Industry Committee on Oct. 19th, 2006

[The Chair, Conservative, James Rajotte]

Okay.

Mr. MacDonald.

[John MacDonald, President, Enterprise Solutions, MTS Allstream Inc.]

Good afternoon. My name is John MacDonald, and I'm president of the enterprise solutions division at MTS Allstream.

By the way, my speaking remarks, as well as our whole submission and some interesting observations regarding the competitive situation in the U.S. that might be helpful to the process, are included within this particular document. To ensure that I keep to the timelines you've set for comments, let me get straight to the point.

First, MTS Allstream straddles the divide between the former monopoly incumbent provider, which we are in the province of Manitoba, and the so-called new entrant competitor, which we are in the rest of the country for business, or, as we refer to it, the enterprise customer. In fact, we were the first long-distance competitor, as Unitel, and among the first local competitors, as AT&T Canada. Today, we are the largest national competitor to the incumbents Bell and TELUS, in each of their territories, and we deliver communications solutions to the small, medium, and large enterprise customers.

Typically, the views of incumbents and competitors on matters of policy and regulation are opposing. Some say our personality on both actually makes us a bit schizophrenic. We say it actually makes us an honest broker. We understand that when we pursue policy and regulation that is pro-competitive, there may be short-term implications for our incumbent business in Manitoba that now faces competition from the likes of Shaw. We certainly are aware that when policy or regulation is adopted that allows former monopoly incumbents like Bell or TELUS to leverage their dominant position in terms of control over their respective local network infrastructure, then competitors and the cause of competition are threatened.

With respect to the proposed policy direction, we agree wholeheartedly with the government's goals to ensure our telecommunications regulatory system is more modern, flexible, and efficient, and that our industry is internationally competitive and successful so that Canadian consumers will benefit from a stronger competitive environment that will bring greater choice and even lower prices and better services.

For the most part, we support the language of the proposed direction. However, MTS Allstream believes subparagraph 1(c)(ii) of the proposed direction that deals with access for competitors to the local networks controlled by the historic monopoly companies, as currently drafted, will actively undermine achievement of these laudable goals. It could jeopardize competition, particularly in the critical market for business services.

To be clear, we would ask the committee to carefully scrutinize language, the impact of which could be the elimination of choice for thousands of small and medium-sized business owners across the country, and that could result in costs to Canadian consumers.

The premise of that section, a copy of which is attached to my comments, is that allowing the former monopolies to set high prices for competitors to access the local network they control, often with markups of at least 50% to 300%, will encourage those competitors to build local networks of their own. That premise is frankly wrong. As has been repeatedly demonstrated in the marketplace in Canada, in the United States, and in Europe, experience has proven that the market will not fund, the economics do not support, and competition will not result from policy that seeks to force a replication of the pervasive local network control by the incumbent.

Local networks, whether telco or cable, have been built and maintained in Canada with an effectively guaranteed rate of return. In the business market especially, there is no widespread local network other than the one controlled by the former monopolies. Fair wholesale access to that local network for competitors is therefore critical to competition.

MTS Allstream has invested more than any other company--$8 billion--in competitive networks nationally. Yet we still require fair access to the local network to offer choice to customers. We propose alternative wording to that section in question, which is also before you. The language we propose is entirely consistent with the goals expressed by the government, but unlike the current language, it recognizes that where a former monopoly exercises significant market power over the network, for competitive market forces to take hold, competitors must have fair access to that network.

Thank you for considering this extremely important issue.

I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. MacDonald.

Now we'll go right to Ms. Léger for comments.

[Sophie Léger, Spokeswoman, President, Inter.net; Chief Operating Officer, Universe Communications Corporation, Quebec Coalition of Internet Service Providers]

Thank you, Mr. Chair.

Good afternoon, ladies and gentlemen.

My name is Sophie Léger and I'm here today on behalf of the Quebec Coalition of Internet Service Providers. We represent about 14 companies with about 200,000 customers throughout the country.

I want to talk about the directive to the CRTC and the strategy behind it. We disagree with some, though not all, of its language, and we think the offensive parts need to be revised.

We refer to what is called mandated access to wholesale facilities. These access arrangements allow us to lease parts of the network of the telcos and the cable companies, and this in turn allows our customers to reach the Internet. The point of the directive is in fact to encourage the CRTC to get rid of such mandated access to third parties.

