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Telecom Decision CRTC 2017-167

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Ottawa, 25 May 2017

File number: 8662-E17-201700170

Bragg Communications Incorporated, operating as Eastlink – Application to review and vary or stay Telecom Order 2016-448 regarding wholesale high-speed access service interim rates

The Commission denies Eastlink’s application to review and vary certain determinations in Telecom Order 2016-448. In that order, the Commission made adjustments to certain cost components to set revised interim rates for wholesale high-speed access service because Eastlink failed to comply, without good reason, with the Commission’s previous determinations and with established Phase II costing principles. As a result, Eastlink’s request to stay Telecom Order 2016-448 is moot.

Background

  1. The Commission regulates aggregated wholesale high-speed access (HSA) services provided by the large cable and telephone carriers (collectively, the wholesale HSA service providers). CompetitorsFootnote 1 can use these services to provide their own retail Internet services and other services. The aggregated wholesale HSA services provided by large cable carriers are known as third-party Internet access (TPIA) services, while those offered by large telephone companies (also referred to as incumbent local exchange carriers [ILECs]) are known as digital subscriber line (DSL)Footnote 2 services.
  2. In Telecom Order 2016-201, the Commission approved on an interim basis the rates for TPIA service speeds offered by Bragg Communications Incorporated, operating as Eastlink (Eastlink). Eastlink had proposed to use Shaw Cablesystems G.P.’s (Shaw) rates, using the flat-rate billing modelFootnote 3 for equivalent service speeds as a proxy.Footnote 4 The Commission also determined in Telecom Order 2016-201 that it would consider final rates for the proposed TPIA service speeds once Eastlink filed supporting cost studies pursuant to Telecom Decision 2016-117.Footnote 5
  3. On 9 September 2016, pursuant to Telecom Decision 2016-117, the Commission received a tariff application (tariff notice [TN] 37) with a supporting cost study from Eastlink. In its application, Eastlink proposed the following:
    • to move from the flat-rate billing model to the capacity-based billing (CBB)Footnote 6 model, and to have a minimum of 30 days to transition to the new billing model;
    • bandedFootnote 7 non-legacy aggregated wholesale HSA service speed rates; and
    • a monthly capacity rate per 100 megabits per second (Mbps) service and associated service charges.
  4. In Telecom Order 2016-448, the Commission determined that Eastlink’s proposed rates set out in TN 37 did not comply with the Commission’s determinations in Telecom Decision 2016-117 or with established Phase II costing principles. Accordingly, the Commission made adjustments to certain cost components to set revised interim rates for Eastlink’s TPIA service.

Application

  1. The Commission received an application from Eastlink, dated 17 January 2017, in which the company requested the following relief:
    • an order varying Telecom Order 2016-448 and accepting in full the proposed CBB model rates submitted in TN 37, without any Commission adjustments, until final rates are determined; or
    • an order rescinding Telecom Order 2016-448 and reinstating the interim rates based on the flat-rate billing model that the Commission approved in Telecom Order 2016-201, until a decision is issued regarding the final rates for Eastlink’s TPIA service.
  1. Eastlink submitted that it was necessary to file the application given the prejudicial impact of Telecom Order 2016-448 on the company over the significant number of months likely to pass before final rates are determined.
  2. Eastlink submitted that its application meets the review and vary criteria since there is substantial doubt as to the correctness of Telecom Order 2016-448 on the basis that the Commission made errors of fact and law. The company submitted that these errors affect its tariffed rates and therefore deny it the ability to recover the costs of providing TPIA service, in contravention of sections 27 and 47 of the Telecommunications Act (the Act).
  3. The Commission received interventions from the Canadian Network Operators Consortium Inc. (CNOC). CNOC requested that the Commission suspend consideration of Eastlink’s application until the Commission makes a final determination with respect to Eastlink’s TPIA service rates. CNOC submitted that continued consideration of the application prior to a final determination on Eastlink’s rates is premature, procedurally unfair, harmful to competition, and wasteful of both Commission and industry regulatory resources.
  4. In reply, Eastlink reiterated its position with respect to its review and vary application, and discounted CNOC’s view of deferring the application until final rates are established. Eastlink submitted that imposing below-cost rates would be prejudicial and irreversible in terms of the impact on expansion to broadband networks.
  5. The public record of this proceeding, which closed on 6 March 2017, is available on the Commission’s website at www.crtc.gc.ca or by using the file number provided above.

