Telesat President & Chief Executive Officer

Daniel S. Goldberg Telesat President & Chief Executive Officer

January 11,2008

Competition Policy Review Panel 280 Albert Street, 10th Floor Ottawa, ON Kl A 0H5 Attention: Lynton Ronald Wilson, O.C.

Dear Mr. Wilson:

Telesat Canada ("Telesat") welcomes the opportunity to make this submission in response to the consultation paper issued by the Competition Policy Review Panel on October 30, 2007, entitled Sharpening Canada's Competitive Edge.

Telesat is a Canadian-based satellite operator with a significant portion of its business dependent upon international trade. Therefore, the Panel's review is unquestionably important to Telesat. I trust Telesat's comments will be helpful to the Panel in its deliberations, and would be pleased to provide any further information which would assist in the fulfilment of your mandate. Please do not hesitate to contact me directly.

Daniel S. Goldberg

1601 Telesat Court, Ottawa, Ontario, Canada K1B 5P4 Tel: +1-613-748-8744 Fax: +1-613-748-8804 Email: [email protected] Telesat

Telesat Canada Submission to the Competition Policy Review Panel Ottawa, January 11,2008 Executive Summary

Telesat Canada is pleased to have the opportunity to make this submission to the Competition Policy Review Panel. Telesat believes it can provide valuable insights to the Panel on the policy framework required to achieve some of the Panel's key objectives. Unlike other Canadian telecommunications service providers, Telesat currently faces direct competition from foreign- based satellite providers in its own domestic markets and competes aggressively in international satellite telecommunications markets. Thus Telesat fully shares the Panel's concerns about the need to establish domestic conditions that enable companies like it to become more productive and globally competitive.

This submission focuses on the investment and competition-related policies required to achieve increased productivity and competitiveness by Canadian firms in the market Telesat understands best - the satellite services market. This market is different from other telecommunications markets, and from the related sectoral regimes under study by the Panel (Broadcasting and Cultural Industries), in several key respects. As a result, the need for policy reform in relation to the satellite market is more urgent than in other telecommunications or related markets. In particular:

• Satellite telecommunications markets are already global in nature. Unlike other telecommunications and broadcasting markets, Canada removed most barriers to foreign competition as part of the 1998 WTO Agreement on Basic Telecommunications. • Telesat has responded positively to global competition by expanding its services into other markets in North and South America. In October, 2007, Telesat was sold to new owners with a global service vision. At the same time, Telesat acquired the satellite fleet of Loral Skynet, providing it with a global footprint and adding international customers that Telesat will serve from its strong Canadian base. • The global satellite industry is consolidating rapidly. Given the economics of the satellite industry, carriers with larger scale clearly have significant cost and productivity advantages, particularly in an era of globalization. While Telesat has grown recently to be the fourth largest global satellite carrier, it remains small compared to the three largest carriers, all of which have been authorized to provide services in Canada. « The current telecommunications investment rules and certain other Canadian regulatory policies place serious restrictions on Telesat's ability to compete on an even footing and to grow its business aggressively in foreign satellite markets. Similar restrictions do not apply to foreign-based satellite carriers that have entered the Canadian market to compete with Telesat. * Telesat and other satellite carriers act simply as 'wholesale' carriers for Broadcasting Distribution Undertakings and other providers of cultural content. Accordingly, any concerns about Canadian content are best dealt with through licensing conditions, rather than ownership rules. The same is true for other Canadian public policy concerns, such as the goal of serving the far North. -n-

Telesat believes that its ability to continue to compete effectively in global satellite markets will depend heavily on the development of a policy framework that:

(1) creates a level playing field between Canadian-licensed satellite operators and the foreign competitors they face in both global and Canadian markets;

(2) provides Canadian-licensed satellite operators with the same flexibility to expand their business and investment base as their foreign competitors by removing the current Canadian ownership and control restrictions; and

(3) ensures that Canadian telecommunications regulators and policy makers provide incentives that are competitive with or better than those in the home jurisdictions of other global satellite operators, in terms of the level of regulatory fees, licensing policies and regulatory support for Canadian-licensed carriers. Introduction

Telesat is Canada's major player in the highly competitive international satellite telecommunications market. It is one of the few Canadian-based telecommunications carriers with a substantial presence in international telecommunications service markets. As such, Telesat is already achieving the goals that the Panel's consultation paper seeks, namely "generating wealth and creating jobs and opportunity in a fast changing global economic environment" through its international investment activities.

In its day-to-day efforts to achieve these goals, Telesat is acutely aware of the need to continue to meet the conditions recognized in the consultation paper, namely to: "enhance Canadian productivity and competitiveness". Unless it maintains its productivity and competitiveness on a daily and year-to-year basis, Telesat will lose ground, and ultimately fail to bring its Canadian employees, investors and all Canadian consumers of satellite-delivered services the rewards of successful participation in the global satellite business. Due to its unique characteristics, the international satellite telecommunications industry has changed more rapidly than the rest of the telecommunications industry. Specifically, it has led the way in globalizing, consolidating and, of necessity, taking more aggressive steps than most other industries to cut costs, introduce new services and generally become more productive and competitive.

