Industry Committee on Feb. 26th, 2007

[The Chair, Conservative, James Rajotte]

Members, we will call the 47th meeting of the Standing Committee on Industry, Science and Technology to order.

Pursuant to Standing Order 108(2), we are furthering our study on the deregulation of the telecommunications sector.

We have two sessions here today of one hour each. For the first session, the first hour, we have two witnesses. First of all, from the Atlantic Institute for Market Studies, we have Mr. Ian Munro. He's the director of research. Secondly, from the Public Interest Advocacy Centre, we have Mr. Michael Janigan, executive director and general counsel.

Welcome, gentlemen. You will each have up to five minutes of opening statements, and then we will go immediately to questions from members.

Mr. Munro, we will start with you for up to five minutes, please.

[Ian Munro, Director of Reseach, Atlantic Institute for Market Studies]

Thank you, sir. I had understood three minutes, so my remarks may be brief. Thank you for the invitation to appear before you today.

As you may know, in January my institute submitted comments to Industry Canada in response to the Order Varying Telecom Decision CRTC 2006-15. If I could, I'll briefly summarize our response here.

We are supportive of the proposal to replace the CRTC's market share test with the competitive facilities test or the alternative competition test, and to move to areas smaller than the local forbearance regions defined by the CRTC as the geographic basis for deregulation decisions. The framework established by the commission is too timid and unnecessarily delays the benefits of full competition to consumers.

The entire province of Prince Edward Island constitutes a single CRTC-defined local forbearance region, and it provides an interesting example on this point. The population of P.E.I. is approximately 140,000, and the population of my hometown of Charlottetown is approximately 65,000. Suppose a competitor entered the Charlottetown telephone service market and captured 51% of the customers, so that it now was the largest service provider in the city. By CRTC rules, the Charlottetown market would remain regulated and the incumbent telephone company, now the number two service provider in the city, would still have restrictions on its marketing and pricing decisions, unlike its now larger rival.

When the outcome of regulation is to hinder the number two player in its ability to compete with the market leader, then there is something wrong with the regulation. It also must be kept in mind that a large market share does not necessarily translate directly into market power. The real question is whether a large market share would survive an attempt to charge high prices and earn monopoly profits.

Given the degree of competition that we have already seen spring up in recent years, we do not believe this would occur in a market featuring three facilities-based competitors. There is more than ample evidence that consumers are willing to switch providers when they perceive better value from a competitor than what the incumbent can offer.

Getting back to the question of geography, smaller is better because it allows for a more precise and effective regulatory response. Deregulating a large region in which there are some areas with no competitors present could put some consumers at risk. Conversely, failing to deregulate a large region featuring areas in which competitors have made significant inroads denies the benefits of full competition to consumers in those areas. By drilling down to smaller areas, regulation can be kept in place where competitors are not present and the benefits of full competition can be provided where competitors are present.

We also support the removal of the win-back prohibitions. Competing offers from service providers is the very essence of competition. If competitor A knows that competitor B will be restricted in its ability to respond, it seems reasonable to think that competitor A may not sharpen its pencil quite as much as it could have.

In the Canadian communications sector, liberalization, deregulation, and the introduction of competition have too often been implemented as halting half measures. Regulatory inertia deprives consumers of the benefits of full competition. We support the proposal to accelerate the pace to a deregulated local telephony marketplace where competition has taken hold.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Munro.

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

[Michael Janigan, Executive Director and General Counsel, Public Interest Advocacy Centre]

Thank you, Mr. Chairman and members of the committee, for extending this invitation to address you on matters of concern to residential consumers, particularly vulnerable consumers, associated with the deregulatory actions of the government in relation to the CRTC in particular and telecommunications in general.

The Public Interest Advocacy Centre is a non-profit organization that provides legal and research services on behalf of consumer interests, in particular vulnerable consumer interests, concerning the provision of important public services.

PIAC has made submissions to the minister in response to the notice in the Canada Gazette setting out his proposed order reversing CRTC decision 2006-15. We have appended a copy of those submissions on the technical points, which raise objections to both the test used by the minister and the precedent associated with the reversal of the CRTC decision, to the speaking notes that have been circulated to you.

