A new report from TD Securities argues Canada’s largest telecom companies have “good odds” of succeeding with an appeal of a recent Canadian Radio-television and Telecommunications Commission ruling on wholesale internet rates.
The CRTC published the ruling in mid-August, seemingly shocking the industry’s biggest players and prompting expectations that one or more of the companies will appeal.
The decision set lower rates for what large telephone and cable operators can charge third-party competitors for network access. Third-party internet service providers (ISPs) – such as Distributel or TekSavvy – pay the large players a wholesale rate for access and then sell internet service to their own retail customers. The system is meant to promote competition in the home internet market.
In addition to slashing rates, the CRTC ordered the large players to make retroactive payments to their smaller competitors to account for the higher prices charged over the past three years. The ruling was hailed as a victory by independent ISPs, who said it validated their arguments over many years that they were being overcharged. They said the lower rates will allow them to invest more in marketing and offer better prices for customers.
But most of the big telecoms have published statements objecting to the decision, warning investors they will take one-time charges as a result and saying they will review their capital spending programs. They have also said they are still considering their options with respect to an appeal.
In a lengthy report Tuesday, TD Securities analyst Vince Valentini argued that the chances of success on an appeal are good.
“We believe there are good odds that the recent CRTC decision … will be overturned, or at a minimum revised in favour of the [large] telecom and cable players," he wrote. He also predicted that if the rates are not changed, Canada’s biggest telecoms will slash their investments in broadband networks by $1.7-billion by 2021.
Mr. Valentini said he expects the first step will be an appeal to the Federal Court of Appeal; the companies must seek leave to appeal the ruling within 30 days of the decision, which is Sept. 14. He then expects further appeals to the federal cabinet or to the CRTC itself, both of which have a 90-day deadline.
“We note with interest that this will be after the federal election on Oct. 21, so hopefully government officials will be able to review this file without worrying about knee-jerk media headlines and any associated voter impact,” he said.
Minister of Innovation, Science and Economic Development Navdeep Bains, who has supported the ruling, has expressed his “disappointment” with BCE Inc. for saying it plans to scale back investments in rural internet. Heading into the election campaign, many in the industry expect all of the major political parties to take negative positions with respect to big telecom.
The TD analyst cited four reasons for his confidence that the decision will be overturned or adjusted in favour of the large providers. He said the low rates are not necessary – pointing to a recent report from the Competition Bureau that said Canada’s broadband market is strong – and that they “do not seem fair” for the companies that have invested in building their networks. He also believes the rates are not accurate in how they reflect the big companies’ costs and argued that the wholesale regime could render Canada less competitive than other parts of the world.
In an interview last week, Matt Stein, chief executive officer of Distributel, one of the largest third-party ISPs, said he “would not be surprised” if the big telecoms pursued an appeal. He said he believes the decision was “pretty solid, well written."
“The real wronged parties here are the ISPs who for three-and-a-half years paid what the CRTC now deems is a really, really high price for services,” said Mr. Stein, who is also chair of the Canadian Network Operators Consortium, a lobby group for independent ISPs. “[Independent ISPs] were not able to take that money to market more, gain more customers, build their own networks, give discounts to customers.”
In total, BCE Inc., Rogers Communications Inc., Shaw Communications Inc., Quebecor Inc. and Cogeco Communications Inc., have said the ruling will cost them a combined $325-million in retroactive payments. Atlantic Canada cable company Eastlink Inc. told The Globe and Mail it will cut $50-million from its capital investment budget this year. Telus Corp. has not commented.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.