As a result, Telesat recognizes the need to take urgent steps to bring Canada's telecommunications investment policy and regulatory framework in line with our major trading partners, and particularly with the countries that host Telesat's major foreign competitors. Unlike other segments of the telecommunications market, Canada has already opened its satellite service markets to foreign competitors. Consequently, there is an urgent need to revise Canadian investment and regulatory policies for the satellite market, to ensure that Canada does not handicap, but rather enables, Canadian-based satellite service providers to become strong and successful competitors in global markets.

In this submission, Telesat will propose policy initiatives to enable Canadian-based players to compete successfully in the global satellite services industry. Before doing so, the submission describes some significant changes at Telesat and in the global satellite services market. These changes relate to: -2-

t the 'new Telesat' created as a result of its change of ownership and Telesat's acquisition of the global satellite network of Loral Skynet Corporation; • the opening of Canadian satellite telecommunications markets to competition since the 1998 WTO Agreement on Basic Telecommunications; and • the consolidation and current state of competition in the global satellite services industry.

The New Telesat

Telesat has a long and proud history as Canada's pioneer in the global satellite industry. Created by an Act of Parliament in 1969, Telesat launched the world's first domestic commercial geostationary satellite in 1972. Over the subsequent 36 years, Telesat has achieved its founders' aspirations of becoming a diversified, end-to-end satellite services company, with a well- established history of innovation and success. During that same period, however, the satellite industry has evolved from being a primarily regional and domestic industry, to one that truly operates on a global basis.

On October 31, 2007, Telesat took a major step in its transformation to becoming a global satellite market player. On that day, ownership of Telesat Canada transferred from BCE Inc. to a new Canadian-controlled company owned by Canada's Public Sector Pension Investment Board ("PSP Investments") and Loral Space & Communications Inc., an experienced global satellite operator. At the same time, Telesat acquired substantially all of the international satellite fleet, network facilities and business of Loral Skynet Corporation.

As a result, Telesat became the fourth largest fixed satellite services (FSS) provider in the world. It now has a global state-of-the-art fleet of 12 satellites, three additional satellites under construction, and a robust global teleport and fibre infrastructure integrated with its satellite fleet to provide users with a range of advanced network solutions. The new Telesat continues to operate out of its Canadian facilities, including its Ottawa headquarters and Canadian satellite control facilities, but it now has significantly greater international service coverage, fleet depth and commercial resources.

In addition to its North American satellite fleet, Telesat now owns and operates satellites serving markets in South America, Europe, Africa and Asia. The new Telesat's business includes:

• a global fleet of 12 satellites in-orbit with three additional satellites under construction; *3«

* leading video distribution satellites serving broadcasters, cable networks and other content creators in North America, Latin America, Europe, Asia, the Middle East and Africa; * extensive teleport and fibre infrastructure seamlessly integrated with Telesat's global satellite fleet to provide advanced network solutions throughout the world; * deep expertise in the design, implementation and management of satellite and hybrid satellite/terrestrial networks for broadcast, telecom, corporate and government users, including the management of over 26,000 VS AT terminals throughout the world; * a leading satellite consulting services division that provides high-value expertise and support to satellite operators, insurers and other industry participants on a global basis, including satellite procurement and launch services and the provision of tracking, telemetry and control (TT&C) services for 13 third-party satellites; and * leadership in rapidly growing Ka-band communications across North America for broadband enterprise, government and consumer services.

Today, Telesat is better placed than ever to pursue and exploit global opportunities in the satellite services business. Given the international retrenchment of other Canadian telecommunications carriers over the past years, Telesat appears to be the best-placed Canadian telecommunications carrier to pursue international business opportunities. -4-

The Opening of Canadian Satellite Markets: 1998-2000

It is sometimes assumed, incorrectly, that all domestic Canadian telecommunications carriers are protected from direct competition from non-Canadian carriers. It is generally true that telecommunications common carriers that own or operate the physical transmission facilities used to provide domestic telecommunications services must be Canadian-owned and controlled.1 This rule effectively requires 'facilities-based' telecommunications carriers to be Canadian owned and controlled, while 'non facilities-based' carriers, or 'resellers' may be foreign owned.2 However, there are exceptions to the rule.

The satellite services market is the most important exception to the Canadian telecommunications ownership and control rules. In the satellite market, unlike the wireline or wireless (cellular) markets, Canada has authorized full 'facilities-based' competition by foreign carriers. This exception was created at the time Canada signed the WTO Agreement on Basic Telecommunications2 (the "1998 WTO Agreement"), which came into effect on January 1, 1998.

During the negotiations that led up to the 1998 WTO Agreement, Canada faced considerable pressure from its trading partners, particularly the United States and Europe, to liberalize its foreign ownership restrictions in telecommunications markets, hi general, Canada decided to maintain the Canadian ownership and control rules set out in the Telecommunications Act and regulations for most telecommunications markets. However, as detailed below, it effectively agreed to remove the foreign ownership and control restrictions in two areas, international submarine cables4 and satellite services.

