THE STANDING SENATE COMMITTEE ON TRANSPORT AND COMMUNICATIONS
EVIDENCE
OTTAWA, Tuesday, March 7, 2023
The Standing Senate Committee on Transport and Communications met with videoconference this day at 9:01 a.m. [ET] to study Bill S-242, An Act to amend the Radiocommunication Act.
Senator Leo Housakos (Chair) in the chair.
[English]
The Chair: Good morning. I am Leo Housakos, senator from Quebec and chair of this committee. And I would like to invite my colleagues to introduce themselves briefly.
Senator D. Patterson: Dennis Patterson, Nunavut. Good morning.
[Translation]
Senator Cormier: Senator René Cormier from New Brunswick.
[English]
Senator Cardozo: Senator Andrew Cardozo from Ontario.
[Translation]
Senator Clement: Senator Bernadette Clement from Ontario.
[English]
Senator Harder: Peter Harder from Ontario.
Senator Manning: Fabian Manning, Newfoundland and Labrador, half hour later.
The Chair: Honourable senators, we are meeting to continue our study of Bill S-242, An Act to amend the Radiocommunication Act. For our first panel, we are pleased to welcome before the committee the Canadian Wireless Telecommunications Association. We have with us, Mr. Robert Ghiz, President and Chief Executive Officer; and Mr. Eric Smith, Senior Vice President. As I would like to welcome you on behalf of our committee and, as is customary, we will give you a few minutes of opening remarks and move on to questions and answers from our senators.
Robert Ghiz, President and Chief Executive Officer, Canadian Wireless Telecommunications Association: Thank you, Mr. Chair, senators. Good morning. The Canadian Wireless Telecommunications Association, otherwise known as CWTA, is an industry association that represents companies that provide services and products across the wireless communication sector in Canada including facilities-based mobile wireless network operators and equipment vendors.
[Translation]
We appreciate the opportunity to discuss Bill S-242. Before we begin discussing the bill, I would like to briefly talk about the state of wireless communications services in Canada.
[English]
Despite the challenges of deploying wireless networks in Canada, such as higher building costs, large geography, harsh terrain and low population density, Canadians enjoy some of the best mobile wireless services in the world.
Reports from the two leading independent mobile network analytics companies show that Canada has among the fastest mobile networks in the world and the fastest of any G7 country. Consulting firm PwC has also rated Canada number one among G20 countries in its mobile quality index which compares countries’ network speed, availability and video experience.
We are not just concerned with performance. Equally important is coverage. As a result of the billions of dollars invested in capital expenditures and spectrum by our members, the CRTC reports that 99% of Canadians have access to the latest generally deployed mobile wireless technology known as LTE, and that the wireless industry is on target to provide coverage to 100% of the population by 2026.
This brings me to Bill S-242. While we share the goal of connecting every Canadian, this bill will not help achieve this objective. In fact, it could, unfortunately, have the opposite effect. The bill seeks to impose a one-size-fits-all spectrum deployment requirement. As officials from ISED testified to this committee, the regulation of spectrum is not a one-size-fits-all process.
To achieve its policy objectives, the department requires a flexible framework that allows it to tailor its processes in spectrum licensing conditions to suit the unique characteristics of the spectrum band being licensed and its proposed use. A one-size-fits-all requirement will limit the department’s ability to do so and risk undermining the department’s and the industry’s shared goal of improving network quality and coverage.
For example, if the deployment target is unachievable in a particular area, it is unlikely that anyone will bid on the spectrum. If the deployment conditions are achievable by only a few service providers, the department’s goal of enabling small and regional service providers to participate in the licensing process is undermined.
As the representatives from ISED testified, deployment targets should be ambitious but achievable for all providers. What is considered ambitious but achievable varies depending on the specific spectrum band, its intended uses and a variety of other factors.
Some have expressed concerns that the deployment targets set by ISED are not ambitious enough. We respectfully disagree.
In recent years, ISED has been aggressively advancing a use-it-or-lose-it approach to spectrum. In 2021, ISED auctioned licences to the highly coveted 3500 megahertz spectrum band which include in some licence areas a requirement to utilize the spectrum to provide services to 90% of the population within five years and 95% within seven years. The deployment conditions for the 3800-megahertz spectrum that will be auctioned later this year are very similar.
Global telecom consultant Analysys Mason has called these deployment requirements the second most stringent among 24 comparable countries it surveyed. ISED has recently issued decisions and launched consultations aimed at improving spectrum access for rural and remote connectivity. The aggressive deployment conditions established in recent spectrum auctions, together with these recent decisions and consultations, are a clear indication that ISED made spectrum deployment a top priority. They have done so by carefully considering each issue and tailoring a response that it thinks will achieve the desired outcome.
Bill S-242 would severely limit ISED’s ability to create tailored solutions to complex issues. It would also risk undermining the goal of enhancing spectrum deployment, the opposite of the bill’s objective.
As I stated earlier, we share the goal of expanding and enhancing connectivity, but, with respect, we do not believe that Bill S-242 will help do so.
[Translation]
Mr. Chair, thank you for giving me this opportunity to speak on this very important topic. We will be happy to answer your questions.
[English]
The Chair: Thank you, Mr. Ghiz. I’ll start off the questions and answer period with a short question. Thank you for your presentation.
You highlighted in your presentation that 99% of Canadians are well served with quick and reliable internet service, which is a little bit contrary to what we’ve been hearing from a lot of Indigenous groups and rural Canadians in terms of their connectivity. They are arguing that they have less connectivity, slower, and significantly more expensive.
My question is the following: Right now the government has been pursuing a use-it-or-lose-it approach when it comes to the owners of spectrum. I think that approach is being used because we find that there are a lot of areas in the country that need to be improved. What is your comment in regard to that?
Mr. Ghiz: It’s a great point. When it comes to connectivity in Canada with regard to mobile networks, the numbers that come from the CRTC, the 99%, that is a number where people live or work. Because we have such a vast terrain, there are still a lot of areas that are not covered.
We know that the CRTC and our industry have a goal — and we are on track to achieve it — of 100% connectivity for mobile wireless networks by 2026. There’s a lot more investment to do. There’s a lot more build out to do. We believe that facilities-based competition, which is what our members do, will help achieve that.
I have heard you ask questions in this committee before with regard to some rural and remote areas, which are extremely difficult, and in the First Nations where there is work to do. That is where we see a lot of partnerships taking place with different levels of government — it could be the federal government, the provincial governments have programs, there are municipal governments that have programs as well. I believe that with the billions that our industry is investing, plus the new programs and all the programs that different levels are investing in that hopefully the target will be achieved by 2026 and 100% of Canadians will be connected with coverage.
[Translation]
Senator Cormier: I will ask my question in French. First, I would like to know what issues your members face when providing services in rural areas.
You are from Prince Edward Island, Mr. Ghiz, and I am from New Brunswick. The rural areas of our communities have big connectivity challenges. When I am in certain areas between the north and south of the province, I lose my connection. So obviously there are connectivity challenges.
What are some of the issues your members face when rolling out services in rural areas?
[English]
Mr. Ghiz: Thank you, senator. There is a lot to that question. Our members are comprised of the wireless providers in Canada. We represent the large member, so Rogers and Bell, but in our region we also have Eastlink, Xplore — which was started in your home province — Vidéotron in Quebec, SaskTel, and also Freedom. We also represent the suppliers, Nokia, Ericsson and Samsung, that provide the equipment to help build the networks.
Our main goal at our association is to promote the wireless industry and the great things that it is doing, to promote what we’ve done in the past and also what can happen in the future with 5G, and to promote a policy that encourages facilities-based competition in Canada so that our members are able to invest more to connect more Canadians.
You talk about rural and remote communities. My members know, and I know, that there is still more connectivity to do in Canada. We need to make more investments in our rural areas, our remote areas and our First Nations. I see it as well. I could be in an area in my home province. Where I live, I have coverage, but we have vast areas where no one lives and that’s why there needs to be more investment.
As I said to the chair earlier, there’s going to be some times when it doesn’t make economic sense for the private sector to do those investments. That’s where there is a role for governments to play, and we’re seeing all governments at all levels do that. Our main goal is for a public policy that encourages investment in Canada by my members, which are the ones that go out and build the networks.
[Translation]
Senator Cormier: Thank you for that answer, but I still do not understand what your members are doing. Which of your members provide services in rural areas? What are the issues related to that? Is it strictly an economic issue?
If Bill S-242 does not meet the objective of making connectivity available in rural areas, what is your solution?
[English]
Mr. Ghiz: Thank you. With respect to the bill that we’re discussing, we believe that it would have too many strings attached and make it too difficult for different members to bid on the spectrum to be able to build in those areas.
