Price cap hearings end with call for changes by Competition Bureau

As the price cap hearings before the CRTC wound down, a government agency called for the maintenance of the current structure but with some modifications. The Competition Bureau believes its formula will lessen uncertainty for telcos, investors, and the general public. The bureau filed a submission in the final stages of the proceedings, recommending extending the price cap to five categories from three to provide greater pricing flexibility by the local telcos. CLECs should have access to ILEC facilities at long-run incremental costs. The bureau also endorses the idea of CLECs reselling ILEC local service through discounted prices. "The commission will need to re-examine the identification and pricing of essential facilities in light of the actual experience of the new entrants over the past four years," the agency writes in its submission. "On the retail side, an adjustment to the design of the price cap is required to remove unwarranted downward pressures on business rates. This can be achieved without having to de-link baskets, loosen rate ceilings, or eliminate productivity factors. The overall price cap index can be broadened to include two specific sub-baskets – subsidies to high cost areas and competitor services. "The ILECs were quick to point out the benefits of their plans. Denis Henry appeared on behalf of Bell Canada."An assessment of the overall fairness of our proposal, however, should not be limited to prices," he told CRTC commissioners. "We also have proposed a residential service quality guarantee that will ensure that the companies have the appropriate incentives to achieve the commission’s quality of service standards. Our package also includes detailed and extensive service improvement programs of particular importance to rural Canadians. They will ensure that the commission’s basic service objective is achieved on a virtually universal basis." He disputed assertions by CLECs that the older telcos are rolling in dough. "The fairness discussion has led to suggestions that there is a pool of excess ILEC earnings that should be distributed to various stakeholders," he said. "This is simply not the case." The idea of incumbents becoming wealthy through rate increases resonated in the early stages of the hearings (NL, Oct. 10/01). Richard Stephen of Aliant Inc. addressed this concern when he delivered the final remarks for the eastern telco."We believe that prices should be based on the principles of affordability, development of facilities-based local competition and investment. However, I am a realist in this matter," he offered. "I only have to look to the media and the politicians in the Atlantic region and to some of the questions asked of various parties during cross-examination to get a sense that Aliant’s earnings may be of interest to some in this proceeding. Again, I implore the commission to be guided by the companies’ criteria. Developing an understanding of earnings and, for that matter, earning trends or ROE trends is not a superficial exercise. A superficial approach would mask the underlying reasons for the results and mask the ability to use such information to predict the future." Manitoba Telecom Services Inc. cited the ruggedness of its serving area and the problems that entails. Roy Bruckshaw is hopeful of ubiquitous service by the time the CRTC considers price caps again. "We are upgrading a system that spans significant distances over areas that are sparsely populated and very difficult to access, where there are no roads and crews must be flown in. Equipment and facilities must be brought into these communities, in most cases over winter roads," the director of regulatory affairs reported. "As a result of the significant upgrades which MTS has proposed in its service improvement plan in this proceeding, 99.7 per cent of MTS’ NAS will meet the commission’s basic service objective within the next price cap period. This would leave those few communities that are served by satellite without toll-free access to the Internet. These communities do, however, have access to the Internet via toll call at present. The company has demonstrated that there is simply no economically feasible solution using current technology at the present time that will permit toll-free access to the Internet via current satellite technology. " Throughout the hearings, there was talk of the declining fortunes of CLECs. The ILEC that has most recently come under federal jurisdiction says financial hardship in the wider world affects its standings. "Farm incomes continue to fall in Saskatchewan and much of the province has experienced the worst drought in decades," John Meldrum, SaskTel’s VP corporate counsel & regulatory affairs told the panel. "Added to this is the current economic downturn. It is accepted that a recession is upon North America and even the optimists seem to be pessimistic. "It is against that backdrop that we have proposed to continue the rate freeze currently in place in Saskatchewan for 2002. In 2003, we propose to eliminate all excess mileage charges, at which time we would have the flexibility to introduce modest local rate increases." John Lowe of the Calgary law firm of Bennett-Jones represented Telus at the proceedings. He warned not to view the ILECs as some sort of monolith."The old Stentor settlement plan is no longer out there to smooth out the applications of national average costs and rates. There is not one ILEC. There are at least five ex-Stentor companies, depending on how you count them," he asserted. "Territories are different, densities are different, costs are different and competitors do not compete against one national ILEC, they compete at both the wholesale and retail levels against the costs of the individual ILECs in their individual operating territories." He lashed out at the CLECs who repeatedly called for a lessening of the amounts they should be required to pay for access to loops."There is no justification for discounts of any kind, either through the manipulation of cost calculations or the explicit disallowance of elements of a markup. The whole notion was discredited in the cross-examination of AT&T and Call-Net. It doesn’t matter whether the discounts are 13 per cent, 20 per cent, 40 per cent, 60 per cent or 100 per cent, as Call-Net seeks for loop service charges. And it doesn’t matter what you call them: a discount is a discount." That claim was disputed by AT&T Canada, represented by Michael Ryan. "The ILECs’ success is not due to superior performance in the marketplace. It is instead the product of the significant advantages that the ILECs derive from their position as incumbents," he stated. "First, their ubiquitous networks, which were largely installed and paid for under the essentially risk-free rate base rate of return regime, and second, the 100 per cent market share that they held as they entered this competitive phase." Call-Net Enterprises Inc.’s Michael Koch of the Goodmans law firm raised another advantage the incumbents have. "The ILECs also benefit from customer inertia. Starting with all of the customers, they do not have to concern themselves with the transaction and customer acquisition costs which competitors face. Competitors must win market share one customer at a time." The only crack in the CLEC wall seemed to come from GT Group Telecom Inc. Its SVP general counsel Robert Fabes seemed more conciliatory than his counterparts with the other new entrants. "It is Group Telecom’s position in this proceeding that the framework for competition does not require significant changes," he testified. "Although there are other parties to this proceeding who have proposed alternative models for competition, in our view, it is only with facilities-based competition over competing networks that Canada will derive the full benefits of genuine competition."

Price cap hearings end with call for changes by Competition Bureau

News | November 6, 2001

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