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Members, I call the 42nd meeting of the Standing Committee on Industry, Science and Technology to order. Pursuant to Standing Order 108(2), we are continuing our study on the deregulation of the telecommunications sector. We have two sessions today. Each is one hour.
In our first panel we have representatives from four cable television companies. First, from Shaw Communications Inc., we have Mr. Jean Brazeau, vice-president of telecommunications. Second, from COGECO Inc., we have Mr. Yves Mayrand, vice-president of corporate affairs. Third, from Rogers Communications Inc., we have Mr. Kenneth Engelhart, vice-president of regulatory. Fourth, from Vidéotron Ltée, we have Mr. Luc Lavoie, executive vice-president of corporate affairs, Quebecor Inc.
Gentlemen, we will start off with opening statements from each one of you of up to three minutes. Then we'll have about 45 minutes for questions from members.
We'll start off with Mr. Brazeau, please.
:
Thank you, Mr. Chairman, and members of the committee. Shaw certainly welcomes the opportunity to appear before your committee to provide its views on the government's initiatives in the local telecommunications market.
Shaw has publicly stated its support for the minister's order and directive because these initiatives recognize that consumers must come first. Canadian consumers can best be served by an approach that relies on market forces and facilities-based competition. The minister's initiative implements these principles, and consumers across Canada stand to benefit. However, Shaw believes that three issues must be addressed in the order.
The first is interconnection and access to rights of way and support structures. Interconnection to the public telephone system and access to support structures and rights of way are the foundation of facilities-based competition. Without interconnection, facilities-based competitors cannot serve their customers. Without access to the telephone companies' poles and conduits, we cannot build out our own networks. Timely and effective interconnection arrangements and access are therefore necessary for durable facilities-based competition. However, arbitrary delay and denial of access and interconnection are not uncommon in our business.
In order to be consistent with its policy of promoting facilities-based competition and to ensure that consumers realize the full benefits of the proposed order and directive, the government must direct the CRTC to ensure that facilities-based entrants are able to obtain efficient, timely, and effective interconnection and access to the support structures and rights of way we need to build our networks.
The second issue is winbacks. The proposed order provides for the immediate removal of winback restrictions. The telephone companies want forbearance in order to be able to win back customers through targeted marketing initiatives. The telephone companies have little or no interest in implementing broad-based price reductions for their local services; it is removal of the winback restrictions that the telcos really want, in order to retain their dominant market share. It is not forbearance. Shaw believes, therefore, that the winback restrictions should not be removed until such time as the criteria for forbearance have been satisfied.
The final issue is the need for a level playing field for telcos and cablecos. If cable is to compete effectively while delivering full benefits to consumers, then existing regulatory restrictions on cable companies must be made more flexible. At present, cable companies are subject to an extensive regulation under the Broadcasting Act. This regulation restricts their ability to respond to consumer demand. These regulations should be reviewed and replaced to the maximum extent possible by market forces. This will ensure that cable companies have full flexibility to compete aggressively with the telephone companies. More importantly, it will ensure that consumers realize the maximum benefits from competition.
In conclusion, Shaw supports the proposed order and the minister's directive; however, the three changes that we have put forward will, we believe, allow consumers to fully benefit from the minister's approach.
Thank you very much.
:
Thank you, Mr. Chairman and members of the committee.
Thank you for this opportunity to provide Cogeco Cable's views on the government's proposed order varying the CRTC's decision on regulatory forbearance for local access telephone services of incumbent telephone companies in Canada. The time allotted is short, and I will be brief.
First, let me voice our deep concern that political decision-making now appears to be the norm in Canadian telecommunications, taking precedence over quasi-judicial decision-making by the independent administrative body formally entrusted by Parliament with the job of ruling on telecommunications regulatory issues, including forbearance. As a result, independent fact-finding, proper evidentiary assessment, and due process have all taken a beating, in our view, with a resulting loss of trust in the due process.
The Canadian government' s official vision for smart regulation includes trust in addition to innovation and protection of the public interest. The proposed order, in our view, is at odds with that vision.
[Translation]
Second, the proposed order is also at odds with basic principles of competition law, as it completely ignores significant market power and market share of the incumbent telephone companies where SMP still prevails. As a result, incumbent telephone companies with up to 100% market share in some local geographic markets would be deregulated based on the mere presence of alternative wire line and wireless facilities providing alternative local access services.
Third, the proposed order would immediately eliminate the incumbent telephone companies 90-day win-back restrictions throughout Canada, even where alternative local access services are still not available. In practice, this means that in local exchange areas where Cogoco Cable has not been able to launch an alternative service yet due to facilities or interconnection constraints—and there are still a number of those in our footprint—the incumbent telephone company could immediately target in those local markets each and every new customer signing up for our alternative service with special and confidential offers, thus making it uneconomical for us to launch there.
[English]
Fourth, the proposed order is at odds, in our view, with several recommendations of the report of the government's own experts, the Telecommunications Policy Review Panel, published less than a year ago, on the way to manage the transition to deregulation of incumbent telephone companies.