Why? It seems that the government has bought into the idea that the only real competition is competition based on owning facilities. If you don't own billions worth of outside plants, wires, poles, remote switches, and the like, you are not competing. This means, in effect, that a valid option for getting on the Internet is going to go away. As those who own the facilities will now say and have told us directly, once the directive goes through, there will be no more need to lease us facilities to access the Internet through their equipment.

The government may think it is increasing competition. In fact, it is choosing one particular form of competition to succeed and another to be eliminated. The form of competition it is choosing to succeed is called facilities-based competition. It requires that a company directly own the physical means of getting access to your home or office. Only the largest types of utilities can do this.

The form of competition the government is choosing to eliminate is competition in services that grew up around the leased equipment. The ISP industry can only get access to high-speed DSL and to the facilities of the cable owners at unregulated prices, and, quite naturally, they would like to see us squeezed out.

Through a quirk in the evolution of regulation, the high-speed facilities that are most needed to reach the customers are called non-essential facilities. All these words, like essential and non-essential, came out of the voice telephony era.

Voice telephone service will soon be just another application like Word or PowerPoint. It may even be given away for free. The real competition is in getting access to the Internet. Here the government is thinking of reducing competition while they believe they are expanding it.

The basic argument of the incumbent companies is that they will invest more if they are given more profit and less regulation. However, competitors, by paying a fair price for the use of this infrastructure, do contribute directly to the incumbent's capacity to invest. We ISPs offer a much more needed alternative to consumers.

Incumbents have lobbied the government very successfully here and in the United States to shut down independent ISPs and to expand their Internet revenues as much as possible to make up the shortfall in declining voice services. Getting rid of access to high-speed facilities for competitors will result in less choice for consumers and less competition. Here the government is carrying out the intentions of the incumbents beautifully.

What must be done? First, we need mandated access to facilities, at fair and reasonable prices. Second, the services to which we have access must evolve with time and with advances in technology. Third, the market power of the incumbents must be constrained. What this means is that Canada needs effective regulation in the public interest as long as incumbents exercise market power.

[The Chair, Conservative, James Rajotte]

Ms. Léger, could we have you conclude?

[Sophie Léger]

I'm done.

[The Chair, Conservative, James Rajotte]

Okay, thank you very much.

We'll go to Mr. Piercy.

[John Piercy, Chair, Telecom Committee, President, Mountain Cablevision, Canadian Cable Systems Alliance]

Thank you. Good afternoon, everybody.

My name is John Piercy and I'm here representing the Canadian Cable Systems Alliance, the CCSA, of which I am a board member and chairman of their telecom regulatory committee. I am also president of Mountain Cablevision, a CCSA member company.

CCSA represents over 90 small, independent cable companies operating in all regions of Canada. Member companies are generally family owned businesses serving small and rural centres. All of these companies favour competition. We compete aggressively with large national companies in the provision of video services as well as in high-speed Internet.

We have taken the risks to make the investment to bring advanced digital and broadband services to our customers. We are also fully prepared to compete in offering local telephony services, the last bastion of monopoly communication services outside of the major urban areas.

One of the key differences in local telephone services is that our competitors currently have 100% of the customers we are seeking to attract. When we do succeed in attracting a customer to our local telephone service, we have to work with our competitor to transfer the customer to our service. We also have to interconnect with those competitors and rely on them to provide other services. This is not the usual structure of a competitive market.

The CRTC, through the local forbearance decision, has put in place a framework consistent with the Telecommunications Act. This framework will allow competition to develop and incumbents to be deregulated once that competition has reached a certain threshold. It also establishes how the relationship between incumbents and new entrants will be governed and provides recourse in the event of disputes.

This framework was put in place only six months ago. Cable companies, even the small ones, have begun to make investments required to provide competitive local telephone services to their customers. The draft policy direction would undercut this framework. This would put cable investment at risk and probably deter other companies from offering telephone services at all. The transition from monopoly to competitive local markets would be derailed, just as it's getting under way.

The shift to less regulation needs to be supported by enforcement tools, as recommended by the telecom policy review panel. It will not be enough to have the Competition Bureau conduct the post mortem on what went wrong. Our efforts to offer competitive local telephone service would already be dead.

The draft policy direction appears to put regulatory efficiency ahead of effectiveness. It does not recognize the need for regulation where there exists significant market power. It does not provide for enforcement powers and it does not recognize the need for a transition period. These were critical recommendations of the TPR panel itself. We believe that the policy direction should be amended to reflect these recommendations.

