14 March 2003
Mr. Jan Skora Director General Radiocommunications and Broadcasting Regulatory Branch 300 Slater Street Ottawa, Ontario K1A 0C8
Dear Mr. Skora: Don Woodford Director - Government & Subject: Bell Wireless Alliance Comments in response to - Consultation on a Regulatory Affairs New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees, Canada Gazette - Part 1, Notice No. DGRB-004-02, dated 21 December 2002.
1. Bell Mobility, on behalf of the Bell Wireless Alliance (BWA), is pleased to submit the following comments in response to Industry Canada's Consultation on a new fee and licensing regime for cellular and incumbent PCS licensees.
2. As the Department is aware, the applicable Treasury Board polices require that federal government departments and agencies undertake meaningful and effective consultations, with the affected client group, throughout the fee setting process. This is to ensure, as outlined in the Treasury Board's policy documentation, that all relevant factors, including the government's overriding policy objectives for the sector, are considered in the process. The BWA believes that this Consultation represents a key step toward Industry Canada's fulfillment of the Treasury Board's requirement to seek the input and participation, of the Canadian wireless industry, in the process of designing a new fee and licensing regime for the sector.
3. As noted in these comments, BWA is in agreement with the proposed harmonization of the disparate licensing regimes, currently applicable to these service bands, with the enhanced licence rights and privileges associated with the auctioned PCS spectrum. We are, however, at the same time strongly of the view that the proposed rate of $0.052 per MHz per person is inappropriate in the circumstances and should, for the reasons outlined in this submission, be reconsidered. The BWA notes that a rate of $0.037 per MHz per person would likely result in licence fee revenue neutrality for the Department in the 2003 timeframe. The BWA respectfully submits however that a full application of the Treasury Board's fee development guidelines, as well as taking into consideration evolving spectrum usage patterns, would suggest a fee of approximately $0.02 per MHz per person.
Bell Mobility 105, rue Hôtel-de-Ville 5e étage Hull (Québec) J8X 4H7 Tel: (819) 773-5575 Fax: (819) 773-4346 Internet ID: [email protected] - 2 -
4. The BWA sincerely appreciates the opportunity to collaborate with the Department in the design and development of an appropriate new fee and licensing regime for the Canadian wireless industry. Finally, given the importance of the outcome of this Consultation to its members, the BWA notes its availability to discuss any of the attached comments in further detail at the Department's convenience.
Yours truly,
Don Woodford Director - Government & Regulatory Affairs
Attachment
Canada Gazette Notice No. DGRB-004-02
Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees
Published in the Canada Gazette, Part 1 dated 21 December 2002
Bell Wireless Alliance Comments on behalf of
Aliant Telecom Inc., Bell Mobility Inc., MTS Communications Inc., MTT Mobility Inc. Northwestel Mobility Inc. Saskatchewan Telecommunications and The Corporation of the City of Thunder Bay
14 March 2003
Table of Contents
Page
Executive Summary ...... 1
1.0 Introduction ...... 4
2.0 Treasury Board of Canada Cost Recovery and Charging Policy ...... 6
3.0 The Canadian Wireless Market in 2003 ...... 8 3.1 The Customer Perspective...... 8 3.2 The Service Providers' Perspective...... 10
4.0 The International and Domestic Economic Environment ...... 11
5.0 Wireless as an Economic Enabler ...... 12
6.0 The Requirement for Consideration of Other Federal Government Costs...... 15
7.0 BWA's Estimate of the Value of Canada's Cellular and 1995 PCS Spectrum ...... 17 7.1 Clearnet Acquisition and Previous Spectrum Auctions Do Not Provide Appropriate Valuation Signals for Existing Spectrum...... 17 7.2 Influences on the Value of Canadian Spectrum ...... 18
8.0 Financial Impact of Industry Canada's Proposed Model on the Industry ...... 21
9.0 BWA Proposed Rate Recommendations ...... 23
10.0 Regional Carrier Considerations ...... 25
11.0 Summary of Proposed Rate Per MHz Issues ...... 25
12.0 Comments on Specific Aspects of the Consultation Paper...... 27 12.1 System Access Fees...... 32 12.2 Resale and Roaming...... 33 12.2.1 Condition Applicable to PCS Licensees Only...... 33 12.2.2 Condition Applicable to Cellular Licensees Only ...... 34
13.0 Radio Station Installations (Section 5.5.5) ...... 34
14.0 Conclusion ...... 35
Executive Summary
1. The Bell Wireless Alliance (BWA) is please to submit the following comments in response to Industry Canada's Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees. The BWA notes that in its Consultation Industry Canada has invited comments concerning all aspects of a proposed new fee and licensing regime that will likely apply to the BWA's members for the next decade or more.
2. The BWA has also been referred to the Treasury Board of Canada's Cost Recovery and Charging Policy as providing the fundamental principles that should guide the establishment of federal government user fees, including those fees charged for the right to use Canada's radio frequency spectrum. The Treasury Board's Policy requires that, in designing or changing such user fees, departments conduct meaningful and effective consultations with their client group.
3. The BWA believes that this Consultation represents a key step toward Industry Canada's fulfillment of the Treasury Board's requirement to seek the input and participation, of the Canadian wireless industry, in the process of designing a new fee and licensing regime for the sector. The BWA believes that a collaborative effort between the Department and the industry, such as that represented by this Consultation, will result in a final fee and licensing regime that is fair, appropriate and one that is in the best interests of all Canadians.
4. The Treasury Board's requirement for full consultation, in the BWA's view, is intended to ensure that all relevant factors, including the government's overriding policy objectives for the sector, are considered in the fee setting process. In this regard, the Treasury Board notes that an essential step in the process is to conduct a thorough analysis of the impact of any fee changes on the sector in question. The Treasury Board also notes that, while Canadians are entitled to a fair economic rent, e.g., in the form of spectrum fees for the use of their resource, one has to be mindful to not set fees at a level such that any overriding policy objectives might be compromised.
5. In these comments, the BWA notes that the infrastructure, provided through considerable private investment by Canada's wireless service providers, is widely acknowledged as being a critical infrastructure which has an enormous enabling impact on the entire Canadian economy. For Canadian business in 2003, the wireless infrastructure serves to enhance the productivity and competitiveness of virtually the entire commercial sector. For
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consumers, the infrastructure enhances the well being and safety of individual citizens whether by enabling them to keep in touch with family and friends or to place a critical call to emergency responders.
6. The BWA submits that these examples are evidence of the significant positive externalities, provided to Canadians and their economy, which the Treasury Board's Policy requires be taken into account when developing spectrum user fees. Further, in the BWA's respectful submission, wireless services represent that instance, described in the Treasury Board's Policy, such that where there is a mix of public and private benefits resulting from the exploitation of the spectrum resource, the Treasury Board states that user fees in such a case should be lower than full cost.
7. The Treasury Board's guidelines also require that departments and agencies be mindful, when designing user fees, of the cumulative impact of multiple fees from all federal sources imposed on a given sector. As noted in these comments, when one takes into consideration wireless service providers' direct and indirect financial obligations in the form of CRTC contribution payments, conditions of licence related to research and development (R&D) investment requirements, the deployment of wireless E9-1-1 service, current spectrum fee payments whether in the form of annual fees or up-front auction payments as well as evolving lawful access requirements, the demand on Canada's wireless service providers is both significant and growing. The BWA believes that an underlying principle of the Treasury Board's Policy is that all these federal fees should have a bearing on the level of any additional user fees which are levied.
8. In addition to the enabling effect provided by Canada's wireless infrastructure, the BWA notes that the competitiveness of the sector is producing tangible benefits for Canadians. This is predominantly evident in the availability of a diverse array of basic and advanced wireless networks and services, from four national service providers, at prices acknowledged as being among the lowest in the world. This competitive landscape also results, however, in industry average revenue per user (ARPU) which has been declining for several years and which, when coupled with the current uncertain economic climate, presents industry participants with an exceptionally challenging operating environment.
9. Taking all of the above into consideration, the BWA notes that it is in agreement with the proposed harmonization of the disparate licensing regimes, currently applicable to the cellular - 3 -
and incumbent PCS service bands, with the enhanced licence rights and privileges associated with the auctioned PCS spectrum licences. This includes, among other things, extended licence terms and divisibility and transferability rights.
10. At the same time, however, the BWA is strongly of the view that the proposed rate of $0.052 per MHz per person is excessively high and inappropriate, in the circumstances, and should, for the detailed reasons outlined in this submission, be reconsidered. The BWA notes in this regard that a rate of $0.037 per MHz per person would likely result in licence fee revenue neutrality for the Department in the 2003 timeframe. The BWA further notes however that, based on its current use of all its spectrum holdings, including its PCS auction spectrum, the BWA is forecasting significantly lower fees in the 2003 to 2011 timeframe than historical trends would otherwise indicate.
