Executive Summary

The Telecommunications Policy Review Panel believes Canada's telecommunications policy and regulatory framework has generally served Canadians well. It has resulted in industry performance and service levels that rank among the best in the world. However, telecommunications technologies and markets today are in the midst of a profound transformation, and the Panel believes the policy and regulatory framework should change to reflect the new environment.

Telecommunications markets are being revolutionized by the rapid adoption of Internet Protocol (IP)-based networks, broadband and wireless technologies and by the convergence of previously distinct information and communications technologies (ICTs). Over the past two decades, most Canadian telecommunications markets have completed the transformation from monopoly to competition. At the same time, there has been an increasing recognition that ICTs have become essential "general purpose technologies" that contribute to many aspects of Canada's economic prosperity and social well-being.

The innovative ICT products and services coming onto the market can provide significant benefits to Canadian consumers and businesses. However, they are challenging the relevance of some elements of Canada's telecommunications policy and regulatory framework, and they pose new risks to the international competitiveness of the Canadian economy.

The Panel concludes that it is time for significant changes to Canada's current policy and regulatory approaches, some of which date back to the early part of the last century. The Panel's report proposes changes to permit the Canadian telecommunications industry to respond more rapidly to new technology and market developments. These proposals seek to accelerate the pace of deregulation of competitive telecommunications markets and will rely more on market forces to achieve Canada's economic goals. At the same time, the proposals will strengthen and better target regulatory approaches to achieve important social objectives and protect consumers' interests in the more competitive environment.

Telecommunications Policy Objectives and Regulation

The Panel believes the telecommunications policy objectives set out in the Telecommunications Act should be clarified and applied consistently by all agencies of the Government of Canada. Outdated and inconsistent objectives currently set out in the Act should be eliminated. The new objectives should focus on three broad goals:

• promoting affordable access to advanced telecommunications services in all regions of Canada, including urban, rural and remote areas
• enhancing the efficiency of Canadian telecommunications markets and the productivity of the Canadian economy
• enhancing the social well-being of Canadians and the inclusiveness of Canadian society by meeting the needs of the disabled, enhancing public safety and security, protecting personal privacy and limiting public nuisance through telecommunications networks.

In addition to clarifying the policy objectives, the Telecommunications Act should establish the following new guidelines for government and regulatory action:

• Market forces should be relied upon to the maximum extent feasible as the means of achieving Canada's telecommunications policy objectives.
• Regulatory and other government measures should be adopted only where market forces are unlikely to achieve a telecommunications policy objective within a reasonable time frame, and only where the costs of regulation do not outweigh the benefits.
• Regulatory and other government measures should be efficient and proportionate to their purpose and should only minimally interfere with the operation of market forces to meet the objectives.

All major government policies and regulatory measures should include a statement describing how they comply with these objectives and new guidelines.

Economic Regulation

Over the past 20 years, Canada's telecommunications markets have become increasingly competitive. In the large majority of today's telecommunications markets, competitive forces can be relied on to ensure that Canadians receive a wide range of services at prices and on conditions that are among the best in the world. Therefore, it is time to reverse the current presumption in the Telecommunications Act that all services should be regulated unless the Canadian Radio-television and Telecommunications Commission (CRTC) issues a forbearance order. This should be replaced with a legislative presumption that services will not be regulated except in specified circumstances designed to protect end-users or maintain competitive markets.

The report recommends comprehensive changes to the regulatory framework to accelerate the job of deregulating telecommunications markets, while retaining essential protections for end-users and for the maintenance of competitive markets. These changes include:

