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Th~ -1 Introd~ction of New TecL~10qy int? By or Te1ec?~unications c~~tition11_ 1 cooperatiort: ' the Case/of Satellite . communications 1 ~------~------~- , ////
/ ;/;' // // t , M.A.. Thesis McGi11 University •
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.' ' '* c: Barry, Chandler / CD Auqust 31, 1981
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COMPETITION OR COOPERATION IN , Il SATELLITE COMMUNICATIONS ) -
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ABSTRACT
, The domestic communications satellite system, ~ - Telesat Canada, introduced in Canada at the start of the 1970's, developed in a manner progressively favouringo cooperation with the established telecommunications common t carriers. The experience in the United States is cited to show that the refusal to introduce satellite technology in compet~tion with terrestrial communications in Canada appears to have contributed to less than full development of satellite potential at the cost of higher priees and less choice for communications users. The traditional reasons for denying competition in communications, natural monopoly and cream skimming, are examined, in the context df Telesat, and rejec.tèd.
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ABSTRAIT
Le systême domestique de communications par satellite, Telesat Canada, lancé au Canada au début des ann~es soixante-d~x a ét~ d~veloppê de maniêre a favoriser '" la coopération avec les entreprises de télêcommunications êtablies. L'exp~rience des Etats-Unis y est évoquée afin de démontrer que le refus de faciliter la concurrence entre les satellites et les installations terrestres au i
Canada, semble avoir attênuer le plein d~veloppement du fJ potentiel des satellites aux dépens de prix élevês et d'un i choix restreint ~our l~s clients. ILes motifs traditionnels ! l'appui dej, l'absence de concurrence dans le domaine des télêcommunications, soit le monopole et l'êcrémage, ont fait; l'objet d'un examen et sont rejetés dans le contexte de Telesat •
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TABLE OF CONTENTS ,< , J Page
l 1. 1. liNT'RODU~TION ., •••••••••••••••.••.••••••• r .· ...... ·.. 1. The Issue and the Organization of the Paper •••• l ,>
" , - 2. The Technologies of Intercity Tetecammunic~~ons 5
II. THE STRUCTURE AND BEHAVIOUR OF THE 'LONG DISTANCE \. TELECOMMUNICATIONS INDUSTRY IN CANADA ••• '••••••••••• 12 / / 1. 1. Th~ Operations of the Common Carriers •••••••••• 12 1 a) ,,,!l'he Carz:iers ...... 12 , 1 b) Transmission Faci1ities •••••••••••••••••••• 17 c) Services and Rates ...... 17 2. The Regulation of Long Distance communications 21" III. THE EXPERIENCE WITH COMMUNICATIONS SATELLITES' IN '11IE UNITED STATES .. ••.••' ••••••••••••• 0 •• 0 0 • ' •••• 0 •• 29 1. The Oevelopment of Competition in the United ( States Long Distance Telec~unication Market 29 2. Domestic Satellite System Operations in the Uni ted States ...... ~ ...... 33
a) RCA American Communications, Inc. • ••••••••• 36 . ( ! 1 b) The Western Un~on Telegraph Company •••••••• 39
Communications Satellite Corporation •.• ',' •• 40 ,: ~) , ! .. 1 . ' d) American Sa telli te Corporation •••••••• 10 ••• 41 !
e) Southern Pacifie Communications Company • 0 •• 43
f) Satel~i te Business Systems ••••• _ .••••••~ •• '0 . 44 1 ~ , 3. SummarV Competition in Satellite Comm\1J\ieations
in the Uni'hed States ••.•. o ••••• 0 •• 00 •••• o •••••• 45 • 1 t ~,- IV. TELES AT 'AND THE REFUSAL TO COMPETE WITH THE
TERRES TRIAL CARRIERS o ••• 0 •••' •••••••••• 0 • " ••• 0 ••••••• 50
1. Opérationa,l :Charaeteristics of Telesat •••••• ,••• 1 50
a) Owners and Office.rs o •••••• ' •••••••••••••• 0 ;. 50 (: b) Satellites ...... ,...... 1•••••••••• 51
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Earth S ta tioa...... f 52 r < ~~ se~V,~.ce Off~ •••• ~ ••••••• : •••.•.•••••• \\t sj
/ ù /l The Orig_inal Sè~J.,ce Aqrel!1llents ••••••• ' s~ , \ ;,\ 'ii)' Tel~S\t 1 s Proposed Tar,i: ss "57 Satellitf! Utiliza1;:~ •.••••. : ., <...... • ~ . , Profitability ... : ...... 58 '. 2. 'Early Action by TCTS to Remove Telesat as ~ . Competi tor'~ • '••• ~ ••••••••••••••••••••••••..• 1•••• 58 III 1 ~) Bac'kground to the Establishment of Telesat. 58
b) The Oraftinq of the Telesat Canada Act 61.
..~ 3. The Connecting Aqreement with TCTS and the Final 'Removal of Telesat. as a-Compl!titor. . •••••• 66. a) ,Background to the Connecting Aqreement, •••• ~"Z b) The Provisions of the Connecting Agreement. '71
i) Space and Earth Segment Ag~eements •••• 72~ ii) Financial Arrangements •••••••••••••••• 73" "'1 iii) System Comtnitments ••••••••••••.••••••• 7~ 1 1 iv) Provisions of' Appendix A •••••••• '•••••• 7~- 4. ~ summàry and Analysis of the Elimination of . Telesat as a Competitive Force in '1 Teleconununica tions ••. r •.••••••••••••••• '••••••• 74 Œb , , V. A COMPARISON OF SATELLITE SYSTEM PERFORMANCE: " COMPETITION VS COOPERATION ...•••••••.••••••••••••• 85 Natural Monopoly ...... 8'6
a) Economies of Scale' ...•••••• ~ ••••••• ~ •••••• 86
b) Economies of S~ope ...... 91
2 • Cream. Skimminq .•...... •. .' .••....•. ft ••••••••• 94
3. A Comparison of the U.S. and ~anadian Satellite Systems ~ Performance •••••.•• '•••.••••••.••••••• 91
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, Rates , , Piie , , .... ,. .. ,..... ~. ·· ... · · ...... ·· · · . ( _Service's ...... ,.\ ...... 100
1" i) ~ video ...•.... ., .. ~ ...... 101 • , ii) Voiee ...... ~...... 102 , • i1i) Data ... _\' . ~ ~ ...... •...... ~ 103 /,,' ~
c) \,Te'chno1ogical Developments.: .••..•' ..
'~ 'd) The Roie of Compei:ition ip Exp1aining -. Differences in the Canàdian -and U.S. . , Satellite systems' Performanqe ••...• 106. ~ i ' APPENDIX TO CHAPTER V THE VALIDITY OF TELESAT' S "EXPLANATION OF A COST ADVANTAGE TO U.S. SATELLITE FIRMS...... 109
VI. SUMMARY AND RECOMMENDATIONS ••••••••••' •••••• 118
BIBLIOGRAPHY •••.•••...•••••••••...••••• I{J. • • • • • • • 121
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f i "-"'-. \ (. *" 0 "" TABLES Page ~< .. "./ 1-1 Major Dimensions of Intelsat Satellites, " 1965-79 .....•...•...... • ta •••• •.••• Facing 8 11-1 Operatinq Revenues of the,Ten Largest • , J Telecommunications Carrie sand Telesat, C in Order of Size, 1969-78 : •••••••••••••• ~ •.••• 15
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1I-2 Long Distance Telephone Ra~es in Canada an~ b the United States,!1979 •• r...... 19 1I-3 Revenues and Market sharesl in the Canadian
Telecommunications Industry, 1976 ..•• 4 ••••••• 21, I1I-1 Representative U.S. Oomestic Tariffs, February 1975 ....•... 1•...... •...... 35 1- 1V-1 pro~~~çiMc;.>ntlrly Rate ,?ptions For Full.;, Per~od RF Channel Serv1ce .•.•••••••••...•••.• Facing.56 IV~elesat Satellite Capacity Utilization by RF Channel, 1973 .. 80 ...... 57 ( IV-3 Telesat Annual Net Earninqs & Return on Equity., 1973-80 ...... •... 5'S V-1 Monthly Rates, Full Period Space Segment Service, Telesat, Western Union, RCA'~ericom, Effective May 9, 1980 ••...•••. Facing 99
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fi' CHAPTER l IN'rRODUCTION
l. The Issue and the Organization of the paeer
Ca~ada and the United States have adoptèd different 1 - approaches to the introduction of satellite·technolonog~yr------~~- irito telecommunications. In the United States, satellite ftrms are_an important feature of a com~titive environment ,for the delivery of domestic long distance communications services' . Competition exists in an intra-modal form between satellite firms rand also between terrestrial carriers) and in an inter-modal forro between satellite firms and terrestrial carriers. In Canada, o~ly one firm, Telesat Canada, has been" given authority to operate a domestic communiCâtions sa telli te system, and this has been ca-rr1ë-Ci.- out in cooperation with the established (terrestrial) tele- • communications carriers. ( competitio:h;nt:::i:n~:e:h~:a:::e:a~sp~:;:di:~:::::~:~tory 1 role in what appears to be the superior performance of U.S~ ___ ------~------satellite companies compared to Telesat Canada. The performance criteria considered in the cornparison are of the type traditionally applied in industrial organization economics, .
that is, technological progressiveness, the choice of services, 1 "and the level of rates. Without considering other, possible criteria, the recommendation which is made at the conclusion of' the yaper i5, that serious consideration should be given 1 to encouraging Telesat to sever its links with the terrestrial
-~------carriers and compete with them in the delivery of domestic -----\-- u telecommunications services.
The remainder of the paper documents this case in the following manner: Chapter II provides background infor mation on the structure and behaviourqof the Canadian long distance communications market. Chapter III reviews the
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( recent history of increasing competition in U.5. long , , distance conununications and the experience with competing satellite conununication systems •. Chapter IV traces the ,history of Telesat and describes the nature of its restrictive marketing policies which are a feature of its cooperation with the ·,terrestrial telecommunications carriers. Chapter (.f V examines the merits of the arguments against permi tting Telesat to compete in the Canadian long haul te1ecommunications market and compares the performance of Telesat wi th the U. 5. satellite carriers in terms of the criteria mentioned earlier. i Chapter VI summarizes the main findings of the paper and \ presents recommendations. The bulk of this introductory chapter is a discussion of the technofogy of long distance telecommpnications and the perceived advantage' of satellite communications. Before presenting that information however, it would be useful to explain the issue of competition vs. cooperation in a little more detail. ( The 'j:.erm "competition" as employe:d throughout this , 1 pap~means rivalrous behaviour and does not refer to a 1 mar et stfucture. l IIco~peration" ~s the opposite of rivalry and m ans Joint action J,here the autonomy of the parties is lost in furtherance, of the collective behaviour. Leaving aside the question of'how a new process or technology lS created, the paper examines the relative merits of introducing
and diffusing the, fruits,...- of new technology in telecornmunicatlons by competition or cooperation,. The technology .under exarnination lS satellite telecommunicatio~ and the issue is whether inter modal èOrnpetition contributes'\:o a b~tter development of '-' satellite communications services, in terms of the performance criteria selected, than does coqperation amc;ng the satellite operations and the already existing telecommunications carriers.
Competition is the general system of economic organization in the non-regulated sector of th.~ Canadian economyc. Competition has strong public pOlicy support because
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'1/ i t is recognized as the hest method of ensuring industrial
effici,ency, encompassing' alloc'ative efficiency 1 x-efficiency and téchnological pro~ressiveness. Given the invention of a new product or process, comp~~~tiqn i~ relied upon for:'~
'rapid diffusion as independent enterprises seek markets 1 ~ ____W'ithout restraint, in pursuit of private profits. Where the press ure 0 f competition does not exist, however, a firm wi th
existing products 1. arid perhaps considerable investrnent in its ,production plant, will be reluctant to risk making its products redundant by applying a new ~nvention. It would .) prefer to retard the development of the new technoiogy unt~l, its existing investment in the oid. techrrology is amortized. This is the argument in favour of competition ., as a more effecti ve Itleans of introducing new ideas into the economic system than monopoly.
, The other side of ~he coin is that the~ are certain industries witl'). special characteristics that dictale that new processes and technologies be introduced in cooperati?h with the existing plant because of complementarities, in the industry structure. Competi tion is unacceptable• beca use i t , 1 interfers with intra-industry linkages. Telecontmunications is an' industry alleged to have the se attributes; a recent description of the telephone network by Northern Telecom details these characteristics:
"'rhe network' has been likened to a ",f" 'giant machine !J" enormously complex with its_inner workings spread over vast geographiEal territaries' and it has been suggested i t is 'probably the . siI\gle most complex machine that man hAs constructed and operated'. While remaiping. in conti'nuous operation, it has, over the years, grown and evalved throughaut the world wi th differ~nt generations of equip'" ment which range Ifrom 'turIJ of the century' • 1 to the most 'm
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unde; the circumstances described,above the design of the ( , network must he carefully planned; ehere can be no piecemea~ 3 approach apd hence new techn~logy must he introduced in 1} cooperation with,the e~tablished ope~ators.
~he attributes of'an industry favouring cooperation ~ ~ in the manner described may result in what is known as a natural mpnopoly. 'In the case of the t~leco~unications industry, it is argued that its communicat~ns services can be provided
author~ty. at least.cost under central , ' Competition in seqments-
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singl~ decision-makil].g ~pparatùs lead's to lower costs and the technical factors that tend to make decisions on the plant ievel interdependent".5 He advises that according to the telephonê companies the major advantages of a single decision'making centre are: "(1) Alternative routing and network management; (2) the interdependence of ~nvestment and capacity decisions; (3) integration and common standards; (4) , administrative and accounting procedures; (5) design; and , . 6 (·6) emergency services'."
Having identified the case in support of cooperation in the- teleconununications sector in terms of economies of , scale and "scope, nothing further will be said until the evidence is examined in Chapter V.
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j 2. The Technologies of Interci ty TeJ:ecemmunications ( The àrigina~ method of transmission :for long distance commun!cations was paired copper wires capable of carrying only one voice conversati6n. This was later augme~téd by the applicatioh of multiplexing equipment which allowed several simultaneous transmissions over one pair of wires and was known as a 'carrier system. The carrier systems were a v~.st impro~ent but still- limi ted the capaci ty of long distance telecommunicatj"ons. Microwave radio re1ay systems were deve10ped in the 1930' s'and introduced in Canada after World War II in response to increased demand for message service and the anticipation of the intércity transmission of television programmes. 7 Microwave ha s' been t" the dominant technology for long haul commûnications in 1. Canada since that time. 8 ~ b ~ t l l' A microwave system opera tes on the principal of f (~ trans~tting messages by radio waves between antennae located \ on tower~ 30 to 40 ,J.r..m _ apart where an unob~tructed view ,f exists betwéen the locations. At each tmter (repeater) the "1 -6- signal is received,, amplified and r~itted. MicrowaNe uses hi~h frequencies'where there is increased bandwidth and ther~fore more carrying capacity. Microwave spans frequency bands from about 2 to 13 gigthertz (GHz) an~ above. 4 and 6 GHz are the usual 'bands employed in Canada.
l' • >'1- __ Waverman' s description of the maJor elements of fixed cost in terrestrial microwave isolates the following: ! a) land and buildings, b) outside equipment, and c) inside equipment. 9 The first includes the station building, road to the station, and land. The second encompasses the tower, antennae and reflectors. The t~ird element is composed of 1 f the reception, amplification and transmission equipment in f 1 addition~to gener~tors, heaters and air conditioners. Recent 1 estimates of the cost 'of microwave relay stations are in the order of $250,000 for the total outlay' required.
Because fixed costs are so obviously dominant in microwave transmission, studies of economies scale have ( focused on the behaviour of investment costs for new microwave system~Waverman investigated 141 private systems which varied in histance from 15 to 2,~62 miles and in channel i ca~acity from 120 to 960 and concluded that microwave trans mission has' small economies of scale, estimated to be abou~ a 3 per cent drop in average investment costs, for a 10 per cent increase in output. 10
L The technology of microwave is such that point-to- \ point broadband transmission is provided relati vely cheaply for heavy traffic routes. Once the initial investment in establishing repeater station~ is~made, additional capac~ty can be added at comparatively low cost. Usually addftional l r antennae and reflectors can be added té the existing tower J , , . \ 1 } and the site preparation and access has alr~ady been performed. 1 l An extension to a system May requirt! a substantial inves'tment 1 .1 . t depending on the length of the proposed route and the terrain l:, whère it will be located. Since a microwave relay system'~' 1 ( is by its very nature point-to-point there must be a high -7- , volwne of ,tr.affic expected along the route if the investment costs of the system are to be absorbed sufficiently to present a low circuit route mile cost. Beig'ie estimates that the average total cost of u~ing' 'the maximum number of microwave channels i8 less 1 than one-quarter• that of using 11 only one.
Satellite transmission is ~oncéptually similar to terrestrial micrbwave except that there is only one radio repeat,er, the satellite, located at a fixed longitude about 36,000 km over the equater. From this position, about. one third of the surface of the earth is visible. The satellite receives very faint radio s'ignals transmitted from earth stations which it amplifies, translates in frequendy and retransmits back to
,the earth. In ord~r that the signal transmitted by the satellite does not interfere with the signal receive~ by the satellite, Q different frequency bands are used. Telesji t 1 S Anik A series
satellites, for example use the,4 GHz" band for the downlink' 1 and 6 GHz "for the uplink. These frequency bands are the ( same as used in terre'strial microwave. o The capacity of a satellite ta transmit messages 7 depends upon both the bandwidth "'ttvailable and the radiated power of the satellite. The ,power of the satellite is provided hy solar cells. The bigger the satellite, the more area to provide solar power. The standard unit of capacity in satellite.... and microwave transmission" is the RF (radio frequency) channel which provides in the' area of 960 ta 1800 voice pircuits depending on the nature of the system. ~ ,Ta, date communication satellites have had capacities of 12-24 - 12 RF channels per satellitê.
As with microwave systems, there are heavy initial investment costs with satellite communications. Bath the satellite and launch costs are in the order of $16-20 million, although the adyent of the Space Shuttle will approximately halve -the launch cost.l3 (
Since the introduction of the fi~st comrnu~ication satellite in 1965, Early Btrd, there has been a drarnatic Table 1-1 i , Major Dimefisions of Intelsat Satellites, 1965-79
\ Q Intelsat Intelsat Intelsat Intelsat ~ Intelsat Intelsat 1 II III IV IV-A V
Year of First Launch 1965 1967 1968 1971 1975 1979 t Height (Centimeters)· 59.6 67.3 < 104 528 590 1,570 Mass in- Orbit " \- (Rilograms) 3.8 86- 152 700 740 967 Launch Vehicle Thor-Delta Thor-Delta Thor-Delta Atlas-Centaur Atlas-Centaur Atlas-Centaur
Primary Electric Power (Watts) 40 75 120 400 500 1,200 . ;.
q> E~fèctive Bandwidth \i (Megahertz) 50 130 500 500 800 2,300 " Capàcity (Telephone ~jI>' Circuits) 240 240 1,200 ~ 4,000 6,000 12,000 Design Lifétime/ Years 1.5 , 3 5 7 ' 7 7 . ~ -Investment Coat Per Circuit Year $32,500 ~U.S) $11,400 $2,000 .' $1,200 $1,100 .. $800 (not including e"arth stations) Source: Burton 1. Edleson, "Global Satellite Communications", , -~ Scientific American, 236, No~ 2, February 1977,_ pp. 64-65 ..'l} '" ~
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~ '" -8- gecrease in the investment cost of satellites per c1rcuit-, ."" year. 'TapIe 1~1 demonstrates this phenomenon for the Intelsat satellites over the·period 1965-79.
~ It j...~difficul t to deal with the concept of economies of scale in a technology that is rapidly changing, Table 1-1 • 1represents cost figures based on full utilization of satellite capacity that reflects both economies of scale a~d technical change. However, one study carried out of the Intelsat system ovér. the period 1965-74 which attempted to compensate for technical progress estimated that each doubling of capacity inèreases the total costs of,a single- satellite 4 1 by a factor of 53 per cent. The ~tudy considered operating costs and research and development expenditures in addition ! to 1nves. tm ent cos t s •. 14
Satelli te investment and l'aunch costs are only one part of the total system cast. The remaining costs are \ accounted for by earth stations and, where applicable, cable or microwave links to the ultimate users. Earth station costs have also fallen,dramatically in the last few years • . For example, by mid-1979 receive-only earth ~tations in the United States cost about $10,000 (U.S.) cQmpared to half a million ta a million dollars (U.S.) for small stations in 1973-74.l~ Land based distribution ta and from the earth sta~ion i's 'required where the satellite system operates in the terrestrial microwave frequency band and the~e is likely , , to be interfere~ce. To avoid this problem earth stations t are located outside population centres where terrestrial i radio wave transmissions are concentrated. 1 \ The techno1ogy bf satellite transmission results in operating characteristics with certain advantages over
conven t 10na, l m1crowave. commun1ca. t'10n8. 16 ~n 0 b'V10US f ea t ure is that satellite transmission is distance and terrai~ f insensitive. That ~s, the distance between points doe~ not f ( a~fect the cost of satellite c~mmunication~,and the difficulty of terrain ls less a factor for satellites than microwave •
., ' " ",t l --- ._---,------, .. _- -"11. -JI-. The èost of micz::owave tra'nsmi~inCrea!l~B with distance because radio repeaters must be added ~t~certain i~t~rvals, and the collt of 'these rel;ay st~ti~ns increases over rugged terrain.
Another ,advantage innerent in satell.ite- technology lies in broadcastinq, or communications from point ~o Many points simultaneously. Satellite communications ca~ be carried out 'wherever the beam of the s~tellite. is seen. . . Microwave is inherently a point-to~point method of· communication and would require a vast network of transmission -links and sw!tching nodes to provide the equivalent capacity of a single
sat~lli te. 17 ;his _special advantage of sa telli tes is 1> particular1y important in television programme transmission which uses a large bandwidth.
A third advantage of ~atellite communications over microwave is with respect to wideband data applications. As new capacity a s~tell.ite system can employ digital transmission that increases'the efficiency o~ bandwidth utilization. Satelli te transmission also -does not require extensive switching and the associated deqradation of the signal'as
\ is the cape with microwave.
The fin~l advantaqe inherent in satellite technology is that satellite transmission capacity is movable. Whereas microwave links can only be emp10yed between particular, . points, satellite communications are potentially available over a wide range of points. This aqvantage has particular application in peak/off-peak situa~ions, for example where there are a number 0 f time zones.
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Footnotes to Chapter l
1 Chris~ppher'Green, Canadian Industrial Organization and Policy (Toronto: McGraw-Hill Ryerson, 1980j, pp. 39-40.
.... 2 Res~rictive Trade Practices Commission (RTPC) Hearing, "Bell-Northern, Il Submission on Behalf of, Northern Telecom Limited, July 17, 1981, pp. 23-24.
3 Ibid. p. 25.
'1 4 Economies of scope are discussed in Chapter~V.
5 Leonard Wa~erman, "The Regu1atio'n of Intercity Tele communications," in A1marin Phillips ed., Promoting Competition in, Regu1ated Markets (Washington: The Brookings Institution, 1975) p. 225.
