Industry Committee on Feb. 10th, 2011

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen.

Good afternoon and welcome to everyone.

Welcome to the 56th meeting of the Standing Committee on Industry, Science and Technology. Before us we have the following witnesses: from the Canadian Network Operators Consortium, Bill Sandiford and Christian S. Tacit; from the Union des consommateurs, Anthony Hémond; from the Canadian Association of Internet Providers, Monica Song; from MTS Allstream, Teresa Griffin-Muir; and via video conference Steve Anderson, from OpenMedia.ca, who has not joined us yet.

We'll proceed in the order on the orders of the day, ladies and gentlemen.

Mr. Sandiford, go ahead for five minutes, please.

[Serge Cardin, Bloc, Sherbrooke, QC]

Mr. Chair, I have a small question regarding the motion that I sent to the clerk. I would like to know whether the committee wishes to discuss it before the end of the meeting. That would mean that we would have to set aside 15 to 20 minutes at the end of the meeting to discuss the motion.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

We don't have time.

[The Chair, Conservative, David Sweet]

I'm always at the behest of the committee. However, I have to say that we have a large group here for only one hour, Monsieur Cardin. Then we have only 45 minutes for the final group. If we take--

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I think actually it might take ten seconds, so maybe just read the motion. I think we'd be okay with that, because we're not opposing it.

[The Chair, Conservative, David Sweet]

Okay.

Read your motion, Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

We can deal with this in very little time, Mr. Lake. I would be very grateful if we could do this, particularly as far as the witnesses are concerned, because I do not necessarily want to disrupt the proceedings of the meeting. I do not know whether my colleagues received this motion.

[The Chair, Conservative, David Sweet]

Just go ahead.

[Serge Cardin, Bloc, Sherbrooke, QC]

The motion reads as follows:

In order to complete the hearings of the witnesses under its study on the recent CRTC'S decision on Internet services billing, that the committee hold a fourth meeting in order to hear the Minister of Industry and the department officials.

[The Chair, Conservative, David Sweet]

Ladies and gentlemen, you've heard the motion. Do we have agreement? I thought so.

(Motion allowed to stand)

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, colleagues.

[The Chair, Conservative, David Sweet]

We'll put it in the schedule. We've now completed our business very quickly.

Go ahead, Mr. Sandiford, for five minutes.

[Bill Sandiford, President, Canadian Network Operators Consortium Inc.]

Mr. Chair and committee members, thank you for giving us the opportunity to appear before you today.

My name is Bill Sandiford. I am the president of CNOC, and also president of Telnet Communications, a mid-size competitive Internet service provider. Accompanying me is Mr. Tacit, counsel to CNOC.

The appendix to this presentation gives some background information on CNOC. We will not discuss the many problems caused by the CRTC's usage-based billing decisions that have already been adequately addressed by others, but there are some additional issues we would like to raise.

Bell has threatened many times in the regulatory and political forums that if it does not get its way, it will reduce its investment in its networks. This has never happened before, and the opposite is true.

Bell must invest to keep up with what the cable carriers are doing. Bell's recent public statements to the effect that investment in broadband networks and services is one of its strategic imperatives is sufficient proof of this.

Competition results in investment. Usage-based billing on wholesale service is the artificial tool that enables Bell to defer investing in its network by repressing competition and, in so doing, demand for bandwidth.

Regulators from other countries have not accepted Bell's approach and the CRTC should not be doing this either.

No other major incumbent telephone company has applied UBB to wholesale services. While the four major cable companies have had the ability to charge for usage for years, none but Vidéotron has actually done so historically for wholesale services.

The other point we wish to raise is that Bell's Internet traffic measurement techniques are not transparent to competitors or end-users, and are prone to errors that have led to overbilling.

So you may ask how we got to this point. The answer is that framework for regulating wholesale high-speed services is broken. There are two main reasons for this. First, the CRTC treats these services as if they are used by competitors to deliver only Internet access to their end-users. This may have been true in the past, but the situation is vastly different now. Incumbent wholesale high-speed services now constitute the broadband platform that competitors need to offer almost all telecommunications and broadcasting services to consumers today and for the foreseeable future.

