Canada: VoIP: A New Chapter In Telecommunications

Recent announcements by several large Canadian telephone and cable companies all indicate an intention to introduce VoIP into the local telephone market over the next few years. Several have already begun offering telecommunications services on a wide-scale basis using in some fashion the Internet as a delivery vehicle.

To date, the Canadian Radio-television and Telecommunications Commission (CRTC), Canada’s telecommunications regulator, has not seen fit to actively regulate the use of the Internet for telecommunications purposes. This light-handed approach to regulation may be about to change. In an interview with Bloomberg News in early March 2004, CRTC Chairman, Charles Dalfen, indicated that the CRTC intends to initiate a process to solicit comments on the regulation of VoIP service.

VoIP is the convergence of voice and data into a single bitstream. VoIP is not a service but is a technology that allows for the transmission of voice communications over the Internet versus traditional circuit-switched telephone networks. This process involves digitizing voice communications and breaking them down into data packets. The data packets are then transmitted over the public Internet or a managed IP network and are reassembled and converted back into a voice signal once they reach their destination.

Traditional circuit-switched telephone networks use a dedicated channel for a single phone call which prevents other communications from passing over the channel while a call takes place. In contrast, IP networks transmit all data (including voice) over the same channel. VoIP telephony does not use a dedicated channel, allowing for multiple calls to be simultaneously placed over the same network.

A review of recent press articles indicates that Canadian telephone and cable operators hope to complete the transition to VoIP over the next few years. Rogers Communications announced recently that it plans to offer VoIP through its high-speed cable service by mid- 2005. Bell Canada has expressed its intention to migrate all of its voice traffic to an IP network within three years. In February 2004, Shaw Communications announced that it intends to use VoIP to provide telephone service over its cable network. Shaw has also registered with the CRTC as a Competitive Local Exchange Carrier (CLEC) which will allow it to interconnect with both incumbent telephone companies and long distance providers.

Although Canadian operators seem intent on the transition to VoIP, widespread migration from traditional telephone networks to IP networks will likely take longer in Canada than in the United States. Local rates in Canada are currently much cheaper and the quality of service is high, so there is not the same pressure for an alternative to traditional telephone service. In the United States, several large cable providers have already deployed VoIP services, as have several "virtual" providers who offer VoIP telephone service through the public Internet. Vonage, the most prominent of the "virtual" providers, has recently announced that it is moving into the Canadian market.

The regulatory treatment afforded to Internet telephony by the CRTC has been minimal to date. The CRTC has for the most part refrained from specifically regulating the use of the Internet for telecommunications purposes. It has, however, developed a policy on IP Telephony in the context of the universal service support contribution regime.

The contribution regime requires profitable telecommunications services, such as long distance, to subsidize basic telephone service in high-cost areas. Until recently, the amount payable under the regime in Canada was based on the number of long distance minutes used within a local territory. With the rise of IP telephony in the mid-1990s, there was a concern that some providers would attempt to avoid the contribution regime by carrying long distance traffic on IP networks making it difficult, if not impossible, to measure the long distance minutes carried.

In 1997, the CRTC addressed this concern in Telecom Order CRTC 97-590, when the CRTC determined that, in general, the contribution regime would not extend to Internet services. However, a service provider would be required to pay a contribution if it was using the IP network simply as a means of delivering public switched inter-exchange voice communications.

Later in that same year, the CRTC had an opportunity to put this new policy into practice. ShadowTel Communications, a company offering telephone service to the public on a frame relay network, applied for an exemption from the contribution regime on the basis that its service was similar to that of an ISP. While technically speaking, ShadowTel was using frame-relay and not VoIP for its service, most of the arguments advanced in the proceeding viewed the service as being a phone service over the Internet.

In Telecom Order CRTC 98-28, the CRTC determined ShadowTel’s service to be contribution-eligible as it was providing a public switched inter-exchange voice service. The fact that some of the communications took place over the Internet was determined to be inconsequential.

Following the ShadowTel decision, the CRTC developed a more comprehensive policy with respect to IP telephony. In Telecom Order CRTC 98-929, ISPs were stated to be not generally subject to the contribution regime, however, the CRTC did establish more clearly the circumstances under which such ISPs would be required to pay contribution. The CRTC distinguished between two types of Internet telephony service: "PC Voice", a PC to PC type of service; and "PSTN Voice", a real-time voice service over the Internet to and from a telephone set. If the service is a "PC Voice" type of service, it is exempt from contribution, and if the service is a "PSTN Voice" type of service, it is contribution eligible. In its reasons for excluding PC Voice services from contribution, the CRTC stated that it would be practically impossible to distinguish voice from other data on the IP network.

In Decision CRTC 2000-745, Changes to the Contribution Regime, the CRTC overhauled the contribution regime by establishing a revenue-based system. Under this system, all telecommunications service providers with annual revenues of $10 million or more from Canadian telecommunications services are required to pay a percentage of their gross revenues from contribution-eligible services as contribution. This includes ISPs if they provide another telecommunications service (such as PSTN Voice). However, ISPs not offering a PSTN Voice type of service are specifically excluded from the contribution regime. It is worth noting that in the United States, the Federal Communications Commission recently announced that it would not regulate PC-to-PC voice communications.

The transition to a revenue-based system is an attempt by the CRTC to adopt a more technology-neutral contribution policy. The focus is simply on whether a telecommunications service is being provided, rather than emphasizing whether the communications service accesses the public switched network. Despite this broader approach, the current framework still assumes that PC Voice has a limited role to play in the Canadian telecommunications market. However, as use of IP telephony becomes more widespread, the lines between PSTN Voice and PC Voice will continue to blur. The CRTC will be under increasing pressure to devise a more comprehensive regulatory policy that addresses the VoIP technology directly. 

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