April 5, 2012 telecom@ic.gc.ca Clerk of the Privy Council and Secretary to the Cabinet Langevin Block 80 Wellington Street Ottawa, ON Sir, Re: Canada Gazette, Part I, March 10, 2012, Notices No. DGTP-001-12 Petition to the Governor in Council concerning Telecom Decision CRTC 2011-733 EastLink s comments 1. Bragg Communications Inc., carrying on business as EastLink ( EastLink ), is in receipt of a petition (the Petition ) filed by L Association des Compagnies de Telephone du Quebec (ACTQ) and the Ontario Telecommunications Association (OTA), (collectively referred to as the Applicants ), in which the Applicants ask His Excellency the Governor in Council (the Governor in Council ), pursuant to Section 12 of the Telecommunications Act to vary Telecom Regulatory Policy CRTC 2011-291 Obligation to serve and other matters and/or Telecom Decision CRTC 2011-733 ACTQ/OTA/CityWest Application to review and vary Telecom Regulatory Policy 2011-291 regarding determinations affecting small incumbent local exchange carriers (collectively referred to as the Decisions ). 2. The Applicants have asked the Governor in Council to: (a) Revert to the subsidy levels and mechanism for calculating the subsidies paid to small incumbent local exchange carriers (SILECs) that were in place prior to the Decisions;
(b) Oblige new entrant competitors in SILEC territories to pay the start-up costs associated with the introduction of local competition; and (c) Fund the ongoing costs of implementation of local competition from the central fund the CRTC has established for subsidy payments. 3. EastLink herein submits that the Applicants have based the Petition on five claims that together paint an alarmist and inaccurate portrait of the SILEC markets. EastLink further submits that, contrary to the Applicants claims, the public interest, the pursuit of competition in rural telephone markets, and the efficient use of subsidies are best served by maintaining the Decisions as issued by the federal regulator, the Canadian Radio-Television and Telecommunications Commission (the CRTC). 4. As a result, EastLink submits that the Governor in Council should reject the Applicants petition in its entirety. EastLink herein provides our comments on the Petition. Applicants claims 5. The Applicants claimed in the Petition that unless the Governor in Council returns the subsidy regime to the form it took prior to the Decisions and unless it directs new market entrants to cover all competition-related costs, there will be an inexorable erosion of both telephone and internet service, and the creation of a new digital divide between the town and country in these rural areas where none now exists. The Applicants claimed that this would happen because SILECs cannot exist without a substantial and constant flow of subsidies, and because only SILECs are willing to invest in high-cost rural serving areas. Finally, the Applicants claimed it is not an exaggeration to suggest that the disappearance of these companies will accelerate the demise of these communities themselves. 6. In fact, these claims are worse than exaggerations; these statements are absolutely untrue and ignore the operating realties of Canada s telecommunications market. 2
7. EastLink herein refutes the Applicants five claims by instead offering the facts, which were not accurately reflected in the Petition: (a) The subsidy regime is intended to ensure that all Canadians can receive basic telephone service from one provider or another at an affordable rate. The subsidy regime is not intended to fund Internet and IPTV services, and is not intended to guarantee the financial well-being of any particular telephone service provider. (b) Regardless of the whether the Applicants continue operating in their current form or whether they are acquired by other telephone service providers, the parent company of the incumbent provider will always inherit the obligation to serve. There is no risk to the ongoing provision of basic phone service in rural Canada. (c) In any case, the Applicants are resilient businesses with strong customer bases in their monopoly markets, and many are aggressively expanding into new territories outside their own. During this expansion, the Applicants and the incumbent service providers whose territories they have entered have each funded their own competition-related costs. This principle is the cornerstone of the telecommunications industry and is the reason that consumers today have a variety of providers from whom to choose. The Applicants are absolutely capable of surviving the modest reduction in subsidies included in the Decisions and of covering their costs related to the implementation of local competition. The Applicants will not all be bankrupt within five years. (d) The CRTC included in the Decisions several substantial and additional protections for the SILECs that are not available to larger incumbent telephone service providers. (e) Not all new entrants seeking to offer local telephone service in the Applicants territories are large, deep-pocketed, urban providers. EastLink first started operating in rural Nova Scotia and continues to offer service primarily in small rural areas. Furthermore, Cablovision Warwick is even smaller than the SILEC whose territory it hopes to enter as a competitor. As EastLink noted above, it has 3
