July 22, 2011 8:30 AM

The CRTC's usage based billing oral hearing concluded yesterday [July 19, 2011] with a final decision expected some time in the fall.  This long post focuses on the shift in CRTC thinking on the state of broadband competition in Canada but wonders whether it comes too late to make a difference.

For many years, the CRTC has steadfastly maintained that the Canadian ISP market is competitive. For example, in the net neutrality decision from October 2009 it stated:

Consistent with the current regulatory approach, under which the Commission has granted forbearance for retail Internet services, primary ISPs may continue to apply ITMPs to retail Internet services as they consider appropriate, with no requirement for prior Commission approval. This approach remains valid due in part to the large number of existing ISPs. A change in the approach would amount to interference with market forces and would result in inefficient regulation, which is contrary to the Policy Direction.

The current CRTC FAQ says much the same thing:

A retail customer is the end user who purchases access to the Internet. The CRTC does not regulate rates, quality of service issues or business practices of Internet service providers as they relate to retail customers. This is because there is enough competition in the market that retail customers can shop around for service packages.

The view that the Canadian Internet services market is competitive has shaped virtually every recent important CRTC decision on broadband regulation. Given its longstanding view that the market was competitive, the frustration felt by independent ISPs, businesses, and consumers simply didn't resonate with the commission. That led to a decade of decisions on TPIA (the cable access for independent ISPs) that rendered the market practically unusable for independent ISPs. It led to years of delay on speed matching, which effectively left independent ISPs with slower, uncompetitive speeds to offer potential customers. It led to the decision to block ADSL-CO, which would have allowed independent ISPs to co-locate closer to the residential customers. It led to the net neutrality decision, which encouraged ISPs to use "economic ITMPs" such as usage based billing without restriction. Finally, it led to the approval of wholesale usage based billing, which came within days of implementation before the public outcry ground it to a halt.

The CRTC's Failure

In other words, the criticism of the CRTC for having failed to establish a regulatory environment designed to foster greater third-party ISP competition is well-deserved. The Commission's track record in this area is awful and much of it stems from the failure to acknowledge what was obvious to so many - the Canadian market, particularly in Ontario and Quebec, is woefully uncompetitive. The CRTC prioritized incumbent investment and dubious network congestion fears over competition, a mistake acknowledged in the dissent by Commissioner Tim Denton in the speed matching case:

What is deplorable, in my view, is the disinclination to consider that specialist outfits like small ISPs should be allowed the opportunity for service innovation because the Commission:

a)      substitutes its opinion for what certain players in the market might decide to do; and
b)      declines to investigate the options for innovation in a serious and prolonged way.

The result is that the possibility for service innovation was turned down, without sufficient consideration, in my estimation. The current ambivalence about the role and legitimacy of smaller carriers continues. They are allowed to exist but denied the means to innovate. In a business with as much uncertainty as this, turning down the possibility for technical and business innovation seems a riskier move than letting it go ahead.

The Commission is now left to wonder why independent ISPs have rarely used cable TPIA (Middleton explains it is a function of cable barriers and poor regulatory decisions), why they are stuck at around 5% of the market (despite Bell's insistence last week that are no barriers to independent ISPs achieving 10 or 20 percent market share), or why Bell and the independent ISPs won't strike a commercially negotiated deal (Bell called Commissioner Katz "delusional" for thinking that was possible). A good long look in the mirror might help.

Yet despite this track record, the recent hearing provided glimpses of a change. On Monday, CRTC Vice-Chair Len Katz posed a question to CNOC that started from the following premise:

I guess I come from the position that we, the Commission, have already recognized there is a need to create competition, more competition in order to protect Canadians, and facilities-based competition is not yet here.  So it's our job to find a vehicle to create that competition and, in the simplest terms, it is to create an environment where broadband would be made available to a third party through a lease arrangement.

Katz re-iterated the perspective yesterday, telling Bell:

One of the reasons we are here is because there has been a finding that competition isn't sufficient in this country and so we want to find a way of creating more competition. The fact that we all have hopefully come together and agreed on cost-based rates and making sure there is no disincentive to investment to the incumbents, whether it's cablecos or telcos, is one of the paramount principles that we are all prepared, I think, to buy into. The issue only is how do you allow for more competition, which will not be as what you are looking for, which is a "me too" competition. You are saying that the folks that are coming into this market should be selling the same services that you are selling at the same speeds that you are selling, which is just a "me too" service.  It doesn't change the dynamics that we are facing in this country, that we are all looking to get out of.

That the CRTC Commissioners may have at long last recognized the need to prioritize competition above all other considerations is the good news. The bad news is that it may be too late.  The Commission has already set much of the wholesale framework and has been unwilling to grapple with the retail one. Retail concerns were ruled out-of-bounds before the oral hearing even began as Open Media was told that most of its submission was irrelevant for the purposes of this hearing (Chair von Finckenstein: "OpenMedia, you mentioned all sorts of very interesting topics such as accessibility, retail caps, business access, et cetera. I don't deny at all the importance of those subjects, but that is not the subject of this hearing."). The net neutrality issue, which as I noted last week is the opposite side of the same UBB coin, has been an enforcement failure with even the CRTC acknowledging it needs real penalties to foster change.

The Wholesale Dilemma

Even on the wholesale issue, the Commission finds itself somewhat limited.  Katz's comments point to the optimal approach -  Canada needs a regulatory environment that allows independent ISPs to differentiate their services any way that they can with price, caps, and speed being the most obvious possibilities (customer service is the fourth area but requires no CRTC involvement).

