Industry Committee on Feb. 3rd, 2011

[The Chair, Conservative, David Sweet]

Good afternoon everyone.

Good afternoon, ladies and gentlemen. Welcome to meeting 54 of the parliamentary Standing Committee on Industry, Science and Technology.

We have with us today, from the CRTC, Mr. Konrad von Finckenstein, as well as Len Katz and Lynne Fancy.

We're ready to roll. I will leave it to you, Mr. von Finckenstein, for your opening remarks of approximately 10 minutes.

[Konrad W. von Finckenstein, Chairman, Canadian Radio-television and Telecommunications Commission]

Thank you very much, Mr. Chairman.

First of all, I have copies of my opening statement, but my communications person is downstairs in the security line-up. You will have them very shortly. I apologize for that.

As you know, we are in the middle of a hearing of Bell's takeover of CTV. We had to scramble to put this hearing in and get the documents done, so it's a last-minute job. I apologize that it's not here.

I recognize that the members of this committee, as well as Canadians, are concerned about our decisions regarding usage-based billing for Internet services. I am pleased to have this opportunity to clarify the CRTC's position in a very public debate over Internet services and to clear up a few misconceptions.

The Internet is a driver of innovation and the backbone of a modern economy. It is vital that Canadians have access to it, and most of them can choose between different Internet service providers. The market is dominated by what many have called a duopoly: large telephone companies such as Bell Canada and Telus on the one hand, and cable companies such as Rogers, Shaw and Videotron on the other. These large distributors have built extensive networks and continue to invest in them.

For example, during the recession of 2008 and 2009, Bell and Telus invested $8.7 billion to extend and upgrade their wireline network.

There are also a number of small Internet service providers, ISPs, that serve approximately 6% of the market. That represents 550,000 subscribers, of which 76% are residential customers. That's 550,000 subscribers out of a total of 9,000,000 subscribers in Canada. Despite offering innovative service and real competition, these small ISPs mostly rely on large distributors' networks to reach their residential customers.

The Internet market has evolved primarily through the efforts of a competitive and dynamic industry. This has been achieved by relying, as much as possible, on market forces. The commission only intervenes if there is clear evidence of market failure.

Let me emphasize that we do not regulate the price of Internet service, whether it's offered to residential or business customers. We also do not set download limits, which are commonly referred to as caps. However, we have established rules to ensure that small ISPs are not squeezed out of the market.

Therefore, large distributors must, one, provide wholesale Internet access to small ISPs at a cost plus a prescribed mark-up, effectively allowing those small ISPs to price their offerings competitively; and two, provide this access at the same speed as that offered through large distributors to residential customers.

Without these two rules, the large distributors could limit the wholesale service to the slowest speeds or make them unattractive to small ISPs in other ways. The commission stepped in to make certain they could present comparable and even different features to consumers.

Earlier this week, Mr. George Burger, a representative of a small ISP, TekSavvy Solutions Inc., appeared on CBC News and stated:

If you did away with all the CRTC regulations, then frankly, you would be left with the duopoly [ ... ] of the cable companies and the telecom [companies].

In recent years, convergence has become a reality and the way Canadians use the Internet has changed tremendously. More bandwidth is being eaten up by consumers who are accessing information, downloading or streaming music and video content, or playing online games. This demand causes congestion on networks, which can push the available bandwidth to its limit.

The commission looked at the situation, and in 2009, developed a comprehensive regulatory approach for Internet traffic management. Let me remind you briefly of its key elements.

First, when congestion occurs, an ISP 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.

Two, realizing that network upgrades are not always the most practical solution, we indicated that if it is necessary to manage Internet traffic, it should be done through transparent economic means.

Three, traffic shaping and other technical means should only be employed as a measure of last resort, in which case customers should be made aware of them ahead of time.

Now you should know that nearly all large distributors have introduced usage-based billing for their residential customers--Bell, for example, adopted this billing practice in 2006. And I would like to point out that usage-based billing applies only to residential customers; it does not apply to business customers. As a result, large users, such as those who watch a lot of high-definition movies and television shows online, pay higher rates than those who simply send e-mails or visit social networking websites. Customers who exceed monthly limits are usually subject to an extra charge, though many providers allow users to buy additional capacity for a small fee.