been a cornerstone of the telecommunications market since 1997 that competitors and incumbent service providers should each be responsible for their own competition-related costs. Large incumbent providers like Bell Canada have had to bear the cost of competitors entering hundreds of their exchanges, and the Applicants have benefited from this arrangement as they expanded outside their territories. Requiring service providers like EastLink and Cablovision Warwick to fund our own and the SILECs costs of local competition implementation would be contrary to fifteen years of telecommunications competition policy in Canada, and could make offering competitive phone service in rural areas cost-prohibitive. 8. EastLink submits that the modest reduction in subsidies included in the Decisions is in keeping with the 2006 Policy Direction introduced by the Honourable Maxime Bernier to rely on market forces to the maximum extent feasible when determining if government intervention is appropriate. The reduction in subsidies and the requirement that the largest SILECs bear some of the cost of local competition is reasonable and reflects that there is a reduced need for government intervention to ensure the provision of basic telephone service. Clarifying the Facts Fact #1: The local telephone subsidy regime is not intended to fund Internet and IPTV. Rather, the local telephone subsidy regime is intended to ensure that all Canadians have access to basic telephone service, and the subsidy regime should be proportionate to that purpose. 9. The Applicants claim that a reduction in the subsidy regime would result in establishing a digital divide between town and country in their territories, as they claim they would no longer invest in their Internet and IP-based TV networks. It seems from this claim that the Applicants have been using subsidies intended to ensure provision of basic phone service to fund their investments in advanced TV and Internet networks. In fact, the Applicants stated in the Petition that several SILECs are offering basic phone service and high speed Internet at rates below those available in Toronto and Montreal. 4
10. It is absurd that Canadian subscribers in Espanola, Chicoutimi and Saguenay should contribute to a central subsidy fund through higher service fees, so that the Applicants can afford to offer their customers phone and Internet service at prices below that available in even Canada s largest cities. This fact alone should be sufficient evidence that the local phone subsidy regime is bloated. The modest subsidy reductions included in the Decisions are necessary to make this particular government intervention proportionate to its purpose. 11. EastLink submits, while it is of course desirable that rural Canadians would have access to advanced TV and Internet services, there are existing programs specifically targeted to encourage such development. For example, EastLink participated in the Broadband for Rural Nova Scotia project, which aimed to provide high speed Internet to all Nova Scotians. In addition, Satellite TV providers have long offered television services to rural areas that are not adequately served by wired services. 12. In any case, competition is the best driver of investment in profitable TV and Internet services. This competition is already present in SILEC markets through cable providers like EastLink, Cogeco and Cablovision Warwick. Cable providers have invested without subsidies in our TV and Internet networks in SILEC territories throughout Ontario and Quebec. As a result, the SILECs have had no choice but to invest in their own networks to retain market share, and these investments now allow them to offer a variety of wireless, television and Internet services that will help ensure their ongoing viability after the introduction of local phone competition. 13. The Applicants claim that they have made significant investments in their TV and Internet networks is an argument in favour of the maximum support possible for competition, rather than favoruing the continuation of a bloated subsidy regime. As long as there are competitive cable and Internet service providers in the SILEC markets, the Applicants will continue to invest in their networks, with or without subsidies. There is no risk of a digital divide. Fact #2: Regardless of which corporate entity buys or merges with a SILEC, the entity will inherit the obligation to provide basic phone service. As a result, the ongoing provision of basic phone service is not at risk. 5
