Telecom Decision CRTC 2004-56

Ottawa, 26 August 2004

Applications for stay and review and vary of Telecom Decision CRTC 2002-56 and Telecom Decision CRTC 2003-27

Reference: 8662-W32-200308131 and 8680-W32-200307315

In this decision, the Commission grants an application by West Coast TelTech Ltd. and by A&A Call Link Telesolutions Ltd. to review and vary Follow-up proceeding to Telecom Decision CRTC 2002-56 - Foregone toll revenue compensation for expanded local calling areas, Telecom Decision CRTC 2003-27, 7 May 2003 (Decision 2003-27). The Commission does not consider it necessary to review and vary Framework for the expansion of local calling areas, Telecom Decision CRTC 2002-56, 12 September 2002 (Decision 2002-56).

The above determination renders moot the application by the applicants to stay Decision 2002-56 and Decision 2003-27 pending the Commission's disposition of the application to review and vary the two decisions.

1. On 6 June 2003, West Coast TelTech Ltd. (West Coast) and A&A Call Link Telesolutions Ltd. (A&A) (collectively, the applicants) filed an application pursuant to sections 55 and 61(2) of the Telecommunications Act (the Act) and Part VII of the CRTC Telecommunications Rules of Procedure (the Rules) for a stay of Follow-up proceeding to Telecom Decision CRTC 2002-56- Foregone toll revenue compensation for expanded local calling areas, Telecom Decision CRTC 2003-27, 7 May 2003 (Decision 2003-27), and Framework for the expansion of local calling areas, Telecom Decision CRTC 2002-56, 12 September 2002 (Decision 2002-56). On 27 June 2003, the applicants also filed an application, pursuant to section 62 of the Act and Part VII of the Rules, requesting that the Commission review and vary both Decisions.

2. The applicants requested that the Commission:

3. In a Commission staff letter dated 16 June 2003, parties were informed that the Commission would deal with both applications at the same time, and were invited to file comments. The applicants had ten days to reply to such comments.

4. The City of Ottawa (Ottawa), the City of Greater Sudbury (Sudbury), Distributel Communications Ltd. (Distributel), H.M.Net Technologies Inc. (H.M.Net), Info-Touch Communications Systems (Info-Touch), SelectCom Inc. (SelectCom), Tatlayoko Think Tank Ltd. (TTT), TELUS Communications Inc. (TELUS) and l'Union des consommateurs and l'Association des consommateurs du Canada (Consumers) filed comments by 15 July 2003. The applicants replied on 25 July 2003.

Background

Extended toll-free local calling areas

5. In Framework for the expansion of local calling areas and related issues, Public Notice CRTC 2001-47, 27 April 2001 (Public Notice 2001-47), the Commission initiated a proceeding in order to establish a set of general principles and criteria that should be used in considering applications for the expansion of LCAs. The Commission invited comment on such principles and criteria, on the issues enumerated in Public Notice 2001-47, and on any other issues relevant to the proceeding. One of the enumerated issues was whether and how the incumbent local exchange carriers (ILECs) and/or competitors should be compensated for loss of toll revenues should an LCA be created or expanded.

6. In Decision 2002-56, the Commission announced a new framework for the expansion of LCAs. The Commission noted that competitors had made significant investments in the toll market, and considered that the competitors' position in the market may not allow them to modify service offerings and rates in order to recover their foregone toll revenues. The Commission also considered that all entities should be treated fairly. Accordingly, the Commission established a new framework that provided for compensation to both the ILECs and competitors for foregone toll revenues when an LCA is created or expanded.

7. As part of this framework, the Commission established a plan to compensate the ILECs and toll competitors for some of the costs associated with creating or expanding an LCA. The plan envisaged compensation, on application, to:

8. The Commission determined that subscribers who benefit from an expanded LCA should bear the costs associated with foregone toll revenues by paying a temporary monthly surcharge which would be collected by the ILEC. The Commission stated that to compensate ILECs and competitors on a permanent basis could lead to consumers overpaying for the expanded LCA service.

9. The Commission stated that having found it reasonable to compensate ILECs and toll competitors for foregone toll revenues for a fixed period, its preliminary view was that such compensation should be equal to three years worth of foregone toll revenues. The Commission initiated a follow-up proceeding to seek comments regarding this preliminary view.

10. In Decision 2003-27, the Commission determined on a final basis that compensation to toll service providers for expanded LCAs would be equal to three years worth of foregone toll revenues.