1 The Canadian ownership and control requirements are set out in section 16 of the Telecommunications Act, S.C. 1993, c.38 and in the Canadian Telecommunications Common Carrier Ownership and Control Regulations SOR/94-667. Telecommunications 'resale carriers' or 'resellers', such as Primus, Vonage and MCI, that are foreign-owned may own and operate certain classes of facilities, such as switching and routing equipment, but must generally use the telecommunications transmission facilities (e.g. wires, fibre-optic cables, microwave transmitters) provided by carriers that are Canadian-owned and controlled, such as Bell Canada and Telus. This exception to the rule that transmission facilities must be owned and operated by Canadian carriers was created by including a definition of "exempt transmission apparatus" in section 2 of the Telecommunications Act. ' The 1998 WTO Agreement on Basic Telecommunications was negotiated under the auspices of the World Trade Organization, and became the Fourth Protocol to the General Agreement on Trade in Services ("GATS"). Canada is a signatory to the GATS Agreement and to the Fourth Protocol, and has implemented them as part of its international treaty obligations. 4 As part of the 1998 WTO Agreement, Canada agreed to terminate Teleglobe Canada's right to be "the sole Canada overseas facilities-based telecommunications service provider", effective October I, 1998. As an ancillary measure, Canada agreed that the right to obtain licences to land submarine telecommunications cables in Canada would no longer be restricted. As a result, non-Canadian telecommunications carriers may own and operate international submarine cables and the 'landing stations' for such cables in Canada. -5-

Under the 1998 WTO Agreement, Canada agreed to remove its restrictions on commercial operations in Canada by foreign owned and controlled satellite carriers in three stages, namely:

• [effective immediately] mobile satellite systems owned and controlled up to a level of 100% by a foreign service provider may be used by a Canadian service provider to provide services in Canada;

• fixed satellites owned and controlled up to a level of 100% by foreign service providers may be used to provide services between points in Canada and all points outside of Canada, except in the United States, as of December 31, 1999;

• fixed satellites owned and controlled up to a level of 100% by foreign service providers may be used to provide services between points in Canada and between Canada and points in the United States, as of March 1, 2000.5

Canada's 1998 WTO commitments to open its satellite service markets to foreign and national competition included agreement to remove all restrictions on cross-border supply of satellite services. In addition, Canada agreed to end Telesat Canada's exclusive rights to operate fixed satellite space segment facilities used to provide national and Canada-U.S. fixed satellite services, all by March 1, 2000.6

Consistent with its position in other international trade agreements, Canada's commitments under the 1998 WTO Agreement permitted retention of Canadian ownership and control restrictions with respect to broadcasting and related services.7 As part of its satellite use policy8, Canada continues to require that Canadian-licensed satellites be used to deliver Canadian direct- to-home (DTH) programming services. However, foreign-originated broadcasting services and all other signals may be delivered to Canadians using non-Canadian satellites. In 2005, an exception was made to the satellite use policy to allow the reception of CRTC-licensed digital radio services from non-Canadian satellites. There is no certainty on how long other elements of the satellite use policy will be retained by the government.

3 Canada Schedule of Specific Commitments, Supplement 3 (Telecommunication Services), GATS/SC/16/Suppl.3. 11 April 1997. 6 As an ancillary measure. Canada agreed to remove limitations on licences to operate satellite earth stations for the provision of Canada-U.S. fixed satellite services. Subsequently, Canada amended s. 16 of the Telecommunications Act to remove the Canadian ownership and control restrictions from all earth stations. The Schedule of Specific Commitments permits Canada to retain Canadian ownership and control restrictions with respect to "services regulated under the Broadcasting Act and measures affecting such services". 8 See Statement on the Utilization of Fixed Satellite Service Facilities for Broadcasting Services" Annex C to Policy Framework for the Provision of Fixed Satellite Services, Industry Canada RP-008, Revised September 2005. S-

The government of Canada has fully implemented its WTO commitments to open its domestic and national satellite service markets to competition. Accordingly, today, more than 70 foreign- licensed satellites have been approved by Industry Canada to provide satellite services in Canada. These satellites are operated by 11 different satellite carriers, which form part of eight different satellite carrier groups10. In addition, in 2005, Ciel Satellite Group ("Ciel"), an entity closely related to SES, the world's second largest satellite operator, was directly licensed by Industry Canada to operate as a competitive Canadian satellite operator.

It is thus clear that Canada has followed up on its WTO commitments and, over the past decade has taken aggressive steps to promote both nationally-licensed and foreign competitors in Canadian telecommunications markets.

The opening of Canada's satellite markets contrasts with the treatment of its fixed-line telecommunications markets, where only Canadian owned and controlled telecommunications carriers are permitted to own and operate the telecommunications transmission facilities used to provide domestic services. In taking this more proactive stance to opening its satellite markets to competition, the Canadian government, led by Industry Canada, has recognized the reality of globalization in satellite markets.

