Industry Committee on Feb. 5th, 2007

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

I am simply asking you to think about this. Our discussion has not been guided by logic. This has distorted the amount of time each member may speak. I am not asking for an immediate decision, but I am asking you to think about it. We'll come back to this once the witnesses are gone, so that we may keep our commitment. If you move the goal posts around, you change the rules.

[The Chair, Conservative, James Rajotte]

We'll raise that at a meeting on future business. Thank you.

I don't know if we'll need to suspend. We have all the witnesses here.

We welcome Ms. Sheridan Scott, Commissioner of Competition from the Competition Bureau. Welcome, Ms. Scott.

Also from the Competition Bureau, we have Mr. Richard Taylor, the deputy commissioner of the civil matters branch.

As with the last witnesses, we have allotted you an opening statement time of up to ten minutes, and then we will go directly to questions from members.

Ms. Scott, you'll be starting off.

[Sheridan Scott, Commissioner of Competition, Competition Bureau, Department of Industry]

Thank you very much, Mr. Chairman and members of the committee.

I'm pleased to have this opportunity to appear before you today to discuss recent developments concerning regulation in the telecommunications sector. As Mr. Rajotte mentioned, I'm accompanied today by Richard Taylor, deputy commissioner of competition in the civil matters branch of the bureau.

In my opening remarks I would just like to highlight the bureau's position with respect to telecommunications deregulation and the steps the bureau is currently taking to prepare itself for the coming changes in the telecommunications regulatory environment. As you would expect, the bureau strongly supports efforts to place greater reliance on market forces in this vital industry.

The bureau has a long history of engaging itself in the debate about telecommunications regulatory reform. Under section 125 of the Competition Act, the commissioner has a statutory right to make representations and to call evidence before federal boards, commissions, or tribunals in respect of competition in relevant proceedings. This power of intervention has been used extensively by the bureau over the years in a number of industries, but in none more extensively than in telecommunications. Since 1990, the bureau has made 65 interventions before the CRTC, including full participation in the 2005 local forbearance proceedings.

The bureau's objective has always been the same. Our role is to encourage regulators to adopt approaches that rely to the greatest extent possible on market forces. Where regulation is necessary, the bureau has advocated that regulation be at the minimal degree necessary to achieve the objectives of the regulator.

Over this period of time, the Bureau has advanced several guiding principles which we believe provide an effective framework for deregulation.

Where competition in an industry is feasible, that is, when it is not a natural or government monopoly, one should move to rely on market forces as soon as possible.

Second, where continued regulatory oversight is required, one should adopt the regulatory model that emulates market outcomes as closely as possible.

Third, where regulation has distorted the prices, regulators should move quickly to ensure that prices reflect the costs of providing the service.

Fourth, if new entrants do not have market power, they should not be regulated.

Fifth, former monopolies should be deregulated as soon as market conditions are such that you have sustainable and effective competition to protect consumers.

Sixth, the period of transition, where some market participants are regulated while others are not, should be no longer than necessary.

As the telecommunications policy review panel noted in its final report, the telecommunications sector has evolved through technological change and innovation to a point in most markets where it is now safe to move away from continued regulatory oversight and to begin to place greater reliance on market forces. Indeed, competition has already replaced regulation for a number of telecommunications services, such as long distance, the Internet, and wireless. Local telephony is the next step in this transition.

As deregulation continues, the bureau will have an increasing role in encouraging and maintaining competition in the telecommunications sector. This means that it will be competition and market forces, not a regulator, that will discipline the activities of the industry and will determine prices and levels of service. The bureau's role will be as it is with any industry: to intervene only in those specific circumstances where anti-competitive conduct threatens the proper functioning of the market. It will not consist of ongoing regulatory oversight.

Nonetheless, the bureau anticipates that it will initially see an increase in the level of complaints in this industry. In this regard, we have been developing and refining our tools and resources. The bureau recently supplemented its general abuse-of-dominance enforcement guidelines with a draft information bulletin on abuse of dominance in the telecommunications industry. This document sets out the specific types of conduct the bureau believes could result in enforcement action under the act. The purpose of this bulletin is to provide clarity for industry participants on the conditions that must be met under the Competition Act before the Competition Tribunal can issue a remedial order. The bureau has recently completed its consultations with interested parties and is in the process of finalizing the bulletin for release later this spring.

As a final point, I would note that the TPRP recommended that the Bureau and the CRTC collaborate on finding ways to make the best use of our respective areas of expertise. In this regard, even before the publication of the panel's final report, we were working to improve the level of cooperation between our two agencies. Subsequent to the release of the final report, we put in place a working group to follow up on the panel's recommendations. This provided a valuable forum for the Bureau to draw on the expertise of staff of the CRTC as we developed the Telecom Abuse Bulletin. Subject to the limits imposed by the existing legislative framework, we believe that there is scope for even further cooperation and information sharing and I look forward to working with the new chair, Konrad von Finckenstein, in this regard.

We would be pleased to answer any questions that the members may have. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Scott, for that presentation. We appreciate that.

We will start with Mr. McTeague, for six minutes.

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

It's great to have you here, Commissioner, and congratulations, belatedly. I never had a chance to sit on this committee when you were elevated, and I want to take the time to thank you for the good work you've been doing.

There are a lot of documents and information here that have never been made public, although they've been shared. The order itself by the minister has a number of effects. The first is, of course, it would eliminate two very common tests that are used to assess market power, the first being market-share loss, and the second being evidence of rivalry, with a much more rudimentary competitor presence test.

Given the time it takes to argue or to bring before the bureau a case dealing with abuse of dominance, is it fair to say that these tests, including the fact that the competitor presence test, would no longer have a structured rule of reason paradigm? How do you propose to be able to stop or arrest an anti-competitive abuse-of-dominance situation in a given market, especially given that there's been no market analysis, which usually follows in every other OECD country prior to deregulation taking place?

