In a series of announcements and consultation papers issued in March and in April, 2012, the Government of Canada changed the rules on foreign investment in Canadian telecommunications markets and set the stage for the 700 MHz wireless spectrum auction planned for 2013. Some information was also provided on the planned 2014 auction of spectrum in the 2500 MHz band.

New Foreign Ownership Legislation

On April 26, 2012, the Government of Canada introduced legislation to amend the Telecommunications Act in order to remove current restrictions on foreign ownership or control from all but the largest Canadian telecommunications carriers.

The amendments, when passed, will permit non-Canadian-owned entities to start up or acquire telecommunications carriers that hold less than a 10% share of the total Canadian telecommunications services revenues, as determined by the Canadian Radio-television and Telecommunications Commission (CRTC). The CRTC’s 2011 Communications Monitoring Report sets total 2010 telecommunications market revenues at CAD$41.7 billion. Consequently, the exemption will likely apply to all Canadian carriers other than Bell Canada, TELUS Corp and Rogers Communications Inc.

Under current legislation, non-Canadians are barred from owning more than 20% of the voting shares of a Canadian telecommunications carrier and 33 1/3% of the voting shares of a carrier’s parent company. In addition, 80% of the board of directors of a carrier must be resident Canadians, and the arrangements non-Canadians have with the carrier must not enable them to exercise "control in fact" over the carrier – as determined by the CRTC and Industry Canada. The restrictions do not prevent non-Canadians from holding non-voting equity or debt in a carrier, provided the control-in-fact test is adhered to.

Under the proposed legislation, these current rules will no longer apply to carriers under the 10% revenue threshold. A non-Canadian owned or controlled entity will be authorized to establish or to acquire a telecommunications carrier business that is under that threshold. Such an entity could expand its operations through organic growth, mergers or acquisitions until the carrier reaches a 10% market share. Subsequently, such a carrier may continue to grow organically, but may not expand further through acquisitions of other Canadian carriers or through acquisitions of assets used by other Canadian carriers to provide telecom services.

The amendment does not change the Canadian ownership requirements for licensees under the Broadcasting Act. Thus, current broadcasting ownership restrictions, which are essentially the same as the current telecommunications ownership restrictions, will continue to apply to all broadcasting licensees, including telecommunications carriers that hold broadcasting licences.

The draft legislation would implement a policy announced by the minister of industry on March 14, 2012. This policy decision followed a consultation process launched in June, 2010, and a subsequent review of the foreign ownership rules in preparation for the 700 MHz spectrum auction. The 10% exemption from the foreign ownership restrictions had originally been proposed by the independent Telecommunications Policy Review Panel, which reported to the Canadian government in 2006. The same approach was endorsed by the government’s Competition Policy Review Panel, which reported in 2008. The proposed amendment applies to both wireless and wireline telecommunications carriers.

Policy for 700 MHz Spectrum Auction

During March and April, Industry Canada also made a series of announcements related to the planned auction in 2013 of wireless spectrum in the 700 MHz band. This spectrum, made available as a result of the transition of analog TV services in the band to digital transmission, is likely to be a hot commodity because of its good long distance propagation characteristics.

On March 14, 2012, the Minister of Industry released the Policy and Technical Framework: Mobile Broadband Services (MBS) — 700 MHz Band, Broadband Radio Service (BRS) — 2500 MHz Band (Policy and Technical Framework).¹ The 700 MHz spectrum is to be auctioned in the first half of 2013, and the 2500 MHz spectrum in early 2014.

The major features of the Policy and Technical Framework are:

• Harmonization with the U.S. 700 MHz band plan, to promote economies of scale in equipment development and to facilitate cross-border roaming and frequency arrangements. This plan will divide available spectrum into the following blocks:
  • three paired blocks (6+6 MHz each): blocks A, B, C (lower 700 MHz band);
  • two unpaired blocks (6 MHz each); blocks D, E (lower 700 MHz band); and
  • two paired blocks (5+5 MHz each): C1, C2 (upper 700 MHz band) are to be created out of one original paired C block (11+11 MHz); the two remaining 1 MHz blocks are to be held in reserve for future use.

