Industry Canada’s review of Canadian telecom foreign investment restrictions has attracted a great deal of interest. However, the Canadian Radio-television and Telecommunications Commission (CRTC), which regulates telecommunications in Canada, also plays an important role in determining the scope that non-Canadian-controlled companies have to participate in Canadian telecommunications services markets. Telecom Decision CRTC 2010-930 (TD 2010-930), issued on December 9, 2010, clarified this scope.

The CRTC decided that a service provider that leases "dark" fibre optic cable, and uses optical equipment to "light" and, thereby, provide service over it, is not "operating" that cable. It is therefore not required to be Canadian. As a result, non-Canadians who wish to act as telecommunications service providers in Canada may exercise a high degree of control over their terrestrial networks, provided the dark fibre on which the network is based is owned by a qualified Canadian company.

Background

Transmission Facilities

Telecommunications services provided in Canada are governed by the Telecommunications Act. That Act distinguishes between facilities-based "telecommunications common carriers" and non-facilities-based telecommunications service providers, such as resellers.

Telecommunications carriers operating in Canada are generally required to be Canadian-owned and controlled if they own or operate a "transmission facility"1 used to provide telecommunications services to the public for compensation. The rules relating to Canadian ownership and control of Canadian carriers require that:

  • both carriers and their holding companies be incorporated in Canada;
  • neither carriers nor their holding companies are controlled by non-Canadians; and
  • non-Canadians comprise no more than 20 per cent of a carrier’s board of directors, hold no more than 20 per cent of its voting shares, and hold no more than a third of voting shares of their holding companies.

The Act does not restrict companies whose foreign investment or control exceeds these thresholds from providing terrestrial or wireless telecommunications services in Canada, as long as they do not own or operate a "transmission facility", which is defined as

any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, for the transmission of intelligence between network termination points, but does not include any exempt transmission apparatus.

The exempt transmission apparatus carved out from this definition includes apparatus whose functions are limited to switching; processing; or "control of the speed, code, protocol, content, format, routing or similar aspects of the transmission of intelligence."

Non-Canadians providing telecommunications services in Canada may therefore own and operate their own switches, routers, and similar network-controlling equipment. They may also generally own and operate transmission facilities physically or "virtually"2 contained within a single customer building or campus. The principal restriction that non-Canadian telecommunications service providers face under the Act is the requirement not to own or operate a transmission facility, such as fibre or copper network links that provide the physical paths for circuits between network termination points.

Operating a Transmission Facility

What it means to own a fibre or copper transmission link between two network termination points is relatively clear. What it means to operate such a link has been less clear.

The CRTC, which is charged with applying the Act, has never restricted non-Canadians from purchasing and assembling "wavelengths", or individual light beams, established inside fibre optic cables by Canadian carriers, in order to operate Ethernet, Frame Relay, Asynchronous Transfer Mode (ATM), or other data networks. This has allowed non-Canadians a relatively high degree of control over the transmission facilities they use in Canada.

The question before the CRTC in the proceeding commenced by Telecom Notice of Consultation CRTC 2010-165 (TNC 2010-165) was whether establishing wavelengths inside a fibre optic cable, or "lighting" fibre that is otherwise "dark" by connecting opto-electronic equipment to it, constitutes "operating" that cable. If it did not, then non-Canadians could extend their control over transmission facilities down to the fibre level by leasing dark fibre and lighting it, which would not constitute operating it.

The CRTC has dealt with the regulatory status of dark fibre in the past. In 1997, the CRTC required incumbents to provide access to dark fibre facilities on a tariffed basis, finding that the provisioning of dark fibre is a "telecommunications service".3 When TELUS argued, in 1998, that the CRTC does not have the authority to do so, the CRTC responded as follows:

The Commission disagrees with TCI/TCEI’s position that dark fibre is not a "telecommunications facility" because it is not used, or capable of being used for telecommunications. The Commission is also unable to agree that dark fibre is not a transmission facility as submitted by TCI/TCEI. The Commission considers in this regard that dark fibre is a system for the transmission of intelligence between network termination points.4

In 2007, the CRTC confirmed "that dark fibre is a ‘telecommunications facility’ within the meaning of the Act, and hence that the provision of dark fibre is the provision of a ‘telecommunications service’ within the meaning of the Act."5 However, the CRTC had never ruled on whether lighting dark fibre is "operating" a transmission facility. The proceeding initiated in TNC 2010-165 explored this question.

CRTC Proceeding

The proceeding that gave rise to TD 2010-930 arose from a dispute between the Canadian subsidiary of an American provider, AboveNet Communications Inc., and a Canadian carrier, TELUS Communications Company.

In the United States and in certain European markets, AboveNet advertises a variety of "high bandwidth connectivity solutions", such as the sale of wavelengths and of telecommunications services assembled using wavelengths, such as Ethernet data networks, and Internet Protocol services running over data networks. According to correspondence, AboveNet first approached TELUS in January 2008 to lease dark fibre, some of which AboveNet intended to resell as dark fibre, and some of which AboveNet intended to light by attaching opto-electronic equipment, in order to provide telecommunications services over it.

