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Telecom Decision CRTC 2020-41

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Ottawa, 4 February 2020

Public record: 8662-J92-201808015

Independent Telecommunications Providers Association – Application to review and vary Telecom Regulatory Policy 2018-213

The Commission denies the Independent Telecommunications Providers Association’s (ITPA) request to review and vary Telecom Regulatory Policy 2018-213 regarding the phase-out of the local service subsidy regime. The ITPA has failed to demonstrate that there is substantial doubt as to the correctness of that decision.

Background

  1. In Telecom Regulatory Policy 2016-496, the Commission determined that to help attain the universal service objective (namely that Canadians, in urban areas as well as in rural and remote areas, have access to reliable voice services and broadband Internet access services, on both fixed and mobile wireless networks), it would begin to shift the focus of its regulatory frameworks from wireline voice services to broadband Internet access services. Consequently, the Commission noted its intention to phase out the local service subsidy regime.
  2. In Telecom Regulatory Policy 2018-213, the Commission determined that local service subsidy would be phased out over three years (from 1 January 2019 to 31 December 2021) through semi-annual reductions. The Commission concluded that there was insufficient evidence on the record of the proceeding that led to that decision (referred to hereafter as the proceeding) to establish that the elimination of the local service subsidy would result in rates that were not just and reasonable, such that some form of compensation would be required in order to maintain just and reasonable rates. The Commission also indicated that, due to revenues generated by other services (e.g. broadband Internet access services) on the same local loop, subsidy amounts were likely overstated.
  3. Incumbent local exchange carriers (ILECs) were given the opportunity, in the context of Telecom Notice of Consultation 2018-214, issued concurrently with Telecom Regulatory Policy 2018-213, to present evidence demonstrating the need for some form of compensation.

Application

  1. The Commission received an application dated 24 September 2018 from the Independent Telecommunications Providers Association (ITPA), on behalf of its member companies, all of which are small ILECs, in which the ITPA requested that the Commission review and vary certain aspects of Telecom Regulatory Policy 2018-213. Specifically, the ITPA requested that the Commission overturn its decision to eliminate the local service subsidy and maintain the subsidy for at least 10 years, or until it can be eliminated organically.
  2. The ITPA submitted that the Commission committed errors in law and in fact in Telecom Regulatory Policy 2018-213. In addition, the ITPA submitted that there is substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to certain of the Commission’s assumptions therein.
  3. The Commission received interventions regarding the ITPA’s application from Rogers Communications Canada Inc. (RCCI), Saskatchewan Telecommunications (SaskTel), Shaw Cablesystems G.P. (Shaw), SSi Micro Ltd. (SSi), and TELUS Communications Inc. (TCI). SaskTel and TCI were generally in support of the ITPA’s application; RCCI, Shaw, and SSi were generally in opposition.

Review and vary criteria

  1. In Telecom Information Bulletin 2011-214, the Commission outlined the criteria it would use to assess review and vary applications filed pursuant to section 62 of the Telecommunications Act (the Act). Specifically, the Commission stated that applicants must demonstrate that there is substantial doubt as to the correctness of the original decision, for example due to (i) an error in law or in fact, (ii) a fundamental change in circumstances or facts since the decision, (iii) a failure to consider a basic principle which had been raised in the original proceeding, or (iv) a new principle which has arisen as a result of the decision.

Issues

  1. The Commission has identified the following issues to be addressed in this decision:
    • Did the Commission err in fact in Telecom Regulatory Policy 2018-213?
    • Did the Commission err in law in Telecom Regulatory Policy 2018-213?
    • Is there substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to certain assumptions made by the Commission?

Did the Commission err in fact in Telecom Regulatory Policy 2018-213?

