Was Bell Canada’s decision to divest its holdings in Northwestel due in part to a regulatory-driven restructuring?

Last week, we learned Bell was selling Northwestel to Sixty North Unity, a consortium of Indigenous communities from the Yukon, the Northwest Territories and Nunavut. The acquisition price is one billion dollars, representing approximately 7.5 times EBITDA ($135M) and the deal is expected to close late this year. The transaction results in Northwestel becoming the world’s largest Indigenous-owned telecommunications company. CRTC approval is not required for the deal.

Two years ago, Northwestel announced the sale if its Yukon fibre to the home assets to a group of 13 Yukon First Nation development corporations.

A number of financial analysts observed that the transaction will reduce regulatory burdens for Bell and dispose of a business unit that is not materially contributing to revenue growth at Bell. Keep in mind, most of Northwestel’s services are still heavily regulated. Even retail internet access service is regulated in Northwestel territory. This meant that CRTC approval was required before the Connecting Families low-income broadband savings program could be introduced.

Over the past year, I have pointed to the potential for regulatory-driven restructuring of major telecom service providers. In “Ending regulated cross subsidies”, I wrote about the CRTC setting wholesale rates paid by Videotron to Rogers below cost. At the time, the CRTC said the financial shortfall could be made up “through other telecommunications services”. In “Cross subsidies cost consumers”, I discussed Corus receiving preferential regulatory dispensation compared to the broadcasting units of Bell, Rogers and Videotron. I observed that the CRTC believed the vertically integrated broadcasters can sustain financial losses, propped up by profits in other segments.

In each of those instances, I wrote “A rational business will restructure, or shut down those units that have no opportunity to climb out of the red.”

Specific to Northwestel, last month the CRTC discontinued a $20 per month surcharge that was applied to customers who subscribed to DSL internet without a residential phone line.

81. The Commission notes that it can consider rates to be just and reasonable even if the rates are non-compensatory, for a specific service within a set period of time. In the specific case of removing the surcharge, the Commission considers that the rates may not fully recover the cost of providing the service, based on the financial information submitted by Northwestel. However, the surcharge impacts Northwestel’s capacity to recover its costs to a very limited degree relative to Northwestel’s total revenues from terrestrial Internet services.

Translation? Even though the CRTC regulates almost all of Northwestel’s rates, the Commission thinks it is OK for the company to lose some money for a little while on this line item. They’ll make up for it somehow. Except they really won’t.

The unwritten subtext is that the CRTC expects Northwestel’s shareholders to eat the cost of the Commission’s generosity. When the shareholder is a multi-billion dollar company like Bell, the CRTC decision is an easy political win. The Commission is seen as a consumer champion. Would the CRTC come to the same determination with the new owners of Northwestel?

Three and a half years ago, the CRTC launched its “Review of the Commission’s regulatory framework for Northwestel Inc. and the state of telecommunications services in Canada’s North”. Perhaps fittingly for Northwestel’s geography, the review has moved at a glacial pace. The oral hearing phase took place 10 months ago. The only decision to have emerged is the $20 surcharge elimination described above. “The Commission continues to review other issues raised in Phase II of the Telecommunications in the Far North proceeding and will address those issues in a future decision.”

Sixty North Unity has announced significant capital investment plans, for growth and enhancing digital connectivity across the North, including

• Doubling Internet speeds to 1 Gbps (gigabits per second) for fibre customers;
• Expanding high-speed Internet availability to meet the CRTC’s universal service objective of 50/10 Mbps to more than 97% of homes in the Yukon and the Northwest Territories;
• Offering Low Earth Orbit (LEO) satellite technology to deliver 50/10 Mbps speeds to eight satellite-served communities in the Northwest Territories and 25 satellite-served communities in Nunavut;
• Investing $4 million to build the Great Slave Lake Fibre Project, bringing critical resiliency to the Yellowknife capital and South Slave regions of the Northwest Territories and further safeguard against the impacts of wildfires and other natural disasters.

As an Indigenous-owned independent service provider operating in the far north, Sixty North Unity will likely have access to a wider range of government programs as it looks to fund these projects.

