Telecom Regulatory Policy CRTC 2015-326

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Route references: 2013-551, 2013-551-1 and 2015-326-1

Ottawa, 22 July 2015

File number: 8663-C12-201313601

Review of wholesale wireline services and associated policies

The telecommunications industry in Canada is supported by a wholesale services framework that sets out the rates, terms, and conditions under which incumbent telecommunications service providers are required to make available parts of their respective networks to competitors. These leased parts are referred to as wholesale services, and are used by competitors to provide services, such as local phone, television, and Internet access services, to their retail end-customers.

The Commission’s determinations in this decision are the result of a public proceeding to review wholesale wireline services and associated policies, including an oral hearing held in Gatineau, Quebec. As part of this proceeding, the Commission reviewed the existing wholesale services framework, various wholesale wireline services, and the approach it uses to set the rates for wholesale services to determine whether changes to the existing regulatory landscape are appropriate.

The Commission has made its determinations set out in this decision with a view to achieving various objectives, notably to provide Canadians with more choice for high-speed connectivity, thereby enabling them to fully leverage the benefits of the broadband home or business. Increased choice is expected to drive competition, resulting in further investment in high-quality telecommunications networks, innovative service offerings, and reasonable prices for consumers.

The Commission has adjusted its mandating criteria for wholesale services, and sets out the reasoning behind its determinations to mandate - or not - the provision of particular wholesale services. Pursuant to its mandating criteria, the Commission has made the following determinations regarding the regulatory status of the following wholesale services:

Wholesale high-speed access services, which are used to support retail competition for services, such as local phone, television, and Internet access services, will continue to be mandated; however, the provision of aggregated services will no longer be mandated and will be phased out in conjunction with the implementation of a disaggregated service. Incumbent carriers are directed to begin implementing disaggregated wholesale high-speed access services, in phases;

to begin implementing disaggregated wholesale high-speed access services, in phases; The requirement to implement disaggregated wholesale high-speed access services will include making them available over fibre-access facilities;

Unbundled local loops, a legacy service used primarily to support retail competition for local phone services and lower-speed Internet access, will no longer be mandated and will be phased out; and

Ethernet and high-speed competitor digital network services, which are primarily used to support retail competition in the business data services market, will remain forborne and not mandated.

In addition, the Commission has rendered determinations on issues such as the costing methodology to be applied to wholesale services and the request to implement an equivalence of inputs wholesale regime.

The wholesale services framework established in this decision will remain in place for a minimum of five years.

The dissenting opinion of Commissioner Shoan is attached.

Introduction

Wholesale telecommunications services (hereafter referred to as wholesale services) are the services that telecommunications companies provide to each other, and are integral to the overall development of the Canadian communications system. The provision of wholesale services primarily supports competition in various retail service markets, such as local phone, television, and Internet access service markets, by enabling competitors to access certain telecommunications facilities and network components from incumbent carriers, such as incumbent local exchange carriers (ILECs) and cable companies, so that competitors can extend their networks where necessary to provide their own services to consumers. Wholesale services also play a supporting role in the overall telecommunications system - for example, by ensuring the efficient interconnection of competing networks, by ensuring public safety through the provision of emergency services, and by optimizing the use of support structures such as poles and conduits. Over the years, the Commission has established various policies, rules, and regulations to govern the provision of wholesale services. These regulatory measures are necessary because incumbent carriers have had considerable advantages over competitors. Without wholesale regulation, fewer competitive service options would be available to Canadians. Throughout the 1990s and early 2000s, the Commission focused its wholesale service regulation on improving competition in the long distance and local voice telephony markets. Over the past decade or so, the Commission has gradually shifted its focus away from legacy voice services and towards improving competition for broadband services. The Commission’s general approach towards wholesale service regulation has been to promote facilities-based competition wherever possible. Facilities-based competition, in which competitors primarily use their own telecommunications facilities and networks to compete instead of leasing from other carriers, is typically regarded as the ideal and most sustainable form of competition. Examples of telecommunications facilities include the copper, coaxial, and fibre connections that connect households and businesses, fibre-optic cables connecting communities, and the various routers, switches, and interfaces located within incumbent carrier data centres. Conceptually, facilities-based competition is best achieved by requiring incumbent carriers to make available facilities that are “essential” for competition. These facilities, sometimes referred to as bottleneck facilities, are, generally speaking, network components that cannot be readily duplicated and that are controlled by incumbent carriers, which gives them the market power to substantially prevent or lessen retail competition if they were to deny competitors access to those facilities. To determine whether to mandate facilities, the Commission has applied a specific set of criteria, set out in paragraph 15 of this decision. If the Commission finds that a facility should be made available to competitors, the next question it assesses is how the facility should be configured and what rates, terms, and conditions should apply. The degree to which incumbent carriers’ networks are made available to competitors depends on a variety of factors, including the policy objectives set out in section 7 of the Telecommunications Act (the Act), technical issues, operational requirements, and the Commission’s regulatory policies. The desired outcome is that once competitors are given access to certain facilities (for example, access facilities), they are incented to enter the market and invest in other parts of the network, eventually leading to lower prices, innovative service offerings, and greater choice for consumers. Regarding the provision of broadband services, the Commission has, in recent years, and for a variety of reasons, opted to allow competitors access to a wholesale service that did not require material investment in facilities, by mandating the provision of a comprehensive wholesale service from incumbent carriers, known as aggregated wholesale high-speed access (HSA) service. This service has enabled competitors to lease a package of both the access facilities they need to connect to customer locations, and transport facilities, through which large amounts of traffic can be sent and received, without requiring them to invest substantially in their networks. A central debate in this proceeding is whether this type of “aggregated” approach continues to be the appropriate means to foster retail competition for broadband services now and into the future. Another issue is whether the fibre-access facilities being deployed by incumbent carriers ought to be included in any wholesale HSA service that is made available to their competitors.

Telecom Notice of Consultation 2013-551

On 6 December 2013, in Telecom Notice of Consultation 2013-551 Specifically, the Commission stated that it intended to examine (i) the appropriateness of the previously established wholesale service categories and of mandating any new or forborne wholesale services; (ii) whether its existing wholesale service policies appropriately balance incentives for innovation and investment in the construction of telecommunications network facilities, resulting in more sustainable competition and the provision of high-quality retail telecommunications services; (iii) the product and geographic markets for wholesale services; and (iv) its rate-setting approaches for wholesale services.

The proceeding

The following parties participated in the proceeding: Bell Aliant Regional Communications, Limited Partnership (Bell Aliant) and Bell Canada (collectively, the Bell companies); MTS Inc. (MTS) and Allstream Inc. (collectively, MTS Allstream); Saskatchewan Telecommunications (SaskTel); and TELUS Communications Company (TCC) [all of which are referred to collectively as the ILECs]; Bragg Communications Incorporated, operating as Eastlink (Eastlink); Cogeco Cable Inc. (Cogeco); Quebecor Media Inc., on behalf of its affiliate Videotron G.P. (Videotron); Rogers Communications Partnership (RCP); and Shaw Cablesystems G.P. (Shaw) [all of which are referred to collectively as the Cablecos]; the British Columbia Broadband Association (BCBA); the Canadian Network Operators Consortium Inc. (CNOC); Distributel Communications Limited; Fibernetics Corporation (Fibernetics); and Primus Telecommunications Canada Inc. (Primus) [all of which are referred to collectively as the Competitors]; OpenMedia.ca (OpenMedia), the Public Interest Advocacy Centre and the Consumers’ Association of Canada (PIAC), as well as l’Union des consommateurs (all of which are collectively referred to as the Consumer Groups); the SSI Group of Companies; TBayTel; Vaxination Informatique; and VMedia Inc.; Aurora College; and School District #67 (Okanagan Skaha); CANARIE Inc.; Cybera; the Canadian Cable Systems Alliance; the Canadian Federation of Independent Business; the Canadian Independent Telephone Company Joint Task Force; the Competition Bureau; Fiber to the Home Council Americas; and i-CANADA; the City of Calgary; the City of Coquitlam; and the Yukon Government; and several individuals. The proceeding included a public hearing, which began on 24 November 2014. The public record of this proceeding, which closed on 19 December 2014, is available on the Commission’s website at www.crtc.gc.ca or by using the file number provided above.

Objectives of the wholesale service regime

The Commission’s wholesale service regime encompasses a wide range of wholesale services provided by the ILECs and the Cablecos (hereafter collectively referred to as the incumbent carriers), and ultimately impacts various downstream retail markets, including the Internet access, local and long distance telephony, television, and business communications markets. During the course of the proceeding, the potential implications of the Commission’s determinations with respect to broadband services were of particular interest, given the role that these services play in the lives of Canadian citizens and the success of Canadian businesses, since these services enable participation in the digital economy by providing access to a range of content, other services, and applications. The Commission’s determinations in this proceeding take into consideration the policy objectives set out in section 7 of the Act, as well as the Policy Direction. Furthermore, the determinations below were also made with a view to achieving the following objectives: enhancing the effectiveness of the wholesale service regime to facilitate vibrant and sustainable retail competition that provides Canadians with reasonable prices and innovative services of high quality that are responsive to their evolving social and economic requirements;

incenting efficient network investment to further the development of facilities-based competition;

considering network efficiency, competitive neutrality, and technological neutrality when establishing wholesale regulations; and

recognizing differences in regional markets.

