Mr. Allan MacGillivray
Executive Director
Telecommunications Policy Review Panel Secretariat
280 Albert Street
Room 1031
Ottawa, Ontario
K1A 0C8
Dear Mr. MacGillivray:
Please find attached a revised version of the Commission's Discussion Paper
prepared for the Telecommunications Policy Review Panel, amending paragraphs 173
and 193. This version replaces the original version sent on 15 August 2005.
Encl.
Mr. Allan MacGillivray
Executive Director
Telecommunications Policy Review Panel Secretariat
280 Albert Street
Room 1031
Ottawa, Ontario
K1A 0C8
Dear Mr. MacGillivray:
The Canadian Radio-television and Telecommunications Commission is pleased to
present the attached Discussion Paper prepared for the consideration of the
Telecommunications Policy Review Panel.
The Commission hopes that its Discussion Paper will assist the Panel in its
deliberations.
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CANADIAN TELECOMMUNICATIONS
POLICY REVIEW
Discussion paper
Canadian
Radio-television and Telecommunications Commission
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Introduction
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1. |
The Telecommunications Policy Review provides an
important opportunity for Canadians to take stock of where we stand in the
global information society, to assess the adequacy of our telecommunications
infrastructure to meet the future needs of both individuals and businesses
throughout Canada, and to consider whether our current policy and regulatory
framework could be improved to better satisfy these requirements. |
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2. |
The Canadian Radio-television and
Telecommunications Commission (the Commission; the CRTC) welcomes this
initiative by the Government of Canada and hopes that it will generate an
informed and stimulating discussion of these important issues. |
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3. |
Telecommunications, like transportation, has
always been of vital importance to Canadians.1
Due to our vast geography and relatively dispersed population, it has
provided an important link, both socially and economically, in the life of
our nation. Now, more than ever, it provides the foundation for Canada's
participation in the global information market, and is providing new
opportunities for Canadians in all regions of the country to participate in
the "new economy", regardless of their location. |
|
4. |
Despite the complexity of the issues before the
Telecom Review Panel, and the numerous important questions raised in its
Consultation Paper, there is likely broad-based support for some very
high-level objectives: Canadians want access to high quality
telecommunications services at reasonable prices; Canada wants to be at the
forefront of technology development; and we want to participate fully in the
new economy. |
|
5. |
The big question for the Telecom Review Panel is
- how best to achieve these important social and economic objectives. |
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6. |
As the independent regulatory agency created to
interpret and apply Canadian telecommunications legislation over the past
three decades, the Commission is in a good position to shed some light on the
regulatory implications of possible legislative reforms. |
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7. |
With this objective in mind, this paper
discusses the evolution of telecommunications legislation in Canada and the
manner in which it has influenced the regulatory framework. It examines what
has worked and what has not. It looks at where we stood in 1993 when the last
major rewriting of the telecommunications legislation took place, at where we
stand now, at what has been accomplished and at what remains to be done. Are
the time-honoured principles of universal service at just and reasonable
rates still relevant in 2005, or can they be dispensed with? Should incumbent
telephone companies be released from their obligations to serve, or from the
statutory restrictions on discriminatory or preferential rates or terms of
service? Do consumers need additional protection from carriers' commercial
practices - or will the laws of general application suffice? Should carriers
and service providers who are denied access to other carriers' networks be
able to seek relief from an industry-specific regulator - such as the CRTC -
or will the courts or the Competition Tribunal better serve the public
interest? |
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8. |
The Commission hopes to advance the debate on
these and other issues by identifying some of the alternatives available and
the possible implications of pursuing them. |
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Where have we come from and where are we headed?
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9. |
Before looking to the future, it is useful to
look to the past to see how our approach to telecommunications regulation has
evolved over the years. This exercise has merit because it helps to explain
certain attributes of our current legislative framework. It assists in the
process of matching historical policy objectives with statutory provisions
and provides an intellectual framework for considering whether the policy
objectives in question remain valid in today's environment. It is useful to
look back to see whether the relevant statutory provisions have worked as
originally intended. Within this framework it is also possible to consider
whether alternative legislative provisions, or the laws of general
application, would better fulfill the relevant policy objectives. |
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10. |
In carrying out this exercise, it is important
to understand that a statute is the formal expression of a legislative
policy, and that before a statute can be drafted, the policy sought to be
implemented by it must be determined.2
It is then up to legislative drafters to ensure that the legislation
accurately reflects legislative policy and it is up to the courts, or
designated regulatory agencies, to interpret and apply the legislation. |
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11. |
One must therefore be careful not to put the
cart before the horse in deciding what needs to be changed in any given
instance. Is it the legislative policy that is no longer relevant? Is it the
legislation itself which fails to give effect to a relevant legislative
policy? Or have the CRTC, or the courts, misinterpreted the legislation in a
manner that thwarts or fails to achieve the legislative intent? |
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12. |
These are questions that need to be asked when
addressing the adequacy of our existing telecommunications legislative and
regulatory framework to meet Canadian requirements in the next decade. Before
altering the wording of specific sections of the Telecommunications Act,
or before dropping long-standing provisions from the Act, one needs to
be sure of the underlying policy objective that is being advanced and one
needs to assess whether it remains valid today. Only then can intelligent
debate take place as to the various options available to best give effect to
that policy. |
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13. |
The Commission itself is a creature of statute.
It deals with the legislation as drafted and tries to give effect to the
policies expressed in it. The breadth of discretion afforded the Commission
in its administration of the Telecommunications Act varies
significantly in different sections of the Act from a very broad
discretion to determine whether carriers' rates are "just and reasonable", to
virtually no discretion in respect of foreign ownership restrictions. When
parties affected by Commission decisions believe that the regulator has
exceeded its statutory powers, or has misinterpreted the governing
legislation, the courts act as a check on its compliance. When parties
believe that the Commission has misinterpreted the telecommunications policy
objectives underlying the Act, they have the option of petitioning the
Governor in Council to vary, rescind, or refer back for reconsideration the
Commission's decision. The Governor in Council may also do this on its own
motion and has the additional power to issue directions to the Commission in
respect of broad policy issues. While never utilized in respect of
telecommunications, this latter power provides the government with an
opportunity to clarify government policy on issues not clearly delineated in
the legislation itself. |
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14. |
The governing legislation is therefore central
to the Commission's role as the principal regulator of Canadian carriers, and
to a lesser extent, of telecommunications service providers. It defines both
the extent of the Commission's jurisdiction and the extent of the regulatory
or legal powers available to the Commission. It provides guidance on policy
through the specific objects in section 7 of the Act, as well as
through the wording of specific sections. |
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The Evolution of Canadian Telecommunications Policy and Legislation
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15. |
At a high level, the Canadian telecommunications
sector can be characterized as having evolved over the past century from a
monopoly towards a more competitive structure. The applicable
telecommunications legislation can be viewed as having embodied the rules
necessary to pursue certain government policy objectives and to balance the
interests of telecommunications providers and users in the public interest
during the various phases of this evolution. |
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16. |
Following an initial period of approximately
twenty-six years, from 1880 until 1906, in which there was a relatively
unstructured environment for the provision of telephone service in Canada, we
entered the first phase of comprehensive regulation. This first phase was
characterized by the monopoly provision of telephone services and the
independent regulation of telephone companies pursuant to the Railway Act.
This phase lasted for eighty-seven years from 1906 until 1993. While some
competition was permitted during the latter stages of this phase in the
provision of non-basic telecommunications services, particularly following
the extension of the Commission's jurisdiction to include telecommunications
in 1976, the telephone companies' monopoly over the provision of basic
telephone services remained virtually intact.3 |
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17. |
The second phase of this evolutionary process
involved the transition of the telecommunications sector from a primarily
monopoly structure to a competitive one. Although this process started in the
late 1970s on an ad hoc basis in respect of non-basic
telecommunications services, it was not until the passage of the
Telecommunications Act in 1993, that the statutory framework was amended
in a manner that endorsed, and indeed required, the pursuit of a more
competitive structure for the provision of telecommunications services in
Canada. |
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18. |
This second phase has been characterized by a
mixture of competition and regulation. It was recognized at the outset that
there would be no flash cut from a decades-old monopoly structure to a fully
competitive industry and that regulation would still be required to protect
the interests of users in this hybrid environment. Due to the highly
interdependent nature of telecommunications networks, it was also recognized
that there would need to be regulatory oversight both to manage the
transition and to ensure, on an on-going basis, that connectivity between
networks and other public policy objectives continued to be met. As discussed
further below, the Telecommunications Act was framed in a manner
designed to equip the Commission with the same powers that it had always had
to regulate the provision of telecommunications services, plus some new
powers to better enable the Commission to manage the hybrid environment that
was anticipated to evolve. |
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The Monopoly Phase
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19. |
For most of the last century, telecommunications
policy in Canada focussed on the objective of extending high quality,
reliable telephone service to Canadians in all parts of the country at
reasonable rates. By and large, the mechanism used to accomplish this
objective was the government-regulated monopoly. It was thought that a
monopoly structure could best achieve this goal by exploiting economies of
scale and by avoiding expensive duplication of facilities in what was
considered to be a "natural monopoly" environment. |
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20. |
In the United States, Theodore Vail is widely
credited with convincing State regulators to enter into a "regulatory
bargain" with his company, AT&T Long Lines, designed to combine a myriad of
non-interconnected local telephone companies into integrated regional
monopolies connected by his Long Lines company. In return for this monopoly
franchise, Vail agreed to extend telephone service to the population resident
within these regional operating territories and submit to government imposed
regulation. From 1915 to 1925, competing local exchanges, which had been the
norm in larger American urban centres, were merged into territorial
monopolies and linked into a nationwide system. Regulation was used to
protect the monopoly as well as to provide a substitute for the price and
service incentives of competition.4 |
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21. |
In Canada, our regional monopolies developed in
a somewhat different manner - but with a similar result. Although Bell Canada
initially established networks in various regions of the country, its
perceived lack of attention to the West led governments in Alberta,
Saskatchewan and Manitoba to purchase Bell's assets in those provinces and
set up their own regional telephone companies in 1907 and 1908. Bell had also
sold its interests in the Atlantic Provinces to private investors. Scores of
independent local telephone companies also emerged in parts of Canada that
were either underserved or not served at all by Bell Canada or the other
telephone companies. Approximately 850 of these independents were still in
operation when the CRTC's jurisdiction was extended to include the regulation
of telecommunications in 1976. The consolidation of these independents into
the larger regional operating companies has continued to this day, with only
38 independent telephone companies remaining in Quebec and Ontario and one in
British Columbia. |
|
22. |
Contrary to popular wisdom, we did not start out
with the monopoly provision of telecommunications services in Canada. In
addition to competing telegraph lines following the rights of way of
competing railways, there was vigorous competition in the provision of local
exchange services in many urban areas. The problem was that the competing
networks were not usually interconnected with the result that customers of
competing systems could not talk to each other. Despite the fact that Bell
Canada had a national charter to provide telephone service across the
country, in many regions, alternative suppliers popped up. In some cases,
this was the result of inattention by Bell Canada, and in others, the
response was purely entrepreneurial - the desire to offer a competing service
that was either better or lower-priced. |
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23. |
In his book entitled "A Voice from afar: the
history of telecommunications in Canada", Robert Collins described the
state of telephone competition in 1902: |
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The same year, 1902, Fort William and Port Arthur started cooperative
municipal telephone systems in competition with the Bell. A civic committee
in Saint John, N.B. recommended the same. Peterborough granted a franchise
to an independent company. Ottawa and London renewed the Bell franchise
only after bitter controversy. Even immortal Brantford refused to renew the
exclusive franchise, after all that Alec Bell had done to put it on the
map. Competition was so vicious in some areas that rival linemen actually
sawed down the opposition's poles. By 1905 the Dominion Grange, a farm
organization, and the Union of Canadian Municipalities had both called for
federal operation of long distance telephone lines. All three prairie
provinces were fretting under the Bell's yoke.5
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24. |
Prior to the passage of the
Telecommunications Act in 1993, the Railway Act contained the
principal substantive provisions applicable to the regulation of
telecommunications at the federal level in Canada.6
The Railway Act was first amended to apply to telephone service in
1906, but even as early as the 1880's, the federal government had asserted
limited jurisdiction in the telephone market, first by incorporating Bell
Canada pursuant to an Act of Parliament in 1880,7
and then in 1892, by prohibiting the company from raising its rates without
the approval of the Governor in Council. This resulted in a "price cap" that
lasted for ten years. In 1902, the Bell Canada Special Act was also
amended to impose an "obligation to serve" on the company. Interestingly,
this statutory obligation, which was a forerunner of our universal service
policy, also contained a quality of service component: |
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Upon the application of any person, firm or corporation within the city,
town or village or other territory within which a general service is given
and where a telephone is required for any lawful purpose, the Company
shall, with all reasonable dispatch, furnish telephones, of the latest
improved design then in use by the Company in the locality, and telephone
service for premises fronting upon any highway, street, lane, or other
place along, over, under or upon which the Company has constructed, or may
hereafter construct, a main or branch telephone service or system, upon
tender or payment of the lawful rates semi-annually in advance, provided
that the instrument be not situate further than two hundred feet from such
highway, street, lane or other place.8
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25. |
Following a number of rather tumultuous years of
direct regulation by the Governor in Council, Parliament passed a bill in
1906 bringing Bell Canada and all other federally-chartered telephone
companies under the jurisdiction of the Board of Railway Commissioners for
Canada and empowering that Commission to regulate all telephone tolls,
contracts and agreements of those companies. |
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26. |
The Railway Act was overhauled in 1919
and then remained largely intact for the next seventy-five years until the
Telecommunications Act was passed in 1993. Under the Railway Act
there were only six substantive sections and two interpretative sections
(sections 335 to 341) that applied exclusively to telephone companies. The
remaining applicable sections were railway provisions adapted to apply to
telecommunications by virtue of section 339 of the Railway Act.