All lSPs advertise their rates, bandwidth caps, and the additional usage charges that apply. Consumers can shop around for a plan that best meets their needs. Internet services are now sold like other public utilities, such as water, gas, and electricity.

As we reported in our most recent Communications Monitoring Report, Canadians used on average 15.5 gigabits per month in 2009. Most users fall within the caps currently set by large distributors, and they would not be charged unless their monthly usage increased dramatically. I'm sure most of you are customers of large distributors and therefore subject to such caps.

It's also worth noting that a very small percentage of consumers are heavy Internet users. According to information provided by Bell Canada, less than 14% of users are responsible for more than 83% of Internet traffic. Let me repeat those numbers because they are key. According to information provided by Bell Canada, less than 14% of users are responsible for more than 83% of Internet traffic.

Let me now address our usage-based billing decisions. I would ask that you keep in mind that this billing practice applies only to residential customers and not to businesses. In March 2009, Bell Aliant and Bell Canada asked permission to impose usage-based billing on their wholesale customers--the small ISPs. Bell wanted to create economic incentives for users to stay within their bandwidth caps and ensure that those who use more bandwidth pay their appropriate share.

I see that the statement has finally arrived, so for your information I'm on page 6.

Following a lengthy process that resulted in a series of decisions, the commission decided as follows. We granted large distributors permission to adopt usage-based billing for their wholesale customers. We imposed as a condition that before they could move their wholesale customers to usage-based billing, large distributors would have to adopt the same billing practice for most of their own residential customers, with the exception of certain grandfathered subscribers. And lastly, the commission examined the rates that large distributors charge their own residential customers when they exceed bandwidth caps and determined that they can only impose 85% of that rate onto their wholesale customers.

In short, our decisions were based on two fundamental principles: ordinary Internet users should not be made to pay for the bandwidth consumed by heavy users, and smaller ISPs offer competitive alternatives to the large distributors and it's in the best interests of consumers that they continue to do so.

I would like to repeat these principles in French.

In short, our decisions were based on two fundamental principles. First of all, ordinary Internet users should not be made to pay for the bandwidth consumed by heavy users. Secondly, small ISPs offer competitive alternatives to the large distributors, and it is in the best interest of consumers that they continue to do so.

As you know, our decisions were set to take effect on March 1, 2011. We have since received from Bell Canada a request that we delay the implementation date by 60 days. A party from our last proceeding, Vaxination Informatique, has also filed a request for a delay.

In light of these requests and the evident concerns expressed by Canadians, the commission decided yesterday to, one, delay the implementation of usage-based billing for wholesale customers by at least 60 days, and two, to launch, on our own motion, a review of our decision to verify that: (a) it protects consumers; (b) those who use the Internet heavily pay for their excess use; and (c) small ISPs retain maximum flexibility and continue to be a key source of innovation in the industry.

I would like to reiterate the commission's view that usage-based billing is a legitimate principle for pricing Internet services. We are convinced that Internet services are no different from other public utilities, and the vast majority of Internet users should not be asked to subsidize a small minority of heavy users. For us, it's a question of fundamental fairness. Let me restate: ordinary users should not be forced to subsidize heavy users.

We are convinced that Internet services are no different than any other public utilities, and the vast majority of Internet users should not be asked to subsidize a small minority of heavy users.

For us, it is a question of fundamental fairness. Let me restate: ordinary users should not be forced to subsidize heavy users. In addition, we want to be absolutely certain that the modalities we have established are the most flexible under the circumstances and do not hinder innovation or harm small ISPs.

A document outlining the terms of the review will be posted on our website this coming Monday.

We would now be pleased to answer your questions.

[The Chair, Conservative, David Sweet]

Thank you, Mr. von Finckenstein.

Now we'll go to our regular rotation of questions. The first round is seven minutes.

