Canadian Government Acts to Speed Up Deregulation

Following the announcement last December that the Canadian government would act to vary the CRTC framework on forbearance, decision 2006-15, "Forbearance from the regulation of retail local exchange services" issued in April 2006, it has announced, through Industry Minister Maxime Bernier, that the rules will be implemented immediately. As previously noted, a number of changes will be made that affect how competition is managed and the requirements for a company to gain forbearance from regulation in a region, although several amendments and clarifications have been made following public consultation (see Canada: 12 December 2006: Canadian Government Moves to Deregulate Local Phone Market).

The minister outlined details of plans to shift some of the regulatory burden away from the CRTC. The Competition Bureau budget will receive a C$10.5-million grant to fund activities in the telecommunications sector. It will release an enforcement bulletin on its approach to abuse of domination in telecommunications by the end of June 2007 (see Canada: 8 December 2006: Competition Tribunal to Boost Anti-Competitive Powers). A new independent telecommunications consumer agency is also being established to resolve complaints from individuals and businesses, and the government called on the industry to work with the CRTC on establishing the agency. The CRTC has been charged with the creation of the agency, which will resolve complaints, and develop industry codes of conduct and standards. It will also publish an annual report including details on the nature, number and resolution of complaints received about each provider, and will identify causes for concern warranting further action. The Consumer Agency will be constructed to ensure independence from the telecoms industry, with the majority of governing body members not affiliated with any telecommunications service provider; a chief executive appointed by the governing body will also have no such affiliation. The agency will also set its budget (paid for by the industry) at a level that ensures effective execution of policy. Until the Consumer Agency is set up, the CRTC will meet the reporting requirements and will also report on progress towards the establishment of the Consumer Agency.

The order has also redefined the area of forbearance, removing the 86 "Local Forbearance Regions" and redefining the area for forbearance applications as the local exchange. The requirements for the presence of one independent facilities-based competitor for business lines or two for consumer lines to initiate forbearance proceedings has also been clarified to note that they must be able to serve 75% of the number of local exchange service lines and one of the independent providers must be a fixed-line service. Forbearance can also be sought based on the demonstration of market power according to the criteria laid down by the Competition Bureau. The CRTC has previously required a market share test to be applied, whereby the incumbent must demonstrate that it has less than 75% of the market in order to receive forbearance. It was notable in a recent forbearance decision that although it used the local exchange as the forbearance area as per this order, the CRTC still applied the market share test (see Canada: 28 March 2007: Forbearance Grantedin Fort McMurray, Bell Canada Criticises Limitations).

Incumbent carriers seeking forbearance must demonstrate that they have met nine quality-of-service standards regarding wholesale access to competitors for six out of eight months preceding the application. The presence test has been clarified to note that small competitors with less than 20,000 local exchange customers in Canada will be given at least 18 months’ grace to gain a foothold in a market. The decision went as far as inviting forbearance applications for local exchanges in metropolitan areas of Calgary, Edmonton, Halifax, Hamilton, London, Montreal, Ottawa-Gatineau, Quebec City, Toronto, Vancouver or Winnipeg, stating that such applications would receive priority processing. In the final component of the order, ”Winback” rules that prevented incumbents from marketing services to lost customers—for example by giving large discounts, have been scrapped (see Canada: 15 June 2005: Incumbents Appeal Win-Back Rules in Canada).

Outlook and Implications

The moves by Industry Minister Maxime Bernier have been attacked by consumer groups (see: Canada: 16 January 2007: Consumer Groups Attack Bernier’s Deregulation Moves) and small competitors; indeed it appears that the decision implies expectations that the regulatory environment will be detrimental to small competitive providers. It states: "While it is possible that over time only a small number of competitors may offer service, this does not mean that consumers' interests will not be well-served. Innovation will be encouraged resulting in more intense competition between traditional telephone companies and competitors such as wireless, cable and Voice over Internet Protocol (VoIP) providers."

Bernier's argument ignores the fact that losing the market share test means that new companies are less likely to invest in infrastructure, if it entails them facing a deregulated market shortly afterwards, where the incumbent will hold the subscriber (and revenue) base, and a stable financial footing that gives them a competitive edge in any price-based competition. This regulatory structure envisions a small number of large players competing against each other. Ultimately this is likely to be the three companies with significant existing facilities. This would be Bell Canada, which is currently dominant in the east, Telus in Vancouver and Rogers, which has a strong wireless and Cable TV subscriber base, WiMAX infrastructure and national VoIP plans (see Canada: 9 January 2007: Cable Telephony Powers Rogers Ahead in Q4 Subscriber Stats and Canada: 6 December 2006: Rogers Indicates National Ambitions Using VoIP). Bernier is introducing a regulatory structure that encourages this tri-opoly and will help to exclude new entrants. Although it will have some benefits of ensuring that the scale of the players involved cuts costs, it does not particularly encourage innovation and entrepreneurship.

Although this regulatory framework is likely to increase competition in certain areas in the short term, with local price wars possible, it will ultimately lead to a more consolidated and less innovative market.