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A policy on hold : regulating telephones in Canada Hall, Nichola Malim 1992

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A POLICY ON HOLD:REGULATING TELEPHONES IN CANADAbyNichola Malim HallB.A., The University of British Columbia, 1989A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF ARTSinTHE FACULTY OF GRADUATE STUDIESDEPARTMENT OF POLITICAL SCIENCEWe accept this thesis as conformingto the required standardTHE UNIVERSITY OF BRITISH COLUMBIAApril 1992© Nichola Malim HallIn presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of ^The University of British ColumbiaVancouver, CanadaDate  Nvv--k-DE-6 (2/88)ABSTRACTIn February, 1992, a new Telecommunications Act was tabled in the CanadianHouse of Commons. This bill has been awaited, with varying degrees ofeagerness, by the industry, policy analysts and community groups, for more than14 years. However it has not answered what was for most people the burningquestion: will the telephone industry be deregulated, and competition to thedominant regional monopolies be permitted in the long distance voice market?The regulatory agency, after nearly a decade of denying applicants suchcompetitive entry, is still struggling with this question with regard to yetanother application, and a decision is not anticipated until the summer.In the meantime the United States regulator, after breaking up the monopolytelephone company AT&T more than a decade ago, has allowed competition into allviable sectors of the industry. A multitude of new products and systems hasemerged, long distance rates have dropped (although with the corollary that localrates have risen), and Canadian businesses are threatening to bypass the Canadiansystem if the same advantages cannot be obtained here.The objective of this thesis is to explain why the Canadian government,despite its Conservative ideology, has found it so difficult to grasp the nettleand follow the United States down the deregulation road. Barriers to change havebeen erected by provincial governments, consumer groups, unions, and socialwelfare advocates, all of whom see the telephone as an instrument of socialpolicy, and consider that deregulation would be a threat to universalaccessibility and affordability.This study explains the complexities of the telephone industry, especially theiiway in which the long-distance and local calling systems are linked so thatcross-subsidization of customers has been possible. It discusses the problemsthat such linkage causes for fair and accurate allocation of costs, and theeffect that this has had on the debate about deregulation. It also looks at thevarious statist, pluralist and political culture explanations for the prolongedprocrastination of the Canadian government, with emphasis on the opportunitywhich both policy-makers and interest groups have had to learn from the Americanexperience.In addition to an examination of explanatory factors, the argument is madethat the regulated status quo has many advantages for Canada, despite the costsit may impose on the business sector. The telephone is an integral part of thedaily lives of all Canadian citizens, and changes in regulatory policy willaffect every one. This thesis analyses the development of such policy in Canadaand explores the opportunity costs for all sectors of our society.iiiTABLE OF CONTENTSAbstractAcknowledgementsPreface^ viChapter I:^Introduction^ 1Chapter II:^Regulation and the Telephone Industry^ 5Chapter III:^Canadian Policy -Protagonists and Procrastination^ 20Chapter IV:^Deregulation and Its Effects 38Chapter V:^Explanations^ 60Chapter VI:^Conflicting Values^ 76Chapter VII:^Why Not Forward to the Past?^ 91Bibliography 101ivACKNOWLEDGEMENTSMy heartfelt thanks to the following:George Hoberg, for introducing me to theories of public policy, for motivatingme to tackle a Masters degree, and for his unfailing encouragement andconstructive criticism;The Social Planning and Research Council of B.C. for many years of educationand inspiration regarding social policy;My husband, Ray Hall, for his tremendous support, without which I could notpossibly have accomplished any of my academic endeavours."You can get a scientist in here and he'llseparate costs until he's blue in the faceand you'll get an answer. Now what areyou going to do with it?^So it costs $85per month for a phone on a farm: tell mewhat to do next?"Telephone company official, quoted in areport to the Department of Communicationsby Simon Fraser University,November 1987, p. 23viCHAPTER I: INTRODUCTIONIn February, 1992, the federal Minister of Communications tabled a newTelecommunications Act for consideration by the House of Commons. This bill hasbeen awaited, with varying degrees of eagerness, by the industry, policy analystsand community groups, for more than 14 years. Since the Trudeau government'sfirst attempt in 1978 to pass a new federal communications law died because itwas not given high enough priority, successive Ministers, both Liberal andConservative, have been promising a comprehensive and definitive policy, but havenot, until this month, delivered.The President of the Canadian Business Telecommunications Alliance announcedthat this bill "would take the future of telecommunications in Canada off hold."Other observers were not so sure: in fact most people are waiting for the othershoe to drop, in the shape of an imminent decision from the telecommunicationsregulator, the Canadian Radio-television and Telecommunications Commission(CRTC), regarding entry of competition into the telephone industry.Why are policy initiatives by the government and the regulator with regard tothe telephone sector so anxiously awaited, and so significant for both Canadianindustry and consumers?For the first six or seven decades of this century relative harmony reignedin the arena of telecommunications. Canadians in every corner of the countryenjoyed one of the best telephone systems in the world, with prices and servicethat were the envy of subscribers elsewhere. Government policy was based ontraditional attitudes towards a -natural monopoly': regulating price, entry andrate of return, in return for the economies of scale and scope enjoyed by therespective provincial telephone companies. There was a high degree of congruencebetween the objectives of the politicians, the regulators, and the telephone1companies themselves, all of whom wanted to ensure the maximum spread oftelephone service.However a series of technological and economic changes over the last twodecades have challenged the underlying premises of telecommunications systems.Competition has, as a result, become viable in certain areas of the telephoneindustry, and its natural monopoly status is being called into question. Theburgeoning telecommunications sector - with its new reliance on computers, faxmachines, cellular radios, etc. - has become a crucial part of the businessinfrastructure in all western nations, and therefore essential to thecompetitiveness of their economies.The response of the United States to these developments has been to break upthe monopoly AT&T, allow competition into all viable sectors, and partiallyderegulate the whole system. A multitude of new products and systems hasemerged, and long distance call rates have dropped, although with the corollarythat local rates have risen. In Canada the regulator has been under ever-increasing pressure to follow the American example. However, despite allowingsome liberalisation in the areas of equipment and reselling, the CRTC has so farbalked at taking the all-important step of allowing competition in long distanceservices, or allowing the telephone companies to - rate rebalance' (i.e. raiselocal rates in order to bring down long distance rates). The currentapplication before the CRTC from would-be competitors Unitel and BCRL,' whichinvolved mammoth hearings in the summer of 1991, may be the straw that breaks thecamel's back; but it is evident from the length of time it is taking theCommission to come to a decision that it is very perplexed about what course totake.In the meantime the government, responsible for direction to the regulator,2has done nothing but equivocate and stall. Fourteen years of studies, reports,committee and task force hearings and interprovincial negotiations produced,until last month, nothing but vague statements of 'principles', and superficialtinkering with the classification of carriers. Even the new bill does notaddress the burning issue of whether or not to allow competition. The ambivalenceof Canadian policy makers about the technological ferment in telecommunicationswas once captured by a Minister of Communications in his description ofdevelopments as "a nightmare of opportunity."'Why are the opportunities seen as a nightmare? And why are both the CRTC andthe government so reluctant to grasp the nettle and follow the United States downthe deregulation road?This paper will attempt to answer these questions by examining the stakes forthe interest groups and institutional actors involved in policy development, andby exploring different theoretical models of explanation. It will look at theeffects that deregulation can have on different groups in society, and howattitudes to these effects have influenced policy.Explaining divergences or delays in policy-making, is, in economic parlance,a form of -positive' analysis.^In addition, this paper will also undertakesome -normative' analysis. Underlying the debate about deregulation oftelecommunications (like many other economic and social debates) are twodifferent paradigms or worldviews. Analysis of these paradigms helps to explainmuch of the conflict over both definitions of the issues and prognostications forthe future.In order to understand the policy issues at stake in the deregulation debateit is necessary to grasp the complexities of both the Canadian telephone industryand the technical system itself. Chapter II therefore describes the3relationship between the regulatory instrument and the industry, as a basis forproceeding, in Chapter III, to the "story" of how Canadian policy has evolved toits present point. Theories explaining the procrastination described in thestory, which are explored in Chapter V, will likewise depend on an understandingof the effects of deregulation, to be found in Chapter IV. Chapter VI willdiscuss the conflicting values which are basic to the debate, and Chapter VIIwill contain my own policy recommendations, as well as an attempt to predictfuture developments.The telephone is an integral part of the daily lives of all Canadian citizens.For businesses efficient telecommunications are essential to their internationalcompetitiveness; for the individual consumer the ability to make unlimited localcalls has been as natural as breathing; for the homebound, the lonely, thehandicapped, the telephone is a lifeline. Changes in policy regarding thisindustry will affect everyone. This thesis analyses the development of suchpolicy in Canada and explores the opportunity costs for all sectors of oursociety.FOOTNOTES to Chapter I1. Unitel Communications Inc. is a combination of Rogers Cableand CNCP, and BCRL a consortium of B.C. Rail Telecommunicationsand Lightel Inc.2. Janisch H., and Irwin, "Information Technology and PublicPolicy: Regulatory Implications for Canada," Osgood Hall LawJournal, 20, 1982, p 622.4CHAPTER II: REGULATION AND THE TELEPHONE INDUSTRYAny analysis of the development of policy depends on an understanding of thebackground to the issues involved. This chapter will therefore describe therelationship of government to the telecommunications industry in Canada, and theoriginal rationale for the regulatory instrument. It will also explain howregulated telephone tariffs have successfully been used for the first three-quarters of this century as an instrument of social and economic policy, why thequestion of deregulating the industry is now on the agenda, and what theconsequences of deregulation would be.THE CANADIAN SCENEThe telephone industry has played a very important part in the history ofCanada. Along with railways, the development of a unified, universallyaccessible telephone system was a way to meet the challenge of communicatingacross the vast land mass and tying the regions together as a nation.However, unlike the United States, Canada has no single national carrier withthe facilities to provide a complete telephone service to the public in allregions of the country. Instead, it has a tangled and complex patchwork offoreign and domestic, public, private and mixed ownership consisting of dozensof small and nine relatively large, full service terrestrial carriers, scatteredacross the country and operating, essentially, within the boundaries of singleprovinces. Despite this multiplicity of companies, however, for technical andeconomic reasons which will be explored below, each carrier is in fact a monopolywithin its own region.All these companies (together with Telesat Canada, established in 1969 tocreate a domestic satellite system) are associated in what used to be known asthe Trans Canada Telephone System and is now called Telecom Canada. The5original - and ongoing - functions of Telecom are to plan the construction of anational system (ensuring, especially, compatibility), to unify rates and serviceofferings, and to divide revenues from traffic involving non-adjacentterritories. As well as providing local telephone service to customers in eachregion, the phone companies together provide national and international longdistance service.In fact, with the exception of calls between Quebec and Ontario on BellCanada's system, no interprovincial public telephone communication can beprovided without using the equipment of more than one telephone company,regardless of whether the transmission is made by cable, microwave or satellite.All such communications must travel from an individual telephone set throughlocal lines to a local exchange and then on to a long-distance exchange forinterprovincial routing. The same equipment and personnel are employed for theprovision of both long-distance and local service.' This indivisibility ofservices is of utmost salience with regard to policy for the telephone industry,as we shall see.Another major carrier, which merges with Telecom Canada into an overseasnetwork operated by Teleglobe Canada, is Unitel (known until its recent mergerwith Rogers Cable and Cantel as CNCP Telecommunications). Unitel hastraditionally been restricted to providing private line service, meaning that thevoice traffic it carries cannot be connected to the switched telephone networkoperated by Telecom Canada. For the last decade CNCP, along with equipmentmanufacturers, resellers, and other would-be competitors, has been challengingthe monopoly of the existing telephone companies. In 1984, in 1987, and againin 1991 CNCP/Unitel has applied to the CRTC to be allowed to interconnect withthe monopoly network and provide alternative long-distance services, but although6the CRTC has allowed considerable liberalization in the equipment and resellingmarket, it has consistently denied access to the long-distance telephone market.(The decision from the 1991 hearings is not expected until June of this year.)It is this challenge which has been spearheading the pressure for deregulationof the industry in Canada.WHY REGULATION? THE POLICY INSTRUMENT RATIONALEFor the first six or seven decades of this century government policy for thetelephone industry was based on traditional attitudes towards a 'naturalmonopoly'. "Some situations exist," asserts Schmalansee in his book on The Control of Natural Monopolies, "in which there is at best a prima facie case thatthe market mechanism will not yield acceptable performance unless special controlmechanisms are employed. Public utilities such as electricity, gasdistribution, water and sewers and telephone service are among thesesituations."' A natural monopoly arises when increasing returns to scale aresufficiently significant that any feasible level of demand can be met at loweraverage cost by a single firm than by two or more firms. Natural monopolies alsousually have heavy 'sunk costs', such as the huge amount of infrastructuralinvestment in terms of local lines or networks which characterise the telephonesystem.A natural monopoly represents a case in which the market cannot workefficiently or equitably. Protection of the industry (in the shape of controlof entry and exit) is necessary in order to ensure fair rates of return oncapital, and protection of consumers (in the shape of rate control) is necessaryto prevent the industry from using its monopoly position to extract excessiveprofits. Traditionally, governments have tried to provide this kind ofprotection in two ways: government ownership (as in England and most of Europe,7Japan and Australia), or investor-ownership, overseen and controlled bygovernment-established regulatory bodies, as in the U.S.In Canada both kinds of regulation evolved, complementing the patchwork oftelephone companies. Until the end of 1989, when a Supreme Court case ruled thatthe federal government had all-encompassing jurisdiction (see Chapter III), sevenprovinces - Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, PrinceEdward Island and Newfoundland - exercised regulatory authority over the majortelephone companies in their territories, and in the three Prairie provinces thegovernment actually owned the companies.' However the two largest telephonecompanies in Canada - Bell Canada and the British Columbia Telephone Company (BCTel) fell within federal jurisdiction, by virtue of provisions in theirrespective -Special Acts of Incorporation' declaring them to be for the generaladvantage of Canada'.' Northwest Tel, Telesat Canada, Unitel and TeleglobeCanada (originally a crown corporation but now privately owned) were alsofederally regulated.Until the Supreme Court ruling and the subsequent Telecommunications Actcurrently tabled in Parliament, the allocation of jurisdiction overtelecommunications was based on provisions in the Constitution Act of 1867 (whichwere essentially unchanged by the 1982 Constitution Act). Of course the onlyform of electronic communication known to the Fathers of Confederation was thetelegraph, and thus the federal government was assigned responsibility for"telegraphs ... connecting the provinces with any other or others of theprovinces".' That explicit power was supported by more general provisions inthe constitution such as the power to make laws for the "Peace, Order and GoodGovernment" of the country', and the exclusion from provincial jurisdiction of"such works as, although wholly situate within the province, are before or after8their execution declared by the Parliament of Canada to be for the generaladvantage of Canada or for the advantage of two or more provinces": Theclaims of provincial jurisdiction, on the other hand, have been based on othersections of the Constitution Act conferring power to legislate with respect to"local works and understandings", property and civil rights within the province,and "matters of merely local or private nature within the province".'While these jurisdictional divisions worked perfectly well while the telephoneindustry in general was considered a natural monopoly, once the idea ofderegulation was introduced harmony was disrupted, and the conflicting claims andideologies of the federal and provincial governments became a giant roadblock tothe entry of competition, as will be discussed in Chapter III.Starting with a Board of Railway Commissioners in 1903, various federal bodiesregulated telephone and telegraph rates in Canada, until in 1976 the CanadianRadio-Television and Telecommunications Commission (CRTC) took over the function.The CRTC immediately recognised that regulation can be a planning instrument aswell as a policing tool, and, "rejecting the traditionally limited, negative,proscriptive role of its predecessor, assumed an expanded, positive andprescriptive role."'REGULATION AS SOCIAL POLICYRegulation by government of industry is sometimes intended to effect atransfer of wealth from one group to another. In general, that transfer isintended to take place from producers to consumers, or among certain types ofconsumers. When regulation either seeks to make the market work better, or tocontrol monopolistic pricing activities, it is described as 'economic'. Howeversometimes regulation will be deemed to be 'social', inasmuch as it is intendedto benefit all consumers by forcing industry to meet needs which are uneconomic,9whether these are for certain services or to compensate for the sociallydetrimental effects of its activities."For the first 70 odd years of this century the regulator was not reallyrequired to act in a social role: the industry performed this function itself.Following in the footsteps of Alexander Graham Bell, the group of people whocreated the North American telephone system worked to implement a grand system'in which the monopoly telephone company "would provide service in virtually everyhome and office, linking local systems throughout the nation and the civilizedworld ... affordable by everyone.' McLure's Magazine, in 1914, attested that*the telephone [used to be] a luxury — the privilege of a social andcommercial aristocracy. About 1900, however, the Bell Co. started acampaign, unparalleled in its energy, persistence and success, todemocratize this instrument — to make it part of the daily life of everyman, woman and child."The industry was able to achieve the goal of universal and affordable serviceby exploiting the indivisibility of its infrastructure (described above). Allswitched calls, no matter what their origin or their destination, have to use thesame equipment. This facilitated the practice of cost—averaging', by whichthe entire operating territory was treated as one unit from which revenuessufficient to cover company—wide expenses were extracted, without necessarilyrelating cost to price in any specific service or locale. The industry was thusable to develop -value for service' pricing, which meant that rural customerscould be charged the same rates as urban customers, even though the costs ofproviding the service were higher for them; that local rates could be subsidizedby long distance rates; and that different rate groups could be created forbusiness and residential subscribers."This kind of cross—subsidization was practised in both Canada and the UnitedStates, and contributed substantially to the goal of universal availability.10Discrimination between buyers of a service who exhibit different demandelasticities is, of course, a widely accepted method of increasing the totalnumber of subscribers.^By increasing the number of subscribers, the overallcost of providing a service can be made affordable.