We'll go to the Liberal Party, to Mr. Garneau, for seven minutes.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

As we know, Mr. Clement and the Prime Minister, or should I say Mr. Soudas, like to notify the world of their decisions via their Twitter accounts. I would like to think that you were notified officially of some of the things that Mr. Clement and the Prime Minister have been talking about via their tweets. I hope that's the case.

I want to say that I have great respect for the CRTC. I believe it's an important institution. Of course, to fulfill its mandate it does occasionally require direction from government, and that takes into account the rapidly evolving technical world in which we live. I believe, for example, the CRTC made the right decision with respect to Globalive in the case of the wireless spectrum auction.

Unfortunately, I think, in the absence of any leadership from this government on such very fundamental issues as their commitment to net neutrality, their view of open e-government, their direction with respect to foreign investment in the telecom sector, and the importance of providing high-speed Internet to all Canadians, it is very difficult for you to carry out your task and to interpret your mandate. So I view the situation today as primarily one of a lack of leadership on the part of the government.

Having said that, we all saw the tweet that came from Mr. Clement that basically said if you don't reverse your decision, then he's going to reverse it.

Mr. von Finckenstein, what do you intend to do as a result of that tweet?

[Konrad W. von Finckenstein]

You made a whole bunch of statements, Mr. Garneau. Let me just set the record straight.

We made this decision yesterday at around five o'clock. I was on the phone with all my fellow commissioners, and we decided, in light of the considerable concern that had arisen in light of the two requests for delay, and in light of.... You know, we don't have a monopoly on this, and we can always approach things differently. As several editorials suggested, the message we adopted was only one of several possible and that it would probably be wise to initiate a review of various decisions. That's what we did. We brought it up.

I then informed the deputy minister of industry, as a courtesy, about an hour and a half later, saying, “Look, it has always been my policy, as a civil servant of 35 years, not to catch your minister by surprise, so you should know that this is what I am going to announce at the committee tomorrow.” That was it. That's the only communication I've had with the minister or anybody in government.

So the decision here to review, as I stated, is self-initiated, and we did it in light of the request by Bell, which, after all, wants to implement usage-based billing. They said to please delay it for 60 days. Since they wanted the delay, and the ISPs definitely wanted the delay, we said, “Let's take the opportunity and make sure we got it right.” We believe the principle is right. Are the modalities right? That's what we're going to re-examine.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You said, and it's very good, that you don't like to catch your minister by surprise. Did he catch you by surprise?

[Konrad W. von Finckenstein]

Do you mean with the tweet? I didn't follow his tweet. I read it this morning in the paper.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Did he notify you officially before he put out that tweet that...?

[Konrad W. von Finckenstein]

I told you that I have not had any communication with the minister of any kind.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

You talked about competition. You talked about innovation in your opening statement. Does your mandate specifically say anything about the importance of competition to allow...?

Obviously, in this case, we're talking about small ISPs that lease services from large ISPs and the fact that this mandated situation allows small ISPs to compete to bring about innovative services that ultimately are good for the consumer. Is that something that is in your mandate specifically?

[Konrad W. von Finckenstein]

Yes, the Telecommunications Act charges us to ensure that we have a healthy, vibrant communications system that serves all Canadians. We also have direction from the government, as you know, to rely on market processes as much as possible and to only intervene when there is market failure.

With the structure of the Canadian market being, as I mentioned in my opening statement, essentially a duopoly between the telcos on one side and the cable companies on the other side, we came to the conclusion that to have some competition we needed mandated access. That's why we mandated access to the wholesalers. We mandated that it had to be at the same speed as what the big companies provide their own retail companies and it had to be at a discount so that they have a margin to compete.

We are fully aware that innovation happens at the margins, and the small players are probably the most innovative ones and the ones who come up, by necessity, with new ways. Therefore, we very much see it as part of our mandate to make sure that they are part of the market and have space to live in and function.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Bell proposed using their cap, and you agreed with that for the small ISPs. Why did you think the caps the large ISPs proposed were at the right level?

[Konrad W. von Finckenstein]

We don't set caps. We don't set any caps whatsoever.

