isp evidence final 20100426

8/9/2019 ISP Evidence Final 20100426

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BEFORE THE CANADIAN RADIO-TELEVISION

AND TELECOMMUNICATIONS COMMISSION

PROCEEDING TO REVIEW ACCESS TO BASIC TELECOMMUNICATIONS

SERVICES AND OTHER MATTERS,

TELECOM NOTICE OF CONSULTATION CRTC 2010-43,

28 JANUARY 2010

EVIDENCE OF

ACCELERATED CONNECTIONS INC.,RADIANT COMMUNICATIONS CORPORATION,

SSI MICRO LTD.

AND

TEKSAVVY SOLUTIONS INC.

26 APRIL 2010


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Table of Contents

Page

1.0 INTRODUCTION .................. .................. .................. .................. .................. .................. ............... 1

2.0 THE TELECOMMUNICATIONS POLICY OBJECTIVES AND THE POLICY DIRECTION .. 1

2.1 Canadian Telecommunications Policy Objectives ................. .................. ................... ........ 2

2.2 Policy Direction ................. .................. .................. .................. .................. .................. ....... 2

3.0 OBLIGATION TO SERVE ................ .................. ................. .................. ................. ................... .... 3

3.1 Background to the Obligation to Serve .................. .................. .................. .................. ....... 3

3.2 ISP Answers to the Commissions Questions regarding the Obligation to Serve ............ 10

3.2.1 TNC 2010-43, Appendix 4, Paragraph 1 ................. ................. .................. ......... 10


3.2.3 TNC 2010-43, Appendix 4, Paragraph 3 ................. ................. .................. ......... 123.2.4 TNC 2010-43, Appendix 4, Paragraph 4 ................. ................. .................. ......... 12



4.0 LOCAL SERVICE SUBSIDY .................. .................. ................. .................. ................. .............. 13

4.1 Background to the Local Service Subsidy ................... .................. ................... ................ 14

4.2 ISP Answers to the Commissions Questions regarding the Local Service Subsidy ........ 17




4.2.4 TNC 2010-43, Appendix 4, Paragraph 10 .................. ................... .................. .... 18




5.0 BASIC SERVICE OBJECTIVE ................ .................. ................... .................. ................... .......... 20

5.1 Background to the Basic Service Objective ................ ................... .................. ................. 205.2 ISP Answers to the Commissions Questions regarding the Local Service Subsidy ........ 21




6.0 CONCLUSION .................. ................... .................. .................. ................... .................. ............. ... 26


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1.0 INTRODUCTION

1. Accelerated Connections Inc. (ACI), Radiant Communications Corporation (RCC),

SSI Micro Ltd. (SSI) and TekSavvy Solutions Inc. (TSI) (collectively, ISPs) are filing this

evidence in the proceeding initiated by TNC 2010-43. 1

2. In this submission, the ISPs address the topics of obligation to serve, local service

subsidy and basic service objective, which are all interrelated. For example, the obligation to

serve leads to the question of what service a carrier having such an obligation is required to

provide. To the extent that the service relates to a basic service, the basic service objective must

be defined. Local service subsidies could, in turn, be employed to fund aspects of the obligation

to serve, including the basic service objective.

3. The balance of this document is structured as follows. Part 2.0 of this submission sets the

context for the balance of this evidence. That context is defined by certain Canadian

telecommunications policy objectives set out in section 7 of the Telecommunications Act 2 ( Act )

and the Governor in Councils Policy Direction 3 (Policy Direction). Following that discussion,

Parts 3.0, 4.0 and 5.0 address the obligation to serve, local service subsidy and basic service

objective, respectively in a manner that is responsive to the corresponding questions posed and

context set out in Appendix 4 of TNC 2010-43. Part 6.0 of this submission contains the ISPs

conclusions with respect to the three issues discussed.

2.0 THE TELECOMMUNICATIONS POLICY OBJECTIVES AND THE POLICYDIRECTION

4. As noted, Appendix 4 of TNC 2010-43 requires that the issues under consideration be

examined with reference to the relevant Canadian telecommunications policy objectives set out

in section 7 of the Act and the Policy Direction.

1 Proceeding to review access to basic telecommunications services and other matters , Telecom Notice of Consultation CRTC 2010-43, 28 January 2010, as amended.

2 S.C. 1993, c. 38.3 Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives ,

P.C. 2006-1534, 14 December 2006.


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2.1 Canadian Telecommunications Policy Objectives

5. The Canadian telecommunications policy objectives that should be considered in any

review of the obligation to serve, local service subsidy and basic service objective include those

set out in paragraphs 7(a), 7(b), 7(f) and 7(h), which read as follows:

7. It is hereby affirmed that telecommunications performs an essential role in themaintenance of Canadas identity and sovereignty and that the Canadiantelecommunications policy has as its objectives(a) to facilitate the orderly development throughout Canada of a

telecommunications system that serves to safeguard, enrich and strengthen thesocial and economic fabric of Canada and its regions;

(b) to render reliable and affordable telecommunications services of high qualityaccessible to Canadians in both urban and rural areas in all regions of Canada;

(f) to foster increased reliance on market forces for the provision of

telecommunications services and to ensure that regulation, where required, isefficient and effective;

(h) to respond to the economic and social requirements of users of

telecommunications services.

