Submission by the Commissioner of Competition before the Canadian Radio-television and Telecommunications Commission—Telecom Notice of Consultation CRTC 2014-76—Review of wholesale mobile wireless services
October 20, 2014
- These are the final written submissions of the Commissioner of Competition (the "Commissioner") in response to Telecom Notice of Consultation CRTC 2014‑76.
- As set out in the Commissioner’s previous submissions, incumbent wireless companies possess retail market power in wireless services markets in Canada. In the Commissioner’s view, there is strong evidence before the Canadian Radio‑television and Telecommunications Commission (the "CRTC") that incumbents are using their market power to raise the costs for new entrants to the detriment of Canadian consumers and businesses who rely on wireless services.
- Competition is needed in mobile wireless markets just as in other areas of the economy. In the absence of market power, market forces can deliver these benefits without any regulatory intervention. However, when market power is present, market forces alone will not unlock the full benefits of competition.
- The evidence in this proceeding clearly indicates that targeted regulatory measures are needed to restore competitive market forces. Targeted regulatory measures are consistent with the principles of Canada’s telecommunications policyFootnote 1 and Parliament’s direction in this regard.Footnote 2 The incumbents’ raising rivals’ costs strategies insulate them from competition because they increase barriers to entry and expansion above and beyond the technological hurdles imposed by economies of scale and scope. By restoring competitive entry conditions, targeted regulatory measures will restore the competitive discipline that market forces would have otherwise imposed on incumbents.
- Currently, Canadian mobile wireless service markets suffer from the presence of a deadweight loss. Because the degree of competitive discipline exerted by new entrants is inefficiently low, incumbents’ retail prices are inefficiently high and, as a result, the amount of wireless services consumed by retail consumers and businesses is lower than the competitive level. There is a deadweight loss because these retail consumers value mobile wireless services more than the resource cost of providing the service.
- The Commissioner reiterates his recommendation that the CRTC adopt effective measures to remove the incumbents’ ability and incentive to raise their rivals’ costs. The Brattle Reports predict that an additional nationwide carrier, not inhibited by incumbents’ strategies to raise rivals’ cost, would increase consumer surplus in Canada by approximately $1 billion annually, which represents 5% of industry revenues in 2012. The Brattle Reports also estimate that an additional nationwide carrier would increase choice, expand mobile wireless penetration in Canada from 78% to 81%, and drive down average retail prices by approximately 2%.
- The incumbents have submitted three expert reports, as well as oral expert testimony critiquing various aspects of the analysis in the Brattle Reports. These critiques suffer from significant flaws,Footnote 3 as demonstrated by the attached Brattle Response to Intervener Filings and Oral Testimony prepared by James Reitzes, Kevin Hearle, Giulia McHenry, Jeremy Verlinda and Coleman Bazelon of the Brattle Group. The key points noted in the attached Brattle Response are set out below:
- No Double Counting: The event study of Verizon’s potential entry does not double count the economic impact of the entry of an additional nationwide wireless carrier into the Canadian market.
- Appropriate Cash Flow Projections in Profitability Analysis: Assessing profitability without projecting future cash flows is not appropriate and the sensitivity analysis described in the Brattle Reply demonstrates that the cash flow projections employed in the Brattle Initial Report are appropriate.
- Calculation of Weighted‑Average Cost of Capital ("WACC") is Confirmed: The critique of Brattle’s WACC calculations is fundamentally flawed and erroneously compares an after‑tax measure to a before‑tax measure.
- Event Study Methodology Provides Useful Information: A fair reading of economic literature confirms the appropriateness of using an event study, as one source of information, for predicting competitive effects.
- Logit‑Based Demand Modeling is Widely Used To Analyse Structural Changes in Telecommunications Industries: The academic literature validates the use of logit‑based demand modeling to examine the telecommunications industry and indicates that these analyses improve the quality of decision making by policymakers.
- Canadian Penetration Rates are Significantly Lower Than U.S. Penetration Rates: The incumbents’ assertions at the hearing that there are certain differences between the way that Canadian and U.S. penetration rates are calculated do not alter the conclusion that Canadian penetration rates are significantly lower than U.S. penetration rates.
- Telecom Decision CRTC 2014‑398 is an important step forward. That decision is entirely consistent with the Commissioner’s view that incumbent service providers have retail market power, and therefore have an incentive to enact strategies to protect their market power by ensuring that entrants are not, and do not become, fully effective competitors. Thus, the Commissioner supports the introduction of regulatory measures to offset the incentives and ability for vertically integrated incumbents to raise rivals’ costs.
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