Search Results for: incentives to invest

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:

• Order Issuing a Direction to the CRTC on a Renewed Approach to Telecommunications Policy
• Backgrounder: Summary of the Government of Canada’s new proposed policy direction to the CRTC
• Backgrounder: Renewing Canada’s approach to Telecommunications Policy: Context for Action

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?

I have frequently written about the regulatory policy tension in balancing quality, coverage and price for telecommunications services. These were key attributes at the foundation of the Canadian government’s policy statements over the past 5 or so years.

There has been an explicit recognition in Canadian policy that the public interest is multi-dimensional, seeking lower prices, while continuing to provide incentives for investment in new technologies and expanded coverage.

A recent blog post by CWTA uses a similar trilogy of terms: value; affordability; and, investment. “Canada’s wireless industry delivering greater value, affordability and investment” criticizes the level of attention “given to one-dimensional and misleading price comparison studies that paint an inaccurate picture of telecom prices and affordability in Canada” and concludes with:

Canada’s economic well-being, safety and quality of life depend on high-quality digital infrastructure. Making world-class telecommunications services available to all Canadians at affordable prices remains the focus of our industry.

No one is saying that Canada has the lowest prices in the world, but contrary to what some would have us believe, Canadian telecom prices are not the most expensive in the world and Canada is not an outlier when it comes to prices. Comparing prices to other countries without factoring in differences in average income levels, quality of service, and cost structures produces misleading results. And as I have written recently, price and affordability are not the same.

As someone who pays bills each month, I too would like lower prices, just as I do for housing, gas, water, electricity, milk, chicken, eggs and everything else. But I also want fast mobile broadband when I am in the suburbs and rural parts of the country. That takes a balance of the various factors that make up the public interest, not just looking at price.

In May, I wrote about an Opensignal report indicating “that Canada’s mobile customers put a value on quality, and will migrate between service providers based on their mobile network experience.”

I had a multi-part Twitter thread on that theme:

Prices are declining, consumers get more data included in plans and at far faster speeds. Aided by regulatory certainty, investments are being accelerated by carriers, expanding the reach and coverage of wireline and wireless networks, both fixed and mobile. Advanced technologies, such as 5G and fibre to the home are not just for Canadians in urban centres, but also in rural and remote regions. More Canadians are signing up for mobile and fixed services every month, evidence of people are finding plans that suit their budgets.

As I wrote last week, we need to do more work to understand and develop solutions for the factors that are inhibiting adoption by those Canadians who have access but have not yet subscribed. That is a different challenge from the industry focus on delivering greater value, affordability and investment.

Ofcom, the telecom regulator in the UK, issued an important policy statement last week promoting investment and competition in fibre networks.

In its story about the policy statement, Computer Weekly said that infrastructure in the UK’s was recognized to be in “urgent need of an upgrade, especially as demand for data continues to accelerate, an issue made even more pressing by the need for mass remote working.”

Computer Weekly reported “To address these needs will require significant private investment in full-fibre broadband, said Ofcom, which noted that network competition had helped full-fibre coverage increase at its fastest ever rate over the past year – and that momentum had continued throughout the pandemic.”

when it comes to ultra-high-speed fibre services, Ofcom confirmed these would continue to be free from pricing regulation. The rationale for this decision is that people can choose the entry-level service as an alternative. Moreover, Ofcom added that Openreach could also “charge a bit more” for regulated products delivered over full-fibre instead of copper, because it regards full-fibre as consistently faster and much more reliable.

This echoes the policy set forward in Canada last summer, when Industry Minister Navdeep Bains pronounced “Canada’s future depends on connectivity”.

Ofcom wrote:

Our approach to supporting investment in gigabit-capable networks is focused on encouraging competition between different networks where viable, which will provide high quality services, choice and affordable broadband for consumers throughout the UK. We recognise that it will require significant investment from private companies to upgrade the UK’s networks, so they are fit for the future. Our decisions incentivise that investment – giving regulatory certainty and allowing companies to make a fair return whilst ensuring consumers continue to have access to affordable broadband as new networks are rolled out.

As I think back to an exchange between the Conservative Industry critic and a TELUS executive at Canada’s parliamentary industry committee last year, we can now see a clear statement from the UK regulator favouring competitive private sector investment in infrastructure, and creating regulatory incentives for facilities-based competition.

