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Telecom Decision CRTC 2023-217

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Ottawa, 24 July 2023

Public record: 8622-V3-202302040

Final offer arbitration between Quebecor Media Inc. and
Rogers Communications Canada Inc. regarding wholesale mobile virtual network operator access rates

Summary

The Commission sets out its decision resulting from the final offer arbitration (FOA) proceeding initiated by Quebecor Media Inc. (QMI), on behalf of Freedom Mobile Inc. and Videotron Ltd., and Rogers Communications Canada Inc. (RCCI) regarding the establishment of wholesale mobile virtual network operator (MVNO) access rates between QMI and RCCI.

The Commission selects QMI’s offer and directs the parties to enter into an MVNO access agreement consistent with QMI’s offer so that QMI can expand competitive mobile wireless services to Canadians as quickly as possible. Offers were assessed on whether they were just and reasonable and evaluated on a number of public policy factors. Based on those factors, the Commission has selected the offer proposed by QMI as it best meets the evaluation criteria.

The Commission’s decision helps to ensure that Canadians have access to affordable telecommunications services. In reaching its decision, the Commission considered whether the approved rates will promote competition, affordability, and investment in networks, in accordance with the Telecommunications Act and the 2023 Policy Direction.

Once the Commission made appropriate adjustments to the cost inputs submitted by RCCI, it found that RCCI’s proposed methodology resulted in a cost per gigabyte that was similar to QMI’s offer. The Commission concludes that QMI’s rates will promote competition, affordability, and continued investment by both companies in their networks. The Commission is committed to providing as much transparency as possible on FOA processes to provide guidance to the industry, while maintaining confidential only information that is deemed as such by the Commission.

Background

  1. On 6 April 2023, the Commission received a joint application from Quebecor Media Inc. (QMI), on behalf of Freedom Mobile Inc. (Freedom Mobile) and Videotron Ltd. (Videotron), and Rogers Communications Canada Inc. (RCCI) for final offer arbitration (FOA) to establish wholesale mobile virtual network operator (MVNO) access rates between QMI and RCCI. As part of the sale of Freedom Mobile to QMI, the parties had already agreed on the terms and conditions for wholesale MVNO service, as well as text messaging rates. However, the parties had been unable to agree upon voice and data rates after numerous discussions.
  2. On 27 April 2023, the Commission issued a letter accepting the parties’ FOA request and setting out the scope and procedures of the FOA process and the following terms:
    • the terms and conditions are those negotiated by the parties; and
    • the proposed rates are to account for seamless handoff capability, if requested by the parties.
  3. In response to the letter, QMI and RCCI indicated that they had since reached an agreement on rates for voice, leaving only rates for data to be resolved in the FOA.

Regulatory framework

  1. FOA is a dispute resolution method used for disputes (i) that are exclusively monetary in nature, (ii) that involve only two parties, and (iii) that otherwise meet the criteria set out in Broadcasting and Telecom Information Bulletin 2019-184 and the process specified inTelecom Information Bulletin 2022-337 for establishing rates for the MVNO access service mandated in Telecom Regulatory Policy 2021-130.
  2. The Commission assesses rate proposals with a view to achieving the strategic objectives of Telecom Regulatory Policy 2021-130, namely that of bringing new competitive choice into the retail mobile wireless service market (retail market), while also encouraging network expansion and sustainable competition over the longer term. These strategic objectives are informed by the policy objectives set out in section 7 of the Telecommunications Act (the Act).
  3. The Commission, as arbitrator, assesses the final offers submitted by the parties with the objective of selecting an offer that best results in just and reasonable rates, as required by subsection 27(1) of the Act. The Commission cannot accept an offer that it does not consider just and reasonable.  
  4. While subsection 27(1) of the Act requires all Canadian carriers to charge rates for telecommunications services that are just and reasonable, sections 25, 32, and 47 of the Act grant the Commission a broad discretion to set rates for telecommunications services. The Act expressly allows the Commission to use any method it considers appropriate to evaluate whether a rate is just and reasonable.
  5. In addition, section 47 of the Act requires the Commission to make every decision with a view not only to ensure that rates are just and reasonable, but also to ensure that the decision furthers the policy objectives in section 7 and is in accordance with any orders made by the Governor in Council under section 8, including the 2023 Policy Direction.Footnote 1 Therefore, the Commission will assess whether offers are just and reasonable in light of these objectives. If both offers are considered just and reasonable, the Commission must determine which offer would best advance the relevant policy objectives and the relevant objectives of the 2023 Policy Direction.
  6. As per subsection 27(3) of the Act, determining whether rates for telecommunications services are just and reasonable is a question of fact. Moreover, section 52 of the Act provides that the Commission’s determinations on questions of fact are binding and conclusive.
  7. The Commission must select one offer in its entirety, and the final offer selected is binding on both parties. In exceptional cases, the Commission may reject both offers if it determines that neither offer is just and reasonable nor in the public interest.

