Canada: New Tariffs On The Horizon After CRTC Revamps Rate-Setting Process For Wholesale Broadband Internet Services

Wholesale rates for broadband Internet services are set to change. This month wholesale broadband providers will file new tariff applications in response to a recent CRTC decision announcing changes to the rate-setting process.  On March 31, 2016, the CRTC announced changes to how it sets rates for wholesale access to broadband Internet services. In Telecom Decision CRTC 2016-117 (the "Decision") the CRTC made three key changes:

  • It modified how it sets rates for wholesale broadband Internet services. Going forward, wholesale rates will be the same for all Internet speeds within a given range.
  • It adopted new cost assumptions. The CRTC found that annual traffic growth was 32% annually, and that equipment costs decreased 26.4% annually.
  • It changed the length of the study period for cost studies. New studies will now take a ten-year window into account.

In light of these changes, the CRTC decided that current wholesale rates for broadband services were no longer just and reasonable, and made all currently-approved rates interim until new cost studies are submitted. The CRTC gave wholesale Internet access providers 45 days to submit new tariff applications reflecting the new changes.

Background: How rate-setting works

The CRTC has a mandate to create competition among telecommunications providers. This mandate extends to regulating wholesale prices for Internet access: the CRTC requires that large cable and telephone companies (the "wholesale providers") who provide broadband Internet services also offer those services at wholesale rates to smaller competitors (the "competitors"), who can then re-sell the Internet services to the public.

In the rate-setting process, among other things, the CRTC decides what "wholesale" actually means. To make sure that the competitors can purchase bandwidth at competitive rates, the CRTC regulates which services the wholesale providers must offer competitors, how much the providers can charge competitors, and how competitors are billed.

  • Which services? Under the "speed-matching requirement", when wholesale providers introduce new Internet service speeds to their customers, they also have to offer the same speeds to competitors, so that the competitors can offer those rates to their own customers.
  • How much to charge? For each new speed offering, wholesale providers must file a tariff application and a supporting cost study with the CRTC, explaining what it cost them to implement the new offering. The application and study allow the CRTC to determine a fair and equitable wholesale rate that wholesale providers can charge competitors. The CRTC regulates what inputs the wholesale providers are allowed to consider in calculating the cost of implementing a new service, and builds in certain assumptions about how Internet traffic will increase and telecommunications equipment costs will decrease over time. At the time of the Decision, the CRTC assumed that Internet traffic would increase by 20% annually, and that equipment costs would decrease by 10% annually. The CRTC required that cost studies reflect trends over a 10-year period.
  • How to bill? The CRTC also regulates how wholesale providers charge competitors. Since 2011, the CRTC has approved of two billing models: (1) a flat-rate model, where providers charge competitors a single monthly rate per end-user for each speed tier; and (2) a capacity-based model, where providers charge competitors for a set amount of bandwidth each month, plus a monthly "network-access rate" for each speed tier.

Were current rates still accurate?

In the Decision, the CRTC noted concerns from both wholesale providers and competitors about possible flaws in the CRTC's valuation process. Competitors alleged that the wholesale providers' actual costs were lower than what the CRTC was allowing them to charge their competitors. The competitors were concerned that the cost parameters and Internet traffic growth assumptions that the CRTC had established in 2011 were no longer appropriate.

Wholesale providers alleged that the requirement to submit a new cost study with each new speed offering created a regulatory burden, since wholesale providers now offer new speed tiers more frequently. Moreover, under the CRTC's rules a new speed could not be offered to a competitor without a cost study. Since not offering a matching speed to a competitor undermined the CRTC's mandate to create competition, the CRTC created interim rates for new speed tiers based on the next lowest approved tier. As a result, it was possible that the wholesale rates for new speed tiers were undervalued.

Issues addressed in the Decision

The CRTC addressed the following issues in its decision:

  • Should the cost and rate structure of wholesale broadband Internet service be simplified?
  • Should the CRTC's cost assumptions about Internet traffic growth and the cost of equipment be modified to reflect current trends?
  • Should the study period be changed from the current ten years to a shorter period?
  • How should wholesale providers price certain types of telecommunications equipment whose value depends on how much traffic flows through them?
  • How should the CRTC determine final rates for services that it had not yet certified?
  • If the CRTC changes its rate-setting process, what should it do about wholesale providers' current rates?

Simplifying the rate structure

Prior to the Decision, the CRTC used a cost study to determine the appropriate wholesale rate for each new speed offering from a provider. In the Decision, the CRTC considered two new approaches: fixed access and speed-banding:

  • In a fixed access approach, prices would not be based on speed tiers. Instead, one rate would cover all speeds by averaging the overall cost of accessing the entire wholesale service.
  • A speed-banding approach, by contrast, would continue to set access prices based on speed tiers. This approach would have two components: a base "access rate" identical to the fixed access method, and a "speed rate" that would apply to all services speeds within a given range.