2.2 Policy Direction

6. Consideration of the telecommunications policy objectives must now be viewed through

the lens of the Policy Direction. The following portions of the Policy Direction are relevant to an

examination of the obligation to serve, local service subsidy and basic service objective:

1. In exercising its powers and performing its duties under the Telecommunications Act ,the Canadian Radio-television and Telecommunications Commission (the"Commission") shall implement the Canadian telecommunications policy objectives setout in section 7 of that Act, in accordance with the following:

(a ) the Commission should

(i) rely on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives, and


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(ii) when relying on regulation, use measures that are efficient and proportionateto their purpose and that interfere with the operation of competitive market forcesto the minimum extent necessary to meet the policy objectives .

(b) the Commission, when relying on regulation, should use measures that satisfy the

following criteria, namely, those that

(ii) if they are of an economic nature, neither deter economically efficientcompetitive entry into the market nor promote economically inefficient entry;

(iii) if they are not of an economic nature, to the greatest extent possible, areimplemented in a symmetrical and competitively neutral manner

3.0 OBLIGATION TO SERVE

7. An examination of the obligation to serve must start with a review of the obligation as it

now exists.

3.1 Background to the Obligation to Serve

8. At common law, the obligation to serve is imposed on entities that are considered public

utilities in certain circumstances. A public utility is an entity that provides a service that is

essential to the public. Where such a service is provided on a monopoly basis by an entity, the

entity is usually required to supply that service at a reasonable price and without undue

discrimination to those within the entitys operating territory who seek the service.

9. The obligation to serve of the incumbent local exchange carriers (ILECs) was codified

in section 4.2 of Decision 86-7 4 where the Commission articulated what are now sections 3.1 and

3.2 of the Terms of Service (Terms) of the ILECs. Section 3.1 provides a limited set of

exceptions to the obligation to serve, such as where: (1) the ILEC would have to incur unusualexpenses which the applicant for service will not pay, such as for example, for securing rights-

of-way or for special construction; (2) the applicant owes amounts to the ILEC that are past due

4 Review of the General Regulations of the Federally Regulated Terrestrial Telecommunications CommonCarriers , Telecom Decision CRTC 86-7, 26 March 1986.


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other than as a guarantor; or (3) the applicant does not provide a reasonable deposit or alternative

required pursuant to the Terms. Section 3.2 of the Terms provides that where the ILEC does not

provide service on application, it must provide the applicant with a written explanation upon

request.

10. In the case of Bell Canada, there is also a specific statutory obligation to provide service.

Section 6 of the Bell Canada Act 5 provides:

(1) Where a telephone service is requested by any person or organization for any lawfulpurpose in a municipality or other territory within which a general telephone service isprovided by the Company, the Company shall, with all reasonable dispatch,

(a ) furnish the service; and

(b) subject to any order of the Commission under section 13 that restricts the right orability of the Company to be a supplier of telephones, furnish telephones of the latestimproved design then in use by the Company in the municipality or territory.

(2) Nothing in subsection (1) requires the Company to furnish the service or a telephonewhere

(a ) the premises for which the service is requested are not fronting on a highway,street, lane or other area along, over, under or on which the Company has a main orbranch telephone service or system;(b) the telephone on the premises would be situated more than 62 metres or suchother distance as the Commission may specify from the highway, street, lane or otherarea; or(c) if the Commission has not otherwise specified, the Company has not receivedtherefor a tender or payment of the lawful rates semi-annually in advance.

11. The exceptions to the obligation is paragraph 6(2)(b) provide the Commission with a

significant degree of latitude to constrain the obligation to serve if it so desires.

12. In Decision 97-8, 6 the Commission noted that the ILECs obligation to serve is not

absolute in the following terms:

141. The Commission notes that, at present, the ILECs' obligation to serve is notabsolute. ILECs currently make service available through the physical extension

5 S.C. 1987, c. 19.6 Local Competition , Telecom Decision CRTC 97-8, 1 May 1997.


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or upgrade of plant under three conditions: first, as part of their normalprovisioning process; second, at the specific request of an individual applicant orgroup of applicants; and third, through specific programs put in place in responseto Commission decisions.

13. The Commission went on to discuss why it was retaining the obligation to serve in the

following terms:

146. The Commission considers that it would not be appropriate, in marketscharacterized by effective facilities-based competition, to designate one carrier ashaving carrier of last resort responsibilities. However, the Commission considersit unlikely that such competition will develop in all areas in the near term. Evenwith a fuller realization of local competition, the Commission considers it likelythat market forces will not, on their own, achieve the Act's accessibility objectivein all regions of Canada. In establishing the rules to foster competition in allmarket segments, the Commission must therefore ensure it has regulatory toolsthrough which to ensure the continued achievement of this objective.

147. The Commission considers that the most appropriate way to reach this goal is tomaintain the ILECs' current obligation to serve, pending further investigationthrough a public process into an approach for serving high cost areas that is moresuited to a fully competitive environment. The Commission also considers that thecontribution regime put in place with this Decision will assist in achieving theobjective of subsection 7(b) of the Act. (Emphasis added.)

14. The Commission addressed the issue again in Decision 99-16 7 as follows:

31. Currently, incumbent local carriers have an obligation to serve in their territories.This means that an incumbent local carrier must provide service to subscribers inits service territory at a reasonable price without unjust discrimination. TheCommission requested comments on whether this obligation should change, inview of the advent of competition among carriers providing basic local services.

32. The concept of an "obligation to serve" developed within the context of atraditional, regulated monopoly in telecommunications services. Where customersin unserved areas have applied for basic service, the carrier's tariffs, including theTerms of Service, define its obligations to extend service beyond the limits of itsexisting facilities and the prices it can charge to customers for such extensions.

