Last week, the Canadian Radio-television and Telecommunications Commission released its much-anticipated usage based billing decision . While the ruling only focused on the use of data caps (or UBB) as between Internet providers, the issue garnered national attention with over 500,000 Canadians signing a petition against Internet data caps and the government providing clear signals that it would overrule the Commission if it maintained its support for the practice.

My weekly technology law column (Toronto Star version, homepage version) notes the resulting decision seemed to cause considerable confusion as some headlines trumpeted a “Canadian compromise,” while others insisted that the CRTC had renewed support for UBB. Those headlines were wrong. The decision does not support UBB at the wholesale level (the retail market is another story) and the CRTC did not strike a compromise. Rather, it sided with the independent Internet providers by developing the framework the independents had long claimed was absent – one based on the freedom to compete.

For many years, Canada has maintained policies theoretically designed to foster an independent ISP market. Those policies required the large Internet providers such as Bell and Rogers to make part of their network available to independent competitors. Since the large providers were not supportive of increased competition, the CRTC established mandatory rules on access, pricing, and speed matching.

Yet despite years of tinkering with the rules, the independents only garnered a tiny percentage of the marketplace (approximately six percent). The UBB issue illustrates why the independent providers have struggled since the original proposal would have allowed Bell to charge independent ISPs based on the amount of data used.

While that sounds reasonable, the cost of running a network has little to do with the amount of data consumed. Rather, it is linked to the capacity of the network – the fatter the pipe, the greater the cost, irrespective of how much data is actually consumed.

Independent providers rebelled against the UBB plans when they realized it would effectively remove their ability to differentiate their services from the large providers. If large providers could charge based on consumption, they could render popular unlimited data plans prohibitively expensive and squeeze the independents out of the market.

The new CRTC approach is based chiefly on opening the door to real competition by granting the independent providers the freedom to differentiate their pricing and services.

First, it adopts a capacity based model for pricing between ISPs, not the volume or consumption models preferred by the large providers. Under the new system, independent ISPs will pay a set access fee for each customer and purchase whatever capacity they think they need. For example, the CRTC set the monthly access fee for an Internet provider using Bell’s network at approximately $14.00 for a customer with speeds of up to 5 Mbps and approximately $25.00 for speeds up to 25 Mbps.

Once the Internet provider has paid those costs, they can offer differing speeds, new pricing models, and whatever service innovations they see fit. This is major change that not only revamps pricing, but it also effectively does away with an earlier speed matching decision that limited the independent ISPs to only offering speeds offered by the incumbents.

Second, the prices for capacity are based on actual costs (plus a reasonable profit), not retail pricing in the market. By sticking to actual costs, the CRTC ensures that independent costs do not swing wildly with the retail market pricing. While there is considerable concern about the actual costs themselves (there is a lack of transparency about the specific numbers and fears that prices could increase significantly), the model is designed to offer independent ISPs greater flexibility.

Third, the Commission has set mandatory deadlines for cable companies to make their networks more readily available for independent providers. For the first time, this offers the promise of competition between large providers to attract the wholesale business as some independent ISPs may abandon Bell in favour of better pricing and speeds with cable.

The CRTC decision won’t change Internet competition overnight – the overwhelming majority of Canadians are still with the large providers – but, subject to getting the numbers rights, it removes many competitive barriers by providing independent ISPs with their own declaration of independence.