Search Results for: calvin

Staying out of the way

I have frequently written about government keeping out of the way. The phrase “out of the way” appears in about 25 of my posts.

Twice, I used the same title, “Getting out of the way” [2012, 2016]. Earlier this year, in “Let the marketplace work”, I describe government policies and regulations inhibiting capital investment by the telecom sector.

So, it was with interest that I read a recent article on “The Hub”, “Want to be a more productive country, Canada? Get the government roadblocks out of the way” by Jerome Gessaroli. He says “policies relying on government intervention to replace the free market seldom produce improved growth and productivity.” His article includes 4 policy recommendations relating to government maintaining a smaller economic footprint.

Mario Draghi’s newly released report for the European Union, “The future of European competitiveness” [Part A (A competitiveness strategy for Europe) pdf, 3.4MB | Part B (In-depth analysis and recommendations) pdf, 11.5MB], cites “inconsistent and restrictive regulations” among the hindrances for innovative company growth. The report calls for reducing the regulatory burden imposed on European companies. “More than half of SMEs in Europe flag regulatory obstacles and the administrative burden as their greatest challenge.” According to the report, “Regulation is seen by more than 60% of EU companies as an obstacle to investment”.

In other words, I’m not alone in wanting government to stay out of the way.

A few years ago, I quoted Ronald Reagan’s 1986 remarks to the National White House Conference on Small Business. “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

That approach gives the appearance of government doing something, but rarely achieves a positive long-term outcome. It seems to be where Canada is heading with its legislation on the digital economy. The Online News Act and Online Streaming Act already drove unintended consequences, as predicted. In addition, Canada is risking a trade dispute with the US over its approach to taxing digital services.

It is so very tempting to intervene in the marketplace. It takes much stronger leadership to trust in the power of competitive markets. Look at the telecom market. Canada ensured there are 4 well-capitalized facilities-based wireless service providers operating in most of the country, including all population centres. These service providers have sufficient spectrum and technology to compete in both mobile and fixed markets.

Continued regulatory intervention in the marketplace threatens to return Canadian telecom to the haphazard Calvinball era of a decade ago. Such an environment discourages investment, precisely the opposite of what is needed to drive productivity.

Government needs to try a new approach. Stand aside.

Recognizing investment in Canadian networks

The public interest for telecommunications is multi-dimensional. Although some lobbyists seem to focus solely on lower prices, government policy needs to balance other factors, like investment in increased coverage, new technology and services, and quality.

Last Thursday, when Minister François-Philippe Champagne announced a new policy direction, there were 3 “associated links” in the press release:

Much of the focus of media coverage was on the proposed Policy Direction as well as the disposition of the wholesale rates appeal:

We recognize the important balance that must be achieved between the need to invest in our networks and the need to promote continued competition and affordability. The wholesale rates decision made by the CRTC in 2021 is an attempt to correct errors made in 2019, and it makes permanent the rates that have been in force since 2016. The decision provides stability, and the government has determined that it will not alter this decision.

My initial impressions were captured in a blog post, “A new direction for Canadian telecom”.

I noticed that many of the news articles cited language that appeared in the Policy Direction Backgrounder, as opposed to the more moderate language found in the actual draft Order.

There seemed to be less attention on the Context Backgrounder, and as has become usual, that is where I like to focus.

I have talked about a theme of balance that I think continues from Minister Navdeep Bains era 5 years ago, balancing Quality, Coverage And Affordable Prices. A few weeks ago, I observed, “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”.”

Nearly two years ago, Minister Bains said Canada’s Future Depends on Connectivity. Generally, last week’s telecom policy announcement promises a framework that continues to balance consumer interests, including the incentives for service providers to make investments that deliver quality services, available to all Canadians.

Policy consistency is important. The context backgrounder leads with details of how these policies have delivered benefits for Canadian consumers:

Canada has benefited from very high investment levels over time, with the private sector investing $11.4 billion in 2020. Canada has consistently been above the Organisation for Economic Co-operation and Development (OECD) average. For example, in Canada the share of telecommunications revenues invested in capital expenditures over time was 30-50% above the OECD average. This has led to high quality telecommunications networks. For example, according to Ookla’s March 2022 Global SpeedTest, Canada ranked 16th out of 142 countries for median mobile speeds, ahead of all members of the G7, and 17th out of 182 countries for median fixed broadband speeds ahead of all members of the G7, except the USA and Japan.

