TOWARDS A FREE TELECOM MARKET

1
TOWARDS A FREE TELECOM MARKET

• Paul Beaudry

Istituto Bruno Leoni Mises Conference October 4,
2008, Sestri Levante
2

• Many people want the government to protect the
  consumer. A much more urgent problem is to
  protect the consumer from the government.
• - Milton Friedman

3
Introduction

• The Contextthe telecom industry as a moving
  target
• The Goal of the reforms of the 1990s Promoting a
  smooth transition to a competitive telecom market
  by creating incentives for new entrants
• The Means of the reforms Network sharing and
  price regulation
• The Shortcomings and anticompetitive effects
• Less innovation,more investment in old
  technology
• High regulated prices
• The Solution The recent deregulation

4
The Regulatory framework

• The Acts
• Telecommunications Act - sets out policy
  objectives
• Nine potentially inconsistent policy objectives
• objectives (d), (e) and (i) are not intended to
  enhance competition
• Overall emphasis on competition, consumer welfare
  and innovation
• Radiocommunications Act - addresses licensing of
  spectrum and certification of wireless equipment.
  

5
The Regulatory framework - contd

• The Regulators
• The CRTC broad powers
• The CRTC has had ample discretion to regulate
  because of Governmental inaction in the field
• The Governments residual power to vary, rescind
  or refer a decision back to the CRTC

6
The Market structure

• The Former Monopolies - Incumbent Local Exchange
  Carriers (ILECs). They are regulated by the
  Telecommunications Act under a system of price
  cap regulation. (they were previously regulated
  under a rate of return scheme)
• The  New Entrants  - competitive local exchange
  carriers (CLECs) They are largely unregulated.
• This market structure was perpetuated by the
  two-tiered regulatory scheme

7
The Regulatory Scheme and its shortcomings

• In general Price cap regulation on bundles of
  services and additional constraints on some
  individual services.
• Some important weaknesses
• Bundling restrictions
• Rate de-averaging
• Win-back rule
• Foreign ownership restrictions
• Mandatory unbundling and mandated network access
• Failure of the stepping stone analysis

8
The Regulatory Scheme - contd

• Bundling restrictions eliminated in 2006
• The CRTCs imposed floor price constraints on
  bundles of regulated and competitive
  (unregulated) services. ILECs structured their
  bundles without regulated local service to avoid
  the lengthy approval process.

9
The Regulatory Scheme - contd

• Rate de-averaging eliminated in 2007
• Consumers in the same geographical area or rate
  band had to be offered the same rates.

10
The Regulatory Scheme - contd

• Win-back rule eliminated in 2007
• ILECs were prohibited from soliciting customers
  who had been attracted by competitors for a
  period of 90 days. The maximum duration of
  promotions was also limited.

11
The Regulatory Scheme - contd

• Foreign ownership restrictions still in force
• Ownership and de facto control Canadians must
  own at least 80 of a telecommunications
  companys voting shares and at least 80 of its
  board of directors must be Canadians.
• This position on foreign ownership is one of the
  most restrictive in the OECD.

12
The Regulatory Scheme - contd

• Mandatory unbundling regulations and essential
  and near-essential facilities
• Broad definition of essential and near-essential
  facilities
• Categories of wholesale services and regulated
  markups

13
Failure of the Stepping Stone Hypothesis

• The Rationale
• Facilitate entry through mandatory access at
  regulated rates
• Allow CLECs to amass capital to build their own
  networks to enhance competition in the long run
• Without the right regulated rate, this hypothesis
  is deemed to fail.

14
Stepping Stone Hypothesis - contd

• The regulated rate
• must reflect the fact that the substantial cost
  of obsolescence, the cost of maintaining and
  upgrading networks and the risk inherent in
  infrastructure investments is borne only by ILECs
• must be constantly adjusted to reflect the
  entrants increasing ability to rely on its own
  facilities.
• must not shield entrants from market forces
  indefinitely and create a reliance on old
  technology

15
Stepping Stone Hypothesis - contd

• The failure
•  The stepping stone hypothesis failed because
  the CRTC was unable to set prices at a level low
  enough to facilitate entrants ability to expand
  their networks and more quickly acquire the
  customer base that would justify construction of
  their own facilities but high enough to provide
  entrants with sufficient incentives to build such
  facilities. (TRTP report, 2006).
• The unbundling regime slowed down investment and
  created dependency on unbundled local loops and
  rent seeking.

