A Paper Prepared for Presentation to The Canadian Association of Members of Public Utility Tribunals (CAMPUT)
by Philippa Lawson, Counsel
Public Interest Advocacy Centre
1 Nicholas Street
Increasingly, telecommunications is seen as a strategic investment. There is no doubt that widespread and innovative uses of advanced telecommunications technology by Canadian business will improve our economic health. But in this enthusiasm to embrace the information age, we must not lose sight of the public utility function of the technology. As much as it has become a strategic investment, telecommunications remains a public utility, which should be available to all citizens regardless of income level.
A strategy designed solely to enhance the competitiveness of Canadian business will not benefit the ordinary consumer, especially if that consumer is stuck with the bill. Whatever benefits actually trickle down are unlikely to compensate the ordinary consumer who ends up paying more for some fancy technology or capacity he neither wanted nor needed in the first place.
Universality must not be sacrificed if we are to enter the information age ahead. The challenge is to guide our transition to the new economy in a way that brings everybody along, that spreads the direct (as well as indirect) benefits of shared investments among all ratepayers, and that requires only those who actually benefit from a given investment to pay for it.
The question you are asking, and which I am here to speak about today, is “universality of what?”. And I will get to that – but first, I feel compelled to say a few words about your role as regulators.
We have been barraged, in recent months, by a endless stream of academic and industry polemic (most of which is aimed at the CRTC’s regulatory review) on the evils of regulation and the wonders of the free market. The problem with this approach is that it compares apples and oranges – that is, it compares the current practice of regulation (which we all agree can be improved) with the theory of competition. What they – and you – should be comparing is the practice of regulation with the practice of competition. Or, perhaps even more appropriately, the theory of regulation with the practice of regulation.
If you do the latter, you will be reminded that regulation is a social, as well as economic, exercise. Efficiency, the ultimate concern of economics, is desirable, but it is not the only purpose of public utility regulation. Equity is at least as important, especially with a service as potentially crucial to individuals as telecommunications. When the two conflict, as they are bound to do, we often choose to sacrifice a little efficiency in order to gain greater equity. This is entirely appropriate in a democratic society, the proper functioning of which requires equality of opportunity.
[As it happens, equality of opportunity is one of the key assumptions upon which the theory of competition is based: we assume that everyone has full information. In the real world, of course, this is not the case: there are vast disparities in knowledge and expertise]
I urge you not to lose sight of the ultimate goals of regulation, which are primarily social. Economic tools should never become ends in themselves, no matter how desirable they may seem at a given point in time. Greater reliance on market forces seems to be a good thing right now, but will we find that it is always the best approach? Telecommunications is a rapidly developing industry. Who knows what is going to happen with the local market, with wireless technologies or with convergence of cable and telephone industries? And if we don’t know what the market is going to look like ten or twenty years down the road, how can we confidently say that one method of managing that market is better than another?
AN ESSENTIAL SERVICE
No one that I have met disputes that the telephone has become an essential service. Not one person that we have polled, in our informal survey of low income consumers, said otherwise. The only holdouts are people trying to escape society, and even they end up relying on someone else’s telephone for emergencies and the like.
Poor people who are unable to afford a telephone find that routine activities become complicated, and important messages don’t reach them on time. Job hunting without a telephone presents a real challenge. With current caseloads, welfare workers often have to use answering machines – and if you are calling with your last quarter, you’re not left with many options. Yet, strangely enough, welfare in most jurisdictions does not include an allowance for telephone service. And even if it did, that is no solution for the 1.4 million Canadians living below the poverty line, who don’t receive welfare.
A telephone in the home has become necessary to full participation in society. It wasn’t always the case, of course: the telephone began as a luxury good, and evolved into a sort of “fancy telegraph”, used mainly for emergencies and business transactions. Gradually, the use of telephones as means of maintaining social contacts and planning everyday events grew, to the point now where we rely on the telephone for all sorts of important things:
- social contact over the telephone is far more important than it used to be, with an increasingly mobile population, a high rate of family break*up, and a generally faster pace of life;
- businesses rely heavily on the telephone to stay competitive;
- voluntary organizations and individual volunteers are able to accomplish a great deal through telephone networks;
- disabled and housebound individuals are able to function more independently;
- Schools, health care practitioners, social agencies, employers and potential employers * all assume that their students/patients/clients/employees have telephones; and
- a sophisticated emergency response service is now available in most places over the telephone.