33. Presently, incumbent local carriers extend or upgrade their existing plant as partof normal provisioning, at the request of individuals or groups, and through

7 Telephone Service to High-Cost Serving Areas , Telecom Decision CRTC 99-16, 19 October 1999.


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specific service improvement plans, either in response to the Commission'sdecisions or as initiated by the carriers themselves.

34. Generally, parties considered that where one carrier (typically the incumbent localcarrier) provides basic service to an area, the obligation to serve should be

retained. Some parties submitted that this obligation should remain until localcompetition ensures service on demand. Other parties maintained that competitionwill not ensure that providers will offer service in all locations to all obligation toserve should be eliminated or compensation provided.

35. In determining this matter, the Commission must weigh, among other things, theobjective of fair competition against the need for an efficient, effective means toachieve the basic service objective in high-cost areas.

36. Effective local service competition will not likely occur in the short term. TheCommission therefore determines that, at this time, incumbent local carriers must

retain their obligation to serve. (Underline emphasis added. Italics in original.)

15. Subsequently, in the Amended Decision 2006-15, 8 the Commission, as varied by

the Governor-in-Council, devised a test for forbearance from certain regulatory

requirements for local services. The test is described as follows:

141. The Commission considers that, for the purposes of a local forbearanceapplication by an ILEC, a local exchange is the appropriate geographiccomponent of the relevant market.

242. The Commission considers that, if an ILEC can satisfy the following criteria, thenthe requirements of section 34 of the Act for a forbearance determination willhave been met and the Commission may therefore grant local forbearance inaccordance with that section:

a) the ILEC demonstrates that one of the following circumstances exists in therelevant market:

i. that the ILEC does not have market power, based on the criteria set outin paragraph 213, 9

8 Forbearance from the regulation of retail local exchange services , Telecom Decision CRTC 2006-15, 6 April2006 (Decision 2006-15), as varied by Order Varying Telecom Decision CRTC 2006-15 , P.C. 2007-532, 4April 2007.


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ii. that, if the ILEC offers residential local exchange services, there are, inaddition to the ILEC, at least 2 independent facilities-basedtelecommunications service providers, including providers of mobilewireless services, each of which offers local exchange services in themarket and is capable of serving at least 75% of the number of residential

local exchange service lines that the ILEC is capable of serving, and atleast one of which, in addition to the ILEC, is a facilities-based, fixed-linetelecommunications service provider, or

iii. that, if the ILEC offers business local exchange services, there is, inaddition to the ILEC, at least one other independent facilities-based, fixed-line telecommunications service provider that offers local exchangeservices in the market and is capable of serving at least 75% of the numberof business local exchange service lines that the ILEC is capable of serving;

b) the ILEC demonstrates that, during a six-month period, beginning noearlier than eight months before its application for local forbearance andending at any time before the Commission's decision respecting theapplication,

i. it met, on average, the quality of service standard for each indicator setout in Appendix B, as defined in Telecom Decision CRTC 2005-20,Finalization of quality of service rate rebate plan for competitors, withrespect to the services provided to competitors in its territory, and

ii. it did not consistently provide any of those competitors with servicesthat were below those quality of service standards.

243. For the purposes of subparagraphs 242a)(ii) and (iii) and paragraph 523, theCommission considers that a telecommunications service provider is independentif it does not have the same owner as, and is not affiliated with, any other serviceprovider referred to in the respective subparagraph. Further, for the purpose of those provisions, the Commission considers that a facilities-basedtelecommunications service provider is one that provides services in the relevantmarket either by using its own facilities and services or by using a combination of its own facilities and services together with those leased from other serviceproviders.

9 An examination of section 213 is beyond the scope of this submission, since local forbearance applications arenot typically based on the test in paragraph 242 a) i., which is much harder to demonstrate than the competitorpresence tests set out in subparagraphs 242 a) ii and 242 a) iii. It should also be noted that the competitorpresence tests as articulated by the Governor-in-Council are not based on traditional competition economicsprinciples.


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523. If, prior to granting local forbearance, the Commission is informed that theILEC's application is based on competition in the relevant market from anindependent fixed-line telecommunications service provider that, including all of its affiliates, has less than 20,000 local exchange services customers in Canada,the forbearance will not be effective until at least 18 months after the day on

which the service provider began providing local exchange services in thatmarket.

16. The Commission also discussed the relationship between regulatory forbearance for localservices and the obligation to serve in Amended Decision 2006-15 in the following terms:

374. The Commission notes that, even in forborne markets established under the termsof the local forbearance framework, there may remain pockets of uncontestedcustomers for whom the ILEC remains the primary or only LEC.

375. The record of the present proceeding indicates, moreover, that even wherecustomers have access to competitive suppliers, the focus of LECs in forborne

markets is likely to be on attracting high-use customers that generate high profitmargins. In this regard, the Commission notes that currently in competitivemarkets only some CLECs offer stand-alone PES. CLECs typically offer PES aspart of a bundle, either with optional local services or with services such aslong-distance, video, wireless and Internet.

376. The Commission considers that market forces will best protect the interests of customers that reside in areas of forborne markets where multiple competitorsoffer service and where customers wish to subscribe to multipletelecommunications services from the same provider, whether these services arein a bundle or otherwise.

377. The Commission considers, however, that for some residential customers,including those for whom affordability of phone service is a serious issue, such asthe many disabled Canadians who live on limited incomes, the availability of PESon a stand-alone basis is very important.

378. In light of the above, in order to ensure that accessibility and affordability aremaintained for residential customers in forborne markets the Commissionconsiders that ILECs should continue to be required to provide PES on astand-alone basis.