14. The Applicants claimed that if they go bankrupt or get into financial trouble, there will be no entity in their territories with an obligation to provide basic phone service. This is patently untrue. 15. There has been a flurry of acquisitions in the SILEC markets in recent years and each time, with each acquisition, the new parent company has inherited the obligation to provide basic telephone service in that particular SILEC territory. 16. For example, EastLink purchased two SILECs in 2007 Amtelecom and People s Tel whose territories are in northern and southwestern Ontario, and who are not signatories to the Applicants Petition. EastLink purchased these two SILECs because they, like many other SILECs, are solid businesses. We have since invested in these territories and expanded service in the area, significantly improving telephone, Internet and video services, improving quality of service to customers and upgrading the underlying telephone switching equipment. We have also invested in local charities and community projects in these territories, contrary to the Applicants claim about disinterested distant owners, and we continue to employ local service centers and staff in these operating territories. 17. Finally, EastLink s SILEC territories include one of few SILEC areas in Canada where customers also have access to alternative phone service providers, as People s Tel was one of the first SILECs to allow competition in its territory in 2009. By all measures, EastLink s SILECs are competitive, local telephone service providers, committed to the local community and continually investing to improve services. 18. Most importantly, we have retained the obligation to serve in these territories and we have continued to meet that obligation without disruption. 19. EastLink is not alone in this respect. Bell Canada purchased NorthernTel and KMTS two northern Ontario SILECs and has continued to meet the obligation to serve in those areas. In some cases, the SILECs have been consolidating amongst themselves. Sogetel, a large SILEC in Quebec, has acquired five smaller SILECs in recent years. 6
20. As a result, it is unnecessary for the SILECs to continue operating in their current form for the federal government to be sure that Canadians will have access to basic phone service. It is furthermore unlikely that the SILECs will continue operating in their current form regardless of whether the Governor in Council accepts the Applicants recommendations. The SILECs are on a steady path toward a marketbased consolidation and there is no need for the government to intervene. Fact #3: The Applicants are not as economically fragile as they pretend. 21. The Applicants are actually resilient businesses with strong customer bases in their monopoly markets, where they claim to be pillars of the community. At the same time, many are aggressively expanding into new territories, even while the Applicants have done everything possible to prevent competitors like EastLink from offering service in their territories. 22. The Applicants have implied that they face an increase in operating expenses with no hope of increasing their operating revenues, however, their operating revenues are not fixed. Consider the example of the five SILECs territories where EastLink is currently working to begin offering phone service. Each of these five SILECs offers wireline phone, wireless phone, high-speed Internet and cable TV services. These services allow considerable flexibility in attracting new revenue in the SILEC territories. For example, they can launch new television and wireless services to offset the modest subsidy reductions and the beginning of competition in their territories. 23. In addition to having the means to increase their revenue, many of the Applicants are experienced operators in competitive markets. Each of the five SILECs described above has entered large incumbent territories as a competitor. This entry has required them to bear significant costs of expanding their networks and interconnecting their networks with those of the incumbents. Furthermore, operating in these larger incumbent territories has required the SILECs to compete against EastLink but also against very large service providers like Bell Canada. Nevertheless, the SILECs have been successful in these markets. 7
24. These SILECs are hardly the defenseless, financially unstable companies that the Applicants describe in the Petition, and there is no reason that they alone in all of Canada should be exempt from the responsibility for their share of the cost of competitive entry in their territories. The Applicants have proven they can bear the cost of competitive entry outside their territories, it reasonable and in keeping with longstanding telecommunications policy and the Governor in Council s Policy Direction, that they should do so inside their territories as well. Fact #4: The CRTC was generous to the SILECs in the Decisions, offering several subsidy and cost recovery mechanisms not available to larger incumbent providers. 25. The Applicants claimed that the CRTC imposed a large incumbent cookie cutter approach to local competition in rural and remote areas. This is simply not true. In fact, the CRTC was quite generous in the Decisions, providing the SILECs with several subsidy protections that it did not make available to larger incumbent telephone service providers. In fact, when one reviews the Decisions closely, it is evident that, in many cases, the Commission granted generous interpretations of the relief that the Applicants had specifically requested. 