DEFINING BASIC TELEPHONE SERVICE
Where people differ is on the bundle of telecommunications services that they consider essential to daily life. For example, there are still a significant number of people who choose to stick with rotary dial telephones, despite aggressive marketing of touch tone by telephone companies: app.25% in the jurisdictions I have looked at.
Yet touch tone is becoming necessary for more and more applications: information services using interactive voice response, banking from home, utility metre reading, and so on. While none of these applications themselves may be essential to daily life for most people, they are becoming the norm. And as they become the social norm, those who don’t have access to them fall behind.
To what extent should the people who choose to remain with old technology be second*guessed? To what extent should a regulator decide that it is in their best interests to upgrade?
This is a difficult question, and I’m sure that you have wrestled with the answer. It will always be difficult, since new technology is not adopted overnight. There will always be a period of time during which a service improvement is neither a luxury nor a necessity. And there will always be holdouts – people who are perfectly happy living without a service that has become part of everyday life for most others.
The challenge is to provide all citizens with affordable access to those services they need to participate fully in society, without forcing those who don’t want fancy new services to pay for them.
The point of defining basic telephone service is to ensure that it, at least, is affordable to everyone, including poor people. I will discuss affordability later on * but first I’d like to talk a bit about content of basic service, now and in the future.
If we define basic service as that level of service required for full participation in society, then I would suggest that the following elements make up basic telephone service in 1993:
- Access to local and long distance
- Single Line Service
- Touch Tone Service
- Local Directory
- Directory Assistance
- Special Services for Disabled
- Operator Service
- Caller ID Blocking
- Call Trace
- 911 service (where available)
These services, whether bundled or not, should, taken together, be priced in such a way as to be affordable to everyone. (1% of average poverty line * 1% of 15K * $15?)
As technology and social norms evolve, so must the regulatory definition of basic service. One challenge for the regulator, as I have mentioned, is to move along right with the evolution; to be neither way ahead of it nor lagging far behind it. Another is to ensure that this evolution is driven by consumer demand, and not be telephone company interests nor by overly*eager advocates of a technology*rich information age.
Consumer Driven Evolution
If the evolution to the information age is to benefit everyone, not just the manufacturers and suppliers of the technology, or just the high*end users, then pricing is going to be key. The expansion of basic service to include a new service, such as touch tone or single line, must be accompanied by appropriate price adjustments, in order to keep the package of basic services affordable.
The current move to single line service and touch tone standards throughout the country is happening partly in response to consumer demand, but largely as a result of telephone company interests. Those interests are clear: to maximize revenue*generating opportunities. While there is nothing inherently wrong with this * it is normal, profit*maximizing behaviour * prices, as a result, do not necessarily reflect the essential nature of the service.
For example, while touchtone service is gradually becoming the service standard throughout the country, premiums for touchtone, generally in the $2.00 * $3.00 range, are still imposed. In other words, consumers are forced to pay extra for touch tone service even if they don’t want it. It’s appropriate to allow current rotary dial customers to maintain that level of service, and to do so at a lower price. However, it’s inappropriate to disguise a basic rate increase as a “premium”, which sounds optional to most people.
When approving the inclusion of what used to be an optional service into basic service, regulators should look closely at pricing implications, and should ensure that any consequent increase to basic rates is justified.
In this age of rapid and sometimes unanticipated technological development, it’s easy to allow ouselves to be led by the technology. The problem is that behind the technology are powerful companies, who of course have their own interests at heart. The onus is therefore on you – the regulators – to ensure that the evolution of basic telephone service responds to legitimate consumer demand and promotes social well*being.
Given that telco revenue potential is maximized when more people have access to new and enhanced services, I think it is likely that you, as regulators, will be responding to telco requests for basic service upgrades, as opposed to initiating such upgrades. I can’t think of a service improvement that the telcos would not want eventually to become standard.
For this reason, I think you should be wary of speculative social benefits put forward by telcos as the rationale for treating a new service as basic. We’ve been wrong in the past * just look at what has happened to 900 service: it’s become a depository for vendors of lewd entertainment. (While I don’t watch cable TV myself, I understand that late*night viewers are inundated with advertisements for erotic entertainment over the telephone lines).