379. Accordingly, the Commission will require an ILEC to continue to provide

stand-alone PES to residential customers in a forborne market and will retain itspowers pursuant to section 24 of the Act to the extent necessary to maintain thisrequirement.

380. The Commission considers that for business customers generally market forceswill prove adequate to protect their interests such that the Commission does notneed to mandate the provision of business stand-alone PES. The Commissiondoes note that, to the extent that issues arise with respect to the treatment of uncontested business customers who wish to receive business stand-alone PES, it


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has, as set out below, retained its powers under subsection 27(2) to deal with anycomplaints regarding unjust discrimination or undue preference.

381. The Commission also considers that in order to ensure that residential stand-alonePES is available to all residential customers in forborne markets, it will also be

necessary to retain in forborne markets the ILECs' obligation to serve with respectto residential stand-alone PES, as set out in paragraph 31 of Telephone service tohigh-cost serving areas , Telecom Decision CRTC 99-16, 19 October 1999(Decision 99-16). The Commission notes that any existing exceptions orlimitations to the obligation to serve would also continue in a forborne market.

382. The Commission notes that in Decision 99-16, it established a basic serviceobjective (BSO) for the ILECs, which included: individual line local service withtouch-tone dialling, provided by a digital switch with capability to connect vialow speed data transmission to the Internet at local rates; enhanced callingfeatures, including access to emergency services, Voice MRS, and privacyprotection features; access to operator and directory assistance services; access tothe long-distance network; and a copy of a current local telephone directory. TheCommission considers that the residential stand-alone PES provided by an ILECin a forborne market should be provided in a manner consistent with the BSO, andthe Commission will retain its powers under section 24 to the extent necessary tomaintain this objective.

17. As of 30 June 2009, the Commission has forborne from regulating local exchanges

representing 77% of all residential lines and 68% of all business lines in Canada. 10 Such

forbearance is typically granted on the basis of the competitor presence tests in subparagraphs

242 a) ii and 242 a) iii of Amended Decision 2006-15, because the test absence of marketdominance test in subparagraphs 242 a) i is much harder to demonstrate.

18. This means that in forborne exchanges there can be pockets of up to 25% of residential or

business lines that are only supplied by the ILEC on a monopoly basis, which reinforces the

concern expressed by the Commission at paragraph 374 of Amended Decision 2006-15

regarding the prospect of pockets of uncontested customers for whom the ILEC remains the

primary or only LEC. Most significantly, paragraph 374 of Decision 2006-15 was not modified

by the Governor-in-Council despite the fact that the Governor-in-Council varied Decision 2005-

16 in other respects after issuing the Policy Direction.

10 CRTC 2009 Communications Monitoring Report, August 2009, p. 201.


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19. With this background in mind, the ISPs now turn to the questions posed by the

Commission with respect to the obligation to serve.

3.2 ISP Answers to the Commissions Questions regarding the Obligation to Serve

3.2.1 TNC 2010-43, Appendix 4, Paragraph 1

In which market(s) (for example, forborne, non-forborne, high-cost) and to what extent, if any, is an obligation to serve necessary? Specify what type(s) of service(s), if any, should besubject to an obligation to serve. Explain whether the provision of service through alternatetechnologies, for example wireless service, should satisfy an obligation to serve regardinglocal voice service.

20. In responding to these questions, the ISPs are starting from the premise that, as theCommission has previously found, 11 mandating the provision of business stand-alone primary

exchange service (PES) is not required. Thus, these questions are only addressed further with

respect to residential PES.

21. The concerns expressed by the Commission regarding the prospect of pockets of

uncontested customers for whom the ILEC remains the primary or only LEC has not been

diminished by or since Decision 2006-15. In fact, the competitor presence tests inserted in

Decision 2006-15 by the Governor-in-Council could result in uncontested pockets of up to 25%

of the number of local exchange service lines that the ILEC is capable of serving in forborne

exchanges. The numbers in the case of non-forborne exchanges can be even higher.

22. Most significantly, the Policy Direction was already in effect when the Governor-in-

Council varied Decision 2006-15. Thus, the fact that the Governor-in-Council did not vary

paragraph 374 of Decision 2006-15 is clear proof that the continuation of the obligation to serve

is consistent with the Policy Direction. Nothing has occurred since the Governor-in-Councilvaried Decision 2006-15 to alter that situation. Therefore, the obligation to serve should continue

in its present form.


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23. Furthermore, the ISPs are of the view that the stand-alone PES to which the obligation to

serve should apply encompasses the basket of items that form the basic service objective, as

defined by the Commission in Decision 99-16. Moreover, as explained in greater detail below in

section 5.2.2, due to inferior call quality and higher prices, wireless technologies, and more

particularly mobile wireless services, are typically not substitutable with wireline services.

Therefore, reliance on wireless services to satisfy an obligation to serve requirement would be

inappropriate.

24. Finally, the ISPs are of the view that the principles articulated herein apply equally to

high-cost serving areas (HSCAs) and non-high-cost serving areas.

25. A continuation of the obligation to serve will promote the Canadian telecommunications

policy objectives listed in section 2.1 above and is consistent with the requirements of

paragraphs 1(a)(i) and (ii) of the Policy Direction.


Should any particular class of service provider (for example, ILECs, competitive localexchange carriers) be subject to an obligation to serve and, if so, how should they beselected?

