The Canadian Radio-television and Telecommunications Commission (CRTC) recently struck down its wholesale pricing set in 2019 that would have reduced the cost of borrowing networks for smaller ISPs, which set off waves of exasperation among independent internet service providers (ISPs) and worries of bias in the CRTC’s leadership.
In a background briefing on May 27, the CRTC said that the 2019 wholesale rate contained errors rooted in its methodologies for setting the new rate. Furthermore, the CRTC said adopting a disaggregated wholesale model can save costs for independent competitors.
Based on its new evidence, the commission lowered the 2016 wholesale rate by 10 per cent. The amended 2016 rates will replace the rates outlined in telecom order 2019-288.
What went wrong
With such a dramatic reversal, almost all relevant parties are wondering what went so wrong. The CRTC listed the following items that were incorrectly calculated for setting a new rate:
- Attribution of costs for digital subscriber line access multiplexer (DSLAM), umbilical fibre, and Ethernet port access facilities.
- DSLAM installation labour costs per port.
- Project development costs.
- Demand-related cost adjustment.
- Unrecovered costs.
- Occurrence rates assigned for manual handling of orders and travel time in the cost study for the bonded access installation charge.
- Exclusion of pole and conduit structure costs in the cost study.
- Repair costs in the bonded access service cost study.
In the new order titled 2021-181, the CRTC explained that the old methodology used to derive the 2019 rates miscalculated the cost of equipment use. In some instances, a competitor would only need to pay for around 70 per cent of the equipment cost even though the wholesaler would lose access to the said equipment when it’s leased (paragraph 87). The CRTC believes that the wholesaler would not be able to recover the difference directly.
The commission also found that it should not apply the same installation labour costs to Bell as it did with the other incumbents due to independent contract and internal labour costs (paragraph 107). Moreover, the commission admitted that it doubled Bell’s amortization period for the final project development cost estimate (five years versus 10 years, as outlined in paragraph 124).
According to the CRTC, other erroneous criteria include a misestimation of TCI’s capital high-speed access (HSA) cash flow at the beginning of the study period and incorrect assumptions of unrecovered costs related to combining different cost studies (paragraph 151).
A turbulent past
The whole fiasco started when the CRTC introduced the Telecom Order 2019-288 in August 2019, in which it lowered the rates that incumbent ISPs (also known as the facility-based providers or wholesalers) can charge independent competitor ISPs (TekSavvy, Start.ca, etc) for borrowing a portion of their network and selling the internet service under their own brands.
In an earlier petition to the Federal Cabinet, Bell said that if the CRTC’s 2019 rates were to take effect, the independent ISPs would pay up 42 per cent less for access and up to 90 per cent less for capacity costs. The pricing was also retroactive to 2016, which meant that the incumbents would need to refund three years of overpayment to the independents. Further, the company denied that the lower rates would benefit Canadians.
But the 2019 rates swung in and out of limbo and never took effect. Bell and other major ISPs appealed the price numerous times, including the aforementioned petition to the Federal Cabinet. On Sept. 27, 2019, the Federal Court granted a stay on the CRTC’s pricing but ultimately lifted it on Sept 11, 2020.
However, another suspension came on Sept. 28–just two weeks after the Federal Court’s dismissal–this time approved by the CRTC itself. That suspension would stand until the decision on May 27, 2021.
Criticisms from independent ISPs
The independent competitors took no time to voice their dissatisfactions. Members of Canada’s internet market slammed the CRTC for reversing its stance.
“I don’t know if the CRTC has any understanding of what they’re doing,” said Andy Kaplan-Myrth, regulatory and carrier affairs at TekSavvy. “I have never seen a tribunal or regulatory body abandon its responsibility in this kind of way. I can’t think of why they’re doing this.”
Geoff White, executive director of the Competitive Network Operators of Canada, also criticized the CRTC, calling the decision a major step towards “dismantling the only proven way to make things better for middle-class Canadians.”
“I don’t think the disaggregated model plays into the decision about the rates at all or the pricing of these rates,” said Kaplan-Myrth. “It seems to be a pretense for the CRTC to not spend any energy on this proceeding…so it seems to be more of a policy choice about where the CRTC wants to spend its resources, as opposed to anything that has to do with the rates or what competitors need right now.”
Kaplan-Myrth said that although he expected some flaws in CRTC’s investigation into the rates, the CRTC did not make an effort to amend the decision based on those errors and their impact.
“They said they made errors, and so they can vary the decision. And then they varied it in a way that is essentially abandoning the entire exercise, freezing rates that basically maintain the status quo, and justifying it by saying they’re going to spend their energy looking at a completely different model.”
Further, Kaplan-Myrth said that despite the 10 per cent reduction for the incumbents, wholesale prices will actually increase due to speed banding, the practice of grouping together a range of speeds into a single price point. Although this simplifies the administration process, the price of a band is often set at the highest speed in that band. For example, in the 150 Mbps to 250 Mbps band, Rogers can charge TekSavvy the cost of the 250Mbps speed across the board even if its customers aren’t subscribed to that speed.
Kaplan-Myrth said that this grouping, which came into effect on the same day of the CRTC’s pricing announcement, increases that particular cost for TekSavvy by almost 40 per cent.
In contrast, Bell, a wholesaler to TekSavvy, applauded the CRTC’s decision.
“It’s a positive decision that enables the major infrastructure investments Canada needs, including Bell’s accelerated capital plan to connect even more Canadians and help drive the country’s ongoing recovery, while also ensuring ongoing vigorous competition,” said Bell in a statement to IT World Canada.
Rogers was unavailable for a statement or interview.
What it means for Canadians
Multiple independent competitors agreed that CRTC’s decision erodes choice. Nonetheless, TekSavvy does not plan on immediately increasing prices, but it isn’t ruling out the possibility down the road.
“Nobody should expect prices to go down, which should have been what came out of this decision,” said Kaplan-Myrth. “It may change some of our prices going forward, especially in cases where the CRTC just raised those rates. But we haven’t made any decisions yet.”
When the CRTC first announced the 2019 rates, TekSavvy lowered the price or upgraded plans for 80 per cent of its customers. Start.ca and Distributel also followed suit. TekSavvy held off on reversing the pricing following the subsequent pricing stay but eventually raised its internet prices in March 2020.
TekSavvy said it’s also reevaluating its investment strategy. Additionally, the company has pulled out from the June wireless spectrum auction, pausing its plans to become a mobile provider, as well as rethinking its four-year $250 million network expansion plan.
Kaplan-Myrth added that TekSavvy will minimize any impact on its customers.
White also described the decision as “very damaging” to consumers and that the backtracking on the 2019 rates will increase internet prices for Canadians.
“It will be harder for smaller, independent ISPs to do business,” said White. “And it will allow for the re-monopolization of our telecommunications industry. That’s why I suggest to you that the CRTC in flip-flopping not only undermined itself, it has undermined the government’s own telecom goals. And it’s undermined Canadians.”
Conversely, Bell announced that it will up its accelerated capital investment plan by CA$500 million. A May 31 news release attributed the increase to “greater regulatory certainty” in the CRTC’s decision.
The battle continues
With both financial and political factors at stake, the independent ISPs have begun challenging the CRTC’s order. On May 28, TekSavvy filed its own petition to the Federal Cabinet, calling for the Liberal government to overrule the new rates. Additionally, TekSavvy and VMedia have called for the immediate resignation of Ian Scott, the chairperson of CRTC.