Industry Committee on Feb. 7th, 2007

[Kenneth Engelhart]

People forget how recent our entry into the telephone market has been. A whole bunch of companies went into the telephone business in the late 1990s and early 2000s, and they all went bankrupt. In 2002-03 we were all scratching our heads wondering what was going to happen. EastLink entered the phone business using a technology that's different from the one we all used. As Mr. Lavoie said, we've used IP technology. We all entered this business around 2005. There has been an astonishingly rapid rollout of service, and we have those rural areas in our sights, but we haven't got there yet.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

I have limited time here. You're the anomaly here in terms of the embracing of the minister's variation decision. Could I ask for some comment from those who did embrace the minister's variation order and are now not necessarily moving down that path?

[The Chair, Conservative, James Rajotte]

Mr. Brazeau.

[Jean Brazeau]

We certainly embraced it, and we still do. The issue we raised today was that the devil is always in the details and the details for us are interconnection. We're a facilities-based carrier. This policy, this minister, this government are promoting facilities-based competition. We just want to make sure that when we call the incumbents and say, by the way, we want to interconnect to Vancouver, Victoria, or Red Deer—pick a city—they don't come back and say, yes, but it'll be a year before we get there. We want them to say, yes, and we'll do it quickly. If it were the Royal Bank or the Government of Canada calling, that interconnection would happen very quickly. We just want the same considerations when we're calling to interconnect our network.

[The Chair, Conservative, James Rajotte]

Thank you.

[Luc Lavoie]

I'd go along the same lines. Essentially we have supported the minister quite strongly. We were asked to make some recommendations as to how we should proceed so that it would be done in an orderly fashion. We made some recommendations, but overall it hasn't changed the basis of our position. Our basic position is that the market forces are what is best for Canadians at the moment because the prices will come down, the services will improve--and we strongly believe that.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Shipley.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chairman.

Welcome back to a number of you who have been here before. I look forward to the questions that are still to come, even though I guess we are running out of time.

I want to go to you, Mr. Engelhart, regarding the winbacks.

It's been estimated in every telecommunications market in Canada that it's really about prohibiting the ability to call back, as you've mentioned, within 90 days. The telecom panel, I think in its March report, talked about how making offers and counter-offers to the same customers is the very essence of competition and, in general, how winback campaigns should not be restricted by the regulator. I'm wondering if you could make a comment on that.

[Kenneth Engelhart]

Of course, in a normal competitive market, these sorts of things are perfectly natural. Even in a communications market where competition has had a chance to become established, I think that the winback rules enhance competition. The trouble is that when you're dealing with a market that has a 100% telephone company monopoly, a monopoly that's been there for 100 years, what happens is that when a new entrant goes into that new market it costs them maybe $300 to acquire a subscriber--a common number--because they have to roll out a truck, install equipment, do advertising, and what have you. When they call that customer up and give them $400 to come back, and that happens to your second, third, and fourth customer, and maybe you lose two out of three of those people, now it's costing them maybe $1,000 to acquire a customer. The project never breaks even. You always lose money, and at some point you give up.

That's what monopolies will do to try to hang on to a monopoly in a market. That's why the CRTC has had these winback rules for cable television and the long distance market, and they've worked. Once the competition gets established, you get rid of the rules, as they did for the long distance market, and customers benefit.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

You've been in business, you're actually a substantial company, I think, worth $23 billion. Are you concerned about regulatory protection to keep you competitive?

[Kenneth Engelhart]

If you would indulge me, let me read to you what Bell said about the winback rules in the cable market. This is a statement they made on January 28, 2005, in a publication called Canadian Communications Reports, a statement by the director of regulatory matters supporting the winback rules in the cable market.

They said:

You invest a lot of money in a building to put a facility in there, to market to the building, and so on. When you make that investment, you have to count on a certain penetration just to break even, he notes. It really doesn't matter if it's a TV service or anything else. When you're selling to a building, you have to count on a certain penetration level just to break even. If you open a donut store or something in the lobby, you have to assume a certain volume of sales to make your presence worthwhile. And if the donut store next door came along and suddenly said, “Don't buy donuts from him, I'll give them to you for half price”, you have no opportunity then to make a business. So are you going to go into another building and lose money there too? The cable company can chase you all over town until you run out of money. (The revised winback rule) is another measure that the commission has put in place to give competition an opportunity to get established...It's only a 90-day opportunity to prove to customers that you have the ability to provide the service they want.

