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The Telecomunication Worker's Union's opinions on selling long distance phone service

                             LONG DISTANCE COMPETITION?


                                 POSITION PAPER ON

                           THE ROGERS/UNITEL APPLICATION

                                    TO THE CRTC

                               FOR PERMISSION TO SELL


                                     FALL, 1990

              In countries where telephone competition has
              strongly progressed as in US, UK and Japan, the
              common driving force has been the needs of large
              [corporate] users.  It is inevitable that the
              benefits of liberalisation flow principally in the
              first place to large users, businesses with
              intensive telecommunications needs.

                             Michael Beesley
                             Professor of Economics
                             London Business School

                             Remarks delivered at a Financial
                             Post conference Toronto, May 2, 1990

              (Professor Beesley has been hired by Ted Rogers to
              help with Unitel's application to the CRTC for
              permission to compete in selling long distance
              telephone service.)


         For the past decade, Canadian telecommunications has been subject
         to increasing pressure from would-be competitors and corporations
         anxious to reduce their telephone costs.  Until recently, the
         Canadian Radio-television and Telecommunications Commission
         (CRTC), which oversees the operations of Canada's private
         telephone companies, has restricted competition in this sector to
         private line and enhanced services, and customer-owned terminal
         equipment.  While these areas are significant, they are of
         secondary importance when compared to the core of the industry,
         where competition is still prohibited: public long distance voice
         and data service.

         There is, however, increasing pressure being exerted by
         corporations to allow competition in public long distance voice
         and data services.  In the spring of 1990 the newly-named Unitel
         company (formerly CNCP Telecommunications), owned by cable
         television magnate Ted Rogers, applied to the CRTC for permission
         to sell long distance service in competition with the existing
         telephone companies.

         It is the view of the Telecommunications Workers' Union that
         competition in long distance telephone service would not be in the
         public interest.  The advent of long distance competition would
         make it difficult, if not impossible, to continue using toll
         revenues to cross subsidize local service.  Furthermore, it would
         reduce regulatory authorities' ability to ensure that services and
         rates to meet the needs of Canadians generally and not just those
         of the corporate sector and the wealthy.

         In addition to our general concerns about the effects that the
         introduction of long distance competition will have on the
         Canadian telephone system, we believe that the current applicant,
         Rogers/Unitel, has little credibility.  Although Rogers/Unitel
         argues that the introduction of competition is necessary in order
         to reduce Canadian telephone costs, the concern for lower rates is
         very selective.  When it comes to the cable television industry,
         in which Mr. Rogers' companies play a prominent role, they have
         taken advantage of their monopoly status to increase their rates
         without fear of either competitive reprisal or strong regulatory
         supervision.  (See Appendix 1.)

         Rogers/Unitel has applied this same self-serving approach in the
         telecommunications sector.  When Bell Canada and B.C. Tel sought
         permission from the regulator to lower the rates charged for
         certain services, CNCP/Unitel opposed the move.  (See Appendix 2.)
         And in its application to the CRTC, Rogers/Unitel is seeking a
         regulated price advantage over the rates for long distance service
         charged by Bell and B.C. Tel.  As well, Unitel wants the CRTC to
         prevent the telephone companies from matching its rate reductions!
         Clearly Mr. Rogers' goal is to secure a piece of the lucrative
         long distance market for himself.  Any benefit which might accrue
         to Canadian telephone subscribers as a result would be strictly


         At the inception of the telephone industry, Canada's private
         telephone companies were granted monopoly control over low-cost,
         premium-priced long distance and business services.  In exchange,
         our regulators have required companies like Bell Canada and B.C.
         Tel to use the profits from long distance and business services to
         make up for the revenue shortfalls incurred on local, residential
         and rural service.  These internal subsidies constitute an
         essential part of Canada's telephone system.

         The large profits generated by long distance service have always
         attracted would-be competitors.  But it is essential to remember
         where these large profits come from: the price of toll service is
         set substantially above related costs in order to generate
         revenues which are used to subsidize the price of local,
         residential and rural service.

