Canada Gazette Notice No. DGTP-001-12, Part I, dated March 9, 2012, Petition of L'Association des Companies de Téléphone du Québec Inc. and The Telecommunications Association to His Excellency the Governor in Council, pursuant to section 12 of the Telecommunications Act, in the matters of Obligation to serve and other matters, Telecom Regulatory Policy CRTC 2011-291, and ACTQ/OTA/CityWest – Application to review and vary Telecom Regulatory Policy 2011-291 regarding determinations affecting small incumbent local exchange carriers, Telecom Decision CRTC 2011-733

Comments of Inc.

April 5, 2012

1. The following constitutes the submissions of Shaw Communications Inc. (“Shaw”) in response to Gazette Notice No. DGTP-001-12, Part I, dated March 9, 2012, Petition (the “Petition”) of L'Association des Companies de Téléphone du Québec Inc. and The Ontario Telecommunications Association (collectively, the “Petitioners”) to His Excellency the Governor in Council, pursuant to section 12 of the Telecommunications Act, in the matters of Obligation to serve and other matters, Telecom Regulatory Policy CRTC 2011-291 (“TRP 2011-291”), and ACTQ/OTA/CityWest – Application to review and vary Telecom Regulatory Policy 2011-291 regarding determinations affecting small incumbent local exchange carriers (“SILECs”), Telecom Decision CRTC 2011-733 (“TD 2011-733”). Collectively, TRP 2011-291 and TD 2011-733 are referred to as the “Decisions”.

2. To the extent that Shaw does not address any specific request, position or argument of the Petitioners in this submission, this should not be interpreted as agreement with such request, position or argument.

Overview

3. The Petitioners argue that “the CRTC’s proposed new approach to the introduction of local telephone competition in rural areas of Canada is ill-suited to rural realities, and will undermine, rather than promote the attainment of several important Canadian telecommunications policy objectives”1. The Petitioners further argue the CRTC intends “to impose in rural Canada the same competitive model that was developed to encourage competition for large urban incumbent service providers”2 with the unsubstantiated claim that it will, in some cases, lead to the “disappearance of small local independent telephone companies, leaving a single communications service provider with no obligation to serve all customers in the service area and no prospect of competition.”3

1 Petition, Executive Summary, page i. 2 Petition, paragraph 4. 3 Petition, Executive Summary, page ii.

4. Shaw respectfully submits that the Petitioners have mischaracterized the nature of the policy issue in question and the relevant facts. The fundamental issue at stake here is how to realize the goal of bringing competition to local exchange markets in SILEC territories. This goal is consistent with the Government’s policy objectives of enhancing rural Canadians’ access to communications services and to ensure that, like their urban counterparts, rural consumers have choice in the telecommunications marketplace.

5. The Petitioners paint a very bleak picture of competition and market forces, asserting that competitive entry will expand the “digital divide”4, force SILECs into bankruptcy5, cause the demise of small communities6 and strand customers with a single service provider.7 The Petition is rife with these dire predictions of what will occur if the Commission’s Decisions are not overturned.

6. While it goes without saying that competition and market forces will challenge the financial and other advantages SILECs enjoy as monopoly service providers, there is a very different perspective on competition that must be granted considerable weight in this matter: the consumer’s perspective. As the Government has consistently recognized, there are significant benefits to consumers that derive from having competitive alternatives in the marketplace. Competition between telecommunications providers drives innovation and value in services and products and makes rates more affordable. Shaw submits that these factors, which form the foundation of Canadian telecommunications policy, must be the Governor-in-Council’s principal concern in reviewing the merits of the Petition.

7. There is no question that competition in the telecommunications market benefits Canadian consumers. Since the introduction of competition, we have seen market forces yield lower long distance and local rates and much more consumer-friendly service offerings within

4 Petition, Executive Summary, paragraph 5. 5 Petition, Executive Summary, paragraph 7. 6 Petition, Executive Summary, paragraph 9. 7 Petition, Page 10, paragraph 39.

Canada. Internet speeds continue to get faster and companies are racing to complete fibre- to-the-node and fibre-to-the-home projects to meet the ever-evolving demands of Canadians. The wireless market is also becoming increasingly competitive, as a result of the Government’s initiatives to ensure equitable access to spectrum and the removal of other barriers to entry, such as access to sites and towers and roaming arrangements. Given the significant benefits of, and the Government’s commitment to, competition and market forces, it is puzzling to Shaw why the Petitioners would seek to deprive consumers in certain areas of Canada of the benefits of competition.