1 26. Under the Decisions, the CRTC first extended the same protections to SILECs that it had provided large incumbents. For example, all incumbents will continue to receive subsidies for each subscriber they serve and for each subscriber they had previously served, even if that subscriber left them, until local competition is implemented. 27. To further ease incumbents operating costs, the CRTC also determined that once an incumbent has sufficient competition in its territory, it can meet the obligation to serve through wireless phone service. This means that incumbents would no longer be required to build costly wireline networks throughout their territories which would substantially reduce the cost of the obligation to serve. This new provision also means that the Applicants operating expenses are no longer fixed. To be clear, this means that, under the Decisions, neither the Applicants operating costs nor their operating revenues are fixed. The Applicants absolutely have the flexibility to adjust 1 EastLink has filed more details on this analysis in our comments, dated 5 August 2011, available at www.crtc.gc.ca under file# 8662-A5-201110270. 8
to the modest subsidy reductions in the Decisions and to bear their share of the competition costs. 28. These protections were deemed sufficient for the large ILECs but, for the SILECs, the CRTC went even further. SILECs are able to continue receiving subsidies for the subscribers they serve even after competition has been implemented in their markets. Furthermore, SILECs will also continue to receive subsidies for subscribers they lose to their competitors for the first few years. Finally, these SILECs can receive additional subsidies to help cover the minimal ongoing costs of operating in a competitive market. 29. For example, when EastLink enters a SILEC territory, we will incur the cost of building our network, of winning over customers from the SILEC, and of actually serving those rural-area customers. We will further continue to provide subsidies to our competitor for the subscribers it serves, and for the subscribers we are able to win over. Finally, we will continue to provide subsidies to help offset the reduction in revenue related to our competition. 30. These subsidies represent substantial additional costs for small new entrants like EastLink and will significantly offset the cost of competition in the Applicants territories. 31. Finally, the CRTC s most generous provision was extended in the Decisions to the very small SILECs those with fewer than 3,000 subscribers. Under the Decisions, these SILECs would have all the start-up and ongoing costs related to local competition fully funded by the new market entrant. To be clear, the protections that the Applicants have requested in the Petition are already available under the Decisions to the small SILECs. The Petition is not aimed at protecting these small SILECs, rather the Petition is aimed at providing larger SILECs additional subsidies and operating revenues, which they have proven they do not need. 32. The CRTC has erred on the side of caution in the Decisions, providing additional protections to SILECs to minimize the impact of its modest adjustments to the subsidy regime, while ensuring that those companies that can fund their own local competition costs, do so. The Decisions have established a regime that is balanced and proportionate to its purpose of ensuring the provision of basic telephone service, 9
and that is consistent with the cornerstone principle that competitors and incumbents should each bear their own competition-related costs. Fact #5: New market entrants are smaller, primarily rural service providers that may not be able to afford the cost of competitive entry into SILEC territories if the Applicants recommendations are accepted. 33. Contrary to the picture the Applicants have painted of large incumbent cable providers with deep pockets ready to pounce on the Applicants small territories, many of the companies attempting to offer local telephone service in SILEC territories are also small rural service providers, some are even smaller than the Applicants. 34. For example, EastLink started as a small rural cable provider in Amherst, Nova Scotia. While we were small, we were the first cable provider to offer local telephone service when the markets opened up for competition. We have entered a couple of small cities like Halifax and Sudbury, but we generally operate in very small rural areas such as rural Newfoundland, Alberta, BC, and northern Ontario. Roughly 85% of our cable systems have fewer than 1,000 subscribers almost half of our systems have fewer than 100 subscribers. EastLink is proud of our SILECs Amtelecom and People s Tel and of our very small rural cable systems. EastLink is also active in these communities and employs people in many of the small territories where we operate. 