.

65. Bell Canada et al. requested that the Commission forbear from regulating a market trial as long as

66. With respect to this proposal, Bell Canada et al. submitted that by ensuring that market trials would be limited in duration to less than a year, this forbearance condition would ensure that they remained distinct and did not evolve into mainstream offers, at least unless they received standard tariff pre-approval.

67. QMI submitted that the market trial requirements should be streamlined but that the ILECs should be required to file an imputation test and to ensure that the service would be made available to any person within the geographic area where the trial would be run. It also submitted that if an ILEC wished to exclude one or more persons, then it would have to justify such exclusions and demonstrate that they were not unjust. QCISP supported QMI's view.

Commission's analysis and determinations

68. The Commission notes that all parties that commented on the market trial requirements recommended that the requirements either be streamlined or eliminated.

69. With respect to QMI's suggestion that a market trial should be required to satisfy an imputation test, the Commission notes that Telecom Decisions 94-13 and 97-8 exempted market trials from an imputation test based on the consideration that below-cost pricing in the case of market trials and promotions is generally not anti-competitive. The Commission remains of this view.

70. With respect to QMI's proposal that a product or service subject to a market trial be made available on request to any person in the geographic area in which the trial would be run, the Commission considers that the scope limitations of a market trial are inconsistent with such a requirement.

71. The Commission notes that in the past, market trials have been limited in duration and scope, and were intended to determine the level of potential market interest in the service and/or to test the associated operational processes of the service provider.

72. In light of the above, the Commission adopts the following definition of a market trial:

A market trial is the offering of one or more new telecommunications services to determine the level of potential market interest in the service and/or to test the associated operational processes of the service provider. The trial must be offered

73. The Commission notes that market trials are business instruments of limited scope and duration that are used to evaluate customers' preferences and needs for new services and to test the associated operational processes of the service provider. In light of these characteristics, the Commission considers that the ILECs do not have market power where services are provided in this context. Accordingly, the Commission finds that the market trial requirements are no longer necessary to address the potential for unjust discrimination or anti-competitive behaviour.

74. In light of the above, the Commission finds that market forces can be relied upon to achieve the telecommunications policy objectives in paragraphs 7(c), 7(f), and 7(h) of the Act. Accordingly, the Commission finds that eliminating the market trial requirements would be consistent with the Policy Direction.

75. The Commission notes that pursuant to subsection 34(1) of the Act, it may forbear where it finds that to do so would be consistent with the policy objectives of the Act. In light of the finding above that market forces can be relied upon to achieve the telecommunications policy objectives in paragraphs 7(c), 7(f), and 7(h) of the Act, the Commission considers that it would be appropriate to forbear from regulating services provided on a market trial basis to the extent set out below.

76. Consistent with Bell Canada et al.'s proposal, the Commission considers that each ILEC should be required to provide the Commission with advance confidential notice of each trial before the market trial begins, as set out below. Such a requirement is hereby imposed, pursuant to section 24 of the Act, as a condition to the provision of the services in question.

77. In addition, the Commission considers that the safeguards set out in each ILEC's terms of service with respect to the protection of confidential customer information should continue to apply. Accordingly, pursuant to section 24 of the Act, the Commission directs each ILEC to include, on a going-forward basis, such safeguards in all contracts and other arrangements with customers for the provision of services forborne from regulation in this Decision. The Commission considers that it is also appropriate and necessary to retain its powers and duties under section 24 of the Act at this time in order to impose other conditions should they prove necessary.

78. The Commission considers that it would be appropriate to forbear from regulation under sections 25, 29, and 31, and subsections 27(1), 27(2), 27(4), 27(5), and 27(6) of the Act.

79. The Commission finds that with respect to subsection 34(3) of the Act, forbearance, to the extent specified in this Decision, will not likely impair unduly the establishment or continuance of competitive markets for the provision of services provided on a market trial basis.

80. The notice referred to in paragraph 76 above is to be provided to the Commission at least 10 days prior to the provision of the trialled service to any customer participating in the trial and is to include

  1. the duration of the trial and the purpose of the trial;
  2. limitations of scope associated with the trial, including the geographic area(s) of the trial and the nature of, and approximate number of, customers to whom the trialled service will be offered;
  3. confirmation that prior to participating in the trial, customers will be advised of the fact that the service is being offered on a trial basis for a limited time and that the terms and conditions under which the service is provided could be modified at any time.

Conclusion

81. The Commission declares that, effective the date of this Decision,

  1. the market trial requirements set out in Telecom Order 95-453 are no longer applicable; and
  2. pursuant to subsection 34(4) of the Act, sections 25, 29, and 31, and subsections 27(1), 27(2), 27(4), 27(5), and 27(6) of the Act do not apply with respect to services provided on a market trial basis.

Secretary General

Related documents

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

Footnotes

[1] The local forbearance regime provides that where competition in the relevant market is from an independent fixed-line telecommunications service provider that, including all of its affiliates, has less than 20,000 local exchange service customers in Canada, the forbearance will not be effective until at least 18 months after the day on which the service provider began providing local exchange services in that market.

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