Skating Toward Deregulation: Canadian Developments

Abstract

I. INTRODUCTION II. THE CRTC FORBEARANCE PROCEEDINGS A. Local Telephone Service B. VoIP Forbearance III. THE PARTIES A. Industry Participants B. Telecommunications Policy Review Panel C. Competition Bureau IV. THE GOVERNOR IN COUNCIL CUTS TO THE CHASE V. ECONOMIC COMMENTS AND CRITIQUES A. Regulation Within Markets B. Measuring Potential Share C. Service Market Definition D. Geographic Market Definition E. Share Tests and Strategic Responses F. Targeted Low Prices G. Defining Dominance H. Building Access I. Timing of Intervention J. Regulated Conduct VI. CONCLUSION I. INTRODUCTION Despite extensive deregulation in the telecommunications sector, local voice service has proven to be the last and most difficult market to deregulate. Perhaps the most extensive steps toward deregulation of this last stage are being taken in Canada. In April 2006, the Canada Radio-Television and Telecommunications Commission (CRTC) decided it was prepared to forbear from regulating the local voice service provided by the incumbent local exchange carder (ILEC), if the ILEC could show it had lost twenty-five percent of its share in a relevant market defined by both product (including voice-over Internet protocol or VoIP, excluding wireless) and geography (primarily the census metropolitan area or CMA). (1) ILECs were also prohibited from efforts to winback customers who had switched to competitors in the prior three months, unless the ILEC had lost twenty percent of its market. (2) This decision followed a 2005 CRTC decision not to deregulate ILEC VoIP service. (3) The CRTC did not have the last word. Shortly after its local forbearance decision, the Cabinet Ministers, referred to in Canada as the Governor in (4) of the recently established conservative government, issued an Order in Council requesting that the CRTC reconsider its VoIP decision. (5) The CRTC declined to forbear, claiming that VoIP was in the same market as regular voice service, which it was also refusing to forbear, although it did propose adopting smaller market share loss tests for forbearance and winback. (6) The Cabinet was apparently not satisfied, leading in September of 2006 to an order reversing the CRTC's VolP decision. (7) Going further, in December 2006 the Minister of Industry recommended to the Cabinet that it overrule the CRTC and order forbearance for residential service where there were three nonaffiliated facilities-based providers, two of which (including the ILEC) relied on fixed wires. (8) Business service would be forborne with only the two fixed-line providers. (9) This proposal was adopted by the Governor in in April 2007. (10) These developments raise a number of economic questions to explore, including the following issues: Regulation within markets: Should an incumbent's substitute service for its regulated service necessarily also be regulated when there may be multiple and more prominent providers of the substitute? Measuring potential share: An issue with share tests is determining the size of the likely market open to digital voice entrants. Should it be high volume customers who would get service at lower prices by switching to a VolP provider? Service market definition: To what extent is wireless in the market for wireline service? Would a weighting scheme be appropriate? Geographic market definition: The CRTC and Competition Bureau (Bureau) accepted that because consumers would not regard a telephone at some other location as a substitute for a telephone at their location, the relevant geographic market is the location. Other geographic market definitions were defended as mere aggregations of convenience. Is this sensible? Share tests and strategic responses: Might basing forbearance on market share introduce perverse effects on both incumbents and entrants? …