In the Matter of Canada Gazette Part I, September 14, 2002 Telecommunications Act Notice No. DGTP-008-02
Petition of AT&T Canada Corp. to Her Excellency the Governor in Council Dated August 27, 2002
Telecom Decision CRTC 2002-34 Regulatory Framework for Second Price Cap Period
Comments of Call-Net Enterprises Inc.
November 21, 2002 TABLE OF CONTENTS
I. OVERVIEW ______1 II. THE ROLE OF THE GOVERNMENT OF CANADA ______8 III. INDUSTRY REPORT CARD ______13 (a) The ILECs’ Remain Dominant ______13 (b) CLECs Are Exiting the Market ______14 (c) Low Price Levels ______15 (d) Declining Investment in Telecommunications Infrastructure______17 (e) No Silver Bullets on the Horizon ______18 (f) Conclusions ______19 IV. IMPLICATIONS FOR CANADA______21 V. REGULATORY REFORM ______24 (a) Prioritizing Policy Objectives______24 (b) Rethinking Facilities-Based Competition ______26 (c) Reforming Pricing of Telecommunications Services ______29 (d) Pro-Competitive Regulation of Telecommunications ______31 (i) Regulatory Lag______32 (ii) ILECs Abusive Marketing Practices ______35 VI. THE PATH FORWARD ______38 (a) Policy Direction ______38 (i) Competition is the preferred means of achieving the socio-economic objectives in section 7 of the Telecommunications Act ______38 (ii) The CRTC must assess the competitive impact of all of its decisions to ensure that they enhance the competitiveness of Canadian telecommunications______39 (iii) New Entrants should not bear the risks of regulatory lag______39 (iv) In fostering competition, the CRTC must develop cost-based rates for ILEC services and facilities that competitors identify as being vital ______40 (v) Competitor Access to ILECS’ Operations Support System (OSS)______40 (b) Investigation and Report on Pricing ______41 (c) On-Going Policy Role ______41 I. OVERVIEW
1. These comments are filed by Call-Net Enterprises Inc. in response to Canada Gazette Notice No. DGTP-008-02: Petition to the Governor in Council by AT&T Canada Corp. (AT&T Canada).
2. Call-Net Enterprises Inc. (Call-Net) is a leading Canadian integrated communications solutions provider of local and long-distance voice services as well as data, networking solutions and on-line services to businesses and households through its subsidiary Sprint Canada. Call-Net, headquartered in Toronto, owns and operates an extensive national fibre network. Sprint Canada is unique in providing national local residential service to more than 130,000 customers across Canada.
3. AT&T Canada has requested the Governor in Council to exercise its powers under section 12(1) of the Telecommunications Act (the Act) to review and vary certain aspects of Telecom Decision CRTC 2002-34, Regulatory Framework for the Second Price Cap Period (the “Second Price Cap Decision”). More specifically, AT&T Canada has asked the Governor in Council to modify portions of that Decision which relate to the pricing of services which competitors purchase from the incumbent local exchange carriers (ILECs) such as members of the Bell Canada Alliance and Telus. AT&T Canada has made this request because of its concern that, unless the Governor in Council intervenes, it is doubtful that a significant competitive alternative to the ILECs will survive and prosper. AT&T Canada says that such an outcome would constitute a major reversal for the pro-competitive policies that the Government has pursued since 1992.
4. In its Petition, AT&T Canada has painted a very bleak picture of the state of competition in the Canadian telecommunications market and, in particular, in the local exchange market which represents the largest segment of that market. It has highlighted the fact that new entrants have been frustrated in their attempts to obtain access to vital components of the ILECs’ networks at cost-based rates and have ended up paying the former monopolies hundreds of millions of dollars in inflated mark-ups. This has served to divert scarce financial resources away from the new entrants’ own networks, while enriching their principal competitors, the ILECs. AT&T Canada raises the specter of “remonopolization” by the ILECs as a likely outcome, if the problems are not fixed. It has cast the blame for this situation on the CRTC and, in particular, the CRTC’s failure to remedy these problems in its Second Price Cap Decision.
5. In response to AT&T Canada’s Petition, the ILECs (the Bell Canada Alliance and Telus) have tried to put a happy face on the industry. They highlight the inroads made by competitors in the local business market and raise the expectation of new entry in the residential local market by cable TV companies and wireless service providers. They blame the current woes of the industry on 2
the worldwide downturn in the telecommunications sector as well as bad business planning, and they continue to oppose any expansion of the limited segment of services and facilities that they are currently required to provide to competitors at cost-based rates. They endorse the CRTC’s focus on “facilities- based” competition and believe that the CRTC has struck an appropriate balance between the interests of the various stakeholders (the ILECs, new entrants and consumers). If anything, the ILECs believe that the CRTC has erred on the side of the new entrants and given them access to a broader range of cost-based facilities and services than the ILECs consider is justified.
6. What should the Governor in Council make of these two very different views of the state of competition in the telecommunications market and the impact of the CRTC’s Second Price Cap Decision on the development of effective competition? Is the local exchange market competitive or in crisis? Can the problems be fixed by varying certain aspects of the Second Price Cap Decision or does that decision strike an appropriate balance between the various stakeholders?
7. In Call-Net’s view, the facts support AT&T Canada’s position that the local exchange market is in crisis and that reforms are urgently required if the competitive local market is to survive and develop. However, Call-Net disagrees with AT&T Canada that the blame for this situation can be placed on the CRTC. While the remedies proposed by AT&T Canada would address some of our concerns, Call-Net believes that broader policy issues need to be addressed.
8. The CRTC has already put in place a proceeding to address certain short- comings in the Second Price Cap Decision identified by Call-Net and we are optimistic that these issues will be remedied by the CRTC itself.
9. AT&T has only focused on one aspect of one CRTC decision that affects the development of a competitive telecommunications market in Canada. In Call- Net’s view, limiting the remedy to revising that Decision will not foster the degree of competition that is necessary to achieve the competitive market objectives of Canadian telecommunications policy set forth in the Act. More pervasive regulatory reform is necessary and more direct involvement by the Canadian Government is required if these objectives are to be realized. This requires the Minister of Industry and the Governor in Council to step beyond the relatively restrictive role that they have traditionally played in the wireline telecommunications market, and that they begin to take a leadership role in addressing the regulatory reforms that are required to achieve a healthy and competitive telecommunications market in Canada. That market is undoubtedly in crisis and action is urgently required. The Government must become engaged in developing a solution, in providing policy direction to the CRTC and in giving positive signals to competitors that are on the verge of extinction. 3
10. Call-Net urges the Governor in Council to begin by examining the facts. What will become obvious when the facts are examined is that the state of competition in the Canadian telecommunications market is very fragile and that longer-term remonopolization by the ILECs is a very real possibility.
11. The local telephony market has been open to competition for approximately five years. During that period, new entrants have spent an estimated $8 billion on facilities and services to enter this market. Yet, at the end of this five-year period, the Incumbents (ILECs) still enjoy a 99.4% share of the local residential market, and a 96% share of the total local market.1 In the past 18 months, 11 new entrants have gone out of business, the first and third largest Competitive Local Exchange Carriers (CLECs) – AT&T Canada and GT Group Telecom – are currently in creditor protection and the second largest new entrant, Call-Net, has recently completed a financial reorganization that involved the capitalization of approximately $2 billion in debt, and a curtailment of its plans to extend local service to a number of Canadian cities.
12. The fact that the ILECs support the existing regime is not surprising given the fact that they have managed to retain more than 99% of the residential local market after five years of competition, and continue to price most services and facilities used by their competitors at rate levels that often include mark-ups of several hundred percent over cost. The fact that most of the new entrants have gone out of business obviously helps to entrench the ILECs’ dominance in the market and augurs well for them in the longer term.2 The bias of the regulatory regime towards expensive, capital-intensive facilities competition, coupled with excessive pricing of most access services and facilities provided to new entrants, has undoubtedly worked well for the ILECs, who face competitors with their own ubiquitous local networks, already in place, financed through rate of return regulation over a hundred year period of monopoly that only ended in January of 1998, when the local market was opened to competition.
13. The long-awaited “silver bullet”, competition from the cable TV and wireless service providers that the ILECs keep referring to is still not imminent, despite the fact that it has been heralded by the ILECs for many years as the source of potential competition to discipline their conduct. The provision of residential telephone service by cable operators will at best be some time in the future as major investments of capital and time are required. As for the wireless providers, it must be remembered that two of the three largest national providers are affiliates of the dominant incumbent telephone companies. The fact is that neither of these competitive forces have materialized to any substantial degree over the past five years and most of the cable TV companies who attempted to
1 Canadian Radio-Television and Telecommunications Commission - Summary Report of selected 2001 telecommunications statistics.
2 John Sheridan, BCE Inc. Second Quarter 2002 results conference call, July 24, 2002. “ When you look at the health of the CLECs and the health of the DLECs, there’s not much out there at all if you want to be trite about it. There are major challenges within that sector of the competition. 4 enter the local telephony market have now exited.
14. This is not a case where competing interests of carriers should be traded off. What is at stake are much larger issues of national importance. These issues concern the achievement of the policy objectives enshrined by Parliament in the Telecommunications Act, the achievement of the Government of Canada’s own policy agenda for the competitiveness of the Canadian economy as a whole and the role of Canada in the information technology services market.
15. The existing framework for local competition is not working in the manner envisaged by the CRTC or by government.
16. Rather than strengthening their positions, new entrants are increasingly going out of business, retrenching, or exiting the local exchange market. Rather than investing in expanding their networks, new entrants are slashing their capital budgets and paying excessive rates to the ILECs for vital service inputs. Rather than attracting new investment, new entrants are either going out of business or seeking to restructure their balance sheet at huge expense to investors.