These, therefore, are the criteria that I suggest you apply when faced with applications to upgrade basic service:
- that there be a demonstrable net social benefit (eg: applications that have been demonstrated as socially useful; value of the service outweighs its cost to all ratepayers); and
- that there be a certain level of consumer demand, definitely over 50% take*rates, and perhaps substantially higher.
Using these criteria, where might we be in terms of basic service ten years down the road?
We’ve already come a fair distance, from a time when mere access to the public telephone network was all that people expected. Now we demand private access to that same network * we’re making too many calls and we’re spending too much time on each call for sharing to work. Party lines are fine for people who use the phone for emergencies and quick calls only. They don’t make sense for people who rely on the phone for daily operations. We also now want to be able to access all the information and other services that touchtone opens up. This is POTS+.
What’s likely in the future? It seems to be pretty much agreed that we will, sooner or later, be demanding access to a much broader array of services, including video and data as well as voice communications. These will be interactive, not just one*way. They won’t necessarily all be offered over the same network, nor by the same company. But they are coming, one way or another.
Much of the necessary technology is already in place. Digital switching, in particular, will soon be universal. International standards have been set for ISDN * the new network intelligence that, in conjunction with digital compression, will enable multimedia services to be offered over existing transmission facilities.
The possible applications are endless:
In education, opportunities are opened up for distance learning, multimedia language instruction, specialized programs for advanced students or for students requiring remedial assistance, parent/teacher video*conferences, and on-line multimedia libraries. Learning possibilities for people with language difficulties or sensory disabilities would be greatly expanded, with computerized conversions between languages and types of media.
In the health field, video applications, in particular, offer new possibilities for patients and practitioners in remote areas. A specialist in Edmonton, for example, could diagnose and give instructions to a paramedic in Fort Vermilion. Or, indeed, a surgeon in Edmonton could actually conduct an operation on a patient in Fort Vermilion by remote robotics. This application, I am told by Bell Canada officials, is currently under trial.
New and enhanced databases, easily accessed, would make looking for a job much easier. Job training could also be greatly improved through the use of multimedia and remote imaging. Telecommuting and home*based businesses will be given a boost, providing greater flexibility to the work force.
Community applications are already evident in the growing number and size of community computer databases and billboards. In Ottawa, for example, we have a service called FreeNet, which is accessible at no charge to anyone with a computer and a modem, and which provides all sorts of community information, from weather and sports news to electronic messaging and information on local service organizations. It is, of course, in its infancy, but the fact that it is usually busy when you try to access it indicates that at least some consumers are ready for such new ways of getting and sharing information. Video conferencing will be next, allowing people to meet face*to*face over the public network.
Applications in the entertainment field may well lead the way, given the unprecedented success of Nintendo and other computer games. Multimedia games, interactive video and video on demand are virtually here, on the cable side. But telcos will have the same capabilities, once digital switch conversion is complete.
Of course, one of the great promises of these new services and capabilities is for disabled people, for whom the rhetoric of equal opportunity and accessibility may finally have some basis in reality. Public information may finally be available in alternative formats, at low cost.
There is not much debate that this vision will eventually be attained. There is debate, however, on how it should be achieved. This debate centres on three interrelated issues: How fast should the transition be? How should the new information age services be priced, initially? and What technology should be used?
SPEED OF TRANSITION
The Alliance for Public Technology in the USA argues for an aggressive, proactive approach to entering the information age. They argue that the inevitable evolution to a PANS service standard, if left to develop at its own pace, will be business*driven and will not serve residential consumers well. They warn of the development of an “information elite” if everyone, rich and poor, educated and uneducated, is not provided with the new technology up front. They also point out that these new technologies and services are far more likely to succeed, the more people are hooked up and using the system. Their agenda therefore includes universal provision of the new services, as quickly as possible, accompanied by a massive consumer education program, teaching people how to use their new equipment.
Others, including the Consumers Federation of America, argue that the transition should occur gradually, in response to demand. It is more important, they argue, to keep what we now consider to be basic service affordable. Ubiquity in the short term will require huge up front capital costs, which will have to be recovered through rates. The costs of building the social infrastructure (which is equally necessary if genuine universality is to be achieved), will also be large. Who is going to pay? Governments sure don’t have a lot of extra cash sitting around right now. Better to spread these costs over a longer period, they argue, in order to soften * or indeed eliminate * the rate impact.
