Speech
REGULATION TRANSFORMED:
COMPETITION'S FIRST DECADE
Notes for an address
by David Colville
Vice-Chairman, Telecommunications
Canadian Radio-television and Telecommunications Commission
to "Celebrating 10 years of telecom competition -
Understanding the past - Building the future" June 11, 2002
Toronto, Ontario
June 7, 2002
(CHECK AGAINST DELIVERY)
Good morning and thank you Mr. Chairman. I am honoured to be leading off this
conference on the 10th anniversary of long-distance competition.
Some may disagree, but I think we should be celebrating, for a number of
reasons. The advent of long-distance competition in 1992 unleashed a revolution
in the telecommunications industry that has released the power of competition and
innovation. By any measure, this decade has been a remarkable one in the history
of telecommunications.
There is no turning back.
That is something worth celebrating.
Most of us fast-forward to the familiar story so far: notwithstanding market
fluctuations in those 10 years, (and most spectacularly in the last 12 months),
Canada has built on its heritage of specialization in telecom to establish global
leadership in telecom services and networks. We have done so at prices that would
be the envy of most of the developed world.
In fact, in 1990, when Unitel's application was filed, a daytime call from
Toronto to Calgary cost 57 cents a minute. Today, a residential customer can make
the same call for 10 cents a minute, and businesses pay even less. (Telemanagement:
The Angus Report 05/06/2002)
Perhaps what matters is the outcome; but the journey has been at least as
interesting as the destination.
And it has been a challenging journey.
For the incumbents, monopoly's moment had passed into history; they began a
massive transformation that has not really stopped since. Breaking the old
monopoly mentality has been difficult for some. Newly minted competitors, and
some not so new, were anxious to get a piece of the action and prove themselves
in the marketplace.
There were great expectations and some companies did reap rewards. Everybody
had to adjust, and confront new frontiers.
As the player at the centre of the action, for the CRTC competition has also
meant embarking on a transformation of the first order. We were, after all,
trying to pry open and change a regulatory framework and a market structure that
was by then almost a century old!
The ten-year mark is a good point to examine the path that we took away from
monopoly. After 1992, step-by-step, decision-by-decision, the Commission moved to
create an open and flexible regulatory framework. That framework has benefited
both individual consumers and promoted our collective objectives as a country.
To quote Lis Angus writing before 92-12, ".the great majority of new services,
introduced in the U.S. since 1984, are not yet available in Canada at all."
"Before competition, Canadian businesses were denied access to important services
and technologies that their U.S. competitors took for granted. Today, we're not
just on par with the U.S., we're ahead in many ways." (The Angus Report
05/06/2002)
Competition was introduced in Canada well after our neighbour to the south.
The introduction of US competition and the divestiture of AT&T had the effect of
lowering the price of long distance communications in the US. For Canada, higher
prices for telecom service would result in higher costs for doing business in
Canada and the threat of bypass of Canadian telecommunications facilities.
Depending on what you believed, the example of the US was either a model to be
emulated or a trap to be avoided.
Regardless, I believed the best way to deal with bypass was to eliminate the
economic incentive to do so. The best way to achieve this was through
competition. Trying to police bypass would have been a futile exercise.
The decision to open up facilities-based long distance competition was
ultimately based on the conviction it would bring four big benefits to consumers
and across the board: 1) lower prices; 2) greater choice; 3) greater access; and
4) stimulate a wave of innovation that would benefit the wider economy.
That decision was reached after an exhaustive and hard-fought campaign for and
against the merits of the case.
One popular prediction from the era was that 90% of Canadians would stand to
lose - and lose big - if competition were introduced. The remaining 10% - the
beneficiaries - would be large corporations.
The Unitel Application was one of the most comprehensive proceedings in the
CRTC's history.
The hearing entertained 85 official interveners, 2,000 letters of submission
by citizens, municipalities and other organizations, and public consultations in
each province and territory in Canada. The printed proceedings can and do fill a
small library, and the oral proceeding itself lasted 12 weeks.
Precursors
Decision 92-12 was part of a long wave favouring competition in Canadian
telecommunications. In 1961, the federal government authorized the CNCP to
construct a second national microwave network.