As you have been told, both the reversal and the kind of issue that is sought to be reversed are very unusual. The determination of the conditions that show whether a workably competitive market exists that is sufficient to protect the interests of consumers without regulation is not one that lends itself to resolution by fiat. It is very much an issue where the practical experience of the regulator must be used in conjunction with the various theoretical constructs associated with the presence or absence of market power. CRTC decision 2006-15 was informed by substantial volumes of expert evidence, such evidence being fully tested in an oral hearing before an independent tribunal. No such process has informed the proposed order of the minister.

We are concerned the government may be unwittingly playing the role of a sorcerer’s apprentice, setting loose inappropriate market forces and problems in the industry that the previous framework of consumer protection was able to deal with, with appropriate controls. The principal question is whether the appropriate mechanisms will be in place to identify problems, much less solutions.

However, it is important to note what the government actions to date did not do. They didn’t introduce competition in any markets where competition didn’t already exist. In fact, most major telecom services have already been forborne from regulation by the CRTC.

Secondly, they didn’t free the incumbent local exchange telephone companies from the obligation to maintain local rates at tariff levels. These companies were always able to lower rates across their rate bands. That's a very important point, which seems to have been lost in a lot of the public commentary associated with this issue.

Thirdly, they did set an unfortunate precedent in allowing telecommunications regulation by politics to trump long-standing administrative procedure. It is a precedent that may prove costly for the winners in the long run. The ILECs are now frequently openly dismissive of regulatory scrutiny in current proceedings before the CRTC, citing the actions of their new champion, the industry minister, as their justification.

Fourthly, they do not accord with the wishes of Canadians. A Pollara survey of September 2006 found that 80% of Canadians were opposed to the ILECs setting their local rates. Strong majorities were against this prospect even in dense urban areas of cable telephony offerings. In fact, most Canadians, perhaps given the problems associated with the wireless and broadband industries, don’t feel that cable provides enough competition for the ILECs.

Fifthly, together with the proposed amendments to the Competition Act, they provide no comfort for customers who complain of overcharging or oppressive conditions from a dominant provider. In theory, the Competition Act protects the potential competitor from anti-competitive conduct; it does nothing for the customer.

It would be, in our submission, far better to create conditions where problems with the proposed new regime may be swiftly identified and remedied rather than endlessly debate the consequences at this time.

These conditions would include, at a minimum: thorough, ongoing, and independent research with stakeholder consultation as to the state of competition in the telecommunications industry, including issues of choice, price, penetration, affordability, and access identified with appropriate customer demographics; establishment of the independent ombudsman consumer agency as recommended by recommendation 6-2 of the Telecommunications Review Panel report to provide remedies for consumers in a deregulated environment and to provide a window on consumer protection problems as well as potential solutions; and the establishment of a process that will swiftly and effectively institute consumer protections where the deregulated market has failed to provide competition sufficient to protect the interests of users.

Thank you for your indulgence. I'd be happy to deal with any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Janigan.

We'll now go to questions from members. We'll go to Mr. McTeague for six minutes.

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

Thank you, Chair.

Mr. Munro, Mr. Janigan, thank you for being here today. Mr. Janigan, I want to let you know that I did try to have an exchange with one of the witnesses, I believe with the CRTC, as to the allowance of the rate, the very thing you were referring to. I didn't get a satisfactory answer, but that too is not of any surprise to me.

Mr. Munro, I'm wondering, in your glowing commentary about the ability of market forces to reign freely, and given the example of Prince Edward Island, what is it with the TPR report that you agree with, and what is it that you disagree with? Do you believe we should have a hybrid telecommunications competition tribunal, or can the protection and safeguarding of consumers and the competitive process happen on its own?

[Ian Munro]

I haven't spent a lot of time analyzing the issue of the institutional structure going forward, but from what I understand from both the testimony you've had here recently from Ms. Scott from the commission and from Mr. Intven, one of the authors of the report, they believe moving to that kind of penalty just described, in the future, would be appropriate, although I note as well that Mr. Intven seemed comfortable that certain measures could go forth, such as this kind of deregulatory measure, before that institution was fully in place.