So that's Bell—big company, big satellites already launched—and they felt they needed that protection just to get established, and they still have that protection today.

I agree with you, sir, that protectionism is something that normally makes us all question whether the regulator is doing the right thing. But this formula of having winback rules in place has worked. I'm concerned that we're going to come to some small market five years from now that won't have phone service, because of the elimination of these rules.

[The Chair, Conservative, James Rajotte]

Last question.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I was going to get some comments on it from some of the others.

Just one. In our position, we've asked for support for Bill C-41in terms of the competitive productive practices. The opposition obviously is not supporting that. We want to get it moved as quickly as possible. If it were passed, do you believe that would maintain the fair practices in the telecommunication market?

[The Chair, Conservative, James Rajotte]

Quickly. We'll go down the line.

[Kenneth Engelhart]

The Competition Bureau really can't help in the telecommunications market because their procedures and their practices take too long. They take years and years. They're not designed to take a monopoly market to competition. Quite frankly, they won't even begin their investigation until you're bankrupt.

[The Chair, Conservative, James Rajotte]

Mr. Shipley, your time is up. I'm sorry.

Anyone else want to comment further to Mr. Engelhart? You all agree?

[Yves Mayrand]

I would add that we are on record as saying it really doesn't make any difference for administrative monetary penalties to be added to situations of abuse of dominance, for the very simple reason that history shows that this particular tool under the Competition Act as it exists--i.e., abuse of dominance--is so complicated to prove and so long to bring to a head that it really doesn't make any difference whether you add monetary penalties or not.

[Jean Brazeau]

I think Shaw is of the same view, that the tool is too blunt a tool to really be effective in the telecom sector.

[The Chair, Conservative, James Rajotte]

Monsieur Lavoie, do you have any difference of opinion?

[Luc Lavoie]

I concur with my colleagues.

[The Chair, Conservative, James Rajotte]

Thank you, gentlemen, for appearing. I apologize for the shortness of time. It was a very good discussion. We appreciate your being with us here today.

We are going to suspend for two minutes and have the witnesses come to the table. We'll suspend for a couple of minutes, members.

[The Chair, Conservative, James Rajotte]

Members, we are into our second hour, and we have our second panel, consisting of the competitive local exchange carriers.

We have three witnesses before us today. First of all, from Primus Telecommunications Canada, we have Ted Chislett, the president and COO. Secondly, from MTS Allstream, we have Chris Peirce, the chief regulatory officer. Thirdly, from Vonage Canada, we have Joe Parent, vice-president of marketing and business development.

We'll start off in the same order, beginning with you, Mr. Chislett, for your opening statement.

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

Thank you very much for inviting me here today. You probably have copies of my presentation, if you want to follow along.

Today, in the short time I have, I would like to impress upon you the need for a wholesale access regime and ongoing regulatory oversight to monitor and react to those players with market power, post-deregulation. This is necessary to ensure that a competitive retail market exists and that impediments to competition do not develop.

By way of background, Primus Canada is the largest alternative telecommunications service provider in Canada that is independent of incumbent telephone or cable companies, with approximately one million customers.

Some appearing before you may say there already is lots of competition in the local market in Canada. I say not to be misled by the extent of competition or the reasons for it. All competitors are reliant on either the telephone or cable companies' local networks to deliver local broadband and other services to their customers. The extent to which vigorous competition exists in local and broadband services from players such as Primus and others is a direct result of the current CRTC policies and its mandatory wholesale access regime.

The local access network is different from other areas of telecommunications like long distance, because it is a “natural monopoly”, like electricity, gas, and water distribution. The cost for competitors like Primus to overbuild this last mile network by digging up the streets and backyards is enormous, and it's an insurmountable barrier to facilities-based entry.

For Canadians to receive the benefits of telecom competition, we need many competitors who can innovate and compete, not a monopoly or a duopoly. A workable wholesale access regime will foster vibrant retail competition and thereby enable the reliance on market forces, eliminating the need for retail rate regulation and tariffs.

However, after retail forbearance, even with wholesale access, we are still very concerned about the continued market power of the ILECs and cable companies. We are concerned that their market power could unduly impair competitive forces in the market, resulting in higher prices, less innovation, and lower quality of service. Therefore, an ongoing oversight role is required to ensure that the actions by dominant players, either individually or jointly, will not unduly impede competition and be detrimental to the objectives of the Telecommunications Act. This oversight should normally be non-intrusive, but the CRTC needs to retain the power to step in and intervene if necessary in order to promote the telecom objectives.