^Thus the growth ofsubscribers from the time of the telephone's invention until the late 1960s wasdependent on the support of cross-subsidies. They were basic to the pricing oftelephone service."The goal of universal availability has largely been achieved in most of NorthAmerica. However the cross-subsidization of rural by urban customers and oflocal rates by long distance users has continued in Canada to this day in pursuitof the goal of universal affordability. It is recognised by regulators acrossthe country that the telephone is not simply a commercial product, but aninstrument of social policy. As Horowitz puts it,universal telephone service [has come] to embody a principle that accessto information and the means of communication is part of being acitizen. Universal telephone service allows individuals to be part ofthe fabric of national life, if only due to a legally embedded principleof mandatory access to the equipment at cheap rates."The goal of universality - which encompasses fair and reasonable rates, themaintenance of rural communities, and regional development - has remained highon the agenda for the telephone companies, the provincial governments, and theregulator. However the social compact which endured for close to three-quartersof a century, serving both the industry and its customers well, is now beingquestioned, and the regulator which presided over it is besieged. What hascaused the climate to change?DEREGULATION ON THE AGENDAAccording to John Kingdon, issues get onto the government's agenda when the threeprocess streams which flow through the system - streams of problems, politics andpolicies - come together." After decades of relatively tranquil monopoly11regulation in the telecommunications industry everything changed.^Into the-problems stream' came the discovery of new technology which challenged thenotion that the industry could continue as a monopoly, and a questioning of theefficiency of the regulatory instrument itself, under the new technologicalconditions. Into the 'policies stream' came the U.S. experience; and the'political stream' experienced pressure from the potential competitors(operators of the new technology), reinforced by the government's ideologicaltrend towards deregulation and privatization. As we will see later, the lackof value congruence with regard to possible policies has served as a constrainton actual policy formulation, but the impetus of the confluence of these threestreams forced the issue onto the agenda anyway.The Technological RevolutionAs Langdon Winner remarks in an article on the advent of computers and advancedcommunication technologies, contemporary attitudes towards the new technology areoften framed in powerful metaphors of revolution and paradigmatic change."This is certainly true in the telecommunication industry. One scholar contendsthat we are currently in the throes of a "revolution of such pervasive scope andprofound impact that it may well match the Industrial Revolution in itseffects," and another exclaims that "the technological genie is out of thebottle, never to return"." Plain old telephones (known in industry jargon asPOTS) are being upstaged by an ever-increasing list of PANS (Pretty Amazing NewServices), including such - intelligent' machines as copiers, computers, faxunits, and cellular radios. Link-ups can be made by satellites, cable TV orterrestrial microwaves, and can be offered by common or specialized carriers, andon an inter-corporate or private basis. The convergence of telecommunicationsand computer industries, as well as massive growth in the information sector,have meant considerable changes in what were previously stable patterns of12industrial organisation."The over-riding significance of these developments is the extent to which theymake it possible for competition to the established telephone companies toprovide equivalent or similar services using the new technologies. Traditionalconcepts of natural monopoly and regulation are therefore being challenged. Acentral feature of conventional utility regulation is restriction of entry, butas Alfred Kahn put it, "the key question is, if competitors want to enter, hownatural can the monopoly be?"' 21Competitors most certainly do want to enter, but only in certain sectors ofthe industry. While the long-distance market looks inviting, the local marketdoes not, because most of the characteristics of a natural monopoly still applythere. This fact is crucial to the debate about deregulation. The othersignificant effect of the new technology is that the tele-communications networkhas become much more than a device for providing traditional POTS to businessesand households. It has become an important input for a wide variety ofindustries, and business users are demanding ever greater and more sophisticatedtechnical capabilities from the networks. As a representative of theDepartment of Communications acknowledged to a meeting of Telecommunicationscarriers:under conditions of advanced industrialization, telecommunications canno longer be considered as simply one among a number of importantindustrial sectors; rather it must be seen as the nervous system of theentire economic order."Indeed the technological revolution has shifted the central focus of thetelecommunications industry from universal service to internationalcompetitiveness, with significant consequences for evolving government policy.Pressures for Convergence with the U.S. In the United States the response of government and regulatory officials tothis technological revolution has been to partially deregulate the13telecommunications industry, and allow competition into the long distance sector.In the early 1980s 'Ma Bell' was swept up in an tide of deregulation whichengulfed other previously controlled industries such as airlines, trucking andbanking. Its divestiture, following other pro-competitive rulings by theFederal Commission on Communications (FCC), went a long way towards breaking upthe monopoly, although complete deregulation has certainly not yet been achieved.The U.S. experience has ensured that deregulation would be on the agenda forCanadian policy makers. As a result of deregulation in the U.S. long distancecosts have come down (see below) and Canadian businesses see this as a threat totheir competitiveness. Because of the proximity of the U.S. border it istechnologically possible for Canadian businesses to bypass the domestic systemand link into U.S. systems. As well, Free Trade and juxtaposition with ourAmerican neighbours create pressures for convergence in many other policiesbesides telecommunications.In addition, the ideology of the Canadian Conservative government, which hasnow been in power for 8 years, has very closely resembled that of recent Americangovernments. In much of the Western world Keynsian economics, with its promisethat governments might control their national economies though manipulation ofdemand and supply, became discredited in face of world-wide recessions.Monetarist policies, which principally attack inflation and decry expenditure bythe state, took over. Although 'Reaganomics' undoubtedly went further down thisroad than the Mulroney government has seemed inclined to do, for manyconservative philosophers any kind of government rule or regulation is a form ofcoercion." Deregulation is therefore linked to the issue of personal freedom:i.e. personal liberty comes with freedom from state -interference' in privateactions. As Pat Marchak puts it, "the New Right sees itself on a moral crusadeto free humankind from the bondage of government intervention.'"'14It is obvious from this discussion of how deregulation has come onto thepolitical agenda that there are considerable pressures for Canadian policy toconverge with that of the United States. A large part of this thesis will bedevoted to explaining why these pressures have so far been resisted. But inorder to follow how the story has unfolded it is important to understand at thispoint the most salient consequences of deregulation.THE CONSEQUENCES OF DEREGULATIONThe central rationale for competition is that it normally results in a moreefficient market place, allows for greater consumer choice at the lowest possibleprices and, especially in periods of rapid change, provides for a betterallocation of investment capital and other scarce resources. Business leadersand most economists agree that a sophisticated telecommunications infrastructureis essential to economies in the late twentieth century, and that the morecompetition there is the more innovation and productivity will occur. Freedfrom the -crippling burden' of regulation, the argument goes, businesses willhave more time and money to spend in research, and the once-monopoly telephonecompanies will be forced to lower their prices to meet the competition.Indeed, in the United States, the opening up of the market to competition hasresulted in lower long-distance rates, and choice of service from differentsuppliers. Since the opening of the terminal equipment market (which hasalready been allowed in Canada as well), there has been an explosion of telephonestyles and capabilities - novelty phones, cordless phones, phones with memory,sophisticated business phone systems, etcetera.But there's a rub. And the rub lies in the fact that the new equipment andthe new services are only useful when connected to telephone lines - lines whichcontinue to exhibit natural monopoly characteristics.It is not possible, as mentioned above, to separate the provision of long-15distance and local services, because they utilize the same basic switches andloops. Before the advent of modern technology, long-distance calls had to pass,like local calls, through the old copper wires. Now, long-distance calls maybe transmitted by microwave, satellite, or optical fibres, and this is wherecompetition is feasible. The basic local exchange, however, with which the long-distance apparatus must still be interconnected, remains a natural monopoly, andthere is not yet any technology which could replace it. Consequently, potentialcompetitors are not breaking down the doors demanding entry to this sector: theyare happy to leave it to the franchised telephone companies.Deregulation, or the admittance of competition, undermines serviceuniversality. The telephone companies have been subsidizing local costs fromlong distance rates, and rural customers from urban ones. Entry centering on themost lucrative markets ( -cream-skimming') invariably drives prices towards actualcosts there, leaving the telephone companies insufficient funds with which tocross-subsidize. The telephone companies are then forced to rate rebalance',thus raising the prices of local calls and the rates to rural areas. This isexactly what has happened in the U.S. While long distance rates have come downand the consumer has a plethora of choice of new products, the price of localcalls has soared. In some areas local measured service (LMS) has been adoptedand customers are charged for every local call. Schiller describes the situation:In the U.S. the entire industry's centre of gravity has already shiftedaway from delivery of basic telephone service toward exploitation ofspecialized enhanced services targeted at businesses and wealthyindividuals ... the amazing truth is that nobody wants to be burdenedwith the all-too-real, enormous historical costs of the U.S. telephonenetwork ... [but] the fact remains that ... somebody has to pay. Theresidential consumer has been fingered for the job."In Canada the CRTC has heard arguments from the telephone companies that fullrate rebalancing would result in dramatic rises in local rates and large numbersof subscribers being forced to drop off the network." Even the potential16competitors and their economist supporters do not disagree about theseconsequences; they only dispute their significance.It is very seldom that a government policy can create winners without at thesame time creating some losers. In the case of policy regarding deregulation oftelephones, the winners are big business and potential competitors. The losersare most residential customers, small business, rural areas, the poor anddisadvantaged. In other words, eliminating the cross-subsidization which is madepossible by regulation and monopoly control involves a fundamental redistributionof income. This has been a crucial factor in the policy debate.FOOTNOTES to Chapter 21. Dalfen C., and Dunbar L., "Transportation and Communications:The Constitution and the Canadian Economic Union," University ofToronto Press in cooperation with the Royal Commission onEconomic Union and Development Prospects for Canada (henceforthknown as 'Macdonald Enquiry') Vol. 62, 1986, p. 157.2. Schmalansee, R., The Control of Natural Monopolies, LexingtonBooks, Toronto, 1979, p. 1.3. For the fascinating history of how the various telephonecompanies and their regulatory bodies were formed, including thepredatory tactics of Bell Canada and the response of public-minded provincial authorities, see (inter alia) R. Babe,Telecommunications in Canada, University of Toronto Press, 1990,and M. Denny, Government Enterprise in Western Canada's Telecommunications, Discussion Paper No 301 for Economic Councilof Canada, Ottawa, 1986.4. Bell Tel was originally created by an Act of Parliament andendowed with powers to construct telephone lines throughoutCanada alongside all public rights of way, whether provinciallycontrolled or not.^This was contested by Quebec and otherprovinces, who enacted legislation governing the installationswithin their boundaries.^Britain's Privy Council also ruledthat Bell's local and long distance operations (covering bothOntario and Quebec) were not divisible for purposes ofregulation.^As a result Parliament declared Bell's works to be"for the general advantage of Canada".^Promoters of BC Telapparently chose to have their company regulated by the federalgovernment, having apparently had some previous experience withprovincial regulation! (see T. McPhail, and S. Hamilton, eds,17Communication in the 80s, Conference Proceedings, University ofCalgary, 1984, p. 16).5. McPhail, p. 4.6. Preamble to Section 91, Constitution Act.7. Paragraph 92(10) of Constitution Act.8. Subsection 92(10), (13), and (16) of the Constitution Act.9. Schultz R., and Alexandroff,A., Economic Regulation and theFederal System, Macdonald Enquiry, Vol 42, p. 95.10. Hills, J., Deregulating Telecommunications: Competition and Control in U.S., Japan and Britain, Francis Pinter, London, 1986,p. 31.11. Pool, I. de Sola, The Social Impact of the Telephone, MITPress, Cambridge, Mass, 1977, p. 128.12. quoted in Pool, p. 131.13. As an example, in Northern B.C., the least densely populatedarea of the province, the cost per $ of revenue for basic localservice in 1989 was estimated by B.C. Tel to be $4.58, while inthe Lower Mainland it was $1.36.^(Government of BritishColumbia, Final Argument, Submission to the CRTC, Re TelecomPublic Notice 1990-73, August 1991 p. 30).14. Schultz and Alexandroff, p. 85.15. Horwitz,R.B., The Irony of Regulatory Reform, OxfordUniversity Press, New York, 1989, p. 16.16. Kingdon,J., Agendas, Alternatives, and Public Policy, LittleBrown, Boston, 1984.17. Winner, L., "Mythinformation: Romantic Politics in theComputer Revolution," Research in Philosophy and Technology, Vol7, 1984, p. 284.18. Schultz, R., "Regulation as Maginot Line: Confronting theTechnological Revolution in Telecommunications," Canadian Public Administration, 26, 1983, p.203.19. Janisch and Irwin, p. 617.20. Janisch H., and Schultz R., Exploiting the InformationRevolution: Telecommunications Issues and Options for  Canada,Discussion Paper for the Royal Bank of Canada, October 1989, p.3.1821. Alfred Kahn, quoted in Schmalansee, inter alia.22. McPhail, p. 723. Stone, Deborah, Policy, Paradox and Political Reason, ScottForesman, Illinois, 1988, p. 17.24. Pat Marchak, in a lecture for the Vancouver Institute,February, 1992, based on her book The Integrated Circus, McGill-Queens University Press, Montreal, 1991.25. Schiller, Dan, Telephone Deregulation: A Historical View,Temple University, August, 1985. p. 6.26. Bell estimated in the CRTC hearings of 1987 that 160,000residential subscribers and 20,000 small business subscriberswould cease to subscribe, and that low income subscribers wouldbe disproportionately represented among such drop offs. (CRTC,"Interchange Competition and Related Issues", No. 85-19, August1987).19CHAPTER III:CANADIAN POLICY: PROTAGONISTS AND PROCRASTINATIONIntroduction Government policy is never, of course, made in a vacuum.^The previous chapterexplained how, after over half a century of relatively stable and uneventfulregulation of the telephone industry, the question of deregulation came on to thepolitical agenda. The purpose of this chapter will be to describe thegovernment's irresolute and incremental responses to the pressures forderegulation, and the interests within our plural society which have influencedthese responses.The first stirrings of change in the telephone industry occurred with thecreation, in 1968, of a new Federal Department of Communications. The rationalefor this was that "telecommunications legislation and regulation as it now existsis, to a considerable degree, uncoordinated and in certain areas inadequate."'Guided by -Green'(1973) and -Grey'(1975) Papers incorporating -Proposals for aTelecommunications Policy for Canada', the creation of the CRTC (1976) was seenas the first stage in a complete review of policy; the second stage of which wasto establish for the first time a set of national objectives similar to thosegoverning the regulation of broadcasting. A 1977 position paper recommendedrecognition of a "national" dimension, and a "proper equilibrium between nationaland regional interests in the regulation of all telecom carrier services." Inaddition, the federal government's policy paper intimated that some services"might perhaps better be provided in the public interest under competitiveconditions."' However when Trudeau tried to achieve provincial agreement toentrenching communications policy in the constitution in 1980, negotiations brokedown completely.20In 1985 the then Conservative Minister of Communications Marcel Masserationalized the government's continuing indecision in terms of due care andattention: "We are talking about an excellent telecommunication system, which hastaken 100 years to build. I cannot and should not allow it to be changedovernight, to the detriment of the Canadian public."' The Minister went on tooutline the four principles which would "guide him through" yet another reviewof telecommunications policy: universal access to the telecommunications systemat affordable prices; a commitment to ensure that the telecommunications sectorremains at the forefront of technological progress and benefits all Canadians;maintenance of international competitiveness; and a -uniquely Canadianapproach'. Subsequent Ministers have all reaffirmed their commitment to theseprinciples.The pivotal problem for the government, of course, is that the second andthird principles conflict with the first. Beneficiaries and losers aredifferent, depending upon which principle takes precedence. Let us look at theprotagonists who see themselves as these potential beneficiaries or losers withregard to changing telecommunications policies.Interest Groups and their Stakes The chief protagonists in favour of deregulation are big business and thecompanies, such as Unitel, who want to be able to compete with the monopolytelephone companies. Deregulation would bring down the cost of long-distancecalls and fax messages which, because of increased reliance on this technologythroughout the business world, is becoming a ever greater percentage of businessexpenses. More and more sophisticated telecommunications networks are essentialfor the movement of information within and between economies. Two major businessgroups - the Canadian Business Telecommunications Alliance (CBTA) and21Communications Competition Coalition (CCC) -have formed to pressure governmentinto deregulating and allowing competition into the telecommunications market.In fact long distance business calling is highly concentrated, and the top 1%of business locations accounts for approximately 50% of total switched callingminutes.' (For B.C. Tel, for example, 20% of its business subscribers generated89% of its long distance revenues, and in New Brunswick 3% provide 53% of totalbusiness revenue. 5 ) Nearly all the entry strategies are targeted at the needsof these large users for specialized and advanced communications. (A Britishworkshop on -universal service' identified the "fundamental distinction" as faras telephone policy was concerned as being "between large businesses and everyoneelse".)'The stakes for potential competitors are fairly obvious: they want a pieceof what they see as a lucrative pie. At the moment they are only asking forentry into the long distance market, because this is where the profits would be.However even though at the moment it would be uneconomic for them to try tocompete in the local exchange systems, if local rates were pushed high enough,the alternative systems that were not previously competitive could become so.In other words, it is certainly in the interests of telecommunicationsmanufacturers to push for a rise in local rates because then they might be ableto enter a market previously closed to them by price, rather than by regulation.'Supported by an array of economists, potential competitors such as Unitel andBCRL also argue that competition benefits the economy, as it allows greaterconsumer choice and provides for a better allocation of investment capital andother scarce resources. (See Chapter VI for further discussion of thisviewpoint.)Although the major telephone companies, Bell Canada and BCTel, originally22opposed the advent of any competition, they seem in the last five or six yearsto have become reconciled to the inevitability of it, and at the last two CRTChearings have concentrated their energies on making the argument for raterebalancing: asking that they may be allowed to raise local rates in order tooffset the cross-subsidization from long-distance calls. They are also arguingstrenuously for large 'contributions" from the would-be competitors to pay forthe costs of interconnection to their networks. The applicants, on the otherhand, assert that they must be protected from the advantages of incumbencyenjoyed by the existing telephone companies. (See Chapter IV).Two groups are joined in opposition to deregulation: the telecommunicationsworkers union, and consumer advocates. The dominant union in thetelecommunications industry, the Communications Workers of Canada (CWC), has beenvery active since the original threat of deregulation emerged with CNCP'sapplication to the CRTC in 1984. Looking warily across the border the Canadianunion sees that AT&T's workforce has been considerably reduced,' and what waspreviously considered a job for life has become highly insecure. With the entryof non-unionised companies into telecommunications and the establishment of non-unionised subsidiaries, what used to be a 100% union membership is now down to3570. 9At the same time, as Banting points out, Canadian unions have traditionallyseen themselves as champions of the underdog, and have allied themselves withsocial policy groups to promote fair and comprehensive welfare policies." Inthis role the CWC and its branches have made common cause with the consumer andsocial policy groups in pointing out the effects of deregulatory policies on thepoor and disadvantaged.Spurred on by American statistics, and using arguments of equity, groups such23as the Consumers Association of Canada, the Canadian Council on SocialDevelopment, the Social Planning Council of B.C., the Public Interest AdvocacyCentre, Federated Anti-Poverty Groups, Old Age Pensioners' Organisations andSenior Citizens' Associations have appeared before the CRTC to argue that thetelephone is a basic and indispensable part of modern society, which the policymakers should ensure is available to all who need it, regardless of their income.(See Chapter VI for the central debate regarding these arguments.) As well asintervening in CRTC hearings public interest groups have formed coalitions withother groups such as the unions and some small businesses, and have sponsored awell-advertised visit to Canada by Ralph Nader, who has now recanted from hisoriginal pro-competition position and is warning Canadians not to make the samemistake as their U.S. neighbours.Provincial Governments No matter what policy area one is studying, in Canada the role of federal/provincial relations is always preeminent. Telecommunications is no exception.As was pointed out in Chapter II, the three Prairie provinces own their owntelephone companies, and the four Maritime provinces exercise regulatoryauthority over the companies in their territories.As a study commissioned in 1989 by the Communications Ministers of the Prairieprovinces notes, telephone services have always been a critical element to lifein the Prairies. "Vast, thinly populated areas, with people living in oftentimes harsh climates, have always made communications both very important andvery difficult to provide."" Public ownership of telecommunication networkswas established very early in the settlement of all these areas. In the firstsession of the Alberta legislature in 1906, the government passed its firsttelephone legislation entitled "An Act Empowering Municipalities to Establish and24Operate Telephone Systems."" There was considerable fear among officials andpublic that the private monopoly, Bell Telephone, would not provide servicesthroughout the sparsely populated territories at a reasonable price, and this wasbuttressed by the conviction that telephones were a public utility like water andelectricity."The objectives of these provincial governments have remained the same to thisday: "the provision of high-class telephone services to provincial residents,accessible to all at a reasonable rate structure.'"' These governments seecommunications as fundamental to regional economic and social development, andhave used their telephone companies as an instrument to achieve this. Withoutexception they have argued before the CRTC that competition would result inseriously detrimental impacts on both their rural and urban subscribers." AsNewfoundland Tel commented at the latest hearings, in a competitive, marketdriven environment, investment decisions are geared to anticipated returns. Ifrural areas don't appear to generate returns, then investment won't be madethere."Federal-provincial conflicts over telecommunications first burst out into theopen at a joint conference in 1973, when the federal government released itsposition paper, "Proposals for a Communications Policy for Canada", in which itintimated for the first time that new entrants might be permitted. Theprovinces' response was to deny the federal government any significant decision-making power, and this remained their position through several years of almostannual conferences. Communications was part of the agenda for the September1980 Conference of First Ministers on the Constitution, and at that time theTrudeau government was willing to concede responsibility over intraprovincialoperations of the telecommunications carriers to the provinces and yield limited25responsibility over cable systems. However, the federal government proposedfurther to retain for itself exclusive responsibility for national and satellitecommunications carriers, and exclusive responsibility over interprovincial andinternational rates and services. The provinces countered with their "BestEfforts Draft" in which there would be exclusive provincial jurisdiction over alltelecommunications works and undertakings wholly situated within a province, withconcurrent but paramount provincial jurisdiction over those extending beyondprovincial boundaries." The issue proved insoluble, and no new provisionswere included in the Constitution Act of 1982.As Schultz suggests, "it is highly likely that if it had been left to thegovernments alone, the constitutional -sleeping dogs' would have been letlie"," but in 1983 the dogs were forcibly awakened when CNCP applied to theCRTC for an order requiring Alberta Government Telephones (AGT) to interconnectwith it on terms similar to those which had been previously granted with Bell andB.C. Tel. CNCP had not been able to negotiate acceptable interconnection rightswith any of the non-federally regulated carriers, and decided that individualnegotiations with seven jurisdictions would be extremely expensive. The CRTCapplication was an attempt to resolve this confusion.When AGT applied to the Federal Court for a writ of prohibition to prevent theCRTC from proceeding with the application, the constitutional issue was finallybefore the courts. The case was appealed through various levels, but in Augustof 1989 the Supreme Court affirmed that "AGT is an interprovincial undertaking... and accordingly lies exclusively within federal jurisdiction. However, asa provincial Crown agent, AGT is entitled to claim Crown immunity."This ruling finally confirmed that the federal government is legally entitledto regulate all major telephone companies in Canada, owing to their provincial26interconnectedness. Alberta's immediate response was to privatize theirtelephone company and acknowledge that it was now to be regulated by the CRTC.All provincial companies have had to allow their customers to purchase their owntelecommunications equipment, such as telephones, switchboards, etc., in orderto make their policies consistent with the CRTC regulated telephone companies.However some provinces have insisted on negotiating 'Memorandums ofUnderstanding' with the federal government, whereby regulation will only betransferred over a negotiated period.The Regulatory Response As was noted in Chapter I, the CRTC has, since its inception, seen itself in apositive and prescriptive role. Until the Supreme Court decision it onlyregulated 70% of the industry, but its pending decision in the Unitel/BCRL casewill now affect telephone systems right across the country.Through a series of regulatory decisions the CRTC has in fact provided for aslow but steady introduction of greater competition into several areas of thetelecommunications sector which previously had been treated as essentiallymonopolistic. Since the late 1970s the Commission has allowed terminalinterconnection, facilities-based competition in data and private line voiceservices, and has liberalized the rules with respect to enhanced servicescompetition and resale and sharing." The Commission has justified its policyof regulatory forbearance on the grounds that "a) in appropriate circumstancesmarket forces alone may be sufficient to assure 'just and reasonable' rates, andb) the costs of regulation to the industry, the regulator and ultimately toconsumers and taxpayers, are not always warranted.'On the other hand, the Commission has so far balked at taking the all-important step of allowing competition in long distance services, or allowing the97telephone companies to 'rate rebalance' (i.e. raise local rates in order to bringdown long distance rates). In 1984 CNCP applied for permission to interconnectwith part of the public switched telephone network to provide long distanceservice on a competing basis with BC Tel and Bell Canada. As the CRTC's reporton this test proceeding exclaimed, " No more difficult question oftelecommunication regulation policy has been before the Commission."" In1987 Bell Canada filed tariff revisions providing for the implementation of arate rebalancing plan, in an obvious effort to forestall the claims of would-becompetitors that they could provide cheaper long distance rates. A year later,after a comprehensive review of Bell's revenue requirements, the Commissiondenied them the right to rebalance, finding that long distance rates coulddecrease without any corresponding local rate increases. However, in a speechafter the decision the Chair of the Commission stated that it considered "thatsignificant social and economic benefits would result from rate rebalancing andthe resultant reduction of rates for long distance service. It could, forexample, further facilitate communications, stimulate economic activity andimprove the international competitiveness of Canadian business." On the otherhand, Mr. Bureau continued, "In considering any rebalancing proposal, theCommission will always be concerned about the impact of increased local rates ...[we will] not make any decisions which would jeopardize the principle ofuniversal accessibility to telephone service at an affordable price.""Analytical models of public policy often develop a version of "capturetheory" with regard to regulatory agencies. Theodore Lowi claims thatlegislation founding many regulatory agencies often calls for contradictorygoals, to be resolved (or avoided and masked) by ceding tremendous discretionarypower to the agencies. This power is then seized and manipulated by interest28groups - usually those whom the regulation was set up to control." Paul Prossalso notes that regulatory tribunals deal with complex and highly technicalmatters and therefore "often depend on the informational resources of the groupsthey are meant to control. [They] even - by defining very narrowly the public'sright to intervene in regulatory hearings - lose the capacity to assess thebroader public interest.'The CRTC, however, has not succumbed to this temptation. It has encouragedwidespread participation in its hearings, stating that "in very few of the casescan all the issues be decided solely on the basis of the interests of the partiesbefore the Commission"." In keeping with this principle, the Commission hasawarded costs to intervenors, tried to give wide distribution to information, andrequired greater financial disclosure. In fact Schultz and Alexandroff see suchliberal inclusion of broad participation as a form of capture by public interestgroups, arguing that it "makes the process of accommodation and the resolutionof conflicts more difficult.""Public interest intervenors certainly don't agree with this assessment. Todate they have much appreciated the CRTC's openness to their perceptions andpoints of view.^However, they are worried about the future of regulation ifcompetition is allowed in, even on a circumscribed basis. The CRTC alsoregulates broadcasting and cable systems, and in this area its record isdefinitely dubious. In the name of "creating more Canadian choices" it hasgranted dozens of licences to new commercial stations, extracting in returnpromises of commitment to Canadian content, which are then routinely violated.Concession after concession has been made to the private sector whenever economichardship is pleaded." The fear is that if Unitel and others are allowed tocompete in the telephone sector, they will not be held to their licensing99requirements for very long.Lowi certainly gives an accurate description of the relationship between thegovernment and the communications regulatory agency in his criticism that manyregulatory statutes are devoid of any meaningful guidelines beyond a perfunctoryand abstract proscription to regulate in the public interest. In -normative'theory the relative roles and relationship of a government department and aregulatory agency should be quite straight forward: the department has broadpolicy responsibility (which should be clearly expressed in legislation) whilethe detailed and day-to-day decision making role falls to the regulatory agency.In practice, in the area of communications in Canada, this has not been the case.In the absence of clear guidelines from the government, the CRTC has seen itselfas having a legislative responsibility to deal with particular applications asthey are presented, even when they have implications which go beyond the agency'sjurisdiction, and policy has, de facto, been made on an incremental basis. Thepending decision to be taken by the CRTC in the Unitel case will have enormousramifications for telecommunications policy in Canada, as will be discussed inChapter VI.The Federal Department of Communications One major problem for the Department of Communications, which applies to theCRTC as well, has been that the field of "communications" includes not onlytelecommunications, but also broadcasting, and culture in general. Doern andPhidd note that "the Communications Ministry is characterized by the presence ofa stable of enterprises ... in [some] circumstances the lack of ministerial timeand attention may prevent desired actions from being achieved."" Issuesconcerning the CBC and cable broadcasting have tended to dominate the agenda forthe Department over the last decade, especially during the debate over the Free30Trade' Agreement.^Telecommunications have had to take a back seat, which madelife simpler for the federal government anyway, since the status quo was beingdefended so vehemently by many of the provinces.Nevertheless, if the issues involved in telecommunications policy had not beenso complex it would obviously have been easier for the Department to set theclear and unequivocal guidelines which are so sorely needed. In 1987 the Ministerof Communications took a significant step in announcing a new -Policy Frameworkfor Telecommunications' which established two classes of telecommunicationscarriers. The first class (Type 1 carriers) included all those who owned andoperated interprovincial and international network facilities, while Type 2included value-added network suppliers (VANs) and resellers of authorizedservices, all of whom have to use facilities leased from Type 1 carriers. Thenew policy established that carriers in Class 1 would be governed in the futureby the three key conditions: 80% Canadian ownership, availability ofinterconnection, and limited, regulated entry. For Class 2 carriers, on theother hand, there was to be open and unrestricted entry. The announcementexplained that the two different sets of rules governing the operation of Class1 and Class 2 carriers were designed to recognise the differences in the natureand economics of their businesses. The idea was to foster competition, while"ensuring that the basic integrity of the Canadian system is protected both fromthe point of view of local subscribers and of the sovereignty of the country."The distinctions, while clarifying some areas, left the question of competitionin the long-distance market unanswered, and the really hot potato remained in thelap of the CRTC.The New Act The new Telecommunications Bill which was tabled in the House of Commons onFebruary 27th, 1992, "replaces the hodgepodge of outdated legislation" which31governed the industry to date with a "coherent statutory basis for the managementof this strategic sector.' The timing of the tabling of this Bill is puzzling.Five years have elapsed since the abovementioned classification announcement, andtwo-and-a-half since the Supreme Court decision gave the federal governmentcomplete jurisdiction over telecommunications. Why, when the CRTC decision onthe Unitel case is imminent, bring in the Bill now? It is possible that thegovernment sees the combination of the new power of - forebearance' for the CRTCand its own new power to -direct' as enabling the introduction of competitionwithout explicitly legislating deregulation.The provision which gives the CRTC the power of forebearance: i.e. the powernot to regulate competitive businesses has already drawn a lot of fire. TheLiberal Communications critic charges that this clause "will lead to deregulationthrough the back door." The problem is the definition of "competitive". Infact four years ago CNCP started selling private lines without approval and theCRTC asserted that it did not need to regulate because the sector was"sufficiently competitive". The TWU successfully appealed the case at the time,but the new Act will allow the CRTC to forebear whenever it so desires. Manyof the newcomers and resellers in the business are hybrids, who rent some oftheir facilities and own others, and who provide a mixture of - enhanced' andbasic' services. Distinctions about who are competitive and who are not willbecome more and more blurred.Under the new legislation cable companies will be allowed to provide anytelecommunications service they want, without any regulation, although theMinister stated that the government would move to regulate this new part of cablecompanies' business "once it becomes a major source of business"." In theorythis would give cable companies the power to offer local service, but it isunlikely that this would happen in the near future, as the huge expense would not32be worth it.^This provision could prove to be the dark horse of the Act,depending on how technology progresses.The Act also confirms both the primacy of federal jurisdiction overtelecommunications already mandated by the Supreme Court and the Type 1/2 carrierdistinction which was put into effect in 1987, although it goes further and givesthe Minister power to licence all carriers. This latter provision has also beenchallenged by the Opposition on the grounds that it will politicize entry intothe industry, and remove power from the CRTC. (Proponents of deregulation, on theother hand, would rather the market was left to decide.)"The Act itself does not direct policy (particularly with regard tocompetition), but it does give the federal government power to do so. Althoughof course the government should have been doing this all along, the effect of theAct should be that it will have to consult the public about policy from now on.However there are no guidelines in the Act regarding public disclosure, andthere are fears that "direction" could simply mean political manipulation withoutexplanation. Also the power of direction prior to a case, added to the power toreview after it (which the government already has), may make the role of the CRTCalmost redundant.This new Act has, of course, now to take its course through the legislativeprocess. The Liberals are pressing the government to allow it to go to theStanding Committee on Communications and Culture, where it would be properlyaired and interest groups could appear. However, the Conservatives aresuggesting it may simply be -fast-tracked' through a special LegislativeCommittee. The fact that it was sneaked in at this point, just after acontroversial Budget, and buried by all the publicity surrounding theconstitutional debates, does not augur well for the possibility that the public .will get a chance to consider the Bill's implications.33In any case, as has already been pointed out, the Act does not in fact set anypolicy regarding competition in the Type 1 market. The government has once againleft the CRTC to make the crucial decision.The CRTC and the Unitel Decision "There are times," John Kingdon asserts, "with the passage of a landmarklegislation or the adoption of a precedent-setting decision, when a new principleis established. Once this occurs, public policy in that arena is never quitethe same again." As noted in the B.C. Government submission to the 1991hearings before the CRTC, the decision taken in this case will definetelecommunications policy for Canada. The implications and ramifications of thedecision will affect the current and political structure of the industry as wellas all classes of users of telecom services."In other hearings throughout the last decade the CRTC has, as has already beenmentioned, been moving closer and closer to allowing competition in all segmentsof the telecommunications business. After its 1987 decision to deny raterebalancing for the time being, the Commission's Chair signalled that itconsidered that significant social and economic benefits, such as the stimulationof the economy and international competitiveness, could result from raterebalancing and the consequent lowering of long-distance rates.At the same time, however, Mr. Bureau reiterated the Commission's commitmentto the principle of universal accessibility at an affordable price, and this, ofcourse, is what has been making the decision so difficult for the Commissioners.At the moment a decision is promised for June, which will mean that it will havetaken nearly a year to reach a resolution.The CRTC may, indeed, find itself in an untenable situation. Janischconcludes that "regulators are likely to find, when facing the high tide oftechnology, that they possess Canute's more limited powers rather than those of34technology, that they possess Canute's more limited powers rather than those ofMoses.'' Commentators from both Britain and the States argue that regulatorybodies, faced with an ever-increasing and burgeoning technological sphere, andperpetual challenges, cannot respond effectively. Instead they end up decidingthat the only way to regain some control is to deregulate, and allowcompetition." However, any power that they initially regain is then challengedagain, as we see from the pressure for even further deregulation in the U.S.Whatever decision the CRTC eventually makes in the Unitel case, it will almostcertainly be appealed to the Cabinet, which has always had the power to "vary andreview". Public interest groups and the TWU hope that if a national debate isnot generated by the new Telecommunications Act, it will be inspired by such anappeal. Certainly the issues need to be understood and discussed in an open,public forum.Conclusion This chapter has given an overview of the stakes for Canadian protagonists in thetelecommunications debate, and the hesitant steps which have been taken by boththe government department and the regulatory agency in trying to develop acoherent policy.One of the greatest problems for everyone has been the difficulty in evaluatingwhat effects deregulation will have on both the economy and the social fabric ofsociety. This will be the subject of the next chapter.FOOTNOTES to Chapter III1. Schultz and Alexandroff, p.90-1.2. Canada, Minister of Communications' "Proposals for aCommunications Policy for Canada", Ottawa, 1977.3. Dept of Communications, Speech by Marcel Masse, June 20, 1985.354. Brock, G., "The Dissolution of AT&T", in Weiss and Klass, eds,Regulatory  Reform; What Actually Happened, Little Brown, Boston,1986, p. 230.5. Janisch and Schultz, p. 14.6. "Workshop on Universal Telephone Service in the U.K.: A PolicyAgenda," Centre for Information and Communication Technologies,Science Policy Research Unit, University of Sussex, October,1990. in Telecommunications Policy, Vol 15, No. 6, February, 1991p. 86.7. Charter, J., "Local Distribution: Monopoly or Competition?" inPolicy Research in Telecommunications, ed. V. Mosco, AblexPublishing Co., N>J., 1984 p. 164.8. A workforce of 117,000 has been reduced by 24,000. (Hills,p. 74).9. Ibid, p. 74.10. Banting, K., The Welfare State and Canadian Federalism,McGill-Queens University Press, 1987, p.13.11. Prairie Provincial Study on Telecommunications, AnExamination of the Potential Impacts of Competition in Long-Distance Service on Rural and  Urban Subscribers, 1989, p. 2.12. McPhail, p. 14.13. Denny, p. 41.14. McPhail, p. 1915. Prairie Provincial Study, p. 56.16. Government of B.C., p. 86.17. McPhail, p. 8.18. Schultz, R., "All Talk, No Action," in Canada: The State of the Federation, 1986, ed P.M. Leslie, Institute ofIntergovernmental Relations,Queens University, Ontario, 1986, p.143.19. quoted in Babe, p. 132.20. Janisch H., and Romaniuk B., Paper for a Conference onPacific Basin Telecommunications, Tokyo, Japan, October 1988 p.44.21. Ibid, p 45.3622. CRTC, "Interchange Competition and Related Issues", August,1985.23. Mr. Andre Bureau, in speech at a Press Conference to announcethe Bell Canada Review of Revenue Requirements and RateRebalancing for 1988 (Telecom Decision CRTC 88-4), Hull, Quebec,17 March 1988.24. Lowi, T., The End of Liberalism, Norton, N.Y. 1969.25. Pross, Paul, Group Politics and Public Policy, TorontoUniversity Press, Toronto, 1986 p. 92.26.CRTC Procedures and Practices in Telecom Regulation, TelecomDecision CRTC78-4, 23 May, 1978.27. Schultz and Alexandroff, p. 19.28. Hindley, Patricia, The Tangled Net: Basic Issues in CanadianCommunications, J.J. Douglas, Vancouver, 1977, p. 87.29. Doern B. & Phidd R., Canadian Public Policy, Methuen,Toronto, 1983, p.313.30. Canada, Dept of Communications, Communications for the 21stCentury, Ministry of Supply and Services, Ottawa„ 1989, p. 57.31. Perrin Beatty, Minister of Communications, quoted in TheGlobe and Mail, February 28, 1992.32. Ibid.33. The Vancouver Sun, February 27th, 1992, p. 1.34. Globe and Mail, February 28th,1992, p. B3.35. Kingdon, p.200.36. Government of B.C., p. 1.37. Janisch and Irwin, p. 639.38. Hills, p. 41.37CHAPTER IV: DEREGULATION AND ITS EFFECTSIntroductionThe most salient consequence of deregulation in the telephone industry - theremoval of cross-subsidization and its subsequent effect on both long distanceand local rates - has already been discussed in Chapter II. In some ways it hasbeen easy for Canadians, both policy makers and protagonists, to analysederegulation's effects by observing the experience of the United States since thebreak up of AT&T and the advent of competition over a decade ago. The Americanexperience will therefore be described in some detail in this chapter. As willbecome clear, deregulation has in fact resulted in a form of re-regulation in theStates, and telecommunications policy there is still in a state of flux. Thereis still considerable confusion about causal theory, the fair allocation ofcosts, and the division of responsibility for ensuring affordable access to thetelephone system. This confusion, involving conflicting definitions andprognostications, is currently reflected in the presentations by Canadianprotagonists to the CRTC, and in the negotiations between the provincial andfederal levels of government in Canada, as we shall see.THE AMERICAN EXPERIENCEFor many decades the monolithic company of AT&T (affectionately known as -MaBell') served the interests of Americans well. "It was an article of faithwithin the Bell system that caring for the public would allow it to earn thereturn to which it was entitled under regulation".' AT&T was also so enormousand all-encompassing that challenging its monopoly seemed an impossible task.Schmalensee writing as late as 1979 commented that "The telephone industry in theUnited States poses special problems, since AT&T's size, relative to othercorporations in the economy, serves to make take over of the bulk of the38telephone industry virtually impossible."'However, both the Justice Department and the FCC began in the 1970s to nibbleaway at the edges of the AT&T elephant. The structure of the company wascontroversial not primarily because of its size, but because it operated in bothcompetitive and monopoly markets and because it owned most of the local telephonenetworks, which were needed by AT&T's competitors to provide their services.Beginning with a 1959 decision (the "Above 890 "decision), the FCC graduallyallowed competition in the provision of private lines for long distance service.Over the next two decades, a series of court cases and agency actions (includingthe "Carterphone" and "Specialized Common Carrier" decisions) continued thistrend, while new rivals became an active and vocal political force. Competitionin the provision of long distance services forced AT&T to lower prices in thisfield, and this began to undermine the sources for the policy of cross-subsidization (see Chapter II). In 1974 the Justice Department filed an anti-trust suit, arguing that "AT&T had both the incentive and opportunity to engagein anticompetitive practices and that it had done so repeatedly in the past". 3Beleaguered on all sides, AT&T in 1976 and 1977 led an effort to restrictcompetition by statute. The proposed bill, which would have prohibited-duplication' (i.e. competition), was nicknamed by opponents "the Bell bill", andalthough it had considerable support (especially from the millions of companyemployees and shareholders), Congress did not pass it, or even seriously considerit.'The reason for this was that by the late 1970s a remarkable politicalconsensus was forming in the United States regarding the desirability of pro-competitive deregulation. As Derthick and Quirk describe it, the ideology wasembraced by not only all the elite and institutional actors - the White House,39the House and the Senate, the Courts and the regulators - but by the consumermovement as well.' Policy entrepreneurs such as Ralph Nader and othersconvinced consumers that competition could only be beneficial, although theylater regretted this. (See below.) In fact, as Temin comments, "the changesthat took place were expressed in terms of the technology of communications, butthe pervasiveness of deregulation in the late '70s demonstrates clearly thatideology,not technology, was the prime mover."'In January 1982 AT&T (now under new leadership) and the Department of Justicejointly announced that they had reached a settlement in the long trust case, andthe agreement was embodied in a Modification of Final Judgement (MFJ), which thenbecame the basic blueprint for divestiture and deregulation. AT&T was brokeninto eight parts: seven regional companies which provided local exchangeservices (henceforth known as Bell Operating Companies, or BOCs), and an eighthwhich was permitted to provide competitive services in unregulated markets. Newfirms wishing to enter the interexchange (long distance) market now have fullaccess rights to the locally switched networks of the naturally monopolistic andstill regulated telephone companies providing local exchange service.There are now three major networks competing in the field of tele-communications - AT&T, MCI and US Sprint. In customer equipment most markets arenow structurally competitive, and long distance charges have, as predicted,fallen. On the other hand, local rates have soared. By requiring that accessto the local exchange be non-discriminatory and unbundled, the MFJ forced the FCCto devise a new system of pricing and cost recovery, with the result that localexchange service prices have risen sharply during the 1980s. Prices haveincreased most rapidly in the least urbanized states and, within these states,in the smallest communities.'40Deregulation and the General Public At the time of the break-up of AT&T the consumer movement was favourablydisposed towards deregulation in general because of its perception that a) thecosts of regulation were always passed onto the consumer and b) regulatoryagencies were at best incompetent and at worst -captured' and corrupt.Politicians in favour of deregulating telecommunications were seen as standingup to and winning against the big business monopoly -Ma Bell'. -Nader'sRaiders', eager to expose the wrong doing of regulators, produced a series ofbooks on the incompetence and pro-business bias they believed they found ingovernment agencies. There was no evidence, according to commentators, thatconsumer representatives, except for some state regulatory commissioners, "sharedthe Cassandra-like warnings about the threat to universal service that AT&Texecutives issued in this period."'This consumer complacence changed dramatically in the years followingdivestiture. Passivity and satisfaction gave way to outrage, especially when theFCC brought in sizable -subscriber access' charges, which were designed tocompensate for the abolition of cross-subsidization, and which hit localtelephone subscribers very hard. Congress, suddenly waking up to the politicaldangers of the situation, leapt into action with a proposed -Universal TelephonePreservation Act', and although in the end no legislation was passed, the FCC wasforced to drop its original proposal and proceed only with charges that Congresswould accept. In fact the proposal engendered so much controversy that theCommission came within four Senate votes of having its telecommunicationsresponsibility severely reduced. The proceedings in Congress aimed at modifyingthe Commission's proposals reflected considerable confusion over the causes oflocal rate increases; but what the politicians did finally understand were the41distributional aspects of the deregulation.'By then, however, it was too late. "One could perhaps sympathise with thoseAT&T executives who might have wistfully asked: -Where were you when we neededyou?'" Despite the Congressional opposition the FCC has over the last decadegradually introduced higher and higher -access' charges. Customers faced witha plethora of new choices they do not want and cannot afford miss the simplicityand security of the old system. The monthly telephone bill, as a Los Angeles Times reporter relates,has become a modern Gordian knot ... There are basic charges anduniversal surcharges, Zone Unit Measure charges, tax (local) and tax(federal). There's a charge for policing the telephone company andanother to subsidize telephone service for the deaf and disabled andanother to call 911. And there's also a monthly charge for access tothe long-distance companies."Rates vary from state to state and from company to company. Some customers paya flat monthly rate, others pay for every call in 'Measured Local Service'.Long distance calls are separated into shorthaul intrastate calls and longerinterstate calls (and some of these rates have fallen dramatically while othershave declined very little.)In sum, Alfred Kahn, a self-confessed proponent of deregulation, admits thatalthough the business community has seen "real benefits of competition, thesubscriber to basic telephone service, I suspect, would take a great deal ofconvincing that he is better off because of it.""Re-regulation, rather than Deregulation Divestiture has not in fact meant complete deregulation. The FCC has not retiredfrom the field, the nature and extent of competition in telecommunicationsservices are far from clear, and regulation has not withered away. According toRichard Vietor "the pricing structure created by past policies continues to foilthe market structuring dictum of Judge Harold Greene (in the MFJ)"," and the42monopolistic segregation of the BOCs is under constant seige. Judge Greene hasbecome a de facto regulator and his court has consistently refused requests towaive the -core' restrictions arising out of the original settlement which barredthe BOCs from providing long-distance and enhanced services. As part of thecompetitive battles, the non AT&T carriers seek stringent regulation of AT&T inorder to limit its competitive responses to them, while AT&T seeks freedom fromregulation."The U.S. Communications Act (1934) gives the FCC the authority to regulatethe interstate portion of the industry, and to regulate the intrastate portionto the extent that it "significantly affects the FCC's interstate policies"."Otherwise, however, regulation of the intrastate portion is left to the states.As we saw in Chapter II, this kind of regulatory division regarding the telephonenetwork is fraught with difficulty. A U.S. Supreme Court ruling in 1986 whichconfirmed the dual regulatory structure also acknowedged that jurisdictionaltensions would probably arise as a result of the fact that interstate andintrastate service are provided by a single integrated system."In fact divestiture and deregulation have created innumerable problems forstate regulators. By July 1986 regulatory change was well under way, butdiverged widely in substance and process from state to state.'' Some stateshave let the - free market' reign, others have increased their own regulatoryactivity. Some are cautiously deregulating (defined by one analyst as"regulation by those who favour deregulation, but not in their lifetime".")Unequal population distribution has meant that some states have suffered morethan others from the -unbundling' of inter-state rates. (By one reckoning ifnetwork access charges were calculated according to the marginal cost factor thenthey would be around $15 in Kentucky and $42 in Nevada.") States worried about43the effect of deregulation on basic service have adopted a variety of regulatoryarrangements including freezes, moratoria, regulatory compacts, rate caps,indexation devices and variable rates of return." And some have felt itnecessary to introduce income assistance programs to help those hit hardest byrises in local rates, while others have not.Lifeline' Programs In response to pressure from many state regulators, the FCC has itself introducedtwo programs in an attempt to offset the damage done to rural and urbanresidential consumers. The -Lifeline Program' allows a reduction in fixedcharges to offset the federal subscriber-line charge, and -Link-Up America'reduces the -access' charge. In both cases these programs are only available tolow-income households satisfying a means test, subject to verification. Howeverthere is no single formula utilized by all states that qualifies individuals forthese discounts. Only 29 states actually participate in the FCC programs, whileother states have either developed their own or don't bother at all." Eachstate has developed its own unique qualifying criteria, amounts of benefits, andfunding for their particular programs.'' In some cases the telephone companiesin the state are required to absorb the costs of the support programs, othersinclude a reimbursement mechanism from the state government, still others tax allsubscribers.In the opinion of some critics, the telephone assistance programs have so farbeen "a tattered bandage on the cost-shifting wound and a pitiful after-the-factsubstitute for sound public policy.'"' Other analysts contend that they havehad a significant impact on maintaining penetration among low-income families.However even these apologists admit that there are still millions of Americanswithout telephones and that the reason "might well be economic"."44A Policy in Transition On the whole, whether recent price trends and growing competition constituteimproved performance for the industry as a whole depends to some degree on whois making the calculation. Deregulation enthusiasts like Janisch and Schultzpoint to the fact thattelephone customers have an unimpeded right to use telecommunicationsequipment of their own choice ...[and] equipment and service optionsthat only the very largest customers previously enjoyed have been-democratized'... Business users in many central business districts alsohave a local fibre optic or microwave network alternative to the localexchange telephone company, at least on a private line basis.'The primary beneficiaries from divestiture and the opening up to competitionin the U.S. are the most intensive users of telecommunications services who cantake advantage of new competitive options. However residential and smallbusiness customers who use ordinary telephones primarily for local calling aredefinitely worse off, especially those in smaller communities. And, in stateswhere these groups constitute an effective political constituency, stateregulators are feeling considerable pressure. The regulatory scene isvery confused, with some people calling for stricter policies, while others wantcomplete relaxation of all strictures. As Alfred Kahn observes, "we are intransition, but to what is very unclear."" An unfinished debate still ragesamong American policy makers as to where the successor group of companies and thereorganized, divested AT&T are yet really - competitive.' "The FCC," maintainsone analyst, "can never be certain it has created a natural' market or whether,like a piece of clockwork machinery, that market has to be wound up again everyfew years by a regulated reconstruction of the industry."'Telecommunications policy in the United States is still, nearly a decadeafter the divestiture of AT&T, in a state of flux. The FCC has tried to bringin what it sees as - rationalizing' regulations (primarily in the shape of45subscriber access charges), but these have been strongly resisted by Congress.Members of Congress are divided on the issues. Having agreed that theypreferred competition to monopoly, now they cannot achieve consensus on theextent to which competition is desirable, or on the best approach to pricingregulated services. Congress has failed to enact any substantial change in lawsgoverning the industry, and after years of debate on various proposed bills,there is still no definitive Communications policy. Many of the dilemmas facingCanadian policy-makers before deregulation are still facing Americans after deregulation has effectively taken place. This cannot help but affect thedecision makers in Canada.CONFLICTING DEFINITIONS AND PROGNOSTICATIONSWhile Canadians can look to the U.S. experience for evidence of howderegulation has worked there, the continuing uncertainties of the transitionprocess raise further questions about the future for a deregulated industry bothin the U.S. and Canada. Presentations to the CRTC in the current Unitel caseincorporate differing interpretations and definitions which, as Thibault andWalker would put it, are based sometimes on cognitive conflict and sometimes onconflict of interest." In other words some of the differences representgenuine lack of firm technological evidence one way or the other, and othersreflect incompatible paradigms or values. (This latter aspect will be discussedfurther in Chapter VI.)How much will prices really change? The first question most Canadians would probably ask regarding this debate is howmuch would long-distance rates really come down, and local rates go up? Theanswer to this is as slippery as an eel: it varies with every analysis onereads. One economist in favour of competition assesses that "if prices [were]46set at marginal cost for each type of service, local service rates would have toincrease by 70%, while long distance rates would decline by a comparableamount.'"' A study commissioned by the Prairie Provinces forecast a rise inrates under competition of as much as 140% in urban areas and 168% in rural."The B.C.Government economists estimate that, even with contributions from Unitel,local rates would have to increase 24.6% by 1996 and 43.6% by 2002. 3 ' In theU.S. it varies from state to state and from carrier to carrier. Proponents ofderegulation such as the Communications Competition Coalition probably do nothelp their cause with advocates for the poor by making such remarks as, "So whatif local rates go up $10 or $12 a month?^That's beer and a pizza.'^Onething that is fairly predictable is that local rates would increase more inCanada than they have in the States, because of our higher per capita costs dueto our smaller population and its distribution over huge distances."Causal theory: the allocation of costs As has already been explained, the physical indivisibility of the telephonenetwork is a very important factor in the whole debate. The problem ofdeveloping cost measurements that appropriately reflect cost causation isparticularly difficult because a high proportion of the network costs areincurred in the process of providing multiple services.It is important for a start to distinguish between the terms "access" and"local service".^Access to the telephone network is the ability to make orreceive telephone calls, and is a fixed cost.^Once a person has access he orshe can use the network to make or receive local or long-distance calls.Therefore access costs are joint costs, and as such there is no way, other thanarbitrarily, to allocate the costs to any one service."^The separationprocedures adopted in the U.S. have led to much controversy, with some parties47claiming that too much of the cost is being allocated to local service, whileothers claim that it is not enough."The conventional wisdom, with statistics to back it up, is that long distancetoll service has been subsidizing local service. However a growing number ofcritics argue that local exchange service generates profits, and "only curiousaccounting practices create the illusion of a necessary subsidy from longdistance." These critics also point out that each different type and classof service offered by the telephone network imposes different technical standardsand costs on the common system. The cost of the local exchange plant, whichwould be a certain amount if only providing a basic local service, is affectedby the cost of providing an increasing variety of -premium' services. (High-speed data communication, for instance, requires different, higher-qualitysignals because computers are unable to filter out noise on the line that isindiscernible to the human ear.) The principle of allocating cost based on costcausation, economists agree, requires that the allocation method identify theincremental cost incurred by the more complex services and assign them to thecost-causer. As Horwitz points out, in order to keep large sophisticatedbusiness users in the system, telephone companies upgrade their facilities andthen add these costs to the ratebase, which is then charged out to the basicresidential user. "Hence the new environment of competitive telecommunicationsin effect reverses the traditionally alleged direction of cross-subsidy: thenew-market driven cross-subsidy goes from basic and local users to sophisticatedand business users.""Gabel observes that regulators will have to come to grips with the localexchange common cost problem, or for all intents and purposes give up the taskof regulation. The FCC in the U.S. has largely chosen the latter path, electing48to allocate as far as possible the interstate share of the common and joint loopcosts back to the local telephone subscribers, and to use - relative use' as anallocator of common costs between basic and information—age services. However,Gabel argues that regulators should be concentrating on the task of determiningthe independent or stand—alone costs for local service, for long—distanceservice, and for enhanced and specialized services, so that they can be fairlyallocated to their individual users."Contribution Payments All parties appearing before the latest CRTC hearings did in fact agree that,because of the common infrastructure, traffic which utilizes access facilitiesshould bear responsibility for the recovery of access costs, whether local, toll,or other competitive network services. Therefore contribution payments shouldbe made by all applicants to reflect these responsibilities."Contribution, its definition and level of payment, is the single mostimportant factor to be determined in the event of introducing competition in theMTS/WATS market," contends the B.C. Government's CRTC submission." However,in this matter as in many others, the participants do not agree on the concepts.In Unitel's view contribution would be required for calls that are interconnectedat both ends of the public switched telephone network, but not for calls whichaccess the network in other ways, which Unitel considers would be newlystimulated traffic.The telephone companies, on the other hand, view contribution as a socialsubsidy of toll surplus revenue to basic service, and therefore argue thatcontribution obligations should be shared equally among long distance voiceservice providers." Once again, designing an accurate contribution test ismade exceptionally difficult by the cost—allocation problem.49Another area of concern raised by many participants in the CRTC hearings wasthe potential unsustainability of currently proposed contribution levels. Therewas a suspicion on the part of many that once competitors had gained access, theywould begin to plead unfairness or economic inefficiency regarding the size oftheir contributions. The CRTC's record regarding holding broadcasting stationsto their promises does not, as previously mentioned, inspire much trust.Offsetting Costs and Benefits When is a cost not a cost, or a benefit not a benefit? And when can they besaid to offset each other? The language of the telecommunications debate isreplete with references to economies of scale, productivity, cost/revenueimbalances, and -threats' of drop-off and bypass.The applicants and respondents before the latest CRTC hearings disagreedfundamentally about the impact of competition on their revenues. Unitel'sposition was that even though the telephone companies would lose revenue in acompetitive environment, because prices will come down, the combination of non-price stimulation, productivity improvements, lowered costs from carrying lesstraffic, and contribution payments from Unitel would more than compensate for therevenues that would migrate to Unitel. The telephone companies argued that notonly would their revenues be lower, but that their costs of providing servicewould be higher. The reasons for this include the loss of economies of scale,which reduces the rate of decline in current unit costs; the additional costsassociated with the required switch modifications to enable interconnection tooccur; and the ongoing costs associated with interconnection."Voluminous amounts of evidence were submitted to the latest CRTC hearingsconcerning economies of scale. The telephone companies (especially the smallerprovincial ones) believe that their present economies of scale would be50jeopardized by competitive entry, and that there would be consequent decrease inproductivity. The applicants claim that such economies are not necessarilyindicative of the most efficient or cost-effective industry structure, and thatentrants might introduce new technologies which would reduce costs."The telephone companies also pointed out that the cost-revenue imbalances inthe long-distance market varied considerably according to whether a calloriginated from a remote location or a larger centre. As the remoter areas aresubsidized by the more heavily populated ones, the cost-price imbalances wouldcreate considerable potential for - cream-skimming' by entrants, who could focustheir efforts on capturing business customers in larger population centres whohave high volume of long distance calling. BCRL disputed this, saying that itdid not believe that route-averaged pricing was necessary because it was a formof subsidy, resulting in an artificial constraint on the attainment of a fullycompetitive market.One factor that no-one could dispute was that expenditures on advertising andmarketing are likely to increase dramatically in a competitive environment, asparties fight for market share and consumer awareness of new products offered.(AT&T is now the largest advertiser in the US, spending S600-700 millionannually.) Some intervenors in the hearings wondered whether these costs wouldnot offset other savings, and felt it would be germane to ask residentialconsumers whether they would prefer to have that kind of money spent on fightingfor their custom or used to subsidize their rates.There was also some debate about how much influence a change intelecommunications costs would have on an industry or firm's ability to competemore effectively in either the Canadian, U.S., or global market. Given the factthat such costs are but a small percentage of most firms' overall expenses (less51than 1% by one estimate), it would probably take a substantial change intelephone usage to affect their international competitiveness." In the samevein, one can question the contention by those in favour of deregulation thatcompanies who are making savings through lower long-distance costs will passthose savings on to the consumer in the form of lower prices. Even if thiscould be proved (why not passed on to shareholders in larger profits, or managersin larger salaries?), the opposing argument can be made that consumers, facedwith higher costs for local calls, may not be able to afford other products theymight otherwise have bought.Threats of -bypass' and -drop-off' are bogies brandished by the two sides ofthe deregulation debate. Advocates of competition say that unless big companiesare given alternatives to the existing telephone system they will purchase theirown terminal equipment or find ways of linking into U.S. systems in order tobypass the Canadian network. A recent Financial Times of Canada articleestimated that Bell Canada was losing many of its most lucrative customers(including retailers, travel firms and large manufacturers) to newtelecommunications -supercentres' in the United States."" there issome evidence that this is happening, it is very difficult to measure how much,partly because of the fact that telephone companies are prevented by privacyrestrictions from monitoring which customers might be bypassing, and partlybecause there seems to be some reluctance on the part of businesses to admit tocross-border shopping'." On the other hand opponents of deregulation cite thepossibility of large numbers of people having to disconnect their telephones iflocal or access rates go too high. However evidence from the U.S. in this areais very mixed, and disagreement occurs over what number of subscribers droppingoff would be "significant"." The point is made that people may not actuallydrop off but, because the telephone is such a basic necessity. may give up otherneeds instead. Others claim that there was "never" any threat to universalservice in the U.S." If that were true one would have to wonder why the FCCand so many states have bothered to bring in Lifeline' programs.The relationship between competition and lower toll rates A 1990 OECD study concluded that there was no evidence to suggest anyrelationship between competition and lower telephone rates." In fact there isconsiderable debate among the experts about whether the price reductions in long-distance rates in the U.S. and the burgeoning choice of products everywhere isdue to competition or simply the result of "opportunities created by exogenoustechnological change"." The Federal-Provincial-Territorial Task Force Reportfound that "Canadian companies appear to have kept pace with internationaltechnological developments, and have built one of the most modern andfunctionally efficient telecommunication networks in the world", without thebenefit of competition." Officials from Bell and B.C.Tel point to thecompetitive situation that already exists here with regard to specializedconsumer products and declare that "Canadian telephone companies can equal U.S.long-distance rates within five years by only increasing local rates to theinflation rate.'"' In fact long-distance rates have already come down, withoutany corresponding increase in local charges. The TWU points out that thetelephone companies have not lost out from doing this: they still make 13%return on their equity.""Real" Competition, or Just Some? Critics accuse Unitel and BCRL of wanting competition only on their terms. Notonly have these would-be competitors suggested to the CRTC that they should begiven discounts on contributions, but they have asked to be allowed to price53their services 15% below the telephone companies' rates for the first four years,and for a waiver of the modification costs of hooking to existing networks.Unitel argues that it needs those measures to allow it to become established inthe market, and to offset the advantages of the incumbent telephone companies.In opening up the market in the U.S., the FCC has never imposed a requirementthat the start-up entrants undertake to provide service on a ubiquitous basis,but has permitted them to be highly selective in defining the scope of theirservice offerings, while at the same time refusing to permit the originalcarriers to abandon any market area. The result is competition in some areasand not in others, regulation of some carriers and not of others. In fact thePrairie Provincial Study contends that competitors could not survive without someartificial and costly market sharing arrangement." Even competitors wantstandards for interconnection, for example, so that different networks can beindividually tailored and yet uniform. A U.S. observer sums up:Whether a competitive industry is feasible in the long run and exactlyhow competitive it will be is unknown. The powerful short-runincentives offered by the current price structure should not beunderestimated. There is a mistaken tendency to perceive thesuccessful current entry into telecommunications as a signal that manyfirms can survive in the industry at prices that are lower than currentprices."The Record of Deregulation Indeed, the most likely scenario if competition was introduced into the telephoneindustry in Canada is that it would only be transitory. After a shake-out, therewould be a brief period of lower long distance rates, then concentration wouldoccur. Ralph Nader emphasizes that in the U.S. the decline in long-distancerates has ended, and prices are going up again - "an off-repeated trend afterderegulation.' Only two major competitors to AT&T have emerged in the States(MCI and US Sprint) and at one point there were rumours that they were in54trouble, although those seem to be laid to rest now. Canadian economist ShaymKhemani's research for the Macdonald Commission indicated that industrialconcentration levels are generally found to be higher in the Canadian economythan those prevailing the U.S., and that a large proportion of Canadian industryoperates under - oligopolistic' market conditions." Consulting reports for thefederal government Task Force Study point out that if competition means only asmall number of firms, with one or two dominant ones, then the industryperformance is likely to deteriorate because of poor resource allocation."Surveying the record of other deregulated industries does not give one muchencouragement. Horwitz describes the consequences in the U.S.: The BusRegulatory Reform Act has made it much easier for bus companies to abandonunprofitable routes and hundreds of rural communities and small towns now haveno public transportation; mergers in the deregulated railroad industry havereduced the number of large rail-freight carriers to so few that shippers havecharged that they are captives to monopoly power; and "concentration, instabilityand differentially distributed benefits" characterize the partially deregulatedbanking system."In the airline industry competition has indeed lowered fares and increasedservice - on high density routes. However, without the obligation to serve andthe subsidy of low-density routes which were preserved by regulation, many smallcommunities have been abandoned.The reductions in airfares and gains in productivity were and continueto be spread in a highly differential, some might say discriminatory,fashion ... Passengers on competitive high density routes receivesubstantial discounts; passengers on low-density, generally noncompetitive routes, see fares go up."Under deregulation in the U.S. several new airlines and some older ones havedeclared bankruptcy. The industry is now more concentrated than in the pre-55deregulation era."^The same trend has been evident here in Canada sincederegulation of the airlines.^In 1987 when legislation was enacted Canada hadAir Canada and C.P. Air and five privately owned regional carriers, includingP.W.A., Wardair, Nordair, Quebecair, and Eastern Provincial Airlines.^Now wehave only two airlines, and they are each fighting for their lives.^Where arethe benefits of competition here? Peter Newman entitled an essay on air travelfor Macleans "Killing us softly with open-skies initiatives" . 61Given the record of deregulation in other industries, it would seem thatclaims for its effectiveness may be somewhat exaggerated. Certainly there isno guarantee that competition would be anymore lively in telecommunications thanit has been in other deregulated areas. An oligopoly situation in the telephoneindustry would mean the worst of all worlds: cross-subsidization would beabolished. so that local rates would rise, but there would be very littlecompetition to spur a continuing decrease in long-distance rates.Assessment Informed observers of the post-divestiture scene in the United States differ intheir assessments, and they are often inconclusive about the extent andconsequences of competition.^Partisan participants in Canada differ in boththeir definitions and their prognostications for the future.^Theseuncertainties have all contributed in their own way to the dilemma facingCanadian policy makers, and to the lengthy process of decision-making, as willbe discussed in the next chapter.FOOTNOTES for Chapter IV1. Temin, Peter, The Fall of the Bell System, Cambridge University Press,Cambridge Mass., 1987, p. 3.2. Schmalensee, p.4.563. Ferejohn J. and Shipan C., "Congressional Influence on AdministrativeAgencies," in Congress Revisited, eds Dodd L., and Oppenheimer B., CongressQuarterly Inc., 1989, p. 400.4. Derthick, Martha and Quirk, Paul, The Politics of  Deregulation. BrookingInstitute, Washington, D.C., 1985, p. 99.5. Ibid.6. Temin, p. 346.7. Ibid, p. 34.8. Schultz, R., "United States Telecom Pricing Changes and Social Welfare:Causes, Consequences and Policy Alternatives,", prepared for Regional AffairsBranch, Bureau of Competitive Policy, Dept of Consumer and Corporate Affairs,Government of Canada, February 1989, p. 21.9. Ferejohn and Shipan, p. 403.10. Schultz, "U.S. Telecom Pricing," p 21.11. Los Angeles Times, March 10, 1988.12. Kahn, A., "Thoughts on the Past, Present and Future of Telecommunications"in Allison J., and Thomas D., eds, Telecommunications Deregulation: MarketPower and Cost Allocation Issues, Quorum Books, N.Y., 1990, p. 265.13. Vietor, Richard, "AT&T and the Public Good", in Future Competition inTelecommunications, eds Bradley & Hausman, Harvard Business School Press,Boston, 1989, p.96.14. Babe, p. 231.15. Noll,R., "Telecommunications Regulation in 1990s," in New Directions in Telecommunications Policy, Duke University Press, Durham, 1989, p. 17.16. Symons, H.J., "Communications Policy Process,", in New Directions, edNewberg, p. 293.17. Vietor, p. 90 See also Schmandt, p. 270. Illinois has chosen to pursuecompetition through - regulatory flexibility' (i.e. the carriers themselves candecide if they are -competitive'.^Nebraska and Virginia have opted for totalderegulation, while Vermont has enacted a social contract which statesuniversal service as a top priority.^In New York regulators face asubstantial disparity between New York City and the rest of the state.18. Allison, p. 85.19. Fuhr, J., "The Effect of the Divestiture of AT&T on Local Rates andUniversal Service", in Policy Research in Telecommunications, AblexPublishing, N.J., 1984, p.141.20. Kahn, p. 259.5721. Dordick H. and Fife M., "Universal Service in Post Divestiture U.S.A.,"Telecommunications Policy, April 1991 Vol 15, No. 2, p. 119.22. Makarewicz, T., "The Effectiveness of Low Income Telephone AssistancePrograms: S.W. Bell's Experience," Telecommunications Policy, Vol 15. No 3,June 1991, p. 232.23. Aufdarheide,P., "Universal Service: Telephone Policy in the PublicInterest," Journal of Communications, Vol 37, No 1, Winter, 1987, p. 93.24. Dordick and Fife, p. 127.25. Janisch and Shultz, p.7.26. Kahn, p. 259.27. Smith, Anthony, in Newberg (ed) New Directions in TelecommunicationsPolicy. 28. Thibault, J. and Walker, L., "A Theory of Procedure," California L.R. 66,1978, P. 541-566.29. Green, C., Canadian Industrial Organisation and Policy, McGraw Hill,Toronto, 1990, p. 445.30. Prairie Provincial Study on Telecommunications, An Examination of the Potential Impacts of Competition in Long-Distance Service on Rural and Urban Subscribers, 1989, p. vi.31. B.C. Government, p. 18.32. Monty Richardson, lobbyist, quoted in "The Great Phone War", CanadianBusiness, October 1990, p. 42.33. Green, C., p. 44.34. Fuhr, p. 140.35. Ibid, p.141.36. Sirico, p. 231.37. Horwitz, p. 275.38. Gabel, D., "An Application of Stand-alone Costs to the Telecom Industry,"Telecommunications Policy, Vol 15, No 6, February 1991, p. 83-4.39. p. 108.40. Ibid.41. ibid, p. 16.42. Ibid, p. 73.5843. Ibid p. 49. See also Janisch and Schultz, p. 9-10.44. "Trouble on the Line," Financial Times of Canada, April 20, 1992, p. 12.45. Interview with Deborah Slaco, B.C. Government Dept. of Communications.See also Crandall, R.W., After the Break-Up, Brookings Institution,Washington, D.C., 1991, p.154, and Government of B.C., pp 51-3.46. Aufdarhaide and Chessler think the numbers are significant, Macarewiczdoes not.47. Janisch & Schultz, p. 30.48. The Globe and Mail, June 7, 1990.49. Chessler, David, "The Effect of Toll Competition on Prices, Costs andProductivity of the Telephone Industry in the United States", for Federal-Provincial-Territorial Task Force on Telecommunications, Competition in Public Long Distance Telephone Services in Canada, Ministry of Supply and Services,Ottawa, December 1988.50. p. 84.51. Bill McCourt, Vice President of B.C.Tel, quoted in Canadian Business, p.4.052. Interview with Sid Schniad, Telecommunications Workers Union, February,19.9253. p. iv.54. Denny, p. 143.55. Ralph Nader at Telecommunications Workers Conference, February, 1991.56. Khemani, "The Extent and Evolution of Competition in the CanadianEconomy," Canadian Industry in Transition, et. D.G. McTetridge, MacdonaldCommission, Vol 2, 1986, pp. 151 and 142.57. Chessler, p. 35-38 and 39.58. Horwitz, p.p 272-3.59. Ibid, p. 268.60. Green, p. 427.^Horwitz gives the following figures:By the end of 1986 the six largest carriers controlled an estimated 84% of themarket, as opposed to 73% in 1978 (the last year under regulation). (p. 269).61. Macleans, November, 1991 p. 56.59CHAPTER V: EXPLANATIONSIntroductionThe previous chapters have described the government's relationship to thetelephone industry, how deregulation has appeared on the political agenda afterdecades of fairly stable regulation, what the effects of deregulation would be,and the long and tortured equivocation of the government's -uniquely Canadianapproach' to telecommunications policy. In this chapter we will focus on thepossible explanations for this political procrastination.The pressures on the Canadian government to follow the Americans down thederegulation road - in other words the rationale for policy convergence in thetwo countries - are, as we have seen, very strong. American business has, withthe advent of competition, accrued an advantage over Canadian companies withtheir lower long-distance calling rates. It has also become relatively easytechnologically for Canadian businesses to -bypass' the Canadian system andconnect up with American systems.Last but not least, the ideological orientation of the Conservative governmentwhich has been in power in Canada for the last eight years has closely resembledthat of its American neighbours. The Mulroney government has taken a number ofmajor initiatives in favour of privatisation, deregulation, cuts in incentive andsubsidy programs, and other reductions in government intervention. It has notapologised for its pro-business bias, citing the neo-conservative case foraggregate economic efficiency, and arguing that growth in the economy has to bestimulated. It has also not been afraid to bring in unpopular measures whichit deemed necessary, such as Free Trade and the General Sales Tax. Why, then,has it been so reluctant to succumb to the pressures from the business communityand deregulate the telephone industry?60There is probably no one answer to this question, but a combination offactors, which call for various theoretical explanations.Pluralist or Interest Group ExplanationsThe preceding chapters have explained how, because of the cross-subsidizationissue, regulation of telephones creates different groups of beneficiaries andlosers in society as a whole. The current regulated structure benefitsresidential and local customers, while business users and companies who wouldlike to compete in the telephone service market see it as a burden. On the otherhand deregulation would, as we have seen from the American experience, benefitbusinesses, while the bulk of the population, who make mostly local calls, wouldsuffer.Business coalitions, such as the CBTA, have certainly represented their caseto government, although Janisch and Schultz maintain that their views have beeneither excluded or dismissed by federal/provincial task forces (despite surveysof business users done by their studies) and that the business community hasfailed to "inspire a positive vision."' Such potential competitors as Uniteland BCRL have, of course, presented their pro-deregulation vision to the CRTC.Much public policy analysis comes to the conclusion that when benefits areconcentrated for one particular group and the costs diffuse for another, thenpolicy favouring the former can be fairly easily implemented. James Wilson'stheory of 'client politics' would assume that the diffused cost of telephonederegulation to most consumers would guarantee a lack of objection from them'.Mancur Olson hypothesizes that, given the difference the average person thinksthey can make with either a vote or a voice through a group (which is'vanishingly small'), the typical citizen is usually 'rationally ignorant' aboutpublic affairs. "Some groups such as consumers, taxpayers, the unemployed and61the poor, do not have either the selective incentives or the small numbers neededto organize, so they will be left out of the bargaining."'However, consumer and advocacy groups in this country have rather turned thesetheories on their head. There seem to be two reasons why they have had moreeffect on deregulation policy than their counterparts in the U.S. In the firstplace, they have been able to watch the American experience of soaring localcosts, and observe the results (not always positive) of deregulation in otherindustries. Secondly, as mentioned in Chapter IV, Canada's huge expanse, smallpopulation and geographic distribution of that population has made even morestark the problem of who should pay for the -non-traffic-sensitive' or accesscosts, which are substantially greater per capita in Canada.Public choice theorists Hartle and Trebilcock argue that politicians areutility maximizers who try to select the most politically efficient policies.While many of the economists' studies of the effect of competition in thetelephone industry concentrate on aggregate costs and benefits, as Trebilcock etal point outaggregate costs and benefits are of little interest to politicians.What is important is the distribution of the costs and benefits, butonly sofar as they further the vote-maximization objective ... that isto say the distribution of costs and benefits should magnify gains anddepreciate pains.'The Canadian government realizes that a new telecommunications policy whichsupports deregulation, or the opening up to competition, would be seen by thegeneral public as favouring big business, at the expense of the residentialconsumer. They also recognise that this would not be popular. A leakedDepartment of Communications document in 1985 cautioned that "the government mustnot look like the supporter of the industry in rebalancing: consultations mustbe arranged to avoid giving such an impression ... the government must prevent62at all costs the formation of a common front between consumers, small businessand provinces."' The Financial Times reports dismissively that "Ottawa isscared to death of the idea of raising the cost of basic service for poor singleparents while giving multinationals a break on long distance."'The Department was a little premature in anticipating a reaction from thepublic in general. Due to the lack of easily accessible analysis, the issue ofderegulation in the telephone industry is still early in Downs' 'Issue AttentionCycle'.' While CRTC hearings have acted as a 'focusing event' for the publicinterest groups, they have not received much coverage in the media, and theadvent of a new Telecommunications Bill was considered of such littlesignificance by the Globe and Mail that coverage was buried on page B3. 