In 1979, the federal cabinet upheld a CRTC decision authorizing CNCP to
interconnect with the local distribution system of Bell. In 1982, the Commission
removed carrier-imposed restrictions on the attachment of customer-owned
terminals, such as telephone and private branch exchanges, to carrier networks.
A number of my predecessors in the Vice-Chair's position laid the foundations
for competition. They were leaders and designers of the architecture. [reference
to staff and past chair, Françoise]. Our current Chair, Charles Dalfen, occupied
the post from 1976 to 1980; John Lawrence between 1980 and 1987; and the man who
was actually Vice-Chair for 92-12, Louis R. "Bud" Sherman between 1987 and1995.
All of these Vice-Chairs were advocates of market liberalization in their time.
Implementation: The Challenge
However, much of the decision to move to allow for competition was anticipated
by previous judgements, Decision 92-12 acted as the inflection point - the take
off point - for unleashing competition.
If the decision was momentous, so were the CRTC's new responsibilities. The
Commission now had to deal with the fundamental problem posed by
telecommunications competition: interconnecting competing networks. Overly
liberal arrangements or overly restrictive arrangements had the power to hurt the
entire framework by undermining either competitors or incumbents. All the while,
the imperatives of public policy - and in particular universal service had to be
safeguarded and promoted.
New conditions required new approaches. The objectives of protecting the
consumer and the public interest would be carried by a new and emerging set of
principles.
Now, the promotion of efficient and sustainable competition, consumer choice,
and stimulating innovation would be the core values governing regulation.
92-12 set us on the path of full liberalization, which would eventually
include local networks. But the number and the complexity of issues that would
have to be settled were staggering - rate rebalancing, cross-subsidies, and the
future of rate-of-return regulation.
Through a series of decisions beginning with 94-19 - Review of the Regulatory
Framework, the Commission undertook a comprehensive restructuring of the
architecture of telecoms in an era of rapid technological change, expanding
competition and the increasing importance of telecommunications to Canada as a
tool for economic growth.
Following the roadmap set out by 94-19, the Commission introduced rate
rebalancing as well as competition in local markets. It unbundled tariffs to
encourage interconnection. It replaced rate-of-return or earnings regulation,
with regulation designed to provide incentives for greater efficiency, focused on
consumer prices known as price caps.
Later, in Telecom Decision 97-8, the Commission aimed to stimulate competition
in the local exchange market in order to increase service innovation and total
market revenues. This decision mandated Equal Access and set out the framework
for the unbundling of and interconnection with the local networks of the major
ILECs.
A major aspect of this decision was that it encouraged efficient
interconnection arrangements, but remained neutral in terms of technology.
It was clear that old models would not solve new issues. Challenges like
interoperability, interconnection, co-location, unbundling, portable subsidies
and number portability represented new territory for us. There was and is a
constant tension between incumbents and new entrants. As we move on the continuum
from monopoly to free market competition, it seemed neither side was happy. The
incumbents argue we have not freed them sufficiently to compete, while the new
entrants feel we have deregulated too much to the point that they can effectively
compete.
No one issue offered black or white solutions. All of them compelled the
Commission to exercise its best judgement. Right or wrong, we made those
judgements.
Competition's Back Office
The Commission's second major response was internal. Local competition poses
extraordinary technical challenges for regulators. In the days of monopoly,
questions about the hundreds of complex technical and administrative issues that
make the system work were resolved in a pretty straightforward fashion. The
process involved relatively few players.
The new telecom universe added layer upon layer of complexity to existing
issues. Who decides on standards? How is everybody going to connect?
How do we ensure customers are transferred transparently from one carrier to
the other while maintaining their number, directory listing, 911 service, and the
like? And how could the Commission do all of these things without hiring
battalions of experts and spending millions?
The innovative approach the Commission came up with in late 1996 was CISC, the
CRTC Interconnection Steering Committee made up of industry players which would
do the bulk of the work, cost a fraction of what the old system did, and
facilitate a faster more efficient response time to resolve these complex issues.
