Asymmetric Pricing: CRTC UBB Decision 2010-802

While we all waited to go trick-or-treating on Sunday evening, the telcos did theirs a few days early. Dressed as little angels they knocked on the door of the CRTC then held out their bags and smiled. When Konrad Von Finckenstein answered the door he looked surprised and worried because he hadn't yet stocked up on candy to pass out to the little ones. Looking around the offices he found something even better: CRTC Decision 2010-802. Hiding their nasty smirks behind their angel masks, the telcos made their way back home to look over their loot. Then the press releases and media articles began appearing.

Bell Canada and other telcos got what they wanted in CRTC Decision 2010-802, giving them flexibility, though not free reign, to charge overage fees (usage-based billing, or UBB) to retail users of their wholesale GAS ISP customers. This does not surprise me, notwithstanding the attitude of at least one CRTC Commissioner, since the CRTC is attempting to allow market forces to work in the broadband sector. ISPs understandably don't like what the CRTC has allowed, and neither do their heavy-usage customers. Although all of us users of broadband have reason to gripe about the potential for paying more, after reading through the Decision I believe the CRTC has struck an appropriate balance. Like a lot of balancing acts it is unstable and will almost certainly require follow-on action in the future as intent and reality drift apart.

Media reports necessarily gloss over the details, instead focussing on news releases, interviews and complaints, which is unfortunate since the actual Decision contains what really matters for those with a strong interest in the matter. As I've done with some previous CRTC actions, I will provide some commentary on those details.

9.      The Bell companies proposed a new grandfathering arrangement whereby they be allowed to implement economic ITMPs for GAS ISPs’ non-grandfathered retail customers, provided that the grandfathering practices are applied on an equivalent basis to the Bell companies’ retail customers. Under the Bell companies’ proposed arrangement, flat monthly rates for unlimited usage would continue to apply for GAS ISPs’ grandfathered retail customers, while the UBB regime would apply for GAS ISPs’ non-grandfathered retail customers.

This is what we get when the regulator gets too involved in a market. The equitable pricing argument is a good one since, now that the CRTC has intruded as far as it has, it has to level the playing field insofar as it wishes to avoid asymmetric mandates among competitors. In their view, however, the telco competitors are the cable companies, not the ISPs; the CRTC sees the ISPs as customers of the telcos, not competitors.

12.  TELUS Communications Company (TCC) and the cable carriers supported the Bell companies’ proposals.
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35.  The Bell companies requested that the Commission vary Telecom Decision 2010-255 to approve the principle, consistent with what is currently being applied by cable carriers, of a UBB component and an excessive usage charge with a cap at equivalent rates to those imposed on the Bell companies’ retail services, instead of a 25 percent discount.

36.  TCC and the cable carriers supported the Bell companies’ request.

Then again, it is very interesting that the cable companies supported the telco interventions on both UBB and UBB caps. That does not sound like the action of competitors. I would have expected them to either remain silent or to make some bland comments, as is typical in these matters; they don't want to appear either disinterested or too supportive of measures that negatively impact their competitors. I solved this mystery -- or merely my own confusion -- by reading the cable companies' submission on the telcos' request for variance. The answer was there:

Conclusion
14. In conclusion, the Cable Carriers reiterate their support for regulatory symmetry as regards the application of ITMPs to wholesale services, and reaffirm their view that their existing TPIA UBB practices are already fully consistent with a policy of ensuring that UBB terms and conditions are applied no less favourably to wholesale as to retail customers.
15. The Cable Carriers agree with the Bell Companies that it should not matter that some retail customers are grandfathered without UBB, provided equivalent grandfathering opportunities are made available to wholesale customers. Similarly, it should not matter that UBB is applied to some service tiers but not others, or that UBB is applied to residential offerings but not business offerings, provided that when a given offering is made available at wholesale it incorporates the same UBB terms as are applied at retail. Furthermore, to protect against draconian results that could arise from an excessively rigid application of the equivalent treatment rule, it is entirely appropriate and of no offense to the principle of competitive equity to allow for de minimus exceptions to the rule.
16. The Cable Carriers agree with the Bell Companies that the Decision 2010-255 prohibition on waiving UBB charges on a promotional basis is an unjustified interference with the effective functioning of market forces in the internet access market. The Cable Carriers further agree with the Bell Companies that an equitable and effective application of economic ITMPs requires that the same UBB rates and caps be applied to wholesale as to retail customers

With the CRTC so focused on treating the telcos and cable companies equitably in this matter, the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them; that is, the option that would give them the maximum flexibility to increase revenue and reduce ISP competitiveness with respect to TPIA, the cable equivalent to GAS.

