Canadian Government Moves to Deregulate Local Phone Market

In the fourth and most likely final act in his campaign against regulation of the telecoms market, Minister for Industry Maxime Bernier has affirmed his disregard for the Canadian Radio, Television, and Telecommunications Commission (CRTC), announcing a move to deregulate the local telecoms market further. Removing the requirement for incumbents' market share to drop below 75% before forbearance is allowed and imposing the lightest requirements for a region to enjoy forbearance from competition regulations, Maxime Bernier has radically altered the competitive landscape in Canada. The announcement yesterday boosts the incumbents' already dominant position in the market and further sidelines the CRTC in the regulation of the local telecoms market. The changes described have three main aspects:

• Incumbents will no longer need to get approval of prices in areas where three facilities-based operators owned by separate companies are operating—this includes wireline, cable, and wireless operators. These areas, which Bernier estimates to cover 60% of the population in mainly urban areas, will be designated as forbearance regions.
• Local business markets will also be deregulated but only two such operators are required to elicit forbearance.
• Win-back rules will be removed, freeing incumbents to contact and make improved offers to market services to lost customers

Outlook and Implications

Moves to Deregulate: The CRTC has aimed to remove regulation wherever possible for several years, for example by introducing the 75% market-share forbearance level in April 2006. Recent regulatory efforts have focused on boosting local competition, particularly from facilities-based competitors, in an effort to level the playing field prior to full deregulation. However, following on from the announcement of the deregulation of VoIP in opposition to prior decisions by the CRTC, the CRTC appeared to seek to appease the pro-deregulation industry minister by increasing the incumbents' flexibility to set the price of their services (see Canada: 20 November 2006: VoIP Prices Deregulated and Canada: 24 November 2006: CRTC Moves Local Pricing to Rate-Range Regulation for Incumbents). This was swiftly followed by the announcement by Maxime Bernier that the Competition Tribunal would be granted powers to impose fines of up to C$15 million (US$13.01 million) for "abuse of market position" by telecoms companies (see Canada: 8 December 2006: Competition Tribunal to Boost Anti-Competitive Powers). This was a power that the CRTC had been aiming to gain for itself. While this was phrased as a move to protect consumers in a deregulated environment, this final move may have come sooner than expected.

Lobbying Pays Off: Christmas has come early for the incumbent operators—and other players who are well established in their markets. These companies have been vocal in their attacks on industry regulation and their lobbying efforts appear to have been successful (see Canada: 20 October 2006: Telus CEO Pitches for Deregulation, Canada: 29 July 2005: Wireline Incumbents Line Up Against New VoIP Regulations in Canada, and Canada: 15 June 2005: Incumbents Appeal Win-Back Rules in Canada). Incumbents saw their market share fall from 94% in 2004 to 90% in 2005. Recent claims by the incumbents include noting that this market-share fall did not take into account losses to VoIP and mobile substitution, which have also severely affected their switched-access line losses, while the VoIP-based offerings from cable companies have also rapidly taken market share. The effect of this on incumbents' true market share was due to be examined by the CRTC in 2007. Bell Canada saw core wireline voice lines fall 3.7% year-on-year, with a rise of 2.1% in business lines cushioning the larger 6.9% drop in residential access lines. Meanwhile, cable operator Shaw has seen voice subscriptions grow by 25% since the second quarter of 2006 to total more than 212,000 lines in service since launching in the middle of 2005 (see Canada: 11 December 2006: Shaw Expands Digital Phone Service Footprint).

Consumer Advocates Cry Foul: The decision has attracted both praise and criticism from the expected quarters: BCE, Bell Alliant, Quebecor, and MTS have all indicated their approval, noting that competition will increase and prices will fall. On the other side, Canada NewsWire reports Charles Tanguay of the Union des comsommateurs as stating that this is "a huge Christmas present to Bell Canada, TELUS, and the other big telephone companies that was bought on credit. Next year, consumers will have to pay the bill." The Public Interest Advocacy Centre found that 70% of Canadians opposed telcos setting their own rates. Louis Audet, president and CEO of number four cable player Cogeco Cable, described the move as "another piecemeal announcement essentially designed to please the incumbent telephone companies rather than to ensure real sustainable competition in the best interest of Canadian consumers". It was noted that the government's own panel found that the Competition Tribunal did not have sufficient knowledge of the sector. The panel stated that the "Competition Act (does not) provide an appropriate framework for the resolution of competitive disputes in the telecommunications sector where SMP still exists, or where markets are in transition from SMP (significant market power). Nor does it provide an appropriate framework in situations where the development, ongoing monitoring, and supervision of sector-specific competitive safeguards may be required." The new powers are being handed to a body that by its nature is reactive and slow to act, often taking years to reach a conclusion. This will likely lead to volatility and uncertainty in the market as the players re-position to select the prime customers, causing high levels of price competition in prime, mainly urban, areas and increasing prices in less-attractive target markets.

The decision will be published in the Canada Gazette later this month and there will be 30 days to respond to this decision before it is likely to be enacted in the first two months of 2007.