Canada: Non-Canadian Telecom Providers May Light Leased Dark Fibre

Industry Canada's review of Canadian telecom foreign investment restrictions has attracted a great deal of interest. However, the Canadian Radio-television and Telecommunications Commission (CRTC), which regulates telecommunications in Canada, also plays an important role in determining the scope that non-Canadian-controlled companies have to participate in Canadian telecommunications services markets. Telecom Decision CRTC 2010-930 (TD 2010-930), issued on December 9, 2010, clarified this scope.

The CRTC decided that a service provider that leases "dark" fibre optic cable, and uses optical equipment to "light" and, thereby, provide service over it, is not "operating" that cable. It is therefore not required to be Canadian. As a result, non-Canadians who wish to act as telecommunications service providers in Canada may exercise a high degree of control over their terrestrial networks, provided the dark fibre on which the network is based is owned by a qualified Canadian company.

Background

Transmission Facilities

Telecommunications services provided in Canada are governed by the Telecommunications Act. That Act distinguishes between facilities-based "telecommunications common carriers" and non-facilities-based telecommunications service providers, such as resellers.

Telecommunications carriers operating in Canada are generally required to be Canadian-owned and controlled if they own or operate a "transmission facility"¹ used to provide telecommunications services to the public for compensation. The rules relating to Canadian ownership and control of Canadian carriers require that:

• both carriers and their holding companies be incorporated in Canada;
• neither carriers nor their holding companies are controlled by non-Canadians; and
• non-Canadians comprise no more than 20 per cent of a carrier's board of directors, hold no more than 20 per cent of its voting shares, and hold no more than a third of voting shares of their holding companies.

The Act does not restrict companies whose foreign investment or control exceeds these thresholds from providing terrestrial or wireless telecommunications services in Canada, as long as they do not own or operate a "transmission facility", which is defined as

The exempt transmission apparatus carved out from this definition includes apparatus whose functions are limited to switching; processing; or "control of the speed, code, protocol, content, format, routing or similar aspects of the transmission of intelligence."

Non-Canadians providing telecommunications services in Canada may therefore own and operate their own switches, routers, and similar network-controlling equipment. They may also generally own and operate transmission facilities physically or "virtually"² contained within a single customer building or campus. The principal restriction that non-Canadian telecommunications service providers face under the Act is the requirement not to own or operate a transmission facility, such as fibre or copper network links that provide the physical paths for circuits between network termination points.

Operating a Transmission Facility

What it means to own a fibre or copper transmission link between two network termination points is relatively clear. What it means to operate such a link has been less clear.

The CRTC, which is charged with applying the Act, has never restricted non-Canadians from purchasing and assembling "wavelengths", or individual light beams, established inside fibre optic cables by Canadian carriers, in order to operate Ethernet, Frame Relay, Asynchronous Transfer Mode (ATM), or other data networks. This has allowed non-Canadians a relatively high degree of control over the transmission facilities they use in Canada.

The question before the CRTC in the proceeding commenced by Telecom Notice of Consultation CRTC 2010-165 (TNC 2010-165) was whether establishing wavelengths inside a fibre optic cable, or "lighting" fibre that is otherwise "dark" by connecting opto-electronic equipment to it, constitutes "operating" that cable. If it did not, then non-Canadians could extend their control over transmission facilities down to the fibre level by leasing dark fibre and lighting it, which would not constitute operating it.

The CRTC has dealt with the regulatory status of dark fibre in the past. In 1997, the CRTC required incumbents to provide access to dark fibre facilities on a tariffed basis, finding that the provisioning of dark fibre is a "telecommunications service".³ When TELUS argued, in 1998, that the CRTC does not have the authority to do so, the CRTC responded as follows:

In 2007, the CRTC confirmed "that dark fibre is a 'telecommunications facility' within the meaning of the Act, and hence that the provision of dark fibre is the provision of a 'telecommunications service' within the meaning of the Act."⁵ However, the CRTC had never ruled on whether lighting dark fibre is "operating" a transmission facility. The proceeding initiated in TNC 2010-165 explored this question.

CRTC Proceeding

The proceeding that gave rise to TD 2010-930 arose from a dispute between the Canadian subsidiary of an American provider, AboveNet Communications Inc., and a Canadian carrier, TELUS Communications Company.