5However both the CRTC and the government have, as has already been pointed out,been warned by the after-the-fact reaction of large numbers of consumers in theUnited States, and the resulting plight of state regulators there. There is nodoubt that the prospect of a revolt of large numbers of residential consumerscome election time must be a factor in the government's calculations.Provincial governments in Canada have not needed to observe the experienceof U.S. state governments in order to recognise the pitfalls of deregulation.In fact until now it has been the governments which own or regulate their owntelephone companies in the Prairies and the Maritimes who have created thebiggest stumbling block for the federal government in its attempt to arrive ata coherent policy for telecommunications.Statist Explanations: Jurisdictional problems and the Division of Powers Leo Panitch has noted that "while [some] argue that amongst Western societiesthere has been a tendency towards the centralisation of state power at theexpense of sub-central institutions, this does not hold for Canada, where63provincial state power has historically been important and has becomeincreasingly more so in recent years."' As we saw in Chapter III, theprovincial governments which own and regulate the telephone companies in theirterritories are firmly committed to the principles of universality andaffordability (particularly with regard to their rural constituents), and usetheir telephone systems as instruments of social policy. During the seventiesand most of the eighties these provinces made it very difficult for the federalgovernment to change the status quo. Negotiations over telecommunicationsbetween Canadian federal and provincial representatives never came to anacceptable conclusion. As Janisch and Schultz scathingly described the process:"the second-order question of who should act has overwhelmed the first-orderquestion of what should be done out of a misguided concern not to offend any ofthe players in the federal provincial game." 10Even though the Supreme Court AGT case finally confirmed in 1989 that thefederal government had jurisdiction over all telephone companies in Canada, theMinister of Communications has been careful to negotiate separate "Memorandumsof Agreement" with some of the provinces, whereby regulation will only betransferred over a specified period. An agreement signed with Manitoba in March1991, for instance, was praised by the provincial Minister as having a "definitemade-in-Manitoba flavour". It contained mechanisms to "ensure the availabilityof reliable and affordable telecommunications goods and services in urban, ruraland remote areas", as well as a plan for a CRTC commissioner, "who could reflectthe circumstances and concerns of Manitobans in the regulatory process" to beresident in the province."One would have thought that the removal of the stumbling block ofjurisdictional disputes would have given the Federal government a clear64opportunity to proceed immediately with a new Telecommunications Bill. But infact it took two and a half years for such legislation to reach the order papers.For an explanation for this continued lag one probably has to look again at theAmerican experience.As we saw in Chapter III it is the state regulators who have borne the bruntof the effect that deregulation has had on local rates. Depending on thepolitics of the state, different means have been employed to try to offset theseeffects, but it is to their state governments that people have turned for suchremedial action. The Canadian federal government has expressed the view that it"should exercise all of the powers required to ensure the integrity of thenational market, while the provinces should retain responsibility for mattersrelating to activities carried out entirely within their borders."" Thiswould, of course, put the provinces squarely on the hook for dealing with theconsequences to local customers. As Alberta's Deputy Minister of Communicationswryly attested to a conference in 1984:The politicians among us will see that the necessity for constantlyrising local rates which have to be shouldered by the local electedrepresentatives is not nearly as comfortable a thing as theresponsibility for lowering long distance rates which would fall to thelot of the federal regulatory body and the federal government. Localpoliticians do not like to preside over rising local charges, and aslong as one telephone company is responsible for both long distancetelephone service and local telephone service, that problem does nothave to be met."Kathryn Harrison has identified the fact that while government officialsprefer to implement policies that will bring them cudos from voters, an equallystrong motivation can be -blame avoidance.'" The federal government would, nodoubt, like to be able to take credit for any boost to big business and thenational economy given by deregulation, but does not want to be seen asresponsible for the inevitable increases in local rates. Welfare is65traditionally within the jurisdiction of the provincial governments, so if incomesupplements have to be given to customers in order to save them from dropping offthe network (as has happened in the U.S.), these will have to come out ofprovincial budgets. Presumably this has been another factor in the continuingnegotiations between the two levels of government which has served to stall anypolicy of deregulation.Learning Experience: The U.S. Influence Peter Hall has pointed out that "formulation of policy is a process ofsolving the puzzles generated by the often unintended consequences of pastpolicies,"" and these policies can be those of other countries as well as one'sown. The influence of events in the United States on the development of policyin Canada has been mentioned on several occasions in this paper. It is not onlysensitive political antennae that have told the Canadian government to expect arevolt from many consumers and provincial politicians if they start down the roadto deregulation. They only have to look south of the border, to benefit from theAmerican experience.Propelled by the convergence of technology and ideology in the early 1980sinto the divestiture of AT&T, none of the institutional actors in the U.S.grasped the implications of this act at the time it was happening, and theaffected interest groups were equally unprepared. The Globe and Mail commentedthat "people in the U.S. learned the hard way that it wasn't possible to puttheir telecommunications system back together again after it was torn apart bycorporate greed.'" 4 Canadian policy makers, on the other hand, have the luxurynow of being able to evaluate developments in the U.S. A Federal-ProvincialTask Force set up to "analyse the potential impact of competition in public voicelong distance in terms of economic and industrial costs and benefits for Canada"66commissioned a plethora of research into the American experience. The finalReport emphasizes the customer confusion and complexity that competition hascreated in the U.S. and argues that none of the existing evidence showsconclusively that competition has had either a positive or a negative macro-economic effect.The continuing confusion in the U.S. over how much further to deregulate, thelack of clarity about whether technology or competition are responsible for someof the changes which have come about, and the indisputable rises in local rates,which have in turn necessitated new welfare programs, have all been discouraginglessons for Canadians. The TWU's use of advertisements featuring Ralph Naderrecanting from his original pro-deregulation stance was a clever reinforcementof these lessons.Canada's trading relationship with the U.S. has also affected the decisionmaking process. Multilateral trade negotiations regarding telecommunicationshave been going on for years under the General Agreement on Tariffs and Trade(GATT). During these negotiations the United States has been demanding thatCanada and other industrialized countries open their long-distance telephonemarkets to unrestricted foreign competition. In the opinion of some analysts,the Canadian Conservative government has been hoping that the GATT talks wouldsettle this issue in favour of the U.S. and that then they would be able to claimthat they had been forced into deregulating." However the GATT talks havefloundered, not least because of the opposition of many countries in the EuropeanCommunity to the U.S. demands.In fact the Free Trade Agreement between the U.S. and Canada already opens thedoor to potential U.S. entry into the Canadian telecommunications market. Oneof the issues holding up the CRTC decision is the knowledge that even if only67Unitel/BCRL were allowed to enter the long distance market, the CRTC could notthen continue to regulate a duopoly. Under the Free Trade Agreement U.S. firmscan only be kept out as long as there is no Canadian domestic competition: oncethe can of worms is opened, it will be a free-for-all, and any kind of regulationwould be very difficult indeed."A final note on learning experience: Canadian policy makers do not have tolook only at the United States for examples in telecommunications policy. InBritain, where the Thatcher government privatised and deregulated the telephoneindustry, only one new entrant has so far attempted to compete with BritishTelecom, despite the fact that competitors are allowed to offer both local andlong distance service. The rest of the European Community has steadfastlyresisted the introduction of any competition into government-owned monopolytelephone operations, and has concentrated on government funding oftelecommunications development.Uncertainty The persistent uncertainties and confusion which characterize the regulatorytransition process in the U.S. have compounded the debate in Canada.Protagonists on both sides point to the American experience to prove their owncase. The structural indivisibility of the telephone network system continuesto cause considerable problems in the fair and efficient allocation of costs, asno-one really knows for sure where the responsibilities lie. This, along withother problems in definition and measurement, has made it very difficult foreither regulators or government officials to appear to be fair to everyone:something which, in our political system, is very important.Political Culture Uncertainty, as Dahrendorf observes, inspires competition, social and68political conflict, and institutions that provide suitable conditions for thisconflict." In democratic societies the leaders of these institutions cannotmake public policy without taking into consideration the values and beliefs ofthe population. Voters take into account not only who benefits from a policy,but whether it is legitimate for that group to benefit. 20Notwithstanding the conservative ideology of the current federal governmentnoted earlier, Canadians embrace a very strong commitment to fairness, asemphasized by the latest government proposals for a new constitution. Thisdocument also asserts that "Canada is a country that cares for thedisadvantaged."" At a national conference on economic issues (held as part ofthe constitutional debate) discussion turned to the necessity for a SocialCharter to offset the effects of the deregulatory and decentralising economicproposals being proposed. If Canadians are to be more exposed to market forces,it was argued, then they should also have more protection from market instabilityin the form of guaranteed income security. Such a Social Charter may well bepart of the final constitutional package.Banting has observed that although "a resurgent conservative critique" hasrevived conceptions of "a fundamental incompatibility between economic efficiencyand social equity" in Canada, there has been "vigorous resistance to any suchshift within important elements of the political system, and only a limitedresonance in public attitudes as a whole. The basic legitimacy of the welfarestate is not an issue for the Canadian public.""And implicit in Canadians' support of the welfare state has been a preferencefor the concept of universality. A debate about the respective advantages anddisadvantages of universality versus selectivity has surfaced again in Canadajust in the last month, when the Conservatives' new budget announced their69intention to eliminate family allowances and replace them with a child taxcredit.^But for several decades the superiority of universality was theaccepted wisdom.^In researching the "Politics of Economic Policy" for theMacdonald Commission writers noted that anew social contract developed in Canadabetween the 1940s and 70s. Changes in programs, the bases for allocatingbenefits, and the forms in which they would be delivered, transformed welfarefrom a system of relief to one of social insurance and universal entitlement."The early debate over medicare was cast in terms of increased equality forCanadians who could not afford private insurance coverage, and the expansion offederal and provincial funding for higher education was advocated on the groundsof increasing the accessibility of qualified low-income Canadians to educationalopportunities. A major cross-national study of public attitudes toward taxingand spending in the mid-1970s found a high degree of convergence in support forprograms that are universal in their distribution of benefits, and a subsequentstudy commissioned by the Ontario Economic Council in the '80s revealed a similarpattern. One Macdonald Commission analyst concluded that "these findingssuggest that there are important political pitfalls in the path of those deficitreduction strategies that rely upon the elimination of the universal dimensionof social programs.'"' In Banting's words:Universality lies at the very heart of the development of the welfarestate in Canada... The whole history of the welfare state over the lastfifty years can be summarized in large part as a sustained flight fromselectivity.'Because cross-subsidization of customer categories inherent in regulation oftelephones is a particularly efficient form of universality (requiring virtuallyno administrative costs), this preference of Canadians for universal programs hasprobably had an impact on the thinking of politicians regardingtelecommunications policy. It is also possible that this aspect of political70culture supplies part of the answer to the lack of convergence with U.S. policy,as Americans appear to have different attitudes towards the relative merits ofuniversal and selective programs.Lipset, in his analysis of the differences between Canada and United States,Continental Divide, quotes a 1988 journalist's observation that the electiondebates on what Canada was all about' emphasized "social programs ... and awillingness to use government power to redress the inequalities of the marketplace." Lipset suggests that the United States, on the other hand, followsThomas Jefferson's dictum -government governs best which governs least': "Onesociety leans toward communitarianism - the public mobilization of resources tofulfil group objectives; the other sees individualism - private endeavour - asthe way an -unseen hand' produces optimum, socially beneficial results.""Canadian commentator Drover agrees:Rooted in the American Revolution and safeguarded by the constitution,the political mind set of the U.S. remains wary of the collectiveprovision of social benefits.^Where assistance is required,philanthropy is preferred.^Where government, of necessity, isinvolved, a minimalist approach is advocated.^Where collectiveprovision is mandated through the public sector, it is sectionalized andfragmented."Some analysts feel that this difference in attitudes between Americans andCanadians has been exaggerated, and that as far as specific income securityprograms are concerned the role of selective systems has declined in the U.S.,especially during the 1980s, whereas it has steadily expanded in Canada."Nevertheless, at least the perception of such differences certainly does seem tohave been salient to telecommunications issues. A spokesperson for aninternational marketing firm recently commented regarding the telecommunicationsissue that "the U.S. industry has always been more driven to a private-line,cost-based philosophy. We're shifting towards that but social issues are still71more prevalent in Canada."Both the intervention of the state in the form of regulatory instruments andthe aim of income distribution incorporated in cross-subsidies fit acceptedCanadian norms. Americans, who strongly emphasize individualism and marketperformance, have "a more punitive attitude towards the poor,"" and in generalprefer vertical redistribution when strictly necessary, while Canadians haveplaced more value on horizontal redistribution and the social commonalities ofcitizenship." And while most Americans seem to have been convinced byeconomists that regulation is bad for the consumer, Canadians do not necessarilyagree. Johnston's study for the Macdonald Commission shows that while there maybe some resentment against regulation in general, when specific kinds ofregulation are mentioned there is usually support."The patchwork of 'lifeline' programs, which has led in the U.S. to citizensof different states receiving very different levels of help (as described inChapter II) also appears a very unsatisfactory situation to Canadians.Throughout the endless debate on the Canadian constitution one constant threadhas been the defence of federally supported social programs as a means ofunifying the nation. Opponents of decentralization fear that there will belittle left to identify people as Canadian citizens once national standards, andfederal financial sustenance for them, are abandoned. And voter support forregional transfers is based on the belief that all Canadians should have equalopportunities, no matter where they live."Political culture in Canada may well be changing, after two terms ofConservative government and several years of recession. (See further discussionin Chapter VII.) The new emphasis in social policy has been on the idea thatwelfare state measures should be designed principally to provide support for the72poor, while universal social programs are attacked.” Although the popular CBCprogram Morningside noted in January of 1992 that a "seachange in opinion" wouldbe needed to challenge universality in this country, the Conservative government,in announcing the intended elimination of family allowances, are obviouslycounting on the fact that such a seachange may already have occurred.Nevertheless, the prevailing cultural climate of successive decades hasundoubtedly had an effect on the decisions of politicians up till now.Conclusion In sum, despite the distribution of interests in Canada and the pressures fromour American neighbours, Canadian politicians and the regulatory agency havecontinued to bar the advent of competition into the long distance sector of thetelecommunications industry. A combination of pluralist, statist, cultural andnegative emulation determinants have contrived to keep Canadian policy-makerssuspended on the horns of a dilemma which is yet to be resolved.These explanations tell us why the policy-makers have had such a difficulttime coming to a decision, but they do not look at the justice issues involved.The arguments used by protagonists on both sides of the regulation/deregulationdebate spring from very different points of view. These will be the subject ofthe next chapter.FOOTNOTES for Chapter V1. Janisch & Schultz, p. 14.2. Wilson, p. 438.3. Olson, Mancur, The Rise and Decline of Nations, Yale University Press, NewHaven, 1982, pp 26 and 37.4. Trebilcock, M., et al, The Choice of Governing Instrument, Ministry ofSupply and Services, Ottawa, 1982, p. 98.735. Dept of Communications, Cabinet Document, May, 1985. Leaked to theTelecommunications Workers Union.6. April 20, 1992, p 13.7. Downs, A., "Up and Down with Ecology: The Issue Attention Cycle,"The Public Interest, No. 28, Summer 1972.8. Globe and Mail, Friday, February 28, 1992.9. Panitch, L., "The Role and Nature of the Canadian State," in The CanadianState, ed Panitch, University of Toronto Press, Toronto, 