Is this a regulatory-driven restructuring? Regardless of the trigger, the transaction should lead to increased investment, and improved funding for customer service and operations.

At the end of the day, that should make this deal a win for consumers.

The Canadian Telecommunications Association released a new report from PwC, “Driving Canada’s productivity: The impact of the telecom sector and its role in improving productivity” [pdf, 5.6MB]. The report is the latest edition of a regular series examining the economic impact of the telecom sector in Canada.

As we have been reading in the news over the past year, Canada’s gross domestic product (GDP) per capita lags other advanced economies and this is part of a decades-long trend. For example, per capita GDP cumulatively grew just 6.8% between 2007 and 2023, compared with 21.4% in the US, 19.6% in Australia and 11.8% in Europe.

Last week, the former governor of the Bank of Canada, David Dodge said “The overriding objective of federal and provincial governments going forward has got to be to raise the productivity of workers.”

Against this backdrop, PwC’s new report predicts that Canada’s telecom sector will play an important role to enable productivity improvements in the economy, increasing Canada’s global competitiveness.

The telecommunications sector is an important part of the Canadian economy; in 2023, the sector contributed almost $81B in direct GDP and supported up to 782K jobs across industries. As the digital transformation of the Canadian economy progresses, the sector’s delivery of enhanced connectivity has the potential to contribute an additional $112B to Canada’s overall GDP by 2035.

In 2023, the Canadian telecom sector invested $11.4B in infrastructure. Capital intensity measures the proportion of revenues reinvested in capital spending. The Canadian telecom sector’s capital intensity (17.9%) is more than 20% higher than the United States average (14.6%), and 70% higher than Australia (11.7%).

PwC notes that the investments by Canada’s facilities-based service providers has led to 99.7% mobile wireless network coverage and 93.5% high-speed internet coverage.

A Bank of Canada discussion paper [pdf, 0.8MB] refers to a positive correlation between increased investment in digital infrastructure, the adoption of information and communications technologies, and productivity growth. As a corollary, PwC says “To realize productivity gains through increased digital infrastructure investment, Canada needs its telecom sector to continue investing capital.”

The report notes that the telecom sector is facing declining prices, high costs of borrowing, increased competition from foreign players (multinationals), increased operating costs and growing risks related to climate change. These challenges are not unique to Canada. PwC observed that worldwide telecom capital expenditures declined in 2023, for the first time since 2017.

Despite these headwinds, the telecom sector remains a key contributor to Canada’s prosperity through its impact on GDP, job creation and investments in digital infrastructure that drive productivity improvement. To sustain these contributions, Canada needs to maintain a regulatory environment that is predictable, transparent and equitable, with sufficient incentives to encourage investment in innovation, technology and infrastructure. This will ensure that network operators can continue to make the investments necessary for deploying advanced connectivity in digital infrastructure to support Canadian productivity and prosperity.

Maintaining incentives to invest is a common refrain on these pages.

Canada’s per capita GDP will benefit from continued investment in digital infrastructure. But, a healthy Canadian telecom industry is necessary in order to continue making those network investments, to provide connectivity through deployment of advanced digital infrastructure.

Investment in infrastructure will be key to driving Canada’s productivity gains, providing a catalyst for the economic recovery Canada so desperately needs.

How should public and private sector stakeholders respond to threats to the resilience and security of digital infrastructure?

That is the subject of a white paper released last month by Dr. Georg Serentschy, the former head of the Austrian telecom regulator and past chair of BEREC (Body of European Regulators for Electronic Communication). Recall that building resilience in telecommunications was the subject of a workshop a few weeks ago; Dr. Serentschy discussed the paper. In my recent post, I included links to a number of other articles on network resilience.

Among the highlights are a call for public-private partnership between governments and the private sector. “The highly complex and ever-changing threat landscape can only be tackled in cooperation between the private sector and governments and, beyond that, with international cooperation”. Governments are not able to address these challenges alone. Keep in mind, digital networks and infrastructure are generally private sector assets. However, since these assets are seen as strategic, what is the appropriate level of government involvement to ensure critical infrastructure is secured?

