Good afternoon. I'd like to thank the honourable members for the opportunity to appear before you today.
I'm a professor at the University of Calgary in the Department of Economics, and also a fellow of the Institute for Advanced Policy Research at the University of Calgary, where I coordinate the markets institution and regulation working group. I have some expertise, having been involved in the telecom wars for at least 12 years, typically as part of the Competition Bureau's telecom team. I was there in 1995-96 as the T.D. MacDonald Chair in Industrial Economics—I happen to have theoretical expertise in network economics—and that was when we were figuring out decision 97-8.
I'm here to talk to you about a couple of things in my opening statement. The first is that when we think of the order by cabinet on overturning the local forbearance decision, there are two issues we have to be aware of.
The first is the institutional context of this decision. In general, for a minister to overrule the regulator has very undesirable implications. On the other hand, if the regulator has made a decision that is sufficiently out of touch, or inefficient, or harmful to consumers, then we have to ask, “How did we end up with a regulator who would make such a decision?” In that case, there are just fundamental problems at the CRTC and with the Telecommunications Act.
The second issue, of course, is assessment of the CRTC's forbearance decision framework and those four key elements.
To understand some of the dissatisfaction I would have with the CRTC's decision framework, you have to recognize two interesting things about this decision. The first is that the nature of the proceeding is all about downward price flexibility. It's about the incumbent local exchange carriers, the ILECs, being allowed to reduce their prices. The existing regulatory regime makes it either impossible or unprofitable for the ILECs to lower their prices to meet competition.
The second issue that dominated the proceedings was the incentive for anti-competitive conduct. That's related to this issue of the lowering of the prices by the ILECs. The worry was that there would be anti-competitive conduct by the ILECs. That worry is whether the dangers are sufficiently legitimate that we should have ex ante prohibition on the behaviour of the ILECs or whether we should have an ex post approach.
The second issue, which I think is probably more important to Canadians, but which was certainly second in the list of things that went on at the hearing, is the question of when competition is sufficient to replace regulatory constraints on the ILECs' market power. What we mean by that is, when is competition sufficiently developed that we can reduce the caps on the prices, so that instead of a regulator holding prices down, competition is sufficient to hold the prices down?
The point of the proceeding was to come up with an expedited process that was administratively simple. When you think about administratively simple processes, what you have to take into account is errors.
There are two things you have to worry about in terms of errors. You have to worry about the probability that you're going to make an error, which is that you forebear when you shouldn't have forborne or you don't forebear when you should have forborne, and you should worry about the costs of those errors. You should take into account the probabilities that your decision framework is going to result in error, and you should also think about what the cost of those errors might be.
The second thing to think about in terms of that proceeding is that we've had this IP revolution; we've had convergence. The old, hybrid model that the CRTC has tried to create, coming out of decision 97-8, simply doesn't work. It's irrelevant; it was an experiment that has failed. We now have competition between networks, and the CRTC needs to institute a regulatory framework that recognizes the competition between networks and the importance of the launch of digital telephony by the cable companies.
Concerning competition between unregulated broadband networks, the old model simply did not work. It was a nice experiment to try, but it was very hard to get it right. We tried very hard to get it right. The CRTC bent over backwards to try to support the CLECs under the old model. It doesn't work.
The CRTC in this decision was very much worried about anti-competitive behaviour. They thought about the conditions for forbearance and in doing so made the conditions for forbearance, in my opinion, far too difficult. What they did is adopt the CTCA's argument to have very large geographic regions. If you have those very large geographic regions based on a high market share threshold, you're going to delay or potentially eliminate the possibility for forbearance.
The market definition principle that the CRTC used is fundamentally at odds with good competition policy and good economics. The 25% threshold is also irrelevant, if you think about competition between competing networks. The role market share plays in assessing the nature of competition is to ask, if one firm tried to raise their prices, what would happen to their customers? If you have two competing networks and one firm tries to raise their prices, the question to ask is, how easily can those consumers switch to that second network? Is there capacity available on that second network? Does the second network have low prices?
In that respect, when you have competition between two networks that are offering very similar services, the market share measure that is relevant is market share in capacities--in terms of how many broadband pipes or access to the telephone network there are into that house or that location.
In general, I would say that the minister's order is a welcome and refreshing change to what the CRTC had proposed. I note that the price ceiling remains, so what the decision or the order allows is for the incumbents to have some downward price flexibility. That downward price flexibility will benefit consumers, it benefits the ILECs, and it stops protecting the cable companies.
There are three things about the minister and the bureau's test that are interesting. One is that it's a step away from what the ILECs have traditionally argued for. I've spent 10 years fighting the ILECs. They have always argued that it was enough for potential competition if we lowered the barriers to entry. That was enough to deregulate. Finally, now, we have a test that is based on actual competition. Not until the cable network is available and supplying digital telephony, which has been shown to be equivalent to the ILECs, is there going to be deregulation.
There are three things about the minister's test, which is essentially, as far as I can see, the bureau's test, that are very controversial, and I'd be happy to answer questions about. The first is, in general, we would think that two is not enough for competition. We've heard this duopoly problem--two is not enough. Well, sometimes two might be enough, especially when the trade-off is between imperfect competition and imperfect regulation. You might want to look at the characteristics of that industry to see that this is a case of when two might be enough.
The second thing I'd be happy to answer questions on is the potential for tacit collusion or coordinated conscious parallelism. When we get this nice cozy duopoly, why do we think they won't act like a monopolist?
The third thing, of course, is the ex ante. Why do we think there may not be such strong incentives for anti-competitive behaviour? The ex ante costs of prohibiting this anti-competitive behaviour are very high, and an ex post approach, after we actually realize it and do a fact-based incentive to see if it actually happened, may be a preferable approach.
Thank you, Mr. Chairman.