The CRTC's Faulty UBB Foundation: Why There is Reason to Doubt the Review
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Friday February 04, 2011
While this suggests that review will be theatre, there is considerable reason to be skeptical of the review on both procedural and substantive grounds (I will leave to the side those who will claim that this is all just political pandering to consumers - Clement has a mixed record in that regard: solid on telecom and spam, weak on copyright given the digital lock rules in Bill C-32). Many in the media have begun to question whether the public realizes that this specific dispute only directly affects some independent ISPs. I think the answer is no. However, after yesterday's hearing, I am left with the sense that the CRTC does not realize it either. In von Finckenstein's effort to defend UBB, he failed to recognize that there is a world of difference between supporting the choice of an ISP to implement UBB and a regulatory model that leaves an ISP with no other alternative. The CRTC's UBB decisions are wrong not because UBB is wrong, but because they undermine the potential for competitors to make alternative choices.
The CRTC Chair emphasized several times during his committee appearance that the decision to review UBB was the Commission's and that it was taken before Clement now-infamously tweeted his decision. In particular, von Finckenstein pointed to the public outcry, the Mezei petition, and a request from Bell for a delay. Of course, the day before, the government had made it very clear that it wanted the entire UBB issue revisited.
Given the CRTC's willingness to ignore public concern in the past, it is safe to say that this would not have been enough to reconsider the decision. The Mezei petition, which was clearly one of the catalysts for the public outcry, seeks a recision of CRTC 2010-802, the first review of the primary UBB decision (2010-255). With a 90 day time limit, Mezei was too late to file a petition against the primary decision, which would have the obvious target. Von Finckenstein did not provide details on the Bell delay request, but it may well have been the most recent decision (2011-44) which provided the March 1, 2011 start date.
Why does this procedure matter?
It may matter because the CRTC review could be confined to the two most recent UBB decisions, which focus on pricing discounts, not on the affirmation of the application of wholesale UBB. If this is the case, Bell's request to delay and the CRTC's review could leave the basic concepts behind wholesale UBB untouched. Indeed, the decision to request a delay may have been an attempt to save UBB and simply reopen the matter of price. Given that Clement is focused on the very concept of wholesale UBB and its implications on competition, it is not clear whether the CRTC review will address the foundational questions associated with UBB by reopening all the decisions or only the most recent one (the CRTC statement says it has decided to "launch, of our own motion, a review of our decision..").
Substantive Questions: Is the CRTC's Foundational Views of UBB Faulty?
Even if the CRTC does review all the UBB decisions, yesterday's appearance raises serious questions about the Commission's perspective on Internet services in Canada. As I noted earlier this week, the Commission has approved UBB models for over a decade. In this particular case, the question is not about UBB per se, but rather about the regulated GAS service used by independent ISPs.
Von Finckenstein faced a very difficult task yesterday, responding to MPs just getting up to speed with a hot button political issue (and coming in the midst of important hearings on the Bell - CTV merger). Yet he presented a vision of the Internet in Canada that should give all Canadians significant reason for concern. The key section in his opening statement was the following:
All ISPs advertise their rates, bandwidth caps and the additional usage charges that apply. Consumers can shop around for the plan that best meet their needs. Internet services are now sold like other public utilities, such as water, gas and electricity. As we reported in our most recent Communications Monitoring Report, Canadians used on average 15.4 gigabits per month in 2009. Most users therefore fall well within the caps currently set by the Large Distributors and would not be charged more unless their monthly usage increased dramatically.
If this is the starting perspective from the CRTC, there are serious problems. First, the notion that consumers can shop around for the best plan to meet their needs only works if there are different places to shop. The practical reality for most Canadians is that there are very limited choices - typically the duopoly of cable and DSL - with plans that mirror one another. It is precisely because of the lack of competition that the CRTC should have this as its dominant focus, yet the discussion and commentary yesterday continually came back to the notion that UBB is a fairness issue since heavy users should not be subsidized by other users.
Second, the frequent comparison of Internet services to utilities such as electricity or gas is misplaced. Electricity and gas are consumed - as you use it, it disappears. Bandwidth does not disappear once used. Moreover, Von Finckenstein conveniently omits the fact that pricing for electricity and gas are regulated in virtually every province in Canada. For electricity, there is a range of regulatory regimes that control both wholesale and retail prices. For natural gas, the prices on transportation and distribution are regulated and the commodity cost of gas changes in response to markets.
