Search Results for: incentives

I am going to take a little vacation time over the next couple weeks, so while I am gone, I thought I would provide a collection of quotations that I think are relevant for a couple hot regulatory issues these days: the state of Canada’s mobile wireless industry and the appeals associated with wireline wholesale.

As noted by the 2006 Telecom Policy Review Panel, the CRTC originally encouraged competition via resale through various rulings that “established a general policy requiring an incumbent who chose to offer a retail telecommunications service to permit resale of that service, whether by competitors or others.” When the CRTC approved facilities-based competition in 1992, “it did so recognizing that the construction of network facilities by entrants was necessary for the full benefits of competitive entry to be realized.”

Have those fundamental principles changed?

From Telecom Decision CRTC 92-12:

The Commission considers that resale can provide many benefits, but it is not a substitute for facilities-based entry. Facilities-based entry permits sustainable and more broadly-based competition, thereby increasing the benefits to be derived from competition.
…
However, resellers can complement facilities-based competition by providing price discipline, ensuring greater responsiveness and serving niche markets.

Testimony of Marc Gaudrault, CRTC Notice of Consultation 2009-261, Transcript 31 May 2010, Line 926:

In order for the ladder of investment to work most effectively, the wholesale services provided by ILECs and cable carriers at each rung of the ladder should be constructed so as to facilitate the maximum amount of service differentiation downstream at the retail level and the ability of competitors to climb the ladder. This means differentiation of functional attributes such as speed, throughput, quality and types of service, geographic coverage and service bundling.

From the report of the Telecom Policy Review Panel:

The Proper Scope of Mandated Wholesale Access
As stated above, a fundamental objective of mandated wholesale access should be to maintain incentives for innovation, network efficiency and investment. In the Panel’s view, the most effective method for promoting these incentives is to ensure that competitive market forces apply to the broadest possible range of network and service components in as many locations as economically feasible.

To this end, new entrants should have both opportunities and incentives to build their own facilities. Since by definition retail market entry is not possible without competitor access to essential facilities, the regulatory framework should continue to require incumbents to make these available, on a mandatory basis if necessary.

However, the Panel concludes that, given the current state of competition in Canada, continuing to require that incumbents make non-essential facilities available to competitors undermines the incentives for the latter to build alternative facilities. This in turn undermines competitive market incentives for all service providers to be efficient, to innovate and to invest, for several reasons.

First, when designing their networks, entrants can either build non-essential facilities or lease them from the incumbent. Mandated wholesale access at regulated prices reduces the cost and especially the risks associated with leasing relative to building. It thus increases the likelihood that leasing will be more attractive than building. Mandated wholesale access therefore tends to discourage entrants from supplying their own facilities, even where doing so would otherwise be economical. The potential negative impact is much more limited if mandated wholesale access is limited to essential facilities.

Second, regulated wholesale pricing reduces the revenues that entrants who build facilities can generate in the wholesale market when they lease those facilities to other providers. This arises because regulatory constraints on ILEC wholesale prices also effectively place upper limits on the price that other service providers can charge for facilities in the wholesale market. This in turn affects investment decisions of both incumbents and new entrants in cases where the viability of constructing network facilities is dependent on their ability to profitably supply facilities on a wholesale basis to other service providers. The broader the scope of mandated access, the greater the negative impact on investment decisions.

Third, artificially low wholesale rates undermine the price levels and revenues that could otherwise be sustained in the retail market. The broader the scope of mandated access, the more significant the impact on retail prices. This compromises the ability of both entrants and incumbents to recover potential network investments.

The argument in support of mandating the availability of non-essential facilities is that it can actually facilitate, rather than hamper, construction of facilities by entrants by providing them with a “stepping-stone” until the day they can build their own facilities. The validity of this argument rests entirely on the assumption that the CRTC can set prices that are both:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities.

