Submission by the Commissioner of Competition before the Canadian Radio-television and Telecommunications Commission—Telecom Notice of Consultation CRTC 2013-551 —Review of wholesale services and associated policies

June 27, 2014

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Introduction

  1. The Competition Bureau (the "Bureau") is pleased to provide this second intervention in response to other intervenors’ evidence and interrogatory responses on the issues raised in Telecom Notice of Consultation CRTC 2013‑551, Review of wholesale services and associated policies ("CRTC 2013‑551"). This proceeding concerns the way in which Canadian residential and business customers access the public switched telephone network and the Internet from their homes and places of business.
  2. When the Canadian Radio‑television and Telecommunications Commission (the "CRTC") began introducing local competition in 1996, the network owned by the incumbent local exchange carrier ("ILEC") was the only ubiquitous wireline network connecting Canadians. To facilitate choice for retail customers, the CRTC developed and applied a methodology for requiring ILECs to provide competitors with access to "essential" elements of their networks in Telecom Decision CRTC 97‑8 ("CRTC 97‑8")Footnote 1 and Telecom Decision CRTC 2008‑17 ("CRTC 2008‑17").Footnote 2
  3. Since then, facilities‑based competition has taken a firm hold in Canada. The vast majority of Canadian residences, as well as many businesses, are now served by two facilities‑based competitors, and competition between ILECs and cable companies is generally vigorous.
  4. This proceeding provides the CRTC with an opportunity to build on this success. In its review of the regulatory status of wholesale services and associated policies, the CRTC can, and should, complete the phase‑out of existing mandated access where it is no longer needed. In doing so, it should continue to apply the framework established in CRTC 97‑8 and CRTC 2008‑17, which has served as the backdrop against which increased facilities‑based competition has developed.
  5. In this review, the CRTC should examine whether market power exists in the downstream (retail) markets in which mandated wholesale facilities and services are used as inputs. In cases where downstream competition does not depend on the existence of mandated access, the CRTC can cease mandating access without adversely affecting retail consumers. Such streamlining of regulation is not only consistent with the principle of maximum reliance on competition and market forces, but may also promote incentives to innovate.

Striking a balance: The appropriate methodology

  1. In this review, the CRTC must be careful not to endanger the competitive benefits that Canadians currently enjoy while, at the same time, taking steps, where necessary, to develop a modern regulatory framework that is minimally intrusive to competition and appropriate for a dynamic and ever changing market.
  2. In CRTC 2008‑17, the CRTC determined that a facility, function or service must satisfy the following conditions to be "essential" and therefore subject to mandatory access:
    1. The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market;
    2. The facility is controlled by a firm that possesses upstream market power such that withdrawing mandated access to the facility would likely result in a substantial prevention or lessening of competition in the downstream market; and
    3. It is not practical or feasible for competitors to duplicate the functionality of the facility.Footnote 3
  3. The Bureau endorses this test. This definition of an essential facility, function or service incorporates an important and well‑developed competition policy concept, namely "substantial prevention or lessening of competition". It is the Bureau’s view that an assessment of whether there is likely a substantial prevention or lessening of competition should begin by examining whether there is market power in the downstream market. In such a retrospective analysis, in order for withdrawing mandated access to lead to a substantial prevention or lessening of competition, it must be the case that it creates, preserves or enhances market power in the downstream market. Applying this analysis will ensure that mandatory access is used as a regulatory tool only where it is likely an effective means of controlling market power in the relevant downstream market.
  4. Regulatory action should be reserved for situations where carriers’ exercise of market power is likely to lead to a substantial negative impact in retail markets. Otherwise, the CRTC risks mandating access in cases where the costs of doing so exceed the benefits.Footnote 4 Requiring that a facility be considered essential only if competition downstream is prevented without access to it, as TELUS submits,Footnote 5 would be too strict a threshold. Going back to a pre‑2008 standard would require the facilities owner to be a monopolist in the retail market. Under this standard, critical facilities would not be considered essential even if the only competition downstream was limited and ineffective, potentially denying consumers a robust and efficient retail market.
  5. The "substantial prevention or lessening of competition" standard strikes the appropriate balance and promotes competition between independent, facilities‑based providers that control their own networks. Facilities‑based competition is beneficial because such competition is most likely to lead to robust and effective long‑term competition.Footnote 6 This is consistent with the Federal Government’s Policy Direction requiring the CRTC to "rely on market forces to the maximum extent possible" and use regulatory measures that are "efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives".Footnote 7 It is also consistent with the objectives set out in section 7 of the Telecommunications Act, particularly "foster[ing] increased reliance on market forces for the provision of telecommunications services and [ensuring] that regulation, where required, is efficient and effective".
  6. In applying the definition of an essential facility, function or service, an analysis of market power in the downstream market should be the key consideration. Market power is the ability of a single firm or a group of firms to profitablyFootnote 8 maintain prices above the competitive level, or other elements of competition, such as quality, choice, service or innovation, below the competitive level, for a significant amount of time.Footnote 9 The CRTC has endorsed this approach and in Telecom Decision CRTC 94‑19 highlighted a "general consensus that the concept of ‘market power’, commonly used in competition law, should be the standard by which to determine whether a market is competitive" in telecommunications proceedings.Footnote 10

