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Telecom Decision CRTC 2022-343

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Ottawa, 20 December 2022

Public record: 8646-N1-202108175

Northwestel Inc. – Application to modify the approval process for the company’s retail Internet service tariffs

Summary

The Commission approves with changes an application by Northwestel Inc. (Northwestel) to modify the tariff approval process for the company’s terrestrial retail residential Internet services.

The Commission’s determinations in this decision

Background

  1. Northwestel Inc. (Northwestel), an incumbent local exchange carrier (ILEC), provides telecommunications services to 99 communities in Yukon, the Northwest Territories, and Nunavut,  as well as parts of northern British Columbia, and parts of northern Alberta (collectively, the Far North).
  2. Of these 99 communities, 60 have access to rate-regulated retail residential Internet services provided by Northwestel via terrestrial transport facilities (terrestrial residential Internet services). The other communities either depend on satellite transport facilities for telecommunications services (satellite-dependent communities), or they are communities where Northwestel is not the dominant provider of terrestrial residential Internet services.
  3. Three competitors – Iristel Inc., operating as Ice Wireless in the Far North; New North Networks (New North); and SSi Micro Ltd. (SSi Micro) – also provide services that are marketed as retail residential Internet services in some of these 60 communities.
  4. Starlink, a division of Space Exploration Technologies Corp. (SpaceX), provides retail Internet services using low-Earth orbit (LEO) satellites in many countries around the world, including Canada. Although Starlink services were not available in the Far North as of the time that Northwestel filed its Part 1 application, the company was accepting pre-orders from customers in the region.
  5. In Telecom Regulatory Policy 2013-711, the Commission found that Northwestel was the dominant provider of terrestrial retail Internet services in its operating territory, and that continued reliance on market forces would not ensure that rates for these services were affordable. In Telecom Decision 2015-79, the Commission set a price cap for Northwestel’s terrestrial residential Internet services.
  6. As a result of these determinations, Northwestel is required to file tariff applications with respect to its terrestrial Internet services in 60 communities so that the Commission can ensure that rates are just and reasonable, meet the Canadian telecommunications policy objectives (the policy objectives) set out in section 7 of the Telecommunications Act (the Act), comply with the 2006 Policy Direction,Footnote 1 and comply with the 2019 Policy Direction.Footnote 2 In particular, the Commission must assess whether the proposed rates for a given service are below the price cap but above the price floor.Footnote 3

Application

  1. The Commission received a Part 1 application from Northwestel, dated 6 December 2021, in which the company requested the following on a temporary basis, pending the Commission’s determinations on the issues raised in Telecom Notice of Consultation 2022-147:Footnote 4
    • The requirement to pass the price floor test be waived for terrestrial residential Internet service tariff filings, so that Northwestel is permitted to make certain changes to these services and their rates without having to file a cost study.
    • The basket-level constraint for Northwestel’s Residential Internet Services sub-basket be suspended, such that any rate decrease within the basket will not create available headroom for a rate increase to another service. This will ensure that no other rate in the Residential Internet Services sub-basket could be increased as a result of such a decrease.Footnote 5
    • The rate-element constraint for services in the Residential Internet Services sub-basket be set to the current approved tariffed rate.Footnote 6 Should Northwestel file an application to decrease a rate, the new requested rate would then become the new maximum rate for that service. This will ensure that the rates for each service cannot be increased once they are reduced.
  2. Northwestel indicated that its proposal would affect only changes that apply broadly to the company’s general customer base and would not apply to promotions or market trials.
  3. Northwestel indicated that if the requested relief is not granted, the company’s ability to mount a competitive response to Starlink’s entry would be significantly limited by (i) long delays associated with the Commission’s review of tariff applications subject to a price floor test, and (ii) the company not being able to reduce rates below the price floor.
  4. Northwestel submitted that if its application is approved, then qualifying tariff applications would be considered Group A applications under Telecom Information Bulletin 2010-455-1. Therefore, the new rates (or higher speeds/data caps) would automatically become effective upon the day of filing (or on the effective date as specified in the application) and would be considered final.
  5. The Commission received interventions regarding Northwestel’s application, including from an individual, Daniel Sokolov; the City of Dawson; the City of Yellowknife; the Government of Northwest Territories (GNWT); Gwich’in Tribal Council; the International Brotherhood of Electrical Workers (IBEW) Local 1574; IRP Consulting; Jean Marie River First Nation; Lı́ı́dlı̨ı̨ Kų́ę́ First Nation; the Public Interest Advocacy Centre (PIAC); SSi Micro; TELUS Communications Inc. (TCI); Tłı̨chǫ Government; the Town of Hay River; the Town of Watson Lake; and Yellowknives Dene First Nation. The Commission also received a letter from the Yukon Government following the deadline for interventions.
  6. In total, 11 parties supported Northwestel’s application, with many of them basing their support on the urgent need for more affordable Internet services in their communities.
  7. IBEW Local 1574 supported the application given its concern for the well-being of 520 Northwestel employees, their families, and their communities if the Commission does not allow Northwestel to effectively compete with Starlink. The GNWT also noted that Northwestel is a major supplier and investor in the region.
  8. The GNWT and the Yukon Government neither explicitly supported nor opposed the application, but did express support for bringing better Internet services at lower rates to their communities as quickly as possible.
  9. Daniel Sokolov, IRP Consulting, PIAC, and SSi Micro opposed the application, citing concern for smaller existing or prospective competitors.

Issues

  1. The Commission has identified the following issues to be addressed in this decision:
    • Should additional submissions from parties be admitted into evidence?
    • To what extent is Northwestel’s application interdependent with the Commission’s review of telecommunications services in the Far North?
    • Is the current tariff approval process efficient, proportionate to its purpose, and minimally intrusive? If not, should it be modified?
    • Could an exception to the price floor test fulfill the objectives of the Act in these circumstances?
    • Will Starlink impact the terrestrial residential Internet service market in the Far North?
    • How should Northwestel be able to compete with Starlink, and to what extent should Commission regulation limit Northwestel’s competitive response?
    • How will existing competitors be affected?