In the United States and in certain European markets, AboveNet advertises a variety of "high bandwidth connectivity solutions", such as the sale of wavelengths and of telecommunications services assembled using wavelengths, such as Ethernet data networks, and Internet Protocol services running over data networks. According to correspondence, AboveNet first approached TELUS in January 2008 to lease dark fibre, some of which AboveNet intended to resell as dark fibre, and some of which AboveNet intended to light by attaching opto-electronic equipment, in order to provide telecommunications services over it.

Eventually, AboveNet applied to register as a reseller with the CRTC, which is one of the classes of registration that would permit it to access leased dark fibre on a wholesale basis. In its November 2009 registration letter, AboveNet stated that it wished to do so in order to provide dark and lit fibre services. TELUS filed an objection to this application. TELUS argued that by attaching opto-electronic equipment to dark fibre to provide lit services, AboveNet would be operating as a telecommunications common carrier in Canada. Since it is not owned and controlled by Canadians, AboveNet is not eligible to act as a Canadian carrier.

Unusually, the companies continued to argue whether lighting dark fibre causes a company to "operate" that fibre, in the meaning of the Act, before the CRTC. After receiving a final written submission from AboveNet, in February 2010, the CRTC issued TNC 2010-165. Two Canadian incumbents (Bell Canada and TELUS) and three other Canadian providers (MTS Allstream, TekSavvy Solutions, and Yak Communications), five US service providers (AboveNet; Cogent, Level 3, and Verizon, acting as a coalition, and AT&T Global Services), and a US equipment manufacturer (NextG Networks) participated in the proceeding. Some other interested service providers were likely reluctant to participate, as doing so could have required them to identify their own activities whose regulatory status was now in doubt.

The Canadian competitors and U.S. providers argued that the opto-electronics by which dark fibre is lit are "exempt transmission apparatus" whose operation does not result in operating a transmission facility within the meaning of the Act. The Canadian incumbents took the opposite view, arguing that opto-electronics do not meet the definition of exempt transmission apparatus and, in fact, are used to provide a basic rather than an enhanced service, so that to light leased fibre is to operate it.

Implications

The CRTC's Findings

In TD 2010-930, the Commission decided on three questions:

• whether optical equipment is, itself, a transmission facility;
• whether attaching optical equipment to dark fibre, and operating it, amounts to operating that fibre; and
• whether the answers to these questions are affected by the Government of Canada's 2006 Direction requiring the CRTC to "rely on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives" (the "Policy Direction").⁶

The CRTC answered the first question in the negative. The Act excludes so-called "exempt transmission apparatus" (ETA) from the set of transmission facilities which can only be operated by telecommunications common carriers. Some interveners considered that ETA are defined so as to mirror the fundamental distinction between basic services, which provide "a pure transmission capability over a communications path that is virtually transparent in terms of its interaction with subscriber supplied information", from enhanced services, which provide something more than a basic service, such as routing, switching and processing.⁷ The CRTC disagreed. It found that "the function of the optical equipment is to control the format of the transmission of the intelligence" and that, as such, opto-electronic equipment was ETA.

The CRTC answered the second question in the same way. Parties arguing that lighting leased dark fibre did not amount to operating it indicated that only the fibre's owner can "finance, engineer, manage, modify, maintain, operate or transfer any interests in the transmission facility". Parties taking the opposite view argued that dark fibre is inert glass until it is lit, and that it is only by operating opto-electronic equipment that intelligence is transmitted through that glass. The Commission decided that operating the opto-electronic equipment to light the fibre was not operating the transmission facility:

The CRTC then considered whether its answer to these questions was affected by the Policy Direction. In doing so, it noted that a number of interveners had

The CRTC concluded that "a service provider that leases dark fibre to which it attached optical equipment in order to provide telecommunications services to the public is not on that basis a 'telecommunications common carrier' as defined in the Act", and confirmed that this finding is consistent with the Policy Direction.