8. When you read beyond the hyperbole, the Petition boils down to three requests. The SILECs want to continue receiving regular subsidies for customers they are no longer serving. They want their competitors to pay SILECs for the privilege of providing competitive local telephone services within the SILEC territories. And they want all Canadian phone customers to continue to subsidize SILEC operations through the central fund. In effect, the Petitioners want the Government to maintain SILEC monopoly revenues even in a competitive market. This points to the fundamental flaw underlying the Petition’s position, which is that it prioritizes the interests of protecting particular service providers (SILECs), over the interests of consumers in SILEC territories.

9. The CRTC’s Decisions will facilitate competition and consumer choice in rural areas – this will enhance access to reliable and affordable telecommunications services through innovation, price discipline, and improved service. The CRTC’s design of the regulatory framework for bringing local competition to SILEC territories already has more than ample regard for the specific circumstances of the SILECs and their operating territories by granting distinct and generous accommodations for SILECs that include greater access to subsidies; a less onerous trigger for obtaining regulatory forbearance; the recovery of competitor entry costs for certain SILECs; and the recovery of ongoing costs of implementing local competition in certain circumstances.

10. The Petition’s tone suggests that the CRTC has abandoned rural areas by imposing a “cookie-cutter”8 framework that will ultimately result in compromised service and deployment in rural areas. Nothing could be further from the truth. The CRTC has specifically tailored a SILEC-specific approach to competitive entry and even committed to monitoring local competition implementation in each SILEC territory. 9

11. There is already evidence that the CRTC’s approach does, in fact, increase competition. In 2007, Shaw started providing competitive telephone services in the SILEC exchange of Thunder Bay. Over the past five years, Shaw and have competed for customers in this region. Both companies have also expanded and improved their respective internet services and product offerings while offering competitive pricing options. In contrast to the dire predictions of the Petitioners, TBayTel has not been forced into bankruptcy and customers have not been stranded without service. In fact, since Shaw’s entry into the market, TBayTel has invested in and launched its own IPTV service to compete in the broadcasting distribution market. The consumers of Thunder Bay now benefit from two strong, facilities-based service providers competing for their business.

12. The TBayTel example illustrates how competitive entry benefits consumers in the form of greater service offerings, lower prices, more flexibility and a choice of providers. Shaw submits that consumers in other SILEC territories also deserve access to these benefits. At the same time, there is no reason for competitors or Canadian telephone customers to subsidize SILEC operations. In Shaw’s view, it would defy the operation of market forces and undermine the development of a competitive and dynamic marketplace in SILEC territories if the CRTC or the Governor-in-Council were to guarantee revenues for any service provider in a competitive market.

Canadian Telecommunications Policy Protects Consumers, Not Competitors

8 Petition, Executive Summary, page i. 9 TD 2011-733, paragraph 51. 13. In Shaw’s view, the Petition asks the Governor in Council to take measures that would contradict the requirements of the Policy Direction and the objectives of the Telecommunications Act (the “Act”). In their petition, the Applicants have indicated that they are not opposed to greater reliance on market forces. However, the intent and effect of the Petition’s requests would be to significantly favour SILECs over new entrant competitors in their territories to the extent of potentially delaying or foreclosing the possibility of competitive entry.

14. If the Governor-in-Council accedes to the Petitioners’ requests, it would undermine the prospects for local competition in SILEC territories and contradict the objectives of the Policy Direction and sections 7(c) and 7(f) of the Act, namely, “to enhance the efficiency and competitiveness…of Canadian telecommunications” and “to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective.”

15. The Petition highlights the contributions that SILECs have made as pillars in their communities and catalysts of local and regional economic expansion.10 The Petition also highlights the SILECs’ commitment to bringing state-of-the-art service to their customers.11 The Petition further argues that “the disappearance of a SILEC will weaken the social and economic fabric that the company has helped to weave in its rural community for over a century.”12

16. Shaw does not dispute whether SILECs have made significant contributions to their customers as providers of telecommunications services and leaders in their communities. Those assertions by the Petitioners are very likely true and Shaw applauds the active role SILECs take within their communities. However, Shaw respectfully submits that SILECs are not the only telecommunications providers that contribute significantly to their

10 Petition, paragraph 10. 11 Petition, paragraph 9. 12 Petition, Page 11. communities. Furthermore, the intent of Canadian telecommunications policy is not to ensure the financial viability of certain providers over others in any community.

17. Instead, a telecommunications provider’s financial success or failure, and its relationship with its customers, should be determined by the operation of market forces. The focus of Canadian telecommunications policy and regulators is, and must be, the interests of consumers and ensuring that consumers have access to choice in a dynamic, competitive marketplace. In that regard, rural Canadians have as much entitlement to choice and competition as urban Canadians do.