11. The BWA also notes that modeling the proposed fee regime using a national service provider's network, which results in a proposed rate of $0.052 per MHz per person, is particularly unfair to smaller regional service providers. Such service providers are serving smaller population centres and markets which are predominantly rural in nature. Using a national service provider as the model for a new fee produces a rate, however, which is inherently skewed toward the larger metropolitan centres served by that entity. Clearly there is an enormous incongruity between the proposed rate of $0.052 per MHz per person derived using this approach and the spectrum market realities facing the regional service providers who are members of the BWA.
12. The BWA respectfully submits that, for all the above reasons, as well as when one applies a full application of the Treasury Board's fee development guidelines as discussed in these comments, a fee of $0.02 per MHz per person, in the circumstances, is both reasonable and provides a fair return to Canadians for the use of their resource.
13. The BWA sincerely appreciates the opportunity to collaborate in the Department's design and development of an appropriate new fee and licensing regime for the Canadian wireless industry. Given the importance of the outcome of this Consultation to its members, the BWA notes its availability to discuss any of the attached comments in further detail at the Department's convenience.
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1.0 Introduction
14. Bell Mobility, on behalf of the Bell Wireless Alliance (BWA), is pleased to submit the following comments in response to Notice No. DGRB-004-02 – Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees, as published in the Canada Gazette, Part 1, dated 21 December 2002 (the Consultation). While in general agreement with the proposed harmonized licensing regime, the BWA submits that the proposed rate of $0.052 per MHz per person is excessively high and that implementation of the new fee regime at this rate would not be in the best interests of Canadian wireless consumers or the industry overall. In this regard, every additional dollar that is extracted from the industry through licensing fees is a dollar that is no longer available for investment in advanced wireless infrastructure development or for service improvements such as coverage expansion and wireless enhanced 9-1-1. Hence, the Consultation addresses issues which are of critical importance in determining the industry's ability to enhance the productivity and competitiveness of Canada's business sector and to contribute to the safety and well being of its citizens.
15. The BWA consists of Aliant Telecom Inc. (Aliant Telecom), Bell Mobility Inc. (Bell Mobility), MTS Communications Inc. (MTS), MTT Mobility Inc., Northwestel Mobility Inc. and Saskatchewan Telecommunications (SaskTel) and, for the purposes of this submission, The Corporation of the City of Thunder Bay.
16. The spectrum holdings, of the majority of the above entities, includes cellular licences, operating in the 800 MHz band, as well as PCS licences, operating in the 1.9 GHz band. In the latter case, these holdings include PCS licences awarded through the 1995 Comparative Review process as well as licences obtained through Industry Canada's 2001 PCS Spectrum Auction (PCS Auction).
17. Included in the spectrum acquired through the PCS Auction were licences obtained by Bell Mobility in both British Columbia and Alberta. Counting these licences, the members of the BWA now operate as wireless service providers (WSPs), offering both public switched mobile services and other mobile services, such as wireless data and Internet access, in every Province and Territory in Canada. Combined, the members of the BWA have almost two decades of experience in building and operating public spectrum-based networks in the - 5 -
challenging mix of urban and rural operating areas that make up the Canadian wireless marketplace.
18. In addition to providing service to all of Canada's major urban centres, the members of the BWA are particularly proud of their track record in providing public switched and other wireless services to those parts of the country which are predominantly rural in nature and which are characterized by smaller population concentrations, whether in Atlantic Canada, Manitoba, Saskatchewan, the Territories or Ontario and Québec.
19. As outlined in our comments below, these are particularly challenging times for the telecommunications industry in general and no less so for the wireless sector. It is important therefore that proposed spectrum fee changes which can substantially influence the health of the industry, such as those raised for consideration in this Consultation, are given full and careful consideration by the Department. Indeed, the BWA believes that this Consultation represents a prudent step, in the process of developing a new regime, which is intended to allow Industry Canada to test the assumptions used to model its proposed fee regime. Working with and equipped with the benefit of feedback from the wireless industry, Industry Canada will then be able to develop a fee regime that is in the best interests of all Canadians.
20. Industry Canada notes that PCS carriers are subject to different licensing regimes than that applicable to cellular carriers or to PCS auction licensees. Consequently, the Department's Consultation seeks comments on its proposal to harmonize the fee and licensing regimes applicable to all types of licensees. In addition the new regime is intended to simplify licensing requirements and to ensure sufficient flexibility to enable the delivery of new, innovative services. The Consultation is also clear, in accord with the October 2000 PCS Auction licensing policy that, other than the winning bids, no additional fees will apply to the spectrum obtained through the PCS Auction during the initial term of those licences.
21. The BWA notes that it is generally supportive of the proposal to harmonize the disparate fee and licensing regimes applicable to cellular and PCS spectrum. Taking all relevant factors into consideration however, and as discussed further below, the BWA does not believe that the proposed rate of $0.052 per MHz per person is reasonable, in the circumstances. Given the current and increasing uncertainty surrounding both global and domestic telecom and financial markets, the BWA strongly submits that there is no reason, compelling or otherwise, that would justify the Department's increasing the industry's spectrum costs at this juncture. - 6 -
22. The BWA also notes Industry Canada's comment that the proposed regime will reduce the administrative burden on the Department as well as on licensees. The BWA is strongly supportive of any initiatives that reduce administrative burdens. Especially now however one would hope and expect that a reduction in administrative burden, for the Department and licensees, would translate into a corresponding reduction in fees. The BWA is concerned therefore that, in this instance, the new regime is accompanied instead with what amounts to, overall, a significant increase in spectrum costs to the industry. The BWA respectfully submits that this is not in keeping with the federal government's enunciated policy concerning user charges.
23. In order to facilitate the use of this submission, the BWA's comments are organized in the following manner. The key issue for the industry is the proposed rate or fee per MHz. As a result, we first address the principles which should govern the establishment of licence fees as outlined in the Treasury Board of Canada Secretariat's Cost Recovery and Charging Policy. Following this, the BWA will briefly address the current circumstances and economics of the Canadian wireless sector. This discussion is particularly relevant since it provides the context within which the Consultation's proposals should be considered. This discussion will be followed by the BWA's analysis of the value, or fair economic rent, of the specific cellular and non-auctioned PCS spectrum impacted by the Consultation. Finally, the BWA will provide its comments on the specific policies as well as the terms and conditions proposed in the Consultation and on which the paper invites comment.
2.0 Treasury Board of Canada Cost Recovery and Charging Policy
24. Concerning the principles underlying the Consultation, the industry has been referred to the Treasury Board of Canada's Cost Recovery and Charging Policy, April 1997 (the Treasury Board Policy) as being a key point of reference for the Consultation. The Treasury Board Policy outlines the principles and provides guidelines to be followed, by departments or agencies, in establishing or adjusting user fees charged for the provision of government services or, as in the case of Canada's radio spectrum, the use of publicly owned resources. The Treasury Board Policy emphasizes the need for meaningful participatory consultation between departments and their clients, in this case the wireless carriers, before introducing or amending such fees. The BWA believes, therefore, that a primary purpose of the current Consultation is for spectrum managers to seek input and comment, from those who have expert knowledge of the wireless - 7 -
industry in Canada, concerning the validity of the assumptions underlying the Consultation paper.
25. Significantly, the statement of government policy concerning user fees contained within the Policy is as follows:
"It is government policy to implement user charges for services that provide identifiable recipients with direct benefits beyond those received by the general public, unless overriding policy objectives would be compromised...
26. Concerning the implementation of new or amended fees, the Treasury Board Policy delineates the following requirements to be followed by departments:
"(a) Departments must undertake meaningful and effective consultations with clients throughout the fee setting process – the focus is on ensuring that those who pay for the service have an effective voice in the design and delivery of that service... The aim of consultations should be to avoid imposing unreasonable cost burdens on clients and to get client buy-in to new partnership arrangements. Specifically, departments and agencies must:
...
- give affected parties reasonable opportunity to provide input (e.g., remain open to proposals from clients as to ways to improve services, consider involving clients in the design phase),
- conduct impact assessments to identify all significant effects, positive and negative, and factor those results into sound fee-setting decisions...
- work with clients to assess the cumulative impact of multiple fees from all federal sources, and assess proposed fees in that context…1
27. Concerning establishing a price for "rights and privileges" such as the right to use public spectrum, the Policy notes that:
"When there is mix of public and private benefits, fees should be lower than full cost...
…
Prices should be:...