But more importantly, when will the government focus on a new Telecommunications Act instead of rewriting the decisions of its regulator?
Thank you for hearing us out. We will be pleased to answer questions you may have on these issues.
If we take a look at the CRTC's forbearance order, they said, as many regulators around the world have said, that they will deregulate once the incumbent phone companies lose significant market power, and they assessed a 25% market share loss as the point at which significant market power is lost. We agree that this is the right number. But if you look today at the numbers for the market share losses the phone companies have incurred in most of their major markets, they're already at the 25% level, or quite close.
Why is it that they have not simply applied for deregulation under the CRTC process? Why are they so opposed to the CRTC process and so in favour of this order? There are really two reasons, which my colleagues have alluded to.
The first is that the proposed order, unlike the CRTC decision, immediately eliminates the winback rules. Those rules are eliminated as soon as the order is promulgated, whereas the CRTC required the phone companies to lose 20% market share before the winback rules are eliminated.
The second is the quality-of-service standards. Those have been watered down by the proposed order.
I think those two changes are very significant.
Dealing with the winback rules first, those rules say that for the first three months after you get a customer, the incumbent cannot phone up that customer to make them a special offer.
There were the same rules in cable television. In fact, in cable television we still have those same rules today for apartment buildings and condominiums, to protect Bell ExpressVu, who argued for them long and hard. The reason for those rules is that in a network business they know exactly what customers they have and know exactly when they've gone to the competitor. It's a way to try to give the competitor a chance to get started before competition just gets knocked out of the box.
The quality-of-service standards are also important. They're important because what they say is that when you get interconnection facilities or services from the incumbent; or business solutions, for companies like Rogers, which gets unbundled loops for the business market; or high-speed pipes from the phone companies; or, for companies such as Rogers that offer telephone service where we don't have cable—we offer it in Montreal and Calgary and Vancouver and have no cable there and need to use phone-company loops—they have to give you the same quality of service on those wholesale facilities as they give for their retail customers. And they never do; they always fall short on that quality of service.
Once the CRTC made it a requirement that they had to meet those quality-of-service standards to get deregulation, we started to see some rapid improvement in the quality of service, a dramatic improvement that I believe will come to an end now that the proposed order, once it becomes a final order, will successfully water down those quality-of-service standards.
Thank you very much.
:
Thank you very much, Mr. Chairman.
I will be very brief and I will not repeat what we said publicly when the minister announced his decision last fall.
Vidéotron and its parent company, Quebecor, are basically in agreement with the approach advocated by the minister, mainly an approach based on the free-market system, market forces and as much deregulation as possible.
It is true that we appeared before you last fall in order to seek a longer transition period. However, as you may know, yesterday Vidéotron announced in a press release that we now have in excess of 400,000 local and residential telephone service subscribers. As a result, we believe that market forces can now fully come into play.
The consumer is the first to benefit. This is demonstrated by the fact that when Vidéotron launched its residential telephone service in January 2005, the cost of telephone services went down for the first time in the history of Canada. The costs were cut dramatically. This pressure on the market was beneficial to consumers.
Basically, we said, and we repeat, that we would encourage the minister to continue along the same path, to carry through with his reasoning and push, with all of the political might that he has, to deregulate the entire cable industry as well.
With the digital revolution that is unfolding before our eyes, cable companies are acting less and less like cable companies and more and more like telecommunication companies that must be active in all telecommunication sectors. Cable companies must currently deal with complicated regulations that are not in the interests of the consumers, the market or the Canadian economy.
We would encourage the minister and the government to continue moving in the direction of deregulation and a free-market system, and we would encourage the government to accelerate the arrival of new competition in the mobile telephone sector. We believe that this sector constitutes the next frontier and that new competition in the mobile telephone sector will enable Canadians to stop having to pay 60% more than their American neighbours for their telephone services. As far as the penetration rate is concerned, Canada currently is ranked 30th amongst OECD countries.
Canadians do not have access to the latest technology as they should. Right now, the most recent technology is becoming the norm in Europe, Asia and very quickly in the United States. Canadians are lagging behind whereas this new generation of technology encompasses much more than mobile telephone services: it is a portal to culture, music and television programming which will become a universal communication vehicle.
We would therefore encourage the government to do what is needed so that there is more competition in this sector.
Thank you, Mr. Chairman.
:
To give you an example, we are a facility-based carrier. This policy, or the government's direction, is certainly to promote facilities-based competition. But we need to interconnect those facilities to the incumbent's existing network. They really control the local network. I need to call them to interconnect my network; they do not call me. We've had some challenges to ensure that this interconnection happens on a timely and effective basis.
An example is Vancouver. It will take us probably a minimum of nine months to interconnect our local network with TELUS in Vancouver. The challenge we have is that we're interconnecting all of our network in a number of cities in Alberta, B.C., Saskatchewan, and Manitoba. Getting the incumbents focused on ensuring that this happens effectively is very challenging. You can certainly call the CRTC and ask them to intervene, but they're reluctant to—in their view—micromanage the process. You are left begging and sometimes yelling on the phone to try to get the incumbents motivated to complete the interconnection.