6 ~. pp. 229-26. 7 There is a great disparity among the different kinds of telecommunications services with respect to the 1 frequency bandwidth required for transmission. Voice is usually selected as the standard unit of carrying capacity and video requires in the range of 960-1200 voice circuits for one television or RF (radio Frequency) ( channel. Telegrams on the other hand require only about 1/40,oooth of the capacity needed for a te1evision transmission (0.06 voice circuit). CompuTer communications are typical1y transmitted on what is known as wideband, , ! that is, up to 12 voice circuits bandwidth. Douglas G. Hartle, "The Regulation of Conununications in Canada," in Government Regulation (Toronto: Ontario Economie Council, 1978), pp. 138-40. ~ ~ 8 Another transmission medium, coaxial cable i8 used to a limited extent in intercity commQnications because it is not an economic alternative ta microwave or satellite. One recent application 16 This desc~iption is drawn from: Douglas G. Hartle, "Regulation of Communications"; Norman Abramson and Eugene R. Cacciarnani, Jr., "Satellites: Not Just a Big Cable in the Sky", IEEE Spectrum, September 1975, pp. 36-40; John R. Meyer et al., The Economies of Comp!tition in the Telecommunications Industry (Boston: Charles River Associates Incorporated, August 1979) 1 pp. 71, 208, 313. ,,1 17 A U.S. satellite operator reports that, for exarnple~ i "interconnecting l2-cities directly to each other in 1 a terrestrial network coùld ~equire 66 sep~rate 1andbased links. One satellite achieves this sarne direct linkage '~ j and more as w~l1." RTPC Hearinq, " Bell.-Ngrthern" , Exhibit T-1208. / , ( ~ 1" , , 1 -,~ &, t l ~ C_"- i ! ( l-----~,~"_·~·--- ...I------_\ -:.- -_. ------:------~-..,--- -12- CHAPTER II l ' v ( THE STRUCTURE AND BEHAVIOUR OF THE LONG DISTANCE TELECOMMUNICATIONS INDUSTRY IN CANADA i , The' supply of long distance conlmunication services "". ' in Canada'~ay be characterized as a regdlated monopoly by the telepbone cornpanies of voice services (i.e. message .toll ~ ~ service; MTS or widé area telephone service, WATS) , a regulated monopoly by CNCP Telecommunications of telegraph service (i.e. public message service, PMS) and a regulated duopoly between these two groups on the r~maininq services, . data and pri vate line services. This Chapter briefly highliqhts the structure and behaviour o'f the industry under the fOllowinq headings: 1. The Opera~ions. of the Common Carriers, 2. The Regulation of Long Distance Tele communications. 1. The Operations of thé Common Carriers Long distance communication services are supplied by a n~r of regional telephone administrations and three ~"" \ national telecommunications carriers: CNCP Telecommunications, l'elesat Cana'da and Teleglobe Canada. 1 1 - a) The Carriers • ~ , Teleglobe Canada, Montreal, Quebeo (Teleglobe) is ~ a federal Crown Corporation, est~blished in 1950, (as ~anadi~ Overseas Telecommunication Corporation) that provides overseas telecommunications services with a mixture of submarine 1 cables and satellites.2 I~s tr~nsmission facilities, with the exception of terminal points, are jointlY'owned'wit~'~ ---- foreiçn international carriers. In the case of satellites, Teleglobe is a foundinq member of INTELSAT, the International Telecommunications Satellite Organization. Teleqlobe's ~b b" ~'" \ ',. -13- "~ \ , '> network of ~ansmission fac~lities converges on three ( \ \ ~ international\ gateway centres in Montreal, Toronto and Vancouver; how~ver it operates as a carrier's ~arrier, offering its services to the public only through the dome~tic facilities of the telephone companies3 -and CNCP. 4 , ~ - ---- Telesat canada,' Ottawa, 'o.n:t-ari~~sat) was formed in 1969 and, began op~rationsr in 1973 as the monopoly . supplier- of CNCP Telecommunications, Toronto~ Ontario (CNCP) is, a partnership of the telecommunication divisions of r 1 Canadian Pacific Ltd. and Canadian National Railway. The i i partnership e~olved beginning after World War II. In 1961' 1 the Basic Microwave Agreement between the two companies j , ( estab1ished de facto joint operation of their respective i ! t,elecommunications- diviai,ons through co-ownership of their _ 1____ . ------; microwave facilities, a sharing------ofresponsibil±ty--for-thEf'J:r ~ ~ , construction and operation, and equalization of revenues -- -~--;------= and expenditures.S The formaI merger of the telecommunicatio~s divisiops under a single management was approved by 'the .. o l Canadian Radio-television and Telecommunications Commission 6 in-January, 1981. 9 i The 1ion's share of long distance communication' , services is supplied by the telephçne companies which have regional operating terri tories but are interconnected with one another. The telephone companies provide toll services aùtonomO~SlY within the~r own territori~s, by special arrangementwith adjacent telephone administrations, and nationally through the auspiêes~ot t~e TransCanada Telephone System, a pa;tnership of the major telephone cbmpaftie~JlQ_ ( each province. ~~ -----~----- 1 1 1 l , t , -14- In 197.9 there ,were approximately 223 telephone f companies in Canada but 98 per cent of the telephone éfctivity 7 was accounted for by only 14 systems. The major telephone t , companies in Canada, proceeding geographically west to east across theocountry are as follows: British Columbia Telephone Company Limited (B.C. Tel), Alberta Government Telephones ('AGT ) , edmonton telephones• 7a (edmonton tel), Saskatchewan Teleco~unications (Sask Tel), Manitoba Telephone System (Manitoba Tel), Bell Canada (Bel1),.Québec-Té1~phone (Québec-T~l), the New Brunswick Telephone company Lirnited (N. B. Tel), Mari'time Telegraph and Telephone Limited (MTT),. Island Telephone Company Limited (Island Tel), and Newfoundland Telephone Company timited (Nfld. Tel). The territory of each of these companies is a province with the fOllowing excePti~ edmonton tel provides telephone service in Edmonton, Alberta; Bell and its subsidiari~s cover aIl of Ontario, aIl of Quebec ~ except the territories of Qu~bec-T~l, and part of the Northwest Territories; Nfld. Tel shares Newfoundland with Terra Nova Tel Inc. ALI the major telephone companies are Canadian /' owned except B. C ~ Tel and Québec-Têl who are controlled by General Tel~hone and Electronics Corporation, Stamford, . J . Conn. Bell controls N.B. Tel and Nfld Tel and has a rninority position in MTT, which owns Island Tel. ~he prairie tele phone adrninstrations, AGT, Sask Tel, and Manitobl:! Tel,' are owned by their respective provincial governrnents, although edmonton tel is owned by the City of Edmonton. Bell and B.C. Tel are vertically integrated into the telecommunications equiprn~nt business .. Beil's subsidiary, Northern Telecom Lirnited, is the 1argest full 1ine supplier of teleconununïçations equipment in Canada. In the ar'ea of inter-city transmission.products, both Northern Telecom and _~c. Tël f s subsidiary., AF,;L Microtel Limi ted, produèe carrier cr systems and rnicrowave équipment but neither has any satellite - 8 system products. e i 1 1 •l' t ------~-, --~- ... ,. ~~ ... 1 ------/ i-- -.- -15- Table 11-1 shows the re1ativè size of the major ( te1ephone companies and CNCP in terms of total operating revenues for three year interva1s during the recent peri~d. Bell is by far the most dominant carrier, al though AGT and , Sa edmonton tel have made the most rapid growth. The ad~ition of Telesat shows that i ts revenues have been very small compared to the other carrier~. Table II-l Operating Revenues of the Ten Largest Te1econununications Carriers and Te1esat, in Order of Size, 1969-78 ~ Cœpan:L Total Operating Revenue ($" 000) 1969 1972 1975 1978 Be1l 842,090 1,125,416 1,665,870 0 2,497,430 B.C. Tel 158,044 227,765 360,687 550,974 A!lr 98,848 141,367 239, ~86 443,471 '" CN:P 90,875 116,054 171,949 234,687 ( Sask Tel 47,095 59,777 1:2,103 164,399 MIT 38,390 54,872 90,621 149,206 Mantaba l'el 48,478 64,933 91,274 148,178 N.B. Tel 35,332 49,594, 76,451 123,217 Qœbec-T~1 25,892 37,484 56,570 84,136 edtcnton tel 18,568 24,854 43,332 84,101 t ~ ------. r; ,f Te1esat 0 31,129 .31,745 " Source: , ~t ,of Camruni~ns, Financial Statistics /' on canadian Te1ec::x:mTturiication Cclmt>n carriers (ottayla: DeparbœIît of· Ccmnunica€d:ons, 1972) W. 56,135. Departrrent of Carnrunications, Financial Statistics, 1978, };P- 35,159. o Table I1-1 includes local service revenue. Local service revenue accounts for slight1y less than half of total operating revenues .for the major t~lephone firms, ~ ,except edmonton tel which is almost exclusively local. Among the majors, in 1972 MTS revenue as a perC~;~lqe of total J"': '1 -~ ----~--' -, ~- , ;------/).1,"'-\ -16- ~' , operating revenue ranged fr,om Bell,' slow of 41.3 per cent to AGT 1 s high of 65.6 per cent. In 1978 it varied from Bell's 10w of~'46.1 per cent to Sas1;t Tel's high of 66.1 per cent. 9 The TransCanada Telephone System (TCTS) .is an important feature of the long distabce telecommunicati?nç market in Canada. It was formed as a consortium of the major telephone companies in 1931 to' provide long distance l services across Canada. .O Its current,members a~~,: B.C. Tel, AGT", Sask Tel, Manitoba Tel, Bell, N.B. 'Tel, MTT, fsland Tel, Nf1d Tel, and Telesat. .) \ j 1 1 1 TCTS exists under the tenns of a Cannecting Agreement which a110~s the parties ta the Agreement to connect their ( respective systems and jointly furI}ish telecammunicatians services. The .Connecting Âgreement::;'is renewed periodica1ly ta incorporate new members or arrangments, mast recently, . 1 in January 197rTelesat became a memberi this arrangment ia . ~ discussed extensive1y in Chapter IV. 1 1. r A Board of Management 1 consisting of one reJr~sen tative of each member company, coordinates the practices of the members and approves such matters as market plans 1 technical facilities, construction plans and budgets. y Any ! matter caming before the Board requires unanimous agreement ., before adoption. The powers of TCTS do not extend to the r. construction and ownership of telecommunications plant which " is assigned ta the members. Revenues and expenses of the System are shared in accordance wi tq, a Revenue Settlement 1 12 Plan established by the Board of Management. , !. il.. J r ( ? • ,- ~ - ..... -..... - \ -17- ( o b) Transmission Facilities The transmission facilities of the carriers in the .to1l mar.ket. consist of Telesat's satellite system13 and separate transcontinental'microwave networks operated by TCTS and CNCP. Bell a1so opera tes a coaxial cable system betw~n Toronto, Montreal and Ottawa which forms part of the TCTS network. The transcontinental miçrowave network of TCTS f first'became operational in 195B. Since that time new routes have been lt to bypass citi~s ~~d spur rines hâve been 1 added connect outlying centres. This additional construction , in effect, resulted in a parallel microwave system across 14 ' \ -the country. The present heavy route§ network consists of \,~ mul tiple 12 RF channel analogue microwave links operating in the 4 GHz band. Each RF channel has a capacity of 1200 voice "15 ' circuits. In 1975 Bell added the coaxial c~le network fi 'mentioned above. This provides transmission through l~ tubes, with each coaxial tube pair carrying 4032 voi'ce circuits. lG As it was estimated that the 4 GlLz analogue system 'would te 'at or near capacity by the late 1970's and early 1980's, an 8 GHZ' digital microwave.. system was added to the existing 7 microwave towers between Toronto and Calgary. 1 " This digital ,J,. system has a capacity of 12 RF channels with 1344 voice circuits ~r RF channel. lB , ~NCP's ~ansC~nada microwave system was, completed in 1964 and has been extendêd in subSéquent years.~9 It ia bett~yed te have simi1ar capacity on the heavy route po~tions as! the TCTS system. " . i1 c) Services, and RateS" ! o As' stated at the outset the te1ephone companies and CNCP s~ply ~TS) have monopo1ies in the of M'l'S (and and PMS \ ;;~ " -18- respectively. The privilege of holding these monopolies has <' .,2 been counter balanced by the requirement that they provide universal service. That is, there, is an o~li9atio~ to serve anyone seeking service in their-entire operating area irrespective of location, at prices that are related to the distance between points regardless of the density of traffic. rhis universality is achieved in part by averaging the costs of monopoly services over the entire subscriber f 20 . population. - 1 1 l r An important characteristic of the telephone companiés is that their ~nopoly extends over public telephone service, covering both MTS and local service. The telephone companies as~ert that one~ their obligations which has evplvèd over ... . the years is the provision of residential local telephone "" "- service at low prices2l with'the priees for toll services 22 set high enough to assure total costs are covered. The whole question of tHe relationship'" between revenues and costs °for par~cular communications services is a contentious issue in Canada but one• regulatory authority,n the·Canadian Radio- television and Teiecommunications'Commi~sion, has made-the fOllowing preliminary findings:2~ a) that most local telephone exchange facilities are ~ common plant used by bo~h local and toll services, b) Bell~s local service revenues -~o not coyer the cost of the common plant and a substantiaL·contribution :' is. made by its toll services, particularly MTS, and finally < that: tt ••• the particular levels of contribution which local service and inter-exchange service should respectively make is a matter which has substantial implications for the relativ~ levels of local and long distance rates, and this judgment shoulft in the en~be madè by regulators and not~by the companies.involved. n24 j To place MTS rates in perspective, Table II-2 1 compares the TCTS rates with those offered in the United 1 States. It is evident that the Canadian rates are generally ( higher than the U.S. rates at aIl distances. Not immediately 0> .. -19- apparent from the comparison is that the u.s. rate reaches (, a plateau at about 700 miles (1120 km) but this occurs in Canada only after 1000 miles (1600 km). On distances or 1000 m~les C1600 km) or more the Canadian rate is greater than 128 per cent of its U.S counterpart. 25 The Departrnent of communications comm nted that: "One could spe~ulate without too much risk that a or reason for the U.S. rates being lower is the degree of competition which exists in the marketplace. n26 , . The rate differentials may,also be due in part to more calls being made on average in the United States because of generally, higher po~ulation densities. A further explanation may be different philosophies with respect to the relationship between toll and local rates. Table 11-2 Long Distance Telephone Rates in Canada and the United States, 1979 (day".,3 min., station to station, 000) Approx. Distance Canada United States (miles) 25 (40 km) $ .73- .78(Can) ~- .14(U.5.) 75 (120 km) 1. 09-1. 32 ~1.04 200 (320 km) 1. 39-192 .94-1.47 400 (640 km) 1.59 1.47 700 (1120 km) 2.28 1.18 1000 (1'000 km) 2.70 1.18 Source: S~e Footnote 25 T,he non-monopoly services that are offered by the telephone companies and CNCP (often called competitive services) do not always operate on a universal bas.irs with the associated , pr1ce.' averag1ng.. 27 Ilf) 8 CNCP •.s maJor serV1ce. 2 1S. T e 1 ex, Wh' 1C h 1S . a p 001 1C. switched network permitting Telex subscribers to exchange ... ~ messages with each other using teleprinte~ terminaIs. CNCP • - • 1 introduced Telex in 1956 and TCTS introduced a comparablè service,TWX,in 1962.29. Telex replaced PHS as its prime • ( message/record offering following the telegraph's decline in pop'ularity after World War II. ' \ The rest of the competitive services offered by ~ CNCP and thé tel'ephone companies consist of a variety of data -20- and private line services. CNCP "s Broadband Exchanqe Service, for example, Acconunodate's computers, business machines, teleprinters and facsimile terminaIs, in addition to private .. '30 ' line voice transm~SS10ns. The private line designation means conununication links for the subscriber's exclusive se that is not part of the public telephone system. CNCP's • 'ntroduction of Broadband in 1967 was met In the are a of pure da ta conununications examples of services are Infoswitch offered by CNCP and Datapac from & TCTS, both of which are packet switching networks. There are a number of other services available from TCTS and CNCP . • The telephone companie~ control of local distribution 'facilities inhibited CNCP's ability to compete in the supply of these competitive services because they would only provide dedicated links between a customer' s premises and CNCP ',s central office, whereas the telephone companies' own çustomers could access their networks directlY. As discussed in the section on regulation below CNCP has subsequently obtained " this syst~m interconnection. Table 11-3 shows the only publicly available breakdown of revenues' and market shares in data, voice and ,- video~for Bell, CNCP and aIl th~ telephone companies in Canada. Th~ figures are for both lonq-di'stance aJld local revenues, but even if we assume that aIl of CNCP ',s services are toll 'an9 50 pèr cent of the revenues of the' telephone companies are derived from long distance services, the dispar~ty in market shares between the telephone companies and CNCP is net significantly altered: CNCP's share becomes 10.3 pe~ cent GQmpare4 to 89.7 per cent for the telephone companies. ( -21- ( . Under the h~ing Computer Communications wou1d be inc1uded services SUfh as Infoswitch and Datapac. Message/ Record·is 1arge1y Telex and TWX and accounts for CNCP's large market share. A careful examination of Table 1I-3 leads to th~ conclusion that MTS is the dominan~ toll service. This ia corroborated by information from another ~ource that MTS revenues accounted for sorne 86 per cent of total TCTS originated r~venues in 1978. 32 --- Table II-3 Revenues and Market Shares in the Canadian ~ Telecommunications Industry, 1976 (millions of dollars) Video other Total Cœputer Message/ Private Public CCIlmmi-, Record L:i.nè Tele-. cations '"Voioe pOOne • 1 CN:P RewIl1,.'- ,$ 1~ .. 7 $139.3 $ 8.5 $ 24.4 $ 3.5 $~ $1192.4 Bell Canada 'f1 ReVenue 79.6 83.6 1674.0 11.3 46.0 1903.9 1 AU Te1cos !, ",,\4 ; Revenue 132~7 l .1 113.0 3004.9 21.9 74.0 3363.0 , Telc;:os &' . c::N:P Revenue 149.4 156.~ 121.5 3029.3 25.4 74.01' 3556.0 CN:P Share li.2% 89.1% 7.0% -0.8% 13.8% -0-% 5.4% Telex> Shàre 88.8 10.9 93.0 99.2 86.2 100.0 ~4.6 Sow:œ: am: , "c:N:P Tel.eo::m'mlnications: Interoonnection w.i. th i Beli Canada," Telecx::rn Decision 79-11, May 11, 1979, p. 282. l 2. The Re ulation of Lo~ Distance CommunicationS cc, . ,------v 1 The responsibili!'y'for ti!ec:regulaUon of t~l~-~ communi~ations in. Canada i~:dtv.i~ed'between the federal ~ governmènt and the provinçial governments. The federai agency, the Canadian Ra4io-television and Telecommunications , , Commission (CRTC), exercises authority for federally ( i~corporated companies, while provincial boa~ds or cab~net committees supervise their telephone companies. A1though the legal posi~ion'of the federal government ia strong with .' -22- , ' 33 ( respect to its jurisdiction in these cmatters, it has not ch~llenged the.authority of the provinces. The provinces, onfhe other hand, have been quite willing to question the jurisdiction of the federalgovernment and this has been 'a topic at a number of meetings_ of provincial communications ministers. The' CRTC regulates Bell, B.Ç. Tel, CNCP, Telesat and Canadian National's public telephon~ companies. Prior ta the proclamat)lon of the CRTC Act on April l, 1976 the Telecommunications Committee of the Canadian Transport Commission exercised authority over the federally incorporated telecommunication carriers. The basic j~risdiction of the CRTC derives from the Railway Act where under sections 32~ and 321 the Commission is required ta ensure"that all rates or aharges' are just and 1 reasonab1e and that the carriers under its jurisdiction do not discriminate unjustly in respect of their rates, services 1 or facilities. The Railway'Act aiso obliges the CRTC to , f approve any agreements entered into by c~rriers with ,regard 1 ta' the interchange of traffic or limitation of liability • 1 • This latter authority i8 of direct relevance to the connecting f , agre~ment entered into by Telesat with TCTS and is contained' , , " in sectipn 320(11) of the Railway Act. l, ~ " t " Until recently there was no regulato~y overview on #' 1 TCTS rates and revenue séttlement procedures because no one authority had c1ear jurisdiction. However, the issu~ of 'the impact of TCTS procedures and rates on ,the federaIly·-t"egulated carriers confronted the CRTC on. severa! occasions. In April , J and May 1980 the CRTC held,a public hearing into TCTS rates, .' practices and procedures and on July 7, 1981,. issued a Decision d~recting the federally regulated carr~ers on a number of \ matters with respect to the TCTS' Re,venue Settlement Plan and ( their proposed tariffs for facilities and serv\ces furnished on a Cana d a-w.l'd e b"as~s. 34 J -23":; The federal Departmant of Communications exercises ( regulatory authority with respect to telecommunications insofar as it has the responsibility for the management of the radio frequency spectrum. in Canada. The Department al10ca tes frequencies for different communications services including those furnished by satellite and microwave by issuing radio station licenses, and carries out a variety of other regulatory functions such as developing standards and specifications for radio wave users. 35 The technical expertise of the Department also extends into, the regulation of telecommunications where the f l' 1 Department develops standards for equipment which may be 1 attachéd to the te1ephone network. For example, the Depax:trnent :reached an agreement with the federally regulated carriers to allow the 'attachment of certain devices by the c~stomer, such as telephone answering equipment and recording machines, without paying for protective,couplers to the telephone companies on a re~tal basis. 36 More recent1y the Department of Comm~ications has begun issuing. technical standards for ~ both non-network and network addressing terminal equipment that may be applied by the CRTC in its terminal attachment rulings. <> In the 1ast few years the CRTC has becomè a focus for change ,in the structure of the long distanç:e telecommun ications industry. Four of its recent decisions have been support ive to the introduction of competition in the supp~y of te1ecommunications services'. The most important is its ru1ings in the Te1esat portion of its Decision pn TCTS, /- issued July 7, 1981. 37 These portend an increased abi1ity/ for Telesat to compete in the long d~ance communications business. The specifie rulings are referred to in Chapter IV and will not be deal t wi th here. ( j .,..) -24- (' i Next in order of importance is Telecom Decision CRTC 79-11, issued May ~7, 1979, which ordered Bell to supply network interconnect'ion to CNCP so it could have direct access to its customers in the area of data and private 1ine services. The disadvantage suffered by CNCP without access to local distribution facilities has been rèferred to ear1ier in this Chapter. ' The effect of the Decision was to enhance competition in the supplY of the selected services. In coming to its Decision the Commission assured itself 'that the system interconnection sought would have a negligible effect on ) Bell' s revenues and no etOsial of i ts MTS monopoly. The 'findings of the Commission in this matter are referred to aga in in Chapter V. The remaln~ng two D~lsions, Challenge and Colins, have no direct impact on competition in the supply of long haul communications 'services but they are part of the t~end . to allow system interconnection and thereby permit c?mpeti tion wi th telephone administrations. \ The Challenge case arose as a resu1 t of Bell .,' .. introdpcing an "automatic mobile telephone service in April 1917 which allowed the user to dial directly into the Bell , , telep~one network from a mobile telephone that could not be purchased but had. to be leased from Bell. Challenge - Communications Ltd. applied to the CRTC on September 26, 1977 for relief from the provisions of Bell' s service that gave it an undue or unreasonable preference regarding the supply of its mobile telephone equipment. On December 23, 1977 the CRTC ruled that Bell must provide for customer-owned and ~ maintained equipment to be used throughout the mobile tele phone service wi th equal access to the public ,telephone network. 38 Bell' s appeals to the Federal and Supreme Courts of Canada were turned down. A fundamental principle 'laid down as a result of this rUling was that the unjust discrimin ation or undue preference mentioned in section 321 (~) of the -25- i Railway Act applies to ~elils ?ompetitors as weIl as, to Bell's ,various classes of subscribers. 'The Colins decision~ copcern interconnection of io COnullQn carriers to Bell' s network. The radio common a1 rriers ~re firms seek~ng to Piovide paging service that could be achieved by direct dial laccess through the Bell network. The first decision established that Beills refusaI 1 to supply direct access was unjus~ly discriminatory contrary 39 to section 321 (2) of the Railwa ct. Subsequent decisions established the tariffs te be cha ged by Bell to the radio / common carriers so that they woulf not frustrate the com- j • 1 petitive entry. 40, i 1 • 1 i The final regulatory det1ision with implications for greater competition in the provis on of long dis~ance tele- ._," communica~ions services, Air Page 1 Communications, is important because it is the first decision by il provincial authority ( with respect to system interconne~tion. On May Il, 1981 . the Board of Commissioners of Public ,Utilities for the , Province of Nova Scotia ruled t:h~~ MTT must afford inter- .. connection to Ai.r Page communicat~ons L1t:nited in order that .. its ability to compete with MTT i~ the supply of voice paging service would be enhanced ~y allowing i ta customers • 1 direct dial' access. 41 \ 1 l- I Î } ," . ,; f, 1 , ,• t 1 (- f ~ 'f . , r \ • • -26- Footnotes to Chaeter II 1 The cable television companies have constructed two microwave systems.in Ontario and have aspirations to become national carriers, but are not yet a factor. See Bell Canada, "A Review of Certain Aspects of the 'DOC Microwave Radio Relay Licensing POlicy Related to Interci ty Deli very of SignaIs for Use by Broadcasting Undertakings. n Submission to the Federal Departmé'nt of Communications, February 1981, pp. 14-16. 2 With the principal exception of te1econununic,ations services between"Canada and the United States, which are provided through the integrated North American ~rid" aIl telecommunipations services between Canada and the rest of the world ,are provided by Teleglobe., 3 That is, the TransCanada Teléphone System. 4 The description of Teleglobe' s Clperations is based on Rest.rictive Trade Practices Commission (RTPC) Hearing, ! ~Bell-Northernll, Exhibit T-462. 1 5 CRTC, "CNCP Telecommunications Interconnection with Bell Canada," Telecom Decision 79-11, May 17, 1979, p. 9. 1 6 CRTC, "CNCP Telecommunications - Partnership Agreement and General Rate Increase" l" Telecom Decision 81-2, January 14, 1981. 1 1 J 7 Statistics Canada, Telephone Statistics Monograph 56-203 l (Ottawa: Department of Supp1y & Services, 1979), p. 7. 7a The use of lower case is part of edmonton tel' s corporate style. S - Extensive information on the nature of Bell and B.C. Tel' s vertical information is found in RTPC Heaxing, " Be1l"'Northern Il ( Argument of the Director of Investigation and Research, Combines Investigation Act, July 17, 1981. Sa Over the perlod 1972-78 total operatin~ revenues of aU the telephohe companies and t,he national telecornmunications carriers together grew at an average compound rate of 16 per cent annual1y. Department of Communications, Financial Statistics on Canadian Telee 'unication Cornmon Carners Ottawà: Department of Conunun cations, 1978), pp. 35,159. 