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BEFORE THE CANADIAN RADIO-TELEVISION

AND TELECOMMUNICATIONS COMMISSION

PROCEEDING TO REVIEW ACCESS TO BASIC TELECOMMUNICATIONS


SERVICES AND OTHER MATTERS,
TELECOM NOTICE OF CONSULTATION CRTC 2010-43,
28 JANUARY 2010

EVIDENCE OF
ACCELERATED CONNECTIONS INC.,
RADIANT COMMUNICATIONS CORPORATION,
SSI MICRO LTD.
AND
TEKSAVVY SOLUTIONS INC.

26 APRIL 2010
Table of Contents

Page
1.0 INTRODUCTION ........................................................................................................................... 1

2.0 THE TELECOMMUNICATIONS POLICY OBJECTIVES AND THE POLICY DIRECTION .. 1

2.1 Canadian Telecommunications Policy Objectives .............................................................. 2


2.2 Policy Direction .................................................................................................................. 2

3.0 OBLIGATION TO SERVE ............................................................................................................. 3

3.1 Background to the Obligation to Serve ............................................................................... 3


3.2 ISP Answers to the Commission’s Questions regarding the Obligation to Serve ............ 10
3.2.1 TNC 2010-43, Appendix 4, Paragraph 1 ............................................................. 10
3.2.2 TNC 2010-43, Appendix 4, Paragraph 2 ............................................................. 11
3.2.3 TNC 2010-43, Appendix 4, Paragraph 3 ............................................................. 12
3.2.4 TNC 2010-43, Appendix 4, Paragraph 4 ............................................................. 12
3.2.5 TNC 2010-43, Appendix 4, Paragraph 5 ............................................................. 13
3.2.6 TNC 2010-43, Appendix 4, Paragraph 6 ............................................................. 13

4.0 LOCAL SERVICE SUBSIDY ...................................................................................................... 13

4.1 Background to the Local Service Subsidy ........................................................................ 14


4.2 ISP Answers to the Commission’s Questions regarding the Local Service Subsidy ........ 17
4.2.1 TNC 2010-43, Appendix 4, Paragraph 7 ............................................................. 17
4.2.2 TNC 2010-43, Appendix 4, Paragraph 8 ............................................................. 17
4.2.3 TNC 2010-43, Appendix 4, Paragraph 9 ............................................................. 18
4.2.4 TNC 2010-43, Appendix 4, Paragraph 10 ........................................................... 18
4.2.5 TNC 2010-43, Appendix 4, Paragraph 11 ........................................................... 18
4.2.6 TNC 2010-43, Appendix 4, Paragraph 12 ........................................................... 19
4.2.7 TNC 2010-43, Appendix 4, Paragraph 13 ........................................................... 20

5.0 BASIC SERVICE OBJECTIVE .................................................................................................... 20

5.1 Background to the Basic Service Objective...................................................................... 20


5.2 ISP Answers to the Commission’s Questions regarding the Local Service Subsidy ........ 21
5.2.1 TNC 2010-43, Appendix 4, Paragraph 14 ........................................................... 21
5.2.2 TNC 2010-43, Appendix 4, Paragraph 15 ........................................................... 21
5.2.3 TNC 2010-43, Appendix 4, Paragraph 16 ........................................................... 22

6.0 CONCLUSION .............................................................................................................................. 26


1.0 INTRODUCTION

1. Accelerated Connections Inc. (“ACI”), Radiant Communications Corporation (“RCC”),


SSI Micro Ltd. (“SSI”) and TekSavvy Solutions Inc. (“TSI”) (collectively, “ISPs”) are filing this
evidence in the proceeding initiated by TNC 2010-43.1

2. In this submission, the ISPs address the topics of obligation to serve, local service
subsidy and basic service objective, which are all interrelated. For example, the obligation to
serve leads to the question of what service a carrier having such an obligation is required to
provide. To the extent that the service relates to a basic service, the basic service objective must
be defined. Local service subsidies could, in turn, be employed to fund aspects of the obligation
to serve, including the basic service objective.

3. The balance of this document is structured as follows. Part 2.0 of this submission sets the
context for the balance of this evidence. That context is defined by certain Canadian
telecommunications policy objectives set out in section 7 of the Telecommunications Act2 (“Act”)
and the Governor in Council’s Policy Direction3 (“Policy Direction”). Following that discussion,
Parts 3.0, 4.0 and 5.0 address the obligation to serve, local service subsidy and basic service
objective, respectively in a manner that is responsive to the corresponding questions posed and
context set out in Appendix 4 of TNC 2010-43. Part 6.0 of this submission contains the ISPs’
conclusions with respect to the three issues discussed.

2.0 THE TELECOMMUNICATIONS POLICY OBJECTIVES AND THE POLICY


DIRECTION

4. As noted, Appendix 4 of TNC 2010-43 requires that the issues under consideration be
examined with reference to the relevant Canadian telecommunications policy objectives set out
in section 7 of the Act and the Policy Direction.

1
Proceeding to review access to basic telecommunications services and other matters, Telecom Notice of
Consultation CRTC 2010-43, 28 January 2010, as amended.
2
S.C. 1993, c. 38.
3
Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives,
P.C. 2006-1534, 14 December 2006.
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2.1 Canadian Telecommunications Policy Objectives

5. The Canadian telecommunications policy objectives that should be considered in any


review of the obligation to serve, local service subsidy and basic service objective include those
set out in paragraphs 7(a), 7(b), 7(f) and 7(h), which read as follows:

7. It is hereby affirmed that telecommunications performs an essential role in the


maintenance of Canada’s identity and sovereignty and that the Canadian
telecommunications policy has as its objectives
(a) to facilitate the orderly development throughout Canada of a
telecommunications system that serves to safeguard, enrich and strengthen the
social and economic fabric of Canada and its regions;
(b) to render reliable and affordable telecommunications services of high quality
accessible to Canadians in both urban and rural areas in all regions of Canada;

(f) to foster increased reliance on market forces for the provision of
telecommunications services and to ensure that regulation, where required, is
efficient and effective;

(h) to respond to the economic and social requirements of users of
telecommunications services.

