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In an effort to foster competition in the internet market, the CRTC requires larger telecom companies with their own networks to sell wholesale access to third-party operators.

Chris Wattie/Reuters

Canada’s large phone and cable companies head to court Thursday to argue that the federal telecom regulator made errors and exceeded its powers when it lowered the rates the companies can charge smaller internet service providers for access to their networks.

The case, which will be heard virtually over two days by the Federal Court of Appeal, is the first of three efforts by BCE Inc. and a group of five cable operators to reverse an August, 2019, ruling by the Canadian Radio-television and Telecommunications Commission (CRTC).

The companies have also appealed directly to the CRTC and to the federal cabinet to overturn the decision, which, in addition to lowering the rates they can charge, also ordered them to make large retroactive payments to independent internet-service providers (ISPs).

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In an effort to foster competition in the internet market, the CRTC requires larger telecom companies with their own networks to sell wholesale access to third-party operators such as Distributel Communications Ltd. and TekSavvy Solutions Inc. Those companies then sell internet services to their own customers.

Last summer, the CRTC decided that interim rates for wholesale broadband set in 2016 were too high and that retroactive payments – totalling an estimated $325-million, according to court documents – were needed to compensate the third parties.

These retroactive payments amount to an “unconstitutional tax,” BCE argues in documents filed with the court, noting that the CRTC does not have the authority to impose a tax. The payments amount to “a subsidy or wealth transfer from carriers to resellers – a tax in the classic sense,” the company argues in court documents. The payments have not been made owing to a stay granted by the court.

BCE argues that the CRTC’s ruling transfers capital from carriers who have invested billions to build high-speed broadband networks to third-party operators “that invest little or nothing” at rates that are too low for the carriers to recoup their investments.

“The impact of the decision will be far reaching and profound,” BCE argues. “Not only will it deter carriers from making the investment needed to bring high-speed internet access to Canadians in rural and remote areas, it will suffocate their ability to invest in new and innovative technologies like 5G.”

The cable companies – Rogers Communications Inc., Shaw Communications Inc., Quebecor Inc.‘s Videotron Ltd., Cogeco Communications Inc. and Eastlink Inc.‘s owner Bragg Communications Inc. – argue that the regulator’s decision-making process was “inexplicably inconsistent.”

The CRTC embraced outdated guidelines when doing so would lead to lower wholesale rates while tossing out more current and relevant practices that would have resulted in higher rates, the companies argue in their submission. “The only consistent theme ... was that every issue was decided in favour of lower wholesale rates,” the submission reads.

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The Competitive Network Operators of Canada (CNOC), an industry group for independent ISPs, argues that inflated rates impede competition, leading to higher rates for consumers.

In its submission to the court, CNOC calls the phone and cable companies’ appeal baseless and says the retroactive payments constitute a “regulatory charge” rather than a tax.

The industry group argues that the CRTC went through a multiyear process involving thousands of pages of detailed costing information before deciding to lower rates and did not make errors or exceed its powers.

“Applying a well-established rate-setting methodology, the CRTC arrived at a conclusion many had long suspected: incumbent ISPs had been charging their competitors too much, for too long, for wholesale high-speed access services,” CNOC says.

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