Structural separation isn’t a solution

I wrote “The truth about structural separation” last May, describing the interaction between a Member of Parliament and TELUS COO Tony Geheran during a meeting of the Parliamentary Standing Committee on Industry, Science and Technology (INDU) that took place a year earlier.

Mr. Geheran said, “I haven’t seen [structural separation] work anywhere globally, to sustainable effect,” to which Calgary-Nose Hill MP Michelle Rempel Garner replied, “It’s in the UK, right?”

Mr. Geheran responded, “But if you look at the UK, they are wholesale moaning about the quality of their infrastructure, their lack of fibre coverage. across what is a very small geography. I know. I originated from there. And quite frankly, the Canadian networks are far superior in coverage and quality and performance through COVID has demonstrated that.”

Recently, that committee adopted a report, “Affordability and Accessibility of Telecommunications Services in Canada: Encouraging Competition to (Finally) Bridge the Digital Divide” [pdf, 3.4MB], that had been released by the Committee during the previous session of Parliament. I found it interesting that the Parliamentary Committee report did not recommend studying structural separation, despite a specific call for such a strong competitive safeguard from at least one of the witnesses. However, in its more recent report examining the Rogers – Shaw transaction [pdf, 3.1MB], that same committee suggested studying the matter further:

Recommendation 1: That the Government of Canada launch nationwide consultations to examine the implementation of structural separation in the telecommunications sector between businesses that build infrastructure and those that provide services in order to ensure a level playing field that fosters network development in both cities and rural areas.

As it turns out, the CRTC has already held nationwide consultations that examined proposals such as structural separation. In 2015, as part of its review of wholesale wireline services, the CRTC examined a CNOC proposal to implement an “Equivalence of Inputs” regime, a very basic form of structural separation, “such that any wholesale service offered by an incumbent carrier to a competitor be provided at the same price, quality, terms and conditions, and timescale, using the same systems and processes that incumbent carriers’ use in their wholesale operations to supply their own retail operations”. The Commission rejected the proposal, saying it “would represent an overly intrusive regulatory measure, which would neither be efficient nor proportionate to its purpose“.

As a regulatory measure, structural separation has rarely been used in wireline broadband markets, and only where there is a single dominant network operator. To my knowledge, it has never been used in the wireless industry.

Unlike some foreign markets, in Canada there is no single network with a dominant presence. For example, in the UK, BT agreed to separate its wholesale and retail operations into separate business units after the regulator concluded that it had a natural monopoly over phone and broadband infrastructure in the UK. In other words, if you wanted phone or broadband services, you had to use the BT network.

In contrast, Canada’s wireline and wireless broadband networks are provided by multiple national and regional wireline and wireless service providers. As discussed recently in “Truthiness and Canada’s Telecom Industry”, Canada has the least concentrated broadband market in the G7 plus Australia. Upon which network would separation be imposed?

Just as proponents of mandated wholesale MVNO access have been pushing for a wholesale model that has been tried and largely abandoned elsewhere, proponents of structural separation are pushing another form of regulatory intervention that has fallen out of favour.

As described in Federal Communications Law Journal [pdf, 2.9MB], “Concerns about the potential for such disruptions [in economic efficiencies]–combined with recognition that the more extreme forms of separation potentially are irreversible-have led most regulators to back away from mandatory separation, or to view it as a “last resort,” to be used only in cases of extreme and otherwise irremediable discrimination.” The authors indicate that separation “may discourage the introduction of new networks, thereby reducing economic welfare and harming consumers.” Further, “the available evidence fails to support the proposition that mandatory separation improves market performance, but this evidence does suggest that such a policy leads to reduced levels of innovation and investment.”

Reduced levels of innovation and investment would fail to deliver the Parliamentary Committee’s stated goal of “[fostering] network development in both cities and rural areas”.

Canada needs regulatory policies that create incentives for more investment and innovation, not less.

Structural separation isn’t a solution.

Canada’s future depends on connectivity.

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