The Canadian Radio-television and Telecommunications Commission (‘CRTC’, or ‘Commission’) issued Telecommunications Notice of Consultation CRTC 2009-30 on Friday, May 22. The notice requests public comments on whether it is appropriate in some instances for the Commission to review compliance with the Canadian ownership and control rules under section 16 of the Telecommunications Act by means of some form of public hearing process, rather than the confidential administrative process it has used since the foreign ownership rules were enacted in 1993.

The notice responds to requests by two incumbent Canadian communications companies, TELUS and Shaw Communications, who have requested a "transparent public process" to review compliance by a newly-licensed wireless carrier, Globalive Wireless Management Corp. (‘Globalive’). The two major investors in Globalive Wireless are Canadian-based AAL Holdings, which has controlled the Globalive Communications group of companies and their YAK brand for about a decade, and Orascom Telecom Holding SAE, a non-Canadian company listed on the Cairo and London Stock Exchanges which has wireless operations in Europe, Africa and Asia.

Review of Canadian Ownership and Control under the Telecommunications Act

Section 16 of the Telecommunications Act requires that most ‘facilities-based telecommunications carriers’ — those that own or operate the physical transmission infrastructure used to provide telecom services to the public for compensation — be Canadian-owned and controlled. The Act and the Canadian Telecommunications Common Carrier Ownership and Control Regulations (‘Ownership and Control Regulations’) set specific limits on the number of voting shares of a Canadian telecommunications carrier that must be held by Canadians (80% at the operating carrier level and 66 2/3% at the holding company level) and the percentage of the carrier’s board of directors that must be Canadians (80%). More significantly, the Act prescribes that a carrier corporation must not be "otherwise controlled by persons that are not Canadians". "Control" is defined to mean "control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly…"

The CRTC is the regulatory agency charged with administering the Telecommunications Act and ensuring compliance with s.16. There are currently over 200 Canadian telecommunications carriers registered with the Commission.

To date, the Commission has always conducted its compliance reviews on an ex parte basis with the carrier involved. In doing so, it reviews ownership and control-related documentation filed by Canadian carriers on a largely confidential basis. This confidential ex parte process is similar to the telecommunications ownership reviews conducted by other government agencies, such as Industry Canada, which ensures compliance with the Radiocommunication Act and with the Investment Canada Act, and, in the U.S., the inter-agency "Team Telecom" group that reviews compliance with the legislation administered by the Committee on Foreign Investment in the United States (‘CFIUS’).

Deja Review?

It is a peculiarity of Canadian law that telecommunications carriers that hold radio spectrum licenses are subject to two separate reviews to ensure compliance with virtually identical Canadian ownership and control rules. One review is conducted by Industry Canada, which issues spectrum licences, and the other by the CRTC. Under the Radiocommunication Regulations, Industry Canada ensures compliance with the Canadian ownership and control rules before it issues a spectrum licence. In addition, Industry Canada requires and reviews compliance on an ongoing basis.

In the Globalive case, Industry Canada apparently conducted a lengthy review to ensure that Globalive complied with these rules before it issued spectrum licences to the carrier in March of 2009. In August, 2008, early in that review process, TELUS had filed a formal request with Industry Canada that it hold a transparent and public review of the Canadian ownership and control of Globalive and the other successful bidders in the AWS Spectrum auction, and that TELUS be given the right to participate in such a review on the grounds that it had a "direct and substantial interest" in the review. Industry Canada denied that request and maintained its longstanding practice of conducting its compliance review on an ex parte and confidential basis. In issuing its licences to Globalive in March, Industry Canada was required to make a legal finding that it complied with the Canadian ownership and control rules – essentially the same rules that the CRTC will apply to conduct a second review.

Change of Control Proceedings under the Broadcasting Act

The ex parte process used by the CRTC, Industry Canada, Investment Canada and other agencies to review compliance with Canadian ownership rules is unlike the more public process followed by the CRTC to review certain changes of ownership in the broadcasting industry. The Broadcasting Act requires public hearings for certain types of changes of ownership and control, namely where it involves issuance of a new licence. Such a public hearing process was recently used, for example, to review the proposed acquisition of BCE Inc., which controlled certain broadcasting licensees, by Teachers Private Capital and three U.S. private equity funds. A public hearing was also held to review the acquisition of Alliance Atlantis Broadcasting by CanWest Media Works and a Goldman Sachs private equity affiliate.

At a public hearing on change of control in the broadcasting industry, the Commission would review the level of foreign ownership, if any, in a broadcasting licensee. However, more typically, it focuses on the ‘public benefits’ related to an acquisition that are required under the Commission’s broadcasting policies. Interested stakeholders, such as Canadian television producers and public interest interveners, typically make submissions at such public hearings on whether the benefits proposed in relation to the change of ownership are consistent with the policies set out in section 3 of the Broadcasting Act.

In contrast to the Broadcasting Act process, the Commission has never held public hearings or public reviews of ownership and control under the Telecommunications Act. That Act does not require hearings. Unlike the Broadcasting Act, it also does not require prior approval for a change of control or for the licensing of a new telecommunications business – the licensing function for wireless carriers is performed by Industry Canada. The CRTC’s role under the Telecommunications Act is a compliance monitoring role. Accordingly, telecom carriers normally file ownership and control-related documentation for review by the Commission annually, or more often, if required. The Commission has, in the past, investigated some carriers’ ownership arrangements further, but always on an ex parte basis. Changes are sometimes made to the ownership or control structure of a carrier, including, for example, the agreements among its investors or its financing arrangements, in order to satisfy the Commission of compliance with the Ownership and Control Regulations.

