CRTC opens competition in the North; Northwestel’s monopoly comes to an end

Northwestel Inc.’s decades-old northern monopoly will end following the CRTC’s move Wednesday to open up the North’s local phone service market to competition, commissioner Len Katz says. “I think it’s certainly the dawn of a more competitive and service-oriented marketplace,” Katz told The Wire Report in an interview. “We think the market is there for competitors to come in.” In a ruling Wednesday, the CRTC removed the restrictions on competition for facilities-based services in the North due to Northwestel’s continuing failure to offer its subscribers modern telephone services. Northwestel is a BCE Inc. subsidiary. The commission said it expects competing telcos to move into previously restricted northern local phone markets within the next three-to-four months. “It just made sense to open up the market to competition, particularly when we heard that a number of the communities don’t have some of the state-of-the-art call management services that may no longer be state-of-the-art for us in the South,” Katz said, citing caller ID as one service that is not yet available in many northern communities. “We firmly believe that the residents of the North did not get what they should have been able to realize in the way of communications.” The decision also rejected Northwestel’s request to increase the monthly rates it charges business and residential landline customers and imposed requirements on the company to file plans for an update of its aging landline infrastructure by May. The commission said it is extending its regulatory arm further into the company’s northern operations. “This will allow for a holistic review of Northwestel’s telecommunications services, including a plan to modernize its network infrastructure,” the decision said of the “additional regulatory oversight” it imposed. The ruling followed a special two-day hearing on northern telco services that took place in Yellowknife in October. During those hearings, competing telcos SSi Micro Ltd. and Telus Communications Co., public interest groups and all three territorial governments petitioned the CRTC to open up the North to competition. Northwestel countered, saying any move to loosen the regulatory protections it received would lead to a “doughnut effect” where competitors would move into profitable urban centres while ignoring the rural communities. This, the company said, would reduce its ability to cross-subsidize costly rural services from profits gleaned larger towns and cities such as Yellowknife and Whitehorse. The commission did not directly respond to these concerns in its decision but said Northwestel’s shareholders had benefited “to a far greater extent than its customers” from the current “price cap regulatory framework” the regulated market enjoyed. That framework sets general rates at which Northwestel can charge its customers regardless of what the company spends on infrastructure investments, Katz noted. He blamed the regulatory system for allowing Northwestel to get by on “bare minimum” network investments. “Since 2006, when we went from a rate-of-return regulation environment to a price-cap regulation environment, it appears to us from the records that Northwestel has done a formidable job in maintaining their business and growing their business,” Katz said. “Yet their subscribers did not get what we would have expected them to get in the way of upgraded facilities, latest technology and innovative services.” He noted that much of the company’s connection switches are now more than 15 years old and have an expected shelf life of 12 years even though Northwestel indicated a desire to continue using them for another 10 years. Under the old rate-of-return system, he said, the company would have been required to pour more profits into network upgrades. The commission said the company’s annual income from operations had nearly doubled since 2007 and stood at $69.3 million in 2010. “Despite this, the company has failed to make the necessary investments in its network,” the decision said. “Northwestel’s infrastructure is aging and services comparable to those provided in the rest of Canada are unavailable in many remote communities.” The decision also denied Northwestel’s request for a $3.5 million boost to the current $20.8 million subsidy it receives from the National Contribution Fund (NFC) for providing services in high-cost, remote northern communities. It also laid out clear guidelines stating that competing telcos cannot receive those subsidies instead of Northwestel even if one of them moves into a high-cost community. As a result of the decision, SSi Micro and other competitors are expected to extend their presence in the North, Michael Janigan, executive director of the Public Interest Advocacy Centre (PIAC), said. Traditionally a broadband-based service provider, SSi Micro is expected to be one of the fiercest new competitors in the regulated wireline market, he said. “Clearly Northwestel is going to be faced with an aggressive and experienced competitor in terms of SSi, and it will obviously have to be pretty nimble in order to be able to compete in a number of different areas,” Janigan said. He said the commission’s decision signalled a “new deal” for northern consumers and speculated that the increased competition would lead to “more services offered, better quality of services, more choice overall better prices.” Ultimately, he said, many northerners would continue to subscribe to Northwestel’s services, but would probably see better services for what they’re paying. “In reading the entire decision, it’s effectively a warning shot across bow to pull up their socks.” Katz agreed that the decision will force Northwestel to offer its customers better services. “I think the critical issue is how fast Northwestel can provide state-of-the-art infrastructure and competitive services,” he said. “If not, they will have their lunch eaten.” Northwestel and SSi Micro declined requests for interviews Wednesday. Northwestel said it needed more time to review the decision. SSi issued news release praising the decision but called on the commission to further examine the rates Northwestel charges for backbone services transmitting call signals to the rest of Canada. “This is good news for consumers and a great step towards telecoms choice in the North,” Dean Proctor, SSi’s chief development officer, said in the release. “However, the next key step will be a decision by the CRTC on our application concerning Northwestel’s discriminatory pricing for backbone services to the south.” nkyonka@thewirereport.ca --- CORRECTION: Katz mistakenly said the switches have depreciated over 12 years and have an average total shelf life of 15 years. The numbers are actually 15 and 12 years, respectively.

CRTC opens competition in the North; Northwestel’s monopoly comes to an end

News | December 14, 2011

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