Our competitors exercise significant market power; our member companies do not. Sustainable competition, if allowed to develop, would limit our competitors' market power, but in order to get to that point, someone must have the authority to intervene, to impose sanctions, and to do so in a timely manner so that new entrants are not forced out.

Our customers in small-town Canada deserve choice in local telephone service as much as those in the large urban centres. As the only other companies with facilities, we are the best-placed alternatives to compete with the large telephone companies. We simply want a chance to compete, and we guarantee our member companies will rise to the occasion, as they have done in the past.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go right now to Ms. Duchesne.

[Geneviève Duchesne, Analyst, Telecommunications, Broadcasting and Information Highway Policies and Regulation, L'Union des consommateurs]

Good afternoon, my name is Geneviève Duchesne and I'm from the Union des consommateurs.

With the respect to the policy direction, the Union des consommateurs is of the view that the Governor in Council does not have the authority under section 8 of the Telecommunications Act to make directions of the kind provided for in the order. The direction as proposed exceeds the limits set under section 8 on the authority conferred on the Governor in Council because they are not all of general application, do not solely concern Canadian telecommunications policy and affect other provisions of the act.

The direction as proposed seems to disregard the fact that the CRTC is required to administer the Telecommunications Act currently in effect, that the Commission has powers conferred on it under that act and that it is required to exercise only those powers. The proposed direction is irreconcilable with Part III of the act, which requires that the CRTC regulate a given telecommunications service, unless certain conditions set out in section 34 are not met.

For example, in section 34, Parliament has cited only one case in which the CRTC is required to rely on market forces, and that is where competition is adequate to protect the interests of consumers. The requirements stated in section 34 of the act may not be amended by means of the authority conferred on the Governor in Council in section 8 of the Telecommunications Act. It is up to Parliament to amend those requirements of the act establishing the conditions that the CRTC must observe before it can rely on market forces.

Would the government attempt to circumvent the legislative process and associated time periods by proceeding by means of directions? That is what is readily apparent from the summary of the regulatory impact study accompanying the draft direction. That study reveals that directions are a transitional measure designed not to delay changes to the regulatory framework that concern questions—we've been able to see that today—that are complex, will require in-depth analysis and consultations. Regardless of the alleged advantages and benefits associated with an approach requiring the CRTC to rely, as far as possible, on market forces, about which, based on our experience, we may have serious reservations. Those advantages and benefits cannot in any case warrant the executive branch's circumventing the democratic process that characterizes the legislative branch.

As I said, the Union des consommateurs has numerous reservations about the alleged advantages and benefits of a new regulatory framework based more on the market and on the relevance of implementing such a framework. It would recall that the CRTC and the regulatory frameworks it is currently required to administer have made Canada a telecommunications leader. We also wish to recall that the Telecommunications Act provides that the CRTC may refrain from regulating a telecommunications service. It even has an obligation to do so where competition is sufficient to protect the interests of users. We also wish to recall that the CRTC has previously refrained from applying economic regulation to nearly 70% of the present telecommunications market mainly affecting clients with a small number of services offered by the old monopolies subject to economic regulation. That is the case of local telephone services in which the old monopolies still hold a highly dominant position.

As the review panel's report reveals, the local telephone sector, which is a regulated sector, performs better internationally—particularly as regards prices—than the broadband services and wireless services sectors, which are largely deregulated. The wireless sector, which, I repeat, is a largely deregulated sector, generates new extensive consumer complaints and frustration. I also wish to point out that, according to the review panel's report, the fact that Canada lags behind in wireless service innovation, as well as the low penetration rate and high rates—60% higher than in the United States and 19% higher than in Europe—are attributable to insufficient competition in the Canadian wireless market, which, I recall, is almost entirely deregulated.

In conclusion, I wish to emphasize that the policy direction almost completely contradicts the opinion of Canadian citizens. According to a recent survey, 70% of Canadians reject the idea that telephone companies should set their own prices without CRTC approval.

Thank you for your attention.

[The Chair, Conservative, James Rajotte]

Merci.

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

[Ted Chislett, President and Chief Operating Officer, Primus Telecommunications Canada Inc.]

Thank you, Mr. Chair. You all should have a copy of my comments and our submission.

Before I get to the specifics of why I felt it important to appear before you today, I want to take the opportunity to give you a thumbnail sketch of our company, for I fear we may not be as well known as some of the witnesses you've seen in the previous two panels.

