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Consumer Group Comments on AT&T Petition re: CRTC Price Cap Decision

Philippa Lawson
Senior Counsel

Mr. Alex Himelfarb
Clerk of the Privy Council and Secretary to the Cabinet
Langevin Block
80 Wellington St.
Ottawa Ontario
K1A 0A3

Dear Sir:

Re: Canada Gazette – Notice No. DGTP-008-02

Petition to the Governor in Council from AT&T Canada under Section 12 of the Telecommunications Act in regard to the following CRTC Decision: Regulatory Framework for Second Price Cap Period, Telecom Decision CRTC 2002-34

1. The comments below are filed on behalf the of Consumers’ Association of Canada, the National Anti-Poverty Organization, and l’Union des Consommateurs (“The Consumer Groups”), a coalition of consumer groups that participated in the CRTC proceeding leading to Decision 2002-34, under the name “ARC et al”.

2. The Consumer Groups were active participants in the proceeding that led to Decision CRTC 2002-34. They represent one of the three main stakeholder groups affected by this decision. As noted in both the Public Notice and Decision in this proceeding, the Commission attempted to balance the interests of the three main stakeholder groups: customers, competitors, and incumbent telephone companies.

3. The Consumer Groups consider that, with the exception of certain reporting requirements that the CRTC decided to lift, the Commission did a reasonable job of balancing the interests of end-users with those of service providers generally. (See below for more on the issue of reporting requirements.)

4. The AT&T Petition challenges the appropriateness of the balance struck between incumbent service providers (“ILECs”) and new competitors (“CLECs”). It does not challenge the appropriateness of the CRTC’s determinations in respect of the balance between companies and end-users. It is important to appreciate this distinction, because any remedies flowing from the AT&T Petition should be carefully constructed so as not to interfere with the appropriate balance struck between consumers and service providers.

Standard for Cabinet Review

5. In general, the Governor-in-Council should not interfere with decisions of its expert tribunals, such as the CRTC. To do so other than in cases of egregious error would undermine the ability of the tribunal to operate independently and effectively.

6. The Consumer Groups submit that the Governor-in-Council should not interfere with the CRTC’s decision in this case unless it is convinced that the goals of Canadian telecommunication policy, taken together, will otherwise be subverted. It is not clear to the Consumer Groups that this is such a case.

The Goal of “Facilities-Based Competition”

7. AT&T challenges the Commission’s interpretation of the policy goal of fostering competition in telecommunications, arguing that Decision CRTC 2001-37’s focus on “facilities-based competition” constitutes a “startling departure from the clear wording of the Telecommunications Act….”

8. AT&T’s characterization of the Commission’s approach to facilitating competition is misleading in two respects: the focus on “facilities competition” is not new: in Decision CRTC 97-8, the Decision by which the local telecom market was opened to competition, the Commission stated:

The Commission is of the view that efficient and effective competition will be best achieved through facilities-based competitive service providers; otherwise, competition will only develop at the retail level, with the ILECs retaining monopoly control of wholesale level distribution.

The Commission is of the view that resale can promote the development of a competitive market while allowing competitors time to construct their own facilities. While resale competition can help promote the development of a competitive market, it is the Commission’s view that the full benefits of competition can only be realized with facilities-based competition.”

9. Second, “facilities-based competition” as promoted by the Commission is in fact a hybrid model of competition: it explicitly permits resale and requires the provision of certain “essential” ILEC facilities at mandated cost-based rates. It does not require competitors to duplicate incumbent networks. It is based on the notion that parallel networks already exist, in the form for example of wireless and coaxial cable transmission facilities, and that competitors can take advantage of such non-ILEC facilities to create more lasting forms of competition.

AT&T’s Requests

10. At the core of AT&T’s Petition is a request for lower rates for certain competitor services. The Consumer Groups do not have the expertise necessary to take a position on the appropriate rate levels for competitor services. They do, however, take a position on the fundamental principles that should underlie the establishment of such “wholesale” rates. Such principles include:

  1. that competitors should have access to those ILEC facilities that cannot be economically reproduced, at rates that cover ILEC cost, but that are not higher than what the ILEC effectively pays for the same service; and
  2. that competition should not be subsidized.

11. Under no circumstances should end-users be forced to pay higher rates in order to facilitate competitor access to ILEC facilities.

12. Competition is a preferred means of achieving the policy goals set out in the Telecommunications Act. It is not an end in itself. As a recent Decima survey indicated, Canadians are not willing to pay more for local residential telephone services in order to have greater choice. Nor should they: competition is meant to bring them lower prices, not higher prices.

13. The ultimate goals of Canadian telecommunications policy involve availability, affordability, quality, and responsiveness to user needs.

