Search Results for: incentives

What does it mean to act in the public interest for telecommunications?

Does it mean working to get Canadians universal access to the fastest internet speeds? The lowest prices? The greatest coverage? All of the above?

There are few people who would say they oppose lower prices, faster speeds or improving coverage. In his remarks opening The 2017 Canadian Telecom Summit, Minister Bains said:

our government understands that Canadians want three things from their telecom services.

• Quality. Is the service fast enough to do what I want it to do?
• Coverage. Is the service available where I want it to be?
• and lastly, Price. Is this service affordable?

These three areas are clearly where providers need to compete and that’s why our Government is doing our part to promote competition and investment. The goal is very clear. We want to improve quality, coverage and price for all Canadians.

There is a tension that ties these together. Quality and coverage each require capital investment, which in the Canadian context is measured in billions of dollars each year. Canada has achieved world leading quality scores for our mobile and fixed line networks. The overwhelming majority of Canadians have access to the latest generation of wireless technology, delivering the fastest speeds in the world.

The Minister carefully defined “Price” as offering service at an affordable level. An affordable price is not necessarily the same as the lowest price. PwC recently looked at Canada’s mobile affordability and described its analytic process in concluding “Canadian mobile services top G7 affordability ranking”:

To provide a holistic view of wireless affordability in Canada, this report examined a number of aspects related to the overall affordability of consumer wireless in Canada, including:

1. The changing pattern of household expenditures, as wireless data use is enabling a different delivery of products and services – including the substitution of select historic spend categories by wireless.
2. The assessment of wireless affordability in Canada, as measured by recognized affordability metrics.
3. The affordability of wireless services for Canadians in proportion to their income relative to other jurisdictions.

As I concluded at the time, “We need to focus on strategies to drive “demand”: increasing adoption rates among groups that could subscribe, but have not. That is a problem across all geographies, and perhaps more pronounced in urban markets. That should start with developing a greater understanding of those individuals and households on the wrong side of the digital divide.” Last week, I wrote more about “Using evidence to solve the digital divide.”

The third leg, coverage, is a real challenge. Many countries define regions as “rural” in terms of population densities that Canada considers to be “suburban”. Not only are there remarkably low population densities in some areas, but some of these are in extremely harsh geographies or so far north to be difficult for equatorial geostationary orbit satellites to “see”. Other underserved areas are close to high quality networks but located just beyond the economic reach of existing service providers. These households are perhaps the most frustrated, and understandably so.

In some cases, it means direct subsidy to offset the uneconomic costs associated with building to an area. Government subsidy programs only amount to a fraction of the level of investment required to extend coverage to unserved and underserved areas. The balance comes from the private sector.

The challenge is how do we create the right environment to incent investment. In some cases, there can be policy incentives, ranging from simplifying approval processes, making available government owned (or government controlled) passive infrastructure, or changing regulatory disincentives. It is important to understand that the current regulatory and financial conditions do not support the business case for extending service to other regions. To incent investment, there has to be an increase in top line revenue or a reduction in costs. Some of these levers are within the control of regulators and policy makers.

Acting in the public interest involves balancing priorities to achieve an optimal outcome. It isn’t all about price. As a nation, we can use targeted subsidies, or programs like Connecting Families to aid with affordability.

It takes a certain level of intellectual maturity to understand that reaching an optimal balance of Quality, Coverage, and Price is a challenge in the Canadian environment. There are trade-offs and prioritization required, especially in these difficult economic times with extraordinary and shift demands for connectivity.

Ultimately, the responsibility for determining the policy priorities rests with the government. Given the response to the pandemic, it is understandable that the federal Cabinet decided Canada’s future depends on connectivity.

How does this shift the equilibrium between Quality, Coverage, and Price?

Ok kids. Gather around. Today’s lesson is engineering economics. How do you put together a business case for expanding broadband into a previously unserved area?

Putting together a business case is an important life skill. You can apply these kinds of studies to personal purchase decisions, or putting together a business case to launch a new service or discontinue an old one. And most importantly, it will help you understand better how to analyse discussions about rural broadband.