Positions of parties

  1. The ITPA submitted that in Telecom Regulatory Policy 2018-213, the Commission erred in fact when it determined that ILECs did not provide sufficient financial data on the record of the proceeding to demonstrate a continued need for the local service subsidy. According to the ITPA, the Commission disregarded the evidence of financial deterioration filed by the small ILECs and other affected carriers in the proceeding. The ITPA claimed that the evidence it submitted on the record of the proceeding supports the continuation of the local service subsidy.
  2. The ITPA also noted that the Commission has never initiated a proceeding specifically to examine the adequacy of the small ILECs’ costing information, on which the local service subsidy calculation is based. The Commission could have initiated such a proceeding if it had serious concerns about the small ILECs’ costs. Instead, the Commission has continued to approve annual subsidy payments to the small ILECs based on proxy amounts, which are based on the costs set out in Decision 2001-756.
  3. RCCI submitted that the Commission had received conflicting evidence as to whether there was a continued need for local service subsidy or for compensation for the carriers that would be affected by the elimination of the subsidy. The company also noted that the ITPA had the opportunity, in the context of Telecom Notice of Consultation 2018-214, to present evidence to support the need for compensation for the loss of the local service subsidy.
  4. Shaw submitted that the Commission did not ignore the ITPA’s evidence, but rather found it to be insufficient to support the need to maintain the local service subsidy, or to provide compensation for the loss of subsidy.
  5. SSi submitted that the evidence that the Commission allegedly overlooked concerns the projected financial position of the ITPA’s members, not whether the loss of subsidy would force the ITPA’s members to adjust their rates for local service such that the rates are no longer just and reasonable.

Commission’s analysis and determinations

  1. To date, the Commission has not directed the small ILECs to submit updated cost studies, nor have the small ILECs provided any detailed costing information to support their local service subsidy requirements. Instead, the Commission has been flexible with respect to the costing information provided by the small ILECs in previous proceedings. For example, in Decision 2001-756, the Commission did not require the small ILECs to submit cost studies to support their need for the local service subsidy. Instead, the small ILECs were allowed to use a proxy approach based on the costs incurred by the large ILECs for the provisioning of primary exchange service (PES),Footnote 1 calculated using Phase II costing methodology.Footnote 2
  2. During the proceeding, the ITPA submitted several arguments with respect to the continued need for a local service subsidy regime, including the investments and ongoing costs incurred by its member companies to maintain, upgrade, and expand their respective networks. However, the ITPA submitted evidence supporting only two of its cost-related arguments: one pertaining to stand-ready costsFootnote 3, and the other pertaining to hydro pole attachment rates in Ontario. In addition, this limited evidence related to only a small and select number of the ITPA’s companies. Also, the ITPA did not submit related cost studies, arguing that the information was confidential and that it did not have cost studies that could be provided on the public record. The Commission notes that the ITPA has been party to numerous proceedings and should be aware that this information could have been filed with the Commission in confidence.
  3. In the absence of cost studies, it is not possible for the Commission to assess the validity of the ITPA’s arguments regarding the above-mentioned costs and rates, or their impact on the ultimate cost of providing local service.
  4. There are many elements that contribute to the cost of providing PES, such as costs related to the purchase, installation, and maintenance of the required facilities. The Commission notes that the ITPA did not identify other relevant cost elements, which may either increase or decrease the overall cost. Consequently, the cost elements submitted by the ITPA constitute only a small subset of the data required for the Commission to determine that compensation for the loss of the local service subsidy in high-cost serving areas (HCSAs)Footnote 4 is needed to maintain just and reasonable rates.
  5. Given the limited evidence provided by the ITPA to justify its arguments supporting the continued need for a local service subsidy regime, the Commission finds that the ITPA failed to demonstrate that the Commission erred in fact when it determined, in Telecom Regulatory Policy 2018-213, that ILECs did not provide sufficient financial data to demonstrate the need for compensation for the loss of the local service subsidy in HCSAs to maintain just and reasonable rates.

Did the Commission err in law in Telecom Regulatory Policy 2018-213?

