Industry Committee on Feb. 21st, 2007

[The Chair, Conservative, James Rajotte]

Order. We will commence the 46th meeting of the Standing Committee on Industry, Science and Technology, continuing our study on the deregulation of the telecommunications sector, pursuant to Standing Order 108(2).

We have two panels with us today. Our first panel, from 3:30 p.m. to 5:00 p.m., deals with competitive local exchange carriers.

We have a number of witnesses here today. I'll just read the list of witnesses in their order of presentation. We have, first of all, from Distributel, the president, Mel Cohen; from Telesat Canada, the chief financial officer, Ted Ignacy; from Access Communications Co-operative Limited, Jim Deane, president and CEO; from Persona Cable, Dean MacDonald; from Barrett Xplore, Mr. John Maduri, the chief executive officer; and from Bluewater TV Cable, we have the president, Tim Stinson.

Welcome to all of you. We do have an hour and a half, but as we do have a number of witnesses, we've asked that you limit your opening statements to three minutes. Then we'll go immediately to questions from members.

Mr. Cohen, we'll start with you for up to three minutes.

[Mel Cohen, President, Distributel]

Reliance on market forces is clearly more desirable than complex overregulation, but for market forces to be effective, we need rivalrous behaviour that's real. This does not mean duopolies. It means a diversity of service providers, as we see in the long-distance market.

Deregulation does not lead to lower consumer prices, competition does. Deregulation prior to effective competition will have the opposite effect.

I joined the telecom sector about 28 years ago. Throughout those years, the CRTC has conducted an orderly dismantling of the telephone companies' monopolies with great success. One of their decisions--that resale of telephone company service was in the public interest--was the inspiration for Distributel. I started that long-distance company 18 years ago on the principle of resale of Bell services.

Since then, we have invested millions of dollars in equipment and facilities. Most importantly, over 200,000 customers, 95% of them consumers, take advantage of our innovative offerings.

For the past two years, Distributel has been developing an Internet-based telephone service. Here's a flyer for that service. On the left panel is the Internet-based telephone service. On the right is our resale-based high-speed Internet service, and in the middle is a bundle of the two.

Here's what will happen to these offerings if we lose our wholesale DSL tariffs. We would love not having to depend on other carriers' wholesale tariffs. But what are the alternatives? Co-location in the telephone companies' central offices is costly and slow and even then does not reach access to consumers served by remote equipment.

We had hoped that wireless might be the alternative. In January 2005 we bid millions of dollars in Industry Canada's auction for the 3.5 gigahertz spectrum. In region after region we bid to the highest level that we thought economical, only to have our highest bids trumped by Bell Canada. So for now, to stay in this business, we need good cost-based wholesale tariffs.

On Monday you heard praise for the CRTC's success in deregulating the long-distance market. Why, then, is it being overruled in the local-services market? The minister's policy directive, a triumph for the large telcos, will surely be disruptive. Just last Friday, Bell Canada used it as the basis for an application to repeal three of the CRTC's latest orders concerning wholesale Internet services.

Though we frequently disagree with CRTC decisions, the process leading up to them has always been fair and transparent. Please use your influence over the government and its industry minister to retreat from premature regulation. Let the CRTC continue to introduce competition, then deregulation, for the ultimate benefit of Canadian businesses and consumers.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cohen. Now we'll go to Mr. Ignacy.

[Ted Ignacy, Chief Financial Officer, Telesat Canada]

Thank you, Mr. Chairman, members.

Telesat appreciates the opportunity to appear before the committee to review the telecom policy review report and its recommendations as they pertain to satellite operators in Canada, and Telesat in particular. Dan Goldberg, our president and CEO, was hoping to be here today, but unfortunately he is unable to attend.

Telesat has invested nearly $3 billion since its inception and has delivered state-of-the-art satellite services to millions of Canadians without regard to where they may live in this vast country. The satellite service markets are inherently international, due to the coverage capability of satellites, and Industry Canada has licensed over 70 foreign satellites to serve Canada.

Telesat's competition therefore not only comes from other telecommunications carriers in Canada but also from the largest satellite operators in the world. As a result, there is a compelling need to update the regulatory framework to ensure that Canadian-licensed satellite operators are not at a competitive disadvantage relative to their much larger international competitors.

The Telecommunications Policy Review Panel recognizes the forces of competition at play today in Canadian telecommunications, and urges fundamental change to the current regulatory framework to rely more heavily on market forces and less on regulation to ensure that the public receives high-quality innovative services at competitive rates.

