BUSINESS

RULES TO DIAL BY

COMPANIES CLASH OVER THE FUTURE OF PHONING

BRENDA DALGLISH November 22 1993
BUSINESS

RULES TO DIAL BY

COMPANIES CLASH OVER THE FUTURE OF PHONING

BRENDA DALGLISH November 22 1993

RULES TO DIAL BY

COMPANIES CLASH OVER THE FUTURE OF PHONING

BUSINESS

The Consumers’ Association of Canada (CAC) is accustomed to fighting battles in which it plays David to some corporate giant’s Goliath. But at the current hearings of the Canadian Radio-television and Telecommunication Commission (CRTC) in Ottawa, the imbalance is even more striking. The hearings are dealing with the transformation of Canada’s monopoly telephone system into a competitive, multilevel telecommunications industry. Despite the impact of this emerging sector on Canadian consumers and despite the lobbyists and legal firms hired by the corporations involved, the CAC, for the first time ever at a major telephone hearing, will not participate. “Even if we were there, the hearings would be

one-sided,” said CAC executive director Rosalie Daly Todd. “There would be a few of us representing the consumer’s interest against dozens of lawyers and technical experts appearing on behalf of the companies.” But because the federal government refused to provide funding for the association to prepare its arguments, it cannot afford to be present. “We should be there representing the individual consumers,” said Todd. “Almost everything that will be decided will have an impact on them.”

The hearings, which began Nov. 1 and are expected to continue until early December, are the second stage in the opening of Canada’s highly regulated telecommunications industry to competition. In June, 1992, the CRTC ended the telephone companies’ historic monopoly and invited new competitors into the long-distance telephone market. With those seeds sown, the commission is now holding hearings to decide how much regulation is appropriate for the industry as it makes the transition from a monopoly controlled by federal government regulators to one that will eventually be disciplined mainly by market forces.

Of particular significance to consumers is the somewhat technical issue of how the telephone companies allocate costs between the local and long-distance segments of their business. Consumer advocates are concerned that as the telephone companies face increasing competition in the long-distance markets—which will force prices and revenues down—they may try to increase their earnings by hiking the price of local telephone services, where they face no competition.

In one camp are the traditional telephone companies, led by Stentor, an umbrella group representing six estab-

lished telephone companies such as Bell Canada. Stentor wants a rapid move to deregulation and wants permission to raise local rates. In the other camp are Unitel Communications Inc. and the other recent entrants in the industry. Unitel is proposing a complicated new regulatory system that would set price caps. It also wants the CRTC to refuse to allow the telephone companies to raise local rates for at least five years, because it fears that the telephone companies will use revenues from local service to subsidize long-distance rates.

In the middle of that corporate standoff are Canadian consumers, including residential and business telephone users, as well as other interest groups who have a stake in the future of the telecommunications industry. ‘The commission may have underestimated the Pandora’s box it was opening last year [with deregulation],” said Hudson Janisch, a telecommunications law expert at the University of Toronto. “Now it’s trying to

figure out how it’s going to regulate the industry to make sure that consumers get the benefits of the competition it’s created.”

Although significant changes are already under way in the long-distance telephone market, to date most residential telephone subscribers have not benefited. That is because all participants in that newly deregulated sector are concentrating their efforts on providing enhanced services for the more lucrative business market. According to statistics provided by Unitel, the cost of long-distance services to residential and small business users has fallen by just two per cent this year. At the same time, however, the costs of some key business services (including WATS lines and 800 numbers), where potential competition is the heaviest, have dropped by as much as 35 per cent.

Under the CRTC’s decision last year, the traditional telephone companies retained their monopoly in the local telephone market. And they are still the dominant participants by far in all of the principal long-distance markets. In the $400-million WATS-line market, for example, the established telephone companies still have an estimated 77per-cent share of the market. In turn, Unitel has eight per cent and the other new competitors have 15 per cent combined. In the $5.5-billion direct long-distance dialing market the newcomers are not yet truly competitive because their customers must still dial an extra 17 numbers to use the system. As a result, the large, provincial telephone companies have kept 95 per cent of that business. Still, even the first intimations of approaching competition have shaken the telephone companies. Said Jocelyne Côté-O’Hara, chief executive of Stentor’s government relations arm: “Like any organization going through dramatic change, were experiencing a culture shock. The 1990s are going to be the decade of the consumer.”

The turmoil in the industry is reflected in the companies’ recent financial results. Last week, Rogers Communications Inc., Unitel’s largest shareholder, reported a $132.8-million loss for its third quarter, and said it may have to take another $ 100-million charge in the fourth quarter as its share of a possible restructuring at Unitel. Meanwhile, Bell Canada’s president, Robert Kearney, who testified at the CRTC hearing just a week earlier, said that he is retiring at 57, after only a year on the job. Bell Canada’s earnings for the first nine months of the year were $585 million, down 21 per cent compared with the same period last year. In September, Bell announced that it would reduce its workforce by 5,000 to save money.