9 Department of Communicatio~s, Financiàl Statistics on Canadian Telecommunication Common Carriers (Ottawa: Department of Communications, 1972), pp. 24-25. Departme'nt of Communiqations, FinaI)cial Statistics 1978, pp. 116.:.17. """ :>CI<' /'-~;:... ( > • -27- 10 CRTC, "Telesat Canada, Proposed Agreement with Trans Canada Telephone System," Telecom Decision,77-lQ, August 24, 1977, p. 16. Il E.B. Ogle, Long Distance Please (Toronto: Collins Publishers, 1979), pp. 274-75. 12 CRTC, Telecom Decision 77-10, pp. 16-17. 13 Details on Telesat's system are covered in Chapter IV. .. E·.B. ogle, Long Distance, p. 216. 15 RTPC Hearing, "Bell-Northern", Transcript Volume 180, p. 29226. -16 R.C. Terreault', "Telco Finds Itself Living in a Digital World Today," Telephony,. July 7,1980, p. 33 • 17 Norman A. McLeod et al., "Planning Bell Canada's Integrated Digital Network," Telephony, July 17, 1978, p. 29 ~ \ /' '18 W.H. Rodger et al., "Long-hau1 Digital Radio Systems Passes Test With Flying Co1ours," Te1ephony, May 18, 1981, p. 46. ( 19 CRTC, TelecomoDecision 79-11, p. 9. 20 ~. pp. 223, 226-27. 21 See for example the statement of a "Bell officer that: "The principles under which use:r:s have been cha:r:ged for service have been a key factor in the'deve1opment of telecommunications in Canada. Cniversal service can be achieved only if that service is priced at rates that the maximum number of users can afford. Over the years, a rating structure has evo1ved, through the combined efforts of tQe telephone companies and thé regulators, ,which per.mits the provision pf basic làcal telephone service a't a price as law as reasonably possible." Quoted in ~. p. 211. ~ / 22 Bel1 l s argument in this issue is summarized in ibid. pp. 213-22. , . 23 Pending the completion of its Cost Inquiry. 24 ~. p. 222. 25 Notes foX" an Address by Jean T. 'Fournier, Senior Assistant Deputy Minis~er, Policy, Department of Communications, to ( the Conference on ,"Telecommunications in Canada; Economie Analysis of an Industry" Ecole des Hautes Etudes Commerciales, Montreal, March 6, 1981, Appendix 2, p. 1 1 1 -28- 26 ~. p. 2. 27 CRTC, Telecom Decision 79-11, p. 227. 28 Telex and the other competitive services offered by CNCP and TCTS are not necessarily long distance service, but they may be considered as Isuch without great risk of inaccuracy. 29 ~. p. 9. 30 CRTC, Telecom Decision 79-11, p. 15. 31 RTPC Hearing, "Be11-Northern, ft Argument of the Director, p. 52. 32 CRTC, "TCTS-Telesat, n Telecom Decisiou 81-13, Ju1y 7, , 1981, p. 60. 33 Douglas G. Hartle, "Thé Regulation of Conununications in Canada," Government Requ1ation (Toronto: Ontario Economi.c Counci1, 1978), pp. 151-56. 34 CRTC, Telecom Decision 81-13. 35 Department of Communications, ADnual Report 1977-78 (Ottawa: Minister' of Supply and services, 1978), p. 8 . • 36 Department of commtll\'ications, Annual Report 1975-76 (Ottawa: Minister of Supply'and Services, 1976),' p. 9. 37 aRTC, Telecom Decision 81-13. ll 38 CRTC, IIChallenge Communications Ltd. vs. Bell r CRTC / Decision 77-16, December 23, 1977. 39 CRTC, "Colins Inc. et al. v. Bell Canada," Telecom , Decision 79-12, June 7, 1979. 40 CRTC, "Colins Inc •. ~tal. v. Bell Canada," Telecom Decision 79-14, July 26, 1979. CRTC, "Colins Inc. _et al. v. Bell Canada: Final Rates, Il Telacom Decision 80-16, August 29, 1980. 41 Province of Nova Scotia, Board of Commissioners of Public Utilities, "In the Matter' of the Public utilities Act and In the Matter of the Application of Air-Page Communications Limited for an Order to Connect the . Applicant' s Radio paging Network to Maritime Telegraph \. "and Telephone Company, Limited's Public Telephone Network and Approving the Applicant's Schedule of Rates, Tolls and Charges for Radio Paging Service", May 11, 1981. i -.._... _-----~ --_._------rOI .. ,0. -29- CHAPTER III THE E~ERIENCE WITH COMMUNICATIONS SATELLITES ~N THE UNITED STATES , A policy of open entry irito the business of supp1ying domestic communication services by satellite in the United States resulted in ~ number of fï~s employing satellites for long distance communications in ?qmpetition with each other and with firms re1ying on microwave trans mission facilities. Beginning in the decade of the sixties and continuing in the seventies the pressure 'of increased demand and new technology throughout the telecommunic"ations industry forced a change in the existing' structure of the industry that placed an increasing re1iance on competition in the provision of long dist~nce 'communications. A~thOU9h the Bell system! rernains overwhe1mingly dominant in toll services, it h~s been joined by other firms, known as speciâlized common carriers. 2., This group is' made' up of the sat.elli te , . . operators and firms leas~ng'~atel1ite c~pacity, in addition to compapies employing 'microwave transmission. In order to place in perspective the introduction of satellite technology in competition with terrestrial , technology, the first section of this Chapter briefly , , summarizes the !andmark regulatory decisions resulting.in increased .comPetition in the U. S '. telecornmunications industry and the second describes the nature of the . operations of the firms employing satellite communication systems. 1. The Development of Competition '~n the United States Long Distance Teleconununications Markét : The regulation of interstate tel~communications in the United States is carried out by the Federal Communications 1 L , ,< .' -30- Commission (FeC), Washin-gton, D.C. The FCC has been the foeus of change in the U. s. industry as a resul t of depision~ taken on its own initiative or overturned by the courts. \ T~e ,first important ruling of the FCC was the Above'890 decision in 1959 which allowed microwave frequencies to be allocated to privatle businesses to establish long aul links for their own use. 3 This was fo1lowed in 1963 an application on behalf of Microwave Communications, - , ~In ,orporated (MCI) to be certified as a conunon carrier to provide poOint-to-point microwave service ,designed for inter- ·office communications between Chicago, IlLinois and St. Louis, Missouri. Mcr proposed to supply long haul transmission i 1 between its microwave si tes but le ft each subscriber to 1 supply his own link to the MCI terminus point. Prior to 1 " ! the final decision of the FeC, more than 30 applications ." were received from other ;irms requesting sirnilar authorization. 1 The Fce granted MCI' s'application in 1969 and as the number of applications grew, initiated a public inquiry to consider the issues surrounding the establishment of a specia1ized cornmon carrier industry. The FeC reached i ts Specialized Cornmon Carrier decision in 1971. It allowed entry into the business, of long distancé cG>mmunications and ruled that, the established carriers should, upon request from, a specialized carrier, permi t interconnection of leased channel facili ties on reasonab1e terms and conditions. In order to ensure that competition would become established in the intercity market, the Fec subsequent1y dealt with two further issues. The first was an examination, . , under Docket 18128, of AT&T' s rate making practices, which concluded that there was a cross-subsidy between its inter city monopoly and competitive services. This proceeding ,established cost allocation procedures' to be ~ollowed by AT&T that relied on a particular fully distributed cast methodology. L_. ______ f J .' -31- 1 • The second, issue deait vith by the FeC was the ability of the specia1ized common carriers to interconnect with the local distribution faciiities of the teleph~ne companies.. on non-discriminatory and reasonable tenus. The 1 Commission established Docket 20099 to set basic technical qround 1, 7 _ _ , . rules for interconnection and provide a forum for the settlinq of specifie interconnection problems. ~ ... Soon aftèr the specijllized'" common carriers' went into business the Fee ruled that they would not be subject to _a rate of return regulation on individual services, such. as AT&T was, 'in recognition of their special statua as- entrants and because they did not have a monopoly business. The Comnlission next. considered their policy with respec1; to the iAtrodudtion of ~ate11ite communication systems into the domestié' teleçonununications market. In 1962, C~ications sa'fil;Lite Corporation (ComSat) had been' qiven a statutory monopoly of international satellite services and later in 1966 the FCÇ limited it te dealing with AT&T and the international ~ec~rd éarriers . .( Despite this precedent, or pe.rhaps because of it,5 "he Fee decided that there was nothing unique in satellite technolo9Y1 ~hat should prevent its compet[tive entry 1 and \ l 6 ! in its "Open 'skies· decisions taken in 1972 the,oFÇC ruled ~ ; tllat there ~hou.J.d be freedom of entry into the domestic communications satell~te business, with some restrictions on AT&T" and Comsat. In arriving at this decision it made ~ L i the fo~lowing prescient observation: ,! "The presence of competitive sources of ~ supply of specialized services, both amonq satellite system licensees and between J satellite and terrestrial systems, should l' encourage service and technical inm:vation \ and provide impetus for efforts te an 7 (-- minimize costs and charges to the public.- fr -- 1 J { -32- Contained in the "Open Skiés" decisions and subsequent ru1ings were provisions that firms entering the ~atellite business would have to establish separate entities to remove the p@ssibility Qf an unfair advantage by some firms who could be cross-subsidized by large pârents' .. AT&T was l~ited to using satellites to provide MTS and WATS in ,{ order to a110w the new entities to become estab1ished. This limitation 1asted until 1979. The Commission' s eoncern was th~t AT&T eould become dominate in the new satellite services by loading a high capaci ty system wi th Ml'S and WATS traffic and thereby control the co st of the specialized service. It4lso feared that AT&T could use its monopoly position in public voiee to cross-subsidize the new competitive services. A further provision made by the FCe was that AT&T and Comsat f could not join, but that AT&T could lease satellite services from Comsat which would then become a carrier' s carrier. / The next major ruling of the FeC with respect to ( the satellite companies and the specialized common carriers in general was the Resale and Share Use 'decision 7a taken in 1976. "l'his found that restrictions on resale and shared use of conununications services and facÜities were unjust and directed the carriers to al10w this type of activi ty . The Commission 1 Sn concern was to increase càmpeti tion and permit smaller firms to operate in the te1ecommunications market. The final landmark regulatory rul.i,ng was initiated when ~I introduced a switched inter-city voice service, called "Execunet", which allowed aIl sÙbscribers in a city ( served py MCl to access al~ telephones in another served city by MCl ni1crowave. and the Bell System local loopa. The specialized common carriers had not offered services directly competitive with MTS or WATS, b~ and large, and } "Execunetn was chal1enged as illegal i\ The Fee upheld the 1 ( .#. -33- 1 challenge by the telephone companïes, but MCl twice took the case to the U. s. Court of Appeals and won ,in a decision that was reaffirmed in January 1978 ,when the U.S. Supreme Court refused to· hear th~ case. The court rpled that the telephone companies do not ·have a legal monopoly in inter city telecommunications. 2. Domestic Satellite System Operations in the United States The ear1y satellite operations in the United States q , were characterized (by' underuti1ization of capacity and poor , profits. Both the profit pictur~ and use of the satellite improved as 'the firms competed among them~elves to develop innovative rates and serv.ices that would take advantëWe of satellite technology. , , , In the 1970 1 s there were three firms operating satellites, one of whom, comAt, sold exclusively to AT&T. There has heen almost full utilizatiol1 of available capacity 8 in the last couplé of years, so in 19_80 the Fee authorized five additionàl fi~ for the domestic market. 9 Before describing the current group of satellite ,- operators and carriers leasing and reselling satellite capacity there will he a brief overview of the video, data, - " , . 10 and voiçe services that have been created by these fl.rms. ! t ae~ause of the pnblicLty surrounding ~llegal earth '\ J 'stations in Canada that are used to receive television trans missions from the United States, it is not unexpected to discover that indeed widespread dissemirtation of television , . 1 was one of the creations of the U.S; sateilite industry. Tele~ision was used ih the early years to increase capacity utilization. ln this regard, one observer has commented that: ( " , .1 -34- "Television o.ffered a quick way to fill ( up these empty transponders, often at annual rentaIs of under $1 million. The pioneerïnq efforts of Home Box Office and ,the Public Broadcasting System have verified that domestic satellites could readily provide multipoint video services." Il The emphasis has been on cable television (CATV) rather than television broadcasting because of a lack of success in dealing wi th the three major television networks. The: growth of CATV has been explosive however; one indication of this is that there are an estimated 2600 CATV receive-only earth sta~ions in the United States. 12 Another application of the video potential of the 'satellite is video conferencing employing freeze-frame picture transmission that uses much less bandwidth than conventional television transmission. In the area of data exchange by satellite the U.S. firmsr have developed a n1;1lllber of wideband applications that allow transmission at speeds greatly in excess df that 'available by conventional terrestrial,means. They have '- alao developed a number of ne~ services such as the trans- mission of copy te,.. .regional printing 1, presses and the dis semination by printer of news and weather reports. \ The firms using satellite systems have also been responsible for developing a variety of voice service offerings that take advantage of sqte11ite transmission. These include: dedicated voice~links, conventiona1 private line veice which uses telephone companies'local loops, , and enhanced private line voice which provides a iimited inter-city switched service. 13 Table III-i shows a comparison of satellite-provided comtentional private 1ine rates and AT&T rates, that existed in February 1975.14 ( -35- Table III-l, RepreseRtative U.S. Domestic TariffS, February 1975 Satellite Sin~le 'AT&T Single Channel Rates Channel Rates Link Per ,Month* Per'Month chicago-NewYork $ 620 (U.S.) $ 760 (U.S.) Chicago-Los Angeles 820 1674 Dallas-Los Angeles 820 1234 New York-Los Angelès 1120 2300 Washington-San Francisco 1120' 2292 * Includes satellite, ground links, and local loops Source: Nonnan Abramson and Eugene R. Cacciamani, Jr., "Satellites: Not Just a Big Cable in the Sky", IEEE spectrum, September, 1975, p. 37. The market acceptance of the video, data, and voice 1 : services offered by the U.S. companies has been enhanced 1 1 by a set of flexible mar~eting policies deJeloped in the 1 competitive forum~ Satellite ,services a~e available on a ! monthly basis with ra~es varying by cat~gory of service. i 1 Fully protected' service, ensures that ifvthe transponder assigned to'the customer is înterrupted another transponder will be substituted. Unprotected non-preemptible ~œ. çJoes not guarantee substitution in the.event of'an interruption, but . : a substitute transponder could be made available at the carrier's discretion. The final category, unprotected preemptible service, does'not offer a guarantee of substitution and may be preempted to restore fully protected , . service which has failed. The rates for these categories of service reflect the degree of protection and are descending " from fUlly protected to unprotected non-interruptab1e and , / ' unprotected ", interruptable 80 that a customer may determine the type of service that best fits his needs. \ Other, examples of flexible marketing policies of the satellite firms in the United States .~re freedom for ( customers te own their earth stations" to engage in thé t . -36- sharing of leased capacity with other customers, and ta de termine the type or types of service that they.will use on their leased capacity~ A more detai1,d explanation of the services, customers and operations of individual carriers using satellites for domestic communications is contained below. The survey covers the three carriers who have owned and operated satellites 'during the 1970's: RCA American Communications, Inc., The ~estern Union Telegraph Company, and Comsat; one firm which i5 just becoming operational this year, Satellite Business 1 sy~~ems; and finally two carriersthat lease and resell satell~te capacity: Amer~can Satellite Corporation and 1r· 1 Southern Pacific Communications ~ompany. ,1 a) RCA American Communications, Inc. ReA American Communications, Inc., Piscataway, New Jersey (~CA Americom) was the first company to offer satellite services within the United States beginning in "~l January, 1974 when, it leased, capacity from Telesat. Sub~ ~equently, it used Western Union's satellites until its own, Satcom land Satcom II were launched in Dec~mb.er 1975 and 1 March 1976 respective1y. The Satcom series are 6/4 GHz 1 satellites with 24 transponders each, designed to provide one 1 colour te1evision transmission per transponder, or the f equivalent of greater than 1000 telephone circuits. Due to a technical malfunction the loss 'of Satcom III, launched i~ '1 1979, led the firm to pack 2892 voice channels into a transponder using specialized techniques. 1S Af~ts heavy start up costs, ReA ~ericom_ neared the breakeven point at the end of 1978. In 1978 its , sal es were 65 per' cent h'19 h er t h an'h' t e pre~10Us year. 16 , l______~-..... __,__ __ ...... ~~ ... ~_._., ______...... -- . . , -37- Its operating revenues amounted to in elCcess of $40 million ~ ( (U.S.) in 1979 .. RCA Amerrcom 1 s 1argest customer has been the c~ble television industry. ,The system serves the industry with more TV progranuning hours than any other carrier in the ., w~rld.17 Customers such as Home Box Office, Viewcom, and Warner use approximately 20 transponders. one of the CNl"V custanérs Southern Satellite Systems, Inc. takes of~ the air WTCG, Atlanta, Georqia 1 s Channel 17, and rèdistril:!utes it across the·count~y. It uses the sarne leased transponder to feed both United Press Internatibnal's Newsline (which provides ,1 black and white news pictures with voice-over news commentary) i ,! and WTCG to cable\subscribers. , ! ! i As of 1979 RCA Americom had not dane a great deal }- 1 of/ ~usiness with broadcast television other than on an , occasional basis becaus~ of the te1evi&ion networks ~ommitment 1 ,1 to AT&T' s terrestria.1\ network. However,.a new servic~ has been offer~d that ha~~he Icapabi1ity of establishing a fourth j j major television network. The service known as SMARTS would J allow the selective dist~~_tion _of television programming i , by hav.ing an earth station ~ all of the maj or broadcast \ stati~.s that could be accessed accordi~g to the arrangements madé b§ a commercial sponsor with the stations. RCA Americom's next largest custpmer is Alascom 1 Inc., formerly a RCA subsidiary, which serves the state of ! i .j Alaska with telephone and broadcast communications using J ... about 14 transponders. ~ i RCA Americom's private l~ased channel services i is made up of two groups: priva te customers and other common car.riers. It advertised tc-its private customers in 1978 1 thab a company would make a substant'ial saving over AT&T j . charges if i t was spending about 30-45 minutes per day ( 1 .\ ------~ _._------"------_._--..+,- '. -38- / / communicating between locations at least 700 miles apart. ( The leased channel refers to a V~iCe-grade dirouit, not a RF channel. ReA Arnerîcom o~ferep to subdivide a voice J, c~~cuit to meet the specific'needs of customers, for example, employing the circuit for ~oice, data, or fascimÏle trans mission while simultaneously up to four 100 word per minute teleprinter channels can bé4 exchanging information without interruption. Among RCA Americom's private customers are IBM, Exxon, Holiday Inns ànd ITT. Customers dial a special acceSB code and their existing terminal equipment converts . , the voice, data or facsimile to a signal which travels over the local telephone company' s trunk lines to one o,f RCA Americom's central offices in the centre of a metropolitan area. 18 From the central office the signal i8 routed by microwave to the earth station located outside the c~ty and transmitted to the satellite and bounced back to ground and sent by the sarne type of arrangement to the number dialed in the distant city.l9 The second group of customers for private leased channel services are other common carriers,auch as American Satellite Corpor~tion and Southern Pac~fic.Communications Company. These firms lease more than one transponder and in turn resell the satellite service as part of one of their own telecommunications packages. - ~, . ~ RCA Americom also provides dedicated voice and data services by the installation of 5 metre antenna size , ., Î 1 earth stations located at the customer's premises. Customers 1 include the U.S. Government, largely NASA and the Department ! of Defence. It advertises that: "Many of our largest users, including government agencies, broadcasters and other private • companies have had built and are ~perating their own earth stations in conjunction witn our' satellite or are leasing ones that we helped design, build and operate". 20 ( -39- " b) The weste~ uqion T:levrapt Compan~ The Western Union TelegraJh c~~pany, Upper Saddle Ri ver,~ New .:tersey launched W~star land Westar II satellites in 1974 (Westar III was launched in 1979) to , 1 assist·in providing its own, telegrafh and telex services. The company'already had a 9000 mi1e,microwave network and local distribution faciliti~n many cities in the United- f 1 States but sought to decrease its dependence on leased lines from AT&T. Its satellite cap~city permitted it to expand into areas not touched befor~, such ~s, priv~te __ _ 1 line voice, high speed data and television and radio dis-, • j 1 1 tribution. 1 1 In 1979 Western Union los~ $7.7 ;illion (U.S.) but forecast a net profit in 1980, fOllfwing a 1-5 per cent ra~e hike made in February 1980. 20a l ' 1 1 ( Western Union operates a 'number of major earth stations outside the 1arg~ urban èehtres to 'cop~ect with its satellites for a variety of serVices. These earth . 1 st~tions are interconnected to the ~irm's microwave network 1 and allow Western Union to provide: ser'ices to about 90 1 cities in the Unite~ States with a E0mbin~tion of satellite l' 1 an1d microw~ve facili ti~s. Its . pr.~y~te l~ne b';lSin~ss accounts for 20-30 percent of ~ts s tel1~te capac~ty. , , The Westar satellites are! of â smaller capacity than RCA Americom's, 12 transpondeJ~ per satellite, operating 1 in the 6/4 GHz ,frequency bands. w~stern Union uses much of its satellite capacity for broa~cast te1evision. The three major users are CBS-TV, HU9'h~S, Television Network, and Robert Wold Co. CBS uses the ~atel1ites for sports programming, news and occasional l~ve broadcasts. Wold , 1 and HugHes produce some of their own programming that they , l' _ ( distribute by satellite but primar'ly they resellrtheir satellite time •.wold's principal lient is a spanish-\anguage J ,t 1 1 1 1 ,---- .~ ... _ .. ~>'~""'- ...... ~ .. _ .... -..&oj.""-~"'·1 ... -40- network of television stations} however a large proportion ( of the Hughes business i8 professional spor~i~g event transmissions. Wes~ern Unionrs other major customer is the Public Broadcasting -,Sel1vice, which became an a11 satellite system in December 1;'978. This client with its radio counterpart, 1/ National 'Public Radio, and another radio ne'twork,- the - ' Mutual Br0adcasting'System, axe expected to account for ~ , about 1000 receive-only earth', stations. Westar satellites also proyide limited television'?istribution for the major networks 'i,n, the form of hook-ups ',from. the West Coast te network he~dquarters,in New Yo~k ~ity. Charges are made by the hour. Typically Western, UnioIi~ has averaged about 16,000- e 2q,000 hours per year of this service. Another video 1 , -" , . 1 service that has been successfully ~rketed by Western l , Union is video conferencing. This ~as ,be~n ernployed for example, ta permit nationwide sales:~e~tings. 1 One of the innovatLve .services that Western Union J.~" ~, introduced in company with the ~erican Satellite Corporation 'was the electronic transmission of copy for the Wall Street Journal to regional printing plants. The service was inaugurated in 1975. This type of transmission us~sonly 1-5 per cent of a transponder. Western Union'has provided a similar service for Time Magazine. Westar satellites have also been us~d ta provide' radio common car~ier paging between cities in the Western Union network. Previously, paging has been limited', ta single. urban centres because of the short range of terres trial transmission employed. c) Communications Satellite Corporation . ( Comsat' was established in 1962 to carry out international satellite communications. Domestically Comsat has three satellites operating in the 6/4 GHz band. 2l,22 1 -41- The satellites are leased exclusively to AT&T. AT&T uses them for MTS, WATS and government private line service. GTE Satellite Corporation also leases space on the Comstars , through AT&T to provide message toll, government and business " communications channels. AT&T owns and operates four earth stations 'and GTE owns and operates three additional earth stations. d} American Satellite Corporation American ~atellite Corporation, Germantown, Maryland, is one of the earliest companies offering c satellite service in the United States. It began operations in mid-1974 after' being founded by Fairchild Industries, Inc., an aerospace and commercial aircraft manufacturer. Since 23 1980 Continental Telephone , Atlanta, Georgia and Western Union have been part owners 24• In 1978 its sales totaled $11-12 million .,.(U.S.) and it was reported to have reduced its operating 10ss from , 2 prior years. 'S American Satellite Corporation (ASC) l~ases ~atellite capacity from both RCA Americom and Western Union. It has never entered the television market but has concentrated its business in two main areas: a} private line voice and low/speed data, up to 56KBPS~5ind b} dedicated earth station communications for industry and government. The first type of business relies on interconriection between telephone companies' local distribution facilities and ASC earth stations located outside certain major cities. ASC offered services in 1979 ta Atlanta" Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, Pittsburgh, San Francisco, Seattle and Washingt~n, D.C. Servièes were (' promised Iater in 15 more cities. Among the services -offered was "Shared FX"" available in six major ci ties, that r -42- .r allowed firms to calI from their office in one of the cities to any local number at one or more of the other five eities at cost, savings proportional to the number of users sharing the circuit. The firm could share a circuit with up to three other eustomers, and save up to 75 per cent on a " 24-hour satel1.ite channel. As of 1979 there was no 1nten,t1on• 1 • to expand this service to' an Execunet type of offering. , The second kind of business is advertised under r the aeronym' "SDX", satellite data exchange, and involves roof-to-roof networks with five metre antennae anq standard modular items. ASC supplies the U.S. Department of Defence meteorological network that obtains information from terrestrial beams and weather satellites and distributes the information around the United States at a data stream of 3 MBPS. Another example of the "SDX" service provided by ASC is the communications network designed for Western Bancorp, a bank holding company with branches in eleven , ( states. The ASC system provides Il dedicated earth stations transrnitting multiple 56 KBPS including computer-to-computer fascimile, digital voice and teleconferencing. As of 1979 ASC was changing from analog to aIL digital links and time r .division mUltip,le access (TDMA) which was expected to increa'Se the data rate to 64 MBPS per transponder. 