2.2 Policy Direction

6. Consideration of the telecommunications policy objectives must now be viewed through


the lens of the Policy Direction. The following portions of the Policy Direction are relevant to an
examination of the obligation to serve, local service subsidy and basic service objective:

1. In exercising its powers and performing its duties under the Telecommunications Act,
the Canadian Radio-television and Telecommunications Commission (the
"Commission") shall implement the Canadian telecommunications policy objectives set
out in section 7 of that Act, in accordance with the following:

(a) the Commission should

(i) rely on market forces to the maximum extent feasible as the means of
achieving the telecommunications policy objectives, and
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(ii) when relying on regulation, use measures that are efficient and proportionate
to their purpose and that interfere with the operation of competitive market forces
to the minimum extent necessary to meet the policy objectives .…

(b) the Commission, when relying on regulation, should use measures that satisfy the
following criteria, namely, those that

(ii) if they are of an economic nature, neither deter economically efficient


competitive entry into the market nor promote economically inefficient entry;

(iii) if they are not of an economic nature, to the greatest extent possible, are
implemented in a symmetrical and competitively neutral manner…

3.0 OBLIGATION TO SERVE

7. An examination of the obligation to serve must start with a review of the obligation as it
now exists.

3.1 Background to the Obligation to Serve

8. At common law, the obligation to serve is imposed on entities that are considered “public
utilities” in certain circumstances. A public utility is an entity that provides a service that is
essential to the public. Where such a service is provided on a monopoly basis by an entity, the
entity is usually required to supply that service at a reasonable price and without undue
discrimination to those within the entity’s operating territory who seek the service.

9. The obligation to serve of the incumbent local exchange carriers (“ILECs”) was codified
in section 4.2 of Decision 86-74 where the Commission articulated what are now sections 3.1 and
3.2 of the Terms of Service (“Terms”) of the ILECs. Section 3.1 provides a limited set of
exceptions to the obligation to serve, such as where: (1) the ILEC would have to incur unusual
expenses which the applicant for service will not pay, such as for example, for securing rights-
of-way or for special construction; (2) the applicant owes amounts to the ILEC that are past due

4
Review of the General Regulations of the Federally Regulated Terrestrial Telecommunications Common
Carriers, Telecom Decision CRTC 86-7, 26 March 1986.
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other than as a guarantor; or (3) the applicant does not provide a reasonable deposit or alternative
required pursuant to the Terms. Section 3.2 of the Terms provides that where the ILEC does not
provide service on application, it must provide the applicant with a written explanation upon
request.

10. In the case of Bell Canada, there is also a specific statutory obligation to provide service.
Section 6 of the Bell Canada Act5 provides:

(1) Where a telephone service is requested by any person or organization for any lawful
purpose in a municipality or other territory within which a general telephone service is
provided by the Company, the Company shall, with all reasonable dispatch,
(a) furnish the service; and
(b) subject to any order of the Commission under section 13 that restricts the right or
ability of the Company to be a supplier of telephones, furnish telephones of the latest
improved design then in use by the Company in the municipality or territory.

(2) Nothing in subsection (1) requires the Company to furnish the service or a telephone
where
(a) the premises for which the service is requested are not fronting on a highway,
street, lane or other area along, over, under or on which the Company has a main or
branch telephone service or system;
(b) the telephone on the premises would be situated more than 62 metres or such
other distance as the Commission may specify from the highway, street, lane or other
area; or
(c) if the Commission has not otherwise specified, the Company has not received
therefor a tender or payment of the lawful rates semi-annually in advance.

11. The exceptions to the obligation is paragraph 6(2)(b) provide the Commission with a
significant degree of latitude to constrain the obligation to serve if it so desires.

12. In Decision 97-8,6 the Commission noted that the ILECs’ obligation to serve is not
absolute in the following terms:

141. The Commission notes that, at present, the ILECs' obligation to serve is not
absolute. ILECs currently make service available through the physical extension

5
S.C. 1987, c. 19.
6
Local Competition, Telecom Decision CRTC 97-8, 1 May 1997.
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or upgrade of plant under three conditions: first, as part of their normal


provisioning process; second, at the specific request of an individual applicant or
group of applicants; and third, through specific programs put in place in response
to Commission decisions.

13. The Commission went on to discuss why it was retaining the obligation to serve in the
following terms:

146. The Commission considers that it would not be appropriate, in markets


characterized by effective facilities-based competition, to designate one carrier as
having carrier of last resort responsibilities. However, the Commission considers
it unlikely that such competition will develop in all areas in the near term. Even
with a fuller realization of local competition, the Commission considers it likely
that market forces will not, on their own, achieve the Act's accessibility objective
in all regions of Canada. In establishing the rules to foster competition in all
market segments, the Commission must therefore ensure it has regulatory tools
through which to ensure the continued achievement of this objective.
147. The Commission considers that the most appropriate way to reach this goal is to
maintain the ILECs' current obligation to serve, pending further investigation
through a public process into an approach for serving high cost areas that is more
suited to a fully competitive environment. The Commission also considers that the
contribution regime put in place with this Decision will assist in achieving the
objective of subsection 7(b) of the Act. (Emphasis added.)
14. The Commission addressed the issue again in Decision 99-167 as follows:

31. Currently, incumbent local carriers have an obligation to serve in their territories.
This means that an incumbent local carrier must provide service to subscribers in
its service territory at a reasonable price without unjust discrimination. The
Commission requested comments on whether this obligation should change, in
view of the advent of competition among carriers providing basic local services.

32. The concept of an "obligation to serve" developed within the context of a


traditional, regulated monopoly in telecommunications services. Where customers
in unserved areas have applied for basic service, the carrier's tariffs, including the
Terms of Service, define its obligations to extend service beyond the limits of its
existing facilities and the prices it can charge to customers for such extensions.

33. Presently, incumbent local carriers extend or upgrade their existing plant as part
of normal provisioning, at the request of individuals or groups, and through

7
Telephone Service to High-Cost Serving Areas, Telecom Decision CRTC 99-16, 19 October 1999.
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specific service improvement plans, either in response to the Commission's


decisions or as initiated by the carriers themselves.