14. The following excerpt from ARC et al’s Final Argument in the Price Cap proceeding sets out their position on the issue of how best to facilitate reliance on market forces in this context:

“Competition is a preferred means to an end; it is not an end in itself

15. Both ILECs and CLECs treat competition as the primary goal in this proceeding. While competition is clearly an objective of the Commission in all of its regulatory efforts, it is not so much an end in itself as the preferred means of achieving the Canadian telecommunications policy goals of affordability, quality, fairness, efficiency, and innovation, among others. From the consumer perspective, choice is desirable, but not at all costs. As the results of BCOAPO et al’s membership survey show, consumers value price over choice: greater choice is not worth higher prices to them.

16. As pointed out by Mr. Todd under cross-examination by Mr. Koch, consumers are not given a choice between competition and higher prices on one hand, and monopoly and lower prices on the other hand. Instead, higher prices are being forced on basic ratepayers in a determined effort to achieve competition, the primary benefit of which is meant to be lower prices!

MR. KOCH: Now, you would agree with me that lower prices is not the only potential benefit of competition to consumers. Correct?

MR. TODD: It’s the primary benefit, but it’s not the only benefit.

MR. KOCH: Okay. Choice and innovation are often cited as other benefits of competition?

MR. TODD: Yes. One of the interesting things is that with the move—and I have been involved in the move to competitive markets in many different industries at this point—with the move to competition, if your choice is between a bunch of different service providers at, say, a 10 per cent higher price than if you didn’t have that choice, customers no longer are able to say “Well, I would rather not have the choice and have the lower price”. So you don’t actually see how much they value that choice.

They are now choosing perhaps at the higher rates amongst competitors, and, yes, they, in a sense, benefit from that choice that they have, but we are not able to get evidence that they actually find those higher prices a fair trade-off for the greater choice.

17. Indeed, for many – possibly most – residential consumers, there may not even be a trade-off: they will continue to face higher prices for an essential service, without seeing any countervailing benefits in terms of choice. As Dr. Taylor stated:

It’s an experiment. We don’t know what the true scope for competition is going to be.

18. Consumers of an essential service should not be forced to underwrite a costly experiment that has no guarantee of success.

Regulation should recognize the reality of competition in local telecommunications

19. The record of this proceeding could not be clearer that effective competition in residential local telephony is a long way off, and will likely never come to pass in some parts of the market. The spate of CLEC failures over the past several months, the inability of any CLEC yet to make a profitable business case, and the fact that only one party in this proceeding is offering local service to residential customers, despite the predictions of ILECs just four years ago, speaks loudly and clearly to this issue.

20. The Commission must not be seduced by unrealistic predictions of competition over the next price cap period. Instead, it should establish a regulatory regime that is based solidly in reality – the reality so eloquently described by TELUS in a recent submission to the CRTC regarding local “winback” rules. In that submission, TELUS emphasizes:

”…..the stubborn economic facts of competition in a network industry (significant capital expenditures, ongoing need for funding, long investment recovery periods, the inevitable failure of some market participants)….”

and states:

“Facilities-based competition in telecommunications is, by its very nature, slow, expensive and risky.”

“The practical and financial challenges posed by infrastructure development appear, in magnified form, in the Canadian context. The difficult task of constructing transportation and communications infrastructure in vast and sparsely populated country is a recurrent theme in Canadian historiography….”

21. Within this context, competition in local telephony should be allowed to develop at its own pace, at rate levels that are constrained as necessary to meet public policy objectives.

22. Experience to date suggests that predictions of future competition have been grossly overstated. The pace and extent of competitive entry in telecommunications over the next 4-5 years is simply not known, regardless of the extent to which accommodative entry policies are put in place.

23. In view of this uncertainty, the Commission should avoid premising its regulatory plan on any particular view of how competition will develop. Instead, it should simply focus on its primary task: protecting ratepayers from monopolistic pricing in a manner that permits ILECs to earn a fair return and that does not impede the natural development of competition.

Competition should not be subsidized

24. Competition is achieved, where it is economic, by ensuring that competitors face fair rates for the services they need from ILECs. Healthy, sustainable competition cannot be forced. It should instead be allowed to develop where economic, and at a pace that reflects the reality of this highly capital-intensive, technology-dependent industry. The public interest will not be served by premature attempts to “kickstart” competition where it cannot be sustained in the long term. Such regulatory subsidization of uneconomic competition is destined to failure at the expense of ratepayers and to the benefit of no one other than a few lucky shareholders.