The B+C bands licensed to AT&T in the U.S. and the C1+C2 bands licensed to Verizon are likely to be of special interest, due to the ready availability of compatible equipment and devices.

• The auctioned blocks of spectrum will be offered in Industry Canada’s 14 "Tier 2" service areas across the country (i.e., most provinces comprise a single tier; Ontario and Quebec contain three tiers each). Since seven blocks will be auctioned in each tier, a total of 98 licences will be available.
• Two additional blocks (5+5 MHz each) in the upper 700 MHz band will be designated for public safety broadband use (the PSBB block) and additional blocks (8+8 MHz) for public safety narrow band and wide band use. A further consultation will be held on the use of the paired D block (5+5 MHz in the upper 700 MHz band), which was recently designated for public safety in the U.S.
• Unlike the 2008 AWS auction, there will be no set-aside of spectrum that can be bid on only by new market entrants. Instead, there will be a spectrum cap (i.e., rules regarding the maximum amount of 700 MHz spectrum that can be held by a licensee and its affiliates). A cap of two paired blocks is applicable to all licensees. "Large wireless service providers" are subject to a cap of one paired block within the more attractive B, C, C1 and C2 blocks.
• Network rollout obligations will apply to all licensees (population coverage and time frame).
• Special rural rollout conditions will apply to licensees holding (or having access through an association with another carrier to) two or more paired blocks. Such carriers must cover 90% of the population of their current HSPA network footprint within five years, and 97% within seven years.
• A Standard Radio Systems Plan (SRSP) and a Radio Standards Specification (RSS) will be released before the auction to establish technical rules for systems operating in the 700 MHz MBS bands.
• The framework document also included policy and technical decisions related to the auction of BRS spectrum in the 2500 MHz band. This auction is currently planned for approximately one year after the 700 MHz auction (i.e., in early 2014). A minimum of 30+30 MHz and a maximum of 50+50 MHz of paired spectrum and up to 25 MHz of unpaired spectrum will be available in most areas of Canada.

Revisions to Mandatory Roaming and Tower Sharing Rules

On March 14, 2012, Industry Canada also released its Proposed Revisions to the Framework for Mandatory Roaming and Tower Sharing, culminating a review it had launched in November 2010. This framework was introduced around the time of the AWS spectrum auction in 2008, with the goal of reducing proliferation of wireless towers and to facilitate competitive wireless entry and expedite network rollout.

The framework established by Industry Canada in 2008 imposes conditions of licence on incumbent and new wireless carriers that require them to negotiate roaming agreements and tower and site sharing arrangements. Carriers may have recourse to Industry Canada for clarification of technical feasibility of roaming and tower sharing. Disagreements over rates and other commercial terms are to be dealt with through a binding third-party arbitration process.

Industry Canada stated that its review of the effectiveness of the existing licence conditions disclosed that roaming agreements "took a considerable amount of time to finalize" and that the tower sharing objective had been "somewhat less successful." There is, in fact, very little tower sharing between incumbent operators and new entrants. Industry Canada indicated that "the arbitration process has not been widely used." In fact, while information about confidential arbitrations is not readily available, it does not appear that any have been concluded.

Amendments proposed by Industry Canada would shorten the timeframes for responding to requests for information from an operator seeking to roam on another network, and the timeframe to submit a roaming disagreement to arbitration. The proposed amendments would not mandate seamless communications hand-off when customers of new entrants roamed onto an incumbent operator’s network – something new entrants had requested.

More changes were proposed to the licence conditions related to tower sharing and site sharing (including rooftops). First, Industry Canada proposed that these apply to all licensed "radiocommunication service providers," not just all "radiocommunication carriers." Timelines for negotiation and arbitration would also be shortened and responding carriers would be required to provide more information. Responding carriers would also be required to permit access to ancillary equipment and services in order to be considered as negotiating in good faith under the licence conditions. Arbitrators would also be authorized to hear together and consolidate disputes involving more than one site sharing agreement or roaming agreement.