1977, p. 10.10. Janisch and Schultz, p. 4.11. Computing Canada, March 1, 1991, p. 37.12. Canada, Dept of Communications, p. 61.13.McPhail, p. 18.14. Harrison, K., "Federalism, Environmental Protection, and Blame Avoidance,"prepared for delivery at the Annual Meeting of the Canadian Political ScienceAssociation, Kingston, Ontario, June 2-3, 1991.15. Hall, Peter, Governing the Economy, Oxford University Press, Oxford, 1986,p.68.16. "Itching to lose that long distance feeling: Deregulating the phonesystem would leave U.S. style mess," The Globe and Mail, September 19, 1989,p. A7.17. Telephone interview with Vincent Mosco, February, 1992.18. This factor was stressed in interviews with Mosco and Deborah Slaco.19. Dahrendorf,Ralf, Essays in the Theory of Society, Stanford UniversityPress, Stanford, California, 1968, p. 247.20. Wilson, p. 248.21. Shaping Canada's Future Together, Ministry of Supply and Services, Ottawa,1991, pp 9 and 1.22. Banting, Keith, The Welfare State and Canadian Federalism, McGill-QueensUniversity Press, 1987, p. 185.23. Rice, J., "The Politics of Income Security," in The Politics of Economic Policy, ed. B. Doern, Macdonald Enquiry, Vol. 40, 1986,p. 233.24. Wolfe, D., "The Politics of the Deficit," in Doern, p. 153.7425. Banting,K., "The Role of Universality in the Canadian Welfare State," inGreen A (ed) Report of Policy Forum on Universality and Social Politics in 1980s, John Deutsch Institute, Ontario, 1985, p.726. Lipset, S.M., Continental Divide, Routledge, Kegan Paul, New York, 1990,p. 141.27. Ibid, p. 136.28. Drover, Glen, Recent Social Security Debates in the U.S. and their Implications for Canada, Discussion Paper for Policy, Planning and InformationBranch, Health and Welfare Canada, Banff, December 9-11, 1990, pp 1-2.29. Banting, "Social Policy and Inequality in Canada and U.S.," prepared for avolume tentatively entitled Canada and the U.S. in a Changing World, October,1991, p. 38.30. April 20, 1992, p. 13.31. Taylor-Gooby, P., Public Opinion. Ideology, and State Welfare, RoutledgeKegan Paul, 1985, p. 32.32. Drover, p. 38.33. Johnston, quoted in Doern, p. 43.34. Wolfe, p. 154.35. Jacobs, L., Rights and Deprivation, Oxford University Press, Oxford, 1992,p. 274.75CHAPTER VI: CONFLICTING VALUESIntroduction As part of the national infrastructure of a country, telecommunications areintegral to local and national politics, to society and to the economy, andtelecommunications policy must consider more than one broad notion of nationalconcern.The movement towards deregulation has brought into the limelight a transferof resources from one group to another which was practised for many years withoutany public discussion of the rights and wrongs of such a transfer. The bargainimplicit in cross-subsidization was satisfactory to everyone, and continuingimprovements in the telephone system achieved 'pareto optimality': the generallevel of welfare was increased without anyone being worse off.However technology has altered the previous balance, and it is now notpossible to change the regulatory status quo without creating new winners andlosers. Concepts of accessibility and affordability jostle in the deregulationdebate with ideas of efficiency and competitiveness. Analysis is oftenundertaken on the basis of normative values. When a trade-off between efficiencyand social justice becomes necessary in any issue the relative weight given tothese two concepts will vary depending on the worldview of the protagonists.For the government the challenge is to arrive at what will be perceived as fairand just compromises among competing priorities and points of view. Thischapter will look at the two main paradigms at work here: the 'free market'view, which believes that competition will work for the benefit of everyone, andthe 'social welfare' view, which has less faith in the ability of the free marketto deliver a just and equitable outcome.76Two paradigms A montage of images from the advertising media in the 1990s seems to sum upthe conflicting values which are central to this policy debate.On the TV screen apple-cheeked grandmothers and grandfathers in rocking chairshappily listen to their grandchildren half a continent away telling them of theirdaily happenings. An adult brother and sister giggle on the phone about theirwidowed parent's late-blooming romance. The news of a new baby brings joy.These cosy scenes are presented with justifiable pride by a telephone company,"bringing people together".Later in the viewing evening the same telephone company appeals to businessusers with pictures of sharks, and vultures, representing the sphere of economiccompetition: "Being able to communicate gives you the edge in this brutishworld."However, picking up the paper the next morning, you may find a full pageadvertisement from Unitel, presenting a more naive vision of the marketplace:"Competition," the large type claims, "brings out the best in all of us!"'Which of these images resonates with you?Deborah Stone observes that definitions of policy problems usually have heroesand villains and innocent victims, and they pit the forces of evil against theforces of good.' In our story of telecommunications policy we have twoversions. For the Communications Competition Coalition and the anti-regulationschool of economists the villains are the regulators, the innocent victims arethe customers who have to pay exorbitant long-distance rates, and the heroes arethe swashbuckling potential competitors who only want to make the market moreefficient. The second version is propounded by the Telecommunications Union, theConsumers Association, and advocates for the poor. In this version the villains77are the potential competitors and big business, the innocent victims are theresidential and rural consumers, the poor and the homebound, and the heroes arethe regulators.For the government, these opposing ideological positions represent a classicconflict between the goals of national economic efficiency on the one hand, anduniversal access and distributional equity on the other.The Free Market ViewThe most important claim of the free market is that it has the ability tomaximize aggregate social welfare. Under certain conditions (i.e. individualsare deemed to be the best judges of their own welfare and able to act so as tomaximize it, a sufficient number of competing firms or individuals exist that no-one can exercise power over prices or costs, and there are no externalities, orcosts and benefits that are not reflected in prices) efficiency is automaticallyachieved through the market mechanisms of supply and demand. The interaction ofthese forces determine how resources will be used and for what purpose, andprices act as a rationing device in the determination of the distribution of thegoods and services produced. A competitive market transmits the correct signalsto producers that reflect the values of consumers.Of course the rigorous conditions required for the existence of perfectlycompetitive markets are seldom found in the real world. Modern-day marketeconomies exhibit imperfections of varying degrees, including monopoly elements,lack of complete knowledge on the part of consumers and producers, and externalcosts such as pollution. Certain services such as national defence are indemand, but will not be provided by private enterprise because of the free riderelement.Free market economists admit that such imperfections exist, and may require78some correction or intervention by the state, but they insist that for the sakeof efficiency these should be kept to the absolute minimum. -Public goods' arelimited to such services as defence, traffic control and lighthouses, where 'freeriding' cannot possibly be avoided. Everything that can possibly be supplied bythe free market (including medical care, housing, insurance against economicinsecurity) should be. Provided the contract is entered into without duress,"to prohibit the agreement not only reduces aggregate social welfare, it is apaternalistic imposition showing lack of respect for both parties as freewillingand autonomous beings."'Economic growth, argues this paradigm, necessitates a willingness to toleratechange that makes some people worse off. Charles Schultze contends that animportant advantage of the market as a means of social organisation is "its-devil take the hindmost' approach to questions of individual equity."' Fromthe standpoint of efficiency the more completely and rapidly the economy shiftsproduction to meet changes in consumer tastes, production technologies, resourceavailability or locational advantages, the better. And these changes will, onbalance, generate gains for society in the form of generally higher livingstandards, even if some sectors of society have to suffer losses of jobs andincome in order to achieve them.'The philosophical argument put forward by such applicants as Unitel and BCRLat the CRTC hearings is that competitive markets provide powerful incentivestowards cost minimization (technical efficiency) and towards the rapidintroduction of product or service improvements (dynamic efficiency). It is therivalry at the heart of the competitive process that, according to this argument,creates rewards for managers, workers and owners from a combination of reducingcosts, creating new products and services, finding better methods of production79or distribution, and responding appropriately to new needs.' The applicantsinsist that no one monopoly company can be all things to all customers, and thatcompetitors may invent innovative new services to meet a previously unidentifieddemand.From the point of view of free market economists, the competitive marketshould be left to do its work in as unrestricted and unregulated a manner aspossible. While Pareto optimality may be difficult to achieve, a -potentialPareto improvement' can be said to have taken place as long as "the gainers havegained enough so that they could fully compensate the losers and still be betteroff," and a policy change creates such a potential pareto improvement "even ifthe losers are not actually compensated."' If, however, society decides thatsome people are overly disadvantaged by the free market process and should becompensated, then they should be targeted by means tests and assisted by narrowlyselective programs.Economists are more comfortable talking about efficiency than about equity orfairness.' Schultze praises economic incentives precisely because they "reducethe need for compassion, patriotism, brotherly love and cultural solidarity asmotivating forces behind social improvement."' For those who argue the socialwelfare viewpoint, however, these motivations carry more weight.The Social Welfare View Even such proponents of a social justice model as Rawls agree that undercertain circumstances the free market is both fair and efficient", but for himand many others there is often a significant tension between the goals ofeconomic efficiency and growth on the one hand and more equal distribution ofincome on the other. According to Rawls' -Difference Principle' an increase inPareto efficiency can only be said to have taken place if the policy is also80(though not necessarily only) to the advantage of the least well-off."Theories of regulation spring mainly from welfare economics, a school ofeconomics which believes in the capability of state intervention to securesocially desirable redistribution as well as general economic efficiency. Thefree market may need to be replaced by regulatory institutions not because it isinefficient, as Strick points out, but because in the process it may produce anunacceptable distribution of income." It may also be able to unfairlyexploit the fact that some products have an -inelastic demand', i.e. if theirprice was to rise sharply most people would, in the short run at least, simplypay the extra cost, rather than significantly reduce usage of something theyconsider an absolute necessity.There are some goods which, although not strictly falling into the 'publicgoods' category, can be defined as -primary goods' or -basic needs'. Harris,while concluding that it is very difficult to argue for the provision of any goodon the basis of pure -need', nevertheless maintains that there is a notion of"what is necessary to protect and preserve someone's full status as a full memberof his/her community." Such effective membership in the community is a rightof all citizens and therefore society is justified in regulating the market inorder to ensure that it is achieved." While traditional economists assert thatthe need for a telephone is simply an example of an - inelastic demand', to Harrisand others the means of communication is essential for integrating citizens intotheir community.Claus Offe sees this attempt to categorize certain goods as basic orcitizenship needs as the state's attempt to universalize a commodity, asexpressed in such institutions as schools, transportation facilities, the postoffice, hospitals, etc." Haar and Fessler also argue that enterprises81providing functions and services that are essential and public in character have"a common law duty to serve: a positive obligation to provide all members of thepublic with equal, adequate and non-discriminatory access." Noting that ofcourse it costs far more to deliver a letter, pipe in water, or wire in telephoneservice to some parts of the country than to others, they ask whether this meansit is fair to deny people living in those places equal access. They go on todescribe how American courts, in a series of decisions regarding municipalitiesand utilities, insisted on equality of access to all as a fundamentalprinciple."The original acts of incorporation of Bell Canada and B.C. Tel recognised this'duty to serve' the public in their provisions declaring them to be for thegeneral advantage of Canada.' And the governments of the Canadian prairieprovinces have consistently committed themselves to the principle with regard totheir telephone companies. As a spokesperson for Alberta Government Telephoneseloquently put it:Our cornerstone is ... the belief that telephone service is a necessityfor both the social and economic well being of the community, and thatbenefits accrue not only to the person being served, but also to allothers who might wish to communicate with him... If there is any sizablesegment of our society that cannot afford basic telephone service, thenall of society becomes handicapped. It symbolizes the disintegrationof some of our most basic social values."(At the recent CRTC hearings Unitel questioned B.C.Tel's position that it hada mandated 'obligation to serve', submitting that the company provided generaltelephone service "because it was in its interest to do so."" Obviously Unitelwould see its own interest in targeting the profitable consumer sectors andignoring the others.)Harris observes that the protection and preservation of a person's status asa full member of society turns directly and immediately on the opportunity and82ability to consume or gain access to the particular service to which they shouldhave a right, and that this supports the tendency to rely upon universal servicesin kind. For example, one may have a right to education, although not a rightto income which may or may not be spent on education. Thus a universal systemis required that ensures delivery of the specific requirement. Furthermore, henotes, universal services in kind may help create some sense of communitymembership by encouraging common participation in their consumption and, to somedegree, in their delivery."Universality vs Selectivity The issue of universality vs selectivity has particular relevance toderegulation of telephones because cross-subsidization is a very simple way toensure that those who need the in kind' telephone service receive it. Thealternative is the kind of targeted subsidization of specific groups chosen byvarious U.S. states. As we have seen, free market economists tend to preferselective subsidy programs (if any), whereas welfare economics lean towarduniversal programs. Selective or targeted programs, such as the American-Lifeline' programs, emphasize vertical redistribution from rich to poor, andemploy various criteria to decide who should benefit from them. Universal, or"entitlement" programs, on the other hand, emphasize horizontal redistribution(from the healthy to the sick, from the employed to the unemployed, from urbanareas to rural ones), and are provided on the basis of common citizenship.Universality avoids divisions among those who are entitled and those who are not:it eliminates a two-tier system that results in "second-class" citizens and"second-class" services."Proponents of selectivity argue that universal programs are too expensivebecause they cover too many people, target too small a share of benefits on the83poor, and enlarge the role of government. In actual fact, selectivity tends togive government an even more intrusive role, in deciding who is worthy, indesigning and administering means tests, and in executing cumbersome - take-up'procedures. Indeed, the administrative costs are far higher in selective thanin universal programs. As Okun puts it, transfers via the tax system are likea leaky bucket." In between taking the money from the high income earner andgiving it to the low income person the - leaks' include all the administrativecosts, and the more selective testing has to be done the more leaks occur. Theother primary objections to selectivity are the stigmatism attached to specialprograms and the difficulties attached to claiming them. As many economistshave concluded, where selectivity is involved, those in greatest need often failto apply either through ignorance of their rights, dislike of the means testingprocedure, or the difficulty found by the less educated and articulate in comingforward to establish their entitlement.There are three essential goals fulfilled by the welfare state, writesBanting, and universality is associated with all of them, "or more accuratelywith the prevailing balance among them.'"' Among the three goals - ofredistribution, social integration and security - it is the latter which has hadthe most political salience. Selective programs are particularly vulnerable tocutting back in tough economic times, or when governments start to lean furtherto the right. It is much easier for politicians to tighten the screws onselectively defined groups without much voting power, than to cut back onbenefits that are universally available as an entitlement to all. Defendersof the status quo in the telephone industry see regulated cross-subsidization asa secure, uncomplicated, and administratively inexpensive form of redistributionwhich ensures universal and affordable access to the system. Reliance on special84- lifeline' support programs would be susceptible to any political change of heartor sudden need for savings at any time. Some provinces might decide they couldnot afford to subsidize telephones for the poor, while others would have to cutback on other priorities in order to find the funds. In fact the very samepeople who argue that help for the poor should come from the tax system, not from- inefficient' cross-subsidies, are those who argue that our levels of taxationare -inefficiently' high because they dampen market spending. One can see wherethat logic will lead.Making the Connection From the standpoint of free market economists, the primary problem in thetelecommunications industry is how to get long distance prices down and localprices up. For them "one beautiful feature of a market economy is thatdepartures from efficient pricing automatically set in motion correctiveforces."' Prices for Canadian long distance calls are too high compared to theU.S.: the solution is to allow entry of competition so that long distance priceswill be forced down and the flow of subsidy from local calls will disappear.For BCRL (applying with Unitel to enter the long distance market) any form ofsubsidy "gives users incorrect economic signals which result in distortions inconsumption patterns."' In other words the farmer on the Prairies facing theactual high cost of a telephone should simply have to make a choice between themeans of communication and some other consumer product.Advocates of deregulation dismiss the "great Canadian threat-to-universalservice phobia" as a lot of "fretting and fussing," which interferes with theimportant goal of enabling Canadian business to be more competitive.'" Socialwelfare advocates, on the other hand, feel that universal and affordable accessshould be the primary policy goal. The telephone, they affirm, has become a basic85and essential part of modern society. And, most importantly, it is just thosewho find it hardest to afford a telephone who need it the most. Seniorcitizens, the handicapped, users of crisis and information lines, all depend onthe telephone as a means of communication in a way the more able-bodied do not.The telephone, as an astonishing number of private letters addressed to the CRTCstress, "is a necessity, not for amusement."" It also plays a central part ina large range of social services, which, in their contribution to the preventionand cure of many social ills, go a long way to reducing social costs."While most people would agree that for the handicapped and homebound (and evenmany voluntary agencies) the telephone is a basic need, it has been suggestedthat although most residential consumers "seem to regard the right to free localcalls as a fundamental principle" this may simply be something they have gotused to, and really have no right' to at all." However it is worthremembering that for most Canadians the telephone has become an indispensablepart of our daily lives. An Ottawa columnist has observed that "Canadians usethe telephone more than anyone else on earth," and Babe calculates that in1987 Canadians engaged in some 37 billion telephone calls: 1436 per person."Most of those calls are local ones. Estimates suggest that "some 35% ofresidential consumers do not even make a long distance call in the course of anygiven month." Large rises in price for local calls would mean a very greatchange in lifestyle for the great bulk of Canadian users, as anyone who has livedin countries where you pay for every minute (like England and Australia) willattest.One American approach has been to separate out the charges for access to thetelephone on one hand, and local calls on the other. Some economists suggestthat the introduction of Local Measured Service (LMS), whereby the subscriber is86charged for every minute of every local call, in the same way long distance callsare dealt with now, would more accurately reflect usage. When flat rate chargesrise there is no way a subscriber can escape or soften the blow except bydisconnecting from the network, whereas if each call is paid for the consumer can'substitute' by cutting down on the number or length of calls. However it isdoubtful that LMS would be more efficient economically, as there are considerablecosts associated with measuring local calls. Companies do not have theequipment or the personnel to either conduct the measurement or see tocomplicated