Northwestel says competitive supply to its Internet gateway service exists

Canada’s Far North incumbent telephone company has told the CRTC that there is competitive supply to its Internet gateway service, and Yukon independent ISPs are wrong to suggest there isn’t. The Yukon ISPs want the CRTC to order Northwestel to reduce by 25% the rates it charges for the gateway service. The following is an edited excerpt of Northwestel’s response filed on January 20. Northwestel notes that its I-Gate service is forborne as approved in CRTC Orders CRTC 98-619 and CRTC 99-625. Per paragraph one of Telecom Order CRTC 98-619, the scope of forbearance includes: the company’s Sympatico service; future enhancements of Sympatico; and the company’s planned dedicated IS, targeted at businesses or Internet service providers (ISPs). In Telecom Order CRTC 98-619, the commission based its determination to forbear with regard to Northwestel’s dedicated Internet services targeted at businesses and Internet service providers on the following:The commission finds that barriers to entry into the applicants’ Internet access markets are minimal. This conclusion is based on the absence of regulatory barriers, the availability from a variety of sources of the equipment and transmission facilities needed by ISPs, as well as the small scale of operations of many ISPs. The Commission also finds that the IS markets under consideration are characterized by active price competition and rivalrous behaviour. Moreover, no party argued that IS markets are not competitive. Northwestel submits that the market for dedicated Internet services targeted at large businesses and ISPs has, in fact, become more competitive since the commission’s decision to forbear. There are a number of competitive alternatives to Northwestel’s I-Gate services available to ISPs. Satellite transport is available through a number of channels in Northern Canada, and is employed by a number of ISPs to access southern Internet gateway services. Frame relay services are similarly available through a number of channels, provisioned using both satellite and terrestrial facilities, and are currently being used by ISPs in the North to access southern Internet gateway services. The company’s I-Gate rates have significantly lower margins than other alternative forms of transport such as digital private line and frame relay offered by Northwestel – which employ the same transport facilities. For example, Northwestel must transport data traffic approximately 1000 miles to access a southern Internet gateway. For 3 Mbps average sustained usage under a one-year contract rate, an I-Gate customer would pay about $15,000 per month including access facilities, inter-exchange transport, and Internet transit service in the south. Northwestel’s digital private line customers pay a rate of approximately $18,000 per month for the inter-exchange transport alone per T1, which would provide only 1.44 Mbps of capacity to the south. Northwestel notes that the comparison of I-Gate rates to pricing for alternative forms of inter-exchange transport is particularly relevant in the case of Northwestel’s I-Gate service, due to northern peering arrangements which exclude north-north traffic from the calculation of I-Gate usage levels. One must also consider the long transport routes and sparse density of the population using the network. Northwestel operates in a high-cost environment. The commission has consistently determined that there are important differences between the provision of telecommunications services in the North and the rest of Canada. In Decisions 99-16 and 2000-746, the commission recognized the high-cost nature of the access and transport network in the North and the services that ride on Northwestel’s network. The large distance between communities and small populations to absorb those capital costs explain why costs are higher. Therefore, direct price comparisons between various I-Gate rates offered in the South versus those offered in the North are not appropriate. Northwestel notes further that, even in Southern Canada, ISPs in communities of comparable size to Whitehorse, Yellowknife and Fort Nelson do not necessarily benefit from direct local access to Internet gateway services. For example, an ISP operating in Owen Sound, Ontario would be required to pay separately for both local and inter-exchange transport to access an Internet gateway service. In their application, the YIISPs provide a comparison between Northwestel’s I-Gate service and high-speed classic home service and imply that residential customers are getting a better deal for Internet service than the ISPs. The YIISPs comparisons between Northwestel’s I-Gate service and retail Internet services offered to residential customers are flawed and misleading. Consistent with established industry practice, Northwestel’s retail ADSL rates are generally based on typical, average, bandwidth utilization delivered on a "best-efforts" basis and net of any savings associated with traffic management and caching – not the maximum bandwidth theoretically available to each customer. In addition, Northwestel’s retail ADSL offerings include provisions for extra charges for high-volume customers. Regulatory EnvironmentNorthwestel’s current regulatory framework relies on a careful balancing of rates, implicit subsidies and supplementary funding. Changes to any one element of this framework must be considered carefully to avoid undermining this balance. To the extent that businesses use I-Gate to replace legacy data services or ISPs use I-Gate to facilitate the replacement of legacy data services by their customers, Northwestel experiences considerable revenue erosion, undermining this balance.Further reductions to I-Gate will further exacerbate this revenue erosion. Therefore any consideration to changing the company’s I-Gate rates must be reviewed in the context of how those changes might impact other elements of our regulatory regime including implicit subsidies and supplementary funding.Northwestel’s current regulatory framework is being reviewed under Public Notice CRTC 2006-1. The associated process may afford Northwestel an opportunity to restructure some of its rates. However, the company cautions that its capacity to restructure rates is severely constrained, and given the availability of competitive alternatives and the relative stability of the current market for dedicated Internet services targeted at large businesses and ISPs in the North, Northwestel may have to focus its rate restructuring in other areas. ConclusionNorthwestel reiterates that forbearance was granted to dedicated Internet services targeted at large businesses and ISPs in Telecom Orders CRTC 98-619 and CRTC 99-625. Direct competition in this service has significantly increased since the forbearance was granted. In addition, alternatives to northern Internet gateways have been adopted by ISPs in the North – demonstrating the feasibility of such alternatives.

Northwestel says competitive supply to its Internet gateway service exists

News | February 2, 2006

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