- based on market value for rights and privileges which are de facto commercial inputs for users in order to ensure efficient utilization of a scarce resource and a fair economic return to the general public." (emphasis in original)2
1 Treasury Board of Canada Secretariat, Cost Recovery and Charging Policy, April 1997, Policy Statement, pages 2 and 3. 2 Ibid., Implementation Requirements, pages 3 and 4. - 8 -
28. Hence, an underlying tenant of the Treasury Board's Policy is that it is crucial for departments to thoroughly assess and understand the market for which it is designing user fees. As noted above, recognizing that the input of the private sector, which is operating in that market on a day-to-day basis is critical to such an analysis, Industry Canada has undertaken this Consultation to test the validity of its assumptions and proposed changes and to seek that crucial input.
29. As the Treasury Board notes, this will ensure that any proposed fee changes are properly designed and vetted, presumably so as not to cause unexpected negative effects. Collectively the BWA's members have over 20 years experience in the Canadian wireless industry and over that time they have developed a fundamental appreciation and understanding of the functioning of the industry from financial, operational and marketing perspectives.
3.0 The Canadian Wireless Market in 2003
3.1 The Customer Perspective
30. The Canadian wireless industry, in 2003, is characterized by intense competition provided by four entities operating on a national basis. This is widely recognized as having produced tangible benefits for Canadian wireless users, both business and consumer.
31. A November 2001 study by Wall Communications Inc., commissioned by Industry Canada, assessing the competitiveness of the Canadian wireless industry (the Wall Study), noted that:
"Prices have been falling over time (particularly after the entry of the PCS licensees) and compare favourably with prices in the United States. The lack of supra-normal returns (or any profitability) in the industry provides further substantive evidence of the vigorous price competition in the market." (emphasis added)3
32. The Canadian Radio-television and Telecommunications Commission (CRTC) in its recent December 2002 Report on the status of competition in Canadian telecommunications markets, noted similarly that:
3 Wall Communications Inc., A Competitive Assessment of the Canadian Mobile Wireless Industry, Prepared for Spectrum Management and Radio Policy, Industry Canada, November 2001, page 5. - 9 -
"Although average revenue per subscriber [ARPU] is not a pure measure of price, it can be used as a reasonably reliable proxy. As indicated... the industry ARPU has declined over the last several years. This decline is due to the introduction and growth in pre-paid plans, and the overall reduction in prices."4
33. The Yankee Group in Canada, wireless industry observers of long standing, have also noted the same downward trend in both Canadian prices and average revenue per user (ARPU). In an October 2002 update on the Canadian wireless industry, Yankee Group noted that:
"Canadian wireless users have historically paid some of the lowest service fees in the world yet the push to attract subscribers has caused [Canadian wireless] carriers to slash prices even further, leading to declining ARPU."5
34. Remarkably, and despite the lack of industry profitability, it has been noted by the Yankee Group, as it has been by others, that Canadian wireless consumers enjoy a wide array of wireless access options, ranging from low cost entry level price packages through to "large bucket" minute options aimed at the enterprise user. The Wall Study, commissioned by Industry Canada, noted in this regard:
"The scope and variety of services, packages, features and coverage indicate a strongly competitive state with respect to product (or non-price) related competition.
...most Canadian consumers enjoy a wide variety of choices in how they can receive mobile telephone service. From pre-paid options to numerous number-of-minute packages, from handset and service features, all the way to highly customized packages, the Canadian market offers numerous product/service choices."6
35. The Wall Study went on to note that the large variety of packages available in the Canadian marketplace translated into "substantive customer choice" for Canadian wireless consumers.7
4 Canadian Radio-television and Telecommunications Commission (CRTC), Report to the Governor in Council, Status of Competition in Canadian Telecommunications Markets, December 2002, page 56. 5 Yankee Group, Snowbirds Take Flight: A Canadian Wireless and SMS Update, Canadian Market Strategies, October 2002, page 1. 6 Wall Communications, op. cit., page 71. 7 Ibid., page 44. - 10 -
3.2 The Service Providers' Perspective
36. As the above discussion demonstrates, Canadian wireless customers are fairing very well in terms of the competitive pricing and service options available to them. In 2002 and 2003 unfortunately, the same cannot be said for the wireless industry as a whole. As the Wall Study noted, virtually twenty years after the introduction of cellular service in Canada in the mid-1980s, profitability still eludes most service providers and the industry as a whole. In fact, despite the dramatic growth of the wireless industry to date, the overall health of this sector of the Canadian telecommunications industry is on less than a firm financial footing.
37. While in many ways this is a reflection of the malaise affecting the telecom sector world-wide, the circumstances in the Canadian wireless industry have been nonetheless dramatic. Experience has proven that a spectrum licence is not "a licence to print money" as was thought by some at the time of the initial awarding of licences in the 1980s.
38. In September 2002, NBI/Michael Sone Associates, in its Canadian mobile services market report, noted:
"The general malaise in the telecom sector shows little sign of abating and has led to a reduction in available capital for service providers. This has forced most carriers to re-evaluate their deployment plans for so-called next generation networks and leverage their existing assets to generate more revenue. For Microcell, the downturn has been particularly onerous."8
39. IDC Canada, in a January 2003 report entitled, Telecom's Continuing Chill: Canadian 2003 Capital Spending Outlook, noted that:
"Capital expenditure budgets of telecommunications carriers are an important indicator of both the health of the telecom sector and the economic viability of major high-technology communications network equipment suppliers. The telecom downturn is not yet over as Canada's telecom service providers continued to scale back their capex budgets in the second half of 2002 and plan further reductions in 2003."9
40. Moreover, not only are smaller wireless operators affected by the downturn. IDC noted in this regard that Canada's five largest incumbent telephone companies, including their
8 NBI/Michael Sone Associates, Canadian Mobile Wireless Communications Services Market Report 2002 Edition, September 2002, page 1. 9 IDC Canada, Telecom's Continuing Chill: Canadian 2003 Capital Spending Outlook, January 2003, Executive Summary. - 11 -
wireless subsidiaries, which account for the lion's share of total Canadian capex spending pruned almost $1.2 billion from planned 2002 capex budgets.10
41. In July 2002, the Dominion Bond Rating Service Limited (DBRS) expressed the opinion that:
"Overall, the environment the wireless operators face is becoming more challenging with the increasing business and financial risk due to slowing growth."11
42. DBRS noted that the challenges facing Canadian wireless operator's included declining ARPU, high cost of customer acquisition (due largely to the continuing heavy subsidization of handsets) along with the continuing requirement for significant capital expenditures, in an unfriendly capital market, for network upgrades and overlays. The DBRS also noted another unsettling trend in that wireless growth rates, in Canada as well as globally, appear to be slowing as the market matures and uncertainty clouds the economy. Merrill Lynch has noted that the trend to slower wireless growth, due to market maturation, is occurring sooner than was originally forecasted by sector analysis.
4.0 The International and Domestic Economic Environment
43. In the Budget speech, delivered on 18 February 2003, the Finance Minister and Deputy Prime Minister noted that:
"...as everyone in this House knows, we live in a very uncertain world. The economies of Europe and Japan remain subdued. Most significantly, the United States has had an uneven recovery to date. Furthermore, the possibility of armed conflict in Iraq has done much to heighten uncertainty about the prospects for more stable global growth in the near term."12
44. The BWA submits that this demonstrates that the economic picture has not changed much, if at all, since DBRS' mid-2002 assessment. In fact, if anything, since that time the slow down in the U.S. economy, the subject of analysts' speculation in 2002, has been confirmed. While Canada's economy continues to out perform that of its largest trading partner in some
10 Ibid. page 4. 11 Dominion Bond Rating Service Limited, North American Wireless Industry – The C's of Change, July 2002, Executive Summary, page 1. 12 Honourable John Manley, Finance Minister and Deputy Prime Minister, The Budget Speech 2003, 18 February 2003, page 5. - 12 -
respects, most economists acknowledge that, given the influence of the U.S. economy on that of Canada, negative developments there will inevitably have spill over effects in this country.
45. Moreover, the geopolitical situation, existing since the 11 September 2001 terrorist attacks, along with the uncertainty surrounding the current situation in Iraq are viewed by many as having a significant dampening effect on the economic climate. The growing uncertainty which currently shrouds the world's financial and, increasingly, consumer markets is proving capable of undermining overall investor and consumer confidence.
46. The introduction to the Department's Consultation noted the importance of "stability" in conducting business. The BWA notes that the circumstances surrounding global economies, in general, and the Canadian wireless market in particular do not auger well for such stability. As a result, it is important that this situation and uncertainty not be further exacerbated by unwarranted increases in wireless service providers' operating costs. This is especially so when the control over that cost element is entirely within the hands of the federal government, such as is the case with spectrum licence fees.
