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TRANSCRIPT OF PROCEEDINGS BEFORE
THE CANADIAN RADIO‑TELEVISION AND
TELECOMMUNICATIONS COMMISSION
TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
SUBJECT / SUJET:
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 9, 2007 Le 9 octobre 2007
Transcripts
In order to meet the requirements of the Official Languages
Act, transcripts of proceedings before the Commission will be
bilingual as to their covers, the listing of the CRTC members
and staff attending the public hearings, and the Table of
Contents.
However, the aforementioned publication is the recorded
verbatim transcript and, as such, is taped and transcribed in
either of the official languages, depending on the language
spoken by the participant at the public hearing.
Transcription
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès‑verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Canadian Radio‑television and
Telecommunications Commission
Conseil de la radiodiffusion et des
télécommunications canadiennes
Transcript / Transcription
Review of regulatory framework for wholesale
services and definition of essential service /
Examen du cadre de réglementation concernant les services
de gros et la définition de service essentiel
BEFORE / DEVANT:
Konrad von Finckenstein Chairperson / Président
Barbara Cram Commissioner / Conseillère
Andrée Noël Commissioner / Conseillère
Elizabeth Duncan Commissioner / Conseillère
Helen del Val Commissioner / Conseillère
ALSO PRESENT / AUSSI PRÉSENTS:
Marielle Giroux-Girard Secretary / Secrétaire
Robert Martin Staff Team Leader /
Chef d'équipe du personnel
Peter McCallum Legal Counsel /
Amy Hanley Conseillers juridiques
HELD AT: TENUE À:
Conference Centre Centre de conférences
Outaouais Room Salle Outaouais
140 Promenade du Portage 140, Promenade du Portage
Gatineau, Quebec Gatineau (Québec)
October 9, 2007 Le 9 octobre 2007
- iv -
TABLE DES MATIÈRES / TABLE OF CONTENTS
PAGE / PARA
AFFIRMED: GEORGE HARITON 6 / 40
AFFIRMED: PATRICK HUGHES
AFFIRMED: JEFFREY CHURCH
Examination-in-chief by the Competition Bureau 7 / 46
Cross-examination by The Companies 8 / 62
Cross-examination by Rogers Communications Inc. 25 / 211
Cross-examination by TELUS 111 / 754
Cross-examination by MTS Allstream 164 / 1121
Cross-examination by Primus / Globility 259 / 1765
- v -
EXHIBITS / PIÈCES JUSTIFICATIVES
No. PAGE / PARA
ROGERS-1 Document entitled "Report of 73 / 525
the ICN Working Group on
Telecommunications Services"
MTS-1 Order Varying Decision 167 / 1153
CRTC 2006-15
MTS-2 Excerpt of Telecom Decision 181 / 1271
CRTC 2006-15
Gatineau, Quebec / Gatineau, Québec
‑‑‑ Upon commencing on Tuesday, October 9, 2007
at 0830 / L'audience débute le mardi 9 octobre 2007
à 0830
LISTNUM 1 \l 11 THE SECRETARY: Please be seated.
LISTNUM 1 \l 12 THE CHAIRPERSON: Good morning. Bonjour, mesdames et messieurs, et bienvenue à cette audience sur les services essentiels.
LISTNUM 1 \l 13 Our panel today is made up, from left to right, of Commissioner del Val from B.C., Commissioner Noël from Quebec, myself, Chairman von Finckenstein, Commissioner Cram from Manitoba and Saskatchewan, and Commissioner Duncan from the Maritimes.
LISTNUM 1 \l 14 Our team will be assisted by Robert Martin, the Team Leader and Senior Manager, Essential Services; Amy Hanley and Peter McCallum as Legal Counsel; and Marielle Giroux‑Girard as Hearing Secretary.
LISTNUM 1 \l 15 This proceeding marks the first time that the Commission has held a comprehensive review of its approach to wholesale services. It also provides us with an opportunity to clearly define what constitutes an essential service. This will undoubtedly be one of the key issues in this proceeding.
LISTNUM 1 \l 16 Given that we have lots of ground to cover at this hearing, we have asked the parties in a letter of organization and conduct dated September 26th to be efficient and focused in their cross‑examinations.
LISTNUM 1 \l 17 In addition, the Commission identified, in a letter dated October 3, six categories which it would ask all parties to refer to when making arguments on the issues in question. We believe these six baskets will facilitate a more focused and informed discussion on the issues at hand. We would appreciate your diligence and cooperation.
LISTNUM 1 \l 18 Finally, as you are aware, Commissioners Noël and Cram will finish their term at the end of the month. Given their broad expertise, I have asked them to sit on this panel. This, unfortunately, means that they will be unable to participate in our final discussion.
LISTNUM 1 \l 19 However, we will benefit from their extensive experience and knowledge during the conduct of this hearing and they have kindly agreed to share with us, the remaining members, their preliminary views prior to leaving their office.
LISTNUM 1 \l 110 We have a lot of ground to cover. I would ask you all to be very short and to the point so that you can conceivably do it within the time allotted.
LISTNUM 1 \l 111 I will now turn the hearing over to our Hearing Secretary Mrs. Giroux‑Girard.
LISTNUM 1 \l 112 Madame Giroux‑Girard.
LISTNUM 1 \l 113 THE SECRETARY: Thank you, Mr. Chairman.
LISTNUM 1 \l 114 Bonjour, tout le monde.
LISTNUM 1 \l 115 As you know, all procedural matters that will apply for this hearing were provided in the Commission's organization and conduct letter issued on the 26th of September 2007.
LISTNUM 1 \l 116 For your convenience, you may get a copy of that letter on the table at the back of this room or retrieve it on our Commission's web site.
LISTNUM 1 \l 117 Aussi, nous avons mis à votre disposition une salle pour examen public, laquelle est située dans la pièce Papineau, près de la réception. Elle sera ouverte à toutes les parties et au public pour la durée de l'audience. Vous pourrez y trouver un exemplaire du dossier public de l'instance et certains services administratifs.
LISTNUM 1 \l 118 Simultaneous interpretation service is available during the hearing. Receivers are available from the commissionaires outside the hearing room. The English translation is on channel 7. L'interprétation française se trouve au canal 8.
LISTNUM 1 \l 119 All submissions heard at this public hearing will be transcribed and will form part of the public record for this proceeding. Anyone wishing to purchase a copy of the transcripts may speak with the court reporter.
LISTNUM 1 \l 120 Copies of the transcripts will be available on the Commission's web site shortly after each day of the hearing.
LISTNUM 1 \l 121 If you have not already completed a written record of appearance, please see me for copies of the form. The information is required and will allow us to contact you at all times if necessary.
LISTNUM 1 \l 122 Any parties wishing to apply for an award cost should file a request on or before November 30th, 2007, copying all other parties and parties should reply by December 7, 2007. In doing so, parties are encouraged to identify the specific amount of costs for which they wish to apply and to file with the Commission all information necessary for the Commission to fix costs.
LISTNUM 1 \l 123 Also, please be reminded when you are in the hearing room to turn off all your electronic devices.
LISTNUM 1 \l 124 Tout autre message jugé opportun vous sera communiqué pendant le déroulement de l'audience.
LISTNUM 1 \l 125 Finally, along with the staff Team Leader Robert Martin and Commission counsel Peter McCallum and Amy Hanley, on my right, I will be available throughout the hearing to assist any parties who have questions regarding practices or procedures that we follow.
LISTNUM 1 \l 126 Merci pour votre attention.
LISTNUM 1 \l 127 We will now proceed with the Competition Bureau witness panel and I'm asking Counsel Abugov to present his witnesses before their solemn affirmation.
LISTNUM 1 \l 128 Thank you.
LISTNUM 1 \l 129 MR. ABUGOV: Good morning, Mr. Chairman, Commissioners and Commission staff.
LISTNUM 1 \l 130 My name is Lorne Abugov, I am Counsel for the Bureau of Competition in this proceeding; seated to my right is my co‑counsel, Josephine Palumbo, Senior Counsel at the Department of Justice; and to my left is Mr. David Teal, Competition Law Officer at the Bureau of Competition.
LISTNUM 1 \l 131 I would like to introduce the witness panel for the Bureau, beginning with the witness closest to the Commissioners, that would be Mr. George Hariton, principal with TIA Telecom.
LISTNUM 1 \l 132 Next to Mr. Hariton, seated in the centre, is Mr. Patrick Hughes, Senior Economist at the Bureau.
LISTNUM 1 \l 133 Finally, closest to our table, is Dr. Jeffrey Church, Professor of Economics at the University of Calgary.
LISTNUM 1 \l 134 Each of the witnesses has filed their CVs with the Commission as prescribed in the org and conduct letter.
LISTNUM 1 \l 135 I would now ask the witnesses to please confirm that the evidence of the Bureau was prepared by or under your supervision.
LISTNUM 1 \l 136 THE SECRETARY: Before you do so, Mr. Abugov, I would like to affirm the witnesses.
LISTNUM 1 \l 137 MR. ABUGOV: Thank you.
LISTNUM 1 \l 138 THE SECRETARY: Please stand up.
LISTNUM 1 \l 139 Please state your name for the record.
LISTNUM 1 \l 140 MR. HARITON: George Hariton. I do.
AFFIRMED: GEORGE HARITON
LISTNUM 1 \l 141 MR. HUGHES: Patrick Hughes. I do.
AFFIRMED: PATRICK HUGHES
LISTNUM 1 \l 142 MR. CHURCH: Jeff Church. I do.
AFFIRMED: JEFFREY CHURCH
LISTNUM 1 \l 143 THE SECRETARY: Thank you very much.
LISTNUM 1 \l 144 You may proceed, Counsel Abugov.
LISTNUM 1 \l 145 MR. ABUGOV: Thank you.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 146 MR. ABUGOV: Yes, witnesses, please confirm that the Bureau evidence was prepared by or under your supervision.
LISTNUM 1 \l 147 MR. CHURCH: I do.
LISTNUM 1 \l 148 MR. HUGHES: I do.
LISTNUM 1 \l 149 MR. HARITON: I do.
LISTNUM 1 \l 150 MR. ABUGOV: Can you confirm that there are no changes at this time or updates to the Bureau evidence?
LISTNUM 1 \l 151 MR. CHURCH: Yes.
LISTNUM 1 \l 152 MR. ABUGOV: Can you confirm indeed that your CVs and qualifications were filed with the Commission?
LISTNUM 1 \l 153 MR. HUGHES: Yes.
LISTNUM 1 \l 154 MR. CHURCH: Yes.
LISTNUM 1 \l 155 MR. HARITON: Yes.
LISTNUM 1 \l 156 MR. ABUGOV: All right.
LISTNUM 1 \l 157 Mr. Chairman, I think our witnesses are ready to respond to questions.
LISTNUM 1 \l 158 Thank you.
LISTNUM 1 \l 159 THE CHAIRPERSON: All right. Who is going to lead us in cross‑examination, please?
LISTNUM 1 \l 160 MR. HOFLEY: I am, Mr. Chairman. Good morning. Good morning, Members of the Panel, good morning Commission staff.
LISTNUM 1 \l 161 My name is Randall Hofley. I am here with my co‑counsel Jonathan Daniels and our favourite economist, Mr. David Kraus. We are from "The Companies", as we have become known.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 162 MR. HOFLEY: I have a few questions for you, gentlemen.
LISTNUM 1 \l 163 I have provided you with four documents, all of which you will be very familiar with.
LISTNUM 1 \l 164 The first document is the opening statement of the Commissioner of Competition which is updated and revised to yesterday's version. That is what I'm going to be asking most of my questions on and then I will have one or two other questions.
LISTNUM 1 \l 165 In your opening statement that was received I guess yesterday, but there was another version received a few days ago, you made a change to your test for essential facilities.
LISTNUM 1 \l 166 Correct?
LISTNUM 1 \l 167 MR. CHURCH: Yes.
LISTNUM 1 \l 168 MR. HOFLEY: That change related to the third condition of your test?
LISTNUM 1 \l 169 MR. CHURCH: Yes.
LISTNUM 1 \l 170 MR. HOFLEY: Can you explain the nature of that change?
LISTNUM 1 \l 171 MR. CHURCH: Yes.
LISTNUM 1 \l 172 So the Bureau has proposed two definitions. The initial definition which was proposed in our evidence of March 15th required that mandated access would result in entry or expansion that would likely result in competition sufficient to remove economic regulation in the downstream market within a reasonable period of time.
LISTNUM 1 \l 173 This definition was proposed prior to the Variance Order and by the GIC and its implementation by the Commission.
LISTNUM 1 \l 174 In recognition of those two significant changes in the regulatory environment, the Bureau has changed its third condition, as stated in its opening written comments, to:
"... such entry or expansion as is likely to result in a substantial increase in competition in a downstream market within a reasonable period of time." (As read)
LISTNUM 1 \l 175 MR. HOFLEY: This change is in recognition of the situations in which forbearance have been granted downstream in retail markets.
LISTNUM 1 \l 176 Is that the principal reason for this change?
LISTNUM 1 \l 177 MR. CHURCH: Like I say, there are two reasons for the change, one simple and one a little bit more complicated, but both on their own we think are compelling.
LISTNUM 1 \l 178 The first is, at the very least a change was required to avoid the measure of benefits for a competitive benefits test being, in the words of some parties, virtually meaningless by the advent of widespread forbearance.
LISTNUM 1 \l 179 So as noted by some parties, the third element of the Bureau's test has been superseded by the advent of widespread forbearance.
LISTNUM 1 \l 180 I think the basic point here is that it would be hard to understand what it would need for determining whether a facility is essential if there has already been a forbearance, because the initial bullet required that granting access would result in forbearance and so if you already have forbearance it would be hard to interpret that.
LISTNUM 1 \l 181 So that was the simple reason.
LISTNUM 1 \l 182 MR. HOFLEY: Can we just stick with that for a second?
LISTNUM 1 \l 183 MR. CHURCH: Yes.
LISTNUM 1 \l 184 MR. HOFLEY: Would you agree with me that for those retail markets that have not been forborne as yet that your original test would continue to be appropriate?
‑‑‑ Pause
LISTNUM 1 \l 185 MR. CHURCH: I mean, I guess you could do it two ways or one way, it depends.
LISTNUM 1 \l 186 You know, the question is the relationship between the significant increase in competition and what would be required for the removal of economic regulation.
LISTNUM 1 \l 187 I think that if you go back and we think a little bit about why we had our third bullet, initially with the significant ‑‑ which led to this idea that we would want to have mandated access only if it resulted in a reduction or elimination of economic regulation, I mean there was two reasons for that in that particular context.
LISTNUM 1 \l 188 One was that we wanted to avoid ‑‑ we wanted to make sure, pardon me, that the costs of mandating access were less than the benefits. We wanted to make sure the benefits where greater than the cost of mandating the access.
LISTNUM 1 \l 189 Also, we had this idea that it struck the Bureau that if you were in a situation where you had regulation at retail and regulation at wholesale that double regulation perhaps is not such a good idea and so you should be very clear that the benefits were going to be substantial of mandating access. So if it would allow you to eliminate retail regulation, then that was why we had this kind of a threshold on the test that was required for the amount of competition that would be created by mandating access.
LISTNUM 1 \l 190 MR. HOFLEY: You didn't talk about double regulation, Professor Church, in your opening statement.
LISTNUM 1 \l 191 Correct?
LISTNUM 1 \l 192 MR. CHURCH: No, we didn't.
LISTNUM 1 \l 193 MR. HOFLEY: Yes.
LISTNUM 1 \l 194 MR. CHURCH: I think in the opening statement, as I recall, there is no discussion about the nature of the change. We just made the change.
LISTNUM 1 \l 195 MR. HOFLEY: All right.
LISTNUM 1 \l 196 Would you agree that the likelihood of retail forbearance, the original test, was, in essence, a screen for determining the cost benefit threshold for determining whether or not there would be a substantial effect on competition. In this case it would be, I guess, from your standpoint, a pro‑competitive effect.
LISTNUM 1 \l 197 MR. CHURCH: Yes.
LISTNUM 1 \l 198 MR. HOFLEY: You say when you changed your threshold in your opening statement that the third condition now requires a substantial increase in competition.
LISTNUM 1 \l 199 Is that a fair ‑‑
LISTNUM 1 \l 1100 MR. CHURCH: Yes.
LISTNUM 1 \l 1101 MR. HOFLEY: Now, I just want to make sure, "substantial increase", that would be the standard competition law analysis Bureau test.
LISTNUM 1 \l 1102 Correct? "Substantial increase in competition".
LISTNUM 1 \l 1103 MR. CHURCH: Yes. The terminology is a little different than a substantial lessening. All that is designed to reflect, I guess, a minor variation in perspective. So in the tab where we use "substantial lessening of competition" we are dealing with a case where you have ex post denial.
LISTNUM 1 \l 1104 Here it is an ex ante mandating, so it's a substantial increase.
LISTNUM 1 \l 1105 MR. HOFLEY: This is the flip side?
LISTNUM 1 \l 1106 MR. CHURCH: Yes, it's the flip side, but interpretation is the same.
LISTNUM 1 \l 1107 MR. HOFLEY: But it's the same standard?
LISTNUM 1 \l 1108 MR. CHURCH: Yes. Yes.
LISTNUM 1 \l 1109 MR. HOFLEY: All right.
‑‑‑ Pause
LISTNUM 1 \l 1110 MR. HOFLEY: Dr. Church, just a point of clarification.
LISTNUM 1 \l 1111 I'm not sure whether you agreed with me or not that in a situation such as DNA, low‑speed DSO or DS1 where there is no retail forbearance test, would you agree with me that you would use the test that you initially proposed in those circumstances?
LISTNUM 1 \l 1112 MR. CHURCH: Yes, we would use the original test.
LISTNUM 1 \l 1113 MR. HOFLEY: I would like to now take you to a different subject, and that is one that you have written about in various interrogatories and in your evidence. You first write about it in your evidence at paragraph 60. This is the so‑called weaker and stricter standards.
LISTNUM 1 \l 1114 Do you recall that? Paragraph 60 of your March 15 evidence is the ‑‑
LISTNUM 1 \l 1115 MR. HUGHES: We will just be a moment.
LISTNUM 1 \l 1116 MR. HOFLEY: You don't actually have to turn there, I just wanted to let you know where it first started.
LISTNUM 1 \l 1117 Now, I'm sorry, Mr. Chairman, I am in ‑‑
LISTNUM 1 \l 1118 THE CHAIRPERSON: Where are you in this red binder, just so I can follow your questioning?
LISTNUM 1 \l 1119 MR. HOFLEY: Okay. Is your red binder the one with the four tabs, Mr. Chairman?
LISTNUM 1 \l 1120 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1121 MR. HOFLEY: I'm not in the red binder, I am in the evidence.
LISTNUM 1 \l 1122 THE CHAIRPERSON: Yes, no, I have two things ‑‑
LISTNUM 1 \l 1123 MR. HOFLEY: Sorry.
LISTNUM 1 \l 1124 THE CHAIRPERSON: ‑‑ I have the four tabs and I have a red book here, which says "The Bureau", which I gather is the equivalent of a compendium for the purpose of this cross‑examination.
LISTNUM 1 \l 1125 MR. HOFLEY: I'm at a loss, Mr. Chairman, with respect to the red binder. I gave you the tabs.
LISTNUM 1 \l 1126 THE CHAIRPERSON: Okay. One moment, please.
LISTNUM 1 \l 1127 COMMISSIONER del VAL: Are you on the March 15th evidence?
LISTNUM 1 \l 1128 MR. HOFLEY: Yes, March 15th evidence, paragraph 60.
LISTNUM 1 \l 1129 THE CHAIRPERSON: Okay, I'm with you. Thank you.
LISTNUM 1 \l 1130 MR. HOFLEY: Thank you.
LISTNUM 1 \l 1131 As I said, I want to just make sure I understand the stricter and weaker standard which is referenced in your evidence and your interrogatory responses. I'm going to go slowly here because I'm pretty slow myself.
LISTNUM 1 \l 1132 Am I correct that under the weaker standard the Commission could determine, assuming there is market power downstream and upstream, that a facility is essential where the facility can be duplicated, but the duplication would not be of a nature to effectively discipline the exercise of market power downstream?
LISTNUM 1 \l 1133 MR. CHURCH: Yes.
LISTNUM 1 \l 1134 MR. HOFLEY: Now, under the stricter standard, the Commission could not determine that a facility is essential once it concluded that a facility can be duplicated. Correct?
LISTNUM 1 \l 1135 MR. CHURCH: Yes, or, alternatively, if it cannot be duplicated profitably, then it is an essential facility.
LISTNUM 1 \l 1136 MR. HOFLEY: Is your answer "yes" to my question, Dr. Church?
LISTNUM 1 \l 1137 MR. CHURCH: Please rephrase it.
LISTNUM 1 \l 1138 MR. HOFLEY: Well...
LISTNUM 1 \l 1139 MR. CHURCH: Or just repeat it.
LISTNUM 1 \l 1140 MR. HOFLEY: Okay.
LISTNUM 1 \l 1141 Under the stricter standard, the Commission would not determine ‑‑ we say "would not" ‑‑ that a facility is essential if it concludes that a facility can be duplicated?
LISTNUM 1 \l 1142 MR. CHURCH: Yes, where the standard for duplication is that it would be profitable for an entrant to duplicate, yes.
LISTNUM 1 \l 1143 MR. HOFLEY: Fine, thank you. That's in your evidence.
LISTNUM 1 \l 1144 MR. CHURCH: Now, is it fair to say that you would prefer, when in doubt, an approach which aired on the side of not mandating access and incenting investment?
LISTNUM 1 \l 1145 MR. CHURCH: So I guess in response to that, you know, the Bureau's perspective on this, and the way we have set things up in kind of an optimal decision‑making framework, is to look at the two types of errors that could be made. One type of error would be to mandate access to facilities which are not essential. The other kind of error would be to not mandate access to the facilities that turned out to be essential.
LISTNUM 1 \l 1146 The Bureau's view, as set out in its evidence, is that the costs of the first type of error, mandating access to stuff which is not essential, are much larger than the costs of not mandating access to things which turn out to be essential.
LISTNUM 1 \l 1147 So that kind of puts a whole tilt in saying that, you know, you should have a fairly strong test to make sure that you are not making a mistake, because we think that the costs of the one error are much larger than the costs of the other error, and so we have incorporated that, you know, in putting the three bullets together as a whole, as a package.
LISTNUM 1 \l 1148 MR. HOFLEY: In fact, you have said at your interrogatory response, which is at Tab B of the materials I gave you. Correct?
LISTNUM 1 \l 1149 It's page 3 of 3. You don't need to go there, I can read it to you.
LISTNUM 1 \l 1150 MR. CHURCH: Okay.
LISTNUM 1 \l 1151 MR. HOFLEY:
"...that the error of concern is mandating access to facilities that are not essential." (As read)
Correct?
LISTNUM 1 \l 1152 MR. CHURCH: Yes.
LISTNUM 1 \l 1153 MR. HOFLEY: So is your answer "yes", Dr. Church, to my question?
LISTNUM 1 \l 1154 MR. CHURCH: My answer is yes, in the sense of the way we designed the three bullets was to reflect these relative costs of benefits for the two errors.
LISTNUM 1 \l 1155 THE CHAIRPERSON: I'm sorry, Mr. Hofley, you may be slow, I'm even slower. I still don't know what the answer to your...I understand your question, I don't understand the answer.
LISTNUM 1 \l 1156 Could you repeat that, Dr. Church? He asks you is your bias, when in doubt, on the pro‑incentive side or not, and what was the answer?
LISTNUM 1 \l 1157 MR. CHURCH: My answer is yes, and that's been incorporated in our three bullets, sir.
LISTNUM 1 \l 1158 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1159 MR. HOFLEY: Now, would you agree that if the Commission were to adopt an ex‑anti approach in this proceeding, the appropriate standard would be, given your preference, the stricter standard?
LISTNUM 1 \l 1160 MR. CHURCH: Well, I guess we would have real concerns about an ex‑anti approach in this, sorry.
LISTNUM 1 \l 1161 MR. HOFLEY: No, I understand. That's why I said "if".
LISTNUM 1 \l 1162 MR. CHURCH: If. Well, I guess we would have to see, you know, what the nature of that test was and what the errors would be between using a strict versus the weak standard. Right? We would have to evaluate.
LISTNUM 1 \l 1163 MR. HOFLEY: Would you agree with me ‑‑
LISTNUM 1 \l 1164 MR. CHURCH: But we would be concerned. We would be concerned about a weak standard on an ex‑anti basis, but that might result in more errors than a strong standard on an ex‑anti basis.
LISTNUM 1 \l 1165 MR. HOFLEY: Those are my questions, Mr. Chairman.
LISTNUM 1 \l 1166 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1167 Any other party want to examine?
LISTNUM 1 \l 1168 Okay, then, on this last point, Dr. Church, in ex‑anti and ex‑post approach, an ex‑post approach, of course, makes a lot of sense when you have some way to discipline, since, as you know, the CRTC does not have them.
LISTNUM 1 \l 1169 Doesn't that necessarily drive you to an ex‑anti approach unless there is legislative change to have a means of disciplining?
LISTNUM 1 \l 1170 MR. CHURCH: Sorry?
LISTNUM 1 \l 1171 MR. HOFLEY: Or do you see the disciplining being done all by the Competition Bureau?
LISTNUM 1 \l 1172 MR. CHURCH: Sorry, Mr. Commissioner, by "disciplining", you mean punishing for denying access?
LISTNUM 1 \l 1173 THE CHAIRPERSON: Well, if you want to put in those cool terms, yes.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1174 THE CHAIRPERSON: Usually, you don't have to go that far. Just the fact that you have the means usually encourages compliant behaviour.
LISTNUM 1 \l 1175 MR. CHURCH: I guess that, in some sense, depends on, you know, where you think, in some sense, the property rights lie, if you think that the normal course of affairs should be that entrants should have access to the facilities of the incumbent or whether you think that should be an exceptional thing.
LISTNUM 1 \l 1176 I think that the Bureau's evidence suggests that, based on our analysis of the costs of the various areas, we think mandating access should be something ‑‑ that would be exceptional and not normal course of affairs.
LISTNUM 1 \l 1177 THE CHAIRPERSON: Yes, I went on the assumption there is something that is considered essential. Right?
LISTNUM 1 \l 1178 MR. CHURCH: I guess we would want to go through the analysis before we decided that something was essential, and you need the right kind of information to do that. That's why we typically think that the ex‑post approach ‑‑
LISTNUM 1 \l 1179 THE CHAIRPERSON: Okay, and now you have gone through the analysis and you have decided something is essential, okay, and therefore you still believe it should not be an ex‑anti approach?
LISTNUM 1 \l 1180 MR. CHURCH: I see. No. So I think that the differences that we have here, perhaps, is that the way the Bureau has used ex‑anti in its evidence would say at the end of these proceedings, and the ‑‑
LISTNUM 1 \l 1181 THE CHAIRPERSON: Oh, okay.
LISTNUM 1 \l 1182 MR. CHURCH: ‑‑ Commission would have a set of rules, which they would then apply to everything, ex‑anti it.
LISTNUM 1 \l 1183 THE CHAIRPERSON: Subsequent?
LISTNUM 1 \l 1184 MR. CHURCH: Yes, subsequently?
LISTNUM 1 \l 1185 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1186 MR. CHURCH: That's what we mean by "ex‑anti".
LISTNUM 1 \l 1187 THE CHAIRPERSON: Okay, thank you.
LISTNUM 1 \l 1188 Commissioner Cram, you have some questions?
LISTNUM 1 \l 1189 COMMISSIONER CRAM: I just had two questions...well, maybe one.
LISTNUM 1 \l 1190 What is your minimum and maximum timeframes for resolving competitive complaints, anti‑competitive complaints?
LISTNUM 1 \l 1191 MR. HUGHES: I'm not sure we have thought that much in those terms. Do you mean for the CRTC to deal with them or...?
LISTNUM 1 \l 1192 COMMISSIONER CRAM: No, I mean you, people complaining ‑‑
LISTNUM 1 \l 1193 MR. HUGHES: Oh, in the Bureau.
LISTNUM 1 \l 1194 COMMISSIONER CRAM: ‑‑ finding an anti‑competitive complaint, and what are your minimum and maximum times for processing them?
LISTNUM 1 \l 1195 MR. HUGHES: The minimums, when someone comes in and we are giving some sort of advice and they are going to comply, particularly voluntarily, is relatively quick. I can't give you a number, I'm afraid, off the top of my head.
LISTNUM 1 \l 1196 COMMISSIONER CRAM: Two months? Three months?
LISTNUM 1 \l 1197 MR. HUGHES: I think there are certainly cases where matters get resolved in that sort of timeframe. Contested cases, on the other hand, take quite some time.
LISTNUM 1 \l 1198 COMMISSIONER CRAM: And what is that? Two, three years?
LISTNUM 1 \l 1199 MR. HUGHES: When you think about the court process and going even to an appeal, yes, a matter of years. That's partly outside the Bureau's control, but, yes, that is true.
LISTNUM 1 \l 1200 COMMISSIONER CRAM: So two to three years?
LISTNUM 1 \l 1201 MR. HUGHES: I think that's probably fair. It could even be longer.
LISTNUM 1 \l 1202 COMMISSIONER CRAM: And am I correct that the bill that was going to give you increased AMPs has died? Is it before Parliament? It is not before Parliament, is it, or has it passed?
LISTNUM 1 \l 1203 MR. HUGHES: I am afraid I don't know the answer to that. My apologies, I just am not prepared with that information.
LISTNUM 1 \l 1204 COMMISSIONER CRAM: So what is the maximum AMP you can impose?
LISTNUM 1 \l 1205 MR. HUGHES: To my knowledge, we don't have any right now.
LISTNUM 1 \l 1206 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1207 Thank you, Mr. Chair.
LISTNUM 1 \l 1208 THE CHAIRPERSON: If there are no other questions, we will now go over to Rogers' cross‑examination.
LISTNUM 1 \l 1209 THE SECRETARY: Thank you, gentlemen. Please, Counsel Dunbar and Counsel Englehart.
LISTNUM 1 \l 1210 THE CHAIRPERSON: Okay, go ahead.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 1211 MR. DUNBAR: Good morning, Mr. Chairman, members of the Commission and the witness panel from the Bureau. I am going to begin our cross‑examination of this panel, Mr. Chairman, and then Mr. Englehart is going to ask some additional questions.
LISTNUM 1 \l 1212 Gentlemen, I would like to begin by looking at the issue of whether it is a necessary requirement for the essential facilities definition to have dominance in the upstream market or monopoly in the upstream market.
LISTNUM 1 \l 1213 As I understand it, the first element of the Bureau's definition of essential facilities requires as a necessary condition that the firm controlling the facility in question is vertically integrated and dominant in two markets; the first relevant market being the upstream market and the second being the downstream market in which the facility is an input. Is that correct?
LISTNUM 1 \l 1214 MR. CHURCH: Yes, it is.
LISTNUM 1 \l 1215 MR. DUNBAR: And in contrast TELUS' definition states that a necessary condition for a facility to be essential is that the facility is monopoly controlled in the upstream market. And I would like to explore the interaction that there has been in the proceeding between the Bureau and TELUS on this issue.
LISTNUM 1 \l 1216 In paragraph 31 of your supplemental evidence the Bureau states that if TELUS means that monopoly control requires 100 per cent market share in the input market its definition is too restrictive.
LISTNUM 1 \l 1217 I would like you to explain, why is monopoly control in the input market too restrictive?
LISTNUM 1 \l 1218 MR. CHURCH: So the TELUS proposal, as I understand it, and you know it is based on our understanding of the record, is that they require monopoly upstream. You know, if they are defining monopoly to be 100 per cent market share in an input market where we define the market using antitrust market definition principles, right, we are taking a share of something, we have to define what it is that we are taking a share of, the Bureau is assuming we are doing that using antitrust market principle definitions.
LISTNUM 1 \l 1219 Then if you had a 100 per cent market share in that, that would be the only circumstances under which TELUS would say that there should be mandated access. I guess the Bureau's point would be that you may be ruling out instances where the ILEC or the firm that owns that facility has substantial market power. There may be other alternatives available. Where those other alternatives are weak in terms of their disciplining effect on the market power of the owner of the essential facility, so there could still be cases where you would want to mandate access because it would increase welfare downstream and that would be ruled out by using a TELUS test.
LISTNUM 1 \l 1220 MR. DUNBAR: And is it your position that the TELUS test is still too restrictive?
LISTNUM 1 \l 1221 MR. CHURCH: Yes, that is why we have a dominance requirement and not a monopoly requirement.
LISTNUM 1 \l 1222 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1223 Now, as we have discussed, the Bureau's test requires dominance in both the upstream and the downstream market. And in contrast TELUS has proposed that a facility can only be considered essential if, without it, competition downstream is prevented. In other words, the monopolist upstream is also a monopolist downstream.
LISTNUM 1 \l 1224 In paragraph 32 of your evidence you discussed this difference and you again characterized TELUS' test as problematic. You state that as with dominance upstream, it raises issues of market definition and market share. And you go on to state that if TELUS is talking in terms of 100 per cent market share, then adoption of this standard will inefficiently restrict access to facilities.
LISTNUM 1 \l 1225 Do you continue to believe that that is the case?
LISTNUM 1 \l 1226 MR. CHURCH: Yes.
LISTNUM 1 \l 1227 MR. DUNBAR: And can you explain what the problem is there?
LISTNUM 1 \l 1228 MR. CHURCH: Again, it is a similar problem that is, as we just talked about in terms of upstream, is that the TELUS test might result in situations where mandating access would be good for consumers and it is not being identified correctly by the TELUS test, whereas it would be with a dominance requirement.
LISTNUM 1 \l 1229 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1230 Now, I would like to turn next to consideration of how the Bureau's test in this proceeding or proposed definitions and tests of essential facilities would be operationalized by the Commission. And I would like to begin by referring to your opening statement, the version dated October 2.
LISTNUM 1 \l 1231 Now, on page 2 of the opening statement of October 2 the Bureau has outlined its three‑part test ‑‑
LISTNUM 1 \l 1232 MR. HUGHES: Excuse me, could you give us a moment?
LISTNUM 1 \l 1233 MR. DUNBAR: Sure.
LISTNUM 1 \l 1234 MR. HUGHES: We have got the eighth, but the second?
LISTNUM 1 \l 1235 MR. DUNBAR: We have a handout there if you don't have it.
LISTNUM 1 \l 1236 COMMISSIONER del VAL: Mr. Dunbar, it is October 2, right, the earlier version of the opening statement?
LISTNUM 1 \l 1237 MR. DUNBAR: That is correct.
LISTNUM 1 \l 1238 THE SECRETARY: We have the October 8 version, but not the October 2 version at hand.
LISTNUM 1 \l 1239 MR. DUNBAR: It is the same test, sir.
‑‑‑ Pause
LISTNUM 1 \l 1240 MR. DUNBAR: So anyway, if we look at this test, you have a three‑part test. We have already mentioned the first part of the test requiring a vertically integrated company that is dominated in two markets. And you state that, within that definition, that a necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.
LISTNUM 1 \l 1241 Your second test requires mandating access to the facility is likely to result in competitors entering or expanding the downstream market. And your third requirement, such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable time.
LISTNUM 1 \l 1242 I am going to come back to that opening statement, so maybe you can keep that handy. And I would like to turn to the Bureau's supplementary evidence at page 18, paragraph 47.
LISTNUM 1 \l 1243 Now here, in talking about how the Commission might apply your test to specific facilities and services, you indicate that your test has three conditions. But in implementing the test you say it should be recognized that one of the most difficult aspects is assessing whether the facility is duplicatable.
LISTNUM 1 \l 1244 MR. CHURCH: Yes.
LISTNUM 1 \l 1245 MR. DUNBAR: Hence, you say the focus should be on using the other conditions to reduce the set of potential facilities that might be essential.
LISTNUM 1 \l 1246 As I understand it, you are proposing that you look at other aspects of the test as sort of a screen that is easier to apply before going to the more difficult question of whether the facility is duplicatable.
LISTNUM 1 \l 1247 MR. CHURCH: Yes. In fact, if you look at our test in our evidence, we suggest that there are two screens that you should do. One would be to look for dominance downstream, and the second one would be to look and see if there are other impediments to competition, such that mandated access may not have the effect of leading to a substantial increase in competition.
LISTNUM 1 \l 1248 Those would be the two screens we would recommend.
LISTNUM 1 \l 1249 We would think that in most cases looking at those two things may save you having to go further in the analysis.
LISTNUM 1 \l 1250 MR. DUNBAR: So, you are doing the process of elimination here, using the easier parts of the test?
LISTNUM 1 \l 1251 MR. CHURCH: Yes. So in anti‑trust parlance, it would be called a structured rule of reason, where you try and have some screens to identify on the basis of things that you can do easily, and then it sets up a structure for how you proceed in the analysis.
LISTNUM 1 \l 1252 MR. DUNBAR: I would like to look at the first part of the screen of your structured rule of reason test and refer to the Bureau/CRTC‑103, where the Bureau has provided its views on how to assess market power dominance.
LISTNUM 1 \l 1253 That was one of the handouts.
LISTNUM 1 \l 1254 THE CHAIRPERSON: Where are you now? What document are you referring to?
LISTNUM 1 \l 1255 MR. DUNBAR: I am in Bureau/CRTC, 12 April, 103.
LISTNUM 1 \l 1256 COMMISSIONER deVAL: Mr. Dunbar, can you please give us the date of that?
LISTNUM 1 \l 1257 MR. DUNBAR: Yes, it is April 7th ‑‑ sorry, 12 April, 2007, and it is number 103.
LISTNUM 1 \l 1258 So, as I was saying, in this interrogatory response, the Bureau has provided its views on how to assess market power dominance, as I understand it, in the upstream and downstream markets. Is that correct?
LISTNUM 1 \l 1259 MR. HUGHES: Yes.
LISTNUM 1 \l 1260 MR. DUNBAR: Can you confirm that this is the same test of market power that was advocated by the Bureau in the local forbearance proceeding before the CRTC?
LISTNUM 1 \l 1261 MR. HUGHES: It is certainly the standard test we use and that was a major part of the local forbearance, yes.
LISTNUM 1 \l 1262 MR. DUNBAR: You start out under this analysis, as I understand it, in defining the appropriate geographic and product markets. Is that correct?
LISTNUM 1 \l 1263 MR. HUGHES: Yes.
LISTNUM 1 \l 1264 MR. DUNBAR: And you gather and analyze the detailed list of qualitative and quantitative information specified in the merger enforcement guidelines?
LISTNUM 1 \l 1265 MR. HUGHES: Not limited to that, but, yes.
LISTNUM 1 \l 1266 MR. DUNBAR: And you use a hypothetical monopolist test?
LISTNUM 1 \l 1267 MR. HUGHES: We use the hypothetical monopolist, of course taking into account things like the "Cellophane Trap" and matters like that.
LISTNUM 1 \l 1268 MR. DUNBAR: Would I be correct in thinking that the product definition test used to assess market power in the relevant market requires you to examine whether there are reasonable substitutes for the facilities in question?
LISTNUM 1 \l 1269 MR. HUGHES: Yes, certainly.
LISTNUM 1 \l 1270 MR. DUNBAR: And this analysis would require the regulator to assess possible substitutes in terms of functionality, quality, price, acceptability to consumers or users, among other things?
LISTNUM 1 \l 1271 MR. HUGHES: Among other things, yes.
LISTNUM 1 \l 1272 MR. DUNBAR: So, the fact that there might be an alternative access functionality available in a given geographic market might not mean that it is a suitable substitute, for example, if it was not acceptable to consumers or business users in terms of those factors such as price and quality?
LISTNUM 1 \l 1273 MR. HUGHES: Yes.
LISTNUM 1 \l 1274 MR. DUNBAR: So, for example, hypothetically, if a wireless connection was not generally acceptable to business customers who require certain quality and reliability of service, would that be a relevant type of consideration for the Commission to consider?
LISTNUM 1 \l 1275 MR. HUGHES: It is certainly relevant, and you would take it into regard, looking at the entire nature of their competitive response.
LISTNUM 1 \l 1276 MR. DUNBAR: Similarly, if residential subscribers did not consider a mobile phone to be a cost‑effective substitute for their home phone, that would be relevant?
LISTNUM 1 \l 1277 MR. HUGHES: Certainly.
LISTNUM 1 \l 1278 MR. DUNBAR: The Commission is going to have to do a significant amount of qualitative assessment to determine the relevant product market?
LISTNUM 1 \l 1279 MR. HUGHES: Yes.
LISTNUM 1 \l 1280 MR. DUNBAR: Is this the same type of analysis that the Commission must do to determine whether it is practical or feasible for competitors to duplicate the facility in question, or is that a different test?
LISTNUM 1 \l 1281 MR. HUGHES: I think once we get there, we are probably moving to another ‑‑ the first issue is to analyze the markets, and if you don't analyze the markets right, you are going to get the wrong answers.
LISTNUM 1 \l 1282 Once you have the right market, then you can look at issues like duplicability, and I have the same problem pronouncing this word as you do.
LISTNUM 1 \l 1283 MR. DUNBAR: I should have looked it up to see if it's a real word, but I didn't. It is all over the place.
LISTNUM 1 \l 1284 Thank you.
LISTNUM 1 \l 1285 MR. CHURCH: Excuse me, if I might just add something to that, to Mr. Hughes' response.
LISTNUM 1 \l 1286 You are correct in the sense that when we are looking for duplicability under either standard, our weak or our strong standard, you are trying to assess what the market conditions would be like if there was entry, and so it is going to be entry into what, and it will be entry into the relevant market.
LISTNUM 1 \l 1287 So, the same analysis is going to be required to start the duplicability analysis.
LISTNUM 1 \l 1288 MR. DUNBAR: I guess what I was wondering there, this is part of your first screen, and you said you wanted to use the first screen because it is easier to apply than the test of duplicability, and I am just wondering really whether it is that much harder, easier or whether you are really looking at the same kind of factors.
LISTNUM 1 \l 1289 MR. HUGHES: I think it would be easier in the sense that you define the market to do your dominance analysis, especially downstream, and it is a first step in a duplicability analysis, but the duplicability analysis requires you to then forecast or assess what would happen if there was entry, and that is much more difficult than just defining the market.
