Commission changes stance on price floors, opts instead for status quo

The CRTC has sharply reversed its position on price floor safeguards and bundling in an April 29 decision that has been widely seen as maintaining the status quo on the minimum prices charged by ILECs on tariffed services. In Telecom Decision 2005-27, the CRTC has ordered ILECs to charge at least imputed costs for Category 1 services on a standalone and bundled basis. The change will likely have little effect on the telcos, but one ILEC executive says the ruling is a dodged bullet since the commission had proposed to increase steeply the price floors, with the effect of guaranteeing competitors a margin. The decision arises from a process that the commission undertook itself after positing in Telecom Public Notice 2003-10 that ILECs may have had too much flexibility to lower their prices beyond what competitors could match (NL, May 11/04). Janet Yale, executive VP of regulatory affairs at TELUS Corp., tells NL the decision to force ILECs to charge retail rates instead of Phase II costs plus 15% as they do now likely won’t have too great an impact on the company’s ability to go head-to-head with their competitors. But, she notes, the move represents an important victory for the incumbents. "Before it was Phase II plus 15%. Now it’s the retail rate that we use for those services. Now, is there a big difference between Phase II costs plus 15% and the retail rates? Generally speaking, not much," she says. If the proposed rate has been adopted, "we would have had to offer our own retail customers a higher price for these services than the price we charge our competitors for using them. "That 10% difference on the markup would have created a guaranteed margin between the cost of the wholesale input for our competitors and the retail price we would have been able to charge. So, there would have been a regulated margin, if you will." BCE Inc. executive VP Lawson Hunter agrees with Yale that the decision represents little real change from the status quo, though he does express displeasure with what he calls the micro-management that he finds in the document. "Like, this idea of now the test has to pass the lowest rate band. That was not there before. And, on bundles you have to use the tariff price and not the Phase II costs. And, there were a couple of others where they moved to tariff prices as opposed to imputed cost, and every time they did that, it sort of raises the bar a little bit in how low you can go, right? That’s largely what it did. But, even that tells you the extent to which they are sort of micro-managing each and every one of these little services." But overall, he says, he’s pleased with the direction the CRTC took. "The commission launched this thing and were proposing a completely new overlay of regulation on the ILECs, on margins and prices etc., which they basically just didn’t find a lot of support for during the proceeding, particularly from customers. So, they backed away really completely from that and stayed with the old framework they had been using, with some marginal adjustments to it which largely increased the degree of micro-management of the ILECs. But, the important thing is that they did not start down a whole new additional conceptual basis for regulation of retail services, which is obviously very good news. And, I think it’s also a demonstration that the consumers didn’t really support what they were proposing, either. On either the residential side, though PIAC, or the business users were, as you probably know, were very, very upset about it. So, they listened to customer, and that’s what they should be doing." While most sources contacted by Network Letter agree the decision does little to change the current pricing environment, Rogers Communications Inc. argues that the commission lost an opportunity in the decision to create a more level playing field. It had filed in the summer of June 2003 a Part VII application to ban the practice of bundling. In a recent editorial board meeting with Decima Reports, Rogers VP of regulatory affairs Ken Engelhart said he was hoping for greater relief. "The bundling decision (April 29) would have been a huge opportunity for the CRTC to expand the opportunities for competitors by protecting against predatory conduct through bundling. So, if you offer local phone service, you’ve got to charge $22. There’s a tariff. It’s the law. But, you can offer it for $22 and give a free cell phone, free cellular service. Wait a minute, how come you can’t lower the price without filing a tariff, but you can do the same thing through bundling? So, we think bundling is a key area where during this transition to competition, the CRTC could have done something to promote facilities-based competition, and it chose not to. It didn’t take our suggestion. They rejected their own suggestions. We had a huge hearing – binders and binders and binders of paper and interrogatories and submissions – and it’s a fair summary to say they did nothing. And, no one seemed to care. I mean, I thought it was the most important decision to come out in years and there wasn’t a press release. The whole thing just sort of came out with not a bang but a whimper." Chris Peirce, executive VP of regulatory and government affairs at MTS Allstream says the decision was encouraging for the forceful language it contained regarding the level of telecommunications competition in Canada. As in the decision on promotions (see story in this issue), the CRTC has again put on record its concerns that a facilities-based competitive telecommunications marketplace, especially for local services, has been stillborn. But, he says, the commission’s omission of some key issues from the decision represents areas where he would have preferred different language. "The decision, in posing some further constraint on that type of dominant behaviour, in anti-competitive behaviour in the marketplace, we think is a good thing. We’re obviously sorry that the regulator chose not to expand things to Category 2 competitor services in the same way, and that they didn’t deal with CSAs in a little more forceful way," Peirce notes. "They obviously fell short doing what Rogers wanted to have happen on bundles. But, it is one of the first instances where the CRTC clearly now understands that pricing behaviour is important. That goes to the fact that they’re willing to go further in terms of defining what elements have to be imputed at a cost-based level for an incumbent in gaining approval for a tariffed offering. That’s good to see because by times the CRTC has been heard to say that pricing – watching pricing behaviour in the marketplace, what sort of margin squeeze can happen – that’s not what they’re really about. So, having them understand the pricing consequence of their decision in the marketplace is very important because ultimately pricing control is what is at the very heart of dominant anti-competitive behaviour." A dissenting voice is heard from Call-Net Enterprises Inc.’s Alexander Adenyinka, who says the decision needs to be looked at in the context of historical problems with customer service agreements (CSAs) that haven’t met commission regulations, and the CRTC’s preliminary views going into the process. He says he’s not surprised that the decision shifted the rules very little. "We don’t agree that it is just status quo regulation. We don’t agree with that at all. I think one has to take a step back, and look at the context in which the commission made those proposals in the preliminary views that they expressed. Don’t forget that a lot of this was driven by what was going on with the CSAs. The commission had actually substantially forced compliance and cleared out some of the CSA problems before the proceeding was completed. One could say that, substantively, some of the more grevious reasons for the preliminary views that the commission strongly expressed in the PN already resolved. Because, the ILECs were very much aware that the commission was very committed and intent on reining them in as far as CSAs are concerned, and the commission was not going to just dilly-dally about CSAs anymore. So, a lot of that, I think, was already on the road to resolution by the time the proceeding itself completed."

Commission changes stance on price floors, opts instead for status quo

News | 05/10/2005 4:00 am EDT

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