Primus Canada is a national, stand-alone Canadian corporation with an all-Canadian management team. We're the largest full-service alternative service provider and one of the few remaining competitors in Canada independent of an ILEC or a cable company. Primus Canada serves about a million Canadians across all regions of the country. Primus Canada provides a full range of high-quality, innovative, and competitive services to Canadians. In our mind, we are what this government wants: competition.

Mr. Chair, Primus supports the objective of ensuring Canadians benefit from a strong, competitive environment that yields innovation, choice, and lower prices. However, Primus is concerned that as the directive is written, it may lead to the opposite: reduced competition. This is because the access networks, that last mile of cable going into Canadian homes, are a natural monopoly, like water, gas, and electricity distribution.

All competitors like Primus Canada need the access networks on which they provide competitive services to Canadians. This is a huge and insurmountable barrier to entry into the telecommunications industry for competitors like Primus. For a competitor, to duplicate the access network has an enormous cost, billions of dollars, and is entirely uneconomic, especially when a network already exists. It just doesn't make sense to duplicate.

For true competition to exist in the Canadian telecommunications industry, we need competitively neutral wholesale access regimes to these bottleneck facilities. These are the access networks that have been built through public rights-of-way over many decades under a monopoly guaranteed rate of return regime.

Otherwise, best case, there would only be two competitors left: the former monopoly telco and the former monopoly cable company, and in many cases only one monopoly access network: in remote regions, areas where the cable network is not two-way, and in most business areas where only the telephone network exists.

For Canadians to receive the benefits of competition in this important industry, we need many vibrant competitors who can innovate and compete, not a monopoly or a duopoly. We understand the cost to build these access networks in the first place and we understand we must pay to access these networks.

With wholesale access at cost plus a reasonable markup, we ensure that, first, a monopoly or duopoly will not persist; second, uneconomic entry will not occur; and third, and most importantly, a vibrant competitive regime can develop an ultimately true choice for Canadians.

With wholesale access, we support the deregulation of retail rates. We believe we will then be able to rely on market forces at the retail level because there would be true competition. But the wholesale regime cannot be left to market forces because it is not competitive.

There is also a need for special ground rules to prevent any competitive behaviour by the former monopolies. Just as it would be anti-competitive for Air Canada, knowing who has reservations on WestJet next week, to contact WestJet's customers individually and offer a special rate or incentive not available to the public at large, we'd have special rules in the telco sector where the competitors' customers can be easily identified to ensure that those with significant market power do not cross the line from competition to anti-competitive behaviour by these former monopoly players.

With a few minor changes to the directive, our concerns can be addressed. We've provided the suggested changes in the brief enclosed in the packages. We strongly believe these minor changes will ensure that viable, competitive entrants like Primus Canada will have what we need to provide competitive service to Canadians and will avoid the unintended consequence of decreasing competition in the telecommunications industry.

Thank you for inviting me today, and I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Chislett.

We'll go right to members. Dan McTeague for six minutes.

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

Chair, thank you for that, and witnesses, thank you for coming here again today on such short notice. I had a feeling when I asked the indulgence of the committee to look at this issue, even for a few minutes, it would certainly enlist the interest of a lot of the members and then find them in a field of engagement they probably had not anticipated without your presence here, so we thank you. We're deeply indebted to your comments.

On that note as well, considering the comments that have come forward, it seems to me the issue of the policy direction and the comments by the minister may very well provide a heavy hammer of interference with respect to the independence of the CRTC, notwithstanding the fact a regulation allows the minister to do that, but I think the concerns have been raised by some of you here, and they certainly speak to the test of whether or not this even passes the requirements of the Telecommunications Act.

I appreciate the comments you made to point out specifically where sections of the Telecommunications Act may be violated by the first, second, and third sections of this direction.

Mr. MacDonald, you referred a little earlier to the experience south of the border. Was it you who pointed this out?

My understanding now is that with the disappearance of the merger of MCI and AT&T, there is no doubt the Americans have now gone back to a point where they were in 1984 when the whole process of deregulation began, very much not because of the FCC's want. I hear another witness suggest it was because of FCC's decision, but it was because of a court decision that took place there.

I am wondering if you could give us a snapshot of what you would predict might be the future if this thing is rushed ahead and Parliament is not given an opportunity to properly debate this issue.