26. The ILECs are the carriers that originally enjoyed a monopoly in the provision of PES

throughout the country, and there are still areas in which they, and not other carriers, remain the

sole providers of PES. Thus, it is most appropriate for ILECs to be subject to the obligation to

serve. Such an approach is most consistent with subsection 7(f) of the Act and paragraphs 1(a)(i)

and (ii) of the Policy Direction. Moreover, since it is the residual market power of the ILECs that

makes the imposition of an obligation to serve on them necessary, paragraph 1(b)(iii) of the

Policy Direction is not breached when it comes to the imposition of an obligation to serve as anon-economic measure solely on the ILECs.

11 E.g., para. 380 of Amended Decision 2006-15.


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What legal considerations exist, for example the Bell Canada Act , which would prevent amodification or the removal of the obligation to serve?

27. As noted in section 2.1 above, the Bell Canada Act contains certain obligations to serve.

However, given the highly evolved state of Bell Canadas network, in the vast majority of cases

in which an applicant seeks service from Bell Canada the company would most likely be

prepared to provide the service in any event. The exceptions to the application of the obligation

to serve set out in subsection 6(2) of that legislation would most likely ensure that the statutory

obligation to serve would not, in most cases, bind Bell Canada to a standard that is more

stringent than the obligation to serve imposed by the Commission through other regulatory

means, such as the Terms.


Should a service provider that has the obligation to serve be compensated and, if so, inwhich market(s)? What should be the criteria, for example the cost of service, fordetermining whether compensation is required? Specify the appropriate compensationmechanism.

28. The ISPs see no justification for compensating the ILECs for the obligation to serve to

any greater degree than is the case today, particularly in those areas where an ILECs network is

present. In fact, any such compensation would cause market distortions in breach of subsection

7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

29. To the extent that the question is aimed at addressing that portion of an ILECs obligation

to serve that pertains to programs required by the Commission for service extension to unserved

and underserved area, the current funding mechanisms for those programs appear to be adequate,

particularly since the remaining proportion of the Canadian population that lives in unserved orunderserved areas is very small and diminishing. To the extent that such programs may require

additional funding in the future, that funding should come from the users benefitting from the

programs and not cross-subsidies. This is the approach that is most consistent with subsection



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Should there be limits to the obligation to serve and, if so, what should those limits be?Indicate whether the current service extension charges and parameters (for example,distance from the network, amount paid by the customer and/or the service provider)

remain appropriate. Should these charges and parameters be made generally consistentacross relevant service providers?

30. The existing limits to the obligation to serve and the current service extension charges

and parameters remain appropriate. There is no significant impetus for the implementation of any

changes in these areas, and any regulatory changes that increase the burdens on the industry or

any of its participants would have an economically distorting effect that is contrary to subsection


31. Furthermore, extension charges and parameters have been developed separately for

various ILECs in recognition of their unique circumstances and cost structures. There is no good

reason for this to change and be harmonized in some artificial fashion. Such a harmonization by

way of regulatory action would only introduce economic distortions, contrary to subsection 7(f)

of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.


Should the obligation to serve be subject to service standards, for example specific timeframes for service delivery? If so, specify the standards and circumstances.

32. At a time when competition is increasing and the need for the imposition of a ubiquitous

obligation to serve on ILECs is receding, it does not make sense to add new requirements related

to the obligation to serve, such as service standards. The addition of any such requirements

would be contrary to subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy

Direction.

4.0 LOCAL SERVICE SUBSIDY

33. An examination of the local service subsidy must start with a description of the current

subsidy regime.


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4.1 Background to the Local Service Subsidy

34. The local service subsidy regime now in effect has been established pursuant to section

46.5(1) of the Act which provides:

The Commission may require any telecommunications service provider to contribute,subject to any conditions that the Commission may set, to a fund to support continuingaccess by Canadians to basic telecommunications services.

35. The existing local service subsidy regime was established in Decision CRTC 2000-745. 12

36. In establishing the regime, the Commission outlined its objectives as follows in Decision2000-745:

8. The Commission believes that the criteria set out in Decision 92-12 are still validfor evaluating the proposed collection mechanisms, including sustainability,pricing flexibility for all market participants and efficiency of administration.Decision 92-12 also indicated that the mechanism should collect the appropriateamount to achieve the basic service objective.

9. The Commission finds that additional contribution collection criteria andprinciples are appropriate for today's more competitive telecommunicationsindustry. In particular, the collection mechanism must promote fairness, ratepayerequity, economic efficiency, technological neutrality and competitive equity. Themechanism must be fair to all market participants and should not adversely affectone service provider over another. It should also promote economic efficiency bylimiting distortions in the telecommunications market. Further, the mechanismshould be competitively-equitable by promoting the efficient allocation of resources and avoid unfair advantages to any service or service provider. TheCommission also considers that the mechanism should be technologically neutralwhereby service providers should not be penalized or favoured by their choice of technology. Finally, the mechanism should be equitable to ratepayers if morecontribution is collected from users who make greater use of the network.(Emphasis added.)

12 Changes to the Contribution Regime, Decision CRTC 2000-745 , 30 November 2000 (Decision 2000-745).


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41. The other important element of the regime is the calculation of the contribution amount

that each Eligible TSP must contribute to the fund. 16 Each Eligible TSP must contribute a portion

percentage of its contribution-eligible revenues, which are defined as its Canadian

Telecommunications Service Revenues (CTSR) less certain deductions. In particular, revenues

from retail Internet and retail paging services, the sale or rental of terminal equipment, inter-

carrier expenses and non-Canadian telecommunications services revenues are exempt.

42. A percentage revenue charge is applied to each Eligible TSPs CTSR. That charge is

determined by dividing the NSR by the total contribution-eligible revenues of all Eligible TSPs.