The second problem is that the wholesale customers of the incumbents are not viewed by the CRTC as being of equal stature with the incumbents when it comes to competitive issues.

CNOC suggests that wholesale broadband access services should be regulated as a broadband platform that can support many types of retail services instead of being regulated by comparison with or forced to mimic the retail Internet services of the incumbents; configured in a manner that allows competitors to choose the attributes of the services provided to consumers, such as speed, throughput, quality of service, type of service, aggregation, bundling, etc.; and priced so as to allow only incumbents to recover the associated costs of providing the services, plus a reasonable and consistent mark-up that recognizes the essential nature of these services.

The CRTC should also require incumbents to provide competitors access that is fairly priced to new network capabilities and facility types as soon as these become available and are deployed by the incumbents to provide services to their own end-users. Otherwise, competitors will fall behind and competition will be unduly lessened.

If this regulatory framework is adopted by the CRTC on a going-forward basis, determinations such as the recent UBB decisions will never be made again.

The notice of consultation issued by the CRTC on Tuesday does not address the core problems with the current regulatory framework for wholesale services. In fact, the questions posed by the CRTC in the notice are unclear and raise the prospect of retail regulation of Internet services, which would be a step backwards.

We hope that the CRTC will amend the notice of consultation to deal with these broader concerns in a clear manner as quickly as possible. A principled and consistently applied wholesale regulatory regime will lead to vibrant retail competition. Canada cannot afford to continue with the status quo.

There is one final topic that I would like to address. We have heard Mr. Bibic from Bell consistently talking about their billions of dollars of investments in their network. To Mr. Bibic we say, “You're welcome”. The competitive ISPs in Canada spend hundreds of millions of dollars with Bell every year. We are sure that our expenditures are well used by Bell and the other incumbents for their capital needs.

We would like to thank the Government of Canada and this committee for addressing these important issues. We welcome any questions you may have.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Sandiford.

Monsieur Hémond.

[Anthony Hémond, Lawyer, Analyst, policy and regulations in telecommunications, broadcasting, information highway and privacy, Union des consommateurs]

I would like to thank the committee for inviting me to testify. My name is Anthony Hémond, and I am a lawyer and analyst in telecommunications with the Union des consommateurs.

The Canadian Radio-television and Telecommunications Commission said the following about usage caps that Bell Aliant and Bell Canada want to impose on independent providers and their clients: “[...] the Bell companies' proposals would incite heavy end-users to reduce their usage, including during peak periods”.

However, the usage caps as proposed by the Bell companies would not in anyway incite users to reduce their Internet use during peak periods, since the application of these caps is not based on the usage period, but on a monthly period.

It has been established that usage caps such as the ones that have been proposed do not in any way serve as an incentive to encourage users to reduce their usage of bandwidth, as indicated in the Bell companies' proposals in their tariff applications approved by the commission. Moreover, this tariff application pertained to the Internet service that is most popular with consumers.

When you look at the graph that I provided in my presentation, you can see that the users whose bandwidth usage is between 80 and 300 gigabytes have no incentive to reduce usage and, incidentally, low users are billed excessively high amounts.

We would also like to draw the committee's attention to the cost billed for bandwidth. It was set at $1.125 per gigabyte for service which was at that time a 5-megabyte service per second, whereas the market price was 3¢ per gigabyte. The Bell companies were asking up to $1.875 per gigabyte, which is 60 times greater than the market price. Accordingly, the lowest resale price imposed by Bell represents seven times the cost of purchasing a gigabyte.

According to the chair of the CRTC, who repeated this during his testimony before the committee “[...] less than 14% of users are responsible for more than 83% of Internet traffic”. Understand that this data pertains to traffic and not network capacity. In other words, it is possible, on this basis, to conclude that small users are subsidizing heavy users who are already being charged seven times the actual cost.

Despite what is being said, there was never any explosion of average bandwidth use on the Bell network from 2002 to 2008. Indeed, growth was linear and extremely predictable, as shown by the graphs in my presentation.