As ISED had indicated when they were here, you need flexibility. You need to understand the terrains that are out there. You need to understand that, for example, for larger members that have more towers, there are smaller members that may have to go out and build towers. It takes them longer to go out and do it. For example, Eastlink is a relatively new company and Xplore is a relatively new entrant into the wireless business, so it will take them longer to be able to do it. That’s why you need flexibility with regard to the spectrum.
The best solutions are having a flexible spectrum auction process and also having governments willing to work to help fill the gaps where, perhaps, our members are not able to do so.
Senator Cormier: Thank you.
[Translation]
I understand the objectives and thank you for your answers.
We are currently considering a bill that proposes 50% for the regions. I would suggest you take a look CanWISP, an organization that makes recommendations about mandatory milestones.
With respect to the bill, the organization suggests that in terms of connectivity, 50% of the community should be connected after three years. It also suggests greater flexibility to avoid having a one-size-fits-all solution. Finally, CanWISP suggests a mandatory milestone in the third year to ensure service availability to 50% of the population in each of the Tier 5 areas included in the auction area, regardless of the size of the areas covered by the licences.
In other words, what CanWISP proposes is effectively not to abandon Bill S-242, but to amend it to provide more flexibility. What do you think of such a proposal?
[English]
Eric Smith, Senior Vice President, Canadian Wireless Telecommunications Association: Thank you very much for that question. I did hear the testimony of the CanWISP representatives, but I think the flaw in their proposal is that it’s setting an arbitrary threshold and trying to fit it into all situations. The reality is that spectrum, when it is auctioned, depending on what spectrum is being auctioned, what its potential use cases are and who the potential of it users are, ISED will set out parameters and licence conditions that are best suited to most efficiently use that spectrum. In the case of, let’s say, a three-year milestone, if you look at the most recent 3500 megahertz auction, some of that spectrum had to be repurposed and existing licence holders had to be transitioned away from that spectrum and made available at the auction. That means those who won licences at the auction, in some cases, aren’t even allowed or permitted to deploy that spectrum until those licence areas have been cleared of existing licence holders. Again, one-size-fits-all would not work in that situation.
Going back to your earlier question about what the barriers are to deployment, it is really an economic case. If you look at a country the size of Canada, the geography, the terrain and the climate, it’s a very difficult exercise to bring connectivity to many areas. We’ve done a very good job on the wireless side, as Mr. Ghiz mentioned. Where we hear the most complaints is along highways and roads, et cetera, which makes sense because people don’t live in a lot of these places so it’s a tough economic case. But there is funding that is going toward building highways. We have a member who is working with coastal nations in British Columbia to build towers along the Highway of Tears in British Columbia, and there is work being done in Newfoundland and elsewhere. A lot of that money is coming through the CRTC’s Broadband Fund, which is funding a lot of highway connectivity projects. That money comes from the industry. It’s not taxpayer money. It is funded by our industry.
It really is an economic issue. It’s not an access-to-spectrum issue. It is an economic issue to make sure the money is there to be able to build.
Senator Harder: Thank you to our witnesses for being here. I broadly share your critique, but I would like to push you a bit if I could. Twenty years ago or so, Canada was leading the world in broadband access — the rollout, the transformation of businesses and social media. We’ve lost that perspective over time, probably because of some funding gaps and policy gaps. Governments in recent years have sought to adjust the policy framework. Certainly use-it-or-lose-it is a very positive step from my perspective. There has been a significant insertion of funds over time for broadband access, particularly in rural, remote and Indigenous communities.
Can you tell us what more could be done from a policy point of view to accelerate the goals that have been established and to ensure that the objectives of the bill, which are very laudable, could be achieved? What more can be done — not just money but also policy frameworks?
Mr. Ghiz: I’ll take this and see if Eric wants to add anything.
You’re right. A number of years ago — and I said it in my remarks — when it came to 4G and LTE in Canada, we are a world leader. We’ve been called a 4G superpower by the groups that I referred to in my opening remarks. That was four years ago. Fast forward to today, and the new technology is the revolutionary 5G. It could change the world. It’s hard to predict what it could do. It’s similar to how, 20 years ago, we didn’t know what 4G and LTE were going to do, and now you look at how everyone walks around with a computer.
We’re a little bit behind when it comes to 5G in Canada. If you look at the United States, China or some other leading G7 countries in the world, we are, perhaps, one to two years behind. That has to do with the fact that our auction for the 3500 was a little bit later than in some of those other countries.
I would say from a public policy perspective, what allowed Canada to become a leader in terms of our 4G and LTE was that investment was key. The directive to the CRTC mentioned investment. Without investment, we’re not going to be able to make that happen, and the only ones that are going to invest are Canada’s facilities-based providers, which are our members.
We’ve seen some decent moves from the federal government over the last couple of years. There were some improvements to the capital cost allowance. But anything that can promote investment will help with connecting more Canadians and also ensuring that Canadians have access to the latest technologies, so we’re able to compete with other countries.
You’re right, it is a race. It is something we need to see happen. However, my number-one public policy thing would be around investment.
Mr. Smith: I would add to that. On the connectivity piece, I think Canada still is a world leader. Where we lag is in terms of the adoption of technology. Really, on the policy side, we would encourage government to look at the digitization of the economy and adopting technologies. Mr. Ghiz mentioned 5G. For example, South Korea has policies and programs in place to encourage enterprises — private industry — to adopt 5G, and they’ve actually targeted specific-use cases or industrial sectors.
As well, we have a habit in Canada of looking at telecommunications as just being a dumb pipe. You build it, it’s there and it gets used. More work needs to be done in terms of digital skills. There needs to be a recognition that a sound and robust digital policy is actually a sound environmental policy. While it’s very good to be investing in things like renewable energies, et cetera, if we can encourage industries — especially those who are big greenhouse gas emitters or users of water or pesticides, et cetera — to adopt the most advanced technologies, using our telecommunications infrastructure, that will have a profound impact on our environment in reducing our footprint.
Senator Harder: I would like to make a quick follow-up. Are you aware of and could you comment on the Telesat proposal — a project that is under way as I understand it — of low-level satellites? I believe the deployment is slightly later than anticipated, but do you share the view that it could be part of the solution, particularly for rural and remote areas? If so, when could we anticipate this?
Mr. Smith: You’re talking about Telesat specifically, but there are a number of companies in the lower-orbit satellite business internationally. I think it’s already seeing an impact.
Look at the province of Quebec, for example. When we talk about connectivity, we’re careful to distinguish between mobile wireless and high-speed internet or what most people think of as internet to their homes. There’s been a big push among the federal, provincial and territorial governments to connect everyone in the province to high-speed internet. The first province to declare victory in achieving that is Quebec. They teamed up with service providers and the federal government for the operation of high-speed internet. In August of last year, they declared that they had achieved connectivity to 100% of households in Quebec. There was a caveat. The caveat was that some projects were still under way. There were about 70,000 households that had not yet been connected with cable or fibre, and they were using lower-orbit satellite technology and subsidizing some of the costs for those households. The goal, though, is that of those 70,000, about 60,000 will eventually transition to fibre to the home, and there will be about 10,000 who, because of where they live and the topography, et cetera, will probably remain dependent on satellite technology. We’re already seeing that impact, and I think it’s a great thing.
There is one other area where lower-orbit satellite can have a profound impact, and it relates a bit more to the mobile wireless side. We know it’s not realistic — and we hope you agree — to build cell towers everywhere in Canada so that if you’re backpacking through the mountains — or what have you — you expect to always have cellular connectivity. But there is a public safety issue. People get into accidents. They trip and fall or whatever and need to get emergency assistance. New technology is coming down the pipe. It has actually started to be deployed in some areas of the world, and it is satellite-to-device technology. It’s not so you can stream YouTube or go on Facebook, but you can send tech messages to emergency responders. There was a situation in California not that long ago. An individual not that far outside of Los Angeles was in a remote area. They got into trouble, and they used this technology — satellite-to-device — to get through to emergency responders. They were able to say that they were in trouble and where they were located, and in about an hour, they were rescued.
It’s an addition to the toolkit. Connectivity is about having as many tools as you can and using the one that works the best in that situation.
Senator Manning: Thank you to our witnesses. I’m thinking back to February 7 of this year when Senator Patterson said that many Canadians, particularly those in rural and remote areas, do not have adequate access to internet services. That struck a chord with me. I live in a rural part of Newfoundland and Labrador. We have access to Eastlink. It’s the only option we have. I suppose in one sense we’re lucky to have an option, but it is the only option we have. I realize we have geographical challenges, as you touched on earlier. I realize that low population density in some areas kind of curtails the investment of private enterprise.
I’m wondering what initiatives the government could put in place. You touched on the funding from CRTC, and we’ve been successful in Newfoundland and Labrador with that in reaching out to a lot of areas. It’s still ongoing because of the — as I touched on — geographical challenges. What other initiatives could the Government of Canada come forward with that would entice private investment to reach those areas that are still — you know, you go up to Northern Labrador, for example — really remote?
