Speech
“The CRTC and the Transformation of Canadian Telecommunications”
Notes for an address
by Richard D. French
Vice Chairman, Telecommunications
Canadian Radio-television and Telecommunications Commission
to the Telemanagement Live Conference
Toronto, Ontario
October 18th, 2005
(CHECK AGAINST DELIVERY)
Introduction
I'm from the CRTC and I'm here to help….don't laugh!
They tell me that some of you don't necessary see the point of what we at the Commission do and don't do. Of course I can hardly believe this, so my objective for the next few minutes is to try to make those people better informed in their wild and unfounded prejudices.
I'm pleased to have the opportunity to speak with you here today. I can assure you that we in the business of regulation are at least as critical of our own performance as some of you may be. I'll be engaging in some self-criticism on this occasion myself. So I had better get the boilerplate out of the way immediately, and tell you that I speak here for myself and not for any or all of my colleagues on the CRTC.
In the first part of my comments, I want to address the changes in the telecommunications world and the implications of those changes for the regulation of the service industry. In the second part, I will consider some of the puzzles which we as regulators face. Finally, I want to talk a bit about what the future appears to hold for telecom regulation in Canada.
The Transformation of Telecommunications
Let me begin with a word of warning. I am not, repeat not, going to rehearse at this point everything you have already read and heard a hundred times on this subject. You know better than I do about this. No one lives through technological and financial change the way you have to every day.
However, it is not only for you who manage telecom that this is a whole new ball game. So I need to try to convey to you in what sense it is a whole new ball game for us as regulators.
Over the last twenty-five years, it is the change from rate-of-return regulation of monopolies operating analog circuit-switched networks to refereeing the transition to competition among multiple operators of digital and now packet-switched networks.
In the perspective of the last fifteen years, it is the change from initiating and fostering competition in major markets, beginning with long distance and private line, to being able to effect a near-complete deregulation of many such markets.
Over the last seven or eight years, it is the change from introducing competition in the last large chunk of regulated retail telephony, local service, to mapping the transition to forbearance from regulation in that market, as the Commission has set out to do in a proceeding whose public hearings just terminated.
Looking at things over the last couple of years, it is the change from regulating quite differently two separate markets in telecommunications and broadcasting, to the belated arrival of converged communications in the form of video over mobile handsets, or subscription radio over satellite, or video over DSL, or streaming video onto laptop computers, for example. These converged markets raise the question as to which regulatory model, telecom or broadcasting, is to apply.
The consistent theme is the pursuit of competition. The Commission's basic assumption is that truly competitive markets serve consumer interests better than regulation. The Commission's experience, however, suggests that to get from monopoly provision of service to truly competitive markets requires a whole lot of new rules, and the enforcement thereof. This is not unique to Canada. A Harvard professor, Steven Vogel, wrote a book about it called, Freer Markets, More Rules.
Now this is very counterintuitive. It suggests the question, “what if we gave a market and nobody came?” Well, it has happened. Regulators have declared markets open without anything resembling competition ever arriving.
The reason it has happened is usually that potential entrants have at some point not been able to raise financing. Why ? Because capital markets are not attracted by the prospect of financing competition against former monopoly incumbents. They want to see that competitors' initial efforts will not be overwhelmed, for instance by pricing which reflects the marginal costs of incumbent networks already in place, and which have been already largely depreciated.
There are lots of investors who are still licking their wounds, including more than a few Canadians.
This is the melancholy lesson of fifteen years of liberalization of telecom markets the world over: that success in such efforts initially requires as much regulation as controlling monopolies required. I define success here as the ability to finally abstain from regulation of competitive markets, which can then protect consumer interests without the intervention of the state.
Wireline telecommunications markets are NOT markets like any other. First, they have been regulated as monopolies for eighty years…..so that competition always starts with one competitor having 100% of the market.
Second, they have an enormous proportion of common costs, meaning that the pricing of any particular product raises near theological questions of allocation of common costs by product. This is important because entrants do not mirror the lines of business of incumbents; competitors enter only the accessible higher margin markets and history shows they need initial protection against cross-subsidy to do so.
Third, incumbents have huge fixed costs and thus huge incentives to ensure that their infrastructures are fully exploited at all times. This raises important issues of potential discrimination among customers.
Fourth, they supply an essential service. Telecommunications represent a vital link in the lives of many customers whose economic attraction for a private competitor is modest or nil.
For all these reasons, telecommunications markets ARE different.
Some of our critics seem never to have read the Telecommunications Act, with its nine different objectives. They would like us declare victory in the campaign to create a competitive telecom market, and walk away. Their frustration notwithstanding, we cannot simply walk away from the obligations Parliament has placed upon us by statute. There are more interests here involved than those visible from the financial district of Toronto.
The Regulator's Challenge
Does this mean we are convinced we are always right and that only we stand heroically between Canada and the inferno of savage competition? Well, not really.
First, we know that regulation is costly. It can inhibit innovation. It transfers resources and management attention away from the market toward the regulatory forum. It creates distortions and rigidities in the economy.
Second, we know that the attempt to mimic a competitive market through regulation is doomed to ultimate failure. There are information asymmetries which cannot be overcome: firms always know more about their businesses than regulators do.
Third, we know that regulation is always slower than the market and the technology and economic changes which drive the market.
The upshot is that we can only justify regulation to the extent that its costs are less than the costs of deregulating a market prematurely. This is why we have now deregulated (or forborn, in CRTC-speak) markets representing roughly 70% of wireline industry revenue. This is also why we have regulated wireless with the lightest of touches.
How are we doing? Well it depends whom you talk to, and what kind of regulation you ask about. We are now regulating the same companies in both broadcasting and telecom, or within broadcasting, in both cable and programming. And I can tell you that some of them will praise us in one breath on one line of business and curse us in another breath with respect to another line of business.