Amazingly enough, with the benefit of only six substantive provisions that
applied specifically to telephone service, the Board of Railway
Commissioners, the Canadian Transportation Commission and the CRTC (to be
referred to collectively in the balance of this paper as "the Commission")
successively regulated the telecommunications carriers that were subject to
federal jurisdiction, including Canada's two largest telephone companies, for
a period of eighty-seven years. |
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27. |
These core provisions did not contain any
express policy objectives in the way that section 7 of the
Telecommunications Act now does. However, it is possible to discern three
distinct policy objectives rising out of the substantive provisions. |
|
28. |
The first principle was the universal service
principle. That principle, which embodies the "regulatory bargain" between
the government and the telephone company, requires the telephone company to
provide a high quality telephone service to users in its operating territory
at affordable rates. The quid pro quo for this service was the promise
of a just return on the capital expended by the telephone company in
delivering on its part of the bargain. This principle, which was developed by
regulators and the courts, was derived from the requirement in the Railway
Act for all tolls to be "just and reasonable". It was implemented by
provisions requiring all tariffs of tolls to be filed with the Commission for
prior approval and conferring on the Commission broad powers to approve,
disallow, amend, substitute or postpone any such tariffs of tolls. |
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29. |
The second principle required the telephone
companies to treat their customers in a fair and non-discriminatory manner.
This principle was an important one since, without it, customers would not
have enjoyed any countervailing power to deal with the monopoly supplier. It
was embodied in a statutory prohibition requiring that a telephone company
shall not in respect of tolls or any services or facilities provided by it,
unjustly discriminate against any person or company, or make or give any
undue or unreasonable preference or advantage in favour of any particular
person or company or any particular traffic, or subject any such person,
company or traffic to any undue or unreasonable prejudice or disadvantage.
This statutory prohibition was buttressed by a reverse onus on
telecommunications carriers to demonstrate that any discrimination,
preference or advantage was not unjust, undue or unreasonable, as the case
might be, and by conferring on the Commission the same broad powers to make
determinations and enforce these requirements, as it enjoyed with respect to
tariffs and tolls. The fairness principle was further embodied in a consumer
protection measure that required prior Commission approval for any limitation
of liability provision included in a telecommunications contract. |
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30. |
The third principle embodied in the Railway
Act was one of network connectivity. It was recognized at an early stage
in the evolution of the telephone system that its utility would be greatly
enhanced if customers of different networks could communicate with each
other. This was important even in a monopoly environment because of the
presence of regional monopolies and hundreds of independent telephone
companies. It was also important for the provision of international
telecommunications. This principle found expression in a statutory provision
that allowed any provincially, municipally or federally-regulated telephone
company that wished to interconnect with a federally-regulated telephone
company, and could not reach agreement on interconnection or terms, to apply
to the Commission for relief. The Commission was granted broad powers to
grant interconnection and to establish terms and conditions, compensation and
standards for interconnection in such cases. It was also granted the power to
review and approve or disapprove of all interconnection agreements between
telecommunications carriers. |
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31. |
The Railway Act was also important for
establishing a model for regulation by an independent regulatory
agency. While the identity of this agency has changed three times since 1906,
the model has survived. It has been left to this agency to interpret the
legislation and to balance the interests of telecommunications users and
service providers for almost one hundred years. This model conferred
considerable discretion on the regulator to carry out its mandate, with
appeals to the Governor in Council, and to the courts on questions of law and
jurisdiction. |
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32. |
It was pursuant to the universal service
principle, and through the tariff approval process and the requirement for
all rates to be just and reasonable, that regulators and the courts developed
the principles of rate of return regulation that applied to
telecommunications carriers until relatively recently. Service consisted of
network access and usage, as well as the telephone terminal itself.9
Rates were set both with regard to their affordability for consumers and
businesses and with regard to generating a sufficient return for the monopoly
to enable it to continue investing in the plant and equipment necessary to
provide a ubiquitous and high quality service. Prices were set in a manner
designed to make access to basic local telephone service affordable to the
broadest possible customer base. Higher prices were sanctioned for long
distance and other "discretionary" services to offset any shortfall in
revenues resulting from the provision of low priced local telephone services
in higher cost areas. This spawned a rather complex rate structure which
embodied a system of internal cross-subsidies by both service and region. It
also resulted in a regulatory framework in which the regulator necessarily
became involved in rate structure, overview of construction and upgrades to
the network, and review of the carrier's expense and revenue projections. |
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33. |
This model of regulated monopoly was hugely
successful in achieving the universal service objective. It resulted in one
of the highest national penetrations of telephone service in the world, at
amongst the lowest prices. It also produced a very high standard of telephone
service. These results, which put Canada among world leaders in the provision
of telecommunications services, were even more remarkable considering the
vast size, low population density, challenging topography and harsh climate
of our country. |
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34. |
However, despite this success, by the 1970's
pressure began to build for a change in the structure of our
telecommunications system. Technological advances began to give rise to a
greater variety of potential service offerings and also began to bring into
question the legitimacy of the "natural monopoly" theory. The introduction of
competitive services and equipment options in the United States brought an
increased awareness among Canadian consumers and businesses, of the potential
for increased choice of services and equipment and lower prices that an
increasingly competitive model was providing south of the border. Lower
prices for long distance services and for business telecommunications
equipment in the United States also brought calls from the Canadian business
community for change. These calls strengthened with a growing realization of
the importance of telecommunications to the economy and our comparative cost
structure relative to competing businesses in the United States. The system
of cross-subsidies that had provided the underpinnings of Canada's successful
pursuit of universal telephone service now provided additional ammunition to
those who were arguing for the introduction of competition. They could point
to higher Canadian long distance rates and business telecommunications costs
(embodying implicit subsidies to rural and residential local service) as
justification for a change in industry structure and our manner of
regulation. |
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35. |
From the late 1970's until the passage of the
Telecommunications Act in 1993, the Commission began to receive
applications for the introduction of competition in various sectors of the
telecommunications market. These applications were dealt with on their
merits, on an ad hoc basis, by weighing up the advantages and
disadvantages of introducing competition in the particular sector involved. |
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36. |
The fairness principle played an important role
in this process. Although the non-discrimination provisions of the Railway
Act had their origins in the laws of common carriage applicable to the
transportation industry, they were adapted by the Commission during the
1970's and 80's to become an important mechanism for implementing some
measure of competition in the telecommunications market. |
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37. |
Starting with the Challenge Communications
case in 1977, the Commission interpreted the non-discrimination provision in
the Railway Act as prohibiting a regulated telephone company from
conferring an undue or unreasonable advantage on itself (as opposed to being
restricted to preferences conferred on third parties).10
In Challenge, Bell Canada was found to be in breach of this provision
when it refused to allow a competing supplier of radio-telephone services to
interconnect its service with the public switched telephone network in order
to provide customers with a new dial through capability. The fact that Bell
Canada was permitting its own radio-telephone service to operate in this
manner, while refusing a competitor's request to do so, precipitated a
finding of undue preference or advantage and led to a requirement for Bell to
produce interconnection standards and an interconnection tariff for the first
time. This interpretation of the provision was upheld by the Federal Court of
Appeal.11 |
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38. |
This important application of the provision soon
led to other competitive inroads in radio paging,12
private line interconnection,13
terminal attachment14
and enhanced services.15 |
|
39. |
The connectivity principle and the CRTC's
jurisdiction to order telecommunications carriers to interconnect their
networks or lines with those of other carriers, to set terms for
interconnection and to approve interconnection arrangements, has also been
extremely important to the evolution of Canada's telecommunications industry. |
|
40. |
Initially, these powers were used to ensure
connectivity between the various regional monopolies and the independent
telephone companies operating within the regions they served. The power to
review interconnection agreements enabled the regulator to monitor settlement
arrangements between the larger and smaller telephone companies and to review
the arrangements that came into effect between the members of the
Trans-Canada Telephone System (later re-named Telecom Canada and then
Stentor) that first came into effect in 1932. |
|
41. |
Because the telephone companies enjoyed de
facto monopolies over local exchange networks and because many competing
service applications required access to those networks to facilitate
communications among all telecommunications users, the power to order
interconnection was a two-edged sword that could be used to preserve the
monopoly, or permit competition to develop. Until 1979, when the Commission
first ordered Bell Canada to permit CNCP Telecommunications to interconnect
its private line voice and data network to Bell Canada's local loops so that
customers no longer needed two phones on their desks,16
this power had generally been used to exclude competition. However, from 1979
on, the Commission has used it, in conjunction with the non-discrimination
provision, to gradually transform the industry from a monopoly to a
competition structure. These powers have been interpreted to provide the
Commission with jurisdiction to do more than just issue orders for
interconnection; they have also enabled it to establish rates and terms and
conditions for interconnection that new entrants would not have been able to
negotiate with the monopoly due to their lack of bargaining power. With the
development of increasingly complex telecommunications networks, these
provisions have enabled the Commission to establish arrangements for the
interconnection of signalling systems, interconnection standards, and access
to databases that are required in order to provide seamless communication
paths between competing networks. In later years, these provisions have also
formed the basis for developing mechanisms to address local number
portability and "equal access" for competing long distance service providers.
Since most of these initiatives were opposed by the telephone companies,
there is little doubt that competition could not have developed on a
commercial basis had these powers not resided with the Commission. |
|
42. |
Despite these competitive inroads, and the
adaptability of some of the old Railway Act provisions to new roles,
most of the new competitive services were ancillary to basic local telephone
service and did not involve a fundamental change in industry structure. The
old Railway Act was proving to be deficient in certain respects. For
example, the Commission's attempt to forbear from regulating the rates
charged by certain wireless carriers and by CNCP Telecommunications had been
struck down by the Federal Court of Appeal on the basis that the Act
did not endow the Commission with this discretion.17
There were also calls for a clearer statement of legislative intent on
industry structure. |
|
43. |
In 1987, the Minister of Communications issued a
policy statement that pointed to a new environment of facilities-based
competition by regulated networks and service-based competition by resellers.18
This policy statement also enunciated a new Canadian ownership policy, and
indicated that the Government would introduce legislation to give effect to
the policy. There was a growing realization that legislative changes would be
required to give direction on industry structure and to provide the
Commission with new powers to manage the new environment which was
anticipated to be hybrid in nature, involving a mixture of competitive and
regulated services provided by a variety of carriers and resellers. It was in
this environment that the Telecommunications Act was enacted in 1993. |
| |
The Telecommunications Act
|
|
44. |
The Telecommunications Act established a
framework for the orderly transition of the Canadian telecommunications
industry from a predominantly monopoly structure characterized by a system of
interconnected telephone companies to a more competitive hybrid structure
characterized by a broader network of competing facilities-based carriers,
resellers and other telecommunications service providers. |
|
45. |
In examining the legislative changes brought
about by the Telecommunications Act, it is important to note that the
new legislation did not replace the existing regulatory framework. Indeed,
quite the opposite is true. The new legislation retained all of the core
provisions of the Railway Act discussed above, with only minor
amendments. It then supplemented these core provisions by the addition of a
set of explicit policy objectives and new powers designed to assist the
Commission in regulating the new hybrid industry structure and managing the
transition from rate of return monopoly regulation to a more flexible form of
regulation. |
|
46. |
The policy objectives included in section 7 of
the Telecommunications Act are discussed further below. However, at
this juncture, it is important to note that they contain a strong endorsement
of the principle of universal service, while at the same time fostering
increased reliance on market forces for the provision of telecommunications
services and enhancing the efficiency and competitiveness, at the national
and international levels, of Canadian telecommunications. |
|
47. |
The Telecommunications Act gave the
Commission a new discretion to forbear from regulating services pursuant to
certain sections of the Act, where it finds as a question of fact that
to refrain would be consistent with the Canadian telecommunications policy
objectives, and it imposed a requirement to forbear where the Commission
finds that a telecommunications service or class of services is or will be
subject to competition sufficient to protect the interests of users. The
Act also expressly confirmed that the Commission was not bound to use
rate of return regulation to determine whether rates charged by Canadian
carriers were just and reasonable, thereby opening the door to price caps or
other incentive-based forms of regulation. It also supplemented the
Commission's powers to regulate tariffs of tolls by adding a new provision
that empowered the Commission to impose conditions on the offering and
provision of any telecommunications service by a Canadian carrier. |
|
48. |
A significant change in the
Telecommunications Act was the imposition of restrictions on foreign
ownership of Canadian carriers, which had become part of the Government's
telecommunications policy in 1987. |
|
49. |
Reflecting the 1987 Policy Statement, the new
legislation focussed primarily on the regulation of Canadian carriers - which
were characterized by their ownership or operation of "transmission
facilities" used either by them or by third parties to provide
telecommunications to the public for compensation. Resellers and other
service providers who utilized those facilities were largely excluded from
the Commission's regulatory jurisdiction. At the same time, according to the
1987 Policy Statement, they were to be given access to the carriers' networks
on just and reasonable terms. By focussing regulation on services provided by
Canadian carriers, and by broadly defining telecommunications facilities to
include all manner of delivery systems, the Act implicitly endorsed a
technology-neutral approach to telecommunications regulation. |
|
50. |
Other innovations in the Telecommunications
Act included: the power of the Governor in Council to issue binding
policy directions to the Commission; the Commission's power to exempt any
class of Canadian carriers from the application of the Act; the power
to order a regulated carrier to bring certain types of services (generally
monopoly services) offered by an affiliate into its regulated operations, or
to order a regulated carrier to cease offering competitive services;
clarification of the division of jurisdiction under the Telecommunications
and Broadcasting Acts; the power to prohibit unsolicited
communications; and the power to relieve carriers from the statutory
prohibition on their control or influence over the content of messages
transmitted. |
|
51. |
In a very real sense, the 1993
Telecommunications Act may be viewed as maintaining the continuity of the
core Railway Act provisions, while providing the Commission with more
flexibility to forbear from regulation in certain defined respects as
competitive markets develop. However, the Act did not contemplate
general deregulation of the telecommunications industry. The forbearance
powers in section 34 relate to only five sections of the Act.