9 Seventy-four foreign-licensed satellites were included on Industry Canada's list of approved foreign satellites as of January 7, 2008. See http://strategis.ic.gc.ca/epic/site/smt-gst.nsf/enysf02104e.html. The 74 foreign licensed satellites currently on Industry Canada's list of approved foreign satellites appear to be operated by 11 different carriers. However, several of the carriers are affiliated with each other, and it appears that there are only eight carriers if affiliated companies are combined. The carriers include SES Americom and SES New Skies, Hispasat and its affiliate Hispamar, Eutelsat, EchoStar, Intelsat, Satmex and Hughes. In addition, the list includes satellites licensed to Skynet Satellite Corp. (formerly Loral Skynet Satellite Corp.) and Telesat Capacidade de Satelites Ltda (formerly Skynet do Brasil Ltda). On October 31, 2007, these latter two carriers became subsidiaries of Telesat Canada. - 7 -

Telesat's Position in the Global Satellite Market

Telesat operates in an increasingly competitive global satellite industry. With the inception of the INTELSAT system in 1965, satellite telecommunications became the first part of the telecommunications market to be opened to truly multinational service provision. Multinational service provision is the most efficient means of supply, given the industry's technological characteristics. Satellite technology has increasingly been manufactured on a global basis, and, more significantly, telecommunications satellites are placed in geostationary orbit over the equator at locations where they can transmit to and from multiple countries as easily as serving a single country.

Telesat was initially conceived as a domestic satellite provider, with an important goal of serving the remote reaches of Canada's large and underserved northern areas. The 1970s and 1980s saw the entry of a significant number of new domestic and regional satellite operators around the world. This was followed by the privatization in the 1990s of the INTELSAT system, which has a global reach. However, during the past decade, overcapacity in the industry and strong competition from terrestrial technologies, such as fibre optic cables and terrestrial wireless services, have led to significant financial problems for a number of satellite operators.

There have been profound changes in satellite service markets over the past decades. In the 1970s and for much of the 1980s, satellites were principally used for the transmission of voice traffic and other basic telecommunications services. Today, as a result of the extensive build-out of terrestrial communications networks (including the dramatic expansion of undersea cables and land-based fibre optic, cable and wireless communications networks), this traffic is largely carried on terrestrial networks. Satellites are now used principally for video distribution, certain types of corporate communications requirements (including point of sale transactions), and a wide range of communications services to remote areas and other users and communities "underserved" by terrestrial network providers.

Not only has the nature of the traffic transmitted on satellites and the extent of competition between satellite and terrestrial network operators changed fundamentally over the years, the market for satellite services itself has seen dramatic liberalization over the past decade.

Individual geostationary satellites are capable of serving one-third of the earth's surface. As a result, satellite services are inherently international inasmuch as satellite transmissions do not respect national boundaries. In recognition of this and consistent with a trend toward more open markets, many countries - including Canada - have opened their domestic markets to -8-

competition from satellite operators licensed by foreign jurisdictions. The 1998 WTO Agreement played a key role in this process. Telesat strongly endorses open markets and believes consumers around the world - including in Canada - benefit from the competitive stimulus that is the natural by-product of market liberalization. Today, as a result of liberalization for satellite services and intermodal facility competition, the markets in which satellite operators compete are among the most competitive markets in the world.

To enhance their position in this hyper-competitive environment, many satellite operators have sought to gain scale by acquiring other satellite operators. The satellite business is one characterized by fixed cost bases, which means that operators that achieve scale can benefit from substantial economies of scale.

Scale confers substantial competitive advantages to the larger operators, including improved operating margins (which can lead to more pricing flexibility in the market while still maintaining appropriate rates of return on the substantial capital expenditures and other investments required in the satellite business); the ability to provide customers with in-orbit redundancy and broader geographic coverage through larger satellite fleets; greater leverage with key suppliers, which improves an operator's overall cost structure; greater capacity to invest in research and development activities; and more diversified revenue streams, leading to lower commercial risk and, therefore, lower borrowing costs. In short, the competitive advantages associated with scale in the satellite services business are enormous.

This has led to a trend toward consolidation among satellite operators. Over the last few years, many small, mid-sized and even large satellite operators have been acquired by or merged with other operators. Among many examples, Hughes merged with PanAmSat, PanAmSat merged with Intelsat, Orion merged with Loral Skynet, SES Astra merged with GE Americom which then acquired New Skies, NSAB and stakes in several regional operators, Intelsat acquired the US domestic assets of Loral Skynet, SingTel merged with Optus, and more recently Loral Skynet's operations were acquired by Telesat.

The following data illustrate the highly competitive nature of the global fixed satellite service (FSS) industry, and the increasingly important role played by large carrier groups.

