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Ottawa, 7 April 1993
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Telecom Decision CRTC 93-3
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FLOOR PRICE FILING REQUIREMENTS FOR THE SALE OF NEW TERMINAL EQUIPMENT
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I INTRODUCTION
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In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission established requirements as to the participation of Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel), Northwestel Inc. (Northwestel) and Unitel Communications Inc. (Unitel) in the terminal equipment market. Those requirements specified, among other things, that:
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(1) sales of each model type of new terminal equipment are to be at a price not less than a floor price to be filed in confidence with the Commission;
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(2) floor prices for new terminal equipment must be shown to the Commission to be not less than the associated costs; and
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(3) semi-annual reports must be filed with the Commission showing, for each model type, the number of units sold, the associated revenues and costs, and an assessment of the continuing validity of the floor price.
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In addition, following a request from the Association of Competitive Telecommunications Suppliers (ACTS), Bell agreed, as of July 1987, to provide ACTS with monthly lists of the items for which it had filed floor prices.
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On 25 February 1992, the Commission issued Telecom Public Notice CRTC 92-9, in which it proposed to relieve the above-noted carriers of the requirement to file floor prices for new terminal equipment. The Commission considered that the complaints process may suffice to bring instances of below-cost pricing to its attention and that such instances could be satisfactorily investigated, provided that mechanisms remained in place whereby each company could be required to furnish the floor price for a particular item. Bell, B.C. Tel, Northwestel and Unitel were made parties to the proceeding. The Commission received comments from these carriers, as well as from AGT Limited (AGT) and Maritime Telegraph and Telephone Company Limited (MT&T). In addition, comments were received from ACTS and from various terminal equipment suppliers.
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II THE REQUIREMENT FOR FLOOR PRICES
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In addition to favouring the elimination of the requirement to file floor prices, Bell went on to propose that it be relieved of the requirement that sales of each model of each type of new terminal equipment be at prices not less than a floor price and of the requirement to report total sales and costs. In Bell's view, the need to sell above a floor price is a competitive disadvantage faced by none of its competitors. In support of this view, the company cited its current inability to do promotional pricing at below floor prices for short periods of time.
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Consistent with its position that it should be relieved of the requirement to sell at prices not below a floor price, Bell also submitted that a complaints process concerning the pricing of individual products is unnecessary. MT&T essentially agreed with Bell's position, stating that, once its Phase III results are available, it should also be relieved of any pricing restrictions.
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Terminal equipment suppliers raised objections to Bell's proposal. Several made reference to the dominance of the telephone companies in the terminal equipment market. Others cited the potential for the telephone companies to use predatory pricing in certain geographical markets, for certain product lines, or with respect to particular customers. Several expressed the view that the current Phase III process is inadequate to protect against such practices, since it entails the filing of results on the basis of Broad Service Categories and will not detect the presence of cross-subsidies within a particular Category.
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In response to concerns raised about possible cross-subsidies within Competitive Terminal Categories, Bell proposed that it submit annually, using the floor price costing methodology, a report of the revenues and costs associated with single-line sets sold through the Teleboutiques/Phonecentres. The company also proposed to provide a similar report for the outright sale of items in the Competitive Terminal - Multiline and Data (CT(MD)) Category.
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Unitel suggested that, if the Commission were to adopt Bell's proposal and remove restrictions on selling prices, both the CT(MD) and the Competitive Terminal - Other (CT(O)) Categories should be split into tariffed and non-tariffed components to safeguard against cross-subsidization between sold and leased equipment. Furthermore, Unitel submitted that the non-tariffed Categories should be required to make a contribution to fixed common costs, calculated using the formula prescribed in Participation of Bell Canada and British Columbia Telephone Company in the Multiline and Data Terminal Equipment Market, Telecom Decision CRTC 86-5, 20 March 1986.
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Unitel also took the position that it should be exempt from any floor price requirements or from any other mechanisms designed to detect and prevent cross-subsidization, submitting that it is a non-dominant supplier of terminal equipment and does not have the ability to engage in cross-subsidization among its service offerings.
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The Commission notes that Decision 82-14 was concerned with the need to minimize (1) the possibility that carriers would unfairly compete with other terminal equipment vendors, and (2) the opportunities for them to cross-subsidize competitive terminal offerings with revenues from monopoly services. Phase III results can reveal a shortfall, and thus the presence of a cross-subsidy, in a competitive Category in any given year. However, audited Phase III results are filed in September of each year for the previous year, and an actual shortfall is not detected until that filing.