No discretion was accorded to forbear from regulation pursuant to other
sections, such as section 40 respecting interconnection of facilities, and
the Act clearly contemplated an on-going role for regulation of the
industry in the new hybrid environment. |
| |
Managing the Transition to Competitive Markets Under the
Telecommunications Act
|
|
52. |
The 1993 Act provided a regulatory
framework to manage the transition of the Canadian telecommunications
industry from a regulated monopoly to a new hybrid competitive market. As
indicated previously, it set as one of its policy objectives increased
reliance on market forces for the provision of telecommunications services,
and it provided a set of regulatory tools to lighten and ultimately forbear
from regulation pursuant to certain of the Commission's powers when market
forces are adequate to replace regulation as the means to protect the
interests of users. |
|
53. |
We have seen a great deal of change in the
regulatory framework over the past twelve years. Some of the highlights are
discussed below. |
| |
Review of Regulatory Framework
|
|
54. |
On 16 December 1992, prior to coming into force
of the Telecommunications Act, the Commission initiated a public
proceeding to examine whether the existing regulatory framework should be
modified in light of developments in the industry.19
In that proceeding, the Commission noted that, in an information-based
economy, a modern and efficient telecommunications infrastructure is a
fundamental component of, and vehicle for, the production and consumption of
goods and services. The Commission noted further that, in recent years,
technological change and increasing competition had significantly altered the
nature of the telecommunications industry, so that, in addition to fulfilling
the basic communications requirements of all subscribers, telecommunications
had evolved into a tool for information management and a productivity
enhancer for business. These changes had allowed the telephone companies to
develop a wide range of new audio, video and high-speed data services to
satisfy the demands of both business and residence consumers in the local and
long distance markets. |
|
55. |
In response to the changing environment, the
Commission had, as indicated earlier, issued a number of decisions allowing
more competition in a number of market segments. While, as a result of
increased competition, the telephone companies were subject to a greater
degree of market discipline, in 1992 they continued to maintain effective
control of the provision of network access and local services and to dominate
the public long distance market. |
|
56. |
This changing telecommunications environment
prompted the Commission to seek public input as to whether the then current
regulatory framework was the most appropriate or effective way to serve the
public interest. In its public notice, the Commission posed the following
questions, which are not dissimilar to some of the questions posed by the
Telecom Policy Review Panel in the current review process: |
| |
(1) Is the Commission's historical form of monopoly regulation still the
most appropriate?
|
| |
(2) Are there alternatives to traditional rate-base rate of return
regulation that would permit telephone companies greater flexibility to
innovate and compete while maintaining a balance among the interests of
subscribers, shareholders and competitors?
|
| |
(3) Should there be increased regulatory flexibility for the telephone
companies in competitive markets?20
|
|
57. |
In its 1994 decision on Review of Regulatory
Framework,21
the Commission established a blueprint for addressing the cross-subsidy
issue, for eliminating barriers to entry into the local exchange market, for
opening all remaining segments of the telecommunications market to
competition including the local exchange market, for encouraging open and
reciprocal access among telecommunications service providers including a
requirement for the telephone companies to unbundle tariffs to facilitate
interconnection, for splitting the telephone companies' rate bases into
"utility" and "competitive" segments, for removing competitive services from
the regulated rate base and introducing incentive-based regulation of the
local "utility" rates in lieu of traditional rate of return regulation, for
establishing criteria to forbear from regulation in markets that were found
to be sufficiently competitive, and increased safeguards to prevent
opportunities for anti-competitive practices by the telephone companies.22 |
|
58. |
While the Regulatory Framework decision did not
directly address broadcasting issues, the Commission indicated in a related
press release that its decision did address convergence-related issues: |
| |
- cable-television undertakings will be permitted to compete in the local
telephone market on the same terms as other suppliers;
|
| |
- cable and telephone companies are expected to compete in the provision
of a wide range of information services, including in the development and
delivery of interactive and content-based services;
|
| |
- telephone companies may deliver broadcast programming to the home as
carriers on behalf of licensed broadcasters (video dial tone);
|
| |
- while this decision does not deal with the entry of telephone companies
into licensed broadcasting activities, in a related public notice the
Commission has announced that telephone companies can now engage in
technology trials of broadcast video-on-demand services;
|
| |
- where a service is defined as broadcasting under the Broadcasting
Act, telephone companies or their affiliates, like any other party,
must apply for a licence or qualify for an exemption if they wish to
provide such a service.23
|
|
59. |
This was an ambitious plan by any measure. As
discussed further below, it was simply not possible to effect a flash cut to
a competitive market without first addressing the effects of operating for
decades under a monopoly structure. Some aspects of the plan, such as the
deregulation of the terminal equipment industry, could be implemented quickly
on a stand-alone basis, while other aspects of the plan required a sequence
of reforms to be implemented over a multi-year period. |
|
60. |
This was particularly true of the introduction
of local competition, which required significant work to be done in order to
isolate and quantify the telephone companies' costs of providing local
service, to identify and reduce subsidy levels, to adjust rates without
subjecting consumers to sudden economic impact, and to identify and isolate
the cost of network components that needed to be unbundled in order to
facilitate interconnection with new entrants. In some cases, such as the
three-year plan to "rebalance" the telephone companies local and long
distance rates, the timing was planned by the Commission. In other cases,
such as establishing cost-based rates for network unbundling and co-location,
the tasks proved to be considerably more difficult than expected to implement
and numerous proceedings were required to get it right. The implementation of
incentive-based price cap regulation also had to wait for the rate
rebalancing process to be concluded so that initial rates could be set in
line with costs. Other aspects of the plan, such as the contribution
mechanism, have undergone a number of reforms over the intervening period, as
other reforms have resulted in local rates moving closer to costs. Due to the
dynamic nature of this technology-driven industry, interconnection
arrangements have also evolved during this period and inter-carrier
arrangements have had to be modified from time to time to keep pace with
technology. |
|
61. |
The OECD commented on this multi-year process in
its 2002 report on Regulatory Reform in the Telecommunications Industry: |
| |
At first sight the pace of change in the regulatory framework has
appeared somewhat slow in Canada. For example, the framework for
competition in local services was put forward four years after the 1993
Telecommunications Act, but this framework itself only provided the broad
outline and not the details necessary to implement competition for local
services. But, each of the key issues were tackled in a methodical way,
such as eliminating to a large extent local loop subsidies before opening
up local loop competition. Furthermore, the technical and operational
details of the local competition framework were left to the
CRTC Interconnection Steering Committee (CISC) to resolve. CISC includes
representatives of industry, consumer groups and public interest groups and
the CRTC. The slower and consensual process has probably been more
successful than in many countries where rapid implementation of regulations
meant that a number of necessary regulatory safeguards were incomplete
resulting in much frustration by new entrants. Relative to a number of OECD
countries, Canada has had a much smoother and less problematic
implementation of its telecommunication regulatory safeguards. However, now
that the basics are in place it can probably afford to accelerate change
where it is needed.24
|
| |
Moving Rates Towards Costs and Rationalizing Subsidies
|
|
62. |
One of the biggest obstacles to the development
of competitive markets in Canada was the complex system of internal
cross-subsidies that had been built into the telephone companies' rate
structures during eighty-five years of rate of return regulation and value of
service pricing. This regime had created below-cost pricing in many local
service markets, making competitive entry unlikely, and well above-cost
pricing in the long distance market, making competitive entry attractive -
but not necessarily on an economically efficient basis or on terms that were
equitable to the incumbent telephone companies, whose long distance rates
embodied these implicit subsidies to local service. |
|
63. |
The Commission began a process of regulatory
reform to tackle this very complex problem in 1992, prior to the new Act
coming into force. Earlier that same year, it had opened the long distance
market to competition and had put mechanisms in place to ensure that new
entrants would also contribute to the cost of universal local telephone
service through the payment of "contribution" charges. At that point in time,
the total level of contribution required, excluding the Prairie Provinces and
independent telephone companies which had not yet come under CRTC
jurisdiction, stood at over $2.8 billion. This translated into a combined
"contribution" or subsidy of between 14 and 19 cents per minute for two ends
of a long distance call, depending on the province(s) involved in origination
and termination of the call.25 |
|
64. |
In its decision, the Commission had to address
the appropriate balance to strike between the principles of universal service
and the need to promote economic efficiency in the telecommunications market.
