In a landmark telecommunications ruling that signals a major shift in the course of Canadian pricing regulation, the Canadian Radio-television and Telecommunications Commission (CRTC) has issued its Regulatory Framework for Second Price Cap Period (Decision 2002-34 issued on May 30 2002). Although it was expected merely to fine-tune the CRTC's four-year-old price caps regime, Decision 2002-34 effectively outlines a new scheme for Canadian telecommunications pricing and regulation that will be effective for the next four years.

The CRTC's decision took effect on June 1 2002 and was welcomed by residential consumer and public interest groups. However, it is almost certain to be appealed to either Canada's Federal Cabinet or Federal Court of Appeal, probably by competitive carriers such as AT&T Canada Inc and Call-Net Enterprises Inc, both of which emerged from the 14-month price caps proceeding with considerably less rate relief than they had hoped for.

The competitive carriers had requested sizeable reductions in the charges they pay to incumbents in accessing essential and near-essential services and facilities.(1) Their requests ranged from up to 70% off current tariffed rates (in AT&T Canada's case) to capping at the level of the incumbent's own cost (as sought by Call-Net).

In response, the CRTC imposed rate reductions estimated at between 15% and 20%. These were achieved partly by trimming mark-ups available to the incumbents from 'cost plus 25%' to 'cost plus 15%' on a range of services and facilities that the competitive carriers lease from the incumbents in order to offer their own retail services. AT&T Canada paid the incumbents C$448 million in lease rates in 2001 and Call-Net paid an estimated C$240 million in 2002. Thus, Decision 2002-34 is likely to save AT&T Canada approximately C$70 million and Call-Net around C$40 million in annual incumbent payments.

In deciding whether to appeal Decision 2002-34, the competitive carriers may take some solace from certain targeted rate reductions and new discounted service offerings that the CRTC ordered the incumbents to implement, including:

  • the creation of a new interim tariff for local digital access circuits (known as competitor-digital network access (DNA) services), priced at 40% off the incumbents' current monthly retail rate;
  • a reduction in rates for direct connection services used by competitors to originate and terminate traffic via the incumbents' local switching offices; and
  • reductions of more than 50% in rates charged by the incumbents to wireless service providers for telephone numbers and local telephone network access.

Equally, the introduction of service and sub-baskets should better protect the competitive carriers from the incumbents' previous practice of aiming price reductions at competitive sectors while raising local residential telephone service rate levels. Moreover, an overlay of service-specific pricing constraints and local-rate freezes, taken together with the CRTC's adjustments to the incumbents' service baskets, should diminish considerably the pricing flexibility that the telephone companies enjoyed under the original price caps formula.

The incumbents' initial responses to Decision 2002-34 were more measured than those of the competitive carriers. However, both Bell Canada and Telus voiced concerns regarding the additional levels of regulation prescribed by the CRTC and the removal of pricing flexibility (which was one of the hallmarks of price cap regulation). Specifically, the new price caps decisions will have the following effects on the incumbents:(2)

  • basic residential local telephone rates will be frozen for the next few years unless inflation exceeds 3.5% (some incumbents had sought monthly increases of up to C$3 during the proceeding leading to Decision 2002-34);
  • local service rates for businesses will be price-constrained for the next few years with rate level increases limited to the rate of inflation (on average);
  • pay-telephone rates will be frozen pending a full CRTC review of the Canadian payphone service; and
  • eight new price-cap service and sub-baskets are created, as well as service-specific price constraints, which will result in greater regulation and less pricing flexibility as the CRTC increases its regulatory management in sectors where there is little competition.

Residential local ratepayers (who saw local rates sky-rocket over the past decade) gain the most advantages from the CRTC's new ruling. The CRTC's vice-chairperson of telecommunications has stated that the new pricing rules "will also protect consumers both in terms of price and quality of service, while continuing to promote competition".

In introducing a range of new regulatory protections for residential and business consumers, the CRTC acknowledged that levels of local competition in the Canadian marketplace are non-existent in the residential local sector and negligible in all other local sectors. The business local sector is an exception, where incumbents face some pricing discipline from competitors. The following measures have been introduced in the many local market sectors where incumbents dominate and competition is inadequate in order to protect consumers:(3)

  • penalties for incumbents (including customer rebates totalling up to 5% of their total annual business and residential local service revenues) for failure to meet CRTC-prescribed quality of service indicators;
  • no increase in local payphone rates pending a full CRTC review;
  • a telecommunications consumer bill of rights;
  • mandated service improvement plans for incumbents (over four years), which are designed to upgrade the existing service and introduce services where they do not currently exist (and the costs of which cannot be recovered through local rate increases);
  • local rate or toll-free access to the Internet for local subscribers in under-served areas; and
  • the prospect of an annual rebate, to be funded by any surplus in the incumbents' local rate deferral accounts.

Legal or political challenges to the CRTC's milestone decision are widely anticipated given the polarity of the positions adopted by the incumbents and competitive carriers during the proceeding. At least one appeal seems to be inevitable in light of the magnitude of the revenues at stake and the overall woes of the telecommunications sector.

Three appeal options are available under the Telecommunications Act:

  • a judicial appeal on a matter of law to the Federal Court of Appeal;
  • a political/policy challenge to the Federal Cabinet; or
  • a further application to the CRTC seeking a reconsideration and variance of the ruling.

Parties that are inclined to appeal may also seek to stay the decision's implementation and effect pending the disposition of their review application to the CRTC or their appeal to the court. Each of the appeal avenues is subject to the following procedures and deadlines under the Telecommunications Act:

  • leave to appeal to the Federal Court of Appeal must be filed within 30 days of the date of the decision (unless the court allows an extension);
  • a petition for a Cabinet appeal must be filed within 90 days of the date of the ruling and a Cabinet order must be issued within one year of the ruling date; and
  • an application for a CRTC review and variance of the ruling is usually required within six months of the decision date.

For further information on this topic please contact Lorne Abugov, Kirsten Embree or Phil Rogers at Osler, Hoskin & Harcourt LLP by telephone (+1 613 235 7234) or by fax (+1 613 235 2867) or by email ([email protected] or [email protected] or [email protected]).


(1) The incumbent carriers are Bell Canada, Telus Corp, SaskTel, Manitoba Telecom Services Inc and Aliant Inc.

(2) This is in addition to the reduced access charges they can expect to receive annually from competitive carriers (a reduction of around C$50 million in Bell Canada's case).

(3) These measures are in addition to frozen or inflation-limited local rate levels.