billing arrangements.A greater problem, however, is in separating out the costs of access and use,which takes us back to the dilemmas discussed in Chapter IV. As we saw there,because of the indivisibility of the network, any allocation of costs to aparticular service has to be arbitrary. Is it fair that the ordinary customerwho only wants the Plain Old Telephone Service pay the same access fee (for thesame boxes and lines) as the business customer who wants all the Pretty AmazingNew Services? Should the customers in remote rural areas (who constitute asignificant percentage of the population in Canada), for whom the actual costsof providing service are astronomical, pay the same access fee as urbancustomers? And if not, how does one arrive at a reasonable price? In fact thestructure of the telephone system is such that, whether it is deregulated or not,the question will continue to hover: who is subsidizing whom, and what is thejustice of the matter?The indivisible structure of the network is at the root of this dilemma ofconflicting values. Due to the current evolution of technology, part of thesystem (long distance calling) has become viable for competitive entry, while theother (local calling) has not. If the local service part was through87technological changes to lose its natural monopoly status, then it is possiblethat the arguments of the free market economists might justly prevail and ifenough competitors could be found, they might drive down the prices in thissector. But until this is the case, the social welfare viewpoint concludes,regulation must persist in order to ensure fair and equitable distribution ofcosts and benefits.Conclusion In sum, the free-market/deregulation supporters concentrate on aggregatebenefits and ignore equity concerns, while the social welfare/regulationproponents are more concerned about equity than uncertain efficiency gainsforegone. And the structural complexities of the telephone system make it verydifficult to allocate costs in ways which are clearly fair.Nonetheless, it is clear that the advantages of deregulation would accrue verysubstantially to a small percentage of the population, namely big business anda few potential competitors such as Unitel. (As already mentioned, the top 1%of business locations accounts for approximately 50% of total long distancecalling, and 35% of residential customers never make a long distance call.)Deregulation would bring down the costs of long distance telecommunications inthe workplace and would probably stem the flow of businesses bypassing theCanadian system, and this would no doubt have a positive effect on the Canadianeconomy. The important question would seem to be: how large an effect, andwould it -trickle down' to benefit most Canadian citizens? If not, the averageCanadian, as the Department of Communications surmised, will see deregulation asa gift to big business at his or her expense. Millions of people will see theirtelephone bills dramatically increase, and their tax bills go up to pay forspecial subsidies to the poor and disadvantaged. Telephone companies who are88committed to serving all their customers equally, and a universal subsidizationscheme which is an administrative bargain, will be things of the past.The opportunity costs are indeed considerable, whatever policy the governmentdecides to support. The incompatible paradigms described in this chapter do notmake it easier for either government or the regulatory agency to come to adecision that is both efficient and fair. Thibault and Walker suggest that in-mixed' disputes, where there is a high level of both cognitive conflict andconflict of interest, or values, the two issues must be separated. Matters oflogical fact must be assessed by a third party, and the conflict of interestshould be resolved through adversarial judicial kinds of proceedings, or thepolitical process. The CRTC has been trying to address the first issue, albeitwith substantial constraints imposed by the second.^The government will haveto decide which paradigm it is going to embrace, and act accordingly.FOOTNOTES to Chapter VI1. The Globe and Mail. Tuesday, October 15, 1991.2. Stone, D., p. 109.3. Harris, D., Justifying State Welfare, Basil Blackwell,Oxford, 1987, p.20.4. quoted in Rhoads, The Economic View of the World, Cambridge UniversityPress, Cambridge, 1985, p.100.5. Ibid, p. 100-01.6. Government of B.C., p. 58.7. Brander,J., Government Policy and Business, Butterworths, Vancouver, 1988,p. 16.8. Brander, p. 29, Rhoads, p. 82, Khemani in lecture to MBA students.9. quoted in Rhoads, p. 55.10. Rawls, J., A Theory of Justice, Harvard University Press, Cambridge, Mass,1971, p. 272.8911. Rawls summarized in Barr, The Economics of the Welfare State, Weidenfeld &Nicolson, 1987, p. 50.12. Strick, J., The Economics of Government Regulation, Thompson EducationalPublishing, Toronto, 1990, p.26.13. Harris, p. 147.14. Offe, C., Contradictions of the Welfare State, MIT Press, Cambridge, Mass,1984, p.127.15. Haar, C., and Fessler, D., Fairness and Justice, Simon and Schuster, NewYork, 1986 pp. 15 and 150, inter alia.16. quoted in McPhail, p. 41-3.17. B.C. Government, p. 43.18. Harris, p. 150.19. Findlay, P., "Social Welfare in Canada, The Case for Universality,"Canadian Social Work Review, 1983, p. 18.20. Okun, Arthur, Equality and Efficiency: The Big Trade-Off, BrookingsInstitution, Washington D.C., 1975, p. 92.21. Banting, "The Role of Universality," p.8-9.22. Wenders, J., The Economics of Telecommunications, Ballinger PublishingCo., Cambridge Mass, 1987, p.5.23. Government of B.C., p. 34.24.Janish and Schultz, p. 28.25. Letter of intervention on file at CRTC office.26. See Lester, D., for valuable data on "The Use of the Telephone inCounselling and Crisis Intervention", in Pool.27. Brander, p. 220.28. Stewart MacLeod, "We are a Chatty Group up Here," Macleans, January, 1991,P. 64.29. Babe, p. 22.30. Aufderheide, p. 82. Mitchell (p. 72) also notes that "some 32% ofRochester Telephone's residential subscribers make no interstate calls in agiven month."90CONCLUSION: WHY NOT FORWARD TO THE PAST?Canadians cannot afford telecommunications designed yesterday, they cannot affordto become an information-satellite of the United States, they cannot afford todeny themselves the opportunity that developing technology affords to fashion forthemselves a more rewarding way of life. Above all, they cannot afford to waitand see how the information-revolution turns out; they must start planning andtaking action now - not tomorrow, but today.Instant World, Department of Communications, 1971Canadians have not waited during the last two decades to develop newtechnology (the monopoly telephone companies have done this very successfully);they have not denied themselves the opportunity to have all the new -designer'equipment (competition is unregulated in this market). But they have waited tosee how deregulation in the long-distance market has turned out in othercountries such as the U.S., which has proved to be a valuable learningexperience.My contention, in this concluding chapter on the telecommunications policydebate, is that Canadians should continue to wait to see how the technologicalrevolution turns out, and not make policy decisions now that they may shortlyregret. As Alfred Kahn has observed with regard to developments in the U.S., "itwould be very difficult to put the regulatory Humpty Dumpty together again," onceit had been dismantled.'The Technological Variable The dependent variable which began this whole debate may well in the nearfuture dramatically alter the ground rules again. Two technologies which havebeen developed for other sectors - fibre optics and wireless systems - mayeventually make it feasible to have competition in the local telephone sector.If fibre optic cable could be made available to every household, then telephoneservice could be provided by cable companies and television by telephonecompanies. The advantage of such new systems is that they do not require the91large upfront -sunk' investments of the present technology, and can easily beadapted to technological improvements in end user equipment. This would meanthat competition could viably be introduced into that part of the telephonesystem which continues, until now, to exhibit features of a natural monopoly:i.e. the local network. Under those circumstances, local rates might not haveto rise, and the whole rationale for delaying deregulation would disappear.However, no one knows at this point which of the new technologies will win out.As Noll postulates:The error can be in either direction: fiber optics, informationservices, and Integrated Services Digital Network may drive us to areintegrated monopoly; or they, along with Open Network Architecture andradio telephony, may drive us to competing integrated suppliers of bothservices and equipment.'My question: Why should we commit ourselves to a policy of deregulation now,with all its consequent disadvantages to the non-business consumer, when therationale for doing so may change again within a few short years?The International Perspective Long-term policy decisions in the telecommunications sector have to take intoconsideration whether competition - even if it was advantageous for the domesticsector - would enhance or impede the ability of Canadian firms to participateon a global scale. Telecommunications, while being fiercely competitiveglobally, is at the same time being reduced to a select group of a few very largefirms working globally in strategic partnerships.' The OECD has estimatedthat large telecommunication manufacturers need to have at least 8% of the world digital central office market to remain viable and that future developments willdemand at least 16% of the world market to remain viable ..."There will bemergers, acquisitions and joint ventures in the struggle to obtain a large marketshare."' In Europe, Japan, and the Pacific Rim countries, government-controlled92telecommunications authorities are pouring huge sums into public-networkinfrastructure modernization so that they can compete in the global market.Countries which have many companies competing within the system will be at adisadvantage with regard to research and development, which will no longer beundertaken with system-wide improvement in mind, as even U.S. analysts admit.'Canada's Teleglobe maintains that one monopoly carrier can actually provide lowerrates than a handful of smaller ones, because of the fact that charges per minutehave to be bilaterally negotiated. "The country is [actually] better served byhaving a single entity to negotiate from a position of strength with the rest ofthe world."' In fact even such proponents of deregulation as Business Communications Review confess thatwhen the perspective on competition and deregulation shifts from adomestic to a world-wide orientation ... it becomes a double edged sword... It may be better to have fewer companies that are strong enough tocompete against the large companies in Europe and Asia."'My question: When we already have large efficient firms in Canada who arededicated to maximizing the regulated system, why would we want to jeopardize ourinternational position by breaking this system up?The cornucopia of gadgetry While some commentators sing the praises of all the amazing newtelecommunications services and claim that competition will provide even morechoice, others point out that it is technology, not competition, that hasstimulated the array of innovations. Still others wonder how the ordinaryresidential consumer has benefitted. A recent issue of the Globe and Mail rana special section on telecommunications. Several of the articles carried titlessuch as "Look what they've done to my phone", "Computer calls badgerhouseholders", and "Confused and Amazed". ° They described services such as-telemarketing,' which mean that computers can badger you at any time of the day93or night, to sell you things you don't want; touch-tone phones which give youmany numerical choices, but never the person you are trying to reach; and billsfor calls you didn't make on phones across the country.' The wry comments werepoking fun for effect, but they contained more than a large grain of truth.As previously pointed out, in the U.S. the costs of sophisticated upgradingof the network are added to the ratebase and then charged out to all subscribersas -access costs'. Under deregulation it is the ordinary residential consumerwho will be asked to pay large amounts more for services that he or she does notreally want. My question: If the demand for advanced and complex services isgenerated by businesses and business people, then why should they not continueto pay for them through the regulated price system?The Advantages of the Status Quo Most Canadian telephone customers (excluding big business) are very happy withthe service that they currently receive from their regulated telephone companies.Their bills are models of simplicity and clarity, and just about every serviceor equipment they desire is available. At a conference on "Communications inthe Eighties" every speaker, whether for or against deregulation, agreed that"Canadians are probably among the best served consumers of communicationsservices and products in the world" while "the Canadian telecom manufacturingindustry represents one of Canada's few international high technology successstories."" An OECD study found that Canada's prices for all business telecommunications services are equal to the average of 24 developed nations andlower than many major trading partners. Although Canada's long distance chargesmight be higher, once local usage was factored into the -basket' the resultingcosts were comparable to, if not better than many other OECD countries.As has already been pointed out, Canadian telephone companies have kept pace94with international technological developments, and have already begun to bringdown long-distance rates, without any corresponding increase in local charges.The companies also argue that one-stop shopping, not competition, will give bigbusiness better service at cheaper prices."One way or another," states the Prairie Provincial Study, "under competition,subscribers would have to bear unnecessary costs from lost efficiency, duplicatedfacilities, wasted spending on network rearrangements, rivalrous advertising,duplicated billing systems, and so on."" My question: At this point thecurrent system is still weakly pareto efficient. It is still possible to makesome people (long distance users) better off by lowering rates, without makinganyone else worse off. While this is still the case, why not continue to enjoyit?Changing Perceptions The answer to all the above questions is of course that to follow a policy ofmaintaining the status quo will result in greater and greater numbers ofcorporations and firms taking their telecommunications business south of theborder. It is interesting to note that although it is twenty-one years since theDepartment of Communications first stated that Canadians could not afford to waitand see how the information revolution turned out (see above), and ten yearssince the Americans deregulated their telephones, the same April 1992 Financial Times article which direly predicts a massive exodus to the States admits that"the trends haven't battered Bell's earnings yet," and that "Bell was 35% moreefficient in processing long-distance calls than AT&T in 1989 and is stillconsidered to be ahead."" Nevertheless, there is still a significantperception among many analysts that the Canadian telephone system is losingvaluable customers, that it is losing the race to be a world leader, and that95deregulation is the answer to these problems."It appears, then, that the opportunity costs of maintaining the regulatorystatus quo in the telecommunications industry are steadily increasing. Thebalance between the costs and benefits for business and industry on the one handand residential consumers on the other is changing.Bearing this in mind, let us review the factors which have seemed to explainwhy the Canadian government has to date been extremely reluctant to change theregulatory system, and assess what effect they are likely to have in the future.In the first place the government appears until now to have been moreresponsive to the consumer and social welfare arguments regarding the effects ofderegulation than to those proffered by the business and economic community.Vote maximisation seems to have been a salient motivation. However, as justnoted, the case for taking into consideration the costs to business has beengetting stronger. It is also very possible that, as the recession deepens,arguments regarding loss of business and jobs to the economy in general willstrike a more responsive chord in the electorate than the polemic of highertelephone rates.Secondly, the political culture which has until recently supported theconcepts of income transfers and universal programs (both of which are intrinsicto the cross-subsidization conferred by regulation) may well also be changingafter several years of recession and a dominant Conservative ideology. A debateabout the advantages of universality is just beginning with the government'slatest attack on Family Allowances, and it is not at all certain where it willend. Despite the commitment of some sectors of the populace to a protective andjustice-enhancing Social Charter, in these -belt-tightening' days the balance mayindeed have altered between those who concur with the old order and those who96prefer the new.Thirdly, just as the U.S. experience has so far served to warn Canadians ofthe pitfalls and disadvantages of deregulation, so in future it may point the wayto advantages. If local rates stabilize and low-income assistance plans can bestandardized across the country, and if the Americans can come through their- transition period' with a coherent strategy for re-regulation, then Canadiansmay decide on positive emulation. And, of course, if U.S. long-distance ratescontinue to drop at a faster rate than Canada's, then that pressure will continueto escalate.The fourth factor which was a serious stumbling block to deregulation for manyyears - jurisdictional problems between the federal and provincial governments -seems to have been removed by the Supreme Court ruling and subsequentconfirmation of federal supremacy in the new Telecommunications Act. However itis likely that the federal government will still face opposition from provinceswho feel committed to the interests of their rural constituents, and who will notwant to be burdened with the responsibility for providing extra targetedsubsidies and income supplements. Thus while other stumbling blocks may beremoved, the old bogey of federal-provincial relations may continue to postponea decision on deregulation for a while yet.Predicting the Future "Despite what some companies may tell you," a recent AT&T advertisement reads,"the future direction of communications is practically impossible to predict.""Nevertheless, following the above analysis, I will take the risk of predictingthat the Canadian government will shortly decide that it cannot meet all four ofits "guiding objectives", and that the principles of protection and promotion ofthe competitiveness of Canadian business, and stimulation of the economy, will97have to take precedence over the principles of universal accessability andaffordability. (In its "uniquely Canadian" way it will, of course, try to avoidexplicitly admitting that this is what it is doing.)There are two ways in which the government could effect such a policy.Either it could - as the free market economists would prefer - deregulate andallow competition into the long distance sector, or it could allow the existingtelephone companies to retain their monopolies but practice rate-rebalancing:i.e. lower long distance rates and raise local. If it chooses the first routeit will have to deal with the consequences under the Free Trade Agreement, andallow U.S. firms such as AT&T, Sprint, and MCI to compete in the Canadian market.This would of course mean not partial re-regulation as has occurred in the U.S.,but complete deregulation with virtually no role at all for the CRTC. If itchooses the second route and simply allows rate rebalancing it will continue toface the ire of all the free market economists and would-be participants in thetelecommunications business who believe that competition is necessary for anefficient economy. Besides, if cross-subsidization is eliminated, then much ofthe rationale for regulation of any kind is also removed.Whichever of these two courses the government chooses to follow, the ordinaryresidential customer who relies mainly on local calling, and the poor anddisadvantaged who rely on their telephones for vital communication with theworld, will lose their protection. Provincially-owned telephone companies willno longer be able to practise their -duty to serve'. The social compact whichprevailed for decades after the initial invention of the telephone will bebroken.Conclusion This paper has examined in some detail the long and tortuous development of98Canadian government policy with regard to the telecommunications industry. Ithas reviewed the rationale for regulation and the pressures for deregulation, andlooked at the consequences of both policies. It has attempted to explain why,in the face of seemingly overwhelming pressures to deregulate, both thegovernment and the regulator have clung to the status quo. It has also describedthe competing values or world-views which have underpinned the debate about theeffects and the relative merits of regulation and competition.The story is not yet ended. The CRTC decision on the Unitel application hasstill to be handed down, and most commentators predict that, whatever thatdecision is, it will be appealed to Cabinet by the protagonists on the side thathas "lost". At that point it is sincerely to be hoped that a public, nationaldebate will take place. The issues deserve a thorough, well-informed airing,and the values involved should be clearly understood and discussed. Neithercompetition nor regulation should be seen as ends in themselves, but as a meansto achievement of broader social objectives, and what those objectives are shouldbe decided by an informed public, which can then direct its elected officials.The time has come for the government to take telecommunications policy off hold,expose it to public discussion, and then respond to the message on its answeringmachine.FOOTNOTES to Chapter VI1. Allison, p. 265.2. Noll, p. 47.3. B.C. Government, p. 50.4. Bohlin E. and Granstrand 0., "Strategic Options for National Monopoly inTransition: The Case of Swedish Telecom," Telecommunications Policy, Vol 15,No. 5, October 1991, p. 463.5. Weber, J., "Is the U.S. Losing its Telecommunications Edge?",Communications Week, 22 May 1989, pp. 40-46.996. Teleglobe spokesperson quoted in Financial Post, September 9, 1991, p. 33.7. Knight, F., "Can Competition Be Managed?", Business Communications Review,p.74.8. The Globe and Mail, March 17th, 1992, Section C.9. 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