The Petition’s Specific Requests

18. We now turn to assessing each of the specific requests that the petitioners have asked of the Governor-in-Council. With respect to each request, we explain how the CRTC has already provided more than ample distinct dispensations for the SILECs and why any further accommodations would result in significant marketplace distortions that would defeat the goal of bringing local competition to SILEC territories.

(a) Subsidies

19. The Petitioners ask the Governor-in-Council to revert to the subsidy levels and mechanisms for calculating the subsidies paid to SILECs in place prior to the Decisions. In support of their requests, the Applicants argue that: the CRTC has simply failed to understand two harsh realities associated with the operating conditions of the small independent companies. First, given the nature of the SILECs' product and geographic markets, their operating costs are largely fixed. Second, the small incumbents are facing competitors that are ideally suited to "cherry pick" customers in the lower cost, higher density areas and to engage in anti-competitive practices like unreasonably low pricing. In these circumstances, rapid and significant market share losses are inevitable.13

13 Petition, paragraph 19.

20. In the Decisions, the CRTC endeavored to reduce the excessive regulatory asymmetry in the subsidy mechanism that applies to SILECs, relative to the regime that applies to large ILECs. That goal, which is consistent with the requirements of the Policy Direction, motivated the CRTC’s decision to, among other things, impose a per telephone line count subsidy mechanism, rather than a fixed subsidy mechanism. This means that SILECs will only receive subsidy for telephone services they are actually providing instead of a lump sum that does not change whether they serve 100% or 20% of the telephone customers in their territory. In Shaw’s view, the CRTC’s per-line approach is much more appropriate than the fixed-subsidy regime. To the extent that subsidies are available, it is critical that the CRTC allocate them in a way that minimizes their distortive impact in the marketplace. As a result, no business should be subsidized for services it is not providing, especially when its competitor does not receive any subsidies.

21. Notwithstanding the considerations above, TRP 2011-291 affords significant favourable dispensations to the SILECs with respect to subsidies that the Petition fails to accurately describe. In the Decisions, the Commission allows subsidies for SILECs to continue for a period of time in the competitive market. Specifically, for three years following the implementation of local competition, SILECs will continue to receive 50% of the subsidy for each of the residential lines they no longer serve.14 In addition, in their territories, SILECs can request forbearance from regulation when a competitor can serve 50% of lines, rather than the 75% competitor presence required for forbearance in large ILEC territories. This is intended to mitigate the impact of the “doughnut effect” that the SILECs claim is inevitable within their serving territory.15 In addition, SILECs will enjoy the advantage of continuing to receive subsidies in forborne exchanges until the competitor presence reaches 75%.16

14 TRP 2011-291, paragraph 177. 15 TRP 2011-291, paragraph 180. 16 TRP 2011-291, paragraph 181. 22. The Petitioners argue that “a per-line subsidy system does not make sense where the operating costs are largely fixed.”17 However, as noted in TD 2011-733, SILECs have not provided any evidence to support their assertions that their cost structures are different from those of the large ILECs.18 In addition, it makes no sense for any service provider to continue to receive subsidies for telephone lines it is not serving. All Canadian telecommunications customers pay into the central fund which provides the subsidies to the SILECs. Those customers have a reasonable expectation that their contributions to the central fund are actually being used to subsidize basic telephone service, rather than being used to provide general financial support to a telecommunications service provider.

23. Competitors are no longer eligible for subsidy. In this context, a fixed subsidy amount for SILECs would significantly advantage the SILEC over its competitors and the rest of the industry. This represents a grave distortion of the market.

24. The Petition asserts that “it is inevitable that new entrants will concentrate their competitive efforts in those parts of the service area where populations in those parts of the service area where population density is greatest and costs are lowest, namely in the largest village or villages in the service area, where these entrants have already deployed cable plant. The more remote and costly parts of the service area will clearly be ignored by the new entrants who, as noted, have no CRTC-mandated obligation to serve customers in these remote parts of the territories.”19 However, this ignores the critical fact that subsidies are still available to the SILECs in the high cost serving areas outside of the “doughnut” core until a new entrant can serve at least 75% of the customers within the entire territory.

25. Finally, it is troubling to Shaw that the SILECs would raise the concern of market share loss as a policy problem in this context. In circumstances where the policy goal is to increase competition in a monopoly environment, it is inevitable that SILECs will lose market share.

17 Petition, paragraph 31. 18 TD 2011-703, paragraph 27. 19 Petition, paragraph 34. When SILECs compete for, and win, customers outside of their territories in the telecommunications and broadcast distribution markets, this is precisely the same impact that ILECs and cable company competitors face.

26. The industry and the Governor-in-Council should be concerned by the implications of the SILECs’ arguments. They are asking the Governor-in-Council to prevent market share loss and insulate the SILECs from competition. Yet, that outcome is precisely the opposite of the policy objective at stake. Furthermore, as described above, the CRTC’s Decisions already provide the SILECs with more than sufficient protection from market-share loss. For a 3-year transition period, SILECs will be able to continue receiving subsidy for lines they have lost.