As I said, I live in rural Newfoundland, but I’m less than two hours from St. John’s. But there are other places that are much more remote. I’m wondering what the government could be doing to entice private investment in that.
Mr. Ghiz: Great question. I have been through that myself when I was in office. I have been in Newfoundland and Labrador many times. I feel for the challenge that exists with that.
I think governments have a role to play, especially in areas where it does not make economic sense and it is tougher for build outs to happen.
For example, in downtown Toronto, Montreal or St. John’s, companies have incentives themselves through economics to be able to go out and build. In those areas you are referring to, that’s where government has a role to play.
There are lots of funds that exist. As you know, as you are aware, you have CRTC funds. You have ISED with a fund. You have the Infrastructure Bank with a fund. You have provincial governments with a fund. People ask me all the time what I think of those funds. I think they are working, but it is not one-stop shopping. Sometimes there is not enough collaboration that would happen among all those.
My colleague referenced Quebec. Sometimes you need a government to take it on and say we are going to take everybody over to the table. Within Atlantic Canada, we do have an opportunity with that. We do have ACOA and provincial governments that are close.
I would say, if there were an improvement that could be made, you don’t need five different funds in different areas; if you could put it all in one specific area, it could be beneficial.
Mr. Smith: If I could add to that, in the case of Newfoundland, two weeks ago you probably saw the Newfoundland and federal government announce funding projects in collaboration with a couple of our members for, if we are talking about internet connection — high-speed internet — to reach all remaining unconnected households in Newfoundland. So 98% would be covered by 2026; the remainder, which is hard to connect, would be by 2030. If you are talking about wireless connectivity, there is some funding that is being done on that.
One interesting thing is that the high-speed internet funding projects will help wireless connectivity because, for wireless, yes, you need a wireless signal; you need spectrum from a tower to a device or a home, but you also need that transport layer, that fibre, that backhaul that takes you back to the core network. These broadband funding projects are building out those transmit layers that can later be used for wireless. The funding has been focused on home internet, because it is a priority. If you get a connection to a home, you can let the whole family use the internet.
Now we are seeing, for example, Quebec is talking about using the model they used for home internet for wireless. I think that the models have shown their value, and that can be applied to wireless as well.
Senator Manning: Thank you. I wonder, when you look at Bill S-242 as we see it today, are there any recommendations that you would think of that would assist in creating that connectivity to rural areas in Canada?
Mr. Smith: Yes, sure. As Rob said from the start, the motivations and objectives behind Bill S-242 are good motivations. Our industry agrees that we want to connect people. I think, however, it is not the right tool.
As you mentioned, and as Mr. Ghiz mentioned in his opening remarks, a lot of initiatives that are going on right now, mostly under the auspices of ISED, to increase rural connectivity, whether it is funding or spectrum policy. They recently tweaked the framework to make the auctions of residual spectrum — that spectrum that was not bid on at an auction — available sooner to those who are able to deploy it.
We have a member in northern Ontario, Tbaytel; they recently acquired residual spectrum which they are going to use to connect to communities in northern Ontario. They have also added smaller tier 5 licensed areas where the spectrum allows it to be used and licensed in a smaller area. They have more aggressive deployment requirements.
They are doing consultations on what’s called access licensing framework. It is a controversial framework, and not everyone agrees with it. Their goal, there again, is to make it easier. If there is spectrum somewhere not being used, and somebody has a business case where they could use it, they want to put in place a framework that would, on an equitable basis, allow them to gain access to that spectrum.
There are a lot of things that are going on. My worry is, in addition to the one-size-fits-all problem with Bill S-242, we are getting into the territory where we need to allow these other initiatives to play out and see their effectiveness. The proposed bill could hurt some of these initiatives.
We really need to let ISED do its work — they are the experts in this area — and let their initiatives play out. After that, measure that and see if anything else needs to be done.
Senator Manning: Mr. Ghiz, if I heard you correctly earlier, you said we are one or two years behind going to auction. Is there any reason for that, or is it just the way things happened?
Mr. Ghiz: It was consultation processes that were in effect. I will say this: We were behind a little in 4G and LTE compared to the United States. Now our networks are faster than the United States’ networks and we rank higher. Sometimes it is not the end of the world to be a little behind. Hopefully, the same thing that happened with 4G and LTE will happen in Canada.
We need governments to make sure that the spectrum is available in a timely fashion, and that they have policies in place that promote the investment of wireless networks in Canada.
Senator Manning: Thank you.
Senator Cardozo: Thank you, Mr. Ghiz and Mr. Smith, for being here.
We have talked a lot about connectivity this morning. What we haven’t talked about yet is affordability. Certainly, there is a view — and you can correct me if I’m wrong — that we have among the highest rates of cellphone and internet costs in Canada compared to the world.
What are your thoughts about how we deal with that issue in general, but in rural and remote areas, and whether this bill would do anything for affordability?
Mr. Ghiz: Great question. Thank you, senator, for that.
We know that, over the last number of years, one of the biggest challenges for Canadians has been the cost of living. According to the all-items consumer price index, last year alone it increased by 6%. Over the last two years, it has increased by 11%. Contrary to that, though, cellular price index over the last year has decreased by 7% and over the last two years by 22%.
You may ask why is that happening now when all the other costs are going up? It goes back to government policies over the last 20 years on facilities-based competition, where you have the incumbents and the new entrants who are competing vigorously for new customers. We are starting to see government policies that go back to 2005-2008 where they encouraged the new entrants to come in where we are starting to see prices go down.
It is not just about price, and this is the second part of your question; it is also about the quality of our networks. The quality of our networks in Canada, as I indicated before, we have some of the top speed networks in the world here in Canada.
It is also about coverage. When it comes to coverage, we need to have an environment that encourages investment so that we can go out and, yes, connect more Canadians but also improve our existing networks — in other words, catch up with 5G — so that Canada is in a position to compete.
To shorten the answer, prices are coming down because of facilities-based competition. We still cannot take our eye off the ball that more investment needs to be done so that we can connect more Canadians so that they can benefit from having access to world-class mobile services.
Senator Cardozo: Is the facility-based competition helping in terms of competition overall in the industry? It is not a very competitive industry. How do we expand? Forever the government and the CRTC have been trying to get more competition in the market. A few new players come in and then they get gobbled up by the big players and we are back to a few players.
Mr. Ghiz: The players that have been gobbled up are more resellers so they are not the ones out building the networks. The ones you have seen announced recently are not going to build in the rural communities. They will resell the networks. They were mainly home internet providers anyway.
In terms of going out and building the networks, it is going to be our facilities-based providers. It takes a while to get into the wireless business. It’s a very capital-intensive business, and if you look at our region, there are probably four Atlantic Canadians here. Eastlink, we think it is large in terms of the Maritimes or Atlantic Canada, but overall it is a relatively small player. The same with Vidéotron in Quebec. It’s viewed as large in Quebec, but overall it’s a small player. Those smaller players have been growing dramatically over the past few years and are providing competition across Canada which is leading to us having better networks with price decline.
Senator Cardozo: Mr. Smith, you talked about adoption of technology and the need for more of that. Beyond 5G, what would you say we need? What can be happening?
Mr. Smith: Are you talking about on the carrier side or the larger economy?
Senator Cardozo: The larger economy of the industry.
Mr. Smith: We like to say that our industry, and the digital infrastructure they build, is an enabler for other industries. Our industry contributes about $70 billion to GDP each year and supports over 650,000 jobs across the industries.
But what is important is that those industries then look at the capability that we are building into the telecommunications infrastructure and utilize it to use advanced technology, whether it is using virtual reality, artificial intelligence, those types of things.
What 5G has done, if you go back and look at the advent of wireless, it was so you could make a phone call. Then it was text. Then you could access the internet. So 5G is expanding the portfolio of capabilities so you can have ultra-low latency. That means mission-critical applications, whether it is public safety, medical, transportation or what have you. It allows minute imperceptible delays in the signal so you can use it for safety applications.
But it’s incumbent on those industries to adopt that technology. I think Canada has a bit of a reputation for being a late adopter of technologies versus other countries. I think it would be good for government to look around the world and see what countries are doing to embrace new technologies that 5G facilitates, and encouraging select industry sectors through different policy levers to adopt that technology so that our businesses in Canada can be competitive with the rest of the world.
Senator Cardozo: Do you have some examples?
Mr. Smith: Yes. There are a lot of interesting things being done in the transportation space. A lot of people talk about self-driving vehicles. I like to put that aside as it’s a very technical challenge, driving your car on a city street. But automotive and safety features are being used in the resource sectors in terms of large, slow-moving vehicles, for example. There is technology used down in mines, in agriculture, in terms of being able to carefully monitor the conditions in which you are planting and the chemicals and other things you need to apply. For a country like Canada, I think we can see a lot of pay off in the natural resources and agriculture space.