LISTNUM 1 \l 1290 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1291 MR. CHURCH: If I may add, I think there is probably a lot more experience and easier proxies to deal with market definition and to try to assess at least at a first pass the market power. This is something that competition authorities do a lot.
LISTNUM 1 \l 1292 Duplicability requires us to get into the business plans and really try to forecast what is going to happen in this market. It is something that we, I think, have been in a position to do. It is somewhat harder, in my opinion.
LISTNUM 1 \l 1293 MR. DUNBAR: When you are defining the market and looking at whether or not there is dominance in the two markets, when you are looking at the downstream market, are you looking solely at the level of competition there would be in the absence of an essential facility, if there is already one out there? Are you trying to isolate facilities‑base competition from non‑facilities‑base competition?
LISTNUM 1 \l 1294 MR. HUGHES: That would be a sufficient test. So, you would be worried if your conclusion was there is no market power, and the reason there is no market power is because of a player who is dependent on the facility. That would worry you.
LISTNUM 1 \l 1295 It doesn't mean that you are completely off the table, but I would feel a lot more comfortable if I knew it was a facilities‑base player.
LISTNUM 1 \l 1296 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1297 Just on that point, that is another factor the Commission would want to look at to try and isolate where the competition is?
LISTNUM 1 \l 1298 MR. HUGHES: Absolutely. Other factors might be relevant too in terms of identifying the players. Not all parties are equal necessarily as competitive forces.
LISTNUM 1 \l 1299 MR. DUNBAR: If we could turn to what I refer to your second screen, second part of your three‑part definition, this is the requirement that mandating access to the facility is likely to result in competitors entering or expanding in the downstream market.
LISTNUM 1 \l 1300 I take it from your evidence that this requires as a first step the Commission establishing that there are not any other significant impediments to competitors in the downstream market except for access to the alleged essential facility. Is that fair?
LISTNUM 1 \l 1301 MR. CHURCH: Yes. The second bullet just says that if you mandated access, then competitors will enter and expand.
LISTNUM 1 \l 1302 The third bullet is designed to assess how effective that entry and expansion would be in creating competition.
LISTNUM 1 \l 1303 MR. DUNBAR: I understood that your second test also requires you to isolate whether or not there might be other impediments to entry that might be blamed for lack of entry in order to get out of looking at whether or not there is an essential facility requirement?
LISTNUM 1 \l 1304 MR. CHURCH: I guess I was thinking about that second screen, the screen about impediments to competition. It was kind of taking the second bullet and the third bullet together and saying what you are really interested in is if I gave you access, would there be a substantial increase in competition in the downstream market, or are there other things that even if you gave me access there still would not be any competition. Therefore, why bother mandating access.
LISTNUM 1 \l 1305 MR. DUNBAR: So that would be part of the second screen because that is ‑‑
LISTNUM 1 \l 1306 MR. CHURCH: It is part of the second screen. You are trying to tie it to the two bullets or a specific bullet. I would tie it to both the second and the third bullet.
LISTNUM 1 \l 1307 MR. DUNBAR: That is fair.
LISTNUM 1 \l 1308 THE CHAIRPERSON: Can I just clarify? You are talking about impediments other than those that have the origin in the dominance of the player, because you have dealt with the dominance by mandating access. You want to see are there other impediments not related to the dominance of the player.
LISTNUM 1 \l 1309 MR. CHURCH: There may be other reasons for the dominance besides the essential facility. So, there may be other reasons why the firm might be dominant downstream besides the essential facility.
LISTNUM 1 \l 1310 THE CHAIRPERSON: Wouldn't you have taken that into account when you deal with dominance? Your second screen deals with impediments. I assumed it was impediments other than those coming from the dominance of the player.
LISTNUM 1 \l 1311 MR. CHURCH: When I think about this, you know, you are asking if I give you access to this essential facility, would you be able to enter and effectively compete against the incumbent. There may be other reasons why you can't effectively compete. Those other reasons may be contributing entry barriers downstream, which are different than the essential facility. They may support dominance for another reason besides access to the essential facility being denied.
LISTNUM 1 \l 1312 MR. DUNBAR: Can you give me some examples of what you are talking about there?
LISTNUM 1 \l 1313 MR. CHURCH: This would kind of be the standard kinds of things we would run through better found in the merger enforcement guidelines. They would be things like switching costs, brand loyalty, those kinds of things.
LISTNUM 1 \l 1314 MR. DUNBAR: So, this analysis also would follow the type of guidelines that are in the merger and the use of dominance guidelines?
LISTNUM 1 \l 1315 MR. CHURCH: Yes, we're looking at impediment analysis. That is part 6 of the merger enforcement guidelines.
LISTNUM 1 \l 1316 MR. DUNBAR: I would like to turn next to the Bureau/CRTC, 12 April, 2007, 101. I would like to refer to, on that particular handout, page 3, it says 3 of 36, page 3 in the third paragraph on the page.
LISTNUM 1 \l 1317 I believe this is where you get to the issue of whether duplication is practical or feasible. At the bottom in that paragraph, second to last from the bottom, near the end of it, you said:
"The third step reached only after the first two have not eliminated the possibility of an essential facility is to identify whether duplication is practical or feasible." (As read)
LISTNUM 1 \l 1318 Then you say:
"Unfortunately, the analysis required to determine if entry is profitable and, if profitable, effective is fact intensive. The analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger having anti‑competitive effects." (As read)
LISTNUM 1 \l 1319 I wonder if you could explain that concept to me?
LISTNUM 1 \l 1320 MR. CHURCH: Sorry, could you be more precise about which concept you would like me to explain?
LISTNUM 1 \l 1321 MR. DUNBAR: You say that the analysis required to assess the incentives and effective entry is very similar to the analysis required to determine if entry is sufficient to prevent a horizontal merger from having anti‑competitive effects.
LISTNUM 1 \l 1322 I wonder if you could just explain why that is the case?
LISTNUM 1 \l 1323 MR. CHURCH: In the merger enforcement guidelines and in a merger context, if there are not substantial barriers to entry, if we think that entry is easy, then even though there might be a merger, we are not worried about a substantial lessening of competition from that merger in response to any kind of market power that might be created by the merger. It is disciplined by entry.
LISTNUM 1 \l 1324 So, to figure out if there is the potential for a discipline from entry, we do an analysis, the Bureau does an analysis of entry barriers to determine whether entry is sufficient, timely and likely to discipline any market power which might be created by the merger. So, that is a discussion of entry barriers. That is part 6 of the merger enforcement guidelines.
LISTNUM 1 \l 1325 The discussion about duplicability is kind of the same thing. This goes back to what we talked about earlier, is that I am trying to forecast if an entrant was to come in and duplicate the facility, what would be the outcome?
LISTNUM 1 \l 1326 So, under the strong standard you are asking whether it would be profitable. That corresponds very nicely to likely and timely in the merger enforcement guidelines.
LISTNUM 1 \l 1327 Also, if you are looking at the weak standard, which is asking what the competitive effects would be, then that is the inverse of sufficient to control the market power.
LISTNUM 1 \l 1328 That same kind of analysis here, when you are addressing duplicability, in the Bureau's estimation, that is very similar to a discussion of what the entry barriers are and what the effects of entry might be post‑merger.
LISTNUM 1 \l 1329 MR. DUNBAR: That is what I was wondering because it seems that we keep going back to part 6 of the MEGs on each of these tests, and I just wonder are each time the Commission is running these tests we are really doing it on a different issue even though we are applying part 6? You said we apply part 6 to the second part of the test; we apply the guidelines to the first part of the test. We seem to be keep re‑applying them.
LISTNUM 1 \l 1330 I am just wondering is it a separate issue each time?
LISTNUM 1 \l 1331 MR. CHURCH: In the definition of our essential facilities, there are two entry analyses that are required, right?
LISTNUM 1 \l 1332 There is one which is to ask about duplication. So, you are asking could it be duplicated, which is you are asking could an entrant come in upstream and duplicate the essential facility? To answer that, you need some apparatus to decide whether or not the entrant could come in. That is one analysis that is required.
LISTNUM 1 \l 1333 There is a second entry analysis which is required, which is to say, given that you mandate access to the upstream essential facility, would there be entry and what would the effect of that entry be from the mandated access in the downstream market. Again, that is an entry question, so there are two possible ways in which entrants can come in to the market. They can come in by duplicating the upstream facility, or they could come in by having mandated access.
LISTNUM 1 \l 1334 In both cases you want to know what the effect of that entry is. Part 6 of the merger enforcement guideline shows you how to analyze the potential for entry and the effects of the entry.
LISTNUM 1 \l 1335 MR. DUNBAR: Would I be correct in saying that even after we have gone through these screens and we have looked at them, as I understand it, the screen we applied on part 2 of the test would only address part of the issue. Would we still have to go back and consider whether mandating access is likely to result in competitors entering or expanding in the downstream market? Is that an issue you have to go back to?
LISTNUM 1 \l 1336 MR. CHURCH: I am not sure what it means to go back to but it is part of our test and that is part of our screen.
LISTNUM 1 \l 1337 MR. DUNBAR: Does that analysis come after the screens are applied or is it part of the screen?
LISTNUM 1 \l 1338 MR. CHURCH: It would be part of the screen.
LISTNUM 1 \l 1339 MR. DUNBAR: Okay. And then we still need to address the third test to determine whether entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time?
LISTNUM 1 \l 1340 MR. CHURCH: That is the second screen, I think. I mean we are doing it at the same time.
LISTNUM 1 \l 1341 If you are going to identify whether there are impediments or not to competition, you are really asking if I have access to that central facility, would I be able to bring about a substantial increase in competition, and in order to answer that, you would have to know whether there are other impediments or not. So they are the same kind of thing.
LISTNUM 1 \l 1342 MR. DUNBAR: When we looked at your opening statement, that seemed to be the third test:
"Such entry or expansion is likely to result in a substantial increase in competition in the downstream market within a reasonable period of time." (As read)
LISTNUM 1 \l 1343 That is the third test, not the second.
LISTNUM 1 \l 1344 MR. CHURCH: It is the third bullet but it is the second screen.
LISTNUM 1 \l 1345 MR. DUNBAR: Okay.
LISTNUM 1 \l 1346 MR. HUGHES: I think it is important to look at this test as a unified ‑‑ and there will be some duplication of what falls under which bullet.
LISTNUM 1 \l 1347 At the end of the day, the question is really ‑‑ can be put fairly simply. Is there a problem ‑‑ and here I am talking about a problem that is going to affect consumers and it is going to affect the market in a substantive way ‑‑ and is there a solution?
LISTNUM 1 \l 1348 And you are right to say that we are doing a couple of things here because we have to do both the merger analysis to see whether there is a problem and the remedy analysis to see whether this solution is going to work.
LISTNUM 1 \l 1349 So it is a little bit more demanding but it is really not fundamentally very different and it is not any more duplicative except for the fact that you need to find out if there is a problem and find out whether this solution is going to work.
LISTNUM 1 \l 1350 THE CHAIRPERSON: But if either one of those tests is negative, then you don't mandate something as essential?
LISTNUM 1 \l 1351 MR. HUGHES: Right, because then you have concluded there is no problem, so you don't have to worry about whether this solution is going to work.
LISTNUM 1 \l 1352 THE CHAIRPERSON: But let us assume you find yes, there is dominance ‑‑
LISTNUM 1 \l 1353 MR. HUGHES: Yes.
LISTNUM 1 \l 1354 THE CHAIRPERSON: ‑‑ but you find that mandating access to this particular service is not likely to create entry ‑‑
LISTNUM 1 \l 1355 MR. HUGHES: Correct.
LISTNUM 1 \l 1356 THE CHAIRPERSON: ‑‑ then you say you have a problem but this is the wrong solution, so therefore, don't worry, don't mandate?
LISTNUM 1 \l 1357 MR. HUGHES: That is our position.
LISTNUM 1 \l 1358 THE CHAIRPERSON: Notwithstanding that one is purely based on prospective assumptions while the other one is actually based on existing fact? I mean whether there is dominance or not is something you can establish.
LISTNUM 1 \l 1359 MR. HUGHES: Yes.
LISTNUM 1 \l 1360 THE CHAIRPERSON: Whether there is entry or not is prospective and is based on a whole set of assumptions which may or may not turn out to be true.
LISTNUM 1 \l 1361 MR. HUGHES: And I think that is a fair consideration to take into account when you are doing your risk analysis of where you want to shade the answer ‑‑
LISTNUM 1 \l 1362 THE CHAIRPERSON: Mm‑hmm.
LISTNUM 1 \l 1363 MR. HUGHES: ‑‑ but we think this is the right framework and then you have to sort of take these into account.
LISTNUM 1 \l 1364 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1365 MR. CHURCH: If I might just follow up, sir.
LISTNUM 1 \l 1366 I mean we are worried about costs mandating access to facilities which are not essential and so we want to be very sure that in fact the remedy to the dominance downstream is going to be solved by this.
LISTNUM 1 \l 1367 And so, as Mr. Hughes has said, we want to ‑‑ you know, we will take into account that it is prospective and that we are going to make assumptions but we are still going to be fairly tough on them or we would recommend you be tough on them.
LISTNUM 1 \l 1368 THE CHAIRPERSON: Mr. Dunbar, I interrupted your cross, please go on.
LISTNUM 1 \l 1369 MR. DUNBAR: There is no problem, Mr. Chairman.
LISTNUM 1 \l 1370 You said in that case you might find a dominance in the market but that mandating essential services is not necessarily the answer even if you have gone through the three tests.
LISTNUM 1 \l 1371 What would you propose that the Commission do in that circumstance? Would you propose that they regulate the service?
LISTNUM 1 \l 1372 MR. CHURCH: Yes. I mean if there is a market power issue in the downstream markets and solving it with mandated access doesn't solve it, mandated access is not the solution and they are worried about market power downstream, the answer should be to regulate at retail.
LISTNUM 1 \l 1373 MR. DUNBAR: Thank you.
LISTNUM 1 \l 1374 I would like you to turn, finally, to paragraph 33 of the Bureau's Supplementary Evidence of July 5th and in particular the bottom of page 12, paragraph 33.
LISTNUM 1 \l 1375 THE CHAIRPERSON: What was the paragraph number?
LISTNUM 1 \l 1376 MR. DUNBAR: It is paragraph 33, Supplementary Evidence.
LISTNUM 1 \l 1377 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1378 MR. DUNBAR: Down at the bottom of page 12, paragraph 33.
LISTNUM 1 \l 1379 Here you say that:
"The Bureau's test for an essential facility consists of three necessary conditions. In addition to these necessary conditions, before mandating access, the Commission should consider whether there are efficiencies that would be lost from mandating access and/or costs that would be incurred to implement access to a facility found to be essential." (As read)
LISTNUM 1 \l 1380 So I take it from this that even if you pass all three tests you want the Commission to embark on some sort of cost‑benefit analysis?
LISTNUM 1 \l 1381 MR. CHURCH: Yes, because there may well be substantial costs incurred by consumers by mandating access which are not necessarily captured by those three bullets.
LISTNUM 1 \l 1382 So we would add that, I think, in most applications ‑‑ and again, remember that paragraph 33 was written in the context of the old third bullet.
LISTNUM 1 \l 1383 The new third bullet requires a substantial increase in competition, which we have already said today is the same as a substantial lessening of competition in terms of what it means.
LISTNUM 1 \l 1384 And so you might want to take into account the efficiencies either there in determining whether you had a substantial increase in competition or if there are other things that arise, you might want to take them into account later.
LISTNUM 1 \l 1385 But ultimately, what the Commission should be interested in is does this mandating access result in an increase in welfare for consumers in downstream markets.
LISTNUM 1 \l 1386 MR. DUNBAR: So would you say the Commission should assume if there is a benefit involved that there is a significant increase in competition but they would still have to look at costs?
LISTNUM 1 \l 1387 MR. CHURCH: My earlier point was it depends. You can either do it when you consider a substantial increase in competition or you can do it later but if there are significant costs involved, then you should take those costs into account at some point in the analysis.
LISTNUM 1 \l 1388 MR. DUNBAR: And what type of costs would those be?
LISTNUM 1 \l 1389 MR. CHURCH: Well, it may be the case that mandating access involves large costs being incurred by the incumbents to make their facilities available to entrants. So that would be one example of potential costs that should be looked at. In some cases those costs may be small, in other cases they may be extensive.
LISTNUM 1 \l 1390 Usually in an essential facilities discussion there is some idea about how practical or feasible it is to allow access to those facilities. This would be one of those considerations that should be taken into account.
LISTNUM 1 \l 1391 There may also be some vertical efficiencies that are involved in terms of when the ILEC is vertically integrated and is involved in both the upstream and the downstream and those vertical efficiencies, whatever they might be, might be impaired by mandating access. That would be something I am sure that the ILECs would be very happy to come forward and tell us about.
LISTNUM 1 \l 1392 MR. DUNBAR: Now, I take it from your evidence and the Merger Enforcement Guidelines that the tests you are proposing do rely to a significant extent on having the necessary data available. The Bureau has asked questions in this proceeding, and in parts of its evidence it states it is unable to draw conclusions as to such things as market definitions due to lack of information.
LISTNUM 1 \l 1393 Would you agree with that?
LISTNUM 1 \l 1394 MR. CHURCH: Yes. I think the Bureau's point here in its Supplementary Evidence is that in terms of considering proxy rules which would involve market definition and the duplicability and the whole bit, without access to the information on the questions that we have asked, we are not in any position to say that proxy rules are possible or whether the ones that might be possible are good or bad.
LISTNUM 1 \l 1395 MR. DUNBAR: So without that kind of data though, the Commission couldn't apply your tests either, could it?
LISTNUM 1 \l 1396 MR. CHURCH: Well, that is the second question, right? I mean any definition is going to imply certain things that you want to check for and those certain things you want to check for should be reflected in the proxy rule that you design. So a proxy rule designed for definition A might not work very well for definition B.
LISTNUM 1 \l 1397 MR. DUNBAR: Yes, but it seems to me that the rules you are proposing or the tests you are proposing in this proceeding involve quite a number of steps and each step requires a significant amount of information.
LISTNUM 1 \l 1398 What I am suggesting is if the Commission does not gather that information and utilize it in the manner you are suggesting, which is a significant amount of information, then your test isn't going to be very practical for the Commission to work with or it won't produce the right results.
LISTNUM 1 \l 1399 MR. HUGHES: It may well depend on how it is applied. If it is a question of looking for an across‑the‑board solution across the country in all markets, for those kind of ex‑ante rules or proxies our position is we don't have sufficient information right now to make a responsible recommendation.
LISTNUM 1 \l 1400 The Commission does have some of this information. It is on the confidential record. We haven't seen it, so we don't know. There may be scope to streamline this to some degree.
LISTNUM 1 \l 1401 If that is not the case, which is, I think, where you are going, and you are looking at a fairly fact‑insensitive analysis, what we have in mind is something a little different process‑wise, is almost a test case. Focus in on one or two or three specific areas where admittedly the information is fairly detailed, but it is only on one market, it is only on one issue. You should be able to nail down these important factual and important evidentiary elements somewhat easier than trying to do it across the board.
LISTNUM 1 \l 1402 Then, if that is appropriate and it works, then perhaps that can be applied across the board. So if you have one medium‑size city and you can delve down into the facts and get the right answer, then maybe you can apply that. Unless someone shows the facts are different in their city. The same thing for a large city or maybe a rural area.
LISTNUM 1 \l 1403 That's more of what we have in mind then an omnibus collection of all the relevant market information for the whole country.
LISTNUM 1 \l 1404 MR. CHURCH: Right. So if I might just add something to Mr. Hughes comments?
LISTNUM 1 \l 1405 I guess we have in mind that in ex post proceedings would be that there would be a number of these cases that would come along and that the Commission would learn and eventually we would evolve into a situation where we would have proxy rules that would implement the Bureau's definition.
LISTNUM 1 \l 1406 I think we have to be very careful here, is that it's fine to have administrative cost savings by having a nice easy, simple approach, but the nice, easy simple approach may result in very large errors in terms of your decision‑making process.
LISTNUM 1 \l 1407 So the Commission is going to have to trade off the ease of administrative cost ‑‑ of administratability versus the cost of an error that an easy rule brings about.
LISTNUM 1 \l 1408 MR. DUNBAR: Thank you very much.
LISTNUM 1 \l 1409 Those are my questions, Mr. Chairman.
LISTNUM 1 \l 1410 Mr. Englehart will have a few.
LISTNUM 1 \l 1411 CHAIRPERSON: Before he does, can we just follow up on this last point, because if I understood you correctly in response to Mr. Dunbar's questioning you really were suggesting that we do a merger analysis on each and every service, including an efficiency trade‑off at the end in the area which is, as you well know, fraught with difficulties and not easy to apply in mergers let alone in this kind of scenario.
LISTNUM 1 \l 1412 Do you really think that's practical?
LISTNUM 1 \l 1413 Everything is fact‑intensive when you do merger analysis. Everything is driven by the fact of why are you ‑‑ I know, Doctor, you suggested we should do a test case and then apply the cost.
LISTNUM 1 \l 1414 Why would that be feasible here? You don't do it in mergers. You don't do it in competition. Why could we do it here?
LISTNUM 1 \l 1415 Wouldn't there be a huge outcry of people saying, "You know, just a second, it may be true in your test case but it doesn't apply to me."
LISTNUM 1 \l 1416 I think Mr. Dunbar brought out the practicality of doing this. It may be conceptually logical to do it, but to do it for each service and for five different companies or something like this is going to be a massive task.
LISTNUM 1 \l 1417 MR. CHURCH: Right.
LISTNUM 1 \l 1418 Mr. Chairman, in responding to that I don't think it is quite so bleak, in the sense that if you thought about a sector ‑‑ and so when the Bureau does a merger analysis in a sector ‑‑ so if we have five forestry mergers, we learn something from the first one that informs the second one informs the third one informs the fourth one, and by the end of it those analyses can be done fairly simply.
LISTNUM 1 \l 1419 I think that's the kind of thing that the Bureau would see evolving up from an ex post rule, would be that in similar geographic regions for similar services you would learn something through time so that you would end up with a proxy rule where you had a nice trade‑off between the administrative cost savings and the errors that you might make, as opposed to this other approach which is, you know, if you have a bunch of proxy rules ex ante they are likely to be susceptible to substantial errors in terms misclassification of facilities.
LISTNUM 1 \l 1420 THE CHAIRPERSON: On the efficiency trade‑off you actually suggest we go through two screens on whether there is dominance and whether there are other impediments, we find that both of those there are none and we still would not, at least theoretically, mandate access because the efficiencies are not there? The cost of providing the service would outweigh the consumer benefit?
LISTNUM 1 \l 1421 MR. CHURCH: Again, I think I would look at the Telecommunications Act which looks at competition sufficient to protect the interest of users. So in terms of what kind of standard you are choosing that seems to me to suggest that it should be a consumer welfare standard that you are looking at.
LISTNUM 1 \l 1422 When there is a conflict between, as you well know, between total surplus and consumer surplus, if there is a conflict it suggests that you should look for a consumer welfare standard. As we know, the consumer welfare standard is much easier to administer than a total surplus standard.
LISTNUM 1 \l 1423 THE CHAIRPERSON: All right.
LISTNUM 1 \l 1424 Commissioner Cram, you had a question?
‑‑‑ Pause
LISTNUM 1 \l 1425 COMMISSIONER CRAM: If I could follow up on that, Dr. Church? I was going to ask you anyway about ultimately the issue is an increase in the benefits for consumers and that has to be examined.
LISTNUM 1 \l 1426 I'm going to put a question to you: What's better, if costs go up for a consumer or if there is a reduction of a CAPEX?
LISTNUM 1 \l 1427 MR. CHURCH: I guess I would want to know a little bit more information about the reduction in CAPEX and whose investment it is that's going down and what would have been the benefits from that.
LISTNUM 1 \l 1428 COMMISSIONER CRAM: Well, you were referring in page 8 of 36 in the interrogatory, a copy of which Mr. Dunbar just gave us ‑‑ 8 of 36 is an attachment. I can't tell you. It's the one before 18 may the Bureau/CRTC 12 April 07. Oh, it is 102, sorry.
LISTNUM 1 \l 1429 MR. HUGHES: "Geographical extent" are the first two words on the page.
LISTNUM 1 \l 1430 Is that correct?
LISTNUM 1 \l 1431 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1432 There is a reference there to:
"... a rollout of facilities by CLECs in Canada being reduced by the availability of CD&A at low prices." (As read)
LISTNUM 1 \l 1433 I'm going to ask you: If the ultimate result would then be an increase in costs for consumers, what would be more important?
LISTNUM 1 \l 1434 If you say that's the ultimate test, the ultimate test is consumer welfare, if the costs go up then shouldn't we then say we should mandate that facility as essential, notwithstanding the reduction in capital expenditures?
LISTNUM 1 \l 1435 MR. CHURCH: Right.
LISTNUM 1 \l 1436 I guess when the Bureau has put together its test and is thinking about these three bullets and ultimately this test at the end that says ultimately what you do should be to the benefit of consumers, I guess the Bureau looks at the experience in the cable companies in competition at residential markets and the Bureau looks and says "If we can have situations where we can have competing networks, really competing networks against each other, if that's possible that's the best thing for consumers because then we are going to get price competition and we are going to get innovation and we are going to get product differentiation, we are going to get ‑‑ you know, there is an increase in capacity on one network then the other network is going to be in a situation where it is forced to respond, it comes up with something new, then the other one has to respond."
LISTNUM 1 \l 1437 If we can have that situation, that, in the Bureau's estimation, would be the best for consumers. It may take some time for that to happen.
LISTNUM 1 \l 1438 COMMISSIONER CRAM: But we are not in Utopia, so what is more important, the consumer benefit or increasing CAPEX in Canada?
LISTNUM 1 \l 1439 MR. CHURCH: Well, I guess my point would be to say that there may well be a trade‑off here that the Commission has to make in terms of assessing are we in a situation where we can have the two competing networks or are we going to opt for competition on a single network?
LISTNUM 1 \l 1440 COMMISSIONER CRAM: So is your answer you don't know and it's up to us?
LISTNUM 1 \l 1441 MR. HUGHES: I think that my answer is that it depends on the particular fact circumstances and what you are going to do.
LISTNUM 1 \l 1442 COMMISSIONER CRAM: All right.
LISTNUM 1 \l 1443 Mr. Hughes, you used of the term "facilities‑based".
LISTNUM 1 \l 1444 Now, we have a particular problem here in that if you look at the directive to us overturning forbearance ‑‑ have you seen that at all?
LISTNUM 1 \l 1445 MR. HUGHES: Yes, I have.
LISTNUM 1 \l 1446 COMMISSIONER CRAM: Yes. It includes a mix of resale and facilities‑based.
LISTNUM 1 \l 1447 MR. HUGHES: Yes, I am aware of that.
LISTNUM 1 \l 1448 COMMISSIONER CRAM: Which could mean it could be 99 per cent revenue from resale and 1 per cent from their own facilities.
LISTNUM 1 \l 1449 So when you say you are less concerned if there was facilities‑based competition, do you mean end‑to‑end facilities‑based competition?
LISTNUM 1 \l 1450 MR. HUGHES: Yes, I do.
LISTNUM 1 \l 1451 COMMISSIONER CRAM: Thank you very much.
LISTNUM 1 \l 1452 Now, duplicability. I want to talk about this because telephone companies need scale in order to make money and to be sustainable.
LISTNUM 1 \l 1453 MR. HUGHES: Yes.
LISTNUM 1 \l 1454 COMMISSIONER CRAM: So if I used a test of duplicability ‑‑ you know, being duplicated ‑‑ based on the fact, well ‑‑ I'm going to use something very silly. Well, based on the fact that a certain item has been duplicated in one market, let's use DSO, DS1, DS3 ‑‑
LISTNUM 1 \l 1455 MR. HUGHES: Yes.
LISTNUM 1 \l 1456 COMMISSIONER CRAM: ‑‑ that it has been duplicated in some markets but not in others, you say look at the business case. So do I look at an individual business case, or do I look at the fact that it has been done before so it can be done again, or do I look at the fact that for a company to be sustainable it has to have a whole bunch of them?
LISTNUM 1 \l 1457 MR. HUGHES: I think we can see two extremes here. One is to look exactly at that particular market.
LISTNUM 1 \l 1458 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1459 MR. HUGHES: ‑‑ one is to look broadly. And that's, I think, where proxy rules are going to come in because ‑‑ the answer I'm most confident in is look at the particular market. That's a relevant geographic market that I'm comfortable with.
LISTNUM 1 \l 1460 Close to there, learning from other markets. I think that has some merit. The mere fact that it's duplicated one or two or three places that may be very different don't give me any comfort at all.
LISTNUM 1 \l 1461 So I guess somewhere in between. I don't know if I have answered your question or not.
LISTNUM 1 \l 1462 COMMISSIONER CRAM: Okay. So what you are rejecting is the very simple ‑‑
LISTNUM 1 \l 1463 MR. HUGHES: Correct.
LISTNUM 1 \l 1464 COMMISSIONER CRAM: ‑‑ duplicability test that, if it's been done before, it can be done again?
LISTNUM 1 \l 1465 MR. HUGHES: Yes.
LISTNUM 1 \l 1466 COMMISSIONER CRAM: Okay. And it's something more than that ‑‑
LISTNUM 1 \l 1467 MR. HUGHES: Yes.
LISTNUM 1 \l 1468 COMMISSIONER CRAM: ‑‑ but less than ‑‑ because when you are looking at the business ‑‑ you said, Look at the business case. I would be looking at a whole proposed competitor ‑‑
LISTNUM 1 \l 1469 MR. HUGHES: Yes.
LISTNUM 1 \l 1470 COMMISSIONER CRAM: ‑‑ and seeing how many DS1s ‑‑ DSOs he would need in order to be sustainable, in order to have a good business plan. Would that be ‑‑ you think that's too much?
LISTNUM 1 \l 1471 MR. HUGHES: Whether you would need it per se, certainly you would look at it. At the end of the day, we need an entrant to come in, we need that competition to be protecting consumers. That's what we are after, at the end of the day ‑‑
LISTNUM 1 \l 1472 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1473 MR. HUGHES: ‑‑ and we are trying to look at their business plans or whatever other kind of information we can to try to get an indication whether that kind of competition is going to come to that market. Exactly how you do it, it's a bit of a judgment call, I guess, is the best answer I think I can give you.
LISTNUM 1 \l 1474 Do you have something to add to it?
LISTNUM 1 \l 1475 COMMISSIONER CRAM: You guys have left it up to judgment calls to us the whole way.
LISTNUM 1 \l 1476 Thank you.
LISTNUM 1 \l 1477 MR. HARITON: Well, just to mention that if you are looking at a service provider, and you may be looking at a specific geographic market, but you have to look at the scope and scale of that entrant because that's what brings unit costs down in all of the markets that they are going to be supplying.
LISTNUM 1 \l 1478 So that you cannot look at the market ‑‑ you have to look at the market, but you can't look at the market in isolation ‑‑
LISTNUM 1 \l 1479 COMMISSIONER CRAM: In isolation.
LISTNUM 1 \l 1480 MR. HARITON: ‑‑ you have got to look at what's happening elsewhere.
LISTNUM 1 \l 1481 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1482 MR. HARITON: Similarly on the demand side, it may be that the customer is ‑‑ sorry, that the supplier is serving a customer who has multiple locations, so you cannot look at that in isolation. The demand side may also be across different geographic locations, as well.
LISTNUM 1 \l 1483 COMMISSIONER CRAM: Yes, like the contract with the Royal Bank or something.
LISTNUM 1 \l 1484 MR. HARITON: That's exactly right.
LISTNUM 1 \l 1485 The other thing I just wanted to add very briefly is some of the costs that are ‑‑ you mentioned the trade‑offs between the short‑run benefits of having a new service ‑‑ what I call a service‑level entrant using unbundled loops and investing in plant and so on, and we have seen that in the long run it's investing in plants that will actually establish stable competitors and will actually bring innovation, which is a very great consumer benefit, as well as lower prices.
LISTNUM 1 \l 1486 Lower price is only one thing. Innovation and better service is also very important.
LISTNUM 1 \l 1487 COMMISSIONER CRAM: And I do want ask that about what is innovation? Is it not primarily at the applications level? No?
LISTNUM 1 \l 1488 MR. HARITON: Innovation will happen at every level. If you look at, though, communications over the last 50 years, many of the great innovations actually happened in the network itself, moving from analogue to digital and putting fibre in, which means you have a lot of capacity ‑‑
LISTNUM 1 \l 1489 COMMISSIONER CRAM: Yes, but now.
LISTNUM 1 \l 1490 MR. HARITON: ‑‑ mobile. It's hard to know where the innovation is going to come over the next five years.
LISTNUM 1 \l 1491 COMMISSIONER CRAM: Do you think there's going to be a new network innovation?
LISTNUM 1 \l 1492 MR. HARITON: I think it's certainly possible. I think that what we are seeing is that we are seeing different media for transmission.
LISTNUM 1 \l 1493 One of the more interesting things that happening right now ‑‑ and stop me if I'm getting too technical ‑‑ is on the wireless side. On the mobile side, we used to have one antenna per car or per receiver. Somebody had the bright idea of putting multiple antennas per car, and now we have a much better ‑‑ we have capabilities we didn't have before. You can get higher speeds when you are driving along at 60 kilometres an hour. You can get 1 meg, and probably more now.
LISTNUM 1 \l 1494 So that's really a change in the network, because what you need is you need coordination between different antennas ‑‑
LISTNUM 1 \l 1495 COMMISSIONER CRAM: Yes. Mr. Hariton, we are in Utopia again. Today, where is the majority of the innovation?
LISTNUM 1 \l 1496 MR. HARITON: Today, the majority ‑‑ well, innovation is happening everywhere. It's happening both at the application level, but it's also happening in the network.
LISTNUM 1 \l 1497 COMMISSIONER CRAM: Is that wireless, primarily?
LISTNUM 1 \l 1498 MR. HARITON: A lot of it is happening in wireless. We have had innovations in the actual wireline network. We have seen a move from circuit switched to packet switched, and that's not finished. There's a lot of circuit‑switched equipment still out there. So that's something which is going on.
LISTNUM 1 \l 1499 COMMISSIONER CRAM: Okay, so circuit to packet. Okay, now ‑‑
LISTNUM 1 \l 1500 MR. HARITON: That's a huge ‑‑ to my mind, that's a huge change. It's not finished.
LISTNUM 1 \l 1501 COMMISSIONER CRAM: Okay.
LISTNUM 1 \l 1502 MR. HARITON: And even in the packet switched, we are getting a lot of different protocols, which make the quality better.
LISTNUM 1 \l 1503 So that you can have an application which is extremely innovative and wonderful, but if the network won't support it because it doesn't have the capacity or the control on the delays and the jitter, then your application will not work. You have got to have the application working with the network. You can't isolate them.
LISTNUM 1 \l 1504 COMMISSIONER CRAM: Okay. Thank you.
LISTNUM 1 \l 1505 Thank you, Mr. Chair.
LISTNUM 1 \l 1506 THE CHAIRPERSON: Commissioner del Val.
LISTNUM 1 \l 1507 COMMISSIONER del VAL: Mr. Hariton, just to follow up on Commissioner Cram's question, do you think that the emphasis on facilities‑based will be somewhat at the expense of innovation at the application layer and as the emphasis is placed on the network layer?
LISTNUM 1 \l 1508 MR. HARITON: As we said before, forecasting is difficult to do, but I think that what you are going to have is that ‑‑ to get innovation, what you really need is you really need people coming at a market from a slightly different slant.
LISTNUM 1 \l 1509 In other words, in my experience, in my opinion, head‑to‑head competition seldom leads to a lot of innovation. If you want innovation, what you want is somebody coming at a market from a slightly different angle.
LISTNUM 1 \l 1510 An excellent example, if I may, since we have got Rogers in front of us, is where you use a network which was built for one purpose, and then you say, "Ah, I can use it for another purpose". And that's wonderful. That's the kind of innovation which is really, really helpful.
LISTNUM 1 \l 1511 Similarly, to your point, if I'm looking at the applications alone, I will be able to come up with a lot of innovation, but, at the end of the day, it's the interaction between the applicational level and the other levels.
LISTNUM 1 \l 1512 And I know that we try to talk about them as if they were separate layers, and to some degree they are, but they do interact. The applications drive the network and the network empowers the applications.
LISTNUM 1 \l 1513 So I don't really see the conflict. Maybe in the very short run, but in the long run I think they reinforce each other.
LISTNUM 1 \l 1514 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1515 THE CHAIRPERSON: Okay, Mr. Engelhart, back to you.
LISTNUM 1 \l 1516 MR. ENGELHART: Thank you, Mr. Chair.
LISTNUM 1 \l 1517 Good morning, panel.
LISTNUM 1 \l 1518 I notified your counsel on Friday that I would be referring to a document which is the "Report of the ICN Working Group on Telecommunication Services".
LISTNUM 1 \l 1519 Do you have a copy of that with you?
LISTNUM 1 \l 1520 MR. HUGHES: We do, and I will just take a half second to get organized here.
LISTNUM 1 \l 1521 MR. ENGELHART: Thank you.
LISTNUM 1 \l 1522 THE SECRETARY: Are you filing this as an exhibit, counsel?
LISTNUM 1 \l 1523 MR. ENGELHART: Yes.
LISTNUM 1 \l 1524 THE SECRETARY: Okay, it will be Exhibit No. 1, obviously.
LISTNUM 1 \l 1525 MR. ENGELHART: Thank you very much.
EXHIBIT ROGERS‑1: Document entitled "Report of the ICN Working Group on Telecommunication Services".
LISTNUM 1 \l 1526 MR. HUGHES: We have got it, thank you.
LISTNUM 1 \l 1527 MR. ENGELHART: Thank you.
LISTNUM 1 \l 1528 This is an international group of competition authorities that are particularly interested in telecommunications matters. Is that correct?
LISTNUM 1 \l 1529 MR. HUGHES: Yes, it is.
LISTNUM 1 \l 1530 MR. ENGELHART: And one of the three co‑chairs of the group is Sheridan Scott, the Commissioner of the Canadian Competition Bureau?
LISTNUM 1 \l 1531 MR. HUGHES: That is correct.
LISTNUM 1 \l 1532 MR. ENGELHART: Would it be fair to say that this report represents the consensus view of the members of the ICN Working Group on Telecommunication Services, including Canada?
LISTNUM 1 \l 1533 MR. HUGHES: As all international reports would be, yes.
LISTNUM 1 \l 1534 MR. ENGELHART: Take a look, if you could, please, at the executive summary, and in particularly the sixth bullet. The sixth bullet reads:
"Competition is enhanced when an effective access regime is in place." (As read)
LISTNUM 1 \l 1535 Do you agree with this statement?
LISTNUM 1 \l 1536 MR. HUGHES: Excuse me, I'm now confused. This is the beginning part?
LISTNUM 1 \l 1537 MR. ENGELHART: Yes. If you take a look at the executive summary, there's a bunch of bullets. It's right after the table of contents.
LISTNUM 1 \l 1538 THE CHAIRPERSON: Madam Secretary, why don't you give her copy of what you have given?
LISTNUM 1 \l 1539 MR. ENGELHART: Oh, yes, sorry.
LISTNUM 1 \l 1540 And the sixth bullet says:
"Competition is enhanced when an effective access regime is in place." (As read)
LISTNUM 1 \l 1541 Do you agree with that?
LISTNUM 1 \l 1542 MR. CHURCH: Yes, Mr. Englehart, we would agree if it is understood that effective access regime means that it is balancing off the potential for competition from mandated access versus the potential for competition from competing networks.
LISTNUM 1 \l 1543 MR. ENGLEHART: And have a look at the heading, 5.6 Access and Interconnection Issues. And there it says at the beginning of that section:
"Difficulties in achieving access and interconnection have been ranked by many countries as the single most important impediment to advancing competition within the telecommunications sector. Few countries have attempted to rely exclusively on a competition law approach to resolving interconnection and access issues. Such an approach would generally entail letting companies privately negotiate terms and conditions and intervening, for example, generally through the use of either refusal to deal remedies with the essential facilities doctrine only where negotiations fail. Accordingly, access and interconnection issues are still largely under the ambit of sector‑specific regulation." (As Read)
LISTNUM 1 \l 1544 Would you agree with that paragraph?
LISTNUM 1 \l 1545 MR. HUGHES: Certainly, different countries have different perspectives and it is probably more true for some than others, but yes, I would agree with that as a principle.
LISTNUM 1 \l 1546 MR. ENGLEHART: And then let us have a look at paragraph 16 to the first complete paragraph halfway through, beginning with the words "possible advantages."
"Possible advantages to local loop unbundling include: reducing barriers to entry thus accelerating competition; encouraging innovation and upgrading since new entrants can combine new technologies with components of existing networks; avoiding unnecessary duplication of network components which, in turn, eliminates the need for public disruptions due to construction; facilitating access to rights‑of‑way by new entrants; and providing new sources of revenue the incumbent. Possible disadvantages include: reducing the incentives for both the incumbent and competitors to construct new and innovative network facilities and requiring regulatory intervention and technical coordination. It has generally been found that the advantages of unbundling outweigh the disadvantages." (As Read)
LISTNUM 1 \l 1547 Would you agree with that statement?
LISTNUM 1 \l 1548 MR. CHURCH: Yes. Mr. Englehart, I think when you are looking at this paragraph and looking at this report it is also important to flip back to page 5 and read the last paragraph on page 5, which gives some perspective about where this report comes from and, in particular, the nature of the competition in the countries which are represented in this group.
LISTNUM 1 \l 1549 And what the paragraph at the bottom of page 5 indicates is that in many of these countries there is only a single network. And so if you were in a situation where you only have a single network, then the conclusions which are found, it has generally been found that the advantages of unbundling outweigh the disadvantages, that will in fact be true. If you only have one network, then it is likely the case that unbundling is a good thing.
LISTNUM 1 \l 1550 The Bureau's perspective on this is that there may be instances where you are not going to have just one network, you may be able to have multiple networks. And if you are in a situation where you can have multiple networks, that is where you are going to get true competition and you should design your access regime to take that into account.
LISTNUM 1 \l 1551 MR. ENGLEHART: So in the Canadian context then, in the residential marketplace where we have duplicate networks, that is one thing. But then in the business market where we don't, as I think you phrased your answer, Dr. Church, the issue is whether we could have duplicate networks?
