The Competition Bureau and Local Communications Competition

Notes for an Address by Gilles Ménard
Deputy Director of Investigation and Research
Civil Matters Branch, Competition Bureau

The Canadian Institute

December 4, 1996

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Introduction

Good morning ladies and gentlemen. I would like to thank The Canadian Institute for the invitation to participate in this important conference. It is a pleasure for me to be here.

I have no doubt that you are in for two days of stimulating discussion among a distinguished group of speakers as together they explore the economic, regulatory and policy issues facing Canada as it embarks upon the road to opening local communications markets to competition.

I have been asked to discuss the Competition Bureau's role in the opening of local telecommunications markets to competition. I was thinking of the title of this session - "The Bumpy Road to Local Competition in Canada" - a couple of days ago and it struck me that two years ago we wouldn't have been here. The Canadian Radio-television and Telecommunications Commission had just released its Regulatory Framework Decision. From it came the realization that mass market competition in local telecommunications was not just a theoretical possibility. Not only did the Commission announce that local competition was in the public interest, it set about establishing a time-table to put it in place.

Even last year at this time a session like today's would have been viewed skeptically. While the CRTC had started a number of local telephone proceedings, no one really knew who the new entrants were likely to be and if or when they would enter.

Yet the most remarkable feature of the communications sector is the rapid pace of change and innovation. Since last December Industry Canada has granted four PCS licenses and two LMCS licenses. We now have Clearnet and Microcell selling PCS services. Meanwhile CelularVision and MaxLink Communicationsare preparing to roll out their LMCS networks. Last month several cable companies announced the introduction of Internet services and some have indicated a desire to offer telephone service. Long distance providers, such as Sprint and AT&T Canada, have also publicly stated that they will be entering local markets. MMDS is underway in Brandon, Manitoba and other licenses are likely to be granted for Southern Ontario and Saskatchewan. And I am hopeful that one of these days we will have a Canadian DTH service.

One of my colleagues, who hails from Brandon, is always quick to remind me that his home town may be the hot spot for communications competition in Canada. The way things are going anyone living there will be choosing their services from among MMDS, LMCS, PCS, cable companies, telephone companies and DTH. He dares anyone else in Canada - even Toronto - to better that!

Today I want to offer the Competition Bureau's perspective on the fundamental principles it believes should govern the transition from monopoly and regulation to deregulation and competition in the delivery of local telecommunication services in Canada.

In addition, I will comment on the role the Bureau expects to play in the communications market over the next few years as convergence and the dismantling of monopoly unfolds. More and more we expect to see you in our offices with your anti-competitive complaints and defences.

Towards a Competitive Communications Sector

Virtually everyone agrees that advances in communications hold the key to Canada's public and private sector investment, growth, and job creation opportunities as well as our international competitiveness. It is also accepted that competition is far more effective and quicker than regulation for bringing economic benefits to consumers of communications services. We only have to look at the spectacular developments in the computer industry to be reminded of this on a daily basis. Market forces are more effective at driving prices towards their costs, inducing firms to produce the goods and services consumers desire, and spurring innovation in new technologies, products and services, and production and distribution methods.

We are now well on the way to expanding the role for competition in Canada's communications industries. It is certainly our belief that a significant part of Canada's economic future will depend upon the actions we take over the coming months and years to liberalize the communications sector.

As many of you know, the Canadian Government is currently involved in negotiations at the World Trade Organization as the nations of the world work to open up the international telecommunications environment to competition. Meanwhile, at home, the CRTC is completing a series of inter-related proceedings to introduce competition into the local telecommunications and broadcasting distribution markets.

The outcome of the WTO negotiations and the CRTC proceedings will profoundly affect the Canadian communications landscape for the next generation. They will determine what kind of Information Highway we will have - including who can play and what rules they will play by. These decisions will also determine the extent to which convergence and effective competition become reality and not just trendy buzz words. At the same time they will affect Canada's ability to thrive in what is looking to be very competitive global marketplace.

