Competition and Price Regulation in the Market for Public Long-Distance Telephone Services Michael H. Ryan' In 1992, the Canadian Radio-television and Telecommu- En 1992, le Conseil de Ia radiodiffusion et des tdecom- nications Commission decided to permit competition in the pro- munications canadiennes a d6cid6 de permettre Ia concurrence vision of public long-distance telephone services. The advent of dans le domaine des services t~l~phoniques interurbains. competition has compelled the Commission to make sweeping L'avnement de cette concurrence a contraint le Conseil Aeffec- changes to the manner in which it regulates the prices charged by tuer des modifications radicales dans sa fagon de r6glementer les the telephone companies and other telecommunications carriers tarifs exigda par les compagnies de tdl~phone et par d'autres under its jurisdiction. transporters en teldcommunications sous sajuridiction. The article begins with a brief overview of the regulatory L'article dbute avec un bref survol du rigime rnglemen- regime as it stood prior to the introduction of competition. The taise en place avant l'introduction de la concurrence. L'auteur author describes the new measures the C.R.T.C. has introduced dderit les nouvelles mesures introduites par le C.RIT.C. afin de to permit the incumbent telephone companies and their rivals in- permettre aux compagnies de t~lphones ainsi qu'A leurs rivales creased flexibility in the pricing of the services they provide to d'augmenter ler flexibilit6 dans la tarification des services the public. qu'elles offrent au public. The author then focuses on the Commission's approach to L'auteur se penche ensuite sur 'approche du Conseil rela- the special issues presented by the pricing of "access". The tele- tivement aux questions particulitres prd6ents par In tarification phone companies own the local exchange and other access fa- de 1'eacc" s. Les compagnies de te96phone d~iennent l'6change cilities to originate and terminate the calls carried over their long- local ainsi que les autres services d'accs pour commencer et distance networks. In order to ensure equality of treamient be- terminer les communications transport6s par leurs nrseaux in- tween the telephone companies and their new competitors, the terurbains. Afin d'assurer l'igalit6 de traitement entre les compa- Commission has instituted a form of accounting separation, un- gnies de tl6phone et leurs nouveaux concurrents, le Conseil a der which the long-distance arm of the telephone companies will institud une forme de sdparation de comptabilit6 selon laquelle be forced to "purchase' access services in a manner similar to les dpartements des appels interurbains des compagnies de e06- other long-distance carriers. This device will eliminate some of phone sont forcEs d',cacheter* les services d'accs d'une manihre the current asymmetries in the treatment of telephone companies semblable aux autres trmspotneurs d'intensrbains. Ce mdcanisme and their competitors in respect of access. At the same time, the permettwa d'dliminaer certaines asym~tries dans le traitement des Commission has moved to correct many of the problems that compagnies de tEl~phone et de leurs concurrents relativement A have undermined the confidence of competitors in the cost allo- I'acc s. De m8me, le Consel a agi afin de corriger plusiers cation scheme, called Phase III, which has been used to set ac- problames qui nt min6 la confiance des concurrents dans le cess prices. schUrne d'aliocation des coilts, aussi appelE la Phase Ill, utiliS Finally, the author turns to the Commission's new policy afin de d~terminer la tarification de I'accs. on predatory pricing. He concludes that reliance on a pure in- Finalement, rauteur analyse la nouvelle politique du Con- cremental cost standard would be inappropriate because the tele- sell concemant le predatorypricing et conclut que se fier S une phone companies provide access and long-distance services on norme de tarif purement marginale serait inapproprie Etant don- an integrated basis and because of the numerous barriers to the nE que les compagnies de tElphone offient un acc s et des servi- achievement ofa workably competitive market which persist. ces d'interurbain de mani re intdgre, et que plusieurs obstacles A I'accomplissement d'un marchE compdtitif persisteront. "Coudert Brothers, Solicitors, London, England. The author was formerly Vice-President, Law and General Counsel of Unitel Communications Inc., Toronto, and acted for that company in several of the proceedings mentioned in this article. The author acknowledges, with thanks, helpful comments received from David Watt and Gary Pizante. © McGill Law Journal 1995 Revue de droit de McGill To be cited as: (1995) 41 McGill LJ. 169 Mode de rf6rence : (1995) 41 R.D. McGill 169 MCGILL LAW JOURNAL/REVUE DE DROiTDE MCGILL [Vol. 41 Synopsis Introduction I. The Regulatory Framework, Old and New H. The Pricing of Access IM. Predatory Pricing A. The Northeastern Case