Canada: New Rules For Pricing Of Wholesale Internet Access

Last Updated: November 18 2011
Article by Fasken Martineau's Communications Law Group

On November 15, 2011 the Canadian Radio-television and Telecommunications Commission (CRTC) released Telecom Regulatory Policy CRTC 2011-703 which establishes the terms upon which large incumbent telephone and cable carriers provide wholesale access services to Internet Service Providers (ISPs), who, in turn, provide high-speed Internet access services to retail residential customers.

This is the latest in a string of CRTC decisions and policies that have grappled with this issue.


The CRTC launched the current proceeding on February 8, 2011 following adverse public and political reaction to an earlier decision released on January 25, 2011 (Usage-based billing for Gateway Access Services and third-party Internet access services, Telecom Decision CRTC 2011-44).  That decision permitted carriers that provide wholesale access services to charge ISPs usage-based rates.

ISPs argued that this approach to wholesale pricing would impede their provision of alternative pricing packages to their customers – essentially tying them to the wholesale providers' own retail pricing practices.  Consumers spoke out strongly against usage-based pricing at the retail level which they believed would result from usage-based pricing at the wholesale level.  The Minister of Industry also weighed in on the debate with a now famous Twitter to the effect that it was virtually certain the CRTC measures would have to go back to the "drawing board".

This negative reaction prompted the CRTC to initiate a new proceeding to reconsider the issue.  In Telecom Public Notice of Consultation CRTC 2011-77, released on February 8, 2011, the CRTC outlined its approach to the regulation of Internet services, as well as the principles that would guide its reconsideration of the role of usage based billing in the pricing of wholesale access services.

The CRTC described the rationale for regulation at the wholesale level in the following way:

The residential retail Internet market in Canada consists of large and small service providers. The large incumbent telephone and cable companies serve approximately 94 percent of the residential retail market and have invested in and built extensive networks. In addition, there are a number of smaller Internet service providers (Small ISPs) serving approximately 6 percent of the residential retail market.

These Small ISPs offer innovative services and compete with the large incumbents. However, Small ISPs have generally not built their networks to the same degree as the large incumbents and, as such, typically rely on wholesale services mandated by the Commission and provided by the large incumbents to reach residential consumers. The Commission regulates the rates for these wholesale services, but it does not regulate the rates or bandwidth thresholds charged by the large incumbents to their retail customers. The business wholesale market is regulated distinctly and is not part of these proceedings.

In its public notice the CRTC also described the relationship between usage-based billing and the Internet traffic management practices that it had established in an earlier public process in 2009 (see Telecom Regulatory Policy CRTC 2009-657).

Consumers continue, and will continue, to increase the amount of bandwidth they use in accessing the Internet to engage in such activities as streaming audio or video, downloading files, or other heavy usage applications. This trend in demand can create network congestion.

Accordingly, in 2009 the Commission developed a comprehensive regulatory approach to Internet traffic management practices on the basis of the following key principles:

i. When congestion occurs, an ISP's first response should always be to invest in more network capacity. In a competitive marketplace where consumers have choice, it is in the ISP's best interests to have a robust network.

 ii.  Given that network upgrades are not always the most practical solution, if it is necessary to manage Internet traffic, this should be done through transparent, economic measures.

iii.  Traffic shaping and other technical measures should only be employed as a last resort, and in such cases consumers should be advised in advance of the application of these measures.

The CRTC also outlined the principles that would guide its deliberations on the appropriate role for usage-based pricing of wholesale services:

The Commission's regulatory approach with regard to the matter of UBB for mandated wholesale services has been developed over time and through a series of decisions. The Commission's approach is based on two fundamental principles:

i.  As a general rule, ordinary consumers served by Small ISPs should not have to fund the bandwidth used by the heaviest retail Internet service consumers.

ii.  It is in the best interest of consumers that Small ISPs, which offer competitive alternatives to the incumbent carriers, should continue to do so.

The Public Hearing

During the CRTC's public hearing a number of different approaches to billing for wholesale high-speed access services were discussed.  Principal among these were: continued use of flat rate billing for wholesale services; aggregated volume pricing and capacity-based pricing.

A number of incumbent local telephone companies (ILECs) and one of the cable carriers proposed to maintain the use of their existing flat rate billing models, which provide for unlimited usage by wholesale providers.

Other ILECs and cable carriers proposed volume based billing models arguing that a volume-based model provides the best proxy to recover a network provider's investment costs because of a high correlation between monthly volume of usage and peak period traffic, which drives investment.

The ISPs argued that only peak capacity drives network investment decisions and submitted that a volume-based model would charge for both peak and non-peak traffic.  They proposed a "95th Percentile" model that would measure peak capacity generated at the interconnection point between the network provider and the independent ISP. 

Others endorsed an alternative capacity model that requires the ISP to forecast and purchase the monthly capacity it requires measured in megabits per second (Mbps), and then purchase excess capacity it may require if it exceeds that level of usage. 

The Decision

In its new policy, the CRTC states that each of the proposed wholesale billing models that includes a separate charge for access and usage provides a significant increase in flexibility over a per-customer wholesale usage-based billing model.  The CRTC has decided to give wholesale carriers two options for billing their wholesale access services to ISPs: the flat rated approach and a modified capacity approach.

The CRTC noted a number of deficiencies in the volume-based model including the fact that volume is not always a good proxy for peak period traffic that drives network investment.  Since the wholesale provider and ISPs cannot measure traffic at the same network points, it was also felt that the volume model would lead to billing disputes between ISPs and wholesalers.

As regards the two prinicipal proposals for capacity models advanced at the public hearing, the CRTC rejected the ISPs' 95th percentile model as being complicated and costly to implement, leading to delayed implementation and uncertainty.  The CRTC therefore favoured the alternative capacity model based on the purchase of capacity in 100 Mbps increments.  This model has three components: a monthly charge for access for each of the ISP's retail customers; a monthly capacity charge offered in 100Mbps increments; a monthly interface charge, where required, and associated service charges.  The CRTC considered that this approach appropriately shifts to ISPs the risk and responsibility of planning and managing their customer's network usage.  Under this model, an ISP must determine in advance its capacity requirements and if demand exceeds purchased capacity, manage its network capacity until it can purchase more.

Finally, the CRTC endorsed a flat rate model as an alternative which involves  a monthly access rate for each of the ISPs' retail customers and ancillary charges such as a monthly interface charge, where required, and related service charges.  Under the flat rate model, the ISP pays a flat monthly fee regardless of usage. 

The Commission decided to cost the service components of these models based on long run incremental costs plus a reasonable mark-up.  Mark-ups are to be uniform for all service components and across all carriers.  However, ILECs providing Fiber to the node (FTTN) are permitted a supplementary mark-up of 10% on access and usage rate components in order to encourage the build out of higher capacity services.

Schedules of approved rates for both the flat rate proposals and the capacity based proposal are contained in appendices to the decision.  While these rates vary widely based on each carrier's costs, it appears in general that they are lower than before the proceeding.

Billing Rates for Wholesale Business High-Speed Access Rates

Although wholesale access rates for ISP business customers were not part of the proceeding discussed above and did not give rise to the same public interest, the CRTC also released a companion decision respecting these rates on November 15, 2011.  In Telecom Regulatory Policy CRTC 2011-704, the CRTC decided that the current flat rate tariff structure for wholesale business high-speed access services offered by the ILECs remains appropriate.  These rates are also based on the ILECs' long run incremental costs of providing the services plus a reasonable mark-up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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