Proponents of gradualism also point out that their approach is far less risky: even if everyone is hooked up, who is to say that they will all use it? An “information elite”, so to speak, will always exist; it is not simply a function of available resources. Computer literacy is not developed overnight * it will take time for people to adjust to a new way of communicating and accessing information. As long as public institutions such as schools, health centres, libraries and community centres are hooked up early on, so that people have access and begin to appreciate the uses of this new technology, predictions of worsening social inequality are overstated.
Also overstated, argue the gradualists, are the concerns that the new network, if not made initially ubiquitous, will leave consumers behind. Business applications have almost always preceded applications in the residential market. This is not necessarily a bad thing. As long as the public network is gradually upgraded in response to demand from both business and residential subscribers, there is little, if any, risk that consumers will miss out.
PRICING IN THE SHORT TERM
Proponents of immediate ubiquity always leave the question of who pays to the end. But surely this is the key question – few people would oppose modernization on a mass scale if it cost them nothing. The proponents argue that it won’t in fact cost so much, and that in any case, consumers are willing to pay the price. They argue for increased basic rates in order to cover the cost of upgrading the entire system. Every telephone subscriber would pay for the new capabilities, whether he or she uses them or not. Subsidies would be necessary for poor people and for regions where the cost of service is unusually high.
Consumer advocates disagree. They don’t want to have to pay for high-tech capabilities they neither want nor need. Before these new services pass the test of universality, or basic service, they should be offered on an unbundled basis at prices that cover costs, including a contribution toward access costs. As costs fall and as the new enhanced network becomes ubiquitious, PANS prices can fall, eventually becoming universally affordable. But until then, I agree with those who argue that POTS+ should remain affordable for all citizens, and should be offered as an alternative for those uninterested in PANS. In any case, revenues from POTS+ should definitely not subsidize PANS.
COMPETING APPROACHES TO THE INFORMATION AGE: UBN VS. N*ISDN
Most observers agree that broadband will eventually become the standard transmission medium throughout the network. Fibre optic lines already make economic sense for new installations, particularly in the interoffice and long distance network. But where experts disagree is on whether copper wire to the home needs to be replaced before it has reached the end of its useful life.
(i) The Ubiquitous Broadband Network (UBN) Approach
Proponents of a ubiquitous broadband network now argue that television*quality two*way interactive video is an essential part of the package of information age services that should be available to all. This capability is the only one that ISDN cannot now deliver over copper wire.
They argue that a univeral broadband telecommunications platform should be put in place as soon as possible, so as to provide to everyone at once a single network with multiple channels of switched interactive multimedia communications. (Optic switching is currently being developed to facilitate switched TV*quality video; it could not be provided immediately).
Consumers would have a choice of using their own personal computers to hook up with the network, or renting low*cost easy*to*use communication terminals, that would give them access to a variety of services.
Network intelligence would therefore be centralized in a public gateway, through which consumers would have to go in order to access the service they require. Information services could still be provided by private vendors, through the public gateway, but presubscription would not be required * the public gateway could handle billing.
(ii) The Widespread Integrated Narrowband Network (WINN) Approach
The other approach, favoured by those consumers concerned about price, is to rely on narrowband ISDN technology to deliver the same services. Mark Cooper, of the Consumers Federation of America, advocates what he calls a “Widespread Integrated Narrowband Network”, at least until the ubiquitous broadband network is achieved.
Using ISDN and compression technologies, virtually all of the services promised by broadband enthusiasts can be delivered over copper wire, at a fraction of the cost. Cooper has estimated the cost of upgrading to narrowband to be app.$300 per subscriber, versus app.$3000 per subscriber for an integrated broadband network.
In fact, good quality two*way interactive video is already being offered over copper wires. Just last week, Bell Canada demonstrated its current switched video capabilities to us in Ottawa, and the quality was very good, certainly adequate for conferencing, which is promoted as the big advantage of broadband for ordinary consumers. Furthermore, compression and other technologies are constantly improving, so that the the differential in the quality of video sent over fibre and over copper is constantly narrowing. Distance learning, remote imaging, teleconferencing * all are available over existing transmission facilities through the use of exisiting technology.
