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Usage-based billing for Gateway Access services

and Third Party Internet access services

Telecom Notice of Consultation CRTC 2011-77, as


amended TNC CRTC 2011-77-1

Comments
Distributel Communications Limited
March 28, 2011
Introduction

1. These comments are submitted by Distributel Communications Limited


(Distributel) in accordance with the procedures set out in TNC 2011-77, as
amended.

2. Distributel is a member of Canadian Network Operators Consortium Inc.


(“CNOC”) and has had an opportunity to review a draft of the comments filed
by them, and supports those submissions.

3. Paragraph 10 of the TNC 2011-77 the Commission reiterates chairman


Konrad von Finckensteins’ statement to the Standing Committee on
Industry, Science and Technology, of its intention to delay implementation of
the decisions 1 relating to wholesale UBB rates charged by certain
incumbents (ILEC and Cable Carriers) to their ISP wholesale customers,
and initiate a review of the billing practices regarding wholesale residential
high speed access services.

4. At Paragraph 12 of TNC 2011-77 the Commission seeks comments on:


i. How to best implement the following principles with respect to
large incumbents’ wholesale services used by smaller ISPs;
a) As a general rule, ordinary consumers served by Small ISPs,
should not have to fund the bandwidth used by the heaviest retail
internet service consumers.
b) It is in the best interest of consumers that Small ISps, which offer
competitive alternatives to the incumbent carriers, continue to do
so.
ii. Whether the Commission should set a minimum threshold level
for the sale of bandwidth by large carriers to the small ISPs, and if so,
what it should be.

1 Telecom Decisions 2010-255. 2010-802 and 2011-44.


5. Additionally at Paragraph 13 of TNC 2011-77 the Commission seeks
comments on how any changes to the regulatory approach would:
i. Benefit consumers to allow them fulsome access to the Internet;
ii. Respect the principle that ordinary consumers served by Small
ISPs should not fund the bandwidth used by the heaviest retail
Internet Service consumers; and
iii. Ensure Small ISPs retain flexibility and continue to be a source of
innovation in the industry.

6. To support the aforementioned principle that ordinary consumers served


by Small ISPs should not fund the bandwidth used by the heaviest retail
internet service, Distributel is of the opinion that short of regulating retail
Internet service offerings the only method that will satisfy this principle is to
adopt an approach that wholesale ISPs are charged rates that are cost
compensatory to the usage generated by their customer base. In such
instance, there would be no subsidy requirement as the incumbent would be
fully compensated for the use of its network.

7. In this submission Distributel focuses on the character of the Per User


Usage Charges and points out fundamental policy flaws in the
Commission's decisions to approve such charges, namely:

a) as currently designed the incumbents Per User Usage Charges


discourage Internet use;

b) when incorporated in wholesale broadband access tariffs the Per


User Usage Charges inhibit innovation; and

c) when incorporated in wholesale broadband access tariffs the Per


User Usage Charges impair competition and limit consumer
choice.
8 Distributel would like to emphasize that it does not oppose the
introduction of economic Internet traffic management practices which are
truly reflective of costs and, hence, are economically efficient. 2 On the
contrary, Distributel supports such an approach. However, the Per User
Usage Charges approved by the Commission are not reflective of costs, do
not serve to shift traffic away from the peak period and are not economically
efficient.

9. In Decision 2010-255, when approving the Per User Usage Charges


proposed by Bell Aliant and Bell Canada (collectively “Bell”), the
Commission acknowledged that all the costs associated with Bell's Gateway
Access Service were recovered by the flat rate component of that service:

54. The Commission notes that under the Bell companies’


proposed economic ITMP, they would continue to recover their
access costs and all usage costs from the flat-rate component.

10. This means that the Per User Usage Charges are not cost-based in any
way whatsoever. These charges are 100% profit.

11. Consequently, the Per User Usage Charges approved by the


Commission are not economically efficient. They constitute a form of
“monopoly rent” and reflect a fundamental failure in both the retail and the
wholesale markets – a market failure which the Commission has accepted
and endorsed to the detriment of all Canadians.