Telesat fully supports such an approach in the satellite sector. The current regulatory regime is in fact dual regulation, where both the CRTC and Industry Canada have added increasing layers of regulatory requirements involving fees, licence conditions, public policy objectives, industrial benefits, and ongoing regulatory reporting and filings. As our foreign competitors are not subject to such burdensome and costly regulatory requirements by their national regulators, Telesat is placed at a significant competitive disadvantage, compounding the disadvantages that already flow from our sub-scale position in the international market.

Of particular importance to Telesat is the approach followed by regulators when assigning new orbital locations in spectrum. Regulators in the United States, Europe, and many other countries around the world apply a licensing approach that favours spectrum aggregation by a single operator at a given orbital location. This licensing approach encourages a satellite operator to aggregate multiple frequency bands at a given orbital location so as to enable the operator to leverage the benefits of larger satellites.

In short, Telesat requires a similar opportunity to structure its business going forward, based on a regulatory framework that is consistent and harmonized with those of other jurisdictions and that allows us, our customers, and the Canadian public to capture the substantial public policy benefits that flow from a policy that favours spectrum aggregation.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Ignacy.

We'll go now to Mr. Deane, please.

[Jim Deane, President and Chief Executive Officer, Access Communications Co-operative Limited]

Thank you, Mr. Chairman, and good afternoon.

I'm here representing Access Communications Co-operative Limited of Saskatchewan. I'm here today because I want local competition to flourish in every part of Canada, including all regions of Saskatchewan. I do not believe the local competition should develop only in the major metropolitan areas where the incumbents compete against well-capitalized cable companies such as Rogers, Shaw, or Vidéotron. The government's goal should be to ensure that all Canadians benefit from competition, regardless of where they live.

With that in mind, I have serious concerns about the approach to deregulation that has been proposed by the federal government and Minister Bernier. Access Communications provides cable television and Internet service to customers in more than 30 communities in Saskatchewan, and we face considerable competition in these markets. Increasingly, our primary competitor has been our own provincial government through its crown corporation, SaskTel. With the support of Saskatchewan taxpayers, SaskTel is able to offer subscribers a complete range of communication services, including local telephone, cable, wireless, and Internet access.

For competitive reasons, Access made the decision and the considerable investment last year to enter the local telephone market. In making that decision, we relied on the fact that the CRTC had put in place a framework for forbearance that would prevent an incumbent telephone company from using its market power to stamp out competition. We launched our telephone service for Regina two weeks ago, and we're encouraged by the response we've received to date.

We are concerned, however, that our attempt to provide choice to the residents of Regina, and hopefully our other markets in Saskatchewan, will be unfairly inhibited by the market power of SaskTel. Until two weeks ago, SaskTel had been the sole provider of local service in Regina. It continues to hold a monopoly over every other community in Saskatchewan, with the exception of Saskatoon. In this environment where a crown corporation is starting with 100% of the market share, a fair and sustainable competitive market will only develop if mechanisms are in place to prevent it from eliminating its competitors. The existence of regulatory mechanisms designed to limit market power are vital in the smaller cities, like Regina, and even more critical in smaller cities like Yorkton, Estevan, and Weyburn.

Sustainable competition simply cannot develop in these smaller markets where a 100-year-old government-owned monopoly has the ability to crush competitors. With this in mind, I'm urging the government to ensure that a market dominance test for forbearance continues to apply in markets outside the 10 most populated metropolitan areas, and particularly in the province of Saskatchewan.

In addition, I believe win-back and promotional restrictions should be retained in those markets until this market test is met. Without effective regulation that limits the ILECs' market power, sustainable competition will simply not develop in my province. I believe all Canadians should benefit from competition regardless of where they live.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Deane.

We'll now go to Mr. MacDonald.

[Dean MacDonald, Persona Cable]

Thank you very much. It's a pleasure to be here today to talk about what I call the “reward the incumbent” order.

I'm so bloody mad at what's come down. It's absolutely ridiculous. What I recommend to all Canadians is that we all take out a full-page ad in The Globe and Mail that says, phone your telephone company and tell them you're moving to the cable company for your phone service; they'll drop their price and then short the stock. And you know what? If we do, we'll all make a ton of money, because that's what's happening.

I represent Persona, 650 systems across Canada. I am rural Canada: we have more systems in Canada than everyone else combined.

We launched a phone service in Sudbury last week. So a customer phones us and says, I'd like to take your phone service, but I'm going to call the phone company. He phones the phone company and here's what he's told: his $41.95 rate for Internet goes to $34.95; his phone rate, from $94.35, goes to $64.92; and his TV service goes from $57 to $45.60.

We have a policy that the minister is recommending whereby there's no win-back rule. I'll get a customer and I'll phone the telephone company and say, here's the customer. The phone company will go, great, thank you very much, we'll phone that customer. They will, and they'll tell the customer, hey, instead of switching over to Persona, here's your deal.

