Elements of third price cap regime begin to show up on telco’s radar screens

Discussions regarding the third price cap regime are expected to begin in earnest later this year with some anticipating that the CRTC will release a discussion paper some time during the first half of this year. While telcos have already started thinking about key elements that need to be addressed in the upcoming proceeding, the majority of them are remaining mum on specifics. Several telcos contacted by Network Letter acknowledge that internal discussions have started, but they aren’t yet willing to talk openly about some of the key issues that need to reviewed in preparation for the implementation of the third price cap regime. Chris Taylor, an Ottawa-based regulatory lawyer, threw down the gauntlet last month with a provocative column suggesting the going-in prices for local optional telecommunications services needed to be revisited (NL, Jan. 18/05), something that wasn’t done in the second price cap proceeding. He reiterates in an interview with Network Letter that there is no longer any policy justification to keep those prices at such high rates because the model for funding local service in high-cost serving areas has changed. Fundamental modifications to the contribution regime in November 2000 should have also led to changes to the going-in prices, Taylor says, because the commission no longer calculated the shortfall based on an ILEC’s entire revenue in its operating territory minus the cost of providing the service. The shortfall calculation is limited to only those areas deemed to be high-cost serving areas. "They (the CRTC) should be re-evaluating the going-in prices because the reason for some of those prices to be so high was that so they could fund this cross subsidy (the old contribution regime), but that cross subsidy no longer exists," he explains. Noting the $800 million that Bell Canada earns from local optional services, he adds, "They are charging rates that are way, way, way higher than are justified on any economic basis, and they’re making huge, huge, huge profits. Formerly, those profits were used to bring contribution down, or were going into the pot for contribution, now they’re not." But Taylor believes there are other aspects of the price cap regime that need to be addressed in the next round of talks, as well. Elements such as the services basket structure and parameters regarding the capping of services should also be on the list of price cap aspects to be reviewed, he says. "Should the same basket structure continue on from the second to the third price cap regime?…You also have to look at the price cap parameters themselves, the productivity offset," Taylor says. Janet Yale, TELUS Corp.’s executive VP of government and regulatory affairs, says the commission needs to take a serious look at making sure there is greater pricing freedom and flexibility, and this can be done by addressing the appropriateness of the current productivity requirement, going-in prices and deferral accounts. Taking aim at the productivity X factor, which was set when there was much less competition in the market, Yale says, "We still have a requirement to put lines in communities, (yet) nobody has an obligation to take service from us, and that is becoming an increasing reality with wireless substitution and cable telephony. And so the notion that we are as productive as we were when putting lines in a subdivision meant you had that many new customers. It doesn’t anymore and productivity is clearly lower than it was. We believe that it is extremely prejudicial to continue with a level of productivity that was set in the previous price cap regime." The deferral accounts have also outlived their usefulness, states Yale. "With Vonage, Primus and other Voice over IP providers in the market, with cable telephone, with wireless substitution, there are lots of price points out there based on alternative technologies that suggest the need to keep prices artificially high no longer apply. Maybe it’s time, obviously, to get rid of the deferral accounts and let prices be driven by the market," she says. As for going-in prices of local optional services, Yale says that there should be greater pricing freedom, but there should also be greater flexibility in packaging optional calling features. "To be honest, the logic and rationale to continue regulation of those services at all to me is hard to justify, and we certainly think that that would be an area for freedom or flexibility, perhaps even outside the context of price caps because of course the CRTC does permit us to file applications to move prices as a result of competitive pressures," she says. It’s not about having the ability to raise prices, it’s about being able to offer customers what they want in a more customized way, she says. "The question is what is the evolution of the way those services are packaged and the ability to respond flexibly to customers’ demand as we start to see the packaging offers offered by our new competitors," Yale says. While MTS Allstream Inc. VP of regulatory affairs Teresa Griffin-Muir didn’t have specific comments on elements for the upcoming price cap proceeding, she agrees with much of what Taylor had to say in his article, except to say the impact of competition on the prices of local optional calling services is missing from his analysis. Greater competition in the local market would have an impact on the pricing of these services, she adds. "If you get the right framework from a competitor perspective, a lot of the pricing issues on a retail level would begin to solve themselves. All you have to watch is how much dominance (there is) in certain markets so that you don’t leap too quickly to concluding the market is already competitive when it’s maybe poised to be competitive," Griffin-Muir tells Network Letter. Prices are also determined by what a competitive market is willing to bear, she says. The dominant provider will have to be more vigilant in lowering prices if it knows there is a competitor in the market that can go toe-to-toe in terms of price reductions. "It puts a certain level of discipline in the market that’s more real, it’s not artificially imposed," Griffin-Muir says.

Elements of third price cap regime begin to show up on telco’s radar screens

News | February 2, 2005

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