RCCI’s position on just and reasonable rates and return on investment

  1. RCCI argued that the rates it proposed would enable QMI to compete, create an incentive for QMI to develop its own network, and meet the just and reasonable statutory standard. Furthermore, according to RCCI, a just and reasonable rate is one that ensures the service provider is able to cover its costs and earn a reasonable return, but not more, on its invested capital.
  2. To that effect, RCCI referred to the Supreme Court of Canada’s (SCC) decision in Ontario (Energy Board) v. Ontario Power Generation Inc., 2015 SCC 44, in which the SCC stated that, over the long run, rates charged must allow the provider (in that instance, a utility) to recover its operating and capital costs. RCCI used this reference to argue that below-cost rates cannot be considered just and reasonable, as required under section 27 of the Act.

Commission’s analysis

  1. The Commission considers that RCCI’s view of the Commission’s rate-setting authority is too narrow, given that the Commission must exercise its powers in accordance with the policy objectives in section 7 of the Act and any direction provided by the Governor in Council under section 8 of the Act. This enables the Commission to take a more holistic approach to rate setting than that proposed by RCCI. This means that the Commission does not necessarily have to ensure that costs are recouped over the short term for a rate to be considered just and reasonable under the Act.
  2. The Commission’s position on rate setting is consistent with the SCC’s consideration of rate setting under the Act in Bell Canada v. Bell Aliant Regional Communications, 2009 SCC 40. In that decision, the SCC determined that the Act, read as a whole, permits, and even requires, the Commission to go beyond the traditional restrictions on rate-setting described in previous jurisprudence. The SCC concluded that the Act grants the Commission “the ability to balance the interests of carriers, consumers and competitors in the broader context of the Canadian telecommunications industry”; that the Commission “need not limit itself to considering solely the service at issue in determining whether rates are just and reasonable”; and that it is open to the Commission to permit cross-subsidization of services.
  3. Given the SCC’s decision in the above-noted case, the Commission considers that just and reasonable rates can (i) include rates that may not provide an immediate-term return on investment, or (ii) require an otherwise profitable enterprise to incur a modest or temporary loss in one line of business while other lines remain profitable.

RCCI’s rate-setting methodologies

  1. RCCI provided two distinct methodologies by which it calculated its proposed rates. Due to RCCI claiming confidentiality, at the start of the process, over certain information contained in its offer pursuant to section 39 of the Act, this decision refers to them simply as “the first approach” and “the second approach.”