If we're not interconnected, then we can't provide our service and we're not seeing the competition we're supposed to be seeing. That is our big challenge.
:
Thank you, Mr. Chairman.
First of all, I would like to thank you because it was your testimony, given last October, that prompted committee members to ask for a postponement, until March 2007, so that we could examine the situation. In December, the minister decided to circumvent our motion, but since that did not suit the committee, we passed a motion to do an exhaustive study on the whole issue of regulation.
Would you agree that the minister should wait for the results of our consultations, which will take place during the course of eight meetings, before deciding which instructions he will be issuing with respect to deregulation?
I'd like to have an answer from each of you. I see that there is strong opposition in three out of the four briefs.
Mr. Lavoie does not appear to be opposed, but I would like to hear his opinion on the relevance of conducting a study to ensure that the model we decide to use will be determined by an acceptable democratic process.
:
That is certainly not the message that we want to give you.
However, on behalf of Cogeco Cable Inc., we are telling you today, as we did on October 19, that we are concerned about the way that these orders are made.
Our company as well as many other parties—not only industry people but consumers, telephone service users and all kinds of interest groups as well—have spent a great deal of time and effort to make presentations and submit accurate documents to the Canadian Radio-television and Telecommunications Commission, the CRTC, about competition issues in certain geographic markets. We are under the impression that no consideration has been given to any of this work, that it has been dismissed. We still don't have the master plan, which is a new telecommunications act, whose objectives would reflect the vision provided to you by the panel of experts appointed by the government itself. That concerns us. We do not want to cause any undue delay, but it is important that this work be done properly.
With respect to the forbearance order specifically, we are troubled in particular by the fact that this whole notion of significant market power, regardless of geographic market, has been dismissed.
You need to understand that the development of competition does not occur at the same rate everywhere, but is in accordance with the size and location of the markets. In small rural region markets, competition develops more slowly, it is more difficult and the economic base allowing for competition is much smaller.
:
I think that we need to have an understanding of what is meant by the relevant geographic market. Competition agencies have a method for defining geographic markets throughout the world. This is not something that is used in Canada alone.
We could spend a great deal of time debating what should constitute units as small as the local exchanges or larger units. However, we have to be able to define what is meant by a geographic market and we have to view these things on a geographic market by geographic market basis.
I find it passing strange that, when an established telephone company in a given geographic market is deregulated, there is no concern for the fact that this company may have up to 100% of the market, whereas companies that want to combine their activities in order to obtain a market share that is considerably less than 100%, through mergers or acquisitions, would be subject, in the same market, to a review by the Competition Bureau.
I do think it's a good idea, because one of the concerns I have, along the lines of what Yves was saying, is that the CRTC reads thousands and thousands of pages of evidence. They hear from all these witnesses. They have oral hearings. There are huge books of transcripts.
Cabinet ministers are very busy. I imagine that when these proposed orders are dealt with, they often get briefed for an hour or two. They just don't have access to the same level of information as a regulator has. So if the committee could have, as you're planning to, eight days of hearings, I think it would be a very valuable body of information that could assist the minister in making his determination.
:
I am very concerned about the policy direction. I think that sometimes government does something that seems on the surface to be a good idea, and then it has unintended consequences, and the policy direction may be an example of that.
The policy direction talks about maximizing the use of market forces. I think all of us, and certainly I myself, strongly believe that market forces are to be preferred to regulatory actions, so how could one really be overly critical of the policy direction? But what we see now that it's in force is that it's thrown a huge spanner into the works of everything the CRTC does.
Just to give you one example from the world of telecom that we live in, the phone companies provide what are called colocation facilities. They are little rooms in their central offices that are used when you acquire unbundled facilities from them. You pay rent for those rooms, and you've got hydro and all sorts of other things.
Well, the CRTC determined that we were being overcharged for the hydroelectric power and overcharged for some of the other elements. They felt that the costing studies done by TELUS, in this case, were faulty. They so ruled. TELUS then appealed back to the CRTC, as they're entitled to do, and said that they couldn't overturn TELUS's own costing estimates, and that anyway they--the CRTC--had started this hearing five years ago, and it was too late to give a refund back to the competitor. Those are the sorts of battles we have all the time.
Now TELUS has filed documents with the commission saying that because of the direction, TELUS has to be right. Because of the direction, you can't challenge our costing studies and you can't challenge our legal opinion on the issues before you. They're creating this argument--which I hope the commission doesn't buy--that says the direction changes everything, and now all the old decisions have to be rewritten and all the old rules have to be thrown out.
:
I can speak briefly to that.
From our vantage point, the policy direction is out. I don't think we've come here to say that we should move backwards and try to undo what has been done. We voiced concerns that the policy direction, in the way it was drafted and brought about, might do more to create difficulties than it would to solve issues.
