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Article

Telecommunications Policy Review Panel Charts a New Course for Canadian Telecommunications

Date

March 27, 2006

AUTHOR(s)

Grant Buchanan
Timothy St. J. Ellam
Peter S. Grant
Hank Intven
John Manley
Charles S. Morgan
Matthew D. Peters
Michel Racicot
Stephen Rawson
Lorne P. Salzman


The Telecommunications Policy Review Panel presented its report to the Canadian government on March 22, 2006. The panel’s 127 recommendations are designed to modernize Canada’s regulatory framework for telecommunications, spur the adoption of information and communications technologies (ICTs) and expand access to broadband telecommunications for all Canadians.

The 392-page report is the culmination of almost a year’s work by the three-member panel, which included McCarthy Tétrault partner Hank Intven. The other panel members were Internet entrepreneur Gerri Sinclair and André Tremblay, former CEO of Microcell Communications Inc. In arriving at its conclusions, the panel considered more than 200 submissions, held two public forums and consulted with a wide range of Canadian and international telecommunications experts and industry stakeholders. The report concludes the first comprehensive review of Canadian telecommunications policy and regulation in 30 years.

The federal government has indicated it will study the panel’s recommendations before deciding how to move forward. Given the importance of the $32-billion telecommunications industry to Canada’s economy and growing concerns about Canada’s poor productivity performance, we expect a vigorous public debate on the report and its recommendations.

This Legal Update discusses the following report highlights:

  • Accelerated deregulation of Canada’s telecommunications markets;
  • Phased liberalization of foreign ownership restrictions;
  • Improving radio spectrum policy to spur the rollout of wireless services;
  • A new "Telecommunications Competition Tribunal" to apply competition policy in telecommunications markets;
  • Strengthening powers of the Canadian Radio-television and Telecommunications Commission (CRTC) to resolve infrastructure access disputes;
  • New measures to protect consumers in increasingly deregulated markets;
  • Initiatives to improve productivity of the Canadian economy through greater use of information and communications technologies, including an ICT tax credit;
  • A new government program to achieve ubiquitous broadband access by 2010;
  • Call for a review of broadcasting policy and regulatory framework;
  • Other issues; and
  • Implementation.

Deregulation of Canada’s telecommunications markets

The report calls for sweeping changes to the legal and policy framework for economic regulation of telecommunications service providers (TSPs). Over the past decade, the CRTC has used its ‘forbearance’ powers under the 1993 Telecommunications Act to substantially deregulate non-dominant TSPs. The CRTC has also gradually forborne from regulation of many services provided on a competitive basis by the incumbent local exchange carriers (ILECs), that is, the former monopoly telephone companies. The commission is currently considering whether to, and if so, how to, begin deregulating services provided by the ILECs in local access markets across Canada (sometimes referred to as ‘the last mile’ of telecommunications networks).

The report concludes that substantially more economic deregulation is warranted now. It points out that, over the past two decades, most telecommunications markets have become sufficiently competitive that market forces should be the primary driver of prices, terms and conditions of service. It therefore recommends (a) removing from the Telecommunications Act the requirement that all telecommunications services be regulated unless the CRTC rules otherwise, and (b) limiting economic regulation to areas where it is demonstrably required to protect consumer interests or the maintenance of competitive markets.

To this end, the report recommends limiting economic regulation to markets where a TSP possesses "significant market power," as that term is understood in competition law. TSPs that possess significant market power will still be required to file tariffs for CRTC approval. Where CRTC tariff approval continues to be required, the report recommends a substantially streamlined process. Under this process, tariffs filed with the CRTC would automatically go into effect seven days after filing, unless the commission suspends or disallows them.

Today, the ILECs must provide a range of wholesale services to their competitors at prices and on conditions set by the regulator. This approach, sometimes referred to as ‘network unbundling,’ was initially adopted by U.S., Canadian and European regulators to encourage competitive entry. The approach has been largely abandoned in the U.S. recently, at least in connection with next generation network infrastructure, but continues to be a cornerstone of telecommunications regulation in Canada and Europe. Regulators initially adopted the unbundling approach in the expectation that new competitors would use resale of unbundled services as a ‘stepping stone’ that would lead to construction of their own networks, and to becoming true ‘facilities-based’ competitors. However, the panel found that the broad scope of unbundling requirements established by the CRTC has discouraged competitors from building their own infrastructure. It has also created a disincentive for the ILECs to build and expand their own network infrastructure as any new network initiative would also be subject to the mandatory unbundling rules.

The report therefore recommends that unbundling requirements should be reduced, so that the ILECs would only be mandated to provide ‘essential’ services to competitors, such as local circuits in rural and remote areas where it is not economically or technically feasible for competitors to install their own infrastructure. The report recommends that existing non-essential services should be deregulated after a transition period of three to five years. The transition period is intended to allow TSPs that rely heavily on unbundled access to ILEC services to adapt their business models to the new regulatory approach.