Senator D. Patterson: Thank you to the witnesses. Mr. Ghiz, I was frankly astonished when you said ISED has been deploying on a use-it-or-lose-it basis. We have watched ISED policies play out for years, and that’s why we are here. Loopholes have allowed companies like your member Vidéotron to buy spectrum in Toronto in 2008 for which they paid $96.4 million. They never built in the most populous city, and then flipped it in 2017 with some spectrum to Rogers for $184 million and then a month later more to Shaw for $243 million for a profit of over $300 million.
I know Mr. Smith called it residual spectrum. I won’t use the term “spectrum squatting,” but I would like to ask you how much fallow spectrum are your members sitting on, if you could give us that detail now or later through the clerk. How do you think that fallow spectrum can be brought back into service?
Mr. Ghiz: Thank you very much, Senator Patterson. Allow me to take this opportunity to congratulate you on this bill.
As we said, we are supportive of the intent of the bill. We think this is a very important issue for Canadians to become more connected and to be able to have someone in a rural or remote area have the same advantage to someone in an urban centre.
I will allow my colleague, Eric Smith, to go into more detail. You have talked about really the first auctions that were taking place with the new entrants. I like to say it was an evolution over the last 15 to 20 years in terms of the spectrum auctions that have taken place. At the beginning, it was about promoting more competition in Canada to help these new entrants of Eastlink, Vidéotron, SaskTel to a certain extent, Freedom Mobile, Xplore to be able to get into the business. They wanted to be competitive across the country.
They are massive investments they have made to be able to do that. I think we are starting to see the fruition those investments are making. But sometimes business cases change. Those changes have taken place over the last 20 years. They will take place over the next 20 years.
In terms of what some consider squatting, it could be a change in a business plan. But because they were able to sell that — and you heard this from ISED — others were able to use that spectrum to be able to connect more Canadians. Sometimes some made money on those sales. Sometimes they lost money on those sales. But overall it was about connecting more Canadians.
I’ll allow my colleague, Eric Smith, to discuss more about those details because I think it is important to know what happened.
Mr. Smith: Just one point of clarification, when I used the term “residual spectrum” it was spectrum that was not bid on by anybody at an auction. Nobody held it. In terms of fallow, our members are using the spectrum which they have acquired through auction under the auction rules and they were deploying it in accordance with deployment requirements.
There are cases — and I think the officials from ISED testified — that when they are coming up on a milestone, they do a review of the licences to see where companies are at with deployment conditions. In very rare situations, they may find a company in a particular licensed area with a particular block of spectrum they have acquired that either through business plan changes, problems getting authorities or permits from local land-use authorities, or whatever the reason is, that they feel they are not going to be able to deploy that spectrum within the allotted time period.
When that happens, typically they look for someone who can subordinate that spectrum to because they get credit for meeting their deployment requirements if they can do that, or they will seek to transfer it to somebody else.
Sometimes they swap spectrum with other providers. I have spectrum you could use here and they transfer and swap it. In very rare cases, they will say that they are not going to be able to use it and they return it to ISED, and then it is made available through other frameworks that ISED has. I think it is a misperception that there was a lot of spectrum that is not being used. It is being used in accordance with the licence conditions.
Senator D. Patterson: That was my question. You represent the wireless industry in Canada; can you provide us with data on how much unused fallow spectrum there is in your membership?
Mr. Smith: We can go back to our members and ask that question.
Senator D. Patterson: Could you get that information back to the committee?
Mr. Smith: We will provide what we get back from our members, yes.
Senator D. Patterson: You lauded data for CRTC showing great penetration. I recall you saying, “where people live and work.” That immediately telegraphed to me that you are talking about big cities and urban areas. But people live and work in remote areas. What is the penetration in rural and remote communities, or what is the penetration if you calculate the rural and remote communities alongside the urban areas where people live and work? Would it not benefit rural and remote areas if fallow spectrum — this unused spectrum that’s a public utility — became available to rural and remote communities?
Mr. Ghiz: That is a great question, senator. When we used the CRTC number — 99% of Canadians where they live and work — that is for all Canadians. But you are right, in urban centres it is higher compared to rural and remote centres. We know that in rural areas it is around 98%. We know that in First Nations it is down to 90%. Those are the areas that over the next three years, since it is 2023, where the goal of the CRTC and our industry, that we are on track for, is to connect 100% of Canadians. Those are the areas that need the investments over the next three years for connectivity to be able to make that happen.
Senator D. Patterson: Thank you.
Mr. Ghiz, you gave us great positive comments about the penetration of the wireless system in Canada, fastest of any G7 country. There is a belief that Canada also has the highest cost in the world perhaps. Could you give us — now or later — an analysis that doesn’t necessarily talk about penetration but talks about costs compared with the G7, which you say we lead in speed?
Mr. Ghiz: Is that cost in terms of investment or in terms of what people pay?
Senator D. Patterson: Cost to consumers.
Mr. Ghiz: I have indicated before in relation to the consumer price index how we are seeing prices drop in Canada. Currently, it is 7%, last year it was 22%. Over the last two years, we have seen other plans where the prices dropped even more dramatically. We know that in Canada our costs are more in terms of build outs because of our terrain, because of our climate and because of spectrum costs being higher in Canada. But we also know that we invest more.
When you talk about the quality of our networks, there is still more work to do. If you look at, I think, the G7 plus Australia, what they spend per subscriber, Canada spends almost twice as much per subscriber as any of those countries in the G7 plus Australia. That is why our networks are faster, but it is also why we are making progress in terms of connectivity even though there is still more to do, and we need to do that in the future.
Senator D. Patterson: You asked me if I was asking you about the cost of investment or the cost to consumers, and you gave me an explanation that costs have dropped in recent years and that Canada spends twice as much as other countries on the build because of our terrain and geography. I would ask you again, do you have data that compares our cost to consumers with, say, other G7 countries or comparable countries? Do you have data on that?
Mr. Ghiz: Yes. I’ll let Mr. Smith answer.
Mr. Smith: It is a difficult question. If you talk to economists, they will say there is no reliable way that you can compare prices from country to country. Why is that? If you look at wireless industries and whatever group of countries you want to compare, there are thousands of different plans that are out there. They all have different attributes. They all have different qualities in terms of speed, coverage, et cetera. Really, you are getting into the situation of comparing apples to oranges.
There are a few studies that have been done by independent organizations that have attempted to do this. When economists and academics look at these studies, I think a direct quote is that they provide, “meaningless results.” You cannot look at costs or prices without looking at the cost of providing the service. If you factor in the consumer price, the retail price, if you look at the cost of providing the service, if you look at the quality of the service, if you look at the coverage of the service, and factor all those things in, yes, we can provide you a report. There was a U.S. industry association that hired economists to look at that very thing and combining all of these things to come up with what they call a value proposition. In that study, among the G7 plus Australia, Canada was ranked number one as having the highest value proposition. The words of the authors of the study was that Canadians get more bang for their buck. In addition to the G7 and G8, they also had a category of leading democracies, which was about 20 countries, and again, Canada came first.
As Mr. Ghiz mentioned earlier, you have to look at the totality. The three pillars are the quality, the coverage and declining prices, and then look at whether the policies that are in place are providing those outcomes. I think it is indisputable that the policies in place are providing positive consumer outcomes. I can get you that study. I’m happy to share that with you.
[Translation]
Senator Cormier: I would like to come back to the issue of compliance by licensees. Mr. Smith, you were saying that there was a perception that non-compliance was less of a problem than it seemed. What do you think the government could do in terms of public policy to further ensure compliance with licences?
We know that the minister has the authority to cancel a licence in the event of non-compliance. However, in a context of subleasing, what more could the government do to ensure greater transparency and compliance, as there appears to be a problem in this area?
[English]
Mr. Smith: I would go back to the testimony of the officials from ISED. I don’t think they perceive it as a large problem. They are looking at maybe taking a scalpel to the issue and having very nuanced decisions, which they have made recently, and some consultations they are doing to tweak their policy framework. But I don’t think it needs any significant overhaul or large movement in policy.
As I mentioned before, they are looking at more aggressive deployment conditions in auctions. They are considering new deployment conditions for some spectrum that has already been licensed. It is spectrum that has completed its initial term of licence and is up for renewal. They are looking at applying some more aggressive deployment conditions on that. They are consulting, as I mentioned, on a framework for accessing licences. They are also streamlining the framework for residual licence auctions and adding smaller Tier 5 service areas.
They have increased the size of the WBS spectrum band in support of wireless services to provide more rural coverage. They’ve also made more spectrum licence-exempt or no-cost spectrum available in the spectrum band. That is a long list of things that they are doing. They’re very seized with the issue. They’re looking at best practices across the world and consulting with industry.
Again, I think that the proof is in the pudding. If you look at the coverage we have in Canada, the quality of the services, the fact there have been very few licences either revoked or returned to the government shows that spectrum is being used and providing good outcomes.