         For some time now, it has been technically possible for potential
         competitors to provide toll service in competition with the
         existing common carriers.  To date, our elected representatives
         and regulators have not allowed would-be competitors to enter the
         long distance market, since such a move would undermine the
         foundations of our national telecommunications system.  Thanks to
         this continuing prohibition, Canada enjoys one of the finest
         telephone systems in the world while our overall rates are among
         the lowest.


         There are those -- predominantly members of the corporate sector
         -- who argue that government supervised telecommunications regimes
         should be abandoned and replaced by competition in network
         services.  We strongly disagree.

         The competitive, market-driven alternative is not one we should
         embrace.  In the United States and elsewhere, corporations mounted
         major campaigns to convince governments and citizens that the
         advent of long distance competition and the dismantling of their
         unitary telecommunications networks would have beneficial results.
         These companies were successful.  As a result, the unitary
         American telecommunications infrastructure was dismantled.
         Contrary to the advertisements, however, all this has not
         benefited ordinary telephone users.

         The negative impacts are legion.  Ignoring this evidence, however,
         self-interested corporations continue to promote the American
         approach to telecommunications as the way to go for Canada.  But
         we must not restrict our policy deliberations to the concerns of
         potential competitors and corporate-based organizations like the
         Communications Competition Coalition which support them.  To do so
         would increase the likelihood that a major segment of the Canadian
         public will not have access to the affordable telecommunications
         services they will need to lead productive lives in the
         information age.

         If we continue on our current path, Canadian telecommunications
         will not escape the problems experienced in the United States,
         where inter-corporate rivalry has dominated American telephony
         since the early 1980s.  Problems experienced there include:
         skyrocketing local rates; redistribution of income from the
         poorest to the most affluent members of society; abdication of
         responsibility for service; hugely expensive duplication of
         network facilities; endless legal and regulatory wrangling over
         the terms on which corporate competitors are allowed to hook up to
         each others' networks and whether or not these terms are being
         adhered to; wasteful advertising campaigns designed to capture
         competitors' customers; and voluminous bills which are difficult
         to understand because of complicated and confusing pricing
         schemes.  Some observers of the American long distance industry
         fear that they are witnessing a trend away from price competition
         in favour of public relations promotions.  (See Appendix 3.)
         Others are concerned that basic mistakes were made in the 1980s by
         the proponents of telephone deregulation.  (See Appendix 4.)

         Ironically, the U.S. approach has not reduced government's role in
         the telecommunications sector.  Instead of being the guardian of
         affordable, high quality service, however, American regulators
         have become referees in inter-corporate rivalries.  The costs of
         this irrational and wasteful approach are borne by American
         taxpayers and telephone subcribers.  Do we really want to
         introduce a similar system in Canada?


         Inter-corporate disputes have already arisen in Canada over the
         terms governing the interconnection of different
         telecommunications companies.  Marathon Telecommunications and
         CNCP, for instance, are battling over allegations that Marathon
         has not paid $250,000 in overdue bills for private line facilities
         rented from CNCP.  The latter has filed a lawsuit in the Supreme
         Court of British Columbia to recover the money in question.
         Marathon responded that it is refusing to pay the bills in
         question because CNCP's service has been poor and has asked the
         CRTC for a reprieve which would allow it to secure alternative
         sources of service.

         In addition to generating inter-corporate problems which must be
         adjudicated by regulatory agencies and the courts, the
         market-driven restructuring of Canada's telecommunications
         industry will lead to tremendous increases in the rates charged
         for local telephone service.  (See Prairie Provincial Study on
         Telecommunications, "An Examination of the Potential Impacts of
         Competition in Long Distance Service on Rural and Urban
         Subscribers," by Dr. R.E. Olley of the University of Saskatchewan;
         this expands upon the warnings contained in the 1988 Federal-
         Provincial-Territorial study of long distance competition,
         commonly known as the Sherman Report; see Appendix 5.)

         The U.S. has responded to these problem by initiating lifeline
         service and targetted subsidies for low income groups.  As a
         result, our neighbours to the south are now forced to deal with a
         telephone welfare bureaucracy whose task it is to provide relief
         from the anti-social effects of telephone competition!  And, in
         some areas, telephone companies are being allowed to charge their
         customers for local calls as if they were toll calls under a
         system known as local measured service in order to generate the
         lost revenues from long distance service.