The Bureau believes that the overriding objective of public policy should be to maximize the benefits which business and residential consumers receive from rivalry among competitive communications networks. This objective is best met by creating an environment which is solidly rooted in the principles of competition policy and recognizing that competition and market forces can play a central role in meeting society's important social goals.

Specifically in the area of local telecommunications, the Commission has a unique opportunity at this time to substantially reduce the market power of the incumbent Stentor companies and lessen, if not remove altogether, their ability to leverage control over local networks to influence market activity in other sectors in which they compete.

In its Convergence Policy Statement last August, the Government announced that it wants to foster "increased reliance on market forces in the provision of facilities, products and services." Timely implementation of the Commission's telecommunications and broadcasting decisions would hasten competition between telephone companies, cable companies, wireless companies and others, thereby facilitating the Government's convergence policy objectives.

Competition Policy and Technological Progress

The primary goal of competition policy is to promote and protect the growth of competition in the introduction of new and improved products and services. As I stated earlier, one of the greatest benefits from competition is its ability to spur innovation and permit innovators to earn appropriate returns for their efforts. At the same time it provides consumers with a variety of new or improved products and services at competitive prices.

Competition law does more than just seek to ensure that independent firms, offering comparable technology, compete vigorously on price. Very often the most potent form of competition is from new products, technologies, or distribution and production methods that overwhelm or eliminate entire firms or industries. The Austrian economist, Joseph Shumpeter, called this process "creative destruction". No doubt there is some "creative destruction" occurring right now as the tide of the computer and information revolution carries us into the 21st century.

It is our job at the Bureau to ensure that incumbent firms do not use their market power to hold back the tide -- that is to stifle technological progress or otherwise impose restrictions that deny innovators and consumers the opportunity to reap the benefits of the competitive process. At the same time, we must be careful not to misread market signals and interfere with the healthy competitive dynamics that prevail in those industries undergoing rapid technological change.

For example, just in the past year the Bureau has been called upon to address competition issues in several network industries undergoing profound technological change - including telecommunications, broadcast distribution, banking, electricity, and postal delivery services - and yes, even the ultimate network, the Internet itself. As regulation is being phased out, we are increasingly being called upon to examine complaints alleging anti-competitive conduct.

Six Principles for a Competitive Communications Environment

A major issue confronting policy makers at the moment is to determine how the transition from monopoly to competition in the communications sector should take place. How long should the transition be? What rules should apply as markets are opened up to competition? What rules and safeguards should be put in place to protect consumers? To whom should these rules apply?

I would note that the term "transition", itself, implies a beginning and an end. We, at the Bureau, think it is inappropriate to think of changes in the communications sector in those terms. The transformation of the communications sector will be on-going -- at the very least from a technological viewpoint as computerization, digitization, convergence, and global competition evolves.

For this reason, the Competition Bureau recommended to the CRTC an approach that places the maximum reliance on competition at the outset, so that firms and consumers can prepare themselves for the eventual day when economic regulation is no longer required.

The Bureau believes that certain fundamental principles should govern the regulatory framework for the development of competition in communications services. These principles would allow for a pro-competitive and de-regulatory approach to reforming communications markets. The Director has recommended these principles for the past few years, both in submissions to the CRTC and Parliament as well as in other public forums.

In summary, these principles are:

First: Maximize the reliance on competition and market forces at the outset;

Second: As a corollary to the first, minimize regulation for incumbents and avoid imposing economic regulation on the new entrants;

Third: Adopt market-based pricing as soon as possible in local telecommunications and, if necessary, introduce specific, targeted mechanisms to address social policy objectives;

Fourth: Establish clear rules governing incumbents obligations to provide access to their networks by competitors and adopt appropriate pricing principles to induce efficient competition;

Fifth: Establish timely and effective dispute resolution mechanisms to ensure incumbents do not attempt to delay access to their networks;

Sixth: Liberalize foreign ownership rules for communications networks to assist in the rapid construction and development of communications networks.

The combination of these principles, we believe, will hasten the benefits of competition to business and residential consumers and assist in the achievement of many of Canada's social and economic policy objectives.