Positions of parties

  1. In its application, the ITPA relies in large part on its view that the local service subsidy is, both in fact and in practice, the embodiment of the regulatory compactFootnote 5 in Canadian telecommunications regulation. The ITPA submitted that the regulatory compact is a binding, bilateral legal agreement between the Commission and an individual carrier, given statutory force by section 27 of the Act. It further submitted that the case at hand is a specific situation in which the regulatory compact is the only regulatory principle by which rates can lawfully be set, and provided cases which, in its opinion, supported this principle.
  2. According to the ITPA, the Commission made the following errors in law in Telecom Regulatory Policy 2018-213:
    • The Commission abrogated the regulatory compactFootnote 6 by (i) eliminating the local service subsidy; (ii) confiscating millions of dollars in local service subsidy revenues from the small ILECs and other carriers, which these carriers had a lawful expectation to receive; (iii) providing these carriers with no compensation for the loss of subsidy payments; and (iv) maintaining the obligation to serve by requiring carriers to continue to provide uneconomic local voice services to their HCSA customers without compensation.
    • By eliminating the local service subsidy without compensation, the Commission (i) gave equal or greater weight to the policy objectives identified in section 7 of the Act (and to the broader interests it describes) in performing its duties under section 27 of the Act than it gave to the carriers’ right to a fair and reasonable return on their investments; and (ii) misinterpreted, misstated, and generally misunderstood its statutory jurisdiction.
    • The Commission wrongfully placed the onus upon the affected carriers to demonstrate, in another proceeding (Telecom Notice of Consultation 2018-214), the need to be compensated for the loss of future revenue resulting from the elimination of the local service subsidy. According to the ITPA, the Commission has the legal onus to demonstrate to the affected carriers that, in exchange for their continued obligation to serve their HCSAs, they would continue to earn a fair and reasonable return on equity without revenues from the local service subsidy.
  3. TCI submitted that the Commission’s determination to eliminate the local service subsidy without eliminating the corresponding obligation to serve in HCSAs, or providing sufficient rate flexibility, or making other changes to the regulatory framework is inconsistent with the regulatory compact, and thus contrary to sections 27 and 47 of the Act.Footnote 7
  4. SaskTel agreed with the ITPA’s argument that the Commission erred in law by abrogating the regulatory compact. SaskTel submitted that the regulatory compact requires that the ILECs be allowed a reasonable opportunity to earn a fair return on their investment for providing local exchange service in HCSAs.
  5. RCCI submitted that the Commission did not abrogate the regulatory compact, since section 27 of the Act does not require the Commission to subsidize the rates charged by the ILECs through contributions collected from telecommunications carriers. Furthermore, subsection 27(5) of the Act permits the Commission to set just and reasonable rates using any method or technique that it considers appropriate.Footnote 8
  6. RCCI also submitted that the Commission can eliminate the local service subsidy pursuant to section 46.5 of the Act and address separately the question of whether compensation is justified.Footnote 9 Therefore, eliminating the local service subsidy is not the same as breaching the regulatory compact. 
  7. RCCI further submitted that there is no evidence that the Commission gave greater consideration to the policy objectives than is required by section 47 of the Act. Finally, RCCI noted that Telecom Notice of Consultation 2018-214 would provide ILECs the opportunity to present evidence demonstrating the need for some form of compensation in order to establish just and reasonable rates for local voice services pursuant to subsection 27(1) of the Act.Footnote 10

