Canada: Ringing The Changes

On 27 September 2005, Canada’s commissioner of competition, Ms Sheridan Scott, appeared before the Canadian Radio-television and Telecommunications Commission (the CRTC) and recommended that the CRTC increase its reliance on competition principles in determining whether to deregulate the provision of local telephone exchange services in Canada. The CRTC is currently holding hearings on the deregulation issue and is expected to release its final decision sometime in 2006.

Prior to the competition commissioner’s appearance, the Competition Bureau (the Bureau) filed with the CRTC a comprehensive 107-page written submission setting out its suggested framework for deregulating local telephone exchange services. The competition commissioner’s testimony supplemented this submission with a proposed streamlined framework for the CRTC to employ in its analysis.

Under Canada’s Telecommunications Act, the CRTC is required "to forbear" from regulating telecom services where the service "is or will be subject to competition sufficient to protect the interests of users".

Currently, the CRTC regulates the provision of local telephone exchange services by what are known as "incumbent local exchange carriers" (ILECs). These are essentially the former monopoly telephone companies in Canada.

The purpose of the CRTC hearings is to determine the appropriate analytical framework to apply in deciding future applications to deregulate the ILECs’ local exchange services. In its written submission, the Bureau recommends that the CRTC adopts a market-centred approach to the issue, stating that "regulation should only remain where it is clearly demonstrated that the net benefits of regulation outweigh the net benefits of relying upon market forces, even where competition is imperfect". Perhaps not surprisingly, the Bureau pointed to its 2004 merger enforcement guidelines (the MEGs) as a useful framework for the CRTC to use, calling upon the CRTC to conduct a full-scale competitive effects analysis – including defining the relevant product and geographic markets and assessing entry conditions – before refraining from regulation.

The Bureau also recommends that the CRTC makes clear in any forbearance order the precise matters it would continue to regulate so that there is no confusion about what (unregulated) conduct would then fall under the Bureau’s purview.

The competition commissioner’s testimony before the CRTC repeated many of the principles outlined in the Bureau’s written submission. However, the competition commissioner also attempted to respond to criticism that repeated application by the CRTC of a full-blown competitive effects analysis for each local telephone exchange market would be too cumbersome in a large and sparsely populated country like Canada, where competitive conditions vary from locale to locale. To that end, the competition commissioner proposed a streamlined forbearance checklist designed to effectuate the principles outlined in the Bureau’s submission without placing an excessive administrative burden on the CRTC.

For example, with respect to market definition, the competition commissioner distilled the various factors outlined in the Bureau’s written submission into three "pivotal factual issues":

1. whether consumers are willing and able to substitute other technological forms of access for ILEC circuit-switched local exchange services (such as Voice over Internet Protocol services);
2. whether ILEC local services have attributes that competing local services cannot match; and
3. whether companies offering competing local services can successfully retain local service customers and reduce churn.

Similarly, the competition commissioner proposed a checklist of six considerations to help the CRTC in determining whether market conditions justify forbearance from regulation:

1. the ILEC faces at least one other facilities-based competitor;
2. the competitor is able to obtain and retain a local customer base;
3. the competitor has similar or lower variable costs than the ILEC;
4. neither the ILEC nor the competitor is capacity constrained;
5. there is evidence of vigorous rivalry between the competitor and the ILEC; and
6. industry characteristics make anticompetitive conduct by the ILEC unlikely.

Interestingly, although her prepared remarks treated these checklist considerations as necessary threshold conditions for forbearance, the competition commissioner backtracked somewhat in response to questioning from CRTC members at the hearing and said that the six considerations were merely "factors" to be taken into account in deciding whether or not to deregulate.

The competition commissioner’s checklist reflects the emphasis placed on facilities-based local exchange competition in the Bureau’s submission. In that regard, the competition commissioner said in her oral testimony that the CRTC should limit its inquiry to existing competitors and those for which entry does not require significant investment because the considerable expense and time lag associated with constructing new network facilities make de novo facilitiesbased entry a poor check on market power.

The competition commissioner also stated that, while the existence of at least two independent facilities-based service providers in a market would significantly constrain the ability of ILECs to engage in anticompetitive conduct, the CRTC should consider, as a "transitional measure", maintenance of a temporary price ceiling in forborne markets in order to limit still further the scope for ILECs to recoup foregone profits. A price ceiling would also ensure that gaps in network overlap within a defined local market could not be exploited by the ILEC.

The CRTC’s proceedings regarding deregulation of local exchange services are taking place at the same time that a government-appointed panel of experts is conducting a wideranging review of Canada’s overall telecom policy and regulatory framework. The panel of experts conducting that review – which focuses on regulatory reform, telecom access and the promotion of new technologies – is holding public consultations through the autumn before issuing formal recommendations by the end of this year.

The Bureau is involved in this broader policy review process as well, having filed a written submission with the panel. As in its submission to the CRTC on deregulating local exchange services, the Bureau’s submission to the telecom policy review panel stresses the need for greater competition analysis in forbearance decisions and suggests that regulation at the wholesale and retail levels should be revisited in respect of markets characterised by facilities-based retail competition. Among other things, the Bureau also urges increased cooperation and information sharing between the Bureau and CRTC and recommends eliminating Canada’s controversial limits on foreign ownership in the telecom sector.

The interface between competition law and telecom regulation is clearly an issue of considerable importance for the commissioner. This was to be expected given the commissioner’s background in the industry, having worked at various points in her career for both the CRTC and Canada’s largest telephone company. In addition to her advocacy efforts domestically, the commissioner is also now co-chair of the International Competition Network’s working group on telecom services.

It remains to be seen, however, to what extent the Canadian government and the CRTC will be receptive to an increased role for the Bureau, and Bureau-type economic analysis, in the area of telecom regulation. The first signal will perhaps come with the policy review report that is expected to be released before the end of this year, as described above.

The Bureau’s submission to the CRTC regarding the deregulation of local exchange services is available on the Bureau’s website at http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=1872&lg=e.

The competition commissioner’s remarks to the CRTC are also available on the Bureau’s website at http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=1950&lg=e. Copies of all other written submissions to the CRTC and related materials are available at http://www.crtc.gc.ca/PartVII/eng/2005/8640/c12_200505076.htm.

Complete transcripts of the CRTC’s forbearance hearings are available at http://www.crtc.gc.ca/eng/process/2005/sep26_t.htm.

The Bureau’s submission to the telecom policy review panel is available on the panel’s website at: http://www.telecomreview.ca/epic/internet/intprpgecrt. nsf/en/Home.

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