34. Generally, parties considered that where one carrier (typically the incumbent local
carrier) provides basic service to an area, the obligation to serve should be
retained. Some parties submitted that this obligation should remain until local
competition ensures service on demand. Other parties maintained that competition
will not ensure that providers will offer service in all locations to all obligation to
serve should be eliminated or compensation provided.

35. In determining this matter, the Commission must weigh, among other things, the
objective of fair competition against the need for an efficient, effective means to
achieve the basic service objective in high-cost areas.

36. Effective local service competition will not likely occur in the short term. The
Commission therefore determines that, at this time, incumbent local carriers must
retain their obligation to serve. (Underline emphasis added. Italics in original.)

15. Subsequently, in the Amended Decision 2006-15,8 the Commission, as varied by


the Governor-in-Council, devised a test for forbearance from certain regulatory
requirements for local services. The test is described as follows:

141. The Commission considers that, for the purposes of a local forbearance
application by an ILEC, a local exchange is the appropriate geographic
component of the relevant market.

242. The Commission considers that, if an ILEC can satisfy the following criteria, then
the requirements of section 34 of the Act for a forbearance determination will
have been met and the Commission may therefore grant local forbearance in
accordance with that section:

a) the ILEC demonstrates that one of the following circumstances exists in the
relevant market:

i. that the ILEC does not have market power, based on the criteria set out
in paragraph 213,9

8
Forbearance from the regulation of retail local exchange services, Telecom Decision CRTC 2006-15, 6 April
2006 (“Decision 2006-15”), as varied by Order Varying Telecom Decision CRTC 2006-15, P.C. 2007-532, 4
April 2007.
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ii. that, if the ILEC offers residential local exchange services, there are, in
addition to the ILEC, at least 2 independent facilities-based
telecommunications service providers, including providers of mobile
wireless services, each of which offers local exchange services in the
market and is capable of serving at least 75% of the number of residential
local exchange service lines that the ILEC is capable of serving, and at
least one of which, in addition to the ILEC, is a facilities-based, fixed-line
telecommunications service provider, or

iii. that, if the ILEC offers business local exchange services, there is, in
addition to the ILEC, at least one other independent facilities-based, fixed-
line telecommunications service provider that offers local exchange
services in the market and is capable of serving at least 75% of the number
of business local exchange service lines that the ILEC is capable of
serving;

b) the ILEC demonstrates that, during a six-month period, beginning no


earlier than eight months before its application for local forbearance and
ending at any time before the Commission's decision respecting the
application,

i. it met, on average, the quality of service standard for each indicator set
out in Appendix B, as defined in Telecom Decision CRTC 2005-20,
Finalization of quality of service rate rebate plan for competitors, with
respect to the services provided to competitors in its territory, and

ii. it did not consistently provide any of those competitors with services
that were below those quality of service standards.

243. For the purposes of subparagraphs 242a)(ii) and (iii) and paragraph 523, the
Commission considers that a telecommunications service provider is independent
if it does not have the same owner as, and is not affiliated with, any other service
provider referred to in the respective subparagraph. Further, for the purpose of
those provisions, the Commission considers that a facilities-based
telecommunications service provider is one that provides services in the relevant
market either by using its own facilities and services or by using a combination of
its own facilities and services together with those leased from other service
providers.

9
An examination of section 213 is beyond the scope of this submission, since local forbearance applications are
not typically based on the test in paragraph 242 a) i., which is much harder to demonstrate than the competitor
presence tests set out in subparagraphs 242 a) ii and 242 a) iii. It should also be noted that the competitor
presence tests as articulated by the Governor-in-Council are not based on traditional competition economics
principles.
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523. If, prior to granting local forbearance, the Commission is informed that the
ILEC's application is based on competition in the relevant market from an
independent fixed-line telecommunications service provider that, including all of
its affiliates, has less than 20,000 local exchange services customers in Canada,
the forbearance will not be effective until at least 18 months after the day on
which the service provider began providing local exchange services in that
market.
16. The Commission also discussed the relationship between regulatory forbearance for local
services and the obligation to serve in Amended Decision 2006-15 in the following terms:
374. The Commission notes that, even in forborne markets established under the terms
of the local forbearance framework, there may remain pockets of uncontested
customers for whom the ILEC remains the primary or only LEC.
375. The record of the present proceeding indicates, moreover, that even where
customers have access to competitive suppliers, the focus of LECs in forborne
markets is likely to be on attracting high-use customers that generate high profit
margins. In this regard, the Commission notes that currently in competitive
markets only some CLECs offer stand-alone PES. CLECs typically offer PES as
part of a bundle, either with optional local services or with services such as
long-distance, video, wireless and Internet.
376. The Commission considers that market forces will best protect the interests of
customers that reside in areas of forborne markets where multiple competitors
offer service and where customers wish to subscribe to multiple
telecommunications services from the same provider, whether these services are
in a bundle or otherwise.
377. The Commission considers, however, that for some residential customers,
including those for whom affordability of phone service is a serious issue, such as
the many disabled Canadians who live on limited incomes, the availability of PES
on a stand-alone basis is very important.
378. In light of the above, in order to ensure that accessibility and affordability are
maintained for residential customers in forborne markets the Commission
considers that ILECs should continue to be required to provide PES on a
stand-alone basis.
379. Accordingly, the Commission will require an ILEC to continue to provide
stand-alone PES to residential customers in a forborne market and will retain its
powers pursuant to section 24 of the Act to the extent necessary to maintain this
requirement.
380. The Commission considers that for business customers generally market forces
will prove adequate to protect their interests such that the Commission does not
need to mandate the provision of business stand-alone PES. The Commission
does note that, to the extent that issues arise with respect to the treatment of
uncontested business customers who wish to receive business stand-alone PES, it
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has, as set out below, retained its powers under subsection 27(2) to deal with any
complaints regarding unjust discrimination or undue preference.
381. The Commission also considers that in order to ensure that residential stand-alone
PES is available to all residential customers in forborne markets, it will also be
necessary to retain in forborne markets the ILECs' obligation to serve with respect
to residential stand-alone PES, as set out in paragraph 31 of Telephone service to
high-cost serving areas, Telecom Decision CRTC 99-16, 19 October 1999
(Decision 99-16). The Commission notes that any existing exceptions or
limitations to the obligation to serve would also continue in a forborne market.
382. The Commission notes that in Decision 99-16, it established a basic service
objective (BSO) for the ILECs, which included: individual line local service with
touch-tone dialling, provided by a digital switch with capability to connect via
low speed data transmission to the Internet at local rates; enhanced calling
features, including access to emergency services, Voice MRS, and privacy
protection features; access to operator and directory assistance services; access to
the long-distance network; and a copy of a current local telephone directory. The
Commission considers that the residential stand-alone PES provided by an ILEC
in a forborne market should be provided in a manner consistent with the BSO, and
the Commission will retain its powers under section 24 to the extent necessary to
maintain this objective….

17. As of 30 June 2009, the Commission has forborne from regulating local exchanges
representing 77% of all residential lines and 68% of all business lines in Canada.10 Such
forbearance is typically granted on the basis of the competitor presence tests in subparagraphs
242 a) ii and 242 a) iii of Amended Decision 2006-15, because the test absence of market
dominance test in subparagraphs 242 a) i is much harder to demonstrate.

18. This means that in forborne exchanges there can be pockets of up to 25% of residential or
business lines that are only supplied by the ILEC on a monopoly basis, which reinforces the
concern expressed by the Commission at paragraph 374 of Amended Decision 2006-15
regarding the prospect of pockets of uncontested customers for whom the ILEC remains the
primary or only LEC. Most significantly, paragraph 374 of Decision 2006-15 was not modified
by the Governor-in-Council despite the fact that the Governor-in-Council varied Decision 2005-
16 in other respects after issuing the Policy Direction.

10
CRTC 2009 Communications Monitoring Report, August 2009, p. 201.
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19. With this background in mind, the ISPs now turn to the questions posed by the
Commission with respect to the obligation to serve.

3.2 ISP Answers to the Commission’s Questions regarding the Obligation to Serve

3.2.1 TNC 2010-43, Appendix 4, Paragraph 1

In which market(s) (for example, forborne, non-forborne, high-cost) and to what extent, if
any, is an obligation to serve necessary? Specify what type(s) of service(s), if any, should be
subject to an obligation to serve. Explain whether the provision of service through alternate
technologies, for example wireless service, should satisfy an obligation to serve regarding
local voice service.

20. In responding to these questions, the ISPs are starting from the premise that, as the
Commission has previously found,11 mandating the provision of business stand-alone primary
exchange service (“PES”) is not required. Thus, these questions are only addressed further with
respect to residential PES.

21. The concerns expressed by the Commission regarding the prospect of pockets of
uncontested customers for whom the ILEC remains the primary or only LEC has not been
diminished by or since Decision 2006-15. In fact, the competitor presence tests inserted in
Decision 2006-15 by the Governor-in-Council could result in uncontested pockets of up to 25%
of the number of local exchange service lines that the ILEC is capable of serving in forborne
exchanges. The numbers in the case of non-forborne exchanges can be even higher.

22. Most significantly, the Policy Direction was already in effect when the Governor-in-
Council varied Decision 2006-15. Thus, the fact that the Governor-in-Council did not vary
paragraph 374 of Decision 2006-15 is clear proof that the continuation of the obligation to serve
is consistent with the Policy Direction. Nothing has occurred since the Governor-in-Council
varied Decision 2006-15 to alter that situation. Therefore, the obligation to serve should continue
in its present form.
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23. Furthermore, the ISPs are of the view that the stand-alone PES to which the obligation to
serve should apply encompasses the basket of items that form the basic service objective, as
defined by the Commission in Decision 99-16. Moreover, as explained in greater detail below in
section 5.2.2, due to inferior call quality and higher prices, wireless technologies, and more
particularly mobile wireless services, are typically not substitutable with wireline services.
Therefore, reliance on wireless services to satisfy an obligation to serve requirement would be
inappropriate.

24. Finally, the ISPs are of the view that the principles articulated herein apply equally to
high-cost serving areas (“HSCAs”) and non-high-cost serving areas.

25. A continuation of the obligation to serve will promote the Canadian telecommunications
policy objectives listed in section 2.1 above and is consistent with the requirements of
paragraphs 1(a)(i) and (ii) of the Policy Direction.

3.2.2 TNC 2010-43, Appendix 4, Paragraph 2

Should any particular class of service provider (for example, ILECs, competitive local
exchange carriers) be subject to an obligation to serve and, if so, how should they be
selected?

26. The ILECs are the carriers that originally enjoyed a monopoly in the provision of PES
throughout the country, and there are still areas in which they, and not other carriers, remain the
sole providers of PES. Thus, it is most appropriate for ILECs to be subject to the obligation to
serve. Such an approach is most consistent with subsection 7(f) of the Act and paragraphs 1(a)(i)
and (ii) of the Policy Direction. Moreover, since it is the residual market power of the ILECs that
makes the imposition of an obligation to serve on them necessary, paragraph 1(b)(iii) of the
Policy Direction is not breached when it comes to the imposition of an obligation to serve as a
non-economic measure solely on the ILECs.

11
E.g., para. 380 of Amended Decision 2006-15.
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3.2.3 TNC 2010-43, Appendix 4, Paragraph 3

What legal considerations exist, for example the Bell Canada Act, which would prevent a
modification or the removal of the obligation to serve?

27. As noted in section 2.1 above, the Bell Canada Act contains certain obligations to serve.
However, given the highly evolved state of Bell Canada’s network, in the vast majority of cases
in which an applicant seeks service from Bell Canada the company would most likely be
prepared to provide the service in any event. The exceptions to the application of the obligation
to serve set out in subsection 6(2) of that legislation would most likely ensure that the statutory
obligation to serve would not, in most cases, bind Bell Canada to a standard that is more
stringent than the obligation to serve imposed by the Commission through other regulatory
means, such as the Terms.

3.2.4 TNC 2010-43, Appendix 4, Paragraph 4

Should a service provider that has the obligation to serve be compensated and, if so, in
which market(s)? What should be the criteria, for example the cost of service, for
determining whether compensation is required? Specify the appropriate compensation
mechanism.

28. The ISPs see no justification for compensating the ILECs for the obligation to serve to
any greater degree than is the case today, particularly in those areas where an ILEC’s network is
present. In fact, any such compensation would cause market distortions in breach of subsection
7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

29. To the extent that the question is aimed at addressing that portion of an ILEC’s obligation
to serve that pertains to programs required by the Commission for service extension to unserved
and underserved area, the current funding mechanisms for those programs appear to be adequate,
particularly since the remaining proportion of the Canadian population that lives in unserved or
underserved areas is very small and diminishing. To the extent that such programs may require
additional funding in the future, that funding should come from the users benefitting from the
programs and not cross-subsidies. This is the approach that is most consistent with subsection
7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.
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3.2.5 TNC 2010-43, Appendix 4, Paragraph 5

Should there be limits to the obligation to serve and, if so, what should those limits be?
Indicate whether the current service extension charges and parameters (for example,
distance from the network, amount paid by the customer and/or the service provider)
remain appropriate. Should these charges and parameters be made generally consistent
across relevant service providers?

30. The existing limits to the obligation to serve and the current service extension charges
and parameters remain appropriate. There is no significant impetus for the implementation of any
changes in these areas, and any regulatory changes that increase the burdens on the industry or
any of its participants would have an economically distorting effect that is contrary to subsection
7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

31. Furthermore, extension charges and parameters have been developed separately for
various ILECs in recognition of their unique circumstances and cost structures. There is no good
reason for this to change and be harmonized in some artificial fashion. Such a harmonization by
way of regulatory action would only introduce economic distortions, contrary to subsection 7(f)
of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

3.2.6 TNC 2010-43, Appendix 4, Paragraph 6

Should the obligation to serve be subject to service standards, for example specific time
frames for service delivery? If so, specify the standards and circumstances.

32. At a time when competition is increasing and the need for the imposition of a ubiquitous
obligation to serve on ILECs is receding, it does not make sense to add new requirements related
to the obligation to serve, such as service standards. The addition of any such requirements
would be contrary to subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy
Direction.

4.0 LOCAL SERVICE SUBSIDY

33. An examination of the local service subsidy must start with a description of the current
subsidy regime.
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4.1 Background to the Local Service Subsidy

34. The local service subsidy regime now in effect has been established pursuant to section
46.5(1) of the Act which provides:

The Commission may require any telecommunications service provider to contribute,


subject to any conditions that the Commission may set, to a fund to support continuing
access by Canadians to basic telecommunications services.

35. The existing local service subsidy regime was established in Decision CRTC 2000-745.12

36. In establishing the regime, the Commission outlined its objectives as follows in Decision
2000-745:

8. The Commission believes that the criteria set out in Decision 92-12 are still valid
for evaluating the proposed collection mechanisms, including sustainability,
pricing flexibility for all market participants and efficiency of administration.
Decision 92-12 also indicated that the mechanism should collect the appropriate
amount to achieve the basic service objective.

9. The Commission finds that additional contribution collection criteria and


principles are appropriate for today's more competitive telecommunications
industry. In particular, the collection mechanism must promote fairness, ratepayer
equity, economic efficiency, technological neutrality and competitive equity. The
mechanism must be fair to all market participants and should not adversely affect
one service provider over another. It should also promote economic efficiency by
limiting distortions in the telecommunications market. Further, the mechanism
should be competitively-equitable by promoting the efficient allocation of
resources and avoid unfair advantages to any service or service provider. The
Commission also considers that the mechanism should be technologically neutral
whereby service providers should not be penalized or favoured by their choice of
technology. Finally, the mechanism should be equitable to ratepayers if more
contribution is collected from users who make greater use of the network.
(Emphasis added.)

12
Changes to the Contribution Regime, Decision CRTC 2000-745, 30 November 2000 (“Decision 2000-745”).
- 15 -

37. The regime requires telecommunications service providers (“TSPs”) with eligible
revenues over $10 million (“Eligible TSPs”) to contribute a percentage of their revenues to a
contribution fund administered by a Central Fund Administrator to subsidize the provision of
PES in HSCAs.13 The subsidy is based on each ILEC’s total subsidy requirement (“TSR”). The
methodology for the calculation of the TSR was established in Decision 2000-745, with certain
details subsequently determined in Decision CRTC 2001-238.14

38. The TSR is computed by adding a 15% mark-up to an ILEC’s Phase II costs to provide
service in HSCAs and subtracting from that total the sum of residential PES revenues and an
annual $60 offset that is meant to represent an implicit contribution from optional local services.
Each ILEC’s subsidy requirement is calculated by multiplying the ILEC’s Commission-approved
subsidy requirement per residential network access service (“NAS”) by the total residential NAS
per band for bands E, F and G which are the high-cost bands. The contribution regime is portable
in the sense that CLECs that provide service in HSCAs can also receive the subsidy on the same
basis as ILECs.

39. In recognition of its unique circumstances, which involve high costs, vast distances, harsh
climate and extremely low population densities, in addition to being provided the usual HSCA
subsidy, Northwestel Inc. (“Northwestel”), is also allowed to draw supplemental Commission-
approved amounts from the contribution fund to subsidize its current service improvement plans
(“SIPs”).15

40. The national subsidy requirement (“NSR”) is the sum of the annual TSRs for all ILEC
territories in a given year. The TSR is updated annually by multiplying the applicable Phase II
costs by the amount I-X, where I is inflation as measured by the national Gross Domestic
Product – Price index (“GDP-PI”) and X is a productivity offset, and updating the average
residential PES revenues by band.

13
The Central Fund Administrator is selected by the Commission pursuant to subsection 46.5(2) of the Act.
14
Restructured bands, revised loop rates and related issues, Decision CRTC 2001-238, 27 April 2001.
15
See Price cap regulation for Northwestel Inc., Telecom Decision CRTC 2007-5, 2 February 2007.
- 16 -

41. The other important element of the regime is the calculation of the contribution amount
that each Eligible TSP must contribute to the fund.16 Each Eligible TSP must contribute a portion
percentage of its contribution-eligible revenues, which are defined as its Canadian
Telecommunications Service Revenues (“CTSR”) less certain deductions. In particular, revenues
from retail Internet and retail paging services, the sale or rental of terminal equipment, inter-
carrier expenses and non-Canadian telecommunications services revenues are exempt.

42. A percentage revenue charge is applied to each Eligible TSP’s CTSR. That charge is
determined by dividing the NSR by the total contribution-eligible revenues of all Eligible TSPs.
Significantly, the percentage contribution rate was initially set at 4.5% in 200117 and the NSR
was initially set at $920.4 million,18 whereas the contribution rate is now 0.81%19 and the NSR is
$207.5 million.20 In other words, the subsidy is declining, and so the degree to which the subsidy
is distorting the economics of the industry is also declining. This trend is consistent with greater
reliance on market forces over time.

43. With this background in mind, the ISPs now turn to the questions posed by the
Commission with respect to the local subsidy regime.

16
A full description of the contribution regime can be found in The Canadian revenue-based contribution regime,
Telecom Circular CRTC 2007-15, 8 June 2007.
17
Decision 2000-745, para. 83.
18
Decision 2000-745, para. 123.
19
Final 2009 revenue-percent charge and related matters, Telecom Decision CRTC 2009-702, 10 November
2009 (“Decision 2009-702”), para. 18.
20
Decision 2009-702, para. 15.
- 17 -

4.2 ISP Answers to the Commission’s Questions regarding the Local Service Subsidy

4.2.1 TNC 2010-43, Appendix 4, Paragraph 7

Should changes to the local service subsidy regime be made and, if so, to what extent?

44. The ISPs are of the view that the Commission should continue reducing the existing local
subsidy regime as defined by the NSR year-over-year until such time as it becomes sufficiently
small to justify elimination of the contribution regime altogether. The only exception to this
approach should be if the Commission were to find a way of targeting contribution payments to a
greater extent right away, such that contribution rates could decline even more quickly. Such an
approach is most consistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the
Policy Direction.

4.2.2 TNC 2010-43, Appendix 4, Paragraph 8

How should high-cost areas be defined and what should be the associated criteria, for
example a banding structure based on loop length or density of network access service
(NAS)? Should the existing banding structure be modified to include sub-bands?

45. The ISPs do not believe that any changes flowing from the questions posed by the
Commission should be pursued. The existing regime provides adequate funding for HSCAs and
the amount of contribution that is being collected annually is declining, which is consistent with
subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction. Any changes to
the contribution regime that could increase local service subsidies run the risk of introducing
economic distortions that will deter economically efficient competitive entry into the market or
promote economically inefficient entry, contrary to paragraph 2(b)(ii) of the Policy Direction.

46. Given the fact that the existing contribution regime fulfills its intended objectives, it
would also be inconsistent with efficient and effective regulation for the Commission and the
industry to be required to engage in the painstaking, lengthy and highly specialized work
required to modify the regime along the lines suggested in the Commission’s questions. See also
section 4.2.1 above.
- 18 -

4.2.3 TNC 2010-43, Appendix 4, Paragraph 9

Identify the appropriate mechanism for distributing subsidy and whether the subsidy
should be paid to the service provider based on revenues and costs or a competitive bidding
process. If the mechanism continues to be based on revenues and costs, what should be
included? Are the current implicit revenue contributions appropriate (i.e. $30 monthly rate
target for primary exchange service and $5 for monthly optional services)?

47. No changes flowing from the Commission’s questions are required. See also sections
4.2.1 and 4.2.2 above.

4.2.4 TNC 2010-43, Appendix 4, Paragraph 10

Which service providers should be eligible to receive subsidy and under what
circumstances? Are there any circumstances in which wireless service providers should be
eligible for subsidy? Should local service subsidy be tied to the obligation to serve or to the
basic service objective?

48. No changes flowing from the Commission’s first two questions are required. See also
sections 4.2.1 and 4.2.2 above.

49. The current local service subsidy is portable and should stay that way until such time as it
can be eliminated altogether. Accordingly, the subsidy should not be tied to the obligation to
serve. The subsidy is implicitly tied to the current basic service objective and, once again, this
should not change until the subsidy regime can be eliminated.

4.2.5 TNC 2010-43, Appendix 4, Paragraph 11

Should there be a subsidy in forborne and/or competitive markets? Should there be


subsidized competition in high-cost areas, including small ILEC markets? In which
markets and under what conditions, if any, should the subsidy be portable?

50. No changes flowing from the Commission’s questions are required. See also sections
4.2.1 and 4.2.2 above.
- 19 -

4.2.6 TNC 2010-43, Appendix 4, Paragraph 12

Which TSPs should be required to contribute to the local service subsidy fund? What
revenues should be contribution-eligible? Should Internet revenues be contribution-
eligible? Are any other changes to the contribution collection mechanism necessary?

51. No changes flowing from the Commission’s questions are required. See also sections
4.2.1 and 4.2.2 above.

52. The Commission’s objective should be to phase out the existing contribution regime over
time, not to apply it to any additional TSPs or services.

53. The independent ISP industry is already disadvantaged from a competitive perspective
due to the joint dominance of the ILECs and cable carriers in the provision of high-speed Internet
services and bundles that include such services. The top five Internet service providers (ISPs),
which are ILECs, cable carriers and their affiliates were dominant in the Internet access market,
capturing 76% of the Internet access revenues in 2008.21 The subscriber-based residential market
share of TSPs other than ILECs and cable carriers declined from 16% in 2004 to 8% in 2008.22
ILECs and cable carriers accounted for 94% of residential Internet access revenues in 2008.23 In
this environment, which is already very challenging for independent ISPs, the imposition of an
additional cost in the form of a contribution levy would be very harmful and could lead to a
further lessening of competition in the provision of Internet access services.

54. The market distortion caused by the payment of contribution on Internet revenues would
be inconsistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy
Direction. Accordingly, Internet revenues should not be contribution-eligible.

21
CRTC 2009 Communications Monitoring Report, August 2009, p. 214.
22
Id., at p. 215.
23
Id., at p. 218.
- 20 -

4.2.7 TNC 2010-43, Appendix 4, Paragraph 13

Should the small ILECs and/or Northwestel be subject to any special considerations or
modifications?

55. These entities should not receive any additional special consideration beyond that which
they already receive, in order to avoid introducing or increasing market distortions, which would
be inconsistent with section 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

5.0 BASIC SERVICE OBJECTIVE

56. An examination of the basic service objective must start with a description of the
objective as it now exists.

5.1 Background to the Basic Service Objective

57. In Decision 99-16,24 the Commission defined the basic service objective, which persists
today as comprising:
 Individual line local service with touch-tone dialing, provided by a digital switch with
capability to connect via low speed data transmission to the Internet at local rates;
 Enhanced calling features, including access to emergency services, Voice Message
Relay service, and privacy protection features;
 Access to operator and directory assistance services;
 Access to the long distance network; and
 A copy of a current local telephone directory.

58. During the proceeding that led to Decision 99-16, several groups representing consumer
interests suggested that basic service should include a telephone line capable of local and
interexchange data transmission at a modem speed of 28.8 kb/s or higher, which was the
standard for Internet access speed at the time.25

59. The Commission refused this request and in so doing stated:

24
At para. 24.
25
Id., at para. 26.
- 21 -

27. The Commission considers that the benefits of upgrading the local network must
be balanced against the subscribers' ability to pay for these upgrades. For a higher
level of basic service, subscribers would have to pay more and costs to provide
the service in remote areas would increase. These costs could, in turn, affect
subsidy rates levied on profitable markets, which would distort the competitive
nature of those markets.

28. The Commission expects that, over time, competitive pressures and
improvements in network technology will permit basic service to include faster
transmission speeds.

29. In light of these considerations, the Commission will not include line speed as
part of the basic service objective.

5.2 ISP Answers to the Commission’s Questions regarding the Local Service Subsidy

5.2.1 TNC 2010-43, Appendix 4, Paragraph 14

Is the basic service objective still necessary and, if so, what should it comprise? Specify the
services/obligations as well as the appropriate technical specifications (e.g. high-speed
Internet access at a minimum speed of 1 megabit per second) to be included in the basic
service objective.

60. The basic service objective as defined in Decision 99-16 is still appropriate and should
continue to apply. Adding additional requirements would cause economic distortions and be
inimical to subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction.

5.2.2 TNC 2010-43, Appendix 4, Paragraph 15

Specify whether alternatives to wireline local service, for example wireless service, should
be considered to satisfy the basic service objective. Specify which service providers should
be subject to the basic service objective.

61. Over 99% of Canadians had access to cellular mobile wireless services in 2008, of which
approximately 74.3% of households subscribed to them.26 Despite this, Canadian are not
disconnecting their wireline PES to any significant degree, suggesting that cellular mobile
services are not typically perceived as full substitutes for wireline services. This is not entirely

26
CRTC 2009 Communications Monitoring Report, August 2009, p. 236.
- 22 -

surprising since the call quality of cellular mobile services is not as consistent as that of wireline
services. Similarly, cellular mobile services tend to be more expensive to use than wireline
services. Accordingly, cellular mobile wireless services do not satisfy the basic service objective.

62. The ILECs are the carriers that originally enjoyed a monopoly in the provision of PES
throughout the country, and there are still important areas of the country in which they, and not
other carriers, remain the sole provider of PES. Thus, it is most appropriate for ILECs to remain
subject to the basic service objective. Such an approach is most consistent with subsection 7(f) of
the Act and paragraphs 1(a)(i) and (ii) of the Policy Direction. Moreover, since it is the residual
market power of the ILECs that justifies the imposition of the basic service objective on them,
paragraph 1(b)(iii) of the Policy Direction is not breached when it comes to the imposition of the
basic service objective as a non-economic measure solely on the ILECs.

5.2.3 TNC 2010-43, Appendix 4, Paragraph 16

What should be the Commission's role, if any, in regard to advancing high-speed Internet
access? Given that the contribution regime is generally limited to subsidizing basic local
service rates in high-cost areas, should the Commission reconsider its approach and use the
regime to subsidize high-speed Internet access?

63. The Commission’s role in regard to high-speed Internet access should be to create
favourable conditions for competition through the design, enforcement and implementation of
appropriate access policies. However, that is a matter that is beyond the scope of this proceeding.

64. Using the contribution regime to subsidize high speed access would not only be wholly
inconsistent with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy
Direction, it would also be doomed to failure, since no subsidy regime could possibly absorb the
enormous costs associated with this kind of undertaking.
- 23 -

65. The enormous costs that would have to be borne under such a regime were confirmed by
the Commission in its first round submission to the Telecommunications Policy Review panel as
follows:27
105. For its part, the Commission has not redefined universal service in terms of
broadband access. Having spent the last decade trying to reduce the level of
subsidy to local telephone service down to economically sustainable levels, it has
not seen fit to reintroduce what would clearly be a multi-billion dollar subsidy
program to provide broadband access on a universal basis in Canada. Rather than
take this approach, the Commission has focussed on creating an environment that
is conducive to the competitive provision of broadband services and has let the
federal and provincial governments assume leadership in direct subsidization of
broadband network builds in regions where high cost makes their competitive
provision unlikely. (Emphasis added.)

66. Furthermore, if the intent of such a policy was to ensure that consumers always have
access to the latest average high-speed access services available throughout the country, the cost
of any corresponding subsidy program would be constantly increasing because the average speed
of high-speed Internet services is rapidly increasing and is expected to continue increasing as
ILECs roll out fibre-to-the-node and fibre-to-the home, and cable carriers take full advantage of
the speeds that can be supported over their hybrid fibre-coax plant.

67. The following evidence filed by TSI in the proceeding initiated by Public Notice 2009-
26128 makes this point:
22. Many Canadians are also aware that access speeds have been rising over time,
from dial access speeds in the 1980s to the higher speeds now available,
particularly over cable networks. Service providers and the equipment
manufacturers that support them have taken the capabilities that Moore’s Law
provides and used them to respond to the expectations of users and application
developers whose behaviour is also driven by Moore’s Law.

23. There have been several studies to characterize this behaviour. The earliest that
has come to our attention was by Dr. Jakob Nielsen who, after considering his
experience as an advanced user over 25 years, formed the view that access speeds
are rising at about 50% per annum and would continue to do so going forward.

27
“Canadian Telecommunications Policy Review Discussion Paper”, Canadian Radio-television and
Telecommunications Commission, Revised 17 August 2005.
28
Proceeding to consider the appropriateness of mandating certain wholesale high-speed access services,
Telecom Notice of Consultation CRTC 2009-261, 8 May 2009, as amended.
- 24 -

He called this empirical relationship “Nielsen’s Law of Internet Bandwidth”. The


trend line developed by Nielsen is reproduced inFigure 2.1.
Figure 2.1 -- Nielsen's Law of Internet Bandwidth

Source: http://www.useit.com/alertbox/980405.html

24. The graph in Figure 2.1 should be understood as the year of first widespread
availability to advanced users in Silicon Valley at the indicated speed. Nielsen
observed that mass-market adoption lags by 2 to 3 years. His trend line crosses
100 Mb/s in the year 2011.

25. That there is a speed growth relationship like Nielsen’s Law was subsequently
validated in five countries of Europe in 2007/8 by Ventura Team LLP for the
FTTH Council Europe. They found slopes that ranged from 46% (Spain) to 60%
(Sweden), with 100-Mb/s intercept years of 2004 (Sweden) to 2016 (Spain).

26. At the moment, Canada is slightly ahead of the speeds predicted for today in
Figure 2.1, with 50 Mb/s services just having been widely introduced by some
BDUs one year in advance of the predicted year of 2010, and 100 Mb/s services
now being offered in at least one location. However this does not make Canada a
leader: 100 Mb/s service is widely found in Japan, South Korea, France, Finland
and Singapore today.

27. No matter what the precise slope of the growth trend is for Canada, it is
reasonable to project a trend of this nature forward at least ten years because of
recent predictions that Moore’s Law will continue to facilitate increases in speed
until 2021 or 2029, when physical limits are expected to present a barrier to
further improvement in integrated circuit technologies.29 (Footnotes omitted.)
- 25 -

68. In light of this evidence, a program that relies on a subsidy mechanism to support the
rollout of high-speed Internet services will be unsustainable.

69. The reasons cited by the Commission in Decision 99-16 for refusing to include a line
speed for Internet access as part of the basic service objective noted in section 5.1 above are even
more compelling today given current trends in the increase of speeds of available high-speed
Internet access services.

70. Any attempt to employ a subsidy mechanism to finance broadband expansion programs
would lead to unacceptable price and market distortions and market inefficiencies, which is
wholly at odds with subsection 7(f) of the Act and paragraphs 1(a)(i) and (ii) of the Policy
Direction.

71. The distorting effect and inefficiencies of any such scheme was confirmed by the
Telecommunications Policy Review Panel in its Final Report as follows:30

As discussed in Chapter 3, Economic Regulation, in the monopoly era of


telecommunications, cross-subsidies between various telecommunications services
helped achieve universal, affordable access to basic service. However, with the onset of
competition, such cross-subsidies have gradually been replaced by more targeted
subsidies. The CRTC-regulated contribution fund is a more direct form of subsidy that
continues to play an important role in supporting universal access to basic
telecommunications services today. The Panel supports the continuing use of the
contribution fund for this purpose.

In general, however, the Panel believes cross-subsidies between classes of


telecommunications service consumers are an inappropriate means of achieving policy
objectives in a competitive telecommunications industry. If inter-service subsidies remain
small, like the CRTC’s contribution fund subsidies, then economic distortions and
inefficiencies are minimized. However, if the contribution fund were expanded
significantly to finance broadband expansion programs, the price distortions and
inefficiencies would increase to an unacceptable level. This would distort markets

29
“Technical Report of Pacomm Consulting Group Ltd. Regarding New Wholesale Services”, Roger Hay, 30
October 2009.
30
Telecommunications Policy Review Panel Final Report 2006 (“TPRP Final Report”), p. 8-9 and 8-10.
- 26 -

and result in an inefficient allocation of resources by artificially lowering the prices


of some services and raising the prices of others.

Internal cross-subsidies are also undesirable from the viewpoint of social equity. Since
the cost of providing subsidies is passed onto consumers, and since all consumers
contribute at the same rate regardless of income, internal cross-subsidies effectively
impose a regressive tax on the customers of telecommunications service providers.

The Panel is also concerned that the changing structure of the telecommunications
industry makes internal cross-subsidies increasingly unsustainable. Previously, the
majority of service providers could be included in such programs, whether they were
incumbents or new entrants. However, that opportunity is eroding as new types of
services provided by new types of competitors emerge from outside the
telecommunications industry, for example, Internet-based providers of PC-to-PC voice
over Internet Protocol (VoIP) services.

In the changing telecommunications environment described in Chapter 1, a


telecommunications provider or subscriber tax designed to subsidize the extension of
broadband would put an unfair burden on traditional telecommunications providers and
their customers, while some new entrants such as web-based service providers and their
customers would be exempt. These solutions appear neither efficient nor fair.

For all these reasons, the Panel has concluded that the CRTC contribution fund should
not be used to finance expansion of broadband access. (Emphasis added.)

72. As the Commission31 and the Telecommunications Policy Review Panel32 have observed,
the funding of broadband expansion is best left to governments. The ISPs urge the Commission
not to use the contribution regime to fund broadband expansion in high-cost serving areas.

6.0 CONCLUSION

73. In conclusion, the ISPs urge the Commission to:

 Apply the obligation to serve in the same manner and to the same extent as
currently applied;

31
See paragraph 66 above.
32
TPRP Final Report, supra, p. 8-10.
- 27 -

 Not make any changes to the contribution regime that would increase the amount
of contribution payable or result in the payment of contribution on retail Internet
service revenues;

 Apply the basic service objective in the same manner and to the same extent as
presently applied; and

 Not introduce a high-speed Internet access element to the basic service objective
or to levy contribution on retail Internet services.

*** END OF DOCUMENT ***