OTTAWA – Talk of the contribution regime and the appropriate level for a high-cost serving area (HCSA) subsidy became heated at times during the fifth day of testimony at the CRTC’s obligation to serve hearing.
Len Katz, vice-chair of telecommunications and national commissioner, took the l’Association des companies de téléphone du Québec to task over the importance of the subsidy to their businesses. He suggested that based on the ACTQ’s subsidy proposal, it would actually be more beneficial for its members to lose customers because they could then become takeover targets.
“The perversion as I see it is, at the end of the day, you can lose all your customers and simply be a takeover target just for the subsidy because what you’re saying is the subsidy is what you need to pay for your fixed costs for your accounting, your technical person, your CFO, your president or general manager. And those aren’t required by someone coming in to take over your business when you could have no customers,” said Katz. “You have a value there. You created a value. If this Commission approves it we’ve created a value for your business that is of inverse proportion to your success. The less successful you are the more subsidy you get per customer and the more attractive you are as a takeover target.”
Unsurprisingly, the ACTQ disagreed.
“If the average revenue for a local subscriber is $75 per month or $60 per month and we’re asking for $25 per month, to suggest somehow that we’re living off the subsidy is in itself a bit bizarre,” Serge Désy responded. “If the Commission really feels that that is a scenario that is possible, then as we concluded you simply have to remove the obligation to serve on the one hand or require someone else to have that obligation as well to provide some kind of equity.”
The ACTQ is concerned that if the current contribution regime remains unchanged, small telephone companies in Quebec will start to feel the financial pinch within three years.
“Our calculations indicate that the company’s profitability would likely become negative by the third year of operations,” Serge Désy said. “It is readily apparent that this type of financial profile is not acceptable for any company, let along a federally regulated company with an obligation to serve.”
The consumer groups were also under the spotlight for their new subsidy plan. The Public Interest Advocacy Centre argued that broadband should be included in the basic service objective and that money from telecommunications service providers (TSPs) with less than $10 million in revenue should be required to provide for it. Under the PIAC proposal there would be two subsidies, one for the build out of broadband and one for the access.
In an interview with Cartt.ca, John Lawford, counsel for PIAC, clarified the plan. He explained that a high-cost service area would be opened up to first movers (companies that would have the obligation to serve) with a subsidy set a specific rate. If there are no takers, the subsidy rate increases the following year. It will continue to rise until a company opts to become the first mover. After a company becomes a first mover, the subsidy begins to decrease by 10% for example each year for 10 years until the subsidy is zero. This, says Lawford, will encourage the company to become more efficient with its operations. There is a second level to the subsidy plan that allows for competitors that enter the HCSA. They get a connection subsidy.
Under this proposal, small ILECs won’t have to worry about going out of business because they will have used the subsidy to build out their network to offer advanced services with more revenue potential.
“If you’re a small ILEC, you’re protected because if you undertook the effort to cover an entire market even the outlying areas, your only real competition is on the connection subsidy. And if for some reason, the market becomes non-high cost, the Commission takes away the connection subsidy,” Lawford explained. “The small ILEC, an entire territory with the best Internet to the edges of it, could have the cable companies come in and say we can offer it cheaper, but the SILEC is not going to go out of the business.”
While the ACTQ and PIAC proposed continued use of the local subsidy in HCSAs, Bell Canada argued that it should be eliminated for all but the most expensive HCSA, otherwise known as the G-band.
“The current contribution subsidy is wasteful, competitively unfair and violates the policy direction,” Jonathan Daniels, VP of regulatory law at Bell told the commission in his opening remarks. “It must be reformed and in a reasonable timeframe. There should be no unnecessary subsidization, but only sufficient levels of subsidy to provide affordable access, where necessary.”
With respect to the subsidy rate itself, Bell argued that the Commission “has lost sight” of the reason for the subsidy in the first place: it should only be required when costs to provide the service are “beyond affordable rates.”
As has been suggested by other parties to the proceeding, Bell said rates in HCSAs can go higher and still be affordable. The Commission has set $30 as the target for subsidy purposes, but the company says this is still too low.
“While it is up to the Commission to determine what rate is affordable, we think the rate could be $36.20, perhaps even $37.83. But, whatever rate level is established the Commission must move quickly to allow rates to rise to this level,” said Daniels.
Testimony for much of the day focused on the subsidy and the appropriate rate, but the Liberal Party of Canada took the opportunity to appear before the panel and lay out is broadband plan. The Official Opposition believes that broadband must be made part of the basic service objective (BSO) and that a minimum target of 1.5 Mbps should be established and be available by 2014. A higher speed target should be in place by 2020.
Marc Garneau, MP of Ville Marie in Quebec, said as a first principle, market forces should be relied on to the maximum extent possible, but in areas where market forces won’t get the job done, then government and the CRTC “must coordinate their activities and fund the development of high-speed Internet access.” The Liberals also want an immediate injection of $500 million to support this objective.
Garneau noted that the best way to administer this joint effort would be for the $500 million to put into the subsidy fund and then the CRTC would set the rules for access to the money to ensure that all parts of Canada receive 1.5 Mbps broadband. A combined program would ensure that “individual parcels of the country are addressed until we’ve reached the target of connecting all parts of the country.”
Key principles of Liberal plan
1. Rely on market forces to the maximum extent possible
2. Governments and commission must coordinate their activities
3. Allocate funds using a least-cost auction model
4. Universal high-speed Internet target should be technology neutral
