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LONG DISTANCE COMPETITION?
THE TELECOMMUNICATIONS WORKERS' UNION
POSITION PAPER ON
THE ROGERS/UNITEL APPLICATION
TO THE CRTC
FOR PERMISSION TO SELL
PUBLIC LONG DISTANCE TELEPHONE SERVICE
FALL, 1990
In countries where telephone competition has
strongly progressed as in US, UK and Japan, the
common driving force has been the needs of large
[corporate] users. It is inevitable that the
benefits of liberalisation flow principally in the
first place to large users, businesses with
intensive telecommunications needs.
Michael Beesley
Professor of Economics
London Business School
Remarks delivered at a Financial
Post conference Toronto, May 2, 1990
(Professor Beesley has been hired by Ted Rogers to
help with Unitel's application to the CRTC for
permission to compete in selling long distance
telephone service.)
INTRODUCTION
For the past decade, Canadian telecommunications has been subject
to increasing pressure from would-be competitors and corporations
anxious to reduce their telephone costs. Until recently, the
Canadian Radio-television and Telecommunications Commission
(CRTC), which oversees the operations of Canada's private
telephone companies, has restricted competition in this sector to
private line and enhanced services, and customer-owned terminal
equipment. While these areas are significant, they are of
secondary importance when compared to the core of the industry,
where competition is still prohibited: public long distance voice
and data service.
There is, however, increasing pressure being exerted by
corporations to allow competition in public long distance voice
and data services. In the spring of 1990 the newly-named Unitel
company (formerly CNCP Telecommunications), owned by cable
television magnate Ted Rogers, applied to the CRTC for permission
to sell long distance service in competition with the existing
telephone companies.
It is the view of the Telecommunications Workers' Union that
competition in long distance telephone service would not be in the
public interest. The advent of long distance competition would
make it difficult, if not impossible, to continue using toll
revenues to cross subsidize local service. Furthermore, it would
reduce regulatory authorities' ability to ensure that services and
rates to meet the needs of Canadians generally and not just those
of the corporate sector and the wealthy.
In addition to our general concerns about the effects that the
introduction of long distance competition will have on the
Canadian telephone system, we believe that the current applicant,
Rogers/Unitel, has little credibility. Although Rogers/Unitel
argues that the introduction of competition is necessary in order
to reduce Canadian telephone costs, the concern for lower rates is
very selective. When it comes to the cable television industry,
in which Mr. Rogers' companies play a prominent role, they have
taken advantage of their monopoly status to increase their rates
without fear of either competitive reprisal or strong regulatory
supervision. (See Appendix 1.)
Rogers/Unitel has applied this same self-serving approach in the
telecommunications sector. When Bell Canada and B.C. Tel sought
permission from the regulator to lower the rates charged for
certain services, CNCP/Unitel opposed the move. (See Appendix 2.)
And in its application to the CRTC, Rogers/Unitel is seeking a
regulated price advantage over the rates for long distance service
charged by Bell and B.C. Tel. As well, Unitel wants the CRTC to
prevent the telephone companies from matching its rate reductions!
Clearly Mr. Rogers' goal is to secure a piece of the lucrative
long distance market for himself. Any benefit which might accrue
to Canadian telephone subscribers as a result would be strictly
incidental.
THE EXISTING SYSTEM
At the inception of the telephone industry, Canada's private
telephone companies were granted monopoly control over low-cost,
premium-priced long distance and business services. In exchange,
our regulators have required companies like Bell Canada and B.C.
Tel to use the profits from long distance and business services to
make up for the revenue shortfalls incurred on local, residential
and rural service. These internal subsidies constitute an
essential part of Canada's telephone system.
The large profits generated by long distance service have always
attracted would-be competitors. But it is essential to remember
where these large profits come from: the price of toll service is
set substantially above related costs in order to generate
revenues which are used to subsidize the price of local,
residential and rural service.
