Rural, remote competition would kill small phone companies within three years, says ACTQ

GATINEAU—Allowing local competition in rural and remote areas would wipe out the profitability of small incumbent phone companies within three years, the Association des Compagnies de Téléphone du Québec (ACTQ), an association of Quebec phone companies, told the CRTC Tuesday. But the ACTQ said such a situation could be avoided by an increase in subsidies. “The ACTQ has proposed that the subsidy mechanism continue to be based on the existing level of local service subsidy available to SILECs , but that it be ‘topped up’ if local competition is implemented in a SILEC’s territory,” said Roger Choquette, managing partner of Comgate Telemanagement Ltd., an Arizona-based telecom consultancy that is an associate member of the ACTQ. Tuesday marked day five of the CRTC’s hearings on access to basic telecom services. As part of the hearing, the commission is reviewing whether rural and remote areas served by small incumbent phone companies should be opened up to competition. Under the 2006 regulatory regime, competitors wishing to enter an area must submit a request to the incumbent phone company, which then proposes an implementation plan to the commission. The commission has 13 outstanding applications to open markets to competition, but the review process has been frozen due to ongoing proceedings about the policy. Traditionally, incumbents have argued they should retain control of their markets because of their obligation to provide phone services. They say competitors only enter profitable urban cores, leaving incumbents to continue serving the outer, high-cost areas in what is referred to as the “donut effect.” But some competitors want to compete in rural and remote areas, and point out that the incumbents receive subsidies to serve high-cost, non-profitable areas. To demonstrate the negative effects of opening up markets to competition, the ACTQ provided the commission with a financial analysis of the impacts on a company with less than 1,500 subscribers. The association predicted the company could absorb market share losses of five to 20 per cent over five years following the introduction local competition. But operating costs would increase by about 10 per cent and unit operating costs would increase by 20 per cent, the ACTQ said. Revenues would decline by about 17 per cent due to a loss of customers. “This type of situation cannot be sustained financially. Our calculations indicate that the company’s profitability would likely become negative by the third year of operations,” Choquette said. “The possible financial demise of the SILEC would not only result in a potential return to a non-competitive voice market, but would also potentially strand those subscribers located outside of the cable company footprint.” The ACTQ said the commission should take two preventive measures to ensure small incumbents don’t go out of business. First, the cost of implementing local competition should not be borne by the incumbent, but by the new entrant or the subsidy program. “It is, in the view of the ACTQ, bad public policy to require a SILEC with a few or several thousand subscribers to absorb the implementation costs of the entry of a multi-million-subscriber cable BDU into the local voice market, under circumstances where the SILEC may be put in a position of such financial jeopardy that its current universal service obligations may not be met,” Choquette said. The ACTQ also suggested incumbents receive a subsidy “top up” to compensate for increased competition. “Under this approach, a SILEC’s subsidy would be increased on an annual basis related to lost revenues associated with basic local service only,” Choquette said. But CRTC vice-chairman of telecom Leonard Katz argued the ACTQ’s proposal, and the granting of subsidies, would make small incumbents targets for corporate takeovers. “The perversion, as I see it, is at the end of the day you can lose all your customers and simply be a takeover target just for the subsidy,” he said. “If this commission approves , we’ve created a value for your business that is in inverse proportion to your success. The less successful you are, the more subsidies you get per customer, and the more attractive you are as a takeover target.” Choquette said he “totally disagreed” with Katz’ assessment because the subsidy would cover only some of the costs associated with serving high-cost, unprofitable regions. The ACTQ also offered another approach, in which competitors cover larger areas including non-profitable zones. Last Thursday, the Ontario Telecommunications Association told the commission it supports a case-by-case review mechanism of requests to open rural and remote markets to competition. But CRTC chairman Konrad von Finckenstein said he did not support a case-by-case approach because it leads to “special deals.” Von Finckenstein also questioned whether allowing competition could cause subscribers to lose service, arguing that large players could acquire failing, smaller players. Telcos TBayTel, Bragg Communications Inc., MTS Allstream and Bell Aliant, as well as cable carriers Shaw Communications Inc., Cogeco Cable Inc., Rogers Communications Inc. and Quebecor Media Inc., have told the committee they support opening markets to local competition. The hearings continue Wednesday in Gatineau with the opening of the rebuttal phase. kfournier@thewirereport.ca

Rural, remote competition would kill small phone companies within three years, says ACTQ

News | November 2, 2010

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