• Global satellite capacity is normally measured in transponders. Today, there are approximately 7,000 satellite transponders in the global FSS market11, with about

'' More precisely, there are approximately 7,000 C-Band and Ku-Band transponders, measured in 36MHz equivalents. ,9-

4,600 utilized, for an industry fill rate of 66%. This large supply of capacity continues to make the industry highly competitive. m While there are over 30 FSS operators in the world, three main operators account for around 70% of total revenues. The big three are Intelsat, SES and Eutelsat. * Telesat is far smaller than the top three satellite operators. Intelsat has 52 satellites in orbit, SES has 33, Eutelsat has 21 and Telesat has 12.l2

The increasing competitive pressures and globalization of the satellite industry have been evident for some time. Over the past decade, Telesat responded to competition in its own domestic markets by gradually expanding its international operations, particularly in the United States, South America and in consulting work for developing nations. However, the more recent industry consolidation left Telesat with little choice but to become a truly multinational operator. The October 31, 2007 transactions described previously in this submission have gone a long way in transforming Telesat into one.

The new Telesat provides Canada with a unique opportunity to support and enable the growth of a multinational telecommunications business with a strong Canadian base. Operating out of its headquarters and satellite control facilities in Canada, Telesat now provides satellite communications services around the globe. Telesat's new owners have every incentive to grow the business, and, without ownership links to domestic telecommunications service providers, have strong incentives to overcome any competitive disadvantage by pursuing investment and other business opportunities around the world. PSP Investments takes a long-term view of investment returns required to finance the Canadian Public Sector Pension fund, and its investment partner, Loral Space and Communications Inc., is an experienced global satellite operator.

The benefits of Telesat's global expansion will clearly accrue to Canada, which remains Telesat's home base, head office location and operations centre. As a global competitor, Telesat provides exactly the type of high-tech, highly skilled employment opportunities to its Canadian- based workforce that the country requires to remain competitive and prosperous in the global economy. Not only will Telesat's employees benefit, but the longer term financial returns will accrue to Telesat's Canadian owner, the Public Sector Pension fund and its pension beneficiaries.

12 Market data sourced from Euroconsulfs 2007 FSS Industry 10 Year Survey (October 2007). -10-

But Telesat faces huge challenges to achieving international market success. Most significantly, in an industry whose economics are dominated by economies of scale, Telesat must find a way to grow its international business if it is to remain viable.

Today, (after acquiring the Skynet satellite fleet) Telesat has twelve in-orbit satellites. In order to grow its business and capture some of the benefits flowing from greater scale, Telesat is in the process of procuring three new satellites which, in the aggregate, represent an additional investment of roughly $ 1 billion.

Although these steps toward growing Telesat are essential for its survival, Telesat will remain dramatically sub-scale relative to the three largest satellite operators in the world, operators who compete with Telesat today. As previously indicated, Telesat is dwarfed by the three big international operators (Intelsat has 52 satellites in orbit, SES has 33 and Eutelsat has 21, compared to Telesat's 12). Intelsat and SES have, in the aggregate, roughly 30 in-orbit satellites serving North America - including Canada - and rights to make use of multiple additional orbital locations in the North American geostationary satellite arc. The dramatically greater scale of these larger operators translates into dramatic competitive advantages vis-a-vis Telesat.

Telesat's challenge is even greater in relation to the Skynet satellite fleet that it has recently acquired. While the former Skynet satellites provide Telesat with a global footprint for the first time, the fleet comprises only four satellites, spread over the Americas, Eurasia, Africa and the Pacific region.

Against this backdrop, it is clearly a competitive necessity that Telesat be able to continue to grow in order to remedy its sub-scale competitive profile and, in this manner, further enhance competition in this important sector.

The current Canadian foreign investment restrictions establish a major barrier to Telesat's ability to grow. The satellite industry currently has about 30 carriers. Many of the smaller carriers (i.e. other than the big three, Intelsat, SES and Eutelsat) are or were the flag carriers or 'national champions' of various countries. While some will inevitably consider merging their businesses with other carriers, to develop the scale required to survive, it is likely some of their owners will want to continue to hold shares in the combined enterprise, rather than selling out. The Canadian ownership rules restrict Telesat from offering shares in future merged operations to non- Canadians. n-

There are various other reasons why Telesat may want to issue shares to non-Canadians as part of its growth strategy. Tn an era where debt has become more difficult to obtain, shares provide a prime currency for acquisitions Telesat may want to make. Similarly, a two or three-way merger of equals would typically result in each of the merging companies taking proportionate shares in the combined entity. In both of these cases, the Canadian ownership rules would hobble Telesat's ability to grow and remedy its size disadvantage. Telesat needs to achieve the required scale.

It is important to note that foreign satellite operators, including the big three, are generally free to pursue their own growth strategies, and to increase their size and scale and attendant market advantage. Indeed, they have been using this flexibility over the past years to rapidly grow their scale and market share. Industry consolidation is already well underway and Telesat faces a huge challenge in its efforts to grow its international business. Telesat's future growth and its success in developing business in international markets are critically dependent on quick changes in the foreign ownership restrictions. Time is of the essence in the highly competitive international satellite market.