Regulatory framework for wholesale services

The Commission has endorsed the concept of essential services in the context of wholesale regulation since the late 1990s. More recently, in Telecom Decision 2008-17 , the Commission established an essential services test (hereafter referred to as the Essentiality Test), with three components: the facility is required as an input by competitors to provide telecommunications services in a relevant downstream market (the input component);

is required as an input by competitors to provide telecommunications services in a relevant downstream market (the input component); the facility is controlled by a firm that possesses upstream market power such that denying (or withdrawing) access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market (the competition component); and

that possesses upstream market power such that denying (or withdrawing) access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market (the competition component); and it is not practical or feasible for competitors to duplicate the functionality of the facility (the duplicability component). However, in practice, essentiality has been only one factor that the Commission has considered in its decision whether to mandate the provision of wholesale services. Wholesale services serve other purposes, such as ensuring the efficient interconnection of competing networks, ensuring public safety through the provision of emergency services, and optimizing the use of support structures such as poles and conduits. In Telecom Decision 2008-17 of wholesale services, the provision of which was mandated for reasons other than essentiality, after considering, among other things, the decision to mandate the provision of aggregated wholesale HSA services. As part of this proceeding, the Commission re-examined its regulatory framework for wholesale services and its approach to classifying these services.

Positions of parties

Parties were generally of the view that the Essentiality Test remains the appropriate means for determining whether a wholesale service ought to be mandated. Most parties favoured retaining the definition and service categories established in Telecom Decision 2008-17 Certain parties considered that the Commission’s general approach towards mandating wholesale services should be clarified and simplified, for example, by consolidating or eliminating some of the categories. Parties generally agreed that in certain circumstances, the Commission’s decision to mandate a wholesale service may be based on policy considerations unrelated to the Essentiality Test, particularly with respect to services related to interconnection or public good. TCC indicated that it was generally satisfied with the Commission’s existing Essentiality Test, but stressed that, with the exception of public good and certain interconnection services, wholesale services should only be mandated if they meet the Essentiality Test. CNOC proposed two wording changes to the Essentiality Test, as follows (changes are in italics): (i) the facility is required as an input by competitors to provide telecommunications services in a relevant downstream market; (ii) the facility is controlled by a firm that possesses upstream market power such that not providing access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market; and (iii) it is not economically efficient for competitors to duplicate the functionality of the facility. CNOC indicated that the first change would allow for a “no head-start rule,” which would enable competitors to launch new retail services in the same time frame as incumbent carriers. CNOC argued that its second change would serve to minimize the duplication of facilities that are inefficient from a macro-economic perspective. Several incumbent carriers opposed CNOC’s proposed changes, arguing that they could have a significant impact on the application of the mandating criteria and would inappropriately result in various non-essential services being mandated.

Commission’s analysis and determinations

The Commission’s framework for determining whether wholesale services should be mandated should be predictable and practical for the industry and should constitute an efficient regulatory regime that provides a high degree of regulatory certainty to both incumbent carriers and competitors. In order to achieve these goals, modifications and clarifications to the Commission’s approach to mandating wholesale services are appropriate. Furthermore, it is important to outline how the Commission intends to apply its wholesale services framework going forward. The following sections provide information on (i) the Commission’s general approach for determining whether a wholesale service ought to be mandated, (ii) the components included in the Essentiality Test, (iii) how the Commission intends to apply the Essentiality Test, and (iv) the additional policy considerations that the Commission may use to inform a decision whether or not to mandate the provision of a wholesale service.

General approach

The general approach for determining the regulatory treatment of a wholesale service depends primarily on whether the service in question (i) is a new service, (ii) has previously been forborne, or (iii) is a regulated service. If a wholesale service would constitute a new service or if it has previously been forborne, the Commission will consider the state of competition in one or more of the affected retail markets to help determine whether regulatory intervention is appropriate. For example, the Commission may examine whether competition is sustainable or whether there are significant barriers to entry into the retail market for competitors. If the Commission finds that competition in one or more of the affected retail markets has been substantially lessened, it could then proceed, where appropriate, to consider whether previous forbearance findings ought to be displaced or whether a new wholesale service ought to be mandated, by conducting a market power test with respect to the wholesale service in question. If the evidence demonstrates that the circumstances that gave rise to forbearance have changed to the extent that the Commission’s original findings are no longer consistent with section 34 of the Act, the Commission will re-assert its jurisdiction by reapplying the appropriate sections of the Act. Once forbearance has been displaced, or for any new wholesale service, the Commission would proceed with the same approach used with respect to established regulated wholesale services, as discussed below. For regulated wholesale services, the Commission will base its decision to mandate the provision of a wholesale service on two elements: (i) the Essentiality Test, and (ii) a set of policy considerations that could modify or support its decision. Since both the Essentiality Test and the market power analysis used to inform the Commission’s forbearance-related determinations contain many of the same analytical elements, these analyses could be performed in conjunction with each other. Based on the results of the retail market assessment, the upstream market power analysis, and the application of the Essentiality Test and policy considerations, the Commission would then determine the specific regulatory measures that should be applied, including whether to mandate the provision of the wholesale service in question.

Components of the Essentiality Test

As noted above, except for CNOC, there was general consensus among parties that the current definition and structure of the Essentiality Test, including the three components - namely the input component, the competition component, and the duplicability component - that were established in Telecom Decision 2008-17 The current definition of an essential facility was developed based on a significant amount of expert testimony and evidence filed in previous Commission proceedings, and no party submitted evidence demonstrating that changes are necessary or appropriate. Regarding CNOC’s proposed wording modifications, the Commission does not consider that they would improve the clarity or the predictability of the Essentiality Test, given that the existing definition includes similar language. The Commission therefore finds that the current definition and structure of the Essentiality Test remain appropriate for determining whether the Commission should mandate the provision of a particular wholesale service.

Application of the Essentiality Test

Parties’ comments on this subject focused mainly on defining the relevant geographic market associated with a given wholesale service. Parties generally agreed that the Commission’s use of a national geographic market in Telecom Decision 2008-17 The first step in applying the Essentiality Test is to define the relevant markets for the wholesale service in question, which include product and geographic components. These markets are typically characterized as the smallest group of services and geographic area over which a firm could profitably impose a significant and non-transitory (i.e. sustainable) price increase. However, some degree of aggregation may be appropriate, since it would be exceedingly onerous to gather data for every wholesale service product market for every location (e.g. community or exchange) in the country, and since certain markets share similar competitive market conditions. As such, a balance must be struck between the use of meaningful and practical definitions for product and geographic markets, as well as the administrative burden associated with gathering and processing large amounts of data. Once the relevant markets are defined, the Commission assesses the wholesale service in question against each component of the Essentiality Test, described in further detail below. In some cases, the availability and/or quality of the evidence and the specific facts associated with a particular wholesale service will dictate the factors to which the Commission will give more or less weight. For a wholesale service to meet the Essentiality Test, all three components must be satisfied.

Input component

The Commission will determine whether the facility associated with the wholesale service in question is required as an input by another firm to provide a downstream retail service(s). The Commission will consider (i) the downstream market(s) for which the wholesale service is an input; (ii) the technical aspects of the wholesale service; (iii) the past, current, and anticipated demand for the wholesale service; and (iv) trends in demand to assess whether there is sustained growth or decline. If the Commission finds that the wholesale service in question is a required input for competitors to provide downstream retail services, and that there is and will continue to be sufficient demand for the wholesale service, the input component would be satisfied.

Competition component

The Commission will examine two elements: (i) the upstream market conditions, specifically, whether a firm or a group of firms has market power, and (ii) the impact that any upstream market power might have on competition levels in the associated downstream retail market(s). When assessing upstream market power, the Commission will consider various factors, such as upstream market share, demand conditions (e.g. the availability of substitutes and customer switching costs), supply conditions (e.g. competitor capacity constraints and the likelihood of competitive entry), and evidence of rivalrous behaviour (e.g. competitive bidding for wholesale contracts, promotions, and service improvements). However, the presence of upstream market power alone is not sufficient to meet the competition component. There must also be the potential for a substantial lessening or prevention of competition in a corresponding downstream retail market(s) should access to the upstream input be denied. In assessing the retail impacts, the Commission will examine downstream retail market share, the number and character of firms and/or customers that might be affected in the absence of the wholesale service, the availability of retail substitutes, customer switching costs, and other retail indicators that may be specific to the wholesale service in question. While the Commission’s assessment may focus on one relevant downstream retail market, it does not preclude additional assessments pursuant to different downstream retail markets. If, on balance, the Commission finds that there is upstream market power and that the associated downstream retail market(s) could be negatively impacted to a substantial degree if it does not mandate the provision of the wholesale service, the competition component would be satisfied.