The Commission found that the subsidy from long distance to local service was
substantially larger than was necessary to maintain affordable access
and that it imposed an inequitable and unnecessary burden on many long
distance users. The Commission also noted the adverse impact that this
situation could have on "information-intensive enterprises". The rate
rebalancing plan adopted by the Commission in 1994 called for a local rate
increase of $2.00 per month in 1995, 1996 and 1997 for both residential and
business subscribers.26 |
|
65. |
During this time frame, the Commission pursued
several other related initiatives designed to sever the long-standing link
between the telephone companies' local and long distance rates and to
identify, more precisely, the cost of providing local exchange services in
urban and rural areas of the country. This included a comprehensive review of
the telephone companies' cost separations and costing techniques for broad
categories of services (Phase III Cost Inquiry) and the subsequent
"splitting" of the telephone companies' rate base into a Utility Segment,
which included monopoly provided services still subject to rate regulation,
and a Competitive Segment, which contained long distance voice and data
services and other competitively provided telecommunications services. The
implicit subsidies between local and long distance services were then
quantified on a per minute basis and made explicit in a utility segment
carrier access tariff, which applied to both the telephone companies' long
distance services and those of their competitors. Although the telephone
companies' competitive services were not required to be structurally
separated from the Utility Segment, they were required to impute the carrier
access costs, including contribution payments, into their long distance
pricing and account for these imputed revenues in the Utility Segment. |
|
66. |
With the eventual introduction of local
competition in 1997, this regime was further developed to enable competing
carriers to gain access to contribution funds when they served high cost
service areas. This was done in recognition of the fact that competition
would not develop in these regions if only the telephone companies' services
were subsidized. This reform required a further extensive costing exercise
designed to establish the telephone companies' cost of providing local
exchange services in different regions of their operating territories
characterized by similar cost structures. The costs of provisioning service
in each of these "rate bands" was then established and compared with the rate
charged, in order to determine the amount of contribution received by the
telephone companies and that therefore would be made available to
competitors. The Telecommunications Act was amended in 1998 to permit
the appointment of an independent contribution fund administrator to
administer the collection of contribution funds from competing carriers and
to make the appropriate payments to eligible recipients providing local
service in high cost areas.27
The contribution subsidy is tied to access lines in high cost regions and
goes to the customer's carrier of choice. When a decision is made by a
customer to change carriers, the contribution payment goes to the new
carrier. |
|
67. |
The scope of contribution paying services was
also expanded in 1997 to include a broader range of long distance services,
including wireless long distance services, in the list of contribution paying
services.28
This broadening of the base served to reduce the contribution burden on
wireline long distance services and led to further long distance price
reductions. |
|
68. |
Finally, in 2000, the link between local and
long distance services was completely severed by changing contribution from a
system based on long distance minutes to one based on the telecommunications
revenues of all telecommunications service providers (excluding equipment,
retail Internet and radio paging services).29
This significant expansion of the base of contribution paying services
reduced contribution rates still further to a point where they no longer have
a significant impact on the price of long distance or any other
telecommunication services. |
|
69. |
The results of this rather arduous process have
been dramatic. Local exchange services are now provided to most Canadians at
cost-based rates, which require no contribution. In areas of Canada that
still qualify as high cost areas, subsidies have been quantified and made
portable. However, even in these regions, rates have been brought
significantly closer to cost in all but the very high cost bands. In gross
terms, the amount of contribution required Canada-wide has shrunk from
approximately $3.5 billion in 1993 to approximately $240 million in 2004 - a
reduction of over 93%. The largest telephone company in Canada, Bell Canada,
has seen its contribution requirement drop from over $2 billion in 1993 to
$46 million in 2004 - a decrease of over 97%. Since being converted from a
system based on long distance minutes to one based on telecommunications
revenues, contribution as a percentage of revenues from contribution-eligible
telecommunications services has steadily declined each year from 4.5% in 2001
to 1.1% in 2004.30
Importantly, this multi-year, multi-staged, process has been accomplished
without any significant decline in accessibility to telecommunications
services in Canada. |
| |
Opening Remaining Markets to Competition
|
|
70. |
Since 1993, all of the remaining segments of the
telecommunications market have been opened to competition. This includes the
largest segment of the industry, the local exchange market in 1997,31
the overseas long distance market in 1998,32
the operator services market in 1995,33
and the pay telephone market in 1998.34
In most instances, new access arrangements and consumer safeguards were
required in order to facilitate seamless communications between networks and
service providers and in order to protect consumers from "slamming" and other
abuses of the new arrangements. |
|
71. |
By far the most complex of these new initiatives
related to the local exchange market, where new, ground-breaking measures
were required in order to ensure the seamless inter-operation and the smooth
transfer of customers between competing networks. These measures included the
introduction of local number portability (in addition to portable
contribution discussed above) to enable customers to change carriers without
changing their local telephone number, the introduction of new network
interconnection and compensation arrangements designed to recognize the
co-carrier status of competitive local exchange carriers (CLECs), as opposed
to treating them as customers of the incumbent local exchange carriers
(ILECs), and the introduction of increased access to certain essential and
near essential network elements that were required by new entrants to
facilitate entry into what was still a de facto monopoly with high
entry barriers. |
|
72. |
Although the Commission established this
framework in its 1997 decision on Local Competition, like other
aspects of the 1994 Review of Regulatory Framework, there were aspects
of this decision which took considerably longer to complete. These included
finding a technical solution to the issues posed by local number portability,
establishing cost-based rates for unbundled network components made available
to CLECs, establishing operational agreements for interconnection between
CLECs, ILECs, long distance carriers, wireless carriers and resellers, and
establishing mechanisms for the smooth cut-over of customers who decide to
switch their local service provider. In order to assist in the process of
establishing all of these arrangements and resolving the technical issues,
the Commission made extensive use of its CRTC Interconnection Steering
Committee (CISC) structure which involves industry participation in
developing consensual interconnection arrangements under Commission
supervision. |
|
73. |
While all of these mechanisms are now in place
and fully operational, it is fair to say in retrospect that some aspects of
the implementation plan took significantly longer to finalize than had been
originally anticipated. This was particularly true of the network unbundling
process, which involved the establishment of cost-based rates for certain
network elements required by CLECs. The rates were highly contentious due to
their potential impact on ILECs and CLECs alike, and the concept of access to
essential and near essential facilities was opposed by the ILECs. It took a
number of proceedings over several years to set final rates. |
|
74. |
Despite the ILECs' predictions of significant
market share loss at the time of the public hearing leading to the 1997
decision, the Commission had concluded that competition would be slower to
develop in the local market than in the long distance market due in large
measure to the capital intensive nature of the local market and other
significant barriers to entry. However, the pace of development of local
competition has been slower than expected. This was in part due to the fact
that it took a significant amount of time to put the various elements of the
1997 decision in place and it took several years to bring the rates for
unbundled local loops and other unbundled network elements required by CLECs
down to cost. In addition, the burst of the technology "bubble" clearly hurt
the ability of the fledgling CLEC industry to obtain additional financing for
their network builds and resulted in many of them failing financially. |
|
75. |
Finally, competition did not materialize from
some of the anticipated sources. For example, the largest Canadian cable
companies are only entering the local market this year. Not unexpectedly, the
ILECs also resisted loss of any market share with all of the tools at their
disposal, including "win-back" campaigns targeted at individual customers who
decided to switch carriers, as well as various promotions and targeted price
reductions designed to recapture any lost customers. While new entrants had
to penetrate a market already one hundred percent served by the ILECs, the
ILECs could target their marketing efforts in respect of individual customers
that chose to leave them, thereby often reversing a customer's decision to
switch by offering them a new deal. This conduct, which was impeding the
development of a competitive market, prompted the Commission to implement a
number of regulatory safeguards designed to restrict the ILECs' retaliatory
marketing efforts until competitors managed to get a foothold in the market.
Floor prices were also established to prevent the ILECs from dropping rates
below cost to undermine new entry. |
| |
Incentive-based Regulation of Local Services
|
|
76. |
In 1998, following the conclusion of the
explicit rate rebalancing process initiated in Review of Regulatory
Framework as discussed above, the Commission replaced rate of return
regulation of the ILECs' local exchange services with incentive-based price
cap regulation. Under this new regime, the Commission extracted itself from
the process of reviewing the reasonableness of the ILECs' projected expenses
and revenues, and from establishing an appropriate return on capital
invested. Instead, it put in place an incentive-based system that capped
overall rate levels at inflation minus a productivity factor, and incented
the ILECs to improve productivity beyond the approved productivity factor and
keep any extra profits realized through their efforts. This mechanism, which
went into effect on 1 May 1998 for an initial four-year period,35
was subsequently reviewed and revised effective 31 May 2002 for another
four years.36
The price cap regime has resulted in streamlined tariff approval of rate
changes that fall within the prescribed cap and the other pricing
restrictions placed on certain prescribed service baskets, such as local
residential service. These restrictions have been designed to share the
benefits of rate reductions among subscriber groups, rather than permitting
the ILECs carte blanche to target them at specific customer segments. |
|
77. |
The conversion to price cap regulation in
respect of Utility Segment local exchange services has done away with a
considerable amount of regulatory burden that had become associated with
general rate cases, construction review programs and detailed review of rate
changes under a rate of return environment. The Commission's price cap plans
have placed technology and investment decisions squarely in the hands of the
ILECs, with no review by the Commission, and have focussed regulation on
retail prices using the price cap index. |
| |
Forbearance from Regulation
|
|
78. |
As discussed above, although the Commission had
attempted to forbear from regulating the rates charged by CNCP
Telecommunications and a number of wireless telecommunications carriers in
the mid-1980's,37
its attempts to do so were struck down by the Federal Court of Appeal as
being beyond the Commission's jurisdiction under the Railway Act.38
It was therefore not until the passage of the Telecommunications Act
in 1993 that the Commission was empowered to forbear from rate regulation. |
|
79. |
Following enactment of the new legislation, the
Commission took immediate steps to forbear from regulation of wireless39
and terminal equipment prices, as well as most services offered by the
ILECs' non-dominant competitors.40
Forbearance of the ILECs' message toll services came in 1997 when
competitive forces had become strong enough to protect consumers from the
ILECs' market power,41
as well as in the private line voice and data markets on routes that were
competitively served.42 |
|
80. |
When competition was introduced in the local
exchange market in 1997, the CLECs were forborne from retail price
regulation, while the ILECs remained subject to price regulation due to their
dominance in that market. In all other segments of the market, non-dominant
carriers have been forborne from rate regulation - although the Commission
has retained the power under subsection 27(2) of the Act to address
interconnection and access issues between carriers or between service
providers and carriers. |
|
81. |
In 1999 the Commission also decided that it
would refrain from regulating Internet content pursuant to the
Broadcasting Act,43
and it approved applications by the ILECs for permission to alter the
content of information carried on their networks pursuant to section 36 of
the Act.44
This opened the door to full participation by the ILECs in the Internet
service industry. |
|
82. |
To date, approximately 70% of the Canadian
telecommunications market (by revenues) has been forborne from rate
regulation - with primarily the ILECs' local exchange rates and rates for
competitive access services remaining regulated.45
Even in the local market, the Commission is currently examining an
application for forbearance brought by Aliant Telecom and has convened a
public proceeding to establish criteria for determining when local markets
may be forborne from rate regulation pursuant to section 34 of the
Telecommunications Act.46 |
| |
Regulatory Efficiency
|
|
83. |
As discussed above, much of the regulatory
agenda over the past twelve years since the enactment of the
Telecommunications Act has been directed at dismantling the system of
monopoly, rate of return, regulation that had developed over the previous 85
years, opening markets to competition, breaking down barriers to entry,
arbitrating competitive disputes and providing for an orderly transition from
a monopoly industry structure to a competitive one that still has regard to
the objectives of Canadian telecommunications policy set forth in section 7
of the Act. The ambitious nature of the process started in 1994, and
the many steps involved in seeing it through may have created a perception
that regulation has increased. In fact, quite the opposite has occurred. What
has consumed so much time and effort, and engaged the regulatory process to
such a degree over the intervening years, has been the painstaking transition
from a regime of pervasive regulation to one with less direct intervention,
fewer approval mechanisms and more streamlined dispute resolution procedures. |
|
84. |
In addition to the elimination of rate
regulation in approximately 70% of the telecommunications market and its
reduction in the other 30% through the introduction of price caps, the
Commission has recently taken steps to further streamline the tariff approval
process to enable the ILECs to better respond to competitive market
conditions.47
Price changes meeting the price cap criteria can be made through an ex
parte interim approval process, thereby enabling the ILECs to effect
price changes without first alerting their competitors to prospective
changes. Seventeen months ago, the Commission also instituted an expedited
competitive dispute resolution process which enables bipartite disputes to be
resolved expeditiously through a combination of staff mediation and
mini-hearings conducted by a special team of staff and Commissioners tasked
with resolving disputes quickly.48
Since this new procedure was implemented, it has been credited with an
increased rate of settlement of competitive disputes that far exceeds the
number of actual hearings that have had to be held. This mechanism
compliments other forms of alternative dispute resolution that have been made
available by the Commission since 1994.49 |
| |
Review of Telecom Policy Objectives
|
|
85. |
As discussed above, one of the innovations in
the Telecommunications Act was the inclusion in section 7 of a set of
policy objectives. Coupled with subsection 47(a) of the Act, which
requires the Commission to exercise its powers and perform its duties under
the Act with a view to implementing those policy objectives, and any
policy directions issued by the Governor in Council pursuant to section 8 of
the Act, the legislation was clearly designed to give direction to the
Commission on broad policy issues. |
|
86. |
While it is relatively rare in Canadian
legislation to include an express policy statement, this has been a feature
of the Broadcasting Act since 1968. The European Community's (EC) "Framework
Directive", discussed further below, also contains a statement of policy
objectives that are intended to guide National Regulatory Authorities in the
EC. |
|
87. |
Some commentators have criticized the policy
objectives in section 7 claiming that there are too many of them to give
clear guidance to the Commission and asserting that their lack of
prioritization gives the Commission too much discretion. We do not share that
view. |
|
88. |
What Parliament has expressed in section 7 are a
number of broad policy objectives that it considers should be pursued by and
for the Canadian telecommunications sector. It is explicit in the legislation
that the Commission is required to take these objectives into account when
deciding issues before it. Since the different objectives may collide in
particular cases, it is implicit that the Commission, as the independent
regulatory authority, will exercise its judgment in weighing up and balancing
these objectives. This is the essence of the Commission's role in the
regulatory process. |
|
89. |
When the Governor in Council disagrees with the
manner in which the Commission has exercised its judgment, it has the power
to review and vary the Commission's determination. Judging from the very few
Orders in Council varying the Commission's decisions over the years, this
process seems generally to be working. |
|
90. |
One of the most important balances that the
Commission seeks to strike on an on-going basis is that between the
objectives set out in paragraphs (b) and (f) of section 7. Paragraph (b)
articulates the universal service principle, calling for the rendering of
reliable and affordable telecommunications services of high quality
accessible to Canadians in all regions of the country. Paragraph (f) calls
for increased reliance on market forces for the provision of
telecommunications services. While, at a theoretical level, the subsidization
of telephone service in high cost areas is inconsistent with increased
reliance on market forces (which would result in higher prices in higher cost
regions), it is possible to balance these objectives by limiting subsidies to
the level required to keep prices affordable, while making the subsidy
competitively neutral and making it portable and transferable to whichever
carrier wins the customer's business. This is the type of exercise,
frequently involving a balancing of social and economic objectives, that the
Commission is charged with performing under the Telecommunications Act. |
|
91. |
Having said that, some twelve years have now
passed since the enactment of the Telecommunications Act and it may be
possible to identify some policy objectives that may not be as relevant in
2005 as they were in 1993. An example is the promotion of the use of Canadian
transmission facilities, as called for in paragraph (e) of section 7. |
|
92. |
Subsection 7(e) provides as follows: |
| |
(e) to promote the use of Canadian transmission facilities for
telecommunications within Canada and between Canada and points outside
Canada;
|
|
93. |
While it was an objective of the Government of
Canada in 1993 to require Canadian facilities to be used to route
telecommunications services between Canada and overseas points and between
points within Canada, and while this was also reflected in the policies of
the Commission, it no longer applies internationally. With Canada's signing
of the WTO Agreement on Basic Telecommunications Services, and with the
subsequent amendment of the Telecommunications Act to permit
competition in the provision of overseas communications services, all routing
restrictions were eliminated.50
Now, even Canada-Canada calls may be routed through other countries using
foreign-owned facilities located in those countries. |
| |
Preparing for the Future
|
|
94. |
While no statute is perfect, the
Telecommunications Act has provided a significant amount of guidance in
charting a course from pervasive monopoly regulation to a more competitive
market, and has provided a flexible set of regulatory rules to manage the
difficult transition. Now, as we look forward, it is appropriate to consider
whether the legislation provides an appropriate model for the next decade. |
|
95. |
As indicated earlier, this discussion paper
focusses its attention on the legislation and broad policy issues raised by
the Telecom Policy Review Panel in its Consultation Paper. Rather than
attempt to answer the specific questions raised, it seeks to place some of
the major issues raised in the context of the statutory framework - to
explore how changes to the legislation would affect policy outcomes and what
might be the effects of such change. Its goal is to contribute to the debate
by exploring the outcomes of possible changes. |
| |
The Future of Universal Service
|
|
96. |
As discussed above, universal service has been
an important element of Canadian telecommunications policy for many decades
both under the Railway Act and the Telecommunications Act. This
policy has generally addressed three aspects of telecommunications service:
availability, price and quality - the goal being for all Canadians in all
regions of the country to have access to high quality telephone services at
reasonable prices. While advances in the quality of telephone service have
generally been enjoyed in urban areas at an earlier stage than in rural and
remote areas, due to the higher cost of providing service in those regions of
the country, over the years, many advances have been made. Multi-party
service has given way to single-line service and, as successive switch
modernization programs have pushed new technology further out into the
telephone companies' networks, the vast majority of Canadians now have high
quality local telephone service available at reasonable prices. |
|
97. |
During the past twenty years, there has been a
major push by both governments and regulators to close the remaining gaps in
coverage and improve the quality of service to rural and remote services both
through direct investment by some governments and by Commission-sanctioned
service improvement plans (SIPs) that have been financed by both the
telephone companies and their subscribers under special regulated programs. |
|
98. |
In 1999 the Commission conducted a review of
Telephone Service to High-Cost Serving Areas.51
In that proceeding it determined that in 1999, over 99% of access lines
in Canada provided basic individual line service. It found that 97% were
connected to a digital switch that provided touch tone service and could
connect to the Internet via low speed data transmission without incurring
long distance charges. In its decision the Commission directed the telephone
companies to develop new service improvement plans for unserved and
underserved communities. By 2004, 1,703 communities had benefited from these
plans, resulting in 12,877 previously unserved customers receiving basic
individual line service and 34,200 underserved customers having their service
upgraded to basic individual line service. The service improvement plans have
been highly successful in extending both the reach and quality of telephone
service in rural and remote high cost service areas. |
|
99. |
It should be noted that, although the Commission
has been successful in eliminating the subsidy from most urban subscribers'
local telephone service, there is still a very large subsidy built into local
telephone service in many rural and remote areas. |
|
100. |
For example, in Band G of Bell Canada's
operating territory, local access lines still receive a subsidy of $23.79 per
month; in TELUS (BC) Band G, the subsidy is $22.86 per month while in
Manitoba and Saskatchewan, the subsidy is $67.31 and $33.65 per month,
respectively.52
The price of telephone service in these latter regions would more than
double if the subsidy were completely removed. The impact on customers of
some of the smaller independent telephone companies in Ontario and Quebec
would also be significant. |
|
101. |
The impact would be particularly significant in
the Far North, where there are unique geographic, climatic and demographic
challenges in providing telephone service. Northwestel, for example, serves
the Yukon, Nunavut, the Northwest Territories and part of Northern
British Columbia, the largest operating territory in Canada, yet with less
than one half of one percent of the country's total population, and with the
vast majority of its communities having fewer than 500 telephone lines, many
accessible only by air. Most of its 80,000 lines are subsidized. |
|
102. |
In all, the contribution program still
subsidizes telephone service to 2.5 million lines, or 19.4% of all
residential lines. All of the above should be kept in mind when considering
the views of those who might question whether universal service is still a
relevant policy objective in the coming decade. |
|
103. |
The universal service goal has never been a
precisely defined concept and it has evolved over the years as technology
developed and customers' expectations increased. |
|
104. |
In the 21st century, the focus of
governments in Canada has shifted towards Internet and broadband access and
the promise that it holds for economic and social development in our country.
