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:
- Three separate baskets for residential, business and optional services. (Alternatively, if easier to administer, four separate baskets, for residential HCSA services, residential non-HCSA services, business services, and optional services.)
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.
- A Quality of Service incentive mechanism which automatically penalizes companies for sub-standard quality of service (and violations of consumer rights, once new indicators have been established).
1. In addition, the Commission should:
- initiate a proceeding on Consumer Rights, with a view to identifying key consumer rights, expressing them in a short, plain language “consumer bill of rights”, and expanding the Quality of Service incentive mechanism to include violations of consumer rights;
- initiate a proceeding to consider ILEC requests for increases in pay phone rates, as well as to evaluate the experience to date with pay phone competition, and in particular the issue of public interest pay phones, as promised in Decision 98-8;
- continue to require ILEC reporting of Phase III SRB results;
- require tracking and auditing of Phase II cost studies, as well as auditing of Phase III SRB results; and
- put in place an effective “self-correcting mechanism” either in the form of earnings sharing, a menu approach to productivity and earnings sharing, or a pre-scheduled review the scope of which is sufficient to identify and correct any errors in the formula.
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:
- providing ILECs with a reasonable opportunity to earn a fair return on their Utility segments;
- ensuring that rates for ILEC services required by CLECs are fair; and
- ensuring that rates to end-users are fair (i.e., “just and reasonable”).
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.
- Low income households pay an increasing, and much higher than average, proportion of their incomes on telephone service.
- Affordability of basic phone service has been jeopardized by rate increases that have far outstripped inflation and income growth over the past several years.
- Many, possibly most, residential customers have not benefited from rate rebalancing and competition over the past several years.
- Canadian rates are at parity with US rates for basic service, and are not out of line with rates in other OECD countries
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:
- productivity gains are flowed through to residential ratepayers, as well as ILEC shareholders and CLECs;
- time-limited exogenous impacts are reflected in time-limited adjustments to the PCI;
- the total package of residential local services, including optional services, is considered when comparing costs and revenues;
- ILEC pricing flexibility is constrained so as to limit anti-competitive pricing;
- regulatory protections do not give way to reliance on market forces unless and until consumers (i.e., those very “market forces”) are fully informed.
1. The evidence in this proceeding clearly shows that the time has come for residential rate decreases.
- Revenues from residential local service in non-HCSAs are not only compensatory, but highly profitable;
- ILEC productivity growth is higher than the 4.5% target set in 1997, and can be expected to continue to grow at a similar rate over the next price cap period;
- ILEC profit margins on residential services in non-HCSAs will continue to grow;
- HCSA rates need not increase, given the existence of a sustainable contribution mechanism.
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.