Duplicability component

The Commission will assess whether it is practical or feasible for competitors to duplicate the functionality of a facility, either through self-supply or third-party supply. Consistent with its approach in Telecom Decision 2008-17 Scale is also important, since competitors’ capacity for isolated or limited duplicability does not necessarily indicate that they are able to deploy facilities on a widespread basis sufficiently to discipline the exercise of incumbent carriers’ upstream market power in relation to relevant downstream markets. Accordingly, the geographic area used to define the relevant market for the wholesale service in question is typically the appropriate scale for assessing duplicability. If the Commission finds that the functionality of a particular wholesale service cannot reasonably be duplicated by a reasonably efficient competitor on a sufficient scale, the duplicability component would be met.

Policy considerations

Throughout the proceeding, almost all parties agreed that certain wholesale services that support the public good, such as emergency and support structure services, as well as services that support network interconnection, should generally be mandated. Parties generally viewed these types of services as falling outside the essential service analysis. Most parties did not propose any specific policy criteria that could inform the Commission’s decision whether to mandate the provision of a wholesale service. However, there was support for certain concepts, such as incenting network investment, encouraging network innovation, encouraging facilities-based competition, maintaining regulatory symmetry and technological neutrality, ensuring consumer choice, and accounting for regional market differences. The Commission agrees with parties that wholesale services that serve the public good and those related to network interconnection should be given special treatment for policy reasons not captured by the Essentiality Test. Further, investment and innovation considerations are also important now and in the future. The telecommunications industry is in a transitional phase between the traditional circuit-switched legacy networks, and more advanced technologies, such as packet-based transport over fibre and wireless facilities. Therefore, the addition of investment and innovation as a policy consideration could encourage the transition away from investment in legacy networks and incent companies to invest in advanced network technologies to benefit Canadians. In light of the above, the Commission will apply the following policy considerations to inform, support, or reverse a decision to mandate the provision of a wholesale service: Public good - there is a need to mandate the service for reasons of social or consumer welfare, public safety, or public convenience.

Interconnection - the service would promote the efficient deployment of networks and facilitate network interconnection arrangements.

Innovation and investment - mandating or not mandating the facility or wholesale service could affect the level of innovation/investment in advanced or emerging networks or services for incumbents, competitors, or both, or impact the associated level of adoption of advanced or emerging services by users of telecommunications services. The Commission may use a policy consideration to justify a decision to mandate the provision of a wholesale service that does not meet the Essentiality Test. Conversely, the Commission may use a policy consideration to justify a decision not to mandate the provision of a wholesale service that meets the Essentiality Test. Finally, the policy considerations could be used to support the Commission’s decision to mandate the provision of a wholesale service following its application of the Essentiality Test. The Commission notes that, as a result of the above approach, there are now only two categories of wholesale services: those that are mandated and those that are not, based on the Essentiality Test and/or the policy considerations.

Assessment of the mandating criteria for wholesale services

Wholesale HSA services

Wholesale HSA services provide a high-speed path between a competitor’s end-customer premises (e.g. a house) and an interface on an incumbent carrier’s network where the competitor connects and routes its end-customer traffic onto its own network. Competitors use wholesale HSA services to offer various services, including local phone, television, and retail Internet access services. As a result of the proceeding, the Commission must consider whether or not to mandate the provision of two types of wholesale HSA services in Canada: (i) aggregated wholesale HSA services, and (ii) disaggregated wholesale HSA services. Wholesale HSA services may be provisioned over incumbent carriers’ existing wireline access network technologies [i.e. digital subscriber line (DSL) technology over copper cable for ILECs, Data Over Cable Service Interface Specification (DOCSIS) over hybrid fibre-coaxial (HFC) cable for cable companies, and fibre-to-the-premises (FTTP) access facilities for both ILECs and cable companies]. Aggregated wholesale HSA service provides competitors with high-speed paths to end-customers’ premises throughout an incumbent carrier’s entire operating territory from a limited number of interfaces (e.g. one interface per province). This path includes an access component, a transport component, and the interface component. The inclusion of the transport component enables competitors to provide their retail services with minimal investment in transmission facilities. Disaggregated wholesale HSA service would provide competitors with high-speed paths to end-customers’ premises served by an ILEC central office or a cable company head-end through a local interface at the ILEC central office or cable company head-end. These paths include an access component and the interface component. To provide service to their own end-customers, competitors would have to (i) invest in transmission facilities to each central office or head-end where they have end-customers, or (ii) lease these facilities from another carrier. FTTP access facilities could be incorporated into either aggregated or disaggregated wholesale HSA services, resulting in multiple configurations depending on the underlying access technology. In Telecom Decision 2008-17 finding them to be conditional essential services. The Commission also mandated aggregated wholesale HSA services, despite finding them to be non-essential services, given its view that withdrawing mandated access to these services would likely result in a substantial lessening or prevention of competition in retail high-speed Internet access service markets. In Telecom Regulatory Policy 2010-632 facilities. In the case of the Cablecos, these technologies comprise DOCSIS facilities. Consequently, there is currently no obligation for the ILECs and the Cablecos to provide wholesale HSA services over FTTP access facilities. Also in that decision, the Commission determined that it would not mandate disaggregated wholesale HSA services, concluding that, given the availability of aggregated wholesale HSA services, there would not be a substantial lessening of competition in the absence of disaggregated wholesale HSA services. The Commission also re-affirmed its requirement for the ILECs and the Cablecos to make aggregated wholesale HSA services available to competitors at speeds matching their own retail service offerings to enable greater competition in the retail Internet access services market. In addition, the Commission required the Cablecos to provide a greater degree of aggregation for their wholesale HSA services, to be similar to the ILECs’ service offerings. Since 2010, the Commission has addressed various issues associated with aggregated wholesale HSA services in a series of decisions. Notably, the Commission decided that there are two acceptable billing models for aggregated wholesale HSA services. The first is a capacity-based billing model, in which competitors pre-purchase the amount of capacity that they expect to need to serve their own end-users on a monthly basis while paying a monthly access fee for each of their end-users. The second model is a flat-rate model, in which competitors pay a flat monthly fee for each end-user regardless of usage. As a result of subsequent applications from incumbent carriers, the Commission reviewed aggregated wholesale HSA service costs, and made corresponding adjustments to the rates where appropriate. In addition, the Commission modified its policy with respect to business markups, and decided that the rates for business wholesale HSA services should equal the rates for comparable residential wholesale HSA services. In this proceeding, parties argued over the merits of mandating the provision of various wholesale HSA services, namely aggregated wholesale HSA services and disaggregated wholesale HSA services that use existing technologies, and wholesale HSA services that use FTTP access facilities.

Positions of parties - Aggregated wholesale HSA services

Competitors argued that the ILECs’ and the Cablecos’ aggregated wholesale HSA services should continue to be mandated, since the rationale that the Commission relied upon in Telecom Decision 2008-17 CNOC submitted that aggregated wholesale HSA services enable competition in the retail Internet access services market, which brings pricing discipline, innovation, and choice to Canadian consumers. Primus indicated that competitors are a valuable source of rivalry in the marketplace, as evidenced by their market share growth since 2009. The Consumer Groups generally submitted that the public interest is served by a wholesale regulatory regime that fosters a competitive marketplace that is not limited to the ILECs and the Cablecos, but also includes other competitors. The ILECs and the Cablecos were generally against the continued mandated provision of aggregated wholesale HSA services. These parties argued that the main source of competition for retail Internet access services is facilities-based service providers, and that other competitors that use leased facilities offer little to no benefits to consumers. The Bell companies indicated that the retail Internet access services market in Canada is very competitive, and that this is due primarily to the vigorous rivalry between facilities-based ILECs and cable companies. They argued that competitors are largely concentrated in Ontario and Quebec, and are not a significant market factor in Atlantic or Western Canada, yet retail competition outside Central Canada is just as robust, and consumer outcomes just as positive, as in Ontario and Quebec. Bell Canada submitted that it would continue to offer aggregated wholesale HSA services even if these services were no longer mandated, since there is an economic incentive for it to do so. Bell Canada argued that it is more advantageous for it to lose a customer to a competitor leveraging its wholesale service, rather than to a cable company or another competitor that uses the cable company’s network. MTS Allstream indicated that, with the potential exception of core urban areas, mandated access to aggregated wholesale HSA services should continue given the limited number of effective alternatives or substitutes and the impact that removal of this mandated access could have on competition in retail markets. SaskTel submitted that there is limited demand for aggregated wholesale HSA services in its serving territory, and that it viewed the use of these services as limited to niche markets. Consequently, SaskTel argued that the mandated provision of aggregated wholesale HSA services, or any other wholesale HSA service, is unnecessary since it would not have a meaningful impact on competition, especially within its serving territory. TCC argued that aggregated wholesale HSA services should no longer be mandated since the retail Internet access services market is sufficiently competitive. TCC submitted that there is no evidence that the mandated provision of aggregated wholesale HSA services benefits consumers in the long run, and that this mandated provision has had a negative impact on incentives to invest in network facilities. Cogeco submitted that there is vigorous competition among itself, Bell Canada, RCP, and Videotron for wholesale customers in Ontario and Quebec. Cogeco proposed that the Commission adopt an ex-post regulatory framework based on negotiated agreements for aggregated wholesale HSA services to reduce the regulatory burden for incumbent carriers and to enable greater reliance on market forces. RCP submitted that the current regulatory framework for aggregated wholesale HSA services is not achieving a balance between encouraging innovation and investment in facilities, and enabling consumers to choose from a wide variety of telecommunications service providers, including competitors. To achieve better balance, RCP proposed that no new aggregated wholesale HSA services be mandated going forward, and that all services through which download speeds greater than 50 megabits per second (Mbps) are offered be subject to a moratorium on mandated provision for the next five years. RCP argued that this moratorium should be applied equally to all incumbent carriers, regardless of the underlying technology they use to provide those services. RCP added that existing end-users of wholesale customers that provide services at these higher speeds should be grandfathered, and that speeds up to and including 50 Mbps should continue to be mandated for a period of five years. Shaw indicated that Western Canadians enjoy all the benefits of a highly competitive market, notwithstanding the relatively weaker presence of competitors in the West. Shaw argued that facilities-based competition is the primary driver of rivalry, investment, and consumer benefits in wireline retail markets, thereby questioning the need for the mandated provision of aggregated wholesale HSA services. Eastlink and Videotron indicated that a gradual relaxing of the regulatory requirements regarding aggregated wholesale HSA services would be appropriate to encourage competitors to develop their own networks and offer their own unique services. The incumbent carriers generally submitted that broadband service obtained through mobile wireless service was a factor to consider when evaluating substitutes for wireline broadband services and the need to mandate aggregated wholesale HSA services. While the incumbent carriers generally agreed that broadband service obtained through mobile wireless service is not a perfect substitute for all end-users at this time, they argued that it is a substitute for certain end-users, and that substitutability will only increase over time as mobile wireless technology continues to improve. In contrast, the Competitors and the Consumer Groups did not generally consider mobile wireless data to be a substitute for wireline Internet services. While these parties did not dispute that wireless substitution was a significant trend for wireline telephony services, they considered that the technical and pricing differences between mobile wireless data and wireline Internet access services severely limited their potential substitutability.