Retrospective vs. prospective analysis

  1. As the CRTC recognized in CRTC 2008‑17, the nature of the market power assessment differs depending on whether the inquiry is retrospective or prospective.
    1. For downstream markets where ILECs do not presently possess market power and there is mandated wholesale access, the inquiry should focus on identifying whether rivals that rely on mandated access are an effective constraint on ILEC market power.
    2. For downstream markets where there presently is no mandated wholesale access, the inquiry should focus on whether ILECs presently possess market power, and whether mandating access to wholesale facilities or services will likely constrain ILEC market power.Footnote 11
  2. If withdrawing wholesale access will not likely result in a substantial prevention or lessening of competition in the relevant downstream market, mandated access is no longer necessary and should be withdrawn. On the other hand, even if there is an absence of retail market power, if withdrawing wholesale access would likely result in a substantial prevention or lessening of competition, regulatory forbearance could endanger the competitiveness of the market.

Defining relevant markets

  1. Defining relevant markets is generally an important first step in a market power assessment. Certain dimensions of product markets and geographic markets are examined below.

Product markets

  1. The provision of retail wireline access to residential and business users are distinct product markets. Business users generally require different services (higher bandwidth) than residential users and prices generally differ.Footnote 12
  2. Wireline access services provided to residential customers generally consist of local exchange service (voice telephony) and/or residential Internet access service. Wireline access services provided to business customers are differentiated by bandwidth. There is a broad spectrum of business access services from DS‑0/DS‑1 to high bandwidth services such as DS‑3, OC‑3 and OC‑12.

Geographic markets

  1. Wireline access inherently involves a particular location (i.e., a physical connection between a supplier and a consumer’s premises). Thus, each geographic location (e.g., each residence or business location) is its own geographic market because a customer cannot generally switch to the wireline access services associated with a different location than his or her residence or business.
  2. As a matter of convenience, however, it is appropriate to aggregate adjacent locations into a single relevant geographic market.Footnote 13 In many instances, locations in a region will have the same access options. This suggests that rather than define every location as a separate geographic market, aggregation across a region can occur by defining the market around the network of an ILEC based on its overlapping footprint with competing networks that provide access.

Market power framework

  1. The market power analysis of wireline access services begins with an assessment of the access options for retail customers in a particular market. If the only option for retail consumers in a relevant market is the ILEC, the incumbent likely possesses market power. On the other hand, if retail customers in a relevant market can be served by two or more facilities‑based carriers (e.g., an ILEC and a cable company), the market power analysis depends on the likely vigour of competition between competing carriers.
  2. To assess whether an ILEC possesses market power in the relevant markets where it competes as a duopolist or oligopolist, the CRTC should assess whether:Footnote 14
    1. The services offered by the entrant over its own facilities (loops and transport) are in the same product and geographic markets as the services offered by the ILEC;
    2. The incremental costs for the new entrant are similar to or lower than the costs of the ILEC, the facilities of the entrant are not capacity constrained, its network costs are sunk, and its short run variable costs of providing service are relatively low; and
    3. Coordinated conduct is unlikely.
  3. An important concept underlying this test is that the nature of a firm’s cost function is a key determinant of the intensity of competition. When oligopolists face rising short‑run variable costs as the number of customers supplied increases and/or their capacity is constrained, their incentive to compete prices down toward marginal cost is reduced. On the other hand, where capacity decisions are sunk and short‑run variable costs are constant irrespective of the number of customers attracted (i.e., there are no significant capacity constraints), the incentive to compete prices down toward marginal cost is strong.Footnote 15