Eventually, AboveNet applied to register as a reseller with the CRTC, which is one of the classes of registration that would permit it to access leased dark fibre on a wholesale basis. In its November 2009 registration letter, AboveNet stated that it wished to do so in order to provide dark and lit fibre services. TELUS filed an objection to this application. TELUS argued that by attaching opto-electronic equipment to dark fibre to provide lit services, AboveNet would be operating as a telecommunications common carrier in Canada. Since it is not owned and controlled by Canadians, AboveNet is not eligible to act as a Canadian carrier.

Unusually, the companies continued to argue whether lighting dark fibre causes a company to "operate" that fibre, in the meaning of the Act, before the CRTC. After receiving a final written submission from AboveNet, in February 2010, the CRTC issued TNC 2010-165. Two Canadian incumbents (Bell Canada and TELUS) and three other Canadian providers (MTS Allstream, TekSavvy Solutions, and Yak Communications), five US service providers (AboveNet; Cogent, Level 3, and Verizon, acting as a coalition, and AT&T Global Services), and a US equipment manufacturer (NextG Networks) participated in the proceeding. Some other interested service providers were likely reluctant to participate, as doing so could have required them to identify their own activities whose regulatory status was now in doubt.

The Canadian competitors and U.S. providers argued that the opto-electronics by which dark fibre is lit are "exempt transmission apparatus" whose operation does not result in operating a transmission facility within the meaning of the Act. The Canadian incumbents took the opposite view, arguing that opto-electronics do not meet the definition of exempt transmission apparatus and, in fact, are used to provide a basic rather than an enhanced service, so that to light leased fibre is to operate it.

Implications

The CRTC’s Findings

In TD 2010-930, the Commission decided on three questions:

  • whether optical equipment is, itself, a transmission facility;
  • whether attaching optical equipment to dark fibre, and operating it, amounts to operating that fibre; and
  • whether the answers to these questions are affected by the Government of Canada’s 2006 Direction requiring the CRTC to "rely on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives" (the "Policy Direction").6

The CRTC answered the first question in the negative. The Act excludes so-called "exempt transmission apparatus" (ETA) from the set of transmission facilities which can only be operated by telecommunications common carriers. Some interveners considered that ETA are defined so as to mirror the fundamental distinction between basic services, which provide "a pure transmission capability over a communications path that is virtually transparent in terms of its interaction with subscriber supplied information", from enhanced services, which provide something more than a basic service, such as routing, switching and processing.7 The CRTC disagreed. It found that "the function of the optical equipment is to control the format of the transmission of the intelligence" and that, as such, opto-electronic equipment was ETA.

The CRTC answered the second question in the same way. Parties arguing that lighting leased dark fibre did not amount to operating it indicated that only the fibre’s owner can "finance, engineer, manage, modify, maintain, operate or transfer any interests in the transmission facility". Parties taking the opposite view argued that dark fibre is inert glass until it is lit, and that it is only by operating opto-electronic equipment that intelligence is transmitted through that glass. The Commission decided that operating the opto-electronic equipment to light the fibre was not operating the transmission facility:

Indeed, the Commission notes that several parties, submitted that the carrier that owns the leased dark fibre retains operational responsibility of the fibre to the extent that it remains responsible for access to, and the maintenance, repair, and replacement of, the fibre.8

The CRTC then considered whether its answer to these questions was affected by the Policy Direction. In doing so, it noted that a number of interveners had

shared the view that a ruling declaring resellers who light leased dark fibre to be telecommunications common carriers would be immediately disruptive to the Canadian telecommunications industry … by placing a number of large resellers in violation of the Act[.]9

The CRTC concluded that "a service provider that leases dark fibre to which it attached optical equipment in order to provide telecommunications services to the public is not on that basis a ‘telecommunications common carrier’ as defined in the Act", and confirmed that this finding is consistent with the Policy Direction.

Scope for Service Providers

Non-Canadians still cannot own the physical portion of the network link, such as dark fibre, or copper. However, the CRTC’s findings in TD 2010-930 indicate that the restrictions on their "operating" it are very limited. As a result, non-Canadians can exercise a high degree of control over the provision of end-to-end terrestrial telecommunications service in Canada, including the exercise of control over the carriage and routing of telecommunications traffic. To do so, they must contract for the use of fibre or copper owned by a qualified Canadian corporation. The lease can be a long-term one, as the Commission has confirmed when discussing IRU (Indefeasible Rights of Use) arrangements.10 But it must be a bona fide lease, and the non-Canadian’s ability to invest in the cable’s owner is limited by Canadian telecommunications law. In light of the CRTC’s statements in TD 2010-930, it may be that the cable’s lessee should not assume operational responsibility for access to or maintenance, repair, and replacement of the cable under the lease.

There remain a number of other significant restrictions on foreign investment in Canadian telecom markets. A major regulatory restriction, which the government has been reviewing,11 prohibits non-Canadians from holding spectrum licences for commercial wireless services in Canada, other than satellite services. Other restrictions have been developed by the CRTC. For example, non-Canadians may not act as Local Exchange Carriers (LECs)12 which access telephone numbers13 and establish certain types of direct interconnection.14 However, the Canadian Parliament has recently passed changes15 to the Telecommunications Act that added satellites to the list of transmission facilities that non-Canadians may own and operate in Canada, which already included satellite earth stations and international submarine cables. The Commission’s ruling in TD 2010-930 that non-Canadians can light leased fibre cables contributes to a warming climate for non-Canadians who wish to participate in Canadian telecommunications service markets.