There are other advantages, besides cost (the big one), to relying on narrowband technologies to deliver information age services in the short term. WINN emphasizes computer skills, which are crucial for economic advancement in the decades ahead. By relying on decentralized intelligence * that is, in the customer premise and in the customer * it avoids problems associated with centralized computing, promotes competition in the delivery of information services, and capitalizes on the burgeoning computerization of society.
WINN also leaves open more room for cable companies to play a role in the delivery of information*age services in the future. Given the remarkable penetration of cable television in Canada (94% of television households are passed by cable; of these, 82% subscribe; in all, 77% of Canadian households have cable TV), it makes sense to leave something to the cable companies to provide.
The public network, with its captive base of ratepayers, is not the place to undertake risky ventures that have uncertain demand. The beauty of WINN is that it responds to demand; those who neither want nor need enhanced services aren’t forced to pay for them.
Digital switching (which is required for either a UBN or a WINN) and CCS#7 technology (which is required for much of the new capability) have been treated as common network costs over the objections of consumer advocates who questioned the benefit that POTS subscribers would get from them. Telephone companies will undoubtedly attempt to treat the much larger costs of ubiquitous broadband networks as common network costs, to be paid by everyone. In contrast, the incremental costs of ISDN services * upgrades, line cards and jacks * need not be spread over all users.
Whatever route you allow the telephone companies to pursue, clear policies will have to be put in place to ensure:
- least cost provision of service: a strict economic test should be applied to all deployment of broadband, so that ratepayers are not saddled with the financial burden of unnecessary capacity;
- competition: mass market*oriented tariffs and open access policies should be used to encourage decentralized information providers to develop and market consumer*oriented services;
- interoperability: common standards, like ISDN, will be needed to ensure easy translation between various systems; and
- usability: databases and directories should be user*friendly, and accessible to people with various types of disabilities.
h3.PRICING OF BASIC SERVICE
I mentioned earlier that the whole point of defining basic service is to ensure that everyone, regardless of income level, can afford at least that level of telephone service. But affordability means different things to different people; I don’t think it has ever defined in this context.
Affordability cannot be measured simply by whether or not one subscribes to the service * the fact that basic telephone service is so essential to daily life means that people will stretch themselves financially to keep it. Those on low budgets will cut back elsewhere * most likely on food * in order to hang on to their telephone. This is not affordable. Penetration rates are useful to see what is happening at the margin; they say little about financial hardship.
A better measure of affordability, I would suggest, is the percentage of income spent on the service. Obviously, at a given price, telephone service will consume a higher percentage of a poor family’s income than of a wealthy family’s income. And the same is true of price increases: poor people must put out a much greater proportion of their income for the increase than must wealthier folk.
This is illustrated in the following graph, which shows the total percent of income that households of varying income levels must spend on basic telephone service, as rates go up. High income earners spend no more than half a percent of total income on basic service, even when rates are $40/month. But low income earners, at the other end, have to put out more than six times that proportion of income to get the same service.
Clearly, lower income families are going to hit a limit long before higher income families. The question is: where is that limit? At what point does the price of telephone service become unaffordable?
It’s a difficult question, but it needs an answer, even if some form of targeted subsidy is put in place to ease the financial burden of higher rates on low income families.
(ii) Cost-Based Pricing
There is tremendous pressure on regulators right now to move from a regime of value-based pricing to what the telephone companies and their economists call “cost-based” pricing.
There are two big problems with cost-based pricing in an environment of inputs with mixed uses. One is the impossibility of getting it right. The other is that cost*based pricing comes into direct conflict with social goals.
Even as someone trained in economics, I have some difficulty with this concept in the field of telecommunications, where all services rely upon the maintenance of access facilities, and where a single piece of equipment such as a switch is used for all sorts of different applications. The CRTC’s Phase III Costing Methodology attempts to resolve these problems, and I think that it’s a noble effort. But when you are relying on the telephone company for the information on which the cost breakdowns are made, and when in many cases the breakdown is arbitrary, the validity of the results has to be questionable.
As discussed above, social goals such as equity are just as important to telecommunications policy as economic efficiency.
