Canadian carriers, large and small, blast latest CRTC price cap decision

In time, the federal government’s latest rules for Canada’s phone companies could give enterprises a greater range of local voice service providers from which to choose. Immediate reaction to the decision, however, reveals a healthy scepticism across the entire Canadian telecom sector as to whether competition will indeed arise, and whether it is necessary at all.

The Canadian Radio-television Telecommunications Commission (CRTC) last month handed down its decision regarding “price caps” and local phone service. The CRTC tried to address an imbalance between competitive local exchange carriers (CLECs) such as Call-Net Enterprises Inc., and incumbent local exchange carriers (ILECs) like Telus Corp.

The CLECs have long complained that they pay too much money to access the incumbent-owned local networks. Connections like this are essential for the CLECs because most don’t have local loops of their own. Call-Net last year spent $300 million to access the incumbent local networks.

To make life less costly for the competitors and increase the likelihood of competition in the local voice service market, the CRTC said that as of June 1, ILECs would charge less for local network access: for the most part, CLECs would pay cost plus 15 per cent. They used to pay in the range of cost plus 25 per cent.

“These changes provide significant cost reduction to competitors and create a more level competitive playing field,” said David Colville, the CRTC’s vice-chair, telecommunications. “At the same time, the revised pricing ensures that the telephone companies can still recover their costs and receive a reasonable contribution towards their overhead.”

But for the telcos, the CRTC’s balancing act brings to mind an ancient adage: in attempting to please everyone with its new rules, the Commission has pleased no one.

“My reading of this decision is the Commission has more or less given up on competition,” said Jean Brazeau, senior vice-president of regulatory and strategic relationships with Call-Net. In his opinion the new rules leave a lot to be desired.

For example, Colville mentioned that the CRTC wants to encourage “facilities-based” competition, whereby CLECs rely on their own networks, instead of using incumbent networks as they do now. But for Brazeau, facilities-based competition is not all it’s cracked up to be.

“They claim they want facilities-based competition. AT&T (Canada) invested $4 billion. We’ve invested a couple billion. Other entrants have invested another couple billion. We’ve invested a lot in facilities, but there’s still not competition.”

In a press release, AT&T Canada Inc. expressed its dissatisfaction, saying the CRTC failed “to adequately address the insurmountable cost advantage enjoyed by the former monopolies (ILECs) over new entrant competitors.”

AT&T Canada had asked for a 70 per cent reduction in the price it pays for network access. But since it received closer to a 10 per cent discount, the firm said it would “have to determine [the decision’s] impact on our business plan,” and suggested that the new rules could adversely affect its bottom-line expectations.

An AT&T Canada spokeswoman said the company would offer nothing further until its annual general meeting scheduled for June 18.

But at least one CLEC is satisfied with the CRTC’s ruling. Group Telecom Inc. (GT) in Toronto said in a statement that it is “pleased to see that the Commission’s regulatory framework continues to foster facilities-based competition.”

The fact is GT has built its own backbone and relies less on incumbent connections than AT&T Canada and Call-Net do, said Fiona Gilfillan, the company’s vice-president, regulatory affairs.

“Group Telecom has pursued a facilities-based strategy, where most of our service is on our network. The Commission was clear in its decision that this was a facilities-based regime. AT&T Canada and Call-Net have chosen not to pursue facilities-based competition.”

Call-Net’s Brazeau said GT’s facilities-based strategy would backfire.

“Their addressable market is…$300 million. Let’s say they’re very good at this and they get 10 per cent of that market. That’s not a lot of revenue.…You’d think this would be a huge win for them, but not one element of this decision is going to help them pay their bills.”

The ILECs are not satisfied, said Mark Quigley, an analyst with Kanata, Ont.-based The Yankee Group in Canada. Thanks to the CLEC connection discounts, Bell Canada and Telus face diminished revenue. As well, although they asked to be allowed to raise local phone service rates for residential users, the CRTC denied the request.

After assessing the decision, Telus said in early June that its prospects would be hurt to the tune of $45 million in 2002. Since making that statement, the company has taken some drastic action in the payroll department, offering “voluntary departure packages” to some 11,000 unionized employees in Alberta and B.C.

But the CRTC’s decision to keep consumer pricing the same is not surprising, said Brownlee Thomas, a Montreal-based analyst with Giga Information Group Inc. As a government body controlled by Parliament, the Commission does its best to protect consumers (read: voters).

Quigley said businesses should expect to see yearly increases in local voice pricing according to inflation, but “it isn’t really an issue. Business customers tend to get a better bargain simply because there’s more competition.”

But competition isn’t the issue for one end user. Craig Tyers, manager of corporate technology with the Sudbury and District Health Unit (SDHU) in Sudbury, Ont., said “reliability” is more important. And as far as he’s concerned, reliability is a factor of business viability – an issue related to competition in the telecom landscape.

Tyers remembers well the late ’90s, when the CRTC first opened the local voice market to competition and a host of CLECs popped onto the scene. Few of those competitors survived, however, and Tyers is sceptical of the remaining CLECs’ prospects.

“I think competition would be beneficial, but the thing is, there’s always the fear of reliability of service,” he said. Frankly, even if a CLEC offered better prices than the local incumbent did, the newcomer could fold up shop tomorrow, he said. So much for reliability.

Thomas from Giga said Tyers isn’t alone in his skepticism. He’s “indicative of the business-user community.…They’re not sure it’s worth it (switching to a CLEC) at this time. They need to be persuaded that competition is viable and healthy before they change local service.”

So what would it take to create “viable and healthy” competition? Brazeau said it’s time we considered a new regulatory framework, one that may or may not include the Commission. “We need to have a policy debate.…Is the CRTC the right tool to achieve the objectives we’re trying to achieve?”

Thomas said we need to rethink our definition of “competitor.” Competition might come from new camps, such as voice over cable providers, the mobile CLECs, such as Montreal’s Microcell Telecommunications Inc., and niche players for specific industries.

Quigley said the CRTC’s opinion on the matter is clear: competition might come from any company, through any technology, and not necessarily from the likes of Call-Net. “Whether that competition means a significant change in the players, we don’t know.”