As is documented in the Telecom Review Panel's Consultation Paper, numerous
government sponsored programs at the federal and provincial levels have
encouraged the widespread development of broadband access networks and have
provided direct investment in the extension of broadband to regions where the
cost of service would otherwise make extension of service uneconomical. These
efforts, which are continuing today, have been very successful in extending
the reach of broadband to schools, hospitals, libraries and communities that
otherwise would not have been able to participate in the information society. |
|
105. |
For its part, the Commission has not redefined
universal service in terms of broadband access. Having spent the last decade
trying to reduce the level of subsidy to local telephone service down to
economically sustainable levels, it has not seen fit to reintroduce what
would clearly be a multi-billion dollar subsidy program to provide broadband
access on a universal basis in Canada. Rather than take this approach, the
Commission has focussed on creating an environment that is conducive to the
competitive provision of broadband services and has let the federal and
provincial governments assume leadership in direct subsidization of broadband
network builds in regions where high cost makes their competitive provision
unlikely.53 |
|
106. |
The penetration of our broadband services
exceeds that of our major trading partners54
and is placing Canadians in an excellent position to take advantage of
the social and economic benefits of the new economy. |
| |
The Future of Economic Regulation
|
|
107. |
Although economic regulation is becoming less
pervasive over time, it still has an important role to play in certain
sectors of the telecommunications industry. Generally speaking, the
Commission has been moving along a continuum from rate of return regulation,
to incentive regulation, to ultimate forbearance of market segments or
classes of services where the tests for forbearance in section 34 of the
Act have been satisfied. The main focus of economic regulation in the
past few years has been on the local market, where the ILECs have remained
dominant. This has necessitated both price cap regulation and the imposition
of marketing restrictions on the ILECs to prevent abuse of dominance and
price discrimination in dealing with customers, as well as competing carriers
and service providers that rely on local access to deliver their services to
the public. |
|
108. |
The reduction and ultimate removal of these
forms of economic regulation are envisaged once competitive market forces are
strong enough to replace regulation to protect the interests of consumers and
sustain competition. A comprehensive proceeding to review the benchmarks for
local forbearance is currently underway.55
However, without wishing in any way to prejudge the outcome of that
proceeding, and as discussed further below, it is unlikely that all markets,
in all regions of the country will be sufficiently competitive to satisfy all
forbearance tests. It is highly likely that both consumers and service
providers will continue to rely on the ILECs for local access in some regions
for the foreseeable future. |
|
109. |
The existing legislation has proven to be
flexible in managing this transition from a monopoly to a competitive market
structure involving a hybrid structure of facilities and service-based
competitors. A question that arises is whether we have advanced far enough
along the continuum to merit a different approach going forward. |
|
110. |
Questions that arise in this regard include
whether the presumptions of rate regulation and prior tariff approval
in sections 25 and 27 of the Act should be maintained or whether we
should move towards a system where economic regulation must be justified on a
case-by-case basis by the regulator, and where price regulation should be
focussed on the ex post facto consideration of complaints. |
|
111. |
The European Community (EC) is often cited as an
example of this approach to regulation. The EC's "Framework Directive",
which was released on 7 March 2002,56
sought to harmonize regulation across member countries by reducing entry
barriers in national markets and fostering the development of competition
both within domestic markets of member states and across borders within the
EC. A major component of the Directive is to reduce sector-specific
regulation at the national level to instances where it is warranted by the
presence of "significant market power" (SMP) in a given market. Moreover, the
regulatory response must be proportionate to the problem and must only be
maintained as long as necessary. Under this regime, ex ante regulatory
rules are only permitted where they are considered to be more effective than
general competition law remedies to address the market problems identified
and must be withdrawn once the desired objectives are met in the market. |
|
112. |
Pursuant to this regime, the EC has identified
eighteen distinct markets in the telecommunications sector which must be
examined by the appropriate National Regulatory Authority (NRA) to determine
whether SMP exists. If NRAs wish to define additional market segments, they
may do so, but they must utilize EC competition law principles to define the
market, and their methodology must comply with EC guidelines on market
analysis and assessment of SMP. |
|
113. |
The tests used to determine whether an operator
has SMP in a given market segment are described in the following passage from
Arnold & Porter's The New EU Regulatory Framework for Electronic
Communications: |
| |
…An operator will be judged dominant if, either individually or jointly
with others, it enjoys a position of economic strength affording it the
power to behave to an appreciable extent independently of competitors,
customers and consumers. When an operator has SMP in a specific market, it
may also be deemed to have SMP on a closely related market where the links
between those markets are such as to allow the market power held in one
market to be leveraged into the second market.
|
| |
An operator will be presumed to be dominant if it enjoys a market share
of over 40%, as compared to the current 25%. While market share is one
factor taken into account when assessing the existence of a dominant
position, other relevant factors which will be taken into account by the
Commission and the European Courts are:
|
| |
- overall size of the undertaking
|
| |
- control of "essential facility" type infrastructures
|
| |
|
| |
- absence of countervailing buying power
|
| |
- economies of scale and scope
|
| |
|
| |
- highly developed distribution and sale network
|
| |
- absence of potential competition.57
|
|
114. |
Pursuant to these directives, individual NRAs
have gone through the exercise of determining which market segments are
served by an operator with SMP. Once a finding of SMP is made, certain
requirements to unbundled local loops apply pursuant to the EC's Access
Directive,58
and it is open to the NRA to apply sector-specific regulation on either
an ex ante or ex post basis, as it considers justified. |
|
115. |
As regards forbearance, NRAs are under an
obligation to refrain from regulating a market once it has been deemed to be
"effectively competitive" based on a market analysis that finds no SMP to
exist. |
|
116. |
Before considering the potential implications of
importing this type of approach into Canada, it is important to note the
context in which the EC imposed this regime in 2002. The principal goal of
the EC in the telecommunications sector has been to develop a competitive
common market for communications services, to restrict regulation to the
necessary minimum and to aim for technological neutrality and accommodation
of converging markets.59
Much of the EC's focus has therefore been on breaking down national
barriers to competition. In its 1999 Review, it found that measures
implemented in 1997 to harmonize and reduce national licensing requirements
and other barriers to a common market, had largely failed. Rather than a
harmonized regime, it found fifteen distinct national regimes with anywhere
from two to forty-nine different regulatory requirements for new entrants.
The Framework Directive, and the other related directives implemented
by the EC in 2002, must therefore be viewed in this context. |
|
117. |
This is significantly different from the
Canadian context, where unified federal jurisdiction over telecommunications
since the early 1990s has enabled the development of a harmonized regime
across Canada. In Canada, we have established open entry models for
competition in all sectors of the telecommunications market (subject to
foreign ownership requirements) and do not have the same structural issues to
resolve in establishing a trans-national market that the EC has to address. |
|
118. |
Moreover, our telecommunications legislation is
not unidimensional. As discussed above, the fostering of competitive markets
is an important element of telecommunications policy in Canada - but not the
only one. Other policy objectives tend to get left out of the equation if one
reverts solely to competition law principles. |
|
119. |
Leaving those other policy objectives aside, one
might question whether the EC approach would produce a different result in
Canada from what has been achieved under section 34 of the
Telecommunications Act. Starting in 2002 in Europe, national regulators
began reviewing the telecommunications service markets identified by the EC
to determine whether an operator possessed SMP. In contrast, this process
began in Canada in 1993 and, well before 2002, approximately 70% of the
market (by revenue) had been forborne from ex ante price regulation.
The only significant markets in Canada that remain subject to ex ante
price regulation are the local exchange and local access markets, where the
telephone companies have been found to enjoy SMP. |
|
120. |
The tests used by the Commission pursuant to
section 34 of the Telecommunications Act to determine whether to
forbear from regulation also include competition law tests which seek to
determine whether a carrier possesses significant market power. As noted
above, in the EC, a 40% market share raises a rebuttable presumption of SMP.