Several other amendments are proposed. Comments may be submitted on the proposed amendments within 60 days, and the new licence conditions should be announced in advance of the 700 MHz auction.

Consultation on 700 MHz Auction Rules

On April 25, 2012, Industry Canada released the Consultation on a Licensing Framework for Mobile Broadband Services (MBS) – 700 MHz Band (Consultation Paper)² on the details of the proposed licensing framework, including auction rules, for the 700 MHz auction planned for the first half of 2013. The main features of the proposed framework are:

• Industry Canada proposes to change its basic auction format. Instead of the Simultaneous Multiple Round Ascending (SMRA) format it has used in five of its seven previous auctions, it proposes to use a Combinatorial Clock Auction (CCA) format. The main effect of the change is that, instead of bidding on individual licences, bidders bid on packages of licences at the prevailing prices (prices still ascend in each round of bidding). Bidders will thus be awarded all of the licences in a package or none. This eliminates the risk of bidders ending up with non-contiguous individual licences. Unlike the SMRA format, the CCA format does not require the identification of a "standing high bidder" that is held responsible for paying for individual licences at the end of each round, which makes it easier for bidders to move to substitute licences in response to price changes. To reduce anti-competitive bidding, the identity of bidders and prices they bid will not be made public until the end of the auction.
• The following "generic licences," which Industry Canada considers to be of comparable value, will be available at the auction: (B+C paired), (D+E unpaired) and (C1+C2) paired. Block A is deemed to be of lesser value, since less technology is available.
• Together with a CCA auction format, Industry Canada is also proposing to use a "second-price rule" to determine the prices bid and paid by bidders for their spectrum. Applying a software algorithm described in the Consultation Paper,³ these prices would be calculated to meet four conditions. Therefore, bidders can pay less than the highest bid they would have placed and still win their package of licences .
• The Consultation Paper notes that several Canadian service providers have entered into different forms of network and spectrum sharing arrangements. It also notes that in past auctions, parties entering into arrangements that were deemed to be affiliated or associated entities were only permitted to act as a single bidder. In addition, associated entities will have a single-spectrum cap applied to them in the 700 MHz auction. For this auction, Industry Canada proposes to define "associated entities" as follows:

Any entities that enter into any partnerships, joint ventures, agreements to merge, consortia or any arrangements, agreements or understandings of any kind, either explicit or implicit, relating to the acquisition or use of any spectrum in the 700 MHz band will be treated as Associated Entities. Typical roaming and tower sharing agreements would not cause entities to be deemed associated.

A definition is also proposed for "affiliated entities." Parties are invited to comment on these definitions and rules. In addition, parties that would be deemed to be associated entities may request to be treated as separate entities for the purposes of participating in the auction. Competitors, such as Rogers Communications Inc. and WIND Mobile, have questioned whether Bell Canada and TELUS Corp. would be treated as associated entities, since they currently share an HSPA network.

• In order to stimulate investment, Industry Canada proposes that licences be granted for 20-year terms, rather than the typical 10-year terms.
• The Consultation Paper also sets out proposed opening bids for each of the 98 blocks of spectrum to be auctioned. The total amount of the opening bids for all blocks is $897,324,000.00.
• The Consultation Paper provides further details on the proposed treatment of the spectrum caps described in the March 14, 2012, policy announcements, on proposed spectrum licence conditions, pre- and post-auction procedures and other matters.

Interested parties may comment on the proposed licensing framework and auction rules by June 25, 2012, and file reply comments by July 25, 2012. Industry Canada scheduled a one-day "Auction Design Information Session" in Ottawa on May 30, 2012, to discuss the proposed CCA auction format.

It is not clear exactly what impact the various Industry Canada policies and legislative changes proposed over the past two months will have on Canadian wireless and wireline telecommunications markets, however they could be substantial.

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¹ Industry Canada document SMSE-002-12

² DGSO-002-12 - Consultation on a Licensing Framework for Mobile Broadband Services (MBS) - 700 MHz Band, April 2012.

³ Annex E. This second-price approach is also referred to as "bidder-optimal core pricing" or "nearest Vickrey pricing."