10.  With respect to how to apply this proposal, the Bell companies stated that they have implemented a grandfathering arrangement for their retail customers and no longer offer flat-rate unlimited usage retail plans as of 1 February 2007. In their application, the Bell companies submitted that, consistent with their retail practices, a GAS ISP’s grandfathered retail customer would be a retail customer who was with that ISP before 1 February 2007 and whose service has continued without any changes.

11.  The Bell companies further stated that, rather than actively migrating retail customers to usage-based plans, their retail divisions have implemented an approach of increasing rates periodically for customers on unlimited plans to incent customer migration. They requested that the Commission approve a similar principle of applying an unlimited usage plan premium charge for GAS ISPs’ grandfathered retail customers.
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16.  The Commission considers that, if an appropriate grandfathering arrangement is established for Residence GAS, the requirement of equivalent treatment for wholesale GAS and retail Internet services would be met in a minimally intrusive manner and, consequently, it would not be necessary for the Bell companies to charge UBB rates to all their retail customers prior to implementing UBB for GAS.

http://www.cbc.ca/technology/story/2010/10/28/crtc-usage-based-billing-internet.html
This is the sweetener that appears to have helped sell the proposal to the CRTC, by stating that they will, over time, strive to migrate their own unlimited plan retail customers to similar UBB plans. This point about grandfathering and telco retail customer migration was not made clear in the CBC article I came across, though perhaps other media did better when reporting this.

Now that they need to act even-handed with respect to the competitors -- in the CRTC's judgment -- they feel compelled, by the law, to withdraw the UBB overage charge restriction so that the cable companies are not handed a competitive advantage by the CRTC. In this situation, the CRTC is behaving in a manner similar to a strong labour union. What a union achieves over time is near-equal salaries and benefits for each trade or profession they represent across entire industries, without regard to individual merit or the market forces that the affected companies must operate under. I care for neither since these are overt and excessive interferences in the free market.

30.  The Commission considers that requiring the Bell companies to extend the same UBB promotions to GAS ISPs that they offer to their retail customers would unduly interfere with their operations in the retail Internet services market.

This point on tying GAS UBB rates to the telcos' own retail promotions seems fair to me, if it is only for limited-time promotions and not done as a matter of course as a means to drive the ISPs out of the market. Every company should be able to use this tool of competitive marketing. The ISPs can do the same if they wish. These promotions do have an impact on costs, but that is true of both the telcos and the ISPs. The cable companies strongly supported this point, as can be seen in the passage I quoted earlier.

45.  The Commission notes that, in response to a Commission interrogatory, the Bell companies submitted revised cost information based on an Ethernet growth solution that included the missing cost elements described above. After evaluating the revised cost information, the Commission considers that the Ethernet growth solution would include significant reductions to switching and transmission costs that would offset the additional conversion and traffic migration costs suggested by the Bell companies.

In an earlier article on UBB I talked about the bizarre situation where the CRTC is making determinations on network and engineering costs to determine the basis for retail and wholesale service prices. They've done it again, with no explicit justification, by rejecting the (non-disclosed) cost calculations of the telco with respect to ATM and Ethernet access networks. Although I, too, would be wary of the figures submitted by these companies, the CRTC is unqualified to make the criticism on these fine details. I doubt that this decision will have much real impact on the telcos, it just annoys me to see the CRTC so intrusive and cavalier on these business matters.

As for the ISPs themselves, they can complain about the granting of the variance to the CRTC order all they like -- and they are! -- but this is the price they, and we their customers, must pay. As I've said before, the broadband ISPs live at the pleasure of the CRTC and their policies because only the CRTC can mandate their access to the facilities of the incumbent service providers. For now they will continue to live. How long the CRTC will support their existence remains to be seen. My guess is that when (if?) there is sufficient facilities-based competitive alternatives they will sunset GAS and TPIA.