Using that test, all of the ILECs in Canada would be presumed to possess
significant market power. |
|
121. |
While the Commission is currently reviewing its
tests for forbearance in the context of the local market, and would not wish
to prejudge the outcome of that proceeding, it would simply note that using
the EC's guidelines, no NRA in Europe has yet forborne from regulating the
basic local telephone market, although some jurisdictions do make use of
ex post, rather than ex ante, regulation. |
|
122. |
In these circumstances one might question
whether the EC model would be a good fit in Canada. We know that competition
in the local telephone market is developing unevenly across Canada, that some
areas have little or no competition, and still other more remote areas may
never see competition. If the presumption of rate regulation were eliminated,
and if the regulator had to justify rate regulation based on criteria such as
a finding of significant market power, the regulator could conceivably have
to embark on an analysis of all local telephone markets (however they are
defined for purposes of the forbearance tests) to investigate whether SMP
exists. If it were found to exist, the Commission would have to assess
whether less intrusive forms of regulatory intervention would be as effective
as ex ante price regulation. This could be a rather massive exercise
in a country like Canada with its diversity of regions and its many rural and
remote areas. Moreover, this exercise would have to be performed periodically
to see whether the market structure had changed. |
|
123. |
Are we far enough along the continuum from
monopoly to competition in local markets to justify a reverse onus? Would the
result be much different from the exercise under section 34 of the Act,
where we do the same analysis of markets that appear to have become
competitive and decide whether to forbear based on the absence of significant
market power? In its current forbearance proceeding, the Commission is trying
to establish objective benchmarks, based on competition law principles, to
determine when competitive forces are sufficient to justify forbearance. If
this proceeding is successful in developing such benchmarks, telephone
companies will be able to apply for forbearance when they believe the
benchmarks are satisfied. This would appear to be a more efficient procedure
to follow than reviewing all local markets in Canada, before any
pre-conditions are satisfied, to see whether significant market power exists. |
|
124. |
As regards the use of the ex post or
ex ante approaches, three observations may be offered. First, many of the
regulatory safeguards that are currently in place have arisen as a result of
complaints regarding conduct of a dominant carrier that was found to
constitute a breach of subsection 27(2) of the Act. These safeguards
have often been modified over time in response to further infractions. The
second point is that under an ex post review approach, the damage can
be done to the competitive market by the time the complaint is made,
responded to and ruled upon. Finally, if one looks at the price cap model
that currently applies to the ILECs and the tariff streamlining measures
recently adopted by the Commission, there are many price changes that can be
made by the ILECs without prior notice to the public and without much more
than a filing requirement. |
| |
Technological Change
|
|
125. |
As discussed above, the Telecommunications
Act addresses technology in two of the policy objectives in section 7:
subsection 7(b) speaks in terms of rendering reliable and affordable
telecommunications services of high quality; while subsection 7(g)
seeks to encourage innovation in the provision of telecommunications
services. |
|
126. |
Historically, in the days of rate of return
regulation, the Commission approached technology change and innovation in
telecommunications in the context of construction program reviews and quality
of service reviews. Under that regime, the Commission reviewed the telephone
companies' plans for network development and the introduction of new
technology, and passed judgment on whether those plans were financially
reasonable. New technologies and services were introduced based on the best
judgment of the telephone companies with oversight by the Commission. Under
that regime we saw the introduction of successive generations of switching
equipment, such as the introduction of digital switching in the 1980's and
related call-management services. We also saw the occasional rejection by the
Commission of the telephone companies' investment plans, such as their plan
to include large portions of their broadband (Beacon) investment in the
Utility Segment of their rate base just prior to the introduction of local
competition and price cap regulation.60
As discussed above, another mechanism that was used in the past decade
was the concept of service improvement plans, designed to finance the ILECs'
upgrade of service in underserved areas from multi-party to single line
service and to fill in service gaps. |
|
127. |
With the advent of competition and forbearance
from regulation of many telecommunications services, there has been much less
of a role for the Commission to play in ruling on the reasonableness of the
ILECs' investments in new technology outside of rural and remote areas. With
the introduction of a price cap regime on local exchange services in the late
1990's, this role was further diminished. The price cap regime left
investment decisions up to the ILECs. The economic incentive for increased
productivity improvements now drives the ILECs to pursue new technologies in
the local market, while competitive market forces drives them in other more
competitive sectors. |
|
128. |
In light of these changes in industry structure
and regulation, the Commission has viewed its role in competitive markets as
one of allowing competitive market forces to drive innovation and technology
and to ensure, to the greatest degree possible, that Commission policies do
not distort investment decisions. |
|
129. |
In markets where competition has not developed,
the Commission has sought to ensure high quality service availability through
service improvement plans. |
|
130. |
In this new environment, the Commission has
pursued a policy of technological neutrality that is designed to ensure that
regulatory interventions in the market do not inadvertently incent or
disincent the choice of a particular technology. The local competition regime
is a prime example of the application of this principle of technology
neutrality. It permits both the ILECs and new entrants to utilize whatever
technologies they wish to compete with each other in the provision of local
telephone services. The result of this policy is that we now see competitors
using various types of wireless access, fibre, coaxial cable, digital
subscriber line (DSL) over copper pair, as well as traditional copper pairs
to provide analog, digital and IP-based telephone services. Market trials of
broadband over power line (BPL) are also underway in Canada and Industry
Canada has recently initiated a public consultation on the use of BPL
systems.61
The theory behind this approach is found in the objectives of the
telecommunications policy in section 7 of the Act, as well as in the
economic literature, that competition is the best mechanism to allocate
economic resources, and that market forces will spur innovation and the use
of new technologies, more efficiently than regulation. |
|
131. |
Under this approach, there is less of a role for
the regulator to play - except in regions of the country where market forces
are not strong enough to drive innovation or new services. In those regions,
the universal service objective in subsection 7(b) requires the Commission to
find ways to ensure that high quality, affordable telecommunications services
are accessible to Canadians in both urban and rural areas in all regions of
Canada. This is where service improvement plans, as well as other government
subsidy programs, come in to help finance the extension of high quality
telecommunications services to regions where competitive market forces are
insufficient or not present at all to do the job. |
|
132. |
The Commission has also recognized the
importance of regulation that incents new investment in Canadian
telecommunications infrastructure in order to improve the quality of service
and service innovation. As mentioned above, in the days of rate of return
regulation, this was done through granting the telephone companies a high
enough rate of return on investment to finance new infrastructure and by
approving construction programs. In the new competitive environment, a policy
of technological neutrality doesn't mean that the Commission is necessarily
technology blind. Rather, the Commission's role is a more subtle one of
encouraging facilities-based competition and trying to ensure that its
policies do not act as a damper on new investment.62
The Commission recognizes the importance of technology changes and the
implications they can have on the state of competition domestically and
internationally. As a key economic building block, it is essential that
Canada keeps pace with technological developments in North America and abroad
if it is to remain prosperous in the information age. |
|
133. |
The Review Panel's Consultation Paper talks of
the shift towards IP-based technologies and the implications that this will
have for the Canadian telecommunications industry. It talks in terms of "one
pipe, multiple applications" and questions whether the Canadian environment
is likely to evolve into a form of duopoly. |
|
134. |
The Commission has some concerns about whether
the telecommunications legislation should anticipate changes in technology or
the industry structure that might evolve as a result of technological change,
and base regulatory reforms on possible outcomes. |
|
135. |
If a country guesses right on technology at an
early stage in its evolution, it may get a leg up on competing nations in
terms of infrastructure development, applications development and economic
spin-off. But what if the bet is placed on the wrong technology, or what if
the next generation technology develops more quickly than anticipated? Will
our institutions and industries be able to adapt to the changes as readily as
they might in a more dynamic environment where the market is left to
determine technology choices? |
|
136. |
The road is littered with technology predictions
that have not come to pass and, as the pace of technological change
increases, such predictions become more risky to make. It is risky to guess
where technology is headed or to influence technological outcomes, and it
could be very risky to design regulatory reforms around specific technologies
- or to anticipate what the market structure will look like 5 or 10 years
out. |
|
137. |
We must also bear in mind that Canada is still a
relatively small country which is integrated into the North American market.
Most technology decisions are not made in Canada - they are made in the much
larger North American market which is driven by competitive market forces. In
this environment, it is difficult for the Canadian telecommunications
industry to decide unilaterally on new technology directions. If it does, it
can find itself without the benefit of low cost technology produced for a
mass market, and unable to pursue an independent strategy. The choice of CT2
plus technology in the mid-1990's provides an excellent example of this
impediment. Unfortunately, that technology had to be abandoned because the
rest of the world went in a different direction.63 |
|
138. |
Competitive market forces are what drive
technology choices in North America and the rest of the world, and it is
competitive market forces that tend to spur innovation. An excellent example
of how the market drives technological change is found in the wireless
market, where competitors have introduced three successive network
generations of wireless technology in just 20 years. It is not regulatory
policies that are driving these network overhauls - it is competitive market
forces and the demand by consumers for new services and products. In this
environment, there is no discussion of how to recover investment in legacy
equipment. It is more a question of "do or die" for competitors in order to
stay one step ahead of their competitors, retain customers, drive revenues
and increase market share. |
|
139. |
This is generally a good thing and, when market
forces work in this way there is less of a role for regulatory intervention. |
|
140. |
This is not to say that it isn't productive to
look forward to what technology might bring. Regardless of whether we end up
with single pipes capable of delivering multiple services or multiple
networks delivering specialized services, it is possible under the existing
legislation to develop a regulatory framework that is capable of adapting to
the industry structure and the technologies employed. |
| |
Facilities-based Competition vs. Service-based Competition
|
|
141. |
Much of the CRTC's attention over the past
decade has been directed at encouraging facilities-based competition as the
best means to realize the benefits of competition in terms of price,
innovation and choice and as the best means of ultimately forbearing from
regulation of the ILECs' services. |
|
142. |
However, facilities-based competition has not
been the sole focus of the Commission. Consistent with the Government of
Canada's 1987 Policy Statement, which envisaged a competitive network
of networks with numerous other service providers accessing and utilizing
those networks on reasonable terms and conditions, the Commission has
fostered service-based competition and resale activity by ensuring access by
service providers to the networks and services of facilities-based carriers.
Even before the 1987 Policy Statement, the Commission had
responded to the emerging electronic services market by allowing resale for
the provision of enhanced services.64
In 1990, the resale of private lines was permitted65
and in 1992 the MTS/WATS market was opened to competition.66
Following passage of the Telecommunications Act, the Commission
continued these access policies granting equal access to resellers on the
same basis as facilities-based carriers,67
granting service providers the ability to co-locate at the ILECs' central
offices and to access local loops for the provision of DSL services,68
and granting Internet service providers (ISPs) the right to access cable
television companies' high speed broadband networks for the provision of
competing Internet services.69 |
|
143. |
The Commission believes that this hybrid
approach is consistent with Government policy that encourages
facilities-based competition - but recognizes the important role played by
resellers and other service providers in the information services
environment. |
|
144. |
While facilities-based competition in the local
wireline market has been slow to develop, it has been successful in the
wireless and long distance markets, which have been forborne from rate
regulation for some years now. Even in the local wireline market, we may now,
eight years after the decision to open the market, be on the verge of
realizing the goal of broad-based facilities-based local competition. This is
the promise of cable television companies' entry into the local telephone
market using either circuit-switched networks to deliver traditional
telephone services, or high-speed broadband networks to deliver VoIP
services, in competition with the telephone companies. If this promise
materializes, Canada may find itself in the very enviable position of having
two competing broadband networks to a significant number of Canadian homes
and businesses, and all of the competitive services that can run over
those networks. |
|
145. |
However, our hybrid approach to network and
service competition is not the only model. Over the years there have been
calls from some quarters for less of a focus on facilities-based competition
and more of a focus on the provision of wholesale access to the ILECs'
networks. |
|
146. |
The wholesale access model has been used in a
number of countries, including the United Kingdom and the United States, as a
mechanism for fostering the development of service competition. This model
has a certain appeal because it provides a rationale for forbearing from
retail rate regulation without actually developing competing networks. The
theory is that if the network provider makes underlying network services
available to its competitors at cost-based rates, then it will not be able to
charge excessive rates to its own customers without risking competitive
entry. |
|
147. |
However, the wholesale/retail dichotomy is not a
panacea. Even if the network provider makes its network available to its
competitors at its avoidable cost, the competitor may not be able to compete
on price due to the cost efficiencies built into the network provider's
integrated network. Moreover, the more reliant the competitor is on the
existing network, the less likely its own administrative costs, which might
be lower than the network provider's, are going to make a significant impact
on price. Furthermore, getting the wholesale price right is critical. It
requires the regulator to set the wholesale rate at a level where it neither
gives competitors an advantage, nor puts them at a disadvantage. This is
difficult to do and, if wholesale rates are pursued as the only strategy for
developing a competitive market, it puts tremendous pressure on the regulator
to get the price right. In countries that have followed this strategy,
regulators have been placed in the awkward position of being called upon to
adjust the wholesale rate if competitors find they can't operate successfully
at the level initially set. Since forbearance from regulation of the
incumbent's retail rates is dependent on competition from its wholesale
customers, the regulator can be placed in the position of having to adjust
the wholesale rates in order to affect competitive outcomes. This can be a
prescription for on-going disputes and regulatory proceedings. |
|
148. |
Adopting the wholesale rate approach alone can
also have a dampening effect on new facilities investment and innovation. As
the wholesale rate is lowered to stimulate competition at the retail level,
investment in competing facilities becomes less attractive. If competitors
are given wholesale access to all of the incumbent's network features, it may
also act as a disincentive for the incumbents to invest in new technologies
and features that they have to share with their competitors. In the longer
term, this could lead to less investment in infrastructure and less
investment in innovative technologies. |
|
149. |
For this reason, the Commission has used
mandated wholesale rates sparingly, in market segments where competitors do
not yet have competing facilities, and where competitors' traffic volumes are
relatively low.70
Wholesale rates have generally been regarded by the Commission as a means
for facilitating the development of competition by both facilities-based
carriers and telecommunications service providers, and not as a substitute
for facilities-based competition. |
|
150. |
Some commentators have suggested that regulators
in a number of countries have retreated along a continuum from
facilities-based competition, to access to unbundled essential facilities, to
regulated wholesale rates when their optimal model for competition fails and
gives way to their second and third choices.71 |
|
151. |
It is questionable whether we have to follow
this downward spiral in Canada or whether we have to choose one form of
competition over another. With the extensive development of competing
broadband networks in Canada and the recent entry by the cable television
companies into the local telephone market, we are now very well placed to
realize the benefits of facilities-based competition. At the same time, we
know that these new IP-based broadband networks are capable of carrying
numerous applications and services that can be provided by third party
service providers. Recent examples include the VoIP services provided by
Primus Canada and Vonage Canada, among others. These non-facilities-based
service providers can bring new innovations and services to consumers by
