Industry Committee on May 12th, 2014

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen. Bonjour à tous.

Welcome to the 22nd meeting of the Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2), we continue our study on the subject matter of clauses 175 to 192, Atlantic Canada Opportunities Agency and Enterprise Cape Breton Corporation; clauses 239 to 241, Telecommunications Act; clauses 317 to 368, amendments relating to international treaties on trademarks; and clauses 369-370, reduction of Governor in Council appointments, of Bill C-31, an act to implement certain provisions of the budget tabled in Parliament on February 11, 2014.

We have with us today, from OpenMedia.ca, Steve Anderson, executive director. We have from the Public Interest Advocacy Centre, John Lawford, executive director and general counsel, and Geoffrey White, counsel. Mr. Lawford's also here for the Consumers' Association of Canada.

Mr. Anderson, could you please go ahead with your opening remarks, and then we'll go on to Mr. Lawford.

[Steve Anderson, Executive Director, OpenMedia.ca]

Thanks for the opportunity to present to the committee on Bill C-31.

I'm Steve Anderson, the executive director of OpenMedia.ca. We were founded in 2008. We're a civic engagement organization working to safeguard the open Internet. For those who aren't familiar, OpenMedia.ca is perhaps best known for our Stop The Meter campaign that engaged over half a million Canadians on metered Internet billing, or usage-based billing. It is the largest online campaign in Canadian history. In addition to our civic engagement work, we also regularly participate in policy processes and produce policy reports.

My comments today will be focused on clauses 239 to 241, which pertain to the Telecommunications Act.

I'll start with a little bit of context. Canadians are upset that we pay some of the highest prices in the industrialized world for cellphone service. Canada ranks among the 10 most expensive countries within the OECD in virtually every category, and among the three most expensive countries for several standard data-only plans. We rank near last on pricing, yet Canadian operators rank fourth in the OECD in mobile revenues. Mobile usage is growing everywhere in the world, yet carrier revenue per user is going up only in North America, and particularly in Canada.

Last year OpenMedia.ca released findings in our report “Time for an Upgrade”, which showed Canadians face systemic mistreatment at the hands of the big three cellphone providers. Lack of choice in the marketplace is the cause of our woes. The Competition Bureau examined the wireless market for a CRTC submission earlier this year and found that incumbent wireless providers have significant market power, which they define as “the ability of a firm or firms to profitably maintain prices above competitive levels”.

The mistreatment and high prices persist because we have three large incumbent conglomerates, Bell, Rogers, and Telus, that control over 90% of the market. The big three have achieved this oligarchic level of market power because they control upwards of 85% of the spectrum available for use. Much of that was handed to them for free. Spectrum, of course, is the digital highway in the sky that cellphone providers use to deliver wireless service.

I appreciate that the government and opposition parties recognize these facts and have committed themselves to fixing our broken cellphone market. While there has been some positive movement by the CRTC and government to follow through on these commitments, so far prices have increased. In fact, in March each of the providers increased its rates.

In 2008 in the AWS spectrum auction, the government ensured an influx of new cellphone choices for Canadians by dedicating spectrum to new entrants. However, these new entrants did not get the regulatory support they needed to gain the market penetration required to be sustainable. With Telus recently taking over independent provider Public Mobile, Canadians now have actually less choice than they had one year ago.

I'm going to move to the cap on roaming charges that's within the legislation.

The provisions to cap roaming rates in Bill C-31 are a welcome interim step. The measures in the bill will make it so that the big three providers cannot charge new entrant competitors more for roaming than they charge their own customers. This is a welcome step because, as Industry Minister James Moore said, the big three incumbents now sometimes charge new entrants “more than 10 times what they charge their own customers”. There is no way an independent provider can compete with those terms.

To be clear, we're not talking about directly regulating the roaming rates Canadians pay, but rather the cost that independent cellphone providers pay to utilize the big three's spectrum infrastructure. While the measures in this bill do not directly regulate retail service, they should begin to level the playing field between incumbents and new entrants, and thereby have a modest downstream effect of lowering prices for Canadians. These measures should also increase the chance that independent cellphone providers will survive and remain available for wireless customers.

I initially emphasized this as a positive interim step because, one, the bill takes on only one of many unfair impediments to real cellphone choice, and two, it also simply limits the inflation of costs for new entrants to service Canadians rather than going the full distance to ensure players have the same basic costs of delivering service.