RCCI’s first approach

  1. RCCI’s first approach focused on its costs to provide the MVNO access service. 
  2. As requested by the Commission, RCCI submitted a high-level assessment of the costs it incurs to provide MVNO access service. It argued that these costs should be offset by QMI under the parties’ MVNO access agreement. RCCI used this assessment to establish what it believed to be the minimum rate that should be considered just and reasonable by the Commission per gigabyte (GB) of data.
  3. QMI replied that causal or marginal costsFootnote 2 should be used to determine fair compensation instead of the costs submitted by RCCI. It argued that, assuming RCCI does not require additional capacity to serve QMI’s needs, RCCI will incur far fewer causal or marginal costs to provide MVNO access service than reflected in RCCI’s proposed rates. In support of this assumption, QMI referenced a statement in RCCI’s submission that the incremental cost of serving network users is low once a wireless network has been built, and referred to the Commission’s statement in Telecom Regulatory Policy 2021-130 that wireless carriers have an incentive to sell excess or unused capacity to MVNOs.
  4. Regarding RCCI’s argument that there will be a significant impact on its ability to attract the capital needed to invest in its network if its offer is rejected, QMI submitted that there is nothing to support this argument. QMI added that access to capital is largely dictated by a company’s credit rating. RCCI’s rating is better than QMI’s, yet QMI can still access financing from a variety of sources. Finally, QMI argued that the impact of this FOA decision is unlikely to affect RCCI’s credit rating.
Commission’s analysis
  1. The Commission has assessed the costs provided by RCCI and considered which items should be included or excluded in calculating the costs.Footnote 3 The Commission considers that RCCI included costs in its analysis that should not have been included. Furthermore, in the Commission’s view, some costs were not properly attributed, and the projected growth rate of data usage was too low.
  2. The Commission’s adjustments all contribute to a lower cost per GB of data. As a result, the Commission is of the view that the first approach developed by RCCI, and the inclusion of some inappropriate costs, resulted in distorted pricing.

RCCI’s second approach

  1. The second approach established rates based on a hypothesis regarding profitability.
  2. RCCI argued that its offer would ensure that the MVNO can bring competitive retail offerings to consumers while still having the maximum incentive to invest in its own facilities-based network and to earn the additional return that ownership would generate. Based on its hypothesis, RCCI submitted what it considered would be the appropriate rate per GB of data for MVNO access. RCCI added that the rate resulting from its calculations would enable QMI to bring Quebec pricing to the rest of the country.
  3. QMI replied that it does not need additional incentive to invest, because the MVNO framework already has a built-in incentive for MVNOs to invest quickly and aggressively in their networks, i.e., the limited time frame of the mandated access. Furthermore, QMI submitted that it will be necessary for it to invest rapidly in its 5G [fifth-generation] network in order to increase and maintain its customer base in new markets. QMI also argued that RCCI’s proposed rates do not allow for affordable access to its facilities and would have an adverse effect on QMI’s ability to invest. Therefore, the proposed rates constitute a barrier to entry into the market.
Commission’s analysis
  1. The Commission considers that because the MVNO framework is intended to help regional wireless carriers accelerate the expansion of their own network footprint, and because this objective was supported by the temporary nature of the mandated service, QMI already has sufficient incentive to invest in its network, and there is no need to create additional incentive. However, this does not in itself mean that the rates proposed by RCCI are not just and reasonable.
  2. The Commission assessed RCCI’s arguments and calculation related to its second approach to determine the appropriate rate based on incentivizing QMI to build out its network. In its second approach, RCCI advanced a hypothesis on appropriate profit for QMI. The Commission disagrees with this hypothesis and with other elements of RCCI’s methodology. Consequently, the Commission made some conservative adjustments to RCCI’s inputs (including applying the utilization rate for Fizz, Videotron’s flanker brand). The Commission notes that with appropriate adjustments to profit assumptions and other inputs, RCCI’s methodology produces a rate just barely higher than that proposed by QMI.