11. In paragraph 46 of Decision 2003-27, the Commission stated:

The Commission notes TELUS' comments that local service resellers have never been regarded as toll competitors and, since they are providing their customers only with extended local calling, they would not be eligible for compensation for foregone toll revenue. The Commission further notes that in Bell Canada - Application to deny resale of Centrex III service by Distributel Communications Limited, Telecom Decision CRTC 89-2, 7 February 1989 [(Decision 89-2)], the Commission stated that Distributel Communications Limited's (Distributel) Metroplus Service was based on the resale, for a flat monthly fee, of Centrex III Service provided from a core exchange that had toll-free calling with surrounding exchanges. Therefore, Metroplus Service effectively linked two local calls and thus avoided the toll charges that would normally apply. The Commission found that the service provided by Distributel was appropriately described as a local service. Accordingly, in the Commission's view, with respect to the new framework for the expansion of LCAs, resellers of local service are not considered to be toll competitors and therefore are not eligible to receive compensation for foregone toll revenue.

Positions of parties

The applicants

12. West Coast stated that it offered regional calling services in the Lower Mainland of British Columbia using a single-hop network configuration. West Coast submitted that its regional calling services competed directly against the long distance services of TELUS and other providers of long distance services operating within West Coast's serving territory, including A&A.

13. A&A submitted that its Lower Mainland Toll-Free Calling services were similar to West Coast's regional calling services and competed with other long distance services. A&A stated that its Lower Mainland Toll-Free Calling services permitted subscribers located in one local exchange in A&A's serving territory to place a call to a party located in a different local exchange within A&A's serving territory without paying the per-minute or other toll charges that would otherwise apply.

14. The applicants submitted that the proceedings leading to Decisions 2002-56 and 2003-27 were unfair, because neither proceeding dealt with the issue of what constituted a "toll competitor". To support their view, the applicants made the following arguments:

15. The applicants remarked that TELUS expressed its view that single-hop resellers should not be eligible for compensation only at the reply stage of the proceeding leading to Decision 2003-27, too late for the applicants to comment.

16. The applicants argued that when the Commission disqualified local service resellers from compensation, it went beyond the scope of the proceeding that led to Decision 2003-27, since the sole issue in that proceeding was the length of the compensation period.

17. The applicants submitted that when it determined that local service resellers were not eligible for compensation, the Commission had given no formal notice to any party that it was considering broadening the scope of the follow-up proceeding to Decision 2002-56 to include the issue of eligibility for compensation. The applicants further submitted that the Commission relied on a decision or principle that was not raised by any party, nor identified by the Commission during the follow-up proceeding for comment.

18. The applicants submitted that according to the principles of natural justice they were clearly entitled to the right to be heard on the issue of whether resellers of local services, including single-hop resellers, should be eligible to receive compensation for foregone toll revenues under the new framework established by the Commission for the expansion of LCAs. The applicants submitted that, since eligibility for compensation was not an issue in the proceedings leading to the impugned Decisions, they had neither the right nor the opportunity to comment on this issue before Decision 2003-27 was published.

19. The applicants argued that both local service resellers and other toll service providers competed in the toll market and offered services that were functionally equivalent, and that both groups would experience lower revenues following LCA expansion. The applicants maintained that, according to the methods of market analysis generally used by competition and regulatory authorities in Canada and the United States, and by the Commission in its Reports to the Governor-in-Council Status of Competition in Canadian Telecommunications Markets (Monitoring reports), single-hop resale is a substitute for toll services, and single-hop resellers were toll competitors.

20. Further, the applicants stated that according to the glossary of terms used by the Commission in its market analysis and for the filing requirements and analysis of competitive conditions in the Monitoring reports, single-hop resale is defined as a long distance service.

21. The applicants noted that the investments of other toll competitors were the basis for compensation pursuant to the principles established in Decision 2002-56. The applicants noted that single-hop resellers such as West Coast and A&A had also made significant investments and argued that expansion of LCAs would eliminate single-hop as a viable business. The applicants submitted that when the expanded toll free calling was introduced in the Greater Vancouver region in 1999, A&A's revenue and subscriber base were reduced by 80%.

22. The applicants submitted that failure to compensate single-hop resellers, while compensating other toll competitors, is inconsistent with the principle of fairness, expressed in Decision 2002-56, to compensate all toll competitors, and the principle and objective of competitive equity.