TSPs that rely on unbundled network elements would have to negotiate commercial arrangements with the ILECs, or with alternate suppliers of equivalent facilities and services, or take steps to install their own network infrastructure. Several of the report’s recommendations should assist competitors in rolling out their own network infrastructure. These include proposed spectrum policy reforms which should make more radio spectrum available to competitors, greater CRTC powers to resolve disputes regarding access by competing operators to various properties and facilities, and greater access to capital as a result of liberalization of the foreign ownership restrictions in the Telecommunications Act (these issues are discussed below).

The ILECs and cable companies will welcome the reduction in regulatory requirements to provide unbundled network elements to their competitors. Some, however, may wish to continue to offer these services on a commercially negotiated basis.

The report recommends other changes in economic regulation, which include:

  • phasing out a range of current regulatory restrictions that affect the introduction and pricing of retail services, including pricing restrictions on discretionary retail services and restrictions on price differentiation and targeted competitive pricing;
  • moving from before-the-fact (ex ante) regulatory prescriptions, with greater reliance on after-the-fact (ex post) regulatory intervention, based on complaints to a new Telecommunications Competition Tribunal (see discussion below); and
  • extending the regulatory rights of competitive local exchange carriers (CLECs) to include all local telecommunications resellers who agree to accept the related service obligations.

Liberalization of foreign ownership restrictions

Canada is one of a small and declining number of OECD countries that still limit foreign investment in domestic telecommunications carriers. Canada’s rules apply to all TSPs that own or operate transmission infrastructure such as fibre optic cables and wireless transmission networks. Under these rules, non-Canadians are restricted to holding no more than 20 per cent of the voting shares of a company that operates as a telecommunications common carrier, no more than 20 per cent of the seats on the board of directors of such a carrier, and no more than 33 1/3 per cent of the voting shares of a holding company of such a carrier. As well, such a carrier must not be controlled-in-fact by non-Canadians.

The report explains the benefits of permitting further foreign investment in terms of boosting domestic competitiveness and productivity. The existing foreign investment restrictions also lead to a number of negative consequences for Canadian telecommunications, including increased cost of capital for some TSPs, and thus a decreased incentive to invest; overly complex capital structures for many TSPs; and slower introduction or reduced penetration of some services and technologies.

The panel specifically notes the benefits of liberalizing foreign investment restrictions in the wireless sector. It comments on the low penetration of mobile services in Canada (29th of the 30 OECD countries), relatively high prices and the slow deployment of advanced wireless services in Canada. The report indicates that quality, pricing and availability of wireless services would be expected to improve if foreign ownership restrictions were liberalized.

On the other hand, the panel acknowledges widely held concerns that liberalizing the foreign investment rules could have potentially negative consequences: loss of major head offices if large domestic TSPs are taken over, loss of high-paying management and high-tech jobs, reduction of research and development in Canada and concerns about protection of Canada’s public safety and national security. As well, the report notes that issues of competitive equity could arise if the foreign investment rules in the Telecommunications Act are changed for the ILECs, but the comparable provisions of the Broadcasting Act are not changed for cable companies and other broadcasting distribution undertakings that compete with the ILECs.

Taking these factors into consideration, the report recommends a phased approach to liberalization of Canada’s foreign investment restrictions. This approach has the potential to break the policy deadlock that has existed in Ottawa over the past five years, since one parliamentary committee recommended that all foreign ownership restrictions in the communications industry be retained, while a different parliamentary committee recommended that all such restrictions be removed.

The panel’s phased approach attempts to achieve the benefits of liberalization of the rules, while retaining the power to avoid the major potential negative consequences. In the first phase of this approach, the federal cabinet would be given the power to waive the restrictions where it considers a foreign investment or class of investments to be in the public interest. The report also recommends that there be a presumption that an investment in a start-up TSP or in an existing TSP with less than 10 per cent market share (measured by revenues) is in the public interest.

The second phase would take place after a review of Canada’s broadcasting policy is completed (see below). The Phase II liberalization would presumably be broader in scope than in Phase I, and would treat the carriage business of the cable companies (as opposed to the content business) in the same manner as other TSPs for the purpose of foreign ownership restrictions.

While these recommendations may be seen as less than ideal from the perspective of potential foreign investors and other industry stakeholders, they may well pave the way for progress in liberalizing Canada’s foreign investment restrictions for the first time since the Telecommunications Act was enacted.