The Committee worked out an innovative, collaborative, problem-solving
template to help the CRTC implement its competition policies in Canada's local
telephone services. The process gave stakeholders a greater sense of control over
the process.
CISC was not without its problems and growing pains . but on balance, I think
it has worked extremely well, especially when the policy issue was clear and the
group focused on the resolution of the issue at hand. Frankly, I was amazed at
the relatively few decisions that were referred to the Commission for resolution
- none of which were appealed.
The CISC process is a pragmatic, made-in-Canada solution to a universal
problem for telecommunications regulators. I routinely get pulled aside at
international meetings to explain how we managed it. The model itself may well be
applied to other sectors, especially in network industries.
I'd say that's something to celebrate.
Rapid technological transformation has required all players in the
telecommunications industry to respond and evolve to meet new challenges.
Regulation has had to be increasingly flexible, light-handed and geared toward
enabling the discipline of market forces to operate, where appropriate, while
protecting the interests of consumers and the public, where competition would not
discipline prices.
Successes and Challenges
Most will agree that our regulatory decisions have helped to reinvigorate
Canadian communications. The long wave has put state-of-the-art communications
within the reach of Canadians. Canada now has, for example, some of the lowest
telecom rates and Internet access rates in the world.
We used to hear that there would be little benefit from competition because
there was no price elasticity of demand for long distance service. Lower long
distance rates and especially flat rate calling plans sure put that theory to
rest.
In spite of the fact that we started years later than the Americans, our
system has evolved with astonishing rapidity. We have made some very long strides
in a very short time. Of course, there are challenges, too: right now, we have
only limited local competition.
And, we have limited facilities available to provide broadband services in
outlying areas. Toll competition was the easy part, comparatively speaking.
It is worth noting, in particular, the U.S. seems to be sharing exactly the
same difficulties as we have in Canada.
I think we also learned that the so-called invisible hand of the marketplace
does not always point us in the direction we want to take.
There is no doubt the telecommunications industry in Canada is currently
facing major difficulties. A number of CLECs have disappeared over the past year
or so. Furthermore, a number of companies are attempting to withstand significant
financial challenges, including enormous debt loads largely resulting from the
exuberance which Charles referred to in his opening comments.
We are not blind to these problems! However, these problems are not, for the
most part, unique to this country.
Regulation is not the cause of these problems and regulation can not and
should not be used or distorted to overcome their problems.
Our regulatory agenda, our competition framework must be based on sound
economic principles.
And these economic principles formed the basis, the foundation for the new
price cap regime which we announced the week before last. I think that some of
you might have heard that the Commission issued the new regulatory framework for
the second price cap period recently. These new rules will govern the rates for
local telephone services over the next four years.
Before developing the new price cap regime, the Commission conducted an
extensive review of the first price cap regime.
The comprehensive process included 14 days of public hearing, 53 intervenors
and presentations from 34 individuals. The Commission received a total of 1,
935 letters and e-mails on this issue.
We listened very carefully to the arguments put forward by all sides and
studied the evidence put in front of us with great care. The new price cap regime
address prices for local telephone service in light of the competitive or lack of
a competitive marketplace.
The new rules will balance more fairly the interests of the main stakeholders
- customers, both business and residential; competitors; and incumbent telephone
companies.
They are intended to distribute the benefits of efficiency gains more evenly
across the system. They will also protect consumers, both in terms of price and
quality while continuing to promote competition.
In fact, Lawrence Surtees of IDC Canada called the decision - and I'm quoting
- "a masterpiece in juggling numerous conflicting interests."
I may have read somewhere an account or two that might differ with Lawrence,
but I think a fair reading of the price cap decision would conclude that while
nobody got everything they wanted going into the proceeding, all the stakeholders
did make some gains.
I would also reiterate a point I made upon release of the Price Cap decision.
In the intervening period, between when we issued Public Notice 2001-36 and
Decision 2002-34 (the new Price Cap Decision), the Commission ruled on a number
of tariff filings which reduced the rates for competitors to interconnect to the
ILECs' facilities.
These reductions, on top of those mandated in the new Price Cap Decision, will
result in a total reduction of costs for the CLECs in the neighbourhood of 35 to
40%.
