Where bigger isn’t better

Size matters. When it comes to paying cost awards for public interest groups participating in telecommunications regulatory proceedings, allocations are generally based on relative size of the companies’ telecommunications operating revenues (TORs).

A recent series of cost awards associated with Telecom and Broadcasting Decision CRTC 2022-28, “When and how communications service providers must provide paper bills”, attracted a number of cost applications that were awarded $53,646.72 as follows:

As a matter of practice, the CRTC doesn’t allocate amounts less that $1000 in order to simplify cheque processing and collections for both the recipient and the payor. As a result, despite the possibility of allocating costs between Bell, Eastlink, Distributel, Videotron, Rogers, SaskTel, Shaw, TekSavvy, TELUS, and Xplornet, the formula used by the CRTC resulted in costs being charged just to Bell, Rogers and TELUS.

Rogers has filed an appeal of the awards [zip, 1.8 MB], questioning the CRTC on the correctness of the revenues used to determine the allocations between the companies footing the bills.

The total amounts under dispute are not huge, relative to some files we have seen, such as nearly half a million dollars sought by various groups in the 2008 internet traffic management proceeding.

Rogers is wondering what the CRTC used as the basis for its allocations. Did the Commission use wireless revenues or total revenues? Did the regulator include the revenues from all the related companies and subsidiaries on behalf of which Bell responded?

Rogers says it is paying the awarded amounts in the meantime to ensure the public interest groups aren’t caught without funding in the interim, saying that it will collect reimbursement from the other service providers, should the CRTC rule in its favour.

A similar issue arose a couple years ago when TELUS challenged cost award allocations in a proceeding that led to Telecom Decision CRTC 2020-33.

As you will recall, I have expressed concerns about some past recipients of funding. It is good to see the level of attention to detail being paid to relatively small amounts of money in these cost awards.

Sustainable competition

We have seen the expression “sustainable competition” used frequently in Canadian telecommunications policy circles.

In its rejection of an appeal on the CRTC’s Review of Wireless Services, just last month Cabinet said: “the Governor in Council considers that the Commission’s decision appropriately balances investment incentives to build and upgrade networks, and sustainable competition and the availability of affordable mobile wireless prices for consumers”.

The terms “sustainable” and variations like “sustainability” appear 29 times in that CRTC decision.

Which brings us to the Competition Bureau filing with the Competition Tribunal to block the merger of Rogers and Shaw.

As reported by Bloomberg, the application is somewhat “baffling”. According to the Bureau, the merger “is likely to prevent or lessen competition substantially in Wireless Services in Ontario, Alberta and British Columbia.” Further, the Bureau says “divestitures proposed by the merging parties are not likely to alleviate the substantial prevention or lessening of competition from the Proposed Transaction.”

What causes many analysts to scratch our heads is an implicit presumption in the Bureau’s arguments that ending the merger will result in Shaw continuing to invest in operating its wireless business.

The lede in the Bloomberg story captures the issue. “The antitrust case against Rogers Communications Inc.’s takeover of a rival is thousands of pages long but comes down to one core idea: the company it’s buying is too good. Analysts don’t see it that way.”

Effectively, the Competition Bureau appears to be saying that Shaw would never be allowed to sell Freedom Mobile, because there are synergies with Shaw’s wireline business, even though the mobile business wasn’t originally integrated with a wireline company when it launched or when Shaw bought it. That seems pretty extreme. Earlier this week, BMO Capital wrote “We believe an outright rejection of this deal would not satisfy the government’s position of a four-player market (i.e., Shaw will not keep funding wireless, that’s why they sold)”.

The Bloomberg article notes “while Freedom may be a tough competitor, analysts question how healthy it really is. Shaw is struggling to generate much cash flow from it.”

As I wrote on Monday, Brad Shaw told the Parliamentary Industry Committee that the status quo is not an option, as the level of investment required for wireless was beyond the ability of Shaw to undertake. While the Competition Bureau may be correct in saying that Freedom contributed to competition in the wireless market, it does not say how Freedom can sustain its past level of competition if the merger is blocked. Shaw has clearly concluded that it cannot.

This is not a unique occurrence. Market consolidation has been happening, or is under discussion, in the U.S., Europe, the UK, Asia and Australia. One of the reasons for consolidation is that remaining competitive is an expensive proposition. GSMA estimates that the deployment and ongoing costs of 5G will be up to 71% more expensive than previous network generations. If Freedom is to remain a competitive force, additional financial resources are required.

Blocking the merger does not maintain Freedom’s contribution to competition in the marketplace; it weakens it.

New investors have apparently stepped up, enabling the “merging parties” to propose a divestiture. The multi-billion dollar purchase price being reported in the media implies that these potential buyers have developed business plans that are attractive to their investors and are willing to undertake the investments necessary to compete.

The outcome of the merger review process, like the CRTC and Cabinet reviews of wireless services, needs to “balance investment incentives to build and upgrade networks, and sustainable competition and the availability of affordable mobile wireless prices for consumers.”