         If Rogers/Unitel gets the go ahead, there is no reason to believe
         that Canada will avoid the problems that have plagued American
         telecommunications since the advent of network competition south
         of the border.  Given the larger land mass, greater distances and
         smaller population densities in this country compared to the
         States, it is difficult to see how the disruptions caused by
         competition would not be far worse than those which have bedeviled
         American telephony since the early 1980s.


         To date, the debate about Canada's future telecommunications
         policy has had the wrong focus.  The proponents of long distance
         competition would like to confine the debate to the question of
         whether the magnitude of local telephone rate increases resulting
         from long distance competition will be sufficiently large to force
         a significant number of Canadians off the network. This narrow
         focus does not deal with the larger underlying issue: the steps
         which should be taken to ensure that all Canadians are able to
         take advantage of the benefits that new information technology has
         to offer.

         As we move into the information age, the concept of basic service
         should be expanded to encompass the full range of
         telecommunications-based services which can be made available via
         the public telephone network.  If we handle the matter properly,
         Canadians from every walk of life, living anywhere in the country,
         will have access to powerful communications tools and services on
         an affordable basis.

         In the TWU's view, it is the responsibility of regulators and
         politicians to ensure that the full range of information-based
         services as well as plain old telephone service (POTS) are
         available in every region of the country at rates that are
         affordable for everyone.  If our elected leaders and regulators
         pursue this goal instead of succumbing to the pressures for
         increased competition, Canada will maintain its place at the
         forefront of telecommunications internationally.


         Unfortunately, the federal government appears to be moving in the
         opposite direction.  Ottawa is weakening regulatory constraints
         and allowing public and private corporations to abandon their
         social responsibilities.  In this increasingly market-driven
         setting, businesses are cutting back on service, raising prices on
         their reduced service offerings, and targeting high revenue, low
         cost customers situated in larger towns and urban centres.

         In the airline, trucking and rail industries, this approach has
         already had devastating effects.  There have been sharp cut-backs
         in some service offerings, while others have been eliminated
         altogether.  In the public sector, many services have been
         privatized.  Not even the postal service has been spared.

         The resulting social and economic damage has been compounded by
         the passage of the Canada-U.S. free trade agreement.  Since the
         enactment of this pact, a significant number of manufacturers have
         closed their Canadian operations and relocated in the United
         States.  The cumulative result is that our small towns and
         outlying regions have been hit with a combination of rate and
         price hikes, curtailments in service, and dramatic cuts in
         manufacturing activity.

         If we allow this country's telecommunications future to be
         determined by corporations' bottom line considerations, there is
         every reason to believe that Canada's small towns and outlying
         regions will get the short end of the telecommunications stick, as

         This is not an idle threat.  When CNCP applied to the regulator
         for permission to enter the long distance business in 1984, the
         phone companies planned to respond to this threat to their long
         distance revenues by cutting back on service to outlying areas
         (see Appendix 6) and raising the price of basic service.  During
         the same proceedings, CNCP made it clear that it intended to sell
         service only in major population centres.

         In this era of increasing economic pressure, businesses in
         outlying areas as well as those in our major population centres
         must have affordable access to the full range of
         telecommunications services over a state-of-the-art network.  As
         things are going, however, policy decisions based on certain
         corporations' short term financial considerations could undermine
         the universal character of Canada's telecommunications
         infrastructure just as we are entering the information age.

         If we allow this scenario to be played out according to the
         corporate game plan, there is every likelihood that the provision
         of telecommunications services will be curtailed in outlying areas
         while prices charged for local, residential and rural services are
         increased.  This would simply be the normal response of
         profit-maximizing companies functioning in a competitive

         As a result of introducing network competition, entire regions of
         the country could be frozen out of the information age. When the
         dust from the competitive battles has settled, vast numbers of
         Canadians may find themselves condemned to live in what the Kline
         Report termed an "information desert", with no access to the vast
         potential that telecommunications services of the future have to

         In an attempt to convince Canadians that theirs is the right
         approach, big corporations like the Royal Bank have formed the
         Communications Competition Coalition.   Determined to reduce their
         communications costs, these companies are promoting
         American-style, market-driven decision-making as the only
         alternative that Canadians should consider.  But according to a
         recent study conducted by the Organization for Economic
         Cooperation and Development (OECD), Canadian telecommunications
         costs are not out of line.  (See Appendix 7.)  Furthermore, if we
         adopt their position, there is a real danger that the Canadian
         telephone system as we know it will be destroyed.