I would also point out that there remain issues that will be addressed at
proceedings in the very near future that might have an additional impact on the
rates paid by CLECs to interconnect. These are 1) a review of the Phase II cost
methodology; 2) the establishment of permanent rates for both the Access and Link
components of DNA; and 3) the establishment of permanent rates for Access Tandem
services.
Striking the right balance, between producer and consumer and between
incumbent and competitor, is never easy, but it is an objective the regulator
must aim to achieve in the best way possible.
The new price cap decision had to take into account the fact that local
facilities-based competition has been slow to develop particularly in the
residential market. However, in addition to the traditional-type CLECs, there are
at least two technologies that I think hold great promise for local competition.
One is coaxial cable - either circuit switched as Eastlink is doing in
Halifax, or internet protocol which will no doubt become more cost effective in
the next few years. The other technology is wireless. More and more people are
using their wireless phone as their primary phone whether in dense urban centres
or in more rural areas.
These developments promise tough challenges. But we are in a strong position
to confront those challenges. It would be easy to get discouraged with all the
doom and gloom in this industry these days.
I, for one, am convinced we will not only overcome these problems, but also
exploit the opportunities in innovation and growth that exist out there. The
reason we have the 2nd highest broadband penetration in the world with
2.1 million Canadians subscribed is not because of the Commission's famous
"Broadband Regulation Decision 2002-02," because that decision doesn't exist.
Rather, broadband has blossomed as a direct result of the competitive
frameworks we have set in place.
It's the broader benefits - the network benefits, the benefits of accelerating
the innovation cycle through competitive dynamics - that are the real long-term
gains for this country and its people. Competition and its consequences have
resulted in waves of innovative activity. That's true of Canada's record on the
frontier of communications today. According to a recent study published by
Ipsos-Reid Internet, we are leading the world in the percentage of the population
with access to the Internet at 75% and nearly one-half or 48% of all households
with Internet access.
This is well ahead of the United States - at 21% and Europe - at 5%. The cores
of our large cities are wired up with both copper and fibre; in residential areas
copper and coaxial cable connect virtually all Canadians to the wider world.
This industry has been an engine of productivity growth for Canada; it must
continue to be in the future.
Conclusion: Competition's Next Decade
As we confront the challenges of the next four years - let alone the next ten
- it is worth reminding all Canadians that we, as a nation, have built up a great
deal of experience and knowledge through the CRTC.
Our expertise and knowledge are envied and sought after, not only by other
Canadian sectors, but also by other countries trying to bring the benefits
Canadians enjoy in telecom to their own people.
The rolling changes that resulted from 92-12 have created a market, an
industry, and a regulator that are all better positioned to handle some of the
ups and downs of an industry that will continue to evolve.
Trying to stay static is something none of us can do in this business. There
will never be a state of rest - an end-point - for companies, or for public
policy.
In that dynamic context, our mandate, is clear.
Balancing the sometimes-conflicting interests of all our stakeholders -
consumers, communities and companies alike is our key mission.
We want to ensure that the Canadian communications infrastructure - as it is
now and as it will be tomorrow - thrives in an environment of innovation,
competition and consumer choice. That requires regulation to be more and more
agile in adapting to changing conditions.
The decisions that companies and regulatory agencies make will not always be
easy ones as we move into competition's second decade. That's probably an
understatement!
The Commission's focus through it all will remain on promoting the open
competitive market - in all its dimensions in all areas - and making it a
national reality as quickly and as efficiently as possible. We pursue competition
not for its own sake, but as the most efficient, direct way of upholding a
superior goal: the public interest and our national objectives in
telecommunications.
That, to me, is how the legacy of the last decade can contribute to a vibrant
telecom industry for years to come.
Thank you.
- 30 -
Contact: Denis Carmel, Ottawa, Ontario K1A 0N2
Tel.: (819)
997-9403, TDD: (819) 994-0423, Fax: (819) 997-4245
e-Mail:
denis.carmel@crtc.gc.ca
Toll-free #
1-877-249-CRTC (2782)
TDD -
Toll-free # 1-877-909-2782
This document is available in alternative format upon request.
Date Modified: 2002-06-07 |