Basing infrastructure costs on retail revenue essentially means the new entrants are paying for the cost of access, plus other factors that play into retail price, such as the cost of advertising, branding and promotion; device subsidy; customer support; retail, legal, and regulatory work; network operations; and much else. While the cap is a useful step in the right direction, new entrants should not, in the longer term, be subsidizing the big three.

To have a true level playing field for cellphone service and innovation, infrastructure must be available at a cost-based rate. Thankfully, the CRTC is also in the process of reviewing roaming agreements. I expect the CRTC will establish cost-based rates for roaming, which they have successfully done to some degree for wireline telecom services. If they do not establish cost-based rates, I'm afraid that it will fall to the government to take additional action on this matter.

I want to highlight, to end here—

Yes?

[The Chair, Conservative, David Sweet]

How much longer do you have, because we have two panels and our timelines are pretty tight?

[Steve Anderson]

I have a minute left. Does that work?

[The Chair, Conservative, David Sweet]

Yes.

[Steve Anderson]

I want to highlight that this is a structural issue, the fact that 90% of the market is controlled by three entities. Part of this is that the spectrum made available to new entrants was capped rather than set aside in the most recent auction. Furthermore, Rogers and Shaw have been permitted to sit on new entrant spectrum rather than reauctioning it. The cumulative effects of these developments on access to capital, investment, and customer acquisition for start-ups is significant, leading to what appears to be a cascading effect that has led to the loss of two new entrants.

I'll end by mentioning that we're not just talking about existing new entrants that are having difficulty competing because of these high roaming rates. There are also players like Ting, for example, a company in Toronto that wants to come into the market. It delivers service in the U.S. at very cheap rates, but can't come to Canada because it's being blocked by the big three. So it's not even just the entrants that we have. A range of companies want to start up in Canada, but can't because they're being systemically blocked, and that is—

[The Chair, Conservative, David Sweet]

I'm sorry, Mr. Anderson, but that's all the time we have. We're two and a half minutes over.

Mr. Lawford.

[John Lawford, Representative, Consumers' Association of Canada, Executive Director and General Counsel, Public Interest Advocacy Centre]

Thank you, Mr. Chair.

Mr. Chair, honourable members, my name is John Lawford, and I'm executive director and general counsel for the Public Interest Advocacy Centre, and I'm appearing today on behalf of both PIAC and the Consumers' Association of Canada. With me is Geoffrey White, counsel to PIAC.

We are pleased to comment on the proposed amendments to the Telecommunications Act to set a maximum amount that a Canadian wireless carrier can charge another Canadian carrier for roaming. Our main message today is that it's necessary and positive to address ongoing challenges to wireless competition, in part through wholesale rate regulations, which part of this bill seeks to do. However, we have four specific points to make about this bill.

First, wholesale roaming rates directly affect the way Canadians select and use their wireless devices, and therefore affect competition. Second, presently high domestic retail roaming rates impair the goal of promoting wireless competition, so we welcome efforts to address that threat. Third, the rate formula in the bill, while a step in the right direction, temporarily passes on the same high prices that incumbents can charge their own customers. Fourth, the amendment is an exceptional occurrence, which should not be repeated as it may undermine the authority of the CRTC.

Geoff.

[Geoffrey White, Counsel, Public Interest Advocacy Centre]

On the first point that wholesale roaming fees directly affect the way Canadians select and use their wireless devices and therefore affect retail competition, where unreasonably high wholesale roaming rates, or restrictive terms and conditions are imposed by one carrier on another, these rates are inevitably passed through to consumers as retail charges. Canadian consumers, on their end, are more reluctant to subscribe to carriers if they face significant prices for domestic roaming. Wholesale rate regulation is intended to address this problem.

Our second point is that high roaming rates have been impairing the goal of promoting wireless competition, so we therefore welcome measures to address that threat. As the Commissioner of Competition recently noted, the incumbent service providers have “market power”, and that the marketplace is “characterized by other factors that, when combined with high concentration and very high barriers to entry and expansion, create a risk of coordinated interaction in these markets.” This has been a real problem in recent years with smaller competitors being charged unreasonable, unsustainable roaming rates that were orders of magnitude higher than the rates the big three charged each other for roaming, and higher than rates that even the smaller competitors could get for roaming in the U.S. from major U.S. carriers.