riding on competing carriers' networks, thereby generating increased use of
those networks and increased competition in the provision of
telecommunications services. |
|
152. |
Since these competing service providers rely on
access to underlying broadband networks that they themselves do not own, it
is important to preserve the rights of broadband customers to access their
service providers of choice and to ensure that service providers' network
access rights are also protected in order to take full advantage of the dual
potential of facilities-based and service-based competition. |
| |
Sector-specific Regulation vs. Laws of General Application
|
|
153. |
There has been some debate in recent years as to
whether there should be a shift from sector-specific regulation in Canada
towards greater application of the laws of general application to the
telecommunications sector. In particular, the question has arisen whether
competition law principles and laws should replace current telecommunications
policy and law in this sector. |
|
154. |
There are really a number of elements to this
issue, which often get blurred in a manner that confuses the debate: one
issue is whether to rely more on competition laws of general application and
less on sector-specific legislation to regulate conduct in the
telecommunications industry; a second issue is whether a single body or two
separate bodies should administer the telecommunications and competition
legislation in respect of the telecommunications industry; and a third issue
is, if a single body is going to perform that function, which is the most
appropriate body. |
|
155. |
If we look at what is going on around the world,
we can see various combinations and permutations being adopted. |
|
156. |
If one examines the issue of sector-specific
regulation versus competition law, one is hard-pressed to find a single
country that has abandoned sector-specific regulation in favour of
competition law. While a lot of countries, including Canada, have moved
towards greater reliance on competitive market forces to achieve their policy
objectives and have placed less reliance on regulation, none has yet achieved
total deregulation. |
|
157. |
The one country that experimented with total
reliance on laws of general application in the telecommunications sector was
New Zealand, which deregulated much of its economy in the late 1980's and
relied on its Commerce Act, a competition law statute of general
application, to address disputes in the telecommunications industry. It is
well-known that this proved to be a slow and ineffective means of resolving
competitive disputes. |
|
158. |
The history of the Clear - Telecom New Zealand
local interconnection dispute in New Zealand highlights the problems posed by
referring highly technical and economically sensitive interconnection
disputes to the courts. Despite an initial memorandum of undertaking entered
into by the two carriers on 24 August 1990, the parties were unable to reach
agreement on terms and Clear filed a law suit against Telecom New Zealand
alleging violation of section 36 of the Commerce Act respecting abuse
of dominance. That case resulted in extensive technical and economic evidence
being filed with the court. Following a High Court decision in December 1992,
and a reversal by the Court of Appeal in 1993, both parties appealed to the
then final court of appeal for New Zealand, the Judicial Committee of the
British Privy Council in 1994. A decision was finally rendered more than four
years after the dispute began and, in the meantime, there was still no
competition in the provision of wireline local services in New Zealand.72
Even after the Privy Council's decision, areas of dispute remained, which
were again the subject of litigation. Four years and several court
appearances later, the parties were still involved in interlocutory motions
concerning their pleadings (a decision of the High Court having been
overruled by the Court of Appeal in June of 1998, eight years after the
initial memorandum of understanding between the parties) and some of the
substantive issue in the case had still not been resolved. In the 1999
general election in New Zealand, a new government was elected on a platform
that included the promise of a telecommunications regulatory regime and the
new Telecommunications Act came into force in 2001. |
|
159. |
It should, however, be noted that even in the
period prior to the new legislation, the Government of New Zealand had
retained some power over Telecom New Zealand's conduct, through what is known
in New Zealand as the "Kiwi Share Obligations". This symbolic share, which
was retained by the government at the time of privatization of Telecom New
Zealand, required the incumbent telephone company to maintain flat-rated
local telephone and dial-up Internet service, maintain availability of
service, and imposed a price cap equal to the rate of inflation on local
service. |
|
160. |
The new Telecommunications Act, which was
introduced in New Zealand in 2001, contains provisions for the
sector-specific regulation of the telecommunications market. Pursuant to this
legislation, a Telecommunications Commissioner has been appointed with powers
to regulate interconnection, resolve access disputes, establish service
obligations, establish costing and accounting mechanisms, set rates, and
establish a contribution regime. |
|
161. |
Some other countries, which have chosen to move
certain aspects of their telecommunications regulatory regime under the
jurisdiction of their competition authority, have nonetheless retained
sector-specific regulation. Jurisdiction in Australia has been split between
the Competition and Consumer Commission (ACCC) and the Communications and
Media Authority (ACMA)73
with the ACCC dealing with economic regulation, interconnection and other
competitive issues and the ACMA dealing with more technical aspects of
telecommunications regulation, such as radio licensing and implementation of
local number portability or equal access. However, even the ACCC regulates
the competitive side of telecommunications pursuant to sector-specific
legislation included in Parts XIB and XIC of the Trade Practices Act.
These parts contain almost 200 pages of statutory provisions applicable
solely to the telecommunications industry. So the split in jurisdiction has
not altered the sector-specific nature of the legislation. Even though the
ACCC is a single regulatory agency, it has organized itself into separate
components dealing with anti-trust laws and with economic regulation. The
latter division has been further structured with separate groups focusing on
telecommunications, energy and transportation - each of which are governed by
different parts of the Act. |
|
162. |
Australia therefore represents a jurisdiction
where sector-specific regulation still applies - but in which jurisdiction
has been split differently from Canada, between two regulatory agencies. |
|
163. |
In the United Kingdom, a different approach has
been taken, partly in response to the EC Framework Directive. Rather
than split jurisdiction between the anti-trust authority (the Office of Fair
Trading) and the sector-specific regulator (Ofcom) the UK has given Ofcom
concurrent powers to administer competition laws with respect to the
telecommunications sector, as well as the sector-specific legislation set
forth in the Telecommunications Act. This enables Ofcom to respond to
the requirements of the EC Framework Directive and to apply EC Treaty
law which takes precedence over national laws in respect of some competition
and regulatory issues. |
|
164. |
It would therefore be incorrect to suppose that
sector-specific regulation has been abandoned in the U.K. It has not. Even
the EC Framework Directive requires regulators to have regard to
a wide range of social policy objectives that do not appear in anti-trust
statutes. In Europe, these include: |
| |
- ensuring that users, including disabled users, derive maximum benefit
in terms of choice, price, and quality;
|
| |
- ensuring all citizens have access to a universal service specified in
Directive 2002/22/EC (Universal Service Directive);
|
| |
- ensuring a high level of protection for consumers in their dealings
with suppliers, in particular by ensuring the availability of simple and
inexpensive dispute resolution procedures carried out by a body that is
independent of the parties involved;
|
| |
- contributing to ensuring a high level of protection of personal data
and privacy;
|
| |
- promoting the provision of clear information, in particular requiring
transparency of tariffs and conditions for using publicly available
electronic communications services;
|
| |
- addressing the needs of specific social groups, in particular disabled
users; and
|
| |
- ensuring that the integrity and security of public communications
networks are maintained.74
|
|
165. |
In the United States, the FCC has been similarly
endowed, but not to the same degree as Ofcom, with jurisdiction to administer
American anti-trust laws in the communications sector. However, this has not
displaced the Communications Act as the primary industry-specific
legislation governing the telecommunications sector, and has not displaced
the primary jurisdiction of the Department of Justice under the anti-trust
legislation. |
|
166. |
Obviously, different countries are drawing the
line between sector-specific regulation and general competition law at
different points and are establishing different divisions of labour between
different regulatory authorities. In doing so, they are responding to
different circumstances within their own countries and, in the case of EC
countries, they are also responding to a different jurisdictional framework
involving supra national laws. |
|
167. |
Here in Canada, we need to consider what would
best serve our policy objectives. If we were to move towards a competition
law model what would the implications be? |
|
168. |
One implication would be the possible loss of
other policy objectives in the Telecommunications Act. The object of
the Competition Act is stated in section 1.1 as follows: |
| |
1.1 The purpose of this Act is to maintain and encourage competition in
Canada in order to promote the efficiency and adaptability of the Canadian
economy, in order to expand opportunities for Canadian participation in
world markets while at the same time recognizing the role of foreign
competition in Canada, in order to ensure that small and medium-sized
enterprises have an equitable opportunity to participate in the Canadian
economy and in order to provide consumers with competitive prices and
product choices.
|
|
169. |
This is an excellent objective - but it is the
only one in the Act. Competition law principles do not address the universal
service objective of rendering reliable and affordable telecommunications
services of high quality accessible to Canadians in both urban and rural
areas in all regions of Canada; does not deal with unjust discrimination,
undue preference and undue disadvantage in the provision of
telecommunications services or rates; does not provide for the
interconnection of networks or access to ancillary databases required by
competitors; does not contribute to the protection of the privacy of
individuals; does not contain mechanisms to ensure access to
telecommunications networks by disabled persons; does not contain provisions
enabling the establishment of 9-1-1 emergency services; and does not protect
individuals from the nuisance caused by unsolicited communications. Nor does
the Competition Act create a body with technical expertise in the
communications sector or a quasi-judicial body empowered to resolve disputes
over interconnection or access rates. The Commissioner of Competition is
empowered to investigate complaints and to recommend criminal prosecutions to
the Attorney General or proceedings before the Competition Tribunal in
respect of reviewable practices. However, these are formal proceedings that
take a very long time to complete. It can take up to five years between the
alleged infraction of the law occurring and a decision by the Competition
Tribunal or the courts. Moreover, the Tribunal is not equipped to handle a
myriad of cases and has stated that its function is not to monitor or
regulate an industry. Since it was established in 1993, the Tribunal has
decided relatively few cases involving abuse of dominance and predatory
pricing across all sectors of the economy. (In contrast, the Commission has
issued 41 telecommunications decisions in the first seven months of this
year.) |
|
170. |
The focus of the Telecommunications Act
and the Competition Act are also different. The Competition Act
assumes the presence of a competitive market and seeks to enforce principles
of fair competition. The Telecommunications Act is addressing areas
where competition has yet to evolve to a state where it can reasonably be
expected to discipline market power. In this environment, regulatory
supervision may be more appropriate than prosecutions. |
|
171. |
In this environment, it might be more productive
to focus on how best to marry the Bureau's expertise in defining markets and
assessing market power with the Commission's sector-specific knowledge and
status as a quasi-judicial administrative body. Consideration could, for
example, be given to allowing the Commissioner and her staff to participate
more directly in CRTC proceedings involving competition issues where the
Bureau's expertise could be utilized. Such arrangements exist in the United
States and Germany, for example, where the agencies are permitted to share
information and to consult on competition issues of mutual interest. |
| |
Regulatory Treatment of Telecommunications Service Providers
|
|
172. |
As discussed above, most of the provisions of
the Telecommunications Act do not apply to resellers and service
providers that do not own or operate "transmission facilities". The
definitions in section 2 of the Act have been interpreted to exclude
from the definition of "Canadian carrier" service providers that may own
switching equipment, but either lease transmission facilities from other
carriers or otherwise use third parties' networks to deliver their services.75
This removes resellers and service providers from the Commission's
regulatory jurisdiction under all but a few sections of the Act. |
|
173. |
Since the passage of the Telecommunications
Act, Parliament has seen fit to depart from this general rule in two
respects. Amendments to the Act have included "telecommunications
service providers" in the scope of subsection 16.1 of the Act,
respecting the international telecommunications licensing regime, and in
subsection 46.5, respecting contribution payments into the fund for high cost
service areas. |
|
174. |
Subject to these limited exceptions, the
Commission has no jurisdiction to directly regulate resellers and other
service providers. However, in an effort to ensure compliance with important
public policy objectives, the Commission has imposed certain obligations on
these entities through the tariffs of the carriers that provide underlying
services and facilities to them. These are found in provisions of the ILECs'
tariffs respecting resale activity, as well as in access tariffs for various
types of services. Since service providers and resellers are considered to be
customers of the underlying carrier, the only way to ensure compliance with
the terms of these arrangements is through suspension or disconnection of
service. |
|
175. |
With the development of broadband networks and
the ability of service providers to duplicate IP-based services offered by
carriers, the question arises whether this indirect form of regulation is
adequate to implement public policies respecting such important issues as
9-1-1 emergency services, access for the disabled, protection of privacy,
prohibition of nuisance, and interaction with law enforcement agencies. The
recent public proceeding with respect to VoIP services has brought this issue
into focus.76
VoIP services are now being sold that are functionally equivalent to
local exchange service and are intended as a substitute for basic telephone
service. In the past, resellers could resell the local exchange carriers'
basic local service, which included all of these important features. Now, in
a VoIP environment, they can provide their own service with or without these
features. While the objectives in section 7 of the Act require the
Commission to address these issues, the Act currently limits the
Commission's ability to do so, except in an indirect manner. |
|
176. |
While the Commission is not suggesting that any
form of rate regulation be imposed on telecommunications service providers,
it would be useful to consider whether the Commission's power in section 24
of the Act to impose conditions on the offering of telecommunications
services should be extended to apply to telecommunications service providers,
in the same way as certain other sections of the Act have been
extended in the past. Similarly, the broader powers to enforce these
obligations should accompany any such amendment. The current regime leaves
the Commission with termination of service as the only recourse against
service providers who break the rules. This is a rather draconian response
and may not be in the public interest when it is considered that the
implication of terminating service to a VoIP service provider is the
consequent disconnection of all of its customers who rely on it to provide
basic local telephone service. It would be desirable for the Commission to
have more flexible enforcement options that do not disrupt service to
Canadians. These could include a fining power, as discussed further below. |
| |
Access to Support Structures and Multi-dwelling Units
|
|
177. |
In a monopoly environment, access by telephone
companies to support structures or to buildings was generally not
problematic, since building owners had an interest in ensuring that their
tenants had access to telephone service, and it was in the interest of
electrical utilities and telephone companies to pool their support structures
and to grant each other reciprocal rights, in order to avoid costly and
unsightly duplication of poles. |
|
178. |
With the advent of the cable television industry
in the 1960's, access to existing support structures became an issue when the
cable companies sought to string their coaxial cables on poles owned by the
telephone companies or electrical utilities. This issue was ultimately
addressed by ordering access to the telephone companies' facilities pursuant
to Commission-approved tariffs. Although the rates and terms and conditions
for such access have proved to be contentious over the years, this issue was
addressed through exercise of the Commission's powers under the Railway
Act and latterly, under the Telecommunications Act. Similar rights
of access were subsequently granted to other competing telecommunications
carriers. |
|
179. |
Access to support structures owned by electrical
utilities has proven to be more problematic. For many years the Commission
reviewed the rates and terms and conditions of access by telecommunications
carriers and cable companies to support structures owned by municipal
electrical utilities pursuant to the Commission's powers to review agreements
with regulated telecommunications carriers. However, oversight of electrical
utility support structure rates was not consistent, and rates and terms and
conditions of access varied significantly from province to province. Matters
came to a head in 1999 when the Commission was called upon to rule with
respect to its jurisdiction under the Telecommunications Act to
resolve a rate dispute between the cable television companies and the
municipal electrical utilities. The dispute turned on the interpretation of
subsection 43(5) of the Act, which provides as follows: |
| |
Where a person who provides services to the public cannot, on terms
acceptable to it, gain access to the supporting structure of a transmission
line constructed on a highway or other public place, that person may apply
to the Commission for a right of access to the supporting structure for the
purposes of providing such services and the Commission may grant the
permission subject to any conditions that the Commission determines.