The chairman of the CRTC, in testifying before this committee, spoke about the “over-the-top” services on the Internet. He was referring in particular to services such as Netflix, or TOU.TV, namely the provision of broadcast services over the Internet. These services are in direct competition with those provided by Bell, whether it would be satellite Bell TV services or IP television services for which the Bell companies are offering unlimited Internet use monthly packages.

I would respectfully submit that it is because of technological development and innovation that these Internet usages are now commonplace and desirable.

The usage caps imposed by Bell companies, that they want to force their competitors, namely the independent ISPs to adopt, would hinder the development of IPTV services by independent providers, and it would also hamper the development of other innovative services that may be part of tomorrow's Internet landscape. Bell's proposals are, in many respects, anti-competitive and likely to limit innovation.

Today it is obvious that the Bell companies are in a position of conflict of interest because of their vertical integration, making them both a retail Internet service provider and a wholesale provider to broadcast distribution undertakings. This phenomenon will be even more in evidence with Bell's purchase of CTV.

The order in council that provided the CRTC with instructions on the implementation of Canada's telecommunications policy is, amongst other things, the reason behind the CRTC decision regarding usage-based billing.

Under this order in council, the CRTC, when making regulations, must take measures that are symmetrical and neutral as far as competition is concerned. The commission is justifying its decision to authorize Bell to force Internet service resellers that use its network to impose usage limits on their clients because the cable companies use the same practices. However, this justification fails to consider the technological differences that exist between these two networks, which to a certain extent could justify cable companies' imposition of usage caps.

We will reiterate how surprised we were by this CRTC decision to impose Bell commercial practices on resellers without any regard for the competition rules that the CRTC is supposed to be protecting, and which regulate the relationship between competitors and their clientele. The CRTC has decided to abstain from regulating this aspect of telecommunications.

Given the desire of the Bell companies to impose their business model, namely to limit usage, and the support that the CRTC appears to be giving to Bell's proposal, we would urge the committee to study solutions that may resolve part of the problem, namely, the functional separation of the Bell companies.

This is a solution that both Great Britain and New Zealand agreed to adopt, and that the European Union integrated in its directive pertaining to telecommunications services:

The purpose of functional separation, whereby the vertically integrated operator is required to establish operationally separate business entities, is to ensure the provision of fully equivalent access products to all downstream operators, including the operator's own vertically integrated downstream divisions. Functional separation has the capacity to improve competition in several relevant markets by significantly reducing the incentive for discrimination and by making it easier to verify and enforce compliance with non-discrimination obligations.

The results of functional separation in the United Kingdom and in New Zealand must be underscored:

Functional separation was followed by a flurry of investment activity by entrants, resulting in the strengthening of competitors Carphone Warehouse, Tiscali UK, and BSkyB, and their shift to competing over more flexible unbundled loops instead of almost solely through wholesale offerings. Prices fell by over 16% each year between 2006-2008. Between the last quarter of 2006 and that of 2008 New Zealand saw its penetration per 100 rates jump, surpassing those of Austria, Italy, Spain, and Portugal; it saw speeds increase more than in any other OECD country, and the primary competitor to Telecom New Zealand, TelstraClear, invested in its own fiber ring connecting all of South Island's towns.

During this time in Canada:

As of September 2008, the monthly price of an unbundled local loop in Canada, excluding prices for remote areas or the densest downtown areas in terms of PPP, purchasing power parity, was roughly 70% higher than in South Korea and Denmark; almost 50% higher than in Italy; 30% higher than in Japan, France, or Norway; and 25% higher than in Finland or the U.K. Indeed, Canada has the highest monthly charge for access to an unbundled local loop of any OECD country.

[The Chair, Conservative, David Sweet]

Monsieur Hémond, on instruction of the committee, I've given some leeway, but we're way over time, so I'll need to move on to the next witness.

[Anthony Hémond]

Okay.

[The Chair, Conservative, David Sweet]

Now on to Monica Song, for five minutes.

[Monica Song, Counsel, Fraser Milner Casgrain LLP, Canadian Association of Internet Providers]

Good afternoon.

My name is Monica Song. I am counsel to the Canadian Association of Internet Providers, or CAIP.

