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ARC et al / BCOAPO et al FINAL ARGUMENT in re: CRTC PN 2001-37: Price Cap Review and Related Issues
1. The record of this proceeding supports a new price cap regime with the following basket structure and price constraints:
1. For the Residential Service Basket(s), PCIRSB = GDP-PI – X, where X = 5.5%. Additionally, an individual rate element constraint on each basic residential service = GDP-PI. However, in HCSAs, the dollar amount corresponding to any decrease in the PCI would go to reduce the Total Subsidy Requirement, rather than HCSA rates.
2. For Business services, no PCI; instead, an individual tariff item (or rate element) price constraint of 10% per annum.
3. For Optional local services, PCIOLS= GDP-PI on the basket of optional local services, with an individual rate element constraint of 10% per annum.
1. The Commission has correctly characterized its challenge in this proceeding as balancing the interests of all stakeholder groups. Balancing the interests of stakeholder groups involves:
1. These three primary stakeholder interests are reflected in the three key policy objectives of investment, competition, and just and reasonable rates. Other important objectives include affordability, efficiency, innovation, reliability/quality of service, rural/urban equity, and efficient and effective regulation where required.
2. Just and reasonable rates, the most central goal of price cap regulation, requires that rates be linked with costs. ILEC earnings are therefore relevant and will continue to be relevant under price cap regulation.
3. Affordability, while an important policy goal, is not the same as fairness. Affordable rates are not necessarily just and reasonable rates. The ILEC and CLEC focus on affordability is a tactic designed to deny consumers their fair share of productivity gains.
4. Affordability of an essential service cannot be measured by penetration rates.
1. Competition is a preferred means to an end; it is not an end in itself. Consumers do not want choice at the cost of higher basic phone rates. Regulation should recognize the reality of facilities-based competition in local telecommunications (“slow, expensive and risky”). Competition should not be subsidized.
2. Investment is satisfied by the long-established principle of ensuring that ILECs have a reasonable opportunity to earn a fair return on their Utility segment investments. This has not changed since rate of return regulation.
3. Reliability of service under price caps requires an incentive mechanism for quality of service, to counterbalance the strong cost-cutting incentives inherent in price cap regulation. The penalty under such a mechanism must be large enough to create the desired incentives.
4. Rural/Urban Equity: Canadians want reasonably comparable rates for reasonably comparable service in rural and urban areas. The HCSA subsidy is sustainable and should not be prematurely eliminated.
5. Regulation vs. reliance on market forces: Retail price constraints are needed as long as there is insufficient competition to protect the users. Reliance on market forces to protect consumers from monopolistic pricing by ILECs is highly premature. Economic theories suggesting otherwise are based on faulty assumptions and are propounded by individuals who admit to ignorance of important relevant market realities such as customer inertia.
6. The Current Regime: Under the current price cap regime, stakeholder interests have not been balanced. ILECs have benefited enormously, as evidenced by their sustained supra-normal profits, while residential consumers have been subjected to ever-increasing rates for an essential service, and competitors have struggled to survive.
7. The New Regime: In order to better balance stakeholder interests under the new price cap regime, the Commission should ensure that:
1. The evidence in this proceeding clearly shows that the time has come for residential rate decreases.
1. The test for uncapping Utility services should require the presence of sufficient competition to protect users of the services in question. Applying the appropriate test, neither basic toll services nor credit card surcharges should be uncapped. Moreover, residential extra listings and optional local services should be capped.
2. Optional local services should be capped separately from basic service, so as to prevent anti-competitive pricing to the detriment of basic subscribers.
3. Pay phone rate increases should not be granted. Pay phones are a vital service to low-income consumers as well as citizens generally. Instead, the Commission should initiate a proceeding to review the pay phone market and especially, the issue of “public interest” pay phones, as it promised to do three years ago.
Self-Correcting Mechanisms: If no earnings sharing regime is adopted, it is essential that the next price cap review allow for identification and correction of errors in the price cap formula The scope of that proceeding should be established now, so as to provide some level of certainty to all parties.