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The clash over the Internet infrastructure of the 21st century

Cities, corporate interests and the new Trudeau government are at the centre of a debate with massive ramifications on how Canadians access the web.

 

Just days before the Trudeau Government was about to be sworn in at the end of 2015, Bell landed a rarely used Cabinet Petition of a vitally important CRTC decision on the new government’s desk. The CRTC decision (2015-326) in question allows wholesale access by rival internet companies such as TekSavvy, Primus, Distributel, etc. to the fibre-based internet access networks now being built by the incumbent telcos and cablecos in cities across the country (Bell’s appeal can be found here and all of the responses for and against it can be found here).

The decision updated the wholesale access regime that has long been in place for the telephone and cable companies’ existing ‘copper’ and ‘coax’ networks and applied it to the fibre optic-based internet access networks that are now being built and which will likely be the information infrastructure for Canada throughout the 21st century. It’s basic thrust was that as the internet infrastructure evolves so too must the wholesale access rules, lest even the modest competition that independent ISPs like TekSavvy, Distributel, Primus and nearly 500 others across the country have been able to generate be left to wither on the vine.

As part of its appeal, Bell sought and obtained support from several mayors, notably the Mayors of Toronto and Ottawa, both of whom submitted letters to Cabinet supporting Bell’s position. Written on city letterhead, the letters implied that Mayors Tory and Watson of Toronto and Ottawa, respectively, were acting on behalf of their cities (see here and here), but the past few weeks has shown that they acted on their own without consulting council.

Thus, last week, in a 28-5 vote, Toronto City Council passed a motion that stands as a major rebuke to Tory while lending its support to the CRTC’s smart, well-reasoned and forward looking decision (see here). The Toronto Star and Globe and Mail both covered the issue.

In Ottawa, Councilors Jeff Leiper and Diane Deans, among others, have raised similar concerns and yesterday (February 10), Leiper introduced a motion in City Council similar to that adopted by Toronto. The motion is significant not just because it too, if passed, will stand as a rebuke to Watson and support the CRTC, but also because Leiper has several years of high level experience at the CRTC and much experience before that at a major consultancy specializing in the telecoms and internet industry. The plan is to put the motion to a vote at the next meeting of City Council on February 24. The Ottawa Citizen covered the story here.

These moves by the Ottawa and Toronto city councils also line up with an intervention by Calgary Mayor Naheed Nenshi, who far more than just offering up a modified boilerplate letter along the lines offered by Tory and Watson, had city staff prepare a smart and very detailed 30 page report in support of the CRTC, and with strong arguments as to why more competition is both needed and possible. You can find this intervention here.

While the mayors of Toronto and Ottawa and a few others signed off on letters in support of Bell, most cities across the country sat this one out: e.g. Montreal, Windsor, Vancouver, Quebec City, Edmonton, Winnipeg, Saskatoon, Halifax, St. John’s, Saint John’s, etc. We can be quite certain that Bell approached these cities and, not feeling that they could support the company, they likely chose to stay silent. Add these cities to Calgary’s opposition, and the overwhelming majority of Canadian’s live in cities that have not lined up in Bell’s corner.

There’s two other points to be made about Tory and Watson’s support. First, both of their letters repeat one of Bell’s key talking points on the issue: namely, that the CRTC is unfairly giving rivals discounted access to its infrastructure and this will likely deter future investment. As Watson told the Ottawa Citizen yesterday,

“They [i.e. Bell and the other companies] invest tens of millions of dollars in their network, just to have competitors come and use their network at a severely reduced cost” (emphasis added).

A week earlier John Tory hit the same notes in an interview with the Toronto Star:

“If you put politics aside, . . . when people make these investments, they have to be able to garner proper return on them, otherwise they just won’t make them. And I think that would be very damaging for the city”.

The CRTC dealt with such claims head on in its ruling and rejected them.

The problem with the mayors’ view is that the CRTC’s decision does not grant discounted access to the incumbent telephone and cable companies fibre-based networks. Instead, it gives rivals regulated access on terms that are still being hammered out between industry players and the regulator. However, if history is our guide, and it no doubt is, in the case of the old ‘copper’ networks, the Commission set the wholesale rates at a 40% mark-up on costs, or in other words, at a level that guarantees Bell a 40% return on its investment (see here and here).