16
RECENT POLICY CHANGES

• Two Factors of Change
• Maxime Berniers tenure as Industry Minister and
  his pro-market approach
• The publication of a report by telecom experts
  recommending increased reliance on market
  mechanisms (TRTP)

17
The TRTP report

• Canada is losing its edge in telecom innovation
  because of its regulatory scheme.
• The panel recommends the following
• Market forces should be relied upon to the
  maximum extent feasible as the means of achieving
  Canada's telecommunications policy objectives.
• Regulatory and other government measures should
  be adopted only where market forces are unlikely
  to achieve a telecommunications policy objective
  within a reasonable time frame, and only where
  the costs of regulation do not outweigh the
  benefits.
• Regulatory and other government measures should
  be efficient and proportionate to their purpose
  and should only minimally interfere with the
  operation of market forces to meet the
  objectives.

18

• Three major changes
• 1. The Policy direction a pro-market approach
• 2. Variance of the VOIP decision
• 3. Variance of the Forbearance decision

19
1.The Policy direction a pro-market approach

• Best alternative to a legislative amendment in a
  minority government context
• The direction
• The CRTC should rely on market forces to the
  maximum extent feasible to regulate only as a
  last resort when exercising its powers under the
  Telecommunications Act.

20
2. Variance of the VOIP decision

• What is VOIP?
• Voice Over Internet Protocol Using the internet
  infrastructure and protocol to communicate by
  phone
• The Issue Whether VOIP is subject to traditional
  wireline regulation?
• The CRTCs original decision VOIP is merely
  another step in the evolution of
  telecommunications networks and as such, falls
  within the purvey of wireline regulation. ILECs
  providing VOIP will be regulated. (CLECs will
  not, because they have no market power).

21
VOIP - contd

• The CRTCs Reaffirmed decision the decision,
  sent back by the government in May 2006, was
  reaffirmed.
• the anomaly of a regulated VOIP the CRTC
  decision was unique, making Canada one of the
  only countries to apply such stringent regulation
  to VOIP.
• Variance by the Government distinguish access
  dependent (the provider provides access and
  service) from access independent (different
  providers for access and service) and forbear
  access independent VOIP.

22
3. Variance of the Forbearance decision

• The Forbearance decision determined the criteria
  to be met for ILECs to be forborne from
  regulation in retail local exchange services.
• The CRTCs test ILECs must lose a 25 market
  share in a specific geographic market in order to
  be forborne from ex ante pricing regulations.
  ILECs also have to meet wholesale access quality
  of service requirements for a period of six
  months before applying for forbearance, and are
  subject to ninety-day win-back rule which
  prohibits them from contacting customers lost to
  competitors.

23
Forbearance - contd

• Berniers proposal
• A bright-line facilities-based test A
  residential market is competitive when at least
  two independent facilities-based carriers,
  including providers of mobile wireless services,
  offer llocal exchange services in addition to the
  former monopoly.
• The independently-owned carriers must be able to
  serve 75 of the number of service lines that the
  ILEC is capable of serving.
• Abolition of win-back restrictions.
• Streamlining of quality of services requirements
  for wholesale access.
• Consider smaller geographic areas for the purpose
  of local forbearance applications. This allows to
  better target markets where forbearance is not an
  option and to properly identify competitive
  markets.

24
Forbearance - contd

• The idea Competition as rivalry, not market
  structure. The 75 threshold is not a relevant
  indicator.
• Under Berniers forbearance test, roughly 70 of
  the Canadian population lived in
  telecommunication markets that were ripe for
  deregulation.

25
Forbearance - contd

• Why deregulating the telecom industry makes
  sense?
• Rapid deployment of cable telephony by CLECs in
  the Canadian market
• Low barriers to entry into the telephone market
  for cable providers
• High barriers to the entry of incumbent telephone
  providers into the video market
• Control of wireline networks is no longer a good
  indicator of market concentration
• Predatory practices cant be successful in such a
  volatile and innovation-driven industry as
  telecom

26
Forbearance - contd

• The Varied decision of April 2007 the Government
  rewrote the forbearance decision and invited
  ILECs to file forbearance applications.
• The CRTCs reaction the government wants to
  move quickly toward more reliance on market
  forces in telecom services, less regulation and
  smarter regulation. I welcome the clarity and I
  welcome the variation order.
• The result As of June 30, 2008, the CRTC had
  forborne from regulation over 73 of the
  residential lines and 65 of the business lines.
  Further, approximately 80 of local access and
  revenues were from forborne local services.

27
Conclusion

• Failure of the two-tier regulatory regime and of
  mandatory unbundling
• Misallocation of investment
• Lagging innovation
• Rent-seeking to keep the subsidy system in place
• The next step phasing out mandatory access
• Strong policy leadership can go a long way, even
  in the absence of legislative change.