The following is an article submitted by Ken Engelhart and David Watt of Rogers Communications Inc. in response to the lead article in the May 26 issue of Network Letter. They take aim at the Montreal Economic Institute’s May 13 economic note on the need to regulate telephone service. Last month a group called the Montreal Economic Institute (MEI) released a four-page paper entitled "Do We Still Need to Regulate Telephone Services?" Their answer seems to be: "No." In fact they feel that CRTC policies inhibit competition.  The paper starts off with a classic "straw person" argument. The author says that there are two types of competition: real-world competition and the "perfect competition" of an economics textbook. They accuse the CRTC of supporting "perfect competition" instead of real-world competition. Of course, the CRTC has never said that their goal is "perfect competition" or anything remotely similar.  The MEI has inferred the CRTC’s beliefs from the CRTC’s position that there is not enough local competition. The MEI states:"This conclusion is based on an end-state vision of perfect competition – for example, on the observation that 95% of local wirelines are supplied by the former protected monopolies." In other words, the MEI believes that a 95% national market share for the incumbents is healthy competition and that only someone with "an end-state vision of perfect competition" would be concerned.  The MEI then goes on to explore the amount of competition in the Canadian market. They state that "substantial competition exists in telecommunications, as indicated in Table 1" (of their paper). That table, however, is fraught with factual errors. The table lists 8 companies as major existing competitors in the residential local telephone market. The largest companies listed, AT&T Canada (presumably the author means Allstream) and 360networks/Group Telecom, do not even offer residential local telephone service. (After the MEI paper was issued 360/GT was purchased by BCE.)  Similarly, Vidéotron Telecom also does not offer residential service. FCI Broadband is described as a CLEC in the Greater Toronto Area. In the City of Toronto, FCI provides residential telephony to four condominium complexes. (They also serve a few subdivisions north of Toronto.) Primus is listed as a CLEC in major cities in Quebec and Ontario - Primus is not a CLEC.  We are left with three companies: Eastlink using cable infrastructure in parts of Nova Scotia and PEI, Microcell with its CityFido wireless offers in Vancouver and Toronto, and Call-Net leasing "unbundled" local loops from the telcos and combining them with its own switches to offer telephone service in the six largest cities in Canada. Since Call-Net obtains these loops at CRTC-regulated prices, they will no longer be able to provide local service if the MEI has its way and there is a "complete deregulation of telecommunications in Canada." Next, the MEI argues, "Even if there is not a large number of competitors in a given sector of the economy, what counts is potential competition." Here the MEI trots out the old contestability theory chestnut, of course, without listing the rigorous theoretical conditions that render the theory moot in the real telecommunications world. The MEI is very bullish about future competitors. In their press release, they tell us that electricity utilities will soon offer a full range of telecommunications and broadcasting services.  However, rumors of the death of the residential local telephone monopoly have been greatly exaggerated! Indeed, without a hint of irony, the MEI quotes a statement made by Richard Posner (an American economist/lawyer who is now a federal judge) thirty years ago. Posner stated at that time that communications is an example of an industry undergoing rapid technological changes so that it would be unlikely to remain a monopoly. However, here we are three decades later and local telephone service is still an effective monopoly almost everywhere in the world. Seven years after the CRTC removed the barriers to local competition in Canada, the incumbents still have a 97% share of the local residential market. All this talk of potential competition overlooks the very real competition that we had four years ago. AT&T Canada, Call-Net, 360networks, Group Telecom, Norigen, Cannect, Stream, Axxent, C1 and other CLECs were in business then. Every one of them has become insolvent since, with only Allstream (AT&T Canada), Call-Net and 360/GT emerging after some sort of legal process. Why is this fact not mentioned by the MEI? Are they unaware of the failure of all of the facilities-based local telephone competitors in Canada? Alternatively, do these economists think that the elimination of all competitors is irrelevant to an analysis of the market? The MEI describes the CRTC’s policies as "a protection package to new competitors." The insolvent former competitors and their shareholders may be forgiven for seeing it a different way.