|
|
180. |
In its decision,77
the Commission held that subsection 43(5) provides it with the authority
to set rates, terms and conditions of access to supporting structures by any
person who offers services to the public, including Canadian carriers and
broadcasting distribution undertakings. In interpreting subsection 43(5), the
Commission considered that the terms and phrases in the section must be
interpreted based on their ordinary meanings as well as the context of the
Act. The Commission concluded that "transmission line", as defined in
ordinary dictionaries, would include lines used to distribute electricity.
The term was not restricted, as it was in other subsections of section 43, to
transmission lines of a Canadian carrier or cable distribution. |
|
181. |
The Commission's decision on this point was
successfully appealed to the Federal Court of Appeal and ultimately to the
Supreme Court of Canada.78
The Supreme Court held that the phrase "transmission line" cannot be
interpreted to extend to electrical distribution lines since Parliament must
be taken to have known that power poles support "distribution lines" rather
than "transmission lines". The Court also held that subsection 43(5) could
not be interpreted to extend to private property including private easements
where some of the electrical poles were located. Finally, the Court ruled
that the Commission could not rely on the policy objectives in section 7 to
overcome these limitations in subsection 43(5). |
|
182. |
This decision by the courts has placed the issue
of access to support structures owned by electrical utilities outside of the
Commission's jurisdiction. Some provincial regulators of electrical
utilities, such as the Ontario Energy Board, have now assumed jurisdiction
over this issue. However, there is no guarantee that this will occur in all
provinces or that a uniform approach will be taken to issues of access and
rates. Having achieved unified federal jurisdiction over telecommunications,
access to support structures stands out as one important exception, that
might be worthy of re-examination. |
|
183. |
Access to multi-dwelling units (MDUs) has also
emerged as an important issue in the new competitive telecommunications
environment. With the advent of competing carriers wishing to serve tenants
in buildings owned by third-party landlords, opportunities have arisen for
some building owners to either restrict access or to exact onerous terms for
access to their building. After the Commission expended a great deal of
effort and resources over the past decade encouraging the development of a
competitive market and breaking down barriers to entry with a view to
increasing consumer choice, MDUs have emerged as a new form of "bottleneck"
or "gatekeeper" capable of limiting access and restricting consumer choice. |
|
184. |
The Commission has responded to this problem by
developing an access code and guidelines for contractual arrangements between
building owners and carriers and by establishing rules respecting the use of
in-building wiring. The Commission has also indicated its intention to
enforce these rules against individual building owners who seek to impede
access to MDUs or otherwise disregard the rules by relying on the power in
section 42 of the Act to require or permit any telecommunications
facilities to be provided or installed.79 |
|
185. |
The Commission's decision was met by an
immediate legal challenge questioning the Commission's jurisdiction under
section 42 to make this type of order against building owners. Although the
application was denied by the Federal Court of Appeal on the ground that it
was premature in advance of the issuance of an actual order against a
building owner,80
the fact that this application was made in advance of an actual order
raises the likelihood that a new legal challenge may be made if the
Commission issues this type of order in the future. |
|
186. |
In these circumstances, while the Commission is
confident of its jurisdiction, given the importance of this issue to the
attainment of the policy objectives in section 7 of the Act, the
Telecom Policy Review Panel might wish to consider further ways of giving
effect to them. |
| |
Creation of a Fining Power
|
|
187. |
At the present time, the Commission does not
have the power to fine telecommunications carriers or service providers for
breach of the requirements of the Act or of the Commission's decisions
or orders. The penalties for carriers that breach the Act, which are
set out in sections 73 and 74, are criminal in nature, and require
prosecutions to be undertaken by the Attorney-General. The power in
section 63 for enforcement of Commission orders through registration with the
Federal Court can involve a multi-stage process that is not well-suited to
the punishment of carriers for regulatory infractions. As discussed above,
due to the Commission's relatively narrow jurisdiction over resellers and
other telecommunications service providers, most of the provisions of the
Act are not enforceable against them. |
|
188. |
Criminal sanctions are not well suited to any
but the most serious infractions of the Act, Commission orders or
decisions. Because of this, the Commission has no real means of disciplining
carriers for their infractions. In the case of resellers and service
providers who disregard the terms and conditions governing their access to
carriers' facilities, the only remedy for breach is disconnection which, as
discussed above, is a rather draconian penalty for all but the most flagrant
of breaches. Disconnection also has negative implications for the service
provider's customers who rely on it for service. |
|
189. |
In these circumstances, the introduction of a
fining power in the Act, without criminal connotations, would be a
welcome addition. In the most recent budget plan, the Government indicated
its intention to amend the Act to give the CRTC a general fining
power. The Government has also seen fit to include a fining power in proposed
amendments to the Telecommunications Act respecting the implementation
and administration of a "do not call list" by the Commission.81
It should be noted that other telecommunications regulators, such as the
Federal Communications Commission (FCC) in the United States, have this
power. |
|
190. |
If enacted by Parliament, this fining power will
apply to all persons who breach the new provisions regardless of their status
as carriers, service providers or individuals. Considerable work has already
been done to refine the fining power in Bill C-37 and to cloak it in the
appropriate safeguards. The Telecom Policy Review Panel may be able to build
on the work that has already been done in this area. |
| |
Change of Control
|
|
191. |
At the present time the Telecommunications
Act does not require approval by the Commission of changes in control of
Canadian carriers. The absence of this requirement creates a regime in which
the Commission is required to regulate with a view to enhancing the
competitiveness of Canadian telecommunications and fostering increased
reliance on market forces, and in which it has opened nearly all telecom
markets to competition, but in which it does not have the power to prevent
consolidation or re-monopolization of the industry through mergers
and acquisitions |
|
192. |
This gap in the Commission's powers may be
contrasted with the broadcasting sector, where all broadcasting undertakings,
including broadcasting distribution undertakings (BDUs), are required to seek
Commission approval for changes in control.82
While as a practical matter the major BDU groups and ILECs offer (or are
about to offer) both broadcast distribution and telecom services, and are
therefore both currently subject to the requirement of seeking CRTC approval
of changes in control under the Broadcasting Act, this would no longer
be the case where an ILEC ceased being a licensee of a broadcasting
undertaking. |
|
193. |
This situation appears to be inconsistent with
Commission's mandate to implement the objectives of the Telecommunications
Act. It is also inconsistent with the situation that exists in the United
States, where the FCC has the power to approve telecommunications mergers
regardless of the convergence strategies adopted by the carriers in question. |
| |
The Next Five Years
|
|
194. |
Since the passage of the Telecommunications
Act significant strides have been made in converting the structure of the
Canadian telecommunications system from one characterized by monopoly
telephone companies, with limited competition in certain market segments,
into a more competitive environment consisting of wireline, wireless and
IP-based carriers, as well as a significant array of other telecommunications
service providers. |
|
195. |
After some very hard work by the Commission to
remove the barriers to entry in a number of telecommunications sectors, and
after a very slow and painful start to competition in the provision of local
exchange services, Canada may now be on the threshold of significant
facilities-based competition. |
|
196. |
Over the past few years, Canada has become a
world leader in the deployment of high-speed broadband networks ranking ahead
of most of its OECD trading partners, including the United States and the
United Kingdom.83
While this gap has been narrowing over the last two or three years,84
Canada remains in an excellent position to take advantage of the new
information-based economy and places consumers in an excellent position to
benefit from price and service competition in what is fast becoming a
converged market. |
|
197. |
While commenting on the painstaking process of
implementing the new competitive framework in Canada, the OECD has approved
of the results: |
| |
…Canada is one of the leading OECD countries in terms of its performance
in the telecommunication sector. Its best practice performance is largely
due to its regulatory processes and frameworks and policy structures. The
development of competition in the telecommunication service sector has
shown good progress but, as is the case for other OECD countries, is still
insufficient for local telephone service and local access and in the short
distance leased line market. But many of the contentious regulatory
problems that have marred performance in other OECD countries have been
largely resolved in the Canadian telecommunication context. Low prices,
good quality service and relatively rapid diffusion of new technologies
characterise the Canadian telecommunication landscape. The regulatory
framework is transparent and allows for full participation of all
interested parties. Consensus building has been a key factor in the
development and implementation of regulations.85
|
|
198. |
The future is very bright for the Canadian
telecommunications system. As noted by the OECD, the extensive groundwork
performed since the passage of the Telecommunications Act to break
down entry barriers, foster competition and rationalize pricing of
telecommunications services, has placed us in an excellent position to take
full advantage of the new information economy. Our high penetration of
broadband access services enhances our telecommunications infrastructure in
comparison with our major trading partners, and the introduction of new
IP-based services such as VoIP by competing carriers and service providers
bodes well for a competitive environment. The hard slogging that
characterized telecommunications regulation over the past twelve years is on
the verge of bearing fruit. |
|
199. |
Yet even if all sectors are rate-deregulated,
the Canadian telecommunications sector will still not have completed a
transition from monopoly to full competition, where no regulation is
required. The Telecommunications Act was not framed with that outcome
in mind, nor is it realistic to suppose that it can happen in the foreseeable
future. |
|
200. |
No matter how successful we are in introducing
facilities-based competition, the geography and demographics of our country
dictate that there will be regions that lack competitive choices and regions
where the high cost of providing service will make the provision of service
at market rates unattractive. As long as we continue to stand by our
universal service objectives, regulatory intervention will continue to be
required to address these issues. Competition will inevitably be uneven and
the possibility of de facto monopoly supply and re-monopolization in
some regions of the country must be viewed as a distinct possibility. |
|
201. |
Even in markets where competition develops and
thrives, there will be a role for regulation if we wish to continue to ensure
access to the network by persons with disabilities, access to a national
emergency response system through 9-1-1 service, access by law enforcement
agencies, and the fulfillment of other public interest objectives. |
|
202. |
In the network of networks environment that we
have developed, interconnection of competing networks and access to
facilities will remain of central concern. None of these arrangements
are static and they must evolve technically over time in a uniform and
systematic manner. Our telecommunications infrastructure is just too
interdependent to suppose that it can be left to competitive market forces in
the same way as a competitive market for "widgets". Too many parties rely on
access and services from their principal competitors for us to ever
reasonably believe that it will all continue to work smoothly without
on-going supervision. The telecommunications network is too important to us
from an economic and social perspective to take this type of risk and engage
in legislative experimentation that assumes free market conditions. |
|
203. |
Our hybrid model of competition at both the
network and service level will require on-going protection of access rights
for non-facilities-based service providers, as well as protection of
the right of customers to use their network provider to access their service
provider of choice. This will be particularly important in the IP environment
where many applications and services will pass over interconnected networks,
and where fair access by competing service providers will remain of vital
concern. |
|
204. |
This is far from a gloomy prognosis. It merely
recognizes the unique nature of the telecommunications industry and its
importance to our country's livelihood and well-being. We are not out of step
with the rest of the world as some commentators have suggested. We are in
many ways at the head of the pack. The Commission does not believe in
regulation for the sake of regulation - but rather regulation where it is
required to protect consumers from the adverse effects of market power; to
ensure that the Government's telecommunications policy objectives are
satisfied when competitive market forces are either inadequate or not
designed to achieve the desired results; and to continue to ensure the
orderly development throughout Canada of a world class telecommunications
system. |
|
205. |
We need not fear for the future of Canadian
telecommunications. To the contrary, we should be excited by it, as we look
forward to the continuing development of this very important and dynamic
sector of our economy and our society. |