Should additional submissions from parties be admitted into evidence? 

Background
  1. The Canadian Radio-television and Telecommunications Commission Rules of Practice and Procedure provide the following:
    1. If the Commission is of the opinion that considerations of public interest or fairness permit, it may dispense with or vary these Rules.
    1. The Commission may

      …

      (c) decide whether to admit a document as evidence;

      (d) order to be amended or struck out a document or part of a document that, in its opinion, might prejudice a party or delay the hearing of the matter on the merits;

      …

  2. The deadline for interventions in this proceeding was 4 February 2022. However, on 14 February 2022, the Commission received a letter dated 11 February 2022 from the Yukon Government. Northwestel filed its reply to interventions on 14 February 2022 and did not have the opportunity to reply to the letter.
  3. In its reply to interventions, Northwestel stated that “Competitors can also purchase, and resell, our tariffed retail Internet rates, and that at the same reduced rates we aim to implement to our residential retail customers under our proposal.” SSi Micro requested that this statement be struck from the record, given that it is inconsistent with the terms of Northwestel’s tariff and Terms of Service in relation to its Internet services. Northwestel agreed with this request and submitted a revised reply without this statement.
  4. Further, Daniel Sokolov submitted a brief supplemental intervention dated 23 March 2022, following the close of record of the proceeding, containing information from a notice that had just become available regarding changes to Starlink service. The notice indicated that, to keep pace with rising inflation, Starlink was increasing the price of its equipment kit from $649 to $699 for pre-order customers, and to $759 for all other customers. It was also increasing the monthly service rate from $120 to $140. Starlink and other parties were allowed to comment on this supplemental intervention.
  5. Daniel Sokolov also requested permission to admit a decision of the United States Federal Communications Commission (FCC) [the FCC decision] into evidence.
  6. The FCC decision concerns Starlink’s application to the FCC for funding to provide service with 100 megabit per second (Mbps) download / 20 Mbps upload speeds to an estimated 642,925 locations in 35 states. The FCC decided not to provide funding for Starlink, finding that Starlink is not reasonably capable of complying with the FCC’s requirements. The FCC cited Ookla Speedtest data to indicate that Starlink’s speeds have been declining, in particular with respect to upload speeds “falling well below 20 Mbps.”
Commission’s analysis
  1. The Commission considers that admitting the Yukon Government’s letter into evidence would give the Commission a more comprehensive record and would not prejudice Northwestel, since the letter was largely in support of the application.
  2. Given that the statement referred to by SSi Micro was addressed by Northwestel agreeing to remove it from its reply, the Commission has considered Northwestel’s amended submission.
  3. With respect to Daniel Sokolov’s supplemental intervention, the Commission considers that admitting it and related comments into evidence would give the Commission a more comprehensive record and would not prejudice the applicant, since Northwestel was allowed to submit comments in reply, and did so.
  4. Regarding the FCC decision, the Commission notes that it specifically concerns the capacity of Starlink’s existing deployment in 35 states in the United States, not the deployment that has yet to occur in the Far North. The very different circumstances of the Far North, especially with regard to population density, will likely be a factor in the speeds that are realized in that region.
  5. Accordingly, the Commission considers that the FCC decision should not be admitted into evidence as requested by Daniel Sokolov.
Conclusion
  1. In light of the above, the Commission
    • adds the Yukon Government’s letter dated 11 February 2022 to the record of this proceeding;
    • strikes from the record the statement noted by SSi Micro in Northwestel’s 14 February 2022 reply;
    • adds Daniel Sokolov’s 23 March 2022 supplemental intervention, and associated comments, to the record; and
    • denies Daniel Sokolov’s request to add the FCC decision to the record.

To what extent is Northwestel’s application interdependent with the Commission’s review of telecommunications services in the Far North?

Background
  1. In Telecom Notice of Consultation 2020-367, the Commission launched the first phase of a public consultation to review telecommunications services in the Far North, including the regulatory framework for Northwestel (Phase I). In Telecom Notice of Consultation 2022-147, the Commission launched the next phase of that proceeding (Phase II). The broad categories of issues to be addressed in Phase II include affordability, reliability, and quality of retail telecommunications services; price cap regulation for Northwestel; competition and wholesale services; and supporting reconciliation with Indigenous Peoples in the context of regulating telecommunications services in the Far North. A hearing for Phase II is scheduled on 17 April 2023 in Whitehorse, Yukon.
Positions of parties
  1. Northwestel submitted that its application does not raise any conflicts with the above-noted proceeding. Northwestel is proposing a temporary, limited, and immediate change in how the price floor test, as it relates to terrestrial residential Internet services, is applied in order to address a rapidly changing competitive environment. It submitted that the Commission may consider, as part of Phase II, whether the proposed change should be a permanent feature of Northwestel’s regulatory framework.
Commission’s analysis
  1. Northwestel’s application has implications for some of the issues within the scope of the Commission’s review of telecommunications services in the Far North, the following in particular:
    • improving terrestrial retail Internet services, including the affordability, reliability, and quality of such services; and
    • improving the state of competition in the Far North to the extent that such competition will improve the affordability, reliability, and quality of services.
  2. However, the two issues most directly relevant to Northwestel’s application that were noted in Phase I were determined to be out of scope in Phase II: rate ranges for tariffed services, and changes to the rates for Wholesale Connect service.
  3. Notably, in Telecom Notice of Consultation 2022-147, the Commission did not propose to review its approval process for Northwestel’s tariff applications or the price floor test.
  4. The Commission considers that Northwestel’s tariff applications should be processed efficiently and in accordance with the policy objectives at all times, regardless of whether the policy framework for the company is under review.
  5. Many parties supported Northwestel’s application on the basis that there is an urgent need for more affordable Internet services in the Far North. Further, parties raised concerns regarding the timeliness of Commission decisions affecting the Far North. This supports a determination to not postpone the issuance of a decision on Northwestel’s application.
  6. The Commission also considers that the determinations made with respect to Northwestel’s application could be reviewed in the context of Telecom Notice of Consultation 2022-147.
Conclusion
  1. While there may be interdependence between Northwestel’s application and the broad issues being considered in Phase II of the Commission’s review of telecommunications services in the Far North, there is no direct conflict.
  2. Further, postponing the assessment of Northwestel’s application pending the completion of Phase II would create unnecessary delays.
  3. Therefore, the Commission considers it appropriate to proceed with its assessment of Northwestel’s application.