For some time now, it has been technically possible for potential
competitors to provide toll service in competition with the
existing common carriers. To date, our elected representatives
and regulators have not allowed would-be competitors to enter the
long distance market, since such a move would undermine the
foundations of our national telecommunications system. Thanks to
this continuing prohibition, Canada enjoys one of the finest
telephone systems in the world while our overall rates are among
the lowest.
THE AMERICAN APPROACH
There are those -- predominantly members of the corporate sector
-- who argue that government supervised telecommunications regimes
should be abandoned and replaced by competition in network
services. We strongly disagree.
The competitive, market-driven alternative is not one we should
embrace. In the United States and elsewhere, corporations mounted
major campaigns to convince governments and citizens that the
advent of long distance competition and the dismantling of their
unitary telecommunications networks would have beneficial results.
These companies were successful. As a result, the unitary
American telecommunications infrastructure was dismantled.
Contrary to the advertisements, however, all this has not
benefited ordinary telephone users.
The negative impacts are legion. Ignoring this evidence, however,
self-interested corporations continue to promote the American
approach to telecommunications as the way to go for Canada. But
we must not restrict our policy deliberations to the concerns of
potential competitors and corporate-based organizations like the
Communications Competition Coalition which support them. To do so
would increase the likelihood that a major segment of the Canadian
public will not have access to the affordable telecommunications
services they will need to lead productive lives in the
information age.
If we continue on our current path, Canadian telecommunications
will not escape the problems experienced in the United States,
where inter-corporate rivalry has dominated American telephony
since the early 1980s. Problems experienced there include:
skyrocketing local rates; redistribution of income from the
poorest to the most affluent members of society; abdication of
responsibility for service; hugely expensive duplication of
network facilities; endless legal and regulatory wrangling over
the terms on which corporate competitors are allowed to hook up to
each others' networks and whether or not these terms are being
adhered to; wasteful advertising campaigns designed to capture
competitors' customers; and voluminous bills which are difficult
to understand because of complicated and confusing pricing
schemes. Some observers of the American long distance industry
fear that they are witnessing a trend away from price competition
in favour of public relations promotions. (See Appendix 3.)
Others are concerned that basic mistakes were made in the 1980s by
the proponents of telephone deregulation. (See Appendix 4.)
Ironically, the U.S. approach has not reduced government's role in
the telecommunications sector. Instead of being the guardian of
affordable, high quality service, however, American regulators
have become referees in inter-corporate rivalries. The costs of
this irrational and wasteful approach are borne by American
taxpayers and telephone subcribers. Do we really want to
introduce a similar system in Canada?
PROBLEMS HAVE ALREADY SURFACED IN CANADA
Inter-corporate disputes have already arisen in Canada over the
terms governing the interconnection of different
telecommunications companies. Marathon Telecommunications and
CNCP, for instance, are battling over allegations that Marathon
has not paid $250,000 in overdue bills for private line facilities
rented from CNCP. The latter has filed a lawsuit in the Supreme
Court of British Columbia to recover the money in question.
Marathon responded that it is refusing to pay the bills in
question because CNCP's service has been poor and has asked the
CRTC for a reprieve which would allow it to secure alternative
sources of service.
In addition to generating inter-corporate problems which must be
adjudicated by regulatory agencies and the courts, the
market-driven restructuring of Canada's telecommunications
industry will lead to tremendous increases in the rates charged
for local telephone service. (See Prairie Provincial Study on
Telecommunications, "An Examination of the Potential Impacts of
Competition in Long Distance Service on Rural and Urban
Subscribers," by Dr. R.E. Olley of the University of Saskatchewan;
this expands upon the warnings contained in the 1988 Federal-
Provincial-Territorial study of long distance competition,
commonly known as the Sherman Report; see Appendix 5.)
The U.S. has responded to these problem by initiating lifeline
service and targetted subsidies for low income groups. As a
result, our neighbours to the south are now forced to deal with a
telephone welfare bureaucracy whose task it is to provide relief
from the anti-social effects of telephone competition! And, in
some areas, telephone companies are being allowed to charge their
customers for local calls as if they were toll calls under a
system known as local measured service in order to generate the
lost revenues from long distance service.