Sixteen months ago, Canada’s telecom regulator launched a consultation calling for comments on “Development of a regulatory framework to improve network reliability and resiliency”. The consultation was focused on notification and reporting requirements in respect of major telecommunications service outages. The file closed 15 months ago, but no determination has been released. In the meantime, the CRTC established interim reporting requirements.

In the February 2023 Notice, the Commission promised a broader consultation:

As its next step, the Commission will initiate a public proceeding to address network reliability and resiliency in broader terms, including issues relating to resiliency principles, emergency services (9-1-1), public alerting, consumer communication, the impact of outages on the accessibility of telecommunications services, consumer compensation, technical measures, and the imposition of administrative monetary penalties.

Such a consultation has not yet been launched. The CRTC’s departmental workplan is indicating a much less ambitious next step. “The CRTC will continue its work to enhance the resilience and reliability of telecommunications networks across the country. This includes continuing to examine requirements for reporting major service outages and future consultations on consumer communication and compensation requirements.”

Yesterday, Sammy Hudes of Canadian Press wrote a related story, “Canadian telecoms work on strengthening networks amid growing wildfire activity”. The article noted “It’s an issue that Canada’s telecommunications regulator is keenly aware of. Two consultations touching on that topic — one considering ways to improve telecom services in the Far North and another on how providers should report and notify customers of major service outages — remain in progress.”

It isn’t clear that the CRTC’s current focus on consumer communications and compensation is the best approach to develop a greater degree of resilience and security in Canada’s digital infrastructure. The work plan does not seem to include addressing “network reliability and resiliency in broader terms”, as promised in last year’s consultation.

To be fair, 6 paragraphs, representing almost 15% of that Notice of Consultation pointed to other government organizations that have roles to play. The agencies and committees are at federal, provincial, territorial and municipal levels. It also mentioned CSTAC, the Canadian Security Telecommunications Advisory Committee, as a voluntary working group that provides a forum for federal government and industry stakeholders to analyze, develop, and implement measures to protect critical telecommunications infrastructure.

The Serentschy white paper warns “regulatory authorities in most cases do not have a mandate to develop or apply a holistic view and break out of their vertical silos.” The paper suggests that policy makers may need to “give regulators a new and expanded mandate.” Dr. Serentschy suggests that increased network element redundancy, and reducing single points of failure can be at odds with other regulatory measures.

There are 10 recommendations in the white paper. Recommendation 10 calls for institutional reform, calling for the establishment of a central coordinating body as “an important step towards overcoming the usual historically fragmented governance structures.” According to Dr. Serentschy, “governments cannot tackle these challenges alone, nor can industry.” Therefore, he calls for a central coordinating, advisory and decision making body, empowered to reassess regulatory priorities, including competition policy, where necessary.

The subject of increased network resilience in a time of climate emergencies was raised on May 21 in the House of Commons:

How do we ensure digital infrastructure security and resilience are priorities for regulatory and policy determinations?

Is a more holistic approach to governance needed to improve cooperation and planning between government and the private sector? In a competitive telecom environment, how do we fund the needed network reinforcement in areas of challenging geographic and demographic characteristics?

Online platform accountability is a significant piece of Canada’s proposed online harms legislation, Bill C-63.

Much has been written about the Online Harms Act already. Observers note there are multiple distinct parts found in the legislation: Internet platform regulation; the return of Section 13 of the Canada Human Rights Act; and, perhaps the most controversial, inclusion of Criminal Code provisions.

As I have written before, my own thinking has been heavily influenced by the late Alan Borovoy, a great Canadian civil rights lawyer, who used to say we should censure, not censor, those who spew hate speech.

I ran across a relevant article from the International Center for Law and Economics (ICLE) to contribute to the discussion. Two and a half years ago, “Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet” was written by Geoffrey A. Manne, Kristian Stout, and Ben Sperry in the context of Section 230 of the US Communications Decency Act of 1996.