Positions of parties - Disaggregated wholesale HSA services

CNOC indicated that, in addition to mandating the continued provision of aggregated wholesale HSA service, the Commission should mandate a disaggregated service. CNOC submitted that a disaggregated wholesale HSA service would serve as the foundation for competition going forward, as it would ensure that competitors can substitute competitive transport supply in place of the bundled transport component of existing aggregated wholesale HSA services - thereby enhancing competitor control over the costs of service inputs and the ability to differentiate service offerings. CNOC added that competitors leveraging a disaggregated wholesale HSA service would invest in middle-mile transport facilities to connect between their sites and the ILECs’ central offices and the Cablecos’ head-ends, resulting in greater facilities-based competition. Primus supported CNOC’s proposal, and argued that a disaggregated wholesale HSA service would enable competitors to offer more innovative services and avoid the traffic management practices of the incumbent carriers. Primus submitted that the economic feasibility of aggregated wholesale HSA services is expected to diminish over time, given the general appetite of consumers for greater bandwidth and services, as well as the associated network challenges. Several Competitors indicated that they would gradually migrate their existing end-users served through aggregated wholesale HSA services over to the disaggregated service if it were mandated, resulting in various new network investments by these companies. Fibernetics also supported the mandated provision of a disaggregated wholesale HSA service in addition to the existing aggregated wholesale HSA service offerings. Fibernetics submitted that while aggregated services foster competitive retail Internet access service offerings on a broad provincial basis, competitors wishing to provide services to consumers in localized markets can only do so economically through an appropriately priced disaggregated service. The ILECs and the Cablecos opposed the mandated provision of a disaggregated wholesale HSA service, generally indicating that this would not materially impact competition, and that it would introduce network complications and substantial costs. The Bell companies argued that there would not be a substantial lessening or prevention of competition in the retail Internet access services market without the mandated provision of disaggregated wholesale HSA services, since the retail Internet access services market is already intensely competitive. Bell Canada argued that disaggregated wholesale HSA services would not likely be financially desirable for competitors, except in a very small number of cases in Ontario and Quebec. Bell Canada submitted that the Competitors had not put forth credible evidence of demand for disaggregated wholesale HSA services, and that the costs of developing these services would likely outweigh any associated benefits. Certain of the incumbent carriers, including MTS Allstream and SaskTel, submitted that, given the limited existing demand for aggregated wholesale HSA services within their respective serving territories, they did not consider that the demand for disaggregated services would be sufficient to recover the associated costs. TCC argued that disaggregated wholesale HSA services would require a significant redesign of the incumbent carriers’ networks. TCC indicated that, consistent with the disinterest expressed by the BCBA for a disaggregated service over the course of the proceeding, there would be insufficient demand to warrant its implementation in its incumbent serving territories of Alberta and British Columbia. Videotron submitted that before the Commission mandated aggregated HSA services for the Cablecos, it had voluntarily agreed to provide a single aggregated point of interconnection to its customers, and that no customer had subsequently requested a disaggregated solution. Videotron submitted that it had serious doubts that there would be demand for disaggregated wholesale HSA services. Cogeco submitted that requiring the Cablecos to reverse course and provide disaggregated wholesale HSA services following a three-year transition period to aggregate their existing wholesale HSA service offerings would be costly, unjustified, and inappropriate. RCP submitted that introducing disaggregated wholesale HSA services would not provide any material benefits for consumers and should be rejected. RCP argued that disaggregated services would not result in product differentiation or significant cost savings for competitors to encourage their investment in middle-mile facilities. RCP indicated that competitors have repeatedly sought to have both aggregated and disaggregated wholesale HSA services mandated, but that the Commission has repeatedly rejected such requests. RCP added that there are no new or compelling reasons for the Commission to overturn its previous determinations. RCP submitted that if the Commission were to mandate the provision of disaggregated wholesale HSA services, this requirement should be limited to specific head-ends and to wholesale customers that provide a bona fide request for the disaggregated services, and that the incumbent carriers should be provided six months to implement the disaggregated services. Shaw indicated that, in certain regions of its serving territory, competitors have confirmed that they do not foresee using disaggregated wholesale HSA services given the limited potential cost savings. Shaw submitted that there would also be technical challenges with respect to implementing disaggregated services, depending on the incumbent carrier’s network architecture, thereby complicating the incumbent carrier’s ability to manage its own network. Shaw submitted that, in the event that the Commission mandates disaggregated wholesale HSA services, the requesting competitor should be required to bear the full implementation costs upfront. If another competitor were to come forward to request the service, it should be required to reimburse the first competitor for a share of the upfront costs. Most of the ILECs and Cablecos submitted that a requirement for them to implement disaggregated wholesale HSA services would divert time, energy, and resources from their core operations, and could negatively impact their ability to provide new innovative services to customers, as well as certain corporate investment decisions.