If Rogers/Unitel gets the go ahead, there is no reason to believe
that Canada will avoid the problems that have plagued American
telecommunications since the advent of network competition south
of the border. Given the larger land mass, greater distances and
smaller population densities in this country compared to the
States, it is difficult to see how the disruptions caused by
competition would not be far worse than those which have bedeviled
American telephony since the early 1980s.
THE NEED FOR PERSPECTIVE
To date, the debate about Canada's future telecommunications
policy has had the wrong focus. The proponents of long distance
competition would like to confine the debate to the question of
whether the magnitude of local telephone rate increases resulting
from long distance competition will be sufficiently large to force
a significant number of Canadians off the network. This narrow
focus does not deal with the larger underlying issue: the steps
which should be taken to ensure that all Canadians are able to
take advantage of the benefits that new information technology has
to offer.
As we move into the information age, the concept of basic service
should be expanded to encompass the full range of
telecommunications-based services which can be made available via
the public telephone network. If we handle the matter properly,
Canadians from every walk of life, living anywhere in the country,
will have access to powerful communications tools and services on
an affordable basis.
In the TWU's view, it is the responsibility of regulators and
politicians to ensure that the full range of information-based
services as well as plain old telephone service (POTS) are
available in every region of the country at rates that are
affordable for everyone. If our elected leaders and regulators
pursue this goal instead of succumbing to the pressures for
increased competition, Canada will maintain its place at the
forefront of telecommunications internationally.
OTTAWA FAVOURS THE COMPETITIVE APPROACH
Unfortunately, the federal government appears to be moving in the
opposite direction. Ottawa is weakening regulatory constraints
and allowing public and private corporations to abandon their
social responsibilities. In this increasingly market-driven
setting, businesses are cutting back on service, raising prices on
their reduced service offerings, and targeting high revenue, low
cost customers situated in larger towns and urban centres.
In the airline, trucking and rail industries, this approach has
already had devastating effects. There have been sharp cut-backs
in some service offerings, while others have been eliminated
altogether. In the public sector, many services have been
privatized. Not even the postal service has been spared.
The resulting social and economic damage has been compounded by
the passage of the Canada-U.S. free trade agreement. Since the
enactment of this pact, a significant number of manufacturers have
closed their Canadian operations and relocated in the United
States. The cumulative result is that our small towns and
outlying regions have been hit with a combination of rate and
price hikes, curtailments in service, and dramatic cuts in
manufacturing activity.
If we allow this country's telecommunications future to be
determined by corporations' bottom line considerations, there is
every reason to believe that Canada's small towns and outlying
regions will get the short end of the telecommunications stick, as
well.
This is not an idle threat. When CNCP applied to the regulator
for permission to enter the long distance business in 1984, the
phone companies planned to respond to this threat to their long
distance revenues by cutting back on service to outlying areas
(see Appendix 6) and raising the price of basic service. During
the same proceedings, CNCP made it clear that it intended to sell
service only in major population centres.
In this era of increasing economic pressure, businesses in
outlying areas as well as those in our major population centres
must have affordable access to the full range of
telecommunications services over a state-of-the-art network. As
things are going, however, policy decisions based on certain
corporations' short term financial considerations could undermine
the universal character of Canada's telecommunications
infrastructure just as we are entering the information age.
If we allow this scenario to be played out according to the
corporate game plan, there is every likelihood that the provision
of telecommunications services will be curtailed in outlying areas
while prices charged for local, residential and rural services are
increased. This would simply be the normal response of
profit-maximizing companies functioning in a competitive
environment.
As a result of introducing network competition, entire regions of
the country could be frozen out of the information age. When the
dust from the competitive battles has settled, vast numbers of
Canadians may find themselves condemned to live in what the Kline
Report termed an "information desert", with no access to the vast
potential that telecommunications services of the future have to
offer.
