CRTC Changes Price-Cap Regime for Local Telephone Services

The Canadian Radio, Television and Telecommunications Commission (CRTC) has announced that it is to introduce new rules governing the pricing of local telephone services, with a move to a 'third generation' price-cap regime, effective from 1 June 2007 and applying to the non-forborne (i.e. regulated) operating areas of the incumbent operators - Bell Canada, Telus, Sasktel MTS Allstream and Bell Alliant.

Key components of the new price-cap regime include:

• maintaining basic local phone service rates in urban areas—capped at existing levels;
• moving rural phone service rates closer to cost at the lesser rate of 5% annually, or the rate of inflation;
• Limiting business and other capped services to the rate of inflation up to a maximum of 10% per year for individual rates;
• removing prohibitions on further rate de-averaging for residential, including optional, local services;
• flexibility to charge customers individual rates;
• no constraints on chargeable rates for optional local services and bundled services;
• an increase in pay telephone rates up to C$0.50 (US$0.45) for cash calls (from C$0.25) and from C$0.75 to C$1.00 for non-cash calls; and
• freezing public safety and social service rates .

Outlook and Implications

Most significant is the reduction in protected pricing for consumers in high cost serving areas, which raises the possibility of pricing flexibility, and moves towards recovering the costs of providing services to an individual will be balanced by future reductions in Universal Service payments. Seeking to strike a balance between the cost of service provision and the effect of subsidies on reducing tariffs below a fair rate, the method used to re-balance pricing and cost of service sets a C$30 'fair rate' for service provision. Where the cost of service to consumers is below C$30, the ILECS are obliged to implement local rate increases on 1 June each year. For areas where the tariff to consumers is above C$30 or receives no subsidy, no rate increases are mandated.

This is the latest in a string of policy directions and orders aiming to accelerate the de-regulation of the local telephone market and is part of the CRTC's response to recent policy direction from Maxime Bernier (see: Canada: 5 April 2007: Canadian Government Acts to Speed Up Deregulation). The policy included:

• deregulating VoIP pricing, allowing incumbents more freedom in setting rates for VoIP-based services (see Canada: 20 November 2006:VoIP Prices Deregulated).
• altering the price-cap regime (which has been further softened with this decision) to allow incumbents limited flexibility to change prices within a pre-determined range without notification (see Canada: 24 November 2006: CRTC Moves Local Pricing to Rate-Range Regulation for Incumbents);
• replacing the market-share test on forbearance in a region (now defined as a local exchange) with a test based on the presence of facilities-based competition within a region (see Canada: 12 December 2006:Canadian Government Moves to Deregulate Local Phone Market);
• handing powers to investigate abuse of market dominance to the Competition Tribunal (see Canada: 8 December 2006: Competition Tribunal to Boost Anti-Competitive Powers);
• directing the CRTC to set up an independent consumer complaints bureau; and
• attempting to change the make-up of the CRTC to include more non-industry insiders (see Canada: 15 January 2007: Constituents of CRTC Set to Change).

While due to the easing of forbearance regulations this decision will apply to an increasingly small number of exchanges, it again adds to the competitive capabilities of the incumbent operators in markets where competition is scant. At the end of 2005 incumbents notably still took 92% of retail local revenues, 90% of lines and 64% of long-distance revenues. Competitors, including out-of-territory incumbents in wireless and wireline combined, took 35% of total telecommunications revenues in 2005, though this could largely be ascribed to Roger's successful cable and wireless operations. The incumbents have complained that substitution from VoIP and wireless have rapidly eaten into market share over the last year, but are still in a highly dominant position for many markets. Commissioner Stuart Langford dissented from the decision, calling it a "fundamental error", based on a flawed "quest for administrative efficiency" that will prevent competitors from entering new markets due to the pricing and marketing tools in the hands of the incumbents. Langford further stated that in the rush to meet the government directives on deregulation and market forces, the decision "overlooked the fact that market forces cannot be relied upon to protect consumer interests in places where little or no competition exists".