Radio spectrum policy reform

The report emphasizes the important role that wireless services can play in enabling new services and facilitating competitive entry and expansion of TSPs. The report observes that Canadian wireless service deployment has lagged behind that of other OECD countries. Accordingly, the report makes a number of recommendations to improve spectrum management and negotiation for both fixed and mobile wireless services. It calls for policy changes aimed at:

  • ensuring availability of adequate spectrum to meet demand for deployment of fixed and mobile broadband networks across Canada;
  • the recovery and redeployment of unused or underutilized spectrum resources;
  • more market-based approaches to spectrum management, including moving to allow secondary trading in spectrum holdings;
  • using spectrum licensing to facilitate an expanded choice of service providers, including by capping the amount of spectrum that a TSP can hold in certain bands in order to provide an opportunity for new entrants to acquire spectrum; and
  • transferring responsibility for spectrum regulation and licensing (including licensing of satellite orbital slots) from Industry Canada to the CRTC, so that a single regulator can address all wireless and wireline services in a unified manner.

With the reduction in mandatory unbundling of network elements by ILECs, Canada can expect to see increased demand for radio spectrum as existing operators and new entrants seek to replace unbundled network infrastructure with wireless alternatives.

Another source of increased demand for spectrum will arise in early 2007 when Canada is expected to auction 3G spectrum to mobile operators. (The comparable U.S. auction will take place in mid-2006.) If the foreign ownership requirements are reduced by that time, Canada can expect to see substantial worldwide interest in any 3G spectrum that will become available.

Telecommunications Competition Tribunal

The report recommends the establishment of a new form of "joint panel" of the CRTC and the federal Competition Bureau, to be called the Telecommunications Competition Tribunal (TCT). The TCT will be a telecommunications sector–specific competition law authority. Its mandate will be to expedite the transition to a more deregulated approach to telecommunications, one that is more consistent with conventional competition law principles.

The TCT will have a number of functions, including to:

  • determine when regulated markets are ready to become deregulated;
  • determine if re-regulation is warranted, in the event that significant market power is found in deregulated retail markets;
  • deal with complaints of anti-competitive conduct in telecommunications markets;
  • define the "essential facilities" that TSPs with significant market power must make available to their competitors; and
  •  review mergers involving telecommunications service providers.

The TCT will be jointly staffed by the CRTC and the Competition Bureau. It is expected to be a transitional mechanism, with its mandate to terminate after five years unless significant market power continues to exist in a substantial number of telecommunications markets.

Resolution of infrastructure access disputes

Disputes continue to arise between TSPs and owners of property or facilities to which TSPs require access. These properties and facilities include streets and municipal rights of way, multi-tenant buildings, electrical power poles, towers and building rooftops. These disputes have led to delays and uncertainty about the costs and other terms of access, with related consequences for the installation of network infrastructure, particularly by cable companies and new entrants but also by some ILECs. The CRTC has been able to resolve some of these disputes, but not others, such as those involving electrical power poles, where the CRTC was found to have no legal authority to establish access conditions. In other cases, delays have been caused by uncertainty about the commission’s legal authority.

The report proposes to facilitate the deployment of new network infrastructure by amending the Telecommunications Act to grant the CRTC clear authority to resolve disputes involving access to poles, towers and like support structures (including those owned by electrical power utilities); to multi-tenant buildings; and to public properties and rights of way. The CRTC would also be given powers to require the sharing of radio transmission towers and the ending of exclusive rooftop arrangements.

New consumer protection measures

The panel concluded that as telecom services become increasingly essential to the lives of all Canadians, consumer protection measures will continue to play an important role. Thus, while the report recommends a significant degree of economic deregulation, it recommends several major initiatives to strengthen the position of consumers in the less regulated markets of the future. These include:

  • An amendment to the Telecommunications Act to impose an explicit obligation on telephone companies to continue to provide basic telephone service to their customers.
  • A new form of "ombuds" office, to be called the Telecommunications Consumer Agency (TCA), with authority to resolve complaints from individual and small business retail customers of any telecommunications service provider. The TCA would be run by the industry but supervised by the CRTC.
  • An expansion of the scope of consumer protection regulation to cover TSPs that are not ‘telecommunications common carriers’ within the meaning of the Telecommunications Act (including Voice over Internet Protocol (VoIP) service providers). 
  • An amendment to the Telecommunications Act to confirm the right of Canadian consumers to access publicly available Internet applications and content, through the networks of TSPs, and to provide the CRTC with corresponding authority to respond to actions by TSPs, such as blocking access to competitors’ Internet applications and content.

Fostering ICT adoption

The report emphasizes the need for Canada to increase its adoption of ICTs, recognizing that Canada’s lower ICT investment compared to the U.S. is contributing to Canada’s relatively weak national productivity performance. The report calls on the federal government to implement a number of measures to support increased ICT adoption, including a tax credit to promote the "smart adoption" of ICTs by small and medium-sized businesses.