5.0 Wireless as an Economic Enabler
47. In conjunction with the Treasury Board's Policy concerning user charges and fees discussed in section 2 above, the Board's Secretariat also has provided the Background Document – User Charging in the Federal Government (the Treasury Board Background Document) to elaborate on the Policy and assist government managers in its application. The Treasury Board Background Document also emphasizes the need for meaningful consultations with affected groups.13
48. In its discussion of the various aspects to be considered in pricing public services or establishing fees for the use of public resources, the Treasury Board Background Document notes that the existence of positive or negative externalities is a factor to be considered in the price or fee development process. In defining positive externalities, the Treasury Board Background Document observes that:
"Education offers an important example of a positive externality, but a better case in the federal sphere concerns telecommunications and transport systems. As
13 Treasury Board of Canada Secretariat, User Charging in the Federal Government – A Background Document, April 1997, Acknowledgement, page 1. - 13 -
each new user is linked to a network, all users presumably benefit as the range of potential interchange is expanded. This is a positive externality. User charges may be appropriate here but they must be designed with such externalities in mind." (emphasis added)14
49. The BWA submits that the Treasury Board Background Document is being mindful of the fact that when a service results in the creation of broad beneficial economic and/or societal effects, then this overriding consideration should strongly influence the level at which any associated user charges are set. The BWA believes that the extremely important point here, taking the longer term strategic view, is to encourage the provision of enabling services, such as wireless, by directing that any associated government fees are not set so high such that service development is impeded and the positive externalities are forgone.
50. The BWA submits that radio spectrum is an example of a circumstance where the resource rent or fee imposed by government must take into account the significant positive benefits which the service infrastructure provides to the Canadian economy and society as a whole.
51. Industry Canada's June 2002 consultation on a revised spectrum policy framework for Canada is instructive in this regard. The spectrum policy consultation noted that:
"Canada depends upon the radio frequency spectrum to maintain its sovereignty and security, and to safeguard individual citizens. The radio spectrum also supports a wide range of business, personal, industrial, scientific, research, and cultural activities, private and public. The radio spectrum influences the daily lives of every Canadian. In Canada, because of immense distances and sparse population, radio services provide essential links connecting people to one another.
The spectrum resource supports a multibillion dollar industry. An increasing proportion of Canadians uses cellular radio and personal communications services. ...The telecommunications industry's impact on the Canadian economy goes beyond the revenues and employment generated by the industry itself. Telecommunications, including wireless services, provides a critical infrastructure for knowledge-based and other economic sectors, which has an enormous "enabling" impact on the rest of the economy."15
52. In a discussion paper concerning its review of telecommunications foreign ownership restrictions, Industry Canada captured the essence of this concept when it stated that:
14 Ibid., Why Charge for Public Services?, (5) Externalities, page 7. 15 Industry Canada, A Spectrum Policy Framework for Canada (2002 Revised Edition), June 2002, pages 2 and 3. - 14 -
"The importance of the telecommunications sector to the Canadian economy has become increasingly critical — the availability of low cost, sophisticated, universally available telecommunications services is one of the platforms on which an innovative society and economy are being built."16
53. In his comments to the Standing Committee on Industry, Science and Technology, on 28 January 2003, the Deputy Minister of the Department of Industry similarly noted that "...telecommunications is the backbone of the knowledge-based economy."17
54. Consequently, the positive effects of the wireless industry go well beyond the mere provision of wireless phones and Blackberry devices to Canadians. They enhance the safety and security of individuals by making access available on an anytime, anywhere basis whether the call is to stay in touch with friends and relatives, or to place a critical call to 9-1-1 service. For Canadian businesses, wireless provides tremendous positive externalities in the form of productivity gains accomplished through the widespread availability of cellular and PCS wireless networks. Increasingly the use of such networks is becoming more innovative as Canadian businesses come to appreciate and employ the enabling benefits of anywhere, anytime wireless connectivity - whether for voice, data or mobile Internet applications .
55. To make these benefits available to Canadian consumers and business users the Canadian Wireless Telecommunications Association (CWTA) estimates that since 1995 alone wireless operators have invested almost $11 billion in capital expenditures on wireless networks, products and services.18 This does not take into account the billions of dollars previously spent in building out Canada's original national and regional cellular networks over the period from 1985 to 1995.
56. Such positive externalities are important to Canadians and to their economy. Not only because of the inherent benefits and value that they bring but also because our North American competitors and, even more so, our global competitors in Asia, notable users of wireless technology, are leveraging the enabling effects of wireless services in the competitive global economy to their strategic advantage. The BWA submits therefore that the Treasury Board
16 Industry Canada, Foreign Ownership Restrictions Applicable to Communications Common Carriers, 19 November 2002, Introduction. 17 Mr. Peter Harder, Deputy Minister, Industry Canada before the House of Commons Standing Committee on Industry, Science and Technology, concerning telecommunications foreign investment restrictions, Transcript, 28 January 2003, page 2. 18 Canadian Wireless Telecommunications Association (CWTA), Response from the CWTA to the Federal Government's Innovation Strategy Consultation, Innovation in Canada's Wireless Industry: Maintaining the Momentum, October 2002, page 8. - 15 -
guidelines are explicit that such positive externalities are to factor into the fee setting process since, in effect, they are part of the economic return or rent provided to the Canadian public. In the BWA's opinion, this consideration strongly weighs against any increase in spectrum user fees.
6.0 The Requirement for Consideration of Other Federal Government Costs
57. The Treasury Board Policy notes that the aim of meaningful consultations should be, among other things, to avoid imposing unreasonable cost burdens on clients. Specifically, in this regard, one of the directives to departments is to work with clients to assess the cumulative impact of multiple fees from all federal sources, and to assess any proposed fees in that context. This is particularly applicable to the Canadian wireless industry which, in a very short span of time, has been subject to significant increases in the financial burdens imposed either directly by government or indirectly through government expectation. These significant increases in the wireless industry's financial obligations are reviewed briefly below.
58. The CRTC's December 2001 decision to establish a revenue-based National Contribution Fund imposed a massive financial burden on the Canadian wireless industry. In the case of Bell Mobility alone, contribution payments increased from $1.6 million annually, in 2001, to approximately $57 million in 2002. The subsequent "reduction" in the revenue-based contribution rate from 4.5% to 1.3%, while significant on a percentage basis, sees the current annual contribution requirement for Bell Mobility set in the $20 million range, an increase in contribution payments of almost 1200% over what was being paid just two years previously. While the BWA fully appreciates that the CRTC and Industry Canada are separate branches of the federal government, we believe that the Treasury Board's Policy specifically requires that respective departments be mindful of the total burden placed on any one fee paying entity or group.
59. As recently as February 2001 the industry paid $1.5 billion in upfront fees into the Federal Treasury as a result of the PCS Auction. While not all members of the Canadian wireless industry are in agreement with the concept of spectrum auctions as a spectrum allocation device, for the winning bidders the fact of the matter is that, within the context of Canadian financial markets, they were required to undertake very significant financial commitments to participate in the PCS Auction.
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60. As a condition of licence, wireless carriers are required to invest a minimum of 2% of their adjusted gross revenue in R&D activities annually. Collectively, this condition of licence requires Canadian wireless carriers to invest in excess of $50 million per year in R&D related activities. The BWA has honoured its requirements in this regard and has committed the significant annual funds, currently amounting to approximately $30 million per year. Moreover, BWA's investments in this regard have provided significant financial support and funding to small, wireless entrepreneurs as well as to educational institutions among others.
61. Recognizing that many of their customers use wireless service to enhance their personal safety, wireless carriers are also cognizant of their social responsibility in this regard. Collectively, wireless carriers are currently investing millions of dollars in the provision of enhance wireless 9-1-1 (wireless E9-1-1) services in various locations throughout Canada. Of the BWA, Bell Mobility alone estimates that by mid-2004 it will have invested $3 to $4 million in deploying wireless E9-1-1 Phase 1 functionality. Although, currently focused on Phase 1 wireless E9-1-1, some BWA members are now planning for the provision of locational based (at the mobile handset level) E9-1-1 service. In this regard, the provision of location based wireless E9-1-1 service is anticipated to require an additional multi-million dollar investment for Bell Mobility alone in its licensed operating areas throughout Canada. While not a mandated requirement, the BWA notes that both Industry Canada and the CRTC have made clear their desire to see such enhancements to wireless 9-1-1 capabilities in Canada.
62. The federal government is also in the midst of a multi-departmental consultation concerning lawful access to information and communications. While again prepared to meet its obligations in this regard, the BWA notes that the outcome of this consultation will also likely cost the industry millions of dollars in new investments to meet the final requirements on a going-forward basis.
63. Finally, and not to be forgotten in this regard, is the fact that the BWA of course pays spectrum fees under the current regime in-place today. The BWA estimates that over the three years commencing in 2000, that it will have paid approximately $150 million in spectrum fees to the Department over and above all the financial obligations previously delineated.
