Skating toward deregulation: Canadian developments.

• Author: Brennan, Timothy J.

1. INTRODUCTION II. THE CRTC FORBEARANCE PROCEEDINGS A. Local Telephone Service B. VoIP Forbearance III. THE PARTIES A. Industry Participants B. Telecommunications Policy Review Panel C. Competition Bureau IV. THE GOVERNOR IN COUNCIL CUTS TO THE CHASE V. ECONOMIC COMMENTS AND CRITIQUES A. Regulation Within Markets B. Measuring Potential Share C. Service Market Definition D. Geographic Market Definition E. Share Tests and Strategic Responses F. Targeted Low Prices G. Defining "Dominance" H. Building Access I. Timing of Intervention J. Regulated Conduct VI. CONCLUSION I. INTRODUCTION

   Despite extensive deregulation in the telecommunications sector, local voice service has proven to be the last and most difficult market to deregulate. Perhaps the most extensive steps toward deregulation of this last stage are being taken in Canada. In April 2006, the Canada Radio-Television and Telecommunications Commission ("CRTC") decided it was "prepared to forbear" from regulating the local voice service provided by the incumbent local exchange carder ("ILEC"), if the ILEC could show it had lost twenty-five percent of its share in a relevant market defined by both product (including voice-over Internet protocol or "VoIP", excluding wireless) and geography (primarily the census metropolitan area or "CMA"). (1) ILECs were also prohibited from efforts to "winback" customers who had switched to competitors in the prior three months, unless the ILEC had lost twenty percent of its market. (2) This decision followed a 2005 CRTC decision not to deregulate ILEC VoIP service. (3)

   The CRTC did not have the last word. Shortly after its local forbearance decision, the Cabinet Ministers, referred to in Canada as the Governor in Council (4) of the recently established conservative government, issued an "Order in Council" requesting that the CRTC reconsider its VoIP decision. (5) The CRTC declined to forbear, claiming that VoIP was in the same market as regular voice service, which it was also refusing to forbear, although it did propose adopting smaller market share loss tests for forbearance and winback. (6) The Cabinet was apparently not satisfied, leading in September of 2006 to an order reversing the CRTC's VolP decision. (7) Going further, in December 2006 the Minister of Industry recommended to the Cabinet that it overrule the CRTC and order forbearance for residential service where there were three nonaffiliated facilities-based providers, two of which (including the ILEC) relied on fixed wires. (8) Business service would be forborne with only the two fixed-line providers. (9) This proposal was adopted by the Governor in Council in April 2007. (10)

   These developments raise a number of economic questions to explore, including the following issues:

   Regulation within markets: Should an incumbent's substitute service for its regulated service necessarily also be regulated when there may be multiple and more prominent providers of the substitute?

   Measuring potential share: An issue with share tests is determining the size of the likely market open to digital voice entrants. Should it be high volume customers who would get service at lower prices by switching to a VolP provider?

   Service market definition: To what extent is wireless in the market for wireline service? Would a weighting scheme be appropriate?

   Geographic market definition: The CRTC and Competition Bureau ("Bureau") accepted that because consumers would not regard a telephone at some other location as a substitute for a telephone at their location, the relevant geographic market is the location. Other geographic market definitions were defended as mere aggregations of convenience. Is this sensible?

   Share tests and strategic responses: Might basing forbearance on market share introduce perverse effects on both incumbents and entrants?

   Targeted low prices: Should an incumbent monopolist be allowed to offer discount services targeted at customers who it learns are switching to an entrant?

   Defining "dominance": Some of the parties and the Bureau expressed at least potential concern with denial by ILECs to facilities that stand-alone retail service providers might need to remain viable. When does a single firm possess an "essential facility," and are effective competition law remedies available?

   Building access: To what extent should ILECs be obliged to provide access to office buildings and apartments so entrants have an opportunity to compete for those customers?

   Timing of intervention: Should monopolization in transitioning industries be controlled through ex ante regulation or ex post penalties?