I don’t think we need any grand policy gestures. We need to, with respect, let the experts at ISED do what they’re doing in terms of finding and tailoring their approach subtly and to attack specific issues that they identify.
Senator Harder: A quick question. Given the challenge that Canadians feel, at least about cost, and given the gradual withdrawal of competition — you see mergers and fewer start-ups being successful — is it time to ask ourselves whether or not we shouldn’t open up the Canadian market globally and introduce competition in the sector with the expectation that that will have a price, quality and coverage effect?
Mr. Ghiz: Great question. I’ll start off and Mr. Smith can jump in.
It’s a bit of a misconception that Verizon, or anyone else, cannot set up shop in Canada. If they wanted to today, any foreign company could come in here and buy spectrum and start being a wireless provider. They could even come in and buy up a lot of our smaller players in Canada, whether it’s the Eastlinks, Vidéotrons or whoever. The only exception that exists, because of their market share, is around Bell, Rogers and TELUS that currently exists. There is an opportunity for them to come in. If you look at Xplore today, I believe they are owned by a U.S. hedge fund.
What is not widely known is that it is an extremely capital-intensive industry that is very expensive to get into and that, if it were so easy to do, we would see those other ones coming in here, but it is very difficult.
It’s ironic. You were probably there setting up the original system, senator. It has been a 20-year progress to get to where we are today, and it’s still evolving with the new entrants that are coming in. But it is because of all governments of the past — whether or not they have been Liberal or Conservative — that have promoted facilities-based competition, and the importance of investment, that we’re finally seeing the three pillars coming together, which is the coverage, affordability and quality. It’s taken a while for us to get here.
As long as governments continue to promote that facilities-based competition, and encourage investment and create an environment, our industry will hopefully even do better in the future.
Senator Cardozo: I have a quick question. I hope this doesn’t come across as a softball question. Over COVID, your industry played a major role. What did we learn and what carries on from there that wasn’t there before COVID came?
Mr. Ghiz: That’s a great question. We’ll do it in two parts.
Senator Cardozo: You get extra points when you say that.
Mr. Ghiz: We’ll do it in two parts, because we did all the stats. Mr. Smith knows the stats a little bit better than I do.
Essentially speaking, overnight Canadians went online. We saw twice as much traffic, now mainly through your home internet, taking place. And because of the investments that took place by our members, our networks were able to handle it.
I was, I’m not going to say shocked, but it was worrisome. Our members worked with government, because there had to be a number of changes that had to happen quickly around health care facilities, government facilities to make sure that things could happen. Our members worked closely with government, federal and provincial, to go into those essential service areas, to ensure that they had the capability to be able to withstand the increase in the bandwidth that happened at that time. It was a testament to the, we would like to say, $90 billion in investment over the last 10-15 years that our members have made for that to be able to happen.
Mr. Smith, you know a few more stats than I do. Feel free to jump in.
Mr. Smith: Thank you for the question.
While we proved to be resilient, it didn’t happen by magic. It was both past investments and, as the crisis was unfolding, our members worked tirelessly — especially working with anchor institutions like hospitals, government, et cetera — to make sure that they had the services they needed.
We also worked with disadvantaged communities in terms of making sure that they had devices. Some of the causes were women’s shelters. I used to be on the board of a women’s shelter. You can imagine the fear of these women who are not yet in the shelter system but are in an abusive relationship, not only is it difficult to get out of that, now you’ve got lockdowns or health restrictions, et cetera. We worked with those communities setting up texting services, et cetera, and getting devices into the hands of these people.
We also worked with other disadvantaged and marginalized communities. There was a lot that went on.
What we learned from it, when we talked earlier about adoption of technology and the digitization of society, it accelerated that, which was a good thing. Businesses, governments and individuals started to adopt technologies they were not yet embracing.
It also revealed that there is a chasm. There are people who don’t have the digital skills necessary and felt that they were left behind.
You raised the question of affordability. Our industry has — these are not government subsidies, they’re subsidized by our members — home internet plans starting as low as $10 to help low-income individuals and low-income seniors connect to the internet.
If you look at other countries, like the United States, there are large government subsidies that help low-income people. That is another area government could look at, just as they subsidize housing, food and things like that, there is an opportunity there as well.
The Chair: Mr. Ghiz, Mr. Smith, thank you for your presence. As you can see, we went over our allotted time of one hour. I thank you for your generosity. Your presence here today has helped the committee in terms of our study on Bill S-242. Thank you again on behalf of the committee.
Honourable senators, for our second panel I’m very pleased to welcome Ms. Bronwyn Howell, Senior Lecturer, Victoria University of Wellington, who is with us by video conference; and Georg Serentschy, Managing Partner, Serentschy Advisory Services GmbH, also joining us by video conference. Welcome.
Thank you for joining us virtually from New Zealand and Europe. I know it’s probably very early in the morning for you. We do appreciate you making the effort and coming before our committee. As is customary, you will have a few minutes for opening remarks and then I will turn it over to my colleagues for questions and answers.
Bronwyn Howell, Senior Lecturer, Victoria University of Wellington, as an individual: Thank you very much for the opportunity to present. I’m Dr. Bronwyn Howell, and I have an academic position at the Victoria University of Wellington. I have over 20 years publishing in peer-reviewed, international literature in telecommunications policy. My PhD is in public policy.
I am presenting work purely as academic in the public interest and as it feeds off those intentions. Most of my experience has been looking at comparative performance of different policies across countries.
In regard to Bill S-242, the use-it-or-lose-it rights are intended to ensure that spectrum that is out and has been auctioned is made available as rapidly as possible to as many people as possible. The rationale being with the use-it-or-lose-it clauses that if it’s not deployed within a reasonable period of time, then the rights can be taken back and made available to other providers who will, in fact, make use of it.
In general, I think it’s a commendable motivation, but unfortunately I think that the way the wording has been phrased with this is it can potentially create some unintended consequences and complications. This is partly because it’s a blunt instrument in an environment of a particularly complex set of policy arrangements around spectrum and competition intentions and other provisions that are in the Canadian policy bundle.
Part of this also comes about because of the fundamental issues that exist with that Canadian spectrum policy. It’s hard to look at this instrument without actually looking at it in the whole of what the bundle of policies is.
Regarding the unintended consequences that can come about, first of all, I think that the 50%-three-years criterion is a laudable intention, but it is a very blunt instrument and a one-size-fits-all criterion that is required to cover some incredibly different and diverse areas in the Canadian landscape. There are rural areas, urban areas and the trade-offs that come between these are incredibly important in looking at the bundle of rights that are available and the incentives, the motivations, and the returns on investment that come from deployment in different areas.
Adding this extra criterion into the obligations for the spectrum rights adds extra risk for the people taking on the licences, and this can be particularly problematic in financially marginal and very high-cost areas. I perceive there could be a risk as it will add additional barriers to potential rights holders to want to bid on this spectrum. If there is any doubt whatsoever that they will be able to achieve those particular criteria within the particular time frame, they will become more reluctant relevant to the current counterfactual that they are too good for the licences in the first place. This might, ironically, end up with lower levels of trade of the spectrum at auction because the bids just won’t eventuate. This is a particular problem because similar provisions were pertained to recent auctions in South Africa and that did lead to significant areas of spectrum rights not being bid for.
One of the other risks that come because of the blunt instrument is that it sets a target, and this may lead to operators that have their populations in urban areas that are low-cost and highly profitable and a rural area that is high-cost and therefore less profitable. Then the 50% over 33 years will be a target to be achieved and what we will see is operators aspiring to get to that target and then having gotten there perhaps relaxing the pressure to take the surpluses they get from servicing the low-cost, higher-volume urban areas, taking those surpluses and applying them to deployment of infrastructure in the rural areas. They may find they will stop or take the foot off the accelerator when they get to that threshold. That doesn’t necessarily help with getting the deployment out into the rural areas that is desired. It could actually further delay the incentives to deploy more remotely than exist currently because the conditions are stricter than those that exist currently. That doesn’t mean, though, that there isn’t some good intention in having conditions like that. However, what I would suggest as a more fruitful way of looking at this use-it-or-lose-it criteria is to look at sliding scales that take into account the particular geographic and demographic features of the areas to which the spectrum rights apply and perhaps look at a whole range of different penalties that could apply. The confiscation or the taking back of the licence rights is a particularly harsh penalty, but there are other things that could be looked at as well, particularly options of putting in statutory managers for a period of time. Again, a sliding scale of penalties could be considered that meet a range of targets within the one arrangement rather than just having the single, strict 50%-three-year criterion.