26 ASC won the Western Bancorp business largely by overcoming the half second de1ay in' getting signaIs between the ground and the satellite which had been a significant impediment to computer communications. The solution was the invention of a satellite delay compensation unit that allows the computer ta function as though it were interacting with a local terminal. 27 '. 1 1 Other customers for which ASC has completed private networks include: Sperry Rand Corporation's Univac Division, Boeing Computer Services Ine. and Texas'Instruments Ine. ------~------_.------43 ... " ~ ~ The last involves the installation of an antenna to provide .(.. data commWlications between Texas Instruments 1 Dallas headquarters and Londan, England using a double-satellite hop. 28 .,. e) Southern Pacific Conununications Company ~outhern Pacific Communications Company, Burlinqame, Califo·rnia began operations as a specia1ized common carrier .,.~ ..... "lt-_ izr1)eceniber 1 1973. It is a subsidiary of Southern Pacific Company, a holding company, which also owns Southern Pacific 1 Ra~lway. In addition to rentinq satellite capacity from both RCA Americom and Western Union, Southern Pacifie Com- ~ munications Company (SPC) has extensive microwave capacity which it constructed initially in 1973 using railroad r property whe.rever possible. SPC uses a mix of Satcom and Westar sat;JJrit~s to complement its microwave system, the choice depending on which companies have two-way ground ( stations at given locations: until 1979 SPC did not have its own earth stations. ln 1978 SPC had sales revenue of about $50 million (U. S .) which p5-0vided an operatinq profit but a net 108s position overa:tl. SPC 1 s private line faci~i~;e~ are interconnected wi th the local loops of the telephone companies which allows routing to earth stations located outside the major c,ities, as is the case with the other satellite firme. Rowever, , because of its microwave network, extensions are made to ,\ . other ci ties located in the ·general area of the major cities 9 and allows $PC to offer interconnection among 5~ ci ties. Ameng the services offe'red by SPC are: voiee' tie-lines , (dedieated 1ines between two PBX syst~ms or reg,ular' tel,ephones) , foreign exchange lin~s, and voiee plus data. It ia not 'in '1 ( , J ( ,1 • ! if ~ '. ~ .... -..., ...... , ..... -~~~-_.---~----.------_. -44- the video market tnd diyides t'ta a.1!,8 80 per cent 1:<> voiee c. services and 20 per! cent to facsimile, and data. A nwnber of services are offered through SPC' s terrestrial facilities, sometimes in cornbination with satellite links. SPC provides "end-to-end" service. For example, on its "Speedfax" facsimile service, SPC makes facsimile transmission compatible 'where there are different format machines employed at each / end. SPC is one of''the most agressive specialized cornmon carriers. Its "Sprint v" -~oice service is an. inter-ci ty switched voice offering similar to MCl' s "Execunet". The service provides an itemized monthly statement of calls, • which is not avail~ble from the telephone companies. SPC's ,lar'gest single customer as an industry is airline reservation; its second largest is the stlck brokerage industry. Both customers use their communications netwo~s. to provide a , mixture of voice and data" at their discretion. : f) >Satellite Business Systems J Satelli te Business Systems, McLean, Virginia (SBS) , " was established as a partnership in 1975 among International 1 , 1 Business Machines Corporation, ~etna Casulty & Surety Co., 29 l, and comsat. Its first satellite was launcheâ in November 30 19a0 and it planned to. be in operation by January or February f 1981. As of the end of 1980 it had invested $375 million (U.S.) 31" 1 'The system is based on twa satellites in orbit, each (l having 10 transponders in the 14/12 GHz frequency ;-ange using 1 .1 ad~anced cqIIlI(lunications technology such as time' division , r~ mul tiple access, and demand ass~griment of satellite bapacity. - 'j The company'.s operational tar,iff filed with the FCC de'scribes )1 \ services for an integrated private communications network for 32 ., ( high volUme users. The services encompass telephone com munications, computer:-to-computer communications, high spe~d ; ! ,0 1 ! l 1 ~ , , -45- .. '.. , electronic document~transmittal and video eonferencinq, c: provided through a minimum of three customer-premises earth" stations. An inrormationai tariff describes services to be offered in 1982 that place mo~e emphasis on intercity voice ·serv~ces. A s~itched intercity voiee service available in 150 metropolitan areas will be competitive with Mcl 1 s "Execunet" and SPC 1 S ·Sprint V". Amonq the customers 'f under contract to SBS are: Aetna Life and CasuJ. ty, Boeing Computer Services, IBM, ISACOMM, a subsidiary of Insurance , 33 Systems of America, and Travellers lnsurance Co. 3. summa~: Cos>etit:ion in Satellite Communications in The Un1ted States. The pattern .of comp~tition amonq suppliers of ~atellite communication services that evolved rollowing the (j "Open Skies'" decisions of the FeC vas ri valry over a number of common serVices and an attempt to explore new markets. American Satellite, for example;co-hçentrated solely on commercial and government business, particularly in data ~ communications~ lt did not beoGme involved in supplying , .L 1 television communication services as did RCA Americom and Westerfi Union; however it offered a wide~-network for private line communications that did RCA Americom. ;. . Beth Western ~ion and Southern Pacifie ineorporated sate~lite communications into extensive land-based systems. o , Western Union interconneèted the larqest number of cities i, , (90) int"o its pr~vate line network, but Southern Pacific i was more aqqressive irt dev~lopinq an inter-city switcbed . ~ offerinq that vou1d co2pete vith the telephone companies' 1 MTS. In televisiofi Western Union virtUally ceded the new cab~e and pay television markets to RCA 'Ameriêom, and concentrated. on broadcast television. Like American Satellite, Soùthem Pacifie did not etiter tbe tele~ision market. ) b . , -""-""'-#~m+.4k.).f~I»iiIV'l\If'.• --...... ~ f -46- 1 1 ( Western Union and RCA Americom competed with each other in the sale of satellite capacity to bther common carriers un~il recent years when demand h~s out- , stripped supplY. ReA Americom, and Comsat have been the only firms providing conventional MT~ and WATS, the former through i ts con't.act with Alascom Inc. and GTE. Comsat, of course, has not competed wîth the other satellite firms in the private line ana data markets because of th~ FCC ruling rererred to earlier. The/final firm, Satellite Business Systems, has only recently started operations, and is targeted for large busin~ss users, particularly in data communications. The Execunet decision and tqe develQpment of the voice market ~ by the other satellite firms has caused SBS to place more emphasis on voice services than was originally intended. ! The satellite firms have not only competed among '! , , themselves over the last decade, but as foreseen in the " first nOpen Skies" decision of the'PCC, they have aiso competed wi th the tèrrestrial-based carriers. 'During the first half of the 1970's the two groups competed in the supp1y of a ran9~ of private 1ine and data services such as 'voice tie lines, foreign ~xchange service, video and facsimile ,transmission and dediçated data links. After the final ",revïew of the Execunet. decision Ilin 1978 the satellite ifrms also began ta compete with ·the terrestrial 'carriers (pri~ipally the Bell System) for" MTS/WATS business, the' major long haul telecommunications markèt in the United \ States. In sununary, there has been a s~nificant degree of ) J " - bath inter-modal and intra-modal competition as a resul t of the ~ - üitroduction of satellîte connnunicati~ns in the United States.' ( To sorne extent the satellite firms have attemp~ed to deflect . \ this competition by,developing new services and customers, thereby contributing ,to adynamie telecommunications market in the United States. ~--,-~-_____ ~I -47- J~ Footnotes to Chapter III t ( 1 1 The Bell System consists of American Telephone & " , II· Telegraph Long Lines Department and the Bell'operating compani~s. There are 23 operating companies serving different geographic areas which cover MOst of the metropolitan areas of the country in aIl states except Hawaii and Alaska. AT&T owns or controts 21 of these and has a minority interest in the remaining two. The operating companies prQvide afmost aIl the intra state toll services in the Bell System, while AT&T Long'Lines looks after a1most aIl of the interstate business. Bruce M. OWen and Ronald B-raeutigam, The RegUlation Game (Cambridge: Ballinger Publising -- Company, 1978), p. 201. 2 Other entrants include value added carriers and radio paging firms who have much smaller ~otal operating revenues. The value added carriers lease transmission capacity and provide sophisticated terminal>equipment which al10ws them to provide specialized "value added" services, such as bund1ing me,ssages into packets and transmitting them at high speed. Radio common carrier paging firms provide one-way tone or voice communications in selected urban areas by radio wave transmissions. Ibid. pp. 204-205 and Restrictive Trade Practices Commission. (RTPC) Hearing, "Bel I-Northel;'n "', Transcript Volume 116, p. 18010. 3 This sectio~ relies on OWen and Braeutigam, Re~ulation, Chapter 7 and "the testimony of witnesses from Satellite Business Systepts and Southern Pacific Communications Company in RTPC Hearings "Bell-NQrthern" Transcript Volumes 132 and 155, unless otherwis~ noted. 4 OWen and Braeutigam, ~egulatio~, pp. ,44-46. , 5 See the remarks of William Melody quote in Chapter v, p.lOS • 6 35 PCC 2d 844 (i972); 37 PCC 2d 184 (1972); 38 FCe 2d 665 (1~72). •. 7 Federal Communic~tions Commission (F~C), "Oomsat", Second Report and Orde~June 16, 1972, p. 847. 7a 60 FCC 2d 261 (1976) 8 R~PC Hearing, "Be11-Northern" Transcript Volume 155, p. 23346. 9 ~ These are: AT&T,General Telephone' E1ectronics -.( Corpor~tion, Hughes Communications Inc., Southern Pacific Communications Compat;ly, and Space Communications. The incumbent$ which havaa1so been authorized are: ReA American Comm~ications,. Ine., The Western Union Te1egraph .. -4e- ) Company and Comsat, this time in partnership with· 1 others under the name Satellite Business Systems. See Walter L. Morgan, "Satellite Communications l' Launch,New Opportunities For Telcos", Telephony January 26, 1981, p. 40. 10 This summary and the individua1 company descriptions ~ that follow ie based on info'rmation obtained in 1978-79 lènd is not more current unless specifically noted. The information is drawn from the testimony of C.G. Grant -and J. V. Kenny, President and Counsel respecti vely of Southern Pacific Communications Company in their ~appearance before the RTPC, December 5, 1978 and February 8, 1979. RTPC Hearing "Bell-Northern" Transcript Volumes 116 and 112. Exhibits T-870 to T-875. Also the testimony of William English, Vice President and General Counsel of Satellite Business Systems, Carl Sl' Congelosi, Vice President and General Counsel of RCA American Communications, Inc., Philip Schneider, Vice President, Satellite Systems of The Western Union Telegraph Company, and Emanuel Fthenakis, President ~ 0 of American Satellite Corporation in their joint appearance before the RTPC on July 10, 1979. Ibid. Transcript Volume 155. Exhibits T-1207 to T-1215. Il Morgan, "Satellitè," p. 40. ( , 12 "Satellite TerminaIs", The Economist, Novernber 22, 1980, pp. 111-12. 13 À conventional private line voice service allows a sUbscriber to contact his office in another city ~ where this particular service is available. Enhanced private line voiee permits â' subscriher to contact· anyone in another city whe~e this particular service' i8 available. . 14 Additlonal infGrmation on rates is provided in Chapter V. , 15 W. Braun and J.E. Keigler, "RCA Satcom System Expansion" Canadian Radio-television and Telecommunications 1 C~ission (CRTC) Hearing, "TCTS-Telesat", DCCA Exhihit 3. ' ~ 1 16 CRTC Hearing, "TCTS-Telesat", Telesat Exhibit 3. 1 1 ~ 17 Ibid. i 18 Available in Los Angeles, San Francisco, Atlanta, Chicago, New,York and Houston. ( 19 This 18 not an "Execunet~ type of service. .. '-, ~~~~~---- .,,_._------'" -49- 1 t ( 20 RTPC Hearing, "Bell-Northern" Exhibit T-12li. 20,a CRTC Hearing, "TCTS-Telesat", Te1esat Exhibit 2. 21: Comsat has also joined in a joint venture called, Satellite Business Systems, to provide satellite communication services domestically in the non MTS, WATS markets. , 22 The infor.mation on Comsat cornes from RTPC Hearing, "Be~l-Northern", Exhibit T-954. 23 Continen'tal Telephone is a large independent telephone company with operations scattered throughout the ' 1, United States. ~ i' 24 Morgan, "Satellite", p. 40 1 -fi 25 "Amsat gra,bs, the lead in private satellite syst.$ms", Business Week, January 15, 1979, p. 80. 25a KBPS refers to thousand bits per second. Bits a~e the "on-off" signaIs employed in digital transmission and.b~ts per second is'a measùre of the capacity of a d1g1.ta1 system. _ . 26 ASC is credited with having the first business oriented wideband TDMA network to go into commercial oPeration , ~he United States. pradman Kaul, "everview: Digital ~ Evolution in S~tellite Networks", Te1ephony, January ( 26, 1981, p. 27. ' 27 "Amsat", Business Week, p. 74. 28 Ibid. é 29 Victor Block, "Countdown to new business service i8 on ~ achedule", Te.lephony, jUly 21, 1980, p. lS'. "". 30 Kau1, "Digital Evolution", p. 33 31 Block, "Countdown", p. 16. ~ 32 "Voiee net included in SBS tariff filing" 1 Telephony, July 7~ 1960, p. 10. 33 Block, "Countdown", ~~ 17. ( .. -50- CHAPTER IV 1-. ( TELESAT'AND, THE REFUSAL TO COMPETE WITH f THE TERRESTRIAL CARRIERS Telesat, the Canadian domestic teleco~unications satellite company, presents a marked contrast to the satellite firms Qperating in the United States; however, a qomparison will he deferred until the next Chapter. This Chapter documents the reversaI of 'tentative steps to introduce satellite telecommunications technology through a separate entity, divorced from the established telecommunications common ca~riers. The'Chapter is divided intQ four sections which describe successively: Telesat's operations, the two phases of the removal of Telesat as an independent competitor, and the, crucial policy decisions and / marketing practices which affected Telesat's development. 1. Operational Characteristics of Telesat a) Owners and Officers ( . r"1 ! . Teles,at is neither"a Crown corporation nor an ~ '. agent of the Federal Government, 1 rather a commerci.a~ "ventu,r, designed to a::t as a private corporati_on on a self-sustaining basis • 2 Ownership is equally divide.d between the Federal Government and certain approved telecommunication common - carriers named in Schedule l of the Telesat c~aa ~ct. In effect, Telesat is controlled by tl"c Feèeral Government through its '1m"~r to appoint th'2 Chief Executive pffj"cer (s. 14) and its ability,. to amend its statutory objects ~nd powers as it sees fit. 'J.'~~ove& carriers are: the members of TCTS, (exc1uding Telesat) and Canadian National Railway Company, Canadfan Pacifie Railway Company, QUébec-Téléphone and the Ontario , Northland Transportation Commission. Qver the y~ars the Board of Directors has had a nucleus of four representatives from TCTS' companies, one from CNCP, and two senior civil servants, in addition to a senior of'ficer of the CBC. Telesat's founding President and Chief Executive Officer, David A. Golden, became the company's Chairman in • -51- April 1980. He was succeeded as President and Chief Execut,i ve ( Officer by Eldon D. Th~mpson of NB T~l, who had negotiated Telesat ··s rnembership into TCTS during an earlier term as Presïdent of TCTS (l~74-77). b) / Satellites 1 The space segment of'Telesat's service has been l ,provided by two series of satellites designated Anik A and Anik B. 3 The Anik A series, consisting of three satellites, launched in November 1972, April 1973 and May 1975, respect ively, provide 12 RF channels each, operating in the 6/4 GHz bands. Two channels are held in reserve, so that each satellite has 10 operating channels. Each RF channel is capable of transmitting a full colour television broadcast or the equivalent of 960 voice circuits. The Anik B series .' consists of a sole satellite that was launched in December 1978. It contains twelve 6/4 GHz channels and six channels ( , in the 14/12 GHz bands, the latter leased principally by the Department of Communications for experimental purposes. 4 The design life of the satellites in both series is seven y~ars but a number of failed channels have occured prior to this term as evident in Table IV-2 below. , Telesat has order~d two new ser~es of spacecraft: 1 Anik C and Anik D. Anik C comprises three 16 channel 1 satellites operating in the 14/12 GHz band. Each RF channel will be able to carry two simult~neous colour television broadcasts or their equivalent in telephone circuits. The ,Anik C satellites are the first Telesat spacecraft designed to employ s'pot beam antennae. The Anik 0_ series consists,of 1 two 24 channel satellites operating in the 6/4 Gaz frequency band'. Each channel will be able to transmit one colour 1 television programme or the equivalent in telephone circuitry. The first of the Anik C satellites i~ sch~duled to be 1aunched' in Mayor November 1982, and the first Anik 0 satellite in ( August 1982. 1 -52- e) Earth Stations ( Although not specifically provided for in the Telesat Canada Act, Telesat maintained exclusive ownership of aIl earth stations until the spJ;ing of 1979 when the Federal Government decided to permit outside o~ership of television 5 ' receive-only stations. Telesat has retained control of all other types of earth stations. T,he number of earth stations . 6 owned by Telesat has risen from 34 in 1973 to 109 in 1979. There are several basic types of earth stations in the Telesat system, basea on the character 0; service they provide: Heavy Route, Network Television, Northern Telecommunications, ) Remote Television, Frontier Television, Thin Route ~nd Transportable (Anikom). 7 The two oHeavy Route stations,' one at Allan Park, Ontario, north of Toronto and the other at Lake Cowichan, B.C., on Vancouver Island, are multi-purpose communications facilities that provide television and message , 1 services in addition to control 'Of the satellites t:q.rough ,1 \ - what is known as Tracking, Telemetry and Commando Each is ( equipped to transmit and receive on several RF channels using a 30m diameter dish antenna. ~ "\ -. ' T,he, Network Television stations are also substantial facilities althouqh no where near as large as the Heavy Route ~ stations. There are six Network TV stations equipped with lOm antennae ta provide high quality transmission and reception of television signals. These stations typically include four TV rece-ivers and a single TV transmit channel. 1 •t ! The Northern Telecommunications ~tations provide .; ~ complete message service in the Artic. There are two such stations in operation, one at Frobisher Bay, N. W. T. and the other a t ResD 1 ute , N. W. T • and they sbare one RF channel in a. multiple access mode. These stations employ IOm non tracking antenna. ( The most numerous of the Telesat earth stations are the Remote and Frontier Television stations which are , equipped w~th 8 or 4. Sm antennae to provide for the reception- of television in remote communities. Under the Frontier .. -53- TV station programme, the customer! provides many of the . necessary auxiliary earth station ~ervices. 8 The Thi d) Service Offerings • Telesat 1 S service offerxngs have consisted of two basically different packages ~ one employed during roughly the, first seven years of 'operation, and the other described o by Telesat' s proposed Tariff CRTC 8001. The two approac employ different concepts of service and ratin~ princi They are described separately below: / " , i ; Telesat 1 s oriqinal servtce offering wa 5-yi,éar service agreements (including a pro~ision for extension) for whOle RF channels at an annual ch rge of $3 mil'lion per channel. The rate covereq, both s ace and earth segment charges and was for full period c verage. Full period ( coYerage meant dedicated service 24 h6urs per day, seven days a week. Occasional use of channel service was also available. In additi~n to the $3 millton charge there were a number of special assembly tar~ffS designed for the 1 1 ~~::::::~~:!:::::;:;::::::::::1::::~:e:~~::::i::::::::V1ce. l \ - l . l " -54- The original customers executed the five-year service agreements in the summer and fa!l of 1972. The agreements f. were approved by the Telecommunications Conunit,tee of the ~ --Canadian. Transport Commission in,January 1973 shortly before Telesat service was inaugurated on January Il, 1973. ~hree customers, TCTS and CNCP Telecommunications, the CBC and Bell Canada contracted for a total of seven RF channels that, produced about $127 million in revenues over the contract , ' 'd an d opt lon perlO s. 9 The CBC service agreement was for $45 million using three RF ch~ne1s; subsequently the ~BC also leased one channel for occasional use. TCTS and CNCP ".jointly leased two RF channels for heavy-route message service between Toronto and Vancouver, and for thin-route message service to a number of smaller communities in the western portion of the Northwest Territories at a co st of $30 million. On its own behalf Bell Canada had a $ 30 million contract for two RF channels to pr~vide medium density message service linking.. Resolute ( and Frobis~er Bay and the main east-west te1ecommunications network in southern Canada, and to provide thin-route message service for a large number of small communities in the eastern Aretic. ( -\ \ In addition to the CBC and carriers cited above, IL. Te1esat obtained the business of two further customers in 1973. In April, 1973 a service agreement was executed with \ ; RCA Global Communications and ~CA Alaska Communications to l provide satellite se~vice over one dedicated and one occasional \ , n " 10, use RF channel between Alaska a.nd the lower 48 States. ThlS arrangement terminated in June 1975 when the service was • , • ! 1 transferred to the first U.S. domestic satelliite, Western 1 11 Onion's Westar 1. The contract provided Telesat with almost $10 million of wiTîdfail revQnues. 12 / \ ) < -55- In December, 1973, Telesat executed a serv~ce / (. agreement with the Canadian Overseas Telecommunications Corporation (Teleglobe Canada) to provide one RF channel between the Trans-Atlantic cable terminal in Nova Scotia-and the gateway office to central and western Canada\~ located in . Toronto. 13 o Because of its policy ta refuse to sell less than a whole RF ch~nnel; discussed in later sections, Telesat 1eft the provision of these small~r requirements to the common carriers. Originally this included the 1ease of part channels . ~ to custorners such as the Government of Ontario for thin-route message services in North~estern Ontario, and resource firm~ for communications services between the high Arctic and southern headquarters. ( with l.n. the ser~1ce. 0 ff'erl.ng. 14 The c h arges f or space and earth segment services are separàted for the first tirne. The space . , portion io; divided into a number. o'f categories, ~eflecting u.s. practices, and the proposed tariff incorporates ,~ub- stantial bulk discounts for l~rge users.1 Filed at the sarne ~. tirne as the general tariff, was ~n agreement betwe,n TCTS and the CBC to provide space and earth satellite services to tne CBC for a period of ten'years over 10 RF chann~ls. Slightly modified vers'ions of the tariff and agreement were given interim approval in Telecom Decisions CRTC 80-5 and CRTC 80-21. ' As a consequence of the interim ruling Te1esat was providing 1 TeTS service on 1'4 fuB. period RF channels, ten of which / were ~ade available to 'the CBC and the remaining four used . ' by TCTS for its own needs. The final rUling, Telecom 1 ~...------.. " - -~--- .. '. ~ Table IV-l Proposed M0nthly Rate Options Per RF Channel for Full Period Service Fu11y Unprotected Unprotected .OE,!-ions Protected Non-PreemptibJ-E! . P,reemptib1e Option One (Minimum 1 RF channel) $180,000 $125,000. $115,000 '\ Option TWo (Minimum 4 RF channe1s) 170,000 120,000 110,000 Option Three (Minim1:J1ll 7 RF channe1sJ 160,000 115,000 105,000 Option Four (Minimum 9 RF channe1s) 150,000 105,000 95,000 ~ Option Pive (Minimum Il RF channe1s) 140,000 100,000 90,000 "Source: CRTC 81-13, p. 171 '\ \ ~ \, . "" , . ) ..... l ' t": '-' '- -- ~ -56- 1 • e 'r ( Decision CRTC 81-13, dated July 7, 1981, ordered revisidns in the general tariff and TCTS/CBC agreement. The major revisions in the general tariff a,re reviewed briefly in the summary of the features of the new serviceooffering that follows. Both the space services and earth station services are subdivided into various classes and tjpes. Theeavailable space services consist of: full period RF channel service, __ arid occasional use RF channel service.16 'As before, fUli--- ~ period refers to dedicated service 24 hours per day; seven 'days a week far a 'minimum period of one year. The tariff describes three types of full period service: fully protected, unprotected non-preemptible, and unprotected preemPtible~16a . '" Under the category occasional use RF channel service, ,q r Telesat offers a variety of different service alter tives for ul!le of at least one RF channel for a mini of 30 minutes ( per occasion with rates varying,according t different. conditions. The rates proposed by Teles~t for full period space service "are set out in Table IV-l facing. In CRTC 81-13 the Commission rejècted the quantity 1 discount approa?h contained in the full period tar~ffl!l and ~uled that Option Fi ve rates should apply to all cJ,stome~s. That is, $140,000 eper month for fully _p;otected serivice, $100,000 per month for unprotected non-preemptible ~ervice and $90,000 per month for unprotected preemptible sèrvice. 17 c,~ \ \ This corresponds to annual charges of $1.68 million ~ $1.20 ' 1 million, 'and $1.08 million respective1y, for space segment i ,! , service alone. Earth segment service charges in, the propoi,sed, CRTC 1 8001 vary by individual eart~ station. They are ann~al , () . \ rates for a five year per,iod that represent the pres~nt value . 1 , , .' -57- ( of ~ revenue requirement using the sum of capi ta1 , r~é?very and profit, plus projected general administration, opérations and maintenance expenses, adjusted by' a five-year '" weighted average infla~ion factor. 18 In CRTC 81-13, the Commission ordered a revision of the rates ta ensure that sufficient revenue was generated in all cases. 19 &) Satellite Utilization The"capacity of, Telesat' s satellite has been ,underutilized froIl1- its inception until 1980 when a combination of increased demand and a shortage of serviceable RF channels \. produced near1y full utilization and \re~ted a concern that a shortage wou1d exist until the Anik C and D series of satellites were launched. .. -k>,~ • • " Table IV-2 below summarizes Telesat satellite capacity utilization ( ov~r the period 1973-80. " Table IV-2 0 Telesat Satellite ca RF Channel, 1973-80 RF Channe1s !fi 1976 1977 1m 1979 1980 I.eased 8 Il 9 B 8 8 10 14 Not Leased 12'" 9 2l 20 15 Il 12 2 Protection 4 4 6 6 6 6 8 6 Falled 0 0 '9 2 7 Il 18 26 Total Availabl'e 20 20 30 2~ 23 19 22 16 fil capacity Utilization (%) 40 55 30 29 35 42 45 88 Source: CRt'C, "Bell Canada, British ,Columbia Telephone 1t , - Compan'y and, Telesat Canada: Increases and Decreases r in Rat~s for se~ices and Facili ties Furnished on a Canada... Wide Basis by Members of the TransCanada t o~ Telephone System, and Related Matters"_, CAC Exhibit 5. Telesat Canada, Annual Report 1980, p.4 1 /- -58- f) Profi tabilit,l \ \ / Te1esat's annual net earninqs and ret~ on eq'uity over the period of i ts operations ar~/ shawn in Table IV-3 below: // Table IV-3 Tel.esat AmUal Net EamÎlJJs & Retpm an ~ty, 197~80 J 1973 ill! 1.975 1976 1977 lm lli! 1980 Net '", /' L EamiIgs 1 "'oS> ($'OOO) . 1,568 3,648 3,657 2,459 '4,522 5,595 9,261 12,260 1 -j RetuIn al , &Jui.ty (i) 2.5 5.4 5.2 3.4 6.0 7.0 . 