Let’s look at a business plan to expand broadband service into a certain area. For the sake of simplicity, we’ll start with an assumption that there are sufficient investment funds available to fund all the construction into unserved areas, subject to a condition that the investor is able to get a certain return on their investment.

Based on that constraint – a positive return on investment, the engineering department should be able to define an area that qualifies for construction. Their calculations would be based on a variety of assumptions: Capital cost of equipment and construction; annual operating expenses including maintenance; retail market share (and thereby retail revenue); wholesale market share (and wholesale revenue); taxes, etc.

All these numbers go into a spreadsheet and the engineer can keep adding more homes to the construction plan as long as the business case continues to be positive.

At some point in the exercise, the next incremental home has a negative impact on the business plan. The engineer can then draw a line on a map delineating a boundary.

That boundary effectively defines the digital divide: where the economics are unable to support traditional investment in infrastructure. On one side of the boundary, the more urban side, the private sector can line up investors willing to support broadband expansion.

On the other side of the boundary, the more rural side, a different approach is required. These households are candidates for government rural subsidy programs.

But let’s go back and look at the ‘urban’ side of the boundary line. That boundary is defined as precisely where the business case goes from positive to negative. Homes on the boundary effectively have a net present value (NPV) of revenues less costs of zero.

What happens if the revenue assumption changes? If revenues somehow increase, the boundary gets pushed outward. More homes (on the ‘rural’ side of the boundary) would potentially now have a positive business case. On the other hand, if revenues somehow decreased, the boundary gets pushed in the other direction and the business case is no longer positive for as many homes.

When the CRTC sets wholesale rates, it is implicitly setting the wholesale revenues for our mythical engineer’s business case calculations. The CRTC doesn’t impact the capital costs, they don’t change the retail rates, or even the market share assumptions. But, the regulated wholesale rates are what drives the wholesale revenue line in the business case. Drop the rates, wholesale revenues go down and total revenues for that area go down.

When the facilities-based carriers warn that changes to wholesale rates impact the incentives to invest in rural broadband, this is what they are talking about. These aren’t threats; it’s just basic economics.

The Federal Cabinet understood these principles of economic studies.

Now you do, too.

Is costing more of a subjective art, or is it an objective science?

A recent opinion piece by former CRTC vice-chair Peter Menzies in the Financial Post says “It [The CRTC] has a cost accounting process that is supposed to be objective and provide certainty for an industry on which, as COVID-19 has made starkly clear, Canadians and their economy depend.”

If it was only that simple.

Costing is at the centre of the appeals of last August’s Telecom Order CRTC 2019-288, “Final rates for aggregated wholesale high-speed access services”. In response to an appeal, a little over a week ago, the Federal Cabinet declined to act but said it believed the CRTC erred and set rates too low, impacting the incentives to invest.

The Menzies opinion piece says “The CRTC has the power to stand its ground based on the evidence before it. It should do so.” The implication in the OpEd is that costing is an objective mechanical process; just input a bunch of numbers into a template and out should pop the costs and the resultant wholesale rates.

In reality, there are a lot of subjective decisions required in telecom costing exercises.

The CRTC Order was complex, following a lengthy consultation. The Order itself was divided into 4 broad sections, labelled by the CRTC as “Issues”, and each Issue contained numerous individual determinations, each impacting the resultant costs and wholesale rates:

1. Costing issues common to all wholesale HSA service providers
• Annual capital unit cost change assumption
• Bell Canada’s, Bell MTS’s, and RCCI’s unrecovered costs
• Working fill factors
2. Costing issues specific to the cable carriers
• Coaxial facility costs
• Segmentation facilities – segmentation fibre, optical nodes, and CCAPs
• Segmentation fibre facilities: Access versus usage
• Cable carriers’ proposed growth rates for annual peak period upstream traffic
• RCCI’s and Videotron’s transport fibre facility costs
• RCCI’s project development costs
3. Costing issues specific to the ILECs
• Labour costs per DSLAM port
• Bell Canada’s explicit costing approach
• Attribution factors to be applied to DSLAM equipment, umbilical fibre, and Ethernet port costs
• Bell Canada’s productivity enhancements costs
• Umbilical fibre costs: Access versus usage
• Bell Canada’s FTTN bonded access installation rate
• Bell Canada’s project development costs for aggregated FTTN access rates
• TCI’s financial parameters
• SaskTel’s VDSL Access service charge
• SaskTel’s VDSL interface monthly charge
• SaskTel’s other charges
4. Other issues
• Markup
• Effective date of the final aggregated wholesale HSA service rates
• Computation errors
• Subsequent tariff applications

As can be seen, the CRTC Order actually consists of 24 decisions, each one having an impact on the rates charged to ISPs reselling carrier access services, and impacting carrier revenues.

From some of the section headers, it should be obvious that not all of these were purely objective, mechanical determinations. There is analysis required and judgment calls made in each of these sections.

For example, let’s look at some of the discussion in the “Markup” section. The CRTC introduced the section saying “Markups have varied over time depending on a number of factors, including whether the wholesale service is essential and whether there may be additional risk to network investment if the wholesale service is mandated.” The Commission acknowledged the subjectivity of setting the markup rate, saying “in setting rates, it balances the need to ensure that network providers are reasonably compensated for their costs with the need to ensure that markups are not so high as to significantly impede competitors from providing competitive alternatives in the marketplace.”

Reading such discussions in the CRTC Order helps challenge the assertion that the CRTC “has a cost accounting process that is supposed to be objective”.

In fact, there is a lot of subjectivity applied, resulting in the potential for a wide margin of error. That potential for error in any regulatory process is one of the reasons that our system includes three avenues to appeal a determination to another authority: to the regulator; to the Courts; and, to Cabinet.

As we heard from one of those avenues a little over a week ago, “the Governor in Council considers that the rates do not, in all instances, appropriately balance the policy objectives of the wholesale services framework and is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.”

These are reasonable concerns for Canada’s Cabinet to have expressed. The need to focus on “investment in high-quality networks, particularly in rural and remote areas” has become more acute over the past 6 months.

In considering its own review of the August 2019 Order, the CRTC can certainly “stand its ground based on the evidence before it”. However, the Commission first needs to reassure itself that it balanced the competing Policy priorities when it made subjective determinations.

The CRTC just may find that a fresh look shines a light on a margin of error in some of those judgment calls.

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This article appears on National Newswatch.

“Canada’s future depends on connectivity.” Those were the opening words in the statement issued by Innovation, Science and Industry Minister Navdeep Bains in discussing Cabinet’s decision not to formally intervene in last summer’s wholesale internet Order by the CRTC. While declining to take action, Cabinet sent a clear message that it expects significant changes to those rates in the pending outcome of the Commission’s own review of the Order.

The CRTC’s Order was issued August 15, 2019. Under Section 12(1) the Telecom Act, subsequent to a ‘petition’, “within one year after a decision by the Commission”, Cabinet (the Governor in Council) could “vary or rescind the decision or refer it back to the Commission”.

Exactly one year later, Cabinet decided not to take any of those actions, at this time.

The statement from Minister Bains explicitly acknowledges that the original CRTC Order got the rates wrong and says that the Commission did not strike the appropriate balance between the competing objectives of the Telecom Act, failing to apply sufficient weight to Section 7(b): “to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada”. Cabinet recognized that wholesale rates got set so low that carriers were unable to continue expanding their networks into unserved and under-served regions.

On the basis of its review, the Governor in Council considers that the rates do not, in all instances, appropriately balance the policy objectives of the wholesale services framework and is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas. Retroactive payments to affected wholesale clients are appropriate in principle and can foster cooperation in regulatory proceedings. However, these payments, which reflect the rates, must be balanced so as not to stifle network investments. Incentives for ongoing investment, particularly to foster enhanced connectivity for those who are unserved or underserved, are a critical objective of the overall policies governing telecommunications, including these wholesale rates. Given that the CRTC is already reviewing its decision, it is unnecessary to refer the decision back to the CRTC for reconsideration at this time.