Positions of parties - FTTP access facilities

The Competitors and the Consumer Groups supported the mandated provision of wholesale HSA services over FTTP access facilities to prevent a duopoly in next-generation Internet access competition. In their view, mandating access to such facilities would not have a significant impact on the investment decisions of the incumbent carriers. CNOC submitted that a competitor’s ability to compete is tied to its ability to offer service speeds that are comparable to those of the incumbent carriers, and that the Commission’s wholesale service policy must be extended to the service speeds that are only available over FTTP access facilities and similar emerging technologies. CNOC indicated that without competitor access to higher-speed wholesale HSA services, there would be a substantial lessening or prevention of competition in the retail Internet access services market. CNOC stated that, while the needs of most consumers may currently be satisfied by service speeds between 25 and 50 Mbps, peak connection speeds are growing exponentially, and competitors must have the opportunity to compete for leading-edge, high-usage consumers who drive innovation. Otherwise, adoption of the higher service speeds available over FTTP access facilities will be suppressed, and the incumbent carriers will exercise market power over such services. CNOC added that if wholesale HSA services over FTTP access facilities are not mandated, there would be many areas where the incumbent carriers would have significant market power over all customers served via their FTTP access facilities, for example, where copper facilities are removed, in greenfield developments, and in various multi-dwelling units. CNOC argued that FTTP access facilities are not practically duplicable by competitors, and that even if they were, any such duplication would be economically inefficient. CNOC considered that the existence of small-scale competitive fibre networks that serve select non-urban areas or buildings in large urban areas was not evidence that it would be possible to duplicate the incumbent carriers’ FTTP access facilities on a sufficient scale to compete effectively and efficiently. CNOC did not consider that a Commission decision to mandate the provision of wholesale HSA services over FTTP access facilities would materially impact an incumbent carrier’s decision to deploy such facilities. On the contrary, CNOC argued that the risky business decision for incumbent carriers would be to not invest heavily in this technology, given the demands of the market and the need to remain competitive. The BCBA indicated that the incumbent carriers are able to remove copper infrastructure when fibre is introduced, thereby limiting the potential addressable market of competitors to the detriment of consumers. The BCBA added that investment in FTTP access facilities is currently underway in British Columbia, despite the possibility of associated regulation, and that it did not consider that the incumbent carriers would stop investing in FTTP access facilities if they were mandated. Some of the Consumer Groups considered that wholesale HSA services over FTTP access facilities should be mandated, and downplayed the potential investment risk for the incumbent carriers, given their need to compete against one another to survive. Moreover, OpenMedia argued that the potential for mandated FTTP access facilities should be expected in a regulated industry. PIAC indicated that the Commission’s mandate does not entail protecting particular business decisions made by the incumbent carriers, nor does it include shielding them to incent their deployment of FTTP access facilities. The City of Calgary submitted that the incumbent carriers have a competitive advantage in building out FTTP networks because of their existing access to support structures and municipal rights-of-way. The City of Calgary submitted that FTTP networks should be deployed as efficiently as possible and with a view to minimizing costs and inconvenience born by municipalities when rights-of-way are accessed. Accordingly, the City of Calgary supported the mandated provision of FTTP access facilities to competitors. The ILECs generally argued that the retail market for Internet access services is subject to vigorous competition across numerous platforms, and that the mandated provision of FTTP access facilities is not required because retail customers already benefit from an abundance of choice. Accordingly, the ILECs considered that FTTP access facilities were in the same relevant product market as FTTN access facilities. The ILECs submitted that there is little demand for retail Internet access services at the higher speeds that are currently available only over FTTP access facilities, and that non-FTTP platforms, such as the ILECs’ DSL over copper cable (both with and without FTTN) and the Cablecos’ HFC, would meet consumers’ needs for several years. In addition, ILECs such as Bell Canada considered that the growth in competitor market share for retail Internet access service subscribers demonstrates that the mandated provision of FTTP access facilities is not necessary at this time. The Bell companies argued that the ILECs will likely voluntarily offer wholesale services over FTTP access facilities to competitors, but that this can only happen after such facilities have been built, and that it should be left up to the market, and not to Commission regulation, to decide on the associated timing and terms. Some of the ILECs submitted that there is extensive evidence of competitor deployment of FTTP access facilities in Canada, demonstrating that it is feasible to duplicate the functionality of FTTP access facilities. This included fibre deployments by certain small ILECs, non-dominant carriers, and municipalities. All of the ILECs raised concerns regarding the impact that mandating the provision of FTTP access facilities could have on their investment decisions. For example, the Bell companies argued that the business case for investment in FTTP access facilities was challenging, and would only worsen if the Commission proceeded to mandate the provision of wholesale HSA services over these facilities. Bell Aliant cited its FTTP deployment program in Ontario, which it scaled back in light of unforeseen costs, to demonstrate the fragility of the business case. Moreover, Bell Aliant argued that mandating the provision of FTTP access facilities may reduce or delay future technology upgrades in areas currently served by FTTP, thereby broadly harming consumers. Similarly, TCC argued that the mandated provision of FTTP access facilities would result in less fibre deployment, and that this would occur not just in lower-density areas, where the already-challenging business case will be eliminated, but more broadly throughout Canada. TCC indicated that if the Commission is not prepared to reject the mandated provision of FTTP access facilities, the negative effects of this regime on investment in next-generation broadband facilities should be attenuated through a moratorium on mandated access to Internet access services at higher speeds. The Bell companies submitted that if the provision of FTTP access facilities were mandated, there would need to be a larger upfront service charge, an end-user term commitment from competitors, and a higher markup than what currently applies for FTTN today in order to appropriately compensate for the costs of deploying the facility. While the Cablecos recognized that they currently have a limited deployment of FTTP access facilities, they did not support mandating the provision of such facilities given their view that the retail Internet access services market is already competitive, and that no incumbent carrier could exercise market power to the detriment of consumers in such circumstances. Notwithstanding the above, certain Cablecos indicated that the Commission’s decision with respect to mandating the provision of FTTP access facilities should be technologically neutral in relation to comparable technologies/speeds deployed by other incumbent carriers. Consequently, they argued that if the Commission does not mandate the provision of FTTP access facilities, it should limit the obligations of the Cablecos that provide wholesale HSA services at comparable speeds.

Commission’s analysis and determinations

While parties articulated their positions with respect to the mandated provision of aggregated wholesale HSA services, disaggregated wholesale HSA services, and wholesale HSA services over FTTP access facilities separately, the Commission will not apply the Essentiality Test on a service-by-service basis, given that these services collectively form part of a larger product market. These services represent variants of high-speed access facilities that enable similar downstream retail services to be provided to end-users, and represent sufficiently close substitutes in that they have the potential to enable competition in the various associated downstream markets. Moreover, end-users may be unaware of the specific underlying wholesale service/facility that is being used to provide their retail services, and may be indifferent so long as their needs are met and there is reasonable overlap in the spectrum of retail services that are enabled by the various upstream services. By adopting a broader lens to its product market assessment, and determining whether that larger product market satisfies the Essentiality Test, the Commission can more appropriately move on to consider which particular wholesale service(s) forming part of that product market ought to be mandated, if any. As a result, the appropriate relevant product market is considered to be wholesale HSA services, which includes aggregated and disaggregated wholesale HSA services offered over various technologies, including DSL over copper or over a hybrid of copper and fibre (including FTTN), HFC cable, and FTTP access facilities. Notwithstanding the Commission’s view that wholesale HSA services provisioned over FTTP access facilities are in the same relevant product market as wholesale HSA services provisioned over other broadband technologies, additional analysis with respect to the assessment of FTTP access facilities in relation to the Essentiality Test is provided in subsequent sections of this decision. As for the relevant geographic market, given that the ILECs and the Cablecos generally operate exclusively in their traditional serving territories, particularly in residential markets, and given the need to balance administrative efficiency, the Commission is of the view that the incumbent carrier’s serving region is the appropriate basis upon which to make decisions with respect to the mandated provision of wholesale HSA services. The Commission notes that wholesale HSA services may be used to offer a variety of retail services, including local phone, television, and Internet access services. Retail Internet access services permit users to access a wide variety of services, including email services, the World Wide Web, and audio and video services. By majority decision, the Commission’s assessment of whether wholesale HSA services meet the Essentiality Test will focus on their associated impact on the main downstream retail market, namely the retail Internet access services market. With respect to this issue, the dissenting opinion of Commissioner Shoan is attached to this decision.

Application of Essentiality Test - Input component

There is currently demand for wholesale HSA services in all regions of the country. Competitor use of wholesale HSA services is mainly concentrated in Ontario and Quebec, which are largely served by Bell Aliant, Bell Canada, Cogeco, RCP, and Videotron, with moderate usage in Alberta and British Columbia and low usage in the rest of Canada. Notwithstanding current usage levels, competitor usage of wholesale HSA services is generally expected to increase in all incumbent carriers’ serving regions in Canada, given the overall demand for retail Internet access services, and the valuable role that they play in the lives of Canadians. While end-user demand for the higher speeds (i.e. speeds greater than 50 Mbps), such as those supported by FTTP access facilities, is currently relatively small, the demand for service speeds supported only by FTTP access facilities and other comparable technologies will likely increase as end-users migrate to higher-speed Internet access services to support their growing usage of existing and future applications. Based on the current and projected demand levels, the Commission therefore finds that wholesale HSA services, including those provided over FTTP access facilities, meet the input component of the Essentiality Test in all the incumbent carriers’ serving regions.