Significantly, the percentage contribution rate was initially set at 4.5% in 2001 17 and the NSR

was initially set at $920.4 million, 18 whereas the contribution rate is now 0.81% 19 and the NSR is

$207.5 million. 20 In other words, the subsidy is declining, and so the degree to which the subsidy

is distorting the economics of the industry is also declining. This trend is consistent with greater

reliance on market forces over time.

43. With this background in mind, the ISPs now turn to the questions posed by the

Commission with respect to the local subsidy regime.

16 A full description of the contribution regime can be found in The Canadian revenue-based contribution regime ,Telecom Circular CRTC 2007-15, 8 June 2007.

17 Decision 2000-745, para. 83.18 Decision 2000-745, para. 123.19 Final 2009 revenue-percent charge and related matters , Telecom Decision CRTC 2009-702, 10 November

2009 (Decision 2009-702), para. 18.20 Decision 2009-702, para. 15.


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4.2 ISP Answers to the Commissions Questions regarding the Local Service Subsidy


Should changes to the local service subsidy regime be made and, if so, to what extent?

44. The ISPs are of the view that the Commission should continue reducing the existing local

subsidy regime as defined by the NSR year-over-year until such time as it becomes sufficiently

small to justify elimination of the contribution regime altogether. The only exception to this

approach should be if the Commission were to find a way of targeting contribution payments to a

greater extent right away, such that contribution rates could decline even more quickly. Such an

approach is most consistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the

Policy Direction.


How should high-cost areas be defined and what should be the associated criteria, forexample a banding structure based on loop length or density of network access service(NAS)? Should the existing banding structure be modified to include sub-bands?

45. The ISPs do not believe that any changes flowing from the questions posed by the

Commission should be pursued. The existing regime provides adequate funding for HSCAs andthe amount of contribution that is being collected annually is declining, which is consistent with

subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction. Any changes to

the contribution regime that could increase local service subsidies run the risk of introducing

economic distortions that will deter economically efficient competitive entry into the market or

promote economically inefficient entry, contrary to paragraph 2(b)(ii) of the Policy Direction.

46. Given the fact that the existing contribution regime fulfills its intended objectives, it

would also be inconsistent with efficient and effective regulation for the Commission and the

industry to be required to engage in the painstaking, lengthy and highly specialized work

required to modify the regime along the lines suggested in the Commissions questions. See also

section 4.2.1 above.


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Identify the appropriate mechanism for distributing subsidy and whether the subsidyshould be paid to the service provider based on revenues and costs or a competitive bidding

process. If the mechanism continues to be based on revenues and costs, what should beincluded? Are the current implicit revenue contributions appropriate (i.e. $30 monthly ratetarget for primary exchange service and $5 for monthly optional services)?

47. No changes flowing from the Commissions questions are required. See also sections

4.2.1 and 4.2.2 above.


Which service providers should be eligible to receive subsidy and under whatcircumstances? Are there any circumstances in which wireless service providers should beeligible for subsidy? Should local service subsidy be tied to the obligation to serve or to thebasic service objective?

48. No changes flowing from the Commissions first two questions are required. See also

sections 4.2.1 and 4.2.2 above.

49. The current local service subsidy is portable and should stay that way until such time as it

can be eliminated altogether. Accordingly, the subsidy should not be tied to the obligation to

serve. The subsidy is implicitly tied to the current basic service objective and, once again, this

should not change until the subsidy regime can be eliminated.


Should there be a subsidy in forborne and/or competitive markets? Should there besubsidized competition in high-cost areas, including small ILEC markets? In whichmarkets and under what conditions, if any, should the subsidy be portable?


4.2.1 and 4.2.2 above.


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Which TSPs should be required to contribute to the local service subsidy fund? Whatrevenues should be contribution-eligible? Should Internet revenues be contribution-eligible? Are any other changes to the contribution collection mechanism necessary?


4.2.1 and 4.2.2 above.

52. The Commissions objective should be to phase out the existing contribution regime over

time, not to apply it to any additional TSPs or services.

53. The independent ISP industry is already disadvantaged from a competitive perspective

due to the joint dominance of the ILECs and cable carriers in the provision of high-speed Internet

services and bundles that include such services. The top five Internet service providers (ISPs),

which are ILECs, cable carriers and their affiliates were dominant in the Internet access market,

capturing 76% of the Internet access revenues in 2008. 21 The subscriber-based residential market

share of TSPs other than ILECs and cable carriers declined from 16% in 2004 to 8% in 2008. 22

ILECs and cable carriers accounted for 94% of residential Internet access revenues in 2008. 23 In

this environment, which is already very challenging for independent ISPs, the imposition of an

additional cost in the form of a contribution levy would be very harmful and could lead to a

further lessening of competition in the provision of Internet access services.

54. The market distortion caused by the payment of contribution on Internet revenues would

be inconsistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy

Direction. Accordingly, Internet revenues should not be contribution-eligible.

21 CRTC 2009 Communications Monitoring Report, August 2009, p. 214.22 Id. , at p. 215.23 Id. , at p. 218.


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Should the small ILECs and/or Northwestel be subject to any special considerations ormodifications?

55. These entities should not receive any additional special consideration beyond that which

they already receive, in order to avoid introducing or increasing market distortions, which would

be inconsistent with section 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

5.0 BASIC SERVICE OBJECTIVE

56. An examination of the basic service objective must start with a description of the

objective as it now exists.

5.1 Background to the Basic Service Objective

57. In Decision 99-16, 24 the Commission defined the basic service objective, which persists

today as comprising:

Individual line local service with touch-tone dialing, provided by a digital switch withcapability to connect via low speed data transmission to the Internet at local rates;

Enhanced calling features, including access to emergency services, Voice MessageRelay service, and privacy protection features;

Access to operator and directory assistance services; Access to the long distance network; and A copy of a current local telephone directory.