LISTNUM 1 \l 1552 MR. CHURCH: Yes, that is right.
LISTNUM 1 \l 1553 MR. ENGLEHART: Well, let us take a look then next at the residential marketplace in Canada.
LISTNUM 1 \l 1554 I understand from your evidence that you think it is unlikely that we need mandated essential facilities for the Canadian residential marketplace where there is cable television network‑based telephony, is that correct?
LISTNUM 1 \l 1555 MR. CHURCH: So the third bullet of our test would require that mandated access resulted in substantial increase in competition. The Bureau is sceptical that that would be the case where you already have competition between the cable company and the ILEC in digital telephony because of what the Bureau would characterize, I guess going back to the local forbearance submissions, that in that instance the competition between the duopoly in those circumstances, which are discussed and described in the response to The Companies number 9, the five conditions are listed there.
LISTNUM 1 \l 1556 Given those five structural characteristics then it is likely that you are going to have fairly vigorous competition between the two and that would appear to be the situation now, you know, two years on.
LISTNUM 1 \l 1557 MR. ENGLEHART: So I don't want to challenge that scepticism as you described it, we are all here to try and get out of here by a week from tomorrow. So I want to just have you assume that someone didn't accept your scepticism and that we do have mandated facilities in the residential telephone market in Canada.
LISTNUM 1 \l 1558 And now, I want to explore with you the costs of that decision. And I want to have you have a look, if you could, to your opening remarks, which Mr. Dunbar has already distributed. And, in particular, have a look at footnote 5 of your opening remarks.
LISTNUM 1 \l 1559 And there you say:
"The potential costs of mandated access are decreased incentives for investment in competing networks, decreased incentives for investment in innovation in the networks to which access is mandated and ultimately and most importantly the preclusion of end to end facilities‑based competition." (As Read)
LISTNUM 1 \l 1560 Would that be a fair summary of what you view as the costs associated with mandating facilities where those facilities are not truly essential?
LISTNUM 1 \l 1561 MR. CHURCH: That would be many of them. I guess I would add two more. One of them would be that there is the cost of regulation, there is the cost of implementing the wholesale mandated access regulation scheme.
LISTNUM 1 \l 1562 MR. ENGLEHART: You said two more?
LISTNUM 1 \l 1563 MR. CHURCH: I am just checking to make sure my other one is not already listed here, sir. Yes I am sorry, it is only one more.
LISTNUM 1 \l 1564 MR. ENGLEHART: Let us have a look at the first of those costs, again concentrating on the residential telephone marketplace in Canada.
LISTNUM 1 \l 1565 You say that one of the costs is decreased incentives for investment in competing networks. Would you agree with me that in most residential markets in Canada where cable television companies operate that the cable company has entered or will soon enter to provide telephony?
LISTNUM 1 \l 1566 MR. CHURCH: Yes.
LISTNUM 1 \l 1567 MR. ENGLEHART: Do you believe that if unbundled loops are mandated in these residential markets that they cable companies will withdraw their telephony operations or fail to enter?
LISTNUM 1 \l 1568 MR. CHURCH: Probably not.
LISTNUM 1 \l 1569 MR. ENGLEHART: So would you ‑‑
LISTNUM 1 \l 1570 MR. CHURCH: Excuse me. I might add, it might depend on what the price is which those loops are unbundled at.
LISTNUM 1 \l 1571 MR. ENGLEHART: Say the current price?
LISTNUM 1 \l 1572 MR. CHURCH: Then that, you know, we already know the answer to that because they have entered.
LISTNUM 1 \l 1573 MR. ENGLEHART: So would you agree with me that mandating unbundled loops in residential areas in Canada would not decrease incentives sufficiently to prevent cable companies from entering this market?
LISTNUM 1 \l 1574 MR. CHURCH: They have entered.
LISTNUM 1 \l 1575 MR. ENGLEHART: Would you agree with me that mandating unbundled loops in residential neighbourhoods in Canada is unlikely to preclude end to end facilities‑based competition in Canada?
LISTNUM 1 \l 1576 MR. CHURCH: I would.
LISTNUM 1 \l 1577 MR. ENGLEHART: Then let us have a look at the decreased incentives for innovation and investment by the incumbents, in other words in the network to which access is mandated. I wonder if you could have a look, for that purpose, at an interrogatory, TheCompanies‑TELUS‑12April07‑7. And copies have been distributed for the Commission. I have got a copy if it is easier for you.
‑‑‑ Pause
LISTNUM 1 \l 1578 MR. ABUGOV: Excuse me, Mr. Chairman, could we have that interrogatory number again?
LISTNUM 1 \l 1579 MR. ENGELHART: Yes, Mr.Abugov. It is TheCompanies‑TELUS‑12April07‑7.
LISTNUM 1 \l 1580 If I could just read the question for you:
"Please refer to paragraph 49 of the declaration of Dr. Taylor. Are the costs associated with providing traditional telephone voice service sunk; are there or should there be incentives for continued investment in network infrastructure for the provision of these services? Explain." (As read)
LISTNUM 1 \l 1581 The following answer is provided by Dr. Taylor:
"Some costs for facilities required to provide traditional voice telephone service are sunk. There are currently incentives for continued investment in this infrastructure and those incentives are affected by the regulation of the services those facilities provide.
Paragraph 49 of my declaration identifies a matter of degree, that the basic network infrastructure for next generation access services may not currently be sunk so that the investment in modernization disincentives for mandated access to those facilities are much more severe than similar disincentives for the current network infrastructure." (As read)
LISTNUM 1 \l 1582 As you may be aware, in the United States the FCC has stated that where the incumbents invest in residential networks to provide new technologies, which Dr. Taylor refers to as next generation access, such as fibre to the home or fibre to the node, the competitors cannot obtain access to the next generation elements of these networks.
LISTNUM 1 \l 1583 The competitors can only get access to a DS‑0 in order to provide traditional services. Are you familiar with that American rule?
LISTNUM 1 \l 1584 MR. HARITON: Yes, I am, Mr. Engelhart.
LISTNUM 1 \l 1585 MR. ENGELHART: Are you familiar with the fact that the Rogers' proposal for the residential market in Canada is the same?
LISTNUM 1 \l 1586 MR. HARITON: I am aware that as far as access to loops and transport facilities and so on, the Rogers' proposal is modeled on the FCC. I understand there are a few differences, but in general it is modeled on that.
LISTNUM 1 \l 1587 MR. ENGELHART: If we had a rule like that, which said that you can get a DS‑0, but you don't get access to the IP functionality or any of the next generation functionality, where an incumbent invests in a next generation residential network, if we had a rule like that, do you believe the incumbents would continue to be incented to invest in their residential networks in Canada?
LISTNUM 1 \l 1588 MR. HARITON: I think that what we are seeing in the States, Mr. Engelhart, the model that I see is Verizon, who is rolling out fibre to the home at a tune of, I think it is $23 billion or something of that sort.
LISTNUM 1 \l 1589 That network, some call it a next generation network, is going to replace both the fundamental ‑‑ the basic telephone service and a lot of other services. It will enable a lot of other services that will hopefully be offered. So that a distinction between basic telephony and all of these new services, this new world, is going to fade away.
LISTNUM 1 \l 1590 One of the difficulties, as I understand it ‑‑ I am not involved with Verizon ‑‑ but as I understand it, one of the difficulties going forward is that as you roll out fibre to the home, it becomes difficult to carve out a single DS‑0 and offer that as a copper loop, which is typically what has been required. I recall seeing that there has been some discussion of that in the States: How do you continue to offer unbundled loops when your whole network is becoming fibre based?
LISTNUM 1 \l 1591 I know that some of that discussion has been happening in Canada, for example, as the traditional telephone companies have been upgrading their networks and driving fibre closer to the home, you know, putting remotes, putting fibre carriers, the remotes and copper down after that, and using integrated remotes, it is becoming increasingly more difficult to provide the actual copper loop that is the subject of discussion, and they have to find alternative ways of doing that.
LISTNUM 1 \l 1592 Whether the fact that they have to continue to provide copper loops or the equivalent of copper loops as they go forward is a restraint or is a factor which slows down the roll‑out, I don't know. I would imagine, though, that there is a cost to it.
LISTNUM 1 \l 1593 MR. CHURCH: Excuse me, could I add something, please?
LISTNUM 1 \l 1594 MR. ENGELHART: Sure.
LISTNUM 1 \l 1595 MR. CHURCH: I would like to follow‑up with two things on this question about the incentives for the investment by the incumbent telephone companies in their existing networks.
LISTNUM 1 \l 1596 The first is, and Mr. Hariton may want to amplify on this because he is the expert we have on pricing, but I am sure there is an issue of the price that is being paid and whether that price is covering the ILEC's cost and giving incentives to maintain, let alone upgrade, but maintain the network. That is an issue.
LISTNUM 1 \l 1597 The second point, which is kind of more general, is in this evolving world which we are seeing, the nature of the market is going to change substantially. We are moving away from a POTS provider to pipes going into the house, which provide broadband access, and on that broadband access, provide a great variety of services, including digital telephony.
LISTNUM 1 \l 1598 Coming back to your original point, which is to say there is no cost associated with unbundling these local loops in residential neighbourhoods, because there is not going to be any effects on the incentives for the ILECs to make their investments, that might not be the case because of the pricing issue. There might be these difficult technical problems in terms of untangling basic POTS service from the broadband access and the increased capacity, but you might wander what the competitive significance of it will be to have a narrow voice band provider using unbundled loops competing in a world where the competition is between the cable company, the incumbent cable company and the incumbent telephone company offering bundles of services down a broadband.
LISTNUM 1 \l 1599 So, there are costs going to be involved under regulation and these other things. There might be difficulties with getting the price right. It is not clear to me that your conclusion necessarily follows that the benefits are going to be greater than the costs because the benefits might be very small.
LISTNUM 1 \l 1600 MR. ENGELHART: We have to stay a little bit focused here or it is going to take too long.
LISTNUM 1 \l 1601 As I explained in my question, we are not talking about the benefits. We are not going to have that debate.
LISTNUM 1 \l 1602 We are talking about the costs. I identified three costs and, Dr. Church, you added a fourth, which we haven't come to yet. We have dealt with two of those costs. The first one is the decreased incentive for investment in competing networks.
LISTNUM 1 \l 1603 We also dealt with a second cost, which is the preclusion of end‑to‑end facilities‑base competition.
LISTNUM 1 \l 1604 Now we are dealing with a third cost, which is decreased incentives for investment and innovation in the networks to which access is mandated.
LISTNUM 1 \l 1605 I want to stay on that issue. In the United States, it is my understanding that whatever difficulties there are in getting DS‑0 capability from a loop that has fibre in it, the FCC has mandated it. Is that your understanding too, Mr. Hariton?
LISTNUM 1 \l 1606 MR. HARITON: That is my understanding.
LISTNUM 1 \l 1607 MR. ENGELHART: You describe the fact that Verizon is spending $23 billion upgrading their networks to next generation architecture. Would you say that it doesn't appear that that FCC rule has prevented Verizon from making the investments in upgrading its existing network?
LISTNUM 1 \l 1608 MR. HARITON: That is certainly true. However, I would say that there are several points which are important here.
LISTNUM 1 \l 1609 So far Verizon is the only one who is doing this. It is widely seen as a gamble by various parties.
LISTNUM 1 \l 1610 But more importantly is that the impact of the various access rules I think may have to do more with the timing of when this happens than whether it happens at all.
LISTNUM 1 \l 1611 A lot of these things are going to happen, in my view, some day. What we are talking about is whether the various rules slow down what is happening or whether it does not. Slowing down is a huge cost.
LISTNUM 1 \l 1612 I am certainly not privy to the cable companies entry into the local telephony market and their decision behind that. One of them at least entered in the late nineties. A lot of them waited until 2005‑2006.
LISTNUM 1 \l 1613 I don't know whether unbundling had anything to do with the delay or not, or whether it was purely the technological problem.
LISTNUM 1 \l 1614 MR. ENGELHART: I just don't think this is that complicated. If you say to an incumbent phone company, if you invest in a new‑fangled network that has all sorts of new‑fangled capabilities, then the competitors can't get the new‑fangled capability; they can just get the old fashioned capability; they can just get a loop or the equivalent of a loop, if you say that, don't you think that it leaves the incumbent with the incentive to invest in the new‑fangled network?
LISTNUM 1 \l 1615 MR. HARITON: The difficulty is that the new‑fangled network is not separate from the existing network. That is really my difficulty. You don't invest in the new‑fangled network separately from the existing one.
LISTNUM 1 \l 1616 I am back to the idea of driving fibre to the home. You are investing in your network; you are investing in your local network, but you are investing in your new‑fangled network at the same time. It is not an either/or. It is a let's invest in this network.
LISTNUM 1 \l 1617 MR. ENGELHART: I just wanted to question you about one thing you said about Verizon.
LISTNUM 1 \l 1618 Verizon is the one going all the way to the home, but would you agree with me that all the American phone companies, the incumbents, are driving fibre closer and closer to the home?
LISTNUM 1 \l 1619 MR. HARITON: That is my understanding, just as in Canada, Mr. Engelhart. Again, it is a question of speed and how quickly they are going to do it and how many resources they will put into it.
LISTNUM 1 \l 1620 MR. ENGELHART: I want to turn to Dr. Church's fourth issue, which is cost, the regulatory cost.
LISTNUM 1 \l 1621 Would you agree with me, Dr. Church, that in the case of unbundled loops in Canada we have the tariffs, we have the dispute resolution mechanism, we have the rules, we have the regulations. We have even got the co‑location facilities. We have the unbundled loops. It is a business that is up and running. So that when you are weighing the cost, the regulatory cost of setting up a regime like that, given that the regime already exists in Canada and has been perfected or honed for some, well, ten years, would you agree with me that the regulatory costs associated with that are less of a factor as you are doing your cost benefit analysis?
LISTNUM 1 \l 1622 MR. CHURCH: You are right in the sense that we have had some learning, so we have incurred some of these costs and they are sunk. But I look around the room today and it clear to me that we are still incurring costing in terms of this regulation.
LISTNUM 1 \l 1623 I have to come back, right, to the fundamental question about this is a system, and after ten years, according to the CRTC's latest numbers, there are 350,000 loops on an unbundled basis across the whole country. I can't remember exactly how many of those are in territories where there is an incumbent cable company, but I know that Rogers has indicated that they will move their unbundled loops, their CallNet customers that they inherited off of those unbundled loops on to their network. So that number is likely to go down.
LISTNUM 1 \l 1624 In some sense there is very little benefits. You might argue that there is very little costs, but it is strikes me that the default here should be to say that mandated access is something that is exceptional.
LISTNUM 1 \l 1625 MR. ENGELHART: I said at the beginning I wasn't going to challenge your scepticism on the demand side. We were having a look at the cost side.
LISTNUM 1 \l 1626 MR. CHURCH: I want to say we have been going on for ten years, we have had costs. It is likely if you continue this, we will continue to have costs that are incurred. Why have those costs incurred without looking at what the benefits are, and our contention is that those benefits are not a substantial increase in competition, though they might well be, if you can make that case. We just don't think that that case has been made by the applicants.
LISTNUM 1 \l 1627 MR. ENGELHART: I would like to have a look now at the business market in Canada.
LISTNUM 1 \l 1628 THE CHAIRPERSON: Mr. Engelhart, how much longer are you going to be?
LISTNUM 1 \l 1629 MR. ENGELHART: Twenty minutes to half an hour.
LISTNUM 1 \l 1630 THE CHAIRPERSON: In that case, I suggest we take a 15‑minute break. Thank you very much.
‑‑‑ Recessed at 1025 / Suspension à 1025
‑‑‑ Resumed at 1047 / Reprise à 1047
LISTNUM 1 \l 1631 THE SECRETARY: Please be seated.
LISTNUM 1 \l 1632 And just note when we get copies of documents, any extras are going back at the distribution table. Thank you.
LISTNUM 1 \l 1633 THE CHAIRPERSON: Let us resume with you, Mr. Engelhart.
LISTNUM 1 \l 1634 I just would like to tell the witnesses, I know you feel very passionate about this subject but we really have a lot of territory to cover, so if you could just answer the question precisely and refrain from overtalk or flourishes or argument, it would be appreciated. Thank you.
LISTNUM 1 \l 1635 Mr. Engelhart.
LISTNUM 1 \l 1636 MR. ENGELHART: Thank you, Mr. Chair.
LISTNUM 1 \l 1637 So we are looking now at the Canadian business telecommunications market, and Mr. Dunbar has already reviewed your test with you and reviewed how it operates in practice, so I am just going to deal with those three tests as described in your opening statement.
LISTNUM 1 \l 1638 I want to deal first with the dominance requirement, which is your first test.
LISTNUM 1 \l 1639 Am I correct that you apply a but‑for test to determine dominance in the downstream market, that is, you consider whether the ILECs would be dominant but for the presence of competitors using mandated facilities?
LISTNUM 1 \l 1640 MR. HUGHES: It is a market power test but it does use that concept.
LISTNUM 1 \l 1641 MR. ENGLEHART: And could you have a look for me at paragraphs 66 and 67 of your March 15th, 2007 evidence.
‑‑‑ Pause
LISTNUM 1 \l 1642 MR. ENGLEHART: Now, in paragraph 66, you state that:
"Entry by the cable companies is likely to be sufficient to control the market power of the ILECs in the residential market." (As read)
LISTNUM 1 \l 1643 But in paragraph 67, you state as follows:
"The Bureau recognizes that the current competitive situation in markets for business services is likely very different. The competitive significance of competing networks providing business services currently appears much less important than in residential markets, although this may change as cable companies expand into business markets or technologies develop that allow for the entry of new facilities base providers, e.g., fixed wireless networks." (As read)
LISTNUM 1 \l 1644 Now, as you discussed with Mr. Dunbar, you need a whole lot of data to do that analysis and you don't have the data to do it and you discussed with Mr. Dunbar the various steps that would be needed to do the analysis. We are not going to go through that analysis right now.
LISTNUM 1 \l 1645 So I wonder if you would make an assumption for me. If you assume that entry by cable companies and fixed wireless networks, as you referred to in this paragraph, and I suppose others such as municipal electric utilities, if you assume that the entry by those players would not be timely, likely and sufficient to restrain the ILECs' market power, would that lead you to conclude that the ILECs are dominant in the business telecommunications markets?
LISTNUM 1 \l 1646 MR. HUGHES: That would be a strong indication, certainly, as a first look.
LISTNUM 1 \l 1647 MR. ENGLEHART: Well, then let us have a look at the second part of your test, which is that mandating access will lead to competitive entry.
LISTNUM 1 \l 1648 Given that the CRTC has already mandated the facilities and given that they are used by Rogers, MTS Allstream and Primus, among others, are you of the view that the second element of your test has been satisfied?
LISTNUM 1 \l 1649 MR. CHURCH: Yes, the second element would be satisfied.
LISTNUM 1 \l 1650 MR. ENGELHART: Now let us have a look at the third part of your test, which is that entry would lead to a substantial increase in competition within a reasonable period of time, which, as has already been discussed this morning, replaces your original third test, which was that entry would be sufficient to lead to forbearance.
LISTNUM 1 \l 1651 As we have discussed, in the voice market the Cabinet has already deregulated the business markets in certain circumstances or perhaps in all circumstances simply because of the presence of unbundled facilities.
LISTNUM 1 \l 1652 Would you agree with me then that the federal government, the Cabinet, is of the view that entry using unbundled facilities is sufficient to lead to forbearance and that the federal Cabinet is of the view that entry using these unbundled facilities would be substantial within a reasonable period of time?
LISTNUM 1 \l 1653 MR. HUGHES: It is not clear to me that you can read that into that conclusion. They made a policy decision to have this occur, that is a policy decision and I can't comment on what the basis of it is.
LISTNUM 1 \l 1654 MR. ENGLEHART: If the entry by Rogers and MTS Allstream and Primus and others, using those essential facilities, is not sufficient to restrain the ILECs' market power in the business market, then the Cabinet has made a mistake, haven't they?
LISTNUM 1 \l 1655 MR. CHURCH: Yes.
LISTNUM 1 \l 1656 MR. ENGLEHART: Now, in your exchange with Commissioner ‑‑ in your discussion with Commissioner Cram, you talked about a couple of elements in which ‑‑ a couple of ways in which mandated access to facilities might actually increase the likelihood of facilities‑based or end‑to‑end competition.
LISTNUM 1 \l 1657 One way would be if that gave the new entrant or the competitor scale and another way would be if it gave the entrant the ability to satisfy the demands of customers who have a demand for one‑stop shopping for multiple locations.
LISTNUM 1 \l 1658 If the provision of mandated access to facilities increased the likelihood of end‑to‑end competition or accelerated the development of end‑to‑end competition, would you agree with me that the third part of your test would be satisfied?
LISTNUM 1 \l 1659 MR. CHURCH: Yes, but it is an awfully big if.
LISTNUM 1 \l 1660 MR. ENGLEHART: Those are my questions. Thank you very much.
LISTNUM 1 \l 1661 THE CHAIRPERSON: Commissioner Cram, you have a question?
LISTNUM 1 \l 1662 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1663 First, Dr. Hughes, I was remiss in calling you Mr. Hughes and I am sorry for that.
LISTNUM 1 \l 1664 I wanted to go back to the four reasons, four costs of mandating, and the first one being a reduction in investments in networks by competitors.
LISTNUM 1 \l 1665 I have to ask you what competitor in their right mind would totally work on a resale basis forever? Because the margins are small, the possibility of higher profits is caused by owning your own network.
LISTNUM 1 \l 1666 MR. HUGHES: Go ahead.
LISTNUM 1 \l 1667 MR. CHURCH: Yes, Commissioner Cram, I think it is a question of the margin of the balance between what components are your own and what components you lease from an incumbent and so it is a question of the margin about what the relative size of the network might be.
LISTNUM 1 \l 1668 And in anticipation of a question from Rogers on the ICM thing, we were able to locate on the weekend a study that has just come out in September of '07 where they look at the distinction between investment in your own facilities versus unbundled local loops in Europe.
LISTNUM 1 \l 1669 They point out that if you lower the price of the unbundled loops by 10 percent it leads to a reduction in investment by the competitors, the competitor cable companies in this context, of 18 percent. They substitute on the buy or lease margin. They move away from the buy margin to the lease margin.
LISTNUM 1 \l 1670 COMMISSIONER CRAM: Mm‑hmm.
LISTNUM 1 \l 1671 MR. CHURCH: The Bureau is quite happy to provide that study as an exhibit.
LISTNUM 1 \l 1672 COMMISSIONER CRAM: And are you aware of the Canadian statistics about investments by CLECs?
LISTNUM 1 \l 1673 MR. HARITON: Just generally.
LISTNUM 1 \l 1674 COMMISSIONER CRAM: And are you aware that in the early 2000 to 2002 there were fairly substantial investments by CLECs?
LISTNUM 1 \l 1675 MR. HARITON: Yes.
LISTNUM 1 \l 1676 COMMISSIONER CRAM: I can tell you what they were in 2002. They were $4.7 million. No, maybe I am wrong. I am sorry.
LISTNUM 1 \l 1677 MR. HARITON: I hope you have a few more zeros in there, Ms Cram.
LISTNUM 1 \l 1678 COMMISSIONER CRAM: Billion, yes.
LISTNUM 1 \l 1679 MR. HARITON: Thank you.
LISTNUM 1 \l 1680 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 1681 MR. HARITON: There was a number of things that happened in the period ‑‑
LISTNUM 1 \l 1682 COMMISSIONER CRAM: No. Are you aware? That was the question.
LISTNUM 1 \l 1683 MR. HARITON: Yes, I am aware. I am aware of that.
LISTNUM 1 \l 1684 COMMISSIONER CRAM: And are you aware that a large majority of these individuals who built the facilities and spent a whole bunch of capital went under?
LISTNUM 1 \l 1685 MR. HARITON: Yes, indeed.
LISTNUM 1 \l 1686 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1687 THE CHAIRPERSON: Commissioner Noël.
LISTNUM 1 \l 1688 COMMISSIONER CRAM: Oh! I had more questions.
LISTNUM 1 \l 1689 THE CHAIRPERSON: Oh! I am sorry.
LISTNUM 1 \l 1690 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 1691 I have one more question and you actually answered it, Dr. Church, that you ‑‑ no, maybe not ‑‑ that another cost of mandating is a reduction in investment by the ILECs.
LISTNUM 1 \l 1692 MR. CHURCH: Yes.
LISTNUM 1 \l 1693 COMMISSIONER CRAM: Do you have any data showing other jurisdictions?
LISTNUM 1 \l 1694 MR. CHURCH: I think that we refer in our evidence to some studies that were done on that, yes.
LISTNUM 1 \l 1695 COMMISSIONER CRAM: And would you expect given that the United States is largely deregulated that it would be happening there?
LISTNUM 1 \l 1696 MR. CHURCH: I think that is where our evidence is based, is on American studies.
LISTNUM 1 \l 1697 COMMISSIONER CRAM: Subject to check, the information provided us through the FCC is totally different.
LISTNUM 1 \l 1698 MR. CHURCH: The information I was referring to, Commissioner Cram, was found in our evidence at paragraphs 46‑47 and the cites are studied there.
LISTNUM 1 \l 1699 COMMISSIONER CRAM: And that is from FCC numbers?
LISTNUM 1 \l 1700 MR. CHURCH: No, no. I am sorry, they are academic studies that have been done.
LISTNUM 1 \l 1701 COMMISSIONER CRAM: Yes, okay.
LISTNUM 1 \l 1702 And in reality, have you looked at the FCC numbers?
LISTNUM 1 \l 1703 MR. CHURCH: I have not.
LISTNUM 1 \l 1704 MR. HARITON: We would be pleased to look at the numbers you have.
LISTNUM 1 \l 1705 COMMISSIONER CRAM: I have them.
LISTNUM 1 \l 1706 MR. HARITON: If you were to give us a reference, we would be pleased to look at them and give comments.
LISTNUM 1 \l 1707 COMMISSIONER CRAM: If you could, that would be great.
LISTNUM 1 \l 1708 MR. HARITON: That is fine. I assume I will get a reference from the secretary or somebody.
LISTNUM 1 \l 1709 THE CHAIRPERSON: Commissioner del Val.
LISTNUM 1 \l 1710 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1711 I just want to clarify in your third branch of the test that such entry or expansion is likely to result in a substantial increase in competition. I would like to understand better how you would interpret "substantial."
LISTNUM 1 \l 1712 The reason I ask this is that I know that originally you talked about substantial lessening or prevention of competition, and then in your supplemental material, I believe it is paragraphs 24 and 25, you explained the subtle difference between ‑‑ and those were your words ‑‑ the test of substantially lessening or prevention of competition under the abuse of dominance provisions. Then you go on to say, in paragraph 25:
"This is not appropriate for determining whether the Commission should mandate access to facility ..." (As read)
LISTNUM 1 \l 1713 Instead, then you say that:
"The Bureau has proposed that access should only be mandated at regulated prices if it results in a significant increase in competition." (As read)
LISTNUM 1 \l 1714 Then throughout that document whenever you talk about increase in competition downstream you use "significant" rather than "substantial".
LISTNUM 1 \l 1715 So, one, I don't understand how you want "substantial" to be interpreted.
LISTNUM 1 \l 1716 Second, I don't know really whether the standard you are proposing is "substantial" but interpreted to mean "significant", or does "significant" mean what Rogers proposed as "non‑trivial"?
LISTNUM 1 \l 1717 Could you please clarify that?
LISTNUM 1 \l 1718 MR. HUGHES: Just one moment, please.
‑‑‑ Pause
LISTNUM 1 \l 1719 MR. CHURCH: Yes. Thank you, Commissioner del Val.
LISTNUM 1 \l 1720 In the supplementary material I guess our perspective there had been that we were trying to be helpful to the Commission in terms of providing some guidance on what we meant by "significant", which was in our original third bullet, would be that the increase in competition, whether you call it "substantial" or "significant" I don't think really matters, because what we tried to do is, we tried to put a minimum threshold on that by saying that if it was enough that you could deregulate or forebear at retail, then you would know that you have a substantial amount of competition that was being created by that.
LISTNUM 1 \l 1721 We have since moved away from that because, as I indicated earlier, events have passed us by and that third bullet has now been changed and now we are back to a substantial lessening of competition. That substantial lessening of competition is the same as our substantial increase in competition.
LISTNUM 1 \l 1722 Substance is what we are talking about here and it is the same thing.
LISTNUM 1 \l 1723 The subtle difference that we indicated earlier was just to indicate kind of the "but for" and the conduct were very different under the Competition Act as opposed to under the Telecommunications Act.
LISTNUM 1 \l 1724 COMMISSIONER del VAL: So "substantial" is different from "significant". It is something of substance is what you are saying.
LISTNUM 1 \l 1725 Can you comment on Rogers proposal that "substantial" means not in a trivial manner?
LISTNUM 1 \l 1726 Is that the same standard?
LISTNUM 1 \l 1727 MR. CHURCH: By it's very nature the word "substantial" is going to involve a judgment call.
LISTNUM 1 \l 1728 The Competition Tribunal has had to make this judgment call and so we can look at the precedents from the Competition Tribunal to decide when either an abuse of dominance case when the particular behaviour at issue has led to a substantial lessening of competition.
LISTNUM 1 \l 1729 They don't have a necessary definition. I can't tell you what's necessary, but I can tell you in those precedents that they do have a "sufficient" definition, which is if a substantial lessening of competition, if the effect of the ‑‑ in these abuse cases, if the effect of the anti‑competitive practice was required to find dominance, then they had a sufficient amount of substantial lessening.
LISTNUM 1 \l 1730 So in the absence of the Act you weren't dominant and the Act makes you dominant, then they say that's enough. That is a sufficient condition for the substantial lessening. But we don't really know. You know, it's a judgment call about what is necessary and whether non‑trivial versus substantial. I don't know the answer to that. I mean, that would be a judgment call on the Commission's part.
LISTNUM 1 \l 1731 But we do have this information about a sufficient ‑‑ what is sufficient which would be sufficient for dominance.
LISTNUM 1 \l 1732 COMMISSIONER del VAL: Then do you see any practical difference ‑‑ do you see that there will be a facility that would have met the standard of being essential if we use the threshold of non‑trivial, but would no longer meet the criterion of being essential had we used the threshold of substantial?
LISTNUM 1 \l 1733 MR. CHURCH: Well, excuse me, I don't know what "non‑trivial" means. We know what "substantial" has meant because we have competition law and we know how to work with that. I'm less uncertain what "non‑trivial" means.
LISTNUM 1 \l 1734 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 1735 Thank you, Mr. Chairman.
LISTNUM 1 \l 1736 THE CHAIRPERSON: All right. Thank you very much.
LISTNUM 1 \l 1737 We will go on to the next. I gather TELUS is next.
LISTNUM 1 \l 1738 COMMISSIONER CRAM: Can I just say something?
LISTNUM 1 \l 1739 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 1740 COMMISSIONER CRAM: For the record, I misread the monitoring report. The number is different in terms of expenditures by CLECs.
LISTNUM 1 \l 1741 MR. HARITON: Would you like us to still comment on the numbers that you have?
LISTNUM 1 \l 1742 COMMISSIONER CRAM: All I was talking about was a history of the fact that there was large investments and then ending in lesser competition.
LISTNUM 1 \l 1743 MR. HARITON: All right.
LISTNUM 1 \l 1744 COMMISSIONER CRAM: That's all. Thank you.
LISTNUM 1 \l 1745 MR. HARITON: Thank you.
‑‑‑ Pause
LISTNUM 1 \l 1746 THE SECRETARY: I am now introducing the cross panel for TELUS, counsel Rogers, Schmidt and Mr. Lowe.
LISTNUM 1 \l 1747 I'm sorry, you forgot your name plate.
LISTNUM 1 \l 1748 MR. ROGERS: Phil Rogers, counsel for TELUS. I'm assisted today by Professor Denis Weisman.
LISTNUM 1 \l 1749 Just on a procedural point, in the last discussion that we were just listening to, there was reference to an LECG report in Europe which is 2007 that I think you felt was quite relevant. You offered to put it into the record and it was referred to a couple of times in your evidence. It seems to me that it forms part of the references that you were making. It would make sense to have it introduced as an exhibit.
LISTNUM 1 \l 1750 THE CHAIRPERSON: Does the Bureau want to introduce it into evidence? Please, do so.
LISTNUM 1 \l 1751 MR. HUGHES: We would be happy to do that.
LISTNUM 1 \l 1752 THE CHAIRPERSON: All right.
LISTNUM 1 \l 1753 Continue.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 1754 MR. ROGERS: Thank you, Mr. Chairman.
LISTNUM 1 \l 1755 Gentlemen, I would like to start by asking you to turn to the opening statement of the Commissioner. The version is the document that was revised yesterday I think. In particular, the revisions which appear in Appendix A to the document.
LISTNUM 1 \l 1756 You conveniently provided a marked up version and that is the version that I am looking at.
LISTNUM 1 \l 1757 Do you have that document?
LISTNUM 1 \l 1758 MR. HARITON: We do.
LISTNUM 1 \l 1759 MR. ROGERS: This is essentially the mark up by the Bureau of the Commission's six‑part framework which was set out in the Commission's letter of October 3rd.
LISTNUM 1 \l 1760 Correct?
LISTNUM 1 \l 1761 MR. HARITON: That's correct.
LISTNUM 1 \l 1762 MR. ROGERS: I would like to look at condition 4. You have marked it up at the end.
LISTNUM 1 \l 1763 If you go to the mark up at the end, essentially this establishes an end period for which such services ‑‑ these are conditional non‑essential services ‑‑ an end period for which those services would be mandated.
LISTNUM 1 \l 1764 It is governed by two factors or scenarios. One is fixed and the other is a conditional upon certain things happening.
LISTNUM 1 \l 1765 I would first of all like you to explain in your own words what those two factors are and then why you chose to add those as the terminating point for mandated access.
LISTNUM 1 \l 1766 MR. HARITON: Yes. The important thing from our point of view is that there be a hard stop. In other words, that the transition period for non‑essential, mandated non‑essential facilities come to a hard stop, and that should send a signal to everybody participating in the marketplace so that they can make appropriate plans and that will give them the appropriate incentives.
LISTNUM 1 \l 1767 The two aspects to that would be, first of all, the fact that there is this time period that will come to an end. That in itself is very helpful. But we also believe that along the way it may well be that conditions may have changed and you don't need those facilities any more.
LISTNUM 1 \l 1768 So that would be the second part of it.
LISTNUM 1 \l 1769 MR. ROGERS: By the second scenario you were just describing you were referring to people will make other arrangements. There will be investments made.
LISTNUM 1 \l 1770 MR. HARITON: That's correct.
LISTNUM 1 \l 1771 THE CHAIRPERSON: Could you explain that again?
LISTNUM 1 \l 1772 I'm sorry, I didn't catch your clarification, Mr. Rogers.
LISTNUM 1 \l 1773 MR. ROGERS: I was trying to make sure that I understood Mr. Hariton's last comment.
LISTNUM 1 \l 1774 If I have understood ‑‑ and he will correct me ‑‑ the first is a hard stop which is a period of time and the second is you wanted to also recognize that there can be changes over time in the form of investments or other commercial arrangements that would be made that obviate the need for the mandating.
LISTNUM 1 \l 1775 MR. HARITON: That's correct.
LISTNUM 1 \l 1776 THE CHAIRPERSON: So effectively shortening the period?
LISTNUM 1 \l 1777 MR. HARITON: Yes, the period could be shortened.
LISTNUM 1 \l 1778 MR. ROGERS: Just to be clear, Mr. Hariton and Members of the Panel, you have indicated that the termination comes at the sooner of the two?
LISTNUM 1 \l 1779 MR. HARITON: That's right.
LISTNUM 1 \l 1780 MR. ROGERS: Gentlemen, in your discussion with Rogers' counsel just a few minutes ago, there was a reference to the current unbundling rules and cable's entry into the residential markets. You indicated, if I recall your discussion with their counsel properly, that the current rules may not have decreased incentives for facilities‑based entry by cable.
LISTNUM 1 \l 1781 Is that ‑‑ we can go back. Of course, we don't have the transcript in front of us.
LISTNUM 1 \l 1782 MR. HARITON: Yes. I think the thing I was trying to stress was one of timing, that we did have ‑‑ we certainly have had entry by cable in 2005. Unbundled loops were mandated in 1996, so they weren't immediately available, they were available shortly after. So what we did see was that, in fact, there was a long delay.
LISTNUM 1 \l 1783 Now, what caused that long delay is still a speculation, but certainly the unbundling decision did not seem to help.
LISTNUM 1 \l 1784 MR. ROGERS: Well, that discussion, as I recall it, was whether or not it delayed or incented or disincented entry by cable, but what you weren't asked was whether or not the current mandated unbundling rules may have decreased the incentives for other entrants.
LISTNUM 1 \l 1785 MR. HARITON: Yes, and I think the ‑‑
LISTNUM 1 \l 1786 MR. ROGERS: I would like your response on that.
LISTNUM 1 \l 1787 MR. HARITON: Yes, the answer is I think there is a significant amount of evidence that the rules for mandated access have discouraged building out of facilities by other parties.
LISTNUM 1 \l 1788 We have that document in our evidence. At certain places, I see that there are other parties to this proceeding that have put evidence on the record that supports that view, as well.
LISTNUM 1 \l 1789 MR. ROGERS: Fine, thank you, Mr. Hariton.
LISTNUM 1 \l 1790 I would like you to turn now to paragraph 14 of the supplemental material filed by the Bureau. That's your July material.
LISTNUM 1 \l 1791 Do you have that?
LISTNUM 1 \l 1792 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1793 MR. ROGERS: And that paragraph is a discussion of two possible errors that could be made, in terms of setting up a mandated access regulatory system.
LISTNUM 1 \l 1794 And these came up earlier. I think, Dr. Church, you were referring to them. These are the type 1 and type 2 errors. They are mandating something which is not essential or failing to mandate something which is. Those are the two types of errors.
LISTNUM 1 \l 1795 MR. CHURCH: Yes.
LISTNUM 1 \l 1796 MR. ROGERS: And after describing each of those errors, in paragraph 16, if you turn to that, in the third sentence, you indicate, the Bureau indicates:
"The costs of mandating access to facilities that are not essential appears to be higher than the costs of not mandating access to facilities that are." (As read)
LISTNUM 1 \l 1797 Do you see that statement?
LISTNUM 1 \l 1798 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1799 MR. ROGERS: It's essentially a statement that, in your view, the costs of type 1 errors appear to be greater than the costs of type 2 errors?
LISTNUM 1 \l 1800 MR. CHURCH: Yes. Assuming your type 1 and type 2 are defined the way we have defined them there, yes.
LISTNUM 1 \l 1801 MR. ROGERS: Right.
LISTNUM 1 \l 1802 And then continuing on, in paragraph 16, just immediately following:
"On the basis of that assessment of the relative costs..."
‑‑ the Bureau concludes at paragraph 16 ‑‑
"...a restrictive definition of 'essential facilities'..."
‑‑ and in bracket ‑‑
"...(and accordingly a narrower access regime) is appropriate." (As read)
Correct?
LISTNUM 1 \l 1803 MR. CHURCH: Yes.
LISTNUM 1 \l 1804 MR. ROGERS: Much of the Bureau's discussion in evidence that's been filed involves a consideration of the weighing of the costs and the benefits of various approaches to mandating access. Would you agree with that?
LISTNUM 1 \l 1805 MR. CHURCH: Yes.
LISTNUM 1 \l 1806 MR. ROGERS: In fact, I understand that your third criterion in both versions ‑‑ it's been revised, but the third criterion that you have proposed as part of your test is really a benefits test or a market effects test. Is that fair?
LISTNUM 1 \l 1807 MR. CHURCH: Yes.
LISTNUM 1 \l 1808 MR. ROGERS: Of course, originally, it was entry sufficient to warrant forbearance, but you have now changed it. I'm not going to get into that change, but you agreed with me earlier it was a benefits cost test. And it's still true. Even with the revised test that you have got, that's still a benefits test or a market effects test. Correct?
LISTNUM 1 \l 1809 MR. CHURCH: Yes, it is.
LISTNUM 1 \l 1810 MR. ROGERS: I would like you to consider a hypothetical scenario in which an input facility has, in fact, already been duplicated in a market by a major new entrant, but not yet widely.
LISTNUM 1 \l 1811 Would you say in that case that it's particularly important that the Commission very carefully weigh the costs and benefits before mandating access?
LISTNUM 1 \l 1812 The scenario is there has been some facilities‑based duplication in the market by a major new entrant, but not yet widely. I'm asking whether in the those circumstances is it particular important for the Commission to very carefully weigh the costs and the benefits?
LISTNUM 1 \l 1813 MR. CHURCH: Yes, I think that we need to be very careful about what we mean by "the market".
LISTNUM 1 \l 1814 MR. ROGERS: And just to understand why you say "yes", I think what you are alluding to is you are probably concerned about discouragement of further investment?
LISTNUM 1 \l 1815 MR. CHURCH: That's correct. In a well defined market, yes.
LISTNUM 1 \l 1816 MR. ROGERS: Let's talk about one market which, I think we would agree, is not characterized by little or no entry, facilities‑based entry, and that's the access facility to the residential market. I think we would be on fairly common ground that that's not a market that has been characterized by little or not entry.
LISTNUM 1 \l 1817 MR. CHURCH: That's correct.
LISTNUM 1 \l 1818 MR. ROGERS: In fact, there's been extensive duplication.
LISTNUM 1 \l 1819 Would you say that the business access market is one market where there is or has been duplication, but relative to the residential market it may be at an earlier stage?
LISTNUM 1 \l 1820 MR. CHURCH: I guess, you know, one of the things that the Bureau asked a number of interrogatories from various parties to this proceeding is to try and get a handle on how extensive, you know, duplication and investment in their own networks had been. You know, some of that information was supplied in confidence to the Commission ‑‑
LISTNUM 1 \l 1821 MR. ROGERS: Right, right.
LISTNUM 1 \l 1822 MR. CHURCH: ‑‑ some of it was not supplied. So, you know, there are some networks being built out there. TELUS said that they had a network ‑‑
LISTNUM 1 \l 1823 MR. ROGERS: Right.
LISTNUM 1 \l 1824 MR. CHURCH: ‑‑ so, you know, there has been some duplication.