The Bureau’s market power comments

  1. In this section, the Bureau provides its comments on retail market power.

Markets for residential services

  1. In submissions to the CRTC in CRTC 2006‑14, the Bureau recommended that mandated access to unbundled local loops ("ULLs") should be withdrawn in geographic markets where there is competition from a cable company.Footnote 16 The key reason was that cable companies already had sunk networks in residential neighbourhoods, originally constructed for the delivery of their broadcasting services that they could, and already were, adapting for the provision of residential wireline access services.Footnote 17
  2. In the years since then, the development of competition in markets for residential services has been successful. At the time the Bureau made its recommendation, ILECs held a share of more than 80% of subscriber lines nationwide, and even in Canadian cities with the most competitive residential markets at the time (Montreal, Toronto and Calgary), ILEC shares of subscriber lines were about 75%.Footnote 18 By 2012, the share of residential lines held by ILECs had fallen to about 60% nationwide, and in Calgary and Montreal were 50% or less.Footnote 19 Today, most residential consumers now have the choice of two facilities‑based networks in most regions of Canada.
  3. It is likely that this success is not related to mandated access to local loops, which the CRTC did not withdraw in CRTC 2008‑17. The most important non‑ILEC competitors in markets for residential services are cable companies that do not generally make use of ULLs. Data from the CRTC's annual Communications monitoring report confirm this; showing that the use of ULLs by competitors has fallen at the same time that the share of residential lines accounted for by the ILECs’ rivals has grown.Footnote 20
  4. The Bureau submits that the ILECs do not possess market power in markets for residential services. This conclusion is based on the Bureau’s view that:
    1. The services offered by the entrant over its own facilities (loops and transport) are in the same product and geographic markets as the services offered by the ILEC;
    2. The incremental costs for the new entrant are similar to or lower than the costs of the ILEC, the facilities of the entrant are not capacity constrained, its network costs are sunk, and its short run variable costs of providing service are relatively low;
    3. Coordinated conduct is unlikely; and
    4. The observed erosion of ILEC shares of residential lines since 2006.
  5. The Bureau also submits that, based on information on the public record, this conclusion on ILEC market power in markets for residential services is not dependant on continued mandated access to ULLs. Thus, in light of the economic costs of mandated access, the Bureau concludes that ULLs are not essential and mandated access should be withdrawn.

Markets for business services

  1. The Bureau has insufficient information to offer a conclusion with respect to markets for business services. There are two reasons for this. First, ILEC rivals in such markets may be capacity constrained, and thus competition may not be as vigorous as it is in markets for residential services. Second, while large businesses may have countervailing power (e.g., they may be large enough to sponsor entry or turn to self‑supply in response to an ILEC price increase), smaller business customers may not.
  2. There is, however, a "natural experiment" available that will allow the CRTC to assess whether or not there likely is retail market power in the absence of mandated access and whether mandated access is essential in markets for business services. Specifically, as documented in Attachment 4 to the Bell Canada submission (the "Attachment"), data is available to assess the market power impact of forbearance from regulation regarding various arrangements to competitors for the digital transmission of information at DS‑0, DS‑1, DS‑3, OC‑3 and OC‑12 speeds which, for business customers, are inputs used to provide data transmission over fibre‑based networks.
  3. The empirical analysis provided in the Attachment uses data from Bell on its high‑speed transport services to assess whether rival Telecom Service Providers that were relying on the forborne services became less effective competitors or were forced to increase rates to their business customers. The information provided in the Attachment is, however, insufficient for the Bureau to evaluate whether the empirical evidence supports or refutes the conclusion that the absence of mandated access has led to a substantial prevention or lessening of competition in markets for business services. This is because:
    1. The information in figures 4, 5 and 6 is presented in indices rather than actual values.
    2. The information in figures 4, 5 and 6 appears to be aggregated across all of Bell Canada’s territory.
    3. There is no information available outside Bell Canada’s territory.
  4. As Bell Canada notes: "There is not likely a single market, either at the retail or wholesale level, that would hold consistently across the country. Rather it would typically be necessary to assess each retail and wholesale service individually to determine the geographic scope of the market." The Bureau concurs with this view. Thus, the CRTC should review data on the confidential record to assess whether these aggregated indices provide adequate information on individual geographic markets to substantiate the conclusions drawn in the Attachment. Additionally, the CRTC should obtain comparable data from other ILECs to assess the degree to which any conclusions drawn from the Bell Canada data apply elsewhere in Canada.

Fibre‑to‑the‑premise

  1. In the Notice of Consultation, the CRTC observes that certain carriers have begun to deploy fibre‑to‑the‑premise ("FTTP") facilities and states that, as part of this proceeding, it will consider the appropriateness of mandating any additional wholesale high speed services.
  2. There is insufficient information available on the public record to fully assess whether services that are supplied to consumers using FTTP, or are likely to be supplied to consumers in the future using FTTP, are sufficiently close substitutes for existing access services that they should be considered to be in the same product market. This lack of information is in part based on the fact that FTTP is an emerging technology.
  3. When considering whether carriers possess market power in respect of FTTP, the CRTC should assess the relevant product market. If the services provided by FTTP are in the same product market as residential wireline access, then the conclusion that there is no retail market power follows, and they should not be deemed essential.

Conclusion

  1. The Bureau submits that the framework adopted by the CRTC in CRTC 97‑8 and CRTC 2008‑17 remains appropriate for determining the scope of mandated wholesale access to wireline services. It has contributed to the successful development of facilities‑based competition in Canadian wireline markets. Most Canadians residences, and many business customers, enjoy the benefits of this increased competition in retail markets.
  2. In the Bureau’s view, ULLs are not essential and mandated access should be withdrawn. At this point in time, the Bureau does not possess sufficient evidence to opine on the application of the CRTC’s wholesale services regulatory framework to business services and FTTP. The Bureau submits that the CRTC should examine whether market power exists in the retail markets in which these facilities and services are used as an input, and regulate only where the absence of mandated access is likely to lead to a substantial prevention or lessening of competition in these retail markets.
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