Here are some examples. I think everyone would agree that if the ILEC were to call every customer who switched from their service and offered them $1,000 to switch back, this would be anti-competitive. While we haven't seen $1,000 credits yet, customers joining our competitor are called, and we have seen offers of over $400 credits. We have also seen long distance credits applied to the customer's local bill, which violates the CRTC's rules.

As another example, if service is consistently worse for wholesale customers than for the dominant player's own retail customers, potentially penalties or even institutional separation may be required.

Guidelines may also be required for promotions. Short-term service discounts or incentives are part of a competitive environment, but it would not be fair if returning customers were offered lower long-term rates not available to customers who did not leave the ILEC. This would establish two classes of customers, which would be unjust.

Intervention may also be required if retail rates are lower than the wholesale rates or if services are not made available to competitors for resale. Also, it may be necessary to mandate network neutrality, prohibit blocking of content, and define what level of packet prioritization is acceptable.

This oversight is broader and more specific than general competition law, as it is concerned with the telecom objectives and fostering an environment to stimulate innovation and competition in an industry of natural monopolies. The CRTC, as the industry's regulator, is needed to provide this oversight.

In conclusion, as the telecommunications industry moves from economic regulation to deregulation, there is a need for a workable wholesale access regime and ongoing regulatory oversight to monitor those players with market power and ensure that Canadians can benefit from competition.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Chislett.

We'll go to Mr. Peirce.

[Chris Peirce, Chief Regulatory Officer, MTS Allstream Inc.]

Thank you.

MTS Allstream is a leading national communications solutions provider. In Manitoba, we are the incumbent, and we now face competition from Shaw. We are unique among the former monopoly providers in that over half our revenues come from having committed to a growth strategy defined by expansion from coast to coast, where we have none of the clear advantages of incumbency. Nationally, we are the leading provider of competitive solutions to Canadian businesses, whether they be small, medium, or large.

By definition, then, we endorse the objective of achieving fully competitive markets as serving the best interests of Canadian customers. Competitive market forces will bring faster innovation, customer choice, and competitive pricing. Market forces that are not competitive, where one dominant player is free to exercise its market power, will slow innovation, bringing less customer choice and inflated pricing. Importantly, we also support the policy direction issued in December by the government. In its final form, that policy direction responded positively to the concerns we raised before this committee.

We cannot support, however, the proposed order dealing with forbearance. In its current form, that proposed order strikes at the very core of the conditions under which the CRTC may or must not grant forbearance, per the Telecommunications Act.

The proposed order offers a choice of two tests to an applicant seeking retail deregulation. The first is the test referred to Monday by Sheridan Scott, the Commissioner of Competition. It is multi-pronged and, while ambiguous, at least considers the presence of market power, including reference to market share, the number of competitors offering service, and active rivalry, all to determine if competitive market forces are present. But the second choice is a test that ignores all of these attributes of competitive market forces and merely calls on the regulator to count the number of providers apparently offering service: two facilities-based providers and, for residential markets, an additional wireless provider.

Clearly, no former monopoly in its right mind will choose Ms. Scott's test. To be deregulated in the local market without having one's market power even considered, as per the second test, is manna from heaven for the former monopolies, not for consumers.

Just as clearly, the second test, which I'll call the mere presence test, is contrary to the approach specifically recommended by the telecom policy report, that deregulation should only occur where significant market power was found not to exist.

The mere presence test is also inconsistent with the policy direction, which recognized the ability of the former monopolies to exercise market power in the retail market, absent an updated essential facilities regime for competitors, and which directed the CRTC to put such a regime in place, a task that won't be completed until 2008.

Our detailed comments submitted to the government in response to the proposed order point out that the mere presence test is fundamentally incompatible with competition law. Nowhere else in the world, save in the now re-monopolizing U.S., would regulators consider deregulating an incumbent without looking at the actual state of competition in the market. Further, and as was alluded to Monday by Richard French, the mere presence test is unworkably vague.

Most importantly, we are concerned with the legality of the proposed order, which supplants the statutory obligations of the CRTC with the mere presence test. The proposed order effectively repeals subsections 34(1) and 34(3) of the Telecommunications Act.

Obviously, cabinet cannot itself amend the statute. In our respectful view, the measure proposed will not withstand judicial scrutiny.

Despite our wholehearted endorsement of the objective of competitive market forces and attendant retail deregulation, we can't support the proposed order. The existing forbearance decision offers more certainty and is, frankly, more streamlined.

Thank you.