LISTNUM 1 \l 1825 I note that in the most recent monitoring report, 41 percent of the business lines are now provided by owned loops ‑‑
LISTNUM 1 \l 1826 MR. ROGERS: Yes.
LISTNUM 1 \l 1827 MR. CHURCH: ‑‑ which is a substantial increase over the 27 percent in 2005. So there is some investment, obviously, going on in business markets.
LISTNUM 1 \l 1828 MR. ROGERS: Right, right.
LISTNUM 1 \l 1829 I guess where I'm going with this is I would like to explore with you, given that investment that has occurred or is occurring, what should that tell the Commission about its regulatory approach to any mandating in that market?
LISTNUM 1 \l 1830 In that regard, I would ask you to turn to your March 15 evidence and have a look at paragraph 71.
LISTNUM 1 \l 1831 Do you have that section, gentlemen?
LISTNUM 1 \l 1832 MR. CHURCH: Yes.
LISTNUM 1 \l 1833 MR. ROGERS: I'm looking in particular at small Roman number ii in that. The entire paragraph talks about business services, and it says:
"The Bureau observes the following..."
and in small Roman ii, it says:
"...a broad access regime in business markets may adversely affect the incentives for facilities‑based providers to enter business markets. Any regulatory framework that negatively impacts the incentives for entry of facilities‑based networks should be avoided." (As read)
LISTNUM 1 \l 1834 Now, that certainly lends a perspective to the kind of evidence that we were talking about earlier, where you acknowledged ‑‑ and others have ‑‑ that there is some duplication that is occurring, some investment in actual facilities in the business market.
LISTNUM 1 \l 1835 So I'm just suggesting to you that factual basis matches well the statement, the caveat or the caution that you are observing here in this piece.
LISTNUM 1 \l 1836 MR. CHURCH: Yes.
LISTNUM 1 \l 1837 MR. ROGERS: With that in mind, and when you refer to the kind of negative impacts in the quotes that I just read to you, I expect that some of you on the panel, certainly Mr. Hariton, would be aware of the criticisms of the Commission's past decisions in CDN and CDNA by certain parties, such as Vidéotron, in fact they referred to it in this proceeding. Those decisions by the Commission, in their view, adversely affected their own new‑entrant investments in facilities.
LISTNUM 1 \l 1838 Would that be an illustration, gentlemen, of the possible negative effects of a broad access regime on incentives to construct in the business community?
LISTNUM 1 \l 1839 MR. HARITON: That is right, Mr. Rogers, I had alluded to that very briefly. But Videotron has said in public several times that it had slowed down their facilities build. I also remember at the time of the second price cap hearing that GT Group Telecom said that if certain services were mandated their business would disappear. And indeed, I noticed that GT Group Telecom went into insolvency soon afterwards. So that seems to have had a huge impact on that market.
LISTNUM 1 \l 1840 MR. ROGERS: All right. Continuing with the issue of incentives, I would ask you to turn to your supplemental evidence at paragraph 8. I will give you a moment to turn that up.
LISTNUM 1 \l 1841 Do you have that?
LISTNUM 1 \l 1842 MR. CHURCH: Yes, we do.
LISTNUM 1 \l 1843 MR. ROGERS: And right at the end of that paragraph your discussion is essentially on the subject, service providers that control their own end‑to‑end networks have greater incentives for investment innovation and cost efficiency, presumably greater than those that rely on the ILECs network.
LISTNUM 1 \l 1844 And what I would ask you to do is when you look at that statement about service providers that control their own end‑to‑end networks have greater incentives, presumably that statement applies both to new entrants and to incumbents, correct?
LISTNUM 1 \l 1845 MR. CHURCH: Yes, it does.
LISTNUM 1 \l 1846 MR. ROGERS: And more broadly speaking, apart from that division of the market, it applies for innovation and efficiencies in any of the telecom markets, whether it be residential local or business local or business high speed, the statement would apply with respect to all those markets?
LISTNUM 1 \l 1847 MR. CHURCH: Yes it would, because when you have mandated access then there is going to be some sharing of facilities at some level and that is going to restrict what firms are able to do.
LISTNUM 1 \l 1848 MR. ROGERS: Right.
LISTNUM 1 \l 1849 MR. CHURCH: And they will have a common cost factor as well.
LISTNUM 1 \l 1850 MR. ROGERS: And we have a table full of economists here, so I will draw on that. When you say efficiencies and innovation you are thinking both in terms, I think, of static efficiency gains as well as dynamic efficiencies?
LISTNUM 1 \l 1851 MR. CHURCH: Yes.
LISTNUM 1 \l 1852 MR. ROGERS: And the dynamic efficiencies would be, if I understand them correctly, the motivation to not just invest in the same old thing, but to invest in something which does something more or better or is enhanced, that is the innovative side, it is a structural change that occurs in the marketplace as a result of something new, a new way of doing things?
LISTNUM 1 \l 1853 MR. CHURCH: Yes. I think the famous quote from Schumpeter is it doesn't matter how many locomotives you put end to end, you don't get an airplane.
LISTNUM 1 \l 1854 MR. ROGERS: All right. Are you a Schumpeterian?
LISTNUM 1 \l 1855 MR. CHURCH: I have been known to dabble.
LISTNUM 1 \l 1856 MR. ROGERS: Okay. It is not a religious question.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 1857 MR. ROGERS: All right, that is fine.
LISTNUM 1 \l 1858 Another discussion in your evidence that I would like you to draw your attention to and that is paragraph 79 of your March 15 evidence. I will give you a moment to turn that up.
LISTNUM 1 \l 1859 Do you have that?
LISTNUM 1 \l 1860 MR. HARITON: Yes I do, Mr. Rogers.
LISTNUM 1 \l 1861 MR. ROGERS: And that, just to put it into context, paragraph 79 and the paragraphs immediately precede it and follow it, is in the context of the discussion of pricing. And I don't want to talk to you about pricing now, but the language that is used in this paragraph that begins with the word "four" does deal with incentives and I will just focus on those words.
"A mark‑up that is too low may not provide sufficient incentives to the incumbents to innovate and invest in the wholesale facilities in question." (As Read)
And you go on from there.
LISTNUM 1 \l 1862 So I take that that is further confirmation of the statements that you made just a few minutes ago, that the incentives and dynamics that we are talking about in terms of investment and innovation apply equally to the incumbents?
LISTNUM 1 \l 1863 MR. HARITON: That is correct.
LISTNUM 1 \l 1864 MR. ROGERS: Gentlemen, there are those in this proceeding who would argue that the incentives for efficiency and innovation don't apply to the incumbent local access networks. Their view is it is all paid for, this is the argument, that the wires are in the ground, there can't possibly be any impact on the incentives and investments and innovation of the incumbents.
LISTNUM 1 \l 1865 Does that square with the kind of dialogue that we have just been having form your own testimony?
LISTNUM 1 \l 1866 MR. HARITON: Well, I don't agree, Mr. Rogers, that the wires are all in the ground. I know that there is a construction program each year. I don't know how big it is right now. At a minimum, there is green fields where you have to build out new wires and new facilities into new developments. There is replacement, because that is always happening to you. And, as I said, there is upgrading of the network. Some say that there is no technical or no innovation in the loops and so on. I disagree. I think we have seen quite a number of innovations over the last number of years and I expect that to continue.
LISTNUM 1 \l 1867 MR. ROGERS: So the Schumpeterian effect that we were talking about applies just as much for incumbents?
LISTNUM 1 \l 1868 MR. HARITON: Oh yes.
LISTNUM 1 \l 1869 MR. ROGERS: Fine. I would like to talk very quickly with you about transition period, because whatever definitions we end up deciding on, and including looking at the framework, the six‑part framework which was advanced in the Commission's analysis, it all includes or at least assumes that there is some sort of transition. So we should spend a minute or two discussing what that should be and what its effects are.
LISTNUM 1 \l 1870 As I understand the Bureau's evidence, the Bureau takes no specific position on the appropriate length of a transition period, is that correct?
LISTNUM 1 \l 1871 MR. HARITON: That is correct.
LISTNUM 1 \l 1872 MR. ROGERS: But you are not opposed to having a transition period?
LISTNUM 1 \l 1873 MR. HARITON: No, we recommend a transition period for the reasons we have discussed earlier.
LISTNUM 1 \l 1874 MR. ROGERS: Right. You would be aware that the proposals in this proceeding range from one year to five years and, in certain specific cases, no transition period at all because there is nothing to transition to? You are aware of that kind of range?
LISTNUM 1 \l 1875 MR. HARITON: Yes, I am aware of that.
LISTNUM 1 \l 1876 MR. ROGERS: If the Commission adopts a definition of essential facilities that is based on sound competition law principles, the kind that you are advocating, the current scope of mandated access will be, and I am using your words from paragraph 9 of your evidence, circumscribed considerably.
LISTNUM 1 \l 1877 MR. HARITON: If you could give me a chance to turn to that?
LISTNUM 1 \l 1878 MR. ROGERS: Sure, paragraph 9 of your supplementary evidence. You used the words "circumscribed considerably." It also appears in your March 15 evidence at paragraph 20.
LISTNUM 1 \l 1879 MR. HARITON: Yes.
LISTNUM 1 \l 1880 MR. ROGERS: So you are saying that the outcome of the proceeding, whatever it may be in precise details, the current mandating will be circumscribed considerably. If that in fact is the outcome of the proceeding, there will likely be some who would argue that there will be adverse effects on certain new entrants in some markets.
LISTNUM 1 \l 1881 Would the Bureau consider a transition period as one means of responding to such concerns? In other words, sound competition law principles should determine the definition of essential facilities and then we can help to deal with the impact and mitigate the impact of the result by establishing a reasonable transition period for all participants.
LISTNUM 1 \l 1882 MR. HARITON: Yes, that is right. I won't elaborate, it is in our evidence and you have said it fairly well.
LISTNUM 1 \l 1883 MR. ROGERS: Right. And when we talk about affecting all participants in the market, would you agree that every participant would be, at least to some extent, affected, including the incumbents, since all are purchasers of facilities in one region or another?
LISTNUM 1 \l 1884 MR. HARITON: Yes, this is a very interdependent industry, Mr. Rogers.
LISTNUM 1 \l 1885 MR. ROGERS: Do you have any views as to whether the length of the transition period should be the same for all types of facilities?
LISTNUM 1 \l 1886 MR. HARITON: I believe we have said that it should not. You should distinguish facilities. Clearly, it is quite a different situation if what you are talking about is changing a piece of software, than it is if you have to build certain structures or so on.
LISTNUM 1 \l 1887 MR. ROGERS: So that suggests that where you are talking about physical network structures, perhaps access, it might be a little longer?
LISTNUM 1 \l 1888 MR. HARITON: That is right. I mean, I would distinguish where you actually have to build outside plant ‑‑
LISTNUM 1 \l 1889 MR. ROGERS: Right.
LISTNUM 1 \l 1890 MR. HARITON: ‑‑ where you would have perhaps to change out transmission or other central office equipment and where you have to change software systems or things like that.
LISTNUM 1 \l 1891 Sorry, I don't want to downplay the difficulty of changing software, but the problems are of a different magnitude.
LISTNUM 1 \l 1892 MR. ROGERS: Switching topics now, Professor Church, you're from Alberta, I believe. When the Commission developed the concept ‑‑ I am just going to jump ahead here.
LISTNUM 1 \l 1893 Being from Alberta, you would be at least broadly familiar, I think, with the SuperNet in Alberta in general terms?
LISTNUM 1 \l 1894 MR. CHURCH: Yes.
LISTNUM 1 \l 1895 MR. ROGERS: And you have looked at it, at least in some respects, in fact I believe you testified before the Parliamentary committee, the Standing Committee on Industry, Science and Technology on February the 27th, and while you talked about many things, there was at least a passing reference somewhere in there to SuperNet. I am not going to go into any of your details, but I just want to introduce my topic with regard to SuperNet.
LISTNUM 1 \l 1896 Is it true that that is a network which extends broadband service into rural regions of Alberta?
LISTNUM 1 \l 1897 MR. CHURCH: Yes, my understanding is that the government contracted with Bell to provide broadband access to most provincial governments in most small towns in Alberta.
LISTNUM 1 \l 1898 MR. ROGERS: From your observation of the SuperNet, have you seen any signs of a policy or a practice by SuperNet to discriminate in granting access to new entrants? I am thinking of ISPs or CLECs or something.
LISTNUM 1 \l 1899 MR. CHURCH: I have no knowledge one way or the other of that.
LISTNUM 1 \l 1900 MR. ROGERS: I thought one of the things that it was intended to do was to allow remote and rural ISPs and others to have a broadband access link out of a rural community?
LISTNUM 1 \l 1901 MR. CHURCH: I think what I am comfortable saying is that I think that has happened. Whether there are complaints about discrimination between some carriers and others, I don't know.
LISTNUM 1 \l 1902 MR. ROGERS: I will go back to the concept of ‑‑ I would like to return to the Commission's original concepts of essentiality. This is the decision 97‑8. We don't actually need to turn up the decision because I think I am going to speak in very general terms about it.
LISTNUM 1 \l 1903 When the Commission developed the concept of near‑essential facilities, that was part of that decision, near‑essential as opposed to purely‑essential. It originally developed a sunset provision, five years. Do you recall that? Certainly Mr. Hariton, I think, you would recall that.
LISTNUM 1 \l 1904 MR. HARITON: Yes, I do.
LISTNUM 1 \l 1905 MR. ROGERS: That period was made indefinite. Right?
LISTNUM 1 \l 1906 MR. HARITON: Yes. I believe that was in 2001.
LISTNUM 1 \l 1907 MR. ROGERS: Right. When the Commission considers the issue of a transition period in this proceeding, is it important, in your view, that the Commission send a clear signal that it does not intend to extend the transition period? In other words, if it says it is going to be three years, then people should understand that it is a firm three years.
LISTNUM 1 \l 1908 MR. HARITON: Yes, as far as we are concerned, the fact that it is a firm stop is more important than the actual length of the period.
LISTNUM 1 \l 1909 MR. ROGERS: I would like now to turn to a discussion of market power, which is a major subject in the submissions of many parties in this proceeding. I would like to refer you to paragraph 30 of the Bureau's supplementary material.
LISTNUM 1 \l 1910 Do you have that, gentlemen?
LISTNUM 1 \l 1911 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 1912 MR. ROGERS: The paragraphs around here, including that paragraph, discuss the difference between dominance upstream and monopoly upstream. You will recall, it came up in your discussions earlier this morning, that TELUS has proposed monopoly control as one of its criteria.
LISTNUM 1 \l 1913 I would like to draw your attention to paragraph 30, the first sentence, in which the Bureau is commenting on this. The sentence reads:
"Requiring monopoly rather than dominance may in fact not be overly different in substantive terms." (As read)
LISTNUM 1 \l 1914 MR. CHURCH: I see that.
LISTNUM 1 \l 1915 MR. ROGERS: I am wondering if you could explain ‑‑ this is clearly a comment on the difference between monopoly and dominance. You are saying in practice, as I read it, it may not be that different. Can you explain?
LISTNUM 1 \l 1916 MR. CHURCH: I see. Well, I guess, you know, when we wrote this we were a bit uncertain about what TELUS meant by monopoly. The jurisprudence, I think ‑‑ I am not a lawyer and not a legal expert, but I have some anti‑trust background ‑‑ would suggest that the courts in the United States, using anti‑trust market definition principles to define the market, typically don't recall 100 per cent market share defined in a section 2 violation of the Sherman Act, defined monopolization.
LISTNUM 1 \l 1917 In fact, our concept of dominance in Canada and the American jurisprudence concept of monopoly in broad section 2 cases are very similar. That is the point here.
LISTNUM 1 \l 1918 But it has never been clear to us how TELUS uses the term "monopoly" and how TELUS would identify what a monopolist was. Our only point here was to say that perhaps the difference between monopoly and dominance was not so broad if what TELUS meant was a monopoly according to section 2 under the Sherman Act in the United States.
LISTNUM 1 \l 1919 MR. ROGERS: The Bureau in its criteria, its three criteria, explains or at least clarifies its first criterion by stating that a necessary condition for dominance in the upstream market is that it is not feasible for the competitors to duplicate the facility. Correct?
LISTNUM 1 \l 1920 MR. CHURCH: That is correct.
LISTNUM 1 \l 1921 MR. ROGERS: So, if there is evidence of actual duplication or likely duplication of the facility in the upstream market, then is it fair to say the first criterion of the Bureau's test fails?
LISTNUM 1 \l 1922 MR. CHURCH: I am sorry, could you repeat that?
LISTNUM 1 \l 1923 MR. ROGERS: Yes. My question was if there is evidence of actual duplication by a reasonable competitor or likely duplication of the facility in the upstream market, then the first criterion fails?
LISTNUM 1 \l 1924 MR. CHURCH: Again, it is very clear that when you say "actual duplication" you mean the exact same facility.
LISTNUM 1 \l 1925 MR. ROGERS: I would qualify that by saying that facility or a facility which provides the same functionality for use in the downstream market.
LISTNUM 1 \l 1926 MR. CHURCH: I guess if we are going to start talking ‑‑ see, this is the reason for my clarifying question. Then we are starting to talk about some differential inputs, right, but they may not be identical inputs. They may be differentiated. So then we talk about market definition upstream, so if you had duplication of inputs which may be similar but they are not identical, then the question becomes do they actually constrain the market power; do we have dominance upstream or not?
LISTNUM 1 \l 1927 MR. ROGERS: Why don't we make it simpler by assuming we are talking about exactly the same facility.
LISTNUM 1 \l 1928 MR. CHURCH: If we are talking about exactly the same facility and the market has been clearly defined, then the Bureau's position would be that you would not have dominance upstream in a well‑defined anti‑trust market, both product and geographic dimensions.
LISTNUM 1 \l 1929 MR. ROGERS: In order to reach that conclusion, you only need, as I understand it, one other supplier that has gone into the market and reproduced or duplicated that facility. One is sufficient?
LISTNUM 1 \l 1930 MR. CHURCH: One is likely sufficient in most cases, but, again, I would caution that it is very important that we are using anti‑trust market definition principles on the geographic and the product side to come to that conclusion.
LISTNUM 1 \l 1931 MR. ROGERS: Right. But there is no a priori reason for you to say that you require two or three or four entrants before the test fails?
LISTNUM 1 \l 1932 MR. CHURCH: No. I mean, for lots of reasons, the Bureau in the local forbearance proceeding put forward the proposition that in these instances, in these markets, what is important is if someone tried to raise prices could consumers easily switch to the facilities of the other firm, in which case if you have two people with the exact same facilities, the proper market share analysis, they each had 50 per cent market share, it is unlikely that in those circumstances you are going to have a dominant firm.
LISTNUM 1 \l 1933 MR. ROGERS: In the paragraph that immediately follows this one that we are looking at, paragraph 31, you again go on to discuss, this is your analysis of the TELUS monopoly control test. In the sentence at the end, there are some qualifying words I would like you to look at.
LISTNUM 1 \l 1934 The sentence at the end reads:
"This possibility is precluded under the TELUS definition and, to the extent it is empirically relevant, is problematic." (As read)
LISTNUM 1 \l 1935 I understand you are saying it is problematic. You have just explained that. But I am wondering what you mean by this qualifying phrase "to the extent it the empirically relevant." Does that mean that in actual practice there may not be that much difference?
LISTNUM 1 \l 1936 MR. CHURCH: Yes, the definition that we are talking about at the end of that sentence is the definition that begins at the beginning of the paragraph where it says:
"If instead TELUS means that monopoly or control requires 100 market share on the input market, this definition is too restrictive." (As read)
LISTNUM 1 \l 1937 That is what we mean by that definition.
LISTNUM 1 \l 1938 The distinction here that is being drawn in this paragraph in 31 is between the Bureau's weak and strong standards of duplicability. It is an open question, I guess, about which one of those standards we would be opting for at the beginning of the hearing.
LISTNUM 1 \l 1939 I think, you know, the Bureau has some views on this at the end of the hearing, where we have reached the stage now in a discussion of proxy versus ex‑post approach.
LISTNUM 1 \l 1940 One of the things that we tried to figure out is whether this in fact would matter empirically. We don't have that evidence. That evidence would come forth in an analysis of the data which was supplied to the Commission by the parties.
LISTNUM 1 \l 1941 THE CHAIRPERSON: Mr. Rogers, I think the panel would find it helpful to follow this discussion if you would give us the answer to what Dr. Church asked: Does TELUS talk monopoly in terms of the Sherman Act or does it talk about 100 per cent?
LISTNUM 1 \l 1942 MR. ROGERS: Mr. Chairman, we filed our evidence, and our witnesses will be coming soon to explain that in great detail.
LISTNUM 1 \l 1943 THE CHAIRPERSON: I am sure they will, but presumably you were involved in filing the evidence. If you can help us at this point in giving us a short answer.
LISTNUM 1 \l 1944 MR. ROGERS: I think what I have heard is sufficient for my purposes to understand the first sentence of paragraph 30. I think Dr. Church has done a good job on that and I am prepared to move on.
LISTNUM 1 \l 1945 THE CHAIRPERSON: I take it you are not willing to answer my question?
LISTNUM 1 \l 1946 MR. ROGERS: I prefer to let our witnesses speak to that, Mr. Chairman.
LISTNUM 1 \l 1947 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 1948 MR. ROGERS: Gentlemen, when you consider the issue of market power, which has been considered throughout this proceeding by many parties, would you agree that an assessment of whether or not an input is monopoly controlled is at least a relevant part of assessing market power? Is it one aspect of the test?
LISTNUM 1 \l 1949 MR. CHURCH: I am sorry, which market are we assessing market power in?
LISTNUM 1 \l 1950 MR. ROGERS: Let's look at the upstream market. The question was: Is an assessment of whether or not an input is monopoly controlled, is that a relevant part of an analysis of market power?
LISTNUM 1 \l 1951 MR. CHURCH: I am sorry, I am having a hard time understanding the question.
LISTNUM 1 \l 1952 MR. ROGERS: Well, let me put it to you this way.
LISTNUM 1 \l 1953 You have done a lot of competition law analysis?
LISTNUM 1 \l 1954 MR. CHURCH: I have.
LISTNUM 1 \l 1955 MR. ROGERS: And competition economics. Market power is a broad term. It means a lot of things in different circumstances. There are many ways of analyzing that.
LISTNUM 1 \l 1956 I would have thought that if you are looking at monopoly control, that is at least one step towards the broader analysis that you would call an analysis of market power.
LISTNUM 1 \l 1957 MR. CHURCH: This is a basic problem that I think the Bureau has with the TELUS evidence is that when you say monopoly controlled, I don't know what you mean by monopoly. For me to figure out what a monopoly is, I have to define the market and then go and look and see if there is significant market power in that market.
LISTNUM 1 \l 1958 You can't say monopoly controlled tells me something about market power because in the way the competition policy is usually done, that is circular.
LISTNUM 1 \l 1959 MR. ROGERS: In continuing this analysis of monopoly power, the distinction from monopoly is there is no monopoly. So, if you have one other supplier that is supplying the relevant facility into the relevant market, that is also part of an analysis of the market power, isn't it?
LISTNUM 1 \l 1960 MR. CHURCH: I think maybe the way to answer this is to say that monopoly depends on market definition. Market definition depends on what you include in the market and what you exclude from the market.
LISTNUM 1 \l 1961 The second point to note is that in anti‑trust circles, monopoly does not mean 100 per cent market share of a well‑defined anti‑trust market.
LISTNUM 1 \l 1962 MR. ROGERS: Gentlemen, I would like you to turn to paragraphs 48 and 49 of your supplemental evidence. In those paragraphs you discuss the analysis required to identify whether duplication is practicable or feasible. In those paragraphs, paragraph 49, you describe the analysis as fact intensive. Correct?
LISTNUM 1 \l 1963 MR. CHURCH: Yes.
LISTNUM 1 \l 1964 MR. ROGERS: In paragraphs further down below, 53 and 54, you describe the type of information that the Bureau would require to do such an analysis.
LISTNUM 1 \l 1965 Then in paragraph 55, which I would ask you to turn to, the Bureau makes the following statement:
"Without access to this information requested in the interrogatory process, the Bureau is not in a position to determine if the development of ex ante proxy rules that are relatively accurate is possible for business markets in Canada." (As read)
LISTNUM 1 \l 1966 You see that statement?
LISTNUM 1 \l 1967 MR. CHURCH: Yes.
LISTNUM 1 \l 1968 MR. ROGERS: Given that the Bureau, at least at this point, is not in a position to say if it is even possible to develop ex ante proxy rules, if it were possible to, assume it is possible or would be possible, they would have to be based on market conditions in Canada, wouldn't they?
LISTNUM 1 \l 1969 MR. CHURCH: Yes.
LISTNUM 1 \l 1970 MR. ROGERS: You would not condone simply importing proxy rules from another jurisdiction?
LISTNUM 1 \l 1971 MR. CHURCH: We would suggest that proxy rules that are appropriate for Canada should be based on regularities observable in Canada.
LISTNUM 1 \l 1972 MR. ROGERS: Given the lack of information that you require, there are some exceptions noted in paragraph 57 as to what you are prepared to endorse, but is it fair to say that the Bureau is not in a position at this time to approve any specific set of ex ante proxy rules?
LISTNUM 1 \l 1973 MR. CHURCH: The only exception to that would be I guess in 57, not proxy rules, those facilities we would be prepared to endorse, but no specific proxy rule.
LISTNUM 1 \l 1974 MR. ROGERS: Right. Apart from the 57 ones which are things like support structures, leaving those aside, you are not in a position to endorse any specific proxy rule set today?
LISTNUM 1 \l 1975 MR. CHURCH: That is correct.
LISTNUM 1 \l 1976 MR. ROGERS: Given that you can't propose any specific proxy rule set today, I take it it logically follows that you couldn't a priori say that a specific set of proxy rules should entail or should include a requirement for three or four independent suppliers?
LISTNUM 1 \l 1977 MR. CHURCH: Yes, that is correct.
LISTNUM 1 \l 1978 MR. ROGERS: Continuing with the discussion of duplicability, we have an exhibit from the Cogeco submission which has been provided here. Copies will be given to you.
LISTNUM 1 \l 1979 I should mention, Mr. Chairman, that we have also provided copies at the back of the room for those generally in attendance.
LISTNUM 1 \l 1980 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 1981 MR. ROGERS: The paragraph that I will draw your attention to is paragraph 61 of that evidence, Cogeco's evidence. As a preliminary point, would you agree with me that in regard to telecom services, Cogeco is a new entrant. Mr. Hariton?
LISTNUM 1 \l 1982 MR. HARITON: That is correct.
LISTNUM 1 \l 1983 MR. ROGERS: Cogeco is discussing in paragraph 61 an indicator of whether or not a facility can be duplicated and, thus, non‑essential.
LISTNUM 1 \l 1984 Cogeco suggests in that paragraph that:
"If a facilities‑based functional alternative exists in one geographic market, then in similar exchanges...
And I emphasize the word "similar,"
"...elsewhere, the Commission should conclude that the input can be economically or technically duplicated." (As read)
LISTNUM 1 \l 1985 Do you see that statement by Cogeco?
LISTNUM 1 \l 1986 MR. HARITON: Yes, I do. I stress with you the word "similar."
LISTNUM 1 \l 1987 MR. ROGERS: I am not going to ask you to endorse every word but do you think that the analytical approach being suggested by Cogeco is a useful way of looking at the question of duplicability?
LISTNUM 1 \l 1988 MR. HUGHES: Could we have a moment, please?
LISTNUM 1 \l 1989 MR. ROGERS: Sure.
‑‑‑ Pause
LISTNUM 1 \l 1990 MR. HUGHES: One point of clarification. It says "exchanges" and it is not clear to us that these are necessarily relevant geographic markets. So that would be a qualifier there.
LISTNUM 1 \l 1991 MR. CHURCH: So if the markets were defined similarly and had similar characteristics, then you might be able to construct a proxy rule for duplicability based on looking at entry in one versus the other. But the economic conditions, both the cost and demand, across exchanges might vary substantially and so entry in one exchange may not tell you anything about the prospects for entry in a second exchange.
LISTNUM 1 \l 1992 MR. ROGERS: But directionally, what I think you are saying is that if you get the markets properly defined in terms of geography and other economic characteristics, it is possible then to learn something about entry that has occurred in one in terms of the prospects for entry in another similar geographic market?
LISTNUM 1 \l 1993 MR. CHURCH: Yes.
LISTNUM 1 \l 1994 MR. HARITON: Yes, sir.
LISTNUM 1 \l 1995 MR. CHURCH: In fact, if we just tie that back to our discussion earlier that we had this morning, I guess in some sense that is how the Bureau sees the administrative process of dealing with this administrative cost narrowing, is that as the Commission does these through time they will learn about what the relevant factors are in given geographic areas and be able to come up with the kind of proxy rules that you are suggesting.
LISTNUM 1 \l 1996 MR. ROGERS: Right. Well, I am not actually suggesting proxy rules but I am looking at ‑‑
LISTNUM 1 \l 1997 MR. CHURCH: It is a form.
LISTNUM 1 \l 1998 MR. ROGERS: I am looking at efficiencies in terms of getting the right answer and what I think you are suggesting is that you can learn something about similar geographic markets, markets properly defined, in terms of the prospects for entry by the similar technology?
LISTNUM 1 \l 1999 MR. CHURCH: Yes.
LISTNUM 1 \l 11000 MR. ROGERS: Yes, okay.
LISTNUM 1 \l 11001 THE CHAIRPERSON: I presume all these markets are in Canada, are they?
LISTNUM 1 \l 11002 MR. ROGERS: Yes.
LISTNUM 1 \l 11003 THE CHAIRPERSON: Cogeco's submission doesn't say in Canada but I assume that we can presume that is what they are talking about?
LISTNUM 1 \l 11004 MR. ROGERS: Well, I certainly read it that way and I suppose we could ask them when they get here.
LISTNUM 1 \l 11005 I would like to finish up by asking you, gentlemen, about the famous stepping stones, a phrase that I know all of you are very familiar with.
LISTNUM 1 \l 11006 You will be certainly familiar, I know you have all looked at the TPR report, some of you more than others, and that report, of course, discussed the current wholesale regime and the stepping stone theory.
LISTNUM 1 \l 11007 You may not have to go to the TPR report ‑‑ you may have a copy with you ‑‑ I don't plan to refer to it extensively other than to read one quote from the TPR report and I know it is a quote which many of you have read probably many times.
LISTNUM 1 \l 11008 It is from page 3‑35 of the TPR final report and it is just a couple of lines. It says:
"There is no evidence in Canada that the CRTC's stepping stone strategy has provided effective transition to greater reliance by entrants on their own facilities. There is, on the other hand, reason to believe these policies have distorted the behaviour and incentives of new entrants in Canadian telecommunications markets." (As read)
LISTNUM 1 \l 11009 You will certainly recall that statement.
LISTNUM 1 \l 11010 MR. HARITON: I recall it distinctly.
LISTNUM 1 \l 11011 MR. ROGERS: In paragraphs 19 and 20 of the Bureau's March 15 evidence ‑‑ you may want to turn to that.
‑‑‑ Pause
LISTNUM 1 \l 11012 MR. HARITON: I see that, Mr. Rogers.
LISTNUM 1 \l 11013 MR. ROGERS: There is in that section an assessment of the current wholesale regime and the Bureau concludes ‑‑ this is in paragraph 20:
"In the Bureau's view, the current wholesale access regime is not conducive to achieving the objective of facilities‑based competition." (As read)
LISTNUM 1 \l 11014 And finally, at paragraph 84, near the conclusion of your text, the very last sentence of that paragraph talks about the current regime. Again, it is an assessment by the Bureau and it says, in effect, that regime has not been a stepping stone in the creation of new networks.
LISTNUM 1 \l 11015 I would like to ask you, gentlemen, is there anything since the release of the TPR final report or the filing of the Bureau's evidence in March or supplementary evidence in July that persuades you that the stepping stone theory is in fact working to achieve the objective of facilities‑based competition?
LISTNUM 1 \l 11016 MR. HARITON: No, Mr. Rogers.
LISTNUM 1 \l 11017 MR. ROGERS: You are aware, no doubt, that in this proceeding we have opening statements from a number of parties. One that comes to mind immediately is Primus and their statement says ‑‑ on page 2, it expressly says:
"The stepping stone approach is working with regard to network facilities." (As read)
LISTNUM 1 \l 11018 I take it that from everything you have said ‑‑
LISTNUM 1 \l 11019 MR. HUGHES: Could we have a moment?
LISTNUM 1 \l 11020 MR. ROGERS: Sure, you can have a look at it.
LISTNUM 1 \l 11021 MR. HUGHES: Where is it?
LISTNUM 1 \l 11022 MR. ROGERS: The Primus opening statement ‑‑
LISTNUM 1 \l 11023 MR. HUGHES: Yes, I have that.
LISTNUM 1 \l 11024 MR. ROGERS: ‑‑ at page 2 ‑‑
LISTNUM 1 \l 11025 MR. HUGHES: Yes.
LISTNUM 1 \l 11026 MR. ROGERS: ‑‑ at the bottom.
LISTNUM 1 \l 11027 MR. HUGHES: At the bottom.
LISTNUM 1 \l 11028 MR. ROGERS: Third bullet up.
LISTNUM 1 \l 11029 MR. HUGHES: Yes, I have it now, thank you.
LISTNUM 1 \l 11030 MR. ROGERS: And it says:
"The stepping stone approach is working with regard to network facilities." (As read)
LISTNUM 1 \l 11031 And I just draw it to your attention by way of contrast with the statements you just made and I think you indicated that there is no evidence that you see since TPR or since your filing of your own evidence that persuades you that the stepping stone theory is working.
LISTNUM 1 \l 11032 MR. HARITON: I have not seen such evidence. The major event since the TPR was written ‑‑ not issued but written ‑‑ was the entry of the cable companies and the cable companies, as I understand it, came in through their own facilities, they did not gradually build up through use of other facilities.
LISTNUM 1 \l 11033 MR. ROGERS: It was not a stepping stone?
LISTNUM 1 \l 11034 MR. HARITON: It was not a stepping stone.
LISTNUM 1 \l 11035 MR. ROGERS: Yes.
LISTNUM 1 \l 11036 Thank you, gentlemen.
LISTNUM 1 \l 11037 Thank you, Mr. Chairman.
LISTNUM 1 \l 11038 THE CHAIRPERSON: Mr. Church, Mr. Rogers took you through the evidence of July 5th in paragraph 8 and particularly the last sentence there, which says:
"In addition, service providers that control their own networks have greater incentives for investment, innovation and cost efficiency than those that rely on the ILEC networks to provide retail services." (As read)
LISTNUM 1 \l 11039 I heard the question. I didn't understand the answer. So maybe for my benefit you can ‑‑ on what basis do you come to that conclusion?
LISTNUM 1 \l 11040 MR. CHURCH: If we have a firm that has entered downstream and is using the facilities of the incumbent upstream, then certain aspects of its technical capabilities are going to be defined by the input that it uses.
LISTNUM 1 \l 11041 THE CHAIRPERSON: Mm‑hmm.
LISTNUM 1 \l 11042 MR. CHURCH: That is one thing that was going to reduce the potential for product differentiation.
LISTNUM 1 \l 11043 The second thing that might reduce the extent of competition is that they will have a shared cost in the sense that the cost of the input is going to be both the cost of the incumbent downstream and the entrant downstream, whereas if they have separate networks, then they are going to have the potential for separate costs, separate product differentiation, separate technical capabilities.
LISTNUM 1 \l 11044 There is not this shared aspect to it and that shared aspect necessarily means that there is going to be some dimensions on which they cannot compete because they share certain things, whereas if they have separate networks, then there is not going to be any ‑‑ they are not tied to each other in any way.
LISTNUM 1 \l 11045 THE CHAIRPERSON: I can see how this applies to the pure reseller but to somebody who has some facilities and buys the other, would it work exactly the same way for that person as it does for an ILEC?
LISTNUM 1 \l 11046 MR. CHURCH: I guess even if I am using unbundled loops, then I am constrained in what I can do because those aren't my loops, they are the ILEC's loops, and if the ILEC is providing service using those same loops as well, then we do still have this sharing.
LISTNUM 1 \l 11047 Now, it's a question of degree. The reseller is certainly going to be much ‑‑ the statement is going to apply much more strongly to resellers, but I still think it applies to people who use unbundled facilities as opposed to competing networks. So it's a continuum.
LISTNUM 1 \l 11048 THE CHAIRPERSON: Is this a conclusion of yours, an educated conclusion, or is it actually backed up by empirical evidence?
LISTNUM 1 \l 11049 MR. CHURCH: I guess it's a conclusion based on the economics of the situation.
LISTNUM 1 \l 11050 THE CHAIRPERSON: All right.
LISTNUM 1 \l 11051 Second, on the transition period, Mr. Hariton, you said that really it depended very much on whatever facilities or software, or something like that.
LISTNUM 1 \l 11052 We have heard submissions all over the place, going from one year to five years.
LISTNUM 1 \l 11053 Can I conclude from that there is no rule of thumb. There is sort of a starting point when looking at transition so could the Commission take any period, whatever it is, three years or so, saying the norm should be three unless you can show me in this case it is really a minor ‑‑ the software should be faster or it is really a complicated physical structure that has to be duplicated so a longer one, et cetera.
LISTNUM 1 \l 11054 For us to do fixed year transition period on the basis of your CO and other submissions will obviously be key and part of it is I'm looking for a starting point.
LISTNUM 1 \l 11055 MR. HARITON: Yes. A lot of the facilities which are most contested here would be things like loops and so on. For things like that a three‑year transition period should be adequate, in my experience.
LISTNUM 1 \l 11056 As you say, for certain things it is open to shorten it, and for other things it may well be necessary to lengthen it. But if you were to pick a three‑year period and say "Well, show us why not", I think that would be a good approach.
LISTNUM 1 \l 11057 THE CHAIRPERSON: All right. Thank you.
LISTNUM 1 \l 11058 Commissioner Cram...?
LISTNUM 1 \l 11059 COMMISSIONER CRAM: I think I must have been around too long, Dr. Church.
LISTNUM 1 \l 11060 You referred to the Monitoring Report, saying in business that 41 per cent of the local loops are owned by the competitors. That is the most expensive part of the whole chain.
LISTNUM 1 \l 11061 When I started here in November of 1998 there were 0 per cent. So from 0 to 41 per cent, are you saying that is no evidence that the stepping stone works?
LISTNUM 1 \l 11062 MR. CHURCH: Well, that evidence is not sufficient to tell you whether the stepping stone is working or not, because the stepping stone theory would say you have to tie it into that they had unbundled loops first and now they have replaced the unbundled loop with their own loop. I don't know the answer to that, whether that is what has happened or not.
LISTNUM 1 \l 11063 The 41 per cent does indicate that there is some competition out there for business access.
LISTNUM 1 \l 11064 COMMISSIONER CRAM: Does it not indicate that because it has increased from 0 in 9 years, does it not indicate that it may be an incentive?
LISTNUM 1 \l 11065 MR. CHURCH: It may be, it may not be. We need additional information to be able to figure out whether the stepping stone has been responsible for that or whether there are other factors that have led to that.
LISTNUM 1 \l 11066 COMMISSIONER CRAM: We could do that by finding out how competitors in the business market acquired these in the first place ‑‑ is that it ‑‑ the 41 per cent?
LISTNUM 1 \l 11067 MR. CHURCH: Yes. Yes.
LISTNUM 1 \l 11068 COMMISSIONER CRAM: All right.
LISTNUM 1 \l 11069 So it's not true when the answer was given there is no evidence that a stepping stone incents competition to build their own facilities?
LISTNUM 1 \l 11070 Your point is, you could not tell one way or another?
LISTNUM 1 \l 11071 MR. CHURCH: We don't have evidence to conclude that the stepping stone has worked.
LISTNUM 1 \l 11072 COMMISSIONER CRAM: All right.
LISTNUM 1 \l 11073 MR. CHURCH: There may well be evidence out there, we don't have it.
LISTNUM 1 \l 11074 COMMISSIONER CRAM: All right. So then instead of saying there is no evidence, the answer is the Competition Bureau has no evidence.
LISTNUM 1 \l 11075 MR. CHURCH: That would be fair.
LISTNUM 1 \l 11076 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 11077 Thank you, Mr. Chairman.
LISTNUM 1 \l 11078 THE CHAIRPERSON: Commissioner del Val...?
LISTNUM 1 \l 11079 COMMISSIONER del VAL: I just want to turn back to paragraph 8 of your supplementary evidence. It is clear that the focus is on facilities‑based competition because that is where you concluded that "effective competition at retail level is most likely to result".
LISTNUM 1 \l 11080 Now, I know that there is no suggestion that efficient resale should be eliminated or discouraged as a path of entry, but what do you ‑‑ do you think that the preservation or encouragement of efficient resale is beyond the scope of this proceeding and that it should not be a consideration in designing the current essential services wholesale regime?
LISTNUM 1 \l 11081 MR. HARITON: I'm sorry, Commissioner del Val, when you say "resale", do you mean resale of the services or do you mean retail of pieces?
LISTNUM 1 \l 11082 COMMISSIONER del VAL: Services.
LISTNUM 1 \l 11083 MR. HARITON: Resale of the actual services themselves.
LISTNUM 1 \l 11084 COMMISSIONER del VAL: Yes. May I just ‑‑ I ask because if the aim is, like you have said, consumer benefit, consumer choices, so at the end of the day it is downstream competition that is the goal.
LISTNUM 1 \l 11085 MR. HARITON: Yes. At the end of the day it is the retail market, that is quite right.
LISTNUM 1 \l 11086 COMMISSIONER del VAL: Yes.
LISTNUM 1 \l 11087 MR. HARITON: Resale competition certainly can be an adjunct, a useful adjunct in that it uses arbitrage to spread price discounts and things of that sort. So certainly it should be encouraged.
LISTNUM 1 \l 11088 However, it is not a substitute for facilities‑based competition, because the person who is providing the resale doesn't really have either the capacity or the incentive to modify the network and make it progress.
LISTNUM 1 \l 11089 So I would say that one would have to say yes, resale of competition, but not if it has negative impacts on the development of facilities‑based competition.
LISTNUM 1 \l 11090 In other words, it is an adjunct, it is not a substitute.
