Friday, November 17, 2006

Cabinet interference in CRTC has a bad smell about it

Adam Daifallah might want to reassess his position on getting rid of the Canadian Radio-television and Telecommunications Commission.

There is something of a strange odour associated with the federal cabinet order which overruled the CRTC tariff rates on the major telephone companies attempting to offer Voice over Internet Protocol service (VoIP).

To simplify an otherwise complicated arrangement, there are two types of telephone service providers: The established corporations such as Telus and Bell; and competitors which often purchase wholesale services from the larger companies to provide service to a smaller customer base.

The VoIP question arose when the larger companies, referred to as Incumbent Local Exchange Carriers (ILEC) attempted to offer, without CRTC tariff regulation, the same type of service as smaller competitors, referred to as Competitive Local Exchange Carriers (CLEC).

The CRTC took the position that should Telus and Bell, for example, introduce a VoIP system that the incumbent nature of the telephone company provided it with an already established customer base. In that case any VoIP system they developed would be within the same market as their traditional network switching system, thus the tariffs and charges to consumers were subject to the same kind of regulation as regular telephone rates.

CLECs were not subject to the same regulation since they had no established customer base. They were competing with each other and also the larger telephone companies.

The cabinet order to the CRTC to change its position and not exercise its power over the major telephone companies means that outfits like Telus and Bell are free to establish VoIP without regulation. Basically, it is the government telling the federal telecommunications regulator that it knows more about the industry than the the industry watchdog and to just let the lot of them battle it out in the marketplace.

That would be fine if it was shaping up to be a fair fight.

Let's look at the ILECs for a second. Telus was slapped a few months ago when it was pointed out that they had not met the Quality-Of-Service metric required by the CRTC. This was a result of some de-regulation and staff layoffs which saw Telus customer service literally evaporate into thin air. In the end Telus was required to rebate customers for a failure to meet those customer Quality-Of-Service metrics. Bell was also required refund subscribers for continued poor customer service.

One of the other metrics CRTC is responsible for monitoring is the quality of service it provides to its competitors who buy time, space, switching and access to service their own share of the market. The expectation is that the major telephone companies will exceed the standard of service set by the CRTC to their competitors who are in effect wholesale customers. In short, the major telephone companies still possess a monopoly on lines, switching and access in their local exchange areas and there is no incentive to provide quality service to their smaller competitors. The major telephone companies claim that the end users, (you and me), are not affected when there is a disruption in service to their wholesale customers. That is patently false and it falls on the CRTC to compel the ILECs to comply with quality-of-service metrics.

The claim by the likes of Telus and Bell that they are being dealt with unfairly when it comes to VoIP product offerings might be valid if it weren't for one thing: They intend to use their financial leverage and offer VoIP at below cost.

That is a predatory pricing tactic which suggests one thing: eliminate the competition and swallow up the small competitors' customer bases. Better to have secured all those retail customers than have to provide a mandatory level of service to a wholesale client.

Daifallah views this as a good thing and it does look good on the face of it. The pronouncement of lower cost to the consumer rings well.... for now. It's short sighted and fails to take into account the past performance of the major telephone companies and other similar utilities.

The major companies will only provide a "below-cost" service for a limited period of time. Once their competition has been sufficiently weakened and the ILECs have expanded their customer base you can expect to see huge increase in rates... with no recourse since the CRTC will have had no opportunity to oversee rates and tariffs and will be removed from the role of protecting the consumer.

The twist is that while consumers would be attracted to both lower rates and the supposed ability of a major telephone company to provide quality service, the major companies have demonstrated a pattern to the contrary, failing to meet quality-of-service metrics and in attempting to skirt regulatory challenges to rate increases.

The major telephone companies are also notorious for developing plans and programs which require the consumer to undertake a minimum time commitment (generally three years) in order to receive reasonable rates. Given the VoIP decision by the federal cabinet the major telephone companies are hoping to undercut their competition enough in a three year period to leave the consumer little choice should rates be increased. Even at that, telephone companies, while they will penalize consumers for departing a contract early, feel no such obligation applies to them and have been known to change plans, increase rates and alter access before the agreement with the consumer expires.

A small business owner recently reported to me that his Yellow Pages™ directory listing, unchanged from the previous five years had suddenly increased in price by nearly 200 percent. When he angrily queried the outrageous jump he was informed that the corporate sale of SuperPages™ and resultant agreements left the directory company free to set whatever rate they saw fit. Such increases eliminate the ability of small business to plan and give them no time to make alternate arrangements. It's having the consumer by the "short and curlies" and then exploiting it regardless of the damage to small business. Interestingly, Yellow Pages™ is operated by Yellow Pages Group which is 100% owned by, ahem, Yellow Pages Income Fund.

And that brings us to the income trust issue. Ignoring the abysmal track record of the major telephone companies for a minute, consider that this latest cabinet order forcing the CRTC to leave the major telephone companies alone comes hot on the heels of Flaherty's changes to the tax status of income trusts. That's where the smell is coming from.

At the time of Flaherty's announcement both BCE and Telus had already announced their plans to convert to income trusts. And shortly afterwards, cabinet tells an independent commission to give Telus and Bell unregulated freedom in a market where their incumbency alone provides an unfair competitive advantage.

And, if anyone needs a reminder of what deregulating incumbent utilities can do, Canadian Cynic provides a great example.

Daifallah's wish for deregulation is about as thoughtless as some of his books.

Nice suit though.

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