In other words, far from being short-changed, Bell is likely to be compensated handsomely for the use of its networks.

Lastly, the intersection of federal telecoms-internet policy with municipal politics in our own time harkens back to the formative era in telecoms in Canada over a century ago. A few examples will help to illustrate the point.

  1. When the federal Patent Commissioner voided Bell patents in 1885 because Bell was not making enough of its equipment in Canada, Bell feared, and others widely believed, that competition would emerge, as happened in the US a few years later. However, this did not transpire. Why? Because while nullifying the patents gave would be competitors access to the technology, Bell’s exclusive municipal franchises blocked cities from granting competing franchises. With only weak powers under a strong federal government that had granted Bell a charter to develop the telephone system for the “general advantage of Canada”, municipalities tried to eek out a tiny amount of influence via their ability to grant franchises, but those often came back to haunt them.
  2. When Kingston pushed to have the telephone company’s poles, wires & rights-of-way taxed as capital assets in 1899, Bell mounted a legal case to have them taxed on their value as scrap–and won.
  3. When competition did break out, as in Montreal in 1888, for instance, Bell launched a ruthless price war with its rival, the Federal Telephone Company, until the latter capitulated and sold out to Bell three years later. In Winnipeg it created a “dummy company”, the People’s Telephone Company, to give the illusion of competition; while in Peterborough and Dundas, to kill new independent telephone Bell gave away service for free;
  4. When Kingston joined the Ontario Municipal Association in 1903 in the adoption of a resolution calling for municipal authority to regulate telephone rates, Bell threatened not to renew its franchise and withhold further capital investment;
  5. In the same year, the Mayors of the Montreal suburb of Westmount and Toronto, William Lighthall and Oliver Howland, respectively, spearheaded a drive to gain greater regulatory authority over telephone rates for municipalities while calling on the federal government to take control of the long distance network. By 1905, 195 municipalities had joined the call, with support from the Montreal and Toronto business associations and the farmers’ association, Dominion Grange. While evidence at the time and recent historical research has shown (Wallsten) that the model had been successful in some Scandinavian countries at the time (e.g. Sweden and Denmark), the cities’ calls fell on deaf ears at the level of the federal government.
  6. As a result of this drift of events, in 1902, 1-in-50 Ottawa citizens had regular telephone service. The upshot, as Bell Canada President Charles Fleetford Side never missed a chance to stress, was that the telephone was treated as a luxury not necessity.[1]

This history reminds us that, unlike Toronto and Ottawa today, and similar to the position now being struck by Calgary and its more progressive mayor Naheed Nenshi, cities have long chafed under their weak position subordinate not just to the giants of the telecoms industry but to a federal government seemingly all-too-willing to turn a blind eye to their demands. Instead, at least historically, the latter has seemed more willing to acquiesce to incumbents’ demands to build things on their own terms and time line rather than, as Bell’s charter once required, for the general advantage of Canada.

The CRTC’s wholesale fibre internet access decision offers a chance to turn this around. While it is easy to get lost in the weeds on this one, the key point is that fibre internet access will be a key part of cities and Canada’s infrastructure for the 21st century. Without it, the stubbornly high levels of concentration and strong tendency for incumbent telephone and cable companies to fly as a flock rather than compete vigorously will likely persist, at the expense of Canadians from coast-to-coast.

The new Trudeau Government should act swiftly and decisively in the present case. It would be wise to avoid granting Bell’s wish lest it erode confidence in the regulator while lending succor to the view that the “Natural Governing Party” – as the Liberal Party is known in far too many quarters — is too close to the industry, and thus unable to act in the best interest of all Canadians.

[1] The points on the history of the telephone in Canada are taken mostly from Robgert MacDougall’s (2014) The People’s Network: The Political Economy of the Telephone in the Gilded Age (pp. 44-46, 125-127). Philadelphia: Penn State University; Dwayne Winseck (1998). Reconvergence: A Political Economy of Telecommunications in Canada. Cresskill, NJ: Hampton; Robert. E. Babe. (1990). Telecommunications in Canada. Toronto: University of Toronto.

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