Favouring facilities-based competition has been Canada’s telecom policy approach for nearly 30 years. And other regulators are seeing the light.

Investment in the telecommunications sector is vital for ensuring Canada’s next generation digital infrastructure. Reliable and leading-edge infrastructure has been seen as essential, thanks to a pandemic-driven shift to remote work and digital services. These are just two of the conclusions drawn from a new report [pdf, 331KB] released last week by the Telecommunications Working Group of the C.D. Howe Institute.

The Telecommunications Working Group identifies policy challenges facing Canada’s telecommunications sector. The group is composed of experts from the private sector and academia. It is co-chaired by Len Waverman, Dean of DeGroote School of Business at McMaster University and Steve Orsini, Adjunct Professor, Public Policy & Administration, Carleton University and President and CEO of the Council of Ontario Universities.

The Telecommunications Policy Working Group was established by C. D. Howe Institute to identify and distill policy directions on strategic questions facing Canadian telecommunications concerning: vigorous competition for competitive pricing and high-quality telecommunications services; investment in next generation infrastructure; and inclusive access to telecommunications services and participation in the digital economy. “Broadly, the Working Group believes governments must focus on regulatory clarity, timeliness, and stability to ensure greater investments in critically needed infrastructure.”

The report leads with 4 key conclusions:

• Action by governments is urgently needed to ensure that public policy and the regulatory framework encourage deployment of the next generation of telecommunications infrastructure for Canada to remain competitive in an increasingly digitally mediated global economy.
• Government policy should support sustainable competition that will ensure that Canadians and Canadian businesses have choice with respect to their telecommunication services in all regions of the country.
• Infrastructure investment by Canadian telecommunications providers outpaces that of their peers internationally. Return on capital is in line with global peers when adjusting for capital intensity.
• Facilities-based providers build the essential infrastructure necessary to deliver telecommunications services. Regulatory certainty, jurisdictional disentanglement and predictable policy is essential for long-term investments and sustainable competition in such a capital-intensive sector.

The report highlights the need for telecom sector investment as a key takeaway: “The current cross-roads for Canada’s telecommunications sector and the economic imperative for expedient deployment of next generation digital infrastructure requires decisive government action to resolve pressing policy challenges. In particular, the federal government must provide facilities-based providers will a clear and predictable regulatory framework that coherently balances vigorous price competition with incentives for ongoing investment to improve network and service quality.”

The communiqué highlights CRTC data that shows the lopsided nature of investment by industry participants. “Resellers make comparably negligible aggregate investments in telecommunications infrastructure: for example, resellers invested $50 million in capital expenditures in 2018, compared with $5.7 billion spent by incumbents and $3.9 billion spent by facilities-based providers.” Fifty million is just 0.5% of the total investment. No wonder some executives in the reseller community have trouble understanding the need for higher EBITDA margins to support the higher levels of investment by Canada’s facilities-based industry participants. Substantial EBITDA margins are needed for businesses with substantial levels of investment.

Analysis by Boston Consulting Group’s Centre for Canada’s Future found that, over the 2005-to-2015 period, Canadian telecommunications infrastructure investment was US$255 per capita compared to an average of US$156 across the OECD, with Canadian per capita investment exceeding all other members of the G7. BCG also observes that, while Canadian telecommunications providers achieve higher earned margins relative to revenue, return on capital is in line with global peers when adjusting for their greater capital intensity. Specifically, while Canadian providers generated higher EBITDA/revenue than those in other OECD countries over 2016-18, their return on capital invested (ROCE) was equivalent with their peers.

According to the report, future communiqués from the Telecommunications Working Group will address specific policy recommendations regarding rate-setting for mandated access and for MVNOs, the framework and timeliness for allocating spectrum, and how to streamline federal and provincial programs and clarify jurisdiction.

In the early days of the COVID-19 pandemic, I wrote about a few of the reports related to telecommunications that emerged from the C. D. Howe Institute:

• Could Political Interference Create ‘Sovereign Risk’ For Canada’s Digital Infrastructure? [March 19, 2020]
• Developing Good Public Policy For Telecom [March 30, 2020]
• A Playbook For Restarting Canada’s Economy [April 20, 2020]

We’ll be watching for further communiqués as they are released.

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.