Professor Schultz’s take on my telecom reform

Published on May 11, 2016

Professor Richard Schultz, who heads McGill University’s political science department, wrote a very interesting analysis of the reforms that I accomplished in the telecommunications sector as Canadian minister of Industry. This analysis makes up a chapter in the book How Ottawa Spends 2008-2009: A More Orderly Federalism? The Financial Post ran an excerpt of this document in its May 29, 2008 edition, which is reprinted below. The quotation refers to the British Comedy series Yes Minister. -- 14 April 2009

Maxime Bernier: the ‘yes’ minister

Financial Post May 29, 2008

McGill professor Richard Schultz says that as industry minister, Maxime Bernier courageously took on telecom bureaucrats and won major victories for market reforms of Canadian telecommunications.

By Richard Schultz

That would be courageous, Minister, very courageous.

– Sir Humphrey Appleby, Yes Minister

Over the past 40 years, telecommunications has largely been neglected by elected policy-makers. For the most part, the industry has been bureaucratically shaped while politicians have played only a supporting role for decisions made by others. This is true even for the 1993 Telecommunications Act which did not substantially affect the policy directions pursued by the CRTC ever since it gained jurisdiction over telecommunications in 1976.

This political-bureaucratic dynamic dramatically changed with the election of the Conservatives in 2006, particularly with the appointment of Maxime Bernier as minister of industry. Telecommunications was not one of the vaunted five priorities of the new government. But in one of his first appearances as minister, Bernier made it clear that he had his own agenda: “As many of you may know, our new government has five priorities, but I can assure you that telecommunications is at the top of my action list.”

Over the next year, Bernier succeeded in fundamentally changing two major decisions of the CRTC through the appeal process and imposing a policy direction on the CRTC, the first since Cabinet was authorized to do so under 1993 legislation. These initiatives represented the most profound policy changes to the regulatory regime since the introduction of competition in 1979. They also established, for the first time, that elected authorities, not appointed officials, were responsible for setting policy.

Bernier was able to overcome both Cabinet and PMO doubts and determined opposition from both his departmental officials and those in the Privy Council Office. For the first time in the past 40 years of federal regulation of telecommunications, a minister had made a policy difference. The major direction Cabinet sent to the CRTC substantially re-interpreted the policy objectives of the Telecommunications Act. The regulator was ordered to give market forces primacy in its regulatory decisions which was a fundamental re-ordering of the objectives of telecommunications regulation.

There is no evidence that Maxime Bernier came to the position of industry minister with any prior knowledge of telecommunications or with any agenda for the sector. What he did bring was a philosophical outlook that would allow him to adopt, and aggressively pursue, an interrelated set of policy prescriptions for telecommunications.

In Bernier’s case, his sense of mission was clearly ideologically inspired. He is a staunch advocate of free market principles. In his first speeches as a minister, Bernier emphasized that he saw himself as a defender of economic freedom and open competition who embraced “the spirit of entrepreneurship and all it stands for – individual freedom, self-reliance, responsibility and autonomy.” In his first speech on telecommunications, Bernier signalled the importance of his principles: “I came to this portfolio from the private sector with a strong appreciation for the benefits of markets and their ability to deliver results.”

Bernier faced a formidable opponent to his agenda: the Canadian Radio-television and Telecommunications Commission (CRTC). Since acquiring jurisdiction over telecommunications in 1976, the CRTC had become the dominant force in shaping telecommunications regulatory policy. Without any overt political direction or guidance, for example, it had radically redefined legislative provisions dating from 1906 to permit competition in the terminal equipment and long distance telecommunications markets.

The only direct political intervention in the telecommunications regulatory system was the Telecommunications Act. It empowered the CRTC to forbear, or conditionally refrain, from exercising its powers to regulate rates and other aspects of market behaviour. Second, it permitted the CRTC to develop alternative methods for regulating telecommunications other than relying on traditional rate of return methods. Third, it gave the Cabinet authority to issue policy direction to the commission.

Bernier’s role in changing the CRTC came in the battle over VOIP – Voice over Internet Protocol – and forbearance of local telephone regulation. In March, 2006, a Liberal-appointed review panel reported with a recommendation that “market forces should be relied upon to the maximum extent feasible as the means to achieving Canada’s telecommunications policy objectives.” The panel was particularly critical of the CRTC.

The panel report would become crucial to Bernier’s overthrow of CRTC policy. In May, 2005, the CRTC had announced the rules that would be imposed on VOIP services. It rejected the major telcos’ position that VOIP services were revolutionary new services which should not be regulated through tariff approval and other requirements. The CRTC adopted the opposite view that such services, rather than being novel, simply marked “another step in the evolution of telecommunications networks” and were not a substitute for primary local exchange services.

The CRTC said it would continue to regulate the prices and service conditions for such services offered by the telcos but forebear from regulating new entrants and resellers on the grounds that they did not have any market power. This would give the cable companies especially a very significant competitive advantage. Included in the regulatory rules were the so-called “winback rules” which prohibited a telco from initiating contact with a residential customer which it had lost to a competitor. These rules would supposedly prevent anti-competitive behaviour by the telcos before a market had “matured.”

Less than two months after the CRTC’s decision, the telcos appealed to the Cabinet. The Liberal government declined to take up the case. And so, following the Conservative assumption of power, Bernier inherited the CRTC policy issue.