Commission’s analysis and determinations

Regulatory compact
  1. In Telecom Regulatory Policy 2018-213, the Commission noted that the regulatory compact, given statutory force through subsections 27(1) and 27(2) of the ActFootnote 11, is a fundamental principle governing the relationship of public utility service providers and regulators in Canada, and forms the basis of the Commission’s rate-setting authority.
  2. However, sections 7 and 47 and subsection 27(5) of the Act extend the scope of considerations relevant to the Commission’s rate-setting analysis beyond the notion of the regulatory compact. Combined, these sections of the Act require the Commission to balance a broad range of interests and objectives in addition to the regulatory compact when determining just and reasonable rates.
  3. Subsection 27(5) of the Act states that in determining whether a rate is just and reasonable, the Commission may adopt any method or technique that it considers appropriate, whether based on a carrier’s return on its rate base or otherwise. Accordingly, the Commission is not required to follow any particular methodology in fixing rates, nor is it required to follow the same methodology in all circumstances. How the Commission achieves the Act’s requirement that rates be just and reasonable is entirely within the Commission’s discretion.
  4. In Bell Canada v. Bell Aliant Regional Communications, 2009 SCC 40 (the Deferral Account Case), the Supreme Court of Canada (SCC) found that section 47 of the Act, which requires the Commission to make its decisions with a view to fulfilling the policy objectives of the Act, together with subsection 27(5), results in the Commission having a much broader rate making power than under its predecessor legislation, the Railway Act. As a result, the Commission is not limited to the rate base rate of return approachFootnote 12 as the only basis for setting just and reasonable rates. Rather, the SCC concluded that the Commission has “the ability to balance the interests of carriers, consumers, and competitors in the broader context of the Canadian telecommunications industry.”Footnote 13
  5. In Telecom Decision 2016-36, in which the Commission set the rates for Northwestel Inc.’s retail Internet services, the Commission applied the Deferral Account Case principles in determining that non-compensatory rates can be just and reasonable when considering the financial impact on the service provider within the context of the broader policy objectives of the Act. Specifically, the Commission determined that the Act provides the Commission with broad discretion in determining whether any given rate is just and reasonable. The Commission noted that it is required to take into account the different constituencies and interests referred to in the policy objectives, and is not restricted to ensuring that rates are compensatory. The Commission also noted that, while a carrier’s costs in the provision of a service are relevant considerations, they must be balanced against considerations relevant to the achievement of the policy objectives.
  6. Regarding the ITPA’s argument that Telecom Regulatory Policy 2018-213 is a unique case for which the regulatory compact is the only regulatory principle by which rates can be lawfully set, the Commission considers that this is not supported by a plain reading of the Act, nor has the ITPA pointed to specific case law supporting this view. The supporting cases that the ITPA relied on in its submissions are distinguishable, since they relate to a different industry, namely energy. Also, in each case cited, the court was interpreting specific legislation related to the associated regulators.
  7. Furthermore, the SCC clearly articulated in the Deferral Account Case that rate of return is no longer the only consideration under the Act for setting just and reasonable rates and that the Commission is required to take into account broader policy considerations in addition to the notion of the regulatory compact.
  8. In light of the above, the Commission determines that in Telecom Regulatory Policy 2018-213 it did not abrogate the regulatory compact, and that it gave the necessary consideration to the broader policy objectives of the Act.
Statutory jurisdiction
  1. With respect to the ITPA’s argument that the Commission erred by generally misunderstanding its statutory jurisdiction, the Commission notes that subsection 27(1) of the Act does not require that the Commission subsidize rates via a fund. The discretionary local service subsidy, established under section 46.5 of the Act, is a distinct legal concept from “just and reasonable rates” under subsection 27(1). Therefore, elimination of the subsidy does not inevitably lead to a breach of the regulatory compact.
  2. This interpretation is consistent with Telecom Regulatory Policy 2018-213, in which the Commission noted that subsection 46.5(1) of the Act provides that the Commission may create a fund to support continuing access by Canadians to basic telecommunications services, but is not required to do so. It is entirely within the Commission’s jurisdiction to phase out the local service subsidy.  
  3. Furthermore, once the Commission decided to eliminate the discretionary local service subsidy, it considered whether other aspects of its regulatory frameworks were consistent with the Act’s requirements. Specifically, the Commission questioned whether other adjustments are required to its regulatory frameworks to ensure that all the requirements of the Act, including the requirement for just and reasonable rates, continue to be met.
  4. The Commission did consider the effect of eliminating the subsidy on the subsection 27(1) requirement of just and reasonable rates. The Commission found that, as discussed above, there was insufficient evidence to demonstrate that the rates were not just and reasonable. Nevertheless, the Commission gave ILECs a further opportunity, in Telecom Notice of Consultation 2018-214, to make their case in order to justify compensation.
  5. In light of the above, the Commission determines that, in Telecom Regulatory Policy 2018-213, it did not misunderstand its statutory jurisdiction in eliminating the local service subsidy.
Onus placed on carriers
  1. The Commission considers that the ITPA has conflated the onus that a regulator has under the regulatory compact with the burden of proof that rests with the carriers. Carriers are required to provide the necessary information to establish just and reasonable rates under subsection 27(1) of the Act, since they are the holders of this information. Therefore, the onus is on the carriers to demonstrate that compensation for the loss of the local service subsidy is required in order to maintain just and reasonable rates.
  2. In light of the above, the Commission finds that, in Telecom Regulatory Policy 2018-213, it did not wrongfully place the onus on the affected carriers to demonstrate a need for some form of compensation.
Alleged error in law
  1. In light of its conclusions above, the Commission finds that it did not err in law in Telecom Regulatory Policy 2018-213 and that its reasons and conclusions in that decision stand.

Is there substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to certain assumptions made by the Commission?

Background

  1. The ITPA submitted that there is substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to two erroneous assumptions made by the Commission: one explicit, about cross-subsidization; and one implicit, about the possibility of raising PES rates.