64. Overall the BWA submits that the financial burdens imposed by the federal government, i.e., amounting to virtually $1 billion for the BWA alone since 2000, facing the Canadian wireless industry of late are indeed daunting. In addition, the time span over which these financial - 17 -
commitments are being imposed is very compressed, with the bulk occurring within the last three years. The BWA submits that, in line with the Treasury Board's Policy, these significant financial obligations must be taken into consideration when considering any changes in current spectrum fee charges. The BWA respectfully submits, in this regard, that this factor alone strongly militates against any notion of an increase in spectrum fees suggesting instead that a reduction in fees should be considered.
7.0 BWA's Estimate of the Value of Canada's Cellular and 1995 PCS Spectrum
65. The valuation of wireless spectrum is a very subjective exercise and attempts at that exercise, by various parties, have produced widely varying estimates. The BWA notes that, in its discussion of the pro's and con's associated with spectrum auctioning contained in its 1997 study for Industry Canada, Lemay-Yates noted that "...private industry is presumably better-equipped than government to evaluate the worth of spectrum."19 The BWA believes that given the service providers' proximity to the marketing, financial and operating intricacies of Canadian wireless markets, that view is correct.
7.1 Clearnet Acquisition and Previous Spectrum Auctions Do Not Provide Appropriate Valuation Signals for Existing Spectrum
66. The BWA notes that one view is that two fairly recent events, in the Canadian wireless industry, provide an appropriate signal of the value of non-auctioned Canadian wireless spectrum. The first is the 2000 TELUS Communications Inc. (TELUS) acquisition of Clearnet Communications Inc. (Clearnet) and the second is the 2001 PCS Auction. The BWA notes that both events strongly reflect the market and economic circumstances and realities of the timeframe in which they occurred.
67. The BWA notes that in the case of the TELUS acquisition of Clearnet for $6.6 billion in August 2000 that TELUS acquired much more than just raw spectrum. First and foremost, the price paid reflected the acquisition of a going concern which included consideration for some .7 million subscribers acquired, 2,600 employees, Clearnet's national wireless network and goodwill. Further, BWA notes that a similar transaction would likely produce a much different valuation result if it occurred today.
19 Lemay-Yates Associates Inc., Assessment of the Market Value of Cellular Telephony, Personal Communications Services (PCS), and Enhanced Specialized Mobile Radio (ESMR) Licenses, presented to Industry Canada, January 1997, page 5. - 18 -
68. A similar argument can be advanced concerning the suggestion that the closing bid levels in the 2001 PCS Auction reflect a realistic value which is appropriate for the purposes of valuing legacy spectrum, especially spectrum which is already and has been in the hands of the service providers for some time. Auction participants will develop their bid valuations or ranges based on the economic and financial circumstances which exist at the time of the auction, including the firm's requirement for incremental spectrum, taking into consideration that spectrum which it already holds, required to operate its business. Hence the valuations placed on auctioned spectrum are specific to both the spectrum at auction and the business and economic circumstances relevant at the time of the auction. The BWA submits that it would not be appropriate to transfer that value to other existing spectrum holdings. The Treasury Board Background Document, referred to in paragraph 47 above, noted that in the right circumstances auctioning will ensure that licences will go to the bidders that value them the most and will pay the highest possible price for them. Clearly the Treasury Board Background Document recognizes that the "circumstances" surrounding any given auction will have an impact on its eventual outcome. The BWA believes that, concerning the financial results of an auction and given the context of the relatively small Canadian wireless market, that the relevant circumstances and timing will have a significant impact on that outcome.
69. The BWA also notes that the tremendous variation in valuation in the cost/MHz/person in various licence service areas throughout Canada demonstrates that using the PCS Auction as a valuation proxy would be fundamentally unfair to regional wireless carriers operating exclusively in smaller market areas.
70. Consequently, the BWA strongly believes that auctions, like corporate acquisitions, to a large extent will reflect the economic and market environment in which they occur. With the benefit of hindsight, it is clear that auctions are not a pricing panacea that necessarily produces a valuation that can be legitimately transferred to other spectrum or other times.
7.2 Influences on the Value of Canadian Spectrum
71. The BWA believes that a number of factors have to be considered in establishing a fair market value for radio spectrum in Canada. The primary factors which should be considered in this regard include: the characteristics of the Canadian wireless market, the international competitiveness of Canadian wireless and the possibility of new entrants. - 19 -
- characteristics of the Canadian wireless market
72. Canada's population is dispersed over a huge geographical area with only a very few major population centres as compared to the U.S. which also has a large geographical area but has several very large and concentrated metropolitan markets. As previously noted, the Canadian wireless industry is widely viewed as being intensely competitive resulting in declining ARPU and an absence of overall industry profitability. At the same time, the average subscriber usage (i.e., minutes of usage) and demand for network capacity has been steadily increasing.
- international competitiveness of Canadian wireless
73. The BWA notes that section 7 (c) of the Telecommunications Act (the Act), which outlines Canada's telecommunications policy objectives, identifies one of its goals as:
"(c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;"20
74. The BWA notes that in the U.S., Canada's largest trading partner, their U.S. counterparts pay approximately (U.S.) $0.24 per year per subscriber for non-auctioned spectrum. The fee essentially amounts to a regulatory administration fee covering the spectrum management costs of the Federal Communications Commission (FCC). The BWA notes that the Canadian equivalent, under the proposed regime, would be approximately (Can) $12.00 dollars per year.
75. Clearly, the Canadian carriers are left at a significant competitive disadvantage as compared to their U.S. counterparts in the North American trading block. In addition to running contrary to the objective of section 7 (c) of the Act, at a practical level this also means that U.S. wireless operators have more funds available to invest in wireless infrastructure and service expansion and development.
76. The BWA also notes that recent history in the Canadian wireless industry demonstrates conclusively that higher government fees do in fact result in higher user charges. The case in point is the CRTC's decision to implement a revenue-based contribution mechanism in 2001. This mechanism dramatically increased the carriers' contribution exposure forcing the carriers, given the magnitude of the decision and the inability of the industry to absorb the financial
20 Telecommunications Act, Canadian Telecommunications Policy, section 7 (c). - 20 -
impact, to seek means of offsetting the CRTC's decision. The end result was an industry wide increased in System Access Fee (SAF) charges by all carriers to offset this impact.
- possibility of new entrants
77. In the case of spectrum at auction, the presence of a new entrant bidder(s) can serve to increase the value of that spectrum. In the case of existing spectrum, such as that being considered in this Consultation, however, the potential of new entrants serves to reduce the value of the spectrum since the opportunity to achieve a reasonable financial return becomes even more challenging. The BWA notes that in its Policy and Licensing Procedures for the Auction of Additional PCS Spectrum in the 2 GHz Frequency Range (PCS Auction Policy), the Department has clearly stated its intention that at the time of the next licensing round for PCS, the Department will, among other things, re-evaluate the measures that may be required to ensure a competitive marketplace. The PCS Auction Policy notes that:
"This would include ... determining whether spectrum should be set-aside for new entrants." (emphasis added)21
78. As the Department is aware, the concept of a new entrant set-aside goes well beyond merely indicating that new entrants may participate in an auction. Rather it literally guarantees that a new entrant(s) will be awarded spectrum in a future auction, should a set-aside be adopted. While the BWA fully appreciates that this determination is yet to be made, the fact of the matter is that the Department's PCS Auction Policy places it squarely on the table as a matter that must be considered in the evaluation of Canadian wireless service providers' existing spectrum holdings. The BWA strongly believes that this policy statement has a significant downward impact on the valuation of its existing non-auctioned cellular and PCS spectrum holdings.
79. The BWA submits that, in tune with the Treasury Board's Policy and guidelines, that it is incumbent on the Department to take all the above factors into consideration when it is contemplating changes to the current spectrum user fees levied on the industry.
21 Industry Canada, Policy and Licensing Procedures for the Auction of Additional PCS Spectrum in the 2 GHz Frequency Range, 28 June 2000, page 8. - 21 -
8.0 Financial Impact of Industry Canada's Proposed Model on the Industry
80. In its Consultation, Industry Canada has proposed instituting a new licence fee regime based on a rate corresponding to the amount of spectrum assigned and the total population included in the licence area. The Consultation invites comments on all aspects of the proposed new fee and licensing regime. Using the cellular portion only of Rogers Wireless Inc.'s (RWI) network and 1996 census data, a formula was developed which distributed the fees based on the amount of spectrum bandwidth and the population of the geographic area licensed to each licensee. Industry Canada notes that the application of the formula results in a licence fee of $0.052 per 1 MHz of assigned spectrum per person in a defined geographic area. This proposed fee would be phased in on a linear basis, commencing April 2004, having full effect in 2011.