Weeks after Bernier’s appointment, he had lunch with members of the Telecom Policy Review Panel as well as departmental officials to discuss among other matters the VOIP appeal. Departmental officials discouraged Bernier from entertaining it, saying it “would be too technical and difficult” to explain to other Cabinet ministers why they should take the extremely unusual and politically risky step of overturning a CRTC decision. Review panel members, however, said the central issue was not how complex the matter was but that VOIP was exactly the type of novel breakthrough technology that should not be regulated by anything other than market forces.

Over the objections of his officials, Bernier supported the appeal but only to the extent of persuading Cabinet, in May, 2006, to send the decision back to the CRTC for reconsideration. Just in case the CRTC did not “get” the message, in June, 2006, Bernier announced that Cabinet was prepared to employ for the first time the power to issue a policy direction to the CRTC. The CRTC appeared to ignore the Cabinet. Bernier viewed the CRTC’s lack of response as an arrogant and wilful dismissal of political policy direction. Convinced that this was evidence that the CRTC was out of control and “did not get it,” Bernier easily persuaded his Cabinet colleagues that a Liberal-appointed commission was not sympathetic to the “new” government’s policy direction in telecommunications.

Consequently, on Dec. 14, 2006, Cabinet issued an order directing the CRTC to implement the revised telecommunications policy objectives. Bernier had won again, ignoring or overriding the advice of his officials, and the CRTC had lost again. But he was not finished. He would encounter the most strenuous opposition, not just from some industry players, his own officials and the CRTC, but from the most senior levels of the government in both the Prime Minister’s Office and the Privy Council Office.

In April, 2006, in a decision closely linked to the VOIP decision, the CRTC had issued its decision setting out how and when it would forbear from regulating the incumbent telcos providing local retail exchange services. It effectively said the CRTC would only forebear from regulating the telcos under certain conditions. They would also be subject to restrictions on their ability to “winback” lost customers. The telcos immediately appealed.

Bernier took up this case, and waged the most controversial of his telecom battles. Departmental officials felt that he was going too far in his attempt to impose his vision on the CRTC. According to several sources, Bernier in turn complained that his own Cabinet memos were rewritten in ways that undercut his arguments. On several occasions he was told that Cabinet did not have the legal authority to pursue his plan. He overcame that argument by obtaining independent legal opinions from outside the department. When Bernier persisted, departmental officials, according to several sources, then sought external support, primarily from the Privy Council Office to defeat their minister.

As a key decision date approached, Ottawa witnessed a bureaucratic coincidence worthy of Yes Minister. On March 27, just nine days before the deadline, the CRTC announced that it would forbear from regulating TELUS’ local service offerings in Fort McMurray, Alta. Although he did not take part in the decision, Konrad von Finckenstein, the new chair, declared in the accompanying press release that the “decision reflects our commitment to act quickly to bring the benefits of competition to Canadians.”

Cabinet was meeting that same day to take its decision on Bernier’s requested order. For the relevant PCO and PMO officers, here was sufficient proof that the CRTC did indeed finally “get it.” Bernier went to the Cabinet meeting only to discover that his item, approval of the Cabinet order, had been lifted from the agenda. Bernier was not yet prepared to concede defeat. He ordered his political staff to contact senior Bell and TELUS officers to tell them that, unless they were able to give him some help quickly, the order was doomed and the decision would stand. Both companies immediately issued press releases critical of the CRTC’s decision. TELUS said that it was “extremely disappointed” because it said that “the conditions for deregulation they set out are unattainable in any practical sense and . their decision runs entirely contrary to the government’s direction.”

In another coincidence, Bernier had a pre-arranged meeting with Prime Minister Harper that afternoon. Armed with the two press releases, he persuaded the Prime Minister that the need for the order amending the CRTC decision was in fact as strong as ever. As a consequence, Harper instructed officials in both the PMO and the PCO that, unless they had substantive problems with the order, he was authorizing Bernier to announce that the government was varying the CRTC’s decision.

On April 4, one day before the legal deadline, Bernier made the announcement that the Cabinet had opted to rewrite fundamentally the CRTC’s original decision and invited the telcos to file for forbearance in a number of major urban markets. This order was undoubtedly the most comprehensive variance of a CRTC decision.

Three weeks after the Cabinet order, the new CRTC chair said, “the message is clear: the government wants to move quickly toward more reliance on market forces in telecom services, less regulation and smarter regulation. I welcome the clarity and I welcome the variation order.” Thus concluded the 12-month series of battles that had been fought following the appointment of Maxime Bernier as minister of industry, battles that the minister had clearly won.

Unfortunately, we will never know whether he would have been able to deliver on the other components of the action plan developed by the Telecom Policy Review Panel because, after little more than a year-and-a-half as industry minister, Bernier was “rewarded” for his performance by being promoted to minister of foreign affairs. But in the short time he was industry minister, he decidedly made a difference that other ministers, past and present, can only envy.

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Richard Schultz is James McGill Professor and Chair, Department of Political Science, McGill University. This article is adapted from Telecommunications Policy: What a Difference a Minister Can Make, in How Ottawa Spends: 2008-2009, just published by McGill-Queen’s University Press.