Other risks pertain to the ability to reassign the spectrum rights to other operators. Obviously, there is an obligation in the bill for operators who fail to reach the 50%-three-year criterion to be able to transfer their licence to another operator. However, the question is, given these extra risks that have been imposed, who will serve them? This leads to another problem that exists within the Canadian system. The way the spectrum has been sliced, diced and cut up and made available in Canada has led to some very high-cost arrangements. One of the issues operators find is that if another operator is going to take on the obligations of someone else, then it is much more cost effective if the operator has spectrum that is adjacent to them in the bundles that are available. It’s not just the quantity of spectrum that matters, it’s the actual position in the spectrum band. It’s much cheaper for operators who are immediately adjacent in the spectrum band with their holdings to take on the operations of another. If those rights have been fragmented and spread around, it is quite costly to take that on. Again, if the new operator faces the same obligations as the existing operator, and the most likely operator doesn’t have adjacent spectrum, then it is going to cost more to take that on. There may also be the same missing market that emerges for the secondary market rights in that case.
Therefore, one of the things that might be considered to help overcome this — if you are going to want to have the spectrum out and get it used or lost — is to look at the option of having a government-subsidized operator of last resort who can come in and take over those operations that don’t meet the target. This is particularly important when a partly deployed network has to be taken back. If that is the case, there are already customers using the network. If the rights are taken back and there are not enough operators, it may appear that not just the spectrum has been taken back but the customers are having their broadband taken off them. In that case, to support those arrangements, it might be necessary to consider this operator-of-last-resort option, which will necessarily have higher costs and will need to be subsidized more extensively in order to take those on. But that does need to be considered.
The fundamental issue I’ll speak to now is the Canadian policy. The thing that makes Canada’s policy unique in the OECD countries is the use of set-asides. There have been laudable intentions in the past to use set-asides for the promotion of competitive entry. Internationally, this is very unusual and is becoming less common as time goes on. That is because in this industry it is only economic to have a small number of operators providing services. One of the issues, then, is that if you’re going to have a market that has sufficient operators to provide service across a wide range, then the operators need to have their spectrum bundles in contiguous lots that are large enough and usable enough.
One of the problems with the set-asides in Canada is that they have created an artificial fragmentation of the spectrum rights in order to create the set-asides, which has left the large nationwide operators, who serve the vast majority of consumers, in a spectrum scarcity situation. The consequence of that is that the rights for spectrum in Canada have traded at much higher rates — multiples of the rates we’ve seen in other countries in recent years, particularly for the 5G auctions. This is one of the problems that leads to potentially higher costs in Canada. The spectrum itself is more costly because of the artificial scarcity that has been created by the set-asides and the fact that with repeated set-asides over time for different spectrum bands, there is quite a degree of fragmentation of the spectrum at the moment. That makes the merger process, as these bundles come together, more costly for the provision of services.
One of the things that could be done to address that is to consider what spectrum is out there already and to see whether it can be defragmented so the costs of acquiring the rights for the existing operators or operators who might take on the operations of a failing network operator are less than they would have been otherwise.
One of the options that’s available here is, first of all, to set aside the set-asides and also undertake a defragmentation of existing allocated rights. For an example of where this is being done, I would suggest Australia. Rather than looking at the tier system as it operates at the moment, it might be better to consider the incentives that operate in urban areas as distinct from the rural areas separately. An example one could look at is New Zealand. New Zealand rights are made available nationwide, but the demarcation is between urban and rural areas. To the extent that there is a higher cost in rural areas and also the reality that there is really going to be one network operator in these rural and remote areas who will find it efficient to put the equipment there, we have to look at ways of making the widest spread possible of that investment at the lowest-cost possible. In New Zealand, in this rural-urban division, we’ve seen the nationwide operators coming together to share their spectrum in the rural areas with support from government funding. They’ve created a 4G multi-operator core network system where the three companies collaborate to build the tower, and they share the equipment and the spectrum and —
The Chair: Ms. Howell, I hate to interrupt, but we usually give our witnesses approximately five minutes. The chair has been very generous because your testimony is very interesting, but could you wrap it up so we can get to our Q&A period?
Ms. Howell: Okay, thank you. This does provide an option. I can provide more details on that if you’re interested. The third point is about looking at the appropriate technologies. Satellite remains a very viable alternative option in rural areas. Looking at the margins of where satellite versus rural are the best technologies is something worth considering. Thank you very much.
The Chair: Thank you, Ms. Howell.
Georg Serentschy, Managing Partner, Serentschy Advisory Services GmbH, as an individual: Good morning, honourable members of the Senate committee. Thank you for inviting me to testify before the committee and offer my thoughts on Bill S-242. I am pleased to be here and contribute as an independent adviser expressing my own views.
Let me begin my remarks with some basic thoughts about the bill. I understand the intent of the bill and think that the underlying spirit is in the right direction. Against the backdrop of an ever-increasing role of digital applications in all areas of daily life, whether in health care, education or e-government to name just a few, this is crucial for all citizens. However, universal participation of all citizens requires nationwide network coverage. Improving network coverage in rural areas and the Northern territories is an important policy goal that, if I’m correctly informed, is to be achieved by 2030.
The impetus for this bill seemed to be an apparent imbalance between the minister’s telecommunications policy objectives, creating competition and connecting rural Canada. For decades, the standard narrative for improving connectivity has been promoting competition. Indeed, competition is a proven economic tool to stimulate investment and innovation and lower consumer prices. However, the success of using this tool in urban areas in Canada has in some ways obscured the role of competition and led to a widespread misbelief that competition is a kind of silver bullet to solve all problems. Competition, however, is an economic concept that works only in cases with an economic basis. In the case of rural connectivity, the economic rationale for expansion is commonly lacking, and therefore pro-competitive measures do not help in these cases. For this, we need, for example, universal service mechanisms and incentives for operators to expand their networks even in non-economic areas. Ultimately, this is a matter of finding an operator who will commit to expansion. While much of this can be solved through regulatory and policy frameworks, the legislature has an important role in providing legislative guidance to the regulator in how they balance these objectives, particularly where there appears to be an imbalance.
On a policy level, I think the right way forward is to shift the policy focus from urban areas to rural Canada and give the minister legislative discretion in setting effective rebalancing measures. A “carrot and stick” approach is a helpful policy tool to operationalize this rebalancing. Allow me to highlight five aspects in this context.
First, spectrum is a public good that should contribute to public welfare for all citizens. Second, licence holders who are granted permission to use this spectrum must meet predetermined obligations on how they will use it in the public interest regarding population coverage, due dates for achieving specific targets, and connection quality. Third, penalties are imposed for non-compliance with the obligations and licences may be revoked if non-compliance persists. I call this the “use-it-or-lose-it” rule, which is quite common in Europe. Fourth, it is completely contrary to the understanding of spectrum as a public good to leave spectrum idle or to use it for arbitrage business. The fifth and final point is that strengthening a secondary spectrum market is an essential element of modern spectrum policy. For example, an operator can meet its coverage obligations by subleasing spectrum to another operator that is able to meet the obligations.
In my view, Bill S-242 helps Canada achieve each of these points, at least from a “stick” perspective. It creates strong deployment conditions and use-it-or-lose-it rules, imposes clear penalties for non-compliance through loss of licence and civil liability, and it strengthens the secondary market by allowing the Minister to consent to a remediation plan. These are my upfront messages. I am looking forward to the questions you might have.
The Chair: Thank you, Mr. Serentschy. I will start off with the first question and some comments. It is becoming clear what we are facing here. We are facing an urban-rural divide when it comes to connectivity. Senator Patterson’s Bill S-242 is making an attempt to overcome some of those challenges in rural parts of our country.
Are there certain models that have worked better in helping rectify this divide? Should the onus solely be on the shoulders of government to use a public policy tool where they make sure that the resources are available to spectrum providers in order to provide a service in areas of the country where we know that there is no good economic case for it? Or do we need to be better at bundling up the spectrum we sell to telecommunications providers who buy that spectrum in economically lucrative urban centres? Do we bundle it with the less lucrative rural parts of the country and say that the two go hand-in-hand? Which one of these strategies would you say is most efficient in overcoming those challenges?
Ms. Howell: I would suggest that looking at a nationwide policy rather than a breaking it up into urban and rural areas appears to be much more successful, particularly in countries that have comparatively or absolutely large rural areas. The policies that are made available in New Zealand and Australia are of that nature. The rights are made available nationwide, and the reality is that the operators who provide the nationwide services are the ones that have the best investment potential. They have the biggest scale; therefore they have the greatest potential to be able to leverage that from their above-margin urban areas to deploy that across as a subsidy for the rural areas.
Obviously, there are going to be some rural areas that are going to be too costly to serve that way, which is where the subsidies come in. Therefore, the Australia and New Zealand way is to look separately at the rural areas and provide additional subsidies for our separate systems that focus entirely on those rural areas and then working with the existing operators to try to determine where it is feasible for them to be able to provide. The New Zealand option that I was talking about is co-investment between the government and the three nationwide operators. The financing comes together. They have pooled all of their resources. They work collaboratively in the rural areas where there will never be facilities competition because it is uneconomic. They share their resources and spectrum there, but they still manage to compete as separate companies. The same three providers are able to sell equally to all consumers in those rural areas. It facilitates services competition in those areas, which is good for consumers, but it still allows them to lever that against what they managed to get for their unsubsidized urban provision.