Canadian Investment Restrictions in the Telecommunications Industry

The foreign investment restrictions that currently apply to the Canadian telecommunications industry are relatively new, originating in the 1987 Policy Framework for Telecommunications in Canada. Detailed implementation of the restrictions occurred as part of the 1993 Telecommunications Act, the 1994 Telecommunications Common Carriers Ownership and Control Regulations and the 1995 Radiocommunication Regulations^.

In recent years, there have been repeated calls to review the rationale for these restrictions, and there lias been an increasing impetus to liberalize or remove them.

In 2001, the National Broadband Task Force (the "Task Force") was formed to consider Canada's future and to make recommendations that would encourage prosperity and opportunity within Canada. With respect to foreign investment restrictions in the telecommunications sector, the Task Force urged the federal government to:

".. .conduct an urgent review of foreign investment restrictions for telecommunication common carriers and distribution undertakings with a view to determining whether they

13 SOR/96-484. See footnote 1 for other citations. 12-

are currently restricting or are likely to restrict increased industry participation in the competitive deployment of broadband infrastructure in Canada."14

The call for change has also come from outside Canada. The OECD's 2002 Report: Regulatory Reform in the Telecommunications Industry15 points out that liberalisation of foreign direct investment has proven to be economically beneficial and Canada has experienced this benefit in other industries, such as manufacturing and services. The OECD report further states that "trade and investment liberalisation, in fact, forms part of overall strategies to maintain and even strengthen a country's capacity to determine its own future". The report notes that several members of the Canadian Council for International Business have also taken the position that foreign ownership restrictions "impose significant market access barriers to Canadian firms seeking to enter foreign markets." These members recommended that "the Government of Canada promote the benefits of open investment rules in the WTO as well as adopting such rules for Canada."16

The OECD report concludes by advocating immediate change;

"Canada should change the foreign ownership and control restrictions as soon as possible in order to rapidly increase productivity, investment, and jobs."17

The Government of Canada recognized the need for a review of its foreign ownership rules in Industry Canada's 2002 Discussion Paper: Foreign Investment Restrictions Applicable to Telecommunications Common Carriers.L8 In this paper, the government acknowledged that it had received many requests for the foreign ownership rules to be reviewed.

While Canadian governments appear committed to reviewing the foreign ownership restrictions, they have been slow to do so. For example, in its response to the Report of the Standing Committee on Canadian Heritage in 2003, the government undertook to "immediately launch an analysis of the foreign ownership question"19 and stated the review would be completed quickly.

Canada, National Broadband Task Force, The New National Dream; Networking the Nation for Broadband Access (Ottawa: Industry Canada, 2001) at 20. • Organisation for Economic Co-Operation and Development, Regulatory Reform in the Telecommunications Industry (Paris: OECD, 2002) ("OECD Report"). 16 Ibid. 17 Ibid. Canada, Industry Canada, Foreign Investment Restrictions Applicable to Telecommunications Common Carriers, Discussion Paper (Ottawa: Industry Canada, 2002). Canada, Department of Canadian Heritage, The Government of Canada's Response to the Report of the Standing Committee on Canadian Heritage, Our Cultural Sovereignty: The Second Century of Canadian Broadcasting (Ottawa: Canadian Heritage, 2003) at 10. -13

Despite its statement that, by the spring of 2004, the government would be ready to examine solutions, the process of completing a review of the foreign ownership restrictions has not progressed in any discernable manner.

In 2003, the House of Commons' Standing Committee on Industry, Science and Technology ("Standing Committee on 1ST") issued a clear call for removal of the foreign ownership restrictions on telecommunications common carriers. It recommended that

".. .the Government of Canada prepare all necessary legislative changes to entirely remove the existing minimum Canadian ownership requirements, including the requirement of Canadian control, applicable to telecommunications common carriers."

Most recently, the Telecommunications Policy Review Panel assessed the benefits and risks of liberalization of the foreign investment rules in the telecommunications sector and stated in its final report:

"The Panel sees significant merit in removing Canada's current rigid and inflexible restrictions on foreign investment in telecommunications markets and replacing them with a more flexible regime that permits such investment where it benefits Canada and restricts investment that would not benefit Canada."20

In summary, there have been repeated calls for review and change in the telecommunications foreign ownership restrictions, but the Government and Parliament of Canada have not taken steps to date to repeal the rules or to significantly liberalize them.

Telesat will not attempt to advise the Panel on the issues related to the telecommunications foreign ownership restrictions in markets other than the one it operates in and knows best. However, Telesat does see an urgent need for action to resolve the problems created by opening domestic satellite telecommunications markets to competition without simultaneously liberalizing foreign ownership restrictions on Canadian-based satellite operators.

