By Ahmad Hathout
OTTAWA – Some of the country’s largest carriers tried to persuade a panel of Federal Court of Appeal judges Thursday that the CRTC – in its reasoning that led to a decision to slash the wholesale internet rate – did not adequately balance the impact of the decision with a 2006 cabinet directive setting out a market-based approach to regulatory decisions.
The 2006 cabinet directive outlines that the CRTC “should rely on market forces to the maximum extent feasible and regulate, where there is still a need to do so, in a manner that interferes with market forces to the minimum extent necessary.” Last year, the Liberal government provided a companion directive that stated the CRTC should also consider all options for enhancing competition, but that directive would not replace the 14-year-old one, just augment it.
The CRTC’s August decision significantly reduced the final wholesale rate at which third party internet access (TPIA) providers pay larger players for access to their network, and mandated the latter pay the former $325 million in retroactive fees dating back to when the interim rates were set in 2016. The crux of the large carriers’ argument before the court Thursday was to show the devastation that the stayed CRTC decision would have wrought on the industry and how that devastation not only belies the 2006 policy objective, but isn’t at all explained in the decision.
That, they said, triggered a procedural fairness issue.
Lawyers for Rogers, Shaw, Videotron, Cogeco, Bragg (the cablecos) and Bell said the CRTC failed to explain an imbalance in the decision’s reasoning, which they say overwhelmingly focused on one outcome while undercutting other policy objectives, including the negative impact the decision could have on rural Canadians, the development of next generation networks like 5G and Canada’s ability to compete internationally. Following the decision, for example, Bell announced it would be cutting back on investments in rural Canada. That gap is an error in law committed by the Regulator committed and must be rectified, said the incumbents.
“The cabinet direction at issue here could not be more clear and it specifically required the CRTC to demonstrate that the regulatory measure it adopted complied with that direction,” Kent Thomson, lawyer for the cablecos, said during the hearing.
Faced with a question by judge David Stratas about the feasibility of the CRTC highlighting every single thing that’s relevant to the decision in every decision, Thomson said “it can’t possibly be good enough that the Commission can include in the preamble to its decision a one-sentence conclusory assertion as to what the decision will achieve without ever even adverting to the other policy objectives set out in the Act and without even adverting to the direction of cabinet that it was required to comply with.”
Thomson added that it’s not only unfair but legally impermissible for the CRTC to expect parties so “badly affected” by its decision to “go on a treasure hunt” and come to a conclusion about everything the regulator might have looked at and assume it factored the issues in question.
In his opening remarks, Bell lawyer Steven Mason observed and pondered how the last four months with the pandemic would’ve played out had the large carriers not invested heavily in their networks. “Covid-19 has highlighted the urgency in expanding and improving high-speed connectivity for all Canadians, and to ensure that Canada remains competitive at international levels.”
The new wholesale rates, he said, will “deter rather than enhance reliance on market forces.”
Brandon Kain, another of Bell’s lawyers, said the regulator did not demonstrate the regulatory means to advance the 2006 policy directive. Kain also posited the retroactive payment requirement, which he noted isn’t mandated to be passed on to consumers, doesn’t interfere with market forces to the “minimum extent necessary.”
“How, I ask, will it enable competition from new technologies to the greatest extent possible…if the appellants are denied the ability to invest that $300 million in rural infrastructure and 5G?” – Brandon Kain for Bell Canada
“How, I ask, will it enable competition from new technologies to the greatest extent possible…if the appellants are denied the ability to invest that $300 million in rural infrastructure and 5G?
“The problem is, we just don’t know because the CRTC didn’t address it,” Kain said. “And it ignored its statutory duty to do so in the face of submissions by the appellants about the effects that the negative impact that retroactivity would have on these issues.”
An analyst note from TD Securities sent today to investors predicts the wholesale rate will be overturned by the Court (an expectation strengthened by network performance during the pandemic) and reiterated a projection that the new tariffs would set back investment by $1.68 billion annually if not. “BCE and a consortium of cable companies have argued loudly, and we agree, that the CRTC ignored many of its own rules and normal practices in establishing what the proper cost base should be for wholesale Internet rates,” the note said.
The cablecos lawyer said the incumbents, upon seeing the August decision, felt like “it was Peanuts and the football, where the football gets pulled away at the end of the day.”
On the issue of retroactivity, judge Stratas noted a revision of wholesale rates in a decision by the CRTC in 2013 set out retroactivity and the Commission did nothing new in its decision. “It has done this before; there’s a statutory provision that allows it and, frankly, given what it has decided in this case, I can see why it ordered retroactivity,” Stratas said, adding “specificity has been met here because I understand they have successfully communicated the basis for the decision.”
In response, Kain said while that specific 2013 decision did allow for retroactivity, the point is that it was not referenced or footnoted in the actual decision. What was referenced was a later decision in 2013, which links back to the first one that year.
“This is the first this court is substantively considering the cabinet direction, and I would say if the CRTC is not required to comply with it in a proceeding of this scope, profile and importance,” Kain said, “then it may very well feel emboldened to not do so in the future. And that could effectively render the entire cabinet direction a dead letter and it could remove rate setting from the ambit of the direction.
“And that may lead to more regulation, not less, and that would frustrate the legislative intent.”
On Friday, the Competitive Network Operators Consortium (CNOC) will kick off the second day of the hearing, followed by TekSavvy. Late on Thursday however, the organization representing a number of independent internet providers flipped the argument the incumbents have been making on the alleged damage the retroactive payment would make on them.
“What my friends [opposing counsel] would say is, it was okay for my clients to pay rates that were 86% too high for nearly four years and they would like that money and keep it and deploy it for different reasons,” CNOC counsel Crawford Smith said.
“In other words, they just want a cross-subsidy [when prices are raised in one area to lower them in another] of my clients paying more and not having to return it. And I say, it is impossible to view what happened here as anything other than the appropriate unwinding of an unjust enrichment that persisted for a very long time.”
Cartt.ca will be covering tomorrow’s proceeding from virtual gavel to virtual gavel. Both Bell and the cablecos will have a chance to reply to CNOC and TekSavvy.
