Foreign capital just one of several issues facing telecom sector, committee told

The lifting of foreign ownership restrictions in the telecommunications sector may prove to be more of a placebo than a panacea, several witnesses have told a Parliamentary committee. The House of Commons Standing Committee on Industry, Science and Technology opened hearings into the topic at the end of January and received presentations again last week. "If we were to list the three most urgent areas of attention, for us, as a competitive telco, foreign ownership might – might – come in a distant fourth," Bill Linton, president/CEO of Call-Net Enterprises Inc., told the MPs. Linton stressed, in person on February 3 and in written submissions, that his company favours loosening the limits. But other factors come into play, as the firm made clear in a separate filing. "In order to solve this problem, both the Government of Canada and the CRTC must become more engaged in the process of regulatory reform," Call-Net wrote. "Only after the fundamental weaknesses of the regulatory regime are addressed will the benefits of liberalizing the foreign ownership restrictions be realized." Linton shared the stage with John McLennan, vice-chair/CEO of AT&T Canada Corp. McLennan argued more strenuously for changes to the current ownership regime, but he backed Linton’s sentiments on regulatory reform. "One thing is perfectly clear – removal of the restrictions will not, in and of itself, pave the way to sustainable competition across the marketplace for telecommunications services in Canada," the AT&T Canada submission stated. "It is equally clear, however, that this goal cannot be accomplished with the restrictions in place." The CEOs of the two CLECs echoed other witnesses who told the committee that the cost of capital acquisition is a major difficulty facing new entrants in the telecom sector. (For more on the discussion of this topic, see the Feb. 4/03 edition of Network Letter affiliate publication Report on Wireless.) McLennan said foreign companies are unlikely to invest in Canadian telecoms for several reasons, including lack of management control, the inability to divert assets to foreigners, the weakness of the Canadian dollar and lower rates of return for Canadian firms. CLECs also face a greater burden when borrowing money. "For example, AT&T Canada spent approximately $400 million on interest expense on $1.5 billion in revenues last year," McLennan told the committee. "Group Telecom’s March 2002 financial statements showed that they spent approximately $78 million on interest expense, as compared to $118 million in revenues for the previous six months (66% of revenues)." Both McLennan and Linton reminded the politicians that competitive carriers must pay access fees to the ILECs in order to connect to their networks. That drives up costs considerably, they maintained."AT&T Canada is Bell Canada’s number one customer," McLennan stated. "My friend Bill’s company is number two. The federal government is number three." Most of the telcos are seeking changes to the regulatory process by using the system itself. AT&T Canada has launched an appeal to Cabinet over the CRTC’s price caps decision (NL, Aug. 27/02). Call-Net has filed Part VII applications with the CRTC over access to DSL customers (NL, Jan. 28/03), bundling rules (NL Update, Jan. 6/03), and local service requests (NL Update, Feb. 3/03). Telus Corp. has filed a Cabinet appeal of the contribution and rebanding decisions (see story in this issue). "There’s a variety of things going on and I think it’s possible all the stars would align and we’d end up where we wanted to end up," Linton explained to Network Letter. "I think a lot of the CRTC decisions recently have been pretty positive and certainly pro-competitive I would say. So the indications are proving in the right direction. We just wanted to make the point that foreign ownership is not the biggest issue, for us anyway. It’s the current domestic telecom policies that are implemented by the CRTC, that’s our primary issue. This is a secondary issue to that – important, but secondary." Linton’s view is shared by Jim Peters, executive VP corporate affairs and general counsel of Telus. The telco is a hybrid in terms of this discussion – it is an ILEC in Alberta, British Columbia and parts of Quebec; a CLEC in Ontario and the rest of Quebec; and a wireless provider nationally. "On the specific issue of access to capital in the telecom sector, Telus believes that the Government of Canada must also undertake a timely review of the Canadian telecommunications regulatory regime – as called for by the Innovation Strategy – to ensure that CRTC decisions are instilling investor confidence and promoting foreign investment in the telecommunications sector," Peters told the committee. "While the commission has made strides in promoting competition and investment, we believe that recent CRTC decisions are, in fact, eroding investor confidence." He is less hopeful than Linton that the committee will be able to effect much change. Its mandate is narrow and Canadian Heritage and Industry Canada were unable to reach consensus to examine telecommunications and broadcasting distribution at the same time. Peters is optimistic that the various mechanisms currently under way – the Innovation Strategy, the Cabinet appeals and the CRTC review and vary applications – will bring about regulatory reform. He worries that the government’s re-examination of regulatory bodies will take too long, citing the example of the price caps decision (NL, June 3/02). All ILECs filed tariffs for areas where price increases were permitted under the decision, assuming the new tariffs would take effect on July 1, 2002. Those levies have yet to be approved by the commission. As a result, when the final prices are set, incumbents will have to go back to customers and ask for retroactive increases. "I’m not faulting the CRTC, because I believe with the resources they’ve got, they’re doing as best they can," Peters tells NL. "But as best they can isn’t good enough. So we question the resources that are available in today’s environment for the CRTC to keep on top of things." Telus stressed before the committee that any changes to the ownership restrictions must be symmetrical. That view was endorsed by University of Toronto law professor Hudson Janisch, who appeared before the MPs the same day as Peters. Janisch dismissed the theory that a tiered ownership regime can be justified on the grounds of handicapping or creating distinctly Canadian champions. "To deprive incumbents (however determined) of the benefits of foreign capital, technology and business know-how in order to give new entrants (who would have access to foreign capital, technology and business know-how) would simply lead to a less dynamic market overall in which the public at large would lose out in order to satisfy the private interests of new entrants," he offered. "As for Canadian champions, this approach would simply weaken our designated runners before they could get out of the starting gate and make them ineffectual international competitors. As well, it would distort regulation as a champion might feel entitled to favourable rulings as it would be Canada’s flag carrier, even though this flattering designation had been earned by government fiat, not success in the competitive market." The regulatory process could be used to guarantee quality of service and to protect customers, a representative of a Quebec consumers’ group told the politicians. Jean Sébastien, telecom analyst with l’Union des consommateurs, reminded the MPs that the CRTC requires telcos to report on the quality of service. Those standards could be retained even if foreign ownership limits are liberalized. Asked by Bloc Québécois MP Odina Desrochers if a Canadian telco could end up merging with an American one, Sébastien replied, "It’s possible, and that’s not necessarily a bad thing per se."He complained that the CRTC has cut back on the amount of consumer information it compiles. Because the most recent competition report from the commission features only five pages on consumers’ issues (NL, Jan. 13/03), Sébastien’s group is unable to make comparisons with data featured in the original study. Although the hearings have been extensive, some witnesses have been unable to appear. Representatives of Group Telecom were scheduled to present alongside McLennan and Linton. Committee officials attributed the no-show to the fact the company had not completely emerged from bankruptcy protection and its subsequent takeover by 360networks Inc. Similar appearances by the Canadian Advanced Technology Alliance and Quebecor Inc. were scrubbed. Still on the docket are BCE Inc., National Broadband Task Force chair David Johnston, Alliance Atlantis Communications Inc. and the Canadian Chamber of Commerce. Industry committee chair Walt Lastewka expects the group will have its final report ready by the end of March or early April (NL, Dec. 16/02).

Foreign capital just one of several issues facing telecom sector, committee told

News | 02/10/2003 5:00 am EST

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