ILECs, CLECs generally unhappy with CRTC price cap ruling, appeals likely

Reaction was swift and generally negative to the CRTC’s May 30 price cap ruling – a landmark decision that will have major implications on the competitive landscape in the telecom sector. While industry players cautioned that their statements immediately following the decision were preliminary until they had time to fully analyze the 232-page document, most telco executives were dismayed by Telecom Decision 2002-34. "This is a serious disappointment for competition, the ongoing competitive environment," John McLennan, AT&T Canada Corp. vice-chair/CEO, declared. "It’s a very serious disappointment for AT&T Canada and I honestly believe when we really get into the detailed review of it, it will be a very serious disappointment for government policy and sustaining competition going forward." The CRTC set up two categories of services that will be included in the basket for the price cap considerations. Category I will be essential services, while Category II will be those developed for use by TSPs. While AT&T Canada had been seeking huge reductions in the amounts it pays ILECs for connection (NL, Oct. 22/01), the commission only granted slight decreases. The new regime, which took effect June 1 and will last four years, altered the markup from Phase II costs plus 25 per cent to Phase II plus 15 per cent. Commission experts project this will save CLECs 15 to 20 per cent each year. "We’re not talking about reducing our costs by 15 per cent or 10 per cent," McLennan told reporters at CRTC headquarters following the release of the decision. "We’re talking about creating an environment of competitive neutrality on costs. Incumbents enjoy a dramatic advantage on cost. They have a fully ubiquitous network, reaches every customer in the country, completely overbuilding a network to provide a facilities-based environment is simply not financable." The ILECs, not surprisingly, dispute that view. Willie Grieve, VP government and regulatory affairs for Telus Corp., asserted that incumbents have been carrying the new entrants for too long. During public hearings, his company pushed for the markup to be boosted to Phase II plus 35 per cent. "We showed them that in the calculations. The commission actually didn’t address that," he stated minutes after the decision was released. "It just said ‘that’s what you said’, and then they made the markup 15 per cent. Well, if that’s the case, we’re subsidizing our competitors to the tune of 20 percentage points off the markup." It was suggested to Grieve that the CRTC had struck middle ground since both AT&T Canada and Telus were upset. "Some people have said in the past if you make everyone unhappy, it must be right," he laughed. One person who was decidedly not unhappy with the ruling was Philippa Lawson of the Public Interest Advocacy Centre. Her group, acting on behalf of several consumers’ associations, had argued against the ILECs’ application for local rate increases (NL, Sept. 24/01). The CRTC agreed, denying hikes for the incumbents. The commission also refused increases in payphone rates, and stated that it would make those costs subject to a separate proceeding. Lawson also praised the rejection of the huge cuts in markup being sought by AT&T Canada and Call-Net Enterprises Inc. She echoed Grieve’s concerns about subsidization. "We don’t think it would be right for consumers to be subsidizing competition through highly discounted rates," she said. "Competitors did get some fairly significant rate reductions here and they should be able to make a go of it with those rates." McLennan disputed that, hinting that all competition may soon disappear if the decision is not reversed. "If we move to a position where there is no competition, what are consumers going to be faced with then?" he asked. "That’s what you don’t know, that’s what we don’t know." He would not respond when asked if the company was contemplating further job cuts or even complete withdrawal from the Canadian marketplace if the ruling is allowed to stand. Nor would he make a definitive statement on whether or not the telco would appeal the decision. He made frequent references to government policy about sustainable competition, leading some to speculate that if AT&T Canada or any other CLECs appeal to Cabinet, the criterion used will be public policy. The executive counsel for the country’s largest ILEC scoffs at such talk. Bell Canada’s Bernard Courtois believes the ruling merely fine-tunes definitions. "The commission clearly, in this decision, goes out of its way to explain that it’s pro-competitive and it’s going to help competitors and it favours the real competition, which is facilities-based competition," he asserted. "I’m surprised that competitors would seriously think that they would get more than this. If so, they’re looking for the kind of artificial help that’s not real competition. It would be totally artificial." The executive counsel disputed claims that the market is not competitive. "There’s actually a lot of competition in the phone market right now in every sector except local residential service," he explained. "In local business service, for example, we’ve lost about as much market share as the entrants in satellite television have gotten. And everybody considers that market to be highly competitive." Courtois suggested that the depletion of the telecom market may not be finished. That would not necessarily be a bad thing, he added. "Indeed, if there is a problem there, it’s that there is too much competition, because there are at the moment still too many players, perhaps, for the market to support," Courtois offered. "If you try to artificially keep players in, rather than let the market decide, then there’s a cost to the system in that. And that cost would eventually have to be borne by customers." That claim overlooks the inherited advantage ILECs have, McLennan countered. Their long history in the business makes it difficult for new telcos to compete. "We were really talking about how to create an environment of how we can establish competitive neutrality on cost," he stated. "Because when you really take a look at an established incumbent and all their invested infrastructure that’s been put in place over 100 years, they have a dramatic advantage over new entrants." Call-Net also expressed its disappointment with the decision and announced it was backing away from financial targets it had issued earlier this year (NL, Feb. 26/02). GT Group Telecom Inc., which had sought markup limits close to what the CRTC ultimately approved, was pleased with the results and appears to be the telco least distressed by the new plan. AT&T Canada has been a vocal proponent of altering the foreign ownership restrictions. McLennan said he did not see any connection between the price caps ruling and the ongoing lobbying to change the limits.

ILECs, CLECs generally unhappy with CRTC price cap ruling, appeals likely

News | June 3, 2002

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