Saturday, February 25, 2006

CRTC vetoes repayment

Ok this is a story that I wasn’t sure how to respond to at first.

So I sat on it and thought about it for week or so and this is how it seems to play out.

First the CRTC made a ruling that forced the traditional telephone companies in Canada to set up what it termed “deferral accounts”. Now the amount of money in these accounts has become significant at better than $650 million. And, the regulator has decided to force these companies to re-invest the funds in development of new local services such as “high speed” or “broadband” access that allows consumers to have fast internet connections and make use of other emerging services. The idea that the regulator has, is that this can be a means of developing rural areas to bring the availability of service closer to that of urban centres. A noble sounding sentiment but I can show a number of ways how this will not work.

My perspective on this development may be very different from most because I am an industry insider of sorts, having spent better than 30 years in the business in a variety of roles. I think that the CRTC has basically failed in one of its primary roles and goals. And now has effectively expropriated money from Canadian citizens and is forcing regulated businesses to become instruments of social policy. A social policy which the CRTC itself seems to have been the author of and the director of.

Now to understand just how this came to be and who the players are there are a few terms of reference that need to be clarified.

First – The CRTC : The CRTC is an independent, public authority which was established to sustain and promote Canadian culture and achieve key social and economic objectives by regulating and supervising Canadian broadcasting and telecommunications in the public interest. As an expert tribunal it takes into account the wants and needs of Canadian citizens, industries and various interest groups. The CRTC is governed by the Broadcasting Act and the Telecommunications Act and reports to Parliament through the Minister of Canadian Heritage.

Second – The Telephone Companies : In Canada the telephone companies are split into two categories. The first is the original providers of regional service who are termed ILECs ( Incumbent Local Exchange Carriers ). The second is the new group of companies called CLECs ( Competitive Local Exchange Carriers) who came on the scene around 1997 with the intention of competing against the ILECs for local dial-tone based service along with the various other services (long distance, toll services, data-communications etc. ) already in competition.

So, we had ILECs versus CLECs going up against each other for a chunk of over $10 billion in Canadian markets. And, the CRTC in charge of keeping the competition healthy and beneficial to the consumer.

This is where things start going very wrong. The CRTC blew it for everyone.

In and around 1977 there were as many as six existing or emerging CLECs and essentially four ILECs. The ILECs were Telus in BC/AB, MTS in MB, Bell in ON/PQ and Alliant in the Maritimes. Saskatchewan’s crown corp SaskTel managed to avoid CRTC regulation by remaining a government entity and so has no place in the rest of this.

The CRTC imposed regulations that FORCED the ILECs to keep their charges for local service at the already high levels ( this is called forbearance ) in order to allow the new CLECs to compete with lower prices and give them a chance to establish market position.

This would have worked except for two things. First that the ILECs were allowed to put roadblocks up against CLECs where shared resources and facilities were required. Second the ILECs practiced price competition illegally where protecting major commercial accounts or large a dense ( therefore highly profitable) markets like Toronto, Vancouver, Calgary etc. The effect was that residential consumers telecom costs went up and business costs went down. Consumers subsidized the savings to the business community,

As a result of these failures of the CRTC to enforce its own rulings in a timely and effective manner, the ILECs and consumer groups brought numerous complaints. The CRTC then decided in 2002 that rather than enforcing its own rules to accomplish the competitive strategy that was its mandate, to impose what amounted to a tax on the ILECs with the money going into these “Deferral Accounts”

In the meantime the failure of the CRTC to enforce the competition rules led to the disappearance of the CLECs and the effective return of the ILECs to monopoly status. So where Canada had upwards of eight telephone companies vying for customers we now have effectively three ( Telus/ MTS/Bell ) with one major outsider in the entity of Rogers Telecom. How is this of any benefit to Canadians? How is this a competitive environment? It is not either and that was the responsibility of the CRTC!

Wrong on so many levels! The consumers who were supposed to be seeing the rewards of competition continued to be gouged by the ILECs and the regulator who was supposed to prevent this kind of gouging was primarily responsible.

There are of course many complications and nuances in the events and relationships of the players in this business but that is beyond the scope of this simple summary.

The bottom line here is that the Canadian Telecommunications Regulator failed its mandate to promote and sustain competition in the telecommunications industry and Canadian consumers and taxpayers are paying for it.

As a side note, this all transpired under the watch of the Liberal government.


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