Price cap rules favour ILECs at expense of viable telecom competition, critics charge

Major competitors to the incumbent telcos say the current pricing regime for telecommunications in Canada isn’t working, and they’re calling for changes in how the CRTC sets the rules. Critics argue that the price cap rules, which replaced rate of return regulation in 1997, favour the incumbents to the detriment of long distance providers and other competitors. They’re hoping the commission’s current review of price caps – Telecom PN 2001-37 released March 13 – will correct the inequities. "As things have evolved now, the system is out of balance," says Chris Peirce, VP regulatory and government affairs at AT&T Canada. "None of the competitive new entrants are earning anything near the return that the incumbents are. So we need to figure out how to bring things into balance so that the benefits of competition will be delivered to the consumer now and in future, so that competition will be sustainable." Price caps were introduced primarily as an incentive to make incumbents more efficient, which would result in lower prices for companies that interconnect with the telco network and lower prices for consumers. Those rules are now up for review and the commission is looking at putting in place an amended regime for next year. AT&T Canada has been a vocal critic of the current structure, saying its flaws are evident when you look at the absence of competition in the consumer and business markets. "You only need to look at what’s happened since the onset of the price cap regime," Peirce told Network Letter. "You’ve had almost a complete exit from the residential long distance market of competitive new entrants. You have virtually no competition for local residential customers. And you have cutthroat, some would say unsustainable, competition for the business market. And that all comes to a point now in 2001 where the market share overall is by far and away in favour of the incumbents." Call-Net Enterprises Inc acknowledges that price caps have succeeded in making Canada’s retail prices for telecom services among the lowest in the world. Those dropping prices haven’t hurt the financial returns of incumbents, it notes, but they’re keeping several competitors in the red. "This is not a sustainable situation and is leading to a reduction in competitive choices and is discouraging the investment needed to ensure that Canada remains in the forefront of the global information economy," Call-Net writes in a Sept. 11 submission filed as part of PN 2000-99, seeking initial comments on the scope of the price cap review. Price caps not isolated regime Among its complaints, Call-Net maintains that price caps have forced business local rates to drop below sustainable levels for competitors, have allowed ILECs to cross-subsidize services in highly competitive markets with revenues from less competitive markets, and enabled ILECs to delay increases in local phone rates that would bring them closer to actual costs. In its September filing, Call-Net also cautioned the commission to not view price caps in isolation. To measure the effectiveness of telecom competition, it said such a review could be broad in nature, and examine issues such as service forbearance, bundling rules, contribution, rate banding, and high cost serving areas. Canada’s second-largest ILEC disagrees with the competitors, saying that everyone wins when price cap regulation (PCR) is employed rather than rate of return regulation (RORR). "Consumers typically enjoy price reductions over time that are more pronounced than those experienced historically under traditional RORR," Telus Corp states in its PN 2000-99 filing. "The regulator benefits not only from more streamlined regulation, but from no longer being required to micromanage the regulated firm’s operations. Finally, competitors benefit from PCR because the regulated firm has neither the incentive to misreport the nature of its costs nor the ability to true-up earnings should its rate of return fall below pre-specified levels." Quebec firms face same process Also on March 13, the commission issued PN 2001-36 which initiates a similar process for regional telephone carriers Québec-Téléphone and Télébec. The two provincial companies are parties while the April 23 guideline holds for other interested parties. QuébecTel predicts competition will heat up in its market once Cogeco and Bell move into its territory. To even things up, its subsidiary QuébecTel Alizé was granted CLEC status last February and will start competing in Bell’s area. Part of the provisions of PN 2001-36 require QuébecTel and Télébec to file service improvement plans with the CRTC. Alain Carmichael, regulatory director of QuébecTel, says he doubts that will be a problem. He estimates that 99.6 per cent of QuébecTel’s lines already maintain the standards required. The improvement in service would be for remote areas. "There’s not much investment we would need to upgrade the service to the level asked by the commission," he says. "But the improvement program that we would have to implement would be mostly on the eastern part of our territory, on the lower north coast of the province of Quebec." The changes to the price cap regime are just the latest in a series of corrections the commission is making to the telecom system. Late last year, it overhauled the contribution regime, implementing a program more amenable to the competitors (NL, Dec 4/00). Chris Peirce has high hopes for this proceeding. "I really do believe the CRTC understands that there’s a problem out there," the AT&T Canada executive states. "Things need to be done to make the regulatory framework more conducive to sustainable competition. We certainly believe the changes to the contribution regime were a direct response to that realization."

Price cap rules favour ILECs at expense of viable telecom competition, critics charge

News | 03/26/2001 5:00 am EST

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