10.8 13.1 Source: Te1esat Canada, Annua1 ~eport 1979, p. 47 - . , '1 .1980, p. 20 " ( It sbould be pointed out that pursuant to the connecting~eement under which Te1esat joined TCTS, Te1esat 'was quaran eed minimum rates of return. TCTS paid Te1esat a-subsidy 0 $4.1 million in 1977 and $2.4 million in 1978 20 and no sUbsl.dy in 1979 and 1980. 2. Early Action by ~S to Remove Telesat as a Competitor a) ~ckground te the gstablishment of Telesat (J The formation df Telesat had been preceeded by a number of proposaIs by private interests to estab1ish a' communications·sate11ite'system. In October, 1966 a proposa! was made by Niagara 'Television Limited 'and the Power ..corporation of Cana~ Limited for a satellite system to distribute te1e ! vis~on pr~rammes for a third national tel~vision network~ In .arch,, 1961 a proposaI for a.doDest~c communications ",satellite system was _de by ':J.'CTS and CJICP. Later in the year, in 5eptelllber.l 1967,. ~A victor COJDpany Limited, Montreal '. -59- 1 n issued a proposaI setting out design critbria for a cOIIUlluni ~ f cations satellite that could be buil t 'by Canadian industry. Finally, in January 1 1968 Northern Telecom, the Beli Canada subsidiary 1 had announced an agreèment with Canadair Limited, Montreal, and Hughes Ai'rcraft Company, Los ~9'el.es to ~orm a joint venture to design and build satellite communications equipment.21 For its part, the Federal Government had designed and constructed Capdlda 1 s firsi:. satellite, Alouette l, through the Canadian Re~earch Telecommunicati.ons Establishment of t • the Defence Research Board. Alouette l, launched in 1962, made Canada the third na1!ion to have a satellite in space. It w:as a small satellite designed to, study the earth 1 s upper atmosphere and provide some information about conununi cations technology. S~ilar satellites were constructed in the years following wi th grea ter participation by pri vate 22 firms. ( The Federal Goverhment also commissioned prepara tory studies23 that led_ to the formation "of a Task Force under the h • 1t Science Secretariat to study and advise the government on '. i satel.lite policy and the use of domestic satellite communi for Canada. 24 The Task Force study formed the basis cati~s J of a White Paper, published in' March, 1968 enti tled A Domestic Satelli te Communication System for Canada J .fi The White, Paper concüuded.:'- t.hat satellite technology ,was uniquely suited to solve the problem of telecommunications ""'-..J o in Canada created' by sparsely settled regions and difficu1t terrain. It made specifie reconunendations on the structure of satellite operations. T-here wou1d fiot be.open entry into the domestic communications satellite business' and'competition amonq sateJ.litè operators as in the United States. It i recommended ,that all satellites and, 'earth stations be under (~ '", -~ .... - ----...... _ .. "t-...-~~...... s ...... ______-60- ( the control of a single management as: "This would provide the operational and technical control which is essential to facilitate the progressive incorporation of new technolo9Y1 and so fulf!ll the minimum conditions for financial' succe;s'~25 Indeed, an important rationale that the White Paper perceived for a Canadian satellite system was the aâvancement of indigenous technology and manufacturing capacity. It concluded that the Federal Government should participate in the management body in order to " ••• facilitate the l involvement of Canadian industry, encourage the advancement of Canadian science and technology , permit the reflection of the interests of various levels of government and otherwise best serve national interests".26 The national interest was referred to in the context of international negotiations concerned with communication satellites and the retention of sovereignty over domestic communications; however the White Paper recommend~d that the Government encourage privat~ participatiqn in the company through discussions with interested parties. It stated that: "The pattern of- ownership needed: to maintain effective Government control in those matters , , 27" involving n~tional interests will e~erge irom these discussions. Of particuI?r ~ignificance is the White Paper's remarks with respect to the 'competitive impact of the satellite system on domestic telecommunications. It acknowledged that the sàtéllite system'could. not achieve its maximum benefit without interconnection to existing and future terrestrial communications systems and that to a large extent, satellite , [1 and terrestrial systems are complementary. 28 lfowever, it observed that competition would: a) assist the 'successful " funding of the sate,llite company, hl promote the development, o,f long-distance c~unication technology and equipment, resulting in lower ~rices and greater choice to -the user, and c) facilitate the analysis of costs 50 that,rates for ( individual services could be identified. The observations of the White Paper in this regard are as follows: ... -61- ( "The organization shou1d have a corporate fom in order that it may sel1 its services efficiently to the common carriers and te1evision systems; in order 4fat it may compete effective1y in those areas wheré competition is appropriate; and in order that it may finance Lfs aC1;-iviti~s throuqh a suitab1e combination o~)~qüity and dêbt capital. fi The revolution in conmunications, which/the r introduction of a domestic satel:lite represent!i, . should initiate even further developnent of long distance communication technoloqy. This' will ' undoubted1y mean that a greater variety of equipment and equipment compbnents will become a.vai1able. The availability of as many competitive mean~ of 'long distance transmission, as possible is an advantage to the telepbOne . companies, to the broadcasters 1 and consequent1y / to their customers. Competition between technologies, as weIl as eompetiti6n between supp1ying companies, usually generates lower priees for theuser. It also ensures maximum versatility in the services offered to the ( public. The establishment of a separa:te body for 'cbnestic satellite cOlllllunications would facilitate the analysis of costs so that rates for the various types of service could be separated. This in turn wou1d assist in recognizin9 the need for subsidies (as, for example, for services to the remote and sparsely populated areas»)9 b) The Orafting of the Telesat Canada, Act '.. In pre;aring the leqis1ation for the establishment ; 1 of the satellite:corporationl the Oepartnlent of Communications and its Minister, the Hon. ~ric.., Kierans, dec'ided that owner- ship should be divided among three groups: the Federal ~vernment, th'; 9~neral public, and the telecommunic~tions common. carriers.' When he introduced the bill establishing 1 1 Telesat for Secopd Reading in the House of Commons on April 1 1 1 14, 1969, t~, ,Minister stated that) it was the Gpvernment s intention that the share ownership of each of the three parties should be approximately equal; no one below 30 per cent, and , . ------~--~------~~~..------~~.------~ -62- (, one-third ownership for each a logical divi~ion.30 Ironica1ly thè Minister rejected the possibi1ity of a joint partnership 'of common carriers and the, Government with the public excluded for the following reasons: "The public are the final users of the system.' and will pay,for it either directly through rates or indirect1y through taxes. Public equity in a'corporation initiated by the government fulfills the ideal of public participation in ventures undertaken in the name of the public; it fulfills also the urgent need for a broader selection, of Canadian owned companies available to Canadian investors. Finally, public participation will ensure accountabi1ity to the public at large rather than merely to those parties directly interested in -the ventUre. ft 31,32 In his speech to t~e House on April 14, 1969, the Minister of Communications, specified that the common carriers were being invited to hav~ a part ownership in ~elesat because of their knowledge of the telecommunications business and , ' also because they would be the'main users of the system which would be a complement, not a competitor to their enterprises. The Minister 1 s remarks in this regard were as follows: 1 "The considerations behind ownership by the common carriers deserve a more extended explanation. Aside from their expertise in telecommunications, the common carriers will be the principal users of the system. They will rent its services to retail to their own customers. The corporation will operate as a complement, not as a competitor, to the common carriers. Except in the instances. of the C.B.C. and of certain possible purchasers of a complete undivided television channel on a sustaining basis, the sole customers of the corporation will be the common carriers." 33 TCTS was not S~fied with this concession and u- 1 ( stated in a Brier to the Standing Committee on Broadcasting, Films and Assistance to the Arts, delivered on May 6, 1969, .' -63- ( that investing in a co~etitor ~ould be against the interests of their sh~reholders and poss~biy subject to disallo~ance 34 by their regulators. ,35 The Brief called for an amendment -1 to the bill that would restrict Telesat to dealing with only the approved common,carriers and the CBC and other federal and provincial government agencies or departments using complete undivided television channels on a sustaining basis and for their own use. 36 A.J. de Grandpr~, then Executive ; D Vice-President (Administration) of Bel~ Canada, appearing before the Committee with the Chairman of TCTS, suggested that the amendment reflected the clear intent of the Minister in his statement before the Bouse on April 14, 1969. 37 In a subsequent appearance before the Committee, the Minister strongly denied Mr. de Grandpr~ls charapterization becaus~ he h~d never indicated a willinqness to fore~lose the availability of satellite services' to any potenttal buyer of a tull channel on a sustaining basis. 38 He- rejected the amendment as unaccepta~e because it would mean that for practical purposes Telesat could deal only with the common carriers who would completely control its chances of survival. 39' The ~inister pointed out that there was a need for the satellite and terrestrial systems to complement each other but not at the"cost of eliminating the independence of the satellite enterprise~ His observation in this regard was as follows: "We should not have an excess investment in any industry because we are so short of capital in this country and, as you weIl know, we are nP.t importers of capital. On the other hand, "to also be complementary means that you do not throw the whole game away. They have to be complementary to the satellite system as weIl and the satellite system also has to have a fair chance of surviving. "40 Mr. Kierans suggested that the difficu~y coul~ be resolved by the common carriers stipulating in the~r contr~cts of participation that Telesat should only seil to customers "'\. ------_.------.------~--- -64- .. b . 41 who require a complete channel on a s b sta1n1n9 aS1S. TCTS concurred with this sugg~s~ion and, in J letter dated May 26, 1969 to the Ch~irman of the Standing Committee, 42 ",ithdr~w its amendment. .The bill that was eventuÇllly passed as the Telesat Canada Act was very general" in scope. There was little attempt to provide specifie direction to Telesat, rather this was left to the Board of Directors. Section 5 laid out in general terms the objects of the company to pr vide satellite telecommunication services on a commercial .~- ba is, using as much as possible Canadian design and construction o 'the~ system. Section 8 stipulated that the construction o satellites and earth stations, required the approval of the Minister of Conununications. Section 3q provided that the Telesat Annual Reports would be tabled in the HoUse of Commons. Sections 27 and 38 provided for the purchase of shares by the three parties mentioned earlier, but there was no stipulation on the division of the shareholdings. Schedule II of the Act provided directions on the limitation of ownership by non-residents, tie provincial governments and indiPBct ownership by the common carriers and foreign governments. Schedule l listed the approved commort carriers 43 who were permi tted to purchase shares in the co~pany. When Telesat signed the first of its service 1 agreements with the common carriers, it made an undertaking reflecting Mr. Kierans' compromise. The text of the letter by the President of Telesat, dated September 21, 1972, to 1 his counterpart at Bell, outlining this understanding is l ' 1 quoted in full below: .. 1, 1 "In connection with our negotiations with Bell Canada, the member companies of the Trans-Canada Telephone System and eN-CP Telecommunications for services over four RF channels - two channels for east-west services and two channels for services to the North - l hereby confirm an undertaking 7 we. had expres~ed verbally in the course of our -65- of discussions and negotiations to the effect that as a matter of p01icy, we wou1d only enter into ( agreements for services with customers who have a requirement for not 1ess than a whole RF channel. We had stated this undertaking would on1y be va1id for the initial five-year operating term of the agreement and the extension of one year if the option to extend is exercised. In our view, this undertaking is a fulfillment of a commitment expressed in the House of Commons by the Minister of Communications on April 14, 1969, whén he state8.: "Except in the instances of the C.B.C. and of certain possible purchasers of a complete undivided television channel on a sustaining basls, the sole customers of the corporation will be the common carriers". l am sure you will readily agree with me that the Minister élearly meant that "television channel" wou1d be an RF channel as defined in the agreement under negotiation. A similar 1etter to this one was issued to the Participa ting Carriers on August 11, 1972. Il 44 . Although this understanding reduced the ability ( .-' . of Telesat to compete with ~he common carriers, the poss~bility of competition remained; however it is clear that the management of Telesat had no wish to take this course. Ouring the / . per~od 1972-77 Telesat did not go outside the common carriers 1 and the CBC to sell its communications services. In testimony 1 before,the CRTCi the President of Telesat revealed that_ the understanding with the carriers was interpreted as precluding 1 competition. When questioned about Te1esat's proposed 1 memberShip in TCTS, Mr. 'Golden, the President of Te1esat gave the fol1owing evidence: "Q. AlI right. WeIl now,' as tQe leader. of 1 an enterprise that provides competitive te1ecommunications systems can you expIa in to ' me why it is you would not compete rather than joining with and sharing revenues with the Trans-Canada Telep~one System? A, WeIl, a decision was ,made !ll- 1969 wi th which l was in agreement, al though l was; not party to the decision, to invite the carriers , ( to become owners of Te1esat and users of Te1esat and as~. condition. to that agreement \ • T -66- Telesat agreed ta be bou d for a period of five years with an optio for a sixth year to conduct its business in certain way. When l became ~resident of Te esat, it was my view that that was a providen arrangement for Telesat, that that was al good commercial arrangement for Telesat,~that it was to the benefit of both Telesat nd its~customefs and the aoard of Directo s of Telesat agre~d \ with me and wé adopted t e ear1ier decision '-_ taken by the Government f Canada and the carriers as a Te1esat derision.n45 When the service agreemerts expired and Te1esat (by its o~n interpretation) wou1d no 1~nge7 be bound not to compete with the terrestria1 carriers, it )elected to confirm its prediliction for cooperation and member of TCTS. 1 This development is described in he next section. ! \ 1 1, Telesat became the tenthl, member of TCTS as la resu~t of signing a C~nnecting Agr1kement with the other members effective January l, 1977. The Agreement was ~ 1 reviewed by the CRTC and in Te1eccf Decision CRTC 77-10,4 dated August 24, 1977, it was not rpproved. The Federal 1 Cabinet overturned this decision ard the Agreement ,was 1 approved by Order-iI'l-Council P.C. 11977-3152, dated November 47 l, 3, 1977. , The dissatisfaction of tlhe CRTC concernea. the effect of the Agreement on the requirement" for effective regulation of rates and the prohi~ition of unjust discrim- ination or undue preference, and also a number of questions of general ,public policy/ inc1uding competition in telecom- • -61- ( rnunications /services. j'li th respect to' the competition policy issue, the CRTC saw the Connedting Agreement as • acting to restrict potentia1 competition by Te1esat in long-haul data, video and other private 1ine services. 48 Before summar~zing the restrictive features of the connecti~9 Agreement it woul~ be useful to review the events 1eading to its formulation. ( 1 a) Background ta the Connecting Agreement, 7 In 1975 Telesat began to examine the-alternatives for the future in view of the fact that its original service agreement would be ending in a few years and i ts satellites' useful terms were a1so nearing an end. There was a1so a concern about Telesat's poor earnings and low utilization of satellite capacity.49 One of the options considered was that Te1esat would join TCTS. 50 In February 1916 discussions ( between Telesat and TCTS began with a view to establishing, sorne type of membèrship arrangement. Along the way, CNCP was made aware of 'the discussions and on AUgu~t 14, 1916 ma,de a proposaI as an alternative to Telesat' s roembership in TCTS. CNCP's proposaI called fbr the establishment of a new association, made up of Telesat, CNCP and TCTS, in dWder t~ plan and construct long distance te1ecommunication, 1 fa~ilities. Rates and terms and~cond~tions for use of the facilities wou1d be established, subjebt to regulatory coritrol but cpmpeti~ion wouid ~xist between CNCP a~d TCTS on a service basis. There wouid be no competition between 7 Telesat and CNCP or TCTS; Telcsat would remain a carriers' '( carrier. f!j> _ In a 1etter to the chief executives of ,CNCP r dated_ September l, .1976, the President of TCTS rejected the: proposal . . , and went on to describe" the TCTS offer in the following ternis:' ( 1 -6B- "The TCTS'proposal for à closer relationship with Telesat Canada is a somewhat altrui-stic , one with little direct bene fit té TCTS but with long term benefits to the public of Canada. By/integration of Telesat' s planning r and design /with that of TCTS we foresee that an optimum satellite design will evolve and will yield the minimum unit cost for satellite facilities. It is our expèctation that this minimum cost will be slightly higher than that for terrestrial facilities used for' long haul transmission in the southern part \ of Canada. However, given approximately equa costs, we wil~ be able to extensively employ satellite facilities in our network without serious cost penalties and to establish a system 51 from which will flow significant other benefit ." Telesat also rejected the CNCP proposaI, on thè basis that the Qffer of TCTS was more advantageous to Telesat. Hav~ng disposed of the CNCP alternative the President of Telesat decided to seek cqncurrence from the Federal Gçvernment " before putting the proposed Agreement with TCTS pefore his (' Board of Direct~rs.52 The matter was considered by the Cabinet in Novernper 1976. A Cabinet Document prepared by the sponsoring ~ Départment, the Department of Communications, has subsequentl~ J been made public as a result of being released by the' "----_/ Consumers' Association of Canada, and it shows support fo~ the proposed Agreement. (,c~ \ ' The Cabinet Document argues for Telesat member ship in TCTS for two basic ·reasons. First of aIl, ~elesat -will be a financial liability unless it is more fully utilized. Second, increased utilization requires that \ ' \> Telesat become an integrated element of the national tele- communications system. Accordipg to the Department of Communications, 1ntegration 1s essential becàuse: , , • -69- ! " there ,has been no impetus to use the satellite for toll communic~tions because present 'terrestriàl, capacity has been adequate to accommodate growth at favourable costs. Furthermore, major integration of satellite facilities into a network predominantly using terrestrial facilities requires investments and ~lan ning that appear ,to have been discouraged by the present Te1esat/industry relation ship."53 The Department's prescription is further specified in the following statement found in the Cabinet Document: \ 1 "It is clear that the TCTS menibers must -\ make full use of the satellite system if. it is to become an integrated elemen~ of the national telecommunications system. This requires long-term investment and planning that TCTS is unwilling to under take on the basis of contractual arrange ments with Telesat that would be relatively short in duration." 54 The benefits of an ~ntegrat~d scheme explained in the Cabin~t Document are that the Federal government would not be required to provide financial support to Telesat and l • to pressure reTS to use the satellite system. In addition, the risk of over-capitalization in telecommunications capacity 1 wou1d be significantly reduced and the existing microwave ,1 routes yould not be made obsolete, although their further expansion would be deferred in favour of satellites. 55 1· 1 The only competition issue --reviewed by the Departrnent of Communications relat~d to CNCP's alternative proposaI. (It was advised against on the grounds that it was complex· and too long in maturation.) There 'w~s 'no suggestion in the Department's mem~randum that Te1esat should compete with the terres trial carriers. In-the area of competition u *.. F, -70- the real concern of the Department was the effect of ,Telesat membership on intercarrier competition, that is, between TCTS and CNCP and other common ~arriers. This is made clear in a letter by the then Minister of Conununications, ' the Hon. Jeanne Sauvêo to the Hon. James Snow, Minister of Transportation and Communications, Government of Ontario, dated November 23,1976. The Minister restates the principle of cooperation between Telesat and the cornmon carriers. The letter, in response to one from Mr. Snow pointing out his concern that telephone subscribers could end up sub sidizing Telesat, con tains the following two paragraphs in the body of the reply: "Basically 1 l believe that we should recognize, and indeed stress, the fact that satellite and terrestrial systems are comp lemen tary ra ther than competitive. Viewed ,in complementary terms, both technologiè§ can make an important con ( tribution to t)le development of telecom munications in Canada, and any aoncern that telephone subscribers might ultimately subsidize Telesat 1 s satelIite operations should be diminished accordillgly. Moreover, one of the features of the proposed member-' ship arrangements i5 that Telesat and TeTS will continue to review the requirernents for satellite services to ensure that the satellite !J, program bears a direct relationship to the requirements. l believe that aIl concerned will strive to ensu;-e high system utilization and that this in turn should reduce any potential cross subsidi zation from the telephone 0 sector. The potential impact of this proposaI on intercar~ier competition ls a matter to which we had to give careful consideration. In this regard, l am taking steps to ensure that the safeguards necessary for non-TCTS members forro an integral part of the agree- ment. l do not view Telesat rnembership in rëTS as a "merger" as you tefer to it. The primary effect of Il'embership will be a relatively stable environment in which bath ,Telesat and TeTS will be willing ta make financial and planning decisions that will resul t in~ater ~ use of satellites. It also allows for the , \ 1 ' .. , -71- ini ti~tion of a large enough system to provide f for economies of scale wh-ich Telesat b$lieves i t wou1d he unable 1::0 finance under the present type of contractual relationships it has with its customers. 56 In letters of the same date, November 23; 197.6, Mme Sauvé informed poth Telesat and TCTS that the Government accepted the membership proposaI subject to the Agreement's fulfi1Iing several conditions. Ni th respect to intercarrier competition the conditions were that: a) there would be .. independent ac.~ss to Telesat services wi thout dealing c;:-. through TCTS, h) CNCP and other non-TCTS members. could play an adequate role in planning for new satellites and s~tel1i tea technology, d):, the Agreement. wouid not inhibit, by rate .' structures or administrative measures, the right of ac~ess \ for no.n-TCTS carriers to u~ilize Te1esat' s capacity and . 57 servl.ces. r ( Fol1owing the receipt of this conunitment Telesat proceeded to the signing of a Memorandum of Agreement which was included in a new connecting Âgreement inc<;>rporating Telesat iri TC'JIS effective January l, 1977. , 4.. __ b) The Provisions of the Connecting Agreement .. , /The o December 31, 1976 Connecting Agr~ement58 incorporJes 'relesat as a full member of TCTS subject to the \ Memorandum of Agreement of the same date between,. Telesat and the nine member telephone companies which is attached ~ as Schedule A to the connicting Agreeme~t. The Memorandum of Agreement sets out th, terms of Telesat membership in TCTS, certain financial guarantees provided to Telesat by the other members, a commitment by the members to construct ...... ' and implement extensions ·to ~elesat ',s system ~nd a listing of the firms who qualified to deal with Telesat.: t , ,~ ( 1 The foll~wing briefly summarizes the leading sections of th~ Memoranqum of Agreement: ; -72- i) Space and Earth seginen.t Arrangements ( ~------• s.5 Te~esat will own and operate the communication satel1ite system consistinq .of tpe space segment and earth stapions. ~ s.6' (b) ~The establishment of the satellite system performance requirements, pl1ans for its inteqration with the terrestrial network, and the pl~s for meetiriq ~ervice requireinents w1.11 he set by TCTS. 59 Earth stations will be located at sites desiqnated "- Pl' '"l'CTS and acceptabl.e to Telesa t. In the event of a change in statutory ~equirement~ j f" 'l'elesat offers ta sell the earth stations, 'reTS o '~ wil~ have a first claim to ,purchase them. , Cl s.11 1'eleSat shall net own or control any terrestrial in " transmission facilities TèTs' members" opèratinq / teI:ri tories. Terrestrial facili tiès between an earth statioJ'.' and the prèmises of the user riil nOlfMlly • be provided by the 'lIC'l'"S member in whose terr~tory the. earth station is located although any Requl~ted. canadian Telecommunications Common ca_rrier (RCTCC) as defiDed in Appendix, A, contracting' for one or more complete RF channels (and Dot por1;:ions of cbannels) and associated earth_ station eqûipment may• ownIr and Qperate such terrestri~l transmission facilities. s.12 ~elesat may not proride s~tellite and earth facilities o separate~y fram this Açreement excépt for experimental or other speci.ali~d services net related to the business of ,'-'CTS. .4 oô 1·, -73- '.( s.13 Any RC'l'CC, as defined in Appendix A, May 'contract for one or more complete RF channels (and not portions of channels) and associated earth station equipment 1 - by applying to Telesat or TCTS. The assurance of service and rates for such service will be affected by commi~nts. . ~de by TCTS, although the rates will not be higher than those assessed to 'l'CTS or to • individual TCTS members where the same terms and t conditions apply. RCTCCs shall ·have the sole ight to market services based., on the use of portions of RF channels. . ii) Financià1 Arran9ement~ ---~------~- )" j ~~ .. s.17 Except for the years 1977 to' 1~80 bo'th inclusive, TCTS will throuqh s~ttlemen~~~rangeme~_ts_ provi&! Te1esa,t ~i t; an after tax mi imum rate of return , on equi ty ~1 to. the _weigh ed: aver~~e \r~te of return achieved by Belcl. and ~.c. Té1 fn dreir 1 current coincidental year. 1 For the years 1977 tQ 1980. both inclu ive, TCTS will tbrough settlement arran9ement~ Te1esat vith an after ~x rate of ret on equity df 6 per cent4 7 per cent, 8 per cen per cent respectively. s.18 Should Telesat achieve a rate of on equity in any year in excess of the specifie inimums, -. the amount of excess will: be shared 0 e basis ~ of 50 per cent ~elesat, 50 ~r cent ~ J '" . ,-1 " ,..J' '. 