Will History Repeat Itself?

The Commission’s practice of conducting s. 16 compliance reviews on a confidential ex parte basis was last revisited in a decision issued in 1996. At that time, U.S.-based carrier AT&T Corp. and several Canadian companies had invested in a new entrant in the long distance telecommunications business, Unitel Communications Inc. Two incumbent Canadian carrier groups, Stentor (a consortium of the incumbent Canadian telephone companies of the time) and Call-Net Enterprises Inc. (now owned by Rogers Communications Inc.), filed applications relating to the process for reviewing Unitel’s compliance with the then-new Canadian ownership and control regulations. Call-Net’s initial application was denied, so it filed a review application requesting a public proceeding that it could participate in.

In a letter decision issued on October 16, 1996 (Re: Call-Net's Application to Review and Vary the Commission's Decision in the Matter of Call-Net's Right to Participate in the Investigation of Unitel's Ownership and Control), the Commission denied the review application. Rather, the Commission decided to conduct the Unitel compliance review on an ex parte basis without participation by Unitel’s competitors or other public participants. In making this decision, the Commission noted that it was under no legal obligation to hold a public proceeding and that its regulatory framework provides for certain applications to be considered on an ex parte basis. The Commission noted that s. 16 reviews raise issues of on-going compliance by a single carrier, and that since the coming into force of the Canadian ownership regime it has monitored such on-going compliance of carriers without third-party participation in a public process.

The Commission also noted that public proceedings before it have the potential of becoming elaborate and time-consuming. In the Unitel case, the Commission considered that "there is a considerable risk that competitors, who are not directly affected by the out-come of such a proceeding, would have every reason to seek to prolong the Commission's review of Unitel, and therefore benefit competitively from continued uncertainty hanging over Unitel." The Commission decided that it was capable of gathering an appropriate factual record in an ex parte process with the carrier under review and it made its decision on that basis.

The consultation launched on Friday by Telecom Notice of Consultation CRTC 2009-303 will revisit this 1996 decision, and determine whether the Commission will conduct some or all future telecommunications ownership and control reviews on a public rather than an ex parte basis.

Issues

The immediate issue raised by the consultation notice is whether it is appropriate in some instances for the Commission to conduct s.16 reviews on a public basis as opposed to a confidential basis. Parties are specifically asked to comment on the circumstances under which it would be appropriate to hold a multi-party public process to review a common carrier’s compliance with the Canadian ownership and control rules.

In approaching these issues, the parties, and ultimately the Commission, will have to address a number of other questions, such as:

  • Are there any circumstances under which a public review is warranted? If so, should public reviews apply to each of more than 200 telecom carriers registered with the Commission? If not, how will the Commission select specific carriers for public review treatment and excuse others? Will competitors, members of the public and others have a voice in deciding which carriers should undergo a public review process and which should not?
  • If the Commission decides to hold public reviews, what procedure will be followed? Will there be a public hearing? Will participants be entitled to pose interrogatories and have access to documents filed with the Commission?
  • Will participants in a public process have a right to see all confidential and proprietary information filed by the carrier with the Commission? If not, will they be in a position to submit meaningful comments on the control issues?
  • What are the implications of requiring such a proceeding for the pace of competitive entry? From the filing of applications until Commission decisions, the proceedings held to review the BCE and Alliance Atlantis transactions each took eight months. However, unlike in most Commission telecommunications proceedings, participants in these broadcasting proceedings were not allowed to pose interrogatories. Would a more expeditious process be used for s.16 public reviews, or a lengthier one that provided for more extensive participation by third parties?
  • What would happen if, following a public proceeding, the Commission issued a decision that was contrary to one already made by Industry Canada on the same issue, such as its decision that Globalive is in fact Canadian owned and controlled? Would conflicting decisions be subject to judicial review? Could the decision then be reviewed by the federal Cabinet, as is permitted under the Telecommunications Act?
  • Conversely, if the Commission issued a decision that Globalive is Canadian owned and controlled, could competitors avail themselves of their right under the Telecommunications Act to petition the federal Cabinet for a review? In either case, the Cabinet has a year to make a decision. What would be the impact of delays associated with such Cabinet reviews and judicial appeals?
  • What benefits would a public review process bring to the Commission’s decision-making, in terms of additional information, analysis, etc.? What costs would be incurred by the Commission and other stakeholders, in terms of legal, administrative and other costs, delay, etc.?
  • What will be the impact of a public review process on the attractiveness of Canadian telecommunications markets to foreign investors? Will non-Canadian investors that consider making a significant investment in a Canadian carrier be deterred from doing so by the prospect of a public review of the terms and conditions of their investments?  

Procedure

The Commission has established a reasonably expeditious schedule for public comments in response to Telecommunications Notice of Consultation CRTC 2009-303. The following deadlines have been established for the CRTC’s consultation:

  • Friday, May 29: Those that wish to participate in the proceeding (and/or receive copies of all submissions) must register with the Commission.
  • Monday, June 8, 2009: Comments responding to the Consultation Notice, including issues raised by the TELUS and Shaw letters and Globalive’s response, must be filed.
  • Monday, June 15, 2009: Any reply comments must be filed.
  • Thursday, July 30, 2009: The CRTC expects to issue its decision within 45 days after the record closes.