LISTNUM 1 \l 11091 COMMISSIONER del VAL: All right. So then the answer would be that in designing the essential services regime, if the byproduct were to discourage resale, then that's just too bad for the purposes of this proceeding?
LISTNUM 1 \l 11092 MR. HARITON: One would have to look at what is going on. The facilities‑based competition will bring, in my view, the vast bulk of the benefits of competition. Resellers, as I say, do have a role, but you have to weigh that role with respect to the benefits that you are going to be getting from your facilities‑based competition.
LISTNUM 1 \l 11093 COMMISSIONER del VAL: Do you think I should be weighing that role right now when I'm trying to come up with a definition of "essential services"?
LISTNUM 1 \l 11094 What is your view about that? How big of a consideration is that here in this proceeding?
LISTNUM 1 \l 11095 MR. HARITON: I would not have thought it would be a big factor to consider when you are looking at essential facilities, because here what you are really look at is the trade‑off between end‑to‑end facilities verses what I would call hybrid facilities where some are your own and some are not.
LISTNUM 1 \l 11096 Pure resellers will exist under either model and they will produce good results under either model. They will bring benefits under either model.
LISTNUM 1 \l 11097 So I think that while it is always important to keep them in mind, they are probably not a major consideration in the choice the Commission is facing here.
LISTNUM 1 \l 11098 MR. CHURCH: If I could just add something, please, to Mr. Hariton's answer.
LISTNUM 1 \l 11099 I think what Mr. Hariton is talking about is arbitrage between stuff that is available at retail, but what I don't think he is talking about is mandated discounts for all services. I don't think that is what Mr. Hariton is talking about.
LISTNUM 1 \l 11100 I think the Bureau would think that mandated discounts off of all ILEC services would run into even more difficulties with respect to incentives for investment and delaying facilities‑based competition and unnecessarily unbundling things which are not essential.
LISTNUM 1 \l 11101 So I think our framework could be used to look at whether we should have mandated discounts as well. You could apply that to that ‑‑ relatively the same analysis and I think we would be even more sceptical that that would have a role to play because of its effect on incentives for investment by everyone in the market.
LISTNUM 1 \l 11102 COMMISSIONER del VAL: Thank you.
LISTNUM 1 \l 11103 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 11104 COMMISSIONER del VAL: Those are my questions, Mr. Chairman.
LISTNUM 1 \l 11105 THE CHAIRPERSON: All right. Thank you very much.
LISTNUM 1 \l 11106 Let's take a break now. I see it is 12:10, we will resume at 1:10 sharp.
LISTNUM 1 \l 11107 Thank you.
‑‑‑ Recessed at 1210 / Suspension à 1210
‑‑‑ Resumed at 1310 / Reprise à 1310
LISTNUM 1 \l 11108 THE CHAIRPERSON: Madam Giroux‑Girard, who is our next witness?
LISTNUM 1 \l 11109 THE SECRETARY: Thank you, Mr. Chairman.
LISTNUM 1 \l 11110 Please be seated.
‑‑‑ Pause
LISTNUM 1 \l 11111 THE SECRETARY: I would like to call, please, to come forward the panel for cross‑examination for MTS.
‑‑‑ Pause
LISTNUM 1 \l 11112 THE CHAIRPERSON: Good afternoon.
LISTNUM 1 \l 11113 I see you have scheduled four hours for cross‑examination.
LISTNUM 1 \l 11114 MR. KOCH: I did.
LISTNUM 1 \l 11115 THE CHAIRPERSON: I hope that was out of an abundance of caution ‑‑
LISTNUM 1 \l 11116 MR. KOCH: It was.
LISTNUM 1 \l 11117 THE CHAIRPERSON: ‑‑ and you can be much more short and to the point.
LISTNUM 1 \l 11118 MR. KOCH: Precisely, Mr. Chairman.d
LISTNUM 1 \l 11119 THE CHAIRPERSON: Wonderful.
LISTNUM 1 \l 11120 MR. KOCH: We did inform the Hearing Secretary this morning that we would not go past two hours. I still hope to be within that estimate.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 11121 MR. KOCH: Mr. Chairman and Members of the Commission and the panel, my name is Michael Koch and I am representing MTS Allstream in this proceeding.
LISTNUM 1 \l 11122 I wanted to ask you firstly, gentlemen, just a couple of quick questions about the role of the Bureau in this proceeding, or the Commissioner.
LISTNUM 1 \l 11123 I take it that the Commissioner is participating pursuant to the provisions of the Competition Act which empower her to make submissions and call evidence in proceedings of other tribunals.
LISTNUM 1 \l 11124 Correct?
LISTNUM 1 \l 11125 MR. HUGHES: That is correct.
LISTNUM 1 \l 11126 MR. KOCH: All right. The Bureau, therefore, is not here as a decision‑maker or even a quasi decision‑maker.
LISTNUM 1 \l 11127 Is that a fair summary?
LISTNUM 1 \l 11128 MR. HUGHES: Certainly.
LISTNUM 1 \l 11129 MR. KOCH: All right.
LISTNUM 1 \l 11130 In your evidence you set out the relevant goals of the Competition Act which I take it would govern the purpose of your appearance here today.
LISTNUM 1 \l 11131 Correct?
LISTNUM 1 \l 11132 MR. HUGHES: Yes.
LISTNUM 1 \l 11133 MR. KOCH: All right.
LISTNUM 1 \l 11134 You cite I believe the entire purpose section of the Competition Act, but I take it you would agree with me that the purposes that are relevant to your appearance today are:
"... to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy." (As read)
LISTNUM 1 \l 11135 That is one of the relevant goals to your appearance in this proceeding?
LISTNUM 1 \l 11136 MR. HUGHES: It is certainly a relevant goal.
LISTNUM 1 \l 11137 MR. KOCH: Yes. And the other being:
"... to provide consumers with competitive prices and product choices." (As read)
LISTNUM 1 \l 11138 Correct?
LISTNUM 1 \l 11139 MR. HUGHES: Correct, sir.
LISTNUM 1 \l 11140 MR. KOCH: All right.
LISTNUM 1 \l 11141 I believe some of the evidence this morning went to that where you candidly indicated that at the end of the day we need an entrant to come in and to provide service to the consumer.
LISTNUM 1 \l 11142 It is really about what the consumer will experience at the end of the day, is it not?
LISTNUM 1 \l 11143 MR. HUGHES: Certainly. Assuming one takes a long enough perspective and looks at it in the correct context, certainly I don't disagree with that.
LISTNUM 1 \l 11144 MR. KOCH: All right.
LISTNUM 1 \l 11145 Now, in your evidence at paragraph 3 you indicate that you are going to provide your views on a conceptual framework based on competition principles and you state that this includes your views on:
"... the primary objective that should underlie any mandated access to wholesale services, namely the development of facilities‑based competition." (As read)
LISTNUM 1 \l 11146 Do you see that?
LISTNUM 1 \l 11147 MR. HUGHES: Yes, I do.
LISTNUM 1 \l 11148 MR. KOCH: All right.
LISTNUM 1 \l 11149 I wonder if I could ask you to turn ‑‑ I have provided a number of both exhibits that are not part of the record as well as material from the record, Mr. Chairman.
LISTNUM 1 \l 11150 If I could ask you to turn to the Order Varying Telecom Decision CRTC 2006‑15 first?
LISTNUM 1 \l 11151 Do you have that?
LISTNUM 1 \l 11152 MR. HUGHES: That will be a moment.
LISTNUM 1 \l 11153 THE SECRETARY: That will be registered as Exhibit No. MTS‑1.
EXHIBIT NO. MTS‑1: Order Varying Telecom Decision CRTC 2006‑15
LISTNUM 1 \l 11154 THE CHAIRPERSON: Mr. Koch, I hope all the documents you refer to will be provided?
LISTNUM 1 \l 11155 MR. KOCH: Absolutely. They were provided previously to the witnesses and I have provided them to the Secretary.
‑‑‑ Pause
LISTNUM 1 \l 11156 MR. KOCH: If everyone has that? Do you have that?
LISTNUM 1 \l 11157 MR. HUGHES: I do.
LISTNUM 1 \l 11158 MR. KOCH: Okay. Terrific.
LISTNUM 1 \l 11159 This is the Order varying Telecom Decision 2006‑15, which you understand was the local forbearance decision.
LISTNUM 1 \l 11160 Correct?
LISTNUM 1 \l 11161 MR. HUGHES: Yes.
LISTNUM 1 \l 11162 MR. KOCH: This Order being dated in April of this year followed the Policy Direction in time.
LISTNUM 1 \l 11163 Correct?
LISTNUM 1 \l 11164 MR. HUGHES: I don't know. Is that correct?
LISTNUM 1 \l 11165 MR. HARITON: That's correct.
LISTNUM 1 \l 11166 MR. KOCH: I would like to ask you to turn to the third page of the handout. You will see these orders have a bit of a unique format, they have a lot of "whereas" clauses.
LISTNUM 1 \l 11167 The first full "whereas" clause at the top of page 3, do you see that?
"Whereas the Governor in Council considers that facilities‑based competition is a durable form of competition that delivers the greatest benefits to consumers, imposes competitive market discipline on incumbents and strengthens investment and telecommunications infrastructure." (As read)
LISTNUM 1 \l 11168 Do you see that?
LISTNUM 1 \l 11169 MR. HUGHES: Yes, I see that.
LISTNUM 1 \l 11170 MR. KOCH: All right.
LISTNUM 1 \l 11171 That is a statement of the Governor in Council's belief as to the strength of facilities‑based competition.
LISTNUM 1 \l 11172 I wonder if I could turn your attention five "whereas" clauses below that where it states:
"Whereas the Governor in Council considers that the provision of competitor services by an ILEC, in accordance with the competitor quality of service standards, support sustainable competition and that it is appropriate that an ILEC demonstrate that it has ..." (As read)
LISTNUM 1 \l 11173 And it talks about quality of service standards.
LISTNUM 1 \l 11174 Do you see that?
LISTNUM 1 \l 11175 MR. HUGHES: I do.
LISTNUM 1 \l 11176 MR. KOCH: All right.
LISTNUM 1 \l 11177 Now, going back to the notion of facilities‑based competition, if you turn the page we get into the sort of effective parts of the Order and we see, under paragraph 2, there is a ‑‑ these are basically amending provisions. It indicates paragraphs 242 to 281 of the Decision ‑‑ that is the local forbearance decision ‑‑ are replaced by the following.
LISTNUM 1 \l 11178 Under (a) you see that there is the test set out there for local forbearance.
LISTNUM 1 \l 11179 Correct?
LISTNUM 1 \l 11180 MR. HUGHES: Correct.
LISTNUM 1 \l 11181 MR. KOCH: The first leg of that test is that the ILEC does not have market power based on certain criteria. We will come to those criteria in a moment.
LISTNUM 1 \l 11182 That is different than or an alternative criterion from those set out in subparagraphs (2) and (3).
LISTNUM 1 \l 11183 Correct? An ILEC might ‑‑
LISTNUM 1 \l 11184 MR. HUGHES: Correct.
LISTNUM 1 \l 11185 MR. KOCH: Correct. So that an ILEC might either meet the criterion in (1) or (2) which applies to the residential market.
LISTNUM 1 \l 11186 Correct?
LISTNUM 1 \l 11187 MR. HUGHES: Correct. That's why I was hesitating, so that is a bit of an either/or.
LISTNUM 1 \l 11188 MR. KOCH: Or (3) which applies to the business market.
LISTNUM 1 \l 11189 Correct?
LISTNUM 1 \l 11190 MR. HUGHES: Correct.
LISTNUM 1 \l 11191 MR. KOCH: In each of (2) and (3) these are what has come to be commonly known as the competitor presence criteria.
LISTNUM 1 \l 11192 Correct?
LISTNUM 1 \l 11193 MR. HUGHES: I'm not particularly familiar with that term.
LISTNUM 1 \l 11194 MR. HARITON: I believe that term is widely used.
LISTNUM 1 \l 11195 MR. KOCH: All right.
LISTNUM 1 \l 11196 MR. HUGHES: All right.
LISTNUM 1 \l 11197 MR. KOCH: I just want to try to find a shorthand so that I don't have to keep referring to these section numbers.
LISTNUM 1 \l 11198 Under these competitive presence criteria there is a requirement that there be a certain number of independent facilities‑based telecommunications service providers.
LISTNUM 1 \l 11199 Correct?
LISTNUM 1 \l 11200 MR. HUGHES: Correct.
LISTNUM 1 \l 11201 MR. KOCH: All right.
LISTNUM 1 \l 11202 If we go to the bottom of the page, in paragraph 243, you see halfway through that paragraph:
"Further, for the purposes of those provisions..." (As read)
LISTNUM 1 \l 11203 And those are referring to 2 and 3 of 242(a).
"...the Commission considers that a facilities‑based telecommunication service provider is one that provides services in the relevant market either by using its own facilities and services or by using a combination of its own facilities and services together with those leased from other service providers." (As read)
LISTNUM 1 \l 11204 You see that?
LISTNUM 1 \l 11205 MR. HUGHES: I do.
LISTNUM 1 \l 11206 MR. KOCH: Okay. So you would agree with me then that the government's definition of facilities‑based competition is that set out in 243, would you not, that it is someone who either uses its own facilities and services or uses a combination of its own facilities and services together with those leased from other service providers, correct?
LISTNUM 1 \l 11207 MR. HUGHES: That is certainly what paragraph 243 says.
LISTNUM 1 \l 11208 MR. KOCH: Okay. The Bureau's goal, would it not be fair to say that when the Bureau in its submission speaks of facilities‑based competition, it is speaking of end‑to‑end facilities‑based competition?
LISTNUM 1 \l 11209 MR. HUGHES: That is probably a fair characterization.
LISTNUM 1 \l 11210 MR. KOCH: Okay. So the Bureau's definition of facilities‑based competition is narrower than the government's definition, correct?
LISTNUM 1 \l 11211 MR. HUGHES: Certainly narrower than paragraph 243.
LISTNUM 1 \l 11212 MR. KOCH: You are not suggesting, Dr. Hughes, that it meant something different in 243 than it did in the whereas provisions of the order in council, are you?
LISTNUM 1 \l 11213 MR. HUGHES: It is Mr. Hughes, by the way.
LISTNUM 1 \l 11214 MR. KOCH: Okay.
LISTNUM 1 \l 11215 MR. HUGHES: Could you ‑‑
LISTNUM 1 \l 11216 MR. KOCH: Well, you said that it certainly said that in 243 but I am saying that is not the only place it used the term "facilities‑based competition" in the order. You are not suggesting that there is anything to be made of that, is there?
LISTNUM 1 \l 11217 MR. HUGHES: I have no reason to think that the words "facilities‑based" on page 3 near the top is any different than paragraph 243.
LISTNUM 1 \l 11218 MR. KOCH: Okay. Now, the objective of providing consumers with competitive prices and product choices that is contained in the Competition Act, that also doesn't focus solely on one form of competition, does it?
LISTNUM 1 \l 11219 MR. HUGHES: Not necessarily but certainly it is our experience that facilities‑based carriers and facilities‑based market participants even in other industries are more likely to provide that kind of effective competition.
LISTNUM 1 \l 11220 MR. KOCH: Okay.
LISTNUM 1 \l 11221 When we started this morning there was some discussion of innovation and the panel ‑‑ I don't want to go over it unnecessarily, sir ‑‑ the panel discussed how innovation can occur at every level of the network and at the applications level as well.
LISTNUM 1 \l 11222 And, Mr. Hariton, you provided the example of innovation in terms of cable's entry into the telephone market, correct?
LISTNUM 1 \l 11223 MR. HARITON: That is right.
LISTNUM 1 \l 11224 MR. KOCH: And your purpose was to provide that as an example of innovation in the network, is that correct?
LISTNUM 1 \l 11225 MR. HARITON: It was an innovation in the network, that is correct.
LISTNUM 1 \l 11226 MR. KOCH: Okay. Mr. Hariton, you and I were both here ‑‑ well, we have been here at a number of hearings over the years. In 2001, we were both here and points before that and there was coming from the ILECs quite a great deal of speculation about cable entry but you will agree cable entry has only happened relatively recently, correct?
LISTNUM 1 \l 11227 MR. HARITON: Yes. It happened much later than was expected.
LISTNUM 1 \l 11228 MR. KOCH: Okay. And in fact, if I suggested to you that the innovation that enabled cable entry was Voice over IP technology, you would agree with that?
LISTNUM 1 \l 11229 MR. HARITON: Certainly, the ‑‑ well, I am not sure I completely agree. I know that the entrants are using ‑‑ cable telephony is using a packet‑switched technology for most of the cable companies in Canada. I do know of one cable company in the Atlantic provinces, EastLink, who came in on a circuit‑switched basis and seemed to be doing quite well.
LISTNUM 1 \l 11230 MR. KOCH: Okay. The IP‑based though, that was based, was it not, on an innovation by Voice over Internet Protocol providers such as Skype and Vonage?
LISTNUM 1 \l 11231 MR. HARITON: Well, I understand that the version that the cable companies utilized was actually developed by CableLabs in the States through a series of standards called DOCSIS but I am by no means an expert on this and you should ask them.
LISTNUM 1 \l 11232 MR. KOCH: Now, one aspect of the test that the Bureau is proposing for when a service or facility is essential is the criterion that the owner of the facility is dominant in the downstream market.
LISTNUM 1 \l 11233 Another way of stating that is that the owner of the facility has market power; is that not correct, Mr. Hughes?
LISTNUM 1 \l 11234 MR. HUGHES: Give us a minute. Which paragraph are you speaking ‑‑
LISTNUM 1 \l 11235 MR. KOCH: I am not at the highest level talking about your test. You are talking about ‑‑ one of the elements of your test is downstream dominance, correct?
LISTNUM 1 \l 11236 MR. HUGHES: Yes, it is.
LISTNUM 1 \l 11237 MR. KOCH: Okay. And downstream dominance, by that, we are referring to market power?
LISTNUM 1 \l 11238 MR. HUGHES: Yes, we are.
LISTNUM 1 \l 11239 MR. KOCH: Okay.
LISTNUM 1 \l 11240 THE CHAIRPERSON: Can I clarify? I thought you were only talking about upstream dominance. Your tests, which are right in front of me, talk about upstream dominance. It doesn't talk about downstream dominance.
LISTNUM 1 \l 11241 MR. CHURCH: It has both, I think, Mr. Chairman.
LISTNUM 1 \l 11242 MR. HUGHES: Yes, I think it does. So at paragraph 56 (sic), for example, of our ‑‑ excuse me, 59, of our March 15th evidence. When I answered that question, I was presuming we were talking about both. It applies to either one.
LISTNUM 1 \l 11243 THE CHAIRPERSON: Just ‑‑ you guys are all experts and have lived with it for years.
LISTNUM 1 \l 11244 MR. HUGHES: Yes, sorry. More than I want to.
LISTNUM 1 \l 11245 THE CHAIRPERSON: Go slow with me. I am looking at your definition which says:
"The first element is the upstream market. The second element is the downstream market. A necessary condition for concluding there is dominance of the upstream market is it is not practical or feasible for competitors to duplicate the facility in question." (As read)
LISTNUM 1 \l 11246 Clearly, this is talking about upstream markets so far, right?
LISTNUM 1 \l 11247 MR. HUGHES: The line you are referring to is just an explanation of one of the two market power tests, one being upstream, one being downstream.
LISTNUM 1 \l 11248 THE CHAIRPERSON: I thought in your revised definition you had moved away from dominance in the downstream market because that depends on whether there was forbearance or not.
LISTNUM 1 \l 11249 MR. HUGHES: Not to my knowledge. I would have to check our opening statement to be sure but my recollection is ‑‑
LISTNUM 1 \l 11250 MR. CHURCH: Mr. Chairman, if you look at our opening statement at page 2, this is the October 8th version, the third full bullet there, the first sub‑bullet says:
"The firm controlling the facility in question is vertically integrated and dominant in two markets." (As read)
LISTNUM 1 \l 11251 And then it says the two markets are upstream and downstream.
LISTNUM 1 \l 11252 THE CHAIRPERSON: I am sorry, where are you, Mr. Church?
LISTNUM 1 \l 11253 MR. CHURCH: Page 2 ‑‑
LISTNUM 1 \l 11254 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 11255 MR. CHURCH: ‑‑ third bullet ‑‑
LISTNUM 1 \l 11256 THE CHAIRPERSON: Yes.
LISTNUM 1 \l 11257 MR. CHURCH: ‑‑ first little ‑‑ it is a bullet but it is not coloured in. I don't know what that is called, a miss?
LISTNUM 1 \l 11258 THE CHAIRPERSON: Right.
LISTNUM 1 \l 11259 MR. CHURCH:
"The firm controlling the facility in question is vertically integrated and dominant in two markets." (As read)
‑‑‑ Pause
LISTNUM 1 \l 11260 THE CHAIRPERSON: Okay. Where there is competition in the downstream market because there is mandated access, is there still dominance, according to you, or not? Because the moment you remove the mandated access, you are not going to have a downstream market. So that is what I am struggling with here.
LISTNUM 1 \l 11261 MR. HUGHES: In that situation, you would have dominance because we are only going to look at ‑‑ we are going to assess dominance and focus primarily on carriers that do not rely on that network and that is going to be our primary consideration. So there would be dominance in that scenario.
LISTNUM 1 \l 11262 THE CHAIRPERSON: Okay, thank you.
LISTNUM 1 \l 11263 MR. KOCH: I think my question ‑‑
LISTNUM 1 \l 11264 THE CHAIRPERSON: I am sorry, Mr. Koch. I just wanted to make sure I can follow you.
LISTNUM 1 \l 11265 MR. KOCH: No, no. I was just trying to reassure you that I might go there as well.
LISTNUM 1 \l 11266 So one aspect of your test is dominance in the downstream market, you have agreed.
LISTNUM 1 \l 11267 In the local forbearance proceeding, the Commission proposed a structured rule of reason for determining whether an incumbent retain market power in the local market, correct?
LISTNUM 1 \l 11268 MR. CHURCH: If I just might, I think what the Bureau of Competition proposed was a test, such that, under that structured rule of reason, the competition would be sufficiently well developed to control the market power as the existing regulatory regime.
LISTNUM 1 \l 11269 MR. KOCH: I will take your answer. I'm not sure that's different from what I said.
LISTNUM 1 \l 11270 I wonder if the panel could be shown the next exhibit, which is the excerpt from Telecom Decision CRTC 2006‑15.
LISTNUM 1 \l 11271 THE SECRETARY: These register under MTS Exhibit No. 2.
EXHIBIT NO. MTS‑2: Excerpt from Telecom Decision CRTC 2006‑15
LISTNUM 1 \l 11272 MR. KOCH: This is a brief excerpt from the consolidated version of the decision, in other words the decision, as modified or varied by the order‑in‑council that we just reviewed, sir.
LISTNUM 1 \l 11273 If I could ask you to go to, it's the third page, there's a paragraph 213, at the top of the page.
LISTNUM 1 \l 11274 MR. HUGHES: Yes, I see that.
LISTNUM 1 \l 11275 MR. KOCH: Here, this is the Commission's discussion of the Bureau's proposal. It says:
"The Bureau proposed the Commission should adopt a structured rule of reason approach that could serve as the basis for streamlined analysis of ILEC requests for local exchange service forbearance."
And then it says:
"In the Competition Bureau's view, this approach used the following set of conditions that, if satisfied, should be sufficient for the Commission to conclude that an ILEC did not possess market power in the provision of local exchange services."
LISTNUM 1 \l 11276 So, Dr. Church, I'm simply pointing out that the Bureau's structured rule of reason recommendation in that proceeding was meant to measure whether or not there was market power. Correct?
LISTNUM 1 \l 11277 MR. CHURCH: I don't know if it's worthwhile to get into a technical debate here or not. This is certainly the Commission's view of what was proposed. I would much rather have a reference back to a submission by the Competition Bureau. Yes.
LISTNUM 1 \l 11278 MR. KOCH: The government also referred to it as a test for market power, did it not, in its order‑in‑council?
LISTNUM 1 \l 11279 MR. HUGHES: One moment, we will have to take a look at it.
LISTNUM 1 \l 11280 MR. KOCH: Okay. Let's go back to the first document, which is the order‑in‑council, and to paragraph 242, subparagraph (a)1.
LISTNUM 1 \l 11281 In the first subparagraph, under (a), one of the alternative criteria is that the ILEC does not have market power based on the criteria set out in paragraph 213. So the government and, by extension, the Commission are clearly treating that as a market power test. Correct?
LISTNUM 1 \l 11282 MR. HUGHES: From the words it would appear that.
LISTNUM 1 \l 11283 MR. KOCH: Okay. In any event, you do not dispute, do you, that that test is a higher threshold to meet than the tests under 2(a), sub 2 and sub 3, the competitive presence test. Correct?
LISTNUM 1 \l 11284 MR. HUGHES: In practice, I would expect that to be the case.
LISTNUM 1 \l 11285 MR. KOCH: Now, accordingly, it is possible, is it not ‑‑ I would suggest it's even probable, but I only try and take you as far as possible ‑‑ that an ILEC that can meet the criterion under 242 sub (a), 2 or 3, would nonetheless continue to have market power?
LISTNUM 1 \l 11286 MR. HUGHES: Sorry, could you restate that?
LISTNUM 1 \l 11287 MR. KOCH: That an ILEC could be granted forbearance under, for example, paragraph 242 sub (a), 2 or 3 ‑‑
LISTNUM 1 \l 11288 MR. HUGHES: Yes.
LISTNUM 1 \l 11289 MR. KOCH: ‑‑ and yet still have market power in that market. Is that not correct?
LISTNUM 1 \l 11290 MR. CHURCH: Yes, it may well be possible, from a competition policy perspective, that there could still be market power downstream, but you have to be careful about this, right, because the Bureau's structure rule of reason test was a sufficiency test, not a necessary test.
LISTNUM 1 \l 11291 MR. KOCH: Can you explain that, please?
LISTNUM 1 \l 11292 MR. CHURCH: Well, the Bureau's sufficiency test says if these conditions are met then ‑‑ and I will grant you, for the sake of this discussion, that it means no market power, so if those conditions exist, then no market power, but it doesn't mean that you might not have market power with something less. These were sufficiency conditions, not a necessary condition.
LISTNUM 1 \l 11293 Necessary conditions says if you have these conditions, then it's necessary that you don't have market power. The Bureau's test was just a sufficiency test. So, you know, it may well mean that even though the Bureau's test isn't met, there still might not be market power.
LISTNUM 1 \l 11294 MR. KOCH: In any event, you agreed that it's conceivable that ILECs will be granted forbearance under the criteria under 242 (a), 2 and 3, while still retaining market power. Correct?
LISTNUM 1 \l 11295 MR. CHURCH: Conceivable, yes.
LISTNUM 1 \l 11296 MR. KOCH: Yes. Thank you.
LISTNUM 1 \l 11297 And you are aware that the Commission has granted forbearance to the ILECs in many exchanges in Canada, both in the residence market and the business market. You are aware of that, Dr. Church?
LISTNUM 1 \l 11298 MR. CHURCH: Yes, I am.
LISTNUM 1 \l 11299 MR. KOCH: Okay. And you haven't performed an analysis to determine whether or not the ILECs might retain market power in those markets. Correct?
LISTNUM 1 \l 11300 MR. CHURCH: I have not.
LISTNUM 1 \l 11301 MR. KOCH: Okay.
LISTNUM 1 \l 11302 Now, if I could ask you to turn to section 3.2 of your March evidence, starting on page 12.
LISTNUM 1 \l 11303 Now, what you are purporting to do in this section of the evidence is to assess the existing framework. Correct?
LISTNUM 1 \l 11304 MR. CHURCH: Yes, that's correct.
LISTNUM 1 \l 11305 MR. KOCH: Okay. And part of your discussion is around the extent of reliance on incumbent facilities, and specifically local loops. Correct?
LISTNUM 1 \l 11306 MR. CHURCH: Yes.
LISTNUM 1 \l 11307 MR. KOCH: Okay. Now, at paragraphs 36 and 37, if I could ask you to turn those up, please, you are contrasting, are you not, the extent of competitors' reliance on ILEC loops in the residence and business markets, correct?
LISTNUM 1 \l 11308 MR. CHURCH: Yes.
LISTNUM 1 \l 11309 MR. KOCH: And you note at the end of paragraph 37, for example, the reliance on ILEC facilities by competitors to provide local service remained unchanged between 2004 and 2005, unlike local residential service. And what you are referring to there, I should have prefaced it by saying, in the business market as compared to the residence market. Correct?
LISTNUM 1 \l 11310 MR. CHURCH: Yes, though, as I indicated earlier this morning, the 2006 numbers tell a slightly different story.
LISTNUM 1 \l 11311 MR. KOCH: Now, you are, in any event, contrasting the situation in the residence market, where an end‑to‑end facilities‑based carrier with a ubiquitous network has emerged to the business market where there's no end‑to‑end facilities‑based carrier with the ubiquitous network, is that not correct?
LISTNUM 1 \l 11312 MR. CHURCH: I don't think that the evidence quite goes that far. It's only talking about the use of local loops, and comparing local loops from residential markets versus local loops in the business market.
LISTNUM 1 \l 11313 MR. KOCH: And you note that there was dramatic increase in the residence market due to cable telephony. Correct?
LISTNUM 1 \l 11314 MR. CHURCH: Yes.
LISTNUM 1 \l 11315 MR. KOCH: And you note that there wasn't that same increase on the business side?
LISTNUM 1 \l 11316 MR. CHURCH: That's right. And so that's as far as we go.
LISTNUM 1 \l 11317 MR. KOCH: Okay.
LISTNUM 1 \l 11318 Now, at paragraph 39, you specifically discuss my client, MTS Allstream. Is that correct?
LISTNUM 1 \l 11319 Sorry, you are distracted, Dr. Church.
LISTNUM 1 \l 11320 MR. CHURCH: I think 39 has been kicked out.
LISTNUM 1 \l 11321 MR. KOCH: Well, it's still in my copy. I would like to ask you a couple ‑‑
LISTNUM 1 \l 11322 MR. CHURCH: It has been withdrawn because it was based on the Sone Report and the Sone Report, we did not provide a duplicate copy, so it was withdrawn.
LISTNUM 1 \l 11323 MR. KOCH: So you are no longer relying on that evidence?
LISTNUM 1 \l 11324 MR. CHURCH: That is correct.
LISTNUM 1 \l 11325 MR. KOCH: Okay. So to the extent that you do rely on any evidence regarding local loops or the reliance ‑‑ do you anymore rely on evidence regarding the extent of a business competitor's reliance on local loops?
LISTNUM 1 \l 11326 MR. CHURCH: Yes, we do. I mean, we had evidence, you know, based on the CRTC local monitoring report. That is, you know, the earlier set of paragraphs which goes from 33 to 37. Then we had some additional evidence which amplified on that and made a similar point, which went from 38 to 40. But we had to withdraw 40 because of I guess costs and copyright issues associated with the Sone Report.
LISTNUM 1 \l 11327 MR. KOCH: Okay, let us deal with the more general level then.
LISTNUM 1 \l 11328 MR. CHURCH: So we still have evidence that we are relying on about the prevalence of unbundled loops in both residential and business based on the CRTC monitoring report alone.
LISTNUM 1 \l 11329 MR. KOCH: Okay. And that evidence, do I understand correctly, relates to a reliance on local loops to provide voice services?
LISTNUM 1 \l 11330 MR. CHURCH: Yes.
LISTNUM 1 \l 11331 MR. KOCH: Okay. So it does not include the reliance on local loops or other ‑‑ well, it is also restricted just to local loops, not to other leased facilities correct, Dr. Church?
LISTNUM 1 \l 11332 MR. CHURCH: Yes, it is based the evidence found in table 1 and table 2, which is looking at local residential service and local business service and the lines and usage of loops, resale and unbundled loops, resale and owned facilities, which follow on after those things at the footnotes that are in 29 to 32.
LISTNUM 1 \l 11333 MR. KOCH: Okay. So that does not measure that data, lines providing data services, for example?
LISTNUM 1 \l 11334 MR. CHURCH: I think that is probably right.
LISTNUM 1 \l 11335 MR. KOCH: And it does not measure lines provisioned for dedicated private networks, does it?
LISTNUM 1 \l 11336 MR. CHURCH: No, it does not, at least I don't think it does.
LISTNUM 1 \l 11337 MR. KOCH: And it does not measure lines providing internet connectivity, correct?
LISTNUM 1 \l 11338 MR. CHURCH: Probably not.
LISTNUM 1 \l 11339 MR. KOCH: Okay. And it doesn't measure, for example, Ethernet services, correct? Do you know ‑‑
LISTNUM 1 \l 11340 MR. CHURCH: We don't know.
LISTNUM 1 \l 11341 MR. HARITON: I don't know, but probably not. But again, Ethernet is a protocol running over lines and I assume you could run it over a loop as well.
LISTNUM 1 \l 11342 MR. KOCH: Now, you are aware of the demand by business customers for one‑stop shopping?
LISTNUM 1 \l 11343 MR. CHURCH: Yes.
LISTNUM 1 \l 11344 MR. KOCH: Okay. And in paragraph 68, if I could ask you to turn to that, of your evidence you refer to that. You say:
"The demand by business customers for one‑stop shopping for many locations across Canada may also make the situation for business services very different." (As Read)
LISTNUM 1 \l 11345 Are you aware of how many of the unbundled lines that are reported are provided to business customers with multiple locations?
LISTNUM 1 \l 11346 MR. CHURCH: No.
LISTNUM 1 \l 11347 MR. KOCH: You would agree with me that if a competitor can't serve certain of a customer's locations it may, and in fact does not have facilities to all those locations, it may not be able to get the contract for any of a particular customer's locations, correct?
LISTNUM 1 \l 11348 MR. CHURCH: I think that is what we say in paragraph 70.
LISTNUM 1 \l 11349 MR. KOCH: Right. So you could have business customers who are not willing to divide up their business between those locations a competitor can serve on its own facilities and those locations a competitor cannot, correct, that's what that reflects?
LISTNUM 1 \l 11350 MR. CHURCH: Yes. You know, that is the circumstances that we discussed in paragraph 70.
LISTNUM 1 \l 11351 MR. KOCH: Okay. So the impact of foreclosing access to unbundled facilities may also have a carryover in terms of a competitor's ability to serve customers who want one‑stop shopping, is that not ‑‑
LISTNUM 1 \l 11352 MR. CHURCH: That is correct.
LISTNUM 1 \l 11353 MR. KOCH: Okay. So there could be an impact, an adverse impact from an inability to have access to unbundled facilities from the ILEC on a competitor's ability to serve a customer with its own facilities, correct?
LISTNUM 1 \l 11354 MR. CHURCH: Yes.
LISTNUM 1 \l 11355 MR. KOCH: Okay. At paragraph 41, if I could ask you to jump back again, Dr. Church, you highlight the entry by the major cable companies and state that such entry has fundamentally altered the competitive landscape in local residential telecommunications markets. And I think you fairly note that in the residential market cable entry was brought about not by the economic proposition of building an entire network to provide telephony services, but rather based on the low incremental costs to providing telephony over an existing network that was already in place, is that not correct?
LISTNUM 1 \l 11356 MR. CHURCH: Yes, it is.
LISTNUM 1 \l 11357 MR. KOCH: Okay. So that is a special circumstance in the case of cable networks where the existing network was it not built to provide video services to residences?
LISTNUM 1 \l 11358 MR. CHURCH: I mean, that is a specific example of the general principle. It doesn't preclude that that general principle might apply for other networks in other locations for other purposes.
LISTNUM 1 \l 11359 MR. KOCH: But the cable example in the residential market, that was an existing network serving residences, correct?
LISTNUM 1 \l 11360 MR. CHURCH: Yes, it was.
LISTNUM 1 \l 11361 MR. KOCH: Okay. And it was built initially to provide video services to those residences, correct?
LISTNUM 1 \l 11362 MR. CHURCH: Yes, it was.
LISTNUM 1 \l 11363 MR. KOCH: Okay. And it was then upgraded to provide broadband, correct?
LISTNUM 1 \l 11364 MR. CHURCH: Yes, it was.
LISTNUM 1 \l 11365 MR. KOCH: And then on the basis of an incremental investment, building on those two previous investments, the cable companies were able to enter the telephony market, correct?
LISTNUM 1 \l 11366 MR. CHURCH: That is correct, as I understand it.
LISTNUM 1 \l 11367 MR. KOCH: Okay. Now, years ago we used to talk about whether there was going to be a silver bullet to the lack of telephone or telecom competition. I would suggest the cable entry was such a silver bullet in the residence market. There is no equivalent end‑to‑end competitor in the business market is there, Dr. Church?
LISTNUM 1 \l 11368 MR. CHURCH: I guess at this stage the answer would appear to be no. Though, I did note earlier that I was surprised at the number of owned loops that are being used by competitors in the most recent data from the CRTC. And it doesn't preclude the fact that it may be possible that a broadband network that is wireless or an electricity network or something else that exists for some other reason could not be adapted even in business markets to provide telephony.
LISTNUM 1 \l 11369 MR. KOCH: I think you agreed with the Chairman this morning that it is quite one thing to observe what is there already and quite another to prognosticate about what may coming down the pike. I mean, those are very different types of analyses, are they not?
LISTNUM 1 \l 11370 MR. CHURCH: Well you have a different level of confidence in the conclusions that you reach.
LISTNUM 1 \l 11371 MR. KOCH: Yes, precisely. Now, you agreed when my friend, Mr. Englehart, was putting to you the ICN recommendation that the advantages of unbundling outweigh the disadvantages of unbundling. You agreed to the extent that there was only one network, correct?
LISTNUM 1 \l 11372 MR. CHURCH: I said that the conclusion that they reached is consistent with only having one network or that that was what informed that conclusion.
LISTNUM 1 \l 11373 MR. KOCH: Now, this morning in discussion with Mr. Rogers on behalf of TELUS, Mr. Hariton, you provided what you felt were examples of or an example of a company who had been adversely impacted by the availability of unbundled facilities at regulated rates. Well, you provide several examples, but GT Group Telecom was one of your examples?
LISTNUM 1 \l 11374 MR. HARITON: That was one of the examples. There were others.
LISTNUM 1 \l 11375 MR. KOCH: Okay. Now, I had the good fortune of having been involved with GT Group Telecom, not in its regulatory policy, but in its initial public offering and many of its purchases. And you are aware that it had a unique strategy of building and hoping that customers would come once it had built out its network in various areas, correct?
LISTNUM 1 \l 11376 MR. HARITON: I was aware that part of their business case was to serve as provider of facilities to other carriers.
LISTNUM 1 \l 11377 MR. KOCH: Well, in fact, the evidence in 2001, was it not, that GT Group Telecom was having difficulty in the retail market and was therefore relying on its wholesale business.
LISTNUM 1 \l 11378 MR. HARITON: Yes, as I recall. This is a few years ago.
LISTNUM 1 \l 11379 MR. KOCH: Mr. Hariton, you, in your evidence, I think it is fair to say were suggesting that a change in policy had put GT Group Telecom under. You know that is not the case, sir. They were already in trouble at the time of the 2001 hearing.
LISTNUM 1 \l 11380 MR. HARITON: They were certainly in trouble at the time of the 2001 hearing. My recollection of the evidence at the time is that if there was further unbundling or unbundling at lower prices, that that would harm them significantly.
LISTNUM 1 \l 11381 MR. KOCH: They were already on the way out, sir, and there was no further unbundling before they went under, was there?
LISTNUM 1 \l 11382 MR. HARITON: I don't know about their unbundling before they went under. I do know there was an order ordering CD‑in services, which came from that decision, price caps.
LISTNUM 1 \l 11383 MR. KOCH: And you can't tell us how that related to their demise, can you?
LISTNUM 1 \l 11384 MR. HARITON: Well, I wasn't inside of the company. I just observed that they were saying that they were in trouble and that we had this order and that they did go into ‑‑
LISTNUM 1 \l 11385 MR. KOCH: Are you aware of who owns those facilities today?
LISTNUM 1 \l 11386 MR. HARITON: At the time?
LISTNUM 1 \l 11387 MR. KOCH: No, today.
LISTNUM 1 \l 11388 MR. HARITON: Oh, today. I understand a number of people bought them. I am not sure. I believe that some of them may have gone to Rogers and some of them may have gone to other parties.
LISTNUM 1 \l 11389 MR. KOCH: A big part of those facilities are owned by Bell Canada today. Is that not correct?
LISTNUM 1 \l 11390 MR. HARITON: Yes, that is correct.
LISTNUM 1 \l 11391 MR. KOCH: There were other competitors who entered who didn't have that sole focus on facilities base or building their own facilities, is that not correct, who also failed. Correct?
LISTNUM 1 \l 11392 MR. HARITON: There are certainly others who failed. I would also notice, Mr. Koch, that we have an example of evidence from Vidéotron, who said that they were building facilities and that they cut back their building program.
LISTNUM 1 \l 11393 We have evidence from TELUS and we have evidence from Bell who, out of territory, said that they were building facilities and cut back on their builds.
LISTNUM 1 \l 11394 So, all of that is consistent with the theory that if you do expand the scope of mandated access, then you do have impacts on the build of the other carriers.
LISTNUM 1 \l 11395 MR. KOCH: Mr. Hariton, or actually, rather, Dr. Church, going back to the test being proposed by the Bureau, the Bureau was proposing a test where mandating access was capable of achieving retail deregulation within a reasonable time while you have now recognized that in reality, given the structure of the government's forbearance test, in fact retail deregulation has been quite widespread based on the competitor presence test. Correct?
LISTNUM 1 \l 11396 MR. CHURCH: Yes.
LISTNUM 1 \l 11397 MR. KOCH: So we don't any more have the luxury of asking whether the downstream market will be forborne as a result of mandating access at the wholesale level. Correct?
LISTNUM 1 \l 11398 MR. CHURCH: Yes, in many markets you have retail forbearance.
LISTNUM 1 \l 11399 MR. KOCH: Accordingly you recognized this fact and developed a new third criterion, namely, that mandating access provides the promise of a substantial increase in competition. Correct?
LISTNUM 1 \l 11400 MR. CHURCH: That is correct.
LISTNUM 1 \l 11401 MR. KOCH: I take it it is a bit of a but for. Substantial increase over what would be if there was no mandated access. Correct?
LISTNUM 1 \l 11402 MR. CHURCH: That is correct.
