ARCHIVED - Telecom Decision CRTC 2003-3

Telecom Decision CRTC 2003-3

Ottawa, 31 January 2003

Edsonet v. TELUS Communications Inc. - Digital subscriber line services in Edson, Alberta

Reference: 8622-E31-01/01

The Commission denies Edsonet's request that the Commission direct TELUS Communications Inc. (TCI) to: (1) restore the rates that Edsonet was paying to TCI prior to the withdrawal of TCI's dedicated access service;(2) demonstrate that digital subscriber line Internet service in Edson is not being subsidized from regulated services; and (3) divest its unregulated services.

1.

On 18 October 2001, Edsonet, an Internet service provider (ISP), filed an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure and the Telecommunications Act (the Act) requesting that the Commission direct TELUS Communications Inc. (TCI) to:

(i) immediately restore the rates that Edsonet was paying to TCI prior to the withdrawal of TCI's dedicated access service;

(ii) demonstrate that TCI's digital subscriber line (DSL) Internet service (IS) in Edson, Alberta was commercially viable in its own right, and was not being subsidized by TCI's regulated services, or by services tied to those same facilities; and

(iii) divest TCI's unregulated services by financially separating its regulated services from its unregulated services.

2.

The Commission received comments from TCI on 16 November 2001. Edsonet filed reply comments on 24 November 2001.

3.

On 21 December 2001, the Commission requested additional information from TCI, that TCI filed on 11 January 2002. On 25 January 2002, TCI filed additional information to clarify its responses, and correct errors contained in its comments of 16 November 2001 and responses of 11 January 2002. On 26 January 2002, Edsonet filed comments on TCI's responses.

Edsonet's application

4.

In its application, Edsonet alleged that, TCI and its affiliate, TELUS Services Inc. (TSI) (collectively, the TELUS companies) were engaging in predatory pricing with respect to retail high-speed DSL IS in Edson, and in unfair and anti-competitive business practices in providing broadband access and transport services to Edsonet.

5.

Edsonet stated that, since 1997, it had been purchasing a dedicated access service from TCI. Edsonet submitted that in 1999, when it requested an increase in bandwidth to 1.544 megabits per second (Mbps), a full T1 capability, TCI informed Edsonet that it was discontinuing its dedicated access service, and any increases in bandwidth required by Edsonet would have to be acquired from TELUS Advanced Communications (TAC), a division of TSI.

6.

In December 2000, Edsonet signed a three-year contract with TSI for broadband access and transport services, at a bandwidth capability of 1.544 Mbps, scheduled to commence on 1 May 2001. These services consisted of two components: Ethernet Routed Frame Access service priced at $1,880 per month, and Carrier Internet Gateway Service, priced on the basis of usage, at a minimum monthly charge of $1,700. Edsonet stated that based on its end-users' usage patterns, the total cost of these services from TSI was over $6,000 per month, approximately three times the amount that Edsonet had paid TCI for the dedicated access service.

7.

Edsonet stated that, in September 2001, TCI began offering retail DSL IS to end-users in Edson at $34.95 per month.

8.

Edsonet argued that the combination of high rates charged by TSI for the broadband access and transport services, and the low monthly rates charged by TCI to end-users for retail DSL IS in Edson, made it impossible for Edsonet to compete. Edsonet submitted that the TELUS companies' pricing practices in Edson led to one of three possible conclusions:

(i) Edsonet was being overcharged for the broadband access and transport services it acquired from TSI;

(ii) TCI was selling retail DSL IS in Edson below cost; or

(iii) TCI was subsidizing retail DSL IS from its other services.

9.

In Edsonet's view, the most likely conclusion was that TSI was overcharging Edsonet for broadband access and transport services. Edsonet estimated that the costs of these services, ranged from $43.66 to $87.32 per end-user per month, thereby greatly exceeding the $34.95 per month that TCI charged end-users for its retail DSL IS. Edsonet stated that if TCI were paying the same rates as Edsonet for the underlying telecommunications services, TCI would have to double the price of its retail DSL IS in order to make a fair return on its investments. Edsonet submitted that it should have access to the same underlying telecommunications services, and at the same rate, as TCI.

10.

Edsonet submitted that in comparison, Saskatchewan Telecommunications' (SaskTel's) rates for similar broadband access and transport services in Saskatchewan were considerably lower than the rates Edsonet paid TSI. Edsonet noted that SaskTel offered a dedicated T1 connection for high-speed data transfer to and from the Internet, without additional usage charges, at $1,660 per month for a three-year contract, with an additional $2,000 service connection charge, while TCI wanted over $6,000 per month for a one-year contract.

11.