Issues

  1. The Commission has identified the following issues to be addressed in this decision:
    • Did the Commission err in fact and in law in its determinations set out in Telecom Order 2016-448?
    • Should Telecom Order 2016-448 be stayed and the rates approved in Telecom Order 2016-201 reinstated pending a final Commission decision?

Did the Commission err in fact and in law in its determinations set out in Telecom Order 2016-448?

Did the Commission err in finding that Eastlink did not conduct its cost study in accordance with established Phase II costing principles and methodologies set out in the large telephone companies’ Regulatory Economic Studies Manuals and previous Commission determinations?

Positions of parties
  1. Eastlink submitted that the Commission erred in finding that the company did not conduct its cost study in accordance with the large telephone companies’ Regulatory Economic Studies Manuals (the Manuals). Eastlink argued that the Phase II costing principles and methodologies set out in the Manuals were reflected in the cost study it had filed. Eastlink disagreed with the cost adjustments made by the Commission in Telecom Order 2016-448 for the following reasons:
    • Working fill factors (WFFs):Footnote 8The WFFs the company used in estimating the costs of its routers and switches were based on its actual network utilization and are consistent with the range of WFFs for cable networks as reported by CableLabs.Footnote 9 Replacing its proposed WFF data with that of Bell Canada is incorrect since Bell Canada’s WFFs are not applicable to cable networks. In addition, Eastlink submitted that it should have been given the opportunity to provide further evidence to support its position in this regard.
    • Channel capacity costs: The Commission replaced Eastlink’s Internet service channel capacity costs with those of ShawFootnote 10 approved in Telecom Order 2016-396, which have not been validated.
    • Node fibre and related costs:Footnote 11The Commission reduced Eastlink’s new fibre build costs associated with node splits based on the approach used by the other cable carriers, and did not seek clarification from Eastlink regarding its proposed costs.
    • Transport/transmission facility costs: The Commission reduced Eastlink’s transport costs based on data from Cogeco Cable Inc. (Cogeco), Shaw, and Videotron G.P. (Videotron), whose rates were also not based on any further investigation or request for clarification. The Commission did not explain why these cable carriers’ rates were a reasonable approximation of Eastlink’s costs.
  1. CNOC submitted that although the WFFs referred to in Appendix V of the Manuals may technically refer to ILEC terminology, it is common industry knowledge that the cable carriers have WFFs for analogous network cost components, including node segmentation, router, and cable modem termination system (CMTS).
  2. CNOC submitted that Eastlink’s tariff application (i) included improper costing deviations, including inappropriate allocation of node fibre and channel capacity costs; (ii) lacked pertinent costing details; and (iii) included modelling assumptions without supporting rationale.
Commission’s analysis and determinations
  1. In Telecom Order 2008-237, the Commission approved the Manuals that the ILECs submitted pursuant to Telecom Decision 2008-14. Additionally, the Commission determined that the methodologies documented in the Manuals also apply to the development of costs for the TPIA services offered by Cogeco, Rogers Communications Inc., Shaw, and Videotron. In Telecom Regulatory Policy 2015-326, the Commission extended this determination to Eastlink’s TPIA service.
  2. In Telecom Order 2016-448, the Commission made adjustments to Eastlink’s proposed TPIA service costs, which included the replacement of Eastlink’s cost inputs that were considered to be unreasonable and not supported by sufficient evidence with those of the other cable carriers and/or ILECs, which the Commission had approved in previous orders and decisions. The Commission adjusted Eastlink’s proposed WFFs of optical nodes, CMTS, and routers consistent with the determinations in Telecom Order 2016-396 for the other cable carriers, which are also consistent with Appendix V of the Manuals.
  3. If Eastlink had wished to modify the Commission-approved WFFs to cable-carrier-specific values, it should have filed evidence as described in paragraphs 46 and 47 of Telecom Regulatory Policy 2009-274.
  4. With respect to the CableLabs report filed by Eastlink in support of the application, this report was filed with the Commission after Telecom Order 2016-448 was issued, and thus could not have been considered in the proceeding that led to that order. However, the Commission will consider it in determining the final rates for Eastlink’s TPIA service.
  5. With respect to Eastlink’s proposed channel capacity costs, Eastlink assumed the same costs independent of speed, resulting in inflated channel capacity costs for lower-speed services. In addition, Eastlink provided no supporting rationale to justify this approach, which is inconsistent with the methodology used by ShawFootnote 12 and approved in Telecom Order 2016-396.
  6. In Telecom Order 2016-448, the Commission also adjusted Eastlink’s proposed node fibre and related costs by reducing the fibre installation frequency to match those approved for the other cable carriers in Telecom Order 2016-396. Eastlink will have the opportunity to substantiate its position in this regard before the Commission sets the company’s final TPIA service rates.
  7. Contrary to Eastlink’s submission, the Commission provided supporting rationale in Telecom Order 2016-448 as to how Eastlink’s proposed methodology to estimate transmission facility costs was inconsistent with the Manuals.
  8. In light of the above, the Commission determines that it did not err in finding that Eastlink did not conduct its cost study in accordance with established Phase II costing principles and methodologies.

