The Canadian Experience With Deregulation

I Introduction

The 1980s and 1990s witnessed a substantial shift in industrial policy in Canada, as in other developed countries. Policies were established to take a number of industries from rigid government regulation to greater reliance on market competition. Proponents of deregulation were especially optimistic about consumer benefits that would flow from competition in the telecommunications, electricity, and airline industries. The transition in the supply of telephone services from a monopoly to competition from new entrants and a convergence of technologies across the telecommunications industry carried the promise of lower prices, greater innovation, and greater responsiveness to consumer needs.² Changing technology in electricity generation diminished the traditional natural monopoly basis for regulated prices in that industry, and in airlines it became increasingly accepted, especially with the increase in air travel, that a natural monopoly justification for price regulation was non-existent, even without substantial changes in technology.

This article assesses the current state of deregulation in Canadian markets for telephony, electricity, and airlines. This is an opportune time to review the Canadian experience. Enough time has passed since the inception of deregulation, and sufficient problems have arisen in the transition toward competition, that lessons are available. The problems are evident: shortages and consumer intolerance to high prices in electricity markets; a slow (relative to prior expectations) rate of entry of competitors into local telephone service; and bankruptcies in the airline industry including the dominant carrier. Yet enough distance remains in the transition toward greater reliance on markets, and enough uncertainty in even how far the transition will take us, that these lessons will prove valuable in the future.

We select telephony, electricity, and airlines for our assessment because of the prominence of these industries within the Canadian economy and their central place in the deregulation movement. In addition, there is considerable overlap in the sets of policy issues that have arisen in the deregulation of each industry and hence considerable benefit from undertaking a cross-industry analysis.

The overlap in policy issues follows largely from the fact that each industry involves a network. The public telephone network serves as a conduit for telephony service; the transmission and distribution grid or network carries the flow of electricity to purchasers; and the network of airports and routes carries airline passengers. In all three industries, issues arise as to the appropriate boundary between the regulated sectors of the network and the sectors in which services are supplied competitively; the appropriate regulation of wholesale, or access, prices; the need for continued regulatory constraints on retail prices and pricing conduct; and the correction of inefficiencies in relative prices (e.g., business versus residential service in telephony or peak versus off-peak pricing in electricity). Of course, industry-specific issues also arise in the transition from regulation toward reliance on markets.

Our approach to assessing the Canadian experience with deregulation is to evaluate the experience of each industry in a separate section of the article and then to summarize the cross-industry approaches to common challenges. In our assessment within each section, we address two general issues. First, is the perception of dismal performance of some deregulation policies justified, or are the regulatory policies in fact the optimal response to the issues delineated above? A wide variety of views have been expressed on this issue. Problems experienced in the transition are attributed by the political left to market failure and the misguided attempt to replace regulation, and by the political right to a failure of governments to truly eliminate unnecessary regulation and allow markets to work. We attempt to identify regulatory failures as well as problems that are simply inherent in the markets. Second, we outline the lessons for future progress towards efficient industrial policy that can be gleaned from a stocktaking...