As indicated earlier in this submission, the economics of the satellite services industry are dominated by economies of scale. It is not practical, just after completing its own sale transaction, and the related refinancing, acquisition of Skynet, and investing $1 billion in three new satellites, for Telesat to grow by buying other satellite operators for cash. Telesat is

20 Final Report, Telecommunications Policy Review Panel (Canada) 2006, p. 11-24; see http://www.telecomreview.ca/epic/site/tprp-gecrt.nsf/en/rx00065e.html -14-

effectively prevented from growing through mergers, strategic partnerships or acquisitions paid for in shares, by operation of the Canadian ownership and control rules.

Removing these restrictions, and permitting Telesat to grow in scale, would bring significant benefits to Telesat's employees and owners, as well as to direct and indirect consumers of satellite services. Larger scale would permit Telesat to compete effectively on price while still earning its required returns. More scale would lead to more efficient operations, and the ability to engage in further research and innovation, in order to improve the company's competitiveness. Thus, global investments by Telesat to increase scale will ultimately accrue to the benefit of all Canadians.

Telesat notes that the Government of Canada made specific legislative changes to the foreign ownership restrictions to implement its 1998 WTO commitments to open its satellite markets to foreign competition.21 However, at that time, the government stopped short of undertaking a comprehensive overhaul of the foreign ownership restrictions on the satellite industry. Given the evolution of the satellite services market, the government should now take steps to complement the opening of the domestic satellite market to competition by ensuring that Canadian-based and domestically-licensed satellite carriers have the flexibility to pursue opportunities for international growth and expansion, free from the constraints of the current foreign ownership restrictions. With Telesat facing full-fledged competition in the domestic satellite market, in addition to intensely competitive international markets, there is an urgent need for reform.

Accordingly, Telesat submits that the Panel should recommend to the Government of Canada that the foreign ownership restrictions on the satellite telecommunications industry should be liberalized. This should be done in a manner that permits Canadian-based operators to play on a level field with the foreign competitors that the Government has authorized to enter into Canadian satellite markets. It should provide Telesat and other Canadian-licensed satellite operators with the ability to attract new strategic investors, enter into equity ventures with them, exchange shares and otherwise develop strategic relationships that will enable Telesat to participate fully in future industry growth in foreign markets.

Shortly after the 1998 WTO Agreement came into effect, Parliament amended the Telecommunications Act, to implement its WTO obligations. Among other things, the Act was amended by adding subsection 16(5) to exempt ownership or operation of satellite earth stations from the Canadian ownership and control rules (Statutes of Canada. 1998, c.8, s.2), and adding section 16.1 to establish a licensing scheme for International Telecommunications Service Licences (Statutes of Canada, 1998, c.8, s.3). - 15-

The Canadian Regulatory Framework for Satellite Services

The Panel's consultation paper poses a number of questions related to making Canada a destination for talent, capital and innovation. These include:

• How can Canada better promote inward FDI [Foreign Direct Investment]? • In particular, what mix of policy changes would be required to make Canada the preferred point of entry to, and location in, the North American market for the high value activities of non-North American business entities? ••• What other priorities and policy issues should governments address?22

As in other parts of this submission, Telesat will restrict its responses to these questions to the area it knows best, the satellite telecommunications industry. In the case of its industry, Telesat believes changes should be made to the Canadian satellite regulatory framework to make it more attractive for satellite operators to locate their high value satellite industry activities in Canada. Telesat acknowledges the tremendous efforts made by Industry Canada and its predecessor departments and related space and research institutions to develop a strong Canadian presence in the satellite industry. For many years, Canada played a pioneering role in the global satellite industry and at the International Telecommunications Union. These initiatives have allowed Canada to participate and contribute significantly in international satellite matters, and they helped Telesat to develop into a global leader in satellite services.

Operating from its head office in Ottawa, Telesat now brings high-value employment to close to 500 Canadians primarily in the scientific, engineering and financial fields. However, it must be recognized that the regulatory policies applicable to Canadian-licensed satellite carriers can and do have a direct impact on their competitiveness in both domestic and global markets. Accordingly, the government should adopt a policy of continuously evaluating how it can best promote Canada's continuing strength in the satellite industry and similar industries that have long-term strategic value in terms of highly skilled jobs and Canadian wealth creation. In today's competitive global environment, a continuous focus is required to maintain a leadership position.

The satellite industry and its regulatory framework are changing rapidly. Moving with the times, the government dismantled Telesat's domestic satellite monopoly some years ago, and has moved aggressively to promote competition, hi the new competitive, global satellite marketplace, different types of government policies are required to improve Canada's position as

22 Consultation Paper, p.33. -16-

a venue for high value satellite activities - not only those conducted by Telesat, but also by non- Canadian satellite operators.

Canada is not alone in seeking to foster a leading satellite industry. The satellite industry has become increasingly globalized and mobile. Some countries, such as Luxembourg and Gibraltar, which have neither populations nor territory to support their own domestic satellite systems, have adopted satellite licensing as a strategic industry growth sector. Canada should do no less.

Accordingly, Telesat submits that the Panel should recommend that Industry Canada review its satellite regulatory regime to ensure that it is at least as supportive to its domestically-licensed satellite operators as other countries are to theirs. Two examples are given below as illustrations of areas where Canadian regulatory policies could be reformed to make Canada a more competitive venue for satellite operations.