17. At the same time, prices for telecommunications services in Canada are quite possibly the lowest in the world giving the impression of a highly competitive market. This indicator, however, is a very misleading one. Existing price levels are resulting in margins for competitors that do not cover their costs and do not provide coverage for capital projects. This pricing structure cannot prevail in the longer term and new entrants will continue to go out of business if it continues much longer. The downward spiral of pricing in the Canadian telecommunications market amounts to a war of attrition that only the player with the deepest pockets can win. It is starving the industry of adequate returns on investment and causing capital to dry up.
18. This situation was highlighted in a recent Yankee Group report that compared Canadian and U.S. telecommunications prices for bundles of services. This report concluded that U.S. prices for the baskets of services examined were 50% to 100% more than comparable baskets in Canada. While the report acknowledged that this was great news for Canadian consumers, it pointed out that carriers face similar input costs on both sides of the border and that the significantly lower price structure in Canada threatens the longer term competitiveness of the Canadian telecommunications market:
The CRTC’s mandate was to ensure that Canadians enjoyed the benefits of low prices for communications goods and services – ironically, the very success of the regulator’s efforts may well jeopardize the competitive framework.
That Canadians have such low prices is a bittersweet achievement – some pricing attention may need to be paid now to the needs of communications company shareholders. 5
19. The problems facing the telecommunications market are not going to be solved by tinkering with the CRTC’s Price Cap Decision. The CRTC is already addressing certain aspects of that decision in its “follow-up” proceeding on competitor digital access services (CDNA) and Call-Net is hopeful that corrective measures will be taken.
20. The malaise facing the telecommunications industry is far broader and more complex than a single regulatory decision.
21. The CRTC is burdened with the task of regulating a complex industry in accordance with a few very broad policy principles enshrined in section 7 in the Telecommunications Act. It has a legacy of incumbent telephone companies to regulate and it is mandated to foster competition and to protect the interests of consumers. The regulatory process is cumbersome and the CRTC has a history of making trade-offs to try to satisfy the interests of all stakeholders.
22. The CRTC has been cautious to take a role in enhancing and fostering competition for fear of disadvantaging the incumbents and it has been reluctant to take actions that might raise prices – even when some consumers are receiving service at below cost and Canadian prices are among the lowest in the world – well below the level of prices in the rest of North America. CRTC regulation lacks a clear policy direction precisely because it is trying to cater to all of these constituencies.
23. This is leading to a situation where already fragile competitors are on the verge of extinction.
24. This is not the result intended by Parliament when it enacted the policy objectives in section 7 of the Telecommunications Act. Those policy objectives recognize that a competitive market place is the best means to achieve the objectives of Canadian telecommunications policy – to stimulate innovation, reduce prices and improve the competitiveness of the Canadian economy. Similar objectives are found in the Department of Industry Act. Competition cannot develop without the incumbents losing market share; consumers cannot benefit from lower prices in the long term if prices do not cover cost, and the competitiveness of the Canadian economy will be short-lived if competition in telecommunications services is not sustainable.
25. The Government of Canada has an important role to play in the development of a competitive telecommunications market in Canada. Parliament has conferred on the Minister of Industry, the Department of Industry and the Governor in Council broad powers to ensure that policy objectives enshrined in the governing legislation are fulfilled. These powers extend well beyond the adjudication of petitions to review and vary CRTC decisions. As discussed below, the governing legislation obligates the Minister of Industry to take an active role in initiating, coordinating and implementing national policies to 6
promote competition and efficiency in the provision of telecommunications services, both domestically and internationally.
26. The Telecommunications Act also envisages that the Governor in Council will direct the CRTC on broad policy matters with respect to the Canadian telecommunications policy objectives. This is the legislative means whereby the Government’s telecommunications policy can be imparted to the CRTC for regulatory action.
27. At the present time, this is not happening. The CRTC is receiving little or no guidance from the Government and it is attempting to render decisions that respond to all interest groups. This is not working. Clearer policy direction is required pursuant to section 8 of the Telecommunications Act. Consumer benefits must be linked to the long term health of a competitive industry– not to short-term regulations that have frozen telephone rates at levels below cost; it must be recognized that competitors will only build facilities when traffic volumes justify the investment and that, in the meantime, resale of ILEC facilities and services will be required at cost-based rates; it must be recognized that competition will not develop; if the ILECs are permitted to use their dominance and complete knowledge of the market to win customers back from competitors, the minute they are lost, it must be recognized that if it takes four years to establish cost-based rates for a service, competitors may be out of business by the time the rate is finally set; and it must be recognized that pro-active regulatory initiatives are required to “enhance” the efficiency and competitiveness of Canadian telecommunications, and to “foster” increased reliance on market forces for the provision of telecommunications services.
28. This market differs significantly from other markets where regulatory intervention is not required. The task at hand is to convert a former monopoly to a competitive market that is healthy, efficient and sustainable in the least disruptive fashion possible,
29. Failure by the Government to act at this critical stage could not only jeopardize achievement of the policy objectives in the Telecommunications and Department of Industry Acts – but could also jeopardize the Government of Canada’s other telecommunications policy objectives such as its broadband initiative, its technology strategies for the Canadian economy and its new Innovation Strategy. Since telecommunications infrastructure and services are a vital building block for all of these policies, and since an innovative and efficient telecommunications system is a vital tool and productivity enhancer in businesses in many other segments of the Canadian economy, the Government has a very clear imperative to ensure that the benefits of a competitive telecommunications market is sustainable.
30. For all of these reasons, there is a clear imperative for the Governor in Council, and the Minister, to involve the Government of Canada in the process to 7 develop policy directions to the CRTC to assist the regulator in satisfying the policy objectives set out in section 7 of the Act and to use the CRTC’s investigative powers to explore ways to better achieve sustainable competition in the telecommunications market.
31. The remaining sections of this submission address all of these points, as well as the governmental action sought by Call-Net, in greater detail. 8
II. THE ROLE OF THE GOVERNMENT OF CANADA
32. The Government of Canada has an important role to play in addressing the crisis facing the competitive telecommunications market in Canada and in filling the policy void. Parliament has conferred on the Minister of Industry, the Department of Industry and the Governor in Council broad powers to ensure that policy objectives enshrined in the governing legislation are fulfilled. These powers extend well beyond the adjudication of petitions to review and vary CRTC decisions. As discussed below, the governing legislation obligates the Minister of Industry to take an active role in initiating, coordinating and implementing national policies to promote competition and efficiency in the provision of telecommunications services, both domestically and internationally.
33. There is a common misconception in Canada that the Government’s powers in respect of telecommunications are limited to the licensing of radio spectrum and submarine cables and reviewing CRTC decisions. This is simply not the case. The Department of Industry Act imposes far more extensive duties on the Minister in respect of telecommunications. This is apparent from section 4(1)(k) of the Act:
4.(1) The powers, duties and functions of the Minister extend to and include all matters over which Parliament has jurisdiction, not by law assigned to any other department, board of agency of the Government of Canada, relating to
(k) telecommunications, except in relation to
(i) the planning and coordination of telecommunication services for departments, boards and agencies of the Government of Canada, and
(ii) broadcasting, other than in relation to spectrum management and the technical aspects of broadcasting;
34. Like the Telecommunications Act, the Department of Industry Act contains certain policy objectives which are to guide the Minister in carrying out his responsibilities:
5. The Minister shall exercise the powers and perform the duties and functions assigned by subsection 4(1) in the manner that will
(a) strengthen the national economy and promote sustainable development;
(b) promote the mobility of goods, services and factors of production and of trade and commerce in Canada;
(c) increase the international competitiveness of Canadian industry, goods and services and assist in the adjustment to changing domestic and international conditions; 9
(d) encourage the fullest and most efficient and effective development and use of science and technology;
(e) foster and promote science and technology in Canada;
(f) strengthen the framework for the development and efficiency of the Canadian marketplace;
(g) promote the establishment, development and efficiency of Canadian communications systems and facilities and assist in the adjustment to changing domestic and international conditions;
(h) stimulate investment; and
(i) promote the interests and protection of Canadian consumers.
35. Section 5(f) and (g) are particularly important in the telecommunications context since they define a role for the Minister in “strengthen[ing] the framework for the development and efficiency of the Canadian marketplace” and specifically require the Minister to “promote the establishment, development and efficiency of Canadian communications systems and facilities and assist in the adjustment to changing domestic and international conditions.”
36. In exercising the powers and performing the duties and functions assigned to the Minister by subsection 4(1), subsection 6(a) of the Act requires the Minister to:
(a) initiate, recommend, coordinate, direct, promote and implement national policies, programs, projects and practices with respect to the objectives set out in section 5;
37. The Department of Industry Act therefore delineates for the Minister a very important role in both formulating and implementing national telecommunications policy in Canada, with a view to promoting the development and efficiency of Canadian communications systems and facilities and assisting in the adjustment to changing domestic and international conditions.
38. This is neither a passive role, nor a role that is confined to looking over the CRTC’s shoulder when decisions are rendered. It is a proactive role to formulate and implement national telecommunications policy in Canada.
39. This is not a power that the CRTC enjoys in respect of telecommunications. When it comes to telecommunications policy, the CRTC is confined by section 47 of the Telecommunications Act to exercising its statutory powers with a view to implementing the Canadian telecommunications policy objectives in section 7 of that Act, and in accordance with any orders made by the Governor in Council under section 8 of the Act: 10
47. The Commission shall exercise its powers and perform its duties under this Act and any special Act
(a) with a view to implementing the Canadian telecommunications policy objectives and ensuring that Canadian carriers provide telecommunications services and charge rates in accordance with section 27; and
(b) in accordance with any orders made by the Governor in Council under section 8 or any standards prescribed by the Minister under section 15.