2
As discussed below, in the case of a wholesale service, a competitor's traffic should be
measured in aggregate (i.e., across all or large groups of end users) and traffic-related usage
charges should be based on peak period usage in order to reflect actual costs incurred by the
incumbent to provision the network. This is something which the incumbents should be able to
do without difficulty since they routinely measure peak period demand in order to monitor and
plan their networks.
a) It is Bad Policy to Discourage Internet use

12. The purpose of the Per User Usage Charges is to discourage Internet
use. This goal was expressly acknowledged by the Commission in Decision
2010-255:

21. The Commission notes that, under the Bell companies’


proposal, rates vary with the amount of usage generated by each
end-user of a GAS ISP. The Commission considers that the
Bell companies’ proposal would incent heavy end-users to
reduce their usage, including during peak periods.
(emphasis added)

13. Canada is probably the only country in the world where the regulator
has a policy that deliberately aims to reduce Internet use by its citizens.

14. This is an extraordinary thing at a time when Canada and all of its major
trading partners are devising and implementing digital strategies intended to
give their citizens and businesses the best that modern communications has
to offer. The Commission's policy runs directly contrary to this goal since its
seeks to discourage Internet usage without there being any economic basis
for imposing such a limitation.

15. On this last point it is important to recognize that it is not the absolute
volume of traffic generated by a user that matters from a cost perspective
but rather the time period when the traffic is generated. Only peak period
usage imposes real network costs on the network operator since the
network must be built to meet peak period demand. During the rest of the
day, end user traffic does not impose any additional network costs.
16. The Per User Usage Charges approved by the Commission do not
recognize this fact. Instead, they impose charges which are economically
unjustified charges and which discourage usage at any time of the day. 3

17. For example, a consumer with a 5 Mbps broadband service could


download 5 Mbps steadily during the two busiest hours of the day for 20
days and that would result in the transfer of about 88 GB in a month. A
second consumer could download 5 Mbps steadily, twenty hours per day for
30 days and this would transfer about 1,318 GB in a month. Despite the
second consumer downloading 15 times as much data, both users would
cost the same to serve because both would consume the same amount of
facilities during the peak period.

18. Both of these consumers would cost the same to serve, but the second
consumer would face a staggering bill at the end of the month because of
the Per User Usage Charges. Indeed, the second consumer could avoid the
peak period altogether and still face an overwhelming bill. This makes no
sense.

19. Both consumers are being discouraged from using the Internet at any
time of the day. There is absolutely no justification for imposing such
charges and discouraging Internet usage in this way. Canadians should be
encouraged to embrace the Internet and all broadband services – not to live
in fear of going over an artificial and economically unsound usage limit.

20. Retail Internet services are not regulated and the incumbents are free
to charge for usage the way they see fit; however, the Commission's

3
The Per User Usage Charge approach approved by the Commission can be contrasted
with what is happening in the electricity market in Ontario where the government is spending
more than one billion dollars on its smart meters program in order to shape the electricity
demand curve away from peak hours. The economic Internet traffic management mechanism
approved by the Commission does not shift traffic away from the peak period and therefore
does not address the peak period traffic congestion problem.
decision to impose such charges on all service providers is bad policy for
Canada and for Canadians.

b) It is Bad Policy to Inhibit Innovation

21. The Per User Usage Charges discourage usage and consequently
inhibit any type of innovation which relies on local broadband networks –
whether over the Internet or otherwise.

22. For example, VoIP, video calls, merchant transactions, video


surveillance, virtual computing, video on demand and many yet to be
invented applications may use the local broadband networks of the
incumbents; however, the Per User Usage Charges approved by the
Commission would impose an extraordinary cost on any person wishing to
develop or use an application which generates a high level of traffic –
irrespective of when that traffic occurs. Consequently, these charges will
distort the economics of such applications and inhibit innovation.

