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Report on Business Eastlink will cut $50-million to capital investments over CRTC move on Internet rates

Linemen test the cable lines in Dartmouth, NS, in this file photo.

Sandor Fizli/The Globe and Mail

Atlantic Canada cable company Eastlink says it will slash $50-million, or about 25 per cent, of its planned capital investments for the year and scale back on rural connectivity improvements because of a recent CRTC ruling on wholesale internet rates.

Earlier this month, a seemingly routine rate-setting decision by the Canadian Radio-television and Telecommunications Commission set off a storm of controversy throughout the industry. The federal regulator requires large telephone and cable companies to sell network access to third-party operators – such as TekSavvy and Distributel – who then resell the service to their own retail clients.

The decision set final wholesale rates for some internet services and in Eastlink’s case, reduced the price the company can charge third parties by 40 per cent or more compared with interim rates set in 2016. The final rates are about one-third of the amounts that Eastlink claims as its actual costs.

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The ruling also requires large telecoms to make repayments to their wholesale customers retroactive to when those interim rates were set. CRTC chairman Ian Scott said the final rates will “foster increased choice at more affordable prices” and encourage more competition in the broadband market.

Almost all of the major telecoms issued statements slamming the ruling last week, with BCE Inc. drawing the most attention when it said it will scale back its plans to expand wireless home internet in rural areas, cutting its program by 200,000 homes to 1 million. Eastlink and Rogers Communications Inc. also said they were considering cuts to rural investments and public interest groups fired back with accusations that the companies are holding rural residents hostage in their dispute with the CRTC.

Eastlink, which is controlled by Nova Scotia’s Bragg family and is privately held, rarely makes public statements or shares financial details. But in an interview with The Globe and Mail, executive vice-chairman Lee Bragg revealed his plans to scale back capital spending.

He said Eastlink is not “using rural as a tool or as a wedge to get [its] way,” but said the cuts will focus mainly on rural areas, owing to lower population density. “Those are the high-cost serving areas and why would we spend that money if we can’t get a return on it?”

Mr. Bragg said he is not opposed to wholesale competitors, but argues the rates have been set too low for network owners. He believes the CRTC decision was influenced by policy objectives of the federal department of Innovation, Science and Economic Development, which has been pushing for greater affordability of telecom services.

“I generally think the CRTC often understands the economics of the businesses. But I feel like they’ve been pushed here by the feds to say, ‘We need a solution and if the economics don’t support it, well too bad, just make it work.’” He said during recent conversations he has had with government representatives, they have favoured political promises over what he sees as economic realities, convincing him, "we are in the realm of the ridiculous.”

Laurel Chester, a spokeswoman for Innovation Minister Navdeep Bains, said of the ruling: "The CRTC, acting as an independent regulatory body, made the decision to cut the rates internet-service providers charge other companies to use their infrastructure so they can offer services to Canadians at more affordable prices.

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“Rather than holding rural Canadians hostage to voice their displeasure, these companies can use the existing appeal process if they wish to express their disagreement. Companies like Bell will have a tough time explaining to Canadians living in rural communities they can no longer afford to connect them while pocketing billions of dollars in profits each year.”

Ms. Chester said the government will “work with all internet-service providers who can help us achieve” the goal of making telecom services more affordable and getting more Canadians access to high-speed internet.

The CRTC has said it will not comment on industry reaction to the ruling.

During the interview, Mr. Bragg referenced a report from TD Securities analyst Vince Valentini, which said, “If Canada continues down this path of not only mandated access, but also seemingly very low rates .... valuations and access to capital for Canadian telecoms are likely to suffer.”

“That’s a challenge for us," Mr. Bragg said. "We are 100-per-cent bank financed. We’re not a publicly traded company. So when the banks lose confidence in our industry, we can’t invest because we can’t raise the money.”

According to Mr. Bragg, it costs Eastlink about $50,000 to build one kilometre of its cable network, a cost that doesn’t change whether it is serving five customers for each kilometre in rural areas or 100 customers a kilometre in Halifax. He estimated more than 50 per cent of Eastlink’s customers live in communities with 5,000 or fewer residents.

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The company, which has 1,500 employees – about 800 to 900 of which are in Halifax – said it spent $850-million on capital investments over the past five years.

Eastlink said it is “assessing all opportunities to address this decision going forward," which include seeking leave to appeal in court, an appeal to the federal cabinet or asking the CRTC to review its own ruling.

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