The Hacker's Encyclopedia 1998

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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.