Application of Essentiality Test - Competition component

The ILECs and the Cablecos own and control the underlying wireline access facilities associated with wholesale HSA services that competitors rely upon to provision retail Internet access services, including those associated with FTTP access facilities. Together, the incumbent carriers are the sole suppliers of the underlying wholesale services available to competitors, and together have the entire upstream market. In general, wholesale HSA services have not been provided voluntarily by the industry, requiring regulatory intervention to do so, and there is no convincing basis upon which the Commission could conclude that this will change in the foreseeable future. There are limited economical substitutes for wholesale HSA services provided over wireline technologies, including those over FTTP access facilities. Based on the significant disparity in price, quality, speed, and capacity, reliance on wireless wholesale alternatives would not enable competitors to effectively compete with the wireline broadband services offered by the incumbent carriers within their serving regions. Moreover, neither the ILECs nor the Cablecos would be able to easily absorb the wholesale operations of the other absent significant network modifications/equipment investment, thereby limiting the effectiveness of potential supply responses in curbing the exercise of market power. In addition, there is limited competition for wholesale HSA services between the ILECs and the Cablecos, and what competition that does exist today is largely, if not entirely, a result of regulatory intervention. Consequently, there is limited rivalrous behaviour to constrain upstream market power. In light of the above, the Commission finds that the incumbent carriers collectively have upstream market power in the provision of wholesale HSA services, including those over FTTP access facilities, within their serving regions. With respect to the potential impact that denying or withdrawing access to wholesale HSA services would have on the retail Internet access services market, the Commission has previously decided to mandate certain wholesale HSA services on the basis that failing to do so would impair competition to the detriment of consumers’ interests. Despite incumbent carriers continuing to dominate the retail Internet access services market, an increasing number of retail Internet subscribers have enjoyed the choice enabled by wholesale HSA services by subscribing to a competitor’s service. An important consideration relates to the availability of substitutes for retail Internet access services provisioned over wireline facilities. In the Commission’s view, most consumers have retail Internet usage and speed requirements that can only be served through wireline services, thereby limiting consumers’ viable options. Fixed wireless and satellite-based services are mainly options in rural or high-cost serving areas, where wireline Internet access is limited or not available. These services typically have limited bandwidth capacity and higher prices compared to retail wireline services and, as such, are generally not effective substitutes. Although mobile wireless services support retail Internet access, the higher prices for data usage over mobile wireless networks limit their substitutability - the speeds, prices, quality, reliability, and capacity of broadband over wireline facilities are far superior to those available over wireless facilities at the present time, and this will likely continue into the foreseeable future. If the provision of wholesale HSA services were no longer mandated, most retail Internet subscribers currently being served by competitors would likely be required to migrate to incumbent carrier retail Internet service offerings over time, given the potential for incumbent carriers to phase out wholesale HSA services, or given their ability to increase the rates for the associated wholesale services, squeezing out competitor service offerings. In the case of FTTP access facilities, consumers do not currently have competitive choice regarding such facilities, although some consumers have access to comparable high-speed Internet services provided by certain Cablecos. As a result, the competitive impact of not mandating the provision of wholesale HSA services over FTTP access facilities would be relatively small in the short term. As FTTP deployment increases, however, the potential impact on competition will increase as more and more consumers desiring higher-speed Internet services would have fewer competitor alternatives to choose from. While the retail impact of a decision not to mandate access to wholesale HSA services, including those over FTTP access facilities, would be felt most strongly and immediately in Ontario and Quebec, where demand for competitor service is highest, competition in other incumbent carrier serving regions would also be prevented to a substantial degree given that these areas are beginning to show signs of competitive growth and higher-speed Internet access services are increasingly being adopted. Consequently, without the mandated provision of wholesale HSA services, most retail customers in Canada would eventually be left with a very limited choice of Internet service providers. Based on the above, the Commission finds that there would be a substantial lessening or prevention of competition in the downstream retail Internet services market, in all incumbent carrier serving regions, by denying access to wholesale HSA services, including those over FTTP access facilities.

Application of Essentiality Test - Duplicability component

In assessing the duplicability of wholesale HSA facilities, there are two components to consider: the access component and the transport component. The access component can consist of a variety of physical media, including copper, fibre, a combination of copper and fibre, and a combination of coaxial and fibre. For the purpose of this analysis, the Commission considers that the access component of wholesale HSA services represents the connection between the customer’s premises and the ILEC central office or the Cableco head-end. The transport component generally consists of the ILEC or Cableco network that carries end-customer traffic between ILEC central offices or Cableco head-ends and a competitor point of interconnection. In Telecom Decision 2008-17 The Commission remains of the view that competitors cannot feasibly or practically duplicate last-mile HSA facilities on a scale sufficient to compete effectively with incumbent carriers within their serving regions. There continue to be significant barriers to duplicating access facilities, including securing sufficient capital, securing rights-of-way, and construction challenges that require significant lead time to complete. With respect to FTTP access facilities, the barriers to duplicating such facilities are also present in all incumbent carrier serving regions. Although there is deployment of non-incumbent carrier FTTP access facilities on a very small scale by certain small ILECs, municipalities, and other service providers, addressing larger markets would represent a significantly larger challenge. For example, the capital investment required by competitors to reproduce the deployment of an ILEC’s FTTP access facilities in their serving territory would be very significant, excluding the additional challenges associated with the myriad of other network facilities, infrastructure, office facilities, and back office support staff and systems that would be required. To that end, the incumbent carriers’ ability to deploy such facilities is largely based on their decades of incumbency in the provision of wireline services, with all the associated advantages, including established brands and customer bases, existing network infrastructure including support structures, national fibre backbone networks, pre-existing municipal access agreements, various economies of scale, and greater access to capital markets. In contrast, the transport component of wholesale HSA services remains generally duplicable in all incumbent carrier serving regions from an economic, technical, and implementation perspective, and no compelling evidence was filed in this proceeding to demonstrate that this is no longer the case. As a result, the Commission remains of the view that competitors are generally able to self-supply or find an alternate supply of transport facilities connecting to ILEC central offices and Cableco head-ends. In light of the above, the Commission finds that it is not practical or feasible for competitors to duplicate the access component of wholesale HSA services, including those over FTTP access facilities. The Commission considers that this finding applies to each of the incumbent carriers in their respective serving regions. Moreover, the Commission finds that it is generally practical and feasible for competitors to duplicate the transport component of wholesale HSA services.

Application of mandating criteria - Policy considerations

Given the outcome of applying the Essentiality Test broadly to wholesale HSA services, which supports mandating the access component, including FTTP access facilities, but not mandating the transport component, the analysis of the policy considerations will include an assessment of the implications of such outcomes for the specific services under consideration. In this context, the policy consideration for investment and innovation is relevant. With respect to aggregated wholesale HSA services, a decision to no longer mandate the provision of such services would not impact investment in high-speed access facilities by incumbent carriers or competitors, nor would it significantly affect consumer adoption of Internet access services, so long as a disaggregated service is made available. For example, investment in access components would be unaffected given that such components would continue to be made available under the disaggregated service. Regarding disaggregated wholesale HSA services, there are relevant investment and innovation implications associated with a decision to mandate the provision of such services. On one hand, implementing a disaggregated wholesale HSA service within the incumbent carriers’ networks raises certain concerns, particularly in relation to the recovery of the associated costs and the disruption in potential network evolution plans through the required network modifications. On the other hand, implementation of a disaggregated wholesale HSA service would enable competitors to become more innovative by giving them a greater degree of control over their service offerings. Moreover, a disaggregated wholesale HSA service could encourage competitor investment in alternate transport facilities, thereby serving to develop a more robust telecommunications system. While the Commission acknowledges the previous investments that the Cablecos have made in transitioning to aggregated points of interconnection, which have enabled increased competition, the Commission considers that a disaggregated solution is the appropriate means forward to support the sustainability of competitive service offerings. With respect to disaggregated wholesale HSA services over FTTP access facilities, the potential disincentive that a decision to mandate the provision of such services could have on investment was the predominant reason given by the incumbent carriers that the Commission should reject such a proposal. There are several reasons, however, why the negative impact on investment is not likely to happen to any significant degree, particularly in more urban areas. First, the Commission expects that the incumbent carriers will generally continue to invest in FTTP access facilities in order to provide enhanced retail Internet access services in response to consumer demand, as well as to compete effectively and efficiently with the Cablecos. In addition, mandating the provision of disaggregated wholesale HSA services over FTTP access facilities would be predicated on wholesale rates that are compensatory and that provide a reasonable rate of return, resulting in profit on the associated investment. Given the above considerations, adoption of an appropriate transition and implementation plan to migrate from the current aggregated wholesale HSA service model towards the disaggregated wholesale HSA service model would substantially alleviate the various investment and innovation concerns identified above. In addition, and as stated above, any investment risks associated with mandating the provision of wholesale HSA services over FTTP access facilities can be attenuated by providing the incumbent carriers with a reasonable rate of return. In light of the above assessments, the Commission determines that disaggregated wholesale HSA services, including those over FTTP access facilities, are to be mandated for the incumbent carriers subject to this decision. Moreover, the Commission determines that aggregated wholesale HSA services will no longer be mandated for the incumbent carriers under certain conditions and subject to an appropriate transition plan. This transition plan will serve to ensure that wholesale access to the access facilities required to provision downstream retail services is always provided for.