The CRTC decided that the status quo approach (i.e. where the rate of each service is based on an associated cost study) was too burdensome to implement and created too much uncertainty, since it required that rates remain interim for extended periods of time. The CRTC also rejected the fixed access approach because it would conflict with the existing flat-rate billing model.

In contrast, the CRTC found that the speed-banding approach could be adopted for both the flat-rate and capacity-based billing models and, as a result, adopted it. Going forward, cost studies will only by required when a wholesale provider introduces a new service speed outside the approved speed-bands or when costs have materially changed. Introducing a new speed within an approved speed-band now requires only a simplified tariff notice application without a supporting cost study.

Cost assumptions, part I: traffic growth

At the time of the Decision, the CRTC set rates based on an assumption that Internet traffic would increase by 20% annually. Several parties argued that annual Internet traffic growth per end-user had actually increased significantly beyond 20%, and as a result a key assumption supporting the wholesale rate cost studies was no longer accurate.

The CRTC agreed. Relying on industry white papers, the CRTC modified the growth rate assumption, finding that it would be reasonable to set the annual busy-hour Internet traffic growth rate for Canada at 32% annually for the purposes of cost studies in support of new service speeds. There was an introductory period of two years in which service providers were to include annual growth rates consistent with historical levels, followed by a 32% per annum growth rate for each of the remaining years of the study period.

Cost assumptions, part II: capital costs

At the time of the Decision, the CRTC also set rates based on an assumption that telecom equipment costs would decrease by 10% annually. The CRTC determined that the price of telecom equipment is decreasing faster in 2016 than it did in when the rates were set in 2011, and accordingly revised its assumptions about rates of price decrease. Going forward, the new decrease rate for annual capital unit costs for traffic-driven equipment will be 26.4%.

Should the study period be changed from the current ten years to a shorter period?

At the time of the Decision, a cost study that a wholesale provider submitted to support a new speed offering was required to take into account a ten-year window. In 2011, the CRTC had decided that adopting a shorter study period would not allow the significant startup costs associated with introducing wholesale broadband Internet services to be spread over a long enough period. However, given that wholesale speed offerings change rapidly, and many service offerings do not have a lifespan of more than five years, the CRTC found that a ten-year study period was no longer appropriate. Rather, a five-year study period would reflect the rapid evolution of Internet technology, more accurately reflect cost and service demand forecasts, and make it possible to update actual costs and traffic usage in a more timely way. Accordingly, effective immediately, cost studies in support of new wholesale offerings must take into account a five-year window.

Pricing traffic-sensitive telecom equipment

The cost model for wholesale HSA services is composed of two broad categories of costs: access costs, which comprise all costs associated with end-users' access to the network, and usage costs, which comprise the costs incurred in moving data through a wholesale provider's network. The CRTC recognized that the amount of traffic over the network ultimately determines usage costs: the more traffic increases, the higher the cost. However, wholesale providers and competitors disagreed over whether Internet traffic affects access costs as well as usage costs. Some wholesale providers argued that the distinction between usage and access costs was artificial: their position was that all kinds of telecom equipment are sensitive to usage, whether or not the purpose of the equipment is to facilitate user access to the network or to move data through it.

In making its determination, the CRTC noted that the capacity-based billing model already factors in the effect of traffic on usage-sensitive equipment. As a result, the CRTC found that wholesale providers must still ensure that when calculating the access portion of their cost model, only non-usage sensitive equipment must be accounted for.

What to do about interim rates?

Prior to the Decision, when a wholesale provider offered a new speed tier without an associated cost study, the CRTC assigned interim rates to these offerings rather than prohibit competitors from using them until a cost study could be submitted. The interim rate was set at the price for the next-lowest speed available. Some parties submitted that these interim rates be formalized into final rates. The CRTC disagreed. Instead, the CRTC said that it will include the interim rates in its calculation of speed-band rates. Once the speed-bands are implemented, the same rate will apply to all speed offerings within a given band.

What to do about current wholesale rates?

With the rate-setting process now fundamentally altered, the CRTC announced that all currently-implemented wholesale rates were now no longer considered just and reasonable. As a result, the CRTC made all current wholesale rates interim until wholesale providers submit new tariff applications reflecting the new changes. The CRTC has given wholesale Internet access providers 45 days to submit new tariff applications for banded non-legacy wholesale HSA speeds. The CRTC also directed wholesale Internet access providers that use the capacity-based billing model to file the updated monthly capacity charge per Mbps within 45 days of the Decision.

To view the original article please click here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions