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BEFORE THE CANADIAN RADIO-TELEVISION

AND TELECOMMUNICATIONS COMMISSION

IN THE MATTER OF

REVIEW OF BILLING PRACTICES FOR WHOLESALE RESIDENTIAL


HIGH-SPEED ACCESS SERVICES, TELECOM NOTICE OF
CONSULTATION CRTC 2011-77, 8 FEBRUARY 2011, AS AMENDED

COMMENTS OF
CANADIAN NETWORK OPERATORS CONSORTIUM INC.

28 MARCH 2011
Table of Contents

Page
EXECUTIVE SUMMARY ............................................................................................................. I

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

2.0 THE FRAGILE STATE OF COMPETITION IN THE PROVISION OF RETAIL


INTERNET AND RELATED SERVICES .........................................................................3

3.0 END-USER-BASED USAGE-BASED BILLING DOES NOT MEET COMPETITIVE


IMPERATIVES AND SHOULD BE REJECTED..............................................................8

4.0 CNOC’S PROPOSAL FOR THE RESTRUCTURING OF RATES FOR WHOLESALE


HIGH-SPEED ACCESS SERVICES ................................................................................13

4.1 Competitive Rate Principles for Wholesale High-Speed Access Services ............13
4.2 The Current Rate Structure for Wholesale High-Speed Access Services..............14
4.3 Proposed Rate Structure for Wholesale High-Speed Services ..............................15
4.4: Advantages of the Proposed Rate Structure...........................................................16
4.5 The Proposed Rate Structure is Lawful and Consistent with the Policy Direction17
5.0 CONCLUSION AND RELIEF REQUESTED .................................................................18
EXECUTIVE SUMMARY

Broadband competition in Canada is fragile and must not be weakened further

Canada’s status as a former leader in broadband has largely evaporated. Canada now lags behind most
OECD countries in broadband measures such as price and speed. One has to look no further than the
CRTC’s own 2010 Navigating Convergence report and more recent OECD data (October 2009) to see
stark evidence of Canada’s poor broadband performance. At the same time, while almost all components
required to deliver Internet access have gone down in cost, prices for Canadian consumers are going up.
Something is very wrong with the state of broadband competition in Canada.

Under these conditions, the Commission must be very cautious in exercising its powers and performing
its duties with respect to how it allows incumbents to structure their wholesale high-speed access services.
Any misstep, no matter how inadvertent, could weaken competitors and unduly lessen competition in the
provision of residential Internet access service and related services and service bundles provided over IP
platforms.

Incumbent wholesale high-speed access services, including the last-mile access, constitute the
broadband platform that competitors need to offer almost all telecommunications and broadcasting
services to consumers. Although in this proceeding the Commission is only considering the competitive
state of retail Interne services, CNOC urges the Commission not to make any determinations that could
hinder the use of incumbent wholesale high-speed access services for the provision of other services to
end-users by competitive service providers.

It is now time for the Commission to recognize competitive service providers as equal to incumbents from
a competitive standpoint.

The UBB Decisions are anti-competitive and should be rescinded

Measures such as Telecom Decisions CRTC 2010-255, 2010-802 and 2011-41 (“UBB Decisions”) would
only serve to exacerbate the poor state of broadband competition by reinforcing telephone and cable
company duopolies, leading to declines in Canada’s productivity and international competitiveness in the
digital age.

The regulatory approach in the UBB Decisions is fundamentally flawed because it:

 Regulates incumbent wholesale high-speed access services that can be used for a variety of
services including voice, data, video, Internet and non-Internet broadband applications as if they
were analogous solely to the incumbents’ retail Internet services (“IS”);

 Treats the end-users of an incumbent’s wholesale customer in the same manner as the
incumbent treats its own end-users, instead of treating the wholesale customer as a whole as the
incumbent’s customer and letting that wholesale customer determine how to provide service to
its end-users based on market demand;

 Creates a disincentive for incumbents to meet demand for broadband capacity and reduce
congestion caused by peak traffic loads by investing in their networks in order to meet demand,
encouraging them instead to constrain network capacity and maximize revenues; and

 Constitutes a regulatory measure whose purpose is ostensibly to reduce the congestion created
by peak period traffic in a manner that instead reduces the volume of all traffic carried by
competitors of the incumbents, even though the bulk of such traffic is carried in non-peak
periods at much lower (if not virtually zero) cost and does not contribute to network congestion.
- ii -

If allowed to stand, the UBB Decisions, which impose usage-based billing (“UBB”) on wholesale traffic
based on individual broadband end-user access connections, would have:

 Increased retail prices for Internet and other broadband services and constrained the use of such
services by Canadians very significantly thereby reducing the use of broadband services as a
catalyst of innovation and economic growth in both rural/remote and urban parts of Canada;

 Reduced the use of broadband as a means of distribution of Canadian content;

 Made it virtually impossible for competitive services providers, such as CNOC members, to
innovate and differentiate their retail IS from those of the incumbents;

 Conferred an undue advantage on the incumbents own retail telephony, video (e.g., IPTV or
cable) and other services which will not be subject to UBB charges, while wholesale broadband
traffic including the telephony, video and other service offerings would have been be subject to
UBB charges – for example, Bell excludes its IPTV service from the application of UBB,
while competitors would not have that option;

 Increased the financial risk of competitors who would have had to charge their end-users for
usage on a post-paid basis more than a month after the usage is incurred and billed by the
incumbents, compared to the present industry practice whereby competitors typically require
pre-payment of services purchased on a flat-rate basis from their end-users;

 Enabled incumbents to obtain an undue preference by providing promotions and discounts to


their retail UBB fees, while wholesale broadband traffic of all types would remain subject to the
incumbents’ tariffed UBB charges;

 Generated additional revenues for incumbents at virtually no cost via the application of UBB
rates to wholesale traffic resulting in improper, anti-competitive cross-subsidies that the
incumbents could use to compete with their competitors;

 Resulted in an asymmetrical grandfathering of retail customers on non-UBB retail plans as


between Bell and its wholesale customers thereby conferring an undue preference on Bell; and

 Created disputes regarding how traffic is measured and billed to wholesale customers by
incumbents.

The use of an end-user-based wholesale UBB regime with all of the anti-competitive consequences just
described does not constitute regulation that is efficient and proportionate to its purpose, is minimally
intrusive and maximizes reliance on market forces as required by the government’s 2006 Policy Direction
to the CRTC. Accordingly, such a regime would not lead to rates for wholesale high-speed access
services that are just and reasonable.

The UBB Decisions are presently stayed pursuant to paragraph 14 of TNC 2011-77. Based on all of the
considerations just discussed, Canadian Network Operators Consortium Inc. (“CNOC”) urges the
Commission to rescind them.
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CNOC’s Proposal for a new rate structure for wholesale high-speed access services

Instead of the regime contemplated under the UBB Decisions, CNOC urges the Commission to adopt a
new rate structure for wholesale high-speed access services employed by Independent ISPs in the
provision of retail IS that adheres to the following principles:

 Wholesale high-speed access services should be regulated as a broadband platform that can
support many services, including voice, data, video, Internet and non-Internet high-speed
services, instead of being regulated by comparison to (or so as to mimic) the retail IS of the
incumbents;

 Competitors must be granted access to the incumbents’ wholesale high-speed access services in
a manner that affords the competitors greater flexibility to manage end-user pricing/service
solutions by being able to choose the attributes of the services provided to end-users, such as
speed, throughput, quality of service, type of service, aggregation, bundling, etc.;

 Prices for wholesale high-speed access services should be cost-based and not include other
subjective concepts, such as value of service principles (and in this respect there should be no
distinction in the use of such services for residential or business purposes or link to the retail IS
rates set by incumbents based on their variable marketing considerations); and

 Prices for wholesale high-speed access services should not be based on whatever the market will
bear as that will only lead to prices that allow incumbents to leverage their duopolistic market
power when providing such services to competitors, as well as retail services to end-users – in
fact, until competitive alternatives become available, wholesale high-speed access services
should be priced as conditional essential services.

The fundamental problem with the existing rate structure is that as long as the usage costs are not
separated from the access and, where applicable, interface components, there will always be disagreement
over what amount of Internet usage is ‘acceptable’ on a per-access basis.

Fortunately there is a simple and elegant solution to this problem, namely, the unbundling of existing
rates to recover the usage-sensitive costs through a distinct aggregation rate. This proposal, featuring three
distinct rate components (access, aggregation and interface) is illustrated in the Figure ES-1 below. An
access rate would capture the non-usage-based cost of the delivery technology employed for the last-mile
connection (e.g., DSLAM ports). An aggregation rate would capture all usage-driven costs and would be
measured on the interface at the point of interconnection between the incumbent and competitor
networks. An interface rate would recover the flat-rate cost of the port facing the competitor network.

Figure ES-1: Proposed Rate Structure for Wholesale High-Speed Services


- iv -

Given the lack of availability of alternative wholesale services that reasonably efficient competitors can
employ, these service components should be priced as Conditional Essential Services.

Advantages of the CNOC Proposal

Separating aggregation into a distinct component removes any doubt that wholesale customers are paying
their fair-share for usage and removes the need to agree on what is an acceptable usage per-access. As a
result, competitors can bring pricing discipline, innovation and consumer choice to the residential retail IS
and related markets by being able to differentiate their retail services from each other’s and from those of
the incumbents.

Under this approach there should also be no concern that ordinary consumers served by Independent ISPs
would fund the bandwidth used by the heaviest retail IS consumers. Aggregation would be charged on a
per wholesale customer basis. Thus, each service provider, incumbent and Independent ISP alike, will be
able to manage its own end-users’ usage. Some service providers may choose to charge for usage, and
some may not. Caps and usage rates would be expected to vary among those service providers that do
chose to adopt UBB models at the retail level.

Ultimately, this type of competition will lead to additional choices in the form of differentiated usage
caps, usage charges and flat-rate pricing, all of which will benefit consumers and the Canadian economy.
Since consumers will have more choices, they will be able to buy the packages that most closely meet
their usage patterns. Any cross-subsidies that do survive at the retail level will be based on competitive
factors in justifiably forborne markets as is the case for the markets for other services where competition
is present, rather than based on incumbent marketing imperatives or regulatory fiat.

Cost-based aggregation charges will also ensure that overall, off-peak traffic that costs very little to carry
will not be charged at excessive rates, while wholesale customers will have to pay for any peak traffic that
their users cause in the aggregate on incumbent networks and that can lead to network congestion.

Under this type of rate structure, there would be no reason for the Commission to set a minimum
threshold level for the sale of bandwidth by large incumbent carriers to the Independent ISPs. Such a
threshold, if imposed, would only serve to artificially constrain competition by removing smaller niche
players from the market.

There are also several technical advantages of this model including ease of implementation (using
industry-standard “95th percentile” techniques for measuring traffic), accuracy and auditing.

The proposed rating approach also does not require any physical changes to how the services are
delivered today. This approach can be adapted to new technologies and also eliminates the problem of
uncorrelated usage.

Finally, because the same structure and principles could be utilized for both the telephone and cable
company wholesale services, the proposed approach would ensure regulatory symmetry in the industry.

The rate structure proposed by CNOC for wholesale high-speed access services is fair to both incumbents
and their competitors. Incumbents will be assured recovery of all Phase II costs incurred to provide the
services to their competitors plus a mandated mark-up, competitors will pay only for the services they
consume, and retail competition will be improved.

By focusing regulatory effort on wholesale high-speed access services in a manner that is efficient and
effective, competition at the retail level will be enhanced and retail IS rates can remain forborne. By
enhancing competition at the retail level, this approach will also improve Canada’s productivity,
-v-

international competitiveness and access to Canadian content in the digital age. All in all, the rating
approach proposed in this submission amounts to regulation that relies on market forces to the maximum
extent feasible as a means of achieving the telecommunications policy objectives, is efficient and
proportionate to its purpose, is minimally intrusive and maximizes reliance on market forces. Since it can
be applied equally to ILECs and cable carriers, this approach is also technologically and competitively
neutral, all of which is consistent with the Policy Direction. Rates developed according to this
methodology if based on sound evidence that is thoroughly tested would lead to rates for wholesale high-
speed access services that are just and reasonable.

Relief Requested

For all of the reasons set out in this submission, CNOC urges the Commission:

 To rescind the UBB Decisions; and

 To adopt the rate restructuring proposal for incumbent wholesale high-speed access services
proposed herein and apply it to all ILEC and cable carrier incumbents.
1.0 INTRODUCTION

1. At paragraph 11 of Review of billing practices for wholesale residential high–speed


access services, Telecom Notice of Consultation CRTC 2011-77, 8 February 2011 (“TNC 2011-
77”), the Commission initiated a review of billing practices regarding wholesale residential
high–speed access services.

2. Pursuant to TNC 2011-77 as amended, the following constitute the comments of


Canadian Network Operators Consortium Inc. (“CNOC”).

3. At paragraph 11 of TNC 2011-77, the Commission stated:

“The objective of this review is that Small ISPs continue to be afforded the flexibility
to bring price discipline, innovation and consumer choice to the residential retail
Internet service markets.”1

4. CNOC is pleased that the Commission recognizes the significant role played by
Independent ISPs in fostering competition. However, CNOC is deeply concerned that the
Commission continues to focus its regulatory scrutiny on the use of wholesale high-speed access
services (which provide last-mile broadband connections) too narrowly, i.e., only with respect to
the provision of residential Internet services (“IS”) to end-users.

5. The wholesale high-speed access services provided by the incumbent local exchange
carriers and incumbent cable carriers (collectively, “incumbents”) on a wholesale basis to their
competitors can now be used to provide a wide variety of retail services. These include voice,
data, video and Internet access. Some retail services supported by wholesale high-speed access
services never touch the Internet!

6. In other words, incumbent wholesale high-speed access services, including the last-mile
access, constitute the broadband platform that competitors need to offer almost all
telecommunications and broadcasting services to consumers. Although in this proceeding the
Commission is only considering the competitive state of retail IS, CNOC urges the Commission
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not to make any determinations that could hinder the use of incumbent wholesale high-speed
access services for the provision of other services to end-users by competitive service providers
(such as the Independent ISPs).

7. CNOC is also concerned that the Commission continues to treat Independent ISPs as
resellers, rather than telecommunications service providers of equal stature to the incumbents
when it comes to competitive issues. For example, the Commission’s press release
accompanying TNC 2011-77 was entitled “CRTC to review billing practices for wholesale
Internet services”. The implication of this title is that the incumbents provide wholesale Internet
services that Independent ISPs resell. The reality is starkly different.

8. As Figure 1 below shows, Independent ISPs obtain wholesale high-speed access services
from the incumbents, which they combine with other facilities, network elements and access to
the Internet to provide broadband services to their end-users. On the other hand, platforms for
services such as voice over Internet Protocol (“IP”) and video on demand services provided by
Independent ISPs using incumbent wholesale high-speed access services do not necessarily need
to touch the Internet.

1
In TNC 2011-77, the Commission used the term “Small ISPs” to refer to ISPs other than the large incumbent
telephone and cable companies. However, since some of these alternative ISPs can actually be larger than some
of the smaller incumbents, in this proceeding CNOC will refer to these ISPs as “Independent ISPs”.
-3-

Figure 1: Incumbent and Competitor Networks

9. It is now time for the Commission to recognize competitive service providers as equal to
incumbents from a competitive standpoint. This means that incumbents would not be allowed to
confer undue preferences upon themselves with respect to the manner in which they use their last
mile broadband connections, or transport and aggregate traffic within their networks to deliver
services to consumers relative to the manner in which they deliver wholesale services to their
competitors so that those competitors can provide their own retail services.

2.0 THE FRAGILE STATE OF COMPETITION IN THE PROVISION OF RETAIL


INTERNET AND RELATED SERVICES

10. At paragraph 7 of TNC 2011-77, the Commission indicated that it is in the best interest of
consumers that Independent ISPs, which offer competitive alternatives to the incumbents, should
continue to do so. However, as the Commission is well aware, competition in the provision of
high-speed Internet access services is still very fragile. In 2009, incumbent local exchange
-4-

carriers (“ILECs”) (excluding their out of territory operations) and cable carriers accounted
collectively for 93.8% of residential Internet access revenues.2 Therefore, all other ISPs
accounted for the remaining 6.2% of residential Internet access revenues.

11. The fragile nature of competition in the provision of retail IS was also acknowledged by
the Commission at paragraph 55 of in Telecom Regulatory Policy 2010-632:3

“The Commission concludes that, without a speed-matching requirement for wireline


aggregated ADSL access and TPIA services, it is likely that competition in retail
Internet service markets would be unduly impaired. In the Commission’s view, an
ILEC and cable carrier duopoly would likely occur in the retail residential Internet
service market, and competition might be reduced substantially in
small-to-medium-sized retail business Internet service markets. The Commission
considers that, in such circumstances, retail Internet service competition would not
continue to be sufficient to protect consumers’ interests.”

12. It is also widely known that only the dominant carriers are typically able to provide
service bundles of telephony, retail Internet and video services on their Internet Protocol (“IP”)
platforms and networks.4 The market for such “triple-play” bundles is a virtual duopoly.

13. As CNOC has also noted on previous occasions, the Commission’s Navigating
Convergence Report5 has made a number of important observations that are germane to this
proceeding:

“Access to content and services is intermediated in Canada by two key industry


groups, cable companies and ILECs offering fixed-line data, voice and
subscription television. Across the country, any given residential market is served
by one or both and only rarely by a third wired-facilities-based provider.

...

2
CRTC 2010 Communications Monitoring Report, p. 138.
3
Wholesale high-speed access services proceeding, Telecom Regulatory Policy CRTC 2010-632, 30 August
2010.
4
It is important to note that the use of IP technology does not always mean that traffic flows over the Internet.
While the Internet employs IP technology, that technology can and is also be used to provide other services that
never touch the Internet.
5
Navigating Convergence: Charting Canadian Communications Change and Regulatory Implications,
Convergence Policy, Policy Development and Research, Canadian Telecommunications and Radio-television
Commission, February 2010, at paragraphs 113, 116, 120 through 122, 126 and 129.
-5-

ILECs controlled 82.1% of wireline local and access revenues in 2008, with
another 18.6% accruing to cable BDUs. Since ISP services are generally provided
over the same infrastructure owned by those two groups, it is not surprising that
just 6% of residential Internet access revenue is controlled by resellers, utility
telecommunications companies and other carriers.

...

The high concentration of residential telecommunications and video distribution


revenue and access points in the hands of largely two main providers in most
regions—a cable company and telecommunications company—has potential
implications for the evolution of a competitive marketplace for these services.
While the threat of competition has a disciplining effect on incumbent behaviour,
the reality of non-facilities-based competition is such that for the majority of
consumers, alternatives are not considered compelling. Without the flexibility to
meaningfully reduce prices below those offered by the incumbent facilities-based
entities or employ other meaningful differentiators, alternative providers are
unlikely to gain any significant traction in the short-term.

Though the Commission has pursued a regime of facilities-based competition that


unbundles or makes available for resale the telecommunications company
provided and cable company owned network elements which are required to offer
competitive services, it seems unlikely that in the short- to mid-term, the most
sophisticated bundles of Internet/phone/television (the "triple play") will be
offered by any other than the incumbent facilities-based providers.

...

As Canadian consumers respond positively to bundled offerings, competitor


inability to offer triple- and quad-play services has the potential to entrench
the dominant position held by incumbent facilities-based providers. At year-
end 2008, approximately 25% of residential accounts included service bundles
with at least two of local, Internet, video or mobile services…

. ..

Although it requires further study, it appears that bundling strategies are having
the effect of enabling service providers to maintain price level. … with the
exception of Internet pricing (which has fallen slightly), telephone and BDU
pricing has been on an upward trajectory in comparison with the overall consumer
price index.

...

Observers have asserted that the concentration of broadband revenues accruing to


ILECs and cable providers has the effect of keeping consumer prices higher than
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they might otherwise be. This is borne out in cross-OECD comparisons of


broadband pricing. Among the most dramatic of the various comparisons is that
of average broadband monthly price per advertised Mbps as measured in U.S.
dollars, adjusted to purchasing power parity (see figure 8).

Figure 8. Average broadband monthly price per advertised Mbps, Oct 2008,
U.S.$ PPP

Source: OECD” (Emphasis added.)”

14. More recent data OECD data reveals that Canada is still near the bottom of the pack in
terms of average broadband monthly price per advertised Mbit/s.6

6
http://www.oecd.org/document/54/0,3746,en_2649_33703_38690102_1_1_1_1,00.html, Table 4f, Average
broadband monthly price per advertised Mbit/s, by country, USD PPP (Oct. 2009).
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Figure 2: OECD Country Broadband Price Comparison

15. Under these conditions,7 the Commission must be very cautious in exercising its powers
and performing its duties with respect to how it allows incumbents to structure their wholesale
high-speed access services. Any misstep, no matter how inadvertent, could weaken competitors
and unduly lessen competition in the provision of residential Internet access service and related
services and service bundles provided over IP platforms.

7
Sections 2.1 to 2.6 of the Final Submissions of TekSavvy Solutions Inc. dated 21 June 2010 in Proceeding to
consider the appropriateness of mandating certain wholesale high-speed access services, Telecom Notice of
Consultation CRTC 2009-261-7, 23 December 2009 provide considerably more detailed evidence of Canada’s
poor broadband performance in the current largely duopolistic environment for the provision of broadband
services and service bundles.
-8-

3.0 END-USER-BASED USAGE-BASED BILLING DOES NOT MEET


COMPETITIVE IMPERATIVES AND SHOULD BE REJECTED

16. CNOC is extremely concerned about Telecom Decisions CRTC 2010-255,8 2010-8029
and 2011-4410 (collectively “UBB Decisions”). If these decisions had been allowed to stand, they
would have significantly altered the rate structure for incumbent wholesale high-speed access
services in a manner that would unduly reduce competition in the provision of retail services and
harm Canadian consumers, culture and the economy, while greatly and unjustly enriching the
incumbents.

17. In the UBB Decisions, the Commission approved a plan for Bell Aliant and Bell Canada
(collectively “Bell”) to place caps on the amount of traffic flowing through each individual
incumbent last mile broadband connection employed by another service provider that purchases
a wholesale high-speed access service from the incumbent to deliver its own services to a
Canadian household. Usage above the caps would be measured and billed as incurred. This
wholesale usage-based billing (“UBB”) rate structure is the same as the UBB rate structure that
Bell has chosen to implement for its own individual residential retail Internet customers, subject
only to a modest 15% discount mandated for wholesale UBB rates relative to Bell’s own retail
UBB rates. In addition, the UBB Decisions also confirmed that this type of UBB framework for
wholesale high-speed access services would have been acceptable if applied by other incumbents
if they so choose.

8
Bell Aliant Regional Communications, Limited Partnership and Bell Canada – Applications to introduce usage-
based billing and other changes to Gateway Access Services, Telecom Decision CRTC 2010-255, 6 May 2010.
9
Bell Aliant Regional Communications, Limited Partnership and Bell Canada – Applications to review and vary
Telecom Decision 2010-255 concerning usage-based billing for Gateway Access Services, Telecom Decision
CRTC 2010-802, 28 October 2010.
10
Usage-based billing for Gateway Access Services and third-party Internet services, Telecom Decision CRTC
2011-44, 25 January 2011.
-9-

18. The Commission adopted this approach on the theory that UBB is an economic Internet
traffic management practice (“ITMP”) that allows incumbents to reduce congestion caused by
peak traffic in their networks and puts users in control of usage by having them pay for the
amount of traffic they consume. However, this regulatory approach is fundamentally flawed
because it:

 Regulates incumbent wholesale high-speed access services that can be used for a variety
of services including voice, data, video, Internet and non-Internet broadband
applications as if they were analogous solely to the incumbents’ retail Internet services;

 Treats the end-users of an incumbent’s wholesale customer in the same manner as the
incumbent treats its own end-users, instead of treating the wholesale customer as a
whole as the incumbent’s customer and letting that wholesale customer determine how
to provide service to its end-users based on market demand;

 Creates a disincentive for incumbents to meet demand for broadband capacity and
reduce congestion caused by peak traffic loads by investing in their networks in order to
meet demand, encouraging them instead to constrain network capacity and maximize
revenues; and

 Constitutes a regulatory measure whose purpose is ostensibly to reduce the congestion


created by peak period traffic in a manner that instead reduces the volume of all traffic
carried by competitors of the incumbents, even though the bulk of such traffic is carried
in non-peak periods at much lower (if not virtually zero) cost and does not contribute to
network congestion.

19. If allowed to stand, the UBB Decisions, which impose UBB on wholesale traffic based
on individual broadband end-user access connections, would have:

 Increased retail prices for Internet and other broadband services and constrained the use
of such services by Canadians very significantly thereby reducing the use of broadband
services as a catalyst of innovation and economic growth in both rural/remote and urban
parts of Canada;

 Reduced the use of broadband as a means of distribution of Canadian content;

 Made it virtually impossible for competitive services providers, such as CNOC


members, to innovate and differentiate their retail Internet services from those of the
incumbents;

 Conferred an undue advantage on the incumbents own retail telephony, video (e.g.,
IPTV or cable) and other services which will not be subject to UBB charges, while
wholesale broadband traffic including the telephony, video and other service offerings
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would have been be subject to UBB charges – for example, Bell excludes its IPTV
service from the application of UBB, while competitors would not have that option;

 Increased the financial risk of competitors who would have had to charge their end-
users for usage on a post-paid basis more than a month after the usage is incurred and
billed by the incumbents, compared to the present industry practice whereby
competitors typically require pre-payment of services purchased on a flat-rate basis
from their end-users;

 Enabled incumbents to obtain an undue preference by providing promotions and


discounts to their retail UBB fees, while wholesale broadband traffic of all types would
remain subject to the incumbents’ tariffed UBB charges;

 Generated additional revenues for incumbents at virtually no cost via the application of
UBB rates to wholesale traffic resulting in improper, anti-competitive cross-subsidies
that the incumbents could use to compete with their competitors;

 Resulted in an asymmetrical grandfathering of retail customers on non-UBB retail plans


as between Bell and its wholesale customers thereby conferring an undue preference on
Bell; and

 Created disputes regarding how traffic is measured and billed to wholesale customers by
incumbents.

20. The average end-user of a CNOC member consumes an estimated 30 GB per month
using his/her broadband access connection. Usage is expected to increase at a minimum rate of
50% per year and reach 300 GB per month in approximately five years, barring any artificial
constraints. If Canadians start shifting more of their viewing to broadband platforms (which is
the current trend) this growth pattern could accelerate much more quickly. According to its very
recently published Project Canada Report, Credit Suisse estimates that the average user would
be consuming approximately 215 GB per month based on 2009 viewing patterns. CNOC trusts
that the Commission does not want to endorse an economic constraint that would only allow
programming offered by the incumbent telephone and cable companies to be viewed by
Canadians over incumbent last-mile broadband connections. Consumers should have the
freedom to use those connections (accessed by competitors such as Independent ISPs via
incumbent high-speed access services) to obtain alternative programming choices from other
services providers.
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21. CNOC does not object to a requirement for Independent ISPs and other incumbent
wholesale customers that also compete with the incumbents to pay for the network resources of
the incumbents utilized by the wholesale customers to provide their own retail services. In fact,
the CRTC has developed the Phase II costing mechanism that it uses for rate setting purposes to
ensure that this occurs. However, there are much more efficient and effective ways of
accomplishing this objective than the application of end-user-based UBB charges via incumbent
wholesale high-speed access services.

22. As Commissioner Molnar stated in her dissent in Decision 2010-255:

“I would note that I am not convinced that the Bell companies’ proposal to apply
UBB charges based upon end-customer usage is the most effective Internet traffic
management practice (ITMP) approach. Nor am I persuaded at this time that an
aggregated usage model, if properly structured, would nullify the potential
effectiveness of UBB as a means of managing network usage. Certainly, an
aggregated usage model would have provided ISPs that subscribe to the
Bell companies’ GAS (GAS ISPs) with greater flexibility to manage end-user
pricing/service solutions.”

23. To date the damage caused by and end-user-based wholesale UBB regime has been
limited. Although the four major cable carriers had obtained regulatory approvals in the last few
years to apply UBB charges to wholesale services, only Videotron Ltd. (“Videotron”) has
actually levied such charges on its competitors and Videotron’s wholesale customer base is
relatively limited.

24. So far, other major telephone companies have also not made any move to introduce UBB,
proving that this kind of measure is not necessary. In fact, even among the ILECs, only Bell
Canada and Bell Aliant Regional Communications Limited Partnership (“Bell Aliant”) (Bell
Canada and Bell Aliant collectively, “Bell”) in Ontario and Quebec have pursued an end-user-
based UBB regime. TELUS Communications Company has stated publicly that it does not
intend to pursue this type of pricing strategy.

25. If the Commission were to affirm the UBB Decisions as rendered or in modified form, a
number of major cable carriers would likely introduce such charges. Other telephone companies
would also be emboldened and follow suit. If the application of UBB to wholesale high-speed
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access services spreads to Bell and other incumbents, the anti-competitive impact will be swift
and severe.

26. Continued application or expansion of an end-user based UBB regime that conceptually
treats wholesale services provided to wholesale customers the same as the incumbents treat their
own retail Internet services is unworkable and interferes unduly with the operation of market
forces.

27. Canada’s status as a former leader in broadband has already evaporated. Canada now lags
behind most OECD countries in broadband measures such as price and speed. As discussed in
Part 2.0 above, one has to look no further than the CRTC’s own 2010 Navigating Convergence
report and more recent OECD data to see stark evidence of Canada’s poor broadband
performance these days. At the same time, while almost all components required to deliver
Internet access have gone down in cost, prices for Canadian consumers are going up. Something
is very wrong with the state of broadband competition in Canada.

28. Measures such as the UBB Decisions would only serve to exacerbate the situation by
reinforcing telephone and cable company duopolies, leading to declines in Canada’s productivity
and international competitiveness in the digital age.

29. To the best of CNOC’s knowledge, no other OECD country is pursuing the kind of
policies promoted by the UBB Decisions. Neither should Canada. In fact, in most cases UBB is
not even applied to retail services in other countries, and where it is, other options are also
available. In the US for example, most carriers do not apply caps, although, Comcast
Corporation, which has imposed usage caps on retail traffic, has set its cap at 250 GB, or 10
times the 25 GB cap that Bell applies to consumers in Ontario, and also intended to apply to end-
users of Bell’s competitors via wholesale high-speed access broadband connections services as
well under the UBB Decisions.

30. The use of an end-user-based wholesale UBB regime with all of the anti-competitive
consequences just described does not constitute regulation that is efficient and proportionate to
its purpose, is minimally intrusive and maximizes reliance on market forces as required by the
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government’s 2006 Policy Direction to the CRTC.11 Accordingly, such a regime would not lead
to rates for wholesale high-speed access services that are just and reasonable.

31. The UBB Decisions are presently stayed pursuant to paragraph 14 of TNC 2011-77.
Based on all of the considerations just discussed, CNOC urges the Commission to rescind them.

4.0 CNOC’S PROPOSAL FOR THE RESTRUCTURING OF RATES FOR


WHOLESALE HIGH-SPEED ACCESS SERVICES

4.1 Competitive Rate Principles for Wholesale High-Speed Access Services

32. Instead of the regime contemplated under the UBB Decisions, CNOC urges the
Commission to adopt a new rate structure for wholesale high-speed access services employed by
Independent ISPs in the provision of retail IS that adheres to the following principles:

 Wholesale high-speed access services should be regulated as a broadband platform that


can support many services, including voice, data, video, Internet and non-Internet high-
speed services, instead of being regulated by comparison to (or so as to mimic) the retail
Internet services of the incumbents;

 Competitors must be granted access to the incumbents’ wholesale high-speed access


services in a manner that affords the competitors greater flexibility to manage end-user
pricing/service solutions by being able to choose the attributes of the services provided
to end-users, such as speed, throughput, quality of service, type of service, aggregation,
bundling, etc.;

 Prices for wholesale high-speed access services should be cost-based and not include
other subjective concepts, such as value of service principles (and in this respect there
should be no distinction in the use of such services for residential or business purposes
or link to the retail IS rates set by incumbents based on their variable marketing
considerations); and

 Prices for wholesale high-speed access services should not be based on whatever the
market will bear as that will only lead to prices that allow incumbents to leverage their
duopolistic market power when providing such services to competitors, as well as retail
services to end-users – in fact, until competitive alternatives become available,
wholesale high-speed access services should be priced as conditional essential services.

11
Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives,
P.C. 2006-1534, 14 December 2006 (“Policy Direction”).
- 14 -

4.2 The Current Rate Structure for Wholesale High-Speed Access Services

33. Currently, incumbent wholesale high-speed access services are broken into two recurring
rate components. In the case of ILECs, the first component is a per-user access rate (access) and
the second is an aggregation interface rate (interface). Both of these rate elements implicitly
recover usage costs.

Figure 3: Current Rate Structure of ILEC Wholesale High-Speed Access Services

34. For the cable carriers, the TPIA service is similarly structured however all of the
aggregation costs are borne in a recurring access component, and cost of the interface is
recovered via a non-recurring charge.

Figure 4: Current Rate Structure of Cable Carrier Wholesale High-Speed Services


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4.3 Proposed Rate Structure for Wholesale High-Speed Services

35. The fundamental problem with the existing rate structure is that as long as the usage costs
are not separated from the access and, where applicable, interface components, there will always
be disagreement over what amount of Internet usage is ‘acceptable’ on a per-access basis.

36. Fortunately there is a simple and elegant solution to this problem, namely, the unbundling
of existing rates to recover the usage-sensitive costs through a distinct aggregation rate. This
proposal, featuring three distinct rate components (access, aggregation and interface) is
illustrated in Figure 5 below. An access rate would capture the non-usage-based cost of the
delivery technology employed for the last-mile connection (e.g., DSLAM ports). An aggregation
rate would capture all usage-driven costs and would be measured on the interface at the point of
interconnection between the incumbent and competitor networks. An interface rate would
recover the flat-rate cost of the port facing the competitor network.

Figure 5: Proposed Rate Structure for Wholesale High-Speed Services

37. Given the lack of availability of alternative wholesale services that reasonably efficient
competitors can employ, these service components should be priced as Conditional Essential
Services.
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4.4: Advantages of the Proposed Rate Structure

38. Separating aggregation into a distinct component removes any doubt that wholesale
customers are paying their fair-share for usage and removes the need to agree on what is an
acceptable usage per-access. As a result, competitors can bring pricing discipline, innovation and
consumer choice to the residential retail IS and related markets by being able to differentiate
their retail services from each other’s and from those of the incumbents.