Is the current tariff approval process efficient, proportionate to its purpose, and minimally intrusive? If not, should it be modified?

Background
  1. The 2006 and 2019 Policy Directions require the Commission’s regulation to, among other things,
    • be efficient and proportionate to its purpose;
    • interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives;
    • neither deter economically efficient competitive entry into a market nor promote economically inefficient entry; and
    • be implemented using tariff approval mechanisms that are as minimally intrusive and as minimally onerous as possible.
  2. Telecom Information Bulletin 2010-455-1 sets out the Commission’s approval process for tariff applications. Notably, it distinguishes between categories of tariff applications. Group A applications deal with relatively uncomplicated matters, such as housekeeping changes. They take effect upon submission, without Commission approval. Group B applications deal with more complicated matters and require Commission approval before they are implemented.
  3. When Northwestel wishes to introduce a new residential Internet service, it must file a Group B tariff application with a supporting cost study.
Positions of parties
  1. Northwestel indicated that if its Part 1 application is approved, it will be able to file tariff applications for new residential Internet services as Group A applications.
  2. Northwestel argued that the Commission is processing the company’s tariff applications too slowly. In particular, Tariff Notices (TNs) 1099, 1122, and 1137 – all of which are Group B applications that deal with Northwestel’s retail Internet services – have been subject to significant delays in approval. Northwestel argued that these delays hinder its ability to compete and prevent its customers from realizing the benefits that are supposed to flow from competition.
  3. Northwestel added that its proposal would enable the Commission to
    • use regulatory measures that are efficient and proportionate to their purpose; and
    • use tariff approval mechanisms that are as minimally intrusive as possible, and continue to explore and implement new approaches for streamlining its processes, consistent with subparagraphs 1(c)(i) and (iv) of the 2006 Policy Direction.
  4. The GNWT expressed concern with respect to the Commission’s “ability to issue timely decisions on key Northern broadband matters,” indicating that the application is driven in large part by the goal of streamlining the Commission’s tariff applicatio review process. Daniel Sokolov, while opposed to Northwestel’s application, submitted that the company’s request shows its frustration with the long time it takes for the Commission to process changes to tariffs.
Commission’s analysis
  1. Telecom Information Bulletin 2010-455-1 provides that the Commission is to assess Group B applications upon filing to determine whether interim approval can be granted within 15 days. A key factor in the assessment at this stage is whether the proposed rates will meet the price floor test. If a determination cannot be made within 15 days, Commission staff will issue a letter to the company to indicate its anticipated timeline for processing the application.
  2. The Commission considers that TNs 1099, 1122, and 1137 were subject to unusual circumstances, including the need to analyze how certain guidelines in Northwestel’s costing manual were applied, which led to longer than usual timelines for approval. 
  3. While it may be appropriate for Northwestel to deviate from its costing manual under particular circumstances, such circumstances may require protracted investigation and scrutiny to ensure the integrity of costing information provided with a tariff application. The Commission is of the view that delays of this nature cannot be avoided as long as tariff applications are to be assessed with regard to the price floor test, where the price floor is established using Phase II costing methodology.
Conclusion
  1. In light of the above, the Commission determines that the current tariff approval process could limit Northwestel’s ability to rapidly update its service offerings, such as in response to new market conditions driven by Starlink, and could, therefore, also delay customers from enjoying the benefits of improved packages and lower prices.
  2. Therefore, the Commission determines that modifications to the current tariff approval process to limit the number of applications that require the submission of cost studies (i.e., to limit the number of Group B filings) could promote efficient competition and affordability with respect to retail residential Internet services in the Far North.

Could an exception to the price floor test fulfill the objectives of the Act in these circumstances?

Background
  1. In Telecom Decision 2009-80, the Commission concluded that the price floor test establishes a minimum price threshold to ensure that rates are just and reasonable and not unjustly discriminatory. The Commission also concluded that the price floor test guards against certain anti-competitive pricing in order to facilitate the development of sustainable competition.
  2. In certain cases, the Commission has allowed exceptions to the requirement to pass the price floor test. For example, in Telecom Decision 2015-78, the Commission approved certain residential digital subscriber line (DSL) Internet service rates for Northwestel that did not pass the price floor test. The Commission provided the following reasons for its determination:
    • in the special circumstances that prevail in Northwestel’s operating territory, including a very large territory and a small, dispersed population, it is necessary and appropriate to provide customers with pricing relief;
    • it will prevent a large rate disparity between rates for DSL and cable Internet services, or rates for similar services in the South;
    • it will not have a significant detrimental impact on Northwestel’s revenues or ability to pursue initiatives such as its ongoing network modernization plan;
    • it may have a negative effect on competition, but exceptional measures must be taken in this case to ensure that residential Internet service is provided at reasonable rates;
    • it will advance the ability of northern Canadians, particularly those in small and remote communities, to access online services and participate in the digital economy; and
    • it will promote the policy objectives set out in paragraphs 7(b) and (h) of the Act.Footnote 7
Positions of parties
  1. Northwestel requested that the Commission waive the requirement to pass the price floor test for retail residential terrestrial Internet service tariff applications so that the company is permitted to do the following:
    • increase the speeds or usage caps (but not the rates) for services that include a usage cap without having to provide a supporting cost study;
    • decrease any existing service rate without having to provide a supporting cost study; and
    • introduce new packages without having to provide a supporting cost study by adopting the currently approved rates for the next lowest speed/usage service offering. If the company proposes a higher rate, then it would file a supporting cost study for that new service.
  2. The company submitted that approval of this proposal would enable it to respond quickly to Starlink’s service offerings.
  3. Northwestel argued that there is no anti-competitive effect from its proposal. It indicated that the intent of the price floor test is to prevent predatory pricing by prohibiting ILECs from setting service prices below their costs, an anti-competitive practice where a provider offers a product below costs for a period in order to discipline or eliminate a competitor, before subsequently raising rates once the competitor has exited the market. Northwestel submitted that given the circumstances of Starlink, there are no credible predation concerns. Starlink’s costs are largely fixed and sunk, and the Far North does not represent even a slightly significant portion of Starlink's targeted customer base. Starlink will likely price on a Canada-wide basis and not even notice Northwestel’s competitive response. Further, the Commission would actually have to approve rate increases for Northwestel’s tariffed services in order to offset the losses due to predatory pricing. Finally, it is well established in competition law that it is not predatory for a provider to lower its price (even to a level below costs) to meet the aggressive pricing strategy from a competitor.
  4. Northwestel further argued that rates will still be just and reasonable, and not unjustly discriminatory. While a price floor may serve to ensure that ILECs are generally not compelled to provide a service below cost, the proposal would allow Northwestel to voluntarily introduce rate reductions to remain competitive in the terrestrial Internet service market. Accordingly, the rates should be presumed to be just and reasonable. Further, given that the lower prices would apply across all of Northwestel’s customer base for terrestrial Internet services, there would be no discrimination at all, and thus no unjust discrimination.
  5. Daniel Sokolov argued that waiving the price floor test requirement would have serious negative consequences to customers and overall welfare in the long run, since it would preclude terrestrial competition. The price floor test is a safeguard against incumbent providers precluding potential competition from entering the market or expanding their presence. Any change in the regulatory regime has to focus on improving conditions for competition, not making them worse.
  6. PIAC submitted that the price floor test plays an important role in addressing anti-competitive practices by preventing ILECs like Northwestel from offering rates that are not just and reasonable, through setting a minimum price threshold. PIAC also submitted that without this threshold, competitors cannot compete with below-cost pricing by Northwestel, which may ultimately mean their exit from this market.
  7. PIAC and SSi Micro both submitted that very recently in Telecom Order 2022-16, the Commission noted the significant role that the price floor test plays to ensure just and reasonable rates, and prevent anti-competitive pricing.
  8. SSi Micro submitted that in the absence of a requirement to pass the price floor test to ensure recovery of technology-specific costs, Northwestel could target existing competition even if it is offering the same below-cost rate to all its retail customers.
Commission’s analysis
  1. As noted above, the Commission concluded that the price floor test is used to
    • ensure that rates are just and reasonable;
    • ensure that rates are not unjustly discriminatory; and
    • guard against anti-competitive pricing.
  2. With respect to just and reasonable rates, the Commission notes that the Supreme Court of Canada (SCC) has found that
    • the Commission “is statutorily authorized to adopt any method of determining just and reasonable rates” and, in doing so, “it is required to consider the statutory objectives [that is, the policy objectives] in the exercise of its authority”; and
    • in setting rates that are just and reasonable, the Commission has “the ability to balance the interests of carriers, consumers, and competitors in the broader context of the Canadian telecommunications industry.”Footnote 8
  3. Therefore, the Commission considers that when choosing a methodology for setting just and reasonable rates, it is required to take into account the different constituencies and interests referred to in the policy objectives. 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. The price floor test is one methodological tool that the Commission uses generally to set just and reasonable rates, but the price floor test is only appropriate to the extent that it promotes the policy objectives.
  4. As noted above, in past decisions the Commission has indicated that the price floor test protects against anti-competitive pricing with the goal of promoting sustainable competition, which is linked to policy objective 7(c).Footnote 9 However, use of the price floor test may not be the best way to promote or weigh one or many of the policy objectives under all circumstances.
  5. For example, if departing from the price floor test would more appropriately balance (i) existing and prospective competitors’ need for Northwestel’s services to have a minimum price threshold with (ii) consumers’ need for affordable services, then strictly enforcing the price floor test would no longer necessarily fulfill its purpose of ensuring just and reasonable rates. Telecom Decision 2015-78 is an example of this.
  6. With respect to rates that do not unjustly discriminate, the Federal Court of Appeal (FCA) has indicated that the Commission also has broad discretion to determine what constitutes “unjust discrimination” when implementing the policy objectives.Footnote 10
  7. In 2019, the Competition Bureau (the Bureau) published the Abuse of Dominance Enforcement Guidelines (the Guidelines). The Guidelines provide the public with information regarding the circumstances in which, pursuant to section 79 of the Competition Act, the Bureau may prohibit anti-competitive actions taken by a business entity in a dominant market position. The Guidelines are based on relevant judicial decisions.
  8. In the context of the Guidelines, the Commission considers the following:
    • One purpose of the price floor test is to ensure that retail prices are not predatory; that is, that prices do not allow a firm to deliberately set the price below an appropriate measure of its own cost for a period of time sufficient to eliminate, discipline, or deter entry or expansion of a competitor in the expectation that the firm will thereafter recoup its losses by charging higher prices than would have prevailed in the absence of the impugned conduct.
    • Pricing below cost is not considered predatory where there is credible evidence that it is in pursuit of a pro-competitive or efficiency-enhancing rationale. The Bureau gives the example of a business reducing its prices to respond to a competitor.
    • A significant consideration when regulating the competitiveness of a market is to avoid chilling or deterring pro-competitive or efficiency-enhancing conduct. It may be challenging to distinguish anti-competitive conduct from aggressive competition on the merits, and sanctioning firms for simply being dominant could undermine incentives to innovate, outperform rivals, and engage in vigorous competition. One benchmark that the Bureau uses to determine whether an alleged predatory price is pro-competitive is whether its purpose is to meet competition by reacting to match a competitor’s price. If the firm will not be able to recoup its losses by charging higher prices in the future, then the conduct cannot be considered predatory and instead could promote efficiency and lead to sustained price decreases.
Conclusion
  1. In light of the above, the Commission determines that the price floor test is only appropriate to the extent that it considers and is responsive to the policy objectives. The Commission must consider whether, under the circumstances of Northwestel’s application, the policy objectives may be better served by allowing an exception to the price floor test.
  2. The Commission also determines that rigid adherence to the price floor test under the circumstances of Northwestel’s application may in fact deter pro-competitive conduct by undermining the company’s incentives to innovate, outperform rivals, and engage in vigorous competition. For example, Starlink’s entry into the market puts competitive pressure on Northwestel, which provides an incentive for Northwestel to reduce its rates. According to competition policy, this is one way that competition is supposed to ensure better outcomes for consumers.
  3. The Commission also determines that there is little risk of predatory pricing, since Northwestel will not be able to recoup its losses by charging higher prices in the future without Commission approval, and appears to be offering a legitimate and pro-competitive response to a competitor.