When it comes to the household availability of full fibre networks, in 2020 the household coverage in Canada (49%) was ahead of the US (42%), Australia (16%), UK (18%), Germany (11%), and Italy (34%) and the EU average of 43%. Similarly, when factoring in cable networks, coverage of the faster speeds of 100 Mbps and 1 Gbps are available to 87% and 76% of homes compared to 76% and 51% in European Union countries. Data from OpenSignal shows strong speeds for new Fifth generation (5G) services with Canada ranking 4th in 2021, strong historical coverage of 4G services, and for more specialized application metrics Canadian operators were not among global leaders but above the sample average. Fibre and new 5G services continue to roll out and ongoing investments will ensure Canadians benefit from these and future technologies as they are introduced and deployed.

The subsequent paragraphs, talking about rural service gaps, demonstrate an understanding and appreciation of the challenging aspects of business cases to build in parts of Canada.

The background document provides a market overview and helps to understand the context in which policies are being formed, “promoting more competition, universal access and a more consumer-oriented telecommunications sector in Canada.”

Minister Champagne said “We recognize the important balance that must be achieved between the need to invest in our networks and the need to promote continued competition and affordability.”

This reference to balance, coupled with the Policy Direction’s requirement for predictability, provide important messages of policy consistency.

Have we seen the end of Calvinball in Canadian telecom regulation?

Maintaining consistency in policy

In its recent rejection of a Cabinet appeal of the CRTC’s Review of Wireless Services, Canada has maintained consistency in its approach to telecom policy, balancing the often competing objectives of extending the reach of networks, delivering world-leading service quality, and affordable prices.

We read “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”.

Calvinball
It hasn’t always been that way. Over the past ten years, I have referred to Canada’s telecom policy environment as being like “Calvinball” at least a dozen times. “The only permanent rule in Calvinball is that you can’t play it the same way twice.”

That is hardly the way to provide policy leadership for an economic segment at the core of the digital economy.

In a dissenting opinion a few years ago, former CRTC Commissioner Candace Molnar wrote “Citizens and regulated entities alike deserve a Commission that is fair, predictable, and transparent.”

In upholding the CRTC’s decision, the determination was consistent with an Order in Council from August 2020, which declared, “Canada’s Future Depends On Connectivity”.

At that time, Cabinet said:

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.

Recall that CRTC Chair Ian Scott’s welcome letter, the Ministers of Heritage and of Innovation, Science and Economic Development said “The Government’s objectives are to improve the quality, coverage, and price of services.” At the time, I wrote “It is a delicate balance. Quality and coverage require significant levels of capital investment, especially in a country like Canada.”

Consistency in policy and regulation is critical for the investment community. “Citizens and regulated entities alike deserve a Commission that is fair, predictable, and transparent.”

Canadian telecom policy appears to be clear. Canada’s future depends on connectivity.

Moving the goalposts

Despite mobile industry prices that have fallen more than 30% over the course of the past summer, Innovation, Science and Industry Minister Navdeep Bains is looking for further reductions of another 25%, warning “If these targets are not met within two years, the Government will take action with other regulatory tools to further increase competition and help reduce prices.”

During last year’s election campaign, the Liberal party promised 25% reductions in mobile prices and it showed sample rate plans of $87.32 for a 5 GB plan and $75.44 for a 2 GB plan. The party promised to bring those rates down to $65.49 and $56.58 (respectively), when elected.

But in an announcement today, Minister Bains said that the January 2020 market prices for a 6 GB plan are $60, and $50 for a 2 GB plan, more than 10% lower than the campaign targets.

Rather than claiming victory, the Minister has announced new targets of a further 25% price reduction over the next two years. The Minister has set a target of $37.50 for the 2 GB mobile plan, more than 50% reduction in the price, when compared to the Liberal’s campaign promise.