   Regulated conduct: Should competition law apply to forborne markets if competition to those markets depends on decisions made by the telecommunications regulator regarding access to still-regulated services?

   This Article begins by describing these forbearance proceedings. Before, during, and after the CRTC proceedings, three other agencies played a leading role:

   As in the U.S., industry participants supplied most of the comments with stakes in the outcome. We draw on those comments, in particular, the revealing perspectives taken by cable companies, the most likely entrant into the local telephone business.

   A three-member Telecommunications Policy Review Panel_("TPRP") was appointed by the Canadian government in April 2005 to study Canadian telecommunications and make policy recommendations. (11) It issued its report in March 2006, issuing numerous recommendations regarding forbearance and postderegulation competition enforcement, along with a range of other issues including universal service and information technology deployment. (12)

   The Competition Bureau, the branch of the Canadian government charged with enforcing the Competition Act and serving as an advocate for competition more generally filed comments in the CRTC forbearance proceeding and to the TPRP. It made available for public comment a draft Bulletin on Abuse of Dominance in the Telecommunications Industry ("Telecommunications Abuse Bulletin"), indicating how it might enforce the Telecommunications Act in this sector as it becomes more open to competition, and now it sees its role vis-a-vis the CRTC. (13)

   Last, and perhaps most, the Minister of Industry, in charge of Industry Canada (which, along with Heritage Canada, oversees the CRTC), (14) has the right to recommend that the CRTC reverse itself or that the Governor in Council overturn the CRTC's position.

   After describing the roles of these parties in the development of Canadian telecommunications policy, we comment briefly on the economic questions listed above, followed by a brief conclusion that the Canadian experience has much to offer telecommunications policy analysts, particularly in the U.S.

2. THE CRTC FORBEARANCE PROCEEDINGS

   1. Local Telephone Service

      During the 1990s, the CRTC made a series of decisions to open a wide range of telecommunications services to competition and to lift price regulation of the services. The overall standard for forbearance or refraining from regulation is set out in Section 34(1) of the Canadian Telecommunications Act, (15) where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives.

      The objectives defined in Section (7) of that act include "(f) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective." (16)

      As was true of the U.S., by the mid-1990s, the primary remaining unregulated market was local telephone service, which in Canada is regulated nationally rather than provincially. In 1997, in anticipation of entry into local telecommunications, the CRTC set out a list of rules, not dissimilar to the framework in the U.S. Telecommunications Act and subsequent FCC proceedings, (17) for regulating access to operation systems, "essential facilities," and interconnection with incumbent local telecommunications companies. (18)

      In April 2004, Aliant Telecom, the ILEC for Atlantic Canada (19) and a subsidiary of Bell Canada Enterprises, Canada's largest telecommunications carrier, petitioned the CRTC to forbear from requiring approved tariffs for local service in thirty-two of its exchanges. (20) Aliant also requested that the CRTC remove winback rules, which prevented regulated local carriers from soliciting business from customers who had switched to a competitor for twelve months, and allow Aliant to waive service charges for those who switched back. (21) According to Aliant, forbearance would, to combine clauses of the Telecommunications Act, be "consistent with the Canadian telecommunications policy objective.... to foster increased reliance on market forces." (22) Aliant's primary argument was that it was facing significant competition in those service areas from a facilities-based entrant, EastLink. (23) Aliant stated that in these local exchanges, EastLink was serving twenty-one percent of the residential lines by the end of 2003 and thirty-three percent by August 2005, and it cited press reports of even more. (24)

      Responding to this request on April 28, 2005, the CRTC issued a public notice requesting comment on the standards for forbearing from regulation of local service, including changing or amending the rules on winback and waiving switching charges. (25) In the notice, the CRTC stated that forbearance would not be appropriate if the incumbent has "substantial market power." (26) The CRTC would assess market power by looking at market share, willingness of consumers to switch to other providers in response to an increase in price, and the ability of those rivals to increase output in response to that demand. (27) The relevant market would be determined using a framework roughly (but only roughly) akin to the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines and the Bureau's Merger...