40. This is a key distinction between the role of the Government of Canada and the role of the CRTC. It is the Government that is empowered to formulate telecommunications policy in Canada through legislation, through the power of the Minister to develop and implement national telecommunications policies, and through the power of the Governor in Council to direct the CRTC on broad policy matters.
41. Conversely, the CRTC is bound to comply with the policy objectives in section 7 of the Telecommunications Act and any policy directions issued by the Governor in Council, pursuant to section 8 of the Act:
The Governor in Council may, by order, issue to the Commission directions of general application on broad policy matters with respect to the Canadian telecommunications policy objectives.
42. The Governor in Council’s power to issue directions to the CRTC on broad policy matters is sometimes characterized as an intrusion by the Government into the jurisdiction of an independent regulatory agency – the CRTC. However, this is not an accurate portrayal of the situation. Parliament has not conferred a policy-making role on the CRTC. That role has been conferred on the Minister and the Governor in Council (subject always to the objectives of the governing legislation). It is therefore not correct to view the Government’s role in directing the CRTC on broad policy matters as an intrusion into the CRTC’s jurisdiction. It is the statutory duty of the Minister to formulate national telecommunications policies and it is a legitimate exercise of the Governor in Council’s powers to direct the CRTC on broad policy matters.
43. Indeed, failure by the Government to collectively exercise these powers would effectively create a policy void, thereby leaving this policy-making power to the CRTC on a de facto basis, in a manner that is inconsistent with Parliament’s intention.
44. The power of the Governor in Council to issue policy directions was added in 1993 when the Telecommunications Act was enacted. This power is designed to provide the Governor in Council with checks and balances to ensure that the CRTC is in fact implementing Canadian telecommunications policy in a manner that is consistent with the Act and with Government policy. It is an important and necessary link between the Government’s policy formulation role and the CRTC’s 11 regulatory role. There would be little point in the Minister formulating a national telecommunications policy if the CRTC were to ignore it when regulating the industry.
45. While this power has not been used to date in the area of telecommunications, a similar power has been used to issue policy directions under the Broadcasting Act on a number of occasions. Examples include: the Direction to the CRTC (Ineligibility of Non-Canadians) 1996, as amended; Direction to the CRTC (Ineligibility to Hold Broadcasting Licenses) 1985, as amended: Direction to the CRTC (Reservation of Cable Channels) 1978; Directions to the CRTC (Direct-to-Home (DTH) Satellite Distribution Undertakings) Order, 1995, as amended; and Directions to the CRTC (Direct-to- Home (DTH) Pay-Per-View Television Programming Undertakings) Order, 1995, as amended.
46. In addition to its power to direct the CRTC on policy matters, the Governor in Council has the remedial power under section 12 of the Act to vary, rescind or refer back for reconsideration any decision rendered by the CRTC. While this power is not limited to policy issues, it provides the Governor in Council with an additional tool to ensure that CRTC decisions comply with the statutory policy objectives in section 7 of the Act or with other aspects of the Government’s telecommunications policy.
47. The Governor in Council also enjoys the power pursuant to section 14 of the Telecommunications Act to require the CRTC to report on any matter within its jurisdiction. This is a power that enables the Governor in Council to use the CRTC expertise and resources to gather data and testimony and report on issues of concern to the Government. This power was exercised on June 26, 2000 when the Governor in Council required the CRTC to submit an annual report for a period of five years on a number of issues including the status of competition in Canadian telecommunications markets (P.C. 2000-1053). The predecessor of this provision (section 50 of the National Transportation Act) was also used in 1983 when the Governor in Council asked the CRTC to investigate and report on the implications of the proposed corporate reorganization of Bell Canada (P.C. 1982-3253).
48. It should also be noted that the Minister enjoys similar powers under section 10(1)(c) of the Competition Act to order the Director of Competition to inquire into whether the circumstances exist to make an order respecting anti- competitive conduct under the Competition Act.
49. Through these powers, Parliament has conferred on the Minister, the Governor in Council and the CRTC roles to play in ensuring that the policy objectives established by Parliament are satisfied and that Canada is served by a world class telecommunications system. No one body has responsibility for all of this system. What is now needed is for the Government of Canada, through the 12
Minister and the Governor in Council, to fulfill its role along side the CRTC. The participation and commitment of all three elements of government are required at this critical juncture to better achieve sustainable competition in the telecommunications market.
50. In Call-Net’s view, the policy objective of promoting sustainable competition in all telecommunications markets is clear. However, it is equally clear that the health of telecommunications competition is in serious decline, and its viability is threatened, as described below. 13
III. INDUSTRY REPORT CARD
51. The characteristics of a healthy competitive market are well understood. There should be rivalry among a number of competitors with no single competitor dominating the marketplace; competitors must be financially viable so that they can earn a return for their investors and encourage further investment in infrastructure and innovation; and there should be no incentive to price below marginal cost as a medium or long-term strategy.
52. Call-Net urges the Governor in Council to assess the state of competition in the telecommunications market against these criteria.
(a) The ILECs’ Remain Dominant
53. After five years of local competition, the ILECs remain dominant with an overwhelming share of the local exchange market. This includes a staggering 99.5% share of the largest local market segment – the residential market; and 97.6% of the overall local market.
54. This compares very unfavourably with the ILECs’ estimates of projected market share loss in the CRTC’s public proceedings that led to the introduction of local competition and price caps in 1997. In that proceeding, Bell Canada, BC Tel, MTS, MT&T, Island Tel and NB Tel projected a 15% aggregate market share loss by the end of 2002. Moreover, this estimate was stated to be a “conservative” one by these ILECs:
The market share loss estimates that went into determining the aggregate loss estimate of 15% by the end of 2002 were developed individually by each company. The Companies believe that these market share loss estimate represent a reasonable forecast of the losses that the Companies can expect to occur over the term of the price cap period, assuming that the rules for both local interconnection and price caps are established in accordance with the proposals put forward by Stentor. Otherwise, as Mr. Brookes notes:
In our case, in forecasting the 15 percent market share, it of course was premised on the conditions we put forward in the Unbundling and Price Cap Proceedings.
…
If those conditions do not hold – as an example, if there is open resale, as some have proposed, portability of contribution, as others have proposed, these are factors that will influence our forecast. I would suggest to you that in that case, it would be quite a bit higher than 15 percent. 14
There are factors that we are going to have to assume going in, dealing with the type of competition, but there are other things we can look at to be comfortable that 15 percent is a reasonable forecast.3
55. While all parties to these proceedings recognized that competition would develop less rapidly in the local exchange market than in the long distance market, new entrants have managed to capture a far smaller percentage of the market than was anticipated. Moreover, as noted in the above-referenced quote, Stentor had anticipated a market share loss “quite a bit higher than 15%” if proposals such as portability of contribution were allowed – which ended up being the case.
56. By any measure, the ILECs remain dominant in their former monopoly preserves. While competitors have made some inroads in densely populated urban regions, the penetration levels drop off dramatically in the suburbs and little, if any, competition exists outside of urban areas. Moreover, with less than 1% penetration in the residential local market, competition exists in name only in the largest segment of the market.
(b) CLECs Are Exiting the Market
57. Over the past 18 months, 11 competitors have gone out of business and exited the market. In addition, Canada’s largest CLEC, AT&T Canada, has filed for Court protection, and the third largest CLEC, GT Group Telecom, which is in creditor protection, is in the process of selling off its assets. For its part, Call-Net, the second largest CLEC, underwent a recapitalization of its obligations to reduce debt by $2 billion in the spring of this year, thereby avoiding creditor protection. However, it has had to postpone its plans to expand its local services into additional communities due to lack of capital.
58. The dire plight of CLECs was documented by Industry Canada in its report entitled Telecommunications Services in Canada: An Industry Overview:
Competing in the local services market as a CLEC has been financially difficult. For example, in February 2001, Cannect Communications was placed in receivership and later ceased operations after selling off its assets. C1 Communication Inc. filed for bankruptcy protection in April 2001, after the proposed merger of C1 and Wispra Networks was cancelled. Shortly thereafter, C1 sold its assets in Atlantic Canada to GT Group Telecom and its Toronto-based DSL co-locations to Futureway Communications. Axxent Communications was placed in receivership in April 2001, eventually selling most of its Quebec assets to Telus Québec prior to ceasing operations. In August 2001, Norigen Communications was placed into receivership and shut down operations
3 Stentor Final Argument, p. 23, Telecom Public Notice CRTC 96-8, Price cap Regulation and Related Issues. 15
completely by the end of the month. In April 2002, Gateway Telephone was placed into receivership and ended its telecommunications services one month later.
The financial troubles for the CLECs have not been limited to the smaller companies. In early 2002, Call-Net Enterprises underwent a recapitalization of its obligations to reduce its debt by $2 billion. Call-Net’s restructuring ended on April 17, 2002, with the private placement of $25 million in class B non-voting shares. On June 10, 2002 AT&T Canada announced that after it finalizes an agreement with its banking syndicate, it can complete the restructuring of its $4.5 billion in publicly held debt. GT Group Telecom is in a similar situation, as it has not met its financial covenant with its bankers and will have to renegotiate its credit lines, among other possible restructuring activities. During this process, GT Group has entered into bankruptcy protection.4
59. Perhaps most disturbing is the fact that other new entrants are not appearing to take the place of those who are exiting the market. The long-term competitiveness of the market is declining as the number of competitors dwindles and their financial health declines.
(c) Low Price Levels
60. The prospects for a turn around in the local exchange market are reduced because of the very low level of pricing that currently exists in the Canadian market for telecommunications services. While ostensibly providing evidence of vigorous competition in the market, the low level of pricing defies logic given the market conditions, and is contributing to the demise of competition.