In a note to investors earlier in the day, TD Securities Equity Research wrote: “our view is that much of the testimony at the [CRTC’s Wireless Review] hearing proved that pricing in Canada is very reasonable relative to excess geographic and spectrum costs incurred by wireless carriers in Canada. Subsequent to heavy efforts by the government to facilitate competitive tension from facilities-based new entrants in every region, we struggle to see a problem that needs to be fixed.”

We agree. The CRTC is in the midst of its review of mobile services. The intervention in the marketplace smacks of playing a populist political card at the expense of policy leadership.

With billions of dollars in funding needed for 5G network upgrades, rural expansion and targeted connectivity programs for low income households, global capital markets will be looking for more consistency from Canada’s regulatory and policy leaders.

In an environment of already turbulent global capital markets, the last thing Canada should be doing is playing Calvinball with its telecom sector.

Fair, predictable, and transparent

The CRTC issued a press release concurrent with its decision to lower internet prices in the far north.

The press release offers a quote from Chairman JP Blais:

Although we recognize the exceptional situation that exists in Northwestel’s territory, we must not let these challenges hinder the development and affordability of telecommunications services in the North. Access to reasonably priced Internet services plays an essential role in the North’s economic and social development. With this decision, we are reducing the gap between what consumers pay for Internet services in the northern and southern parts of Canada.

I suspect – perhaps hope – that more of the media looks at the dissenting opinion appended to the decision and seeks more comment from CRTC Commissioner Candace Molnar who delivered a brutal critique of the Majority:

Citizens and regulated entities alike deserve a Commission that is fair, predictable, and transparent ‒ and one whose decisions are based upon the evidence of the proceeding. In this instance, the Commission stated that it would determine the appropriateness of the stand-alone surcharge based upon detailed costing information. The detailed costing information filed in this proceeding clearly indicates that a stand-alone fee is warranted, yet the Majority deny the surcharge.

At a minimum, the decision of the Majority is not predictable.

Calvinball
Why the strong words?

As Commissioner Molnar enumerates, over the past few years, the Commission has put Northwestel under a microscope because the CRTC determined the company “was not meeting the needs of Northern consumers.” There were two comprehensive reviews of Northwestel’s operations, a denial of request to increase local telephone services prices and the CRTC opened the market to competition. Commissioner Molnar has “been firmly in support of the initiatives undertaken by the Commission to address issues related to service quality, availability, and affordability in the North.” But she disagreed with the 10-30% reductions in the price of consumer internet services that were ordered by the majority – reductions in prices that were already below cost.

The majority decision by the CRTC says “it must take exceptional measures in this case to ensure that residential Internet service is provided at reasonable rates across all of Northwestel’s operating territory.”

“Reasonable” is a term of art in the regulatory world. According to Canadian Telecommunications Law and Regulation, “[n]ot only may the rate being charged for a particular service be unreasonably high, it may also be unreasonably low. While a low rate will not be objectionable to the customers receiving that service, … the rate shortfall attributable to the charging of unreasonably low rates for one service may lead to the imposition of unreasonably high rates on the customers of other services.”

The below cost rates were characterized in the proceeding as “predatory”. As acknowledged by the CRTC decision:

SSi submitted that Northwestel’s proposal for below-cost retail Internet service rates – that is, rates for which the price floor test is not met – and comparable service at comparable rates across Northwestel’s operating territory effectively amounts to predatory pricing. SSi added that such pricing has forced it to shut down retail Internet service in a number of communities where it could not compete, despite having previously established a significant broadband market presence in those communities.

Competitors get shut down, Northwestel shareholders are effectively ordered to subsidize broadband internet to the entire geographic region, regardless of financial needs.

“The Commission acknowledges that these changes may have a negative effect on competition for these particular services, but considers that it must take exceptional measures in this case to ensure that residential Internet service is provided at reasonable rates across all of Northwestel’s operating territory.”

In other words, the CRTC is dispensing with its customary rules for rates in order to achieve a government political objective without impact on the federal budget. As regular readers know, I prefer to see targeted subsidies based on need, rather than perpetuating the patronizing politics of presuming the need for rural and remote services to be offered below cost, regardless of means.

It is hard to imagine why there would be any incentive for Northwestel to invest in continued service improvements, capacity expansion or geographic reach. At a certain point, the shareholders may have to assess the returns being delivered from the asset.

Calvinball continues.

Scroll to Top