[Sheridan Scott]

There are two aspects to your question, first with respect to the tests that are being proposed in the variance of the CRTC's decision. One of those tests is a test that we, the Competition Bureau, developed ourselves to assist the CRTC that was looking for an administratively streamlined and efficient test to apply to determine whether there should be forbearance in the market. So we tried to use our expertise to develop what could be a relatively straightforward test for forbearance purposes, and we believe that's a test that does incorporate many of these elements you're speaking about. It has a rivalry dimension to it; it looks at the nature of the competition between the parties in the marketplace. So that is going to be one of the tests that is available.

With respect to looking at abuse of dominance, should those issues come to us once there is deregulation, following a forbearance order by the CRTC, then we will obviously use the traditional tools we have at our disposal. Richard may wish to add some comment to what I'm talking about. He is responsible for that.

I would say when we are focused in a market, we can move with huge speed. I know some of the parties that have been speaking to you have suggested we take many, many years to carry out our work. I'm not sure that's an accurate description. When we have a major issue before us and we put the resources on it, we can work in a fairly expeditious timeframe. For example, when we had one of the major complaints in the airline industry, we were able to investigate the entire issue in a process of five months. We were able to obtain relatively speedy injunctions where we felt that was necessary.

For the last year, Richard has also been very active in streamlining how he comes at abuse-of-dominance complaints, and this is across all industries we regulate. I think we will be able to put our resources on this issue if we need to and be fairly quick in the marketplace.

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

Madam Commissioner, I am familiar with the airline regulations. I was responsible for getting them before this committee back in 2001, but that was in response to a real dramatic perception that there was a loss in competition, whereas this may be very much a manufactured loss of competition at a time when I think we're trying to ensure long-term competition.

The order eliminates market-share considerations, as you know, and proposes to deregulate the telephone companies based on the mere presence of one wireline competitor in an area. This is of course the so-called competitive facilities test. It's our understanding that you would not agree with this test. In the hearing that led to the CRTC decision and the order overturning the bureau, I think it's clear you made the point that telephone companies would have to lose market share before it would be appropriate to deregulate them. You've done an analysis on this statement, from what I understand, accompanying the proposed order references?

[Sheridan Scott]

Our traditional position, which we've articulated over the years, is that market share is actually not determinative of such matters. Indeed, the Competition Act stipulates that we should not rely on market share to determine the state of competition in a particular marketplace.

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

You have six tests, however, to make that determination. I won't go through all of them.

[Sheridan Scott]

Yes.

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

The entrant must be able to obtain and retain a customer base. There is, of course, one issue that's not been raised here: it's the question of winability. If someone gets into and uses their deep pockets to basically buy customers back before the new entrants have a chance to even start, how would you propose to stop the possibility of and real potential for re-monopolization of this industry, despite significant presence in very specific markets across Canada where there may be two or three competitors—and those tend to be in urban areas?

[Sheridan Scott]

We don't protect particular competitors. We're interested in protecting the competitive process. When we look at an issue such as targeted reductions, we would be looking at whether they were going to result in a substantial lessening of competition in the marketplace. The way we would look at the targeted discounts that might be offered is within the same terms as we would use in looking at targeted pricing.

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

But the rule of reason test has been put aside in favour of merely a competitor presence. I don't even have to have a customer, and you're prepared to accept that—you must be prepared to accept it—as effective, vigorous competition.

[Sheridan Scott]

I think there are two different tests going on here. One is the test with respect to forbearance by the CRTC, and that's the test you're referring to—the three-by-three test. Then, a second test included in the same document is our streamline test. With respect to our work in the civil matters branch, we would use our traditional tools that are used to do a competition assessment.

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

I've had many commissioners come before this committee saying we need more resources to do our job, since these are on a case-by-case basis. I appreciate the fact that you can do this. We didn't hear much from Mr. French. He was unable to talk about the legislative difficulties of constructing two regulatory authorities together.

How do you propose to do this, given the limited resources you have? Where are you going to take it from, in other words?

[Sheridan Scott]

We have a process of prioritizing the use of our resources. Certainly telecommunications is an area where we believe we'll be prioritizing our work in the coming period of time. We believe we have sufficient resources to deal with those issues.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Scott.

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.

In your document you list seven criteria with regard to deregulation. It begins as follows: "Where regulation is necessary, the Bureau has advocated that [...]".

Do you feel that the minister's current decision, according to which local telephone services did not need to be regulated, is based on actual facts?

[Sheridan Scott]

What part of the document are you referring to?

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

In the paragraph preceding the list of criteria, you stated: "Where regulation is necessary [...]".

Normally, it's the CRTC that decides whether regulations are necessary, but the minister decided to go beyond his own powers.

Do you know if the minister's decision is based on some study to determine whether there currently is real competition in the local telephone service market?

[Sheridan Scott]

No, not that I'm aware of. In the current context, we do not give advice to the minister. Because we took part in the hearing before the CRTC, we recuse ourselves from any discussions about changing the CRTC decision. I'm not at all aware of the minister's analysis.

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

All right. Do you have any analysis indicating that right now, in the area of local telephone services, there is sufficient competition, or is there a monopoly or a duopoly?

[Sheridan Scott]

We did not examine that question. That was not before us. We described and attained what we thought was reasonable in the process before the CRTC. Given the evolution of the market over the past 18 or 24 months, our criterion probably conforms with market conditions and is not very different from the other criterion regarding competitive infrastructure, I believe.

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

In many regions, they were determined by the minister. There will be three players on the market. Right now, between 90% and 99% of the market belongs to one of these sectors. Does that market seem competitive to you?

[Sheridan Scott]

It could be.