Boon or blunder

It's all about what's best for the customer.

That's what industry observers and experts will tell you when you ask them about the reason for local telephone service deregulation.

The rules of the game all change on April 18, when a shift in federal policy takes effect, allowing all players — including the existing telecom giants — to set their prices at whatever rates they choose in local markets served by three or more competitors.

The approach is a departure from the previous set of rules that prevented existing telecommunications giants from luring lost customers back from rivals — unless the incumbents could prove that they had lost 25 per cent of their business to competitors.

That rule was meant to prevent incumbents such as Bell, Telus and Aliant from relying on their vast resources to offer rates so low that new local phone service operators would be unable to compete.

The new policy, announced on April 4 by Industry Minister Maxime Bernier, allows for unrestricted competition in any market, letting telecoms charge whatever they want for local phone service.

The shift has set off a flood of deregulation applications to the Canadian Radio-television and Telecommunications Commission (CRTC), from companies such as Telus, Bell Canada and Aliant. If the applications are granted, major markets such as Vancouver, Edmonton, Toronto, Ottawa, Montreal and Halifax would be among the first cities to experience deregulation.

Likelihood of competition questioned

But will that mean increased competition and lower local phone rates? Maybe — but not immediately.

The CRTC has 120 days to review deregulation applications and ultimately grant or decline permission, so it's unlikely any changes to local phone rates will be seen until fall 2007.

The assumption being made in all of this is that deregulation will lead to increased competition and lower prices, industry observers have told CBC News Online. However, that may not be the certainty that some seem to believe it to be, according to one telecom analyst.

"To paraphrase [comedian] George Carlin, premature deregulation is no laughing matter," Lawrence Surtees, the director of telecommunications and network research at market research firm IDC Canada said.

He explained that the notion that the telecommunications industry has gone from a monopolistic one to a competitive one is a myth.

"This is a hugely important debate that isn't being discussed with enough detachment or historical perspective," Surtees said. "Ideologues say regulation is bad without looking at history and why regulation exists."

Going back to the origin of telecommunications in Canada in 1846, Surtees pointed out that history shows that left unregulated, the industry has repeatedly devolved into a monopoly as far back as the days of the telegram.

"It's because of abusive practices of monopolies that regulation came about," Surtees said. "It's taken 25 to 30 years for the monopoly pieces of the Bell system to be made competitive."

New technologies change the game

The latest move to deregulation of local phone service could eventually lead to a circumstance in which Canadian consumers have no real choice in who provides their telephone service if the incumbents decide to undercut smaller competitors and newcomers, forcing them to sell to bigger rivals or go out of business, Surtees said.

That's a capability that larger telecoms have since they can distribute their costs across the span of their businesses in a way that smaller telecoms can't. And that's the reason for regulation, he said — to prevent incumbents from taking unfair advantage of their size.

Ken Wong, a business professor at Queen's University in Kingston, Ont., agrees with Surtees — to a limit.

"With respect, that was valid under the circumstances when landline was the only mode of communication possible," he said, adding that the existence of large cable and mobile operators virtually eliminate the concern that incumbent telecom firms could crush new competitors who might lack an equal footing.

Instead, cable companies in particular — which already have their own widely distributed networks — can provide credible competition to telcos without the onerous cost of having to build completely new infrastructure, he said.

"It's not like 20 or 30 years ago when, if [you] wanted a network, you had to compete with Bell [by setting up your own network]."

CRTC rules outdated?

Concerns that the removal of the 25 per cent loss-of-business provision is too hasty are overstated, Wong said. The rule previously prevented incumbent carriers from seeking exclusion from the CRTC's Price Regulation Regime — a schedule of what carriers could charge consumers, businesses and other organizations.

"The 25-per-cent rule was an effort on the regulators' part [to ensure] that there have to be at least two strong competitors in a market," Wong said, explaining that while it may have been a key safeguard to prevent the rise of local monopolies decades ago, modern circumstances have rendered it obsolete. "Throw in wireless number portability and you have a different environment."

Ronald Guia, principal analyst with Toronto-based market research firm Frost and Sullivan, takes the idea a step further, saying the move to deregulation is long overdue.

"You start thinking about deregulation when you want to simplify the rules, when the regulation has become onerous," Gruia said. "We've reached this point."

According to Gruia, the CRTC has "missed the boat" on how to effectively manage a telecommunications regime — the regulator had wanted to keep the 25-per-cent rule, but was superseded by Ottawa.

That's just as well, Gruia said, arguing that the best way to create a level playing field is not to pre-emptively exclude big players and let smaller competitors run free — as the 25-per-cent rule did — but to penalize those who abuse the freedom of an unregulated business environment.

That appears to match the federal government's thinking. It mandated the new deregulation regime by employing a provision in the Telecommunications Act that empowers the government to overrule a CRTC decision — a circumstance that is unique to Canadian law, according to Surtees.

New agency would address complaints

Under the new policy, a consumer agency will be created to resolve complaints from individuals and small business customers who feel the telecoms are abusing the relaxed rules. It would be funded by the industry and report its findings to the government.

Until it is formed, the CRTC will field customer complaints.

The CRTC will also "retain some flexibility" in regulating prices in rural markets by giving small cable companies 18 months of lead-time. Existing protections, such as price ceilings for stand-alone residential phone services and price regulation, will continue in areas where there is little competition.

The federal Competition Bureau will be given a further $10.5 million over five years to investigate anti-competitive practices by the big telephone companies should they occur.

But Surtees says that the new approach is a recipe for trouble.

"Watchdog measures are not enough," he said.

Under the previous rules, incumbents were forbidden from certain activities and courses of action to offer new, smaller competitors a chance to establish and develop their businesses, he said.

In contrast, under the new rules, the large telcos would be penalized after a finding that they had violated some rules — an approach that offers little comfort for new players, he said: "Suppose the big guys wipe out [smaller] competition — are they going to come back?"

Gruia and Wong don't think the circumstances are that dire.

Market economics rule

"Some of the smaller players are always going to drop out, be bought or merge anyway," Gruia said. "But for the incumbents, it's much easier to lose share than gain share."

"Unless you can show me there is a danger the consumer needs to be protected against that they might not be able to recognize, like a technical problem or something they can't see for themselves, I like to let the market sort it out," Wong said.

Both men believe that deregulation will not only result in lower prices and better service for consumers, but will be accompanied by new services and bundles of services.

"If you look at Google or Skype, they have shown that services can be a success without owning the infrastructure," Gruia said, referring to the range of free or advertising-supported offerings by the internet search giant and the Voice over Internet Protocol company. "There could be new models emerging."

Wong is similarly optimistic.

"You're going to see a broader range of services, especially from Bell because they'll need to replace lost revenue," Wong said.

That could result in the long-awaited goal of convergence between telecommunications, the internet and media, ranging from streaming music and TV show downloads to videoconferencing, he said.

"The only limit is the power of the receiver in your hands."