Did the Commission violate Eastlink’s right to procedural fairness by denying the company the opportunity to provide further information to clarify any outstanding issues and replacing the proposed cost inputs with those of third parties?

Positions of parties
  1. Eastlink submitted that the Commission violated the company’s right to procedural fairness by failing to consider its actual costs and information specific to its serving areas and geography, and by failing to seek clarification of those costs. Further, it submitted that the Commission should have given it the opportunity to provide further explanation as to why its evidence was the best evidence to rely on in the interim, instead of replacing its cost inputs with those used by third parties.
  2. CNOC submitted that Eastlink’s submission regarding procedural fairness has no basis for the following reasons:
    • parties to a proceeding are not entitled as a right to unlimited opportunities to provide further information or clarification;
    • the Commission, in Telecom Order 2016-448, explicitly considered the cost inputs submitted by Eastlink and provided detailed reasons describing the underlying rationale justifying all adjustments; and
    • the Commission has a longstanding and accepted practice of using benchmarking to make cost adjustments, as was done in Telecom Order 2016-448 to overcome Eastlink’s deviations from costing determinations and missing cost information, and with a view to establishing reasonable interim rates for its TPIA services.
Commission’s analysis and determinations
  1. The Commission is of the view that procedural fairness requirements are lower in relation to interim orders because there will be further process when considering the final rates. Further, in this case, the Commission is not required by law to give Eastlink an opportunity to make submissions on the Commission’s proposed cost adjustments, particularly because the adjustments in question were reasonably foreseeable. The Commission is therefore not persuaded that Eastlink should be entitled to relief on procedural fairness grounds.

Did the Commission fail to exercise reasonable discretion in setting the interim rates?

Positions of parties
  1. Eastlink submitted that while the Commission has broad rate-setting discretion, principles of fairness and natural justice warrant that discretion to be reasonably exercised. The company submitted that to disregard its actual evidence and to replace its costs with non-validated third-party costs, merely to arrive at a lower end rate, illustrates an unreasonable exercise of discretion, and is inconsistent with the requirement under section 47 of the Act that the Commission exercise its discretion under section 27 with a view to implementing the telecommunications policy objectives set out in section 7 of the Act.
  2. Eastlink submitted that in past decisions in which the Commission applied interim rates as a proxy, its explanation for its authority to apply interim rates appears to be based on the fact that the proxy rates were previously tested and validated via a prior process.
  3. Eastlink submitted that the interim rates established in Telecom Order 2016-448 were not based on rates that had been previously submitted and validated, or that had been reviewed and approved based on evidence. Rather, they were interim rates applied to the large cable carriers.
  4. CNOC submitted that the Commission exercised a principled approach in concluding that Eastlink’s rates were not appropriate, and the outcome of Telecom Order 2016-448 is therefore consistent with sections 47 and 27 of the Act in a manner that furthers the telecommunications policy objectives.
Commission’s analysis and determinations
  1. In setting interim rates, the Commission’s general approach has always been to modify cost inputs by way of proxy costs in cases where company-specific data is not available or where that data is found to be unreasonable, which was the case with Eastlink. Further, the Commission’s approach of applying proxies in Telecom Order 2016-448 was consistent with its approach in Telecom Order 2016-396 for the other cable carriers.
  2. The Commission has clearly exercised its discretion appropriately since the adjustments made in setting interim rates were supported by rationale and addressed matters that, as discussed above, Eastlink ought reasonably to have known would be the subject of scrutiny. Further, Eastlink will have a full opportunity to make meaningful submissions prior to the rates being finalized.

Did the Commission fail to consider the principles of subsection 27(2) of the Act by establishing a rate that grants an unreasonable preference to competitors and an undue or unreasonable disadvantage to Eastlink?