Implementation of mandating decision

While the determination to mandate the provision of disaggregated wholesale HSA services, including over FTTP access facilities, and to phase out aggregated wholesale HSA services pursuant to an application of the Essentiality Test may be consistent with economic principles, it also raises certain challenges and opportunities for the industry and consumers. On one hand, moving to a disaggregated wholesale HSA service model will better support the sustainability of competition and can be expected to provide benefits, such as reasonable prices and innovative services, to consumers. One of the main drawbacks of the current aggregated HSA service is the high cost incurred by competitors when transporting large amounts of traffic over incumbent carriers’ facilities. These costs are expected to exacerbate as consumption increases over time, given that a competitor must pay for all of its data traffic to be routed back to a central point of aggregation, no matter how far away a subscriber is located. The result is an expensive and often inefficient use of the network that will challenge the sustainability of competitors in the years ahead. In addition, the aggregated wholesale HSA service model enables competitors to rely almost entirely on an incumbent carrier’s network, and is therefore dependent on the Commission to set the correct rules and prices. Consequently, an important benefit of moving to a disaggregated HSA service model is to lessen competitor dependence on price regulation and give competitors more control over their cost structure. On the other hand, moving to a disaggregated wholesale HSA service model, including over FTTP access facilities, raises concerns, notably with respect to its implementation within the various incumbent carriers’ networks. For example, given that the ILECs and the Cablecos have materially different network architectures, the proposed configuration for each incumbent carrier’s respective disaggregated wholesale HSA service could vary significantly. Further, the implementation of a disaggregated wholesale HSA service should be demand-based in order to minimize regulatory intervention and allow for the market to develop. There may initially be limited demand for such a service broadly across the country, given that the existing demand for wholesale HSA services is predominantly within Ontario and Quebec, and given the preference of some competitors to continue to use only aggregated, rather than disaggregated, wholesale HSA services in the near term. Consequently, incentives will be required to encourage migration to a disaggregated wholesale HSA service, which will result in minimizing regulation to just the essential access facilities, as discussed below. Finally, while the transport facilities that support a disaggregated wholesale HSA service model were previously forborne from price regulation on a national basis, there is a risk that, in specific geographic markets, there may be limited availability of such facilities. While investment in and deployment of competitive transport facilities was no doubt impacted by the availability of aggregated wholesale HSA services, it may take time for competitors to build the necessary transport facilities, a factor to consider when phasing out aggregated wholesale HSA services. The ultimate goal is to have a smooth transition, over time, where competitor adoption of disaggregated wholesale HSA services increases, spurred by increasing consumer demand for higher-speed services, over an increasingly broader geographic area, with a corresponding reduction in aggregated HSA service coverage. Given the above, the Commission considers that the measures identified below are appropriate to support the implementation of disaggregated wholesale HSA services. First, since the demand for wholesale HSA services is currently focused within certain geographic markets, disaggregated wholesale HSA services should be implemented in phases, starting with Ontario and Quebec. Other phases targeting the implementation of disaggregated HSA services in other geographic markets will be identified at a later stage. Implementation of the disaggregated wholesale HSA service in the designated geographic markets will be triggered by competitor requests for the service at specific central office and head-end locations. Incumbent carriers are to consult with their wholesale HSA service customers to identify the specific central office and head-end locations where a disaggregated wholesale HSA service will be in demand. As previously established, the Commission will not mandate the provision of aggregated wholesale HSA services, including over FTTP access facilities. Consequently, competitors desiring access to customers served by FTTP access facilities will only be able to do so by using a disaggregated wholesale HSA service. A speed threshold will also be imposed for the service speeds available over aggregated wholesale HSA services, such that download speeds in excess of 100 Mbps will be required to be made available to competitors only through the implementation of the disaggregated service. This speed threshold takes into account trends in consumption and technology, and is set at an appropriate level to minimize short-term disruptions to end-consumers. The removal of the obligation to provide aggregated wholesale HSA services capable of supporting speeds in excess of 100 Mbps will take effect within an incumbent carrier’s serving territory once the associated disaggregated wholesale HSA tariff is approved on a final basis. Incumbent carriers are to grandfather existing aggregated wholesale HSA customers that are served above the speed threshold, at that time. In support of competitive wholesale alternatives, aggregated wholesale HSA services will be phased out for each respective incumbent carrier in the geographic markets where the disaggregated service is in-service. The phasing out of the obligation to provide aggregated wholesale HSA services in any given central office or head-end will only apply to the incumbent carriers that provide a disaggregated service. In order to provide competitors sufficient time to invest in, migrate to, or negotiate appropriate alternatives, the Commission considers that a three-year phase-out period, once the disaggregated service is implemented, would be appropriate. Incumbent carriers are expected to continue to file tariffs regarding the introduction of or modifications to the provision of aggregated wholesale HSA services until such services have been phased out within their respective serving territories. After the phase-out period, incumbent carriers will have the ability to continue offering the aggregated wholesale HSA service at tariffed rates, cease providing the service for the regions served by the disaggregated wholesale HSA service, or file for forbearance one year prior to the end of the phase-out transition period if they wish to continue to provide the service on a forborne basis. The market conditions associated with the provision of appropriate transport facilities will be assessed during the forbearance process. Finally, in order to encourage reliance on market forces, incumbent carriers and competitors will continue to be allowed to enter into off-tariff agreements for wholesale HSA services, consistent with the disclosure requirements that were established in Telecom Regulatory Policy 2012-359 In light of the above, the Commission will, as a first phase, initiate a follow-up implementation proceeding to consider the appropriate configurations of a disaggregated wholesale HSA service, including over FTTP access facilities, for the incumbent carriers operating within the larger markets within Ontario and Quebec. The main objectives for this implementation proceeding will be to assess demand forecasts, review and establish proposed configurations for disaggregated wholesale HSA services, and determine how FTTP access facilities will be integrated as part of the disaggregated service. Bell Aliant, Bell Canada, Cogeco, RCP, and Videotron are therefore directed to file updated configurations for their proposed disaggregated wholesale HSA service for their Ontario and Quebec serving territories within 30 days of the date of this decision. Further details associated with this follow-up proceeding are provided by way of a separate letter released concurrent with this decision. The tariff process will begin after the configurations for disaggregated wholesale HSA services are approved by the Commission. As part of the tariff process, the Commission will consider the proposed markups, methods of cost recovery, and implementation timelines. The incumbent carriers operating in other territories will be expected to identify appropriate configurations and implementation plans for their respective disaggregated wholesale HSA services at a later date, depending on demand considerations.

Unbundled local loops

Unbundled local loops (ULLs) provide a transmission path by means of copper facilities between an end-user’s premises and an ILEC’s central office that can be used by competitors to provide local telephony and Internet access services to residential and business customers. In Telecom Decision 97-8 In Telecom Decision 2008-17

Positions of parties

The Bell companies proposed that the wholesale provision of ULLs in rate bands A and B (generally in the major urban areas in Canada) no longer be mandated and be forborne from regulation. Bell Canada submitted that the demand for ULLs has decreased significantly since 2006, and considered that this trend would likely continue. Bell Canada also submitted that less than 1% of retail local telephony customers are provided services by means of ULLs, and argued that there are abundant competitive retail service alternatives available for consumers who do not depend on ULLs. Bell Canada stated that if the Commission no longer mandated the provision of ULLs, the company would continue to make ULLs available to competitors, since ULLs represent valuable sources of revenue. TCC argued that the ILECs’ access networks have been broadly duplicated in both the residential and business telephony markets and that, accordingly, the mandating of ULLs can no longer be justified. TCC submitted that ULLs should be put on a path to forbearance within two to five years, and that the Commission should be open to applications for destandardization or market-value pricing of ULLs. The Competition Bureau was of the view that the ILECs do not have market power for residential wireline services (telephony and Internet), given the competitive service offerings within the same product market and the erosion of the ILECs’ shares of residential lines since 2006. The Competition Bureau submitted that, in light of the costs of mandated access, the Commission should withdraw the mandated provision of ULLs. MTS Allstream submitted that there is a continued need for mandated access to ULLs, if not universally, then certainly for use in business telephony markets. They argued that there are no effective substitutes for ULLs, even in urban areas. CNOC was of the view that ULLs should continue to be mandated, since they are the only reasonable means of providing (i) traditional telephony services to subscribers who do not perceive voice over Internet Protocol (VoIP) to be a substitute, and (ii) affordable low-speed Internet access services. Primus submitted that ULLs remain a critical input for the provision of traditional telephony and Internet access services, and that they should therefore continue to be mandated in both urban and rural markets. Primus argued that if the Commission were to cease mandating and forbear from regulating the wholesale provision of ULLs, consumers would be deprived of competitive alternatives for their telephony and Internet access services, and current customers of competitors would be forced to stop receiving services from these competitors. The company also expressed concern over the equipment that it had invested in to make use of ULLs, and the potential that any such investments would be stranded should the service no longer be mandated.

Commission’s analysis and determinations

In terms of market definition, ULLs form their own distinct upstream product market. While some wholesale services provide similar functionality, specifically certain low-speed competitor digital network (CDN) access facilities, the substitutability of such services is limited by important differences in price. Given that ULLs are made available by the ILECs at their central offices at rates based on rate bands and are also used by competitors to provide exchange-based services, the appropriate geographic market for ULLs is the ILEC exchange. For administrative purposes, however, the Commission will apply its analysis on a more aggregated basis using rate bands. Finally, ULLs are currently being used by competitors primarily to provide local telephony services, and to a lesser extent, Internet access services, to both residential and business customers. However, Internet speeds using ULLs are limited when compared to those achievable through high-speed Internet access facilities, resulting in fewer and fewer consumers accessing their Internet services through ULLs over time. As a result, the Commission considers that the primary relevant downstream retail market for ULLs is the local wireline voice market, including both residential and business markets.