Ubiquitous broadband access by 2010

To maintain Canada’s international leadership in providing broadband access, the panel recommends establishing a target of ubiquitous broadband deployment across the country by 2010. The term "ubiquitous" is defined to be around the same level as the penetration levels achieved for Canadian telephone services, that is, covering 98 to 99 per cent of the population.

The report recognizes that market forces will continue be the prime driver of Canadian broadband expansion, but also acknowledges that the cost of serving some remote areas will be too high to provide a business case for private sector companies to deploy broadband networks without financial incentives.

Accordingly, the panel recommends a narrowly targeted subsidy program to promote broadband deployment in high-cost areas. The subsidy should be borne by the federal government, and should be dispersed by way of ‘least-cost subsidy’ auctions. The subsidy would thus be awarded to the financially and technically qualified bidder that requires the smallest amount of subsidy to provide broadband service to a specified region. Although new to Canada, other countries have successfully undertaken such least-cost subsidy auctions to expand telecommunications infrastructure. The proposed subsidy auctions would be open to all TSPs, including ILECs, cable companies and new or existing wireless operators.

Review of broadcasting policy and regulatory framework

Although the panel’s mandate did not extend to broadcasting policy, the panel observed that the same technological forces that are shaping telecommunications markets are also affecting broadcasting. Most of the larger TSPs, including the cable companies and ILECS, also provide broadcasting services. TSPs and broadcasting licensees operate increasingly converged networks, in an increasingly competitive environment. Due to the expansion of IP-based networks, the unregulated audio and video content available to Canadians is growing rapidly, thus undermining some elements of the existing broadcasting policy and regulatory framework.

Canada has for many years imposed restrictions on the distribution of audio and video content, in order to foster the production and distribution of Canadian content. The panel expresses concerns that maintaining the old rules will become more and more difficult in increasingly converged markets, dominated by IP-based services. It therefore calls for a review of Canada’s broadcasting policy and regulatory framework.

A major goal of the review would be to develop a more consistent and competitively neutral regulatory approach to the rapidly converging broadcasting and telecommunications industries. The report lists issues that the panel believes should be addressed as part of this review. These include a review of the legislative framework and the possible introduction of unified legislation for the telecommunications and cable industries, possible unification of Canadian telecommunications and broadcasting policy-making (now housed in two separate federal departments, Industry and Heritage), and possible convergence of the CRTC’s regulatory functions with those of the Copyright Board. A key issue for the review would involve making greater distinctions between content and carriage regulation, possibly along the lines adopted in the European Union.

Other issues

The report deals with a range of other issues related to telecommunications policy and the regulatory framework. Key among these are recommendations for changes to the structure and process of the federal policy and regulatory institutions. The report includes recommendations aimed at:

  • Drawing a clearer line between federal telecommunications policy-making and regulation.
  • Transferring Industry Canada’s remaining regulatory and licensing functions involving international submarine cables and telecommunications equipment to the CRTC (as well as spectrum regulation and assignment of satellite orbital slots).
  • Increasing Industry Canada’s capacity to provide timely, in-depth advice to the Government on policy and legislation, and including policy directions to the CRTC. Related recommendations include establishment of an improved policy research capacity, streamlining the policy direction process and abolishing cabinet appeals from CRTC decisions.
  • Streamlining and increasing the professional capacity of the CRTC in a number of ways. Recommendations include reducing the number of Commissioners from 13 to five, and appointing future candidates for CRTC positions based on open and professionally run recruitment processes.
  • Procedural reforms aimed at expediting the CRTC’s decision-making process, and generally streamlining regulation.
  • Empowering the CRTC and the TCT to impose administrative monetary penalties to enforce telecommunications laws.
  • Allowing the CRTC to place increased reliance on alternative dispute resolution.
  • Increasing use by Industry Canada and the CRTC of public notices and consultations on proposed policies and regulatory actions.
  • Removing licensing requirements for service providers that do not have significant market power, and replacing them with simple registration requirements.
  • Reviewing and rationalizing the structure of licence and regulatory fees charged by the CRTC and Industry Canada.

Implementation

The panel suggests that the government should implement its recommendations in two phases. In the first phase, the government would issue policy statements endorsing the development of a national ICT adoption strategy, the implementation of a new regulatory framework, and take steps to reform the policy-making and regulatory institutions. In addition, as part of the first phase, the government would use its powers under section 8 of the Telecommunications Act to issue a policy direction to the CRTC, requiring the commission to apply the Act in a manner that is broadly consistent with the major reforms recommended in the report. During the second phase, the government would introduce legislation to implement other recommendations in the report.

Archived broadcast

On March 27, 2006 McCarthy Tetrault hosted a live Internet broadcast reviewing highlights from the Telecommunications Policy Review Panel Report.

The archived video presentation from the session is available for your viewing by clicking here to see the archived broadcast (presented in English and French).

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