Will Starlink impact the terrestrial residential Internet service market in the Far North?

Background
  1. Starlink provided in confidence to the Commission information on when it expects to start providing service in the Far North and the number of customers in that region that have placed deposits with the company.
  2. In addition, Northwestel and Starlink provided their respective Internet service revenues and number of subscribers in Canada to the Commission in confidence.
  3. Starlink’s parent company, SpaceX, is a well-financed global competitor. In May 2022, its market capitalization was estimated to be $127 billion (USD).Footnote 11 This is significantly larger than Northwestel’s parent company, BCE Inc., which reported a market capitalization of $63.07 billion (CAD) at the end of the first quarter of 2022.
Positions of parties
  1. Northwestel submitted that it filed its application because it urgently needs to be able to compete with Starlink, which offers service with a comparable speed and a lower price than Northwestel’s current high-end Internet services.
  2. However, Daniel Sokolov, PIAC, and SSi Micro argued that it is too early to consider Starlink’s services to be in the same market as Northwestel’s terrestrial retail Internet services, and there are important differences between the services such that customers may not consider them to be substitutes for one another.
  3. For example, Daniel Sokolov submitted that while Starlink may offer lower monthly rates than Northwestel, there are several other relevant factors for customers to consider when choosing between their services, including reliability, upfront cost, installation cost and timeline, contract flexibility, customer service, equipment specifications, threat of sunk costs, and whether the current price point is sustainable.
Commission’s analysis
  1. In Telecom Regulatory Policy 2013-711, the Commission determined that in the Far North, Internet services provided via terrestrial transport facilities were in a separate product market from Internet services provided via satellite transport. In making this determination, the Commission indicated that the key distinguishing features between the two markets were rates, maximum speeds, and latency.
  2. However, the evidence on the record of this proceeding indicates that the rates, speed, and latency of Starlink services available in the Far North will be comparable to even Northwestel’s fastest terrestrial Internet services. While interveners have identified differences between the products, the Commission is of the view that many customers will likely see Starlink service as a viable substitute for Northwestel’s services, particularly given demand conditions where Northwestel’s rates are higher than Starlink’s, and in communities where Northwestel provides services only via DSL, where Starlink services may be considered an upgrade.
Conclusion
  1. In light of the above, the Commission determines that Starlink’s entry into the Far North is likely to impact the market for terrestrial residential Internet services, especially in communities where Northwestel provides services only via DSL.
  2. Accordingly, it would be appropriate to consider changes to how the Commission regulates Northwestel’s terrestrial residential Internet services.

How should Northwestel be able to compete with Starlink, and to what extent should Commission regulation limit Northwestel’s competitive response?