LISTNUM 1 \l 11403 MR. KOCH: Not substantial increase necessarily from where we are today?
LISTNUM 1 \l 11404 MR. CHURCH: It is a substantial increase from where we are ‑‑ well, it is substantial increase in the but for where there has been no mandated access.
LISTNUM 1 \l 11405 MR. KOCH: So we have to imagine a situation where there was no mandate ‑‑
LISTNUM 1 \l 11406 THE CHAIRPERSON: Say that again, Dr. Church.
LISTNUM 1 \l 11407 MR. CHURCH: As Mr. Koch has pointed out, conceptually what you would like to do is you would like to start from a situation where you didn't have any mandated access; you just have the essential facility, and then you ask if we mandate access to it, what would happen? That is conceptually what you would like to do.
LISTNUM 1 \l 11408 It has become muddied because we already have access to it. Therefore, that sometimes informs what might happen if you have access to it, and it muddies it conceptually but actually makes it on a factual basis easier because you don't have to prognosticate about what might happen; you can look and see what has happened, how much competition do we have.
LISTNUM 1 \l 11409 MR. KOCH: We were discussing a competitor presence threshold for retail forbearance, which does include, as we discussed, the possibility that forbearance will be granted based on the presence of competitors who do both have their own facilities and lease unbundled facilities from the ILECs. Do you recall that?
LISTNUM 1 \l 11410 MR. CHURCH: That is the present policy and law of the land.
LISTNUM 1 \l 11411 MR. KOCH: Accordingly, in light of this threshold, we would have a situation, would we not, and in my submission we do, where forbearance has been granted where competitor presence was in fact predicated on the use of unbundled facilities. Correct?
LISTNUM 1 \l 11412 MR. CHURCH: Actually, I don't think I know that. I think that you can infer that from the Commission's decisions, but I don't think that the Commission has ever said how they are implementing the competitor presence test.
LISTNUM 1 \l 11413 MR. KOCH: So, you are not aware, for example, that in the situation of the city of Toronto, forbearance of the business market was dependent on competitor presence, which includes leasing of local loops?
LISTNUM 1 \l 11414 MR. CHURCH: I guess what I am not aware of is that I don't know if the Commission has ever said they require that to make the test.
LISTNUM 1 \l 11415 MR. KOCH: To the extent that that is the case, then could I ask you to look at the attachments that you ‑‑ it was the Commission's attachment which you attached as Appendix A to your opening statement. Do you have that, Dr. Church?
LISTNUM 1 \l 11416 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 11417 MR. KOCH: I take it we can agree that presumably this part of the framework, number 4, was predicated on precisely that, that you would have situations where local forbearance has been approved on the basis of mandated access or of unbundled loops. Correct? Unbundled facilities. Correct?
LISTNUM 1 \l 11418 MR. CHURCH: Yes.
LISTNUM 1 \l 11419 MR. KOCH: That is the whole purpose of this?
LISTNUM 1 \l 11420 MR. CHURCH: Yes.
LISTNUM 1 \l 11421 MR. KOCH: Otherwise you could have a scenario, if you didn't mandate in those circumstances, where customers in the downstream market would, given that the market is forborne, would be unprotected by retail regulation. Correct? And also not protected by a competitive presence.
LISTNUM 1 \l 11422 Sorry, I should have finished my question.
LISTNUM 1 \l 11423 MR. CHURCH: So, could you repeat your question, then, please?
LISTNUM 1 \l 11424 MR. KOCH: Given that you can have forbearance, forbearance based on a competitor's use of unbundled or leased facilities, if one did not mandate facilities in that scenario as is contemplated by paragraph 4 of the Commission's framework, you could have a situation where a customer in a downstream market would be unprotected either by the presence of a competitor or by retail regulation. Correct?
LISTNUM 1 \l 11425 MR. CHURCH: That is a possibility, yes.
LISTNUM 1 \l 11426 MR. KOCH: Yet, in your response to the Commission's draft framework, you propose to remove access to these facilities after a hard stop transition period. Correct?
LISTNUM 1 \l 11427 MR. CHURCH: That is correct.
LISTNUM 1 \l 11428 MR. KOCH: What would this be a transition to if these facilities are not built by competitors in the interim?
LISTNUM 1 \l 11429 MR. CHURCH: Based on all of the assumptions that you have made, if the facilities are not replaced or alternative arrangements are not made, then the interesting issue is whether or not there would be market power being exercised by the incumbents.
LISTNUM 1 \l 11430 MR. KOCH: Precisely. And in this framework, you would basically leave the customers potentially to the incumbent's market power. Correct?
LISTNUM 1 \l 11431 MR. CHURCH: I think you need to understand a couple of things about why we made that suggestion.
LISTNUM 1 \l 11432 First, I think that the Commission should avoid the seductive logic that existing unbundled facilities are necessarily essential if access to them is required to meet the conditions of the forbearance under the variance order because we have to understand that retail regulation and wholesale regulation are not perfect substitutes.
LISTNUM 1 \l 11433 If there is a problem with market power developing downstream, you may not be able to solve it in a way that makes sense for society by mandating access to a whole bunch of facilities upstream.
LISTNUM 1 \l 11434 The Bureau's submission is that you should use the proper definition of an essential facility, which is the definition that we put on the table. You have some transition period. During that transition period, you hope that because those things are non‑essential, that they are replaced, that alternative arrangements were made, that competitors are able to figure out some other alternative to use them. If that doesn't happen and market power issues arise downstream, then our recommendation would be that the Commission should address those market power issues, they should address the local forbearance. They should not go and go back into the wholesale market and adopt a different definition of the essential facilities.
LISTNUM 1 \l 11435 The reason for that is if you are trying to increase competition downstream, the alternatives available to the Commission are going to be to mandate access to things which are truly not essential or to lower prices on things that are truly not essential or lower prices on things that are essential to try and increase competition downstream to control that market power. Both of those alternatives are not costless.
LISTNUM 1 \l 11436 Essentially what you are doing is you are subsidizing entry by giving a subsidy to the entrants to come in and control the market power.
LISTNUM 1 \l 11437 It has to be a much better option to go back and look at how you would control that market power directly in the retail market as opposed to subsidizing entry in the upstream market.
LISTNUM 1 \l 11438 MR. KOCH: So I understand it, the Bureau's proposal to the Commission, therefore, is that in that situation where the hope is not borne out, to use your word, that in that situation it shouldn't determine that, well, maybe those were essential, if they weren't built, but, rather, that the Commission should get back into the business of retail regulation, notwithstanding what the government has said about competitor presence and forbearance. Correct? That is your submission. Correct?
LISTNUM 1 \l 11439 MR. CHURCH: We are going to take a minute just to confirm.
‑‑‑ Pause
LISTNUM 1 \l 11440 MR. CHURCH: I am back. Would you please repeat the question?
LISTNUM 1 \l 11441 MR. KOCH: I think that would take a half an hour.
LISTNUM 1 \l 11442 You indicated that if the hope ‑‑ and that was your word ‑‑ that something would be built in the interim was not built, then the solution is for the Commission to re‑regulate the downstream market. Is that not your submission?
LISTNUM 1 \l 11443 MR. CHURCH: The submission is slightly different than that. The submission is that at the end of this transition period, at the end of this hard stop, if there is a concern about market power downstream, then you have done everything you can to control that market power by using the right definition of the essential facilities upstream. So you have tried to use your wholesale instruments that you have available; you have used them appropriately; they are not capable of controlling the market power downstream. Then you should go address the problem where it exists, which would be to go address market power downstream by looking at introducing retail regulation again or revisiting the tradeoff that was behind the local forbearance.
LISTNUM 1 \l 11444 You have done the efficient thing upstream, you have done what you can. The only way you can increase competition downstream would be by jump starting it by, as you say, either expanding the set of facilities to which the competitors have access to, giving them access to non‑essential facilities, you are going to give them access to that. Well, if you are going to give them access to non‑essential facilities, you have to ask yourself if they are non‑essential, why didn't the competitors make them themselves, why didn't they make this investment, why wasn't the hope realized?
LISTNUM 1 \l 11445 The only reason that they would use the non‑essential facilities from the ILEC would be if they are priced too low. That means you are giving them a subsidy. That is likely to be the outcome.
LISTNUM 1 \l 11446 You have a problem down here. You have done the appropriate things up here. There is a limit to what you can do up here to control the market power downstream. Therefore, you are going to cause a great deal of cost if you go try and take this regime and bend it out of shape to address a problem which is related to down here. It may not be a problem. We will have to wait and see.
LISTNUM 1 \l 11447 MR. KOCH: So, your proposal again ‑‑ I think you are agreeing with me ‑‑ is that the Commission would have to get back into regulation at the downstream level. That is what the Bureau prefers?
LISTNUM 1 \l 11448 MR. CHURCH: The tradeoff would be you would leave that market power alone or you would introduce retail regulation, but the Bureau would not be in favour of bending your wholesale access regime out of shape.
LISTNUM 1 \l 11449 MR. KOCH: Do you believe leaving that market power alone is consistent with the goals of the Competition Act, to provide consumers with competitive prices and product choices?
LISTNUM 1 \l 11450 MR. CHURCH: No, as a matter of competition policy, we are typically against market power.
LISTNUM 1 \l 11451 MR. KOCH: I would say typically, yes.
LISTNUM 1 \l 11452 One of the Bureau's recommendations is that the relative costs and benefits of mandating access to a particular facility be weighed. In this, too, you acknowledge that there may be different implications in the residence and business markets. Correct?
LISTNUM 1 \l 11453 MR. CHURCH: I am sorry, what are you referring to? Where are you referring in the evidence, Mr. Koch?
LISTNUM 1 \l 11454 MR. KOCH: Paragraph 7.
LISTNUM 1 \l 11455 MR. CHURCH: Of the first submission or the second submission?
LISTNUM 1 \l 11456 MR. KOCH: Of the first submission. You state:
"The Bureau recognizes that the application of the test proposed herein for determining whether a particular facility function or service is essential may have different implications in the residential and business markets." (As read)
LISTNUM 1 \l 11457 Do you see that?
LISTNUM 1 \l 11458 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 11459 MR. KOCH: At paragraph 64 you acknowledge that where mandated access significantly increases competition downstream, its benefits will be substantial. Do you see that?
LISTNUM 1 \l 11460 MR. CHURCH: Yes, I do.
LISTNUM 1 \l 11461 MR. KOCH: I believe this morning in your evidence you stated that it is a requirement that mandating access should lead to entry of competitive significance. That is another way of saying this. Correct? You want to make sure that when you mandate access it is going to be to something that produces a meaningful result. Correct?
LISTNUM 1 \l 11462 MR. CHURCH: I think that both of our tests as mandated access should result in a substantial increase in competition.
LISTNUM 1 \l 11463 MR. KOCH: But I am interested in your remark this morning of mandating access leading to entry of competitive significance. Do you recall that evidence?
LISTNUM 1 \l 11464 MR. CHURCH: I think what I recall from the context of that discussion was that we were tracing the history of the Bureau's bullets through and we were talking about the earlier bullet was to remove all the economic regulation. There is a discussion in the supplemental evidence about a significant increase in competition. That significant increase in competition was designed to bring about this removal of economic regulation.
LISTNUM 1 \l 11465 The Bureau's third bullet is a substantial increase in competition.
LISTNUM 1 \l 11466 MR. KOCH: But to be meaningful, it would have to be effective competition as well. Correct?
LISTNUM 1 \l 11467 MR. CHURCH: That is what we mean by substantial increase in competition is that we mean it is a reduction in market power downstream, it is a reduction in prices and increase in innovation, increase in quality. It is a material benefit to consumers.
LISTNUM 1 \l 11468 MR. KOCH: This morning my friend, Mr. Engelhart, had a discussion with the panel regarding the example of Verizon, where all that was mandated was a DS‑0 on a fibre facility that in fact it turned out could not be provisioned. Do you recall that discussion?
LISTNUM 1 \l 11469 MR. HARITON: I am sorry, Mr. Koch, something that was not provisioned?
LISTNUM 1 \l 11470 MR. KOCH: You indicated that it was not possible ‑‑
LISTNUM 1 \l 11471 MR. HARITON: I indicated that there was a discussion going on in the States because it was difficult to provide unbundled loops with the new network architecture.
LISTNUM 1 \l 11472 MR. KOCH: Right. So, if you could not do that, then obviously mandating that kind of limited access on that facility would not be effective. Correct?
LISTNUM 1 \l 11473 MR. CHURCH: Just to make sure that I am clear here, you are saying that if you mandated access to something which in fact could not be provided, there would not be a substantial increase in competition.
LISTNUM 1 \l 11474 MR. KOCH: Correct.
LISTNUM 1 \l 11475 MR. CHURCH: I can agree to that.
LISTNUM 1 \l 11476 MR. KOCH: Likewise, if the situation was that you had one network and customers of that network wanted a high speed service and what was mandated on that network was only a low speed service, then that, too, would not lead to effective competition or substantial competition, correct, that kind of limiting of access to only the last generation or a slower speed. Correct?
LISTNUM 1 \l 11477 MR. CHURCH: That would be correct.
LISTNUM 1 \l 11478 MR. KOCH: I want to go back to the part of your evidence that I led you to, paragraph 64, where you talk:
"Where mandated access significantly increases competition downstream, its benefits will be substantial." (As read)
LISTNUM 1 \l 11479 Elsewhere, you suggest that unbundling hasn't been successful or that there is evidence that the Commission's wholesale access regime has adversely affected investment decisions, correct? That is part of your evidence, is it not?
LISTNUM 1 \l 11480 MR. CHURCH: Yes. We have introduced some preliminary evidence that we had based on a CRTC Monitoring Report about the effectiveness of unbundled loops in the present access regime.
LISTNUM 1 \l 11481 We also asked a number of interrogatories of MTS and Rogers in particular. That was our preliminary evidence. We invited those two parties in particular to provide us with additional evidence on the competitive impact of their access to unbundled facilities.
LISTNUM 1 \l 11482 MR. KOCH: Okay. And you noted that others had also introduced evidence regarding the incentives not to build and you referred to them this afternoon as well.
LISTNUM 1 \l 11483 You will agree you did not include in your evidence either the theoretical or empirical evidence supporting the counter‑position that unbundling actually increased investment in facilities by allowing entrants to combine their facilities with facilities leased from incumbents? That is nowhere mentioned in your report, is it?
LISTNUM 1 \l 11484 MR. CHURCH: We do have a discussion of the stepping stone hypothesis and some evaluation of that stepping stone hypothesis.
LISTNUM 1 \l 11485 MR. KOCH: But you don't give equal time, do you, to the theoretical or empirical evidence that exists, that actually in terms of the incentives to invest, that mandating and unbundling access to the ILECs' networks will in fact incent investments by allowing competitors to build their own facilities and combine those with the ILECs' facilities, do you?
LISTNUM 1 \l 11486 MR. CHURCH: Yes, and the reason for that is found in paragraph 8 of our Supplementary Evidence, is that when we are thinking about investment and the benefits that come from investment, the Bureau's bias is that we should try and increase investment in competing networks, so then we get the full benefits of competition.
LISTNUM 1 \l 11487 Me‑too investment is good but it depends what cost you get for the me‑too investment. If the me‑too investment means that you are foregoing competing networks, then maybe it is not such a good deal.
LISTNUM 1 \l 11488 MR. KOCH: Now, I am sure you don't use the word "bias" in the way that I would use the word "bias," Dr. Church, but I think ‑‑
LISTNUM 1 \l 11489 MR. CHURCH: That is because it is a biasian statistical decision‑making framework and I apologize for using it.
LISTNUM 1 \l 11490 MR. KOCH: No, that is okay. I wanted to get you off the hook.
LISTNUM 1 \l 11491 MR. CHURCH: Thank you.
LISTNUM 1 \l 11492 MR. KOCH: Dr. Church, you have co‑authored many studies with Rogers' expert witness Dr. Ware, have you not?
LISTNUM 1 \l 11493 MR. CHURCH: I have.
LISTNUM 1 \l 11494 MR. KOCH: I assume you have a high degree of respect for Dr. Ware.
LISTNUM 1 \l 11495 MR. CHURCH: I have ‑‑ Roger and I have co‑authored lots of things together and done very well with those things.
LISTNUM 1 \l 11496 MR. KOCH: Okay. I wonder if you could look at Dr. Ware's evidence that was filed by Rogers in this matter.
LISTNUM 1 \l 11497 Madam Secretary, there should be copies.
‑‑‑ Pause
LISTNUM 1 \l 11498 MR. CHURCH: I have it, Mr. Koch.
LISTNUM 1 \l 11499 MR. KOCH: Okay. Now, Dr. Ware in his reply evidence, did he not, cited a number of economic arguments supporting the position that mandated access will lead to greater competition and a higher level of investment? Do you agree with that?
LISTNUM 1 \l 11500 MR. CHURCH: I agree that the perspective that Professor Ware takes on this is in a context where there is a single network and where you have that single network, then maybe unbundling will lead to an increase in investment.
LISTNUM 1 \l 11501 I think that I am going to go back to my original point, which is that there are different kinds of investment and different kinds of competition and if we can get facilities‑based competition between two competing networks, that is the kind of competition which gives immense benefits to consumers.
LISTNUM 1 \l 11502 If you get competition between the two networks, it allows for both retail and wholesale deregulation. If we can get that kind of competition, that is what the objective of our wholesale regime should be.
LISTNUM 1 \l 11503 MR. KOCH: So if we can get that, that is great but let us take a look at what we have and what the incentives might be in that scenario.
LISTNUM 1 \l 11504 If you go to paragraph 29 of Dr. Ware's report ‑‑
‑‑‑ Pause
LISTNUM 1 \l 11505 MR. KOCH: ‑‑ he is talking about different scenarios based on mandatory sharing of essential facilities and in 29 he says:
"It is plausible, perfectly plausible, perhaps more plausible that without sharing there will be no entry or competition but with sharing profitable entry will occur." (As read)
LISTNUM 1 \l 11506 Do you see that at paragraph 29?
LISTNUM 1 \l 11507 MR. HUGHES: We will take a minute, please, sir.
LISTNUM 1 \l 11508 MR. CHURCH: I lost it.
LISTNUM 1 \l 11509 MR. KOCH: I am sorry, I thought you said you had it.
LISTNUM 1 \l 11510 MR. HUGHES: We got a little confused. We have a lot of paper around. We will be right with you.
‑‑‑ Pause
LISTNUM 1 \l 11511 MR. CHURCH: I have it. This time I have it for sure.
LISTNUM 1 \l 11512 MR. KOCH: So he is saying at paragraph 29 that it is perhaps more plausible if the framework for access is restrictive that there will be no entry or competition rather than a restrictive policy will increase incentives for the entrant to invest. Isn't that his point?
LISTNUM 1 \l 11513 MR. HUGHES: Where are you, at page 13 or 14?
LISTNUM 1 \l 11514 MR. KOCH: Paragraph 29.
LISTNUM 1 \l 11515 MR. CHURCH: I am sorry, Mr. Koch, it has been sometime since I had a look at this. Perhaps you could walk me through his argument a little bit so that I become familiar with it.
LISTNUM 1 \l 11516 MR. KOCH: Sure.
LISTNUM 1 \l 11517 THE CHAIRPERSON: Why don't we take a short break and you familiarize yourself with the content. Since this is not fresh in your mind, it is pointless. Let us take a 10‑minute break.
LISTNUM 1 \l 11518 MR. KOCH: Thank you.
‑‑‑ Recessed at 1417 / Suspension à 1417
‑‑‑ Resumed at 1442 / Reprise à 1442
LISTNUM 1 \l 11519 THE CHAIRPERSON: Could you please take your seats? We want to continue.
LISTNUM 1 \l 11520 MR. McCALLUM: Mr. Chair, could I make two procedural reminders, please.
LISTNUM 1 \l 11521 THE CHAIRPERSON: Go ahead.
LISTNUM 1 \l 11522 MR. McCALLUM: First of all, just two procedural reminders. When parties are under oath, just a reminder that in the middle of their cross‑examination they should not be discussing the substance of the testimony with their counsel at breaks. Just a reminder for the proceeding.
LISTNUM 1 \l 11523 Second, if a counsel is cross‑examining a panel and the counsel is presenting an exhibit to the panel, just a reminder that it would be courteous if the counsel could also remember to give a copy to the counsel for the panel itself.
LISTNUM 1 \l 11524 Thank you very much.
LISTNUM 1 \l 11525 THE CHAIRPERSON: All right. Mr. Koch, I believe you were cross‑examining on the basis of the evidence of Dr. Ware.
LISTNUM 1 \l 11526 MR. KOCH: Yes. The preface was to suggest to the panel that they had provided a one‑sided view.
LISTNUM 1 \l 11527 Dr. Church, I was pointing you to Dr. Ware's suggestion at paragraph 29 ‑‑ let me start at paragraph 28. He indicates:
"Those advocating the virtues of facilities‑based competition assume, explicitly or implicitly, that ..."
LISTNUM 1 \l 11528 I'm going to skip over the words that "Cell 'A' in the above table is the relevant one, i.e.:
"... that entry and competition will take place whether access to an essential facility is mandated or not." (As read)
LISTNUM 1 \l 11529 He states in paragraph 29:
"In fact, however, it is perfectly plausible, perhaps more plausible, perhaps more plausible that Cell 'C' is the relevant one in the above table, that is, without sharing there will be no entry or competition, but with sharing profitable entry will occur." (As read)
LISTNUM 1 \l 11530 You would agree, would you not, that that is also a plausible outcome?
LISTNUM 1 \l 11531 MR. CHURCH: Just to back up a little bit ‑‑
LISTNUM 1 \l 11532 MR. KOCH: Do you agree whether that is a plausible outcome?
LISTNUM 1 \l 11533 MR. CHURCH: You asked me to explain, I'm going to explain. The Commission was kind enough to give me time to do my analysis.
LISTNUM 1 \l 11534 I just wanted to back up. Before you had asked me ‑‑
LISTNUM 1 \l 11535 MR. KOCH: When did I ask you to explain?
LISTNUM 1 \l 11536 MR. CHURCH: Just a second.
LISTNUM 1 \l 11537 You had asked me earlier about the esteem that I held Roger Ware in.
LISTNUM 1 \l 11538 MR. KOCH: Yes.
LISTNUM 1 \l 11539 MR. CHURCH: So let's be very clear that without Roger Ware I wouldn't have a Ph.D., so i have immense ‑‑
LISTNUM 1 \l 11540 MR. KOCH: Okay. Well, we have that clear.
‑‑‑ Laughter / Rires
LISTNUM 1 \l 11541 MR. CHURCH: I have immense respect for the man.
LISTNUM 1 \l 11542 However, I think that the whole point of this proceeding is to try to figure out if we are in Cell "A" or Cell "C". Right? That's what our essential facilities test is designed to do, is to identify when can you have competition between networks, when can you not have competition between networks, and the only competition you are going to get is if you mandate access. That is Cell "C".
LISTNUM 1 \l 11543 We don't assume that without ‑‑ the sentence that you read out which says that entry and competition will take place whether access to an essential facility is mandated or not. We don't assume that.
LISTNUM 1 \l 11544 The whole point of our essential facilities test is to figure out whether you would have competition without or whether you need to have mandated access to have competition.
LISTNUM 1 \l 11545 That is the very essence of this proceeding, so that's why we have our three bullets, to try to figure out when would we have competition from facilities‑based competitors? When is the only source of competition we are going to get is when we mandate access.
LISTNUM 1 \l 11546 Our whole point is to try to distinguish between "A" and "C" and I would like to add that "C" is certainly hypothetical, it's certainly possible, but entry into cable markets and, as we have seen, entry into business markets suggests that "C" is not automatic.
LISTNUM 1 \l 11547 MR. KOCH: The entry in the business market is very different than the cable entry into the residence market, but we don't have to go back there, do we, Dr. Church?
LISTNUM 1 \l 11548 MR. CHURCH: What I know is that the Bureau asked a number of interrogatories of all the parties in this proceeding to try to figure out what the nature of the entry was ‑‑
LISTNUM 1 \l 11549 MR. KOCH: Yes.
LISTNUM 1 \l 11550 MR. CHURCH: ‑‑ into business markets, what the loops were, what the networks are, what the facilities are. That information, some of it, was provided to the Commission in confidence, some of it was not provided at all. Without seeing that information it is very difficult to know exactly what is going on in business markets.
LISTNUM 1 \l 11551 MR. KOCH: All right. I will take that for your answer.
LISTNUM 1 \l 11552 My question was simply this: You, in your evidence, provided the arguments for the assumption ‑‑ and I suggest it's an assumption ‑‑ that investment will be chilled by mandating access.
LISTNUM 1 \l 11553 I'm putting to you that Dr. Ware has provided evidence and both a number of theoretical constructs to oppose the constructs that unbundling dampens the incentives to invest, as well as reference to empirical evidence supporting the counter position and that he has laid those out in this report, but the Bureau has not chosen in its evidence to provide this side of the argument, has it?
LISTNUM 1 \l 11554 MR. CHURCH: No, but you see I disagree with that characterization. Right.
LISTNUM 1 \l 11555 What the Bureau's essential facilities test is designed to do is designed to figure out when you could have competition from competing facilities and when you can only have competition from mandated access.
LISTNUM 1 \l 11556 The Bureau's test is informed by our view of the record in terms of what has gone on under the preceding wholesale mandatory regime, which suggests that this type of competition has not been all that effective. That informs the test and makes it very difficult to find essential facilities, but it doesn't preclude finding them.
LISTNUM 1 \l 11557 That is the point of our test. Our test is designed to distinguish between "A" and "C". It is informed by this idea, this very basic idea which I have tried to explain to you several times.
LISTNUM 1 \l 11558 So I will try again, which is that if we have competition between two networks, that type of competition between two competing networks is much better for consumers than competition on one network enabled by mandated access.
LISTNUM 1 \l 11559 So if we have a choice, an opportunity or a policy decision to make, which would give us the competition between those two networks, that is the way that our test is slanted.
LISTNUM 1 \l 11560 MR. KOCH: So if that were possible, that is the way you would slant it.
LISTNUM 1 \l 11561 My point was ‑‑
LISTNUM 1 \l 11562 THE CHAIRPERSON: Can you explain why competition between two networks was better than to a competition based on one network and sharing?
LISTNUM 1 \l 11563 MR. CHURCH: That goes back to our earlier discussion about the nature of the competition that can happen.
LISTNUM 1 \l 11564 If I have two networks that are competing against each other, then all of the possible parameters that they can compete on are available because they don't share anything. Right? Particularly in a broadband world where I have two broadband networks competing with each other, then it's likely that any given place is only going to have access to one of them and so it's kind of a winner take all situation so you get very vigorous competition, lots of incentives for investment and innovation on each network in response to the other network and vice versa.
LISTNUM 1 \l 11565 THE CHAIRPERSON: So it is a question of intensity of competition that will result because you have access to every level of activity.
LISTNUM 1 \l 11566 MR. CHURCH: Yes.
LISTNUM 1 \l 11567 MR. KOCH: I understand your test, Dr. Church. My questions have gone to the element of your weighing analysis, that suggests that there are costs to mandating access, and one of the costs is, potentially, a dampening on investment in competing facilities.
LISTNUM 1 \l 11568 The reason I'm pointing you to Dr. Weir's evidence is Dr. Weir has made a number of arguments, as well as cited empirical studies ‑‑ and I'm not going to dwell on it because we have spent enough time on it ‑‑ that show the other side of the coin.
LISTNUM 1 \l 11569 I'm suggesting to you that, on this question of incentives, Dr. Church, a balanced view is that there are equally good reasons to believe that mandated access will provide incentives to invest, both by the incumbents and entrants.
LISTNUM 1 \l 11570 Would you not agree with that?
LISTNUM 1 \l 11571 MR. CHURCH: The point I have been trying to make to you is that not all investment is the same. In the Bureau's view, investment in competing facilities is to be valued more than investment in so‑called "me too" investment, which allows you to provide services using the incumbent's network.
LISTNUM 1 \l 11572 MR. KOCH: What is ‑‑
LISTNUM 1 \l 11573 MR. CHURCH: Excuse me, let me finish, please.
LISTNUM 1 \l 11574 MR. KOCH: Yes.
LISTNUM 1 \l 11575 MR. CHURCH: We are not saying that investment downstream is worthless. We are not saying that it, you know, shouldn't be accounted for. We are saying that, if you want to figure out what the social value of the investment is, you should track it through to the benefits to consumers.
LISTNUM 1 \l 11576 MR. KOCH: You throw in terms like "me too" investment, Dr. Church. Is my client MTS Allstreams' investment a "me too" investment? Do you know what they are investing in and what they are not investing in, Dr. Church?
LISTNUM 1 \l 11577 MR. CHURCH: It's shorthand, just like your shorthand before, you know, referring to the two tests in the variance order as a competitive presence test. All it's designed to do is to say that investment is a different character, a different flavour. It's designed to work with the incumbent's network.
LISTNUM 1 \l 11578 By definition, you have a hybrid model, so it's designed to work with that network, enabling MTS to provide perfectly good services on that network. That's what I mean. That's the nature of the investment that's being made.
LISTNUM 1 \l 11579 By definition, it is different than the investment that would be made by someone who is building their own competing network, full facilities‑based carrier.
LISTNUM 1 \l 11580 MR. KOCH: Okay. And you will agree with me there's not a single full facilities‑based carrier serving the business market. Correct?
LISTNUM 1 \l 11581 MR. CHURCH: I don't think I know the answer to that.
LISTNUM 1 \l 11582 MR. KOCH: Okay. I will take that as your answer.
LISTNUM 1 \l 11583 Now, at paragraph 80 of the Bureau's evidence...rather of the Bureau's supplementary evidence, I think...no, it's of the original evidence, you are talking about pricing principals, and you state in the second sentence:
"If the price of access is too high, entry will not occur and the benefits of competition will not be realized. For instance, where a potential competitor's entry is fully contingent upon it obtaining the facilities in question from the incumbent, if the access price is too high entry will not occur and the benefits of competition will not be realized." (As read)
LISTNUM 1 \l 11584 Now, would you not also acknowledge that, by setting the price too high, it might also undermine investments already made by competitors, if, for example, by setting the price too high, they lose contracts with existing customers?
LISTNUM 1 \l 11585 MR. HARITON: Mr. Koch, I think, first of all, we have to clarify. Are we are talking about essential facilities here?
LISTNUM 1 \l 11586 MR. KOCH: Yes.
LISTNUM 1 \l 11587 MR. HARITON: So the idea is that you do have to get the price of essential facilities right, so not too high and not too low.
LISTNUM 1 \l 11588 MR. KOCH: Right. You acknowledged the situation of one‑stop shopping in a business market. I put to you the situation of a customer who is served by a competitor, both on the competitor's own facilities and leased facilities, and that the competitor may, in fact, require access to the leased facilities in order to have a contract at all with that customer to provide one‑stop shopping.
LISTNUM 1 \l 11589 I'm asking you to acknowledge that, if the price of access is too high and, therefore, in this sense entry will not occur, that could also undermine investments already made by competitors ‑‑
LISTNUM 1 \l 11590 MR. HARITON: Yes.
LISTNUM 1 \l 11591 MR. KOCH: ‑‑ in the example that I just gave. Correct?
LISTNUM 1 \l 11592 MR. HARITON: That's correct.
LISTNUM 1 \l 11593 MR. KOCH: Okay.
LISTNUM 1 \l 11594 MR. HARITON: If prices are too high, access to essential facilities are de facto denied, and that could have ripple effects.
LISTNUM 1 \l 11595 MR. KOCH: Okay. And the ripple effect could go beyond a competitor whose entry is entirely contingent on mandated access. Correct?
LISTNUM 1 \l 11596 MR. HARITON: Well, the...
LISTNUM 1 \l 11597 MR. KOCH: In the example that I gave.
LISTNUM 1 \l 11598 MR. HARITON: Yes, that's correct, although here I distinguish different markets. I would say that a market where you have multi‑locational clients of the type you are specifying is a different market than the usual single‑location market. So to the extent that you are referring to a market with a multi‑location client, I assume that's what you are referring to ‑‑
LISTNUM 1 \l 11599 MR. KOCH: Yes.
LISTNUM 1 \l 11600 MR. HARITON: ‑‑ then that would, in fact, be the case, right.
LISTNUM 1 \l 11601 MR. KOCH: Okay.
LISTNUM 1 \l 11602 At paragraph 50, after reviewing some of the evidence regarding competition in the market, you indicate:
"There are two logical responses to the evidence that limited competition has resulted from the existing wholesale access regime. The first is basically to accept that the fundamental approach is sound and that, with appropriate modification, the regime will ultimately create sufficient competition downstream to enable forbearance. The second response is to abandon or significantly scale back the existing wholesale access regime." (As read)
LISTNUM 1 \l 11603 Now, they are both logical responses, correct?
LISTNUM 1 \l 11604 MR. CHURCH: Yes.
LISTNUM 1 \l 11605 MR. KOCH: And you have chosen the path of abandoning or significantly scaling back the existing wholesale regime. Correct?
LISTNUM 1 \l 11606 MR. CHURCH: We have, based on our analysis of the relative costs of the two kinds of errors that can be made.
LISTNUM 1 \l 11607 MR. KOCH: Okay. Again, in terms of the relative costs, you haven't referred to the evidence that Dr. Weir refers to, that, in fact, the mandating access could lead to greater investment. Correct?
LISTNUM 1 \l 11608 MR. CHURCH: Well, because we don't think of investment as something that you do just for the sake of investment, we think of the competitive implications that flow from the investment, so to the extent that we have considered the competitive implications of the different models, we have considered the kind of considerations that you are talking about.
LISTNUM 1 \l 11609 MR. HARITON: One thing, Mr. Koch, indirectly that evidence is referred to in that the TPRP had looked at a wide variety of evidence, including some of the studies that Dr. Weir cites. Although it didn't go through a detailed analysis because of the nature of the report, at the end of the report he had come up with the conclusion that the scope should be narrowed, and that included looking at a variety of empirical papers, including the specific one that Dr. Weir refers to, the one by, I believe it was Willig & Company.
LISTNUM 1 \l 11610 MR. KOCH: Mr. Hariton, you know that because you worked on TPR, but that is not referred to in the Bureau's evidence, is it, and that's the point I was making.
LISTNUM 1 \l 11611 MR. HARITON: That's true ‑‑
LISTNUM 1 \l 11612 MR. KOCH: Okay.
LISTNUM 1 \l 11613 MR. HARITON: ‑‑ although the Bureau does pick up the recommendation from the report, and it uses that as one of the bases for its position, I assume.
LISTNUM 1 \l 11614 MR. KOCH: At paragraph 49 of your evidence, when you are discussing what you term "the lack of success of the present regime in enabling competition", in the middle of that paragraph, you say:
"Moreover, more effective regulatory constraints would have to be in place at the wholesale level to control any incentive and ability on the part of the monopolist supplier of access to engage in non‑price discrimination that provides it with an advantage in retail markets." (As read)
LISTNUM 1 \l 11615 I wonder if I could ask you to turn to the information bulletin on merger remedies in Canada, because I would like to discuss with you briefly ‑‑ and this is close to my last area of cross‑examination, Mr. Chairman ‑‑
LISTNUM 1 \l 11616 MR. CHURCH: Mr. Koch, could I just...? There's a typo in that. Maybe we should have declared this earlier. I just realized it. That sentence you read should not say "Moreover, more effective regulatory constraints...", it should just say, "Moreover, effective regulatory constraints...". You don't need the "more" in there.
LISTNUM 1 \l 11617 MR. KOCH: And I assure you there is nothing in my cross‑examination that turns on the "more".
LISTNUM 1 \l 11618 MR. CHURCH: I just wanted to point out that we don't need the "more".
LISTNUM 1 \l 11619 MR. KOCH: Okay, I will strike the "more". It would have been lucky for you had my entire cross‑examination turned on that ‑‑
‑‑‑ Laughter / Rires
LISTNUM 1 \l 11620 MR. KOCH: ‑‑ but as it turns out that's not the case.
LISTNUM 1 \l 11621 If I could ask you, then, Dr. Church ‑‑ or perhaps you are the most appropriate witness for this line of questioning, Mr. Hughes, being from the Bureau, yourself. I wanted to discuss with you briefly the information bulletin on merger remedies in Canada.
LISTNUM 1 \l 11622 You have that before you? Does the panel have that, Madam Secretary?
LISTNUM 1 \l 11623 THE SECRETARY: Oui.
LISTNUM 1 \l 11624 MR. KOCH: It's one of the exhibits that we circulated, Information Bulletin on Merger Remedies in Canada.
‑‑‑ Pause
LISTNUM 1 \l 11625 MR. KOCH: Now, Mr. Hughes, just a few questions on this. And I appreciate that this is an information bulletin on specifically remedies relating to mergers and specifically to deal with the issue of remedying an SLC, correct, substantial lessening of competition?
LISTNUM 1 \l 11626 MR. HUGHES: That is correct.
LISTNUM 1 \l 11627 THE CHAIRPERSON: Okay. And I believe you agreed with my friend, Mr. Hofley, this morning that essentially the substantial increase in competition standard that you are putting forward in this proceeding ‑‑ maybe it was you, maybe it was Dr. Church ‑‑ is the same standard as an SLC, correct?
LISTNUM 1 \l 11628 MR. HUGHES: That is correct. And whether I said it or not, I endorse it.
LISTNUM 1 \l 11629 MR. KOCH: Okay, thanks. Now, in light of the comment that the Bureau makes regarding the requirement for effective regulatory constraints to address the monopolist incentive and ability to engage in non‑price discrimination, to explore the remedial approach that the Commissioner takes to remedying an SLC, and I recognize that it is in the merger context, but I would still like to explore it with you ‑‑
LISTNUM 1 \l 11630 THE CHAIRPERSON: Why are you referring to merger guidelines rather than abuse of dominance guidelines?
LISTNUM 1 \l 11631 MR. KOCH: Sir, the issue is what would be required by way of remedial response to deal with this issue of a substantial lessening of competition. And the Bureau makes comments in its Information Bulletin on Merger Remedies in Canada, which I believe are quite pertinent to how we should be looking at the remedies, acknowledging the distinction from mergers to the issue that is before the Commission, which is the issue of market power being exercised through control of upstream facilities.
LISTNUM 1 \l 11632 THE CHAIRPERSON: So you are making argument by a way of analogy?
LISTNUM 1 \l 11633 MR. KOCH: Yes.
LISTNUM 1 \l 11634 THE CHAIRPERSON: Okay.
LISTNUM 1 \l 11635 MR. KOCH: Thank you.
LISTNUM 1 \l 11636 Now, at paragraph 3, if you could turn to that, and I will be quick, Mr. Chairman. The point being made here is that eliminating the substantial lessening or prevention of competition sometimes means that the remedy must go beyond that which is necessary to restore competition to an otherwise acceptable level. Do you see that?
LISTNUM 1 \l 11637 MR. HUGHES: I see that, and I would point out that this is probably specific to merger analysis and the problem of trying to structure a divestiture remedy in a particular fact situation.
LISTNUM 1 \l 11638 MR. KOCH: So you don't agree that in the context of trying to encourage a substantial increase in competition the remedy might have to go beyond that which is strictly necessary?
LISTNUM 1 \l 11639 MR. HUGHES: I am saying that the line you are directing me to is dealing with, primarily, the process of having a merger in front of us and trying to structure a remedy which may involve divestiture, hold separate, fix it first, which are not obvious to me that they are relevant here, but yes, I see the sentence.
LISTNUM 1 \l 11640 MR. KOCH: In paragraph 7 the Bureau deals with a more general statement, you will agree with me, about remedies that in addition to being effective they must also be enforceable and capable of timely implementation. Do you not agree that that would be relevant to the Commission's consideration of how to address upstream market power and its effects in the downstream market?
LISTNUM 1 \l 11641 MR. HUGHES: Again, if you are asking me whether something should be effective, I don't even need this bulletin to agree with that. The particular sentence is really addressing a remedy. And when you are directing me to that particular sentence it is not obvious that this sentence says anything about that, to me.
LISTNUM 1 \l 11642 MR. KOCH: The sentence speaks to remedies being enforceable and capable of timely implementation.
LISTNUM 1 \l 11643 MR. HUGHES: Yes.
LISTNUM 1 \l 11644 MR. KOCH: Would you agree that whatever remedy the Commission chooses to impose in this proceeding to deal with any finding of market power should be similarly enforceable and capable of timely implementation?
LISTNUM 1 \l 11645 MR. HUGHES: Absolutely. And maybe the dictionary meaning of the word "remedy" is similar. But the word "remedy" in paragraph 7 is referring to a specific type of remedy in a specific situation.
LISTNUM 1 \l 11646 MR. KOCH: Okay. And if we can jump ahead to paragraph 42, and I think you will agree with me, there is a general discussion between what we just reviewed and where we are now about the preference for structural over behavioural remedies, correct? You are familiar with the document?
LISTNUM 1 \l 11647 MR. HUGHES: I am certainly familiar with the sentence. And again, it is based on our review of merger remedies.
LISTNUM 1 \l 11648 MR. KOCH: Right. And under quasi structural remedies, the third bullet down under 42, you provide an example that under certain circumstances granting non‑discriminatory access rights to networks, especially when horizontal overlap is coupled with both vertical integration and a risk of foreclosure of inputs may be appropriate. Do you see that?
LISTNUM 1 \l 11649 MR. HUGHES: I do see that.
LISTNUM 1 \l 11650 MR. KOCH: Okay. And are you aware of the arrangements that have been put in place in the United Kingdom and New Zealand to operationally separate the wholesale and retail arms of the incumbent telcos?
LISTNUM 1 \l 11651 MR. HUGHES: In very general terms. And I might turn to George, George may be more familiar with that than myself.
LISTNUM 1 \l 11652 MR. KOCH: Okay. I was just going to ask you whether those remedies that have been put in place in those jurisdictions would be an example of the type of quasi structural remedies to the concern about non‑priced discrimination or foreclosure of inputs referred to here. Would you agree with that?
LISTNUM 1 \l 11653 MR. HUGHES: I would have more specific information before I could really say one way or the other. This is in very particular circumstances.
LISTNUM 1 \l 11654 MR. HARITON: I do note, Mr. Koch, that one of the reasons the UK has gone that route, or at least this is what I was told in 2005, was the local loop unbundling policies were not working. And so rather than go back ‑‑ this is back to the two‑pronged approach that you were discussing with Dr. Church ‑‑ rather than cut back and try something else, they decided to push forward and make everything available. And I think that is the logical extension of what happens when a local loop unbundling policy doesn't work.