58. During the proceeding that led to Decision 99-16, several groups representing consumer

interests suggested that basic service should include a telephone line capable of local and

interexchange data transmission at a modem speed of 28.8 kb/s or higher, which was the

standard for Internet access speed at the time. 25

59. The Commission refused this request and in so doing stated:

24 At para. 24.25 Id. , at para. 26.


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27. The Commission considers that the benefits of upgrading the local network mustbe balanced against the subscribers' ability to pay for these upgrades. For a higherlevel of basic service, subscribers would have to pay more and costs to providethe service in remote areas would increase. These costs could, in turn, affectsubsidy rates levied on profitable markets, which would distort the competitive

nature of those markets.

28. The Commission expects that, over time, competitive pressures andimprovements in network technology will permit basic service to include fastertransmission speeds.

29. In light of these considerations, the Commission will not include line speed aspart of the basic service objective.

5.2 ISP Answers to the Commissions Questions regarding the Local Service Subsidy


Is the basic service objective still necessary and, if so, what should it comprise? Specify theservices/obligations as well as the appropriate technical specifications (e.g. high-speedInternet access at a minimum speed of 1 megabit per second) to be included in the basicservice objective.

60. The basic service objective as defined in Decision 99-16 is still appropriate and should

continue to apply. Adding additional requirements would cause economic distortions and be

inimical to subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.


Specify whether alternatives to wireline local service, for example wireless service, shouldbe considered to satisfy the basic service objective. Specify which service providers shouldbe subject to the basic service objective.

61. Over 99% of Canadians had access to cellular mobile wireless services in 2008, of which

approximately 74.3% of households subscribed to them. 26 Despite this, Canadian are not

disconnecting their wireline PES to any significant degree, suggesting that cellular mobile

services are not typically perceived as full substitutes for wireline services. This is not entirely

26 CRTC 2009 Communications Monitoring Report, August 2009, p. 236.


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surprising since the call quality of cellular mobile services is not as consistent as that of wireline

services. Similarly, cellular mobile services tend to be more expensive to use than wireline

services. Accordingly, cellular mobile wireless services do not satisfy the basic service objective.

62. The ILECs are the carriers that originally enjoyed a monopoly in the provision of PES

throughout the country, and there are still important areas of the country in which they, and not

other carriers, remain the sole provider of PES. Thus, it is most appropriate for ILECs to remain

subject to the basic service objective. Such an approach is most consistent with subsection 7(f) of

the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction. Moreover, since it is the residual

market power of the ILECs that justifies the imposition of the basic service objective on them,

paragraph 1(b)(iii) of the Policy Direction is not breached when it comes to the imposition of the

basic service objective as a non-economic measure solely on the ILECs.


What should be the Commission's role, if any, in regard to advancing high-speed Internetaccess? Given that the contribution regime is generally limited to subsidizing basic localservice rates in high-cost areas, should the Commission reconsider its approach and use theregime to subsidize high-speed Internet access?

63. The Commissions role in regard to high-speed Internet access should be to createfavourable conditions for competition through the design, enforcement and implementation of

appropriate access policies. However, that is a matter that is beyond the scope of this proceeding.

64. Using the contribution regime to subsidize high speed access would not only be wholly

inconsistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy

Direction, it would also be doomed to failure, since no subsidy regime could possibly absorb the

enormous costs associated with this kind of undertaking.


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65. The enormous costs that would have to be borne under such a regime were confirmed by

the Commission in its first round submission to the Telecommunications Policy Review panel as

follows: 27

105. For its part, the Commission has not redefined universal service in terms of broadband access. Having spent the last decade trying to reduce the level of subsidy to local telephone service down to economically sustainable levels, it hasnot seen fit to reintroduce what would clearly be a multi-billion dollar subsidyprogram to provide broadband access on a universal basis in Canada. Rather thantake this approach, the Commission has focussed on creating an environment thatis conducive to the competitive provision of broadband services and has let thefederal and provincial governments assume leadership in direct subsidization of broadband network builds in regions where high cost makes their competitiveprovision unlikely. (Emphasis added.)

66. Furthermore, if the intent of such a policy was to ensure that consumers always have

access to the latest average high-speed access services available throughout the country, the cost

of any corresponding subsidy program would be constantly increasing because the average speed

of high-speed Internet services is rapidly increasing and is expected to continue increasing as

ILECs roll out fibre-to-the-node and fibre-to-the home, and cable carriers take full advantage of

the speeds that can be supported over their hybrid fibre-coax plant.

67. The following evidence filed by TSI in the proceeding initiated by Public Notice 2009-

26128 makes this point:

22. Many Canadians are also aware that access speeds have been rising over time,from dial access speeds in the 1980s to the higher speeds now available,particularly over cable networks. Service providers and the equipmentmanufacturers that support them have taken the capabilities that Moores Lawprovides and used them to respond to the expectations of users and applicationdevelopers whose behaviour is also driven by Moores Law.

23. There have been several studies to characterize this behaviour. The earliest thathas come to our attention was by Dr. Jakob Nielsen who, after considering his

experience as an advanced user over 25 years, formed the view that access speedsare rising at about 50% per annum and would continue to do so going forward.

27 Canadian Telecommunications Policy Review Discussion Paper, Canadian Radio-television andTelecommunications Commission, Revised 17 August 2005.