Positions of parties
  1. Northwestel provided to the Commission, in confidence, two projection models that illustrate the company’s estimated loss of subscribers, revenue, and market share over the next two years, based on two sets of assumptions. Scenario 1 assumes that its application is approved, and TNs 1122 and 1137 are approved in April 2022. Scenario 2 assumes, among other things, that Northwestel’s application is denied, and TNs 1122 and 1137 are approved in September 2022.
  2. Northwestel indicated that granting the requested relief would enable the company to respond quickly with rate reductions in response to future demand and supply conditions. Its competitive response would ideally be an iterative process, where the price and service characteristics are progressively adjusted.
Commission’s analysis
  1. Since Northwestel provided the two projection models, certain circumstances have changed: TN 1122 was approved in January 2022, and TN 1137 was approved effective April 2022. Nonetheless, the Commission considers that the following observations remain relevant:
    • Northwestel would introduce more frequent and greater overall reductions in average revenue per user if its requested relief were granted, per scenario 1; and
    • Northwestel would lose significantly more subscribers, market share, and monthly revenues associated with the relevant services if its requested relief were not approved, per scenario 2.
  2. To assess Northwestel’s projected subscriber and market share loss, the Commission has compared these projections against the number of pre-order customers reported by Starlink. While it is challenging to predict what impact Starlink will have on the market, the Commission considers that the projections provided by Northwestel are credible.
  3. Regarding how Northwestel’s proposal would provide it with increased flexibility to compete, the company is already able to decrease the rates for all its existing services by submitting a Group A tariff application without new cost studies, as long as the new rates do not fall below the price floor according to the cost studies that were provided at the time that the rates for these services were approved.
  4. However, Northwestel would not be able to do any of the following without submitting new cost studies:
    • reduce rates for existing services below the price floor determined by previously submitted cost studies; and
    • introduce new services at higher speeds, or new services at existing speeds with unlimited data or higher usage caps.
  5. The Commission’s review of Northwestel’s margins for its residential DSL, cable, and fibre-to-the-premises (FTTP) Internet services (submitted in confidence) indicates the following potential negative consequences of not approving Northwestel’s application, which are related to regional differences in the type of access facility serving each community:
    • It could result in very different retail rates for FTTP Internet services when compared to cable Internet services in the Far North, since Northwestel can reduce the rates for its cable Internet services by significantly more while still satisfying the price floor test.
    • It could exacerbate the digital divide in the Far North between more populated communities and more remote communities. Currently, Northwestel’s cable access facilities tend to serve more populated areas, while more remote communities are more likely to be served by DSL. Therefore, rates for higher-quality services in more populated communities could decrease, while Northwestel would not be able to reduce its rates for DSL Internet services in more remote communities.
    • It could result in less of a business case for Northwestel to build FTTP access facilities in more remote communities, since Northwestel may lose a significant proportion of its subscribers in these communities to Starlink. It may be difficult for Northwestel to win back those subscribers once they have invested in Starlink equipment, even if Northwestel did build FTTP access facilities in those communities in the future. Further, the subscribers it loses may be more likely to be able to afford higher quality, more expensive services, since they will also be consumers that can afford the upfront cost of Starlink equipment. Meanwhile, the most vulnerable members of more remote communities in the Far North may continue to only have access to DSL at rates that Northwestel will not be allowed to reduce.
  6. To compare the monthly rates for Starlink service with services offered by Northwestel, the Commission has assumed a rate of $140 for Starlink service plus $21.08 for equipment ($759 amortized over 36 months),Footnote 12 for a total of $161.08 per month. This rate was then weighed against the rates for similar services offered by Northwestel.
  7. The monthly rate differences are as follows:
    1. Northwestel’s FTTP Internet 300 Unlimited and Cable Internet 300 Unlimited packages are $78.87 higher than Starlink’s service;
    2. Northwestel’s FTTP Internet 200 Unlimited and Cable Internet 200 Unlimited packages are $28.87 higher than Starlink’s service; and
    3. Northwestel’s FTTP Internet 100 Unlimited and Cable Internet 100 Unlimited packages are $11.13 lower than Starlink’s service.
  8. In communities where Northwestel offers only DSL Internet services, the fastest service option has a download speed of 15 Mbps, an upload speed of 1 Mbps, and a usage cap of 300 megabytes (MB) per month for $76.95 to $83.97 per month. Each additional gigabyte (GB) costs $2.50. These services are already provided below the price floor. In the Commission’s view, the quality of the Starlink service would be a significant improvement to these services, even if the rates are also significantly higher.
  9. To address the potential for (i) different retail rates between FTTP and cable Internet services, (ii) remote communities left with DSL Internet services at rates that cannot be reduced, and (iii) a weaker business case for Northwestel to build FTTP access facilities in remote communities currently dependent on DSL Internet services, the Commission issued a request for information (RFI) asking that Northwestel comment on the appropriateness of the company’s application being approved with certain modifications. In response, Northwestel made the following proposal:
    • For DSL residential Internet services, Northwestel’s requested relief would apply in its entirety.
    • For existing cable residential Internet services, Northwestel would be permitted to decrease the rates without a supporting cost study, as long as the new rate is above the price floor established by the cost study that was most recently submitted with respect to that service.
    • For new cable residential Internet services, Northwestel would be permitted to introduce them without a supporting cost study as long as the rate is no lower than the price floor established by the cost study that was most recently submitted in support of the closest existing approved service.
    • For existing FTTP residential Internet services, Northwestel would be permitted to decrease the rates without a supporting cost study as long as the new rate is, at most, 20% below the price floor established by the cost study that was most recently submitted with respect to that service.
    • For new FTTP residential Internet services, Northwestel would be permitted to introduce them without a supporting cost study as long as the rate is, at most, 20% below the price floor established in the cost study that was most recently submitted in support of the closest existing approved service.
    • New higher-speed residential Internet services would be provided at a higher rate than the retail rate of Northwestel’s closest existing lower-speed service that is currently offered.  
    • Northwestel will reduce the tariffed rates for Wholesale Connect by the same percentage that it reduces its rates for revenue-weighted average residential terrestrial retail Internet services, relative to the 2021 annual revenues reported for its 2022 price cap model in TN 1151.
  10. Based on confidential information Northwestel provided as part of its RFI response, the Commission considers that lowering the price floor for FTTP Internet services by 35% will more appropriately align the minimum price thresholds for FTTP and cable residential Internet services. 
Conclusion
  1. The Commission finds that adopting the revised proposal outlined above, modified so that FTTP Internet services are, at most, 35% below the price floor (as discussed in subparagraphs 93.iv and v), would be an appropriate way to avoid the possible negative consequences of denying the application, particularly on vulnerable populations in DSL-dependent communities. At the same time, it would (i) promote Northwestel’s ability to compete efficiently with Starlink, (ii) maintain appropriate safeguards for smaller and regional service providers in the Far North, and (iii) bring timely benefits to consumers in terms of affordability and quality services through facilities-based competition.

How will existing competitors be affected?

