Canada: Telecommunications - Recent Developments Of Importance

Reprinted with Permission from the 2006 issue of the Lexpert/ALM Guide to the Leading 500 Lawyers in Canada. (c) Thomson Carswell."

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, Internet entrepreneur Gerri Sinclair and André Tremblay, former CEO of Microcell Communications Inc. In arriving at its conclusions, the panel 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 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 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).

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. 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.

Taking these factors into consideration, the report recommends a phased approach to liberalization of Canada’s foreign investment restrictions. 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.

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 regulation 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.

The report recommends the establishment of a new form of "joint panel" to be staffed by 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 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.

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.

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.

• 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 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.

• Reviewing and rationalizing the structure of licence and regulatory fees charged by the CRTC and Industry Canada.

• Granting 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.

In late December 2003, the Commission called for applications to provide "multichannel subscription radio programming undertakings". Canadian Satellite Radio (CSR) and Sirius Canada Inc. (Sirius) applied for satellite audio licences, while CHUM/Astral applied for a terrestrial licence.

CSR, owned by John Bitove, proposed to offer the service of XM Satellite Radio Inc. (XM), currently operating in the United States, across Canada, on a subscription basis. XM would make available four of its 101 audio channels to enable CSR to provide four Canadian channels; and a French-language news/talk channel. CSR also proposed other benefits to the Canadian broadcasting system, including $4.1 million in CTD benefits.

Sirius would be owned by three corporations, with the Canadian Broadcasting Corp. (CBC) and Standard Radio Inc. (Standard) each with a 40 per cent voting interest, and Sirius Satellite Radio Inc. (Sirius US), an American corporation, holding a 20 per cent voting interest. Sirius proposed to distribute four channels produced by the CBC, and 74 US channels provided by Sirius US. Sirius committed to contribute five per cent of the revenues to CTD initiatives.

Both CSR and Sirius noted that US satellite coverage of virtually all of Canada’s population has created the environment necessary for a grey market to develop in this country. They stated that unless there is a licensed Canadian alternative, the growth of the satellite radio grey market in Canada may be significant.

CHUM/Astral, an entity in which CHUM would hold an 80.1 per cent voting interest and the remaining 19.9 per cent will be held by Astral Media Radio Inc., proposed a service that would initially offer 50 music channels through the use of digital terrestrial transmitters. Ten of these channels would be in the French language. All of the channels would be Canadian-produced and would generally fulfil the weekly requirements for Canadian musical selections and French-language vocal musical selections that apply to conventional radio stations. CHUM/Astral committed to contribute approximately $8.3 million during the first licence term to CTD initiatives, approximately 2 per cent of projected revenues for the proposed service.

The applicants made various changes to their applications both before and during the Commission’s November 2004 public hearing. In June 2005, the Commission approved all three applications, raising the bar significantly in some cases. Most importantly, it created a floor of eight Canadian channels on the two satellite radio services and capped the number of non-Canadian services that could be packaged with those services at nine per Canadian channel. It also required that at least 50 per cent of the programming on a Canadian channel be produced for and broadcast for the first time on the channel. And at least 85 per cent of the material on the Canadian channels had to be Canadian.

The decisions were criticized by a number of observers who petitioned the federal cabinet to either overturn the CRTC’s decisions or return them to the CRTC for reconsideration. In early September, Sirius and CSR applied to the CRTC to increase their commitments, including a promise of parity between English-language and French-language offerings. The cabinet rejected the petitions. The Commission approved the amendments and both Sirius and CSR began offering their services to Canadians before Christmas 2005.

In November 2004, the CRTC announced incentives for English-language Canadian television drama. These incentives were designed to accomplish three different objectives: an increase in the number of original hours of Canadian drama, an increase in the viewing to Canadian drama and an increase in expenditures on Canadian drama. In each case, the broadcaster would be rewarded with the ability to air additional advertising minutes above the normally permitted level.

With respect to the incentive to increase the number of original hours of Canadian drama broadcast, the Commission created three categories. First, where a licensee broadcasts, in peak time, a 10-point, original, CTF-funded drama program with an hourly production budget of at least $800,000 and a licence fee of at least $300,000, subject to certain qualifications, that licensee would be permitted to broadcast three minutes of additional advertising for each hour broadcast.

Second, where a broadcaster licences a 10-point, original, non-CTF-funded drama program with an hourly production budget of at least $800,000 and a licence fee of at least $300,000, the licensee will be permitted, subject to certain qualifications, to broadcast five minutes of additional advertising for each hour licenced; and where that broadcaster subsequently broadcasts, in peak time, such a non-CTF-funded drama it will be permitted to broadcast three minutes of additional advertising for each hour broadcast.

Finally, where a licensee broadcasts an eight- or a nine-point original drama program, or a 10-point drama program for which the licensee is not eligible for an incentive under one of the two prior incentives, the licensee may broadcast, subject to certain qualifications, 30 seconds of additional advertising for each hour broadcast.