1 , { .1 f " .-14- " ( iii) System Commitments 1 s.23 TCTS agreesi to a programme tOl construct and 1 imp1ement extensions to Telesat's system to provide the folfowing ov~rall minimum·communications capability: 10 RF channels in the 6/4 GHz band, 30 RF channels in the 14/12 G~z band, eartb stations operating in either band ât a substantial number of locations. 5.24 Te1esat sba1i use its best efforts to provide the minimum capability for the operation of the/l~/12 ;1 GHz portion of the system by the secon~ half of ,1980 and the completè complement of earth stations no 1ater than December 31, 1984. \ \ iv) Provisions of Appendix A The companies which are RCTCCs for the purpàses of this Agreement and thereforè qualified to deal with Te1esat o~~TS for satellite telecommunications services, are: the members of TCTS (excluding Telesat), and, Canàdian \National Railway Company, Canadian Pacific Limited, Northern Telephone Limited, Okanagan Telephone~imited, Ontario North1and Communications, Qu~bec Tel, T~lêbec-L~e and Téleglobe. Ir , . 4. Summary and Analysis of the Elimination of Telesat as a competitive Force in Telecommunications Most of the mayes to limit the cOqletition of Te1esat ·that have been summarized in earlier sections of this', Chapçer are obvious but it is use fuI to review the evolution, ~~Of policy decisions taken by Telesat and its sponsor, the \ \epart.nt of COlIIDunications, and to CODDDent on the siqnificance c' of . particular marketing policies of 'l'elesat. " -. -75- i First of all, on the 1evel of competition among .1 : different satellite firms, the Whi~e Paper and Telesat Canada Act established tha;t Telesat would be the chosen instrument for the provision of domestic' satellite telecommunications services and theFebY eliminated the.possibility of co~petition within one technplogy in Cana~. Competition between Te1esat and U.S. satell'rte firms was removed in th. origi~al Telesat Canada Act by l' iting Telesat to Canada and confirmed in , 1 the Canada-cr. S ~ exchange of letters in 1972 which allowed for the extensi n of service to points in the other country only in speci-al- ,circumstances and subject to intergovérnmental 60 arrangements. \ The possibility of çompeti:tion between Telesat and t J t~rrestria common carriers was progressively removed ajt.er the fo tion of Telesat, although the CRTC f S rece:t;lt ~xamination6l f Telesat's proposed tariff' has struck down / seme restricti ns .and may go a long way to restoring competition.62 ·( , teaving aside, he impact of the CRTC decision, the story of t/~ removal of satellite competition in the past is marked by two phas~$: the formation of Telesat, and the Connecting .. Th's 'mey be summarized as follows: The ,federai governmen t' s study of domestic conununi satellites, the White Paper, recommended that ttle ellite company set up should compete with t~e conventional riers in the supply of long haul ~elecommunications ices. The Minister of Communications during this period " p efed:ed to emphasis the ,role of the satellite operator as c~l~entary to the terrestria1 carriers, but refused te ,~ede ~ontrol to the carriers by providinC] for public partic ~pation in-the equity of the satellite fir.m and ~nsistin9 / '. /that i t could deal direct1y wi th purchasers of whole RF channels. At least potential competi ti6n for the business of , these customers existed until the making of the Connecting ,[ . ; Agreement in January "}-977. This potential wall never l;'èa1ized, . ,. -76- in part, because the managemént of Telesat elected not tQ pursue these opportunities. • ... _i Competition was aiso made Iess I~kely as a resuit of specifie policy decisions taken by Teles:at in. the early years. Following the lead in the White Paper, Telesat 1 adopted the policy that only it could 0,r earth stations. Experience in the United states and wit~ the INTELSAT system has demdnstrated that there are no technical problems with customers owning earth stations and an official of Telesat has confirmed that this is so in testimony before the CRTC. 63 Quite apart from there being no technical problem the ,refusaI to allow customers to own their own earth stations makes it less attractive to use the satellite. Customers can establish ground facilities to suit their particu1ar needs sooner and without an unnecessary bureau ( cratie interface. There is more flexibility. Furthermore, in common with the liberalized attachment of other terminal equipment to the telecommunications network, there would be an accompanyinq increased demand for earth stat~op equip- ment resultinq in lower priees and greater product devel~pment. 1 AlI of these factors would 1ead to greater utilization of the satellite system and stimulation of competition with terrestriai facilities. 64 ,65 1 Telesat has consistently opposed liberalizing' its policyon the ownership of earth stations. 66 It was one of the fa~tors leading to its rejectinq of the CNCP \. ' \ alternative to Telesat membership in TCTS and it was ,reaffi~d in the Connectinq Agreement. With the exception ,o'f allowing customer ownership of televislon. reoei ve-only, èarth st~tions, introduced in the sprinq of 1979, the poli~y remains .' the same today. ,\ f,·,1 ." ' J • 1 1 < ~ < .' .. ". -,-_.~.,_...... --.-,.-$~ .... _.... _.•• t ,1--, ." 1 -77- IlThe second restrictive covenant that has 'been a _, feature'o~ Telesat's marketing policy aince inception~is the requirement that Telesat seil only whole RF channels to its customers. ft was originally established. in the initial service agreements~ it was confirmed in the Connecting Agreement with the added restriction that Telesat could deal with'onl?tcertain common carriers. It has existed until CRTC Telecom Decision 81-13 ordered Telesat to file a revised 67 tariff specifying a partial RF channel service. Once again it has been established that there is no technical probl~ in leasing less than a whole RF channel, indeed, the common carriers themselves have been involved in the retailing of partial channels and the practice is widespread in the United States. The poliey. does have signifieant antiçompetitive effects, however, because it ç mak~s the satellite unavailable to certain users who do not have the resources or the need for a complete RF channel •. ( If several small users could share a channel on their own initiative, or, as a result of the agressive marketing' of the satellite supplier bringing them together, it would promote the use of the satellite system in .competit~on to 'the terrestrial system. 68 At the timè that Te+esat proposed to join TCTS, '" the Department of Communications, under a new Minister, • 0 whole-heartedly embraced the view that competition should not exist between terrestrial and satel.lite systems •. The ~epartment' s sole concern for competition related to attempting . to safeguard that one group of terrestrial carriers, TCTS, did not have an unfair advantage over another, CNCP. The co-opting of Telesat in TCTS in 1977 marked the formaI e'nd to the possibility of satellites being in competition with' at least the dominant terrestrial faqJilities. '.. -78- Besides the fact that Telesat became part of a joint venture ( with its potential competitor, there were a number of restrictive terms contained in the Connecting Agreement. The first example is the limitation of Telesat's direct customers. This policy has the effect of incorporating an unnecessary third p~rty between Telesat and its final users. In addition to scepticism about the agressiveness of the selected common'carriers who are expected to divert sales from the!r ~ terres trial facilities to the satellites, there i s an extra ;'cost invol ved in their overhead and administration expense which is presumably borne by the end 69 user. Both' may be expeèted to reduce the utilization of the ,satellite system and ~hereby lessen cOIni>etitio~ wit'h ,alternative facilities. The restriction on direct dealing , '1' , was removed by the CRTC in Teiecom Decision 81-13, when Telesat was directed to refile its general tarift without , 70 ( limitations to its customer base. Another anticompetitive device contained in thè " ~ connecting Agreement is that Telesat will not own any terres trial fàcilities in TêTS' members l operating territories. - 1 This removes the possibility of developing an integrated service such as has been so successfully employed in the United states. Particularly with the 6/4 GHz band satellites where antennae are required to be located away from population centres, viable competition between the satellite and terrestrial, mode fQlr long haul, communications' is redu~ed when these short hop links are unavailable. 1)...The terrestrial carrie~ may weIl be less willing to provide these -important links and face a di version of traffie from its own long haul facilities and tperefore satellite transmission remains a Iess attractive al ternati ve. "-~.--,~- ~---~~---~- ---;---,-=------1 --- ,\, ~ . ... 79- J The third restriction term contained in the Connecting· ( Agreement i8 that earth stations w~ll be located at sites designated by TCTS. The significance of this clause relates to the future launch of the Anik C satellites operating in the 14/12 bands when earth stations are capable, technieally, of being located in urban centres at the users' premises. This means that the satellite system can compietely'bypass the terrestrial network; howeve~ subject to this clause \ . ., Telesat will be constrained from loca~ing ear~ stations at sites tha t take advantage of this situation. 7 The final, and perhaps JOOst direct, limitation on r competition stemming from the Connecting Agreement is the , restriction on providing satelli~e services separately i .( from the Agreement except for specialized space activities unrelated te .. ;he business of TCTS. Since the bûsiness ~ TÇTS already encompases a bread range of telecommunications services and is capable of expansion, this term has the effect of forcing Telesat to operate in an environment where competition has already been.foreclosed by a numbér of restricti ve cJauses. " In sunnnary the history of ~e~esat deScribes a relu~tance to use its new technoiogy to éompete with .the , established carriers. It is also a story of the successful efforts of TeTS to neutralize the competitive impact of satellite technology on their operations. The' po,sition adopted , . ls that the satellite system.must be a cooperative enterprise with th~.domi~ant established carriers in order to assure its survival 'and success'~ This approach was rejected in the united States in favour of competition. The next Chapter compat'.es the relative performance of these alternativès and examines the feasibility of competition by satellite in the Canadian long distance,communications market. , 1 -80- 1 ( l, Te lesat Canada Act R. S., c JI T-i, Section 34. 2 Ibid., Section 5 (1) and the statement of the Minister of Conununications, Canada, Conunons De~ates, April 14, 1969, p. 7494. (\ 3 This subsection is baJed on Telesat cana~a Annua1 Reports, 1979 and 1980. 4 Since September 1980 one of the 14/12 channels has been leased commercially for use in the Province of Quebec, Telesat Canada Annual Report 1980, p.S. 5 ~., 32. 6 Telesat Canada Annual Report 1979'1 p. 47. ", Te],esat Canada, nA Technical Description of the Canadian Domestic Satellite Conununications System", mimeo., undated, Chapter 4. 8 Telesa~ Canada Annual Report 1976, p. 4. 9 Telesat Canada Annual Report 1979, pp. 12-13. 10 In November 1972 officials of the Canadian and ( united States Goverpments exchanged letters, constltuting an intergovernmental arrangement, that the respective domestic satellite telecornrnunications systems wou1d be precluqed from providing assistance to one another except Under certain $pecial circumstances, such as, catastrophic failure of either system, or when one count'ry does npt yet have a system in 1 operation, or when i t may have a temporary sho~tage \ of adequate facilities. This is found in: CRTC Hearing_ l "Bell Canada, British Columbia Telephone Company and Telesat Canada: Increases and Decreases in Rates for Services and Faci1i ties Furnished on a Canada-Wide Basis by Members df the TransCanada Telephone System 1 and Related Matters", DCCA Exhibit 2. . , ,lI Telesat Canada Annual Report 1979, p. 14. • 1 12 David A. G~ldn, ·"Te1esat Canada and the Canadian , Space progr ", Notes of a Lectur~ to the Royal i Canadian l stitute, Toronto, March 12, 1977, p. 14. '13 ~. 10. , 14 CRTC, ,Tel~om Decision. CRTC 81-13, July 7, 1981, Chapter V'.' 15 Other rul,ings from CRTC 81-13 are referred to in section 4' of this Chapter. l,. -81- • 16 ~., 165-66 (. fi' 16a These are the same as those described for the, U.S; carriers in Chapter III at p. 3Si 17 CRTC, Telecom Decision 81-1,:), p. 182 18 "Ibid., 186 19 Ibid., 188-89 20 CRTC Hearing, "TéTS-Te1sat, Il Te1esat (CRTC) 4 Feb. 80-607 21 on A Canada 22 Alouette II was 1aunched in, November, 19651 ISIS'~ ______and ISIS II were 1aunched in January 1:969 and April ~ 1971 respectively. See Canada, Oepartment of ~ { ... Externa1 Affairs, "Communications Satellites: The ' --- Canadian Experience'! Undated," pp. 1-3. 23 Science Secretariat, "Upper Atmosphe~e and Space programs in Canada" January, 1967; Science Council, ( liA Space Program for Canada ", Ju1y 1967 referred to in White Paper, 38. - , 24 Telesat Canada, Annual Report 1979, p. 4. 2S White Paper, 46. 26 !Ë.!2.. , 56. / 27 Ibid. , 70. 28 Ibid. , 12 • l, , 29 I~d. , 46. 1 y 1, ~h Canada, Commons Debates, April 14, 1'969, p. 7496. f( 3i Emphasis added. Ibid., 7495. i 32 By March l, 1~72 the Federal Government and theq approved common carriers had taken one-ha1f each -df a total 6 million common shares, a110tment at 1 $10 a share. Tele~at Canada; Annual Report 1979, p~9. 33 Commons Debates, p. 7496. , , 34 Canada, Hoç.se of Commons, Standing Commi tteé on (:. Broadcasting, Films and Assistance toQthe Arts, Minutes of Proceedings and Evidence, May 6, 196~, pp. 1679-80. • -82- ( 35 Whi~ adamant in their opposition ta the creation of Telesat as a competitor, TCTS argued, ironica11y, that a satellite channel would be'3-4 times mQre " expensive for east-west communications than a conventional terrestrial channel. Ibid., 1677. . 36 ~., 1680. \. " 37 Ibid., 1728, 38 ~.r 2070, 39 Ibid. , 2048-49, 40 ---Ibid. , 20/2 . 1 41 Ibid., 2050. 42 lli9,. , 2125. 43 ~ . See section 2 a) of this Chapter.lt ...... 44 Canadian Transport Commission, Telesat and ',participating Carrier Service Agreement Executed September fI, °1972 Exhibi ts ..File, Exhihi t III. 45 --~------CgTC Héaring, "Telesat Canada, Proposed Ag~eement 1 • wi th'"T,~~ms-Canada Telephone System, Il Transcri~t Volume 6'~"PP,. 926-27. , , 46 ;RTC, "Te1e~~~' 'é'~rli~'da~, Proposed. Agreement' wit ';' , Trans-Canada Telephone 'Syst,~m, Il August 24, ~9 7, ~ Telecom Decision CRTC 77-10."·"" - /, " , ~!, -' l "4 47 Canada, Privy Counci1, P.C. 1977-315'2; -Npvember 3, 1977. .. 48 CRTC 77-10, pp. 1-3, pp. 52-56. tf-/ ,-y 49 lIt applying' to the CRTC for approval of the Connecting Agr~ement a Telesat Vice President commented tha~: 1 "Sinee Telesat commenced operations. in 1973, the! } satellite communications system has been und.~ruti1ized( and the revenues of the Corporation have been 1 inadequate to provide a reasonable ràte of return." letter of Ronald Turta, January 21, 1977, CRTC Exhibits File. 50 CRTC 77-10 , p. 13. 51 CRTC, Exhibit File, Letter of E.O. Thompson, September 1, 1976. , ' o -83- 52 He wrote the Minister of Communications, thé Hon. (, Jeanne Sauvê, in early Septernber 1976, . pointing out that, whatever the legalities were, neither Telesat nor TCTS would enter into an association if the ,-r Federal Government was opposed. CRTC, Exhibits File, Letter of D.A. Golden, September 7, 1976. 53 Canada, Department of Communications, "Proposed Te1esat Canada Membership in the Trans-Canada Telephone System"" Undated, p.3, par. 13. 54 Ibid.,' p. 3, par. 16, 55 Ibid., p. 4, par. 17. 56 CRTC, Exhibits File, ~etter of the~on. Jeanne Sauv~, November 23, 1976. .' 57 CRTC 77-10, pp. 14-15 •. " 58 CRTC 77-10, Appendix l. 59 AlI references to TCTS include Te1esat.. 60 See Footnote 10. CRTC, Telecom Decision CRTC 81-13, July 7, 198!. .( 61 62 TCTS petitioned the Federal cabinel to vary or rescind this Decision July 23, 1981. ' 63 ' CRTC Héaring, "TCTS-Te1esat", Tra script Volume XIX-A, pp. 3433-34. 64 Support for this position is cont ined in t:he testimony 1 of witness for Broadcast News an Cable Satellite Network. Transcript Volume XXI, pp. 3882-83, p. 3783 Ibid. 6S In CRTC 81-13, the Co~ission p intedlyobserves that there does not appear to be a justification for Te1esat being the exclusive owner of transmit earth stations. CRTC 81-13, pp. 202-03. 66 Te1esat Canada, "Earth Station Ownersbip The Te1esat Canada Position and Recommendatiions" mimeo; March l, 1978. .. 1 67 CRTC 81-13, p. 195. 68 The CRTC has qiven notice that the prohibition against resale and sharing of. satellite capacity is- in need of review which it will undertakeJ in conjunction with a sirnilar review with respect to terrestrial services. CRTC 81-13, pp. 206-07. j , , g, \ C' 69 Ibid. , 193. • . , - 70 ~bid., 193. , 71 CRTC Hearing, "Te1esat Canada, 'Proposed Agreement with ~rans-Canada Telephone System". Argum~nt o-f Counsel for thè Director of Investigation ~nd Research, Combines 'Investigation Act, undated, ~30. t ·f \ .i 1, i, i \ ". f , • ( < .,' " .0, ~ '. , . l, " , " "" . , r - , 1 , /t/Jl. J- " fl" " • '1 ~ , , _Î' .' (. " ", '"" -/?, , ' , . :1' .!.~ ": ~ , , " . " '. -85- ~ \ 0, CHAPTER V A COMPARISON OF SATELLITE SYSTEM PERFO~CE: COMPETITION VS COOPERATION ( The parallel development of Jsatelli te communication systems in Canada and the United States presents a rare opportunity to compare the performance of the systems operating' under different philosophies. In the United, States of course satellites have played an important part in the liberalization of competition in the supply of long distance communications services. This resul ted from the FCC' s acceptance of the principle that competition "should enc~urage service and technical innovation and provide an impetus .for efforts to minimize costs and charges to the public." 1 In Canada, on the other hand, a similar acceptance of competition by the ICRTC was rejected by Telesat and the federal government in favour of cooperation with the established carriers that \ , would integrate the satellite system into the terres trial network façilitating long-term planning and investment. 2 The strongest potential argument that can be made in defense of the coop'erative approach is that the economies of l ' , ' scale anç scope in telecornmunications oconstitute a natural , , monopoly"and/or that cream skimming by satellite operations • would cause an unacceptable disrupt~on in the pract1.ce of internal subsidization within the industry. The meri-çs of this .J:dnd of argument are examined in the first two sections --of the Chapter, under the headings: Natural Monopoly, and. Cream Skimming. In brief, i t is concluded that the evidence of natu~al monopoly characteristics is weak and unconvincing and that there would appear to be no overriding .reasons for concern about the effect of satellite competition on inter- ," servicersubsidies~ , Having disposed of the major argument that could be " ., ~ made, in support of the cooperativè approachi' the third section of ,-<\,.• ~ .. ,.~ the jhapter presents a comparison of '-the' performance' of the J- 'Cr 1: Cana ian and U. S. satellite systems in terms of the relative -f I,. leve of rates, -the choice of services, and technological '--_- , t ' progressiv.eness. 'lfft'e chapter's final section examines the role ~ l i of Cfmpetition as a factor influencing the different performance • __...... __',_._-__...... - ~f th~_:.t~_l_i_t_e_o_p_e_r_a_t_i_o_n_s_i_n_t_h_e_t_w_~o __ c_o.",...,un_t_r_i_e_s_. __"'"- _____....::..~ ..,. ~ .. -86- . ' 1. Natural Monopoly • J , / 'Natural monopoly·is the situation where it is less' costly for a single integrated organization to supply a service, or several serVice~ than it is for separate and competlng organizations. The conditions of nat~l monopoly have been ' asserted to exist in t~e ca~~dian'telecommunicat~ons industry.3 If more than one supplier is allowed. into the market there. o will be a duplication of facilities and an ineÏficient. allocation of resources. If the market circumstances do not lead to tacit collusion among the suppliers, one firm will· -become dominant and earn supernormal.profits unless regulation is imposed. There are two variations of the natural monopoly argument: a) economies of scale, and b) economies of scope •. a) Economies of Scale Economies of scale is a planning concept that refers (' to a proportionate increase in the physical inputs of a product resulting in a more than propor~ionate incrèase in output. It is most often thQugqt of in terms of a declining average cost ~s output increases and input priees are constant but it should not be confused with lower unit cost that results from the utilization of excess capacity. Econo~ies of scale , . ia a static, concept ~nd therefore lower costs that result from technical change cannot be attributed to scale effects. The impact on cost of capacity utilization and technical change are very difficult to factor out of estimations of economies of scale and undermine their reliability, as will be noted below. The existence of econoll\ies of scale alone is not ., sufficient reason to limit competition; however a stronger case·may be made when they'exist over a considerable portion of the available market and they are internaI to.the firme \ , -B1- In th!Dlatter situation, the ~~ër costa are available only to the fi~ that expands its production. with respect to the former, if maximum" scale economies ocurred at an o~tput equaJ to th~ee-quarters of the total demand of a ~ product, for examp1e, efficient production cou1d likely on1y be carrieq out by one firme (1 l' A test of the importance of cooperation in the tele , ~, communication industry isevidence of the existence of Waverman 1 s system econornies of sca1e, that is, the overall economies I~ of sca1e in the te1ecommunications plant. This is distinct 1 from product-specific economies of scale that examine individual services in the telecommunioations industry such as long distance or local. Although the existence af • product-specific economies of scale in long distance services does not have a direct bearing on the validity of the argument , for cooperation' among teleconununic~tions suppliers it is ( important insofar as it determines whether there would be f a cost penalty for entry by a satellite system into the L intercity market. Therefore we will examine the evidence l' 1 1 of scale economies in the long distance market bèfore looking 1 1 1 at systems economies of scale,. 1 1· , , It has already been noted that 'Waverman reported sorne economie~ of scale in ~is ~t~dy of ~ numbe~ of privat~ microwave. systems' in the United States. His results roughly 1 correspond to a scale elasticity ~f 1.43. 4 John R. Meyer î ét al. reviewed engine~ring studie~ in the United States 1 and concluded that long distance scal.e elasticity appears to be between 1.1 and 1.S'at t~e ou~lde.5 u~ing an econometric mode 1 , Frank Kiss et al~ of Bell Canada were 1 unable to produce strong evidence on economies of scale with l' • 6 Q: respect to Bell Canada's toll serv~ce. In aIl these st~dieS, except Wavermanls, an important finding is missing -- whether the observ~d economies of scale { --.....\------~ 1------'-8a- (' occur through all observa~le value of output o~ are \ exhausted at a certain rate' of output. Waverman observes ~ that, based 'on limited evidence, there appear to be sub stantial, scale economies up to a capac:ity of 1,000-1,200, .. , 1 voice circuits, and then only a slight advantage for larger systèms. 7 If this is"the case, then entry by satell.j.te ~ ~ is no~ likely to haV~significant 90st penalty because the capacity of the main routes in the Canadian microwave network is well in excess of this threshold. ,~. : 0 • 1 Aa observed in Chapter l satellite economfes of 1 scale'appear to be significant, although in estimating them there i9 the.. usual problem of· controlling for lower costs due to technical change. Satellite', technology a':Uows a >. new twist in achieving scale economies and lower ~ost~ , due to capacity utilization. Unlike terrest~ial transmissî?n systems that ar~ fixed between points, satellite capaci~y is • , 1 available for a number of different links. Therefore --a scale efficient satellite~ fully utilized, may be applied to a number of routes and not cause a cost penalty in any one route even if terrestrial scale economies are exhausted at' a higher rate than 1,000-1,200 circuits. Turning to systems economies of scale a number of .studies have looked at the question of overall scale economies in the telecommunications plant and are summarized" briefly as follows:. 1 Christensen et al. usë data from the U.S. Bell System to develop an econometric model based on hypothesised cost funètion and conclude that there are scale economies in the r:ange of 1.3-,1. 7. 8 At the confe·r~nce where they ~livered their paper they were critized by another participant for specifying a single-output co st function because it _ 0 . ignores the possibility that results may be.biased due to ' (~ ,.strong scale economies on looal service outweighing negligible 9 or constant economies of scale on toll service. 1 Ii. __ ~ _____: __ l , , ~- -, ------s'--~ ------89- The Bell Canada study, 10.· referred to earlier, found Ir, • that scale elasticities at the expansion point (1967) for op~, two, and three output models varied over the range 1.22-1.75. 'This s'tudy, i1, common' with aIl the .econometric investigations, relied on ttm~eries data, in, this case over the period 1952-78. One of the majdr problems wich this approach is 'that it relies heavily on the assumptions under which the effects of technical change are removed. In a paper delivered at the conference already mentioned, Professor Fuss observed that the separation of efficiency gai~ into those due to scale economies ànd those ~ue to technical change is very gifficult and "Re1iable estimates of economies of scale and economies of scope will . .-""-.... probably have to await the deve10pment of a pooled' time series- cross section data base. nll It is curious that a study using cross-sectional data has never been completed given the free exchange of data within TCTS. , Two earlier studies using Bell Canada data, Dobell et al. and Fuss and Waverman arrived at scale elasticities in the range of 0.85-1.11. 12 These two studies and athird by. Professor Carr were presented during the CRTC hearing into the interconnection of CNCP with Bell.13 The evidence of four ~ economists(including Fuss and Waverman) who testified-as expert witnesses for CNCP,after reviewing various studies on the extent of economies of scale for Bell and for ATT in the U.S.,in addition to those presented to the h~aring, was that: ~ i ft there is no quantitative evidence that determines in/hard scientific terms: 1 1 a) th~ existence of any of these'economies, î t b) the precise function in the network which suppîies these economies, c) the magnitude of such economies, j ( ------~------90 .. , . \ ' d) a compar~son of the. true lonq run incremental ( costs to society of having additional services supplied by the current franchise.d firm rather -than by.a newentrant, and \ e) the difference between scale economies (the incremental decline in per unit cost when output is expanded with full utilization of capac'lty for a qiven tecliiiOIogy) and economies of fill (~ne decline inper unit cost when existing e~cess capacity is spread over larger outputs). This distinction is especially • important since i t has been demonstrated that regulated utilities have incentives to operate with excess capacity.nl4 The wi tnesses also C,onc l uded tha t : "In summary, the majority of econometric studies of economies of scale are based on aggregate company-wide data and do not ,concentrate on specifie production tinits such as local.looping, switching, trunking, etc. They ignore problems of capacity utilization, measure' the effects of technological change by proxy variables, . and utilize functional forms which impose strict a triori judgments on the production character stics. Some,studies utilize regression techniques which are biased, and do not report the confidence interval Il "estimates. Such studies cannat be used for ,v .poli.!i:Y purposes. In short 1 the available evidence is consistent with the hypothesis that telecommunications systems May be operating with economies of scale, constant returns to scale or diseconomies of scale. 