Partly in response to such financial pressure, Stentor’s proposal to this round of CRTC hearings strongly advocates a “rapid transition from a regulatory-driven to a market-driven environment.” The consortium wants the commission to immediately start withdrawing from the regulation of some parts of the industry and, at the same time, it also wants the price of local telephone service to increase. Currently, although competition has been introduced in some parts of the industry, the regulatory system—including the ability to raise prices—is still controlled by the CRTC. Stentor’s opening statement to the commission last week noted that, “Ultimately the companies’ proposal envisions a fully competitive environment where all the suppliers are able to enter all lines of business.”

In anticipation of that day, Sasktel, the

Saskatchewan-govemment owned telephone company, announced in August that it was conducting a video-on-demand experiment in 40 homes in Regina. This apparent incursion by a tele-

phone company into the broadcast sector, which lacked the approval of the CRTC acting in its role as a broadcast regulator, signalled that the telephone companies were beginning to get serious—and impatient— about entering the broadcast

business. The CRTC’s solicitor immediately told them to stop, underscoring the challenge of reining in an industry in which the technology is outpacing the regulators’ ability to establish rules.

The Sasktel initiative is just one of a handful of so-called convergence projects under way in Canada. Convergence is the point of technological development at which the technical capabilities of the cable television companies’ cable lines and the telephone companies’ wires begin to merge, allowing both kinds of companies to deliver the services traditionally supplied by the other—plus a host of new ones. In addition to offering more choice of existing products, in the future the telecommunications industry is going to merge the capabilities of television, telephone and computers and provide services from home banking and interactive

Consumers take the backseat as competition drives the phone market

television to access to movie and information data banks that may allow users to dip into electronic libraries without leaving home.

Although issues directly relating to such convergence will not be reviewed in the current round of hearings, they will be at the top of the CRTC’s agenda in the next few years. In fact, in late October, just before the sessions convened, a $37-billion merger in the United States between Bell Atlantic Corp., one of the large U.S. telephone companies, and Tele-Communications Inc., a major cable

television company, showed that convergence was progressing more quickly than many in the industry had predicted. That U.S. development also gave Canadian companies a new prod to use on the CRTC to encourage the commission to start preparing for its imminent arrival in Canada.

The push to introduce convergence, however, is a more pressing problem for the telephone companies than it is for

their rival, Unitel. One of Unitel’s largest

shareholders, Rogers, is a major Toronto cable television and telecommunications operator and is already operating in a broad range of telecommunications businesses. As a result, in its proposal before the CRTC hearings, Unitel is seeking a much less radical change to the regulatory system than the telephone companies. Although it was the first major company to aggressively pursue convergence opportunities, it is now more reluctant to give up the protection offered by the old regulatory system.

Unitel argues that the CRTC’s presence is essential to protect it, and the other newcomers, from the overwhelming market strength of the telephone companies that still dominate the telephone markets. Richard Stursberg, Unitel’s executive vice-president of strategic planning and external affairs, says that the phone companies are targeting the newcomers by dropping prices by as much as 35 per cent in the markets where they compete, such as WATS lines, while holding prices steady in markets where the new entrants are not yet competitive, such as direct long-distance dialing. “So far most of the benefits of competition have gone to large businesses,” said Stursberg. “Small residential users have received very little.”

Unitel is also asking the commission to refuse to allow the telephone companies to increase local rates for at least five years. Stursberg says that in the United States the difficult issue of cross-subsidization, in which revenue from long-distance services is used to help pay for the cost of local telephone services, was eventually solved by the breakup of AT&T into seven so-called Baby Bell companies.

Unitel claims that under the current costallocation system used by the CRTC, the local telephone service carries too great a proportion of the costs of the total system. Unitel says that the cost of local service is calculated at $9.3 billion, while the cost of long distance is $2.6 billion.

It is this part of the debate that is of greatest relevance to residential consumers. For the National Anti-Poverty Organization (NAPO), which is appearing as a witness at the hearings the crucial issue is keeping the cost of basic local telephone service down. NAPO is hoping that, as usual, at the end of the hearing its costs will be reimbursed by the CRTC because the quality of its hearing work will have proved to be valuable to the commission. Said Philippa Lawson, a lawyer from the Public Interest Advocacy Centre who is acting on behalf of the anti-poverty organization: “NAPO’s position is that local basic rates shouldn’t have to rise at all at a time in the industry when costs are declining and revenues are rising.”

While NAPO specifically represents the interest of low-income people, the CAC represents the interests of more middle-class consumers. Although the CRTC does have a mandate to protect the interests of all consumers, the absence of the CAC from the hearing is notable. “The commission is hearing over and over and over again from the companies with vested interests,” said Lawson. “You can’t expect the commission to be able to cover all of the consumers’ interests without the consumer groups being there to put forward their positions.”

The CRTC is on the hot seat now as it tries to devise rules that will be as fair as possible for all the stakeholders, from the largest telephone company to the poorest telephone user. Said law expert Janisch: “They’ve got a tiger by the tail and they’ve got to hang on.” The ride is certain to be fast, and maybe more than a little bumpy, but the fate of one of the most important industries of the future is at stake.

BRENDA DALGLISH

NANCY WOOD