Is costing more of a subjective art, or is it an objective science?
A recent opinion piece by former CRTC vice-chair Peter Menzies in the Financial Post says “It [The CRTC] has a cost accounting process that is supposed to be objective and provide certainty for an industry on which, as COVID-19 has made starkly clear, Canadians and their economy depend.”
If it was only that simple.
Costing is at the centre of the appeals of last August’s Telecom Order CRTC 2019-288, “Final rates for aggregated wholesale high-speed access services”. In response to an appeal, a little over a week ago, the Federal Cabinet declined to act but said it believed the CRTC erred and set rates too low, impacting the incentives to invest.
The Menzies opinion piece says “The CRTC has the power to stand its ground based on the evidence before it. It should do so.” The implication in the OpEd is that costing is an objective mechanical process; just input a bunch of numbers into a template and out should pop the costs and the resultant wholesale rates.
In reality, there are a lot of subjective decisions required in telecom costing exercises.
The CRTC Order was complex, following a lengthy consultation. The Order itself was divided into 4 broad sections, labelled by the CRTC as “Issues”, and each Issue contained numerous individual determinations, each impacting the resultant costs and wholesale rates:
- Costing issues common to all wholesale HSA service providers
- Annual capital unit cost change assumption
- Bell Canada’s, Bell MTS’s, and RCCI’s unrecovered costs
- Working fill factors
- Costing issues specific to the cable carriers
- Coaxial facility costs
- Segmentation facilities – segmentation fibre, optical nodes, and CCAPs
- Segmentation fibre facilities: Access versus usage
- Cable carriers’ proposed growth rates for annual peak period upstream traffic
- RCCI’s and Videotron’s transport fibre facility costs
- RCCI’s project development costs
- Costing issues specific to the ILECs
- Labour costs per DSLAM port
- Bell Canada’s explicit costing approach
- Attribution factors to be applied to DSLAM equipment, umbilical fibre, and Ethernet port costs
- Bell Canada’s productivity enhancements costs
- Umbilical fibre costs: Access versus usage
- Bell Canada’s FTTN bonded access installation rate
- Bell Canada’s project development costs for aggregated FTTN access rates
- TCI’s financial parameters
- SaskTel’s VDSL Access service charge
- SaskTel’s VDSL interface monthly charge
- SaskTel’s other charges
- Other issues
- Effective date of the final aggregated wholesale HSA service rates
- Computation errors
- Subsequent tariff applications
As can be seen, the CRTC Order actually consists of 24 decisions, each one having an impact on the rates charged to ISPs reselling carrier access services, and impacting carrier revenues.
From some of the section headers, it should be obvious that not all of these were purely objective, mechanical determinations. There is analysis required and judgment calls made in each of these sections.
For example, let’s look at some of the discussion in the “Markup” section. The CRTC introduced the section saying “Markups have varied over time depending on a number of factors, including whether the wholesale service is essential and whether there may be additional risk to network investment if the wholesale service is mandated.” The Commission acknowledged the subjectivity of setting the markup rate, saying “in setting rates, it balances the need to ensure that network providers are reasonably compensated for their costs with the need to ensure that markups are not so high as to significantly impede competitors from providing competitive alternatives in the marketplace.”
Reading such discussions in the CRTC Order helps challenge the assertion that the CRTC “has a cost accounting process that is supposed to be objective”.
In fact, there is a lot of subjectivity applied, resulting in the potential for a wide margin of error. That potential for error in any regulatory process is one of the reasons that our system includes three avenues to appeal a determination to another authority, to the regulator, to the Courts and to Cabinet.
As we heard from one of those avenues a little over a week ago, “the Governor in Council considers that the rates do not, in all instances, appropriately balance the policy objectives of the wholesale services framework and is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.”
These are reasonable concerns for Canada’s Cabinet to have expressed. The need to focus on “investment in high-quality networks, particularly in rural and remote areas” has become more acute over the past 6 months.
In considering its own review of the August 2019 Order, the CRTC can certainly “stand its ground based on the evidence before it”. However, the Commission first needs to reassure itself that it balanced the competing Policy priorities when it made subjective determinations.
The CRTC just may find that a fresh look shines a light on a margin of error in some of those judgment calls.