B. The MCI Case C. The FC.C.'sApproach D. The C.R.T.C.'s Approach Conclusion 1995] M.H. RYAN - COMPETITIONAND PRICE REGULATION Introduction Prior to 1992, the provision of public long-distance telephone services in Can- ada was largely the preserve of Bell Canada and the eight other major telephone companies with which it is allied through the organisation called Stentor.' Each of the Stentor members provided service in its respective operating territory on a mo- nopoly basis and collaborated with the other members to provide nation-wide service. In 1992, however, in a decision entitled Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Is- sues,2 the Canadian Radio-television and Telecommunications Commission ("C.R.T.C." or "Commission"), the authority which regulates the members of Stentor' and other Canadian telecommunications carriers, approved an application by Unitel Communications Inc. ("Unitel") to provide a public long-distance tele- phone service to compete with the service provided by the Stentor members. The C.R.T.C. simultaneously declared its readiness to permit further new entry by other long-distance carriers , referred to in the industry as "interexchange carriers" ("I.X.C.s").' Several have since emerged. As of December 31, 1994, competitors, including so-called "resellers"', reportedly accounted for twelve percent of the market for Canadian public long-distance telephone traffic. The single largest com- petitor, Unitel, had a four and one-half percent market share.6 The advent of competition in the provision of Canadian public long-distance telephone services has compelled the C.R.T.C. to reconsider the methods it has traditionally followed in regulating prices charged by the Stentor members and to devise new rules that are better tailored to the new competitive environment. In a ' The eight other telephone companies that are members of Stentor are: AGT Limited, BC TEL, The Island Telephone Company Limited, Manitoba Telephone System, Maritime Tel &Tel Limited, The New Brunswick Telephone Company Limited ("N.B. Tel."), Newfoundland Telephone Company Limited and Saskatchewan Telecommunications ("SaskTer'). 2(1992), Telecom. Decision C.R.T.C. 92-12 [hereinafter Long Distance Competition]. 'The C.R.T.C. does not regulate SaskTel. The Telecommunications Act, S.C. 1993, c. 38, s. 133, provides that SaskTel shall not come under the jurisdiction of the C.R.T.C. until a date to be fixed for that purpose by the Governor in Council on or after October 25, 1998 (the fifth anniversary of the coming into force of the Act), unless the Government of Saskatchewan requests that an earlier date be fixed. ' An I.X.C. is a telecommunications carrier that provides long-distance services between local tele- phone exchanges but which does not itself own local exchanges. The term "telephone company" is typically reserved in industry usage for those carriers, such as the members of Stentor, that own local exchanges and provide both intra- and interexchange services. Interexchange (".X.") services include not only public long-distance telephone service and enhancements, such as 800 service, but private- line and data services, also. It is the former that has the most relevance to the discussion in this article. ' Resellers are companies which do not own their own transmission facilities and instead lease ca- pacity from telephone companies and I.X.C.s. Resellers have been allowed to provide public long- distance telephone service since 1990. 'See letter of G.Pizante to the author (24 February 1995)" MCGILL LAwJOURNAL/REvUEDE DROITDEMCGILL [Vol. 41 series of decisions that culminated in Review of Regulatory Framework,"released in September 1994, the C.R.T.C. has made sweeping changes to the regulatory re- gime. Among these changes is the abandonment of the system of "rate base/rate of return" regulation' - the foundation of telephone company regulation for several decades - for the telephone companies' competitive services. This has been re- placed with a new scheme which will allow greater play to market forces in setting prices. One of the criticisms levelled at the Unitel application in the Long Distance Competition proceeding was that it did not offer true competition but only "regulated competition" - a reference to the on-going role the C.R.T.C. would have in regulating carrier prices - and the Unitel proposal would, therefore, not deliver the benefits normally associated with competition. The concept of regulated competition is an anathema to many economists - a "worst of both worlds" ap- proach. Alfred Kahn has said that: [There [is] no rational halfway house between thorough regulation and free competition ... [Riegulation confronted with competition will have a systematic tendency either to suppress it ... or to orchestrate it and control the results it produces. Why? Because competition is unpredictable and messy, and the regulator prizes predictability and tidiness. Businesses move in and out of competitive markets.