RTC Public Notice 2001-37: Price Cap Review and Related Issues


ARC et al are grateful for the opportunity to participate in this proceeding, and hence to be part of shaping the regulatory regime for basic telephone service across Canada for the next few years. The outcome of this proceeding will have major repercussions for residential telephone subscribers, as well as for the telecommunications industry.
Residential subscribers have borne the brunt of costs associated with restructuring the Canadian telecommunications industry. They should be as handsomely rewarded for their substantial and continued investment in Canada’s telephone networks as have ILEC shareholders and senior management.

Goals of this Proceeding

The goal of this proceeding is to establish a new regulatory regime that will achieve the following key objectives:

  1. to render reliable and affordable services of high quality, accessible to both urban and rural area customers;
  2. to foster competition in the Canadian telecommunications markets;
  3. to provide incumbents with incentives to increase efficiencies and to be more innovative, and with a reasonable opportunity to earn a fair return for their Utility segments; and
  4. to implement a price cap plan that is simple, straightforward, easy to understand and reduces the regulatory burden to the greatest extent possible.

Some parties have characterized this proceeding as being primarily about competition. There is no question that the new regime should be designed so as to foster the development of healthy, sustainable competition. However, the Public Notice makes it clear that this proceeding is about much more than competition. It is about designing a mechanism that will determine the level of local rates for the term of the new regime (until 2005 or 2006).
If we get it right, sustainable competition will emerge when competitors have a realistic opportunity to compete successfully against the ILECs on the basis of their costs. In the meantime, residential customers will pay fair prices for local services – prices that allow the ILECs to recover their costs and make returns that are reflective of competitive markets.
If we get it wrong, prices will rise, consumers will pay excessive rates, and ILECs will have a highly profitable captive market. They will be able to use this wealth to subsidize their competitive activities and defeat potential competitive entry into the local market. Even worse, they may be able to re-monopolize areas of the market where competitors are already active but struggling (LD, cellular, etc.), and possibly to spread their dominance to new areas such as internet access.

A Key Issue: Fairness between shareholders and ratepayers

As with any regulatory regime involving monopoly providers of an essential service, the key concern of the regulator is fairness: allowing the regulated company to make a fair rate of return for its shareholders, while ensuring that captive ratepayers are subject to rates no higher than necessary to achieve such fair returns. Whether through hands-on rate-base rate-of-return regulation or hands-off price caps, utility regulation must ensure that rates remain just and reasonable. Price regulation is no excuse for abandoning this basic principle of regulation.
Rates are not just and reasonable when they result in industry-wide excessive profits, as they have over the past few years. They are not just and reasonable when they are established on the basis of customer tolerance rather than on reasonable benchmarks for costs and rates of return, as the ILECs have proposed. They are not just and reasonable when they are maintained at high levels in order to subsidize otherwise uneconomic competition, as proposed by CLECs.

Sharing the Benefits: The Need for a Consumer Dividend

In the Public Notice, the Commission has rightly characterized the key challenge before it: to balance the interests of the three main stakeholder groups: ratepayers, ILEC shareholders, and competitors. It is clear that the past regime failed in this respect, as ILECs earned supra-normal profits on their Utility business while Utility ratepayers endured ever-increasing rates and CLECs struggled to survive. This proceeding provides the Commission with an opportunity to right that balance.
Rather than sharing the benefits of incentive regulation, however, both ILECs and CLECs want all the benefits for themselves. ILECs want to keep increasing local rates, despite evidence that non-HCSA rates already cover declining costs. CLECs want all such productivity gains to be funneled into rate reductions for the ILEC services they must use. Neither of these approaches meets the Commission’s mandate of ensuring just and reasonable rates. Neither will result in healthy, sustainable competition.
Instead, the Commission must develop a regime that not only provides incentives for ILECs to cut costs, but that also flows a fair share of the benefits of such productivity gains back to basic residential ratepayers as well as to shareholders and business customers. This time around, there must be a meaningful consumer dividend in the form of real price decreases.

Quality of Service

This Commission has an admirable history of making cutting-edge decisions in the field of quality of service. The MacPherson report, adopted in Decision 82-13, helped to establish the prestige which the Commission justifiably enjoys to this day. Nor has the Commission rested on its laurels in this field. New quality of service indicators have been established, and old ones deleted, in keeping with changing technologies and changing customer needs.
There is no question but that price caps have a significant advantage over rate of return regulation insofar as they provide much greater incentives for telephone companies to act efficiently. However, in the quality of service field, an important regulatory tool is lost in moving away from rate of return regulation. At the same time that quality of service is jeopardized in the drive to cut costs, the Commission loses its ability to penalize sub-standard quality of service performance by setting rates to achieve a rate of return below the approved level (as was done as early as 1981, in Decision 81-3, for BCTel).
Fortunately, however, a price cap regime can be designed to include incentives for high quality of service. This is one key dimension in the quality of service field where the Commission, in moving from rate of return to price caps, has yet to act. The current proceeding accords the perfect opportunity for the Commission to redress this shortcoming. In the new price cap regime, the Commission should tie quality of service performance to the formula of the price cap regime, in a manner that provides meaningful incentives for the ILECs to meet pre-established service benchmarks.


The Commission has a choice to make in this proceeding. It can take measures to ensure that residential rates are just and reasonable as costs continue to decline, and to ensure that residential subscribers receive continued high quality service. Or, it can establish a regime that puts CLEC and ILEC interests ahead of the interests of residential subscribers. Other stakeholders are calling for an unbalanced distribution of the benefits flowing from price cap regulation. At a time when declining costs and competition are supposed to lead to lower rates, residential customers are counting on the Commission to call a halt to ever-increasing local rates.