Let me expand on each one of these principles.

1. Maximize our reliance on competition and market forces at the outset:

As many of you are aware, technological change has altered the communications landscape to the degree that the traditional rationale for regulating telephone and cable companies is fast disappearing. With the potential for a variety of wireline and wireless providers to meet our business or residential demands, the natural monopoly assumption is vanishing as the raison d'être of our economic regulatory policy. The question now is how long will it take for effective competition to arrive in local communications markets as a variety of wireline and spectrum based firms role out their digital networks.

In its forthcoming decisions the CRTC has the unique opportunity to move decisively to open up local telecommunications markets to new competitors and to lessen the economic regulatory burden on the Stentor companies. We believe the CRTC should rely to the maximum extent possible on competition, as opposed to regulation to achieve the objectives of the Telecommunications Act.

The Bureau supports the adoption of a competitively neutral and technologically neutral regulatory regime that does not impose unnecessary regulation on new competitors or emerging technologies. Nor should incumbents be limited in their ability to offer the full benefits of their economies of scale and scope to consumers, through for example, the bundling of communications services.

2. Minimize regulation for incumbents and avoid imposing economic regulation on the new entrants:

As a corollary to the principle of maximizing competition, economic regulation of communications markets must be minimized. Only where it can be demonstrated that the benefits to society of imposing regulation outweigh the cost, should regulatory requirements be imposed on new entrants, or continued for incumbent firms.

The hallmark of a competitive marketplace is the freedom to compete. Both entrants and incumbents should be given the maximum ability to do so as they wish. Entrants should not be subjected to unnecessary regulation or certification in order to satisfy subjective notions of competitive "equity" or symmetry.

At most, regulations imposed on new entrants should be confined to privacy, safety and the provision of emergency services and other areas where there is a compelling concern that social policy regulation is necessary to protect the public interest. Beyond these aspects, new entrants should be provided maximum flexibility to compete in whatever manner they wish, as entrants do elsewhere in our economy.

It is clearly in the interest of new entrants to offer services to the public in order to be competitive. Not possessing any market power, the new entrants should not be restricted in their pricing, service quality, geographic coverage, timing of entry, or their ability to innovate. Rather, they should be provided every opportunity to serve consumers in their own fashion. If consumers are dissatisfied with the performance of any individual local provider, they would be free to choose any other firm in their area, including the former incumbent provider. In this way the market will discipline the business performance of the new entrants. Also, given the heightened public interest in the communications sector, consumers will quickly become aware from the media of the identify of those firms that fail to provide quality service.

3. Adopt market-based pricing and new mechanisms in local telecommunications to address social policy objectives:

The introduction of efficient pricing by rebalancing and restructuring telephone rates should be an integral part of the package of regulatory reforms necessary to facilitate the development of effective competition in local telecommunications markets. The current system of inter-firm and intra-firm cross subsidies and rate averaging is fundamentally incompatible with the development of competitive markets. The cross-subsidies inherent in the current rate structure are a substantial barrier to the entry of new competitors in local telephone services and need to be eliminated if the majority of Canadians are to benefit from competition. The existing system of funding social policy objectives will have to change if residential and business subscribers are to benefit from competition in local telecommunications.

There are understandable concerns associated with continued affordability for low income groups and persons living in high cost geographic areas. In this regard, the Director is pleased with the CRTC's recent local telephone service pricing options decision in which the Commission confirms its commitment to reforming the telephone rate structure. The Commission concluded that affordability is not a concern at the present time. Yet it did note that if an affordability concern should arise in future as rates are restructured and rebalanced, narrowly targeted subsidies provided directly to qualified subscribers are the most economically efficient means of ensuring affordability. In addition the Commission stated its intention to address the issue of high cost geographic areas in its local interconnection and unbundling decision.

In the Bureau's view should a subsidy program be required, it is important that it be competitively and technologically neutral. In other words it should treat all competitors - whether wireless or wireline - equally. Freedom to choose is another hallmark of the competitive process. Proving subsidies directly to qualified subscribers based on established income or geographic criteria would enable those consumers to select the service provider of their choice rather than be confined to the incumbent monopolist.