Mr. Serentschy: Allow me to add something giving the European perspective. If you talk about a nationwide auction, it is good to make special provisions for underserved areas. If you pick out specific areas, which are called “white spots” in Europe, meaning they have no connection or a very limited connection or only voice and no data, then you can give special provisions for covering those areas. There are many different tools to do that. You can give additional money from the government, but what you can also do is provide incentives in the sense of a kind of reverse auction. Who needs the least subsidy or the least discount to provide it? Give the spectrum to that provider. That is a very helpful and efficient tool to get a balance between rural and urban.
The Chair: Thank you for that.
Ms. Howell: I would also like to raise the question — as Mr. Serentschy mentioned earlier — where is competition the appropriate objective to pursue and where is pure coverage the objective to pursue? When you are clear on the economics of these urban and rural areas and are aware of the margins where that applies, then you can get better, focused policy for those two different areas.
[Translation]
Senator Cormier: My question is for Mr. Serentschy. First of all, thank you for your very enlightening presentation.
Here in Canada, a provider who holds a spectrum licence can resell it to anyone, as long as the minister approves the sale and the buyer complies with the licence conditions.
Licences are then likely to be used as tools of speculation if they are resold at a high price. To your knowledge, is Canada the only country that allows this? Would it be desirable for the government to regulate the transfer price of licences?
[English]
Mr. Serentschy: Excuse me, senator. I cannot respond to your question because I cannot hear the translation and my French is too weak.
[Translation]
Senator Cormier: I repeat my question. Here in Canada, a provider who holds a spectrum licence can resell it to anyone, as long as the minister approves the sale and the buyer complies with the licence conditions.
Licences are then likely to be used as tools of speculation if they are resold at high prices. To your knowledge, is Canada the only country that allows this? In your opinion, would it be desirable for the government to regulate the transfer price of licences?
[English]
Mr. Serentschy: That’s a very good question. I tried to touch upon this already in my short intro. I was a regulator for 11 years. I have done this on a European level and a national level. We put safeguards in place that arbitrage business is a no go. It is a public good. It is not intended for private investor speculation.
When I say we need a strong secondary market, which means if a spectrum is left idle or a licencee is not able to fulfill obligations, he can transfer it to someone else, but as a kind of swap but not to make an arbitrage out of it. I think that is the important point; to have a largely secondary market in case an operator fails to comply with the conditions, meaning he can transfer the obligation to someone else without making an arbitrage business out of it. The consent of the regulator or minister means that this is prohibited, that this is not the case that somebody, private investor, makes a business out of it.
Ms. Howell: It is not unusual to have these provisions to allow free trade. In fact, it is essential to ensure the spectrum gets to where it’s needed most. One of the things that happens in telecommunications is that services evolve and things don’t come out as initially planned. The options made available for different operators at different times are not necessarily the same that prevail at the time the spectrum is sold. That ability to be able to sell at a different pace reflects the change in the value of the spectrum to different operators as their options change.
Even though it appears, sometimes, that profits are being made, it is not necessarily from speculation. It is because the spectrum has now become more valuable to another user than it was to the one that had it in the first place. It is far more efficient to allow the market to sort that out than to have regulatory intervention because regulators, with all due respect, don’t know necessarily what those values are and how they should be arrived at. That is going to help if it is freely done.
One of the issues, particularly in the Canadian space, that has contributed to the high values here is the spectrum fragmentation, because the spectrum is more valuable to an operator that is adjacent than to one who isn’t. And that leads to this area where prices can be bid up off the fragmentation that exists. Again, part of the problem why it might appear worse in Canada is because of the set-asides and the fragmentation. If that is removed, then the potential opportunities for arbitrage and prices being bid up high are also reduced.
[Translation]
Senator Cormier: Thank you for these answers. My second question is for Mr. Serentschy. You talked about the Competition Act, and the fact that it is a tool that does not necessarily apply in regions where there is no competition on the market.
As part of a public policy vision similar to the state’s commitment to funding education and health, which are essential services, do you consider that subsidizing this category of essential services which are needed in rural areas should be a priority for the state instead of simply relying on the Competition Act to solve the problem?
[English]
Mr. Serentschy: Thank you, senator. That’s a very good question and it goes exactly to one of the points I tried to make in my intro. Competition is a very good tool in areas where the economics allow for network expansion, allow for competition, allow for several facilities-based operators to excel. But if you come to an area where there is no economic case, you can only do it with the help of government, either by directly subsidizing it or by giving a discount on the price of the spectrum, which is right pocket, left pocket in some way.
It is important to say — and for me when I read through the bill — I see rebalancing between urban, rural and very rural is an important aspect. I very much supporting this. Also as a former regulator and as an adviser for regulatory things, this is the best way to handle it. Canada is a prime example of this enormous difference between urban and rural, and it needs to give way to give discretion to the minister to handle that rebalancing.
[Translation]
Senator Cormier: Thank you very much for your answer.
[English]
Senator Harder: Thank you to our witnesses. My question is for Mr. Serentschy. I really like your policy framework. I would suggest that basically is the policy framework for Canada. Yet we still have the gaps that Senator Patterson’s bill is designed to deal with.
Because I have problems with Senator Patterson’s solution, I would like to pursue another potential solution, and that’s with your experience on how auctions themselves are conducted. In Canada, auctions were designed to maximize the economic value of the public good of spectrum. The benefits of that option went to the Department of Finance, the central funds of the government. In a sense they did not reserve that funding to ensure broadband access or expansion. They were unassociated with that. The government instinct was to get as much money as you could from the auction process, and then the minister had to fight the Minister of Finance for adequate funding to allow the rollout, particularly in rural areas. We lost a minister in that fight.
My question is, in the European experience, what was the philosophy of auctioning spectrum? Was it to achieve maximum price for the Consolidated Revenue Fund, or was it to achieve a maximum price so that the funds received could be applied to the policy objective of coverage?
Mr. Serentschy: Europe is not a uniform country. It is not a single country. When I speak about Europe, I’m speaking about the 27 member states of the European Union. There are some member states who are extremely advanced, like the Scandinavians and others which are lagging behind.
Let me phrase it that way. What we have seen over time, looking back at the last 20 to 30 years or so about spectrum policies and auction methods, the pendulum swings in one direction and then in the other direction. What we have seen is sometimes a kind of — I wouldn’t call it greed — but a strong interest from the treasury to collect as much money as possible.
I think a great awareness evolved in many countries and governments that we have a persistent problem in some areas with persistent white spots where people are lacking connectivity. Twenty years earlier it was okay, can you make a phone call? That’s your private entertainment because you still have a land line. Now it is about ubiquitous connectivity and digitalization of the country, participation and inclusion and all this stuff. Government has now learned that the pendulum swung in the other direction, that it is not so much about maximizing the income for the treasury. It is also to give it back in a way to the sector.
There are two mechanisms which I have observed. One is that a certain part of the proceeds, maybe 50% or 70%, is earmarked for subsidizing non-economic areas. The second approach is to design the auction in a way that the proceeds are not going through the roof.
I admire Canada for many reasons, but the spectrum policy is probably not the strongest side of the country so far, looking at the late beginning of 5G and all this stuff.
Again, I think the bill goes in the right direction, because it, kind of, repairs a couple of weak points from the past, and this rebalancing is part of that, and giving enough funds to the underserved areas is an important part of that.
Ms. Howell: If I can also address that question, I think the issue of auction design is not just about the process via which the lots are offered; it is the whole design of the lots in the first place, and the set-aside policy itself is part of that.
I would argue that, in fact, the auction design, in addition to the raising of revenue, the objective was also to achieve a particular competitive outcome, and that’s what has led to the set-asides. To that extent, that distortion that has come from the set-asides has created a problem with the auction process itself, because it has led to, effectively, two different approaches to the way the spectrum is bid for — the operators that are bidding for the open spectrum and those for the set-aside spectrum. That, in itself, is an underlying part of Canada’s overall spectrum problem.
I think if you are thinking about the whole design of the auction process, it is not just the method or the auction method that is used or the use of the funds, it is the design of the lots as well, and the two things go together.
Mr. Serentschy: And the very high part of the set-asides. I think 40% set-aside of the whole spectrum creates enormous spectrum scarcity, and that’s a driver for the proceeds.
Ms. Howell: And the operators who are starved of the spectrum are the three nationwide operators who serve the largest number of consumers. And because they are spectrum-starved, this leads to the strong incentives for the spectrum farming, because they need to get extra spectrum to be able to expand, and the only way they can get it is by going to the people who have the rights that are not being used. And because of the distortions that lead to the high prices coming forward.
Senator Clement: Thank you to the witnesses. I’ll ask my questions and then get out of the way. The first one will be for Professor Howell.