61. Reports by the Yankee Group have made this point in recent years. While these reports have proven that Canadian consumers and businesses enjoy a significant competitive advantage over their American rivals in terms of telecommunications costs, the Yankee Group has begun to question whether the rather significant pricing differential is sustainable, whether it is healthy for the industry, and whether there are hidden costs in the form of instability, reduced employment, investment and the loss of competitors.
62. The Yankee Group 2001 report compares baskets of business services purchased from the incumbent telephone companies in comparably sized communities in Canada and the United States. The results are startling. For example, small businesses in Atlanta pay 96% more for similar services than do small businesses in Toronto. Nor is this an aberration, prices in Chicago were 61% higher than Toronto, prices in san Francisco were 74% higher, while Buffalo and Detroit were 99% and 90% higher respectively. Similar results were apparent for medium-sized businesses and large businesses. Large businesses in Detroit and Buffalo paid 111% and 116%, respectively, more than large
4 Industry Canada, Telecommunications Services in Canada: An Overview (October 2002) at page 2-11 16 businesses in Toronto, while larger businesses in Atlanta paid 53% more, in Chicago 82% more and in San Francisco 75% more.5
63. With such large price differentials, the Yankee Group has tried to explore the reasons for this phenomenon. It reports that the capital equipment costs associated with the services, provision are identical, the costs of real estate and labour are similar and even the costs of capital are comparable. The Yankee Group finds that the answer may lie in the regulatory regime:
Canada’s CRTC has done much to keep Canadian communications costs low. Certainly this is of significant benefit to the country’s businesses – at least, it is of benefit to those companies whose businesses are concentrated in areas other than communications. For shareholders of Canada’s communications companies, the news is somewhat grim. There are many risks involved in the communications business – technology risks, competitive risks, management risks – and the risks are similar on both sides of the Canada-U.S. border. The reward side of the equation is less balanced. The rewards to service providers on the U.S. side of the border are considerably more than the rewards to Canadian service providers. Low prices mean low margins.
Canada’s regulator may feel trapped. As we have seen in this Report, Canadian business prices are very low. We also examined consumer communications pricing earlier this year – the findings in that study also found that pricing was significantly lower in the Canadian consumer market than in the U.S. market. The CRTC’s mandate was to ensure that Canadians enjoyed the benefits of low prices for communications goods and services – ironically, the very success of the regulator’s efforts may well jeopardize the competitive framework. If the prices charged to communications users are too low, Canada’s service providers will not be able to demonstrate the returns required by the financial markets. That Canadians have such low prices is a bittersweet achievement – some pricing attention may need to be paid now to the needs of communications company shareholders.6
64. In a second report entitled: Canadian Consumer Communications: Talk is Cheap, the Yankee Group found that the prices paid by Canadian consumers “are still the lowest on the continent.” While low, medium and large users of telecommunications services in Canada consistently paid less than similar users in the U.S. for comparable services in comparable sized communities, the price differential was greatest for “typical users.” For example, typical users paid approximately 60% more in Burlington, Vt., 55% more in Buffalo and 40% more in San Francisco and Atlanta, compared with residents of Saint John, Brockville, Toronto, Ottawa, Regina, Sherbrooke, Kingston or Victoria.7
65. Again, the Yankee Group has commented on the implications of this price differential for the Canadian telecommunications industry:
What can one learn from such a comparison? Certainly we learn that Canadian companies are selling services for much less than their U.S.-based analogs. This is
5 The Yankee Group Report, Competitive Advantage: Business Communications Costs in Canada, August 2001. 6 Ibid. at page19. 7 Ibid. at page 10. 17
great for consumers. The Yankee Group would contend, however, that this discount pricing is not particularly good news for service providers. If you were a new enterprise looking to establish operations, why would you ever consider opening a bureau in Toronto when, for the same service set, you would be rewarded 60% more in Burlington, Vt.? This may explain why there is a dearth of competition for local consumer communications services in Canadian market at present. The pot of gold at the end of an evanescent rainbow may be too small.
There is room in Canada for rates to rise. Canadians are enjoying a significant bargain – but there are hidden costs, too. Canada’s communications companies are not reaping the returns from the consumer segment of the market that their U.S. counterparts enjoy. That puts Canada’s communications enterprise at a competitive disadvantage in the financial markets, for example, where all the communications enterprises compete for capital.8
66. Call-Net views the pricing issue of telecommunications services as a key indicator of the unhealthy state of the competitive market in Canada. These remarkably low prices cannot be attributed to the superior economic performance of Canadian telecommunications service providers, or our economy as a whole. Rather, the low prices reflect structural problems including certain aspects of government regulation; the incumbents’ desire to maintain their dominant market share,9 and the competitors focus on pricing in order to gain market share.
67. It is shortsighted to view these low prices as a boon to consumers and businesses in Canada. If price levels do not sustain competitors; do not lead to investment in facilities and innovation, and do not provide adequate returns to investors, competition will eventually dry up and the industry will be starved of both capital and innovative services.
(d) Declining Investment in Telecommunications Infrastructure
68. As pointed out by the Yankee Group report, “If the prices charged to communications users are too low, Canada’s service providers will not be able to demonstrate the returns required by the financial markets.”
69. There is already a lot of evidence of this impact in Canada as the capital available to new entrants has dried up and even the debt of incumbents like Rogers and Telus has been down-graded.
70. The impact is already being felt in the industry. In addition to those CLECs who have already exited the market due to lack of access to capital, most of the established industry players have significantly curtailed their capital spending in 2002.
8 Ibid. at page 14. 9 For example, the ILECs routinely engage in aggressive campaigns or other generous promotions to residential customers although they continue to enjoy a 99.5 % market share in that segment. 18
71. According to an IDC Canada Report entitled, Telecom’s Nuclear Winter: Canadian Capital Expenditure Outlook 2001-2002, capex reductions by telecommunications companies in 2002 will total $5.1 billion. According to the report, AT&T has seen its capex fall every year since 1999. It spent $400 million in 2001 and planned to spend 25% less in 2002. Call-Net’s affiliate, Sprint Canada, has seen its capex spending plummet to $100 million – down from $600 million just two years ago. GT Group Telecom, that had capex expenditures of $378 million in 2001, estimated a drop down to $175 million in 2002. However, with both AT&T Canada and GT Group Telecom in creditor protection and Sprint Canada cutting its own capex budget again in 2002, it is unlikely that even these greatly reduced capital spending budgets will be achieved. Even the incumbents have projected lower capex spending in 2002 and these estimates were lowered further following release of the CRTC’s Second Price Cap Decision. According to Michael Sabia, CEO of BCE, Bell will cut capital spending by some $300 million in 2002.10 This would bring Bell’s capital spending down $900 million below the 2001 level.
72. Clearly, the existing regulatory framework is not generating sufficient returns for competitors to sustain capital spending and research and development activity.
(e) No Silver Bullets on the Horizon
73. While many still hope that the cable television companies and the wireless companies will eventually enter the local exchange market, their entry is not imminent and there is no guarantee that it will happen. Several of the largest cable companies have in fact sold their telecommunications businesses to other carriers: Rogers to MetroNet and Shaw, Cable Atlantic and C1 to GT Group Telecom. Again, this is documented in Industry Canada’s report: Telecommunications Services in Canada.
Cable companies have also registered to provide local service via Internet Protocol (IP), rather than conventional switched services, in specific regions of the country. The competitive local exchange business has been arduous for the cable operators: C1 Communications Inc. (formerly Fundy Cable Ltd.) and Cable Atlantic have both exited the CLEC industry. After delays in launching its IP telephone service, Cogeco Cable Inc. announced in October 2001, that it would be writing off its investment in the project, citing as the cause an unforeseen level of effort required for successful implementation. Vidéotron Télécom and Eastlink Telephone are the only remaining cable companies to offer CLEC services (Appendix B, Table B-6).11
74. Since publication of Industry Canada’s report, Vidéotron has also exited the local residential market and has written off its $100 million investment – leaving Eastlink as the only cable TV/CLEC offering residential telephone service
10 Allan Swift, Canada Press News Story, “CRTC price cap ruling to cost Bell Canada…” June 13,2002. 11 Industry Canada, Telecommunications Services in Canada; An Industry Overview (October 2002) at page 2-11. 19 operating exclusively in the Halifax market, and using traditional voice over co- axial cable technology.
75. Moreover, it is important not to underestimate the considerable capital expenditure and the length of time required for a cable operator to enter the local telephone service market. The vast majority of telecommunications activities undertaken by cable operators involved the provision of dedicated services to a small group of customers (i.e. a Competitive Access Provider). Little, if any, switching was involved and few back office systems were deployed. In order to provide full-fledged lifeline telephone service, cable operators will need to invest heavily in operational and business support systems. This will require billions of dollars in additional capital expenditure for the already debt-laden cable operators, and will take a considerable amount of time to deploy.
76. In addition, the CRTC decision to effectively freeze residential local service rates in the Second Price Cap Decision provides a further disincentive to cable operators to enter this market segment.
77. In the wireless sector, Microcell’s foray into the CLEC market does not appear to have generated much market share and the financial longevity of that company has now been reported to be in question. The ILEC wireless affiliates (the Mobility companies and Clearnet) are unlikely to take on their own affiliates who already enjoy a 99% market share and Rogers Wireless is not making any motions in this direction either. The wireless industry is already facing significant problems of its own trying to finance the roll-out of new 3-G networks in the face of very low prices and declining growth in demand in their own market. They are not well positioned to reduce their rates lower to enter the local exchange market as CLECs.
78. Little comfort can therefore be gained from looking to the cable TV or wireless industries for a solution to the problems facing the local exchange market.