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

Sir, you are director of research for the Atlantic Institute for Market Studies. I'm wondering if you have had an opportunity to glean anything from the U.S. experience on the competitive telecom policy there. A court decision had basically upended their version of forbearance, and the conclusion is that after several years the U.S. telecom industry will soon be almost as highly concentrated as it had been prior to the 1984 breakup of the old AT&T as a result of a simple retake or revision or a return to the old monopolies.

It's been the position of the members on this side that there is, without an understanding of a substantial and proper market study, an event that was recommended by the TPR, that this is very much what could happen.

Your comments seem to escape or not to include the fact that the ILECs come from hitherto monopolies. Are you not concerned that without proper safeguards--and of course I understand what you just said with respect to Ms. Sheridan Scott and a few others. But from your perspective, have you had a chance to do any international analysis as far as what happens when regimes are deregulated in the absence of a market study?

[Ian Munro]

I don't have any specific studies that would fill that exact bill. I understand there may be measures that would show increased concentration in the U.S. I don't know that I've heard anyone saying that the deregulatory actions have been problematic and that consumers are worse off.

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

I'm only saying this because we have our own study here, which I'd be quite willing to give you, and it says right off the top: “Library of Parliament”, “Local Telephone Company Market Shares by Local Forbearance Region”. It says, “According to the market share data in 2006, only residential services in the Halifax region would meet one of the CRTC's forbearance criteria.”

In terms of the work you've done, I'm a little concerned that someone who has a background in research and market studies wouldn't first be concerned about the market in which they are trying to do the research and to come to the conclusions you have, but be that as it may, you have used the example of Charlottetown or of Prince Edward Island. I come from a community where we have, in theory, two potential players.

Are you satisfied there could be more, or are you comfortable with just having the two or three players, one being wireless that's not attached to the first two, whether it's cable or telephone?

[Ian Munro]

I think the three competitors are sufficient, and as I mentioned in my opening remarks, I think it's wrong to focus too much on market share in this instance. The real test is whether the competitors have the ability to quickly and fully respond to any kind of a price increase that an incumbent might attempt to put in place.

I live in Halifax where EastLink is a very strong competitor. We have wireless competitors as well. If that market were deregulated and if the incumbent chose to increase prices tomorrow, I can be with a competitor by the weekend. And I think that's really the true test. The constraint put on the incumbents is that the competitor is present and able to respond very quickly to any pricing action they might put in place.

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

Mr. Janigan, in your estimation, after working on these kinds of things in the past, how likely is it if something should go awry for a new competitor that relies on the services and facilities of a former monopoly, and now is thrust back into a position where they're being competed against—either through win-back rules or a mere competitor test presence—that they will become the subject of an anti-competitive act? How likely is it that the $15 million will go back to the Government of Canada as opposed to the aggrieved party? How is this going to help the competitive process?

[Michael Janigan]

As the committee well knows, the provisions associated with abuse of dominance and predatory pricing have not had extensive use in Canada. There has been a great deal of reluctance on the part of the Competition Bureau to find conduct that would amount to abuse of dominant position; rather the Competition Bureau looks upon it as potentially a more efficient way of dealing with their own position.

I would not put a great deal of faith in the matter of increasing the penalties under those provisions, because they've been so infrequently used, and in fairness to the Competition Bureau, the associated test in the U.S. jurisdiction has also been very stringent, but perhaps in greater use than in Canada.

Particularly regarding the position of the new entrant competitor, if the best prediction of the future is usually the past, we don't have a great number of local exchange carriers competing with incumbent carriers at this point in time. By and large, they've been unsuccessful in maintaining competitions. Some would say because of the barriers that have been put in place by the dominant company, and some say that it's simply a matter of the economies of scale.

[The Chair, Conservative, James Rajotte]

Okay. Thank you.

Thank you, Mr. McTeague.

We'll go to Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

I'd like to hear more about how regions are defined. The order created a new kind of region. The CRTC used to go by local forbearance regions or LFRs, while the ministerial order created local interconnected regions, or LIRs.

Even though your briefs present somewhat different opinions on the substance of this matter, do you favour going with smaller, or larger, regions?

In Quebec alone, there are 102 LIRs, whereas the CRTC relies on 20 LFRs. This is quite a difference, especially when it comes to limiting competition.