We have to figure this out. Either we're going to make a fortune by shorting the stock of the incumbents or we're going to really make competition happen. I can tell you that this order is a farce. It's an absolute farce. It cost us $8 million to launch service in Sudbury. I have another 649 systems I'd like to launch service in. But under these rules? Not a chance.

Rural Canada is getting screwed by this rule, and that is a fact.

Those are my comments. I can't wait to answer your questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. MacDonald.

We'll go to Mr. Maduri.

[John Maduri, Chief Executive Officer, Barrett Xplore]

Barrett Xplore is a national rural broadband service provider, and 2006 was our first full year of operation, with both our satellite and fixed wireless services in the market.

Our satellite service, launched in conjunction with Telesat, offers a ubiquitous national footprint for broadband, ready now to serve and deliver service anywhere in Canada.

Members of this committee should have in front of them a map outlining the dispersion of our customers across Canada's great geography. Quantum advances in satellite and wireless technology position rural Canada at a historic and critical juncture to benefit from greater choice, competition, and the availability of broadband service. We believe these technologies best fit the characteristics of rural markets and deliver urban-quality broadband to rural Canadians.

Those making inroads into the furthest reaches of Canada are not necessarily the brand names that you might recognize. There are numerous entrepreneurial and innovative new service providers that have recognized the rural broadband opportunity and moved to fill the need.

This is why we support and applaud the Government of Canada as it moves towards greater deregulation in telecommunications. Ultimately, we believe, this means a freer marketplace and more competition, translating into greater choice and better value for rural Canadians.

What can the Government of Canada do to facilitate the deployment of broadband in rural Canada? First, careful scrutiny or diligence to avoid future decisions like Telecom decision CRTC 2006-9, which uses deferral accounts and hundreds of millions of dollars to push the telcos or ILECs to compete with us in rural Canada. In our view, this type of market distortion will, ironically, slow the deployment of rural broadband, discouraging new entrants who already have invested heavily and effectively deliver service today.

Second, processes to award wireless spectrum must take the differential nature of rural Canada into account. Improved access to spectrum for rural providers is vital if your goal is to level the broadband playing field for rural Canadians.

Third and finally, there's an opportunity to learn from, and possibly replicate, Alberta SuperNet, a province-wide Internet backbone network that reaches into the hundreds of communities in rural Alberta. Since mid-2005, this innovative PPP model has encouraged the investment of private capital and the entry of more than 60 service providers delivering broadband to rural Albertans.

On behalf of Barrett Xplore, I thank you for your time and consideration.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Maduri.

We'll go now to Mr. Stinson.

[Tim Stinson, President, Bluewater TV Cable]

Good afternoon.

I'm the president of Bluewater TV Cable, which is our family-owned business. Bluewater provides cable TV, digital cable, and Internet services to 10 different communities with approximately 7,000 subscribers. The communities we service range in size from hamlets of 20 households, to our largest market that services 3,000 subscribers.

Our family has been in the cable business for 40 years, serving rural and remote communities. The communities we serve have virtually no growth. Over the years, the only way for us to initiate growth has been through the addition of services. The demographic we service is not one that thrives on technology. As such, we see lower penetration levels on Internet and digital services than in large urban markets.

About two years ago, we began evaluating voice. We found that due to our rural location, we did not have access to a CLEC reseller, such as MTS Allstream, which has been instrumental in other successes. As a result, our costs are significantly higher.

Every small operator serving small rural markets has significantly different business models than those serving large urban centres. Access to these resellers' demographics, population density, and higher per subscriber costs contribute to this.

Knowing the current regulatory regime, we decided to make the heavy investment for voice. We were actually testing this with a few friendlies when the minister made his announcement. Since then, we have suspended all of our efforts due to the uncertainty the order creates in our rural markets.

Every dollar invested in these companies is financed 100% privately by the shareholders. The only shareholders are my immediate family. Collectively my family shares all this risk. We have found that voice, if done properly, is not equipped to market inexpensive service. We believe the minister's order deters competition in rural Canada. The mere presence of competition does not create a scenario where small companies such as Bluewater can compete. In every market we service, the incumbent, in most cases Bell, has 100% of the market share.

In the small markets, the current market tests and win-back rules are the best to ensure competition has a chance to grow. The only other alternative we can suggest would be a grace period after the launch of service. This may allow small operators the opportunity enjoyed by larger operators that have been successful thus far. Without market tests, or at the very least a grace period, after launch, competition simply will not develop in rural markets throughout Canada. The companies are just too small and do not have the market power to compete against Bell and other telecom giants.