(f) Conclusions
79. When judged against these objective criteria, it becomes clear that a very unhealthy competitive environment exists in the local exchange market.
80. Very little market share has been taken from the incumbents by the new entrants. Many new entrants have already failed financially or have otherwise exited the market. Of the three largest remaining CLECs, two are in creditor protection, and the other has undergone a financial restructuring and postponed expansion of its CLEC activity. The market is characterized by irrationally low pricing that is unsustainable in the longer term. American prices for both business and consumer telecommunications services are 50% to 120% higher 20 than Canadian prices for comparable services, while carriers in the two countries have comparable costs. The low level of Canadian pricing is partly a result of the regulator’s success in championing the cause of consumers. However, it will not benefit consumers in the longer term if more competitors fail and the remaining carriers are unable to make the necessary investments in facilities and innovative services.
81. Unless the current course is corrected, competition in the local exchange market is doomed to failure. Only the company with the deepest pockets will be left standing at the end of the day.
82. As discussed below, this disturbing situation has much broader implications for the Canadian economy and for Canada’s industrial policy. It is not just a telecommunications issue and it is not just a CRTC regulatory issue. It will ultimately have adverse effects on our domestic economy and on our position in the global information and technology economy. 21
IV. IMPLICATIONS FOR CANADA
83. The telecommunications industry in Canada has long been recognized as an important component of our domestic economy
84. As a major contributor to our GDP as an employer and trainer of highly skilled workers, as an investor in research and development as a building block for our information and technology sectors and as part of our national infrastructure.
85. According to Industry Canada’s report entitled, Telecommunications Service in Canada: An Industry Overview, 2001-2002, telecommunications services GDP has out-performed the overall economy since 1994. In 2000, the GDP generated by telecommunications services reached $24.793 billion, representing 2.6% of total GDP, or approximately 3.9% of the service sectors GDP.12
86. In 2001, the telecommunications sector employed approximately 118,500 people. As a high tech employer, the industry paid its employees at an average rate that was 30.3% higher than the average salary in the overall economy and 40.9% higher than the service sector as a whole.13
87. At 4.6% relative to the economy as a whole, the telecommunications industry far exceeded the level of average investment in capital by Canadian businesses in 2001 (when compared with its 2.6% share of total GDP).14
88. While these statistics clearly demonstrate the importance of telecommunications to our domestic economy, they nonetheless understate that importance.
89. Because telecommunications networks (wireline, wireless and IP) are the backbone of the information and technology sectors, and constitute the primary means for conducting national and international business, they have become a vital building block in the Canadian economy in the latter part of the 20th century and for the foreseeable future in the 21st century.
90. Telecommunications infrastructure and cost has become an increasingly important criteria for locating businesses in Canada. Telecommunications is recognized as a valuable tool for increasing the productivity of our domestic
12 Ibid, at page 1-3, 1-4. 13 Ibid, at page 1-7, 14 Ibid, at page1-8. 22 businesses and enabling them to compete better internationally. It attracts foreign investment in Canada and it promotes exports of our technology. Increasingly, telecommunications is becoming an important tool in education and medicine.
91. It has also become a facilitator of regional development in Canada as software and information services can increasingly be provided from smaller communities and less urban regions of the country away from the larger metropolitan centers. In this sense, it has become a great equalizer among regions. It has also aided farmers, small businesses and home offices throughout Canada to compete more effectively on a national and international level.
92. The Government of Canada has recognized the importance of this sector. Industry Canada’s National Broadband Task Force, its SchoolNet initiative, its e- Business initiative, its “Connectedness” Agenda, and its Information Highway Advisory Program all confirm the importance of modern, innovative telecommunications networks connecting Canadians nationally and with the rest of the world. Most recently, the Government’s Innovation Strategy is built in part on the existence of an advanced, robust telecommunications infrastructure serving all regions of Canada. The goal of “making the maple leaf a hallmark of excellence around the world” will not be achievable unless advanced communications networks are in place and are providing innovative services at a reasonable price.
93. The mandate of Industry Canada reflects this emphasis on productivity and competitiveness in the new knowledge-based economy:
Industry Canada’s mandate is to help make Canadians more productive and competitive in the global, knowledge-based economy thus improving the standard of living and quality of life in Canada.
94. The Department’s strategic objectives all rely on the telecommunications building block:
The department concentrates its efforts on five strategic micro-economic objectives in order to facilitate Canada’s transition to a knowledge-based economy:
S improving Canada’s innovation performance; S making Canada the most connected nation in the world; S building a fair, efficient and competitive marketplace; S improving Canada’s position as a preferred location for domestic and foreign investment; S working with Canadians to increase Canada’s share of global trade.15
15 Industry Canada Mandate, Document No. 2332. 23
95. In light of the foregoing, it is very clear that telecommunications is central to Canada’s industrial policies. The current demise of the competitive market for telecommunications services in Canada is therefore of national concern as so many other sectors of the economy are dependent on the reliability of telecommunications services and carriers, their ability to reinvest capital in new and innovative services and the increased productivity that competition in this sector helps to generate.
96. Clearly it is in the interests of all Canadians that the problems faced by the Canadian telecommunications industry be addressed now in a comprehensive and meaningful way before the situation deteriorates further. 24
V. REGULATORY REFORM
(a) Prioritizing Policy Objectives
97. The CRTC is tasked with regulating a very complex industry in accordance with nine very broad policy principles enshrined in section 7 in the Telecommunications Act. It has a legacy of incumbent telephone companies to regulate and it is mandated to foster competition and to protect the interests of consumers. The regulatory process is cumbersome and the CRTC has a history of making trade-offs to try to satisfy all stakeholders.
98. The CRTC without clear direction from Government has been hesitant to take an active role in stimulating competition for fear of disadvantaging the incumbents and it has been hesitant to take actions that might raise prices in fear of consumer back-lash – even when some consumers are receiving service at below cost and Canadian prices are among the lowest in the world. CRTC regulation lacks a clear policy direction precisely because it is trying to cater to all of these diverse constituencies.
99. This is leading to a situation where already fragile competitors are on the verge of extinction.
100. This is not the result intended by Parliament when it enacted the policy objectives in section 7 of the Act. Those policy objectives recognize that a competitive market is the best means to achieve the objectives of Canadian telecommunications policy – to stimulate innovation, reduce prices and improve the competitiveness of the Canadian economy. Similar objectives are found in the Department of Industry Act. Competition cannot develop without the incumbents losing market share, consumers cannot benefit from lower prices in the long term if prices do not cover cost, and the competitiveness of the Canadian economy will be short-lived if competition in telecommunications services is not sustainable.
101. The development of a sustainable competitive market is therefore the key to achieving most of the constituent elements of policy set out in section 7 of the Act. Not only do paragraphs (c) and (f) of section 7 actually call for the development of competitive markets as a policy objective, but it is widely recognized by both the government and the CRTC that competitive markets are the best means of achieving the other social and economic goals set out in other paragraphs (a), (b), (g) and (h) as well. (Paragraphs (d) and (e) relate to Canadian ownership policy and (i) relates to privacy concerns.) 25
102. The CRTC has recognized that competition will lead to productivity improvements and innovative services:
The Commission is of the view that the potential exists for meaningful local competition in basic telecommunications and in many of the information-based telecommunications markets. The Commission also considers that encouraging that potential will lead to benefits, such as productivity improvements and the introduction of even more innovative services.16
103. Indeed, it was concern over the status of competition in Canadian telecommunications markets that led the Governor in Council to issue P.C. 2000- 1053 on June 26, 2000 to monitor competition and to obtain the information required to assess whether further measures are needed to achieve the objectives of the Telecommunications Act.
104. Paragraphs 7(c) and (f) of the Telecommunications Act are worded in a manner that requires a proactive response by the regulator to stimulate development of a competitive market.
105. Paragraph 7(c) requires the CRTC to implement policies that “enhance” the efficiency and competitiveness of Canadian telecommunications. “Enhance” means to heighten or intensify. It means more than just permitting competition. It requires proactive steps to be taken to improve efficiency and competitiveness.
106. Similarly, paragraph 7(f) requires regulatory policy to “foster increased reliance on market forces.” Foster” means to promote the growth of, or to encourage, competition. Again, this language requires proactive steps to be taken to fulfill the objective.
107. The CRTC has tended to narrowly construe the objectives set out in paragraphs 7(c) and (f) of the Telecommunications Act. It has read down the objectives to apply to one particular from of competition over other forms and it has not put in place policies that actually promote competition. The CRTC has “permitted” competition on certain terms and conditions rather than pro-actively “promote” or “enhance” it.
108. Indeed, unintentionally, some of its policies have had the opposite effect and have actually hindered competition.
109. The CRTC has lacked guidance from the Government of Canada on how to balance the sometimes conflicting interests of incumbents, consumers and competitors. This guidance is now clearly needed.
110. Since the objectives of the Telecommunications Act are predicated on the establishment of a competitive market and since it is widely recognized that
16 Telecom Decision CRTC 94-19, Review of Regulatory Framework, at page 33. 26 competition will stimulate innovation and lower prices in the long term, the immediate priority is to ensure that a framework is put in place that actually results in sustainable competition. This cannot happen in an environment in which consumer prices are frozen below cost, where the regulator is concerned if the incumbents lose market share to competitors, where competitors are denied access to facilities they need from the ILECs at cost-based rates, and where incumbents are permitted to retaliate against competitors who take customers from them.
111. The Governor in Council has an important task before it to prioritize the objectives in section 7 of the Telecommunications Act and to direct the Commission on the importance of competition in achieving other objectives of Canadian telecommunications policy.