Background
  1. As noted above, three competitors in the Far North offer services over terrestrial transport facilities that are marketed as retail residential Internet services in communities where Northwestel provides rate-regulated residential Internet services:
    • SSi Micro provides Portable Wireless Internet Service in Yellowknife, Northwest Territories, using Northwestel’s Wholesale Connect service;
    • Ice Wireless provides Wireless Home Internet in eight communities using Northwestel’s Wholesale Connect service or Mackenzie Valley Fibre Link wholesale services;Footnote 13 and
    • New North Networks provides Internet services in Inuvik, Northwest Territories, via Mackenzie Valley Fibre Link wholesale services.
Positions of parties
  1. Several parties expressed concern over the impact that approval of Northwestel’s application would have on smaller existing or prospective competitors. TCI countered that the competitive threat of Starlink also threatens smaller competitors, and that preventing Northwestel from responding to Starlink’s prices will not protect smaller competitors because it will not affect Starlink’s prices.
  2. Northwestel replied that the Commission’s policy goal is to encourage sustainable competition, not to protect any given competitor. Regardless of the outcome of this proceeding, other providers will have to compete with Starlink. Northwestel submitted that it is the only company in the Far North (and in Canada) to have regulation of its rates for retail Internet services, and thus the only entity whose ability to respond to Starlink’s entry into the market is hindered.
Commission’s analysis
  1. Ice Wireless’s and SSi Micro’s services, though marketed as home Internet services, are portable. They are provided over mobile network access infrastructure, and require customers to use a mobile device (such as an LTE [long-term evolution] modem) to create a mobile hotspot for Internet access. In Telecom Regulatory Policy 2021-130, portable services such as these were determined to be part of the mobile wireless services product market, separate from fixed Internet services.
  2. In addition, these services are also significantly different from Starlink’s service in terms of speeds and usage caps. SSi Micro’s most comparable service offers a 3 Mbps download speed and a usage cap of 150 GB for $150 per month. Ice Wireless’s most comparable service has a 200 GB usage cap for $99 per month (no download speeds are indicated on its website).
  3. New North provides fixed residential Internet services over cable access facilities in Inuvik, Northwest Territories. It competes directly with Northwestel, which provides FTTP Internet services in the same community. Its services that are most comparable to Starlink’s are Net 50 Unlimited at $168 per month, Net 100 Unlimited at $189 per month, and Net 200 Unlimited at $218 per month.
  4. The Commission considers that both Starlink’s entry into the market and Northwestel’s capacity to reduce rates to the price floor for its cable and FTTP Internet services are likely to impact other providers negatively. However, both will likely occur whether or not Northwestel’s application is approved.
  5. A key issue in this proceeding is whether the additional negative impact on other providers that would result if Northwestel were able to lower its rates below the price floor is outweighed by the potential benefits of promoting Northwestel’s ability to respond in a pro-competitive way to Starlink, and the benefits that consumers may receive as a result.
  6. The Commission considers that Ice Wireless and SSi Micro provide services that customers may not consider to be a substitute for the Internet services offered by Northwestel or Starlink, since they are portable. With respect to New North, Northwestel already offers services at higher speeds for lower prices while still retaining some room to reduce its rates above the price floor for those services.
  7. As noted above, Northwestel agreed to reduce the tariffed rates for its Wholesale Connect service. This discount would not only mitigate against the additional impact of any rate reductions that fall below the price floor, it would mitigate against the impact of any rate reductions implemented since the start of the reference period (2021), which, whether or not Northwestel’s application (as modified in paragraphs 93 and 95 above is granted), are likely inevitable in response to Starlink’s market entry.
  8. The Commission does not have any specific information regarding what proportion of Ice Wireless’s and SSi Micro’s total costs is accounted for by Wholesale Connect rates. However, a portion of their transport costs will be reduced by the discount to Wholesale Connect service, which will result in savings that could be passed on to their customers. With respect to the rest of their costs, which are not within Northwestel’s control, it would be up to these service providers to respond to competitive pressure by identifying ways that they can operate more efficiently and provide better services to customers. This is pro-competitive behaviour supported by competition policy, which is supposed to result in better outcomes for consumers.
  9. The discount to Wholesale Connect service will not help New North, since it accesses wholesale transport services via the Mackenzie Valley Fibre Link, not via Wholesale Connect service. However, the GNWT could consider providing a similar discount as appropriate.
  10. Finally, if it approves Northwestel’s application as modified in paragraphs 93 and 95 above, the Commission would still have recourse to address any anti-competitive behaviour on the part of the company as follows:
    • Northwestel would still be required to file a Group A tariff application with the Commission for any rate reductions, which the Commission would review for compliance with its policies;
    • these Group A tariff applications would still be posted and publicly available, and stakeholders could still file comments if they oppose the changes;
    • if it is determined that a tariff application did not meet the Group A application criteria and that the associated changes should not have been implemented, the Commission could exercise its remedial powers to address the situation; and
    • the Commission could issue a notice of consultation if concerns arise, either as a result of its monitoring function or through comments submitted by stakeholders.
  11. Further, stakeholders could submit a Part 1 application to address alleged anti-competitive behaviour.
Conclusion
  1. The Commission determines that while competitors will be affected by approval of Northwestel’s application, as modified in paragraphs 93 and 95 above, the Commission considers that there are measures in place to support competitors and mitigate any possible negative impacts. As such, the Commission considers that the possible negative impacts are outweighed by the benefits of approving the modified application.

Conclusion

  1. In light of all the above, the Commission approves with changes Northwestel’s application as follows:
    • Regarding Northwestel’s DSL retail residential Internet services, without a supporting cost study, the company is permitted to:
      • increase the speeds or usage cap allowances (but not the rates) for packages with caps;
      • decrease any existing rate for any package without a supporting cost study; and
      • introduce new packages by adopting the currently approved rates for the closest existing lower-speed package.
    • Regarding Northwestel’s existing cable retail residential Internet services, the company is permitted to decrease the rates without a supporting cost study as long as the new rate is above the price floor established by the cost study that was most recently submitted with respect to that service.
    • Regarding Northwestel’s new cable retail residential Internet services, the company is permitted to introduce these without a supporting cost study as long as the proposed rate is no lower than the price floor established by the cost study that was most recently submitted in support of the closest existing approved lower-speed service.
    • Regarding Northwestel’s existing FTTP retail residential Internet services, the company is permitted to decrease the rates without a supporting cost study as long as the new rate is, at most, 35% below the price floor established by the cost study that was most recently submitted with respect to that service.
    • Regarding Northwestel’s new FTTP retail residential Internet services, the company is permitted to introduce these without a supporting cost study as long as the rate is, at most, 35% below the price floor established by the cost study submitted in support of the closest existing approved lower-speed service.
    • With respect to any changes that Northwestel proposes to its retail Internet services that qualify under subparagraphs 111.i to v, the Commission directs the company to
      • file a Group A tariff application in accordance with the process set out in Telecom Information Bulletin 2010-455-1;Footnote 14
      • file, on the same day, a Group A tariff application to reduce the tariffed rates for Wholesale Connect service by the same percentage that it reduces its revenue-weighted average terrestrial residential Internet service rates, relative to the 2021 annual revenues reported for the company’s 2022 price cap model in TN 1151;Footnote 15 and
      • provide new higher-speed cable and FTTP residential Internet services at a higher rate than the retail rate of the company’s currently offered closest existing lower-speed service.
    • The basket-level constraint for Northwestel’s Residential Internet Services sub-basket is suspended, such that any rate decrease within the basket will not create available headroom. This will ensure that no other rate in the Residential Internet Services sub-basket could be increased as a result of a rate decrease.
    • The rate-element constraint for Northwestel’s Residential Internet Services sub-basket is set to the current approved tariffed rate for each service. Should Northwestel file to decrease a rate, the new requested rate would then become the new maximum rate for that service. This will ensure that the rates for each service cannot be increased once they are reduced.
  2. This decision applies only to broad changes to Northwestel’s general customer base, and does not apply to promotions or market trials.