The question we're asking ourselves is, do we want to enter the voice market and deregulate Bell Canada? Is that a wise move for a small player in a rural market? We're not asking for relief from competition. What we're asking for is a chance to compete. As proposed today, we are not afforded that chance.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Stinson.

I want to thank all of you for being so concise with your opening statements.

We will go to questions for members.

For your information, members will typically address their questions to one witness or two witnesses. If you want to address the question, you can indicate that to me and I'll try to ensure you address it. Be aware that members have six minutes and then five minutes, and it's a short period of time. Let's be concise in our answers as well.

We'll start with Mr. McTeague, for six minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Chair, thank you very much.

On behalf of my party, the Liberal Party, I want to express our gratitude to you for taking time out of your very busy schedules. Many of you come from more distant areas and are of course operating much smaller firms. But your is a voice that would otherwise not have been given any consideration had this committee and its members not decided to hear from all players on this.

I want to ask most of you this, if I may. You can choose not to answer this. It will be a very simple question.

The minister decided to set aside what was called a telecom competition tribunal, which would have had both the expertise of the CRTC and the force of the Competition Bureau to look into cases after deregulation to prevent predatory pricing and to prevent a number of anti-competitive activities. It will not be the case now.

In my interpretation, the minister has instead proposed a very flimsy variant based on administrative monetary penalties contained in a bill that we're going to have to pass.

The bill says there will be a deterrence of some $15 million against anyone who engages in anti-competitive acts after deregulation, if the tribunal indeed agrees to it. From previous experience, it will take several months, if not a year, before a tribunal will be able to make a decision on an anti-competitive act.

Given the scale of your companies and the fact that you rely so heavily on the ILECs and the incumbents for much of your service, if $15 million goes back to the public treasury and it takes a year to resolve the problem, how long do you think you will survive? Can you tell us categorically whether or not you would be in business during that period of time?

[Tim Stinson]

I know categorically that we'll be out of business. If it takes seven months, we won't have a chance to start. We'll be done.

[The Chair, Conservative, James Rajotte]

Does anyone else want to comment?

Mr. MacDonald.

[Dean MacDonald]

Why put your money into that risk? It's a joke; come on. I mean, if I seriously asked people around this table if they would be willing to use their hard-earned dollars to bet on the risk that it's going to work out, it's not going to happen. That's the reality. You thwart competition and you thwart innovation.

You know what? This is supposed to be consumer friendly, but it becomes anti-consumer all the way.

[The Chair, Conservative, James Rajotte]

Mr. Cohen.

[Mel Cohen]

I would say that for giants like Bell and Telus, a penalty of $15 million is only the cost of doing business.

[The Chair, Conservative, James Rajotte]

Mr. Deane.

[Jim Deane]

I would echo what Mr. MacDonald talked about. As with his company, we've spent a lot of money on launching telephones in Regina. We'd likely continue, but the chances of us launching in Weyburn, Yorkton, Melville, or Kamsack would frankly be zero under this regime.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

In that case, I would take it that for a good part of Canada, outside the urban areas that some of us represent but for rural Canada, this is a recipe for disaster, as you quite readily pointed out.

Mr. Cohen, you talked a little bit about the win-back program. In the TPR report, the report from which the minister chose some of the recommendations, they said win-back is not a bad thing; it just happens to be the way it is.

What effect is it going to have on your business? Are consumers really going to win in the end?

[Mel Cohen]

No. I think Mr. Bernier characterized win-back restrictions as denying consumers access to rivalrous behaviour. It is no doubt what he learned from the incumbent telephone companies, but they're misleading. They make you focus on the small part of the market that has already taken advantage of rivalrous behaviour by moving to the competitor.

In contrast, win-back allows the monopolies to maximize the revenues they extract from the vast majority of consumers. Instead of advertising their best prices and making them available to most consumers, they can keep them quiet and then roll them out in a very targeted and anti-competitive way at the people who choose to lose them. It's far less costly for them to do this. To the extent that they succeed, it drives our acquisition costs up.

The one other thing I would add about win-back is this. The most insidious thing about it is that the only ones who can use it are the incumbents. If I make a sale to a new customer who leaves the telco, Primus can't call that customer up and try to win them back. Vonage can't do it. Rogers can't do it. The only one who knows it has happened is the incumbent. And why does the incumbent know it's happened? Because the incumbent started with all the customers, and that's a legacy of their monopoly.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

In your estimation--in a very brief answer, because I only have a few seconds left--what will be the outcome in a year or so? Do you foresee a situation where the former monopolies will re-monopolize?

[Mel Cohen]

I don't think it will happen like that because they're up now against some very big giants. Rogers also is no small player. Vidéotron is no small player. But taking away the restrictions on win-back certainly does retard the growth of competition, especially by smaller competitors.