25. Competitors can be subsidized either through discount rates for services they buy from ILECs, or through artificially high retail rates. In the latter case, ILECs also benefit, and may indeed benefit more than CLECs due to their dominant position in the marketplace. As Dr. Taylor acknowledged, it is inappropriate to raise retail rates simply in order to create margins for competitors:

MS LAWSON: Right. Now, if it turns out, though—and I ask you to make this assumption—if a competitor’s costs are significantly higher than the incumbent’s costs, should retail rates be increased to a level that provides the competitor with an attractive margin, regardless of the incumbent’s costs and margins?

DR. TAYLOR: Not in my view.

MS LAWSON: No. Because that would amount to subsidization of inefficient competitive entry. Correct?

DR. TAYLOR: Yes, which would, in the end, be bad for consumers.

26. Inefficient competitive entry will not be sustainable. If such entry is made possible through retail price increases beyond levels necessary for fair ILEC returns, it will be very short-lived. Once ILECs lower prices to levels more in accordance with efficiently competitive markets, inefficient competitors will lose their margins and go out of business. In order to avoid such inefficiency and disruption to consumers, it is incumbent on the Commission to establish price caps at levels that reflect lowest cost provision of service.”

END OF QUOTE

How to ensure that the balance between end-users and service providers is not jeopardized

27. As noted above, the Consumer Groups believe that Decision CRTC 2002-34 reflects a reasonable balance between service providers and ratepayers, and should not be interfered with in that respect. The Consumer Groups, however, do no take a position on whether the balance between ILECs and CLECs needs to be adjusted (via competitor service rates), all else equal.

28. Should the Governor-in-Council decide that some adjustment or reconsideration of competitor service rates is appropriate, it is essential that any such adjustment or reconsideration be made without affecting retail rate caps and ratepayer entitlements under the Decision.

29. In particular, any negative financial impacts on ILECs as a result of reduced rates for competitor services should be borne by ILEC shareholders; ILECs should not be “made whole” through increases to the price cap or by monies that would otherwise go to reduce retail rates (e.g., via the deferral account).

ILEC Reporting Requirements

30. In its Petition, AT&T addresses the need to ensure fair and appropriate costing methods, given the reliance on ILEC-reported costs. The Consumer Groups agree, and submit that he CRTC should use all the tools at its disposal to monitor and assess, on an ongoing basis, the reasonableness of the balance that Decision 2001-37 strikes between the three main stakeholder groups. One of the key measures of whether the balance is fair, is ILEC earnings on their regulated Utility businesses.

31. If ILEC Utility earnings are extremely low across the board, it can be expected that the ILECs will request adjustments to the regime at the time of the scheduled review (if not earlier), noting their inability across-the-board to earn a fair return on their Utility segments under the regime. If, on the other hand, ILEC Utility earnings are well above market averages, no one will know. This is because the Commission determined, in para.994 of the Decision, that “there is no longer a need for Phase III/SRB inputs on a going-forward basis”. ILEC Utility earnings are reported as part of the “Phase III/SRB inputs”.

32. The Commission does state, in para.995, that “ILEC financial results will need to be available for the purpose of the review of the next regime. Sufficient information must be reported to allow the Commission the gauge the financial state of the ILECs in order to ensure that the objective of the price cap regime are being met.”

33. It is not clear from the Decision whether the Commission will review ILEC Utility earnings as part of the “ILEC financial results” referred to in this paragraph. If so, it is unclear why the Commission would eliminate the ongoing reporting of these particular financial results. If not, the Consumer Groups submit that an important monitoring and assessment tool has been unnecessarily and inappropriately discarded.

34. Dispensing with ILEC Utility segment financial reports is, furthermore, inconsistent with Order-in-Council P.C. 2000-1053, in which the CRTC was ordered to monitor and report on the state of competition in Canadian telecommunications markets. Such reports, over a period of time, provide an important indication of how well the price cap regime has balanced the competing interests of various stakeholders.

Conclusion

35. In conclusion, the Consumer Groups submit that:

  1. the Governor-in-Council should not interfere with the CRTC’s Decision at least in respect of the balance it strikes between service provide and end-user interests;
  2. “facilities-based competition” as promoted by the CRTC is neither new nor exclusive of other forms of competition;
  3. competition is a preferred means to an end, not an end in and of itself;
  4. competition should not be subsidized;
  5. any adjustment of competitor service rates should be done in a manner that does not interfere with end-user entitlements under the current regime; and
  6. the CRTC should not be dispensing with reporting requirements that assist it in its role of monitoring and assessing the state of competition in this industry.

All of which is respectfully submitted,

Philippa Lawson
Counsel for the Consumer Groups
cc: The Honourable Allan Rock, Ministry of Industry
Ms. Diane Rheaume, Secretary General, CRTC
Mr. Michael Helm, Dir. Gen., Telecom Policy Branch, Industry Canada
Chris Pierce, AT&T
Bernard Courtois, Bell Canada

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