0" --'W~juât dO.,not have precise enouqh estilllates availabl~ from t1\e applications of _fhis technique. 1115 " The Commission stated in Telecom Decision CRTC'.79-11 that: " .•• no conclusions can be drawn from the available ~vidence as ta the existence on non existence of economies of , scale. If' 16 It further stated that': \ ( o -91- nOn the basis of aIl the material submitted on this issue, the Commission considers that Bell failed to provide adequate empirical evidenoe to support ifs contentions regarding the nature and exteni70f any economies of .... scale ep,joyed by it'! , . There appears to be no recent contradiction of this conclusion. Another study by Fuss and Waverman, cOmInissi~ned by the Economieh Council of" Canada for its Regulation ~ Reference, concluded tbat any overall economies of scale in the Bell system ,are modest at best and "there exists no evidence on scale economies that would contradict, recent •.• decisions concerning the desirability of'competition in J competiti ve services." 18 1 o D In summary, the evidence qf sys~em economies of scale in telecommunications does not support the existence of a natural monopoly basis for centralized planning or ( cooperation among communication enti~es. ~he next section will examine whether these characteristics are better . explained by multi-product natural monopoly. b) Economies of Scope 1 The existence of numerous multiproduct firms in most industries has led to the hypothesis that a firm may be a natural monopoly not on the baBis of absolute size or scale but due to technological cost complementarities among products,. known as economies of scope. Economies'of scope mean that joint production of several goods or services by one firm i8 less costly than the combined costs of production of individual speciality firms. According to one of th~ founders of the multiproduct natrual monopoly literature,' Robert Willig: , . ( ., ) ,. - ~~ ------..,92- "Economies of scope arise from imputs that ( are shared, or utilized jointly without com plete congestion. The shared factor may be imperfectly divisible, so that manufacture of a subset of the goods leaves excess capacity in some stage of production. Or sorne human or physical cap,i tal May be a public input w~ich, when purchased for use in one production process, is then freely available to another."19 Whether the integration of ~elesat into TCTS takes advantage of economies of scope of the nature described above is open to spec\,llation. It is conceivable that the co-location of a' satellite 'earth station with a microwave" re1ay station would involve sorne sharing of costs, but this saving is pro bably not substantial and will be 1ess important when the 12/14 GHz system has the capacity to bypass the terrestrial network. The more efficient utilization of satellite RF channels would 1 1ead to cost savings but RF channels have been made indivisi9le 1 as a 'result of restrictive practices not because of technical 1 reasons. Finally, i t is not clear that planning and investment and the factors cited by Waverman involve indivisibilities in l /' facilities or management personnel that would calI for central 1 control over satellite and terrestrial systems., k 1 1 l- As was the case of economies of scale, the existence t and importancè of economies of scope is an empirical question. There appears to be little or no evidence of their size. 20 Baumol and Braunstein found that the conditions for natural monopoly exist in the production of academic journals, but this result has not been repeated for any other industry because of the large amo~t of demand and'cost information'required which Baumol adroits calls for" .•• data that May lie well beyond the range of recorded experience ... 21 ( -' - L -93- In Canada, Rl1ss et al. in the study refe;-red to f earlier,' were unable to discover statistically significant 1 global and local economies of scope in Bell, Canada over the 1\,\ 22 period 1952-78. Their results were confirmed by Fuss \' and Wa'\1:erman. 23,24 '1 The lack of empirical evidence of economies of scope, and more fundamentall\ the virtual jmpossibility of providing empirical evidence means that there·is no empirical support for the existence of a multiproduct natural monopoly in telecommunications, al tqough there is similarly no '. grounds for rejecting its existènce. However it should q.lso be noted that the assumptions of the theory have been subject to sorne criticisms. One of the general criticisms made by Joskow and Noll in their review article of regulatory economics has special relevance to the case of innovati ve entry into the long distance market by a satellite system. They observe that the theory assumes that entrants only replicate the services already offered by the monopolist rather than provide new services. However, once the product mix is allowed to become variable, the optimal market structure may be monopolistic competition rather than monopoly, even --• .-Y 1 25 in the face of strong economies of scale and scope. A special case of multiproduct natural monopoly is the finding that a natural monopoly may be unsustainable. J That is, the monopolist, producing and pricing efficiently and earning zero economic profits, is nevertheless vulnerable to entry by firms wi th nei ther new products nor improyed technology. The intuitive policy prescription is to control ~ entry because total, industry costs will rise as the natural monopoly is eroded. However, Meyer et al. show that the " actual incidence of unsustainab~e natural monopolies in telecommunications is likely to be limited based on the factors , which underlie sustainability ~ These factors are demonstrated by Panzar and Willig to be: ihterproduct substitution effects, product-specific economie's of scalË~, and economies of scope, (which they refer to as economies of joint product) .26 ,---~.~------~ ~------___ J_. __ -94- ( For example, the existence of strong economies of sèale in a particular produet may allow an entrant te forego cost complementaries and specialize succe~sfully at a lower priee and a larger quantity than ean the monopelist. The monopolist would be unable te match this lower price if the -\ average incremental costs of" other prQducts were increased too rapidly by the lo~'s of demand resul ting from a high 27 cross-elastici ty arnong the products. Meyer et al. show that unsustainabili ty' would require: posi tive cross-elastici ty of demand among products, fairly strong product-specifi,c econ9mies of se~le, and only 8 modest or slight economies 0 f scope. 2 As reported above there is no evidence at all about economies of scope, but they observe that the evidence of economies of scale in telephone services (modest or negligible) and cross elasticity (negati~e.., between local and long distance; positive between message toll, WATS, and private line) would suggest that ( local service is sustainable in the face of intercity competition, and the actual revenue losses in message toll service are likely to he minimal Fecause of slow penetration and the high growth rate of intercity services. 29 ' In sununary the evidence of two measures of the existence of economies resulting from centralized control in tÈilecommunications does not support the case for cooperation in the supply of telecornrnunication services. The next o section will examine the significance of a disruption of inter-service subsidization, in telecommunications as a result of competition. i 2. Cream Skimming 1 Cream skimming has a variety of meanings in the economic and regulatory li terature;' wha t is meant in this 1 ( section is competition that redl.lces the contribution of sorne \ --.. ---~---~ ------_ .. _------,--___ ~ __I " ' ------~. ~ -- -'- -95- ( portions of the Canadian telephone companies' bus iness to common costs and therefore endangers the service to other customers or imposes on them a greater share of the burden. 30 Competition in the provision of. intercity telecommunication services is alleged to be cream skimming because of the belief that the telephone, qomp9nies,10ng distance service ( subsidizes local service, so that a revenue diversion to a competitor must be offset by higher local rates or poorer 'service. It is also alleged thtt the telephone companies are constrained in their resPofse to cream skimmers not "because of inefficiency but their obligation to provide universal service under a system of price averaging. 4 The issue of cream skimming was one of the main arguments of Bell and other 'telephone companies in op~sition to CNép' s application for interconnection. This was made clear in Bell' ~ opefting statement: " if CNCP were to be granted the rights it seeks in this application, the almost inevitable result would he either a decrease in the qua1ity of telephone service in Bell Canada terri tory and perhaps throughou t the country, or an increase ~n local telephone rates for the ordinary residence telephone ,user. "31 The significançe of crcam skimming to' the establishment of Telesat in competition with the terres trial carriers depends 1 on the revenue effect on the carriers. The' calculation of the J. impact of competitive entry by Telesat on established revenues 1 and rates is a complicated matter well beyond the scope of this paper; however i t is possible to draw sorne tenta ti ve conc 1 us io~s from the examination of the CRTC related to i ts decision to o allow CNCP to intérconnect with Bell. , l' ft_- ____ 4------_._------, -96-" As described in Chapter II CNCP sought and was granted interconnection by the CRTC in furtherance of competition in the data communications and privat~ line services markets., Bell contended that CNCP's enhanced competition would resul~ in a revenue loss of $235.2 million which would r~quire inc~eases in basic residence and basic business rates of 27 per ée~ and 37 per cent respec~ively. The Commission ruled that-aell's estimated revenue loss was grossly overstated and that the-rev,nue short fall would actually require an increase in basic residence rates of 5:5 per cent and,7.S per cent for basic business rates. The Commission, also observed that the distribution of an additionél'l rate burden on local residence telephone rates was not'the' only or preferred method and that rate increases that May result trom CNCP's application should be borne primarily by the business users MOSt likely to benefit from interconnection. 32 \ An application by Telesat fOr interconnection with Bell ( and the other te~ephon~ companies should not have a significantly different impact on local rates and service than was judged to be the case for CNCP. Although there would then be three éntities competing for the pr~vate line and data communications business, this market May be expe,cted to have grown from the projections " , j made for the CNCP application. Furthermore part of the acceptance '1 of satellite communication services in the United States is based 1 • :f.- .J on the fact that they are different from the traditional services. , ,, New and innovative private line and data ser~ices provided by j Telesat w~uld expand the market rather than divert revenue from 1. 1 the carriers. l 1 Local rate increases in the~rder of 5.5-7.5 per cent as an upper limit are not significant enough to raise concern . about cream skimming although if Telesat began providing an alternative to MTS and WATS through a switched inter-city network there could be a revenue drain on the telephone companies affect ing their ability to provide universal service. The magnitude' 'C of such a revenue effect cannot be predicted at this point, since • , ~------~'~F·------91------" there is no reliable ,information available in regard to the revehue/cost relationship' for i~dividual services. Whether (,)1: would be justifiable should be up to the regula±.ory authori ty, f however, and not the carriers. Competitive entry could force the re,gulators to pay greater attention to efficiency con'- siderations in approvihg rate structures. •• 3. A Comparison of the U.S. and ~anadian Satellite Systems' PeI;',formance ' The'preceding sections have shawn that there would appear to be no convincing evidence of grounds for favouring the introduction of sauellite technology by cooperation ~ather 1 than competition. This section presents evidence of the l, . 1 -superior performance of satellite' systems in the united States where inter-modal competition is one of the fundamental 1 chara-cteristics of the telecommunications market. The finding of "superior performance" must be qualified insofar as it relates to certain criteria, often emp10yed in industria1 organization economigs, but whïch do not necessarily encornpass aIl ( valid measures bf performance. Other possible crite~ia which have been associated with the Canadian domestic satellite 1 system, such as, Telesat' 5 role in developing a high technology 1 1 aerospace industry in Canada, or its success in providing i 1 service to isolated areas of Northern Canada, have not been considered. , With this proviso in mindl suitable starting point is the comments of a frustrated pot~~ial custo~er of Te1esat, Broadcast News Limited, contained in its Argument to the CRTC with respec~ to Telesat's proposed tariff CRTC 8001: , , "Not very long ago Canada was a wor1d leader in satellite telecommunications. Canadai as a country wi th a vast land area interspersed with pockets of population, was a natural . candidate for a . i ! { closed. by aggressive and inno.vative activities 1 in the United States. 'he question to be addressed now ~s whether Canada 'Will fall .~ further behind or, alternat1vely, take steps ta match the innovation and progïess burstinç (" forth in the Utti ted States. 1. The activities of conèern in the Uni te'd States are not technical in character' - the Canadian satellites are certainly the equal of those of other nations. Rather, the key concerns centre on the use to whian our ", satellites are being put. Whereas ~: " 1 aggressive marketing tac tics of th,e United States operatars have brought forth an abundance of new satellite users wi th novel. applications, the Can'adian scene is characterized by insipid marketing of satellite services t and few satellite users ... 34 These strongly worded remarks are substantiated in the comparison between Telesat and the U.S. satellite firms that foll~s witll"'respect to: a) rates, b) services, and c) technolog- ical deve1apments., ' .... <' a) Rates The rate structure for satelli te co~nications that evolved in the United States has been much more flexible .than " Telesat' s until the recent CRTC 8001 filing which copied the U.S. 35 " tariffs. Among the features available in the United st:p.tes , were: different categories of servic~, such as, protected or ; . ~ unprotected (the latter available on a preemptible basis), and j monthly rather thgn minimum yearly leasing terms. 1 ~ 1 L --- ! . Beyond fIe, xibility the U.S. satellit~ firms rate 1 \ J structure hq~ always been lower than Telesat' s.\ This was . 1 . ! admitted by Telesat to'" be a matter of record. 36 Mention was made . h ! l.en Capter III of annual rentals under fl million (U. S.) in an 1 effort to fill excess capaci ty in the early days of domes.Vc 1 satellites in the United States. No such promotional disc~t~1 ( t~ probe the elasticity of demand for new services were offe~~d by Telesat. 37 , Î . ----- .. _.. _--_ .. -.------,.,....:..-.--~-.-.,.....,.------/- ~ . TABLE V-l ~ Month1y Rates, Full Period Space Segment Service, Te1esat, Western Union, RCA Americom, Effective May 9, 1980 - >. '-0 ". ($000 Canadian) ... UNPROTECTED FULLY UNPROTECTED 0 PROTECTED NQN-PREEMPTIBLE PREEMPTIBLE ~ 0 d Te1esat WU ,RCA Te1esat WU RCA- Te1esa't WU RCA , , . A. 1 Year Terrn '. 1 RF Channel 1-80 230 138.8 125 149.5 o 100.9 - 115 115 57.5 5 RF çhannela , 170 23(} J 130.3 120 0 149:5 92.2 110 115 57.5 10 RF Cbanne1s 150 230 1208.1 105 149.5 90 95 115 -57.5 J B. 5 Year Terrn " 1 RF Channel j 180 17,2.5 129 125 96 91.1 115 75.9 55.4 S,RF Channè1s 1'0 172.5 121 120 96 83.0 110 75.9 55.4 1 10 RF Channe~s ' 150 172.5 119 105 96 81.0 95 55.4 " ~ C. 10 Year Term 1 .- 1 RF Channel 180 172.5 132.7 125 96 94.6 115 75.9 N/A-'" l~ 5 RF Channe1s 170 , 172.5 124.5 120 96 86.5 110 75.9'" NIA 10 RF Channe1s 150 0 172. s.. 122 .. 4 105 96 84.4 95 75.9 NIA ~ Note 1: Western pnion's and RCA Arner~con's rates were translated into Canadian funds at ~1.15 Canadian per $l-U.S. • Note:! 2: Telesat's rates are those conta~ned in its proposed Tariff CRTC 8001. They were al tered by the CRTC. (See Cha.Ilter IV.) """ l'" 0 Source: CRT~Be11 Canada, B;itish Columbia Telephone Company and Te1esat _ Canada: Increases and Decreases in Rates for Services and Faci1ities Furnished on a Canada-Wide Basis by Members of the TransCanada Telephone System, and Related Matters", Telesat Exhibit 7. 1 ! I l 1 '- 1 i '" f- -, " , ' ' ...... ...... ----- ~ -~- ---~r- -"' ~------.....;.' <1> , • -99- 0 (" Until the filing of Telesat's Tariff CRTC 8001 it was impossible to compare Te~esat's r~tes with those prevailin~ in the United States because the service offerings were ·so different . . (e.g. Telesat had a combined charge for the space and earth segment). Table V-l facing compares Telesat rates with those of Western Union and RCA Amerito"; und,er various configurations. ·U.S. J;ates are shown to be considerably lower than those which Telesat proposed to make available in Canada. If anythi~g Table V-l ùnderstates ,the disparity because of the difficulty in canparing tenus. For examp~e, Western Union has no 1 year , ' term sa when Telesat canpiled the table i t applied Western Union 1 s ' monthly rate; one would expect a lower rate for the guarantee of 1 yea,r s cq$tom as op~sed to one month '53.,8 During the proceedings before the CRTC examining thè propos~d Tariff CRTC 8001, Telesat was asked to explain why its costs for 'RF channels appeared to be ~ignificantly higher than costs in the United States. In Hs wri tten response ta this interrogatory Telesat cited four factors which ,~ould tend to ,lead to higber cos'ts per RF cha~nel: 1 "- higher costs resulting from statutory - requirements of Canadian content in 1 satellite system construction 1 - different tax treatments in the United States, particul~ly with respect to capital cost allowances 'and investment tax credits, ' higher debt costs in Canada, particu~arly .'" in recent years by virtue of size and population, United ' States operations are able to more readily achieve economies of scale in satellite - operations. "39 f Cl L -100.- '. f In cross-examination, a Vice-President of Telesat added another explanation; that the'U.S. satellite firms, being part of larger enterprises,' were cro'ss-subsidizeà. While this . 40; suggestion went unchëülenged since it was based on sp~culat~on', further examination subst'~nti~lly weakened the validitv of the original factors. The spf\cious nature of Telesat 'os éxplanations is treatèd separately in the Appendi~ to this Chapter. Basic micro economics supplies the explanation that in a competitive market priees will be bid down from their monopoly level. Even , the Telesat Vice-President and his co",:wi tness were forced to [ admit that competition in the United States cornpared'to Canada was a factor explaining the rate differentials. 4l o b) Services As i8 the case with rates, the services available from ( the United sèa~es' satellite firms are much more------flexible than Telesat's offering. Two examples of this contained in the U.S. tariffs are the provision for the joint use of satellite channels and the lease of a transponder that may be used however the 'customers desires, rather than the lease of a partic'\11ar service on a transponder or RF channel. The most dramatic evidence of the better performance which has'occurred under competition in the United States l j compared to cooperption or monopoly in Canada is ~number and variety of services available. in the United States wh~ch outstrips by far the choice available from Telesat. An initial l indication of this is the fact that the United St~tes satellite 1 , 1 firms have tapped in the ordet of five different types of usera, .1 while at best Telesat may have been said to have made contact .. ~, with three types of cu~tomers. Telesat's services are'used by l " l broadcasters (CBC anp TV Ontario), the telephone companies, and i ~ C' \ f 1 " -101- the Federal Governrnent (for experimental purposes only). BX contrast, the satellite companies in the United States do business with these three classes of customers but have also f extensively developed television, a'wide and extensive clientele of general business. To org~nize the comparison of satellite services in Canada and the-United States, spahning different customer groups, it is divided into: i) video, ii) voice, and'iii) data. i) Video ~n the video field the market in the United States covers CATV, broadcasting.. and teleconferencing. As noted earlier, it was the U.S. satellite companies that pioneered the development of television transmission by satellite and verified .that it was an ideal medium for the provision of multipoint video services. Recently Telesat has been proViding CaDI~ Satellite Network Ine. with transmission of the House of Conunons Debates, but this in 1 no way compares with the impact of a network of at least 2600 1 television receive-only earth stations used by Home Box Office. 1 ~ Viewcom and other general entertainment and sports programming \ concerns. In this regard -the comments of the Canadian Cable J Television Association, contained in their Argument to the CRTC reviewing the?proposed tariff CRTC 800l,-are particularly telling: "The general lack of vigour and imagination , in Telesat's attitude to marketing, refleryd 1 in the preparation of its proposed tariff, j illustrates ~e observation that 1 the beat._ f î al! ~opoly profits is a quiet life'''. 4~ l 1 In fairness it must also be noted that with respect to cable television, the two areas of most growth in the United States, pay television and super stations, are pr~hibited in Canada by the CRTC. The CRTC w~li be reviéwing its policy on ( pay tel~vision in the near future. " In television broadcasting, Telesat has r~ied on long term arrangements with the cac and done very little else. The ) plans for a third national television network apparently 'died , '-~-:--....,...------~------,,--~------~....,.....,- ._------~-_...!~----...... ,.,-._--- -102- , when the Government rejected the proposaI to establish ~ ( satellite system for th~t purpose in 1966. CTV has made no siqnificant use of Telesat services. In-the U~ited States examples ab 0 und of the innovative use of broadcastinq by satellite such as the Public Broadcasting System. Once' again the comments of an in terested party in the Canadian scene are relevant. Part of the remarks of the Canadian Association of Broadcasters in their Arq~ent to th~CRTC were as follows: "During the public hearing the applicants and the CBa pointed out that the private broadcasters had not, to dàte, made extensive use of satellite services, and ex.pressed amazement that an objection should be raiéed to the planned use by the CBC. The inference to be drawn from such comments i~ that private broadcasters ,had abundant ,opportuni ties to lease the channels desired by the CBC but did not see fit to enter into contracts with Telesat and/or TCTS. This, of course, is a red herring and should not be considered by the Commission in determin~ng whether an undùe advantage, is beinq affprded to the CBC wi th the present,contract. The reason why broadcasters ( - ,were not lined up in previous ye~rs to lease satellite channels was because Telesat offered no pricing options, and insisted on leasing only full RF channels on a fully protected basis. It is only now, with the in'troduction of several '!' "price options, that satellite transmis~ion has , become more attractive to the private broadcasters ... 4·3 Finally with respect to video the marketing of freeze frame téleconferencing, - is been carried out in the United States by the, American Satellite Corporation and oth"er.s whereas in Canada this service by satellite is not likely to be available until - Q - 1983, as discussed in the subsection on data below. '].') V' 1 _2!~~ Both the, Cana6ian and United States satellite systems , ; are employed to provide message toll services; RCA Americom leasing several trahspqnders for traffic within'Alaska and to the remaining states, Telesat involved with TCTS. The U.S. , , -103- 1 Satellite Ïirms have also entered the conventional private line voice business, in addition to providing limited intercity switched v~ice services; Neither of these markets have been touched by Telesat obviously because of ~e nature of "coopera tion If ~ has wi th the terrestrial carriers. 44 Another voice service currently offered in the United States that is unavailable in Canad~ is audio news service for radio stations. One of the major suppliers of this service in Canada, Broadcas,t News Limi ted, has been unable to use the , Telesat system despite advice from communications oonsultants that " ... satellite transmi'ssion of BN' s services couid be highly advantageous to BN ~nd its subscribers".45 Broadcast News (BN) made the following observation to the CRTC: ., 1 " the activities in the United States t market indicated that the Assoèiated Press (which provides a comparable service to BN in the U.S.) was enthusiastically relying { on satellites for its telecommunications requirements. , The ambit~ousness of the U.S. satellite efforts is a threat to Canadian program 1 ming organizations such as BN. The U.S. 1 ! opera tors are advancing in a variety of j } markets. BN is concerned that users of U.S. '1 satellites wil~ achieve economies and advances unavailable to BN, and will use { this~communications technology to furnish l i new and attractive offerings to customers 4 /' in Canada. As a result BN, which provides i '. , its subscribers ~ith a unique Canadian perspective in both English and French, will be threatened by competition it is unable to meet. In this way, Telesat's unresponsiveness goes beyond negligence, and imperils a vital and innovative Canadian programming service. "46 The final category of telecommunications services where Telesat has been deficient compared to the Uni ted States is da ta services. There are a number of wide band data services in -i04- _..JfI ) ~---"" (, operation in t.he united Sta~es at speeds of 56KBPS and above. An example is American Satellite Corporation's service to the U.S. Department of Defence and communications network for the branches of Western Bancorp. o By contra,st,' Te1esat currently provide~ no specialized data services in Canada and only recently (June, 1981) announced, through ~e Computer Communications Group of TCTS, plans to establish a national satellite network to transmit voice, video and data. However the system will only be launched in 1983 following a trial with the Bank of Nova Scotia in June 1982. 47 The final, indicator of Te1esat' s comparative inabi1i ty to provide timely services is not raw data per se Qut transmission of written materiAl to regional printing plants. In 1975 this type of service was initiated for the Wall Street' Journal over a Western Union satellite using earth stations designed by the American Satellite Corporation. 4 B In 1977 U.S. News & l'iorld ' Report became the first magazine to transmit entire pages via Western Union satellite for slmultaneous printing. 