The wholesalers picked this cap for themselves. Those are the caps they apply to their own users.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

With respect, you accepted the caps they proposed in this particular instance. I know that you don't set specific caps, but you accepted the ones they actually proposed, in this case.

[Konrad W. von Finckenstein]

We say you have to treat your wholesale customers like you treat yourselves. That's the basic principle. They impose a cap on their users. If you are a Bell customer user, you are subject to a cap right now. We said that if you resell, don't make it any harsher; it has to be equivalent.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You did not feel that this would stifle competition.

[Konrad W. von Finckenstein]

No, on the contrary, we specifically provided not only that they have to impose the same cap but that the retail price has to be at a 15% discount so that there is room for the small ISPs. Obviously they asked for more. That's a question you may want to look at. Our whole intent all along was to make sure that the small ISPs remain there as a competitive edge, to discipline the large companies.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. von Finckenstein.

Thank you, Mr. Garneau.

Now we'll move on to the Bloc Québécois. Monsieur Cardin, vous avez sept minutes.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair. Good afternoon and welcome to the committee.

I will get straight to the point of the issue that concerns me. In 2009, the CRTC released telecom regulatory policy CRTC 2009-657. This policy pertained to Internet traffic management and its main purpose was to prevent congestion. However, we are being told that user-based billing also strives to prevent congestion.

Does that mean that your 2009 regulatory policy was ineffective? Is the network currently experiencing this absolutely terrifying congestion?

[Konrad W. von Finckenstein]

Not at all. It makes perfect sense. If you read page 4 of the statement I gave this afternoon, you will see that the first measure taken to deal with congestion was to broaden the network. If this measure alone is inadequate and we don't have the necessary means, we then have to use economic measures. User-based billing is exactly that. It is a way to discipline usage. Finally, if these two approaches do not work, we can turn to technical means.

That was our general policy. We are going to try a test, namely, we are going to use economic measures in order to discipline Internet usage.

[Serge Cardin, Bloc, Sherbrooke, QC]

We know that there has been increasingly phenomenal advances made in the Internet and that we can now do streaming. Sites such as YouTube or TOU.TV use temporary downloads in order to stream.

Do you think that your recent telecom decision CRTC 2010-802 encourages technological development or do you think that it may limit consumer interest for this type of site?

Moreover, given that one of the principles put forward by the CRTC in its Internet traffic management policy was innovation, do you think that your recent decision, which deters streaming, may in fact be incompatible with your 2009 policy?

[Konrad W. von Finckenstein]

Not at all. I believe that it is primarily the market that encourages companies to develop. They will do the developing. They will contribute technological development and promote development in society. As you said, we now have streaming. People watch Netflix via the Internet. Obviously, this results in heavy use of the Internet, which prompts companies to invest and expand.

The decision on traffic that you are referring to clarifies what is legitimate and stipulates, for Internet providers, what they can do to manage their network in order to maintain integrity. As I said, only a small minority of people are heavy users of the Internet, which creates problems.

[Serge Cardin, Bloc, Sherbrooke, QC]

In the order in council providing instructions to the CRTC on the implementation of the Canadian telecommunications policy, namely P.C. Order 2006-1534 of December 14, 2006—which we commonly refer to as the Bernier order—the Conservative government asked the commission to rely, as much as possible, on free market forces as a way of achieving the objectives set out in section 8 of the Telecommunications Act.

Does telecom decision CRTC 2010-802 comply with this government request? If so, could you explain how?

[Konrad W. von Finckenstein]

This order in council asks the CRTC not to intervene unless there is a market failure. Our entire policy is aimed at keeping the small ISPs in the market and in faciliting wholesale Internet access for ISPs so that there will be some competition. I believe that these measures fully comply with the instructions given by the government. At the same time, we realize that there are problems, namely, some people use the service more than others and it is not fair for heavy users to be subsidized by the smaller ones. Let's look at all of the markets. Take, for example, wireless. Usage is not unlimited. There is a basic package and, if someone exceeds the time allowed by the package, an additional amount has to be paid. We do the same thing with electricity, oil, etc. We are trying to apply this principle to small providers. The big providers already do this with their own clients. Now we want to try to broaden this approach.