• removing the statutory requirement that all telecommunications services of telecommunications common carriers must be regulated unless the CRTC has forborne from regulation, and clearly limiting economic regulation to markets where a service provider has "significant market power"
• applying economic regulation symmetrically to all service providers, based on whether they have significant market power, regardless of the technology they use
• moving away from before-the-fact (ex ante) regulatory prescriptions to approaches that place greater reliance on after-the-fact (ex post) regulatory intervention, based on verified complaints of significant market problems
• phasing out economic regulation of all basic retail transmission services over a 12–18-month period, except in markets where there has been a specific ruling that significant market power continues to exist
• phasing out a range of current regulatory restrictions that affect the introduction and pricing of retail services, including pricing restrictions on discretionary retail services as well as restrictions on price differentiation and targeted competitive pricing
• when services remain subject to CRTC tariff regulation, replacing the current requirements for prior regulatory approval of tariffs with a provision that tariffs will automatically come into effect seven days after filing unless the CRTC suspends or disallows the tariff
• phasing out the current requirement that telecommunications service providers must make their "non-essential" facilities and services available to competitors on an "unbundled basis" at regulated rates, and replacing it with a system that creates better incentives to invest in the construction of new competitive telecommunications networks, with future wholesale arrangements for "non-essential" facilities and services based on negotiations between service providers rather than on regulatory prescription
• continuing the requirement that telecommunications service providers must make "essential" facilities and services available to competitors
• extending the regulatory rights of competitive local exchange carriers (CLECs) to include all local telecommunications resellers who agree to accept the related service obligations.

The report makes a number of other recommendations to reduce or eliminate the current level of CRTC economic regulation. However, such regulation would continue in markets where there is significant market power, such as in rural and remote Canadian markets. The report also recommends a new approach to control anti-competitive conduct in telecommunications markets on the basis of complaints made on an ex post basis, rather than by prescribing detailed ex ante restrictions governing the provision of services.

Telecommunications Competition Tribunal

After reviewing the strengths and weaknesses of the Canadian regulatory framework and comparing it with the frameworks of other member countries of the Organisation for Economic Co-operation and Development (OECD), the Panel has decided to recommend a new approach to dealing with competition issues in telecommunications markets. The Panel notes that the regulatory frameworks of most other OECD countries differ from Canada's in a number of respects:

• There is greater reliance on the application of specific rules developed in modern competition law. By contrast, the competition-related powers of the Canadian Telecommunications Act grant the regulator a broad discretion to define and prevent whatever it considers to be "unjust discrimination" or "undue preference" in relation to the provision of services or charging of rates by carriers.
• Competition law is applied to the telecommunications sector by means of legislation and regulatory authorities that are specifically designed for telecommunications, rather than by relying on general-purpose competition law and authorities.
• There is better coordination between telecommunications regulators and competition authorities and between the laws and policies they apply than has been the case in Canada.

Based on its analysis of the Canadian and international experience, the Panel recommends establishing a Telecommunications Competition Tribunal (TCT) as a transitional mechanism to expedite the change from the traditional Canadian approach to telecommunications regulation to the more competitive deregulated approach recommended in the report.

The proposed TCT should not be a new government institution, but rather a joint decision-making mechanism involving the CRTC and the Competition Bureau. It should combine the telecommunications sector expertise of the CRTC with the competition policy expertise of the Competition Bureau. It should facilitate the application of conventional competition policy to the specific circumstances of telecommunications service markets. The TCT should operate as a telecommunications sector-specific competition authority, assuming responsibility to apply industry-specific competition law based on the civil provisions of the Competition Act. It should also become the single authority responsible for telecommunications merger reviews. The Competition Bureau should retain responsibility for the application of criminal and misleading advertising provisions of the Competition Act.

The mandate of the TCT should include:

• conducting market analysis to determine when specific telecommunications markets should be deregulated on the grounds that no service providers continue to hold significant market power
• ruling on complaints that basic retail services are subject to significant market power and should therefore be subject to CRTC economic regulation
• dealing with complaints that anti-competitive practices have resulted or are likely to result in a significant lessening or prevention of competition, based on the application of the principles of competition law as adapted to the circumstances of telecommunications markets
• dealing with certain other issues related to the application of competition policy to telecommunications markets, including the definition of "essential facilities" that must be made available by service providers to competitors.

Unlike the Competition Bureau, the TCT should have timely decision-making powers and remedies as well as specific telecommunications market experience. Unlike the CRTC, it should not generally establish restrictions on telecommunications market behaviour on an ex ante basis. Its mandate should be to apply ex post remedies to punish or control anti-competitive conduct in cases where it determines, based on the evidence, that such conduct has resulted or is likely to result in a significant lessening or prevention of competition.

The proposed TCT should have:

• three members, including senior members of the CRTC and the Competition Bureau and a chair appointed by the federal Cabinet
• a small administrative staff, headed by an executive director
• professional staff to be assigned by the CRTC and the Commissioner of Competition, depending on the skills and experience required for its caseload
• power to retain expert advisors on a temporary basis, where the requisite expertise is not available from the CRTC or the Competition Bureau.

In order to prevent duplication of resources, the TCT should rely on the legal powers and administrative regime of the CRTC. Reliance on the staff and other resources of the CRTC and the Competition Bureau should significantly reduce its costs of operation, relative to the costs of establishing a new regulatory institution.

The proposed TCT should be a transitional mechanism. The Telecommunications Act should include a sunset provision terminating the TCT's functions at the end of five years, unless there continues to be significant market power in a substantial number of telecommunications markets at that time. The Panel proposes a general review of telecommunications policy after five years. At that time, it should be possible to further reduce the regulation of telecommunications markets.

Technical Regulation

Technical regulation should ensure safe and efficient use of telecommunications facilities and promote rapid deployment of advanced telecommunications and ICT networks throughout Canada. In this regard, the CRTC's regulatory powers should be clarified to ensure that it can deal effectively and efficiently to resolve certain types of access disputes that can delay expansion of telecommunications infrastructure across Canada. These powers should include clear legal authority to:

• resolve disputes over rates or conditions of access to poles, towers and other support structures of electrical distribution companies, after consultation with any provincial or territorial regulator that has dealt with such matters in the relevant jurisdiction
• require sharing of towers for radio transmission equipment and prohibit exclusive rooftop arrangements by wireless service providers, both for environmental reasons and efficient service deployment
• resolve disputes over access to in-building wiring, ducts, risers, equipment rooms and other necessary facilities in multi-tenant buildings as well as other spaces necessary to locate wireline or wireless networks to serve the public
• resolve disputes over access to public property such as rights-of-way.

Regulation of the radio spectrum will be an increasingly important determinant of the rate of expansion of advanced ICTs throughout Canada. Recognizing the increasing dynamism and innovation in wireless telecommunications markets, Canada's trading partners are moving away from the old prescriptive models of spectrum assignment. Instead, they are increasingly relying on market-based approaches to regulate the radio spectrum. In addition, the convergence of telecommunications services has caused most other OECD countries to combine spectrum regulation with other telecom regulatory functions in a single independent regulatory authority.

The Panel believes the increased convergence of wireless and wireline telecommunications and broadcasting technologies calls for a more consistent and unified regulatory approach. Such an approach could be facilitated by moving the current spectrum regulatory and licensing functions of the Minister of Industry to the CRTC. This move would be consistent with international practice. A recent OECD report recommends that Canada should adopt the same approach. This would increase the transparency of spectrum regulation and provide the CRTC with a better overview and insights into the wireless developments. It would also harmonize the policies and enhance the considerable regulatory expertise located in two regulatory institutions that currently function quite separately.

Prior to the transfer of spectrum regulation functions to the CRTC, Industry Canada should complete its current review of Canadian spectrum policy to:

• provide a clear policy mandate for the CRTC in exercising its new authority to regulate Canada's radio spectrum
• ensure consistency of the new policy with international best practices
• ensure Canada's ability to take leadership in the deployment of advanced wireless telecommunications services.

In developing the new spectrum policy, Industry Canada should take into account work completed as part of its ongoing spectrum policy framework review, and make certain to address the following areas:

• ensuring that adequate spectrum is available to meet demand for deployment of fixed and mobile broadband networks across Canada
• ensuring that licensed and licence-exempt spectrum is available for the Ubiquitous Canadian Access Network/Ubiquité Canad a or U-CAN broadband access program recommended in Chapter 8 of this report
• relying as much as possible on market-based approaches to spectrum management
• recovering and "refarming" previously assigned spectrum that is unused or underutilized to accommodate new services
• moving toward establishment of market-based exclusive spectrum rights (i.e. the ability to buy, sell, lease spectrum holdings) and the elimination of barriers to the development of secondary markets in spectrum
• reviewing both current licence fees to correct fee imbalances that may exist among service providers and the application of market-based pricing approaches for non-auctioned licences
• streamlining and standardizing licensing processes
• continuing the use of regulatory approaches to increase the opportunity for Canadians to have an expanded choice of service providers, such as spectrum caps and reservations for new market entrants.

Social Regulation

The Panel recognizes the growing importance of telecommunications services in promoting the social as well as economic welfare of Canadians. It therefore recommends that the policy objectives set out in the Telecommunications Act should clearly recognize key social objectives, namely:

• promoting affordable access to advanced telecommunications services in all regions of Canada, including urban, rural and remote areas
• meeting the needs of the disabled, enhancing public safety and security, protecting personal privacy and limiting public nuisance through telecommunications networks.

Implementation of the social objectives of telecommunications policy should recognize the realities of the more competitive telecommunications markets. Where social regulation is used to pursue fairness and other social objectives, it should be competitively neutral and minimize distortions of the competitive process. Social regulation may be funded from within the industry if the cost is small, but should be funded from general government funds if the cost is large. For example, the latter approach should be used for major social programs such as the Panel's proposed U-CAN program for expanding broadband access to all areas of Canada.

To reflect the changing marketplace, the Panel also recommends amending the Telecommunications Act to impose an explicit obligation on incumbent telephone companies to continue to provide basic telephone service. The CRTC should be empowered to define such service and approve applications to discontinue service. This obligation should apply in all areas where the companies have network infrastructure available.

To ensure adequate protection for consumers in the new, market-driven environment, the Panel also recommends the establishment of a new form of "ombuds" office, to be called the Telecommunications Consumer Agency (TCA). The TCA should have authority to resolve complaints from individual and small business retail customers of any telecommunications service provider. The report proposes that the TCA should operate as a self-funding, independent, industry-established agency, subject to guidelines set by the CRTC. As is the case in other countries with similar models, telecommunications service providers should all be required to be members in good standing of the TCA.

The Panel considers it important to ensure that Canadian consumers are not denied access to the wide range of new and innovative Internet services. The report notes that there is a growing concern that increasingly deregulated telecommunications service providers could, for strategic competitive reasons, decide to block or limit access to some Internet applications and content. Therefore the Panel recommends that the Telecommunications Act should confirm the right of Canadian consumers to access publicly available Internet applications and content by means of all public telecommunications networks that provide access to the Internet. This provision should:

• authorize the CRTC to administer and enforce these consumer access rights
• take into account any reasonable technical and efficiency constraints on providing such access
• be subject to legal constraints on access, such as those established in criminal, copyright and broadcasting laws.

The Panel believes telecommunications service providers in most cases have little or no incentive to interfere with customer access. However, the principle of open access to the Internet is sufficiently important that it justifies a new regulatory provision to ensure that it is maintained.

Information and Communications Technology Policy

ICTs will play an increasingly important role in the economic and social welfare of Canadians. There is a growing consensus among economists that ICT investment fosters productivity growth. This evidence should not be ignored by the Canadian government, since our national productivity growth is significantly lower than that of the U.S. There is a growing body of evidence that an important contributing factor to Canada's relatively weak productivity performance is our much lower level of ICT investment than that in the U.S.

Investing in ICTs by itself is no guarantee of higher productivity. The economic research suggests that productivity gains come through ICT investment when combined with investment in organizational transformation, including such areas as business process re-engineering, supply chain management, more efficient marketing and distribution practices, and workforce training. The economic evidence indicates that it is "smart adoption" of ICTs that is the essential precondition to increasing the productivity and competitiveness of the Canadian economy.

The Panel therefore recommends that the Prime Minister mandate the Minister of Industry to lead the development and implementation of a national ICT adoption strategy containing components aimed at:

• strengthening ICT adoption by all Canadian businesses, especially by Canada's small and medium-sized enterprises (SMEs)
• strengthening the linkages between ICT sector research and development (R&D) and the adoption of ICTs throughout Canada's economy and society
• enhancing the use of ICTs by governments to improve their efficiency and quality
• promoting ICT adoption skills development on a coordinated national basis
• developing security, confidence and trust in the online environment.

To increase the productivity of Canada's SME sector, the Panel recommends that the government should develop a tax credit to increase the rate of "smart adoption" of ICTs in this sector.

