Industry Responses to Kevin Wilson's Article

G. Hariton (Unitel)

Janet Yale (Unitel)

In June 1992, the CRTC drastically changed the nature of the telecommunications industry in Canada by facilitating competition in the long-distance market. Kevin Wilson raises important issues as to the way the CRTC reached its decision, and indirectly as to the broader implications for regulation.

As Wilson has stressed, in considering the desirability of long-distance competition, the CRTC has had multiple objectives, and the priorities of the different objectives have changed. Indeed, both in a first decision in 1985, rejecting long-distance competition, and in the public notice leading up to the 1992 decision, the CRTC emphasized impacts on the prices of both long-distance and local services. In the 1992 decision, however, the most important criterion was customer choice (Decision 92-12, p. 12). As Wilson points out, by definition this must lead to opening up the long-distance market to multiple providers: "In the opinion of the Commission, such choice and responsiveness cannot be met in the longer term in a single supplier environment, nor is it reasonable to assume that a single supplier can differentiate in terms of product and price sufficiently to meet the specific needs and multiple demands of different user groups" (Decision 92-12, p. 12).

But the CRTC went further. For consumers to enjoy choice of supplier, it is not sufficient that the long-distance market be open to competition: there must actually be a significant number of competitors present. However, it is not immediately apparent that the nature of the long-distance industry will allow many players to enter and flourish. Certainly, the costs of entry could be large, especially for facilities-based carriers, and irrecoverable once committed. As well, there may be significant economies of scale and scope (although the CRTC chose not to rely on the evidence presented on this subject; see Decision 92-12, p. 21).

In consequence, the CRTC decided to follow a variant of the "infant-industry" model of economic development. In effect, new entrants were to be given a series of advantages at the start, in hopes that this would allow them to become established and financially viable. There were two major advantages and a host of minor ones.

The first major advantage lay in the degree of regulation of prices and services. The incumbent telephone companies' prices had to be explicitly approved by the CRTC, and were subject to a host of restrictions. Price decreases or new service introductions could be challenged as anti-competitive by competitors and delayed for weeks or months. By contrast, competitors' prices and services were routinely rubber-stamped. This gave new entrants a significant edge in competitive markets.

The second major advantage grew out of the massive cross-subsidy from long distance to local and access services. Long-distance prices have traditionally been three to four times the average cost of providing service, with the surplus being used to hold local prices to consumers at less than half the cost. As new entrants take long-distance market share, the source of cross-subsidy to local is eroded. The CRTC directed that, to minimize the impact of competition, new entrants had to make "contribution" payments toward local services, partly replacing the lost cross-subsidy. However, the new entrants' contribution payments were at a much lower rate than that for incumbents' payments (new entrants paid proportionally about one third as much in 1993). This had two consequences. First, it lightened the financial burden of new entrants. Second, it created an artificial cost penalty for the incumbents; and since the CRTC would not allow the incumbents to price below cost, it served to keep long-distance prices higher than otherwise, creating a price umbrella under which new entrants could shelter.

It was clearly the CRTC's intention that both these advantages to new entrants be temporary: "While the Commission considers that these terms and conditions will provide Unitel with the opportunity to become a viable competitor, the decision to assume the risks of entry must rest ultimately with the shareholders of Unitel" (Decision 92-12, p. 13).

Indeed, in December 1994, the CRTC issued Decision 94-19 which relaxes regulation of incumbents' long-distance services and reduces the cross-subsidy from long-distance to local services, thus reducing the importance of contribution payments and the advantages that may be gained by their avoidance or discounting.

It remains to be seen, however, what happens to the long-distance industry structure as new entrants' advantages are reduced. Expectations are for mergers and bankruptcies of higher-cost new entrants. When these take place, will the CRTC let competition run its course? Or will it feel a commitment to the new entrants and step in to protect them, stopping or even reversing the move toward deregulation?

The difficulty is that the CRTC adopted the infant-industry model with almost no discussion as to its theoretical validity or empirical relevance to the long-distance market. Consequently, it seems to have given no thought to its course of action, should the model fail.

Alternatively, it may be that looking at the long-distance industry in isolation is out of date. Increasingly, carriers will have to be vertically integrated providers of a full range of services, including wireline or wireless access, telephony (local and long distance), interactive services, and entertainment. Competition for customers will centre on one-stop-shopping for packages of services and suppliers will have to form alliances or expand their lines of business. In such a market for information services (rather than just long-distance telephony), the CRTC's narrow definition in Decision 92-12 of competition and its objectives will have to be replaced by more comprehensive ones, which will recognize the new sources of competitive advantage and the new priorities of customers.


The thesis of Kevin Wilson's paper is that the CRTC failed to properly consider Unitel's application to enter the long-distance market and that, if the Commission had given proper weight to the relevant considerations, Unitel's entry into the market would have been denied. It does not take more than a cursory review of the record of the proceeding to reveal the flaws in Wilson's analysis.