         Clearly, there are significant problems with allowing market
         forces to shape our telecommunications infrastructure.  An
         alternative approach, one which expands upon the capacity of
         existing unitary system, is gaining adherents among industry

              ...In Europe, Japan and the Pacific rim countries,
              government-controlled telecommunications authorities are
              pouring huge sums into public-network infrastructure
              modernization and subsidizing the broad deployment of
              new services such as videotex and integrated services
              digital network, even in the absence of significant
              demand.  This "supply-push" approach assumes that
              telecommunications is a component of the economic
              infrastructure -- like roads and ports...

              In the United States...the free-market, "demand-pull"
              model has led to a broad array of new facilities and
              service opportunities for large business customers, but
              has discouraged the development of public network
              capabilities that cannot be justified on the basis of
              today's market.......

              "For the high-end users and private networks, our
              services are as good as anyone's and probably better,"
              said Manhattan Institutes' (Peter) Huber.  "But for the
              smaller users, there are growing indications that we are
              not moving as fast as others."

              "We could end up with have and have-nots," said Nynex's
              Ferguson.  "The big guys that can buy competitively will
              have a network for their own services, but others will
              be left out."

              Fritz Ringling, an analyst with Robert A. Sayles
              Associates Inc., San Jose, Calif., sees a similar
              problem.  "I fear a reduction in service quality to less
              densely populated areas; new services will not be made
              available in those areas.  We are falling behind in
              homogeneity, and that will cause problems."

              There is a danger, Ringling and others said, that the
              United States could end up with a patchwork of networks,
              some highly advanced, others relatively primitive...
              European telecom authorities, by contrast, are placing
              "very strong emphasis on the integrity of network
              infrastructure," according to Herbert Ungerer of the
              European Economic Commission's information technologies

              ...The New York PSC's (Eli) Noam called the issue a
              "classic question of infrastructure.  Other countries
              see telecommunications as a component of their
              industrial policy....The problem [for a market-driven
              system] is that the financial rewards are societal, and
              so they do not accrue to those who take the financial
              risk."  If the United States does not find a way to
              counter that disadvantage, it will end up with an
              inferior national telecommunications infrastructure,
              Noam said.

              Jonathan Weber, "Is the U.S. Losing Its Telecom Edge?"
              Communications Week, 22 May 1989, pages 40-46.

              Clearly, leaving the fundamentals of telecommunications
         decision-making to the market, as the United States has done, is
         fraught with problems.  Yet it is being suggested that Canada must
         take follow the American lead in this field.


         As we approach the 21st century, Canadians should look forward to
         enjoying universal access to the full range of services that will
         become available via state-of-the-art digital and fibre
         technology.  But to achieve this end, we must construct a unitary
         network that is governed by strict regulatory requirements.  Such
         safeguards are necessary to ensure that socially wasteful
         duplication of network investment -- such as those that would be
         pursued as a result of the introduction of toll competition -- is
         avoided.  Only in a strictly regulated environment can we be sure
         that telecommunications investment corresponds to Canada's
         economic and social needs.

         The Department of Communications' March 1988 document, "Canadian
         Telecommunications -- an overview of the Canadian
         telecommunications carriage industry", concludes with the
         following observation:

              ...Canada has one of the finest telecommunications
              systems in the world, which offers a very high level of
              service and is at the forefront of technological
              developments in many areas, such as digital switching
              and transmission, satellite communications, fibre
              optics, protocols for communicationg word-processors,
              videotex technology, telemedicine, tele-education
              systems and office automation. (Page 56.)

         Having built such an infrastructure, Canadians are faced with a
         strategic choice.  The challenge before us is to use this
         infrastructure to ensure that Canada remains at the forefront of
         the worldwide telecommunications revolution.  There is a real
         danger, however, that our telecommunications advantages could be
         frittered away if our regulators succumb to corporate pressure and
         give the go ahead to toll competition.

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