New Zealand has what I think is a groundbreaking set-aside, 20% of the spectrum allocation going to the Maori nation at no cost in the spirit of the United Nations Declaration on the Rights of Indigenous Peoples, of which Canada is a signatory. I’m inclined to think that that is a good thing; however, I would like your take on this, because you have written on this. I’m not sure you have been completely supportive, so your comments on this would be interesting.
Also, if you could comment on subsidizing operations of last resort, if you could give a bit more detail as to where that takes place or how it operates.
To Dr. Serentschy, I like the way you outlined your five points, and it’s fair for you to say that spectrum policy in Canada may not be necessarily a reason for great admiration, which is why we are looking at things. You said strengthening a secondary spectrum market is important and the way to go. If you could go into more detail and give more specific examples of that.
I think you got to that when Senator Housakos asked you his first question, but if you could give more detail on that.
First to Professor Howell.
Ms. Howell: The issue of the Maori spectrum, I think, as you note, I have not been entirely supportive of it from an economic perspective, because to create a different bundle of rights that leads to different prices and different incentives does become distorting over time. I think the issues that have gone with the Maori spectrum have been more in satisfying a legal accountability for the state, where the policy was introduced without any consideration of what the long-run economic purposes and intentions and unintended side effects might have been as a consequence of that. I do predict that there will be some issues over time that could come to resemble some of those that are occurring in Canada, because of that particular policy.
One of the big concerns I have is that the capital intensity of the industry is such that the particular people who have been given the spectrum rights struggle relative to the other operators to be able to get the complementary investment to be able to build the rest of the infrastructure. Owning the spectrum is only a small part of the equation. If you can’t actually get the complementary investment, then the consequence is that the spectrum lies fallow.
If you have an open bidding process, then the spectrum that is bid for is bid by people who do have access to the finances and the ability to be able to bring something to market. That’s all I’ll say at the moment on the spectrum reserve issue. There is a lot of water to flow under that bridge yet.
The second question you had is about the operator of last resort. I think that if you do have a situation in Canada where you have lots, that you want to be able to provide service in an area, and no one bids, then you have to address the question of how you are going to get service in there. You could have an operator who is favoured through subsidies to be able to go in and do that in their own right, or you can look for other creative solutions.
That’s where I would suggest that the New Zealand collaborative of the three providers is an option that allows that to happen. It would help address the missing market by allowing providers to come together in those areas of high cost where no single individual provider has incentive. Then it is the collective that is subsidized rather than an individual operator, and then they can make the decisions themselves about how the deployment happens. So it’s a co-investment model.
Where it comes to the other area, there is a separate problem that exists, I think, in the case where spectrum is being taken back from an operator who has not met the auction conditions when they have a partly deployed network. This creates a problem, because it potentially disadvantages the customers who are already buying services from that network. You want to be able to transfer it to a going concern. If the operator with the rights cannot find another operator to take it on, then it is unlikely that it is going to be helpful for it to be taken back and then the regulator to try and find someone who is going to take it on. That is where, if that is going to happen, then having an operator of last resort who is funded to take on those particular services is going to be better for consumers, because they won’t get that interruption in their service that would have come otherwise.
I’m not sure that I’m aware of any example overseas where that has happened, because regulators have been very reluctant to actually take rights back when there has, in fact, been some deployment. That is something where Canada may be going somewhere that no one else has gone before with this regulation, and that’s where, thinking in the long run about that, if you are going to put this in place, you need to be able to address that issue ex ante rather than struggling to address it ex post when the first example comes to fruition.
The Chair: Thank you.
Senator Clement: I had one for Dr. Serentschy.
The Chair: Dr. Serentschy, do you want to respond to one of the questions that was asked by Senator Clement earlier?
Mr. Serentschy: Yes, with pleasure.
I think it is a very good question, because it addresses a very delicate point in the whole discussion. On one hand, as a regulator or as a ministry, as a policy-maker, what you want to avoid is arbitrage business. Opening doors wide open for arbitrage is a very bad thing.
What does that mean? If somebody gets spectrum — maybe at preferential conditions because of the set-asides and preferential rules — and then sits on this spectrum and does nothing and leaves it idle for a long period of time, that’s a speculative approach, and that creates, then, arbitrage, which is in contradiction to what spectrum is as a public good.
The other thing is if an operator, a licencee, notices during the expansion of their networks that he is facing difficulties in rolling out, lacking back hold facilities or whatever — any technical, regulatory or other reason — this operator should be able to transfer the spectrum to another one who is better suited to fulfill these obligations, and there is no insurmountable hurdle to make this transfer happen. That is what I meant by “have a lively and open secondary market,” which allows such occurrences, in which there is no arbitrage business interest behind. It is simply to the public good that the spectrum is used for everybody in the market.
Senator D. Patterson: We’re privileged to have both these witnesses with their wealth of experience.
Dr. Serentschy, you were the head of the EU regulator on spectrum. As you know, there have been some questions about the effectiveness of the approach in my bill, so I’m very grateful for your clarion call against what I call spectrum squatting or arbitrage.
I have a couple of questions in that connection. Given your background as a regulator, do you believe that 60 days for redeployment of spectrum taken back is a reasonable time frame to meet where spectrum is taken away for failing to meet deployment conditions?
Mr. Serentschy: It’s a very good point. I reviewed the discussion in the Senate on February 8, when this was a highly contested thing, whether 60 days is too aggressive or not. My opinion is: It is not about setting up a full auction; it is about a licencee who is not able or willing to fulfill its obligations. So the regulator claws back the spectrum and gives it to somebody who is better suited to do that. You are not preparing an auction; you don’t need to run a consultation. You can do that via a simple, sealed-bid auction with a secondary price rule, which I’m very much defending for this because then it’s easier that no bidder overstates the value of the spectrum. And you can do that easily in 60 days.
If you want to be on the very safe side, you could add one sentence to that clause and say, for example, “that if the minister fails to put a competitive process in place after 60 days, a first-come, first-served rule would kick in.” That would be a backstop solution as a fallback, but I don’t think that would bite, because in 60 days you can make, for instance, a sealed-bid auction.
Senator D. Patterson: Thank you very much. You probably heard Dr. Howell describe the penalty provisions in the bill or the bill as a rather blunt instrument. She suggested that a sliding scale for deployment conditions would improve the effectiveness of the goal of the bill, which you and she have said is laudable. Could you comment on whether a sliding scale on deployment conditions could be effective, please?
Mr. Serentschy: It’s a good question because, I mean, you can take it from different sides. I’m not a fan of the sliding scale. Sorry, Ms. Howell, for saying that very bluntly. I think clear obligations are better — to have clear rules for everybody. Otherwise, a bidder could come afterwards and say, if I had known this, I would have bid more or something like this. You should have stable conditions put in place, not this moving target stuff.
Ms. Howell: If I could clarify what I meant by the sliding scale. If you’re going to persist with an area-based system for the allocation of rights, then each area should be looked at and that the rights should be tailored to the specific demographic and geographic features of that area. So that an area that is largely urban, it may be appropriate to have the 50%-three-year criterion, but in an area that is predominantly rural, it may not be appropriate to have it that way. A predominantly rural area might have, say, a five-year scale. Or the other option, as I suggested, is taking back the spectrum. Looking at other penalties that could be applied for failure to meet the targets is also something that could be looked at in the different areas.
On the other hand, if you go to a national system for the auctions, then by all means that’s where a single instrument that applies to all comers is appropriate.
Mr. Serentschy: Thank you for clarifying this. Sorry, I obviously misunderstood your point.
Senator D. Patterson: With the greatest of respect to the valuable advice we have gotten about dealing with auction design, dealing with fragmentation of spectrum and dealing with set-aside policy, that is not in my bill. I don’t pretend to solve all the complex issues around this area with the bill, but it’s about tackling the problem of arbitrage and unused spectrum being sat on for profit.
Dr. Serentschy, you were very clear that arbitrage is a “no go” I think you said. I’m wondering if you could tell us whether in your time as a regulator in the EU, you were able to eliminate arbitrage in Europe. Is this the kind of measure that would also work in Canada? Thank you.
Mr. Serentschy: Let me make a little correction, senator. When I was chairman of the BEREC, the Body of European Regulators for Electronic Communications, BEREC has no competencies in spectrum. That is with the Radio Spectrum Policy Group, or RSPG. My experience is 11 years as a national regulator. Of course, I have closely observed what is going on in other countries. That’s normal that regulators in Europe exchange very closely their different experiences.
I think arbitrage was never a big issue in Europe as far as I can see. In my tenure as a regulator, it never happened, because we were very strict with rollout obligations. In my 11 years as a regulator I think we had two cases where it was necessary to claw back spectrum from an operator who, despite giving reminders to them, failed to comply with the conditions.
Senator D. Patterson: Thank you.
The Chair: On behalf of the committee, I would like to thank our witnesses for appearing before us and for your valuable testimony.
(The committee adjourned.)