It is possible – Worst aspects of telcom meddling are disappearing

Regulatory agencies always find good reasons to regulate. It’s possible to reverse the tendency of regulators to constantly expand their turf. What is needed is a clear stand in favour of the free market on the part of the legislator.

Regulatory agencies always find good reasons to regulate. Even when the goal is to maintain « competitive » markets, they tend to define competition so as to give themselves a role in managing these markets.

One of the ways regulators do this is by restraining big players that are deemed to have too much « market power, » even though allowing some players to get bigger and better than others is precisely the point of having competition. Microsoft is a sad example of an innovative company that has been persecuted in both the United States and Europe because of its success in serving its customers.

That’s also why a decade after local telephone markets were opened to competition in Canada, the Canadian Radio-television and Telecommunications Commission is still involved in regulating various aspects of the services offered by former monopolies such as Bell and Telus.

Although official documents will not put it so candidly, the goal has been to prevent these so-called incumbents from trying too hard to keep their customers with cheap, well-marketed and appropriately bundled telecom products. Too bad for consumers, but according to the interventionist logic, this might have prevented the new guys from getting a foothold in the market. Regulations went so far as to forbid incumbents from calling back the customers that were leaving them to offer them a better deal.

The CRTC has also been actively helping the new players by forcing incumbents to provide them with mandated access to their network at advantageous prices, on the ground that networks are costly and difficult to duplicate.

If you keep doing this for too long, you are not fostering competition. You are simply favouring small players at the expense of the established ones and removing the incentive for these new players to build their own competing infrastructure. Which means that in fact, you are preventing an increase in competition.

Fortunately, Canada has not followed the American and European lead in launching a witch hunt against Microsoft. And in the telecom sector, the worst aspects of regulatory meddling have been fast disappearing over the past year, thanks to two major initiatives by the federal government inspired by recommendations made in March 2006 by the Telecommunications Policy Review Panel.

The first one was a simpler test for when to consider a local telephone market competitive enough to be deregulated. True to their habitual inclinations, the CRTC bureaucrats had proposed a test so stringent that it would have postponed deregulation years into the future. Former Industry Minister Maxime Bernier told them to deregulate markets when, in addition to the former monopoly, a wireless company and a cable company providing telephony services were present. Following this, all major urban markets in Canada, comprising about two thirds of the country’s population, were deregulated last August.

Some doomsayers had predicted that the move would lead to higher prices, fewer services and a return to a monopoly situation following the disappearance of competition. Seven months later, none of this has of course happened or is likely to happen.

The second initiative was a Policy Direction issued by Cabinet to the CRTC in December, 2006, which tells it how to interpret the Telecommunications Act. Essentially, it directs the regulator to rely on market forces to the maximum extent feasible and, when relying on regulation, to use measures that are efficient and proportionate to their purpose and that interfere with the operation of market forces to the minimum extent necessary.

Since then, the Commission has issued several rulings which, on the basis of this new interpretation, have all gone in the direction of a gradual removal of regulatory shackles on the former monopolies, even in areas that were not deregulated last summer.

Among other changes, optional services and bundled service rates are no longer subject to pricing constraints. The restriction that required incumbents to offer the same rate to all customers in the same area for the same service, which prevented them to respond to specific situations, has been removed. And proceedings have been initiated to decide if the CRTC should stop regulating short-term promotions and adopt an automatic approval mechanism for retail tariffs.

Finally, earlier this month, again as a direct consequence of the Policy Direction, the CRTC announced that certain wholesale services that incumbents are forced to provide to competitors will be phased out of regulation over the next three to five years. Unfortunately, it decided that unbundled loops will still have to be made available at mandated prices. These are the connections between homes and telephone exchanges that competitors rent from incumbents to avoid having to build their own network.

Although the ruling did not go nearly far enough, it would probably have been worse without the Policy Direction. All in all, there is more competition today in the telecommunications market, which can only benefit Canadian customers.

The lesson in this story is that it’s possible to reverse the tendency of regulators to constantly expand their turf. What is needed is a clear stand in favour of the free market on the part of the legislator. Perhaps the principles laid out in the Policy Direction should be copied and applied to all other sectors where the government intervenes.

Martin Masse is a public policy consultant in Montreal. He worked as an advisor to former Industry minister Maxime Bernier.