QMI’s methodology

  1. QMI submitted that the margin on the sale of wireless services in MVNO access areas cannot be loss-making; otherwise, the possibility of successfully marketing a service offering based on MVNO access would be illusory. QMI added that the rates it proposed would enable it to cover its retail costs, react to commercial strategies from incumbent carriers (Bell Mobility Inc., RCCI, and TELUS Communications Inc.) that hold market power, earn a modest profit margin, and reinvest in the expansion of its network.
  2. To justify its offer, QMI submitted a sensitivity analysis that shows the profitability of various plans based on the rate per GB it must pay. The analysis included the costs QMI incurs to provide service to Fizz customers and its expected margins for different packages.Footnote 4
  3. QMI also submitted that its offer is the maximum rate at which it can compensate RCCI while still honouring its binding commitments to the Minister of Innovation, Science and Industry (Minister of Industry) and to Innovation, Science and Economic Development Canada (ISED) as part of the Freedom Mobile purchaseFootnote 5 while absorbing all of the deployment costs associated with Videotron’s entry into new markets.
  4. RCCI argued that the analysis of Fizz’s and Freedom Mobile’s current retail rates is not an economically meaningful exercise and suffers from several mistakes.
  5. Furthermore, RCCI submitted that QMI’s arguments in support of its low proposed rate are justified by the commitments it made to the Minister of Industry and to ISED at the time of the purchase of Freedom Mobile, but that these arguments do not stand up for two reasons. Firstly, RCCI argued that any commitments QMI may have made to ISED are irrelevant, since RCCI should not be made to assist QMI in meeting its own freely given commitments. Secondly, even if the commitments were relevant to the decision in front of the Commission, RCCI’s proposed rates already enable QMI to meet and exceed those commitments. RCCI argued that there is simply no need for the Commission to set an artificially low, unjust, and unreasonable rate to enable QMI to meet its commitments.

Commission’s analysis

  1. The Commission has reviewed QMI’s analysis in light of RCCI’s assertions and confirms that QMI did not make the mistakes alleged by RCCI. 
  2. The Commission considers that QMI’s commitments to the Minister of Industry and to ISED are irrelevant considerations when it comes to considering QMI’s proposed rates. It is neither RCCI’s nor the Commission’s responsibility to ensure that QMI is able to meet such commitments.
  3. In the Commission’s view, the costs provided by QMI in its sensitivity analysis are generally appropriate.

Comparison of offers 

Advancing the relevant policy objectives in section 7 of the Act and the relevant objectives of the 2023 Policy Direction

  1. To evaluate the offers, the Commission must compare them to determine which one would best advance the relevant policy objectives in section 7 of the Act and the relevant objectives in the 2023 Policy Direction.
  2. Based on the practices and procedures outlined in Telecom Information Bulletin 2022-337, and on the arguments raised by QMI and RCCI, the Commission considers that certain sets of policy objectives from section 7 of the Act and key objectives from the 2023 Policy Direction are most relevant to evaluating the offers submitted.
  3. The first set of objectives relates to affordability of services:
    • the policy objective set out in paragraph 7(b) of the Act: to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada; and
    • paragraph 2(b) of the 2023 Policy Direction, which requires the Commission to consider the extent to which its decision would foster affordability and lower prices, particularly when telecommunications service providers exercise market power.
  4. Whether the proposed rates would allow for more affordable retail plans than those currently available and generally exert enhanced competitive pressures in the retail market is an important line of inquiry the Commission has considered in evaluating offers against these first two objectives.
  5. The second set of objectives relates to enhancing and fostering competition in the telecommunications sector:
    • the policy objective set out in paragraph 7(c) of the Act: to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications; and
    • paragraph 2(a) of the 2023 Policy Direction, which requires the Commission to consider the extent to which its decisions encourage all forms of competition and investment.
  6. The Commission has considered whether there is fair compensation for RCCI, as a service provider, which maintains its ability and incentive to invest in its network and does not undermine its ability to compete. At the same time, the Commission has considered the impact of the rates on QMI’s ability to compete in the market, innovate, and develop its own network.
  7. Finally, the third objective is related to efficient regulation and fostering reliance on market forces:  
    • the policy objective set out in paragraph 7(f) of the Act: to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective.
  8. To evaluate this objective, the Commission has considered how the rates on offer can be measured against rates for comparable services.

QMI’s ability to foster affordability

  1. Both offers could potentially enable QMI to provide wireless plans at lower prices than currently available in the market outside Quebec.
  2. The tables below compare carriers’ advertised retail rates available in June 2023 for bring-your-own-device plans.


