Economic regulation not required to protect business customers: CCT

The Coalition for Competitive Telecommunications (CCT) continues to argue that the prices of incumbent telephone companies’ business services don’t require economic regulation. The CCT states in comments to the CRTC’s review of the VoIP ruling (Telecom Decision 2005-28) that ILECs can’t simply raise prices and not expect to get push-back from enterprise customers. An edited excerpt of the CCT’s comment is below. The ITCs cannot charge prices above competitive levels for their local VoIP services and expect to have customers subscribe to their services. No customer can be forced to subscribe to any supplier’s local VoIP services, including those of the incumbent telephone companies (ITCs). Where the ITCs offer local VoIP services, and as parties have noted they do not all offer such services, these services are discretionary. If a customer does not want to use an ITC’s local VoIP service, the traditional local wireline services of the ITC remain universally available and subject to economic regulation, which means a customer can continue to subscribe to them at prices determined to be just and reasonable by the commission. On the other hand, if a customer subscribes to any of the local VoIP services, local wireline or local wireless voice services of the numerous other suppliers in the market, there is nothing that can force that customer to subscribe to an ITC’s local VoIP service. In the case of a customer that subscribes to a local VoIP service of an ITC (and by all accounts there are relatively few of these at the moment), and if the ITC tries to impose a price increase above competitive levels, the customer can switch to another of the many local VoIP providers in the market, or to the regulated local wireline service of the ITC, or to the local wireline or wireless services of other suppliers. In addition to demonstrating that the customer (i.e., demand) side of the market prevents any supplier, including the ITCs, from exerting significant market power (SMP) in the provision of local VoIP services, an examination of the supply side comes to the same conclusion. For a supplier to have SMP, typically there are major barriers to either expansion by suppliers already in the market or entry by new suppliers. Where such barriers exist, the supplier can raise its price above competitive levels without losing customers to competitors. This is because existing competitors cannot easily expand their capacity to serve customers, while at the same time potential new entrants cannot come into the market to provide new options to customers.The barriers to entry to providing local VoIP services are low. VoIP technology has dramatically lowered the cost of offering local voice services while at the same time offering customers new features and functions that improve productivity and spur innovation. The result of the low cost of entry can be seen in the rapid rise in the number of service providers offering local VoIP services. Local VoIP services were launched in Canada in the fall of 2003. From large multi-national companies to small locally based start-ups, the number of providers has grown quickly and steadily. Today, less than three years later, there are well over 50 companies offering local VoIP services to business customers and an even greater number serving the residential market. The speed with which a local VoIP provider can expand across the country is a further illustration of the low barriers to entry. For example, in January 2004 Primus simultaneously launched its local VoIP service for residential customers in seven major metropolitan markets in Canada, and within three months expanded into eight more metropolitan markets. As a result, in a few short months Primus’s local VoIP service was available to the large majority of Canadian households. Thus, both the demand and supply characteristics of local VoIP services show unequivocally that no supplier, including the ITCs, have SMP in the provision of local VoIP services. If the ITCs do not have SMP in the provision of local VoIP services, there is no rationale to subject their local VoIP services to economic regulation. Competitors to the ITCs’ are promoting their own interests, not customers’.The majority of the comments filed in this proceeding are from competitors to the ITCs. They are unanimous in their call for continued economic regulation of the ITCs’ local VoIP services. This is not surprising because it is completely rational behaviour on their part; they benefit from the status quo. Competition is less intense when the ITCs’ local VoIP services are subject to economic regulation and the ITCs’ competitors are better off.The ITCs’ competitors attempt to conceal their support for continued regulation of the ITCs’ local VoIP services in the guise of it being necessary to protect customers. The thousands of business and institutional customers represented by the Coalition can and do speak for themselves and they say in no uncertain terms that economic regulation of the ITCs’ local VoIP services is not required to protect them. Such regulation is in fact not only unnecessary, but also harmful to their interests since it creates uncertainty and delay, limits price competition, restricts marketing and promotions, and constrains innovation.The argument that the ITCs’ competitors provide as to why regulation of the ITCs’ local VoIP services is required to protect customers can be summarized as follows. To start with, the ITCs’ competitors avoid any mention of the costs to customers in the short term. These are real, and cannot be denied, which is perhaps why they are not mentioned. Customers pay higher prices than otherwise, and suffer through slower supplier responsiveness and delayed innovation. The ITCs’ competitors do indirectly address the pricing aspect of continued economic regulation of the ITCs, but only from their own perspective which can be paraphrased as: if economic regulation were removed, the ITCs would lower prices and thereby harm their competitors. There is no acknowledgement that customers would benefit from these lower prices. Since there is no disagreement that customers suffer in the short term through continued regulation of the ITCs’ local VoIP services, the argument offered for continued economic regulation is that, if the ITCs were forborne, they would lower prices in the short term, and in so doing eventually drive all competitors from the market, thereby creating a monopoly that will allow the ITCs to push prices upward and thus hurt customers. In other words, customers must endure short- term pain in the form of higher prices, slower supplier responsiveness, and restricted innovation among other penalties in return for ensuring that there is competition in the longer term. Given the market characteristics of local VoIP services discussed above, the business and institutional customers represented by the Coalition find this hypothesis – that the ITCs could substantially reduce or eliminate all local VoIP competitors if their local VoIP services were forborne – to be completely lacking in credibility. Customers therefore are suffering needlessly to obtain a benefit in the longer term that will be realized in any event.

Economic regulation not required to protect business customers: CCT

News | July 6, 2006

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