81. At the outset, the BWA questions the validity of using any single service provider's network to model or design a fee regime that will be applied to the entire industry. The BWA notes that, in addition to RWI, the industry consists of three other service providers whose network and operating characteristics vary substantially from that of RWI. The BWA submits that inherent in such an approach is the transference of the attributes of the modelled service provider's national cellular network design and operating characteristics, whether valid or not, into a fee regime that will apply to these other service providers.
82. The analysis is further flawed given that only the cellular portion of RWI's network was considered. The BWA understands for example that a substantial portion, nearly 30%, of the spectrum used by RWI to provide wireless services consists of the 10 MHz of digital PCS spectrum awarded through the 1995 comparative process. The BWA submits that it is therefore incongruous that the licence fee regime which will apply for the next decade or more, and to wireless networks which will be substantially digital in nature, should be developed on the basis of the fees applicable to the analogue spectrum portion of one service provider's network.
83. For comparative purposes the BWA has computed its rate per MHz for spectrum fees paid to Industry Canada today. Taking the BWA's 2003 fee payments and assuming its total assigned cellular and (non-auctioned) PCS spectrum, provides a rate of $0.037 per MHz per person. In other words, implementing the proposed harmonized licensing regime but at a rate of $0.037 per MHz per person, versus the proposed rate of $0.052 per MHz, would result in the proposed regime being revenue neutral for Industry Canada. Otherwise, Industry Canada's - 22 -
proposed rate of $0.052 represents an increase in the order of 35% to 40% in the cost of spectrum for its members.
84. The BWA notes that the Department's Consultation does not offer any insight into the rationale behind proposing an increase in spectrum fees. The BWA notes however that the fiscal year 2000/2001 annual licence fee for Bell Mobility, cited in the Consultation, is significantly at variance with Bell Mobility's anticipated annual fee in the current fiscal year and beyond.
85. The BWA submits that this is likely due to a number of factors related to how Bell Mobility is using its current spectrum holdings. First, Bell Mobility is increasingly using the spectrum acquired in the PCS Auction in its operations. This enables Bell Mobility, and other service providers with Auction spectrum, to increase their capacity without incurring additional licence fees. As a result of this factor alone, forecasts of industry spectrum fees which are based on historical trends will likely not be valid.
86. The second factor relates to the increasing digitization of Bell Mobility's subscriber base. With increasing numbers of customers being transferred to higher capacity digital services, the number of analogue channels is decreasing thus enabling Bell Mobility, and likely other service providers, to substantially reduce their requirement for analogue channels. This factor, which relates to the more efficient use of its spectrum, also results in a significant decrease in Bell Mobility's projected licence fee payments in current and future years. While this freed up spectrum will be used for digital services in the future, at the present time it is serving to reduce our spectrum costs.
87. A third factor relates to general improvements in wireless technology design, in such areas as signal processing, antenna design, more efficient data compression and vocoder technology, all of which enables service providers to increase network capacity while again reducing licence fee payments.
88. The BWA submits that the preceding suggests that if anticipated licence fee payments were trended solely based on historical trends, the result would likely be at considerable variance with the actual fee payments currently being projected by service providers. Given the current fee and licensing regime, along with the mix of cellular as well as non-auctioned and auctioned PCS spectrum held by most carriers today, carriers are driven to seek any - 23 -
opportunity to optimize their overall spectrum use and reduce operating costs. Further, the BWA notes that not only will the variance apply to the 2011/2004 (proposed regime implementation timeframe) comparison, but will also apply when one computes the 2011 proposed regime/2011 current regime variance.
9.0 BWA Proposed Rate Recommendations
89. The BWA also strongly believes that, when all relevant factors are considered and a strategic view of the industry is taken, Canadians are receiving more than fair economic rent for their resource today, especially taking into consideration the positive externalities, outlined in these comments, which are provided by the availability, to business and consumers of four advanced wireless infrastructures. As noted previously, the Treasury Board Policy clearly, and with reason, directs that the overriding benefits provided to those same Canadians, in their private and business affairs, must be taken into consideration when establishing associated spectrum user fees.
90. The BWA participated in the CWTA's submission and notes the alternative fee design proposed by the CWTA in its response to the Consultation. In this regard, the CWTA noted that the proposed fees, for reasons discussed in its submission, are too high. In the alternative, the CWTA suggests a range of between $0.01 and $0.037 per MHz per person as an appropriate starting point for consideration.
91. In this regard, the CWTA notes that Australia, for non-auction Global System for Mobile Communications (GSM) spectrum at 1800 MHz, charges licensees $0.01 (AUS) per MHz per person. Given that Australia's geography and population distribution are similar to Canada, i.e., the majority of Australia's population are localized in a few well-defined urbanized areas with wide expanses of undeveloped territory separating them, it is in fact a more reasonable economic and cultural proxy for Canada than is, for example, the U.S., one of the largest and wealthiest markets in the world.
92. The high end of the CWTA's proposed range is the amount that would generate the same quantum of licence fee revenue for the Department as it realizes today, i.e., $0.037. As previously noted, the BWA strongly believes that this rate provides more than a fair economic rent to the Canadian public for the use of their resource, when all things are considered.
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93. Given the circumstances discussed in these comments, the BWA is strongly of the belief that it would not represent good public or spectrum management policy to implement the new fee and licensing regime at the proposed rate of $0.052 per MHz per person. The proposed rate is excessively high and the realities and circumstances of neither the Canadian wireless market nor domestic or global economies would point toward such a value.
94. Moreover, while the rate of $0.037 would result in revenue neutrality for Industry Canada, the BWA strongly believes, however, taking the Treasury Board Policy guidelines concerning the establishment of user fees into consideration would lead to a significantly lower rate than even $0.037 per MHz. In support of this view the BWA would note:
• the enabling effect of the wireless sector and the benefits it makes available to Canadian businesses and consumers;
• the fact that Canadians are benefiting from an intensely competitive wireless market as reflected by declining ARPU accompanied with the provision of a diverse and growing suite of basic and advanced wireless services on a national basis at among the lowest prices in the world;
• the enormous financial obligations already imposed on WSPs, either directly or indirectly by various federal government departments and agencies;
• the fragile and increasingly uncertain financial shape of both the global and North American economies as well as the overall Canadian wireless industry itself;
• the objectives of the federal government's Innovation and Connectedness Agenda's and the Act; and
• finally, given that the Canadian WSPs are increasingly making more efficient use of their existing spectrum holdings, licence fee payments are already declining substantially from what they were a short time ago.
95. The BWA submits that all the above translates into strong downward pressure on the licence fee rate per MHz per person, which would suggest a value well below even $0.037 per MHz per person, likely in the order of $0.02 per MHz per person. - 25 -
10.0 Regional Carrier Considerations
96. Beyond this, the BWA would also offer the following comments concerning the fees for spectrum in areas characterized by smaller population densities spread over larger geographic areas. The BWA notes that some of its members, particularly Northwestel Mobility, Aliant Telecom, SaskTel and MTS, serve markets in which these characteristics predominate. BWA has previously noted its concerns relative to using a national carrier's network, as the proxy on which to establish a rate per MHz for the entire industry. Of particular concern is the suitability of such an approach in terms of its impact on smaller carriers operating in markets predominantly characterized by high rural concentrations. The modeling approach used by the Department, i.e., based on a national service provider, produces an average rate of $0.052 which is inherently skewed toward the larger metropolitan centres served by the national carrier and this is unfair to the smaller regional carriers.
97. As a specific example of this, compare the Consultation's proposed rate of $0.052 per MHz per person to the $0.0089 (less than one fifth of the proposed rate) generated in the 2001 PCS Spectrum Auction for additional PCS spectrum acquired in Aliant Telecom's serving area. Clearly, there is an enormous incongruity between the proposed rate, derived from using a national carrier's network as the model for establishing fees, and the market realities facing the service providers serving the less densely populated areas of Canada. In this regard, the BWA would suggest that if anything, and in light of the federal government's Connectedness Agenda, a strong argument can be made that licence fees in these areas should be heavily discounted well below the current rate of $0.037 per MHz per person in order to foster the expansion of wireless services infrastructure as a regional development initiative.
11.0 Summary of Proposed Rate Per MHz Issues
98. In summary concerning the proposed rate, Canadians have access to a wide array of wireless products and services at prices that are among the lowest in the world. The infrastructure provided is enabling in nature and provides benefits to Canadian consumers and businesses well beyond the mere provision of a wireless device. Canadian wireless carriers have taken the risk and invested billions of dollars to build this enabling infrastructure. At the same time, the Canadian wireless industry struggles to reach profitability.
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99. Further, the continuing negative sentiment in both domestic and global telecom markets, coupled with the current geopolitical climate, dictates that fundamental uncertainty is the order of the day. The BWA strongly believes that, in the circumstances, it is simply not appropriate or strategically wise to consider increasing the spectrum fees of Canadian WSPs. The BWA submits that, in fact, it is seriously concerned that such action may be detrimental to the industry overall and self-defeating in light of the federal government's objectives for the sector.