Positions of parties
  1. Eastlink submitted that the Commission failed to consider the principles of subsection 27(2) of the Actby establishing a rate that grants an unreasonable preference to competitors and an undue or unreasonable disadvantage to Eastlink. Further, Eastlink submitted that the impact of Telecom Order 2016-448 is likely to impede its plan to upgrade or expand to higher-quality communications services for Canadians in some smaller communities. Eastlink also submitted that the reduction of TPIA service rates is prejudicial to the company since it is the only company required to offer wholesale HSA services at higher speeds in its serving areas in Atlantic Canada at this time.
  2. CNOC submitted that the Commission’s adjustments resulted in interim rates that are appropriate for this stage of the proceeding and that the outcome does not prejudice Eastlink or any other interested parties. It also submitted that if Eastlink’s proposed rates were to stand, it would significantly prevent or lessen levels of competition in Atlantic Canada. CNOC further submitted that while it is conceivable that Eastlink’s proposed rates could provide the company with additional capital flexibility, this is only because the rates are not reasonable and would result in supernormal profits.
Commission’s analysis and determinations
  1. The Commission, in general, sets rates for regulated telecommunications services based on established costing principles, methodologies, and procedures, independent of whether these services are wholesale or retail. This approach is consistent with section 27 of the Act. As discussed above, the Commission’s cost adjustments in Telecom Order 2016-448 were based on Phase II costing principles, methodologies, and the best information available to the Commission at the time. The Commission applied the same approach when setting the interim TPIA service rates for the other cable carriers in Telecom Order 2016-396. In the Commission’s view, this approach favours neither the wholesale HSA service provider nor the competitor.

Did the Commission fail to consider the Policy Direction?

Positions of parties
  1. Eastlink submitted that a wholesale access regime applicable to rural providers creates business risks, and that by substantially reducing the rates for the company’s TPIA services, Telecom Order 2016-448 is inconsistent with and impairs the policy objectives set out in paragraphs 7(a), (b), (c), (f), (g), and (h) of the Act. The company submitted that the reduced rates will impede its ability to invest and innovate, while granting preference in favour of non-facilities-based competitors, contrary to the Policy Direction.Footnote 13
  2. CNOC submitted that the Commission’s determinations in Telecom Order 2016-448 are aligned with the Policy Direction and the telecommunications policy objectives. It further submitted that the rates established by the Commission will result in facilities-based deployments, innovation, and lower-priced services for TPIA service end-users in both urban and rural areas.
Commission’s analysis and determinations
  1. The Policy Direction states that the Commission, in exercising its powers and performing its duties under the Act, shall implement the policy objectives set out in section 7 of the Act, in accordance with paragraphs 1(a), (b), and (c) of the Policy Direction. Since the determinations in Telecom Order 2016-448 pertain to rates set by the Commission for a tariffed service, subparagraphs 1(a)(i) and (ii), and 1(b)(i) and (ii) of the Policy Direction apply to the Commission’s determinations in that order.
  2. Consistent with subparagraphs 1(a)(i) and 1(b)(i) of the Policy Direction, the measures set out in Telecom Order 2016-448 maintain and advance the policy objectives of the wholesale HSA service regime, as set out in paragraphs 7(a), (b), (c), (f), and (g) of the Act, including rendering affordable telecommunications services, increasing innovation, and enhancing the competitiveness of Canadian telecommunications at the national level.
  3. In this regard, the interim rates set for Eastlink’s TPIA service in Telecom Order 2016-448, alongside those set for other wholesale HSA service providers in Telecom Order 2016-396, ensure symmetrical application of the costing principles for TPIA service across all facilities-based providers pending the conclusion of other proceedings before the Commission. In doing so, they enable the wholesale HSA service regime to work efficiently and in proportion to its purpose during this transitional phase, and minimize interference with competitive market forces by ensuring that incorrectly stated costs do not cause economically efficient competitive entry to be mischaracterized as economically inefficient, or vice versa.
  4. Accordingly, the measures set out in Telecom Order 2016-448 are efficient and proportionate to their purpose, interfere with the operation of competitive market forces to the minimum extent necessary, and neither deter economically efficient competitive entry nor promote economically inefficient entry, in compliance with subparagraphs 1(a)(ii) and 1(b)(ii) of the Policy Direction.

Conclusion 

  1. In light of all the above, the Commission finds that Eastlink has failed to demonstrate substantial doubt as to the correctness of Telecom Order 2016-448, and denies Eastlink’s application to vary that order.

Should Telecom Order 2016-448 be stayed and the rates approved in Telecom Order 2016-201 reinstated pending a final Commission decision?

  1. Given the Commission’s determination to deny Eastlink’s review and vary request, the company’s request to stay Telecom Order 2016-448 is moot. 

Secretary General

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