I think we would like you to understand that one of the big difficulties lately that Cogeco Cable has with this whole process is that we seem to be having some piecemeal use of certain selected parts of the recommendations of the Telecommunications Policy Review Panel report. That report contemplated a policy direction--there is no question about that--and we don't have an issue in principle with that, but it did entail a number of other tied recommendations, including a recommendation that the government move with the policy direction but change the act to repeal the cabinet power to modify individual CRTC decisions.
So much of our unease is with the way in which we seem to be moving with piecemeal measures that do not implement the whole thrust of telecom policy review and that ignore certain fundamental considerations, such as the TPRP's finding that it is not advisable, in a democratic system of administration, to have concurrent use of policy directions and individual decision rewriting from the regulatory body.
:
I think that indeed time is of the essence. The market is moving at an incredible pace. The digital revolution is something that is completely changing the way telecommunications work all over the world, as we speak. It changes the time span we can apply to different decisions of this sort.
I think the minister was right to move fast, but I think he should move just as fast in other sectors to deregulate them, because as we speak, we're seeing—and we could have a long discussion about this—that the IP protocol, the Internet, is becoming the universal vehicle for all sorts of communications.
Soon this committee will not invite cable companies such as we are, because you will not be able to define us as cable companies. As we speak, we at Vidéotron—and I know it's true for the others—have more than 700,000 Internet access users; we have 400,000 wireline telephone users; we have 1.6 million, or close to it, subscribers to our TV distribution system, digital and analog. Are we a cable company anymore? We're not a cable company anymore. We're a part of this digital revolution; we're a telecommunications company.
We do not have years to think it over; otherwise we're going to miss the boat in Canada and we'll be late in terms of technology.
:
Thank you, gentlemen, for coming today.
I'm going to make a purely partisan pitch at the beginning. Mr. Engelhart, you have the same last name as a town in my riding where they vote New Democrat, so you obviously are a very wise and intelligent man. I have to say that at the beginning.
Some hon. members: Oh, oh!
Mr. Charlie Angus: I was interested to hear the various discourses given this afternoon. I'm interested because we see examples such as, with Shaw, that you're looking to the CRTC to make changes so that you can get into the telephone market, and yet both Shaw and Vidéotron are publicly defying the terms of their licences right now, with the Canadian Television Fund.
I'd like to ask you and Vidéotron, are you going to pay up your share of the CTF this year?
Once again, we'll go back to the early 1990s, when we had our cable companies come before us asking for help to stop competition from satellites. At that time, the decision that was made was to deregulate and to bump up subscriber fees in order to penetrate markets. Then, after that change had occurred, the decision was the cable production fund, which became the CTF. Now we have a change in direction coming from the cable companies, and I'm looking to see whether they're going to continue with what they're saying publicly, that they're not going to pay after August 31 to this fund and are going to insist on another set of arrangements.
:
Thank you very much, Mr. Chair.
Thank you, gentlemen, for your presentations.
On December 11 and 12, shortly after the minister announced his intentions for the variation order, most companies--and we're sensing this at the table again today--put out press releases indicating strong approval of the minister's direction. They basically committed to deregulation and announced their intention to work with the minister, saying that deregulation is the best avenue for consumers. Generally speaking, with some variation, that was almost a unanimous consensus within the cable sector.
Now we're hearing suggestions that when the minister reviews CRTC decisions and contemplates the potential for a variation order, what also happens is that the minister has one hour or two hours to review a decision, that is briefed for about one or two hours. I find that statement a little strange, given that it's unusual for a minister to issue a variation order on a CRTC decision. This particular minister has done it on a consistent basis.
You issued press releases, but now we're hearing that really it's not necessarily about complete and utter deregulation. We're hearing from your testimony that you feel your sector of the industry still needs to maintain certain regulatory benefits to enable you to compete in market share areas. Based on the virtue of your ability to bundle and other things, you have had significant market penetration in key lower-cost market areas, for example, above and beyond the 25%. Your desire to maintain restrictions on winback and other things was not in your initial press release. Most of your companies are highly capitalized. In fact with Rogers, for example, I think your market capitalization meets or exceeds Bell Canada's.
As a member of this committee, looking to provide advice to the House, I want you to help me out here. How do I communicate to my colleagues that this is good sound policy and sound deregulation, carte blanche, but at the same time that we still need to cherry-pick protective mechanisms for a sector that has penetrated market access, won customers, and is still looking for certain protections?
:
Well, we didn't put out a press release supporting either the draft order or the direction. I know some of my colleagues did, so they can explain their press releases.
We, at Rogers, absolutely believe that deregulation is the right approach, that market forces are the right approach, and that competition is the right approach. But almost every western country has followed the approach that the CRTC has, where you don't just decide on day one that it's competitive now and let's go. You have a transition period. As I said in my remarks, whether you do it under the proposed order or under the CRTC's decision, that transition period is pretty much over. We're pretty much at the 25%. It is time to deregulate.
My concerns about the way it's being done under the proposed order are the loss of the quality-of-service incentives--I think it would have been very valuable to leave that part of the CRTC order in--and secondly, the winback rules for those markets where there is no competition today. I think you may discover that some of those markets will never get the benefit of competition now that those winback rules will be removed. But I would agree with you that protectionism is a bad thing, that competition is a good thing, and that after the transition period you want to let it rip.