The Commission also created incentives to increase the viewing to English-language Canadian drama as a percentage of all drama viewing on Canadian English-language services. The Commission stated that where over a broadcast year a multistation ownership group attains an increase over the previous broadcast year in the ratio of total viewing to all Canadian drama as a per cent of the total drama viewing on all conventional television stations and/or specialty services within the multistation ownership group, that meets or exceeds the target set by the Commission, each licensee in the ownership group will be permitted to broadcast an additional 25 per cent of the total advertising that it is permitted to broadcast pursuant to the incentives described above. This incentive will apply mutatis mutandis to conventional television stations or specialty services that are not part of a multistation ownership group.

Finally, the Commission created an incentive to increase expenditures on English-language drama by the English-language conventional television industry, as a per cent of total revenues, from four per cent to six per cent over a five-year period. It stated that where all of the conventional television stations in a multistation ownership group attain an annual increase over the broadcast year in aggregate expenditures on Canadian drama as a per cent of aggregate group revenues that meets or exceeds the target set by the Commission, each licensee of a station in that ownership group will be permitted, subject to the additional qualifications set out below, to broadcast an additional 25 per cent of the total advertising that it is permitted to broadcast pursuant to the first three incentives described above. Many broadcasters applied for the necessary conditions of licence allowing them to take advantage of the incentives.

In December 2004, the Commission revised its approach to assessing requests to add non-Canadian third-language television services to the lists of services for distribution on a digital basis. The Commission indicated that its revised approach puts a greater emphasis on expanding the diversity and choice in television services available to underserved third-language ethnic communities in Canada. This revision followed the preparation of a report by a panel of experts selected by the Minister of Canadian Heritage and a growing body of evidence relating both to the grey market for ethnic services in Canada and whether the ethnic marketplace in Canada was underserved.

With respect to non-Canadian third-language general interest television services, the Commission determined that it would adopt a more open-entry approach. At the same time, in order to ensure that Canadian third-language general interest services are in a position to continue to fulfill their obligations, the more open-entry approach involved certain distribution and linkage requirements.

First, where a sponsored general interest, non-Canadian, third-language service offers 40 per cent or more of its programming in any of the Cantonese, Mandarin, Italian, Spanish, Greek or Hindi languages, the Commission will be disposed to authorize its distribution, subject to the requirement that the non-Canadian service only be distributed to customers who also subscribe to the analog service operating in the same language.

Second, where a sponsored general interest, non-Canadian, third-language service provides programming in a third language that represents 40 per cent or more of the service’s program schedule (a principal language) that is also a principal language of one or more launched, general interest, third-language ethnic Category 2 services, the Commission will be disposed to authorize the distribution of the non-Canadian service, subject to the requirement that a BDU choosing to distribute it also distribute at least one third-language ethnic general-interest Category 2 service in the same principal language, and further, that the BDU make available at least one third-language ethnic general-interest Category 2 service in the same principal language as part of a package with the general-interest, non-Canadian, third-language service.

In May 2005, the Commission approved the addition of RAI International 2 to the lists of services available for distribution to Canadians.

In February, 2006, the Commission released its digital migration framework relating to the pay and specialty services that were licensed under the analog framework. The general rule is that a BDU must obtain the prior written consent before distributing an analog service on digital. There are exceptions, namely where the service is already being duplicated on digital or where 85% of the homes that currently subscribe to the analog tier subscribe to digital. Until 85% penetration of digital is achieved, the Commission will expect programmer consent to be given if the appropriate mirroring and packaging rules are respected by the BDU.

Small systems no longer are required to obtain the consent of analog programmers before distributing them in digital. Systems not owned by Rogers, Shaw, Videotron or Cogeco are considered to be small systems. Previously unlaunched analog services can also be carried on digital.

BDUs that offer a digital only service must distribute the analog dual status services that are on basic on digital basic until at least January 1, 2010 and after that to the earliest of January 1, 2013 or 85% digital penetration. Cable BDUs must mirror the existing analog tiers in digital until at least January 1, 2010 or, after that, to the earlier of January 1, 2013 or 85% digital penetration.

In French-language markets, BDUs that offer a digital-only service must distribute on digital basic all French-language dual status and modified dual status services that are currently on analog basic. This must continue until at least January 1, 2010 and after that until the earlier of January 1, 2013 or 85% penetration.

The dual status and modified dual status rules will terminate on September 1, 2007, although existing dual status services can apply for "digital basic status", as can other services that satisfy the Commission that their carriage on digital basic contributes in an exceptional way to the achievement of the objectives of the Broadcasting Act.

The Commission will continue to regulate wholesale rates only for services on digital basic, (although historical rates will serve as a reference point for negotiations and dispute resolution) and the existing linkage rules will continue to apply.

Finally, BDUs in French-language markets must offer one large "all-in" package including all the French-language specialty services. In English-language markets each analog and Category 1 digital specialty service must be offered in at least one theme pack or an all-in package before it may be offered on a standalone or pick a pack basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.