Application of the Essentiality Test - Input component

Based on the information gathered in this proceeding, overall competitor demand for ULLs provided by all the ILECs decreased by approximately 50% from 2009 to 2013. At present, the vast majority of ULLs are provisioned in ILEC exchanges in rate bands A, B, C, and D within the provinces of Alberta, British Columbia, Ontario, and Quebec. While the downward trend in demand for ULLs is expected to continue, ULLs in these areas continue to be an input for competitors to provide voice telecommunications services in the downstream local wireline residential and business markets. With regard to ILEC exchanges in rate bands E, F, and G within the provinces of Alberta, British Columbia, Ontario, and Quebec, ULLs are not typically used by competitors to provide voice telecommunications services in the downstream local wireline residential and business markets. Finally, there is little or no current and future expected demand for ULLs in ILEC exchanges in all rate bands within the Atlantic Provinces, Manitoba, and Saskatchewan. Accordingly, ULLs (i) meet the Input component of the Essentiality Test for the exchanges in rate bands A, B, C, and D within the provinces of Alberta, British Columbia, Ontario, and Quebec; (ii) do not meet the Input component of the Essentiality Test for all exchanges in rate bands E, F, and G within the provinces of Alberta, British Columbia, Ontario, and Quebec; and (iii) do not meet the Input component of the Essentiality Test for all exchanges within the Atlantic Provinces, Manitoba, and Saskatchewan.

Application of the Essentiality Test - Competition component

As indicated earlier, ULLs are only accessible from the ILECs’ central offices, and are therefore controlled by these companies. While other wholesale services provide similar functionalities, such as low-speed CDN services, these services are not appropriate substitutes for ULLs for the reason noted above. As such, the ILECs possess upstream market power with respect to the provision of ULLs. In assessing whether the withdrawal of mandated access to ULLs would likely result in a substantial lessening or prevention of competition, the Commission must consider the primary relevant downstream markets for ULLs, which are, as discussed above, the local retail wireline residential and business voice services markets. However, the Commission’s conclusions on this issue would also extend to other downstream retail services, such as Internet access services. As discussed above, the vast majority of ULLs are provisioned in the ILEC exchanges in rate bands A, B, C, and D within the provinces of Alberta, British Columbia, Ontario, and Quebec. However, subscribers that currently rely on ULLs for access to local voice services in these exchanges represent a very small percentage of the overall total number of subscribers to local voice services, both residential and business. Furthermore, and as noted above, the trend in use of ULLs has been steadily declining over the years. Accordingly, the withdrawal of mandated access to ULLs in these exchanges would not have a significant impact now and in the future on competition for residential and business local voice services. With regard to ILEC exchanges in rate bands E, F, and G within the provinces of Alberta, British Columbia, Ontario, and Quebec, as well as all exchanges within the Atlantic Provinces, Manitoba, and Saskatchewan, the withdrawal of mandated access to ULLs would also not have a significant impact now and in the future on competition for local voice services in these exchanges because of the state of demand for the service. If mandated access to ULLs was to be withdrawn, the ILECs could choose to continue to provide competitors access to such services, given their established operations and associated business cases. Nonetheless, certain subscribers who obtain their local service(s) from competitors that use ULLs could be required to change local service providers in the event that the ILECs withdraw the provision of ULLs. In such circumstances, these subscribers would typically still have access to several alternative service offerings, including wireless voice services that are widely available across Canada and that are increasingly being used as a substitute for local wireline voice service. In light of the above, ULLs do not meet the Competition component of the Essentiality Test, given that the withdrawal of mandated access to ULLs would not likely result in a substantial lessening or prevention of competition in the local retail wireline residential and business voice services markets, regardless of the exchange or the ILEC serving territory.

Application of Essentiality Test - Duplicability component

In order to duplicate the functionalities of ULLs, competitors would have to replicate the ILECs’ local access network on a large scale. Moreover, there are impediments to such duplication, such as securing significant capital and rights-of-way, addressing construction challenges (e.g. trenching and timelines), or in the case of wireless technology, obtaining wireless spectrum and access to towers. As well, alternate technologies are available through which local telephony service can be provided (e.g. cable, wireless, and VoIP technologies). Consequently, ULLs meet the Duplicability component of the Essentiality Test, given that it is not practical or feasible for competitors to duplicate the functionalities of ULLs.

Application of mandating criteria - Policy considerations

An important policy consideration related to the issue of whether the provision of ULLs should be mandated is the impact that no longer mandating access to ULLs may have on investment and innovation. A decision to no longer mandate the provision of ULLs could lead to a greater adoption of advanced or emerging services by consumers. For example, competitors that migrate their end-users from retail Internet access services provisioned over ULLs to services provisioned over wholesale HSA services would enable their end-users to access new content and applications that were previously inaccessible. On the other hand, the provision of ULLs has resulted in a certain level of investment by competitors that have co-located in the ILECs’ central offices, and some of this investment could be stranded as a result of a non-mandating decision. However, the adoption of an appropriate phase-out transition period for ULLs should provide competitors with adequate time to reconsider their current provisioning requirements and to make alternate arrangements, as necessary. In this context, a three-year phase-out period for ULLs is appropriate.

Conclusion

In light of the above, ULLs do not meet all three components of the Essentially Test across the country, and there is no valid policy reason supporting a need to continue mandating the provision of these facilities. Therefore, ULLs are not essential, and are no longer mandated. The Commission no longer requires that ULLs be provided by the ILECs subject to this decision, subject to the phase-out transition period discussed below. During this transition period, the obligation to provide ULLs will remain in place.

Implementation of the mandating decision

As mentioned above, the establishment of a phase-out period associated with the obligation to provide ULLs would provide competitors with adequate time to reconsider their current provisioning requirements and to make alternate arrangements, as necessary. The transition period would also assist in attenuating any impact that the removal of the obligation to provide ULLs may have on certain end-users. The establishment of a three-year phase-out period, from the date of this decision, would provide competitors with a reasonable period of time to review their provisioning requirements and take appropriate measures. However, in exchanges for which an ILEC subject to this decision does not currently have ULL customers, no phase-out period is needed as the concerns identified above have no application. Accordingly, a phase-out period of three years with respect to the existing obligation to provide ULLs is instituted for those exchanges where there is present demand for this service. The phase-out period takes effect from the date of this decision. While the Bell companies proposed that the Commission forbear from regulating ULLs, they did not provide justification why the scope of forbearance they were requesting was consistent with section 34 of the Act. Given the lack of evidence in the proceeding to support the findings of fact necessary to justify in-service forbearance at this time, ULLs are to continue to be made available in exchanges where there is demand, based on Commission-approved tariffs for at least the duration of the three-year phase-out period. However, ULLs should be forborne in exchanges where there is no current demand. In those exchanges where there are no ULLs in service, forbearance with respect to the provision of ULLs would be consistent with the policy objectives set out in section 7 of the Act and the Policy Direction. The ILECs can choose to make ULLs available, or cease providing ULLs. Pursuant to subsection 34(1) of the Act, the Commission may forbear where it finds that to do so would be consistent with the policy objectives set out in section 7 of the Act. Where there is no current demand for ULLs, the Commission finds, as a question of fact, that to forbear to the extent set out below with respect to the regulation of ULLs would be consistent with the policy objectives set out in paragraphs 7(f) and (g) of the Act, and with the Policy Direction. Regarding subsection 34(3) of the Act, the Commission, in making its determinations, has found evidence that the demand for ULLs is decreasing, and that this trend is expected to continue over time. Accordingly, where there is no current demand for ULLs, forbearance will not likely impair unduly the establishment or continuance of a competitive market. Pursuant to subsection 34(4) of the Act, the Commission declares that, effective the date of this decision, sections 25, 29, and 31, and subsections 27(1), 27(5), and 27(6) of the Act do not apply with respect to exchanges where there is no demand for ULLs as of the date of this decision. However, subsections 27(2) and 27(4) of the Act should be retained to address any issues of unjust discrimination or undue preference. As discussed above, in exchanges where there is demand for ULLs, as of the date of this decision, ULLs will continue to be made available for a three-year phase-out period. If an ILEC’s intent is to continue to make ULLs available in concerned exchanges after the expiry of the phase-out period, the ILEC can choose to file a forbearance application regarding the provision of its ULLs. Such applications should not be filed earlier than one year prior to the end of the phase-out period. The ILECs are encouraged to put forth an analytical framework or a “test” that the Commission could use to assess forbearance in an administratively efficient manner, and are required to justify why their request for forbearance would not impact local forbearance decisions that the Commission has previously made on the basis of ULLs being available. If, however, an ILEC’s intent is to cease making ULLs available, that ILEC will be required to provide written notice to existing customers and the Commission one year prior to the end of the phase-out period. This notice should include details on the specific exchanges that will be affected, the date on which the ULLs will no longer be available in those exchanges, and any potential alternate arrangements that may be available to wholesale customers. Similar to the above, the ILECs will be required to justify why ceasing making ULLs available would not impact local forbearance decisions that the Commission has previously made on the basis of ULLs being available. The ILECs are to file updated tariffs identifying the exchanges that will continue to support ULLs during the phase-out period, consistent with the above determinations. These tariffs are to be filed within 30 days of the date of this decision.

Ethernet and high-speed CDN services

Wholesale Ethernet and high-speed CDN services are generally used by competitors to provide voice and data services to medium and large businesses, or to connect small networks in multiple l