:
Thank you, Mr. Chairman.
Welcome back to a number of you who have been here before. I look forward to the questions that are still to come, even though I guess we are running out of time.
I want to go to you, Mr. Engelhart, regarding the winbacks.
It's been estimated in every telecommunications market in Canada that it's really about prohibiting the ability to call back, as you've mentioned, within 90 days. The telecom panel, I think in its March report, talked about how making offers and counter-offers to the same customers is the very essence of competition and, in general, how winback campaigns should not be restricted by the regulator. I'm wondering if you could make a comment on that.
:
If you would indulge me, let me read to you what Bell said about the winback rules in the cable market. This is a statement they made on January 28, 2005, in a publication called
Canadian Communications Reports, a statement by the director of regulatory matters supporting the winback rules in the cable market.
They said:
You invest a lot of money in a building to put a facility in there, to market to the building, and so on. When you make that investment, you have to count on a certain penetration just to break even, he notes. It really doesn't matter if it's a TV service or anything else. When you're selling to a building, you have to count on a certain penetration level just to break even. If you open a donut store or something in the lobby, you have to assume a certain volume of sales to make your presence worthwhile. And if the donut store next door came along and suddenly said, “Don't buy donuts from him, I'll give them to you for half price”, you have no opportunity then to make a business. So are you going to go into another building and lose money there too? The cable company can chase you all over town until you run out of money. (The revised winback rule) is another measure that the commission has put in place to give competition an opportunity to get established...It's only a 90-day opportunity to prove to customers that you have the ability to provide the service they want.
So that's Bell—big company, big satellites already launched—and they felt they needed that protection just to get established, and they still have that protection today.
I agree with you, sir, that protectionism is something that normally makes us all question whether the regulator is doing the right thing. But this formula of having winback rules in place has worked. I'm concerned that we're going to come to some small market five years from now that won't have phone service, because of the elimination of these rules.
:
Members, we are into our second hour, and we have our second panel, consisting of the competitive local exchange carriers.
We have three witnesses before us today. First of all, from Primus Telecommunications Canada, we have Ted Chislett, the president and COO. Secondly, from MTS Allstream, we have Chris Peirce, the chief regulatory officer. Thirdly, from Vonage Canada, we have Joe Parent, vice-president of marketing and business development.
We'll start off in the same order, beginning with you, Mr. Chislett, for your opening statement.
:
Thank you very much for inviting me here today. You probably have copies of my presentation, if you want to follow along.
Today, in the short time I have, I would like to impress upon you the need for a wholesale access regime and ongoing regulatory oversight to monitor and react to those players with market power, post-deregulation. This is necessary to ensure that a competitive retail market exists and that impediments to competition do not develop.
By way of background, Primus Canada is the largest alternative telecommunications service provider in Canada that is independent of incumbent telephone or cable companies, with approximately one million customers.
Some appearing before you may say there already is lots of competition in the local market in Canada. I say not to be misled by the extent of competition or the reasons for it. All competitors are reliant on either the telephone or cable companies' local networks to deliver local broadband and other services to their customers. The extent to which vigorous competition exists in local and broadband services from players such as Primus and others is a direct result of the current CRTC policies and its mandatory wholesale access regime.
The local access network is different from other areas of telecommunications like long distance, because it is a “natural monopoly”, like electricity, gas, and water distribution. The cost for competitors like Primus to overbuild this last mile network by digging up the streets and backyards is enormous, and it's an insurmountable barrier to facilities-based entry.
For Canadians to receive the benefits of telecom competition, we need many competitors who can innovate and compete, not a monopoly or a duopoly. A workable wholesale access regime will foster vibrant retail competition and thereby enable the reliance on market forces, eliminating the need for retail rate regulation and tariffs.
However, after retail forbearance, even with wholesale access, we are still very concerned about the continued market power of the ILECs and cable companies. We are concerned that their market power could unduly impair competitive forces in the market, resulting in higher prices, less innovation, and lower quality of service. Therefore, an ongoing oversight role is required to ensure that the actions by dominant players, either individually or jointly, will not unduly impede competition and be detrimental to the objectives of the Telecommunications Act. This oversight should normally be non-intrusive, but the CRTC needs to retain the power to step in and intervene if necessary in order to promote the telecom objectives.
Here are some examples. I think everyone would agree that if the ILEC were to call every customer who switched from their service and offered them $1,000 to switch back, this would be anti-competitive. While we haven't seen $1,000 credits yet, customers joining our competitor are called, and we have seen offers of over $400 credits. We have also seen long distance credits applied to the customer's local bill, which violates the CRTC's rules.
As another example, if service is consistently worse for wholesale customers than for the dominant player's own retail customers, potentially penalties or even institutional separation may be required.
Guidelines may also be required for promotions. Short-term service discounts or incentives are part of a competitive environment, but it would not be fair if returning customers were offered lower long-term rates not available to customers who did not leave the ILEC. This would establish two classes of customers, which would be unjust.