To support the development of these and other components of a national ICT adoption strategy, the report recommends:

• establishing a National ICT Adoption Centre within the federal government to conduct policy research and analysis on ICT adoption issues, to coordinate policies, programs and other measures aimed at promoting ICT adoption among federal government departments andagencies and with the provinces, and to be a lead advocate for the effective use of ICTs, particularly among SMEs
• establishing a blue ribbon National ICT Advisory Council, whose members would provide public and private sector leadership for the smart adoption of ICTs by Canadian governments, business and other organizations, as well as advice on measures to achieve the objectives of the nationalICT adoption strategy.

Connectivity: Completing the Job

As part of its national ICT adoption strategy, the Panel recommends that Canada should set a clear goal of remaining a global leader in the deployment of broadband networks in all regions of the country, including urban, rural and remote areas. The Canadian government should establish an objective of achieving ubiquitous broadband coverage no later than 2010. Ubiquitous coverage should be defined as the same level of coverage that Canada has traditionally achieved for wireline telephone service; that is, broadband network access should be available to over 98 percent of Canadian households.

Canadian policy and regulation should recognize that vigorous competition in our telecommunications markets will continue to be the main driving force in maintaining Canada's global leadership in providing broadband access. However, the goal of achieving ubiquitous broadband coverage by 2010 will not be achieved without some government action, particularly in high-cost rural and remote areas.

Therefore, a specific, targeted, new government-funded infrastructure program should be developed to complete the job of expanding broadband coverage in areas that are uneconomic for commercial service providers. The purpose of this program should be to fill in the gaps of broadband coverage, where the market is not likely to provide coverage in the near future. A new "Ubiquitous Canadian Access Network" (U-CAN) program should be the successor to the current Broadband for Rural and Northern Development (BRAND) pilot program and the National Satellite Initiative (NSI).

The U-CAN program, to be developed in consultation with provincial and territorial governments, community organizations and service providers, should provide limited subsidies to selected service providers to complete the job of providing broadband coverage in unserved areas.

The Panel recommends that, unlike BRAND, the proposed U-CAN program should run a series of least-cost subsidy auctions to select financially and technically qualified service providers able to complete the jobs of providing backhaul network capacity and local access networks to uneconomic areas. The auctions should be competitively neutral, and bidders should be invited to propose the most efficient and effective technologies available to meet regional requirements. The report sets out detailed recommendations for the operation of the U-CAN program.

Policy-making and Regulatory Institutions

A number of changes should be made to the structure and process of Canada's federal policy-making and regulatory institutions to bring them into line with better practices of other OECD countries and to facilitate implementation of the proposed new policy and regulatory framework. These changes include:

• drawing a clearer line between policy making and regulation, and improving the effectiveness of the institutions performing those functions
• enhancing Industry Canada's policy-making capabilities to provide more timely and in-depth advice to the Minister of Industry on legislation, policy directions and reviews of telecommunications and ICT policy, which should be conducted every five years, and establishing a policy research program to provide better Canadian research and data in support of informed policy making in the telecommunications and ICT sectors
• streamlining and increasing the professional capacity of the CRTC by:
  
  
  - reducing the number of commissioners from 13 to five members (at least in the telecommunications area)
  
  – compiling short lists of qualified candidates for CRTC positions, recruited through open nationalcompetitions based on professional experience and qualifications
  
  – increasing compensation for commissioners and selected expert telecommunications staff to market-based levels
• giving the CRTC clear authority and sufficient budget to retain expert consultants at market rates, where they are required to provide specialized expertise or to avoid regulatory delays due to heavy workload requirements
• transferring to the CRTC Industry Canada's remaining regulatory and licensing functions involving international submarine cables, satellite orbital slots and telecommunications equipment.

Other procedural reforms recommended in this report deal with:

• expediting the CRTC's decision-making process
• empowering the CRTC and the TCT to impose administrative monetary penalties to enforce telecommunications laws
• putting greater reliance on alternative dispute resolution by the CRTC
• making greater use of public notices and consultations on proposed policies and regulatory actions by Industry Canada and the CRTC
• removing licensing requirements for service providers that do not have significant market power and replacing them with simple registration requirements
• updating the CRTC's Telecommunications Rules of Procedure, and bringing them into line with the proposed new regulatory framework
• reviewing and rationalizing the structure of licence and regulatory fees charged by the CRTC and Industry Canada.