23. The applicants submitted that, in Decision 2003-27, the Commission relied on Decision 89-2 when it stated that resellers of local service were not considered to be toll competitors and therefore were not eligible to receive compensation for foregone toll revenues. The applicants submitted that the regulatory context has changed since the time Decision 89-2 was released.

24. In addition, the applicants argued that the Commission erred in fact when it disqualified the applicants from compensation, because the applicants did not resell Centrex services, and were technically configured differently than Centrex resellers. The applicants concluded that therefore there was substantial doubt as to the correctness of Decision 2003-27.

Single-hop resellers

25. Distributel, H.M.Net, Info-Touch and SelectCom supported the applicants' submissions. Distributel contended that eligibility for compensation was not an issue in the proceedings that led to Decisions 2002-56 and 2003-27. Distributel stated that during the proceeding that led to Decision 2002-56, some parties expressed the view that all competitors should be compensated for lost toll revenues resulting from LCA expansion. According to Distributel, the Commission supported this view in Decision 2002-56 when it stated that all toll competitors should be treated equally. Amongst other matters, Distributel submitted that if eligibility for compensation had been an issue, it would have participated in the proceedings.

26. Distributel argued that exclusion of single-hop resellers was unfair, since these resellers marketed their services as toll services, and their customers continued to obtain local service from a local exchange carrier.

27. SelectCom submitted that arbitrarily creating different classes of toll providers, with only some entitled to compensation, was prejudicial.

28. H.M.Net and SelectCom submitted that Decision 2003-27 appears to imply that local service resellers would not receive compensation for any foregone toll revenues. They stated that they offer services other than single-hop resale services, and that provision of single-hop resale services should not disqualify them from receiving compensation for foregone toll revenues resulting from LCA expansions.

Public interest groups

29. Consumers argued that the review and vary application should be approved, and that the Commission should initiate another proceeding in order to compensate all parties for actual losses in case of LCA creation or expansion.

30. Consumers also submitted that, when an LCA is created or expanded, all lost revenues and additional costs should be considered in order to estimate correctly the impact of creating or expanding the LCA on rates paid by subscribers.

31. Consumers argued that, in Decisions 89-2 and in Bell Canada v. Distributel Communications Limited et al and London Telecom v. Bell Canada - Resale of local services, Telecom Decision CRTC 91-6, 10 May 1991 (Decision 91-6), single-hop Centrex resellers were considered local service providers for technical reasons. Consumers argued that examination of the market served by Centrex and other local service resellers showed that their services were a substitute for toll services, including the long distance services offered by ILECs and competitive local exchange carriers.

Other interveners

32. Ottawa, Sudbury and TELUS opposed the applications to review and vary Decisions 2002-56 and 2003-27. Sudbury argued that there was no basis for a review and vary of the impugned Decisions, since there was no error in law, there was no change in circumstances, and there were no new facts.

33. Ottawa submitted that the applicants equate a loss of revenues derived from services that may be seen as substitutes for toll services in particular situations with "foregone toll revenues" as that phrase is used in the impugned Decisions.

34. Further, Ottawa and TELUS submitted that the key issue in this proceeding was whether single-hop local resale was a toll or local service. They submitted that in Decisions 89-2 and91-6 and in numerous other decisions, the Commission has consistently determined that single-hop Centrex resale was a local service, and that two-hop Centrex resale, linking exchanges between which there was no extended area service (EAS) for any subscriber, was a toll service. Ottawa noted that Decision 2002-56 did not state that these decisions would no longer be relevant.

35. TELUS submitted that the applicants did not make a case that single-hop service should be a toll, and not a local service, and they offered no evidence to question the earlier rulings that single-hop Centrex resale was a local service. TELUS added that in Telecom Order CRTC 97-590, 1 May 1997 (Order 97-590), when the Commission made changes to toll contribution, the Commission remained of the view that single-hop Centrex resale was a local service.

36. Ottawa and TELUS argued that any technical differences in the way in which Distributel provides its Metroplus service, as approved in Decision 89-2, and the applicants provide their service were of no regulatory significance, since the results for retail customers were the same.

37. Ottawa and TELUS argued that the proceedings that led to Decisions 2002-56 and 2003-27 were fair, since Public Notice 2001-47 identified compensation for foregone toll revenue as one of the issues in the proceeding that led to Decision 2002-56, and since the Commission has consistently ruled that single-hop resale was a local service.