The Competition Bureau’s position disrupts that balance, risking the long-term sustainability of all market participants.

Shifting regulatory sands

Circumstances shift over time, and telecommunications technology, policy and regulations are no different.

A recent set of CRTC filings provides an opportunity to take another look at the processes for changing the regulatory landscape.

A year ago, in “Channels of appeal”, I described the three normal ways to appeal a CRTC decision: to Cabinet (the Governor in Council); to the Federal Court of Appeal; or, back to the CRTC itself.

These processes have prescribed timetables set out in the Telecom Act or the CRTC’s Rules of Practice and Procedure.

But what do you do if you believe an older decision is past its “best before” date and the channels of appeal have long since expired?

That question has come up in the context of a TELUS filing, “Application requesting that SILECs be classified as Originating Network Providers for NG9-1-1” [zip, 820KB]. I’m not going to look at the substance of the application or its merits. For the purpose of today’s post, it is sufficient to know that this is a new application, dated April 21, 2022, asking the Commission to modify determinations made five years ago, in 2017.

The Independent Telecommunications Providers Association (ITPA) filed an entertaining reply that seems to suggest that there is no process available to challenge older CRTC rulings.

In its reply [download pdf, 170 KB], ITPA asserts that when TELUS argues in its application that the Commission “erred”, then its application became an appeal subject to the channels of appeal and the timetables set out in the legislation. ITPA says “waiting almost five years after the decision or order because one dislikes the effects of the decision or order is not among the choices.”

Regardless of how TELUS chooses to qualify its application, it does not make it a “new application”. Calling an apple an orange does not make the apple an orange.

I thought it would be obvious that there must be ways to change regulations after the 90 day statutory appeal process expires. Technology changes, circumstances change, the rest of the world evolves. It is inconceivable that the rules of procedure would not contemplate such a need.

And indeed, they do. In Telecom Information Bulletin CRTC 2011-214: Revised guidelines for review and vary applications, the CRTC describes the processes. Interestingly, that guideline reference is cited in the ITPA reply where the Association argues that TELUS is almost 5 years too late to file a review and vary application.

The point is, TELUS did not file a review and vary application. TELUS must have read the second half of the Information Bulletin where the Commission described “Criteria for distinguishing review and vary applications from new applications.”

In the past, some applications have been framed as new applications when they should have been framed as review and vary applications, and vice versa. The delineation of general guidelines for distinguishing among the various applications should assist applicants in determining whether to proceed by way of a new application or a review and vary application and avoid unnecessary delays.

The Commission has identified five factors that, although not exhaustive, will assist in assessing whether an application raises an issue relating to the original or the continuing correctness of the decision in question and accordingly, whether it should be treated as a review and vary application or a new application. These factors are the following:

  • whether the application raises an error of law, jurisdiction, or fact;
  • the extent to which the issues raised in the application were central to the original decision;
  • the extent to which the facts or circumstances relied upon in the application were relied upon in the original decision;
  • the length of time since the original decision; and
  • whether the resulting decision would supersede the original decision in a prospective manner as opposed to curing an error on a retrospective basis.

We can’t have a situation where any application seeking a change is deemed to be a “review and vary”, but then the filing is thrown out for being too late. The CRTC’s guidelines accommodate such circumstances by indicating that a new application should be used.

The regulatory landscape needs to be able to evolve and the rules of procedure accommodate these shifting sands.

I think we are going to find that the CRTC will agree that TELUS properly formulated its filing as a new application.

Class dismissed.

Investigate versus adjudicate

In Canada’s competition review system, Canadians’ interests are represented by two separate, but equally important groups: the Competition Bureau, who investigate; and, the Competition Tribunal, a quasi-judicial body led by Federal Court judges who adjudicate cases brought forward under the Competition Act.

Forgive me for inserting the “Law & Order” sound effect here.

As the review of the Rogers – Shaw merger moves to this next phase, it is important to recognize that there is a clear separation between the Competition Bureau and the Competition Tribunal. My weekend post provided a high level description of the Tribunal.

The two bodies are completely separate and have not always agreed on competition policy or interpretations.

There have been a number of significant applications brought forward by the Competition Bureau that were rejected by the Competition Tribunal or the Courts.

In “Courts slam competition chief in two harsh legal putdowns”, Terence Corcoran describes what he calls “a harsh rebuke” delivered by the Competition Tribunal to the Competition Bureau this past Canada Day (2021).

Just over two years ago, the Competition Tribunal ruled against the Commissioner’s application against Vancouver Airport and ordered the Commissioner to pay $1.3M in legal costs, as described in a note from Oslers.

In a case looking at the Toronto Real Estate Board, the Competition Tribunal dismissed an application filed by the Commissioner alleging abuse of dominance.

Rogers only competes with Shaw in the mobile business, and the companies say their proposal will spin off that business.

Based on statements by Rogers and Shaw that the companies are “proposing the full divesture of Shaw’s wireless business, Freedom Mobile”, it is difficult to envision how the transaction “prevents or lessens, or is likely to prevent or lessen, competition substantially” as prescribed in the Act.