Explicit assumption

Positions of parties
  1. The ITPA alleged that the Commission erred in Telecom Regulatory Policy 2018-213 by making the explicit assumption that the small ILECs can recover lost local service subsidy by diverting revenues from other services, such as broadband, wireless, and broadcast services, to maintaining voice networks. The ITPA submitted that the markets for other telecommunications services provided by its member companies are competitive, and that its members cannot be expected to divert the revenues they generate to local phone service.
  2. TCI noted that no economic profits are made in cases where rates are set in a competitive market. Thus, any cross-subsidization would force the ILECs to take an uncompensated loss in the provision of local service.
  3. SaskTel submitted that the only other significant source of revenue for copper loops is Internet access, since broadcast services are available to only a small subset of HCSA lines. In some cases, typically outside small towns and villages that are served by long loops, existing wireline facilities do not allow for the provision of either Internet or broadcast services. Regardless, none of these services generate “excess” profits, since they are delivered in competitive markets.
  4. RCCI submitted that the ITPA is incorrect in its interpretation of the Commission’s determination. RCCI noted that the Canadian telecommunications industry has changed significantly since the time that the subsidy amount required to support local service rates was established and that, considering this and the other factors mentioned by the Commission in Telecom Regulatory Policy 2018-213, it was reasonable for the Commission to conclude that subsidy amounts are likely overstated.
Commission’s analysis and determinations
  1. At paragraph 85 of Telecom Regulatory Policy 2018-213, the Commission noted that several parties made persuasive submissions in the proceeding that the method used to determine the subsidy amounts and the associated costs is likely out of date, as are the costs estimated for the local loop used to provide local voice services in HCSAs. The Commission indicated that the record of the proceeding shows that ILECs are now earning, or have the potential to earn, additional revenues from other services (e.g. broadband Internet access services) that use the same local loop for which ILECs are receiving local voice subsidy on a per-line basis. These services were not available at the inception of the local service subsidy and, all things being equal, due to the revenues they generate, subsidy amounts are likely overstated.
  2. The ITPA has taken that paragraph to imply that the affected carriers could cross-subsidize a loss in revenues from the provision of local voice service with the revenues generated by other services being delivered over the same local loop.
  3. The Commission notes that when it established the local service subsidy regime in Decision 2000-745, it factored in revenues generated by other local services used by residential subscribers, including optional services such as call display and voicemail, when calculating the total subsidy requirement for each ILEC.
  4. The Commission considers that the telecommunications landscape has changed in HCSAs since the establishment of the local service subsidy. Incumbents are now able to generate additional revenues by offering Internet and other services over the same copper or fibre loops that provide local voice service.
  5. The original subsidy amounts were calculated using data that is about two decades old. If the Commission were to conduct a new costing proceeding to determine what subsidy amount, if any, would be appropriate, it would be reasonable for the Commission to consider any additional revenues generated by the use of facilities that are also used to provide local voice service. This would most likely result in a reduction in associated subsidies.
  6. Notwithstanding this general view, the Commission initiated Telecom Notice of Consultation 2018-214 to provide parties, including the ITPA, with an opportunity to present evidence to validate or refute the need for compensation for any loss in local service subsidy.
  7. In light of the above, the Commission determines that the ITPA failed to demonstrate that there is substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to any explicit assumption made by the Commission that bound ILECs to cross-subsidize the loss of revenue from the provision of local voice service with the revenues generated by other services delivered over the same local loop.

Implicit assumption

Positions of parties
  1. The ITPA submitted that the Commission erred in Telecom Regulatory Policy 2018-213 by making the implicit assumption that increases in local stand-alone PES rates would be a source of potential replacement revenue for the loss of the local service subsidy. The ITPA argued that raising local PES rates is not possible in the current market without risking losing customers to carriers that offer wireless services in their serving areas.
Commission’s analysis and determinations
  1. The Commission did not base its determination to phase out the local service subsidy in Telecom Regulatory Policy 2018-213 on whether raising PES rates would serve as a form of compensation for the elimination of that subsidy. This is demonstrated in paragraph 86 of Telecom Regulatory Policy 2018-213, which indicates that while the record of the proceeding does not support the position that compensation to offset the elimination of subsidy was required at that time, ILECs would have the opportunity, in the context of Telecom Notice of Consultation 2018-214, to present evidence to demonstrate the need for some form of compensation.
  2. In Telecom Notice of Consultation 2018-214, the Commission indicated that it would consider in that proceeding whether compensation is required given that the local service subsidy is being eliminated, and if so, an appropriate approach. Thus, the Commission did not make any assumptions, explicit or implicit, that raising PES rates was possible or appropriate for the ITPA or any other ILEC. In fact, the Commission explicitly stated that it did not have the record to make any conclusions on that point and left open the issue of whether compensation is required, and of any potential approaches to compensation, in Telecom Notice of Consultation 2018-214.
  3. In light of the above, the Commission finds that the ITPA failed to demonstrate that there is substantial doubt as to the correctness of Telecom Regulatory Policy 2018-213 due to an implicit assumption made by the Commission that increases in local stand-alone PES rates would be a source of potential replacement revenue for the loss of the local service subsidy.

Conclusion

  1. In light of all the above, the Commission denies the ITPA’s application to review and vary Telecom Regulatory Policy 2018-213.

Secretary General

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