Final arguments give CRTC much to ponder in local forbearance proceeding

The CRTC has to wade through complex arguments presented by incumbents telcos, competitors and industry associations to arrive at, what will undoubtedly be a seminal decision on the rules regarding the forbearance of local exchange services. As could be expected, the competing local exchange carriers recommend a cautions approach while the incumbents generally state that market conditions currently support de-regulation. But beyond the requests by Bell Canada and Aliant Telecom Inc. to be de-regulated is the fact that this process should establish a forbearance framework to be used for future applications, which puts into light the importance of this complex decision. "There is a very high price for consumers and competitors to pay for an improperly designed forbearance scheme," submits MTS Allstream Inc. "Given the sheer size and importance of the local services market to the Canadian economy, and the fact that this market lies at the very root of the ILECs dominance in the Canadian telecommunications industry… it is of paramount importance that the Commission establish the correct regulatory framework for local forbearance at the outset." To aid the commission, the interveners primarily focused their comments on the same key issues: definition of a relevant market; criteria for competition; which commission powers to forbear; post-forbearance criteria; and the institution of a transitional regime. Of course, with the extent of the submissions, many sides of each issue were examined, with different issues proving as points of greater interest for different parties. In the case of market definition, ILEC SaskTel offers that, "The ILEC exchange is the appropriate and relevant geographic market upon which the tests for forbearance should be applied. Proposals to adopt other geographic regions, such as the province, census metropolitan areas (CMAs) or local interconnection regions (LIRs), are not appropriate." Deregulating specific exchanges, argues SaskTel, makes sense because CLECs already choose to enter the market where it makes sense to do so, which in most cases are large urban areas that are served by one exchange. However, MTS Allstream rejects this proposal, noting "ILEC exchange boundaries are historical artifacts of each ILEC’s local exchange network." MTS goes on to suggest the incumbent’s traditional operating territory as the relevant geographic market, which was echoed by other competitors. As with the submissions submitted to the CRTC in June, definition of a sufficiently competitive market remains a point of contention. While the incumbents continue to offer that the Commission should forbear when competitive penetration reaches a 5% threshold in any exchange, the CLECs don’t see this as substantial proof of competition. Says Quebecor Media Inc. (QMI): "We reiterate our proposal for a 20% market share as a threshold for proceeding with a qualitative forbearance analysis." Quebecor adds that if the geographic market is defined as anything less than the entire ILEC territory, this threshold should be set nearer to 30%. Deviating from using market share as the be-all definition of competition, Bell suggests its own criteria for forbearance, which include "the low barriers to entry, vigorous and aggressive rivalry by competitors, technological innovation, customer awareness of competitive choices, and the extent to which customers have exercised that choice." Bell says that under these guidelines, particularly when you consider the existing customer base of the cablecos which are, or soon will be, offering VoIP service, the market is ready for deregulation. The United Telecom Council of Canada (UTC Canada) is of the opinion that any current measure of competition is inherently inaccurate because much of it comes from resellers. "In UTC Canada’s view, it is a better course to be patient, to wait for facilities-based competition to develop, and then to forbear from rate regulation when the ILECs no longer possess significant market power." If forbearance were to occur now, the incumbents could raise and lower their prices to scare off new entries, and thereby create what UTC Canada calls a "pseudo form of competition." Since the incumbents already argued that development of wholesale services in a forborne market should be negotiated between the involved parties, resellers, such as Yak Communications Inc., fear the ILECs would have too much power in wholesale negotiations. Yak and FCI Broadband also argue that deregulation of incumbents is unfair from the standpoint that competitors entered the market assuming the ILECs would be operating under certain guidelines: "If knew at the time that the Commission would seriously contemplate the deregulation of the ILECs in 2006, or soon after, investments may not have been made or the risks incurred. A more cautious, conservative approach would have been appropriate." How resellers are treated in a deregulated market raises the issue of what exactly will be forborne. MTS Allstream submits that the Commission retain all of the established rules that relate to wholesale arrangements. Aliant Telecom, however, suggests that "in the post-forbearance environment no distinction should be made between former incumbents and entrants. All Local Exchange Carriers should be subject to the same degree of forbearance and the same residual regulatory requirements." Because no one can predict for sure what would happen in a deregulated market, the competitors and incumbents are urging the Commission to consider various post-forbearance scenarios. Primus Telecommunications Inc. "submits that the Commission must establish a mechanism whereby it would re-regulate an ILEC if any ILEC’s market share rises above a pre-determined level after the ILEC has been granted forbearance." While some competitors do not wish to institute a re-regulation regime for fear that it would confuse the market, they suggest getting around it by waiting for a far more substantial level of competition before deregulation. Not surprisingly, the incumbents disagree with both notions. Says Bell: "The uncertainty that re-regulation would engender is most likely without purpose: in no instance of forbearance to date has an ILEC regained substantial market power nor have customers been harmed. In the absence of evidence, there is no reason to assume that local exchange services, particularly in the face of the considerable entry that is observable today in the local exchange markets, would be any different." A final option to consider is a transitional regime in which the incumbents would be allowed some greater measure of competitive, and promotional, freedom. UTC Canada believes that there should not be forbearance until it is unequivocally dictated by the market, and "by the same token, prior to competitive market forces taking over this role, there is no rationale for loosening regulatory safeguards. QMI agrees: "We believe that below-cost promotions and targeted winbacks are not innocuous intermediate steps on a continuum of increasingly more powerful ILEC marketing strategies. Rather, for an ILEC desirous of perpetuating its dominance, they are weapons of choice." With a full compliment of arguments, the CRTC has much to weigh when making its decision. Comments Yak and FCI Broadband: "The purpose of regulating markets that are becoming competitive markets is not for assignment of market share, handicapping incumbents, or protecting the new entrants. Regulation is needed because, without it, there would be no competition." SaskTel states, "Public policy has long accepted that reliance on market forces, rather than regulation, is a superior means for ensuring the efficient allocation of society’s resources both in the short term and in the long term." While the incumbents and competitors would most certainly agree to disagree, that option is not available to the Commission.

Final arguments give CRTC much to ponder in local forbearance proceeding

News | 09/29/2005 4:00 am EDT

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