Intervention may also be required if retail rates are lower than the wholesale rates or if services are not made available to competitors for resale. Also, it may be necessary to mandate network neutrality, prohibit blocking of content, and define what level of packet prioritization is acceptable.
This oversight is broader and more specific than general competition law, as it is concerned with the telecom objectives and fostering an environment to stimulate innovation and competition in an industry of natural monopolies. The CRTC, as the industry's regulator, is needed to provide this oversight.
In conclusion, as the telecommunications industry moves from economic regulation to deregulation, there is a need for a workable wholesale access regime and ongoing regulatory oversight to monitor those players with market power and ensure that Canadians can benefit from competition.
Thank you.
MTS Allstream is a leading national communications solutions provider. In Manitoba, we are the incumbent, and we now face competition from Shaw. We are unique among the former monopoly providers in that over half our revenues come from having committed to a growth strategy defined by expansion from coast to coast, where we have none of the clear advantages of incumbency. Nationally, we are the leading provider of competitive solutions to Canadian businesses, whether they be small, medium, or large.
By definition, then, we endorse the objective of achieving fully competitive markets as serving the best interests of Canadian customers. Competitive market forces will bring faster innovation, customer choice, and competitive pricing. Market forces that are not competitive, where one dominant player is free to exercise its market power, will slow innovation, bringing less customer choice and inflated pricing. Importantly, we also support the policy direction issued in December by the government. In its final form, that policy direction responded positively to the concerns we raised before this committee.
We cannot support, however, the proposed order dealing with forbearance. In its current form, that proposed order strikes at the very core of the conditions under which the CRTC may or must not grant forbearance, per the Telecommunications Act.
The proposed order offers a choice of two tests to an applicant seeking retail deregulation. The first is the test referred to Monday by Sheridan Scott, the Commissioner of Competition. It is multi-pronged and, while ambiguous, at least considers the presence of market power, including reference to market share, the number of competitors offering service, and active rivalry, all to determine if competitive market forces are present. But the second choice is a test that ignores all of these attributes of competitive market forces and merely calls on the regulator to count the number of providers apparently offering service: two facilities-based providers and, for residential markets, an additional wireless provider.
Clearly, no former monopoly in its right mind will choose Ms. Scott's test. To be deregulated in the local market without having one's market power even considered, as per the second test, is manna from heaven for the former monopolies, not for consumers.
Just as clearly, the second test, which I'll call the mere presence test, is contrary to the approach specifically recommended by the telecom policy report, that deregulation should only occur where significant market power was found not to exist.
The mere presence test is also inconsistent with the policy direction, which recognized the ability of the former monopolies to exercise market power in the retail market, absent an updated essential facilities regime for competitors, and which directed the CRTC to put such a regime in place, a task that won't be completed until 2008.
Our detailed comments submitted to the government in response to the proposed order point out that the mere presence test is fundamentally incompatible with competition law. Nowhere else in the world, save in the now re-monopolizing U.S., would regulators consider deregulating an incumbent without looking at the actual state of competition in the market. Further, and as was alluded to Monday by Richard French, the mere presence test is unworkably vague.
Most importantly, we are concerned with the legality of the proposed order, which supplants the statutory obligations of the CRTC with the mere presence test. The proposed order effectively repeals subsections 34(1) and 34(3) of the Telecommunications Act.
Obviously, cabinet cannot itself amend the statute. In our respectful view, the measure proposed will not withstand judicial scrutiny.
Despite our wholehearted endorsement of the objective of competitive market forces and attendant retail deregulation, we can't support the proposed order. The existing forbearance decision offers more certainty and is, frankly, more streamlined.
Thank you.
:
Thank you for the invitation to appear.
For those members who aren't yet familiar with Vonage Canada, we're a leading independent provider of innovative consumer-friendly broadband telephone service, also referred to as voice over IP or VOIP. We've been in the telecommunications business for a little over two years, and within that time we've created over 200 well-paying technology sector jobs in Canada.
We believe Canadians are hungry for innovative and well-priced alternatives to the services of the large telephone and cable companies. We want to continue to build our high-growth business and provide that choice to consumers and businesses.
The committee study is on telecommunications deregulation. Vonage Canada supports the goal of a deregulated telecommunications market structure that will ultimately produce lower prices, greater choice, and increased innovation for Canadians in our economy. However, we cannot simply wish such a competitive market structure into being. The CRTC, an independent regulator, conducted an extensive proceeding and developed a sound plan for the transition from a market still dominated by former monopolies to robust and sustainable competition. By contrast, the minister's proposed order varying the local forbearance decision assumes a competitive market regardless of the overwhelming evidence that the former monopolies still dominate. It does so in contradiction of the Competition Bureau's criteria and in contradiction even of the Telecommunications Act.
But the main reason we felt it important to address you today is that the proposed order takes Canada in the direction of less innovation and of less choice, not more. The minister's proposed order would replace the CRTC criteria with a singular focus on the presence of a competitor's network in the geographic market. This competitive presence test ignores completely the market power a telephone company continues to exercise.