100. The BWA agrees that Canadians are entitled to a "fair economic rent" in return for the use of the public spectrum. As discussed in these comments, and taking into account the private investment committed at considerable risk to provide this enabling infrastructure, the BWA strongly believes that Canadians are currently receiving what amounts to at least a fair economic rent for the use of their resource.
101. The International Telecommunication Union (ITU) recognized the fundamental problem in its 1994 study concerning spectrum pricing. The ITU concluded that:
"...no administration should attempt to modify its fee structure without reality checks, especially those that measure the impact on individuals and groups of individuals. In the end, if increasing revenues to the State results in significant reduction of radiocommunication infrastructure development, the comparatively small increase in revenues from this means will be greatly out-weighted by the loss of economic causal effects of a strong radiocommunication infrastructure."22
102. The BWA notes that a 1997 study providing one consultant's estimate of the market value of wireless spectrum, prepared for Industry Canada, similarly noted that:
"Industry Canada will need to be careful to not weaken the ability of the industry to invest and weaken incentives for future developments that would benefit the Canadian economy as a whole."23
103. Businesses and the financial markets do not like uncertainty. As noted above the degree of uncertainty developing around North American markets is global in its origin and has the potential to be profound should events on the geopolitical stage unfold as some fear they will. In fact, the Department's Foreign Ownership Review discussion paper precisely captured the sentiment when it stated that:
22 International Telecommunications Union (ITU), Study on Spectrum Pricing, RAS/94/013, 1994, page 41. 23 Lemay-Yates Associates Inc., op. cit, page 36. - 27 -
"Telecommunications companies around the world — including Canadian companies — are facing significant financial challenges. No company has been insulated from recent difficulties in the industry. In Canada some telecommunications companies have ceased operations, others have been forced to seek protection from their creditors, and yet others have had to restructure financially. Most large companies have had their credit ratings downgraded. Given these financial challenges, it is not surprising that requests for a review of investment restrictions have intensified in recent months." (emphasis added)24
104. The BWA recommends in this regard, that in implementing its new fee and licensing regime, that Industry Canada should signal that it recognizes the enabling capability of wireless infrastructure and decrease the rate per MHz per person to an amount below $0.037. The BWA submits that a rate of $0.02 per MHz per person would be reasonable when one takes into consideration the other significant financial obligations imposed on the industry, by the Department as well as other federal government agencies.
12.0 Comments on Specific Aspects of the Consultation Paper
105. In the following sections the BWA will provide its comments concerning specific aspects and proposals, other than that related to the proposed fee regime, contained in the Department's Consultation paper. To facilitate the use of these comments, the following sections are keyed to the appropriate Consultation paper sections.
Section 1 Introduction
106. The Consultation paper states that technological change, as well the evolution of the Department's licensing processes, including the different privileges and conditions associated with the various types of authorizations "has created imbalances among service providers." The Consultation suggests that this results from the fact that PCS Auction licensees have 10-year licences with enhanced privileges while cellular and incumbent PCS licensees do not.
107. The BWA notes that, given that for the most part, the auction licensees substantially are the incumbent cellular and PCS providers; any imbalances that may exist may be of little consequence. In fact, the only incumbent licensee which does not have auction spectrum is Microcell Telecommunications Inc. (Microcell), but then again Microcell was not required to finance its participation in the auction.
24 Industry Canada, Foreign Ownership Restrictions Applicable to Communications Common Carriers, 19 November 2002, Impact of Current Regulations on Investment. - 28 -
108. In this regard, the BWA is aware that PCS carriers have expressed concern with the fact that they pay $27,000 for each cell site opened up as compared to, for example, the BWA which pays $9,000 per cell site. The BWA submits that this simply reflects the fact that Microcell was the successful candidate for a 30 MHz PCS licence, at the time of the 1995 comparative process, whereas the BWA members were awarded 10 MHz licences. It should be noted that Mobility Canada, the BWA's predecessor, submitted an application with a documented business case for a 30 MHz licence in that process but was awarded only a 10 MHz licence. The BWA notes that carriers with 30 MHz of PCS spectrum pay more because they have more spectrum. In addition, it should be noted that one aspect of the 1995 process was a requirement to demonstrate financial capability to exploit the licence. All applicants at the time played by the same rules. If individual service provider circumstances have subsequently changed for successful applicants for the 30 MHz licences, they should not now be allowed to benefit from a rule change after the fact.
109. An overall thrust of the Consultation paper is the concept of a change from apparatus-based to spectrum-based licensing with enhanced licence rights including 10-year licence terms and spectrum divisibility and transferability.
110. The BWA notes that it agrees with the change from apparatus-based to spectrum-based licensing with enhanced licence rights. The BWA submits however, given current circumstances in the Canadian wireless industry, that neither of these changes present service providers with increased business opportunities such that an increase in the rate per MHz per person would be warranted.
Sectioned 2.2 Licensing – Auctioned PCS
111. The BWA notes that the Consultation paper states, concerning the auctioned PCS spectrum, that "…no other fees or payments for these licences will be required for the duration of the licence term." Industry Canada has indicated, in other forums, that it has yet to decide what fee treatment, if any, will be applied to the auctioned PCS spectrum post-initial term. It has been noted that one alternative, among others, is to apply the harmonized rate proposed in this Consultation. In any event, the lack of certainty is not helpful to the industry.
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112. The BWA notes the view of various U.S. WSPs as well as that of the Cellular Telecommunications and Internet Association (CTIA) that, under the FCC's auctioning regime, no additional spectrum fees will be applied to U.S. carriers' auctioned spectrum subsequent to the initial term. What they pay at auction will constitute full payment of the applicable spectrum charges for the use of the frequencies.
113. The BWA submits that Canadian WSPs should be provided with the same degree of certainty, concerning the post-initial term treatment of auctioned PCS spectrum, as their U.S. counterparts. The BWA strongly recommends that, as part of its decision in this Consultation, Industry Canada should indicate conclusively that auction PCS spectrum will not be subject to licence fees post-initial licence term. Having substantially chosen the FCC's auction polices and procedures as a method of awarding spectrum, Industry Canada should now adhere to North
American wide practice in this regard.
Section 2.3 ESMR
114. The Consultation paper states that Enhanced Specialized Mobile Radio (ESMR) spectrum licensees are not part of this Consultation. The BWA believes that, consistent with its comments in response to the Department's Canada Gazette Notice No. DGTP-003-02, Consultation on a Request to Modify the Treatment of Enhanced Specialized Mobile Radio Systems under the Mobile Spectrum Cap Policy, dated 10 May 2002, ESMR spectrum should be included within the scope of this Consultation. In its response to the ESMR consultation the BWA strongly asserted that the services offered with ESMR spectrum are not sufficiently different from cellular and PCS to warrant special treatment [under the spectrum cap].
115. The BWA notes that since the filing of that submission, the FCC has released its Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services, released 3 July 2002 (the Report). In its Report the FCC noted that with the development of digital technologies [E]SMR systems had evolved significantly and that they were now significant competitors in mobile telephony. The Report further noted the comments of Nextel to effect that "[we are] referred to as an 'SMR provider' ... although [our] services compete directly with and are regulated virtually identically to those of cellular and PCS providers."25
25 Federal Communications Commission (FCC), Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services, Seventh Report, released 3 July 2002, page 12. - 30 -
116. As Nextel, the largest provider of ESMR service in North America noted, ESMR competes directly with the cellular and PCS spectrum that is the subject of this Consultation and, in Canada as well as in the U.S., are regulated virtually identically. The BWA submits that this same rationale provides a compellingly strong argument to include ESMR spectrum within the scope of this Consultation in order to ensure, in the interest of regulatory symmetry, that services which are substitutable are treated in a consistent manner.
Section 4 Market Distortions
117. The Consultation paper notes that the present system creates a "no-cost opportunity" for cellular and incumbent PCS licensees to "warehouse" spectrum thus distorting spectrum availability. The Consultation further notes that in some areas licensees are not offering service and are not charged a licence fee, nevertheless, they maintain the allotment of spectrum. It is also noted that in some areas carriers may not be using their full allotment (e.g., full 25 MHz of spectrum in the 800 MHz band) yet again continue to maintain it. The Consultation cites a third "distortion" as being the effect of licence fees, which are applied on an apparatus or radio-station basis, on the investment or network expansion decisions of licensees. It is postulated that the marginal cost, imposed by the current apparatus-based licensing regime, of activating a site may compromise the economics of extending the network into lesser populated areas or corridors along major highways, where the underlying business case may be borderline at best.