To the extent that the current legal regime permits social harms online that exceed concomitant benefits, it should be reformed to deter those harms if such reform can be accomplished at sufficiently low cost. The salient objection to Section 230 reform is not one of principle, but of practicality: are there effective reforms that would address the identified harms without destroying (or excessively damaging) the vibrant Internet ecosystem by imposing punishing, open-ended legal liability? We believe there are.
…
A common set of objections to Section 230 reform has grown out of legitimate concerns that the economic and speech gains that have accompanied the rise of the Internet over the last three decades would be undermined or reversed if Section 230’s liability shield were weakened. Our paper thus establishes a proper framework for evaluating online intermediary liability and evaluates the implications of the common objections to Section 230 reform within that context. Indeed, it is important to take those criticisms seriously, as they highlight many of the pitfalls that could attend imprudent reforms.

The ICLE authors assert that there are actual harms — violations of civil law and civil rights, violations of criminal law, and tortious conduct — occurring on online platforms. These impose real costs on individuals and society at-large and therefore, justify establishment of a means to apply a measure of order and accountability to the online world.

According to ICLE, intermediary liability, applied to the platforms, can be a cost effective approach for online platform accountability. It notes that “the fundamental principles that determine the dividing line between actionable and illegal or tortious content offline can and should be respected online, as well”.

I found the executive summary and the full paper [pdf, 1MB] worth the time to review.

Still, as I wrote on Twitter (X) a few weeks ago, I remain concerned that Canada’s Online Harms Act may not address the root cause of harms online. The Act may indeed reduce the number of despicable posts we see on digital platforms, but it will do nothing to reduce the number of despicable people who hold those despicable points of view. It will just be harder to find them.

Last week, I touched on the obligation to serve in a post about the challenges of providing telecom services in high cost serving areas.

I thought it would be worthwhile exploring that concept a little more.

In the file discussed last week, the CRTC asked TELUS a number of questions. One of them started with, “Given that TELUS is currently subject to an obligation to serve in terms of the provision of basic primary exchange service, explain how the company intends to continue to meet this obligation”.

What is this obligation? Back in 2011, the CRTC issued a policy determination on precisely that issue. The operative paragraphs in that document is paragraph 6: “The obligation to serve requires ILECs to provide telephone service to existing customers, new customers requesting service where the ILEC has facilities, and new customers requesting service beyond the limits of the ILEC’s facilities.⁴” What did that footnote [4] say? “The terms and conditions associated with such service extensions are set out in the ILECs’ respective General Tariffs.”

More recently, the CRTC confirmed this in 2020, saying “In exchanges that continue to be regulated, the obligation to serve includes the provision of tariffed local voice services and related services (e.g. optional features) throughout the ILECs’ serving territories, subject to any limitations set out in the general terms of service.”

As it turns out, that is a very important caveat. The obligation to provide services is not an absolute one. If the potential customer is beyond the limits of the service provider’s facilities, then we need to examine the General Tariffs to see what terms apply.

Item 103 of the General Terms of Service for TELUS is entitled “The Company’s Obligation to Provide Service”. In section 103.1 (c), we find “The Company must provide service to all customers who apply except when… the Company cannot acquire or maintain the equipment, facilities, rights-of-way, rights-of-access, or space in or on buildings that are necessary to provide service”.

It is important to note that these terms of service are CRTC approved.

There are other interesting precedents to explore. For example, there are CRTC requirements for de-standardization or withdrawal of a service. The rules say that the carrier must provide notice to each affected customer, as well as information on how to participate in the Commission’s process. The CRTC encourages (but no longer requires) companies to identify any substitute services, where available, in the customer correspondence.

Let’s tie these provisions back to last week’s post, examining the challenges of providing phone service to 110 residential subscribers in 8 small communities with limited commercial power, located in mountainous geography. TELUS has identified an alternate service provider for customers to use as a substitute when its services are discontinued.

The commercial business case for serving these communities simply doesn’t work without a substantial subsidy. The CRTC no longer operates a fund for high cost serving areas, but the regulator could choose to designate these communities as eligible for its Broadband Fund. The two funds are fundamentally different. The CRTC used to fund the shortfall in annual operating expenses for high cost areas; the Broadband Fund is a one time injection to correct the projected business case for unserved areas.

Should a subsidy program trigger an open competition for the funding? What is appropriateness of funding a new network, when another service provider is already present?

A reminder that the CRTC re-opened its consultation on the Broadband Fund, inviting comments until June 5.

In a competitive marketplace, what is meant by the obligation to serve?