Rightly so, therefore, the CRTC has just held a public proceeding to determine whether the rates being charged for wholesale roaming are unjustly discriminatory under the Telecommunications Act. In addition, the CRTC is in the midst of another public process to examine other broad issues affecting wireless competition, including tower-sharing and network-sharing agreements.

John.

[John Lawford]

Our first point is that the rate formula in the bill, while a step in the right direction towards greater fairness in roaming rates, will pass on the high prices that incumbents can charge their own customers by virtue of their market power.

There are a number of ways that telecom regulators set wholesale rates. What this bill proposes is a simple application of average retail rates to wholesale. Basically the rates being charged to the incumbent's own retail customers become the wholesale rate the competitors will pay so that their customers can roam on incumbents' networks.

This is a rough and ready way to approximate what the going rate is for voice, text, or data, but what it doesn't do and what the CRTC will be doing in an open and public process is assess whether the going rate is fair under the Telecommunications Act, in light of the market power that the incumbents have.

However, we recognize that this may be an acceptable approach in the interim, given the urgency and importance of the issue, as the big three retrench and the remaining competitors struggle or consider whether to even enter the market nationwide.

Our fourth point is that amending the Telecommunications Act before the CRTC has finished its review is not the preferable way to achieve the result being sought. We would have preferred the government to leave the CRTC to pursue its mandate of setting rates and regulating the wireless market. Given the situation described in our first point about the market situation, however, we understand the purpose of the approach and suggest that quick targeted amendments made in the absence of the regulators' full review of issues not become a frequent practice, as it may eventually undermine the authority of the CRTC.

Those are our remarks, Mr. Chair. Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Lawford.

Now we'll go on to our regular rotation. We have four and a half minutes each, in order to stay within the timeframe that we need for the next panel.

Go ahead, Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to our two organizations for being here today and for contributing to our study.

It sounds as if you both agree that it's important that we find ways to deal with the barriers that exist for new entrants to the telecommunications industry. I wanted to ask both of you if you could list the top two or three barriers currently, in your mind, to new entrants in the cellphone marketplace.

[John Lawford]

I'll start.

The number one barrier to new entrants is the spectrum acquisition, not having a good result in the spectrum auction, say, for example in the most recent 700 megahertz. The second one is roaming. The third is tower-sharing. There are some other market elements, but those would be our top three.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you.

Go ahead, Mr. Anderson.

[Steve Anderson]

I agree with John on those.

I also think that phone locking is another issue. The CRTC has put forward its code, which remedies that to some degree, but I think it could use a bit more work.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Why is it important to address and remove the barriers to new entrants? What will be the consequences of doing that, Mr. Anderson?

[Steve Anderson]

I think if we remove the barriers fully.... One thing I didn't get to is that I think we need to ensure that companies like Ting, the Toronto company, and many others that will come to market can get access to that infrastructure. What the CRTC is doing won't necessarily get us there. I think, if we removed those barriers and had cost-based rates, we'd have a plethora of different alternative providers and the rates would come down. We would see something a little bit closer, while still imperfect, to the wireline market where you have at least a little sector of independent ISPs that keep the pricing in check and have different service plans.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

That's great.

Mr. Anderson, you describe the cap on roaming rates contained in Bill C-31 as a welcome step. You also explain that it will have positive downstream effects. Could you elaborate on that please?

[Steve Anderson]

Sure.

It should enable at least the one or two independent providers that are still in existence to survive and hopefully make it to the end of the CRTC process. It will also give them a bit more flexibility in terms of having less cost that they will have to pass on their customers for roaming. So they should be able to modify their prices slightly, but again we're talking about a tweak here. We're going to need something more fundamental, but we could see some lower prices.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Mr. Lawford, you described this as an exceptional occurrence, but it does sound as if you support the measure. Is that correct?

[John Lawford]

Yes, that's correct. We do support the measure, but it's because of a lot of barriers and timing issues with getting new entrants the kind of toehold they need, so it's a necessary measure. I add that on the downstream question you gave to Steve, we also see competition coming from new entrants and regionals that would put together a national program with this roaming and therefore could bring down prices across the board.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you.

Do I have time for—

[The Chair, Conservative, David Sweet]

If you're very quick.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

I think I'll conclude there.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Braid.

Mr. Côté, you have five minutes.