4. Establish clear rules governing incumbents obligations to provide access to their networks and introduce appropriate pricing principles to induce efficient competition:

Timely and effective local competition will require clear rules governing incumbent obligations to provide the basic requirements for entry. These include specific rules setting out the scope of interconnection, unbundling and resale requirements and the principles underlying the prices for essential facilities and interconnection. Without such rules local competition in many parts of the country may never get off the ground.

The Stentor companies, because they are in a dominant position, must be mandated to provide interconnection with all new entrants. The Bureau has also recommended that the Commission consider requiring the Stentor companies to provide new entrants with transiting as an alternative to direct interconnection between new entrants in order to promote competition until alternative arrangements are in place. Again, since only the incumbents possess market power, there is no need to regulate interconnection arrangements between or among non-incumbent firms. Those arrangements are best left to the marketplace to work out.

The Bureau believes that effective competition will depend upon the presence of competing facilities-based networks in the market. Competing communications networks will ensure both wholesale and retail competition. However, because of the substantial capital and time required to construct telecommunications networks throughout Canada, facilities-based competition will necessarily be incremental, and must be supplemented through the use of the incumbents' facilities and resale of the incumbents' services.

The development of widespread facilities-based local telephone competition will best be promoted if entrants are given a range of access options to the incumbent monopolists' networks, based on sound economic principles. Entrants should have access to those essential facilities and services that will most efficiently supplement their own facilities and services. To achieve this, the Stentor companies should be required to unbundle essential network facilities and services.

Stentor should be required to permit entrants to resell its telecommunications services. First, it will enable new entrants to offer bundles of communications services in competition with the Stentor companies as the trend to 'one-stop shopping' evolves. Second, it will allow for competition in rural and remote areas where network economics precludes the immediate presence of alternative competitive facilities.

Access to the essential components of incumbents' networks must be appropriately priced to reflect economic costs. In the Director's view, forward-looking incremental cost (plus an appropriate mark-up for forward looking fixed and common costs) should be the basis for pricing essential facilities which form part of the Stentor networks. Departures from this standard will distort and deter investment by entrants. Access rates set below forward-looking incremental cost will induce inefficient entry and deter investment in alternative communications networks. Access rates set above forward-looking incremental cost will raise barriers to entry and forestall the development of effective competition. The Commission's challenge will be to find that range of prices that ensures the timely entry of efficient competitors.

5. Establish timely and effective dispute resolution mechanisms to ensure incumbents do not attempt to delay access to their networks:

The Bureau believes it is vital that the Commission establish clear legal parameters to govern negotiations between incumbent monopolists and new entrants for local network access. This will ensure that incumbents are not able to delay entry to protect their monopoly position. In addition, it will ensure that entrants are not able to unreasonably exploit the regulatory process.

Since entrants will need access to a wide variety of facilities and services of the incumbents in order to enter local telecommunications markets, it is critical that the parameters for such access be clearly articulated in advance, through specific rules.

If the United States experience is to serve us as a guide, there are likely to be a large number of negotiations between the Stentor companies and the entrants over the next few years as new players seek interconnection, unbundling and resale arrangements. A large number of difficult technical and business issues are certain to arise.

To facilitate the transition to competition, specific dispute resolution procedures must be developed. Parties to interconnection, unbundling and resale negotiations must have confidence from the outset that workable and effective procedures exist to bring about timely and binding decisions if parties are unable to reach agreements among themselves. The objective of any dispute resolution procedure should be to expeditiously arrive at pro-competitive and binding agreements among the parties. The Commission would be called upon to act in the public interest in approving agreements among the parties to ensure that they achieve the objectives of the Telecommunications Act.

In the interests of ensuring that the Commission's limited resources are used efficiently, the Bureau has suggested that it give very serious consideration to adopting new measures to reduce the Commission's work load while, at the same time, ensuring expeditious dispute resolution. For example, the Commission could encourage parties to seek private mediation or arbitration, appoint outside mediators or arbitrators, or develop its own internal mediation or arbitration process.

