Economics and Technology, Inc. -- Views and News, September 2010

September 2010

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Canadian regulators expand requirement for nondiscriminatory provision of wholesale broadband transmission to rival carrier

Canadian regulators (the Canadian Radio-television and Telecommunications Commission – CRTC) have consistently treated high-speed Internet access as a common carrier telecommunications service, whether provided over ILEC facilities or over those owned by cable companies. In 2006 and 2007, the CRTC adopted a requirement that Canada's larger ILECs and cable carriers make high-speed Internet access services available to competitors at whatever speeds the incumbents offer to their own retail Internet customers – the so-called "speed-matching" rule. After ILECs and cable carriers mounted challenges to the speed-matching requirements – particularly as they applied to higher-speed services – the CRTC initiated a proceeding to examine the current status of wholesale and retail Internet access competition to determine what changes, if any, were appropriate. ETI had submitted expert evidence in that proceeding on behalf of the largest CLEC in Canada. The CRTC has just released an order that not only reaffirmed the earlier ruling, it even broadened the speed-matching requirements with respect to incumbents' high-speed Internet access services. The relevant findings upon which the CRTC based its August 30, 2010 decision include:

The additional competition supplied by non-facilities-based retail providers of Internet access services is beneficial to residential and small business customers:

"The retail residential and small-to-medium-sized business Internet service markets are now served by the incumbents and a number of smaller competitors that generally use the incumbents' wholesale services to do so. In the Commission's view, these competitors' services bring pricing discipline, innovation, and consumer choice to these retail Internet service markets."
Retail competitors are impaired without access to wholesale ILEC and cable carrier high-speed Internet access services:

"[W]ithout a speed-matching requirement for wireline aggregated ADSL access and TPIA [Third-Party Internet Access] services [the high-speed wholesale Internet access offerings of ILECs and cable carriers, respectively], 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."

"[A]t this time, retail Internet services provisioned using wireless and satellite facilities generally remain complements to, and not substitutes for, retail Internet services provisioned using wireline facilities."
Calling a service or facility "next generation" (or "broadband") does not confer some mystical status that trumps the regulators' obligation to examine the impact of denying wholesale access on the viability of retail competition:

"[T]he real issue is to establish those wholesale obligations, if any, that should apply to identified facilities. ... competitors continue to require access to the wholesale services currently offered by the incumbents over their digital subscriber line and DOCSIS platforms in order to ensure that sufficient competition exists in the provision of retail Internet services. In the case of the ILECs, the facilities that are subject to wholesale obligations include FTTN and, in the case of the cable carriers, DOCSIS 3.0 facilities."

In stark contrast to the Canadian approach, for most of the past decade the FCC has classified broadband Internet access as an "information service," thereby relieving US ILECs and cable providers of any obligation to make the underlying transmission component available to competing retail ISPs on a wholesale basis. Like the FCC, the CRTC does not impose rate regulation on retail Internet services, a policy that dates back to the time when "competitive retail Internet service providers were able to provide their services on a dial-up basis, using the customer's retail telephone service" and the ILECs and cable companies were not themselves heavily involved in providing retail Internet services. However, unlike the FCC, the CRTC adapted its policies to the changes in the Internet access market once the dominant facilities-based telephone and cable providers began to offer broadband Internet access. Thus, "[a]s the retail Internet service market began to evolve to higher speed retail Internet services, to ensure these services remained subject to competition sufficient to protect consumer interests, the [CRTC] required that ILECs and cable carriers make some of their high-speed access facilities available as wholesale services for competitors to use as inputs in the provision of retail Internet services." CRTC 2010-632 at para. 6. The CRTC has been willing to adopt and maintain regulatory forbearance for retail Internet access services precisely because it has a wholesale regulatory framework that assures non-facilities-based ISPs the ability to purchase wholesale services – including broadband – from ILECs and cable providers.

As a result of the affirmative measures that Canadian regulators have taken to promote retail competition by imposing wholesale obligations on ILECs and cable companies, Canadian regulators have reduced the scope of net neutrality concerns that remain to be policed through ex post (after the fact) regulation (such as is contemplated by the FCC's "Third Way" proposal – see Views and News, June 2010). Having adopted requirements that foster competition at the retail level, the CRTC's net neutrality framework (see, Telecom Policy CRTC 2009-657, Review of the Internet traffic management practices of Internet service providers, 21 October 2009) legitimately presumes that retail ISPs are implementing their Internet traffic management practices (ITMPs) in a competitively neutral manner (although such practices remain subject to ex post review in the event of a customer complaint, and "transparency," i.e., full disclosure of ITMPs, is still required). By contrast, ITMPs that a "primary" (ILEC or cable carrier) ISP seeks to apply to its wholesale services are subject to advance regulatory scrutiny. For wholesale services, any economic ITMP must be disclosed in a filed tariff, which is subject to prior approval by the CRTC "using the ordinary principles for rate approvals." Some technical ITMPs can be implemented without prior approval of the Commission, if they are not more restrictive on "secondary" ISPs (facilities-dependent providers) than on the primary ISP's own retail Internet services and "do not have a significant and disproportionate impact on secondary ISP traffic." But when a technical ITMP is more restrictive to retail competitors than to the primary ISP's own retail service, the CRTC must review and approve the provision prior to its implementation.

The CRTC has thus crafted a regulatory model that, by imposing greater regulatory controls at the wholesale level, helps to facilitate increased competition; in so doing it has largely eliminated the need for regulatory involvement at the retail level. If a retail ISP were to unilaterally undertake to impose an ITMP whose effect is to disadvantage its retail customers (by, for example, degrading or blocking their access to websites or services that are not willing to play by the retail ISP's ITMP rules), the affected customers can "vote with their feet" and seek out a competing provider whose policies are more open and neutral. While not necessarily a perfect solution, the CRTC regulatory model imposes regulation in those upstream segments where market failure could potentially arise precisely so as to reduce the potential for such market failure in downstream segments that rely upon the upstream inputs. In contrast, the FCC's decision not to impose common carrier obligations on upstream facilities-based services has created conditions for downstream retail services that make it nearly impossible for any independent non-facilities-based retail competitor to enter and remain viable over time.

For more information on this subject, please contact Helen E. Golding at hgolding@econtech.com.

Read the rest of Views and News, September 2010.

About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.