Evidence of meeting #47 for Industry, Science and Technology in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was competition.
A recording is available from Parliament.
5:10 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Church, I have a couple of questions again.
It sounds like you have made an argument here for a new definition of relevant market. I know that you wouldn't agree with it because market shares are certainly not here. But you would certainly have to conclude that you've defined a more reasonable and more appropriate market.
Nevertheless, can you give this committee an example of where deregulation has ever taken place anywhere in the world--certainly with nations that have at least some degree of sophistication with telecommunications--where deregulation has proceeded without understanding the market, first of all, or having an agreement as to what the market might be?
5:10 p.m.
Professor, University of Calgary, As an Individual
I'd go back to our earlier discussion about the reason these markets are regulated; it's that you're worried about market power. If you're worried about market power, it's very important that you have the market defined correctly. That's the only way you can access where there is market power and whether you can deregulate, where the competition is sufficient to replace the regulatory constraints on market power.
5:10 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
I'm interested in that because I think it's crucial. You said:
Moving away from before-the-fact (ex ante) regulatory prescriptions to approaches that place greater reliance on after-the-fact (ex post) regulatory intervention, based on verified complaints of significant market problems
is the way we ought to go. That's, in fact, in the TPR.
But the interesting part is that the recommendation immediately before that, sir, is:
...applying economic regulation symmetrically to all service providers, based on whether they have significant market power, regardless of the technology they use.
It's acceptable, I suppose, to say we can proceed with all these wonderful new technologies that come down the pipe. If an entrant or one of the two vigorous competitors who are left decides not to compete or decides to leave, and in the absence of any other alternative, you're suggesting perhaps voice-over-IP might be one of the ways to go.
What guarantee does the consumer have that these programs will be made available to them, that new technologies will become available to them, when you have one dominant player left in the market?
5:15 p.m.
Professor, University of Calgary, As an Individual
I think you have to be careful....
We're under tight time constraints here in terms of what I'm allowed to say.
In fact, there are a number of reasons why predation might not be such a concern in terms of being able to raise your price later. The most important one is that the cable networks are there. They've been upgraded to broadband. They've made the investment in the equipment to require digital telephony. Someone is going to be able to pick up those assets, even if they pick them up cheaply. And they'll be able to compete.
5:15 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
We've heard from Shaw in Vancouver that they're not at the point of interconnection. If this order proceeds, they will not interconnect. Therefore, they will not be the competition cable and telephone that one would expect, or at least more than the two that you have given as a baseline or as a minimum.
Do you not think this might be a little premature, and that hanging on an extra few months might do the trick, as was suggested by the formula provided in the TPR report?
5:15 p.m.
Professor, University of Calgary, As an Individual
So you're suggesting to me that Shaw is not willing to proceed if the minister's order is the regulatory framework?
5:15 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
It's not at the point of interconnection. It's one of the concerns that was raised by the report, that there may be a question of many of them not being at the stage yet where they've been able to connect quality of service issues, etc.
5:15 p.m.
Professor, University of Calgary, As an Individual
Okay. I understand.
I think that's fine. And that's why I think a very important bridge was crossed here by the ILECs. Traditionally, the ILECs claimed if we remove the regulatory barriers to entry, we could rely on the threat of hit-and-run entry to control market power and you could deregulate. Our experience has shown us there are economic barriers to entry, and what this thing says is that we don't deregulate until we actually have competition on the ground. In Vancouver there's not going to be deregulation; you continue to regulate Telus until Shaw is interconnected and until Shaw provides service that customers find acceptable.
5:15 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
We have seen in the past that efficiencies defences have been used to create virtual monopolies, based not on a question of consumer welfare but on efficiencies within companies. Superior Propane would be the one predecessor to.... Ms. Sheridan Scott would be able to speak plentifully to this.
What guarantees do you believe could be forthcoming in the mere competition test? That is, a presence test that is, as far as I know, unheard of anywhere in the world. What safeguards are there for consumers if, at the end of the day, you simply have a recognition of a couple of players and leave it that way? It seems to me we've heard enough from people, not complaining because they'll be wiped out and because they're too lazy, but because the facilities by which they must compete will simply be pulled from under them. You're literally pulling the rug from under many of these companies and eclipsing the competition, as opposed to increasing it.
5:15 p.m.
Professor, University of Calgary, As an Individual
But you have to be careful in that a bunch of existing competitors use the ILECs facilities. We regulate it wholesale, so those facilities are available to create that competition at retail. But that's a very different form of competition. It's a competition that the CRTC has tried very hard to work since 1997-98. They've bent over backwards to try to make the playing field even more level to make those guys sustainable.
The kind of competition between competing networks we're seeing now is very different. It's facilities-based competition between the two of them. And I think when you look at the nature of that industry and you look at the huge amounts of money that both the cable company and the telephone company put in the ground, which is sunk, and how low their costs are to provide service to a given place, given that they're going to compete over bundles, it's going to be winner-take-all in terms of providing broadband access to that house, given that the cable companies are new entrants, so they have very small market share. They're not interested in colluding or engaging in conscious parallelism yet. They're going to compete fiercely to try to get up their market shares.