6. Liberalize foreign ownership rules for communications networks to assist in the rapid construction and development of communications networks

Foreign direct investment is becoming one of the major forces in integrating the global economy. Indeed, foreign ownership limits in telecommunications are a critical component of the current negotiations at the World Trade Organization.

For some time now the Bureau has advocated the relaxation of foreign ownership restrictions in communications. We have done so for two reasons. First, some have suggested that it may require as much as $30 billion to construct the Canadian information infrastructure. Foreign ownership restrictions impose significant costs on the domestic communications industry in terms of limiting access to financial capital resources by both incumbents and potential competitors. For example, the Canadian cable television industry has a limited financial base to support the upgrade of existing communications infrastructure and to support new entry into content and delivery services.

Second, barring foreign enterprises leads to reduced competition in this sector relative to other areas of the economy and other nations where these restrictions do not apply. By reducing the pool of capital available and the number of potential competitors in the domestic market, we limit the choices, quality and prices available to Canada's residential, business and institutional customers.

Access to increased foreign financial and intellectual capital at this time would be of great benefit to Canada's long-distance telecommunications firms, cable companies, wireless companies, content providers, and others who are contemplating entering into local telecommunications markets. It would benefit as well companies wishing to upgrade existing networks or to construct new networks in order to offer interactive broadband services and telephony.

The Bureau and the Communications Sector

With the evolution of competitive markets in communications, it will become increasingly important for consumers and firms to better understand the role of the Competition Bureau and the Competition Act. As I noted earlier, we are increasingly being called upon to examine complaints alleging anti-competitive conduct.

There are three facets to the Bureau's communications work:

1. intervening before the CRTC in respect to matters involving competition;
2. enforcing the criminal and civil provisions of the Competition Act ; and
3. providing competition policy advice within Industry Canada and to the Government generally.

In light of the highly regulated nature of our telecommunications and broadcasting industries, we have focused on interventions before the CRTC and we continue to be involved in the process of regulatory reform on both the telecommunications and broadcasting side.

With competitive markets evolving and the Commission increasingly exercising its forbearance powers under the Telecommunications Act, the Bureau is becoming less involved in regulatory interventions and is increasingly more active in enforcing the substantive provisions of the Competition Act.

There are three things about the evolution from regulation to reliance on market forces which I want to stress:

First, in advocating regulatory reform and greater reliance on market forces, the Competition Bureau does not question the Government's social policy objectives as they relate to universality of affordable telecommunications services or the cultural objectives of the Broadcasting Act.

What we do question is whether various policy instruments which were developed during a time of regulated monopolies are compatible with the emergence of competition and the revolutionary advancements in technology which have so altered communications industries around the world. We are of the view that competition can play a major role in attaining social objectives, but where some additional government intervention is required, policy alternatives which are least restrictive of competition should be chosen.

Second, we share with the CRTC and the Government a common goal of seeing the growth of competitive communications markets.

Third, it is important to emphasize that competition law is not a substitute for regulation. As market are deregulated, it will be competition in the marketplace which will replace regulation. The Bureau does not regulate and has no legislative power to do so. Rather, we enforce the criminal and civil provisions of the Competition Act.

Unlike the Telecommunications and Broadcasting Acts, which are directed at specific sectors of the economy, the Competition Act is a law of general application. It applies to all sectors of the Canadian economy, except where specific exemptions exist either within the Act or in other legislation. The Act applies to particular forms of business conduct across all industry sectors.

The criminal law provisions in the Competition Act seek to punish firms by imposing fines and other penalties for past business conduct, often of a covert nature. The civil provisions are more flexible and provide greater scope for assessing and balancing complex economic questions related to efficiency and market power, and for implementing remedies to remedy the competitive problem.