On page 170 of his article, Wilson recites the 11 factors which, in Public Notice 90-73, the Commission listed as relevant for determining whether or not long-distance competition would be in the public interest. These were:

  1. the revenues of the respondent telephone companies;
  2. rates for interexchange services and the practice of route averaging;
  3. affordability and accessibility of local service;
  4. regional differences and different classes of subscribers, such as rural, urban, residence, and business;
  5. telephone companies' obligation to serve;
  6. non-respondent telephone companies and their subscribers;
  7. the long-run costs of supplying telecommunications services;
  8. the efficiency of telecommunication network planning and design;
  9. service quality and choice, supplier responsiveness, innovation, research and development, and supplier efficiency;
  10. international competitiveness of Canadian business; and
  11. bypass of Canadian network facilities. (Public Notice 90-73, p. 10)

However, Wilson incorrectly described the Commission's objective as being "to weigh the advantages and disadvantages of scenarios for reducing toll rates by looking at their likely impacts" in these areas. What the Commission actually said, by way of introduction to the eleven factors, was: "Interested parties are invited to indicate the advantages and disadvantages associated with either or both of the applications and with the alternative market scenarios, both with and without rate restructuring by the respondents, in terms of their impact on, among other things, the following..." (Public Notice 90-73, pp. 10-11).

In fact, nowhere in the Public Notice did the Commission identify "toll reductions" as a "principal objective" (Wilson, p. 173). If the Commission's principal objective was merely to reduce long-distance rates, Unitel's application, the telephone companies' opposition, the months of public hearings, and the mountains of paper, all would have been unnecessary. The Commission could have simply ordered the telephone companies to begin rate rebalancing, namely, reduce long-distance rates and increase local rates by a corresponding amount.

Furthermore, Wilson is incorrect when he asserts that "at no point did the CRTC step back from the piecemeal approach in order to engage in a comprehensive, global evaluation of its emerging competition policy" (Wilson, p. 188). At an early opportunity, the CRTC made it clear that the hearing to consider Unitel's application would provide an opportunity to conduct a detailed examination of the social, technical, and economic issues associated with long-distance competition (Public Notice 90-73, p. 5). In fact, although Unitel would have preferred to focus the proceeding narrowly on the proposal contained in its May 1990 application, this was not the case. Instead, the Commission broadened the scope of the proceeding to consider Unitel's application in the more general context of the appropriateness of entry into the public long-distance market in Canada.

The debate which followed was exhaustive and unprecedented. It is unlikely that there will ever be another telecommunications proceeding as wide-ranging and as detailed as that held by the Commission between the time Unitel's application was filed in May 1990 and the release of Decision 92-12 in June 1992. The proceeding encompassed regional hearings in every province and territory (even those not under the Commission's jurisdiction at the time), attracted thousands of members of the public, included participation from approximately 150 interveners, and produced evidence and testimony on such wide ranging topics as competition in New Zealand, lifeline rates, econometric estimation of productivity, the future of the telecommunications technology, and the benefits of competition. No stone was left unturned.

Wilson also takes issue with the Commission's treatment of the alternatives to long-distance competition proposed by the telephone companies. While, in his view, the CRTC unfairly dismissed the telephone companies' counter-proposals, the record of the proceeding made it clear that these proposals fell far short of the competitive alternative. While both long-distance competition and the "Vision" as the telephone companies called their counter-proposals envisaged long-distance rate reductions, the similarities stopped there. The telephone companies' proposals did not involve the creation of innovative services or even the duplication of services available in the U.S. Customer service would not be improved under the "Vision" nor would route and service diversity become available.

However, the most significant flaw in the telephone companies' plans was the rate proposals themselves. The telephone companies intended to target significant long-distance rate reductions to large business users and to ignore the rest of the customer base. Residential customers and all other business users would not have seen any reductions to their long-distance rates despite the fact that these customers would have been forced to finance these reductions through higher local rates. While Wilson is sceptical about the Commission's conclusions on this issue, the evidence indicated that local rates would have had to increase in all provinces other than Ontario, Quebec, and British Columbia if long-distance rates were reduced as proposed by the telephone companies. By contrast, the Commission did not expect local rates to increase as a result of competition; hence the epithet "consumer-friendly competition." The facts prove the theory: long-distance competition has not caused any local rate increases.

Only two years after Unitel's entry, all of the predicted benefits of competition have begun to materialize. All customers, not just large business users, have benefited from lower prices, greater choice and a faster rate of innovation and new service introduction. Competitive pressures have ensured that these benefits accrue not only to those customers that have switched to an alternative provider of long-distance service but to those who have remained with the telephone company. Despite Wilson's desire to turn back the clock and retroactively impose a different outcome for Unitel's application, it is clear that telecommunications users in Canada are thankful that his view did not prevail.