Scope for Service Providers

Non-Canadians still cannot own the physical portion of the network link, such as dark fibre, or copper. However, the CRTC's findings in TD 2010-930 indicate that the restrictions on their "operating" it are very limited. As a result, non-Canadians can exercise a high degree of control over the provision of end-to-end terrestrial telecommunications service in Canada, including the exercise of control over the carriage and routing of telecommunications traffic. To do so, they must contract for the use of fibre or copper owned by a qualified Canadian corporation. The lease can be a long-term one, as the Commission has confirmed when discussing IRU (Indefeasible Rights of Use) arrangements.¹⁰ But it must be a bona fide lease, and the non-Canadian's ability to invest in the cable's owner is limited by Canadian telecommunications law. In light of the CRTC's statements in TD 2010-930, it may be that the cable's lessee should not assume operational responsibility for access to or maintenance, repair, and replacement of the cable under the lease.

There remain a number of other significant restrictions on foreign investment in Canadian telecom markets. A major regulatory restriction, which the government has been reviewing,¹¹ prohibits non-Canadians from holding spectrum licences for commercial wireless services in Canada, other than satellite services. Other restrictions have been developed by the CRTC. For example, non-Canadians may not act as Local Exchange Carriers (LECs)¹² which access telephone numbers¹³ and establish certain types of direct interconnection.¹⁴ However, the Canadian Parliament has recently passed changes¹⁵ to the Telecommunications Act that added satellites to the list of transmission facilities that non-Canadians may own and operate in Canada, which already included satellite earth stations and international submarine cables. The Commission's ruling in TD 2010-930 that non-Canadians can light leased fibre cables contributes to a warming climate for non-Canadians who wish to participate in Canadian telecommunications service markets.

Footnotes

1 Canadian carriers are not subject to foreign investment restrictions if they only own or operate international submarine cables, satellites or satellite earth station that provide service within Canada.

2 Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994 ("Co-location refers to an arrangement whereby customers of the telephone company can terminate their own transmission facilities in the telephone company central office.... Virtual co-location allows competitors to terminate facilities at a point outside the central office, but in all material aspects provides the same rate as would physical co-location.... With physical co-location, space in the central office may be limited and the telephone companies may have legitimate security concerns that would restrict the ability of competitors to maintain their equipment located in the central office. Virtual co-location solves these problems by placing the termination point outside the central office.").

3 Tariff filings related to the installation of optical fibres, Telecom Decision CRTC 97-7, 23 April 1997, paragraph 7. The Commission did not need to clarify, in that decision, whether it had found dark fibre to be a telecommunications service under the more restrictive definition at subsection 2(1) of the Act, or only under the broader definition set out at section 23.

4 Applications for review and variance of Telecom Decision CRTC 97-7 and follow-up matters relating to the requirement for the Atlantic companies to file General Tariffs for optical fibre, Telecom Decision CRTC 98-10, 16 July 1998, paragraph 36.

5 TELUS Communications Company - Regulatory issues with respect to the provision of interexchange dark fibre, Telecom Decision CRTC 2007-101, 26 October 2007, Appendix, paragraph A-20.

6 Order issuing a Direction to the CRTC on implementing the Canadian Telecommunications Policy objectives, P.C. 2006-1534, 14 December 2006.

7 Enhanced services, Telecom Decision CRTC 84-18, 12 July 1984.

8 Paragraph 35.

9 Paragraph 41.

10 Regulatory regime for the provision of international telecommunications services, Telecom Decision CRTC 98-17, 1 October 1998, paragraphs 17-22.

11 Industry Canada, Opening Canada's Doors to Foreign Investment in Telecommunications: Options for Reform (Ottawa: 2010).

12 ACC TelEnterprises Ltd. - Application dated 26 September 1997 to Review and Vary Telecom Decision CRTC 97-8, Local Competition, 1 May 1997, Telecom Decision CRTC 98-12, 7 August 1998.

13 In Local Competition, Telecom Decision 97-8, 1 May 1997, the Commission granted the right to directly access North American Numbering Plan numbers from the Canadian Numbering Administrator, as well as the LNP database, to CLECs, but not to resellers. However, resellers may obtain numbers from LECs: Regulatory framework for voice communication services using Internet Protocol, Telecom Decision CRTC 2005-28, 12 May 2005.

14 Telecom Decision CRTC 97-8, paragraph 282.

15 Jobs and Economic Growth Act, S.C. 2010, c. 12, section 2184.

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