    Quebec

    Provider Price Data Notes
    Incumbent carriers exercising market power $45 6 GB Cheapest data plan
    Incumbent carriers exercising market power $55 20 GB N/A
    Incumbent carriers exercising market power $65 Infinite Throttled after 25 GB
    Videotron $45 6 GB Cheapest data plan
    Fizz $34 1 GB Cheapest data plan
    Fizz $38 8 GB Most comparable plan to RCCI
    Fizz $39 20 GB Limited time offer – previously $55

    Rest of Canada (except Nova Scotia)

    Provider Price Data Notes
    Incumbent carriers exercising market power $65 50 GB Cheapest data plan
    Freedom Mobile $39 20 GB Cheapest, only 3 GB nationwide
    Freedom Mobile $60 50 GB Only 3 GB nationwide
  3. RCCI submitted that it based its offer on the plans it provides in Quebec. The Commission considers that the MVNO access rates proposed by RCCI would enable QMI to bring Quebec pricing to the rest of the country.
  4. The Commission considers that either offer would enable QMI to provide plans at lower prices than those currently available in the retail market. Using the RCCI rate, however, QMI would need to offer lower data allocations than what is currently offered, which would run counter to the interests of many Canadian consumers. If accepted, either QMI’s or RCCI’s offers would contribute, to some extent, to the achievement of the policy objective set out in paragraph 7(b) of the Act and the key objective from paragraph 2(b) of the 2023 Policy Direction.

Incentives to invest and compete

  1. The Commission assessed RCCI’s arguments and calculations based on RCCI’s two methodological approaches. Based on the Commission’s analysis of RCCI’s calculations, with conservative adjustments and integrating the cost per subscriber into RCCI’s second methodological approach, the cost to RCCI per GB falls just barely higher than QMI’s offer. The evidence on the record of this proceeding indicates that it is likely that the rates offered by QMI would enable RCCI to recover the full costs of providing its MVNO access service.
  2. The Commission notes that RCCI only submitted costing evidence for a portion of the proposed agreement. As a result, the Commission’s ability to evaluate whether QMI’s offer would enable RCCI to recoup its costs is limited. The evidence provided by RCCI therefore does not permit the Commission to conclude that the rates proposed by QMI would not provide RCCI with the ability to recover its costs of providing MVNO data access services.
  3. The Commission considers that the incentive for RCCI to invest, and its ability to attract capital for such investments, remain intact, given the relative size of revenues RCCI would accrue by providing QMI with MVNO access for data services compared to its overall revenues. Although the Commission is of the view that it is likely that any costs that may be unrecoverable through the sole application of the data rate at issue in this proceeding would, at most, be minimal, the Commission also considers that RCCI will retain its capacity to recover any outlying costs associated with the provision of MVNO access services to QMI through other telecommunications services it offers without undermining its ability to compete effectively in the retail market.
  4. Moreover, the relatively short duration of the agreement upon which this FOA is being conducted further mitigates any concerns with respect to RCCI’s ability to sustain network investment and maintain its competitive efficiency in the retail market.
  5. Regarding QMI, a comparison of profit margins based on information provided to the Commission in confidence shows that both offers would enable Fizz to profitably provide the same service that it currently provides to its customers. However, the market is trending towards higher data allotments. This is confirmed in both QMI’s and RCCI’s submissions. If Fizz’s customers’ data usage increases, the rates proposed in RCCI’s offer quickly result in a negative profit margin for Fizz.
  6. The Commission notes that although it could not vet the retail costs for Freedom Mobile, the submitted costs are higher than those of Fizz, suggesting that the losses for Freedom Mobile would be even higher than those of Fizz.
  7. Thus, the Commission considers that although RCCI’s offer would enable QMI to offer low-priced plans, and compete, to some extent, it would limit the amount of data, and therefore the range of plans, that QMI can offer without incurring losses. Therefore, the Commission makes a finding of fact that both proposals are just and reasonable and that they would contribute to the achievement of the policy objective set out in paragraph 7(c) of the Act and the key objective from paragraph 2(a) of the 2023 Policy Direction. However, given market trends, QMI’s proposed rates would better achieve these objectives and would better enable it to compete in new markets.
  8. Finally, the Commission notes that although there is no specific or direct evidence on the record that a lower MVNO data access rate would automatically translate into lower retail prices, the Commission did conclude in Telecom Regulatory Policy 2021-130 that by creating the conditions for an expansion of sustainable competition in the retail market and creating clear expectations for specific types of service offerings, lower prices should be more broadly available. The Commission considers that sustainable retail competition from QMI would be better attained with rates that are lower than those proposed in RCCI’s offer.

