GATINEAU – Wholesale access rates that are too low, as Rogers Communications contends they are now, will not lead to further competitor investment in networks, the company said on Tuesday to the CRTC. Rather, it will continue to encourage independent ISPs to lease capacity from the incumbents in perpetuity.
Rogers said its wholesale business – customers who pay 45% less than retail consumers – has grown from essentially zero to nearly 15% of customers in the last four years. If the current growth trajectory continues, it will top 30%. Company executives appeared before the Commission as part of its look into allowing third party internet service providers to access advanced fibre optic networks.
“The 70% of the retail customers that we serve will be subsidizing the wholesale customers that do not contribute a compensatory return on our investment. A smaller and smaller retail customer base subsidizing a larger and larger wholesale base is not sustainable,” said Ken Engelhart, senior VP of regulatory at Rogers, in his opening remarks.
If incumbent providers were able to raise their rates, the CRTC would help to establish a regime that would incent competitors to build networks if they chose to do so, while also growing their businesses through wholesale and at the same time let network owners earn compensatory rates for the use of their facilities, the company said.
“If the wholesale rates are too low, you’ll never get anyone investing in a third wire because the wholesale entrepreneur crowds out the opportunity for a third facilities-based (competitor).” – Ken Engelhart, Rogers
“You don’t want to kill the goose that lays the golden networks. You want to keep that going,” said Engelhart. “You also get into the strange Catch 22 because if the wholesale rates are too low, you’ll never get anyone investing in a third wire because the wholesale entrepreneur crowds out the opportunity for a third facilities-based (competitor).”
To fix the wholesale rate setting process, the company argued that the Commission should abandon its current Phase II costing approach, which doesn’t send the right economic signals to spur competitor network build out. Engelhart noted that making Phase II work effectively for all parties requires “a superhuman regulator” that needs to figure out costs now and into the future but also predict Internet usage out to 10 years.
Instead, the CRTC should adopt a retail minus avoidable costs wholesale costing methodology. It, on the other hand, is simpler and easier to manage because it deals with current costs and usage, added Engelhart.
In a nutshell, retail minus takes the retail rate and then subtracts all costs not associated with the network itself such as sales and marketing, customer care, modems, bad debt and Internet transit facilities. This could be done annually and would represent a much more transparent approach to Phase II. The result would be better incentives for the incumbent carriers to serve both wholesale and retail customers in the same manner, the company argued.
“It also ensures that resellers will still continue to be able to compete in the retail market based on price by providing a margin between our retail prices and wholesale rates,” said Engelhart in his opening remarks. “Furthermore, if any providers, including new entrants, do want to build new last mile facilities, they will not be disincented from doing so by non-compensatory wholesale rates.”
Some parties to the hearing have discounted suggestions that a retail minus approach can work in Canada. Telus soundly panned the approach on Monday. Rogers countered that retail minus is much easier to function within and would be similar to the average revenue per minute methodology for wireless roaming.
“Here you’d be looking at average revenue per user,” said Engelhart. “It’s an easier calculation. And then you do a resource study on what are these guys spending on sales and marketing and Internet transit today, so you don’t have to make the forecast.”
Rogers told the commissioners it has suffered some real negative financial impacts from Phase II costing. A recent costing exercise resulted in the company’s wholesale rates being considerably lower than those of Cogeco Cable and Vidéotron just because Rogers has a different approach to some network engineering activities. In essence, the CRTC determined that Cogeco’s network was more expensive to build than Rogers.
“It’s implausible,” he said. “It cannot be true that the Cogeco network is 60% more expensive than the Rogers network.”
The hearing continues tomorrow as the reply phase begins.