Now my predecessor, David Colville, who was honoured last night, was not only a fine regulator but also a good philosopher. His view was that if they are criticizing you from one side for too little and simultaneously from the other side for too much, you are probably doing just about the right thing for the public interest. I call this Colville 's Law of Countervailing Criticism. We at the Commission have lots of occasions to invoke it!
At the end of the day, you can think of regulation as similar to the job of a Commissioner in a professional sports league. The owners need the Commissioner, but they never feel totally comfortable with him or her. The telecom firms need the regulator but they never feel completely comfortable with him or her. The business instinct to control as many variables of the business as possible leads to a continual tension, since the Commissioner, or the regulator, represents an uncontrollable factor.
If the regulator loses the confidence of the industry, investment stops and political pressure builds. If the Commissioner loses the confidence of enough owners, he or she loses the job.
By the standard of continued investment, the record in Canada is very good.
Of course, we are constantly trying to minimize the costs and flaws of regulation. Our work involves the balancing of interests among a diverse group of people and firms. It involves the dealing with economic, technological, cultural and social changes. And it involves meeting some quite exacting legal standards of fairness or natural justice. All this means that we have to be rather deliberate in our proceedings. This is frustrating for parties and for us as regulators.
One of the most difficult issues is whether regulation should try to anticipate developments in the future, or should not move until, as it were, the world has provided unequivocal evidence of the necessity of doing so. The Commission has a had a lot of success with the latter approach.
After all, the recent history of telecommunications is a history of false dawns. In a way, we have never really recovered from the trauma of not accurately appreciating the significance of wireless and the Internet until the reality was upon us. The spectacular growth of both caught us by surprise. So over the last several years, hyperbole has taken over. Every new technology is going to revolutionize the industry and it is going to do so tomorrow, right now, immediately. But for every wireless boom, there is a CLEC bust. For every Internet, there is a Minitel.
Thus, someone who argues caution has a lot of ground to stand on. Adjusting regulation in anticipation has its perils.
Still, it is my sense that the Commission will be wrestling with this issue of anticipation vs. hard evidence for some time to come. Technology is no respecter of precedent. On one hand, the system sometimes shows signs of outrunning our capacity to follow it. On the other hand, our attempts to get ahead of the game can end in disappointment. So one our biggest challenges is to know when we may have to let more of the communications world evolve without our close supervision, and when not.
The Future
We should get another perspective on regulation when the Telecommunications Policy Review Panel issues its report at the end of the year. The Minister of Industry asked the panel to address three specific aspects of communications policy. One was the question of the digital divide – the question of the extension of broadband Internet access to all Canadians. A second was the matter of the adoption of IT by Canadian firms and its possible relationship to the growing productivity gap between Canada and its major trading partner. The third, and most immediately relevant to the CRTC, was the issue of the policy framework and procedures for the regulation of telecommunications.
There has been a lively debate among the participants in the Telecom Review process, with a variety of perspectives on the CRTC and its performance. It is helpful that the participants have in general recognized that the core debate is on the continued adequacy of the Telecommunications Act of 1993.
The challenge for the two wise men and one wise woman of the Panel is that there are two schools of thought on this. One is satisfied that the Act remains pertinent and sufficiently flexible to meet the demands of the foreseeable future. The other concludes that the Act has served its purpose and that it retains too much traditional command-and-control regulation for an era of rapid technological change and burgeoning competition.
It is entirely possible that we in the Commission are a little too close to the day-to-day grind of interests and arguments to see this particular forest for the trees. In the CRTC contribution to the Panel's deliberations, we have attempted to provide a perspective as to how we got here. We have not advocated a particular view of the future, though it is the Commission's view that the Act as it stands provides a great deal of flexibility.
We look forward to the Panel's conclusions and to the government's response to them. If a new dispensation is required, the Commission will be a sincere and committed participant in the transition.
So the outcome of the Telecom Review Panel is one major and telling event in the future of telecom regulation. Another is the CRTC decision on forbearance of local service, the last remaining chunk of telecom which is regulated at the retail level. The Commission has just completed four and a half days of oral hearings on the matter. Our staff and our Commissioners will now digest and debate that material, with a decision expected in the first quarter of next year.
The decision will outline the rules to apply to forbearance: what market geographies and product sets will be established as units of analysis, what kinds of market factors will be pertinent to the analysis, what kinds of information will be required and how it will be collected, and what levels of the relevant factors will constitute a prime facie case for forbearance, among other things. So this is a second major event on the telecom calendar.
A third major event will be the performance of Voice Over Internet Protocol telephony in the marketplace. We should know by, say, the middle of next year whether the widespread optimism about this product as a mass market product is justified. We should also know whether VOIP is going to be the killer app which has so far eluded entrants into local telecom markets. These would be crucial developments.
There will naturally be a whole range of other important questions before the CRTC next year: the establishment of a national do-not-call list for consumer protection from commercial telemarketers, issues related to the regulation of the telecom portion of integrated IT services sold to large business, and no doubt other issues which we cannot now foresee.
Ladies and gentlemen, I hope that I have not led any of you to believe that we in the CRTC are complacent about our role in the telecom industry. We are not. Nor do we expect to live in uninteresting times. We are, like those of you here, in the eye of the storm and we do not expect that life will be any easier for us than it is for you.
Technology will continue to change the game in unpredictable ways. Customers will be demanding. You will lose some and gain some. We will be bitterly criticized and, less intensely, praised. But make no mistake. Our objective is the same as yours: to ensure that Canadians have the best, and best value, telecommunications services in the world.
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Date Modified: 2005-10-18
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