A small provider like Vonage Canada is David to Bell's Goliath. We cannot ignore the former monopoly's market power, which is real and manifests itself every single day. Bell and TELUS can and do preclude competition by denying Vonage Canada access to their online advertising properties and by limiting the supply of broadband connections used to provide VOIP.
Moreover, under the proposed order, Bell and TELUS would have the ability to contact each and every new customer signed up by Vonage Canada at the very moment that customer acts on his or her decision to switch. Using the knowledge that they obtain through their monopoly position, the telephone companies will be able to offer those customers, and only those customers, a special deal. The vast majority of their customers will not experience lower prices as a result.
In our view, the competitive presence test adopted in the proposed order will simply transition the market from a telephone company monopoly to a duopoly including the cable company. These companies share a mutual incentive to protect their market share, but lack the incentive to compete aggressively for Canadians' business by innovating or contributing to our national productivity. The cable companies have simply matched the product and price offered by the telephone company. This may be in their commercial self-interest, but it does not result in true choice or innovation for Canadians.
Canadians will not and should not be satisfied with such a limited choice and poverty of imagination, nor, in our view, should the government.
Thank you.
:
Thank you for being here today and thank you for the frankness and the brevity with which you presented your concerns here today. I can tell you that on the opposition side we are deeply concerned about the rush by the minister to proceed notwithstanding the number of recommendations made in the TPRP.
I wanted to point out for my colleague Mr. Shipley that Bill genesis was Bill , and it was this member of Parliament who had everything to do with making that happen. Unfortunately, we had a lot of opposition at that time, including that from your party.
I realize, Mr. Shipley, you weren't here at the time, but I want to make it abundantly clear that the issue of fines concerns us. Fines, if they are limited only to administrative monetary penalties that go back to general revenue, assuming the time it takes to even get a fine, cannot possibly help you, the aggrieved party.
Tell me, from your perspective, how you see these fines--assuming that your various companies have been found to be in a position of having been egregiously violated--helping your company stay in business, or will you be gone by that point?
:
I think, to start off quickly, I would say that I agree completely that the problem with the AMPs approach is that there is nothing remedial about it. If you had a competition act that actually granted access to private interests to pursue a remedy, that would be different, but as Ken Engelhart mentioned in a previous panel, in terms of quality of service, there already are fines.
We just received another cheque for over $300,000 from Bell for inferior-quality service provided in the fourth quarter of 2006. They've clearly decided that the fines are just a cost of doing business, and that they are better off paying the fines than providing improved quality of service.
So to us, the act needs redefinition in terms of what constitutes anti-competitive behaviour in telecommunications, because the fines on their own don't make that any sort of avenue of relief for us.
:
Right now the Telecommunications Act calls on the CRTC, under section 34, to find as a fact, on a case-by-case basis, that sufficient competition is present to justify the granting of forbearance to a incumbent provider.
The telecom policy review admittedly says that section of the act should be replaced, but the way you replace that is through an amended piece of legislation. One test you could relate to this proposed forbearance order--the one Sheridan Scott was referring to--talks about various indicia of market power. But the problem is that the applicant gets to choose the test, and the test any applicant will choose is the one that isn't about market power; it's just about counting whether or not there are providers in the marketplace.
On the question earlier about what would happen in a rural or a more regional municipal setting, if small cable companies to which we'd provided the wholesale provider were looking to get into telecommunications and knew that as soon as they even existed in the marketplace the incumbent would be able to apply for forbearance, they'd be very hesitant to get involved. That's why we say that section is effectively replaced by this proposed forbearance order.
:
As I mentioned in response to Mr. McTeague's question, subsections 34(1) and 34(3) both call on the CRTC to find, as a fact, that there is competition present sufficient to protect the interest of users before granting an order of forbearance to an incumbent, a former monopoly provider, that applies to be deregulated from the retail business. So on a case-by-case basis, it's a statutory obligation of the CRTC to look at the situation, find competition, grant forbearance.
This order says, don't do that. It says, count providers. If there's more than one facilities-based provider offering service, then that's sufficient. You then must grant forbearance. Pay no attention to the market power of the incumbent; pay no attention to the other indicia of market power, which is what competition is all about--if those providers are offering service, that's sufficient. If the incumbent provider has 95% of the market, and there's one other provider with 2% and another with 3%, you must deregulate. You can't look at any further assessment of market power. We say that is effectively repealing section 34 by executive order, which would be really ultra vires the executive branch.
:
My next question is for Mr. Parent.
On the second last page of your brief, you refer to companies that have a mutual incentive to protect their market share. You stated, and I quote:
...but lack the incentive to compete aggressively for Canadians' business by innovating or contributing to our national productivity. The cable companies have simply matched the product and price offered by the telephone company. This may be in their commercial self-interest, but it does not result in true choice or innovation for Canadians.
The way I see it, cable or telephone companies will set a price and the players who want to latch on to these companies will be stuck, because they will have to pay in order to reach the network. They will have to pay and therefore they will not be competitive.
I would like to hear your comments on this matter.