38. According to Ottawa, the Commission did not err in fact and did not deny the applicants' procedural fairness when it stated in Decision 2003-27 that single-hop resale was not eligible for compensation pursuant to the new LCA framework. Ottawa added that since the applicants' service was not a toll service, not compensating local resellers was not contrary to the principle established in Decision 2002-56, specifically that all toll service providers should be compensated.

39. TELUS submitted that, prior to the reply stage of the proceeding that led to Decision 2002-56, it had commented on the applicants' position that they should get compensation for foregone revenues when an LCA is expanded.

40. TELUS argued that it was clear that when the Commission used the term "competitor" in Public Notice 2001-47 and Decisions 2002-56 and 2003-27, it was referring to "competitors who provide toll services". Likewise, Public Notice 2001-47 stated clearly that the scope of the proceeding included "whether and how the ILECs and/or competitors should be compensated for loss of toll revenues". TELUS argued that the applicants were not toll service providers, and that they had no valid reason to believe that they would be considered toll service providers. According to TELUS, in this regard, the applicants ignored a series of decisions more recent than Decision 89-2, including Decision 91-6 and Order 97-590, in which the Commission considered single-hop resellers to be local service providers. TELUS remarked that the Commission has consistently ruled that while multi-hop resale was a toll service, single-hop Centrex resale was not.

41. TELUS argued that Decision 2003-27 merely clarified that, as local service providers, single-hop resellers were not eligible for compensation. Accordingly, TELUS argued that there was no error in law when the Commission stated that Centrex and other local service resellers were not entitled to compensation.

42. Sudbury noted that during the proceeding that led to Decision 2002-56, the applicants stated that they wanted to receive compensation, and also expressed this in their final comments in that proceeding. Sudbury added that the applicants knew from TELUS's response to one of their interrogatories that EAS expansion would put the revenues of single-hop resellers at risk, and that they may not get compensation if an LCA were expanded. Sudbury argued that the applicants could have requested more time during the proceeding to examine the status of Centrex and other local service resellers.

43. Ottawa stated that it had requested that Bell Canada initiate the process to expand the Ottawa LCA, and that any further regulatory delay would be "unconscionable". Ottawa and Sudbury submitted that if the Commission granted the review and vary of the impugned Decisions, it should simply amend the two Decisions without additional process.

Applicants' reply

44. In reply, the applicants reiterated that the Commission erred in fact, in Decision 2003-27, in basing its determination that local service resellers are not eligible for compensation for foregone toll revenues solely on Decision 89-2, since the applicants' single-hop resale services are not technically configured in the same way as Distributel's Metroplus service, which was the subject of Decision 89-2.

45. The applicants submitted that while the Commission's characterization of what was then Distributel's Metroplus service in Decision 89-2 might have been relevant in the context of the then applicable regulatory framework for resale and sharing, the instant case was about a wholly different regulatory framework for expanded local calling introduced by the Commission many years later. The applicants noted that there have been significant changes in Canadian telecommunications, including Commission regulation and market forces, between 1989, when Decision89-2 was issued, and 2003, when Decision 2003-27 was issued as a follow-up to Decision 2002-56.

46. The applicants also reiterated that single-hop resale was functionally equivalent to traditional toll or long distance services, and thus competed in the same market.

47. The applicants submitted that, without compensation, the new LCA framework would drive many single-hop resellers out of business. They argued that they were denied adequate notice and a full and fair opportunity to be heard with respect to the factual and legal considerations that are relevant to their eligibility for compensation.

48. Further, the applicants argued that no reasonable person could conclude from Decision 2002-56 that single-hop resellers were not entitled to compensation, and that therefore the Commission went beyond clarification when, in Decision 2003-27, it declared them ineligible for compensation.

Commission analysis and determinations

49. In Guidelines for review and vary applications, Telecom Public Notice CRTC 98-6, 20 March 1998 (Public Notice 98-6), the Commission stated that in order for it to exercise its discretion pursuant to section 62 of the Act, applicants must demonstrate that there is substantial doubt as to the correctness of the original decision, for example due to:

  1. an error in law or in fact;
  2. a fundamental change in circumstances or facts since the decision;
  3. a failure to consider a basic principle which had been raised in the original proceeding; or
  4. a new principle which has arisen as a result of the decision.