Edsonet submitted that ISPs in Edson did not have any practical alternatives to the broadband access and transport services provided by TSI. Edsonet stated that it had contacted five other Internet suppliers, but none could match TSI's rates because of the high backhaul transport charges to access the Internet gateway in Edmonton.

12.

Edsonet further submitted that its customers had to lease a local channel from TCI at additional expense, because TCI would not permit it to cross connect in the Edsonet building. In Edsonet's view, the associated co-location costs were prohibitive for a small service provider.

13.

Edsonet stated that it did not provide detailed evidence to support its allegations that TCI was subsidizing DSL IS since, pursuant to section 27(4) of the Act, the burden of proof was on TCI to demonstrate that it was not unfairly cross-subsidizing its retail DSL IS in Edson.

14.

Edsonet submitted that in order to prevent anti-competitive business practices, the Commission should force TCI to separate its unregulated operations from its regulated business operations to prevent the funneling of revenues from regulated to non-regulated operations.

TCI's comments

15.

TCI submitted that Edsonet had confused TCI with TSI, and argued that this confusion was the source of a significant number of Edsonet's allegations. TCI clarified that it provided retail DSL IS to end-users, and that TSI provided the other services which were the subject of Edsonet's application. TCI stated that as a registered reseller, TSI's rates were not regulated. TCI also stated that any services or facilities acquired by TSI from TCI were procured pursuant to Commission-approved rates, terms and conditions.

16.

According to TCI, Edsonet had been purchasing dedicated access services from TCI as an aspect of PLAnet Corp. service, which were neither managed nor monitored by TCI. TCI confirmed that, in 1999, it decided to no longer offer PLAnet Corp. service to new customers, and advised existing customers to migrate to alternative services, including managed, monitored services offered by TAC, a division of TSI.

17.

In regard to Edsonet's request for interim relief to restore the TCI rates for broadband access and transport services to those that were in effect prior to the withdrawal of its PLAnet Corp. service, TCI submitted that there was no basis for setting aside the rates contained in the three-year contract that Edsonet had signed with TSI. TCI submitted that the pricing of long-term contracts embodied the principle that both parties accepted the risks of a change in circumstances during the period of the contract. According to TCI, the change of circumstances in this particular case was the entry of TCI and the announced entry of Shaw Cable Inc. (Shaw) into the high-speed IS market in Edson.

18.

TCI submitted that its retail DSL IS rates were based on competitive market conditions, in that they took into account the retail rates being charged by the cable companies who were the market share leaders in the high-speed IS market.

19.

TCI further submitted that the cost estimates formulated by Edsonet for providing DSL IS to a typical customer in a remote location, such as Edson, could not be regarded as indicative of TCI's costs to provide the service. TCI stated that the rates it charged end-users for DSL IS in Edson were identical to the rates it charged all other end-users in its geographic operating area. TCI noted that its retail rates were based on costs that were averaged over Alberta and British Columbia. It stated that these rates took into account the average costs of service to provide the service over a large base of customers, most of which were located in urban centers. TCI submitted that it was able to keep its rates low because, unlike small ISPs, it benefited from the near-ubiquity of its services, the advantages of aggregation, and general economies of scale and scope.

20.

In TCI's view, Edsonet had provided no evidence to substantiate its claim that TCI was providing DSL IS in Edson below cost. TCI stated that even if it were established that the rates charged by TCI for DSL IS were below cost, that, by itself, would not necessarily constitute predatory pricing. TCI noted that in Application by Canadian Association of Internet Providers regarding ADSL-based Internet services, Telecom Order CRTC 99-591, 25 June 1999 (Order 99-591), the Commission had ruled that below-cost pricing, in the short-run, was not inconsistent with highly competitive, innovative markets, especially when substantial technological advances were expected to impact the cost of provisioning the services involved. TCI noted that, in Order 99-591, the Commission had also stated that such market-based pricing by a telephone company was an appropriate response to the competitive pressures and pricing initiatives by the cable companies.

21.

TCI submitted that the Commission had a regulatory framework in place to detect cross-subsidization between TCI's regulated and non-regulated services, such as the split rate base (SRB) reporting requirements and price cap regulation. TCI noted that the SRB reporting requirements safeguarded against TCI using revenues or earnings from its regulated services to subsidize competitive services or an affiliated company. TCI further submitted that in addition, price cap regulation was designed to reduce the incentives and opportunities for regulated telephone companies to cross-subsidize or engage in anti-competitive pricing practices, since price changes in one price cap service basket, or capped services, could not be offset by changes in other capped or uncapped services.

22.