(b) Rethinking Facilities-Based Competition
112. When the CRTC first permitted local exchange competition in 1997, it determined that the benefits of competition could best be achieved through facilities-based competition – i.e. through the duplication of local facilities. At the same time, it recognized that competitors would not be able to duplicate local networks over night. This led the Commission to permit new entrants to supplement their own facilities with the lease of certain “essential” and “near essential” facilities from the ILECs.
113. In order to prevent the ILECs from price gouging their competitors on these services and facilities, the CRTC ordered them to be provided at cost- based rates.
114. Unfortunately, the list of so-called “Competitor Services” designated by the CRTC for this special pricing treatment was severely limited based on the CRTC’s own perception of what services could not technically or economically be duplicated by the new entrants.
115. While this policy was intended to assist competitors in entering the local exchange market, it was severely tempered by a concern, advanced by the ILECs, that adding too many services to the Competitor category would result in “uneconomic entry,” and would discourage the new entrants from building their own facilities. Moreover, although cost-based rates were ordered by the CRTC, in most cases it took several years to actually whittle the ILECs’ prices down to cost plus a mark-up of 25%.
116. Despite its good intentions, the CRTC’s approach has not fulfilled the statutory goal of ”fostering” the competitiveness of Canadian Telecommunications. By focusing on the ability of new entrants to technically duplicate the ILECs’ services, instead of their short to medium financial inability 27 to do so on any sort of scale, the CRTC’s policies have required CLECs to construct facilities at too early a stage in their development and penalized them in those instances where they fail to do so.
117. The result has been the financial failure of most new entrants, a diversion of scarce financial resources to pay the ILECs’ excessive charges and virtually no new entry in residential markets or outside large urban cores. Clearly the statutory policy objectives in the Telecommunications Act are not being met.
118. There are a number of root causes for this policy failure. They include:
S A pre-occupation with encouraging facilities-based competition – with too little regard for the fact that it is not always economical to duplicate facilities, particularly in the early stages of competition;
S A restrictive policy on making ILEC access services and facilities available to competitors at cost-based rates;
S An inability to develop cost-based rates for ILEC facilities and services required by competitors in a timely manner – often taking years to finally drop the rates to the appropriate level, and a consequent failure to recompense CLECs for any overpayment;
S An underestimation of the competitive advantages enjoyed by the ILECs as a result of their pre-existing integrated and ubiquitous networks and control of bottleneck facilities derived from their former monopoly positions; and
S A consequent failure to take steps to negate or off-set the ILECs’ advantages to a degree that might level the playing field – let alone give the new entrants any advantage in getting started.
119. Over the past five years, in a series of decisions starting in 1997 and culminating in Decision 2002-34 earlier this year, the CRTC has narrowed the scope of competitive activity that its policies are trying to foster.
120. The CRTC has pursued a policy of promoting “facilities-based competition” based on its determination that the full benefits of competition can only be realized with this form of competition. While this conclusion may be theoretically correct, and may constitute a valid long-term policy objective, the CRTC’s devotion to this principle in the short to medium term has led it to implement a regulatory regime that significantly raises the financial barriers to new entry and has the effect of encouraging inefficient competition. This is particularly true in a period of restricted access to capital for telecommunications 28 firms.
121. The CRTC has not recognized the fact that facilities duplication is not always efficient - particularly in the early stages of competition, when competitors lack the volume of traffic necessary to justify facilities construction. The difficulty faced by new entrants in meeting this challenge was noted by Statistics Canada in its October, 2002 Research Paper entitled: The State of Telecommunications Services:
Local services have been the backbone of the telecommunications industry throughout the 20th century, gradually supplanting the telegraph industry, which dominated the 19th century. The growth of telephony was dependent on building out networks that connected individual households and businesses to a public network. The development of the public network required enormous investments over many decades. One of the major difficulties in introducing competition relates to the cost and time horizon to develop such a network, and the consequent dominant position of the carriers that build and operate it, vis-à-vis entrant companies.17
122. In its Second Price Cap Decision, which AT&T’s Petition addresses, the CRTC has added an important new service to the list of Competitor services eligible for cost-based treatment. It has also reduced the mark-up over cost for Category I Competitor services to 15% from 25%. Unfortunately, the new Competitor Digital Network Access (CDNA) service was accompanied by a series of restrictions, which make it far less useful than it would otherwise be for competitors.
123. Fortunately, as a result of an application by Call-Net, the CRTC has decided to review this aspect of its decision and Call-Net is confident that the CRTC will ultimately expand the scope of CNDA service.
124. However, a problem persists with the CRTC trying to balance the interests of stakeholders. By reflecting the ILECs’ concerns about “uneconomic entry” and by persisting in its view that CLECs should self-supply at the early stages of entry, the CRTC has severely impeded the ability of competitors to enter the local exchange market on an economically viable basis.
125. Call-Net continues to believe that the “hybrid” model of facilities-based competition is the most appropriate. Under this model, competitors build facilities where it makes economic sense to do so – when traffic volumes justify the investment. In the meantime, competitors need to be able to build up their traffic volumes using leased facilities acquired from the ILECs at cost-based rates.
126. This in no way penalizes the ILECs who fully recover their costs and continue to earn a return on services used by new entrants. No new entrant – no matter how well financed – can economically replicate the networks of the former monopoly telephone companies. Their networks were built out for more than 100
17 Statistic Canada, Catalogue No. 56F0004MIE – No. 8, at p. 10. 29 years under rate of return regulation that guaranteed them a healthy return on their investment.
127. There is no doubt that competitors will ultimately invest in facilities. The long-distance business provides clear-evidence of this. The regulator’s policy framework encouraged all forms of competition – simple arbitrage, facilities- based, and hybrids in between. The result was that companies like Call-Net built facilities where it was cost justified and leased in circumstances where it was not. As Call-Net’s business grew, both in terms of revenue and geographic scope, it continued to buy or build facilities in order to be a cost-efficient competitor. Indeed, not so long ago, Call-Net provided Bell West with its fibre optic network across Western Canada.
128. The same is true with local facilities. Call-Net has invested in local facilities where it could be cost justified – and more will be built. But in the interim, all competitors are dependent on the local distribution facilities of the incumbents. This is the reason the terms and conditions associated with these facilities are so critical to the health of competition in Canada.
129. A change in mind set is needed. The regulator must not be afraid of giving new entrants a helping hand. They clearly need it if competition is going to develop in the local exchange market and it is this type of proactive policy that section 7 of the Telecommunications Act requires. In addition, more attention needs to be paid to the services and facilities that competitors actually want to use. The CRTC should not substitute its judgment for that of the competitors. Competitors need facilities and services that fit their unique business plans – not the CRTC’s perception of how their networks should be structured.
(c) Reforming Pricing of Telecommunications Services
130. As discussed above, the low level of pricing for local exchange services in Canada severely impedes new entry and is restricting the ability of both the ILECs and their competitors to invest in infrastructure. This is particularly devastating for new entrants given the CRTC’s rules respecting “facilities-based” competition. If the regulatory framework does not permit a reasonable return on investment, money for capital projects will simply dry up.
131. This phenomenon is already being witnessed in the Canadian telecommunications market, where capital spending is declining significantly.
132. The CRTC’s Second Price Cap Decision is exacerbating this situation. Despite the fact that Canada’s local exchange rates are already among the lowest in the world, and are well below U.S. levels, the CRTC has put in place a mechanism to ensure that the ILECs’ local residential rates continue at this level, except where “competitive pressures” require further rate reductions, or where inflation exceeds the CRTC’s productivity offset of 3.5%. Since inflation levels 30 are not projected to exceed this level, local residential rates are effectively not permitted to rise.
133. The CRTC’s rationale for this restriction is that the ILECs do not face sufficient competition to discipline their market power. Ironically, the impact of this decision will be to make it even more difficult for new entrants to enter the residential market since they will not be in a position to charge enough to recover their investment costs.
134. It is important to note that during the public proceeding that led to the CRTC’s Decision, both the ILECs and competitors had argued against mandated reductions to residential local service rates on the grounds that such reductions would have a negative impact on competition in the local market.18 While not going as far as to mandate rate reductions, the CRTC’s decision effectively freezes residential rates at the current very low levels and perpetuates the provision of local service at below cost in some areas.
135. While no regulator likes to raise rates to consumers, there is a general consensus in the industry that existing price levels are too low. They have led both the ILECs and competitors to slash capital spending and they are acting as a barrier to competitors entering the market.
136. As pointed out by the Yankee Group, this may be a short-sighted policy. While consumers are currently benefiting from these very low price levels, this is not sustainable in the longer term and, unless corrective action is taken soon, competition will fail. Ultimately, this will hurt consumers and business users.
137. Statistics Canada has also recognized this concern. In the concluding chapter its report entitled “The State of Telecommunications Services” Statistics Canada offers the following comments:
Despite many challenges, the alternative service providers have made significant contributions to the development of the telecommunications market – they account for a growing share of industry operating activity, capital investment, and employment. However, their growing operating losses and negative equity position continue to threaten their sustainability in the marketplace.
Clearly, more work needs to be done in this area, in an effort to measure the impacts and outcomes of the regulatory decisions that have helped shape the state of telecommunications services in Canada. Competition in the industry depends on many complex and interrelated factors, including the regulatory framework, the viability of alternatives, innovative technology, consolidation of the sector, and convergence.19
138. Again, the Government of Canada has a role to play in addressing this problem. To this end, Call-Net recommends that The Governor in Council
18 Telecom Decision CRTC 2002-34, at para. 403. 19 Statistic Canada, Catalogue No. 56 Fooo4MIE – No. 8, at p. 23. 31 exercise its powers pursuant to section 14 of the Telecommunications Act and direct the CRTC to investigate and report back on the relative level of telecommunications prices in Canada versus other G-8 countries; whether existing price levels provide a sufficient return to ILECs and competitors to finance their capital projects and research and development activity; and what measures can be taken to reform pricing of telecommunications services, to improve investment in telecommunications infrastructure in Canada and the ability of competitors to finance their new entry; while providing service to Canadians at reasonable rates.