The Petition to the Governor in Council procedure: Canada’s wholesale broadband policies, the appeal mechanisms that challenge them, and broader regulatory trajectories
Daniel Mackwood, 2016 Paper
CRTC Prize for Excellence in Policy Research

CRTC decision hearing outcomes have regularly supported wholesale competition in the fixed access broadband market. The agency’s ongoing aim has been for its regulatory decisions to help usher new-entrant and competitor ISPs into an eventual transition from service- to facilities-based competition. Referred to as the “ladder of investment” (LOI) or the “stepping-stone” approach, this regulatory strategy encourages an evolution from ISPs existing as wholesale access customers relying on tariffed usage of incumbents’ networks, to eventually being able to invest in and maintain their own facilities and infrastructure.

The CRTC is in the midst of a proceeding reviewing mobile wireless services in Canada, focusing on three areas: Competition in the retail market; The current wholesale mobile wireless service regulatory framework, with a focus on wholesale MVNO access; and, The future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment.

It isn’t yet clear there is a justification to mandate wholesale access services for the mobile wireless market. That is the first gate.

Missing from the historical documents (cited above) is a discussion of the need to preserve appropriate incentives for facilities-based service providers to invest in network expansion in terms of reach and capacity.

Should there be a third principle in setting wholesale prices? Perhaps wholesale rates need to be:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities
• structured in a manner that encourages incumbents to expand capacity and reach for their own network facilities.

I will have spotty internet access for the next 10 days or so, a reminder that not every country has coverage as good as Canada; I look forward to reading your comments.

Too many are confusing ‘affordability’ with a desire to pay lower prices. Don’t we all want lower prices for everything we buy?

In reality, millions of Canadians are finding mobile data plans that they can afford, as evidenced by Rogers third quarter 2019 financial results. More than a million subscribers signed up for its unlimited data plans, “adopting these ‘no more overage’ plans at three times the pace anticipated”. More than 100,000 net new customers, despite an increase in churn.

Rogers indicated that “Approximately 60% of our existing customers that have migrated to these plans have upgraded to higher price plans.” It is an interesting data point. Clearly, those customers have found that the new plans are delivering much better value, with far more data for just a little more money.

Rogers’ financial results provide evidence that most Canadians are finding mobile plans to be affordable. While we all want to pay less, at the same time, we need to ensure our policies preserve incentives for investment in network expansion for capacity and coverage, maintaining leadership in the delivery of advanced speeds and services.

We should be exploring more creative approaches that deal with the small minority of Canadians who cannot afford the mobile devices and service plans they need to participate in the economy. I have often written about the need to understand all of the factors that have inhibited universal adoption of broadband and mobile services, such as in “Understanding the digital divide”. In “Do we know what we don’t know?”, I asked, “Is Canada doing enough research to explore the nature of its digital divide?”

The price of connectivity is just one of the elements. How can we find solutions for a problem that we may not fully understand?

I have also written frequently about the challenges associated with producing international price comparisons for telecommunications services. Each year, Innovation, Science and Economic Development produces a mobile price comparison study [2018 study | pdf | 1.35MB], examining trends in prices in Canada and how those prices compare to selected trading partners. The annual study looks at 6 baskets of services for mobile:

• Level 1: 150 voice minutes;
• Level 2: 450 voice minutes and 300 SMS (texts);
• Level 3: 1,200 voice minutes, 300 texts and 1 GB of data usage per month;
• Level 4: unlimited nationwide talk and text along with 2 GB of data;
• Level 5: unlimited nationwide talk and text along with 5 GB of data; and
• Level 6: Shared plan with 3 phones lines and unlimited nationwide talk and text along with 10 to 49 GB of data.

A problem arises when those baskets are no longer representative of the types of services that people are buying. For example, the average price for a level 4 plan from 2018’s study was $75.44 which included just 2GB of data. New ‘unlimited’ plans are available from most carriers for less than that price, with at least 5 times the full speed data. However, these new popular plans with no overage charges simply don’t fit into any of the survey’s arbitrary baskets.

As Statistics Canada writes about its updates to the Consumer Price Index, “If the fixed-quantity basket of goods and services was kept unchanged for an extensive period of time, it would gradually lose accuracy and relevance as a reflection of consumer spending.” The report continues, “New products and services are introduced to the market and existing ones may be modified or become obsolete. As a result, the basket needs to be revised periodically to reflect changes in consumers’ spending patterns.”