118. The BWA believes that referring to these examples as "market distortions" and warehousing may be misleading. For example, the fact that all existing licensees may have spectrum which is not currently in use, is simply a reflection of the fact that this is the way the current regime has been designed and that in some areas, the business reality of a given market is that service can be provided with less than the full allotment of spectrum. In any event, the carriers are operating within the framework established by the Department and that framework applies equally to all carriers.
119. Concerning the issue of licensees not using their entire allotment of spectrum, again the same rule applies to all licensees equally and hence is not unfair to any party. In this regard, Industry Canada has also referred to its Policy for the Provision of Cellular Services by New Parties (RP-019). On this issue, the BWA would suggest that if the spectrum is not being used - 31 -
it reflects the realities of the marketplace and the ability of such underserved or unserved areas to support the provision of commercial mobile service by either one or more service providers. The BWA would further submit that those market realities, with very few exceptions and in the absence of supporting government funding, will likely be the same for any party, incumbent or new. The BWA does not object to changing this regime feature, however we note an apparent inconsistency between the concept of being required to pay for all spectrum assigned, under the proposed regime, while at the same time the provisions of RP-019 remain in effect. The BWA suggests that RP-019, which enables the Department under certain circumstances to reallocate either BWA, RWI or TELUS cellular spectrum to a third party, may have been a viable policy alternative under the current regime, it would be inconsistent in a regime where service providers are paying for that spectrum in any event. The BWA recommends therefore that the Department consider revoking RP-019 coincident with the introduction of a spectrum licensing regime.
120. As to the investment decisions of licensees in lesser populated areas or corridors, as the Department notes the licensing costs in such circumstances are marginal, especially when compared to the capital cost involved in extending networks to such areas, and hence the BWA submits that a reduction in this marginal cost, is not likely to influence those investment decisions to any significant extent. The BWA notes in this regard that there is no "high-cost serving area" fund available to the majority of WSPs to extend service to such areas. The BWA submits that a reduction in the current $0.037 rate per MHz per person, accompanied with the new spectrum licensing regime, would likely have more success as service extension simulative policy.
Section 5.1 - Proposed Spectrum Licence Attributes
121. In the following section the BWA will offer its comments on the proposed licence attributes outlined in the Consultation paper. In those instances where no comment is offered, it can be construed that the BWA is in general agreement with the proposed attribute. At the outset, the BWA notes that it is in agreement with the enhanced licence attributes proposed by the Department. These include the proposed extended licence term, the application of transferability/divisibility rights and the flexibility of use. The BWA also notes the Department's clarification statement that the Solicitor General's Enforcement Standards for Lawful Interception of Telecommunications were written to apply to circuit-switched voice telephony systems and as such are not readily applicable to a packet-based environment. - 32 -
12.1 System Access Fees
122. The Department states that continuing consumer inquiries, to Industry Canada, indicate that there is confusion in the marketplace about the costs associated with the SAF. As a result, the Department indicates it is considering is a new condition of licence that would require all cellular/PCS licensees to include the following text in their customer invoice "System Access Fee" or "Network and Licensing Charge":
"System Access Fees are neither required nor collected by the Government. [Name of Company] is subject to licence fees for the use of the public radio frequency spectrum it uses in its business operations. There is no correlation between the licence fees for the radio frequency spectrum and the number of subscribers to whom the service is provided. Industry Canada encourages consumers to seek the best value from among the competing service providers that have been licensed."
123. The BWA notes that, while the components of SAF have evolved over time, its original introduction coincided with the Department's 1986 decision to charge licensees, rather than customers, for the radio fees associated with subscriber terminals. The SAF was developed, at that time, to offset the costs associated with this change in the licence fee regime. Indeed Industry Canada correspondence to users at the time noted that service providers would be reflecting this charge in their subscriber invoices.
124. As wireless services evolved in Canada so too did the SAF. Consequently, the SAF today is designed to offset the substantial costs associated with the operation and maintenance of the BWA's wireless networks. Most recently, it was adjusted to partially offset the costs associated with the CRTC's revenue-based contribution regime. The BWA believes that its SAF messaging is entirely accurate and hence that there is no basis for the Department to involve itself in the BWA's communications with its customers.
125. The BWA also understands that the Department's intention is that the proposed text would in fact be used anywhere where the SAF term arises or is referenced. This would include marketing collateral, where the SAF is referenced, in addition to customer contracts and invoices, customer service websites as well as for use with service representatives. The BWA notes that the Department's proposal could involve considerable expense for the service providers and, in the absence of a clear cut case of misleading information, the Department should refrain from this proposal. The BWA submits that if the Department has an issue with a - 33 -
particular service provider's communications surrounding its SAF communications, then the issue should be pursued with that company rather than increasing the costs of all WSPs.
12.2 Resale and Roaming
126. The Department proposes certain conditions of licence, with regard to resale and roaming requirements, for cellular and PCS licensees respectively. The BWA's comments, concerning these conditions, are addressed separately below.
12.2.1 Condition Applicable to PCS Licensees Only
PCS Resale
127. This requirement, dating from the time of the initial PCS licensing process in 1995, requires that PCS licensees offer PCS resale throughout their service area to other PCS licensees on a non-discriminatory basis. As set out in the Consultation, this condition would essentially be enshrined in the proposed conditions of licence at least until 2011. While the appropriateness of such a condition might reasonably be considered at the time of entry of a newly licensed PCS service provider, it should not be assumed that there is any valid public policy reason to extend this requirement beyond a reasonable timeframe. The BWA would suggest that a reasonable timeframe would be 10 years after the new entrant's initial launch. At that time, it should be entirely up to the parties to any such arrangement to decide if they wish to continue with their PCS resale agreement.
128. In this regard, the BWA notes the comments of the CRTC in Order 97-1797, concerning the resale and sharing of cellular and PCS services, that:
"In the Commission's view, based on the record of this proceeding, the question of whether to offer unrestricted resale and sharing is best answered by individual providers responding to their investment and business requirements. The Commission considers this to be appropriate and to be in the public interest in an increasingly competitive market characterized by new-facilities based entry. Accordingly, the Commission has concluded that it will not mandate unrestricted resale and sharing of cellular and PCS services."
129. The BWA submits therefore that while the mandating of PCS resale for new entrant licensees for a reasonable period, such as the initial 10 years may be appropriate, subsequent - 34 -
to that period any such arrangements, as the Commission noted, should be left to the individual service providers responding to their investment and business requirements.
12.2.2 Condition Applicable to Cellular Licensees Only
Cellular Analogue Resale and Roaming
130. In this condition the Department indicates that cellular licensees will be required to offer analogue cellular roaming through commercial agreements to PCS licensees who are not also cellular licensees. The Consultation further notes that the commercial arrangements are to be offered on a non-discriminatory basis and apply to those licensed areas which are common to the parties of any such arrangement.
131. The BWA reiterates, with regard to this proposed condition, the same comment as above that this condition should not be enshrined into the conditions of license in perpetuity. Rather, as noted above, a reasonable period of time, such as 10 years after the new entrant's launch, or upon termination of such an existing arrangement, would be a more reasonable approach. After that initial period, it should be left to the parties to decide if it is in their mutual interest to continue the arrangement.
132. Further and specifically with regard to this requirement, the BWA notes that in some service areas it is entirely possible that analogue cellular service may very well be eliminated within the time scope of this Consultation. Hence the BWA submits that it would not be appropriate or represent good public policy to enshrine such a requirement conditions of licence that will apply until 2011.
13.0 Radio Station Installations (Section 5.5.5)
133. The BWA notes that a significant change is proposed concerning the condition of licence respecting radio station installations. The proposed condition of licence would require, for instance, consultation on "all" radio station installations. The BWA notes that the current condition requires consultation on "significant" installations. Further, the proposed condition also requires consultation with "all" local municipalities or land use authorities rather than the current condition which requires consultation with "the appropriate" land use authority.
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134. While apparently innocuous, the BWA notes that these changes amount to a substantial revision of the current condition of licence respecting tower site approvals. Moreover, these changes are appearing simultaneously with the Minister's announcement of a pending national review of the Department's tower approval policy and process. The BWA strongly believes that it would be inappropriate to change this condition of licence in the absence of a full consultation, especially when that consultation has already been announced by the Department. The BWA would recommend therefore that no changes to this condition be implemented prior to the completion of the announced consultation.
14.0 Conclusion
135. As noted in these comments, the BWA concurs with the harmonization of the various licensing regimes, including the provision of enhanced licence rights, under the framework of a spectrum licensing regime.
136. The BWA submits however that the proposed fee is unreasonably high when viewed in the light of the Treasury Board's Policy and taking into consideration the economic and financial circumstances surrounding the wireless industry today.
137. The BWA respectfully submits that, while introducing the regime at a fee of $0.037 per MHz per person would be revenue neutral for Industry Canada, for all the reasons outlined in these comments the Department should instead consider implementing the regime at a rate of $0.02 per MHz per person.
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