:
First of all, I should explain the comment regarding simply price matching. If you look at the products that have been brought to market by the cable companies, it would seem they have almost intentionally been structured to exactly, or very closely, match the products that are already on the market from the telephone companies. So you simply buy a local access service and then you pay on a permanent basis, or you bundle for a block of long distance minutes and so forth.
There has not been, in our estimation, any significant innovation in terms of the way those products are brought to market, the way they're priced and packaged, and in fact, in the value that's baked into those. As an example, if you look at a Vonage service, it is essentially packaged to eliminate the concept of local versus long distance; you buy a service that provides you access across North America. It's that kind of innovation that we feel will only be brought to market by smaller players because it is not in the business interests of the cable companies or the telephone companies to change the structure. They are simply in a battle for market share, which will ultimately--hopefully, in their perspective--result in the highest possible prices and the highest possible returns for their business, whereas with smaller companies like Vonage, we must innovate or we die. If we don't come to market with something different, we don't have a business to bring.
To go forward with the policy as it's espoused could essentially result in a market structure that results in no significant change in the product that's brought to market, with no significant across-the-board improvements in pricing or competitiveness of the players that are left in the market.
Thank you for coming this afternoon.
I want to separate this thing. I want to go right back to basics again. As you know, the members opposite brought forward a motion a few weeks ago that would impose a six-month moratorium on the application of the policy direction. We're talking about the policy direction at this point.
Considering the minister brought forward this proposal in June and there was ample time for reflection from the industry and then you responded to that, I have to ask you a really basic question. Do you think--and we're talking now about the policy direction--would it have been prudent, would it have been constructive, to wait another six months for that direction to come into force?
:
Certainly we can and do compete on a regular and daily basis. The issue, I guess, boils down to the fact that I don't have 125 years of monopoly power behind me, and I don't have a 125-year relationship with this customer base, nor do I have millions of customers I can draw upon.
From our point of view, in order to have sustainable competition, which is one of the policy objectives, competitors need an opportunity to establish themselves in the market. And just as we're getting to a beachhead, if our customers are getting attacked or poached, or whatever word you want to use, before we have an opportunity to establish a relationship with them--a relationship that, in former situations, could last 90 days before their old beau came back and started offering incentives to them--it becomes much more difficult for us to create a viable business. In fact, if you look at the situation, where it costs us hundreds of dollars to achieve a customer, if more and more of those customers can be taken away without any kind of return before we've even had a chance to break even, it becomes very difficult to run a business.
Thank you, gentlemen, for being here.
Mr. Chislett, I have just a quick question. In your brief, and again in your verbal presentation, you indicated that your company is aware of breaches of the regulations and the criteria. When that comes to your attention, what do you do? Do you report? And what happens?
:
What we would really hope is that the test for forbearance, the framework--however it's amended--will provide certainty.
Remember, in Manitoba we will be seeking forbearance in the city of Winnipeg, because that's where Shaw is present. Nationally we want to make sure that forbearance is not granted in markets until competition is present.
The problem we have is that this test of mere presence, of counting providers, really has nothing to do with the presence or not of competitive market forces. And if we want competitive market forces, we should follow the specific recommendation of the telecom policy review panel report, which was to review, and if there is market power, don't forbear the retail pricing of the incumbents; if there is no more market power present, then forbear.
So we would prefer to see the order revised. If six months of hearings would help us do that, then certainly we'd be in favour of that.
:
We don't maintain that the consequence would be us disappearing. In the latest CRTC telecom monitoring report, people talk about the accelerating pace of competition. The most recent telecom monitoring report shows that in the business market in Canada, competitor share of business revenues dropped from 14% to 12% from 2005 to 2006. There's no question that the incumbents are dominant in the business market in our market in Canada today. It is a very competitive market, because most of what they do is forborne now. Certainly the market would be even tougher for competitors. As I said, 70% of the telecom market has been forborne. The only thing that is really regulated is the local exchange rates of the former monopolies.
At any point of forbearance, that's the high-water mark for a competitor share. With long distance, data services, or any services like that, after forbearance the incumbent gains back share and competitors don't. That's the history in Canada, without exception.
You have to expect that if forbearance comes along in local retail services, you will probably see a high-water mark for a competitive market share in that. We only have a market share at this point for most competitors, as Ken Engelhart mentioned, that is approaching 25% in a number of municipalities--more in Halifax.
:
In the areas we talked about, the forbearance proposal certainly needs more work in terms of ongoing oversight afterwards. That's certainly a shortcoming, more to the CRTC side of things.
Because the proposal from the governing council is basically to amend that, it has the same shortcomings with it. It would be worthwhile to look at that and to see what the consequences of what we're doing are.
We don't know what the right answer is supposed to be to forbearers. We'd better have a way of monitoring this afterwards to make sure we're getting what we expect and so that we're able to intervene and know what's happening. It's worthwhile to look at that area. I don't think enough study has been done to see what the consequences are and what the possibilities afterwards are.
I'm less concerned about what the threshold is. I'm more concerned about what monitoring you're doing afterwards to make sure the objectives are followed.