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Furthermore, while Phase III results provide information about possible cross-subsidies from monopoly services, they do not address the potential for anti-competitive, below-cost pricing within a Category. In the Commission's view, valid concerns have been raised in this proceeding regarding the ability of the local monopoly carriers, who continue to be dominant suppliers of terminal equipment, to engage in below-cost pricing for certain items or in certain geographical markets, while nonetheless avoiding shortfalls in the Competitive Terminal Categories. Bell's proposal to file annual reports on revenues and costs does not adequately respond to those concerns, since these reports would be at an aggregate level.
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The Commission considers, therefore, that eliminating the minimum pricing requirement would entail a risk of predatory pricing on the part of the local monopoly carriers, with the attendant impact that this would have on competitors and on the overall level of competition in the terminal equipment market. Accordingly, with respect to such carriers, the Commission considers it appropriate to retain the requirement that all sales be at or above a floor price.
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The Commission notes that Unitel is not dominant in any of the markets in which it participates. Thus, it is not in a position to sustain a predatory pricing strategy supported by revenues from other activities. Under these circumstances, the Commission does not consider it necessary that Unitel remain subject to the requirement that sales of new equipment be at or above a floor price.
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III THE FILING REQUIREMENT
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All of the local monopoly carriers who filed comments in the proceeding supported the elimination of the requirement to file floor prices. AGT and B.C. Tel stated that they would continue to develop floor prices for internal purposes and that they intended to continue to set prices for specific model types that would meet or exceed floor prices as currently established. However, they submitted that the elimination of filing requirements would result in cost savings.
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Unitel and the terminal equipment suppliers opposed the elimination of the floor price filing requirements unless a more effective alternative could be established. They expressed the view that the complaints process, with its requirement to examine each complaint individually, would be too onerous for the Commission, especially if the volume of complaints were to increase as a result of the elimination of filing requirements. Terminal equipment suppliers stated that a Commission finding that a sale had taken place below cost would not reverse that sale after the fact; furthermore, there would be no compensation for the complaining party for the lost sale. As a result, they expressed concerns about a possible increase in the incidence of below-cost pricing, should the Commission eliminate the floor price filing requirements.
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While stating that little would be gained in terms of cost reductions, ACTS submitted that, in order to streamline the process, carriers should continue to prepare floor prices as they currently do, but not submit them to the Commission. The floor price would then be available should a complaint be filed. ACTS also submitted that the carriers should be required to continue to file a list of items for which floor prices have been developed.
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The Commission is not persuaded that the removal of the requirement that floor prices be filed would increase the likelihood that local monopoly carriers will engage in selling below cost. Furthermore, although floor prices are currently filed with the Commission, individual instances of sales occurring at below those prices do not come to the Commission's attention unless a complaint is filed. The Commission is of the view that the complaints process can continue to function properly without the regular filing of floor prices, provided that the local monopoly carriers are in a position to provide them to the Commission upon request.
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Since the complaints process is, and will remain, the primary mechanism by which the Commission ensures that selling prices are not below costs, the Commission concludes that the availability of audited Phase III results should not be a criterion in determining which carriers are relieved of the filing requirement. Bell, B.C. Tel, MT&T and Newfoundland Tel all have approved floor price methodologies. The Commission therefore relieves these carriers of the requirement to file floor prices, including the semi-annual reports showing the volume of sales for each item, the cost of the sale and the revenues and an assessment of the continuing validity of the floor price, as well as the report reflecting items for which floor prices have been developed. However, they are to remain in a position to generate floor prices, based on their approved methodologies, in order to respond to any complaints that may arise.
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IV OTHER ISSUES
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In recent complaints, both Unitel and Bell have raised the issue of whether floor prices must be filed for stand-alone cable and wiring. The Commission is of the view that Decision 82-14 applied to all equipment sold. Therefore, Bell, B.C. Tel, MT&T and Newfoundland Tel are to be in a position to provide floor prices, if requested, for all stand-alone cable and wiring sold.
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Unitel and others submitted in this proceeding that the possibility of structural separation should be re-examined. Based on the American experience, it was also suggested that local monopoly carriers could be required to withdraw entirely from the sale of terminal equipment. In the Commission's view, these options are outside the scope of this proceeding. Therefore, the Commission did not consider them in arriving at the determinations set out in this Decision.
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Allan J. Darling
Secretary General
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