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  • Ted Woodhead

Scotiabank research models potential outcomes of the CRTC's upcoming final decision on fibre unbundling

In a research report published on June 20, 2024 Maher Yaghi and his colleague Joey Chan turned their minds to the potential outcomes of the CRTC's decision on fibre unbundling that it is anticipated will be be released by the end of summer (or in other words over the next three months).

The report is well thought out. They correctly point out that the CRTC's objective is to create a regulatory environment for fibre to the home that will create increased competition and in turn, lower fibre internet access prices for consumers. The authors also point out that Industry Science and Economic Development Canada (the portfolio Department currently led by Minister François-Philippe Champagne) has concluded that internet access prices in Canada remain too high when compared to other OECD countries. This belief is fuelled by the Department's perception that internet access prices in some OECD reference countries, particularly in Europe, are lower than in Canada and therefore measures need to be taken to force the lowering of internet access prices too.

This belief is most likely misplaced because, as I wrote in a blog post in March, the European Commission is actually considering its forward looking frameworks and has, as a preliminary finding, concluded that the European market is too fragmented with the attendant lack of scale to invest in next generation fibre networks widely beyond urban and suburban levels. This, the European Commission concludes has led to to a significant decline in return on capital employed relative to North America, Japan and Korea. All of that to say that replicating sub-optimal regulatory rules that pervade in Europe would most likely not be the path to logically choose if Canada actually is concerned about the continued investment in its digital infrastructure and its vital importance to improving our lagging productivity as a country.

The Scotiabank report includes the authors' base case for what the upcoming CRTC decision might look like. The base case posits that 1) fibre to the home (FTTH) unbundling will be mandated permanently across Canada; 2) the aggregated model will be used for the purpose of unbundling FTTH; 3) only small internet service providers will be permitted to access the wholesaling regime, with a warning that if rates don't begin to decline within a set amount of time, then the regime will be made accessible to incumbents out-of-territory; and 4) rates will be set using the Phase II costing methodology, with a potential wholesale rate for a 1 gigabyte per second service set at $65-$70 per month. Scotiabank forecasts that any heavier handed approach would lead them to reduce its forward looking revenue growth forecasts for the entire industry. [Editors Note: this is precisely what has happened in many countries in Europe].

Messrs. Yaghi and Chan presciently conclude that the CRTC should proceed cautiously as regulatory overreach could significantly curtail capital expenditures in wireline infrastructure (i.e, fibre) as seen in other countries.

The report goes further to examine other scenarios, that in my opinion go from highly unlikely to potentially plausible but very bad indeed. The first and least plausible scenario is that the CRTC decides to reverse its interim decision and determine not to finalize permanent FTTH unbundling on an aggregated basis in Ontario and Quebec. This of course, will not happen. Minister Champagne has essentially as much as ordered the CRTC to unbundle FTTH. Why the CRTC ordered it on an interim basis only in Ontario and Quebec is one of the great mysteries of life as it smacks of being punitive.

Another scenario the authors posit is that the CRTC mandates FTTH unbundling across Canada on an aggregated basis but mandates a tariffed price below $65/month. While the CRTC might do this and seemed to articulate a justification for it in a previous decision, this would essentially destroy the incumbents economics in some areas. This would be a terrible precedent to set. Forcing companies to sell their product to competitors at a price at their cost or below it would deprive the incumbents a return on their investment. In articulating its justification, the CRTC appears to believe that just and reasonable rates do not require that a firm be owed a return on investment or alternatively, that a firm can be required to operate at a loss in one line of business if it is profitable in another. For the uninitiated this seems to imply that the incumbents should fund competitors broadband aspirations from profits they make in wireless. This is both a novel and unprincipled justification for mandating below cost wholesale rates and would seem to run counter to the Minister's other edict that he wishes to see wireless prices come down. You can't have both at once if this justification from the CRTC is actually to be believed. If the CRTC were to proceed along this path it is quite possible that it would lead to a curtailment in investment and would do nothing to improve Canada's significantly declining productivity.

The final alternative scenario involves mandating FTTH unbundling on an aggregated basis across Canada to new or newer ISPs but would include permitting access to incumbents out-of-territory. I have previously written how the CRTC made a critical error in not clarifying that incumbent out-of-territory access is neither intended nor permitted. The principle that the CRTC has always followed is that the frameworks should encourage companies to invest in their own facilities whether in their home territories or out of it. Encouraging incumbents to wholesale the facilities of other incumbents out-of-territory would be a major departure and would signal a level of central planning of an industry by government and regulator that is virtually unprecedented since the last world war. As I have written previously, I believe this would among other negative things have the unintended consequence of making things harder rather than better for the resale competitors and other new facilities-based entrants.

While far from perfect or desirable in the long run, Scotiabank's base case is probably the best case scenario that we can anticipate from the CRTC since it would appear the Minister's desire as to result has been clearly dictated to it.


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