Price cap review pits incumbents against CLECs

The conflicting views of incumbents, CLECs and consumer groups promise plenty of static for hearings into the current price cap regime, opened Monday by the Canadian Radio-television and Telecommunications Commission.

“The parties are very far apart; each one is setting out a different view of the world,” said Ian Angus, president of research firm Angus Telemanagement Group. “I wouldn’t like to be on the CRTC right now.”

At issue are rules governing local service prices, and how to change them in order to facilitate more competition. The hearings are expected to run until Oct. 19. The CRTC expects the new regime to be implemented in the spring and extend for four or five years.

Incumbents like Bell Canada and Telus Corp. say more flexibility with regards price increases will encourage competition. Competitive local exchange carriers AT&T Canada Corp. and Call-Net Enterprises Inc., which owns Sprint Canada Inc., say reduction in fees they pay to incumbents will increase competition. The country’s other large CLEC, Group Telecom Inc. is more interested building its own network and the constraints around the use of incumbent long-term contracts. Consumers just want to avoid getting fleeced.

Under the current price cap regime, residential rate increases are limited to the rate of inflation and extraordinary circumstances. Business rate changes are governed by a formula that subtracts the rate of inflation plus one percent from savings resulting from productivity increases.

Incumbents are lobbying for the CRTC to scrap the productivity offset, claiming it hinders innovation, especially when productivity gains are greater than inflation.

“Their argument is, ‘Why would we improve productivity when we have to give it back in rate reductions?'” Angus said.

Bell Canada wants average annual price increases for business and residential services to be in line with inflation in non high-cost areas. With respect to high-cost areas, mainly rural regions, Bell is looking for the ability to raise rates up to two dollars per month, up to a maximum of $30 over four years.

“In the high-cost areas, we’re still not close to recovering our costs,” said Sheridan Scott, Bell’s chief regulatory officer.

Telus wants the CRTC to allow price increases up to a maximum of $35 per month. Charlie Fleet, Telus’ communications manager for regulatory affairs, said pushing up the cap would help bring to local service the same level of competition present in the long distance and wireless markets.

“There’s more incentive to get in if there’s more return,” Fleet said.

Call-Net senior vice-president of regulatory affairs Jean Brazeau disagrees. While he agrees that Canadian rates are cheap compared to those in other countries (one of the few things incumbents and CLECs agree upon is that rates in Canada are some of the lowest in the world), Brazeau suggests rate increases will just end up lining the pockets of incumbents.

“Prices for residential service have been going up over the past four years, and competition hasn’t increased,” he said. “No matter what the (large) telcos would have you believe, competition is in trouble in this country.”

Brazeau would like to see incumbents reduce line-lease charges to CLECs to better reflect incremental costs – what it costs Bell and Telus to provide these services. AT&T is pushing for the same adjustment, and unlike Call-Net, it has actually pinpointed a figure by which it feels the incumbents should lower their service rates to CLECs.

AT&T argues that the services it pays for from Bell would cost 70 per cent less if AT&T, which services only business customers, had the kind of networks owned by Bell and Telus. Since those were built during a period in which the former telephone monopolies were heavily regulated, AT&T feels it should get a 70 per cent reduction in the service charges it currently pays to the incumbents.

“Our view of the market is that the former monopolies are getting stronger and none of the new entrants is making any money,” said AT&T spokesman Ian Dale, adding that nine CLECs have failed in the last failed in the last eight months.

The fee reductions proposed by AT&T and Call-Net are anathema to Bell.

“The consumer groups, we’re willing to have a debate with,” Scott said, suggesting that incumbents and consumer groups find compromise in their impasse over productivity offsets. “In terms of Call-Net and AT&T’s proposal, we would really part company. To say you have money flowing from one set of companies to another, we find that objectionable. This model does not advance facilities-based competition.”

Angus said the position put forth by Call-Net and AT&T faces an uphill battle as it is in conflict with the CRTC’s method for setting prices. Where Call-Net and AT&T look at the businesses of incumbents as a whole, the CRTC tends to look at specific services as standalones.

However he added the CRTC’s interest in increasing competition means the body is not satisfied with keeping things the way they are. And he said the lack of common ground between the different groups suggests these issues will not be easy to resolve.

“Very likely, the CRTC is going to come up with a decision that’s going to be appealed,” Angus said.

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