(b) Start-up Costs

27. The Petitioners ask the Governor-in-Council to oblige new entrant competitors in SILEC territories to pay the start-up costs associated with the introduction of local competition. This request is highly inconsistent with the historical practice of ILECs and CLECs being responsible for their own costs for local competition implementation. However, in TRP 2011-291, the CRTC decided that SILECs serving 3000 or fewer lines should be able to recover competition implementation start-up costs from the competitor new entrant.

28. The Petitioners ask that this special accommodation be extended to all SILECs. This would unnecessarily and harmfully distort the marketplace. In this regard, it is critical that the Governor-in-Council keep in mind that many SILECs offer multiple services, including local and long-distance telephone, internet and broadcasting distribution, both within and beyond the boundaries of their SILEC territories. The evidence submitted by SILECs showing forecasted income from operations should therefore be viewed with considerable skepticism as it may not represent the complete competitive picture.

29. The SILECs portray themselves as the underdog. It is easy to forget that the SILECs have 100% of the market within their serving territories and have decades of experience with the customers within their communities. As they stated in the Petition, they constitute a pillar of the community. The SILECs have all the market power in this situation yet they assert that competitors somehow have the ability to “cherry pick” and engage in anti-competitive practices. Yet, it is the new entrant that faces barriers to entry and the challenges of customer inertia while the SILECs only need to retain existing customers (all the while having ongoing access to subsidies).

30. Considering that many SILECs offer bundles of services that go beyond the capabilities of their potential competitors, they have considerable advantages in retaining the customer. For example, in Prince Rupert, , the SILEC is CityWest, which is an incumbent telephone service provider who purchased the broadcasting assets of in 2005. CityWest is capable of providing multiple service bundles that include local, long distance, high-speed internet, cellular and . As a result, it would be practically impossible for a new entrant into CityWest’s territory to “cherry pick” customers or engage in anti-competitive practices.

31. As detailed above, SILECs, with their current market monopoly, consumer awareness and their ability to offer multiple service bundles in many exchanges are well-positioned to fight for their customers against new entrants. In that context, it would be highly distortive to require the new entrant to pay their SILEC competitors’ costs for competitive entry. These SILECs clearly have the financial wherewithal and the technical and operational expertise to compete with new entrants in their territories and cover the costs of competitive entry.

(c) Ongoing Costs of Implementation of Local Competition

32. The Petitioners ask the Governor-in-Council to fund the ongoing costs of implementation of local competition from the central fund the CRTC has established for subsidy payments.

33. As with the issues of subsidy and start-up costs, the Decisions already afford SILECs special consideration on this issue. Specifically, SILECs that incur ongoing costs of local competition implementation may lower the rate component used in calculating their subsidy by up to $2 per line per month, or by the approved amount of ongoing costs, whichever is less. This will effectively ensure that SILECs are subsidized for their ongoing costs of implementing local competition from the subsidy fund.

34. In TD 2011-733, the CRTC determined that “allowing SILECs access to the ongoing cost recovery mechanism beyond the thresholds described above would likely create market distortions by conferring small ILECs an undue advantage in competitive markets relative to other similar providers.”20 As with the start-up costs of local competition, historically, CLECs and ILECs have borne their own ongoing costs of implementing local competition. Furthermore, the purpose of the subsidy fund is not to lessen the impact of local competition on certain providers. Extending the CRTC’s special accommodation in this regard would exacerbate the inequitable distribution of subsidy that it represents and the advantage that a SILEC enjoys over its competitor in the marketplace.

Conclusion

35. The intent and effect of the CRTC’s Decisions is to facilitate competitive entry and increase competition in an environment that is currently a monopoly. It is therefore implausible that “the CRTC’s Decisions may, in some instances, ultimately lead to a reduction in competition through consolidation in the market, reflecting ineffective regulation and precluding reliance on market forces.” as suggested by the Petition.21

36. The Petitioners have characterized the CRTC’s initiative as “an attempt to fix a system that wasn’t broken.”22 Presuming that the “system” here refers to the SILEC monopoly, this assertion raises serious policy concerns that should be troubling to the industry and the Governor-in-Council. It underscores the fact that the intent and effect of the requests contained in the Petition are to forestall competition within SILEC territories.

20 TD 2011-733, paragraph 44. 21 Petition, Page 10. 22 Petition, paragraph 12.

37. The Governor-in-Council should reject the Petitioners requests. To do otherwise will result the distortion of a competitive marketplace and the reduction of competitive alternatives for rural Canadians.

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