I think this idea that we should be worried we're going to have a cozy duopoly right off the bat is completely illogical, given what the mandate of the cable companies will be. They will want to go out and grow their market shares. They are going to compete.
The other thing we should think about is that we had entry. The cable companies have entered, and they don't enter with higher prices; they enter with lower prices to attract customers. That's the direction that prices are going to go. That's the nature of the competition we're seeing.
5:15 p.m.
Conservative
The Chair Conservative James Rajotte
Okay, thank you.
Thank you, Mr. McTeague.
We'll go to Mr. Del Mastro.
February 26th, 2007 / 5:15 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Thank you, Chair.
Mr. Church, you're involved with the Competition Bureau. Can you draw a parallel between telecom deregulation and airline deregulation? Is there a parallel?
5:15 p.m.
Professor, University of Calgary, As an Individual
There's a parallel, and it's very interesting in the sense that when we engaged in airline deregulation, we stacked the deck the wrong way. In other industries, when we introduced deregulation, we tried to reduce the advantages of incumbency and give the entrants a chance to compete. With airline deregulation, we did the exact opposite. We made it very easy for Air Canada to exert their dominance and remain dominant.
Even with that experience, we've seen that entry and that possibility of having a second hub-and-spoke carrier. WestJet is able to compete. They were able to enter. There we have a duopoly industry. Relative to what the old age of a regulated monopolist was 20 years ago, the competition between a duopoly now seems to me much better.
5:20 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
I would agree with that.
How does Canada's regulatory framework for telecom compare to that of other countries internationally?
5:20 p.m.
Professor, University of Calgary, As an Individual
Our framework is different. We were early out of the gate in terms of trying to introduce competition into the local network with the United States. The United States did it with their telecom act in 1996. We were engaged in the proceedings for establishing what the conditions of local competition were going to be. That proceeding started in January 1995.
So we were really early out of the gate at trying to do this. Our approach is very different from that of the United States. The United States looked at every network element of the incumbents and said you have to provide every element at such-and-such a price to the entrants, whereas our approach was to identify very few elements in the network, so-called essential facilities, and provide them at much higher prices than those in the United States.
So in some sense the American experience was opening up the whole network and letting all elements of that be available to entrants. It was no more successful than our experiment was with this so-called hybrid model in which we would allow entrants to use some of the incumbent's networks.
5:20 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Intuitively, in my experience, whenever new competition enters into any market, it doesn't tend to drive prices up, which, as you've said, is the purpose of regulation. It tends to drive prices down. I don't see any cause to believe that this deregulation would wind up with prices being higher.
One of the points you've made or that was made earlier is that the types of companies we're talking about that may enter this market are not small companies. It's not like these guys are going to be scared out of the market in short order. Certainly, as you've indicated, if they were scared out of the market, there are other players who will come in and offer these services.
Again, just for clarification, you don't see any reason to believe that players would be driven out of the market, and then in lieu of regulation we would have significantly higher prices being paid for services because these regulations were no longer in place?
5:20 p.m.
Professor, University of Calgary, As an Individual
The important thing about what the CRTC did, and about what is in the minister's order, is that we still have this latent regulation. We still have a price ceiling on basic residential service. So I think that's really important, because it means if you've made a mistake on geographic market definition and there's some area where you've forborne and there's no competition, they still have, in essence, regulation.
If you think about the incentives for anti-competitive behaviour, which certain people are very concerned about, well, there's no point, right? There's no point driving people out of business if I can't raise my price. Why can't I raise my price? I could have entry from Vonage. I could have someone else acquire the cable company's facilities, or, ultimately, I still am regulated there. There's no way to recoup the investment in predation. That's an important consideration. We have this kind of lingering remanent on upward pricing by the incumbents.
The debate is about the ability to lower prices, and that's a debate in which consumers hope that lower prices win.
5:20 p.m.
Conservative
5:20 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
I'll share that time with Mr. Arthur.
Do you have a question, André?
5:20 p.m.
Independent
André Arthur Independent Portneuf—Jacques-Cartier, QC
How refreshing, Mr. Church, to hear an economist I can understand. Thank you.
5:20 p.m.
Some hon. members
Oh, oh!
5:20 p.m.
Independent
André Arthur Independent Portneuf—Jacques-Cartier, QC
I don't know where this committee will end this debate about deregulation, but if we have to do something constructive, we'll have to settle the problem of those very little mom and pop cable operations. They are in the market with the big telcos. They know that wireless is there. The minute they pay millions to buy the equipment to get telephone, they will be crushed instantly because they are very small operations. They're terrified of what's going to happen to them if they move into this market.
Is there any solution? Is there any protection for those people, still respecting the need to deregulate now?
5:20 p.m.
Professor, University of Calgary, As an Individual
I don't think they would be immediately crushed, because the same incentives that the ILECs have when they compete against Shaw and Rogers affect them when they compete against the mom and pop operations. They're going to say, “Even if I crush them, unless the Competition Bureau lets me buy them out so I can acquire those assets, those assets will still be there. Someone will own them and compete against me. It may not be the original mom and pop guy, but someone can acquire those assets, because they're sunk; they're there.”