We expect that competition issues in the communications industry will involve both the civil and the criminal provisions of the Competition Act . The most important civil provisions are likely to be those dealing with mergers, abuse of a dominant market position, and exclusive dealing. In particular we expect to be called upon to examine mergers among actual or potential competitors, such as proposed mergers involving cable companies and telephone companies. In addition we expect to receive complaints against vertically-integrated companies from other firms which compete with them at only one level of the industry.

The test for the Competition Tribunal to issue an order under the civil provisions is whether the business conduct or merger in question "is or is likely to result in a substantial prevention or lessening of competition." In applying this test, the Bureau uses relevant market analysis. This means that we look at the relevant geographic and product markets in which firms compete or are likely to compete. Then, we determine to what extent competition in those markets is likely to be substantially lessened or prevented by the business conduct in question.

In conducting this analysis, the Bureau examines a number of factors. For example, a competition issue is not likely to arise when entry barriers are low, effective competition exists in the form of other competitors already in the market, or we are made aware of firms outside the market who could easily enter and become effective competitors. Where grounds exist and voluntary compliance attempts have failed, the Director will bring an application to the Competition Tribunal to seek an order to remedy the competition concerns.

The criminal provisions of the Competition Act, such as those on conspiracies and deceptive marketing practices, also apply to this sector. For instance, the manner in which competitive telecommunications services are being marketed has raised issues under the misleading advertising and deceptive marketing provisions of the Competition Act. The Bureau has received consumer complaints numbering in the thousands concerning "slamming", the switching of long-distance service providers without proper authority. I should clarify that slamming per se, without misleading representations, is not covered by the provisions of the Competition Act.

While the volume of these complaints has stabilized at roughly fifty per month, it is expected that they will rise again with the advent of competition in local telephone service. The Bureau has launched a number of examinations which may result in referrals to the Attorney General for prosecution. The Bureau will continue to monitor and enforce the misleading advertising and deceptive marketing practices provisions in this area.

Lower long-distance rates have facilitated an expansion of telemarketing activities. Unfortunately, this has been accompanied by an increase in deceptive telemarketing practices involving representations to promote the sale of products that either do not exist or that are valued at grossly inflated prices.

In order to escape enforcement of the law, dubious telemarketing firms are extremely mobile and often operate from another jurisdiction or country using a variety of long distance service providers. Consequently, investigating fraudulent and deceptive telemarketing schemes and prosecuting individual operators is a very difficult and resource intensive exercise.

To ensure a high level of deterrence in deceptive telemarketing, the Minister of Industry recently tabled Bill C-67 to amend the Competition Act. The proposed amendments include new provisions dealing with deceptive telemarketing. These new provisions will require telemarketing firms to make certain specific disclosure as to the nature and purpose of their call and the identity of the telemarketer. A number of creative provisions are included in Bill C-67, including the prohibition from offering products at grossly inflated prices where delivery is represented to be conditional on prior payment.

The Director believes that the majority of business persons will respect the Competition Act if they understand how it applies to their business affairs. Therefore, the Bureau attempts to encourage general compliance with the Act through a program of communication and education. In addition, compliance in particular situations is facilitated through advisory opinions, information contacts, and, in the case of proposed mergers, advance ruling certificates.

Therefore, for those of you operating communications companies, I would invite you to contact the Bureau whenever you have questions about whether a proposed business plan or practice could raise a concern under the Competition Act.

Conclusion

It is clear from the direction in which the rest of the world is moving that Canada must proceed quickly to develop competitive and efficient communications markets if it is to compete effectively in international markets. The experience in Canada in opening these markets to competition compares favourably to what is occurring elsewhere.

However, Canada must continue to adapt to an increasingly competitive environment. The process of reforming the telephone rate structure, opening local communications markets to competition, and implementing the government's convergence policy will have to be completed on a timely basis if we are to keep up with global change.

We, at the Bureau, believe that the best way to achieve this goal is to rely on fundamental principles of competition policy. We also recognize that, as deregulation unfolds, we will have a vital role to play in ensuring that competition in communications remains vigorous and effective. And we want you to know that our door is always open for you to come and discuss any competition concerns that you may have.

Thank you.