(d) Pro-Competitive Regulation of Telecommunications
139. In order for sustainable competition to develop in the local exchange market pro-competitive policies are required. It is clear that this market segment is not like other market segments. The incumbents have had a century in which to develop their networks and to extend them to the near ubiquitous state. Moreover, this has occurred in a monopoly environment under the supervision of a regulator who set prices at levels designed to recover all of the telephone companies’ costs, including depreciation expense and a reasonable return on capital investment – absent any competition. Competitors who are now being encouraged to duplicate this feat in a fiercely competitively environment against incumbents with established networks, face a daunting task. The experience of the past five years demonstrates that they will not succeed in an environment that protects the incumbents from loss of market share or that places on competitors the financial and competitive risk of regulatory lag.
140. There is an urgent need for regulatory reform – for a change to a new pro- competitive approach to regulation. Under this approach, the regulator should continually ask itself whether its proposed regulatory action would “foster” and “enhance” competition – or impede competition. Moreover it should ask itself this question in the context of the market structure in existence at the time the issue arises. At the present time this is an environment in which ILECs hold a dominant (97%) share of the overall local market and 99.5% of the residential local market, and in which competitors are struggling just to a establish a toehold. This is a quite different context than that of a market that is already competitive with several rivals that do not enjoy market power.
141. While the market must ultimately serve the interests of consumers and business users, the regulator must recognize that these interests are best served by a healthy competitive market and it may take some time to achieve that state. In order to attain the requisite level of competition, pro-competitive policies must prevail over other policy objectives.
142. Two significant areas where a pro-competitive policy framework could make a big difference are in addressing the implications of regulatory lag in 32 setting cost-based rates for Competitor services, and the abuse of the ILECs dominant position in promoting and marketing their services.
(i) Regulatory Lag
143. Regulatory lag in this context refers to the time lags that occur in the regulatory process between the time that the CRTC renders a decision and the time that the decision is actually implemented. It also refers to the time lag between the date on which the CRTC has prima facie evidence before it on an issue of vital concern to new entrants, and the date on which it takes regulatory action.
144. In many instances, the CRTC has made a good pro-competitive decision at the outset – but has then ended up severely hurting competitors by taking years to implement its decision in protracted “follow-up” proceedings. In other instances, involving a complaint or the filing of costing data that justifies lower prices for new entrants on Competitor services, the CRTC will have evidence before it justifying a pro-competitive determination on a prima facie basis – but will again take months or even years to render a decision.
145. In the current environment, competitors usually end up bearing the economic cost of these delays since they are usually the party seeking relief from high prices on ILEC supplied services, or in a competitive dispute with an ILEC.
146. During these periods of regulatory lag, competitors either run up huge losses paying exorbitant rates to their principal competitors, the ILECs, or go out of business. In either case, the robustness of competitors is weakened significantly to the advantage of the incumbents. This delays the development of a competitive market and prolongs the dominance of the ILECs. The worst examples of this problem, and its impact on competitors, are found in the protracted follow-up proceedings to develop cost-based rates for Competitor services.
147. Numerous examples exist of multi-year proceedings to establish cost- based rates for Competitor services.
148. For example, on May 1, 1997 the CRTC decided to require the ILECs to provide competitors with access to the ILECs’ local loops at cost-based rates. Local loops were identified as the single most important facility required by competitors to enter the local exchange market, and the CRTC’s decision was supposed to assist ILECs to enter the market. Despite the fact that the ILECs had been directed to file proposed cost-based rates for this service in 1996, and had been ordered to file improved costing information in 1997, it ultimately took three public proceedings over a five year period from 1996, until August of 2001, 33 before the CRTC approved a final rate that was cost-based. It ended up being 70% below the level initially proposed by Bell Canada and 62% below the CRTC’s initial interim rate. The steps in this process are shown on the table below:
Bell Canada Rate for Type A Local Loop (Band A)
Date Source Rate % Change 1996 Bell Canada Proposed $29.15 -- Rate May 1, 1997 CRTC Approved Interim $24.30 - 16% Rate (Decision 97-8) Nov. 30, 1998 CRTC Revised Rate $12.22 -50% (Decision 98-22) August 7, 2001 CRTC Revised Rate $9.04 -26% (Decision 2001-238-2)
149. As can be seen from the table, it took more than four years after the CRTC’s initial decision to require cost-based rates for competitors to actually produce a cost-based rate. During this extended period of regulatory lag, new entrants were required to pay excessive rates for this vital access component.
150. This diverted scarce fund from the new entrants’ own networks and enriched the ILECs at their expense. Some new entrants went out of business before the final rates were set. Other prospective new entrants may have been discouraged from entering the market because of the high level of pricing for essential services. In either case, the robustness of competitors was weakened to the advantage of the ILECs. The nature of the regulatory process and their dominant position in the local exchange market gives the ILECs both the incentive and the opportunity to use regulatory lag and their control of costing information to hurt their competitors. This arises out of the fact that the ILECs are both competitors of the new entrants and a primary supplier of services and facilities to them. Because the ILECs are often the sole source of these vital inputs to the new entrants’ businesses, the ILECs can use this supply relationship to slow down or prevent new entry from occurring on an economically sustainable basis.
151. Nor is the local loop process an isolated case. Other examples, involving important Competitor services, include loop service charges and the two principal access services used by long distance carriers – direct and tandem access.
152. In the case of the service charges charged to new entrants on orders for residential local loops it took a period of four years between 1997 and 2001 to reduce the rate from $171 per loop to $17 – a reduction of 90%. In the meantime, new entrants were required to pay a rate that exceeded cost by over 34
900%.
153. In the case of “direct connections” used by competing long distance suppliers, it took a period of three years from 1997 to 2000, to reduce this rate from $0.007 per minute to $0.003 per minute – a drop of 57%, and a further two and half years (until September 2002) to reduce this rate to its current interim level of $0.00128 (for Bell Canada) – a further drop of 57%. In the meantime, new entrants paid a price that was for a number of years 450% above the new interim price level.
154. For “tandem” toll connections, it took even longer to reduce the rate from a charge of $0.005223 per minute in 1997 down to $0.00148 in October of 2002 – a drop of 72%. In the meantime, new entrants paid 250% over the new interim rate.
155. During this period, hundreds of millions of dollars have been diverted from the new entrant’s own network construction programs – to the ILECs. Again, the competitors have been required to bear all of the risks of regulatory lag and the ILECs failure to file proper cost studies at an earlier stage of the proceedings.
156. In Call-Net’s view, the fact that new entrants have been forced to bear the economic risks of regulatory lag, has had a significant impact on the development of competition and on the economic health of new entrants. Since the new entrants collectively pay hundreds of millions of dollars to the ILECs for Competitor services each year, the fact that these services have often been provided at rates two or three times higher than the ILECs’ costs, helps to explain the demise of competitors.
157. This is an on-going problem. In a follow-up proceeding from the CRTC’s Second Price Cap Decision, that is currently under way, the CRTC ordered the ILECs to file cost studies for CDNA service by September 13, 2002. When the ILECs filed their cost studies on September 13, 2002, it was immediately apparent that, based on the ILECs’ own cost estimates, the interim rates set by the CRTC were extremely high – almost four times the level of the rates indicated by the ILECs cost studies.
158. Once this costing information was revealed, Call-Net immediately applied to the CRTC on for orders to lower the interim rates to the levels proposed by the ILECs – again making them interim pending final review of the cost studies. As pointed out by Call-Net in its application, the ILECs had no reason to understate their costs for Competitor services so it was likely that even the ILECs’ proposed rates were conservatively high. In any event, Call-Net proposed that the ILECs’ proposed rates be used as the interim rates and that there be an accounting once final rates were set so that any over-payment or under-payment could be adjusted. 35
159. Despite the fact that Call-Net had made what it thought was an obvious case for relief, and despite the fact that Bell Canada chose not to oppose its application, a month has passed and no order has yet been forthcoming. Again, Call-Net and other new entrants are bearing the economic cost of delay by paying higher prices than are justified by the CRTC’s initial decision or the costing information filed by the ILECs.
160. Under a pro-competitive regulatory framework steps should be taken to insulate new entrants from the costs associated with regulatory lag. In the case of new cost-based rates, the CRTC should rely more on its own experience with the costs of similar services and with the ILECs’ propensity to overstate costs. A serious effort should be made by the CRTC to set an interim rate that represents the CRTC’s considered view of what a cost-based rate will look like. Once the interim rate is set, the ILECs can be protected in a number of ways from the risk that the rate has been set at too low a level. First, there can be an accounting at the time that final rates are set. In this way, any overpayment or underpayment can be rectified. Secondly, if the new entrant has gone out of business in the meantime and is no longer in a position to pay the difference between a low interim rate and a higher final rate, the CRTC can use the ILECs’ deferral accounts established in the Second Price Cap Decision to make the ILECs whole.
161. A similar approach could be used when the ILECs file cost information that justifies rates that are significantly below the interim rates established by the CRTC. The CRTC should immediately make an interim order lowering the rates on the basis of the ILECs’ costing data.
162. In both instances, the balance of convenience and the policy objective of fostering and enhancing competition, require the CRTC to exercise its judgment in a manner that gives expedited relief to competitors. There is an urgent need at this point in time, when the ILECs are overwhelmingly dominant in the local market, to ensure that new entrants receive the benefit of lower rates for Competitor services at the earliest possible moment, rather than diverting their scarce financial resources to the ILECs. The CRTC has ample tools to insulate the ILECs from economic loss if its decisions end up understating the ILECs’ costs. New entrants, on the other hand, are going out of business or curtailing their network construction plans waiting for the implementation of decisions that were supposed to assist them in entering the market.