If the Internet services were really like electricity and gas, the regulated price on additional bandwidth would be a fraction of its current rate given that the actual cost may be roughly three cents per GB, but some providers have overage charges as high as $5 per GB. A regulated price would allow for a reasonable profit, not the gouging currently experienced in the Canadian market. In fact, if Internet services were sold like utilities then the 90% of people that Bell says do not reach their cap would receive a refund for their unused bandwidth each month.
Third, Canadians should be very uncomfortable with the CRTC's notion of "heavy users" and the reports that 15.4 GB represents an average user. If we are to set the standard of heavy users based on 2009 data, the majority of users will be classified as heavy users (and find themselves paying for overages) before long. As MP Peter Braid noted during the hearing, policies should be forward looking and it feels like the CRTC's reference point for Internet usage is stuck looking back in the rear view mirror. Numbers like 15 GB, 25 GB, or even 60 GB should not be viewed by anyone as constituting heavy usage.
There were other moments that should give even ardent CRTC supporters pause - the notion that IPTV should not count against the cap because it isn't an Internet service (it may not run on the Internet for every provider but the potential to harm competitive offerings is enormous) and the sense that the discount pricing on UBB was based on little more than guesswork. But the lasting image is of a Commission that has genuinely bought into the storyline that the foundational principle for UBB is to ensure "fundamental fairness" by avoiding the subsidizing "heavy users" and guarding against network congestion.
That should not be the foundational principle nor the key starting point for analysis, particularly for a GAS service for independent ISPs. In the current Canadian environment, it should be competition, competition, competition that rules. Given how absent the competitive environment was from the Chair's comments, there is ample reason for skepticism about where this UBB review will lead. This is precisely what Commissioner Tim Denton warned against in his dissent in the speed matching case which I quote at length (the same decision that von Finckenstein cited as an example of how the CRTC has fostered competition):
Competition in telecommunications comes in two forms, not one. The first kind of competition, the conventional kind, is where carriers compete with each other, and further, the carriers determine what gets onto their networks. This would be the kind of competition that is characterized by what I call “closed end-points”. The customer gets what the carrier determines the service shall be. Service definition is fully in the hands of the carrier. The ability to modify any portion of the network to suit customer needs belongs solely to the carrier. The old public switched telephone network (PSTN) was of this nature, as is the business model of Apple, which alone determines which applications shall be allowed on its devices. This is a sensible business model if you are a carrier; it minimizes risk of harm to the network, and allows the carrier to capture the economic rents from the services it allows to be offered on its network, so that applications pay for infrastructure.
There is a second form of competition, which comes from innovation. It will be recalled that ISPs first came to public attention when they offered a way for people to get onto the Internet. The development of the Internet protocol (IP) suite has constituted a radical innovation in signal transmission systems. It came from developers outside the carrier industry. In turn, the IP suite has transformed the capacities of cable and telephone systems and made them rival to one another, since IP ended the single-purpose nature of transmission systems. In this model, applications still pay for infrastructure, but the owners of the applications have a right to get onto the infrastructure without anyone’s permission. This phenomenon is referred to as innovation without permission.
When people speak of competition in telecommunications, the distinction between open and closed end-points, and the consequences which flow from those technical possibilities, is not usually well understood.
The first people to satisfy consumer demand for access to the Internet were small ISPs, who saw a demand and found a technical way to satisfy it. Carriers caught up to them a few years later, and have been squeezing them out of business ever since the beginning of the 21st century.
The large carriers have to be encouraged to invest and innovate, certainly, and the Commission does everything it thinks necessary to allow that to happen. Yet the question remains whether two large players in each market constitute the right mix of factors to encourage innovation in services. To this question the Commission has answered “no” on several occasions, including this one. Why then do I dissent in part from the decision?
My concern is that the Commission is not engaging the steps that would be consistent with allowing significant service innovation, and doing so on rather flimsy grounds that it knows better than industry participants what the difficulties might be. It has done this both in relation to CO-based ADSL access service, and with regard to local head-end-based cable access service. It has not investigated the matter in depth, in the sense of spending extra time investigating these matters. It has relied in part upon cost figures from the parts of the industry opposed to these possibilities. I think the Commission would have been better off looking into these assertions in greater depth than we did.
While I recognize that nearly all decisions are made with inadequate information, and in an environment of time and other constraints, I think we have failed here to take seriously the possibility of significant service innovation on the basis of questionable assumptions and inadequate digging into the issues.
If you want to know what is happening from the inside of the Commission and why there is reason to doubt the CRTC review, read the whole thing.
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Friday February 04, 2011