How federal decisions on wholesale rates impacts internet prices for all Canadians

On August 15, 2020, the federal government issued a controversial statement regarding an ongoing disagreement between incumbent Internet Service Providers (ISPs) and wholesale internet providers over the wholesale rates set by the CRTC. In its statement, the government seemingly supported an argument advanced by Canada’s big three telecoms providers. They claimed that current regulations requiring them to lease capacity on their networks to independent service providers are unfair and will stifle investment.

As our President & CEO Barb Carra pointed out, this seeming support of the big telco’s could have long-lasting negative impacts on the price of internet for all Canadians.

Background

In Canada, the CRTC requires incumbent facilities-based ISPs to lease some of their capacity to independent service providers at mandated, federally regulated rates. The goal is to enable more commercial internet providers, and thus increase competition in Canada’s relatively monopolized telecommunications market. The rates themselves are determined by complex costing analysis done by the CRTC, who look at both direct and unrecovered costs that incumbents lose in order to give wholesalers access to their network. 

This regulatory framework is what allows a number of smaller, independent service providers such as TekSavvy and Distributel to provide commercial internet services in Canada. 

The current dispute over wholesale rates comes down to a decision that the CRTC made in August 2019. From 2016 to 2019, the CRTC set interim wholesale rates for access to the incumbents’ networks while it studied the question of appropriate rates for wholesale network access. This study of wholesale costs itself was prompted by concerns that the incumbents weren’t following the CRTC’s guidelines by, among other things, including theoretical and inflated losses in their costing analysis. 

Pushing back

In August 2019, the CRTC agreed that these concerns were justified. The commission reduced the wholesale rate to a level up to 77% lower than the interim rates, and also mandated that the incumbents repay wholesalers at this adjusted rate, retroactive to three years. 

Over the past year, the incumbents have done everything they can to fight this decision, including referring the matter to the Federal Court of Appeal, which has effectively paused the CRTC’s new rate until the matter is resolved in court. 

Among Canadians, wholesale internet is a complicated and poorly understood aspect of broadband access. Canada is relatively unique in mandating it in regulation. But there is a good reason why we should be paying attention to this current dispute and be concerned by the federal government’s statement in favour of the incumbents’ side in the debate. While wholesale service providers only comprise up to 20% of market share in certain geographic areas, they have been growing over the past several decades. 

Where wholesale access has been mandated, incumbent and independent service providers have fought protracted battles before the CRTC over the fairness of the wholesale rates that are set. 

The importance of competition in the market

The Competition Bureau, Canada’s federal regulatory agency responsible for monitoring and enforcing competition and innovation, has found that the affordability of broadband services in Canada correlates closely with the number of competitors in the marketplace. Simply put, the more companies a region has providing internet services, the lower the average cost of internet plans in that region. 

In addition, internet plans from wholesale ISPs are 15-20% cheaper, on average, than comparable plans from incumbents. In fact, when the CRTC lowered wholesale rates in August 2019, a number of wholesale providers immediately passed on these savings to their customers in the form of reduced prices on their plans. 

But now, with the message from the federal government supporting an overturn of the reduced wholesale rates set by the CRTC last year, these prices have begun to increase again

Now, more than ever, it’s important that the government does everything it can to ensure internet in Canada is affordable and accessible. In our recent White Paper about connectivity issues related to the COVID-19 pandemic, Cybera argued that wholesale internet was an important aspect of ensuring healthy competition for broadband services in Canada. 

While this issue is ongoing before the courts and the CRTC, Cybera hopes to see CRTC’s August 2019 decision upheld.