50. In Public Notice 2001-47, the Commission established a proceeding in order to, among other things, determine whether and how the ILECs and/or competitors should be compensated for foregone toll revenues and for which expenses the ILECs should be compensated when an LCA is created or expanded

51. In Decision 2002-56, the Commission determined that the competitors' position in the market may not allow them to modify service offerings and rates in order to recover their foregone toll revenues. The Commission also considered that all toll competitors should be treated fairly. Accordingly, the Commission concluded that compensation should be paid to both the ILECs and competitors for foregone toll revenues when an LCA is created or expanded.

52. The Commission notes that the applicants argued, and several interveners, including Ottawa, agreed, that single-hop resale services have some of the functionalities of traditional toll or long distance (interexchange) services, and thus compete in the toll market. Further, the Commission notes that it stated in Decision 89-2 that single-hop Centrex resale provides the capability to make interexchange calls. In fact, single-hop Centrex resale is a type of single-hop resale, and in all cases single-hop resale services compete with toll services.

53. The applicants submitted that failure to compensate single-hop resellers, while compensating other toll competitors, was inconsistent with the principle of fairness established in Decision 2002-56, to compensate all toll competitors, and the principle and objective of competitive equity. SelectCom added that arbitrarily creating different classes of toll providers, with only some entitled to compensation, was prejudicial.

54. The Commission considers that service providers that wish to provide interexchange services may choose from various technical arrangements in order to provide their services. For example, they may provide services using their own facilities, or by leasing facilities from other carriers. Service providers may resell services provided by the ILECs or by other carriers, or they may offer single-hop resale over leased facilities, or single-hop Centrex resale. The Commission expects that each service provider would choose the technical arrangements it finds most advantageous given its particular circumstances.

55. In view of the alternatives that are open to competitors that wish to provide toll services, the Commission considers that it would be more consistent with the principle of fairness to all competitors, expressed in Decision 2002-56, to base compensation for foregone toll revenues in case of LCA creation or expansion on the market that a service competes in, instead of on the technical configuration used to provide the service, or on whether the service has been classified as a toll or a local service for other purposes.

56. In addition, the Commission notes that customers of single-hop resellers subscribe to services of such service providers in order to obtain interexchange services. However, such customers continue to obtain local service from a local exchange carrier, predominantly an ILEC.

57. Further, pursuant to the glossary of terms used for the Monitoring reports, service providers are instructed to report single-hop resale revenues as toll revenues. In the Monitoring reports, the Commission has recognized single-hop resale as a substitute for toll services, and single-hop revenues are reported as toll revenues.

58. Based on the above, the Commission considers that, for the purpose of LCA creation or expansion and compensation for foregone toll revenues, single-hop service providers should be considered to be providers of toll services.

59. The Commission further considers that paragraph 46 of Decision 2003-27 did not fully implement the principle, established in Decision 2002-56, of treating all competitors fairly.

60. Accordingly, the Commission considers that paragraph 46 of Decision 2003-27 contained an error in fact in stating that resellers of local service are not considered to be toll competitors and therefore are not eligible to receive compensation for foregone toll revenues.

61. Based on the above, the Commission considers that there is substantial doubt as to the correctness of paragraph 46 of Decision 2003-27.

62. Accordingly, the Commission grants the application to review and vary Decision 2003-27, and determines that single-hop resellers will be entitled to compensation for foregone revenues for their services that compete with toll services. However, the Commission does not consider it necessary to review and vary Decision 2002-56, since that decision did not determine that single-hop resellers are not entitled to compensation when an LCA is created or expanded.

63. The Commission notes that Decision 2002-56 contemplated that each application to create or expand an LCA would be a separate proceeding, to be decided according to the facts of that proceeding. In this context, the Commission considers that during an LCA implementation proceeding, service providers should identify the services, and the associated foregone revenues, for which they request compensation, and submit that information to the Carrier Services Group of the affected ILEC. Where appropriate, compensation will be granted in accordance with the principles established in Decision 2002-56, Decision 2003-27, and this decision.

Conclusion

64. In light of the above, the application to review and vary Decision 2003-27 is granted in order to provide that single-hop resellers will be eligible for compensation for foregone toll revenues when an LCA is created or expanded. As indicated above, it is not necessary to vary Decision 2002-56. In view of the Commission's decision regarding the application to review and vary Decision 2002-56 and Decision2003-27, it considers the application to stay those decisions pending the Commission's determination to be moot.

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

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