Policy Directions 

  1. The 2006 Policy Direction requires that the Commission, in implementing the policy objectives, rely on market forces to the maximum extent feasible as the means of achieving the policy objectives. Further, when relying on regulation, the Commission should use measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives.
  2. The Commission considers that its determinations in this decision promote the policy objectives set out in paragraphs 7(a), (b), (c), (d), (e), (f), (g), and (h) of the Act.Footnote 16 In particular, these determinations seek to
    • streamline the tariff approval process for Northwestel’s terrestrial residential Internet services in a targeted way, to promote the timely availability of reliable and affordable telecommunications services of high quality in all regions of the Far North that respond to the economic and social needs of users;
    • promote capital investment in telecommunications infrastructure in the Far North;
    • strengthen the social and economic fabric of the Far North through jobs and investment in communities; and
    • promote efficient and sustainable competition and innovation, increased reliance on market forces, and efficient and proportional regulation.
  3. At the same time, the Commission’s determinations aim to
    • constrain Northwestel’s market power by ensuring that appropriate safeguards against anti-competitive behaviour remain in place; and
    • ensure that the impact of changes to the tariff approval process on smaller, regional, and wholesale-based service providers are mitigated via discounts to Wholesale Connect service rates and targeted cost-based minimum thresholds for Northwestel’s rates.
  4. The Commission’s determinations in this proceeding comply with the 2006 Policy Direction as follows:
    • Consistent with subparagraph 1(a)(i), the Commission considers that market forces alone cannot be relied upon to ensure that the policy objectives are achieved, and that tariff approval mechanisms remain necessary. However, the Commission’s determinations grant some increased flexibility in its tariff approval processes given new market forces in the form of facilities-based competitive pressure from Starlink in the Far North.
    • Consistent with subparagraph 1(a)(ii), the approved regulatory measures are efficient and proportionate to their purpose and minimally interfere with competitive market forces. Specifically, they allow for targeted and narrow flexibility that will increase the efficiency of regulation, based on competition policy principles and regional differences in markets, to the extent that competitive market forces can be relied upon.
    • Consistent with subparagraph 1(b)(ii), the Commission’s determinations will neither deter economically efficient competitive entry into the market nor promote economically inefficient entry, since the flexibility provided with respect to tariff approval processes applies narrowly to a subset of Northwestel’s service offerings and incorporates reduced rates for Northwestel’s Wholesale Connect service. In addition, the tariff approval processes still protect against anti-competitive behaviour. Further, the determinations are proportionate to the sustainability and efficiency of competitive responses that they allow, and to the need for affordable and high-quality terrestrial Internet services in the Far North.
    • Consistent with subparagraph 1(b)(iii), the Commission seeks to impose regulation in a symmetrical and competitively neutral manner by allowing Northwestel a small degree of the flexibility that its competitors enjoy, while ensuring that appropriate protections are still in place, and by ensuring that competitors that depend on Northwestel’s wholesale services also benefit from that increased flexibility through discounts.
    • Consistent with subparagraphs 1(c)(i) and 1(c)(iv), the Commission seeks to implement a new approach for streamlining its tariff approval process that is less intrusive and less onerous, while still achieving the policy objectives.
  5. Additionally, the 2019 Policy Direction provides that when the Commission exercises its powers and performs its duties under the Act, it should consider how its decisions can promote competition, affordability, consumer interests, and innovation. Moreover, the Commission should, in its decisions, demonstrate its compliance with the 2019 Policy Direction and should specify how those decisions can, as applicable, promote competition, affordability, consumer interests, and innovation.
  6. The Commission’s determinations in this proceeding comply with the 2019 Policy Direction as follows:
    • Consistent with subparagraph 1(a)(i), the Commission seeks to support all forms of competition and investment by providing targeted regulatory support to wholesale-based competitors, promoting Northwestel’s ability to engage in pro-competitive behaviour, and encouraging investment in telecommunications infrastructure and in communities more generally in the Far North.
    • Consistent with subparagraphs 1(a)(ii) and (iii), the Commission’s determinations foster the availability of affordable and lower-priced services of high quality across the Far North, including in rural and remote areas that only have access to services via DSL, by allowing Northwestel increased flexibility to reduce its rates and requiring discounts for its wholesale-based competitors so that they may reduce their rates.
    • Consistent with subparagraph 1(a)(v), the Commission’s determinations reduce barriers to entry into the market and to competition for telecommunications service providers that are new, regional, or smaller than Northwestel by reducing the rates for Northwestel’s Wholesale Connect service, maintaining targeted cost-based minimum price thresholds for Northwestel’s services, and ensuring through tariff regulation that Northwestel will be constrained from exercising anti-competitive behaviour.
    • Consistent with subparagraphs 1(a)(vi) and (vii), the Commission’s determinations enable innovation in telecommunications services, including new technologies and differentiated service offerings, by supporting pro-competitive behaviour, providing regulatory support to wholesale-based competitors, and promoting investment in telecommunications services in the Far North.

Secretary General

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