Comparable agreements

  1. With regard to comparable MVNO agreements, the Commission considers the limited number of agreements to date to be of minimal probative value in evaluating QMI’s and RCCI’s offers.
  2. Regarding domestic roaming agreements, the Commission considers that these do provide some insight given that roaming is a similar service as MVNO access but intended for incidental use. The Commission considers that the domestic roaming agreements under consideration were negotiated and would, in a properly functioning market, provide a good indication of the market value of the service. However, the Commission considers that the existence of tariffs, which are not commercially negotiated, likely influences the negotiated rates. QMI also argued that roaming tariffs should not be used because they include a 40% surcharge to discourage use. Furthermore, neither party has advocated the use of the tariffed roaming rates as comparable. Therefore, in the Commission’s view the insight that domestic roaming agreements provide, when taken on their own, is limited.
  3. With respect to international rates, RCCI argued that they are not a good factor to compare because of the nature of international roaming, and QMI only provided a subset of agreements that may exclude agreements with higher rates.
  4. Considering the relative lack of market factors to compare at this time, the Commission does not consider comparable rates or agreements as determinative of its decision in this proceeding.

Conclusion

  1. In this decision, the Commission determines the rates for MVNO data services that RCCI will provide QMI for a relatively short period. This decision follows the Commission’s decision to mandate the provision of MVNO access service to regional wireless carriers by the incumbent carriers and Saskatchewan Telecommunications with a view to encouraging the development of competition in the retail market. The Commission considers that this decision is consistent with the relevant policy objectives set out in section 7 of the Act and is in accordance with the 2023 Policy Direction.
  2. The Commission has assessed the offers presented with a view to determining which one would best promote competition, affordability, consumer interests, and innovation. The Commission has considered which of the offers presented would best serve to encourage all forms of competition and investment and to foster affordability and lower prices for retail mobile wireless services. For the reasons above, and having made a limited number of conservative but reasonable adjustments to certain costs proposed by RCCI, the Commission determines that QMI’s offer best serves to promote those objectives. 
  3. Either offer could potentially contribute to rendering more affordable telecommunications services. However, QMI’s offer will enable it to more meaningfully compete in today’s retail market and provide it with the ability to effectively respond to competitive offerings by larger incumbent carriers in the evolving retail market over the short period of its agreement with RCCI.  
  4. Further, QMI’s offer maintains the ability and incentives for both parties to invest while providing it with the ability to expand into new geographic areas and grant it more pricing flexibility to better discipline rates in the retail market for the benefit of all end-users. Notably, the Commission finds that the adoption of QMI’s offer would not undermine RCCI’s ability to compete effectively in the retail market, whereas the adoption of RCCI’s proposed rates would likely impede QMI’s ability to strengthen the competitive pressures brought to the retail market.
  5. Finally, given the short duration of this agreement and framework, and given that the monetary impact of this determination is minor compared with the revenues generated by both QMI and RCCI in the wireless service market, the Commission is of the view that this decision will not have any impact on RCCI’s ability or incentive to invest in its wireless network.
  6. The Commission therefore selects QMI’s offer and directs the parties to enter into an MVNO access agreement consistent with QMI’s offer so that QMI can expand competitive mobile wireless services to Canadians as quickly as possible.

Secretary General

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