With such strong views about the CRTC’s Order, some may ask why Cabinet didn’t exercise its power to formally “refer it back to the Commission.”

The better question is “Why would it bother referring it back to the CRTC?” All that would do is cause a delay.

The CRTC already has its own review of the Decision underway. That process began last November and submissions have already been received. Had Cabinet chosen to exercise its option to “refer it back to the Commission”, the resultant process might have to start over.

By setting forth a statement outlining its expectations for the Commission’s own review process, Cabinet is expediting the process that will ultimately release wholesale rates that balance the competing objectives. Although it declined to act, Cabinet is sending a signal to the Commission for what could trigger a subsequent review of the CRTC’s reconsideration proceeding.

[The CRTC’s Order was also the subject of a judicial process that was heard by the Federal Court of Appeal this past June. The Court imposed a stay of the Order, saying “the implementation of the CRTC Order that could result in a permanent market distortion which would be difficult to remedy posteriori.”]

A little over a week ago, I wrote that there are “other regulatory or policy levers that don’t require direct subsidies to improve the business cases for rural expansion”. In today’s release, we see Cabinet pulling a powerful policy lever that will significantly improve the business case for network investment including rural expansion.

Sometimes, the best decision is choosing not to make a decision at all.

A few months ago, in “A key to recovery? Communications leadership”, I wrote “Set clear objectives; Align activities with the achievement of those objectives; Stop doing things that are contrary to the objectives.”

Canada’s future depends on connectivity.

That is a strong statement, around which we can build objectives.

Last month, in “The COVID wild card”, I wrote about the supplementary comments filed in the CRTC’s mobile services review. “The importance of maintaining incentives for investment figures prominently in the final comments submitted last week.” On the subject of mandated resale of mobile services, I noted that Bell wrote “It would be particularly destructive now, during a period of unprecedented economic turmoil brought on by the COVID-19 pandemic and at a time when large investments of private capital are required to support rapidly expanding usage, the roll-out of 5G, and the continued extension of access to underserved rural and remote communities.”

With the ability to declare victory on falling prices for mobile services, the government is rightly turning its focus on maintaining incentives for investment in advanced facilities and expansion in unserved and under-served markets. What implications can we extract from today’s Cabinet release that may guide the outcome of the CRTC’s review of mobile services?

After all, Canada’s future depends on connectivity.

Final comments for the CRTC’s Review of Wireless Services consultation were submitted last Wednesday evening and the file is now in the hands of the Commission for determinations on whether to mandate MVNOs as well as a host of other issues.

Going into the hearing, the CRTC’s Notice of Consultation set out a preliminary view [at ¶39]:

that it would be appropriate to mandate that the national wireless carriers provide wholesale MVNO access as an outcome of this proceeding. The Commission considers that, on balance, it is likely that the benefits that a well-developed MVNO market would deliver to Canadians are now more likely to outweigh any negative impacts that a policy of mandated wholesale MVNO access might have on wireless carriers’ network investments, particularly given the extensive investments that have been made in recent years. Further, properly structured rates, terms, and conditions should further mitigate potential negative impacts on future investments.

However, 2 months ago, the CRTC re-opened the evidentiary record, asking parties to comment on a new interrogatory:

Does the ongoing situation with respect to the Covid-19 pandemic change the views you have previously put forward on any of the issues being examined in this proceeding? Explain why or why not with supporting rationale and evidence, as necessary.

What significance should we place on the Commission’s May 15 letter? To what extent, does the letter reflect an understanding at the Commission of the significant change in circumstances, that could change its preliminary view on the potential impacts on network investment? Or conversely, was the Commission papering the record, preparing a preemptive defense against a future appeal on the basis that it didn’t consider the change in circumstances?

The importance of maintaining incentives for investment figures prominently in the final comments submitted last week.