Licensing and Regulatory Fees - To enable Telesat, and other Canadian satellite operators who locate their operations in Canadian territory and utilize Canadian orbital23 slots to be effective global competitors, Canada should ensure that its licensing and regulatory fees are as attractive or more attractive than those of competitor nations.

Most governments levy a variety of licensing and regulatory fees on satellites and operators licensed by them. Governments also license radio spectrum used by satellite carriers within their national boundaries. A variety of types of fee mechanisms are applied in different countries, including spectrum auctions. Such auctions have become popular in Canada and some other countries, partly because they provide a ready source of revenues for governments and regulators. However, these returns to governments can be short-term and short-sighted in an industry which is so international and capital intensive by its nature.

Telesat is currently paying significantly more in radio spectrum licensing fees for its satellites than its competitors are required to pay in their home jurisdictions. A typical Canadian-licensed satellite incurs annual fees of $800,000 and more, while a US-licensed counterpart will pay only about US$115,000.

Telesat notes that Industry Canada is reviewing its approach to spectrum fees. However, the outcome of the review will not necessarily result in lower fees for satellite spectrum. One of the objectives of the review is to take into account the 'economic rents' that could be extracted, based on the approach that is used for spectrum fees for terrestrial wireless services. While this approach is competitively neutral in a closed national market like the terrestrial wireless market.

23 An orbital position or 'slot' can be viewed as a 'parking space' in the satellite arc around the equator, with a specific longitude - e.g. 118 Degrees West. -17-

it imposes a significant competitive disadvantage in a global industry, like the satellite industry, in cases where non-Canadian satellite licensees do not incur similarly high spectrum fees.24

In Telesat's view, spectrum fees and related regulatory burdens on Canadian service exporters are precisely the sort of issue the Panel should focus on. The fact that satellites and terrestrial systems both happen to use radio spectrum does not require the fee structure for both to be the same. If Canada is to implement policies to promote its position as a base for global competitors, it should reduce licence fees and related regulatory burdens that otherwise place its domestic service exporters at a cost disadvantage.

Spectrum Aggregation Policies - This submission has stressed the important role of scale in achieving success in global satellite markets. Another reason Telesat's competitors have been able to achieve scale is the ability granted by their domestic licensing jurisdictions to aggregate multiple frequency bands at a given orbital location. This enables them to leverage the benefits of larger satellites by deploying multiple payloads utilizing different frequencies on a single satellite.

The public policy benefits of spectrum aggregation to satellite operators, their customers and the public are manifold and include lower per unit transmission costs from bigger satellites (which reduces costs to users); allowing a user to receive a plethora of services from a single satellite dish at their home or place of business; increasing in-orbit redundancy and service reliability; fostering more efficient use of limited spectrum resources; and stimulating technical innovation. The fact that Canada has not consistently applied spectrum aggregation policies places Telesat at a competitive disadvantage.

These two examples are illustrative of current issues, but as the satellite market evolves there will be other concerns about maintaining a competitive domestic policy framework. hi summary, Telesat urges the Panel to recommend that the government in general, and Industry Canada in particular, should review the impact of its regulations and licensing fees to ensure that they are internationally competitive. In particular, industries that compete internationally, like the satellite industry, should be supported and not burdened with greater regulatory or licensing costs that will handicap their ability to compete.

24 Moreover, the onerous fee calculation methodology is based on l950s-era microwave technology. . _ .J IJ •

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Conclusion

Telesat believes that its ability to continue to compete effectively in global satellite markets will depend heavily on the development of a policy and regulatory framework that supports its international business ventures, and that it is competitively no more restrictive or onerous than the framework under which its global competitors operate.

One area where Telesat clearly faces greater regulatory restrictions relates to the Canadian ownership and control restrictions, which deny it the same flexibility as its foreign competitors to increase its size and economies of scale through alliances, mergers, acquisitions for shares and other equity-based transactions with foreign operators. Telesat therefore submits that the Panel should recommend to the Government of Canada that the foreign ownership restrictions on the satellite telecommunications industry should be liberalized, without delay, to provide comparable flexibility to permit Telesat to grow its international business. Whatever investment policies Canada ultimately develops for the wireline and terrestrial wireless telecommunications markets, markets that- unlike satellite services- have not been opened to foreign competitors, immediate change is required to ensure Canadian companies can become more competitive now in the global satellite market.

Telesat also suggests that the Panel recommend that the government review the impact of its other satellite regulations, including licensing fees, to ensure that they are internationally competitive. Industry Canada, in particular, should be asked to review and eliminate any regulatory disadvantages faced by Canadian licensed satellite earners vis-a-vis the home jurisdiction of their international competitors.

Telesat appreciates the opportunity to make these submissions, and would welcome the opportunity to answer questions or elaborate on any of them.

Daniel S. Goldberg Chief Executive Officer Telesat Canada