23. The recent entry into Canada of Netflix - the Internet video service –
provides a good example. Because of Per User Usage Charges a Canadian
consumer who wishes to use Netflix on a regular basis faces the prospect of
significant usage charges no matter when the consumer uses the Netflix
service. The consumer could watch Netflix videos during the quietest traffic
period of the day and still face high usage charges. This does not make
economic sense.

24. It is also important to recognize that implementation of Per User Usage


Charges puts Netflix at a competitive disadvantage as compared to the
video services of the cable and telephone companies. The incumbents'
television and video-on-demand services are being offered on an unmetered
basis - that is, users do not face usage charges based on traffic volume
when they use the incumbents services. Consequently, the application of
Per User Usage Charges to the incumbents' own Internet services and their
wholesale broadband access services has a direct anti-competitive effect on
innovative services such as Netflix which rely on the local broadband
network to reach consumers.

25. Per User Usage Charges also affect innovative services which do not
even touch the Internet. A video surveillance security service which used the
incumbents' local broadband networks would quickly become uneconomic
because of the high usage charges which would be applied – even though
the vast majority of the traffic would not occur during peak periods. And,
once again, the incumbents would not apply Per User Usage Charges to
their own security services. The anti-competitive aspect of the Per User
Usage Charges is obvious.

26. Overall, the Per User Usage Charges represent a significant


impediment to the development and implementation of innovative
broadband services. They also have a serious anti-competitive effect. It is
profoundly bad policy to inhibit innovation and impair competition in this way
and thereby cripple Canada's ability to develop and use leading edge
innovations for the digital economy.

c) It is Bad Policy to Limit Consumer Choice

27. The direct application of the incumbent's retail Internet pricing


mechanisms to wholesale broadband access tariffs has the effect of limiting
consumer choice since it forces wholesale customers to follow the retail lead
of the incumbents instead of designing their own, truly cost-based services.

28. It makes no sense from a policy perspective to impair competition and


limit consumer choice in this way.
29. If a competitor - who is a wholesale customer of an incumbent - were
subject to an economic Internet traffic management usage charge reflecting
the competitor's total peak period usage the incumbent would be fully
compensated for the use of its network. At the same time, the competitor
could design, in an economically rational manner, a variety of retail services
- some with lower and some with higher usage limits which may be time-of-
day specific – in order to meet specific retail market niches. This would give
consumers more choice and strengthen competition.

30. This cost-based approach makes basic economic sense and accords
with the requirements in the Telecommunications Act and the Policy
Direction that the Commission promote competition and rely on market
forces to the maximum extent possible. It also complies with the Policy
Direction's requirement that regulatory measures of an economic nature
should “neither deter economically efficient competitive entry into the market
nor promote economically inefficient entry”.

31. Instead of taking this economically sound, cost-based approach the


Commission has adopted a policy which permits the incumbents to impose
their retail pricing on their wholesale customers to the detriment of
competition and consumers. This is a bad policy decision.

Conclusion

32. Distributel firmly disagrees with any application of the Per User Usage
Charges at the wholesale level. The Commission's decisions to approve
such charges are based on a seriously flawed policy which discourages
Internet use, inhibits broadband innovation, impairs competition and limits
consumer choice. It is a bad decision for Canada and for Canadians.
33. Any usage charges applicable at the wholesale level should be truly
reflective of costs and should apply to a wholesale customer's aggregate
traffic. This is the only way to ensure an economically rational wholesale
regime. It is also the only way to ensure that the wholesale regime complies
with the Policy Direction's requirement that regulatory measures of an
economic nature should “neither deter economically efficient competitive
entry into the market nor promote economically inefficient entry”.

34. As indicated previously, Distributel is a member of CNOC and has had


the opportunity to review a draft of its comments submitted in this
proceeding and wholly supports the proposal for the restructuring of rates for
wholesale high-speed access services contained therein 4 .

35. All of which is respectfully submitted.

*** end of document ***

4 CNOC comments March 28, 2011 Section 4.0 pgs 13-18