Price and caps are the subject of this hearing with Bell arguing for an approach that will make it tougher for independent ISPs to compete. Its volume based approach means paying for usage even when that usage has no real cost.  Indeed, when the independent ISPs argue for a capacity based approach - let us pay for capacity and use it as we see fit - Bell argues that such an approach will mean wholesale costs will be higher than retail. Consider this discussion from Monday:

MR. BIBIC (Bell): If you are a larger ISP that can handle -- you know, that has the customer base already, and there are some large ones here sitting in front of you that have the traffic volumes and since they are going to have to pay for capacity anyway now -- I mean Mr. Stein basically said it last week. I want to use the bandwidth that I buy the most efficiently as possible.  Mr. Stein wouldn't come forward and be a benevolent ISP and say to Bell, "I'm willing to pay you for the total capacity of the pipe just because I'm a good ISP and I want to be friendly do you". No, he is going to buy that capacity and if he is going to be paying for capacity regardless of what he uses.  A good businessman has an incentive to make sure he uses that pipe as efficiently as possible.

COMMISSIONER PATRONE:  Okay.

MR. BIBIC:  That will drive costs to us that are not reflected in the cost model.

COMMISSIONER PATRONE:  So you are saying you won't --

THE CHAIRPERSON:  That's where you lose all of us.  They paid for it.  Why can't they use it 100 percent?  I just don't get this.

MR. BIBIC:  Mr. Chairman, look, the bottom line is this:  If you fully cost that pipe and you force the ISPs to pay for the full cost and you do the costs properly with no magic markers in the costing group, the wholesale price will be higher than retail. And as I sit here, in my heart of hearts, and you all know it; you will never let the wholesale price be higher than the retail price -- ever.  We will not recover those costs.  And if those costs are higher than the retail price you won't let it happen. All the ISPs came forward last week.  CNOC said it, Primus said it, Mr. Cohen said it.  They said they want cost-based rates but, but make sure that those wholesale prices are below retail and you give us a sufficient margin to let us compete. So if you could sit here and guarantee us that all those costs will be recovered that would be one thing.  But it won't happen.

In other words, Bell fears that independent ISPs will buy a certain amount of capacity and use precisely what they've paid for. Apparently that doesn't work because the retail ISP model is actually based on having many customers paying for capacity that they do not use. If independent ISPs use the capacity they've purchased more efficiently (there is little reason to believe they could use 100% capacity), they risk becoming more efficient than Bell's retail network and will therefore be able to offer larger caps and lower prices (this is what the public wants but Bell doesn't).

If independent ISPs have trouble competing on price and caps, perhaps they can offer differing speeds? To this suggestion, Bell was even more emphatic, stating court action would ensue if the CRTC were to open the door to allowing an independent ISP to offer a speed not offered by Bell:

MR. BIBIC: ...This hearing is not to inquire about changing the speed matching decision and if the Commission does that, that is out of scope and we all know where we are going to end up.

THE CHAIRPERSON:  Whoa, whoa.

MR. BIBIC:  Well, we will.  We will have to end up in court because --

THE CHAIRPERSON:  Whoa, whoa, whoa, whoa.  Who said anything about redoing the speed matching decision?

MR. BIBIC:  Vice Chairman Katz just suggested that we are here to examine how we will foster more competition and without "me too" services.  "Me too" services in that context of his question meant speed matching.

THE CHAIRPERSON:  You are reading that into his question.

COMMISSIONER KATZ:  Yes.  You are reading a lot into that, but the reality is if you are telling me that every single time an independent ISP is going to come up with a new product that is different than yours you are going to object when you have the capability of offering the same service, if you so chose, with or without their introduction of that service, then there is a problem.

MR. BIBIC:  No, I'm not suggesting that.  I'm saying we have a speed matching decision and those are the rules.  Within the context of speed matching, if ISPs want to offer unlimited services, different caps than us, different prices than ours, different services, whether it's security, surveillance and all the things that are listed in CNOC's presentation from February, I have no issues with that; none. The only point I'm making here is that the rule is that incumbents have to offer the same speed tiers to small ISPs.  We are fine with that.  But to design a pricing model for access and volume-based billing that allows small ISPs to now have access to different speeds than we offer I think is going beyond the scope of this hearing. That is the only point I'm making.

Later in the discussion, Bell's Jonathan Daniels was even more direct:

What's acceptable to us is in terms of that if we offer a retail speed we will match it for wholesale.  It's not acceptable for us that the ISP be able to offer different speeds than what we offer in the retail market, because we don't consider it speed matching.

While Bell's interpretation of the speed matching decision may not be right, its view of the competitive environment is unmistakable. It has worked tirelessly to limit the ability of independent ISPs to compete by limiting them to what Commissioner Katz terms "me-too" services that are largely indistinguishable from incumbent offerings and hold little chance of gaining significant market share. The Commission now appears to see that the goal should be full competition supported by as much provider differentiation as possible. The question is whether it has come to this realization far too late.

Originally posted on Michael Geist's Blog

Blogger Profile: Michael Geist

Dr. Michael Geist is a law professor at the University of Ottawa where he holds the Canada Research Chair in Internet and E-commerce Law. Dr. Geist has written numerous academic articles and government reports on the Internet and law and was a member of Canada's National Task Force on Spam. He is an internationally syndicated columnist on technology law issues. He is an internationally syndicated columnist on technology law issues.

Posted by Sue Ansell at July 22, 2011 8:30 AM

Categories: Usage based billing

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