TCI submitted that Edsonet provided no substantive evidence to support its claim that rates charged by TSI for the broadband access and transport services acquired by Edsonet were unreasonable. TCI further submitted that while a small Internet network could be economically built to serve the needs of a remote community, it was often the substantial cost of accessing the Internet gateway, if not available locally, that presented the major challenge to small ISPs. TCI indicated that in the case of Edson, the Internet gateway was located in Edmonton.

23.

TCI argued that TSI should not be required to offer services to Edsonet at rates below cost, as such an approach would amount to requiring TSI to subsidize an independent ISP to compete with the imminent entry into Edson of Shaw.

24.

In regard to Edsonet's request to cross connect in the Edsonet building, TCI stated that while Edsonet could not cross connect to TCI's facilities at the Edsonet building, co-location at TCI's central office was available to Edsonet under Commission-approved terms and conditions, just as was available to other retail customers.

25.

TCI submitted that divestiture was an extreme remedy, justified only if extreme breaches of rules had occurred. In TCI's view, Edsonet had not demonstrated any breach of regulatory principles, or of law, by TCI or TSI. In this regard, TCI noted that in Order CRTC 2000-398, ShockWare application for relief from TELUS denied, 12 May 2000 (Order 2000-398), the Commission stated that it had never used its powers under section 35(2) of the Act to require a Canadian carrier to structurally separate or divest certain of its business activities, and that such a remedy would be inappropriate in instances where no breaches of the tariffs and applicable rules have occurred.

Edsonet's reply comments

26.

Edsonet submitted that the distinction that TCI made between itself and TSI was irrelevant since the two companies were closely related and were not readily distinguishable from each other. Edsonet further submitted that when utility companies operate non-regulated and regulated companies side by side, there was potential for competitive abuse, as the non-regulated affiliate could benefit from the regulated company's asset base.

27.

In its comments on TCI's responses to Commission interrogatories, Edsonet stated that data services should cost the same regardless of the path they took. In Edsonet's view, TCI had two choices of paths available to provide data services, but chose to make only one of them available to Edsonet. Edsonet submitted that TCI forced it out of business by terminating the previous dedicated access service, by refusing to negotiate a reasonable one-year contract, and by refusing to offer Edsonet a reasonable alternative.

Commission's analysis and determinations

28.

The Commission notes from Edsonet's reply comments that since Edsonet filed its application, Edsonet's IS operations were acquired by another ISP which entered the retail IS market in Edson. The Commission therefore considers that competition in the DSL IS market in Edson has not been lessened.

29.

The Commission is not persuaded that the evidence filed in this proceeding justifies granting the interim relief sought by Edsonet in regard to restoring the rates it was paying TSI for broadband access and transport services to those charged by TCI for its PLAnet Corp. service. The Commission considers that the broadband access and transport services that Edsonet purchased from TSI were not equivalent to the dedicated access service it had obtained from TCI. In this regard, the Commission considers that unlike the PLAnet Corp. service, the services provisioned by TSI were monitored and managed by TSI and consisted of increased bandwidth capability.

30.

The Commission also notes that the SaskTel rates filed by Edsonet corresponded only to an Internet access component, and did not include a backhaul transport component that ISPs located outside SaskTel's Internet access areas must acquire. Since TSI's rates for the services provided to Edsonet consisted of both broadband access and backhaul transport services, the SaskTel rates filed by Edsonet, do not provide, in the Commission's view, a reliable benchmark for the rates charged by TSI.

31.

The Commission notes that TCI's retail residential DSL IS rates are forborne from regulation and, hence, are market driven.

32.

The Commission also notes that TCI's retail residential DSL IS rates in Edson were identical to the rates it charged for the service in the rest of its operating territory. The Commission considers that Edsonet's cost estimates of providing retail DSL IS in Edson may not be comparable to TCI's costs, since TCI's costs may be significantly lower due to economies of scale and scope resulting from being a large, broad-ranged telecommunications service provider throughout Alberta and British Columbia. Consistent with its view in Order 99-591, the Commission considers that below-cost pricing is not necessarily inconsistent with a competitive market, especially in the short-run, in markets undergoing significant technological innovations expected to impact the cost of provisioning the service in question. The Commission therefore concludes that there is no evidence to suggest that Edsonet was being unfairly targeted, or unjustly discriminated against by TCI, through lower-priced retail residential DSL IS in the Edson market.

33.

In the Commission's view, as it stated in Order 2000-398, divestiture, pursuant to section 35(2) of the Act, is an extraordinary remedy that, to date, the Commission has not exercised. The Commission considers that Edsonet has not adduced the necessary evidence to justify the exercise by the Commission of its powers under section 35(2) of the Act.

34.

In light of the above, the Commission denies Edsonet's application.

Secretary General

This document is available in alternative format upon request and may also be examined at the following Internet site: www.crtc.gc.ca