Implementation

The Panel suggests that the government should implement its recommendations in two phases:

• In the first phase, the government should issue policy statements endorsing the development of a national ICT adoption strategy as well as the implementation of a new regulatory framework, and take steps to reform the policy-making and regulatory institutions. In addition, it would use its powers under the Telecommunications Act to issue a policy direction to the CRTC to interpret the policy objectives of the Act in a manner that is broadly consistent with major reforms recommended in the Panel's report.
• During the second phase, recommendations requiring changes to existing legislation should be implemented.

Afterword

In an Afterword to this report, the Panel deals with an issue that was not part of its mandate but is inextricably related to it — the future evolution of Canadian broadcasting policy.

The Panel believes the same technological and market forces that drive the need for changes in telecommunications policy also generally apply to Canadian broadcasting policy. Prime among these are the widespread deployment of IP-based services on telecommunications, cable and wireless networks, and the resulting convergence of broadcast distribution markets with telecommunications markets. These trends call into question the sustainability of some of the current approaches to broadcasting policy and regulation and their impact on the future evolution of the telecommunications industry.

The Panel believes it is important to develop effective policies to promote the presence of Canadian content in the converging broadcasting and Internet spaces. Those policies should be designed to advance the development of advanced broadband networks by the cable industry as well as the traditional wireline and wireless telephone industries. The policies should recognize that all these industries are developing increasingly powerful and integrated broadband networks. These networks will all be able to deliver a wide range of content and applications, irrespective of their current classification as "broadcasting" content. Consumer demand will increasingly replace government regulation as the prime driver in the evolution of these advanced networks and of the content they provide. Canada's future broadcasting policies should recognize these technological and market trends. Canada should develop sustainable policy and regulatory approaches to ensure that its cultural and content production communities can take advantage of technological and market trends and not be undermined by them.

To this end, the Panel proposes a comprehensive review of Canada's broadcasting policy and regulatory framework. It proposes that this review should be conducted by an independent group of experts. One important goal of the review should be to develop a more consistent and competitively neutral regulatory approach to the rapidly converging broadcasting and telecommunications industries. The Afterword lists issues that the Panel feels should be addressed as part of this review.

The Afterword also deals with Canada's telecommunications foreign investment rules. The Panel concludes that liberalization of the restrictions on foreign investment in Canadian telecommunications common carriers would increase the competitiveness of the telecommunications industry, improve the productivity of Canadian telecommunications markets, and be generally more consistent with Canada's open trade and investment policies.

The Afterword notes that the investment restrictions have been maintained in large part due to concerns about the impacts on Canadian broadcasting policies. In particular, there have been concerns about the impacts on Canadian broadcasting policy of increased foreign investment in Canadian cable and satellite broadcast distribution undertakings (BDUs). The Panel notes other areas of significant concern about such liberalization, including impacts on Canadian head offices, employment of high-tech personnel in Canada and national security.

The Panel suggests that the proposed broadcasting policy review should resolve issues related to the separation of Canadian broadcasting "content" policy from policies for the "carriage" of telecommunications. Such a separation has been effected in telecommunications policies in the European Union and elsewhere. If implemented in Canada, such a separation would permit creation of symmetrical foreign investment rules for traditional telecommunications carriers as well as the BDUs that now operate in the same telecommunications markets.

Pending completion of this review, the Panel proposes a phased liberalization of restrictions on foreign investment in telecommunications service providers that are not subject to the Broadcasting Act.

The first phase should replace the currently inflexible restrictions on foreign investment with a "public interest" test to review new foreign investments in specific telecommunications markets. Such investments should require approval by the federal Cabinet under a new provision established in the Telecommunications Act to protect Canada's important strategic and security interests. In the first phase, it is proposed that investments in market entrants and telecommunications common carriers holding less than a 10-percent share of any relevant telecommunications market should be presumed to be in the public interest, unless there is evidence to the contrary. The second phase, involving further liberalization, should follow completion of the proposed broadcasting policy review.