CAIP thanks the committee for this opportunity to appear before you today.

The chairman of CAIP, Mr. Tom Copeland, has been called away on a personal matter and asked me to express his sincere regrets for not being able to appear before you personally today.

The Canadian Association of Internet Providers was formed in 1996 to provide effective advocacy and leadership respecting public policy and regulatory and judicial proceedings affecting the ISP industry. Subject to any questions you may have, CAIP would like to focus on three specific points, with a view to re-establishing the trust of Canadians in the industry and the regulatory process.

First, the true measure of telecommunications services is the network's peak-period bandwidth requirement, expressed in kilobits per second, megabits per second, or gigabits per second. Competitors already pay their proportionate share of the costs of provisioning to the network's peak-period bandwidth requirement.

Second, given that all costs associated with the provision of wholesale gateway access services access costs are already fully recovered, along with very healthy markups, there is no principled basis to authorize wholesale UBB. We want a rational tariff based on wholesale pricing principles that the CRTC has always followed, until now.

Third, we hope that the commission has resolved to go back to the drawing board and rethink the appropriateness of wholesale UBB charges. The commission's so-called “retail equivalence principle” is anti-competitive and arbitrary, and must be shelved in favour of established wholesale costing principles.

Bandwidth constraints are the true measure of network value. It's important to understand what usage means and how it relates, if at all, to the true costs of designing and building a telecommunications network, and therefore whether anyone is heavy or light or getting a free ride.

All IP-based services are defined in terms of bandwidth, or the rate of data transfer, measured in kilobits per second, megabits per second, or gigabits per second. When a retail customer orders an Internet access service or a private network service, or any number of other IP-based services, the customer will be asked to select from the available speed restriction of the service. In the case of Internet services, for example, the retail customer will be asked to select a speed of between say 500 kilobits per second or 25 megabits per second.

Thus, a person who has already migrated to the Internet as his or her preferred video content delivery mechanism, a scientist who wants to exchange huge scientific data sets with a graduate student or fellow scientist across the country or on the other side of the world, or a grandparent in a far-flung area of Canada who wants to video-Skype his or her grandchild in Ottawa will definitely find a 500 kilobit per second connection painfully slow and will order higher-speed services. However, no matter how hard the customer tries, he or she will never be able to exceed the preordained bandwidth of the service ordered. The service is therefore constrained or capped at its preordained speed. And the price of the service increases in proportion to the speed ordered. The higher the speed; the higher the price. In this sense, every IP-based service is already priced to reflect bandwidth intensity.

Carriers and network operators the world over design and invest in their networks based on projected total bandwidth requirement at peak periods—the peak-period bandwidth requirement. This is the true measure of telecommunications services and of the way in which telecommunications networks are planned and built. In contrast, and not to be confused, is usage in association with usage-based billing. Usage in this context refers to the number of bits of data that are transferred over a given end-user connection, usually over the course of a month. Usage is expressed in bytes, as opposed to bits.

As concerns wholesale access services, such as Bell's GAS, in addition to the foregoing bandwidth cap, competitive ISPs are doubly constrained by a further aggregated bandwidth restriction, which is also preordained and paid for in bits per second. Bell’s own responses to commission interrogatories make it abundantly clear that the only way that costs associated with the wholesale GAS access service may be derived is on the basis of peak-period bandwidth, expressed in this case in kilobits per second.

The commission found that Bell already recovers all costs, plus prescribed markups, that are associated with the provision of GAS from the pre-existing rates for the wholesale GAS access service. Wholesale UBB charges are therefore pure gravy.

In the interests of time, I will summarize my second point, which is that we want a rational tariff based on wholesale pricing principles that the CRTC has always followed, until now. They've abandoned that in the case of wholesale UBB. And we’d like a return to established wholesale pricing principles.

CAIP's third point: the commission's equivalence of treatment principle must be shelved. The commission abandoned wholesale pricing principles and instead based its approval of wholesale UBB charges on its so-called “equivalence of treatment" principle for wholesale services and retail services.

The problems with this approach are manifold. They have all been touched on by previous witnesses but were not necessarily related back to this misplaced equivalence principle.