(ii) ILECs Abusive Marketing Practices
163. Win-back campaigns and promotions by the ILECs are good examples of abusive marketing practices. Win-back campaigns are marketing programs put in place by the ILECs to win customers back as soon as they switch to a competitor’s service. Since the ILECs have started out in the local market with 36
100% of the customers, they know as soon as they lose a customer to a competitor. Since the competitor has to process an order for local number portability with the ILEC (in order for the customer to retain its existing telephone number) the ILEC also knows which competitor has attracted the business of its former customer. Armed with this information, the ILEC immediately institutes a direct marketing campaign to win that customer back.
164. Despite the fact that the Commission has ruled on several occasions that the ILECs are not to make win-back calls to a local customer until 90 days after the customer is physically connected to the competitor’s network, the ILECs continue to target their marketing activities at lost customers within days of receiving the customer’s local service request (LSR) to change to another carrier. This has a devastating impact on new entrants. It dramatically increases customer acquisition costs and also causes new entrants to pay for ILEC service charges related to local loop orders on local number portability requests, without ever receiving any revenues from the new customer.
165. If a pro-competitive policy were being pursued by the CRTC, it is doubtful that any targeted win-back programs would be permitted. It is certainly not a common practice in other industries for vendors to personally contact customers as soon as they buy a competitor’s product. Of course, most competitors cannot follow the purchasing habits of their customers. It is only because of the ILECs’ position as former monopolies that they have such complete knowledge of the competitive market.
166. If the question were asked, do ILEC targeted win-back programs help or hinder competition in a market where ILECs are overwhelmingly dominant, the answer would be obvious. They severely hinder the ability of competitors to get a foothold in the market. The answer might be quite different in a market where no player was dominant and no player had more complete information than another. In the current market conditions however, any concern that the regulator might have for “tying the hands” of the ILECs is severely misplaced. More effort needs to be placed on restricting the ILECs’ abuse of market power, and less concern needs to be paid to the consequences of ILECs losing a customer to a competitor.
167. The consequences of the ILECs aggressive win-back campaigns is to increase the customer churn rates of competitors and ultimately to place downward pressure on industry prices as competitors attempt to regain the same customers.
168. ILEC targeted win-back programs cannot be justified in the current market circumstances. 37
169. ILEC promotions are equally damaging to new entrants. These are promotions offering consumers bundles of local services at reduced prices. They are designed to maintain the ILECs’ 99% share of the local residential market.
170. The speed with which the regulator approves these types of promotions by the ILECs is startling. In a recent filing by Bell Canada for a promotion service called “Flex Bundles”, the CRTC approved the proposed tariff before the period for public comment had expired. This is even more disturbing when it is compared with the lengthy proceedings that are required to extend any pricing benefits to competitors.
171. Again it would appear that the regulator is not "promoting" competition. If a pro-competitive policy were being pursued, the regulator would ask itself whether the ILECs’ promotional activity helps or hinders the development of a competitive market. As with other issues, the answer depends on the status of competition in the marketplace. What would be commonplace in a healthy competitive environment may be anti-competitive in a market characterized by a player with 99% of the market. In this environment, the ability of the dominant ILECs to launch promotional offers the minute a competitor shows its face, does nothing more than preserve its dominance and ensure that competition does not gain a foothold. Rather than rubber-stamp these types of ILEC promotions, the CRTC should require cogent evidence of significant loss of market share before any such promotions are approved. 38
VI. THE PATH FORWARD
172. Given the importance of the telecommunications industry to Canada’s industrial policy, and given the widespread endorsement of competition as the best means of achieving efficiency, productivity improvements and innovation in the telecommunications sector, it is imperative that the Governor in Council and the Minister now marshall their resources to address the demise of the competitive market for telecommunications services in Canada. Action is needed on several fronts to put in place appropriate corrective measures.
173. While the Governor in Council clearly has the power to review and vary Telecom Decision 2002-34 in the manner proposed by AT&T in its Petition, Call- Net believes that broader-based regulatory reform is required. What would best serve the public interest at this point in time is a more far-reaching intervention in the form a broad policy direction to the CRTC that would set a new pro- competitive course for the CRTC and save the nascent competitive industry from what appears to be its eventual demise. In addition, Call-Net urges the Governor in Council to direct the CRTC to investigate and report on possible reforms to the pricing of telecommunications services in Canada. Finally, Call-Net hopes that the Governor in Council and the Minister will continue to monitor the development of competition in the Canadian telecommunications market and take an active on-going policy making role in this sector.
(a) Policy Direction
174. In Call-Net’s view, the Governor in Council’s policy direction should include the following broad principles designed to guide the CRTC in dealing with issues that have an impact on the development of competitive telecommunications markets in Canada and the achievement of the objectives in section 7 of the Telecommunications Act:
(i) Competition is the preferred means of achieving the socio- economic objectives in section 7 of the Telecommunications Act
The Direction should reaffirm that competition is the preferred means of achieving all of the socio-economic objectives in section 7 of the Telecommunications Act. The development of a competitive telecommunications market is both a goal in itself and means of achieving these other policy objectives. 39
(ii) The CRTC must assess the competitive impact of all of its decisions to ensure that they enhance the competitiveness of Canadian telecommunications
The Direction must instruct the CRTC that the statutory policy objectives in section 7 require it to assess the competitive implications of all of its decisions and orders. The CRTC must look at ways to proactively foster the development of competition. The CRTC should always be asking itself whether its decision “fosters” and “enhances” competition – or hurts the development of a competitive market. Furthermore, this analysis must be performed in the context of the market structure that, at this point in time, involves dominant ILECs with a 99.7% share of the local residential market and a 97% share of the overall local telecommunications market. The CRTC must be alert to abuses of this dominant position by the ILECs – both in the pricing of their services and in their marketing activities. In this environment, no ILEC win-back programs or local service promotions should be approved until there is evidence of significant market share loss by the ILECs that might justify this type of response.
(iii) New Entrants should not bear the risks of regulatory lag
The Direction must instruct the CRTC to consider, and to implement pro- competitive policies by reducing the risk of regulatory delay on new entrants. This is especially important in establishing cost-based rates for ILEC services and facilities. The CRTC must consider other approaches to lowering rates down to cost on an interim basis and in an expedited manner, based on its own knowledge and experience with ILEC costs, with adjustments following a full public process. The CRTC must look for ways to pass the economic benefit of price changes on to new entrants at an early stage in the process – rather than waiting years for retroactive adjustments, or prospective rate changes. This form of uncertainty is detrimental for all players in the industry. The CRTC must also examine other means at its disposal to insulate the ILECs from economic loss if rates are initially set too low. Use of the deferral account set up in Decision 2002-34 should be considered as a possible means of financing pro-competitive policies and decisions. (The deferral account was established by the CRTC to insulate the ILECs from the potential costs associated with other CRTC pricing policies, and could legitimately be used for funding pro-competitive pricing policies.) 40
(iv) In fostering competition, the CRTC must develop cost-based rates for ILEC services and facilities that competitors identify as being vital
The Direction must instruct the CRTC that the ILECs’ dominance of the local market, coupled with the new entrants’ inability to economically duplicate their networks in the short to medium term, gives rise to a requirement for ILECs to make a wider range of facilities and services available at cost-based rates. Where the degree of competition is insufficient for providing a viable alternative, the CRTC must focus on developing cost-based rates for services and facilities that competitors actually need. Competitors are in a better position than the CRTC to know what they require from the ILECs and how to provide their own service in the most efficient manner possible. The onus must be on the ILEC to justify why sufficient competition exist for the specific service or facilities in order for them not to provide these services at cost-based rates rather than placing the onus on the competitors to show that it is an "essential service."
(v) Competitor Access to ILECS’ Operations Support System (OSS)
Because of the competitors’ continued dependence on ILEC's facilities, non-discriminatory access to ILECs OSS to promote efficient interoperability among carriers is essential. OSS are used by the ILECs and competitors to perform a variety of tasks, including ordering, providing maintenance and repair services, and billing. It is paramount that competitors have access to the ILECs’ OSS on a nondiscriminatory basis and in a similar manner as the ILECs’ own retail operations if competition in the residential local market is to take hold. The CRTC has recognized the importance of system access and has directed the industry to provide a report, by April 2003, identifying the ILECs’ OSS functionality that should be made available to competitors and how access should be implemented. This is a positive step forward on the part of the Commission. Call-Net requests that the Direction must include an affirmation of the importance of competitors’ access to ILECs’ OSS and should specify that competitors must begin accessing ILECs’ OSS by the end of Q3 2003. 41
(b) Investigation and Report on Pricing
175. Call-Net requests the Governor in Council to direct the CRTC pursuant to section 14 of the Act to investigate and report on policy initiatives to reform the pricing of telecommunications services in Canada. This would include reports on the relative level of telecommunications prices in Canada versus other G-8 countries; whether existing price levels provide a sufficient return to ILECs and competitors to finance their capital projects and research and development activity; and what measures need to be taken to improve investment in telecommunications infrastructure in Canada and the ability of competitors to finance their new entry; while still providing services to Canadians at reasonable rates.
(c) On-Going Policy Role
176. In addition to issuing these broad policy directions respecting the objectives in section 7 of the Act, and directing the CRTC to report on the pricing issues identified above, it is important that both the Minister and Governor in Council continue to take an active role in following up on these initiatives – on developing detailed national telecommunications policies and monitoring the CRTC’s implementation of its directives. Perseverance and commitment by both the Government of Canada and the CRTC is required if the current market conditions are to be successfully turned around.