LISTNUM 1 \l 11655 MR. KOCH: And sticking with this notion of quasi structural remedies, would an ex ante requirement to grant non‑discriminatory access to those parts of the incumbent networks where such access is warranted not be an example of the type of quasi structural remedy discussed here?
LISTNUM 1 \l 11656 MR. HUGHES: In theory, I suppose.
LISTNUM 1 \l 11657 MR. KOCH: Okay. And requiring the entrant to negotiate with the incumbent for access in the face of the incentives you have identified in your evidence for non‑price discrimination, would you not agree with me is likely to be far less effective at remedying any substantial lessening in competition that would result from the denial of access to the facility?
LISTNUM 1 \l 11658 MR. HUGHES: Are you asking me to comment in general ‑‑
LISTNUM 1 \l 11659 MR. KOCH: Yes.
LISTNUM 1 \l 11660 MR. HUGHES: ‑‑ or on a specific part of the document?
LISTNUM 1 \l 11661 MR. KOCH: In general.
LISTNUM 1 \l 11662 MR. HUGHES: In general, as a general rule in a general application that is reasonable.
LISTNUM 1 \l 11663 MR. KOCH: Okay. Now, Commissioner Cram talked with you about the Bureau's experience with ex‑post enforcement of competition laws and I take it it is uncontroversial that there is potential for significant delay in the enforcement of those laws, is there not?
LISTNUM 1 \l 11664 MR. HUGHES: Well, I would say that, again, and perhaps this is a good opportunity to elaborate a bit, that it is a spectrum and there are very different situations, depending on whether it is full‑blown analysis, whether it is going to the courts or not.
LISTNUM 1 \l 11665 MR. KOCH: Right.
LISTNUM 1 \l 11666 MR. HUGHES: And it could be relatively expedient, it could be quite time consuming.
LISTNUM 1 \l 11667 MR. KOCH: Okay. And it is more likely to be time consuming if it is heavily contested, correct?
LISTNUM 1 \l 11668 MR. HUGHES: Particularly if it goes to the courts. When I say contested, that is what I really mean, that it is going to another body.
LISTNUM 1 \l 11669 MR. KOCH: And in the case of one of the latest and best known abuse of dominance case, the Canada Pipe case, you are familiar with that, Mr. Hughes?
LISTNUM 1 \l 11670 MR. HUGHES: I am familiar with it in very general terms.
LISTNUM 1 \l 11671 MR. KOCH: Do you know when the initial conduct complained of took place?
LISTNUM 1 \l 11672 MR. HUGHES: I am not really prepared to talk about Canada Pipe in the specifics, given it is before the courts.
LISTNUM 1 \l 11673 MR. KOCH: I was going to ask you about facts on the public record, Mr. Hughes. You cannot acknowledge that it related to conduct in 1998?
LISTNUM 1 \l 11674 MR. HUGHES: I would be happy to talk to counsel. I am reluctant to get down a road and inadvertently say something that is inappropriate.
LISTNUM 1 \l 11675 MR. KOCH: Your counsel will undoubtedly inform the Commission if my understanding that the complaint was brought in 2000 based on a program introduced in 1998, and that the matter has only recently been sent back to the Tribunal for determination by the Supreme Court of Canada.
LISTNUM 1 \l 11676 THE CHAIRPERSON: Mr. Abugov, can you confirm that?
LISTNUM 1 \l 11677 MR. ABUGOV: I cannot myself confirm that, Mr. Chairman, but we would be pleased to confirm that and get back with a response, if you would like us to take an undertaking.
LISTNUM 1 \l 11678 THE CHAIRPERSON: I think Mr. Koch is trying to establish that contested abuse of dominance cases take a long time. He is citing one. Since he states it on the public record, I don't see any harm in you supplying us with those.
LISTNUM 1 \l 11679 MR. ABUGOV: Just one moment, Mr. Chairman.
LISTNUM 1 \l 11680 MS PALUMBO: That process, though, has gone through several different venues, including the Competition Tribunal, the Federal Court of Appeal, leave for appeal to the Supreme Court of Canada and how has returned back to the Tribunal for reconsideration.
LISTNUM 1 \l 11681 MR. ABUGOV: Indeed, Mr. Chairman.
LISTNUM 1 \l 11682 THE CHAIRPERSON: Whatever is on the public record, if you could provide us with a summary of that, it would be appreciated.
LISTNUM 1 \l 11683 MR. ABUGOV: Yes, we will do that, Mr. Chairman. Thank you.
LISTNUM 1 \l 11684 MR. KOCH: Thank you, Mr. Chairman.
LISTNUM 1 \l 11685 Just to conclude, in your supplementary evidence at paragraph 6, and I have to confess I am a little confused as to where you land at the end of the day, Mr. Hughes, in your supplementary evidence, you indicate that at this stage of the proceeding, the Bureau can only recommend that access be mandated ex ante to facilities where the benefits seem clearly to outweigh the costs.
LISTNUM 1 \l 11686 At the bottom you say:
"Where the Bureau does not have the information necessary to develop accurate ex ante rules and so can only recommend an ex post approach for determining whether or not to mandate access ..." (As read)
LISTNUM 1 \l 11687 Do I understand this correctly, because the Bureau doesn't have sufficient information to recommend ex ante rules, it is recommending that the Commission itself take an ex post approach. Do I understand that correctly?
LISTNUM 1 \l 11688 MR. HUGHES: That is correct.
LISTNUM 1 \l 11689 MR. KOCH: Wouldn't a fairer recommendation be that because the Bureau feels it doesn't have the information necessary to develop ex ante rules, it is not able to make a recommendation to the Commission on what those rules should be, rather than preferring an ex ante approach, which may have, as we have seen, a very long shelf life and may not be effective?
LISTNUM 1 \l 11690 MR. HUGHES: In our view, a lot of the principles we have espoused are based on competition principles. They are well known and well recognized, proper market definition, market power assessment.
LISTNUM 1 \l 11691 We do not agree that they are excessively time consuming. We do not think that the court processes are necessarily representative of how much time this analysis would take, and we look forward to the Commission trying to look to these principles and applying it if they find it helpful.
LISTNUM 1 \l 11692 THE CHAIRPERSON: Thank you, Mr. Koch.
LISTNUM 1 \l 11693 Dr. Church, I have two questions for you. At one point in time you suggested if the problem is really in the downstream market and not the upstream market, rather than trying to fix things at the upstream market and thereby doing an implicit subsidy, deal with the downstream market and actually re‑regulate is what you suggested.
LISTNUM 1 \l 11694 You are aware, of course, that the variation order that we got from the minister suggested once we are forborne we are out of regulation of that market.
LISTNUM 1 \l 11695 MR. CHURCH: Yes. I guess if this eventuality happens and we have a market power problem downstream, then perhaps someone is going to have to re‑think the variance order.
LISTNUM 1 \l 11696 THE CHAIRPERSON: Secondly, I was very perturbed at your answer to Mr. Koch when he said you start off with saying facilities‑based means a provider who does end‑to‑end provision of services. That is the model you have been dealing with.
LISTNUM 1 \l 11697 Then when he said in business there is not a single provider who does actually provide end‑to‑end facilities base and you said I can't answer that question, I don't know, wouldn't it be very relevant to know whether in effect there is or not since this is the definition that you use for your model, whether your model has any counterpart in the real world?
LISTNUM 1 \l 11698 MR. CHURCH: I agree with that. Now that I think about it a little bit more, I think we do have some evidence. The Bureau has asked parties what networks they have, and I think TELUS has actually told us that they do have a network in Ontario which they use, which is an end‑to‑end network.
LISTNUM 1 \l 11699 I guess what I am trying to say is that the information available to us on the record about the nature of the competing networks in business markets is very hard for us to come to any conclusion about whether there is or isn't such a network. That is information that the Commission should have based on the interrogatories that we asked.
LISTNUM 1 \l 11700 THE CHAIRPERSON: But you are advocating to me a model, and I am trying to find out whether it actually exists in reality or not. You say it is for me to find out whether it does or doesn't.
LISTNUM 1 \l 11701 MR. CHURCH: I think what we said is that is the framework and here is the categories of costs and benefits that need to be taken into account. If we had access to the facts, I could be more definitive about where we would come down and how this model would work, but we don't have access to those facts.
LISTNUM 1 \l 11702 THE CHAIRPERSON: I wish I could give you the access, but as you well know, I am a little restrained by statute from doing so.
LISTNUM 1 \l 11703 Commissioner Cram, you had a question?
LISTNUM 1 \l 11704 COMMISSIONER CRAM: Thank you, panel.
LISTNUM 1 \l 11705 Thank you for the LECG report, Dr. Church. I will read it this evening. I was remiss in not reading it before.
LISTNUM 1 \l 11706 Another footnoted report in the proceedings was in Rogers' evidence, and it is the U.S. Government Accountability Office, report to the Chair of Government Reform, House of Representatives, November 2006. It says:
"FCC needs to improve its ability to monitor and determine extent of competition in dedicated access services." (As read)
LISTNUM 1 \l 11707 Those are the business DS‑0 to DS‑3. Are you aware of that report?
LISTNUM 1 \l 11708 MR. CHURCH: I have not read that report.
LISTNUM 1 \l 11709 MR. HARITON: I read that report approximately seven months ago.
LISTNUM 1 \l 11710 COMMISSIONER CRAM: So you know, then, that their results are, in brief, on page 12:
"In the 16 major metropolitan areas we examined, facilities‑based competition for dedicated and access services..."
That is our DNA, DS‑0 to 3,
"...exists at a relatively small subset of buildings. Our analysis of data on the presence of competitors in commercial buildings suggest that competitors are serving on average less than 6 per cent of the buildings with at least a DS‑1 level of demand. Competition is more widespread when buildings have a higher level of demand. For the subset of buildings identified as having companies with a DS‑3 level of demand, competitors have a fibre‑based presence in about 15 per cent of building on average, and..."
I will be quicker.
"...for two DS‑3s of demand, 24 per cent on average." (As read)
LISTNUM 1 \l 11711 Mr. Hariton, you will also have read the fact that, indeed, once this decentralization happened, that the prices have gone up on page 13 of that report.
LISTNUM 1 \l 11712 MR. HARITON: I would benefit from having the report in front of me so my comments are necessarily going to be very general.
LISTNUM 1 \l 11713 COMMISSIONER CRAM: If they are going to be so general that they can't address those two issues, how can you provide me with something that says since then it has gotten better because it has certainly gotten worse since they decentralized the business ‑‑
LISTNUM 1 \l 11714 MR. HARITON: Madam Commissioner, I think what we are starting to see in Canada is that the cable companies here are starting to spread to the business market, which is something that would not be reflected in that report.
LISTNUM 1 \l 11715 That report is based on somebody who is building, as I recall it, brand new facilities ab initio. If you are going to go in in a downtown core with your own facilities and then build, that is very expensive and you want to target buildings where you have a lot of customers.
LISTNUM 1 \l 11716 But from what I have read in this proceeding, at least one cable company says that it is going into the one‑ and two‑line business market today, starting slowly, of course, but starting, and I believe that Rogers somewhere in their evidence suggested that within the next year or two they will have a technology allowing them to develop up to 12 lines per business. Again, this is something which should be checked with Rogers' witnesses.
LISTNUM 1 \l 11717 But the point, I think, is that we are starting to see service in business markets with business facilities of a kind that would not be captured in the GAO report that you are citing.
LISTNUM 1 \l 11718 COMMISSIONER CRAM: You would agree, though, that cable Cap‑Ex would not just be the small incremental cost of bumping up your capacity as it would be with residential?
LISTNUM 1 \l 11719 MR. HARITON: It would be more if you were looking at the business market.
LISTNUM 1 \l 11720 COMMISSIONER CRAM: Yes. So you would really have to make a business case?
LISTNUM 1 \l 11721 MR. HARITON: You would have to make a business case for that.
LISTNUM 1 \l 11722 The other thing which I wondered about when I was reading the GAO report, and I didn't know, was to what extent that the new entrants in these markets were using existing ducts and so on from the telephone companies or whether they had to build their very own ducts from scratch. I don't remember having seen an answer to that.
LISTNUM 1 \l 11723 Certainly if you have access to somebody else's ducts, the situation is quite different than if you don't. If you don't, I can understand that you would build to very few buildings indeed. If you have access to ducts in a downtown centre, then many of the obstacles are reduced, not completely, but it does do a lot for you.
LISTNUM 1 \l 11724 COMMISSIONER CRAM: That is support structures you really mean. Right?
LISTNUM 1 \l 11725 MR. HARITON: Yes, I'm sorry. Ducts are one form. There are several other forms of support structures.
LISTNUM 1 \l 11726 COMMISSIONER CRAM: You also know, Mr. Hariton, that they say at page 42:
"Taking a broader view of the competitive landscape, our analysis suggests that wire line facilities‑based competition itself may not be a realistic goal for some segments of the market for dedicated access." (As read)
LISTNUM 1 \l 11727 Then they refer to barriers.
LISTNUM 1 \l 11728 MR. HARITON: Yes, that is right.
LISTNUM 1 \l 11729 COMMISSIONER CRAM: My question is: If they think it is not rational for them, how can it possibly be rational in Canada?
LISTNUM 1 \l 11730 MR. HARITON: Let me go back to the sentence you read out, which said for some ‑‑ I forget, for some locations or some segments.
LISTNUM 1 \l 11731 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 11732 MR. HARITON: The challenge before us here, I think, is to apply a series of test or criteria to potential essential facilities. In some cases there will be found to be essential facilities indeed. In the case of loops for the business market, we don't know today, and in fact it would probably depend on the market.
LISTNUM 1 \l 11733 Some markets they may well turn out to be essential. In many markets they will turn out not to be essential. This is why we can't make an ex ante pronouncement, and we haven't, and I think it would be unwise to make an ex ante pronouncement that all loops for business markets are or are not essential. This is why we are saying ‑‑
LISTNUM 1 \l 11734 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 11735 My question was: If they are questioning it, how is it even rational for us to even think about two networks, as Dr. Church said, or full facilities‑based business competition in a country one‑tenth the size? That is my question.
LISTNUM 1 \l 11736 MR. HARITON: Let me try that again.
LISTNUM 1 \l 11737 I think that you will never get full business networks ubiquitously. Certainly there will be communities where you will not have it. There will be communities like Toronto or like Montreal, where I fully expect that very soon, if not now, you will have business networks that will serve an appreciable number of customers.
LISTNUM 1 \l 11738 The real question is how about all the other towns? And the answer is that we have to look at the facts. As hard as it is to say you should do a fact intensive analysis, at some point you have to do a fact intensive analysis, because otherwise you will wind up, as you are saying, where you have declared non‑essential things that really are essential and the converse, is you will have continued with things that you have declared essential that really shouldn't be essential.
LISTNUM 1 \l 11739 COMMISSIONER CRAM: So, the error in declaring non‑essential things that are essential is in fact happening in the U.S.?
LISTNUM 1 \l 11740 MR. HARITON: It would seem so from the report. Again, I would want to read the report again before I ‑‑
LISTNUM 1 \l 11741 COMMISSIONER CRAM: What about the decoupling of the ‑‑ the unbundling of the UNI? Have you seen any of the results?
LISTNUM 1 \l 11742 MR. HARITON: The UNI‑P, you mean?
LISTNUM 1 \l 11743 COMMISSIONER CRAM: The unbundled loop, the equivalent of the unbundled loop in the States, have you seen any results of that?
LISTNUM 1 \l 11744 MR. HARITON: I understand that there will be a gentleman here called Bob Crandall who has made a special study of that. I think he is probably in a better situation to speak to it than I am.
LISTNUM 1 \l 11745 COMMISSIONER CRAM: Have you looked at the Ofcom results on their type of structural separation and what has happened to the revenues of the competitors?
LISTNUM 1 \l 11746 MR. HARITON: Again, I understand that there will be witnesses speaking specifically to this area. The conversations I have had with people in Europe, which date back a year or two, would have been before the structural separation, but after the unbundling of the loops.
LISTNUM 1 \l 11747 The unbundling of the loops is widely regarded as not a success, and I can give you cites for that, if you want.
LISTNUM 1 \l 11748 COMMISSIONER CRAM: Can I suggest to you that I think the outline was an incredible increase in competitor revenue and share, and if you look at the 2007 Ofcom report, that is what you will see.
LISTNUM 1 \l 11749 MR. HARITON: Good.
LISTNUM 1 \l 11750 COMMISSIONER CRAM: Thank you.
LISTNUM 1 \l 11751 THE CHAIRPERSON: There are no other questions.
LISTNUM 1 \l 11752 Madam Giroux‑Girard, who is our next witness?
LISTNUM 1 \l 11753 THE SECRETARY: Our next panel for cross‑examination is Primus Globility. Mr. Ruby, please.
LISTNUM 1 \l 11754 MR. CHURCH: Excuse me, Mr. Chairman, before Mr. Ruby begins, we just wanted to ascertain whether the various reports and studies that Commissioner Cram was referring to are on the record of this proceeding, and if they are not, if they could be perhaps given an exhibit number.
LISTNUM 1 \l 11755 THE CHAIRPERSON: Commissioner Cram, will you answer, please?
LISTNUM 1 \l 11756 COMMISSIONER CRAM: My own view is they are a matter of public record, and available to the public as a whole. The Government Accountability Office of the U.S. certainly have the reports, as does Ofcom have its annual report, as does the FCC cover the expenditures of ILECs since 1996 or since before.
LISTNUM 1 \l 11757 Thank you.
LISTNUM 1 \l 11758 THE CHAIRPERSON: Mr. Abugov, I think as you saw from the tenure of Commissioner Cram's questions, these are really questions asking the expert for his opinion, rather than a factual base. So, I don't see any need to make them part of the record, but if you wish to, we could.
LISTNUM 1 \l 11759 MR. ABUGOV: Mr. Chairman, it would be helpful I think at minimum if all the parties knew the title of the reports, if the Commission could provide us at least with the titles of the reports.
LISTNUM 1 \l 11760 THE CHAIRPERSON: Why don't we do that beginning tomorrow? We will give you a summary of all the reports Commissioner Cram referred to.
LISTNUM 1 \l 11761 MR. ABUGOV: Yes, thank you very much, Mr. Chairman.
LISTNUM 1 \l 11762 THE CHAIRPERSON: Go ahead.
LISTNUM 1 \l 11763 MR. RUBY: Thank you, Mr. Chairman. I am joined today by Mr. Selwyn.
LISTNUM 1 \l 11764 Panel and Commission members, you should have a small compendium with the pre‑filed materials that I may be referring to this afternoon. It is a buff coloured bound document.
EXAMINATION / INTERROGATOIRE
LISTNUM 1 \l 11765 MR. RUBY: Panel, we focused today a great deal on the business market and probably have adequately covered that.
LISTNUM 1 \l 11766 I would like to direct your attention to the residential market for a little while. Just so I make sure I have this right, is the Bureau's position that in the residential market currently neither the cable company nor the ILEC have a single dominant position?
LISTNUM 1 \l 11767 MR. CHURCH: We have no evidence before us that says in any product or geographic market that the cable company or the ILEC company in markets where they compete against each other in the provision of residential telephony, that either one of them is likely dominant.
LISTNUM 1 \l 11768 MR. RUBY: Thank you.
LISTNUM 1 \l 11769 You will be far more expert than me, but are you aware of the Herfindahl‑Hirschman Index?
LISTNUM 1 \l 11770 MR. CHURCH: Yes.
LISTNUM 1 \l 11771 MR. RUBY: Because I have a hard time pronouncing it, commonly called HHI. Right?
LISTNUM 1 \l 11772 MR. CHURCH: Yes.
LISTNUM 1 \l 11773 MR. RUBY: That is an indicator commonly used by competition authorities with respect to the amount of competition between firms in a market?
LISTNUM 1 \l 11774 MR. CHURCH: It is a structural guideline that creates, at least in the United States, after the Philadelphia Bank decision in the 1960s, creates a structural approach for a prima facie approach to identify when you might have difficulties and when you might not, and subject to additional evidence, either to turn it over or to confirm it.
LISTNUM 1 \l 11775 MR. RUBY: It is a tool?
LISTNUM 1 \l 11776 MR. CHURCH: It is a tool that is primarily used by the U.S. in their U.S. Merger Enforcement Guidelines, that is correct.
LISTNUM 1 \l 11777 MR. RUBY: And it is used in Europe as well?
LISTNUM 1 \l 11778 MR. CHURCH: I am less familiar with the European Horizontal Merger Guidelines.
LISTNUM 1 \l 11779 MR. RUBY: Okay. Is it used in Canada?
LISTNUM 1 \l 11780 MR. CHURCH: In the Canadian Merger Enforcement Guidelines there is a ‑‑ as I recall, there is a paragraph that says it may be used.
LISTNUM 1 \l 11781 MR. RUBY: Fair enough. And just so we are all talking about the same thing, in a monopoly situation the HHI would be 10,000, right?
LISTNUM 1 \l 11782 MR. CHURCH: Yes, it would be 100 squared.
LISTNUM 1 \l 11783 MR. RUBY: Okay.
LISTNUM 1 \l 11784 MR. HUGHES: If I may, I would just point out there is a question of what you are using to calculate your HHI. Are you using revenue shares, are you using lines, are you using capacity?
LISTNUM 1 \l 11785 Certainly, the Canadian Merger Enforcement Guidelines have a paragraph explaining when we would use these various measures when we took ‑‑ usually a market share rather than an HHI but they are very similar concepts and I believe the Americans have the same thing.
LISTNUM 1 \l 11786 MR. RUBY: Thank you.
LISTNUM 1 \l 11787 Now, is there an HHI level at which generally speaking the Bureau has concerns?
LISTNUM 1 \l 11788 MR. HUGHES: Again, we don't tend to use the HHI. We use a very similar concept, the Pre‑Merger Market Share or the Market Share and the Abuse of Dominance Guidelines. Then we have thresholds that give us some indication that there is not a market power problem.
LISTNUM 1 \l 11789 MR. RUBY: And does it use the same kind of range, 10,000 for a monopoly?
LISTNUM 1 \l 11790 MR. HUGHES: No. We use percentages like 35 ‑‑
LISTNUM 1 \l 11791 MR. RUBY: Okay.
LISTNUM 1 \l 11792 MR. HUGHES: ‑‑ depending whether it is unilateral or coordinated effect.
LISTNUM 1 \l 11793 MR. RUBY: All right. Well, in the United States, is it fair to say that an HHI of 1,800 and above causes concern?
LISTNUM 1 \l 11794 MR. CHURCH: I think you have to be very careful. I mean the U.S. Merger Enforcement Guidelines have one statement but, as I recall, the FTC and the DOJ released a report a year, a year and a half ago, which looked at what the HHI numbers were for cases that actually concerned them and they were quite a bit higher than the numbers that are found in the U.S. Merger Enforcement Guidelines, as I recall.
LISTNUM 1 \l 11795 MR. RUBY: Right. When you say quite a bit higher, it is in the 2,000 level?
LISTNUM 1 \l 11796 MR. CHURCH: I would have to go and check. I guess we could take an undertaking to find that report for you.
LISTNUM 1 \l 11797 MR. RUBY: Well, let us start with this. Leaving aside what has been done in specific circumstances, would you agree with me that 1,800, 2,000, something like that is a level at which the Bureau, the U.S. competition authorities to the extent you are familiar with them, would become concerned with competition in the market?
LISTNUM 1 \l 11798 MR. CHURCH: Yes. As I teach my students when we talk about the HHI and the U.S. Merger Enforcement Guidelines, if you had an HHI of 2,000, that would be the same thing as having five equivalent size firms, and that reflects on Commissioner Cram's earlier observation that the United States market is much bigger than the Canadian market.
LISTNUM 1 \l 11799 Usually, we would be delighted to have five equally sized firms in any market in Canada. So the Americans clearly have much lower thresholds based on their legal jurisprudence in these things than would typically be the case in Canada.
LISTNUM 1 \l 11800 In fact, as I pointed out earlier, the thresholds in the U.S. Merger Enforcement Guidelines may not actually be operative in practice. Again, that depends on reference to this report that the FTC and the DOJ released.
LISTNUM 1 \l 11801 I think the other important point here is that this HHI is a structural indicator and so in the kind of old‑fashioned industrial organization we had this structural conduct performance‑based approach where we looked at structure and from structure we went straight through to performance, and on the basis of structure we thought that we could infer something about performance, and that is kind of the environment which HHI comes out with.
LISTNUM 1 \l 11802 For the last 15 or 20 years, that has not really modern industrial organization. Modern industrial organization is much more concerned with what is the behaviour of the firms and how do firms behave in particular structures.
LISTNUM 1 \l 11803 If you look at the U.S. Merger Enforcement Guidelines, they have the first part which has the Herfindahl Index and structural measures and explains how changes in HHI would indicate whether they have concern, substantial concern, no concern, whatever it is going to be.
LISTNUM 1 \l 11804 But then the last part of it has a discussion about suppose you have a high HHI, what are the other considerations that you should take into account: are products differentiated, are you in an auction market, what are the different kinds of things that you should take into account to overturn that prima facie approach based on the HHI?
LISTNUM 1 \l 11805 THE CHAIRPERSON: Mr. Ruby, can I ask you why you are pursuing this line of question regarding the HHI. You heard from Mr. Hughes that the Bureau doesn't use it, it isn't advocating it. I know from my seven years at the Bureau that they don't use it. So I am not quite sure why we are spending time on HHI.
LISTNUM 1 \l 11806 MR. RUBY: Only because it has been raised in other parts of the evidence, not just the Bureau's, for example, in Dr. Ware's evidence, I believe.
LISTNUM 1 \l 11807 But let me ask this just to make sure I understand it.
LISTNUM 1 \l 11808 In a two‑player market, if the parties divide the market roughly 90 percent for one and 10 percent for the other, the HHI would be 8,200; is that right?
LISTNUM 1 \l 11809 MR. HUGHES: I don't know. We don't use the HHI.
LISTNUM 1 \l 11810 MR. RUBY: Okay, fair enough.
LISTNUM 1 \l 11811 MR. HUGHES: If you quiz me, I could get the math. I mean ‑‑
LISTNUM 1 \l 11812 MR. CHURCH: I think your math is right.
LISTNUM 1 \l 11813 MR. RUBY: You will tell me if I have got the math wrong but it is not so difficult.
LISTNUM 1 \l 11814 The Bureau recognizes, I gather, that there are costs for residential consumers to switch from one carrier or provider to another; is that right?
LISTNUM 1 \l 11815 MR. CHURCH: I think if you go back to the Bureau's local forbearance evidence, there is a discussion about whether the cable companies' service and the ILEC's telephone service are in the same product market and that analysis puts some limit on how big those switching costs can be. If they are in the same market, then that switching cost must be relatively low. If those switching costs are large, they would be in a different market.
LISTNUM 1 \l 11816 MR. RUBY: So those switching costs are things like having to buy new equipment for broadband internet service, right, that is one?
LISTNUM 1 \l 11817 MR. CHURCH: Yes.
LISTNUM 1 \l 11818 MR. RUBY: Loyalty systems, air miles and so on, that would be another cost of switching?
LISTNUM 1 \l 11819 MR. CHURCH: It could well be.
LISTNUM 1 \l 11820 MR. RUBY: E‑mail address, that would be a big one, right, switching from Rogers.com to Sympatico.ca, that is a switching cost?
LISTNUM 1 \l 11821 MR. CHURCH: Yes.
LISTNUM 1 \l 11822 MR. RUBY: And bundles of services also make it more difficult to switch, isn't that right?
LISTNUM 1 \l 11823 MR. CHURCH: I am sorry, you would have to explain to me why.
LISTNUM 1 \l 11824 MR. RUBY: So if you ‑‑
LISTNUM 1 \l 11825 MR. CHURCH: If I took a beat in bundles, I mean I would have switching costs at the level of each component of the bundle, why does the bundling make it worse?
LISTNUM 1 \l 11826 MR. RUBY: Well, I am asking you. So the question really is this: If you have got a bundle of, let us say, three services and you wanted to switch one but to get the same benefits of a bundle, discounting and so on, you have to switch all of them, that is a cost that you count as a switching cost in your analysis?
LISTNUM 1 \l 11827 MR. CHURCH: I guess the Bureau's approach is, again, explained in the tabs and in the local forbearance.
LISTNUM 1 \l 11828 When it comes to bundling, you have to try and decide whether the bundle is part of the market, you know, whether bundled things are the market, the product market, or whether bundles compete against consumers making their own bundles by buying each service from a different provider.
LISTNUM 1 \l 11829 MR. RUBY: An earlier issue came up with respect to dominance in the ‑‑ I think it was called network or facilities layer. Do you remember that discussion earlier this morning?
LISTNUM 1 \l 11830 MR. CHURCH: You are referring to dominance upstream?
LISTNUM 1 \l 11831 MR. RUBY: Well, I think the discussion there was a little bit different but you had discussed, I think, if we had dominance at the facilities or network layer ‑‑ I am not sure which term you used ‑‑ there is also a risk of dominance at the application layer.
LISTNUM 1 \l 11832 If not, let me ask you the question. Is there a risk of dominance at the application layer if you have got dominance at the physical or facilities layer?
LISTNUM 1 \l 11833 MR. CHURCH: You know, we addressed this in an interrog earlier. I don't have the number right now but you have to be very careful about this, right?
LISTNUM 1 \l 11834 So you are telling me I have got some facility upstream where I have a monopolist and that is used as input to provide services for consumers downstream. It depends on whether there is regulation or whether there is not regulation and, in fact, it turns out to be relatively difficult to tell an argument about why that upstream firm would necessarily vertically integrate and become dominant downstream because if I have that monopoly upstream, the learning that we have from economics suggests that I would like to have lots of options downstream, lots of competition downstream, because they all create value and I can extract that value through a higher price that I charge to have access to my monopoly upstream.
LISTNUM 1 \l 11835 So to tell a story explaining why just because I have a monopoly upstream, I am going to have an incentive to lever that into a monopoly downstream based on anti‑competitive effects has turned out to be something that the economic profession has spent a long time trying to tell those stories and not been very successful at.
LISTNUM 1 \l 11836 MR. RUBY: So is it fair to say that there is a risk but not a certainty?
LISTNUM 1 \l 11837 MR. CHURCH: I think its weaker than that. It says that there are circumstances where it can happen. If you want to see what those circumstances are you could look at the report that I prepared for the European Commission which is referenced in both our interrogatory response and our report, which is a 350‑page survey of the economics literature explaining when vertical integration by a dominant firm downstream could cause problems and why in most circumstances it likely does not cause problems.
LISTNUM 1 \l 11838 MR. RUBY: This morning we also talked about growing ‑‑ these were not your words ‑‑ growing existing facilities into next generation networks.
LISTNUM 1 \l 11839 Do you remember that discussion? Copper becomes fibre, and so on?
LISTNUM 1 \l 11840 MR. HARITON: That might have been me, Mr. Ruby.
LISTNUM 1 \l 11841 MR. RUBY: I think it was. Do you recall that?
LISTNUM 1 \l 11842 I take it that in the residential market you would agree with me that it is not realistic to expect a party that has no copper facilities for example to be building out next generation access facilities.
LISTNUM 1 \l 11843 Is that fair?
LISTNUM 1 \l 11844 MR. HARITON: I hesitate to accept that as a blank statement.
LISTNUM 1 \l 11845 For example, if somebody has a concentration ‑‑ and I'm thinking of a university residence. Fibre to university residence makes a lot of sense and I believe we have seen that here in Canada.
LISTNUM 1 \l 11846 The thing is, you have to balance ‑‑ I'm sorry to use the word "balance" all the time. You have to balance the revenues against the costs, so that if you have a location where there is going to be enough revenues, whether it be through local service or a mix of all sorts of services to justify the cost, then you build. If not, you don't.
LISTNUM 1 \l 11847 Now, that equation is changing all the time. As we discussed again this morning, down in the States Verizon thinks that the balance has shifted to the point where you would want to build out fibre all the way.
LISTNUM 1 \l 11848 A Greenfield operator would have even more incentive than Verizon. In fact, we had an experiment in Canada a few years ago where Futureway north of Toronto built fibre to the home throughout their development area. My understanding is that at the end of the day they weren't big enough to be a success and they have been bought out, but certainly their business plan suggested in 1999 that this would be viable.
LISTNUM 1 \l 11849 MR. RUBY: That was a Greenfield situation?
LISTNUM 1 \l 11850 MR. HARITON: That was a Greenfield.
LISTNUM 1 \l 11851 MR. RUBY: The Verizon example is an existing carrier that overbuilt their own network?
LISTNUM 1 \l 11852 MR. HARITON: Yes. And also Greenfield, but mostly overbuilt.
LISTNUM 1 \l 11853 MR. RUBY: All right.
LISTNUM 1 \l 11854 But with respect to residential development, leaving aside Greenfield for the moment ‑‑ I understand your comments ‑‑ I gather you would agree with me that we cannot expect a third wire to the home in residential development?
LISTNUM 1 \l 11855 MR. HARITON: I don't think we can expect a third wire to the home. It is not outside the bounds of possibility that we will see other things to the home. Wireless is a prime candidate. And I know that we have been saying for years now wireless will come. For years and years we said cable would come and people started laughing and, by gosh, they did come.
LISTNUM 1 \l 11856 So the other one is there are at least two other ways of going into the home. One is through electric power facilities, and we know there are difficulties with that because of getting through the transformers. But just the way that problems have been solved on the cable side, it is certainly possible that the problem will be solved on the electric utilities side.
LISTNUM 1 \l 11857 Finally, I know this is still very much Blue Sky. I have seen people suggesting you might be able to use natural gas pipelines, but I agree that is a long ways away.
LISTNUM 1 \l 11858 MR. RUBY: Just to cover off ‑‑
LISTNUM 1 \l 11859 MR. CHURCH: If I might add something to that?
LISTNUM 1 \l 11860 MR. RUBY: Sure.
LISTNUM 1 \l 11861 MR. CHURCH: As I understand it, Rogers and Bell in partnership have started to roll out some sort of fixed wireless broadband, and once I have fixed wireless broadband I can have digital telephony.
LISTNUM 1 \l 11862 MR. RUBY: I gather that is a subject I should take up with Rogers or Bell?
LISTNUM 1 \l 11863 MR. HARITON: Yes. Although again when we are looking at the competitive possibilities Wi‑Max is very promising, but that was included in the fixed wireless I mentioned to you.
LISTNUM 1 \l 11864 MR. RUBY: All right. With respect to broadband over power line, so the use of electricity facilities, I take it that you are not aware of any commercial roll out of that technology in Canada?
LISTNUM 1 \l 11865 MR. HARITON: I'm not aware of any roll out in Canada today, no.
LISTNUM 1 \l 11866 MR. RUBY: All right.
LISTNUM 1 \l 11867 Is it fair to say that ILECs and cable companies interact each time ‑‑ first case, each time a customer is transferred from one to the other?
LISTNUM 1 \l 11868 MR. HARITON: Yes.
LISTNUM 1 \l 11869 MR. RUBY: All right. It's fair to say that they also interact on a fairly regular basis with respect to making interconnection agreements between them?
LISTNUM 1 \l 11870 MR. HARITON: Yes.
LISTNUM 1 \l 11871 MR. RUBY: Can I ask you to turn up my compendium, the Bureau's response to Rogers interrogatory 19‑July‑102. It's at Tab 2 of the compendium.
‑‑‑ Pause
LISTNUM 1 \l 11872 MR. RUBY: Do you have it there, panel?
‑‑‑ Pause
LISTNUM 1 \l 11873 MR. RUBY: It's 102. It's Tab 2 of the buff book.
LISTNUM 1 \l 11874 MR. HUGHES: Yes. It also has 101 and 102. Which one are you speaking to?
LISTNUM 1 \l 11875 MR. RUBY: It's 102.
LISTNUM 1 \l 11876 MR. HUGHES: All right. Thank you.
LISTNUM 1 \l 11877 MR. RUBY: The question posed in "A" ‑‑ this is at the second page under the tab:
"... was provided detailed explanation and supporting evidence to substantiate the statement that the competitive benefits from the existing wholesale access regime have been limited." (As read)
LISTNUM 1 \l 11878 Then a second question dealing with specific benefits that the Bureau considers it would need.
LISTNUM 1 \l 11879 Starting with the first one, I take it in answering this question ‑‑ I see references to MTS and to Rogers ‑‑ there is no reference to my clients, Primus or Globility's activities?
LISTNUM 1 \l 11880 Did you consider what Primus and Globility are doing in your analysis?
LISTNUM 1 \l 11881 MR. CHURCH: No, we did not.
LISTNUM 1 \l 11882 MR. RUBY: All right. Do you have any knowledge about any of the features that Primus offers to its residential customers?
LISTNUM 1 \l 11883 MR. CHURCH: I have some knowledge.
LISTNUM 1 \l 11884 MR. RUBY: All right.
LISTNUM 1 \l 11885 MR. CHURCH: I guess I cannot recall if we asked Primus the same interrogatories that we asked MTS Allstream and Rogers.
LISTNUM 1 \l 11886 MR. RUBY: But in doing your analysis and arriving at the answer to (a) you didn't consider Primus or Globility?
LISTNUM 1 \l 11887 MR. CHURCH: No, we did not.
LISTNUM 1 \l 11888 MR. RUBY: So features like turning voicemail into e‑mail was not a benefit, a competitive benefit you considered?
LISTNUM 1 \l 11889 MR. CHURCH: It was not an innovation that we considered in our answer to this question.
LISTNUM 1 \l 11890 MR. RUBY: All right. Primus "Find‑Me Follow‑Me" service?
LISTNUM 1 \l 11891 MR. CHURCH: No. As I indicated earlier we did not consider ‑‑
LISTNUM 1 \l 11892 MR. RUBY: But you mentioned that you had some information. It's not part of your analysis at all?
LISTNUM 1 \l 11893 MR. CHURCH: No.
LISTNUM 1 \l 11894 MR. RUBY: All right.
LISTNUM 1 \l 11895 In answer to "B" ‑‑ before I get to that, we have talked a lot about facilities and access networks. In the case of unbundled local loops, you attach equipment to one end or both ends to provide broadband service. Right?
LISTNUM 1 \l 11896 MR. CHURCH: Actually, I'm sorry, I would like to come back to the previous question.
LISTNUM 1 \l 11897 The reason that we didn't look at the Primus evidence I think is when we looked at the market shares on the unbundled loops and we saw how small they were, we asked questions of the two major competitors who make up those numbers, because if these innovations ‑‑ at least if they were given time to play out, if those innovations had been significant we would have expected them to be reflected in market shares.
LISTNUM 1 \l 11898 MR. RUBY: All right.
LISTNUM 1 \l 11899 Are you aware of when Globility started to roll out for example collocation?
LISTNUM 1 \l 11900 MR. CHURCH: That was my point, is that these innovations might be very recent and therefore you can't look at the market share to decide what the impact would be.
LISTNUM 1 \l 11901 MR. RUBY: Let's go back to my other question.
LISTNUM 1 \l 11902 To provide broadband service you attach equipment to one or both sides of the unbundled local loop. Right?
LISTNUM 1 \l 11903 MR. HARITON: You might have to do a bit more than that.
LISTNUM 1 \l 11904 MR. RUBY: But it is one of the things you have to do?
LISTNUM 1 \l 11905 MR. HARITON: Yes, indeed.
LISTNUM 1 \l 11906 MR. RUBY: All right.
LISTNUM 1 \l 11907 And a competitor can attach different equipment, for example a different kind of DSLAM to the unbundled local loop than the ILEC?
LISTNUM 1 \l 11908 MR. HARITON: Yes. DSLAMs come in a variety. Manufactures offer a variety of products.
LISTNUM 1 \l 11909 THE CHAIRPERSON: For the uninitiated, what is the "DSLAM"?
LISTNUM 1 \l 11910 MR. HARITON: Well, would you rather have counsel give evidence?
LISTNUM 1 \l 11911 THE CHAIRPERSON: You are the expert.
LISTNUM 1 \l 11912 MR. RUBY: Why don't tell us what a DSLAM is?
LISTNUM 1 \l 11913 MR. HARITON: Well, a DSLAM is really a device which, as I understand it, is usually on the Internet service provider's premises. So that customers have modems, okay, broadband modems, and then the bit stream will arrive at a central office, and there it will have to be translated further on into the network, and the DSLAM is the interface device, the device that actually does that.
LISTNUM 1 \l 11914 It does a lot of things, but that's basically it.
LISTNUM 1 \l 11915 MR. RUBY: I may have misheard you. My understanding was that a DSLAM's located in the central office.
LISTNUM 1 \l 11916 MR. HARITON: Yes.
LISTNUM 1 \l 11917 MR. RUBY: Is that your understanding, as well?
LISTNUM 1 \l 11918 MR. HARITON: That is what I was trying to say.
LISTNUM 1 \l 11919 MR. RUBY: Okay.
LISTNUM 1 \l 11920 MR. HARITON: If I didn't say it, thank you for correcting me.
LISTNUM 1 \l 11921 MR. RUBY: Okay, thank you.
LISTNUM 1 \l 11922 The most common ILEC DSLAM is of the ADSL variety, is that fair?
LISTNUM 1 \l 11923 MR. HARITON: Yes. The reason I'm pausing is I believe, although I don't know, that there's a new generation of equipment which may have replaced DSLAMs.
LISTNUM 1 \l 11924 MR. RUBY: Okay, so ‑‑
LISTNUM 1 \l 11925 MR. HARITON: But certainly that was true a few years ago.
LISTNUM 1 \l 11926 MR. RUBY: There's evidence on the record of ADSL2 Plus. Are you familiar with that term?
LISTNUM 1 \l 11927 MR. HARITON: I'm aware of the term.
LISTNUM 1 \l 11928 MR. RUBY: And that's a faster form of ‑‑
LISTNUM 1 \l 11929 MR. HARITON: Yes.
LISTNUM 1 \l 11930 MR. RUBY: ‑‑ DSLAM, and therefore a faster form of Internet access?
LISTNUM 1 \l 11931 MR. HARITON: That's correct.
LISTNUM 1 \l 11932 May I point out also that cable access is becoming faster, as well.
LISTNUM 1 \l 11933 MR. RUBY: Fair enough.