Over time, we have seen significant changes to consumers’ spending patterns for mobile equipment and services. Regulatory changes have led to a restructuring of device subsidies for many plans; new unlimited plans have caught on faster than anticipated. How will these get captured meaningfully in the annual study?

Consumers were promised lower telecommunications prices as part of the political campaign. Will the government’s annual price comparison study accurately “reflect changes in consumers’ spending patterns” and show that mobile plan prices are already much lower than last year?

The CRTC’s decision earlier this week set final wholesale rates for broadband internet access services, a proceeding that has been dragging on since interim rates were set in 2016. The CRTC’s final rates are up to 77% lower than the interim rates, and retroactive adjustments could cost carriers close to a third of a billion dollars.

Bell responded, indicating that the retroactive payments will have impacts of up to $100M and will result in cutting back on capital investment in rural markets. A news story in Cartt.ca indicates that Minister Bains is “‘disappointed’ but believes others will step up as incumbents pull back from network investment”.

Bell’s announcement referred specifically to its plans for Wireless Home Internet, a program that had aimed to offer wireless broadband to up to 1.2M households. As a result of the CRTC’s decision, Bell said it needed “to scale back Wireless Home Internet rollout in smaller towns and rural communities by approximately 20%”. As Cartt.ca observed, other carriers have similarly indicated that there would be impacts on capital investment programs.

Although the Minister may be disappointed, one has to wonder where people thought the money would come from. With a material impact on cash, there has to be a reassessment of budgets inside all of the companies. Put yourself in the shoes of the Chief Financial Officer and you have to find $100M. What choices do you have? You would look at various lines in the budget and find projects with the lowest return on investment.

There are always some projects with better returns on investment than others; some areas that have more marginal business cases. Bell’s announcement appears to be indicating that 20% of its Wireless Home Internet program had lower potential returns and that it would be the best source for funding the CRTC order.

Rural broadband, even using wireless technology, has a lower return on investment, almost by definition. After all, if it had a strong business case, then we would see all sorts of service providers fighting over that space. Instead, the business case is typically so poor that the government has had to give away billions of dollars in incentives to get service providers to build and operate rural networks.

In the case of the projects that are being impacted by this week’s CRTC decision, there was no direct government money other than an accelerated investment incentive – basically a faster capital tax write-off. So, the Minister may be hopeful that “others will step up as the ‘incumbents’ pull back from network investment,” but it is far more likely that the business cases for many communities won’t work any better for smaller players than for the major carriers. If there was a strong business case for smaller players to build in these communities, wouldn’t those networks have been built already?

Those rural areas may find that they have to wait for the next wave of government broadband funding programs. At the end of the day, that may end up being the answer to where the money comes from.

Earlier this month, I wrote about “Maintaining incentives to invest,” asking how a change in regulatory framework might impact investment levels by incumbents and the regional carriers. What are the broader economic impacts of Canada’s mobile industry?

Earlier today, the Canadian Wireless Telecommunications Association (CWTA) released a report [pdf, 0.5MB] prepared by Nordicity that examines “The Benefits of the Wireless Telecommunications Industry to the Canadian Economy in 2017”. This is the 10th annual version of the report.

Nordicity found:

• In 2017, Canada’s wireless industry contributed $27.5 billion to the Canadian GDP, an increase of 9.1% from $25.21 billion 2016.
• The major contributor to this overall GDP increase was the $1.22 billion increase in the contribution of wireless network operators to the GDP.
• The wireless sector generated 151,550 full-time equivalents (FTE) jobs in 2017, including direct, indirect and induced effects — an increase of 13,500 FTEs or 9.8% from 2016.
• Canadian facilities-based network operators made capital investments in Canada’s wireless infrastructure totaling $2.92 billion in 2017 — an increase of $0.34 billion or 13.2% from 2016.

Robert Ghiz, President & CEO of CWTA, will be speaking at The 2019 Canadian Telecom Summit, taking place June 3-5 in Toronto. Have you registered yet?

On Friday, Innovation Minister Navdeep Bains announced agreement had been reached with his provincial and territorial counterparts on the principles for a national broadband strategy.