I'd like to hear your view on this subject. What is the best approach to ensuring good competition?

[Ian Munro]

Thank you, and I apologize for the difficulty with the language.

Yes, we support the smallest possible area that you could look at as the basis for these deregulation decisions because it allows you the most precision. It also allows you to avoid the potential problems that could occur in either making or not making a regulatory decision in a larger area.

If you imagine a hypothetical large area, in which half is served by a number of competitors and the other half is not, and if you were to deregulate that area, then you would have a certain portion of the area not being served by competitors and deregulated, which is problematic. Conversely, if you choose to retain regulation, then the half of that area in which competitors are present is denied the benefits of complete competition because the regulatory framework stays in place.

If instead you can focus your regulatory decision on each half independently, in my hypothetical example, you can deregulate the area where competitors are present and allow consumers the full benefits of competition, while maintaining protection for consumers in the other area where competitors are not present.

So we always believe in going to the smallest area that can be practically administered.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

So then, practically speaking, you would amend the order to have smaller regions.

[Ian Munro]

Yes, the new test speaks of either the LIRs or the exchanges, and in particular we think the exchanges are a very useful area to have on the table.

[Michael Janigan]

This matter of an attempt to define LFRs was a matter that occupied a considerable amount of time and head-scratching in the original proceeding. It's frankly not so much a matter of science, but belief, in terms of how this thing should be crafted. There are opinions on both sides of the map.

The difficulty is, of course, if you make the region too small, it would mean that effectively deregulation will only occur in a small core of perhaps an urban area, and the rest of the regions may effectively be subject to regulation for endless amounts of time because the deregulated core is not included with that larger amount. If you make the size too large, then, effectively, some of the rural areas may be included by the fact that their population is less than the urban areas and be automatically deregulated in circumstances where that may not be something that is in keeping with their interests.

There are ways in which the local forbearance region can be constructed either smaller or larger that may in fact either benefit or hurt the interests of the incumbent telephone companies or benefit or hurt the interests of the customers it's attempting to serve. The CRTC took the position of effectively trying to look at a community of interest, in particular the economic community of interest, to come to some resolution on that scale.

And it's not perfect. Let's face it. I's not. You can find exceptions in this country and how it's applied where it's not perfect, but I think, by and large, it would have been preferable to leave that in place and try to individually fix the exceptional regions where their particular plan didn't work.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I want to be sure that I understand you. You would prefer to see the minister's order amended so that we go with regions established by the CRTC rather than we those provided for in this version.

[Michael Janigan]

I think that's correct, yes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Fine. I have another question.

Mr. Janigan, you stated that the regulatory body must have decision-making authority and that these decisions must not be overturned any old time. You mentioned the occasional, temporary use by the minister of the power to make orders. It seems the minister regularly exercises this authority.

Are you concerned at all about the decision-making authority of the CRTC or of any new body created as a result of measures adopted?

[Michael Janigan]

I think, objectively, in looking at what the proposed order of the minister is, it is a very exceptional order, and it seems to be offside of the standard thinking in relation to the behaviour of regulatory bodies, both within this country and externally.

You'll note in my submissions to the minister there is reference to OECD policy documents in relation to the relationship the government should have with its regulator. In our view, this decision is offside the standard approach to regulation, and we think, and have noted, that in fact the Telecommunications Policy Review Panel report specifically took some time to ensure that this type of action would not be possible in the future. I think it's because of the fact that it's just not in keeping with attempting to design regulatory policy and regulatory frameworks by an independently authorized regulator.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Mr. Carrie.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you, Mr. Chair.

Thank you very much to the witnesses for being here today.

We've heard a lot over the last few weeks about how quickly things in the telecom industry are changing. It seems that demographics are changing all across the country. I know in Oshawa, where I'm from, I talk to young people, and they don't even have a land line any more. They all have their cellphone. They love their cellphone. They take it everywhere they go. They send text messages to their friends. It doesn't matter where they are, they can utilize this great technological advance.

In Atlantic Canada, we've had some witnesses--we've had somebody from EastLink and we've had satellite companies--that seem to be really raring to go for competition. In the Atlantic region, do you think the area as a whole--the consumer--will benefit from deregulation?