LISTNUM 1 \l 11934 So I take it, then, you would agree with me that a CLEC installed may be collocated in a central office. A newer form of DSLAM equipment attached to the same old copper wire would provide faster service to the customer than the ILEC would using an old form of DSLAM. Right?
LISTNUM 1 \l 11935 MR. HARITON: That's possible. You have to recognize that speed over copper is very much limited by a number of factors. One is the distance, of course.
LISTNUM 1 \l 11936 MR. RUBY: Right.
LISTNUM 1 \l 11937 MR. HARITON: The other one is the state of the copper loop itself. The third is whether or not there are bridge taps and other things off that loop. The fourth one is what else there is on that loop.
LISTNUM 1 \l 11938 So that a lot of the speed that you can get over a loop is in the control of the operator of the network, of the actual facilities. The equipment certainly plays a part, there's no doubt. And this goes back to a point I was making this morning, I think, where you have to look at innovations from the network and from the terminals, not just from the terminals.
LISTNUM 1 \l 11939 MR. RUBY: Just so we are clear, so a competitor, all else being equal with respect to the copper wire, can provide the customer with better service than the ILEC can if it changes out the equipment?
LISTNUM 1 \l 11940 MR. HARITON: I would agree, but I would argue that the real improvements are made through changes in the network. And, again, we have discussed this this morning, rolling out fibre closer to the customer, rolling out fibre all the way to the customer, in the case of cable companies, I gather, segmenting rings and making them fewer people per ring, these are all things which will buy you a much bigger bang for the buck than changing out the equipment. But certainly the changing out the equipment will help.
LISTNUM 1 \l 11941 MR. RUBY: And changing out the equipment, I take it, you would agree, is faster than rolling out fibre networks, for example, in residential developments?
LISTNUM 1 \l 11942 MR. HARITON: From what we have seen to date, that's certainly seems the case.
LISTNUM 1 \l 11943 MR. RUBY: Yes.
LISTNUM 1 \l 11944 MR. CHURCH: Just if I might add something there, I mean, the way you have posited the question is that the ILEC has some existing generation of DSLAM, Primus, or the entrant, whoever it is, comes in with the next generation and replaces it. That is, obviously, of a benefit. Holding the copper lines and everything else constant, that's a benefit to consumers, but I don't think you should end the analysis there.
LISTNUM 1 \l 11945 Presumably, at some point, the ILEC will also roll out the next generation thing, so that, you know, it's a question of timing, because the real innovation here doesn't come from the CLEC, it comes from the equipment manufacturer, whoever makes the new DSLAM.
LISTNUM 1 \l 11946 MR. RUBY: Well, is it fair to say that it's a combination of development of new equipment and the will and implementation of a provider to put it in place for the customer?
LISTNUM 1 \l 11947 MR. HARITON: Yes, that's certainly so, Mr. Ruby, and this is why it's so important that there be competition. But there has to be a competitor. Once you have a competitor in there ‑‑ and, again, we see the cable companies doing very well by increasing the speed. The telephone companies are driven to increase their speed, as well, and I gather this has an impact where the cable companies also want to get better speed.
LISTNUM 1 \l 11948 So that while a non‑facilities‑based provider, as you are suggesting, might contribute, I suspect that the race to better capacity and better speed is already on and I'm not sure how much more you are going to get from the independent.
LISTNUM 1 \l 11949 MR. RUBY: If we go back to the third part of your test ‑‑ I won't take you to the document ‑‑ you will remember you had your three bullets and your third bullet was new. With me so far, panel? Right.
LISTNUM 1 \l 11950 MR. CHURCH: Yes.
LISTNUM 1 \l 11951 MR. RUBY: I gather that you were measuring whether there was an increase in competition over a reasonable period of time?
LISTNUM 1 \l 11952 MR. CHURCH: The third bullet is would mandated access result in a substantial increase in competition in a reasonable period of time?
LISTNUM 1 \l 11953 MR. RUBY: Okay. And that reasonable period of time starts when? When, in 1997? Today?
LISTNUM 1 \l 11954 MR. CHURCH: On the basis of the test, it starts when mandated access to that particular facility. And that's part of it, right? When you mandate access to the facility, starting then, what would be the impact on competition in a reasonable period of time?
LISTNUM 1 \l 11955 MR. RUBY: So if a competitor only started a little while ago, they would be penalized if they hadn't started earlier, effectively?
LISTNUM 1 \l 11956 MR. CHURCH: Well, "penalize" might be kind of a harsh word, right? I think that instead what you are pointing out ‑‑ and we had the discussion about this earlier ‑‑ is that the way the test is constructed it's like no one has access to the essential facility, and then you have to have a projection or a forecast about what the effect of mandating access might be.
LISTNUM 1 \l 11957 In certain instances, that's going to be less of an exercise involving a prediction, because you will actually have evidence from people who may have already had access to those things. So that may give you more faith, in terms of ‑‑ "confidence" is a better word, more confidence in your analysis about what the effect of mandating access would. But even if you have not had access to it, this analysis could still be applied.
LISTNUM 1 \l 11958 As we talked about it earlier this morning, Part 6 of the Bureau's Merger Enforcement Guidelines is all about trying to predict what the effectiveness of entry will be in the future.
LISTNUM 1 \l 11959 MR. RUBY: And that's the prediction, that you have less confidence in the result, I think you told Mr. Koch earlier?
LISTNUM 1 \l 11960 MR. CHURCH: Well, I said, you know, if you have actually got entry, then you can observe what's happened. If your just a something that's new that's going to be speculated, in terms of mandating access, too, you know, it's going to be more informed judgment and less actually experience.
LISTNUM 1 \l 11961 MR. RUBY: Can you please turn top Tab 4 of my compendium? This is the Bureau's answer to Primus' Interrogatory, from 12 April, number 2.
LISTNUM 1 \l 11962 Now, here you say:
"The evidence presented suggests that non‑ILEC, non‑cable service providers that rely on unbundled local loops and other network elements to provide service have not captured a significant, i.e. major, or important share of either the residential or business market under the wholesale access regime to date." (As read)
LISTNUM 1 \l 11963 Now, when you make that statement, is that statement based on market share by revenues lines or some other indicator?
LISTNUM 1 \l 11964 MR. CHURCH: That statement is based on lines from the two tables, Table 1 and Table 2, which immediately precede paragraph 38 in the Bureau's evidence of March 15th.
LISTNUM 1 \l 11965 MR. RUBY: Right, but nothing more than that? There's not qualitative evaluation, in terms of deciding whether something is major or important to the customer?
LISTNUM 1 \l 11966 MR. CHURCH: No, because what we are interested in is finding out if it's of major importance to the customer, is it reflected in the fact that they have been successful in the marketplace? The success in the marketplace, we can get some idea from by looking at the marketshares.
LISTNUM 1 \l 11967 MR. RUBY: I take it that, with respect to the figures, you have pointed me to ‑‑ and I have actually reproduced Tab 8 of the compendium, some of the pages from the monitoring report, the 2007 report. You have referred to Table 4.21, at page 45, is that right? I have got the right table?
LISTNUM 1 \l 11968 MR. CHURCH: I think that's right. I mean, in the actual evidence we have used the 2006 version, but I think that this is the source of the numbers that I have used earlier orally today.
LISTNUM 1 \l 11969 MR. RUBY: Okay, thank you. And I take it it is the least bar in the middle that you are indicating shows only a small increase in alternative lines between 2005 and 2006?
LISTNUM 1 \l 11970 MR. CHURCH: Yes. Actually, what I commented on earlier this morning was the large increase in the grey box between 2005 and 2006.
LISTNUM 1 \l 11971 MR. RUBY: But in your answer to this interrogatory I just took you to, it is the dark grey box that you are pointing to, as not being a significant change for leased facilities?
LISTNUM 1 \l 11972 MR. CHURCH: Right. But again, I don't have the box in front of me from the 2006 monitoring report, but that is what we looked at when we compared. It would have been 2004 to 2005 in our evidence.
LISTNUM 1 \l 11973 MR. RUBY: I understand. Now, did you take into account any of the switching that I think you spoke about today, about Rogers switching over its unbundled local loop customers to its cable facilities?
LISTNUM 1 \l 11974 MR. CHURCH: We did, though that is evidence that we have since withdrawn, because it came from the Sone Report. But we did ask interrogatories of Rogers and I don't have that number right off the top of my head, but I think that they confirmed that something like half of their customers were going to be switched over from unbundled loops within in their cable serving territory and so they were presently being serve by unbundled loop, they would now be on the cable network. Though I would have to look for that interrogatory and find out what the exact number was.
LISTNUM 1 \l 11975 MR. RUBY: Leaving aside the exact number, I take it it is fair that if Rogers is decreasing the number of unbundled loops it is using because it is now switching people to cable, that is likely masking perhaps an increase in others' use of unbundled local loops?
LISTNUM 1 \l 11976 MR. CHURCH: Actually, just to come back. Now that I look at this, I think I actually used figure 4.2.2 to get the owned, leased and resold numbers for business and residential, not what you were earlier looking at.
LISTNUM 1 \l 11977 MR. RUBY: Okay, well I was going to ask you about that one too, so let us go there now.
LISTNUM 1 \l 11978 MR. CHURCH: I mean, that is where the 41 per cent number is, is in figure 4.2.2.
LISTNUM 1 \l 11979 MR. RUBY: Right, exactly. And those 19 per cent that we see there on figure 4.4.2 on page 46, those are the non‑ILEC, non‑cable customers who ‑‑
LISTNUM 1 \l 11980 MR. CHURCH: We don't know. There might be some Rogers customers who are using unbundled local loops, right?
LISTNUM 1 \l 11981 MR. RUBY: Yes, you are quite correct. When I say non‑cable I should have said non‑cable facility. But that is them, that is the 19 per cent, right?
LISTNUM 1 \l 11982 MR. CHURCH: That is right.
LISTNUM 1 \l 11983 MR. RUBY: Those are the ones that you think are not a major or important group or share?
LISTNUM 1 \l 11984 MR. CHURCH: That is right. And that number has gone from 80 to 40, now to 20 in the last three years.
LISTNUM 1 \l 11985 MR. RUBY: Yes. But that is the number, that is the one that is not major, significant or important, those are the three words you have used?
LISTNUM 1 \l 11986 MR. CHURCH: Well, I think if you take that 19 per cent and multiply it by the number of lines you get a number that is something like 300,000 out of 13 million.
LISTNUM 1 \l 11987 MR. RUBY: I understand how percentages work, but thank you.
LISTNUM 1 \l 11988 Tab 5 please of the compendium. It is the Bureau's response to TELUS question 12 April, number 24 dealing with negotiation. And if I may, I would like to play this out a little bit with you. So I take it the Bureau's position, first of all, is that there should be negotiation between the parties even for mandated services, is that right?
LISTNUM 1 \l 11989 MR. HARITON: There should be negotiations. We have discussed that in this interrogatory and I believe in other places as well.
LISTNUM 1 \l 11990 MR. RUBY: But that is even for mandated services? Just so we are all on the same page.
LISTNUM 1 \l 11991 MR. HARITON: That is correct. I mean, the one thing that we know is that if there is ‑‑ well, let me follow your questions.
LISTNUM 1 \l 11992 MR. RUBY: Okay. So you assume with me for the moment, for the purpose of this question, that the Commission says that residential unbundled local loops are essential in some particular geographic market. Okay, so I am asking you to make that assumption. I am trying to figure out how this negotiation would work. Presumably, first the SILEC would come to the ILEC's carrier services group and say I want some unbundled local loop, is that right, Mr. Hariton?
LISTNUM 1 \l 11993 MR. HARITON: I would assume so.
LISTNUM 1 \l 11994 MR. RUBY: And the ILEC would say, I want X dollars on such and such conditions?
LISTNUM 1 \l 11995 MR. HARITON: Presumably.
LISTNUM 1 \l 11996 MR. RUBY: And you would expect the SILEC would probably not want to pay that much?
LISTNUM 1 \l 11997 MR. HARITON: They might suggest a different price.
LISTNUM 1 \l 11998 MR. RUBY: Probably lower?
LISTNUM 1 \l 11999 MR. HARITON: Possibly.
LISTNUM 1 \l 12000 MR. RUBY: Possibly. So they might want to pay a higher price?
LISTNUM 1 \l 12001 MR. HARITON: No, they might agree to the price being offered.
LISTNUM 1 \l 12002 MR. RUBY: All right. The ILEC would then know that it has a choice, right, it could negotiate and maybe end up closer to what the SILECs asked or it may end up in front of the Commission, is that how you see this working?
LISTNUM 1 \l 12003 MR. HARITON: There are several models here. One of the models is that once ‑‑ well, for unbundled local loops, if the parties negotiate and don't come to an agreement, there is two ways. One is, the Commission can either hold a formal proceeding or it can go to a model where it would have something in the nature of final offer arbitration, which is a model which I understand is used today in the railway industry.
LISTNUM 1 \l 12004 So that there would be some pressure on the parties to be reasonable in their offers, because they know that their last offer is going to be one of the ones that is going to be in front of the arbitrator and who will choose between these two positions. So that is one model that could be used.
LISTNUM 1 \l 12005 I suspect that after a few of these disputes have been settled in this way one will find that the parameters of the solution for the previous ones very quickly become the benchmarks against which people negotiate. So that if you know that in these particular circumstances previously a loop went for $10 a month, then it is unlikely that you are going to argue for either $20 or for $5, you might be arguing for $11 or $9 or $12 or $8, depending on the circumstances.
LISTNUM 1 \l 12006 MR. RUBY: So effectively, the Commission will have set the price over time instead of ex ante?
LISTNUM 1 \l 12007 MR. HARITON: The parties will have evolved the price over time with the Commission's help, because they are the ones, if you are using the final offer arbitration model, which is not the only one, they will have adjusted the offers and the counter‑offers they are making to reflect the circumstances in that case.
LISTNUM 1 \l 12008 MR. RUBY: They would be adjusting it to what they think the Commission's expectations are, right?
LISTNUM 1 \l 12009 MR. HARITON: They will be adjusting it to what they think an arbitrator's expectations are, that is true.
LISTNUM 1 \l 12010 MR. RUBY: Okay. So over time you would expect that the price would end up where the Commission thinks it should be?
LISTNUM 1 \l 12011 MR. HARITON: Yes, and that is quite so. Notice though several things about this, that the Commission will have a much richer record in terms of information to base its decisions on and notice that there are incentives for the parties to be reasonable, which may not always be here today.
LISTNUM 1 \l 12012 THE CHAIRPERSON: Isn't the key of your scheme is that the parties will come to an agreement by themselves, not need to go to arbitration because they have a good expectation where arbitration will take them?
LISTNUM 1 \l 12013 MR. HARITON: That is right.
LISTNUM 1 \l 12014 MR. RUBY: And to follow on the Chairman's question, when that happens, that expectation is, is that the Commission will have set the mandated price effectively at whatever level?
LISTNUM 1 \l 12015 MR. HARITON: If you want to interpret it that way, that is fine.
LISTNUM 1 \l 12016 MR. RUBY: Well, I am asking for your evidence.
LISTNUM 1 \l 12017 MR. HARITON: I think that what you will see is you will previous prices being set as a guide, a benchmark, but I can see where there may be deviations from that in individual circumstances.
LISTNUM 1 \l 12018 For example, it may be that the price for loop has been set at a certain level in a previous determination, but you are serving a part of that exchange, which is particularly high cost because you are on an island in the middle of a river. And it may be that in that case you both decided that the loop should really be priced at higher than the benchmark price and that is information which the parties have which the Commission would not normally have. In that case, I would expect an negotiated price to come out, which is higher than the benchmark.
LISTNUM 1 \l 12019 And if it goes to arbitration, which I don't think it will, but if it does go to arbitration, at that point then you would have that fact flagged, that there is a river in the middle of it.
LISTNUM 1 \l 12020 MR. RUBY: Right. And for that model, you assume that both parties will be reasonable and try not to use the regulatory process, arbitration process ‑‑
LISTNUM 1 \l 12021 MR. HARITON: Yes.
LISTNUM 1 \l 12022 MR. RUBY: ‑‑ to gain an advantage?
LISTNUM 1 \l 12023 MR. HARITON: That is so, again, this seems to be the way that it is played out in rail, although I have been away from there a few years and I couldn't speak to what has happened recently.
LISTNUM 1 \l 12024 MR. RUBY: So and ILEC, for example, could use the arbitration process to delay granting access, for example?
LISTNUM 1 \l 12025 MR. HARITON: Again, the question of delay is one where it may well be that the first determination or two may be delayed, but the next ones, I think, would happen fairly quickly.
LISTNUM 1 \l 12026 The other thing that would happen, I think, is that I would likely not expect a CLEC to go in loop by loop and location to location. I would expect a CLEC to have a list of places and have them done at one time. I mean, it is unlikely they are going to go in by one‑ies and two‑ies.
LISTNUM 1 \l 12027 MR. RUBY: Maybe not one‑ies and two‑ies, but you will agree that people roll out their networks sometimes by geography, sometimes by market type.
LISTNUM 1 \l 12028 MR. HARITON: Yes, that is correct. There again, if you are going to a different geography or a different market type, it may be that the price should be different.
LISTNUM 1 \l 12029 MR. RUBY: Let's try and get a little bit of terminology straight. I take it you will agree that the oligopoly is a market structure where supply is represented by a small number of firms, Dr. Church?
LISTNUM 1 \l 12030 MR. CHURCH: Yes.
LISTNUM 1 \l 12031 MR. RUBY: And duopoly is an example of oligopoly?
LISTNUM 1 \l 12032 MR. CHURCH: Yes, where you have two firms competing.
LISTNUM 1 \l 12033 MR. RUBY: Can I ask you to turn up tab 7 of my compendium. This is a report with the catchy title of "Is Two Enough?" from the Netherlands telecom regulator dated September 2006. Have you had an opportunity to review this report?
LISTNUM 1 \l 12034 MR. CHURCH: You have just given it to us. I have seen it ‑‑ sorry.
LISTNUM 1 \l 12035 MR. RUBY: It is referred to in the pre‑filed materials.
LISTNUM 1 \l 12036 MR. CHURCH: I have seen it before. I have actually talked to one of the authors of it.
LISTNUM 1 \l 12037 MR. RUBY: Terrific.
LISTNUM 1 \l 12038 If you can turn up page 6 ‑‑ this report, I take it, Dr. Ware ‑‑ excuse me, I know you have a lot of respect for him, but I should call you Dr. Church, I take it that it is a fair summary that this report examines the competitive risks of having two players in a telecom marketplace. Right? Is that a fair summary?
LISTNUM 1 \l 12039 MR. CHURCH: Yes. It is an analysis that considers whether you could either have what we will call unilateral effect, which is just competition between the two of them, what the outcome would be, or whether you are going to have a coordinated effect, which would say through time, were they able to coordinate their responses to each other to get to an even higher level of market power exercise.
LISTNUM 1 \l 12040 MR. RUBY: The first two paragraphs of page 6, that is exactly what it talks about. Right? They start with the first way is explicit or tacit collusion, and then in the next paragraph it deals with market concentration is high enough for non‑competitive outcomes. Those are two options you just mentioned?
LISTNUM 1 \l 12041 MR. CHURCH: Yes. The first one would be a coordinated effect and the second one would be unilateral exercise of market power.
LISTNUM 1 \l 12042 MR. RUBY: The Commission should be concerned with both. Right?
LISTNUM 1 \l 12043 MR. CHURCH: They should indeed.
LISTNUM 1 \l 12044 MR. RUBY: Let's first look at what they have called non‑competitive oligopoly. This is the non‑collusive variety. I take it one factor you would examine there is the ability of one player to drive the other out of the market. Right?
LISTNUM 1 \l 12045 MR. CHURCH: Actually, no. That would be a completely different kind of conduct, which would be anti‑competitive conduct, which typically would not be the concern here.
LISTNUM 1 \l 12046 The concern, as I have expressed here, would be do we have unilateral ‑‑ you know, when they compete amongst themselves, not worrying about signalling to each other and trying to coordinate their actions. That is unilateral market power.
LISTNUM 1 \l 12047 The other one is coordinated market power, where they try to act essentially like an monopolist.
LISTNUM 1 \l 12048 Neither one of those have a predation story to them.
LISTNUM 1 \l 12049 MR. RUBY: Obviously I wasn't clear. It is not that one tries to force one out of the market. It is that it happens. One of the things that you take into account is is there an ability for one player to drive the other out of the market?
LISTNUM 1 \l 12050 MR. CHURCH: I would suggest to you that that would be kind of very non‑standard discussion of a coordinated effect.
LISTNUM 1 \l 12051 MR. RUBY: I was trying to break it down. So, one of the things you would look at, for example, would be whether the firms are able to serve the entire market, whether they have that capacity?
LISTNUM 1 \l 12052 MR. CHURCH: Yes.
LISTNUM 1 \l 12053 MR. RUBY: And you look at product ‑‑
LISTNUM 1 \l 12054 MR. CHURCH: We can short‑circuit a lot of this, I suspect, by saying that there is a standard kind of check list of industry characteristics that will be found about the U.S. Department of Justice and FTC merger guidelines, and the Canadian merger enforcement guidelines, and in chapter 10 of Church and Ware about the kind of structural characteristics that are conducive to coordinated effects and, you know, kind of give you an idea about when you should be concerned about these things and when you should not be concerned about these things.
LISTNUM 1 \l 12055 MR. RUBY: Let's see if we can just identify some of them for the Commission.
LISTNUM 1 \l 12056 You look at investments in capacity to see if it is continuous growth in capacity. Right? That is one of the things you look at?
LISTNUM 1 \l 12057 MR. CHURCH: Sorry, would you repeat that, please?
LISTNUM 1 \l 12058 MR. RUBY: You look at investment in capacity upgrades to see if that is continually happening. That would be one of the things?
LISTNUM 1 \l 12059 MR. CHURCH: Yes, we would usually notice that in industries which do have innovation and continual investment, that those industries are industries where it is typically very difficult to have coordination and a coordinated effect.
LISTNUM 1 \l 12060 MR. RUBY: You would also look at any problems in supplying new customers as growth occurs. So, things like growing pains, customer service delays, billing issues, that sort of thing?
LISTNUM 1 \l 12061 MR. CHURCH: I would look at that under a unilateral effect, and say when they are competing for the customers in a kind of a ‑‑ you know, not worrying about signalling to each other and coordinating their activities through time, that would be one of the things that the Bureau would consider.
LISTNUM 1 \l 12062 If you turn to our answer to Bell number 9, you will find there that there is a list of the five characteristics which we have looked at in terms of competition between a cable company, for instance, and the ILEC in the local forbearance decision. From the basis of those five things, we say in those circumstances entrants can easily add new customers to their networks, customers are willing and able to switch to the entrant and the entrant is willing to retain customers, those are going to be circumstances when you don't have to worry about this unilateral exercise of market power.
LISTNUM 1 \l 12063 MR. RUBY: I understand that that is your analysis. What I am trying to take you through is some other points you may want to consider or should be considered.
LISTNUM 1 \l 12064 MR. CHURCH: My point that we have considered here, as you point out, is very important: Can entrants easily add new customers to their networks, do they have that capacity to do that? That is an important consideration, I agree.
LISTNUM 1 \l 12065 MR. RUBY: I am glad to hear you agree with me on that one.
LISTNUM 1 \l 12066 Another factor is product differentiation.
LISTNUM 1 \l 12067 MR. CHURCH: Yes. Again, product differentiation cuts in various ways. It may make it easier to have unilateral exercise of market power, but typically it makes it much more difficult to have a coordinated exercise of market power.
LISTNUM 1 \l 12068 MR. RUBY: So, you evaluate whether there is some, none or a lot of product differentiation, and that factors in accordance into the analysis?
LISTNUM 1 \l 12069 MR. CHURCH: That is correct. I think you will find in most of the writings on coordinated effects dealing with product differentiation, the existence of considerable product differentiation typically is enough to stop any discussion of the coordinated effect.
LISTNUM 1 \l 12070 MR. RUBY: This is what they call the inverse U. There is a place in the middle where there is some differentiation where you are at a higher risk of a non‑competitive outcome?
LISTNUM 1 \l 12071 MR. CHURCH: I am not familiar with that inverse U.
LISTNUM 1 \l 12072 MR. RUBY: Another factor is the number of firms in the market clearly?
LISTNUM 1 \l 12073 MR. CHURCH: Number of firms affects both unilateral exercise of market power. We usually think if there is more firms there is likely less market power. It also makes coordination much more difficult.
LISTNUM 1 \l 12074 MR. RUBY: I am looking at the unilateral effects.
LISTNUM 1 \l 12075 MR. CHURCH: I am sorry, I wasn't clear. We were bouncing back and forth.
LISTNUM 1 \l 12076 MR. RUBY: We did one. We are just dealing with unilateral effects now.
LISTNUM 1 \l 12077 Barriers to entry are also a factor nor unilateral effects?
LISTNUM 1 \l 12078 MR. CHURCH: Barriers to entry are typically something that you would look at in terms of defining the number of firms that are competing in the market and, given that market structure, based on that number of firms, that would determine the unilateral effect.
LISTNUM 1 \l 12079 So you wouldn't typically look at barriers to entry and the number of firms separately. You would say that the barriers to entry presumably determines the number of firms that you have in the industry, and the number of firms is going to have some impact on that unilateral exercise unless you are in a contestable market, in which case you have hit‑and‑run entry and then you don't have any exercise of market power because it is disciplined by the threat of entry.
LISTNUM 1 \l 12080 MR. RUBY: I gather you would agree with me that, let's say, residential telecommunications is not a hit‑and‑run market?
LISTNUM 1 \l 12081 MR. CHURCH: No. I just wanted to give you a full answer.
LISTNUM 1 \l 12082 MR. RUBY: But you agree with me that is not the case?
LISTNUM 1 \l 12083 MR. CHURCH: When we talked earlier about impediments, so if you mandated access to an essential facility and you are asking about whether you are going to get a substantial increase in competition from mandating that access, I think that through time various people have had various different opinions on about how easily it is to enter downstream what other impediments are.
LISTNUM 1 \l 12084 Certainly in the past I have seen things written by the ILECs which suggested that that downstream market would be contestable if all of the essential facilities were unbundled and priced accordingly.
LISTNUM 1 \l 12085 MR. RUBY: You used the term hit‑and‑run entry.
LISTNUM 1 \l 12086 MR. CHURCH: It's a threat of entry is enough to discipline the ‑‑
LISTNUM 1 \l 12087 MR. RUBY: I understand what you are saying.
LISTNUM 1 \l 12088 Is the residential telecom market susceptible to hit‑and‑run entry? Is that what you are trying to tell me?
LISTNUM 1 \l 12089 MR. CHURCH: No, I am not saying that. I am just saying that ‑‑
LISTNUM 1 \l 12090 MR. RUBY: You are saying somebody else said that?
LISTNUM 1 \l 12091 MR. CHURCH: I am saying that other people have suggested that that might be the case. I am not saying that I am suggesting that.
LISTNUM 1 \l 12092 I am suggesting that I would want to do analysis in any particular downstream market, product market, to see what those barriers to entries are and what those impediments are. This is a framework. That is one of the considerations that has to go into this framework.
LISTNUM 1 \l 12093 THE CHAIRPERSON: Could we put a bit of discipline in the questions and answers? We have limited time, and possibly as this may be an academic point of view, I am wondering where we are going. So, please let's bring it back to what this is all about.
LISTNUM 1 \l 12094 MR. RUBY: Thank you, Mr. Chairman.
LISTNUM 1 \l 12095 You will see at page 28 of this report that for the Netherlands, at least, the authors conclude that there is a significant risk that competition is not effective in the Netherlands telecommunications market. This is in the last paragraph at page 28.
LISTNUM 1 \l 12096 I take it, from all of your evidence, that for the Canadian market you don't agree with that conclusion?
LISTNUM 1 \l 12097 MR. CHURCH: So, the conclusion that you want me to agree with is which line?
LISTNUM 1 \l 12098 MR. RUBY: There is a sentence four lines up from the bottom in the middle:
"On balance, the conclusion of the assessment is that in the relevant scenario there is a significant risk that competition is not effective." (As read)
LISTNUM 1 \l 12099 MR. CHURCH: Right. So, I would disagree with that. I think that the Bureau's submission in the local forbearance says otherwise as well.
LISTNUM 1 \l 12100 MR. RUBY: I take it that your position is that if the Commission largely circumscribes wholesale regulation, you don't expect, for example, the ILECs' market share to increase, is that right, or you do?
LISTNUM 1 \l 12101 MR. CHURCH: It depends, which market are we talking about here?
LISTNUM 1 \l 12102 MR. RUBY: Local telephony, residential telephony.
LISTNUM 1 \l 12103 MR. CHURCH: The idea is in our test, the third bullet of the test says if you mandated access, would there be a substantial increase in competition? So, you could well look at that bullet and say, all right, I have duopoly now. If I mandated access, would I get a substantial increase in competition?
LISTNUM 1 \l 12104 The Bureau's priors on this, based on what we know about local forbearance, based on those five characteristics which are spelled out in our answer to Bell number 9 and the implications of those characteristics, which are that entrants can easily add new customers to their networks, customers are willing and able to switch, the entrant is able to retain customers, firms have an incentive to acquire new customers or retain existing ones in order to utilize their network capacity, bundling is important and adds a winner‑take‑all aspect to it, if you put those three things together, as logical conclusions from those five characteristics, then that is why our conclusion differs with the conclusion of the people in the Netherlands.
LISTNUM 1 \l 12105 MR. RUBY: So, it depends on the factual circumstances as opposed to the analysis?
LISTNUM 1 \l 12106 MR. CHURCH: You know, you take this framework, you apply it. It suggests to us that you have fairly vigorous competition now between the duopoly, so the additional benefits that you are going to get from mandating access to essential facilities are likely to be pretty low. Not to say that they are necessarily going to be low. We just suggest that they are likely to be low in that framework.
LISTNUM 1 \l 12107 MR. RUBY: Mr. Hariton, earlier today you had a discussion with the Chairman, where he asked you for some help with the transition period, how long it would be. Do you remember that?
LISTNUM 1 \l 12108 MR. HARITON: I do.
LISTNUM 1 \l 12109 MR. RUBY: I think I heard you tell him that you thought an appropriate number for local loops was three years, based on your experience?
LISTNUM 1 \l 12110 MR. HARITON: I emphasized that the ‑‑ sorry, let me go back again.
LISTNUM 1 \l 12111 Three to five years is the time period that the TPRP report recommended in its conclusions. If one wanted to set a simple number of three and allow for exceptions for certain things, then that certainly seems to be an approach that would be consistent with that.
LISTNUM 1 \l 12112 MR. RUBY: You said that that three‑year number was based on your experience. Is that right?
LISTNUM 1 \l 12113 MR. HARITON: The three‑ to five‑year period is certainly based on my experience, yes.
LISTNUM 1 \l 12114 MR. RUBY: Is that experience building local loops, is it making arrangements? What experience is that?
LISTNUM 1 \l 12115 MR. HARITON: It is looking at what it takes to extend networks into unsurfed territory.
LISTNUM 1 \l 12116 MR. RUBY: So you have been involved in extending networks into unsurfed territory?
LISTNUM 1 \l 12117 MR. HARITON: I have certainly been interested in it from both a budgetary and a regulatory point of view. I haven't actually built them, nor have I actually designed a network.
LISTNUM 1 \l 12118 MR. RUBY: Nor planned them?
LISTNUM 1 \l 12119 MR. HARITON: I have not planned them. But I have had to get time frames for them.
LISTNUM 1 \l 12120 One of the things that I had to do in the old days, as part of budgeting, was to try and figure out how much money we would have to spend over how many years, and that was a thing we did do to try to figure out the time frame which the build would take.
LISTNUM 1 \l 12121 MR. RUBY: So, this was the time frame for an ILEC to build out?
LISTNUM 1 \l 12122 MR. HARITON: Yes, but this was into an area where it didn't have facilities.
LISTNUM 1 \l 12123 MR. RUBY: This is a data set or your experience is based on an ILEC experience?
LISTNUM 1 \l 12124 MR. HARITON: It is an ILEC experience, that is certainly true.
LISTNUM 1 \l 12125 MR. RUBY: Was it based on having support structures or not?
LISTNUM 1 \l 12126 MR. HARITON: It was based in extending the network into fairly rough territories where there were no ‑‑ well, in some cases there were hydro poles, and in other cases there were not, so I am giving you an average. I am giving you a very broad average.
LISTNUM 1 \l 12127 MR. RUBY: Thank you, Mr. Chairman and panel. Those are my questions.
LISTNUM 1 \l 12128 THE CHAIRPERSON: Thank you. Commissioner Cram, go ahead.
LISTNUM 1 \l 12129 COMMISSIONER CRAM: I am having difficulty understanding your reply to Bureau/Primus 12 April, 2. That is at tab 4. You say:
"Paragraph 38 of the Bureau's evidence references competitor market shares in discussing the competitive significance of unbundling." (As read)
LISTNUM 1 \l 12130 You go on then to say:
"The evidence presented suggests that non‑ILEC, non‑cable service providers have not captured a significant business market." (As read)
LISTNUM 1 \l 12131 I guess I don't understand, because if you are looking at competitor market shares, you would have to include ILEC out‑of‑territory competitors, wouldn't you?
LISTNUM 1 \l 12132 MR. CHURCH: In cable as well.
LISTNUM 1 \l 12133 COMMISSIONER CRAM: Yes, but if you are talking about ‑‑ I am right back to the stepping stone essentially, but if you look at competitor market shares, you have to consider Bell West, where they are; you have to consider MTS outside Manitoba, where they are; you have to consider TELUS outside ‑‑
LISTNUM 1 \l 12134 So, it goes right back to my question, Dr. Church, about the effectiveness of stepping stones, and page 45 of the monitoring report, where 41 per cent of the business segment is provisioned by non‑ILEC, non‑cable because the definition in the monitoring report of ILECs includes their out‑of‑territory business.
LISTNUM 1 \l 12135 I will give you a hypothetical. Bell West is in Edmonton and they are providing, I think they have the Government of Alberta. I have to bet that they are going to be self‑provisioning a good lot of lines.
LISTNUM 1 \l 12136 So, at what point, if it was 50 per cent from all of the competitors in the market, would the stepping stone have been effective, or if it is 60 per cent self‑provisioning, which I suspect it may well be, shows the effectiveness of the stepping stone?
LISTNUM 1 \l 12137 MR. CHURCH: Right. So, Commissioner Cram, as I understand the stepping stone theory ‑‑ let me back up.
LISTNUM 1 \l 12138 I agree with you, it looks like that, especially in the last year. We have had considerable entry of competitors, either out‑of‑territory ILECs or CLECs actually building their own facilities. The Bureau wants to leave two messages here.
LISTNUM 1 \l 12139 One is that in fact construction of facilities is possible and does happen and we don't want to create a system where we undercut the incentives to build those facilities.
LISTNUM 1 \l 12140 On the other hand, there may well be instances where our definition for essential facility is met and there are substantial benefits to mandating access and the Commission should mandate access to those things. I want to leave that message.
LISTNUM 1 \l 12141 But my understanding of the stepping stone is that ‑‑ the evidence we have is not ‑‑ I mean it is consistent but it is not inconsistent and it is not consistent. What I need to be able to do is I need to be able to track through, right. I need to be able to say I unbundled that loop and now I have replaced that unbundled loop with my own loop now, right.
LISTNUM 1 \l 12142 That is the stepping stone theory. The stepping stone theory is I temporarily get access to the network of the incumbent and then I replace what I have gotten access to by building my own facilities.
LISTNUM 1 \l 12143 I just don't have enough evidence on the record to be able to track that through and see if that is in fact what has gone on.
LISTNUM 1 \l 12144 COMMISSIONER CRAM: Okay, I get your point.
LISTNUM 1 \l 12145 MR. CHURCH: I don't know that, right ‑‑
LISTNUM 1 \l 12146 COMMISSIONER CRAM: Yes. Mm‑hmm.
LISTNUM 1 \l 12147 MR. CHURCH: ‑‑ because I know that we have had new entry. These competitors have entered into the business markets building their own loops but I don't know if those are the same, if it is MTS or Rogers who are doing that and replacing their unbundled loops. I don't know that.
LISTNUM 1 \l 12148 COMMISSIONER CRAM: So in order to prove the effectiveness of the stepping stone, you would have to start off ‑‑ everybody would have to start off renting or resale of bundles?
LISTNUM 1 \l 12149 MR. CHURCH: I can look at the people now ‑‑
LISTNUM 1 \l 12150 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 12151 MR. CHURCH: ‑‑ who use the unbundled loops and I can track through their investment ‑‑
LISTNUM 1 \l 12152 COMMISSIONER CRAM: For each loop?
LISTNUM 1 \l 12153 MR. CHURCH: Yes. And I would get some sort of statistical average or something and that would allow me to say something about the validity of the stepping stone.
LISTNUM 1 \l 12154 COMMISSIONER CRAM: Okay.
LISTNUM 1 \l 12155 THE CHAIRPERSON: But by the same token, the evidence may be perfectly consistent with the stepping stone working, you just don't know?
LISTNUM 1 \l 12156 MR. CHURCH: It could be and, in fact, one of the things that I find heartening about their most recent monitoring report is that we are at 41 percent. I mean I think that that is quite remarkable in terms of the potential for competing networks in business markets.
LISTNUM 1 \l 12157 COMMISSIONER CRAM: Well, we are at much higher if you include the ILEC out of territory ‑‑
LISTNUM 1 \l 12158 MR. CHURCH: Yes. Yes.
LISTNUM 1 \l 12159 COMMISSIONER CRAM: ‑‑ which I have to say may even be 70.
LISTNUM 1 \l 12160 MR. CHURCH: Right.
LISTNUM 1 \l 12161 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 12162 MR. CHURCH: But the implication of that is going to be that that is likely to mean that there are a lot fewer essential facilities.
LISTNUM 1 \l 12163 COMMISSIONER CRAM: Yes. Yes.
LISTNUM 1 \l 12164 Now, my next question is the government tells us the directive about this, about the policy, about implementing telecom policies, that we are to:
"The Commission, to enable it to act in a more efficient, informed and timely manner, should adopt the following practices, namely..."
(As read)
LISTNUM 1 \l 12165 And at (2):
"...with a view to increasing incentives for innovation."
(As read)
LISTNUM 1 \l 12166 If we close off the local loop as a non‑essential facility, are we not precluding the possibility of a competitor coming in with a new innovative concept into the market, in terms of an application in the market?
LISTNUM 1 \l 12167 MR. CHURCH: So I mean in all of these things, the Commission is going to make a decision under conditions of asymmetric information where there is going to be ‑‑ you know, Rogers and Bell and TELUS are going to be better informed about the industry than you are, unfortunately, and there are going to be uncertainties about how the world is going to unfold.
LISTNUM 1 \l 12168 So you are going to make a decision, the best decision you can, weighing off different costs and different risks.
LISTNUM 1 \l 12169 So the Bureau's approach is to try and get a handle on those costs and risks and think about, you know, that no matter what you do, there are going to be costs and there are going to be benefits.
LISTNUM 1 \l 12170 So you may well preclude this kind of innovation that you are talking about and if that kind of innovation was going to be of great significance to Canadians, was going to be absolutely likely and at very low cost, then we should do that.
LISTNUM 1 \l 12171 COMMISSIONER CRAM: Yes.
LISTNUM 1 \l 12172 MR. CHURCH: We should do it.
LISTNUM 1 \l 12173 If, on the other hand, on our understanding of the industry, we think that those big innovations and the real dynamic competition is going to come about from erring on the side of caution to make sure that we continue to get these people to roll out their business networks, then we would want to have a kind of circumscribed essential facilities regime.
LISTNUM 1 \l 12174 COMMISSIONER CRAM: Mm‑hmm. You are leaving it all to us, again?
LISTNUM 1 \l 12175 MR. HARITON: Well, I mean, again, the important thing is that you may encourage application level, competition up here, but that in itself freezes in place the network as it is because the people up there become dependent on somebody else's network and therefore you can't really change that network without harming them downstream, whereas if they have their own network top‑to‑bottom they can make all the changes and integrate the innovation in the bottom part, which is the way most industries in Canada work. You don't ‑‑ you control your own infrastructure.
LISTNUM 1 \l 12176 COMMISSIONER CRAM: Yes, but telecom is pretty unique. It is not a widget factory.
LISTNUM 1 \l 12177 MR. HARITON: It is not a widget factory and the important thing ‑‑
LISTNUM 1 \l 12178 COMMISSIONER CRAM: I mean if somebody has a ubiquitous system that has been very, very costly to set up.
LISTNUM 1 \l 12179 MR. HARITON: Yes, ma'am. But the thing is that once you get call termination ordered, everybody has access to that ubiquitous system. So if I am a new entrant in telecommunications, I alone can't do anything without interconnecting with your network and your customers, so that call termination becomes the key and a very, very crucial thing.
LISTNUM 1 \l 12180 But once you have solved one of the aspects of network effects with call termination, you have removed a lot of the things that are special about telecommunications, in my opinion.
LISTNUM 1 \l 12181 I am happy to go through it at great length. I am not sure this is the place.
LISTNUM 1 \l 12182 COMMISSIONER CRAM: No. Thank you.
LISTNUM 1 \l 12183 Thank you, Mr. Chair.
LISTNUM 1 \l 12184 THE CHAIRPERSON: Thank you.
LISTNUM 1 \l 12185 I think we will terminate there for today. Our absorption capacity goes to absolutely zero at 4:30. So we will start tomorrow morning at 8:30 with the remaining cross‑examination of ‑‑
LISTNUM 1 \l 12186 THE SECRETARY: PIAC.
LISTNUM 1 \l 12187 THE CHAIRPERSON: I had hoped we would be getting through everything today but we will hopefully catch up tomorrow.
LISTNUM 1 \l 12188 Thank you very much.
‑‑‑ Whereupon the hearing adjourned at 1626, to
resume at 0830 on Wednesday, October 10, 2007 /
L'audience est ajournée à 1626, pour reprendre
à 0830 le mercredi 10 octobre 2007
REPORTERS
_______________________ _______________________
Jean-Marc Bolduc Jean Desaulniers
_______________________ _______________________
Barbara Neuberger Jennifer Cheslock
_______________________ _______________________
Sharon Millett Monique Mahoney
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