The strategy is based on 3 key principles: Access, Collaboration and Effective Investment. These form what could be a “table of contents” of a more complete strategy document.

As we move forward and engage in this work, we will be guided by the following connectivity principles:

Access

• Access to reliable, high quality and affordable services are necessary for Canada’s success in a digital world, to allow all Canadian businesses, households, and public institutions to realize the economic and social benefits of connectivity through the use of advanced technologies and applications
• Work towards establishing universal access of at least 50 Mbps download / 10 Mbps upload taking into context scalability and longer-term growth.
• Businesses should have access to networks that support their ability to utilize technology, compete, and contribute to the economy.
• Mobile connectivity on major highways and roads is an important need, including for safety.

Collaboration

• Collaboration is essential to address the scope of the challenge and maximize the effect of our actions.
• Shared objectives and priorities will lead to better outcomes.
• Gathering, having access to, and sharing reliable data can significantly improve analysis and deployment strategies, as well as enable public reporting on progress.
• Recognize the unique circumstances of Indigenous communities, especially in remote and isolated locations.

Effective Investments

• Targeting market failures allows governments to direct support to where it is needed most.
• Coordination of regulatory and spending levers helps ensure effective implementation.
• Open access requirements can promote competition, affordability, and greater choice and should therefore be considered.
• Addressing deployment barriers can significantly reduce constructions costs of digital infrastructure.

Improving broadband adoption is predicated on two key elements: an effective strategy needs to be concerned with increasing the availability of high speed services (supply), as well as ensuring that all Canadian households are able to get on-line (demand).

The elements in Friday’s announcement set out a framework that needs to reach beyond the various levels of government and encourage increased private sector investment, potentially unlocking billions of dollars per year in capital spending.

There are many ways that government can help, especially in improving access to rights of way and access to existing government infrastructure, as well as providing faster processes for investment approvals. The recent court decision striking down a bylaw from the City of Calgary shines a light on how some policies have restricted telecommunications industry access to rights of way and municipal infrastructure, creating disincentives for investment. I have written before “How smarter policy can create smarter cities.” And more than 11 years ago, I wrote that a “city would be better off with a declaration that it will no longer fight carriers looking to invest and it will get out of the way of service providers that want to improve fibre access to their customers. The best way to support industry may be for the city to just get out of the way.”

Canada should examine the rules recently put in place by the FCC that require accelerated timelines for municipalities to approve or reject construction projects and the federal regulator also imposed limits on the fees that municipalities could extract for communications infrastructure projects.

The strategy appears to endorse the CRTC’s pragmatic approach for implementing its new Broadband fund. “Work towards establishing universal access of at least 50 Mbps download / 10 Mbps upload taking into context scalability and longer-term growth.” As I have written recently, the Commission recognized the challenges of extending broadband to some remote area, even when it set its ambitious national broadband target. “In some underserved areas, achieving the objective will likely need to be accomplished in incremental steps due to many factors, such as geography, the cost of transport capacity, the distance to points of presence, and the technology used.”

How do we increase demand?

This past June, Minister Bains announced the coming launch of “Connecting Families“, a project in collaboration with most of Canada’s major telephone and cable companies, that is designed to help hundreds of thousands of low income Canadian households get affordable internet services. It is a major step in the right direction. While Rogers and TELUS have been offering similar services for a number of years, the national program is supposed to be launched very soon.

As the Federal and Provincial ministers agreed, “Gathering, having access to, and sharing reliable data can significantly improve analysis” to improve our understanding of other factors that are inhibiting increased adoption, as I wrote in “Building a broadband research agenda.”

The new national broadband strategy, based on the principles of Access, Collaboration and Effective Investments, will help drive supply of advanced broadband infrastructure. The launch of Connecting Families will be an important step in helping to increase subscriber adoption.

With far less fanfare than the previous government’s widely ridiculed national digital strategy – perhaps better characterized as a national digital pamphlet – Minister Bains has put forward a more actionable broadband strategy. Digital issues have moved higher on the national agenda evidenced by the multi-stakeholder broadband strategy, the Broadcast and Telecom Legislative Review and the CRTC’s Broadband Fund.

These are encouraging signals. We will continue to watch the file as greater detail is released.