CRTC offered few compromises at rates hearing

Perhaps to no one’s surprise, the country’s residential Internet providers have left the federal telecommunications regulator with no unified position on how to resolve a battle over wholesale pricing.

At a hearing in Gatineau, Que., Monday, at the Canadian Radio-television and Telecommunications Commission (CRTC), phone, cable and independent Internet providers stuck to their positions, leaving the regulator with five choices.

However, during a wide-ranging session in which all sides were free to take pot shots at each other, there were really two contenders: A plan called “aggregated volume pricing” from BCE Inc.’s Bell Canada, and the so-called 95th percentile plan of a group of independent ISPs called the Canadian Network Operators Consortium (CNOC).The cable and phone companies largely lined up behind Bell, although they offered variations to its plan, while ISPs not in the consortium were behind CNOC.

Broadly, the Bell plan says the wholesales rates ISPs should pay should be based on the volume of capacity they consume on a carrier’s network, plus a flat rate, so they don’t cause congestion on a carrier’s network. CNOC says ISPs should only pay for the capacity they use during peak hours, measured by a formula that takes the 95th percentile average of peak consumption.

Bell says ISPs have to pay for what they use; CNOC says carriers should only charge for how much they use when it costs the most, during peak hours.

The hearing is scheduled to wind up Tuesday.

Anyone tuning into the Webcast of the hearing, which started last week, would have thought the sides couldn’t be reconciled. Not Jean Brazeau, senior vice-president of regulatory affairs at cable operator Shaw Communications Inc.

“After listening to the presentations of the last week, we are optimistic a reasonable and balanced solution can emerge,” he told the commissioners Monday, one that will allow ISPs to compete and carriers to invest in their networks.

Where that optimism came from isn’t clear.

CNOC is fighting to create a new wholesale billing scheme for ISPs, arguing that once they have paid for the peak demand imposed on an incumbent network it shouldn’t have to pay any more. Many carriers already bill them using the 95th percentile formula, noted one CNOC member, Marc Gaudrault of TekSavvy Solutions.

He complained that under current wholesale rates, if he wants to buy an extra 10 Gigabyes of capacity for future expansion he has to pay for the entire 10G even though, initially, it won’t be used.

But commission vice-chair Len Katz complained CNOC had created a complex pricing model – and one the regulator has to oversee.

“The simplest solution is to give ISPs access (to a carrier’s network) and let the market take care of pricing,” he said. “It’s the least intrusive model.”

“You need to convince me that this commission won’t get bogged down in reconciliation and billing and audit disputes in perpetuity,” he told CNOC. “I’ve seen it before and it’s a no-win.”

Katz said he liked a plan put forward by Manitoba phone company MTS Allstream, in which ISPs order the capacity they need from a carrier, the commission ensures the pricing is cost-based “and life goes on.”

Commission chair Konrad von Finckenstein also complained that CNOC wants carrier pricing so limited that it is in effect dumping all the business risk of building networks on the incumbents.

CNOC doesn’t want usage fees to be added to the wholesale price ISPs have to pay, but commission members and incumbents suggested that helps cover the cost of building carrier networks.

But von Finckenstein and Katz also turned on Bell’s senior vice-president of regulatory affairs, Mirko Bibic, who at one point said he feared CNOC’s plan would encourage ISPs to offer “midnight madness” specials to drive up network consumption by their subscribers not just during peak hours but around the clock.

If they are paying for the capacity, the chairman asked, why shouldn’t they use it? That got Bibic’s back up.

If the commission fully costs Bell’s shared network pipe used by the ISPs and forces them to pay full cost, the wholesale price will top the retail price consumers pay, he argued. “And as I sit here in my heart of hearts you all know you will never let the wholesale price be higher than retail. Ever. We will not recover those costs,” Bibic said, referring to the commission.

“If you could sit here and guarantee us that all those costs can be recovered, that will be one thing. But it won’t happen.”

That prompted Katz later to conclude that Bell is selling Internet access below cost.

He came back to that further on in the day, pointedly asking Bibic if Bell is in the business of making money when pricing products.

Yes, said Bibic, but he added that the phone company is spending more than $1 billion over the last five years to upgrade its copper-based networks to fibre optic to catch up to the speeds cable operators offer. That’s why Bell’s capital expenditures exceed its Internet revenues. Over time, he added, “you hope to recover that” with retail pricing that makes those who use more pay more.

But because Bell can’t impose user-based billing (UBB) on its wholesale ISP customers, it can’t recover all of its costs, he maintained.

Under pressure from the Harper government, the commission has been forced to re-examine its approval of UBB for Bell. User-based billing would have let Bell impose its retail pricing on ISPs. With its new aggregated volume pricing, ISPs would have the ability to set their own rates, yet the wholesale rate would still be linked to the capacity they buy.

But, wondered Katz, if Bell backs out of costs that it doesn’t have to provide to ISPs, like billing marketing, shouldn’t the wholesale price be lower than the retail?

Not necessarily, said Bibic. Any solution the CRTC chooses will add costs.

Katz was trying to see if there was room for a compromise, but Bibic wasn’t biting.

“We’re trying to find a vehicle to create more competition, in the least intrusive manner,” Katz said. “I start from the assumption that you (carriers) are all competitive and making money.” He wondered if Bell would look at its price points, back out certain expenses that it won’t be incurring costs on, add in things that will be driven by a wholesale regime and let ISPs find their way.

Somewhere between this so-called “retail-minus” rate and “cost-plus” should be an area where ISPs could do business, he said. “And it’s all of our jobs to find those numbers.”
Bibic did announce that Bell is modifying its original AVP billing model, which would require ISPs to pay for connectivity by buying capacity every month at $200 a Terabyte. There would also be a penalty charge of just under a third of a cent for every gigabyte the ISP’s customers went over the purchased amount. That would leave the the ISPs free to set their own rates, the telco said, but at the same time set an incentive for the ISP to set a structure to discourage subscribers from using more capacity than the provider purchased. The new proposed AVP rates would be a flat $0.178 a gigabyte.

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