A major reform for local telephone markets

On December 11, 2006, I held a press conference at the Canada Science and Technology Museum to announce the main points of the changes in the regulatory framework of the local telephone markets that I had succeeded in getting adopted by the government. Professor Richard Schultz, who is director of the political science department at McGill University, explains in an article reprinted elsewhere on this blog the process that led to this reform. It is a major reform, seen by many as the most important in this sector for several decades, and of which I am extremely proud — 8 April 2009

A major reform for local telephone markets

Today, December 11, 2006, will become an important date for telecommunications in Canada. We are here this afternoon for a very important announcement. A museum featuring an exhibition on the history of telecommunications is the best place to announce a reform of the telecommunications industry.

About 25 years ago, Canada started the process of ending the monopolies of a few big telephone companies. This long process started with allowing the interconnection of private lines and private equipment to the monopoly networks in 1979 and 1980. But the pace accelerated after the government licensed two national cellular service systems in 1984.

Further, in 1992, the Canadian Radio-television and Telecommunications Commission (CRTC) opened the market for public long-distance calls to competition. Then, in 1997, competitors were also allowed in the local telephone market.

There have been many technological revolutions during this period, such as the arrival of cell phones, the Internet, broadband networks, Voice over Internet Protocol and cable telephony. Today, Canadians benefit from one of the most developed and dynamic telecommunication industries in the world.

All this happened thanks to several key ingredients: entrepreneurship, capital investment and new technologies.

But it also happened for one major reason and that is because the former monopolies lost their privileges – because market forces were allowed to play, and because consumers were allowed to choose.

Without deregulation of the telephone market, or the absence of regulation from the start of emerging sectors like wireless and the Internet, it could not have happened. Today, 70 percent of the telecommunications sector is deregulated.

That is why I am spearheading an ambitious policy agenda in the telecom sector, the essence of which is a new regulatory framework that is more modern, flexible and efficient.

I started this process in June, when I tabled a proposed policy direction to the CRTC in Parliament. It calls on the CRTC to rely on market forces to the maximum extent feasible and to regulate telecommunications services only when necessary.

Now, it is time to enable consumers and businesses to benefit from retail-price deregulation of traditional local telephone service as well.

Today, I am proud to announce that, in the interests of Canadian consumers, the government is proposing to change the CRTC Decision on Local Forbearance. In this ruling, the CRTC laid out its criteria for determining when it would refrain from regulating retail local telephone service provided by the former monopolies, on the basis of a market-share test.

With this regulatory regime, however, the CRTC is still inhibiting competition beyond what is necessary. Continuing with this regime means it may take up to two years before deregulation comes to major urban markets. Meanwhile, consumers are deprived of the benefits of more intense competition.

The government proposes to replace the CRTC’s market-share test with one that emphasizes the presence of competitive infrastructure in a given geographical area.

The new test that we are putting forward is based on the presence of several competitors that have their own wireline or wireless networks and are offering competing telephone services. Under this test, the former regional monopolies will no longer need to get CRTC approval to set their prices for residential services in areas where there are at least three facilities-based telecommunications service providers owned by three non-affiliated companies.

This means that in regions where consumers have access to telephone services from a traditional telephone service, a cable company and at least one non-related wireless provider, deregulation will occur. For local business markets, we are proposing a similar test based on the presence of two competing wireline network operators.

We are also proposing an end to restrictions on “winback” offers and other promotions and marketing practices in all markets across Canada. It is the essence of competition to be able to inform your customers. We don’t help competition by preventing players from promoting their products.

The transition from the old way of regulated telephone monopolies to an open and competitive market offering several types of services is now almost complete. Except for rural and remote regions of the country, there are competitive pressures coming from all sides.

In a competitive sector, consumers – not a government agency – should determine what price to pay for telephone services. In a competitive sector, there is no reason to regulate some companies while allowing others to offer the services they want at the prices they want. It is time to have a level playing field.

This is why our government is taking a step further today to complete this development. We are proposing to remove the last regulatory obstacles to full competition in the local telephone market, so that Canadian consumers will benefit from even more choice, better service and lower prices.

Deregulation in the long-distance sector has shown that competition is a key factor in keeping telephone service prices low. Domestic prices for long-distance calls have dropped from an average of 35 cents a minute in 1993, when the market was open to new players, to approximately 10 cents a minute today. And these price decreases occurred mostly in 1998 and 1999. That’s just after the CRTC deregulated the long-distance rates of the former monopolies.

In following this agenda, Canada will be guided by the spirit of deregulation shown by initiatives in several developed countries such as Denmark, Finland, Germany, New Zealand, the United Kingdom, Norway and Australia, which have significantly less price regulation than Canada, or no regulation at all. This is despite the fact that none of these countries have cable deployment as extensive as Canada, where cable telephony is rapidly establishing itself as the main competitor to traditional wireline telephony.

On Saturday, December 16, we will publish our proposal to alter the CRTC Decision for public consideration in the Canada Gazette for a 30-day consultation period.

About 60 percent of the Canadian population lives in regions that meet the competitive infrastructure test, including most major urban centres. For Canadians living in remote areas of the country where there is limited choice, our government will be there to ensure universal access to telecommunications services at a reasonable price.

We propose to leave in place existing safeguards that protect consumers such as a price ceiling for stand-alone residential service and continued price regulation in regions where there is little competition.

Finally, we are also proposing to amend the Competition Act. Last week, I tabled in Parliament amendments to the Competition Act to establish financial consequences for companies that engage in anti-competitive behaviour in deregulated markets.

This new safeguard will ensure the viability of competition in a deregulated market, protecting both consumers and competitors. Together, these proposals will reduce unnecessary regulation and increase reliance on market forces and competition in telecommunications, so that Canadian families and businesses can benefit from more choices and improved products and services.