39. Under this approach there should also be no concern that ordinary consumers served by
Independent ISPs would fund the bandwidth used by the heaviest retail IS consumers.
Aggregation would be charged on a per wholesale customer basis. Thus, each service provider,
incumbent and Independent ISP alike, will be able to manage its own end-users’ usage. Some
service providers may choose to charge for usage, and some may not. Caps and usage rates
would be expected to vary among those service providers that do chose to adopt UBB models at
the retail level.

40. Ultimately, this type of competition will lead to additional choices in the form of
differentiated usage caps, usage charges and flat-rate pricing, all of which will benefit consumers
and the Canadian economy. Since consumers will have more choices, they will be able to buy the
packages that most closely meet their usage patterns. Any cross-subsidies that do survive at the
retail level will be based on competitive factors in justifiably forborne markets as is the case for
the markets for other services where competition is present, rather than based on incumbent
marketing imperatives or regulatory fiat.

41. Cost-based aggregation charges will also ensure that overall, off-peak traffic that costs
very little to carry will not be charged at excessive rates, while wholesale customers will have to
pay for any peak traffic that their users cause in the aggregate on incumbent networks and that
can lead to network congestion.

42. Under this type of rate structure, there would be no reason for the Commission to set a
minimum threshold level for the sale of bandwidth by large incumbent carriers to the
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Independent ISPs. Such a threshold, if imposed, would only serve to artificially constrain
competition by removing smaller niche players from the market.

43. There are also several technical advantages of this model including ease of
implementation, accuracy and auditing. From an implementation standpoint, there is an industry
standard method of measuring bandwidth at a common interface known as “95th percentile”
billing. In fact, this is the chosen technique that has been in use by the incumbents for decades
for other retail services they offer, and therefore does not require any new measurement or
billing processes. This method also does not impose complex and error-prone per-user
correlation and reconciliation processes thereby dramatically increasing the accuracy of
measurement data. In addition, since the interface can be measured by both the wholesale
provider and customer at any time, the proposed method provides an auditable method of
measurement rather than having to trust incumbent ‘black box’ usage data otherwise not
available to Independent ISPs for months after collection by the incumbents.

44. The proposed rating approach also does not require any physical changes to how the
services are delivered today. By simply splitting the aggregation costs into a separately billable
component, a tariff rate structure can be established that is timeless, adaptable to growth and new
technologies. Such a tariff structure also eliminates other challenges introduced by the model
introduced by the UBB Decisions, such as arbitrarily determined caps and wholesale per-end-
user discount rates, and how uncorrelated usage and per-user measurement discrepancies can be
addressed.

45. Finally, because the same structure and principles could be utilized for both the telephone
and cable company wholesale services, the proposed approach would ensure regulatory
symmetry in the industry.

4.5 The Proposed Rate Structure is Lawful and Consistent with the Policy Direction

46. The rate structure proposed by CNOC for wholesale high-speed access services is fair to
both incumbents and their competitors. Incumbents will be assured recovery of all Phase II costs
incurred to provide the services to their competitors plus a mandated mark-up, competitors will
pay only for the services they consume, and retail competition will be improved.
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47. By focusing regulatory effort on wholesale high-speed access services in a manner that is
efficient and effective, competition at the retail level will be enhanced and retail IS rates can
remain forborne.12 By enhancing competition at the retail level, this approach will also improve
Canada’s productivity, international competitiveness and access to Canadian content in the
digital age.13 All in all, the rating approach proposed in this submission amounts to regulation
that relies on market forces to the maximum extent feasible as a means of achieving the
telecommunications policy objectives, is efficient and proportionate to its purpose, is minimally
intrusive and maximizes reliance on market forces. Since it can be applied equally to ILECs and
cable carriers, this approach is also technologically and competitively neutral, all of which is
consistent with the Policy Direction.14 Rates developed according to this methodology if based
on sound evidence that is thoroughly tested would lead to rates for wholesale high-speed access
services that are just and reasonable.15

5.0 CONCLUSION AND RELIEF REQUESTED

48. Wholesale pricing for access, aggregation and interface components of incumbent
wholesale high-speed access services based on Phase II costs with a reasonable and consistent
mark-up on those costs protects telephone company and cable carrier incumbents' investments
while still enabling vibrant competition that yields significant benefits for consumers and the
Canadian economy.

49. Any other model of end-user-based usage-based billing only serves the last-mile
providers (i.e., incumbents) by allowing them to control the downstream retail markets through
the arbitrary application of service speeds, as well as usage thresholds and rates imposed on
wholesale customers’ end-users.

12
Which is consistent with subsection 7(f) of the Telecommunications Act, S.C. 1993, c. 38, as amended (the
“Act”).
13
These impacts are consistent with subsections 7(a) and 7(c) of the Act.
14
See, especially paragraphs 1(a)(i), 1(a)(ii), 1(b)(ii) and 1(b)(iv) of the Policy Direction.
15
As required by subsection 27(1) of the Act.
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50. For all of the reasons set out in this submission, CNOC urges the Commission:

 To rescind the UBB Decisions; and

 To adopt the rate restructuring proposal for incumbent wholesale high-speed access
services proposed herein and apply it to all ILEC and cable carrier incumbents.

*** END OF DOCUMENT ***