35. However, being a primarily rural service provider is costly. Prior to the Decisions, competitors like EastLink received subsidies for our phone service subscribers in the highest-cost rural areas, which would have included the SILEC territories. Under the Decisions, competitors like EastLink will no longer be eligible to receive subsidies for the customers we serve in the Applicants territories. This change in circumstance negatively impacted the business case for offering competitive services in these territories but we remain committed to entering the markets. We have existing cable and Internet customers in those territories and we would like to offer our customers and new customers the ability to bundle their phone, Internet and television services. 10
36. One of the reasons EastLink could remain committed to entry was the inclusion in the Decisions of the cornerstone principle that new entrants and incumbent providers each bear responsibility for their own competition-related costs. This system has created a phone market with many service provider options for consumers and is a system from which the Applicants have benefited. This principle means that, while we lost the subsidy support and while we would have to incur the cost of expanding our network and interconnecting our network with those of the SILECs, we could focus our other resources on improving services in the area and in providing topquality customer service. 37. However, the Applicants recommendations in the Petition could make it prohibitively expensive to enter these territories, as new market entrants would also have to bear responsibility for the SILECs competition-related costs. Cogeco, a company that is larger than EastLink, decided not to offer phone service in several SILEC territories it had planned to enter because these SILECs all had fewer than 3,000 subscribers which meant Cogeco would have to pay their local competition implementation costs. EastLink is smaller than Cogeco and Cablovision Warwick is smaller still. In fact, Cablovision Warwick has fewer subscribers than the SILEC whose territory it plans to enter. 38. Placing this additional burden on small rural service providers like EastLink and Cablovision Warwick, would discourage competitive entry in SILEC territories. Fortunately, the Decisions have ensured that the SILECs that can bear these competition costs will bear them, so that new entrants of all sizes can afford to offer competitive services in SILEC territories. This competition will drive innovation and investment in advanced services, just as it has in the television and Internet service markets in the SILEC territories. Conclusion 39. EastLink submits that the subsidy regime is intended only to ensure the provision of basic phone service. The Applicants are apparently using this subsidy to build IPTV networks and to offer below market rates for their Internet service. This is evidence enough that the subsidy regime was bloated and that the modest adjustments 11
included in the Decisions were necessary to bring the regime to a level that is proportionate to its purpose. 40. The CRTC managed this subsidy regime adjustment in a thoughtful and balanced manner, providing several additional protections for SILECs of all sizes, as well as substantial cost recovery mechanisms for the very smallest SILECs. To be any more generous under the Decisions, the CRTC would have disregarded a 15-yearold cornerstone principle that competition costs should be the responsibility of the service provider that incurs them and would have endangered the economics of competition in SILEC territories. Residents of the Applicants territories have been waiting for local phone competition for years and, with interested competitors willing to enter the markets without hope of subsidies, it made sense to avoid discouraging such competition. 41. Accepting the Applicants recommendations would mean reverting to the bloated subsidy regime in place prior to the Decisions. Accepting the Applicants recommendations would furthermore overturn a pro-competition regime that has worked well and fostered a healthy telecommunications market full of competitive service providers, and that includes additional protects for the SILECs, despite the fact that SILECs have proven they are resilient competitors outside their territories. 42. Simply put, the Applicants have not proven they require the Governor in Council s intervention and, in fact, have provided every indication that they will adapt and survive this modest adjustment without additional government help. 43. As a result, EastLink submits that the Governor in Council should reject the Petition and the Applicants three recommendations in their entirety. Sincerely, Natalie MacDonald Vice President, Regulatory Matters 12
Tel: (902) 431-9979 Fax to Email: (902) 446-9979 Email: regulatory.matters@corp.eastlink.ca C.c.: Director General, Telecommunications Policy Branch, Industry Canada *** END OF DOCUMENT *** 13