Some academics have over simplistically alluded to disappointment in the outcome from the Xplore Mobile remedy arising from Bell’s acquisition of Manitoba Tel.

There should be no parallels drawn between then and now. At the time of the Bell-MTS transaction in 2017, Xplornet had different ownership, had no prior experience in the mobile business and it did not acquire a complete national network and business operation. As I describe in “A Kobayashi Maru scenario”, the situation is very different if Xplornet acquires Freedom Mobile. Xplornet has fixed wireless services in need of additional spectrum in rural markets; Freedom Mobile owns spectrum in vast swaths of rural markets where it has not deployed (and likely will not deploy) its mobile network.

Indeed, a transaction with Xplornet could greatly strengthen the level of competitive intensity in the Manitoba market, (a market in which Freedom Mobile does not operate), by boosting Xplornet’s overall mobile operations, while enabling Rogers to leverage the Shaw wireline assets in the province to compete better against Bell. Such a remedy provides the Competition Bureau with an opportunity to gain a win on the earlier Bell-MTS transaction.

Acquiring the wireline business from Shaw enables Rogers to be a stronger competitor in Western Canada, positioned to deploy 5G network investment more efficiently to compete with the incumbent wireline phone companies: TELUS in BC and Alberta; Sasktel in Saskatchewan; and, Bell in Manitoba.

When the merger was first announced, Brad Shaw testified before the Parliamentary Industry Committee and said that the status quo was not an option, the level of investment required for wireless was beyond the ability of Shaw to undertake:

Canada’s future success depends on a forward-looking approach to connectivity. We need to bridge the digital divide to connect underserved rural and indigenous communities in the west, but we also need to build out a new 5G platform. This is an investment challenge of unprecedented scale. We cannot look backwards, as we might have worked in the past. As we look forward, it is clear that Shaw cannot build what Canada needs on our own. By joining forces with Rogers, I am confident that we can create something extraordinary for Canada.

“It is clear that Shaw cannot build what Canada needs on our own.”

As such, rejecting the merger transaction will predictably result in a weakened fourth competitor in Western Canada, unable or unwilling to make the necessary investments. Rogers would continue to operate at a disadvantage in the west, lacking the depth of infrastructure it sought from the transaction. How was this factored into Competition Bureau modeling of the status quo?

As BMO Capital indicated in an investment note last night, “We believe an outright rejection of this deal would not satisfy the government’s position of a four-player market (i.e., Shaw will not keep funding wireless, that’s why they sold).”

With a full divestiture of Freedom Mobile being proposed, the only segment of Shaw’s business in which it competed with Rogers, it will be fascinating to see the basis of the Competition Bureau’s objection to the merger.

The Competition Tribunal

Late Friday evening (or very early Saturday morning), Rogers and Shaw issued a joint press release in response to having received notification that the Commissioner of Competition intended to file applications to the Competition Tribunal opposing the companies’ proposed merger.

A number of people may not understand what this means, so I will try to sort out the players.

The Competition Tribunal is “a specialized tribunal that combines expertise in economics and business with expertise in law”. Members of the tribunal are appointed by the Cabinet, but are independent of any government department”.

The Governor in Council appoints judicial members from the Federal Court on the recommendation of the Minister of Justice. Lay members are appointed by the Governor in Council on the recommendation of the Minister of Innovation, Science and Economic Development. They provide expertise based on their individual backgrounds in economics, business, finance, accounting or marketing. Lay members are appointed on a part-time basis.

The members are appointed for fixed terms of up to seven years and may be reappointed. One of the judicial members is appointed Chairperson of the Tribunal by the Governor in Council.

There are 5 judicial members of the panel, but interestingly, the Tribunal’s website indicates that terms expired last week (April 29) for 2 of the members, including the Chair, The Honourable Mr. Justice Denis Gascon.

Procedurally, the Tribunal hears applications for orders under Part VIII of the Competition Act (Matters reviewable by the Tribunal) in panels of three to five members. A judicial member presides at the hearing and there is at least one lay member on the panel.

There is a formal protocol defining the separation between the Commissioner of Competition and the Tribunal. Notably, the Tribunal is defined as “strictly an adjudicative body that operates independently and at arm’s length from the Government of Canada, its departments and the Commissioner.”

So, the Commissioner of Competition carries out competition related investigations independently with the support of Competition Bureau staff, but that body is independent of the Tribunal. “At all times, the Parties will strive to ensure that any interactions will not create potential or future conflicts of interest, or undermine the public perception of the Parties’ independence and impartiality.”

If it is helpful, think of the separation of roles between the police and the judicial court system. Under this metaphor, the Competition Bureau is the police force, the Commissioner is the Chief of Police, and the Competition Tribunal is the Court. The position of “Commissioner of Competition” used to be known as the Director of Investigation and Research, which was more descriptive of the role played in cases such as this merger.

I’ll have more on this in the coming weeks.

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