In an attempt to convince Canadians that theirs is the right
approach, big corporations like the Royal Bank have formed the
Communications Competition Coalition. Determined to reduce their
communications costs, these companies are promoting
American-style, market-driven decision-making as the only
alternative that Canadians should consider. But according to a
recent study conducted by the Organization for Economic
Cooperation and Development (OECD), Canadian telecommunications
costs are not out of line. (See Appendix 7.) Furthermore, if we
adopt their position, there is a real danger that the Canadian
telephone system as we know it will be destroyed.
IS COMPETITION THE ONLY WAY?
Clearly, there are significant problems with allowing market
forces to shape our telecommunications infrastructure. An
alternative approach, one which expands upon the capacity of
existing unitary system, is gaining adherents among industry
experts:
...In Europe, Japan and the Pacific rim countries,
government-controlled telecommunications authorities are
pouring huge sums into public-network infrastructure
modernization and subsidizing the broad deployment of
new services such as videotex and integrated services
digital network, even in the absence of significant
demand. This "supply-push" approach assumes that
telecommunications is a component of the economic
infrastructure -- like roads and ports...
In the United States...the free-market, "demand-pull"
model has led to a broad array of new facilities and
service opportunities for large business customers, but
has discouraged the development of public network
capabilities that cannot be justified on the basis of
today's market.......
"For the high-end users and private networks, our
services are as good as anyone's and probably better,"
said Manhattan Institutes' (Peter) Huber. "But for the
smaller users, there are growing indications that we are
not moving as fast as others."
"We could end up with have and have-nots," said Nynex's
Ferguson. "The big guys that can buy competitively will
have a network for their own services, but others will
be left out."
Fritz Ringling, an analyst with Robert A. Sayles
Associates Inc., San Jose, Calif., sees a similar
problem. "I fear a reduction in service quality to less
densely populated areas; new services will not be made
available in those areas. We are falling behind in
homogeneity, and that will cause problems."
There is a danger, Ringling and others said, that the
United States could end up with a patchwork of networks,
some highly advanced, others relatively primitive...
European telecom authorities, by contrast, are placing
"very strong emphasis on the integrity of network
infrastructure," according to Herbert Ungerer of the
European Economic Commission's information technologies
(group).
...The New York PSC's (Eli) Noam called the issue a
"classic question of infrastructure. Other countries
see telecommunications as a component of their
industrial policy....The problem [for a market-driven
system] is that the financial rewards are societal, and
so they do not accrue to those who take the financial
risk." If the United States does not find a way to
counter that disadvantage, it will end up with an
inferior national telecommunications infrastructure,
Noam said.
Jonathan Weber, "Is the U.S. Losing Its Telecom Edge?"
Communications Week, 22 May 1989, pages 40-46.
Clearly, leaving the fundamentals of telecommunications
decision-making to the market, as the United States has done, is
fraught with problems. Yet it is being suggested that Canada must
take follow the American lead in this field.
THE ALTERNATIVE
As we approach the 21st century, Canadians should look forward to
enjoying universal access to the full range of services that will
become available via state-of-the-art digital and fibre
technology. But to achieve this end, we must construct a unitary
network that is governed by strict regulatory requirements. Such
safeguards are necessary to ensure that socially wasteful
duplication of network investment -- such as those that would be
pursued as a result of the introduction of toll competition -- is
avoided. Only in a strictly regulated environment can we be sure
that telecommunications investment corresponds to Canada's
economic and social needs.
The Department of Communications' March 1988 document, "Canadian
Telecommunications -- an overview of the Canadian
telecommunications carriage industry", concludes with the
following observation:
...Canada has one of the finest telecommunications
systems in the world, which offers a very high level of
service and is at the forefront of technological
developments in many areas, such as digital switching
and transmission, satellite communications, fibre
optics, protocols for communicationg word-processors,
videotex technology, telemedicine, tele-education
systems and office automation. (Page 56.)
Having built such an infrastructure, Canadians are faced with a
strategic choice. The challenge before us is to use this
infrastructure to ensure that Canada remains at the forefront of
the worldwide telecommunications revolution. There is a real
danger, however, that our telecommunications advantages could be
frittered away if our regulators succumb to corporate pressure and
give the go ahead to toll competition.