The Competition Bureau’s comments open with “This proceeding is more important than ever for consumers, businesses and the Canadian economy. The COVID-19 pandemic reinforces the need for robust competition in the wireless sector, to drive the provision of ubiquitous, high-quality wireless networks that are accessible and affordable for all Canadians.”

TELUS’ comments open with, “COVID-19 demonstrates the fundamental importance of network connectivity.”

Bell worked its way up to the subject, using 4 introductory paragraphs before stating “It [mandated resale] would be particularly destructive now, during a period of unprecedented economic turmoil brought on by the COVID-19 pandemic and at a time when large investments of private capital are required to support rapidly expanding usage, the roll-out of 5G, and the continued extension of access to underserved rural and remote communities.”

For Rogers, the COVID-19 factor was midway through the executive summary:

It is critical that regulatory policy continue to take a long-term view. Canada will require substantial ongoing investments to improve productivity, maintain its competitiveness globally, and to realize the promise of 5G. The importance of ongoing investments in high quality, resilient broadband networks across Canada, and of extending these networks to remaining and underserved areas of Canada, have been dramatically underscored by the current COVID-19 crisis. The ongoing COVID-19 pandemic has heightened awareness of the critical importance of our wireless networks to Canadians and the Canadian economy. Canada’s networks have performed among the best in the world during this unprecedented time. Mandated wholesale access to mobile wireless networks will significantly undermine incentives, and the ability, to invest going forward, jeopardizing Canada’s recovery and future success.

In the second paragraph of its final comments, Shaw warns against “artificial support for resale models that would destroy the economics of competitive investment”:

As this proceeding draws to a close, the world continues to struggle with the COVID-19 pandemic, which has illuminated the power and importance of robust, resilient and competitive telecommunications networks. These networks, and the investment capital that sustains and nourishes them for the future, cannot be taken for granted. New competitors like Shaw have invested many billions of dollars in spectrum and new wireless infrastructure that form our footing in the fight for sustainable competition. We are not done.

Videotron’s introduction to its executive summary is entitled “Introduction – les leçons de la crise COVID-19”, concluding the introduction with “Compte tenu de ce qui précède, il nous apparaît évident qu’il est dans l’intérêt national de maintenir une approche de réglementation privilégiant la concurrence axée sur les investissements.”

In its comments, CWTA was more reserved, deciding to close its executive summary with the COVID card: “As Canada emerges from the health and financial crisis caused by COVID-19, the wireless industry will play an important role in Canada’s economic recovery. The demand for high-quality, reliable wireless services will continue to grow.”

Even the potential new entrants put COVID front and centre. In the second paragraph of Cogeco’s submission, we read “This need [investments in all types of telecommunication infrastructure] is now even greater, as society has shifted many location-based activities (work, shopping, cultural activities, etc.) online in response to the current COVID-19 pandemic.”

DOT Mobile’s first paragraph opens “The ongoing COVID-19 pandemic has made acute the needs of the underserved Canadians who must rely on communication services more than ever. The underserved are now faced with severe impacts from the pandemic, such as a decrease or complete loss of income, reduction of job opportunities or mental health issues caused by COVID-19 induced stress, social distancing and solitude.”

Teksavvy said “Covid19 has brought an additional urgency to the completion of these proceedings. It has revealed how people rely on general network connectivity, as well as exposing gaps in that connectivity caused by the incumbents’ profit-seeking behaviour.” I’m not sure I understand the implicit pejorative nature of “profit-seeking behaviour”, but I am equally unclear how Teksavvy believes reductions in revenues and profits will help close those connectivity gaps.

The Coalition for Cheaper Wireless Services said in its opening paragraph “The COVID-19 pandemic has only increased Canadians’ individual
technological dependency.”

This is just a small sampling excerpted from the final comments submitted Wednesday night.

It is clear that COVID-19 is the wild card in the CRTC deliberations. What is less clear is whether the CRTC has been swayed from its preliminary view favouring mandated MVNO, despite explicitly recognizing the “negative impacts that a policy of mandated wholesale MVNO access might have on wireless carriers’ network investments.”

We’ll share more in the coming days.