Cross-subsidies which achieve social goals are entirely appropriate in the context of a public utility. Even if the economists are right, and there is some efficency lost as a result of geographic price averaging, surely the equity gains outweigh the efficiency losses. Similarly, a policy of contribution from long distance revenues to the cost of access achieves a key policy goal in Canadian telecommunications: that of universality. It should not be dropped simply because the telephone companies find it a nuisance, and hire academic economists to tell you it makes no economic sense. If we lived by economic sense alone, we wouldn’t have telephone service in many rural and remote areas, we wouldn’t have a national telephone penetration rate of over 99%, and many of our less fortunate citizens wouldn’t have a service that both makes their lives more livable and better enables them to break out of poverty. In sum, we would have a very different society, one that I am not sure we would like.
(iii) Information Age Services as a New Revenue Source
Even if the telephone companies are right that they have to raise basic rates in order to make up for lost long distance revenues, how long will this situation last? Given new information services that the telephone companies can deliver now over existing facilities at minimal cost, there are likely to be all sorts of other sources of contribution in the near future. These new revenue sources will only grow in number and potential, if current forecasts prove accurate. We needn’t wait for broadband; we needn’t pad the ratebase with broadband: narrowband ISDN services can and should be treated now as a contribution source whose significance will grow quickly. Call Display, a tiny forerunner of what is coming in the next decade, has already shown that, with proper pricing policies, telephone companies can make significant amounts of money from enhanced services.
It may well be that telephone companies have neglected the development of narrowband ISDN capabilities because they would rather pursue the more capital*intensive route of broadband, which would give them a strong platform from which to enter the video entertainment market. Perhaps also telcos want to jack basic rates up while they can, before bringing new profitable services on stream. Such a strategy would of course make sense from a telco perspective, but any strategy which unnecessarily raises basic telephone rates cannot be socially beneficial.
(iv) Problems with Alternative Pricing Proposals
The telephone companies are not so uncaring ore impolitic as to ignore the effect of basic rate increases on low income families. They recognize the value in having as many subscribers on the network as possible, and have therefore proposed that some version of a discount service be made available to those who qualify or who have no other choice.
So-called “lifeline” programs were instituted in the United States as a way of softening the impact of the subscriber line charge and other local rate increases allowed by regulatory authorities. Such programs have operated for several years, with mixed results, depending on the nature of the program.
There are a number of problems with lifeline programs. First, lack of receptiveness from the target population. Many people view special rates for poor people as yet another stigmatizing public subsidy.
Second, lifeline programs tend not to reach a significant proportion of the target population. Participation rates among eligible groups in the United States averaged only 30% in 1989 (the last year this measure was taken). Whether because the subsidy was too small, or because of illiteracy, pride or simple lack of awareness, many poor people with and without telephones were not taking advantage of the programs.
Another problem has to do with the threshold that is chosen. There will always be a number of families and individuals who just barely fail to qualify. If the threshold is set low (eg: welfare recipients), then a large number of low income individuals who actually need assistance won’t get it. The determination of eligiblity criteria in Canada will be particularly difficult, since welfare reaches only 65% of Canadians living below the poverty line. If all needy citizens are to be eligible, lifeline programs cannot simply piggyback on other low income programs, as in the USA.
Self-certification programs, which provide assistance to those who assert that they need the help, get around this problem, but there may be a perception that they invite fraud. If verification of income is politically necessary, it will of course add to the costs of the program. Any sort of means testing is unacceptable to the target population and would therefore be counter-productive. If applicants must sign a consent, authorizing the telephone company to check their tax returns, the participation rate is likely to be further reduced.
In sum, lifeline programs and other targeted subsidies may raise more problems than they solve.
Local measured service has also been suggested as an alternative to universally affordable flat rates. The problem with this is that there is no evidence to suggest that poor people use local service any less than do higher income people. In fact, local measured service makes most sense for working people, who spend long days at an office from which they can make local calls free. It makes very little sense for people who are stuck at home with children or with disabilities, and for whom the telephone truly is a lifeline.
People who are unemployed, housebound or just plain poor need to make calls during peak hours just as much as, if not more than, other folk. Potential employers, government agencies, and other social services cannot usually be reached between 9pm and 8am. Offering local measured service as an option may increase consumer choice, but it does not respond to the needs of poor people.
For all these reasons, I caution you against buying into the telephone company’s theories that local rates have to rise in the long term, and that there is a better way of meeting the needs of low income citizens. Basic telephone service, whatever it includes at any given time, should be within the financial means of all Canadians.