I have five points, which I will quickly summarize.

[The Chair, Conservative, David Sweet]

Again, we're way over. Hopefully somebody will ask you a question on the five points and you'll be able to do that.

Mr. Wallace said that he would ask you. So you'll be fine in having that laid out later.

[Monica Song]

That's fine. Thank you.

[The Chair, Conservative, David Sweet]

We're now going to Ms. Teresa Griffin-Muir, from MTS Allstream.

[Teresa Griffin-Muir, Vice-President, Regulatory Affairs, MTS Allstream Inc.]

Good afternoon. I am the vice-president of regulatory affairs at MTS Allstream.

MTS is the incumbent telephone company in Manitoba. We offer an array of telecommunications services, including high-speed Internet and IPTV services. Outside of Manitoba we are the leading competitor to Bell and Telus, offering state-of-the-art business services throughout the country.

I'd like to thank the committee for this opportunity to appear before you today to discuss the CRTC's UBB decision.

The CRTC's approval of Bell's proposed usage-based billing for wholesale DSL services further erodes the mandated availability and pricing of wholesale services. As the availability of economically priced wholesale services erodes, so too does consumer choice and the innovation that robust competition delivers.

The CRTC has allowed what amounts to regulator-sanctioned retail price fixing with the UBB decision. The CRTC has done so on the basis of misinformation and misconceptions.

The first misconception is that wholesale UBB is necessary to protect the integrity of the Bell network. The second is that UBB is competitively neutral and transparent because Bell allegedly applies a usage cap on its retail customers' traffic and charges these customers for usage in excess of a cap.

Bell has offered no evidence demonstrating that its network is congested and would fail if steps were not taken, economic or otherwise, to control traffic on its network. Nor did Bell offer any evidence that demonstrated that the traffic of competing ISPs' customers was the cause of any congestion problems. Indeed, the CRTC has acknowledged that there is no cost-based rationale for the manner in which it is allowing Bell to implement wholesale UBB charges.

Moreover, congestion in a telecommunications network is specific to both time and location. No properly provisioned telecommunications network is congested everywhere at all times. Yet the application of usage caps and usage-based billing by Bell on competing ISPs' customers' traffic is applied everywhere and irrespective of the time.

These caps and usage-based charges are sanctioned by the CRTC even though competitor ISPs, when purchasing wholesale DSL service from Bell, purchase not only access to a customer's premises, or the last mile, but also capacity over Bell's network to transmit the traffic generated by all of their customers, or the middle mile.

Having leased and paid for capacity, the ISP should have the right and responsibility to manage its own customers' traffic. By approving wholesale UBB, the CRTC has allowed Bell not only to decide how much capacity a competitor's customer is entitled to, but to charge that ISP for any usage by individual customers in excess of a cap that Bell arbitrarily imposes. This cap is imposed irrespective of whether the ISP has exceeded the overall network capacity it has purchased from Bell.

In effect, Bell is allowed to charge the ISP multiple times for the same capacity. In fact, we demonstrated to the CRTC that a competitive ISP could purchase far more capacity than its end-user customers use in aggregate and still end up paying substantial UBB charges because some of the competitor's customers exceed a completely arbitrary cap.

Through the imposition of a cap and usage charges, Bell will be allowed to dictate the structure and level of retail Internet pricing. In the best case, competitor ISPs will be forced to mirror Bell's pricing. However, today Bell's retail Internet pricing is no longer regulated and the CRTC has neither the oversight nor the visibility to this pricing.

Do I still have time?

[The Chair, Conservative, David Sweet]

One minute.

[Teresa Griffin-Muir]

The CRTC has no way of guaranteeing that Bell is even charging its customers UBB in the same manner that Bell is imposing UBB on competitors for their customers' traffic.

Placing so much discretion in the hands of a dominant market player can only diminish competition and, with it, crucial innovation and investment in Canadian broadband infrastructure and productivity-enhancing applications and services. This outcome is contrary to the stated objectives of government and longstanding telecommunications policy. It is not a good outcome for Canadians or Canadian businesses.

Thank you.