Canada: New Regulatory Framework For Wholesale Telecom Services

In Telecom Decision CRTC 2008-17, released on March 3, 2008, the Commission articulated new rules for the regulation and pricing of wholesale telecom services provided by incumbent telecom carriers. The rules apply mainly to the services and facilities provided by incumbent local exchange carriers (ILECs), such as Bell Canada and Telus, to competitive service providers including alternative local and long distance carriers, resellers, and ISPs.

The Commission's proceeding to review its wholesale regulation regime was mandated by the Canadian Government as one of its initiatives to implement the 2006 Report of the Telecommunications Policy Review Panel. The Commission's decision marked the culmination of a detailed review of the rationale and rules for mandated access by competitors to wholesale services. As part of this review, the Commission considered the need for continued regulation of wholesale facilities that are not "essential facilities" required for newer entrants to compete. The decision set out a new framework for the regulation of wholesale services and specific timeframes for the removal of mandated access to certain non-essential facilities.

Definition Of Essential Facility

Much of the debate in the Commission's proceeding had focused on the definition of "essential facilities." Past CRTC decisions had indicated that, over the longer term, carriers should only be mandated to provide such facilities to competitors. In the end, the Commission accepted a broader definition of essential facilities than the original definition set out in its 1997 local competition decision (Telecom Decision CRTC 97-8). Since that decision, the Commission had mandated provision of a range of other "non-essential" facilities, in an effort to promote competition. The impact of the new definition is that, over the longer run, carriers may be mandated to provide a greater range of facilities and related services to competitors at regulated rates than they would have under the original 1997 definition.

In its March decision, the Commission defined essential facilities to be those that satisfied all of the following conditions:

1. The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market.
   
   
2. The facility is controlled by a firm that possesses upstream market power such that withdrawing mandated access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market.
   
   
3. It would not be practical or feasible for competitors to duplicate the functionality of the facility.
   
   

Paragraph (ii) of this definition is broader than the previous definition, which applied only to facilities provided on a "monopoly basis." The new definition requires non-monopoly facilities to be provided to competitors if the Commission determines, based on its assessment of market conditions, that withdrawal of mandatory access would likely result in a "substantial lessening or prevention of competition." This language, which seems to be based on the abuse of dominance provisions in Section 79 of the Competition Act, establishes a fairly subjective test, and future regulatory litigation can be expected before its interpretation is settled.

Categorization Of Wholesale Facilities

Having settled on a definition of "essential facilities," the Commission's March decision divided all wholesale facilities, which are now subject to mandatory access rules, to one of six categories: (1) Essential Facilities; (2) Conditional Essential; (3) Conditional Mandated Non-Essential; (4) Public Good; (5) Interconnection; and (6) Non-Essential Facilities Subject to Phase-Out. A brief description of each category and its regulatory treatment is provided below.

Essential Facilities

The CRTC classified only two services as strictly "essential," namely "basic listing interchange file" and "service directory file service." This classification was non-controversial, as virtually all parties had agreed to it. These services must be unbundled and provided on a mandatory basis for an indefinite period of time.

Conditional Essential

The CRTC decided that certain facilities "conditionally meet the essential service criteria." Services classified as conditional essential are subject to mandatory wholesale provision. The Commission noted that services would remain classified as conditional essential until functionally equivalent wholesale alternatives are present "such that withdrawing mandated access would not likely result in a substantial lessening or prevention of competition" in a downstream market.

Services classified as conditional essential include unbundled local loops and related services, competitor digital network (CDN) services, DS-0 and DS-1 access facilities, and ADSL access service. The ILECs must continue to provide conditional essential facilities in their ILEC territories to competitors at tariffed rates. Conversely, ILECs entering out-of-territory markets may obtain mandated access to such conditional essential facilities from the local ILEC in territories it enters.

Conditional Mandated Non-Essential

The Commission mandated access to services in this category on the grounds that mandated access is necessary for special reasons, notwithstanding that the services are not technically "essential." The services in this category are:

• Co-location and related link services. These were mandated because access to unbundled local loops and network interconnection are only available through co-location.
  
  
• Aggregated ADSL and third-party Internet access (TPIA) services (provided by cable companies). Although ADSL access was already found to be conditional essential, the CRTC mandated access to aggregated ADSL and TPIA, on the grounds that these facilities are needed "for competitors to offer retail high-speed Internet access services ... [and] they have no option other than to buy wholesale aggregated ADSL access or TPIA." This classification will continue until "a functionally equivalent wholesale alternative exists."
  
  
• Other services. CLEC access to OSS, CLEC manual equipment records, dedicated access line service and pay telephone basic access line service.
  
  

Public Good

Taking into account the general agreement of all parties to its proceeding, the CRTC continued mandated access to emergency services, message-relay services and support-structure services.

Interconnection

The Commission mandated access to services required to permit the interchange of traffic with PSTN customers. The definition of such services includes services required to permit the interchange of traffic between LECs within the same exchange or local interconnection region, and to exchanges within the extended area service area of the originating exchange or an exchange within a local interconnection region. The CRTC also determined that a number of other services should be treated as mandatory interconnection services, including:

• local, toll and CCS7 transiting services;
  
  
• administrative services related to long distance telecommunications service provider selection (equal access); and
  
  
• services related to the interchange of traffic between LECs and wireless service providers.
  
  

In this category, the Commission essentially maintained interconnection arrangements that had been implemented across the industry.

Non-Essential Facilities Subject To Phase-Out

The Commission classified the remaining wholesale services as non-essential services that would no longer be subject to mandated access after the end of a phase-out period. The phase-out period is generally three years, but is five years for certain facilities that the Commission considered to be subject to "impediments to replacement," requiring more time to negotiate alternative arrangements.

Key facilities classified as non-essential — and their corresponding phase-out periods— are:

The Commission determined that a phase-out period was necessary to "provide competitors with a reasonable period to review their provisioning arrangements and restructure them as required." During the phase-out period, mandated access to non-essential facilities will continue at tariffed rates. In addition, new customers and existing customers with additional demand requirements are entitled to seek access to these facilities at tariffed rates during the phase-out period. At the end of the phase-out period, the non-essential facility will be automatically forborne from rate regulation.

The CRTC stated that this scheduled forbearance for non-essential facilities would "send a strong signal as to when mandatory access ends and reliance on market forces begins."

Finally, it should be noted that the Commission's decision applies to existing wholesale services and facilities, and does not specifically apply to the next generation of network facilities. However, the decision does establish the regulatory framework within which the Commission is likely to classify and regulate (or forbear from regulation of) wholesale services provided by means of next generation facilities.

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