[John MacDonald]

We have included a report that is a fairly detailed analysis, in retrospect, of what's happened in the U.S. in particular with regard to a fairly substantial modification of the regulatory regime as it relates to wholesale access in particular.

What's really important is that we sort of tunnel down through the 10,000-foot view of some of the high-level objectives--you know, if you really want to get access to some of these customers, then why don't you build, why don't you just invest the capital, raise the capital to do it, and so on.

Also, the whole premise that all companies could invest in facilities, by virtue of the fact that some companies actually do invest in facilities, has resulted in an environment that I believe, ultimately, is going to minimize--and is minimizing--competition and competitive entry, particularly for enterprise customers in the U.S.

The environment is a little different when you talk about consumers, because we now have additional facilities-based players with cable entry in particular that have been able to offer additional choice. At least we have two fundamental providers in that regard.

Of course, the other folks, like Ted and his company, continue to fight the good fight in terms of offering a non-facilities-based access arrangement for customers as well.

The bottom line is that in the U.S., some very simple and what on the surface appear to be fairly logical arguments have led to a diminishment of competition. I would be very concerned that if you fast-forward in Canada to have the CRTC implement some of the proposals or the policy framework that's included here, it would result in the same thing. I think that having fewer competitive options is not a good thing for the competitiveness of Canadian business, let alone for the participants who are actually providing those competitive services to those customers.

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

The original panel had questioned, and sort of bore down on, the issue of significant market power. I think there has been an effective argument made here about the overarching concern as to who really wields it in a number of significant areas across Canada. You might have a different market in one region than in another. But to have a blanket approach that suggests that somehow we can throw these issues back to being a matter of competition, or that with the restrictions unveiled or taken away in the area of local telephone that somehow competition will re-emerge.... I think it's very clear that the examples demonstrate otherwise.

Perhaps I'll go to you, Mr. Janigan, since you deal with a lot of consumer groups in this country. I note that you've done a number of polls in the past. But the one that interested us as a committee--I believe my colleague Mr. Masse referred to it--was the number of Canadians who do not believe that wireless VoIP, whether or not the incumbents themselves may be involved in that business, and cable can in fact impact what local telephone companies can do. Is that a correct perception?

[Michael Janigan]

The majority of Canadians in our survey, which was done in September 2006, did not believe, essentially, in the premise of the CRTC test--which the incumbent telephone companies think is far too restrictive--which is that having one competitor, a cable provider, is sufficient competition. The CRTC test more or less boils down to having at least one competitor and a 25% loss of market share. The incumbent telephone companies believe this is far too restrictive.

In our view, this was a fairly liberal kind of decision by the CRTC. There's a whole body of economic literature that shows that in fact you need about four or five competitors of more or less equal size in order to have a workably competitive market.

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

Mr. Janigan, members in my party are very much concerned about the fact that there seems to be a guillotine date of November 3 coming forth. We believe, fundamentally, that this issue of having the minister make a decision by then, which he's capable of doing, should in fact be extended. I'd like to get the opinion of every one of you here. Do you believe we should extend this?

[The Chair, Conservative, James Rajotte]

Dan, you have ten seconds left.

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

Maybe we can have just a yes or no.

[Witnesses]

Yes.

[The Chair, Conservative, James Rajotte]

Thank you.

That was very helpful.

Go ahead, Monsieur Crête.

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

I'm going to continue in the same vein as Mr. McTeague.

You said that, if the committee requested an additional six-month period to study the direction before giving the minister an opinion, you would all be in agreement, despite the complex nature of the situation.

I'd like each of you to tell me what principal amendment he or she would like to see made to the direction as it is presented by the minister. If you feel it should be completely set aside, tell me that as well. So I'd like to know whether there is a principal element that you would like to see different.

We could begin with Ms. Léger.

[Sophie Léger]

We at the Coalition believe that the general recommendation that there should be free market access is valid for every existing business because we believe that competition ultimately always protects consumers.

However, the documents we've submitted to the committee contain three recommendations.

Core facility suppliers—like us—must have access to infrastructure at fair and reasonable rates as long as there is no competition. A duopoly is not competition, in our view.

We must also have access to services depending on their evolution and technological advancement. Today, we are limited and do not have access to all new very high speed or even very low speed services.

Lastly, regulation will be necessary as long as incumbents—and we include the cable and telephone companies here—do not have equal power and market share.

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

Thank you.

Ms. Duchesne.