May Day 2002: New Conditions for Canadian Communications Competition

Telecom Decision CRTC 2002-34: Regulatory Framework for the Second Price Cap, released 30 May 2002, sets out new rules for regulating competition in the Canadian telecom industry. The Decision capped a process that was launched more than a year ago and saw many different visions of the future presented by consumers, incumbent carriers (ILECs) and new entrants. In this Decision, the Canadian Radio-television and Telecommunications Commission (CRTC) provided a significant win for consumers. At the same time, incumbent and new entrant carriers alike received varying amounts of relief as described below. In this Decision, the CRTC attempted to strike a balance between the interests of business and residential consumers, ILECs and competitors.

Business and Residential Consumers

The Commission determined that there would be insufficient competition to discipline ILEC pricing of local service and optional local features during the next four-year period. As a result, the CRTC has frozen residential rates such that increases in any given year will not be permitted unless the rate of inflation exceeds 3.5%. In addition, ILECs were denied price increases for local service in high cost serving areas, which were proposed in order to eliminate the contribution subsidy. This is a big win for consumers who will likely experience a decrease in residential local service pricing in real terms over the next four years.

The Commission also determined that it no longer requires business local rates to be reduced by a productivity factor. As a result, ILECs will have the ability to increase local business rates by the rate of inflation each year. This will likely put an end to the price decreases experienced by business local subscribers under the previous price cap regime. Previously, business rates in urban areas declined, on average, by 15% in Ontario and Quebec, 11% in British Columbia and 5% in Alberta.

The CRTC endorsed the concept of Consumer Bill of Rights, with rebates if phone companies fail to meet certain service quality standards.

Incumbents

The incumbent carriers, such as Bell and TELUS, will get to recover the CRTC-mandated price decreases won by competitors in this proceeding. As a result, the cost savings for competitors handed down in this Decision will likely not come from ILEC shareholders. Another major improvement from the ILEC perspective is the removal of the requirement for regulated price decreases to local services. Instead, Price Caps are used to keep price increases to constrained levels. Through the removal of the productivity offset for business services and the use of “deferral accounts” for residential services, price decreases for ILEC business and residential customers will only be due to competitive pressures, rather than CRTC intervention. In addition, a significant amount of regulatory reporting has been eliminated, resulting in reductions in overhead costs.

Regulatory Help

As reported in earlier analysis reports, the CRTC has provided certain amounts of relief, contributing hundreds of millions of dollars in financial adjustments to the complex system of cross-subsidies and payments from competitors to incumbents. In fact, more relief is expected in the coming months as the CRTC completes deliberations in its recent Price Cap proceeding.

New Entrants

Effective June 1, 2002, the CRTC has created two classifications of competitor services and a number of new pricing rules for these services. As a result, the major CLECs can expect a reduction in the charges they pay to the ILECs of about 15% to 20% on an annualized basis.

Key price changes include:

  1. Reducing the mark-up for certain competitor services from 25% to a 15% mark-up over incremental cost, yielding an 8% decrease in the price for these services;
  2. A major reduction in the direct connection cost from $0.003 per minute to a cost-based rate as low as $0.00128 per minute for long distance calls from Bell Canada territory; and
  3. The creation of a new interim competitor service tariff for local access circuits providing digital transmission capacity.

The new interim tariff for digital local access circuits (referred to as “competitor-DNA service”) will provide competitors with a monthly rate of 40% off of the equivalent retail service (known as Digital Network Access or DNA), subject to certain limitations. Further Commission processes have been established to determine cost based rates for this service (including a 15% mark-up) based on the banding approach used for unbundled local loops. In addition, the Commission is prepared to hear arguments on broadening the competitor-DNA service to include other types of local channels, such as interconnecting trunks between ILEC central offices and competitor POPs.

Summary

Among the carriers, Bell and Telus executives are likely more satisfied than their competitor counterparts. Still, AT&T Canada will save in the order of $75 million annually as a result of this Decision while Call-Net’s annual costs are reduced by about $50 million. The Price Cap Decision is more than 200 pages and consists of over 1000 paragraphs in setting out many of the business issues for managing the Canadian telecom industry over the next 4 years.

A comprehensive analysis of the Price Cap Decision is being prepared by Mark H. Goldberg & Associates Inc. in conjunction with Decima Publishing, scheduled to be available in late June. For more information about this in-depth report and to get information about special pre-publication pricing, please click here: Report on Price Cap Decision

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