Telephone companies present final arguments on telco pricing safeguard rules

Canada’s telephone companies, incumbent and competitors alike, have played their final hands in the price floor safeguards process and it now remains for the CRTC to decide who won (Telecom Public Notice 2003-10). Presenting final arguments to the commission this summer, incumbent telephony providers say rules proposed by the CRTC and those put forward by their rivals to restrict their ability to bundle would thwart the development of sustainable telecom competition. Competitive providers, on the other hand, counter that they need added flexibility in pricing to be able to compete against vertically integrated and market dominant incumbents. Earlier this summer, incumbent and competitive telcos sparred over proposed pricing safeguard rules with each side accusing the other of wanting to stifle the development of effective competition. In arguments filed with the CRTC, ILECs say that proposed rules for pricing safeguards, if adopted as are, will only serve to prop up the financial viability of competitors without improving local telephony competition. MTS Allstream Inc., Call-Net Enterprises Inc. and other competitive telcos counter that the commission needs to reduce the pricing flexibility of the incumbents if competition in the local market is going to take hold. ILECs also go to great lengths in their submissions to the commission to show that competition is alive and well in the provision of tariffed services, particularly in the business services segment. Highlighting recent comments from competitive providers Call-Net and Primus Telecommunications Canada Inc., TELUS Corp. writes that these providers are increasingly gaining market share under the current rules. So, it concludes that there is no real need to overhaul the system that would limit ILECs even more, while affording competitive providers, which are doing well, even greater flexibility to attack the market. Adds Bell Canada and its affiliates: "Whether the state of competition is strong or weak, the PN proposals should not be adopted because they are unnecessary to achieving the stated objectives of protecting against anti-competitive behaviour and unjust discrimination. Further, they would artificially increase market prices for services and bundles, and therefore, be harmful to customers and lead to artificial market signals that would slow development of the market." The incumbent telcos argue that the rules proposed by the commission and those put forward by the competitive telephony providers run counter to generally accepted economic principles. Limiting an ILEC’s pricing flexibility doesn’t fit with sound economic practice, the companies indicate in their evidence. ILEC witnesses - experts on the Canadian telecommunications marketplace - suggest that it wouldn’t be in the ILECs’ economic best interests to try to undercut competitor prices under the current rules. This, they say, is why the current rules work. The incumbent telephone companies add that customers believe the current rules are working and wouldn’t accept the imposition of new rules that would increase prices. The Coalition for Competitive Telecommunications Pricing suggests that there is overwhelming evidence on the record indicating that the business telecommunications services market is highly competitive and that if the commission’s proposals are implemented, they "would result in significant direct financial harm to the consumer welfare of Canadian business users of telecommunications services." In a joint submission, Call-Net and MTS Allstream laud the commission for recognizing that the current state of competition is weak and that decreasing incumbents’ pricing flexibility would be a positive move toward ensuring the development of healthy competition. But the two companies suggest further changes to the current regime, more particularly to the services imputation test. They note that they aren’t trying to overhaul the system as the incumbent providers contend. They say they are simply proposing a set of modified pricing safeguards for tariffed services that will in the long term create an environment in which healthy competition from incumbents and competitors can exist. Call-Net/MTS have proposed four key changes that they say will allow for the development of effective competition. They say the commission needs to change the imputation test such that essential facilities and services, Category I Competitor services, near essential facilities and those facilities that are essential in nature are imputed at tariffed rates. As well, the CRTC must ensure that services are not offered on a retail basis until they are offered to competitors on an unbundled basis at tariffed rates. The two companies disagree with Bell Canada et al.’s argument that it would be inappropriate to now expand the definition of an essential facility because it is outside the scope of the proceeding. Call-Net/MTS respond that there aren’t proposing a change to the definition of an essential service. "The competitors have simply proposed that all Category I Competitor Services should be imputed at actual rates for imputation test purposes, whether they are classified as essential, near-essential, in the nature of essential, interconnection or otherwise," the joint submission reads. The two companies say this is required because competitive providers rely on ILECs not only for essential facilities, but others, which are only available at retail rates. This, they say, results in the current imputation test placing entrants at a competitive disadvantage by not reflecting the actual rates paid for necessary facilities obtained from the ILECs. "For all intents and purposes, competitors are equally reliant on the ILEC for ‘non-essential’ as well as ‘essential’ Category I Competitor Services … In other words, while there are clearly no alternatives available to competitors as far as essential facilities and services are concerned, there are virtually no alternatives for near-essential services at this time, rendering competitors highly dependent on all Category I Competitor Services at this stage in the development of the market," the two companies write. The incumbent operators argue that adopting pricing rules for tariffed services as set out by the commission in PN 2003-10 or as proposed by competitive providers would only serve to create a price umbrella for competitive providers. This, they add, provides competitors with a guaranteed margin with which to operate and protects them from margin erosion resulting from vigorous competition. The two companies counter that revising the imputation test would not create a price umbrella or guarantee margins. "It would accomplish the exact opposite. The competitor’s proposal would eliminate the opportunity and incentive for ILECs to squeeze competitors’ margins in respect of services involving underlying Category I Competitor Services and, thereby, help promote rather than suppress competition," they write. Call-Net/MTS take issue with the incumbent’s argument that the CRTC’s proposals don’t mesh with economic principles and competition law. They say that a market such as telecommunications doesn’t satisfy a textbook case of a competitive marketplace to which the incumbents’ expert witnesses tried to make allusion. That means the commission must not only take into account economic principles, but also actual market conditions in setting pricing safeguards. "The existing imputation test, in the competitors’ view, creates a barrier to entry by providing the ILECs with the ability and incentive to lessen competition in the marketplace, as is supported by experience to date. Consequently, in the competitors’ view, its proposal to impute all Category I Competitor Services at rate levels actually paid by competitors is in fact consistent with economic principles and consistent with existing market conditions. Competition law considerations, on the other hand, would come into play at a time when the industry is no longer subject to direct regulation," the two companies write.

Telephone companies present final arguments on telco pricing safeguard rules

News | August 4, 2004

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