49 It was only in October 1980 that Te1esat started providing the sarne service 50 for its first (and only) such customer The Globe & Mail. '. c} Technological Developments The case can be made that the U.S. ~atellite companies have a better record of the diffusion of new technology than Te1esat. While,Telesat cannot be consider~d technologically backward, at ~this point, there ia a concern that new developrnents will not be available to potential satellite usera in Canada because of the marketing straitjacket that Telesat has adopted. At some stage the futility of expending money to develop new ( , applications of satellite technology that 're never'app1~d . , -105- commercial1y is accepted. The case of Telesat'_ applicatron of Time Division Multiple Access (TDMA) is illustrative. Telesat is recognized as a pioneer in introducing digital techniques into its satellite network.51' One such technique, TOMA, increases satellite channel capacity'and improves system flexibility by allowing a number of earth ~ stations to share a common RF channel through transmitting bursts of carrier signals to the satellite in a sequential "mode. In 1975 Telesat becarne the first Satellite System in the world to introduce ,high speed T~ to carry part of Teleglobe's traffic (800 voice channels) from its Nova Scotia transatlantic cable terminal. 52 Unfortunately a few years later Teleglobe cancelled its service agreement with Telesat. On the other hand the ~erican industry has spawned a number of important technological developments that have been employed in furthering their commercial success: two examples will be cited: the delay compensation unit, and frequency co orld1DatioA for earth station reception The satellite delay compensation unit designed by American Satellite Corporation overcomes the half-second lag . ' 'in getting signals between the ground and the satellite which causes computer transmissions to malfunction. A vice-president a't Western Bancorp, ASC' s client, was quoted in Business Week that until this device became available in late 1978, "Satellites for. business Lda t!7 were not even viable." 5 3 Frequency coordination for earth station reception 1 does not refer ,to a particular piecé of equipment but rather the development by RCA Americon of techniques to limit interfer~nce ( between 6/4 GHz-satellite transmissions and terres trial trans missions which employ similar frequencies. The techniques involve ;; 0- \:.... --'-'- __ ._---,--.------".--.-..... ~._------106- precise on-site measurement of inter erence levels and the ( judicious use of natural or artificia .screenin~,This dèvelop- ment has permitted RCA Americon to us e advanta es that 6/4 GHz sateflites have'over 12/14 GHz satellites in of power and orbital parking to lower satellite system costs. 54 d) The Role of Compet~tion in Explaining Differences in the U.S. and Canadian Satellite SystèmS' Performance .. There are probably a ~ùmber of factors that havê contribut~d, to the superior per:Bormance of satellite operations in. . . ! " the United States compared to C~nada for the criteria considered.. For example, one of these is tqe CRTC's prohibition on pay , 1 television and super stations in Canada. As noted earr"ier the ! -,i CRTC will be reviewing its pOlicy in this area in the near i future. It will also pe looking at the question of resale and shared use which is presently precluded in Canada and may be another factor in the development of satellite services in the United States. t Another condition which is traditionally ~~teq when reviewing the relative performance of' industries in Canada • l'1 1 and the United States, the largeropopulation and ma~ket in i l, the United States, would not se~m of overriding importance for • communications aatellite operations. The fact that the long distance telecommunications market is smaller in Canada than in the United States should not,. by itself, prevent the attainment of the potential of satellite telecommunications in Canada. First of aIl, the evidence is tbat Canada can support a scale efficient communications satellite system. 55 Therefore, satellite communications services can be provided in Canada at as Iowa cost, based on'considerations of scale, as in any other country. Secondly, the absolute size· of the Canadian 1 market is not carved in stone. Even under a high level of supplier Il. concentration the overall market has shown a healthy growth rate of 16 per cent annually over the 'last decade. 56 -- 1 , -107- In any event, 'even wi thout attempting to analyse ( ~ aIl the possible explanations, it would be hard, to deny' the role.of competition ,as. a major factor that explains the difference i~ the relative performance of satellit~ operations in Canada and ,the United States f6r the criteria considered. In this regar9 the remarks of one observer, William Melody, in cross-examination by counsel for Bell during hearings - before the CRTC, âre telling especially when considered in conjunction with the analysis contained in the Appendix to 1 this chapter,. Dr. Melody had observed that the m08t 8igni- ficant difference between Canada and the United States is the/absence of monppolist~c restrictions 9n satellite use in the United Sta~es and their overwhelming p~esence in Canada. He was asked if he thought that this was more important than the size of the market. His reply was as follows: nA. Without que~tion. The U.S. attempted . " , ( to apply an indu~try structure very, very 'similar to that which has been applied in ',Canada with regard to :i"nternational satellites and the results l think were directly par~llel to the results in Canada in terms of the restrictions creating inefficiency in the use of the system and l believe it was on the bas~s of that experience that the U.S. was p~ofupted to significantly alter its dornestic satellite policies and change those restrictions and l think tha~ is the prirnary reason for: the difference in results and l would expect a similat change in Canada with the restrictive l j policies were modified. "57 j 1 Of course, competition in the domestic tele- , - 1 1 • comrnunica~ market in the United States is in two forms: j intra-modal and inter-mod~l. It geems safe to conclude that 1 '- 1 both forms hàd a positive impact on the performance of 1 communications satellite systems in the United States 1 according to the criteria considèred. It could be argued r ~ Î , 1 that inter-modal competition contributed to the development,, , 1 ( 1 l ' 1 ," -108- of services and rates) in the United, States which reflected ( the unique,advantages of satellite technology compared to llt 1 that of terrestrial communications. Intra-modal, competiti~n, 1 . .' on the other hand, could be said to have reinforced this effect by speeding the development and diffusion of communi cations satellite·technology. Without attemptinq to sepa rate the relative effects of inter-modal and intra-mod~l competition in any rigorous fashion, an example of the former ' is the establishment of multipoint distribution to regional printing plants: 'an example of the latter is American Satellite Corporation' s introduction of satellite delay compensation, ' hardware. Further examples can be found in the description contained in Chapter III. ~n conclusion, both intra-modal and inter-modal cpmpetition had a positive impact on the performance, with respect to rates, choice of services and technology of the satellite 9perations in the United-States, compar~d to Canada. It is virtually impossible to quantify the roles of • these distinct fo+ms of competition in producing the results described. However, in relation to the 'central question of this paper, the existence of two approaches to the introduc tion of new technology and the development of domestic, commounications satellite systems, it is satisfactory to conclude that inter-modal competition has played a contribu (tory role in prpducing this éuperiot performance record in the United States. The recommendation for Canada whiph,is associated with this conclusion is presented in the concluding & chapter. \ i ( 1" (l 1 1 1 1 1 1 --- ~-" il 1 -109- APPENDIX 'l'O.'CHAPTER'V (' ~ THE VALIDITY, OF TELESAT'S EXPLANATlON OF A COST ADVANTAGE' TO U. S. SATELLITE FIRMS , The four factors ci.teo by Telesat as causing hiqher ,satellite space segment costs per RF channel in Canada compared to the United States w~re: 1) Canadian content requirements, '2) different tax treatments in the United states, 3) higher debt 1 costs in Canada"" and 4) more favourable access to economies of 1 scale in the United States. i 1 1 l, 1) With'respect to the Canadian content requirernents it 1 1 1 was established in cross-exarnination that this amounted to a i premium of about $1:8 million for' the Anik A series,' or roughly 1 6 per c~nt of the capital cost of aIl three satellites. The 1 prernium for aIl the 6/4 GHz satellites, including the Anik D 58 series, was estima,ted at about 10 per cent. The extra cost 1 , j for Canadian content in earth stations was re~arded as amounting j, ( 59 to a'lS-20 per cent premium. No attempt had been made by ! ! 1 .Telesat to estimate the p~rcentage premium on the total plant, i that is both 'satellites and earth stations. In fact any extra cost derived from the earth stations ~ is irrelevant for two reasons: a) if Telesat followed the less res~ictive policy in the United States of allowing customer ownership of qround stations, their cost would not be allocated to the space segment, and b) one of Telesat's basic rate makinq principles is that the space and earth segments should each , ' , . t d 60 , Therefore if the estimates of the peice~tage premium for Ca~adian content on ~hel space segment is inapcurate thi,s requirement costs Telesat-about $9.7 million which m~st be amortized over the average seven year life of an RF transponder. ( i.e. $9.7 million = $1375 per RF Channel 7 years X 12 months X 84 RF channels monthly. I~ r' -110- ( Depending pn the category of service this amounts to a'premium in the range of 0.8-1.4 per cert' on the monthly rates shown in Table V-le ''? , The impact of Canadian 'content requirements, a1ready negligible,' is further reduced as a result of subsidies received frorn the Federal Gover~~nt ta offset Canadian content premium . costs for the Anik C and Anik D pro9,;ammes. (Anik C is for ,) . 12/~4 GHz satellites). In the period 1979-80, Te1esat received , $16,615,000 from the Federal Governme,nt under this arrangement. 6l 2) Further information provided by Telesat on relative tax treatments in Canada and the United 'states62 suggests that advantages ta U.S. satellite firms are negligib1e at best. The taxes referred ta by Te1esat are ~apital cost allowances and investment tax credits. With, respect to the former, in Canada the declining balance method is used ta determine the amount of tax depreciation with rates of 20 per cent applied te earth segment investment and 40 per cent for satellites. In the United States th~ applicable range of tax depreciation rates is 16.5-25 per cent for the earth segment and 21-31 per cent for satellites. There fore, even if earth segment costs were app1ied ta the space costs, it is not clear that there would be any advantage to firms operating in the United v Stqtes as a result of capital cost allowances. On the space segment costs, a greater tax shield is available in Canada than in the United States. , l Regarding investment tax credits, there is no such tax t credit available in Canada, 'except for R&D investments. There is t a 10 per cent tax credit in the United States, not to exceed ,~. $25,000 (U.S.) plus per cent of the federal liability ioa t~x exceeding $25,000 (U.S.). It is hard to consider this an actual advantage for u.S. satellite operators becàuse Te1esat has never pa id incorne taxes in its history.63 - -' ( The higher debt costs' in Canada which were alleS,ed by Telesat to be the third factor explaining their higher'costs • per RF channel were based, on genera1 statistics ~ long term debt " -111- " ( ~an~da and the United States at the time of filillg the, ~roposed tariff CRTC 8001 CSept:ember, 1979). There was rio study 1 done to show that the actual debt costs of the U.S. satetlite 64 firms 'were lower. It ls conceivable that Telesat's rites are -lower because it made i ts debt placements earlier or be~ause it ia viéwed as a safer investrnent becau$e'of~its monopol~ position. 1 \. .'~ !' 4) The final factor, more favourab-Ie access to /economies of scale in the United States, appears ta be completely unfounded. The description of economies of scale given by an offfcer. of Telesat was: IIIIf you can have three satellites in orbit and two ol them are fully loaded with the, third acting as a standby, and also some l' possibili ty of preemptable channe1s being 1 on the ~ird , you do have an economy of scale:" 1 / . Fully loaded satellites result in lower costs per ~ channel than underutilized satellites due to the absorptio,n of the capit~l cost of the satellites over a greater number of channels, • f not because of an economyof scale. There may bean economy of sca1e in having three satellites in orbit;.. in terms of a sharing of the fixed cost of the telemet~~ control and cqbmand earth • station, but its significance is not known, and in' any event it is not ~clear wny Telesat has not been in a position to obtain this scale economy, since it has in the past and will in the ,) future have more than one satellite in orbit. , 1 The other economy of sca1e that was brought out in cross-examination of the Telesat executive was purchasing economies obtained fram buying m6re than one sate1lite. 66 Unfortunate1y , tl}e record is that Telesat buys ,'i ts satellites in multiples, except in the case of Anik B which was a one satellite series. Anik B was a special hyarid'satellite with both 6/4 GHz and 14/12 GHz capabil!ty ~hat wasl'burchased at least (' -.... -112- in part for experimental pu;po8es ~ This one situation cannot, '" be regarded as ~'Y'idence that there 18 less favourable access l ' to ~conamies of ~cale in Canada. The present technoloqical capacity limit of a c0-:nmunlcations satellite ls 24 RF channels. The Anik D series will consist of satellites at this capacity wh~ch represents the maximum achiev~le scale eco~omy. ,. 1 .. b • . " J ' J. 1 l \ 1 i 1 ~ ;;',' J f .. ~ ,... /' 1,'II r\ 1 '.- 1 '1 0 , , / " , , ./ Ci @ , t· ", t I~ '. ,~, , ~-----~~~--~--~I----~,------,------.Ir';; ~.,' J: " ~\t ( -1" ___ ~ ___ _ l' ,....1 -113- : ( Footnotes to Chapter V l See Chapter III, p. 31. 2 See the comments of the Department of Communications in Chapter IV at, p. 68. "major integration of satellite faci1ities into a network predominant1y using terrestria1 faci1ities requires invest ments and planning that appear to have been discQuraged by the present. Telesat/industry relatiQnship."- ) ...... IlIt is clear that the TCTS members must make full use of the satellite system if it is ta become an integrated element of ! the national telecommunications system. This requires 10ng term investment and ~·l ning that TCTS iso unwi~ling ta under take on the basis of c ntractual arrangements with Telesat that would be re1ati y short in duration." ~ 1 At p. 70. ,~ "The primary effect of membership will be a relatively stable environment in w.hichboth Telesat and TCTS will be willing ta make ~inancial and planning decisions that will result in greaittr use of satellites." ,1 3 The Chairman of Bell tèstified to the CRTC that: t "We\at Bell Canada manage ~hat we believe to be a natural monopoly. There are underlying factors which define the boundaries of any natural monopoly. Broadly speaking, those boundaries exist where the monopolist has just exhausted the .total range of'products'and services which it can supply at costs lower than anyone else could achieve." ., , Canadian Radio-television and Telecommunications Commissions (ÇR~C), "CNCP Telecommunications Interconnection with Bell Canada," Telecom Decision 79-11, May 17, 1979, p. 194. 4 Scale elasticity is the percentage change in output from a 1 l percent change in aIl inputs. John R. Meyer et al., The l Economics of Corn etition in the Te1ecommunic'ations Industr ! (Boston: Charles R1ver Assoc~at~s Incorporate, August 1979 , p. 186 ~ 1 5 Ibid. pp. 199-213 • 6 F. Kiss et al., "Economies of Scale and $cope in Bell Canada: Sorne Econometric Evidence," a paper presen ted at Telecom ( munications in Canada;,Economic Ana1y~is of the Industry, Montreal, Quebec, March 4-6, 1981, p. 34. \.. ' ~'-~-~------~--'-- -114.- ( 7 Leonard Waverman, "The Regulation of Intereity Telecommunica tions," in Promoting Competition in Re~ulated Marke'ts, ed. Almarin Phillips (Washington: The Book1ngs Institution, 1975) p. 215. J. 8 Laurits R. ~hristensen et 1., "Econometrie Estimation of Scale Economies in Teleco unications," a paper presented at Telecommunications in Cana a: Economie Analysis of the Industry, Montreal, Queb , March 4-6, 1981, pp. 3-4. 9 The ccmments of Professor Melvyn Fuss, University of Tor.onto. 10 F~ et al., "Economies of Scale." Il ~l~A. Fuss, nA Survey of Recent Results in the Analysis of Production Condi tions in Telecommunications," a paper presented at Telecommunications in Canada: Economie Analysis of the Industry,' Montrea;l, Quebec,_ March 4-6, 1981, p. 3I. 12 Referred to in CRTC, "CNCP," Telecom Decision 79-11, pp. 197-98. and John R. Meyer et- al., "Economies of Competition," p. 188. 13 CRTC, "CNCP," Telecom Decision 79-11, p. 196. 14 Ibid. p. 197. 15 Ibid. pp. 197-98~ 16 Ibid. pp. 198-99. 17 Ibid. p. 199. 18 Economie Council of Canada, (ECC) Reforming Regulation (Ottawa: Minister of Supply and Services, 1981), p. 41. 19 Robert. D. Willig, "Multiproduct Technology and Market Structure," American Economie Review Papers and proceedings, May, 1979, p. 346. 20 John R. Meyer et al., Economies of Competition, p. 300. 21 William J. Baumol, "On the Propèr Last Tests for Natural Monopoly in a Multiproduet Industry," The Ameriean Economie Review, Deeember, 1977, p. 809. 22 F. Kiss et, al.. l "Economies of Scale, fi pp. 31-32. 23 Quoted in Ibid. p. 32. 24 It is not elear on what basis the Economie Council cone1uded in Reforming Reaulation that eeonomies of seope exist between local and Ionqistance services, other than intuition. The (' sarne applies to their suggestion of eost eomp1ementarities --,---____--, ______~ ______.1"" -115- ( between local telephone facilities and inter city data transmission and private line services. While it is undoubedly true that a potential competi tor in these toll services is at a disadvantage not having local loops, it is not clear that it is less costly to have thes~'ser~ l.. vices provided by one firm or sepa~ate firms. ECC, Reforming RegUlation, p. 42. , 25 Paul L. Joskow and Roger G. Noll, "Regulation in Theory and practice: An Ove rv iew i Il California Insti tu te of 1 Technology, Social Science Working Paper Number 213, May, 1978, p. 23. 26 John C. panzar and Robert D. Willig, "Free Entry and the Sustainability of Natural Monopoly, fi Bell Journal of Economies, spring 1977, p. 16. 27 Ibid. 28 John R. Meyer et al., "The Economies of Competition," pp. 299-300. 2'9 lb id. pp .1, 300-301. 30 Adop~ed from Alfred E. Kahn, The Economies of Re ulation: Prineiples and Institutions, Volume 2:, New York: Jo n wi~ey & Sons, Inc., 1971), 1;>. 226 •. 31 CRTC, "CNCP," Telecom Decision 79-11, p. 229. 32 ~. pp. 229-32. 33 See the comments of the' Economic Council in ~ing Regulation, pp. 45-46. 34 CRTC Hearing, "Bell Canada, British Columbia Telephone Company and Telesat Canada: Inereases and Decreases in Rates for Services and Facïlities Furnished on a Canada-Wide Basis by Membérs of the Tra'nsCanada Telephone System, and Related Matters," Argument of Broadcast News Limited, June .13, 1980,' pp. 4-5. ' 35 Reference to the U.S. tariffs was aeknowledged by Telesat. CRTC ijearing, "TCTS-Telesat," Tr.anseript Volume l~, p. 3041. 36 Ibid. p'. 3169. 37 See, for example the remarks of the Canadian Cable Teleyision Ass.ociation. "Special provision for progr~ translllission in the Telesat Canada tariff ia a desirab1e and justifiable means by whieh ( the high oost of program transmission, which has impeded the devèlopment of the Canadian broadcasting system" can be . j -116- , ( reduced. One of the justifica~'ons'"" for the Can~dian space proqram was the expedtation of -~aterial benefits to the broadcasting system, but without special rates for program o transmission it is unlikely that these benefits will be realîzed. " CRTC, Hearing, "TCTS-Telesat," Argwnent of Counsel for the Cqnadian Cable Television Association, June 12,1980, p. 18. ' 38 This point was conceded by officiaIs of Te1esat in cross examinatïon. CRTC Hearing, "TCTS-Te1esat," Transcript Vol'ùme 19, pp. 3299':'3300. See also pp. 3300-3303 where it . is acknowledged that Western Union' s offering that required a minimum initial period of 2 years was used under the 5 year term rates. ' 39 CRTC Hearing, "TCTS-Telesat," Response to Interrogatory --Telesa t (CSN) 4 ··F"fOIembc::-. ~8fl-O---z,20ft,Ofl-:-'.1'1--29-:--. ----~---- 40 It will be reca1led that the FCC requires U.S. satellite firms to be separate subsidiaries. See Chapter III~ p. 32. 41 CRTC Hearing, ItTCTS-Telesat," Transc;ipt Volume 18,· pp. 3165- 66, 2170. CRTC Hearing, ItTCTS-Telesat," Argument of Counse~or the Çanadian Cable Television Asso~iation, p. 4. 43 ,CRTC Hearing, "TCTS-Te1esat," ArgUment Submi tted by the Canadian Association of Broadcasters, June 13, 1980, pp. 17-18. 44 It is no excuse to argue that Telesat is precluded from these markets. CNCP sought interconnection with Bell's local loops in order to al10w it to cornpete in conventiona1 private 1ine and data communications and there is.no reason to think that Telesat would be le~s successful. The inter city switched market also remain~vulnerable to entry by Telesat if i t is willing to aggressive1y pursue thfs options before the CRTC. 45 CRTC Hearing, "TCTS-Telesat," Argument of Broadcast News Limi ted , p • 16 . 46 Ibid. pp. 16-17., 47 Roger Newman, "CCG Plans to Establish Business Satellite System," The Globe and Mail, Jun~ 17, 1981. « 48 Restrictive Trade Practices Commission (RTPC) Hearing, IBel1-Northern" Exhibi ts T-1207, T-1209. ------_.--_.- -~_ ..._- -117- 49 -Ibid. 50 Telesat Canada, Annua1 Report 1980, p. 5. 51 Pradman Kau1, "Overview: Digital Evolution in Satellite Network~," Te1ephony,-January 26, 1981, p. 26. 52 Ibid. p. 27. 53 "AmSat Grabs the ~ead in private Satellites -Systems," Business Week, January 15,,1979, p. 80. 54, W. Braun andJ.E. Kreigler,. "l\CA Satcom System Expaniion," CRTC Hearing, "TCTS-Te1êsat" DCCA Exhibi t 3. 55 See pp. 88-89; Apendix, pp. 111-112. 56 See Chapter II, footnote 8.a.:..c-_ 57 CRTC Hearlng, "TCTS-Telesat". Transcript Volume 21, p. 3783. 58 Ibid. Transcript Volume 19, pp. 3311-18. 59 Ibid. pp. 3318-19. 60 CRTC, "TCTS-Telesat',"-Telecorn Decision 81-13, p. 169. 1 61 Te1esat Canada, A~nual Report ,1980, p. 18. -62 CRTC Hearing, TCTS,:",Telesat'~, Tèlesat Exhibit 8. c 63 Telesat Canada, Annual Report 1979, p. 47; Telesat Canada, Annua1 Repprt 1980,· p. 20. 64 CRTC Hearing,o "TCTS-Te1esat;," Transcript Volume 19, pp. 3323-24. 65 ~. p. 3324. .', 66 Ibid. p. "3325. ~;' ,! 1 -l1B- , J CHAPTER ,VI S~RY AND RECOMMENDATIONS The Canadian long distance telecommunications market is h~gnly concentrated with the major traffic, voice message services, controlled by the telephone cornpanies. Entry into the long distance market iS'controlled by the telephone cornpanies hold on local diStribution facilities , " which permits access to end users. Recent long h~ul competition has, had little effect on long distance telephone rates, which are generally higher than in the United States, for aIl distances for a variety of reasons. Becàuse of a split in j ur isdiction between the federal and provincial· governments 1 there has been no regulatory overview of long distance commun ications until a recent review undertaken by the federai agency, the CRTC. Regulation is alsoharnpered by the lack of clear accounting of the relationship between revenues and costs for particular communications services. Satellites ofier a new technology of telecommunications r that has a number of unique advantages over terrestriai long distance communications including~ distance and terrain insensitivity, sirnultaneous broadcast to many points, wide- band data communications and widely dispersed transmission capacity. In the United States, satellite communications were 1ntroduced in competition with terrestrial communications by separate en~i~ies. A number of companies using satellite facilities and competing among themselves and with land- based communications firms developed a variety of new and '. imaginative services in the video, voiee and data markets. In Canada domestic satellite commun~ations were 1 ~ntroduced by a ehosen instrument company owned 50-50 by the federal government and the common carriers. This firm, Telesat Canada, chose t0 operate its monopoly in cooperation with the common carriers. It interpreted a:n, arrangement ( \. . - - --.--- ~ .. --,--_.. _~ .-._.--~------119- , ' ( made by the Mi,nister of Communications wi th the common carriers at the time Te,lesat was being formed, as precluding it from cornpeting for the long 'distance teleconununications ~usiness. When thj.s original understanding expired, Telesat again refused to place itself in competition wi1:h the terrestrial carriers and chose to accept the promise of . financial guarantees in return for joining with the major 1 telephone cornpanies as a mernber of TCTS. An important feature of Telesat's cooperation 1 with the common carriers throughout thl.s period was the \. developrnent of a nurnber of testricti ve marketing policies that removed satellites as a competitive threat to terrest,rial l communications. The performance flowing from this behaviour is marked by a very low utilization of satellite capaci ty (averaging 3~ per cent over the period 1973-79) and both higher rates and fewer new services than in the competitive environrnent in the United States. The Departr.u,'!n-:: of CC'I:Jrlunications sponsored Telesat' 5 o member~hip ift TCTf: o~ the grounds that satellite communications .had to be inte~ated into the,telecommunications 'network through'a mechanism of a joint authority for' investment and, planning. The stronge'st argurnen t tha t could be made to. support Telesat 1 s cooperative approach with the major terres trial ,carriers i5 the existence of a natural monopoly in telecornrnunications and the need to prevent cream skimming. Éowever, an examination of the evidence ~n this regard does not support this contentzion and therefore i t is not suffi~ient reason to deny competition between Telesat and the terrestrial operators. The major finding of this paper is that there are good grouhds to suggest that inter-~odal competition has played a contributor~ ~ole in producing a better co~unications \_-_._------120- sate1li te performance in the United States wi th respect to rates, choice of services: and deve10pment of techno}ogy, than reSU~lfr,om intefmOdal cooperation in Cana~a. Al though the cri ter employed to compare industry performance in , , the two co ies are by no means thé on1y ones tha t should be consider d in formulating a policy r,commendation for Canada, they are,~mportant considerations since they reflect directly on the welfare of the major traditional consumers of telecommunications services. The finding described above points to the liklihood that if Telesat severed its links with the terrestrial .) , ! carriers and competed with tpem in the de1ivéry of tele- commuI\icationsservices, an important number of sàtellite end ))sers in Canada would be better served. More generally it 'uqgests that it may be more beneficial to introduce new communications technologie~ in Canada that are in competition with the established industry, rather than integrated wi th. it through formal cooperative arrangements. In arriving at a final policy recommendation with respect te Teles~ and generally the introduction of new teohnology into te leconununicat ions , the onus is shifted to the opponents- of / the competitive approach to demonstrate that the benefits , , ' of such a~ approach would be outweighed by the costs associated with poorer performance. in sorne other dimension, not cons idered. {) (' ) j 1 1- l ____ .__ .------,... ______.____ ~ ___.~_....,.~----- ______. 1 .. , " -121- , . ( Bibliography Books and pamphlets " i Beigie, Carl E. "An Economie' Framework for Policy Action in Canadian Telecommunications". In Telecommunications for Canada: An Interface of Business and Government, edi ted by H. Edward EngHsh, Toronto: Methuen Pûblications, 1973. 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