28 Proceeding to consider the appropriateness of mandating certain wholesale high-speed access services ,Telecom Notice of Consultation CRTC 2009-261, 8 May 2009, as amended.


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He called this empirical relationship Nielsens Law of Internet Bandwidth. Thetrend line developed by Nielsen is reproduced inFigure 2.1.

Figure 2.1 -- Nielsen's Law of Internet Bandwidth

Source: http://www.useit.com/alertbox/980405.html

24. The graph in Figure 2.1 should be understood as the year of first widespreadavailability to advanced users in Silicon Valley at the indicated speed. Nielsenobserved that mass-market adoption lags by 2 to 3 years. His trend line crosses100 Mb/s in the year 2011.

25. That there is a speed growth relationship like Nielsens Law was subsequentlyvalidated in five countries of Europe in 2007/8 by Ventura Team LLP for the

FTTH Council Europe. They found slopes that ranged from 46% (Spain) to 60%(Sweden), with 100-Mb/s intercept years of 2004 (Sweden) to 2016 (Spain).

26. At the moment, Canada is slightly ahead of the speeds predicted for today inFigure 2.1, with 50 Mb/s services just having been widely introduced by someBDUs one year in advance of the predicted year of 2010, and 100 Mb/s servicesnow being offered in at least one location. However this does not make Canada aleader: 100 Mb/s service is widely found in Japan, South Korea, France, Finlandand Singapore today.

27. No matter what the precise slope of the growth trend is for Canada, it is

reasonable to project a trend of this nature forward at least ten years because of recent predictions that Moores Law will continue to facilitate increases in speeduntil 2021 or 2029, when physical limits are expected to present a barrier tofurther improvement in integrated circuit technologies. 29 (Footnotes omitted.)


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68. In light of this evidence, a program that relies on a subsidy mechanism to support the

rollout of high-speed Internet services will be unsustainable.

69. The reasons cited by the Commission in Decision 99-16 for refusing to include a line

speed for Internet access as part of the basic service objective noted in section 5.1 above are even

more compelling today given current trends in the increase of speeds of available high-speed

Internet access services.

70. Any attempt to employ a subsidy mechanism to finance broadband expansion programs

would lead to unacceptable price and market distortions and market inefficiencies, which is

wholly at odds with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy

Direction.

71. The distorting effect and inefficiencies of any such scheme was confirmed by the

Telecommunications Policy Review Panel in its Final Report as follows: 30

As discussed in Chapter 3, Economic Regulation, in the monopoly era of telecommunications, cross-subsidies between various telecommunications services

helped achieve universal, affordable access to basic service. However, with the onset of competition, such cross-subsidies have gradually been replaced by more targetedsubsidies. The CRTC-regulated contribution fund is a more direct form of subsidy thatcontinues to play an important role in supporting universal access to basictelecommunications services today. The Panel supports the continuing use of thecontribution fund for this purpose.

In general, however, the Panel believes cross-subsidies between classes of telecommunications service consumers are an inappropriate means of achieving policyobjectives in a competitive telecommunications industry. If inter-service subsidies remainsmall, like the CRTCs contribution fund subsidies, then economic distortions and

inefficiencies are minimized. However, if the contribution fund were expandedsignificantly to finance broadband expansion programs, the price distortions andinefficiencies would increase to an unacceptable level. This would distort markets

29 Technical Report of Pacomm Consulting Group Ltd. Regarding New Wholesale Services, Roger Hay, 30October 2009.

30 Telecommunications Policy Review Panel Final Report 2006 (TPRP Final Report), p. 8-9 and 8-10.


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and result in an inefficient allocation of resources by artificially lowering the pricesof some services and raising the prices of others.

Internal cross-subsidies are also undesirable from the viewpoint of social equity. Sincethe cost of providing subsidies is passed onto consumers, and since all consumers

contribute at the same rate regardless of income, internal cross-subsidies effectivelyimpose a regressive tax on the customers of telecommunications service providers.

The Panel is also concerned that the changing structure of the telecommunicationsindustry makes internal cross-subsidies increasingly unsustainable. Previously, themajority of service providers could be included in such programs, whether they wereincumbents or new entrants. However, that opportunity is eroding as new types of services provided by new types of competitors emerge from outside thetelecommunications industry, for example, Internet-based providers of PC-to-PC voiceover Internet Protocol (VoIP) services.

In the changing telecommunications environment described in Chapter 1, atelecommunications provider or subscriber tax designed to subsidize the extension of broadband would put an unfair burden on traditional telecommunications providers andtheir customers, while some new entrants such as web-based service providers and theircustomers would be exempt. These solutions appear neither efficient nor fair.

For all these reasons, the Panel has concluded that the CRTC contribution fund shouldnot be used to finance expansion of broadband access . (Emphasis added.)

72. As the Commission 31 and the Telecommunications Policy Review Panel 32 have observed,

the funding of broadband expansion is best left to governments. The ISPs urge the Commissionnot to use the contribution regime to fund broadband expansion in high-cost serving areas.

6.0 CONCLUSION

73. In conclusion, the ISPs urge the Commission to:

Apply the obligation to serve in the same manner and to the same extent as

currently applied;

31 See paragraph 66 above.32 TPRP Final Report, supra, p. 8-10.


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Not make any changes to the contribution regime that would increase the amount

of contribution payable or result in the payment of contribution on retail Internet

service revenues;

Apply the basic service objective in the same manner and to the same extent as

presently applied; and

Not introduce a high-speed Internet access element to the basic service objective

or to levy contribution on retail Internet services.

*** END OF DOCUMENT ***

isp evidence final 20100426

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